AutoZone, Inc. (AZO) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the AutoZone Conference Call. [Operator Instructions] Please be advised, today's call is being recorded. If you have any objections, please disconnect at this time. This conference call will discuss AutoZone's second quarter financial results. Bill Rhodes, the company's Chairman, President and CEO, will be making a short presentation on the highlights of the quarter. The conference call will end promptly at 10 a.m. Central Time, 11 a.m. Eastern Time. Before Mr. Rhodes begins, the company has requested that you listen to the following statement regarding forward-looking statements.

Certain statements contained in this presentation are forward-looking statements. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including without limitation: credit market conditions; the impact of recessionary conditions; competition; product demand; the ability to hire and retain qualified employees; consumer debt levels; inflation; weather; raw material costs of our suppliers; energy prices; war and the prospect of war, including terrorist activity; availability of consumer transportation; construction delays; access to available and feasible financing; and changes in laws or regulations. Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of our annual report on Form 10-K for the year ended August 25, 2012, and these risk factors should be read carefully.

Mr. Rhodes, you may now begin.

Good morning, and thank you for joining us today for AutoZone's 2013 Third Quarter Conference Call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer, IT and ALLDATA; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third quarter, I hope you've had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with slides complementing our comments today, is available on our website, www.autozoneinc.com. Please click on Quarterly Earnings Conference Calls to see them. To begin this morning, I want to thank all AutoZoners across the globe for another very solid quarter. Similar to last year, our sales performance included some significant volatility over the 12-week period. From our perspective, the most important takeaways from the quarter were: one, trends improved during the last 4 weeks of our quarter; two, our sales trends in the most challenged markets also improved; three, retail sales improved during these last 4 weeks on both a 1-year and a 2-year basis, with positive same-store sales results in that period, a trend we have not been able to report for quite some time; four, we opened 102 new commercial programs in the quarter and expect Q4 Commercial sales to improve from here; and lastly, the capital allocation and earnings model for our company remains strong and intact. Our ability to manage in good sales environments and not so good has allowed us to deliver 27 consecutive quarters of double-digit EPS growth. That consistency allows us to be shareholder-friendly through our stock buybacks, and bondholder-friendly through a targeted investment grade rating and financial transparency. We are excited about our opportunities to grow our business in both this quarter and in future periods. We continue to manage this company for both short-term and long-term optimum performance. We continue to execute our strategies to improve the customer shopping experience, the initiative that we call Great People Providing Great Service! We also grew our commercial program counts, sales and profitability, opening 102 programs for the quarter. We expanded 5 additional hub locations during the quarter to take our total remodel hub locations to 82. These remodels entail adding additional inventory into the market that benefits both our Retail and Commercial businesses. We also opened 2 new hub locations for the quarter, finishing with 154. Additionally, we substantially completed the integration of our purchase of AutoAnything from back in December. On last quarter's conference call, we spoke of sales challenges we saw in the last week of January and the first week of February. Those weeks' results were what I'll call severely negative and brought our quarterly results down. While I'm happy to say the money did flow back to consumers throughout the quarter and appear to be essentially flat year-over-year in dollars refunded, we didn't feel those 2 weeks were made up at any point during this third quarter. This quarter started out slightly down for same stores, ran negative in March and positive in April. We do not contribute our performance improvement in April to tax refunds. In fairness to our March results, I need to point out that last year, we had our best monthly results in March. Specifically, our northeastern and midwestern markets outperformed our remaining markets in last year's March. This year, these same markets materially underperformed the remaining markets through March. There was approximately a 600-basis-point gap in performance up until the beginning of April. I should point out weather patterns during March were not favorable. We experienced cooler temperatures and snowfall that negatively impacted our results. Once the weather warmed up a bit, results did improve. For the quarter, the northeastern and midwestern markets underperformed our remaining markets in same-store sales by approximately 150 basis points on a total comp-store basis, a noticeable improvement from the 500 basis points we have been discussing in previous quarters. We continue to believe this regional and -- regional underperformance and more recent improvements to be weather-driven. Last year's mild winter caused a material decrease in what we have classified as maintenance items sold. Our belief is that this past winter's more normalized weather patterns should benefit us and our industry. While the category of goods we classify as maintenance decreased year-over-year, April's positive same-store sales results were attributable to this category's sales turning positive. As we look forward to the fourth quarter of fiscal 2013, we are enthusiastic about the progress we're making on many of our initiatives. This past year, we have spent tremendous time on improving our inventory assortments, with the result being reducing out of stocks and increasing our ability to say yes to our customers' requests. We continue to utilize our hub network as a tool that will improve the 2 metrics mentioned. As we continue to experience benefits from our hub stores' few additions, it provides us with further insight into areas of potential opportunities. As a result, we are performing various tests to determine the optimal levels of inventory in our local stores and our hub stores. As is customary for us, we will learn from our testing and roll out those that make sense financially. Listeners should expect us to always be learning and pushing ourselves to improve our results. As previously mentioned, this quarter's results marked our 27th consecutive quarter of double-digit earnings per share growth. We're very pleased with our ability to consistently deliver strong EPS growth through our financial model of steady mid-single-digit EBIT dollar growth or better, along with high-single-digit reductions in diluted share count through our share repurchases. Our goal quarter-over-quarter continues to be to provide consistency to our shareholders, our AutoZoners and most importantly, our customers. We feel this targeted consistency in both financial performance as well as execution of our key initiatives results in stability and confidence for all of our key constituents. Next I'd like to discuss our sales results for this past quarter in more detail. Our sales were up 4.5%, and our same-store sales were down 0.1%. This quarter's same-store sales results compared to last year's third quarter comps of 3.9%. Our same-store sales results are a combination of both our domestic Retail and Commercial businesses. I should point out, our total Commercial sales were up 9.7% over last year's third quarter, driven by a combination of existing program growth and the addition of 302 net new programs over the trailing 12 months. In the last few earnings calls, we have cautioned listeners that we wouldn't have a good read on our sales patterns until we lap last year's slowdown, which began in April. As highlighted previously, April was a strong month. But one month does not make a trend, and the first 2/3 of the third quarter were softer than we had anticipated. Our stated belief all along was the unusual weather patterns in the winter of 2011-2012 in that particular area of the country were the single largest contributor to the slowdown. Since performance to date has been consistent with those beliefs, we are cautiously optimistic as we head into our all-important summer selling season. I use the word cautiously because we still have some concerns on the health of the consumer due to continued weakness in the broader economy and the recent reinstitution of the payroll taxes to recent norms. This morning, we want to call out some key accomplishments this past quarter. We completed 5 additional hub projects this quarter, taking our hub resets like to date to 82. We continue to be quite pleased with the sales benefits from the reset hubs as we have increased the size and/or improved the location, allowing us to expand the number of SKUs offered on a same-day basis in the market. These SKUs have benefited both Retail and Commercial customers. The proliferation of unique makes and models constantly rolled out each year continues to drive our need to add inventory. We expect to discuss proper inventory placement for years to come. We believe our evolving hub strategy better positions us to address this need. Regarding Mexico. We opened 7 stores this quarter and finished with 341 stores. Sales in our other businesses achieved very solid sales results. Our ALLDATA and eCommerce businesses, which include autozone.com and autoanything.com, continue to perform well, increasing 79.9% over last year. The significant increase was primarily attributable to the inclusion of AutoAnything, which we acquired during Q2 of this fiscal year. There are great opportunities for eCommerce sales growth on both a business-to-business basis and to individual customers, or B2C. While these businesses are relatively small for us at just 3.5% of our total sales mix, we are experimenting to understand where the most potential exists. At this point, we still view our traditional autozone.com and AutoAnything as complements to our walk-in business. Our objective is to provide exceptional service to all of our customers regardless of how they want to interact with us, and we believe that leveraging the Internet is a powerful tool to meet their needs, whether they're researching their purchase prior to visiting a store or having their products delivered straight to their home. With continued aging of the car population, we continue to feel positive trends exist for our industry in both DIY and DIFM. With the recent decline in gas prices, we are hoping to see an acceleration of miles driven. Through February, the latest data available, this metric has been basically flat year-over-year. We continue to remain bullish on our industry sales growth opportunities on both Retail and Commercial fronts over the long term. As the vehicle population remains at an all-time high and consumers continue to look for good values while maintaining their vehicles, we see AutoZone's opportunity to sell to these customers only growing. Now let me review our highlights regarding execution of our operating plan for 2013, 1TEAM Delivering WOW! The key priorities for the year: Great People Providing Great Service!; two, profitably growing the Commercial business; three, leveraging the Internet; four, hub store improvements; and five, leveraging technology to improve the customer experience while optimizing efficiencies. On the Retail front this past quarter, under the Great People Providing Great Service! theme, we continued with our intense focus on improving execution. We have dedicated great resources to training our AutoZoners on customer service, and we feel we've done a great job at differentiating ourselves on this front. The fifth key priority on leveraging technology is new this year. We are designing enhancements to improve the information available to our AutoZoners at the point of sale while also making them more efficient, and we are in the process of developing that functionality now. At AutoZone, we have a long and strong heritage of leveraging information technology to improve customer service and optimize efficiencies, and this priority was added this year to enhance our focus in this area. In regards to Commercial, we opened 100 new -- 102 new programs this quarter. Year-to-date, we've opened 195 versus 287 through the third quarter last year. We continue to expect to open approximately 300 stores for the year, consistent with our annual plan. Our past quarter's results were not where we would like. The driver behind the results had not surprised us. In particular, regional performance discrepancies and weather impacted our business. We continue to see Commercial as a material sales growth driver for us for many years to come. Our results continue to provide us confidence to be aggressive in adding additional resources and new programs to this important growth initiative. I'll take a moment now to talk more specifically about our third quarter performance in more detail. Our domestic same-store sales declined 0.1% for the quarter. As noted earlier, our third quarter, which ended May 4, did experience variability in month-to-month sales results. As we've mentioned in previous quarters, our performance in the northeastern and midwestern regions has been materially below that of the remainder of the country. In fact, the separation in results began in April of last year for us. As we've said previously, the category of sales we define as maintenance had the most challenging performance since that began. With approximately 40% of our sales in this classification, sales of this category were soft, particularly in the subset of geographic regions previously discussed. However, we saw the sales in this category improve the last month of the quarter. This improvement, we believe, is attributable to having more normal winter weather in these regions versus last year, and we began to lap last year's slowdown. This regional difference in results carries through to our Commercial business as well. We will continue to invest to grow our Commercial business and penetrate a larger percentage of our existing store base. As I said earlier, ALLDATA and eCommerce, which now includes AutoAnything, had another fine quarter, up 80% in sales from this time last year. AutoAnything's inclusion in this bucket drove the majority of this growth. This portion of our business, while small as a percentage of our overall sales mix, continues to experience faster sales growth than the auto parts stores. We should also highlight another strong performance in return on invested capital, as we were able to finish the second quarter at 32.3%. We are very pleased with this metric as it is one of the best, if not the best, in all of hard lines retail. However, our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return, well in excess of our cost of capital. It is important to reinforce that we will always maintain our diligence regarding capital stewardship. As the capital we invest is our investors' capital. Before I pass the discussion over to Bill Giles to talk more about our financial results, I'd like to thank and state how proud we are of our entire organization's efforts to manage this business appropriately these past few quarters. We suspected the sales environment was going to be difficult during the first 3 quarters of this fiscal year. And as is evident in our overall performance, we aggressively managed our cost structure. We are very proud of our organization and all that they continue to accomplish. We have an amazing team, and we are ready. We are ready to continue to provide WOW! Customer Service to all of our customers, and we are ready to continue to prudently manage our cost structure, providing our shareholders with the consistency we have exhibited in the past. Now I'll turn it over to Bill Giles.

Good morning, everyone. To start this morning, let me take a few moments to talk more specifically about our Retail, Commercial and international results for the quarter. For the quarter, total auto parts sales, which includes our domestic Retail and Commercial businesses, our Mexico stores and our one store in Brazil, increased 2.9% on top of last year's third quarter's growth of 6.7%. Regarding macro trends during the quarter, nationally, unleaded gas prices started out at $3.61 a gallon and ended the quarter at $3.54 a gallon, a $0.07 decrease. Last year, gas prices increased by $0.27 per gallon during the quarter, starting at $3.52 and ending at $3.79 a gallon. We continue to believe gas prices have a real impact on our customers' abilities to maintain their vehicles, and we will continue to monitor prices closely in the future. We also recognize that the impact of miles driven on cars over 10 years old, the current average, is much different than on newer cars in terms of wear and tear. Miles driven were up in January 0.6%, but down versus last year, 1.4% in February. And the other statistic we highlight is the number of 7-year-old -- 7 year and older vehicles on the road, which continues to trend in our industry's favor. Lastly, another key macro issue facing our customers today is the reinstitution of payroll taxes back to historic norms. This reduction in our customers' take-home pay just began at the beginning of the new calendar year and, at this point, combined with the delay in income tax refunds and seasonal weather trends, it is hard to objectively quantify the ramifications of this change. However, we believe this is, and will continue to have, a negative impact on our consumers' ability to spend. For the trailing 4 quarters, total sales for auto parts stores was $1,713,000. This statistic continues to set the pace for the rest of the industry. For the quarter, total Commercial sales increased 9.7%. For the third quarter, Commercial represented 16.2% of our total sales and grew $32 million over last year's Q3. Last year's Commercial sales mix percent was 15.4%. As we have said previously, overall, we have been pleased with the progress we are making in our Commercial business, both operationally and financially, and we remain on track with our plans. We believe there are ample opportunities for us to continue to improve many facets of our operations and offerings, and therefore, we're optimistic about the future of this business. We continue to believe we can grow revenues in existing stores, and we will continue to open additional Commercial programs. This past quarter, we opened 102 new programs versus 121 programs opened in third quarter of last fiscal year. We now have our commercial program in 3,248 stores, supported by 154 hub stores. Approximately 900 of our programs are 3 years old or younger. With only 68% of our domestic stores having any commercial program, and our average revenue per programs materially below several of our competitors, we believe there is ample opportunity for additional program growth, in addition to improved productivity opportunities in current programs. While we recognize that our Commercial sales productivity per program is well below our peers, we do not believe there are any structural impediments that prevent us from achieving similar productivity numbers. As we look forward, we're focused on building upon the Commercial initiatives that have been in place for the last few years. We have a very talented sales force, and we are enhancing training and introducing additional technology to optimize the productivity of this sales force. We have increased our efforts around analyzing customer purchasing trends and in-stock trends. We feel our product distribution model is scalable going forward, and we are continuing to test additional enhancements to our offerings. We believe our strategy is the right one for the long run, but it will be an evolution. Our Commercial sales growth has recently been below our aspirations, but we continue to be quite optimistic about our long-term growth potential, as we believe we have the right strategy and people in place to continue to succeed. In summary, we remain committed to our long-term growth strategy. We have accelerated the growth of our commercial programs, having opened over 900 programs over the past 36 months. Effectively, 28% of the programs are 3 years old or younger. We believe we are well positioned to grow this business and capture market share. The regional variances in our Commercial sales results give us comfort our underperforming markets are not the direct cause of something we have specifically done. We believe we can scale this business in a profitable manner. We continue to be excited about our opportunities in this business for many years to come. Our Mexico stores continued to perform well. We opened 7 new stores during the third quarter. We currently have 341 stores in Mexico. We remain consistent with our strategy to open stores at a steady pace while managing our Mexico business for the long run. We have operated stores in Mexico for over 14 years, and we continue to see opportunity for growth going forward. Our returns and profit growth have been in line with our expectations. Now regarding Brazil, we currently have one store opened, and we are in various stages of development on future stores. Our plans remain to open 10 to 15 stores over the next couple of years and then reevaluate our development as we refine our offerings and prove that our concept works for our customers and is financially viable. At that point, we will talk more on our long-term growth plans. Recapping our second quarter performance for the company, in total, our sales for the quarter were $2,206,000,000, an increase of 4.5% from last year's third quarter. Domestic same-store sales, or sales for stores opened more than 1 year, were down 0.1% for the quarter. Gross margin for the quarter was 51.8% of sales, up 20 basis points compared to last year's third quarter. The improvements in gross margin were attributable to higher margins on merchandise growth [ph] . The increased merchandise margins were primarily due to lower acquisition costs. In regards to inflation, we have seen some increases in costs year-over-year, but at a much slower pace than last year at this time. At this point, our assumption is we'll experience subdued producer pricing for the balance of the calendar year, and therefore, we feel costs will be predictable and manageable. We will remain cognizant of future developments regarding inflation and will take the appropriate adjustments should they arise. Looking forward, we continue to believe there remains opportunity for gross margin expansion within both the Retail and Commercial businesses. However, we do not manage to a targeted gross profit margin percentage. As the growth of our Commercial business has been the steady headwind on our overall gross margin rate for a few years, we have to continuously work strategies to offset this. Additionally, AutoAnything has been a drag on our gross margins as this business model operates at a lower gross margin rate. Our primary focus remains growing absolute gross profit dollars in our total auto parts segment, which for the quarter increased approximately $43 million. SG&A expense for the quarter was 31.1% of sales, lower by 24 basis points from last year's third quarter. Operating expenses as a percentage of sales decreased primarily due to a gain on the disposal of certain assets and lower incentive compensation. I want to take a moment to thank our entire team for their diligence on cost control, which ultimately was a significant contributor to our performance in Q3. We continue to believe we are well positioned to manage our cost structure for this foreseeable future. EBIT for the quarter was $456 million, up 6.7% over last year's third quarter. Our EBIT margin improved to 20.7%, or up 44 basis points versus the previous year's third quarter. Interest expense for the quarter was $42.1 million compared with $39.7 million in Q3 a year ago. As the fourth quarter will have an extra week, we're modeling interest expense to be in the $62 million to $64 million range. Debt outstanding at the end of the quarter was $4 billion or approximately $395 million more than last year's third quarter balance of $3.6 billion. Our adjusted debt level metric finished the quarter at 2.5x EBITDAR. While in any given quarter we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment-grade rating and our capital allocation strategy, and share repurchases are an important element of that strategy. For the quarter, our tax rate was approximately 35.8%, flat with last year's third quarter. We expect our tax rate to be 36.5% to 37% on an ongoing basis. Net income for the quarter of $266 million was up 6.8% versus the prior year's third quarter. Our diluted share count of 36.5 million was down 7.7% from last year's third quarter. The combination of these factors drove earnings per share for the quarter to $7.27, up 15.8% over the prior year's third quarter. Relating to the cash flow statement, for the third fiscal quarter of 2013, we generated $385 million of operating cash flow. Net fixed assets were up 9% versus last year. Capital expenditures for the quarter totaled $89 million and reflected the additional expenditures required to open 43 new stores this quarter, capital expenditures on existing stores, hub store remodels and work on development of new stores for upcoming quarters. For all of fiscal 2013, our CapEx is expected to be approximately $400 million. With the new stores opened, we finished this past quarter with 4,767 stores in 49 states, the District of Columbia and Puerto Rico; 341 stores in Mexico; and one in Brazil, for a total store count of 5,109. Depreciation totaled $52.9 million for the quarter versus last year's third quarter expense of $49 million. With our excess cash flow, we repurchased $325 million of AutoZone stock in the third quarter. At the end of the quarter, we had $278 million remaining under our share buyback authorization. Our leverage metric was 2.52x EBITDAR this past quarter. Again, I want to stress, we manage to appropriate credit ratings and not any one metric. The metric we report is meant as a guide only, as each rating firm has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy. Accounts payable as a percent of gross inventory finished the quarter at 111%. Next I'd like to update you on our inventory levels in total and on a per-store basis. We reported an inventory balance of $2.8 billion, up 6% versus Q3 ending balance last year. Increased inventory reflects new store growth, along with additional investments and coverage for select categories. Inventory per store was up 2.2%, reflecting our continued investments in hard parts coverage. Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing 4 quarters of 32.3%. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. As the last point, I'd like to point out that this year, fiscal year 2013, has an extra week in it. More specifically, the extra week will fall during this fourth quarter. Already our longest quarter in number of weeks, this year's fourth quarter will consist of 17 weeks versus last year's 16 weeks. As a result, our year end this year -- our year will end this year on August 31. The last time we had an extra week in our financials was fiscal 2008. We would encourage each of you to review the impact this extra week had on our performance in Q4 2008 to better understand the impact it will have on our fourth quarter and fiscal 2013 results. Now I'll turn it back to Bill Rhodes.

Thanks, Bill. We are pleased to report our 27th consecutive quarter of double-digit EPS growth and to report an EPS growth rate of 15.8% for our fiscal third quarter. Clearly, our sales performance has not met our expectations, as we have experienced softer sales over the past few quarters. Based on our recent results, we continue to believe we should experience an improvement in sales for the remainder of the year. The basis for this expectation is the confluence of a more normalized winter and easier sales comparisons, combined with strong execution of our plans, including enhanced product assortments, improved productivity in our existing commercial programs and continued new commercial program growth. The hardest things to predict for us when it comes to our performance are macro factors and in particular, the weather. Spring arrived much later than normal this year and materially later than last year, and it clearly dampened our performance in the first 2/3 of the third quarter. But we can't control the weather, and over time, its effects even out. Ultimately, our actions determine our performance, and we continue to be pleased with the strategies we have in place, and quite pleased with the execution of those strategies. But that doesn't mean we aren't looking to improve. We are constantly testing new ideas and innovations to determine what is successful and what isn't. We will keep you apprised of our developments as they progress. Again, we are excited about our initiatives around inventory assortment, hub stores, Commercial growth, Mexico, ALLDATA, eCommerce and Brazil. Our long-term model is to grow new store square footage at a low-single-digit growth rate, and we expect to continue growing our Commercial business at an accelerated rate. Therefore, we look to routinely grow EBIT dollars in the mid-single-digit range or better in times of strength, and we leverage our very strong and predictable cash flow to repurchase shares, enhancing our earnings per share growth into double digits. We feel the track we are on will allow us to continue winning for the long run. We believe our steady, consistent strategy is correct. It is the attention to details and consistent execution that will matter. Our belief is solid, consistent strategy combined with superior execution is a formula for success. Our charge remains to optimize our performance regardless of market conditions and continue to ensure we are investing in the key initiatives that will drive our long-term performance. In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves. We are pleased with our earnings per share growth and ROIC for Q3, and we remain committed to delivering on our strategic and financial objectives. Finally, I want to again thank our entire organization for their dedication to our customers, fellow AutoZoners, stockholders and communities. Our approach remains consistent. We're focused on succeeding in the fourth quarter of 2013, and we are excited about our future opportunities. Thank you for your time. Now we'd like to open up the call for questions.

[Operator Instructions] The first question today is from Alan Rifkin with Barclays.

A couple of questions, if I may. First on the Commercial programs. Can you maybe give a little bit of color on what the productivity levels are for the programs that are under 3 years old, since it's such a significant portion compared to the more mature programs? And then I have a follow up, please.

Yes, Alan, I don't want to get into too many specifics on it, but clearly, they're much less mature and they come out significantly below the existing programs. The other thing that I think is important, and I'm not sure everybody understands, is as those programs open, many times, probably most of the time, they also cannibalize the existing programs. So some of the growth in the productivity of the Commercial programs right now is muted because we do have those 900 stores that, over the last 3 years, have done some cannibalization of the existing programs. At the end of the day, we're not meeting our aspirations, but the underlying performance of the new programs and the existing programs, when you take everything into account, we're generally pleased with.

Okay. So for the select group of markets, Bill, like the west, where you said was better, and let's say the southeast, where weather really was not an impact, did those markets collectively perform on your plan?

I think for the first 2/3 of this quarter, I would say they were generally aligned with where our expectations were. In the last 1/3 of the quarter, frankly, the northeast and midwest is where we really saw very strong performance, as they rebounded in a significant way.

Okay. And then just lastly, real quick, the 82 expanded hubs, I mean, any sort of color as to how much more productive these hubs are? And do you ultimately plan to expand every single one of the 154?

Yes. Our objective is to expand all the 154. Obviously, we've made great progress so far, getting 82 opened in less than 3 years -- 82 expanded or relocated in less than 3 years. As we get farther down the cycle, because these are real estate deals, we've done the easy ones. Now we have more complicated ones ahead. So the pace will likely slow. As for how they're performing, this is the first time that we've ever deployed capital really for our hub stores. If you think originally, all we did was take existing space that was there and leverage it to put the product assortments. So the easiest way for me to show you that they're meeting our expectations is we continue to make real estate acquisitions and build buildings because they're exceeding our expectation -- meeting or exceeding our expectations. So we're pretty pleased with them.

Our next question is from Gary Balter with Credit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: It's Simeon Gutman for Gary. Two questions. First, Bill Rhodes, you talked a lot about the regionality. And so I think that, that kind of helps explain some of the, I guess, cyclical versus secular arguments. Is there anything else you can point to, be it age of vehicles or other factoids that they kind of point to, that this is -- I guess, a year ago's downturn was more cyclical?

Yes. I think we're going to stick with what we said for the last year. This isn't a new story. I think the last 3 calls, we talked about the fact that we thought last winter, the lack of winter in the midwest and northeast last year did not cause the same level of maintenance requirements or failure items because the roads weren't messed up. So far, that prognostication has come to effect, but we're 1 month into it. We've seen April come. And I also want to reinforce the 2 points that we've made in our prepared remarks, we're also a little concerned about the consumer. This economy is still not booming, particularly for the low-end consumer, and we've seen them be in a difficult situation now for more than 4 years, and they're all still trying to get readjusted to the reinstitution of payroll taxes. Gary Balter - Crédit Suisse AG, Research Division: So how should we think about that in terms of weighing off -- obviously, the weather is driving -- helping the comps and we think will continue to help the comps as you've talked about. But at what level does that get hurt? Or like what say -- where does that kind of peak out because you still have this macro issue overriding it?

Simeon, your voice changed. Hello, Gary. Gary Balter - Crédit Suisse AG, Research Division: Got a Canadian accent.

Gary, here's the deal. That's what you guys do. You guys are as good at this as we are. We're going to plan our business conservative, like we always do, hope for upside and make sure that we continue to deliver strong performance. I can't tell you sitting here today what the number is, and you know that, that's not our practice, to provide guidance. Gary Balter - Crédit Suisse AG, Research Division: And last one, if the weather markets do get better and maintenance categories start picking up, what does that mean for gross margin? Does it bode well for gross margin? How does it mix out?

I think, overall, we've had good performance on gross margin. Think back that we had some lower acquisition costs this quarter, frankly for the last 3 or 4 quarters. So as we get into Q4, we'll likely begin to anniversary some of the lower acquisition costs that we experienced over the last year or so. So we expect gross margin in and of itself to remain reasonably healthy. Also, in the spirit of full and fair disclosure, AutoAnything will obviously have a negative impact to gross margin. That impacted us about 40 basis points this quarter. That's probably a fair number for next quarter as well. And then at some point, we'll anniversary that and move forward. Like we say, we always manage gross profit on terms of dollars, not so much rate.

Our next question is from Colin McGranahan with Bernstein. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: I know you're tired of talking about the spread between the cold weather markets and not, but I'm a little confused here. So if you can first just get the facts right for me. Did you say in March there was a 600-basis-point spread between the cold weather markets and the rest, but for the quarter was 150 bps?

Yes. What we said, Colin, was it's been about 500 for the last few quarters. Q3 to date through the end of March, it was 600 basis points, and it ended the quarter only with 150 basis points, which means it significantly outperformed in the month of April. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: I'm sorry, the whole quarter was 150? Or at the end of the quarter, it was running 150?

The whole quarter was 150. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: So that would mean that the cold weather market significantly comped positive above the rest of the house in April?

That would be correct. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Okay. So how do you -- we think about that in terms of just -- obviously, February and March were really bad, and the normal spring maintenance that would have happened in March didn't happen because the weather was so bad. How do we think about that just getting pushed into April?

Yes. I think several things. Number one, I don't want to get too excited, and we're not getting too excited about 1 month. We have variability in our sales all the time, week-to-week, month-to-month, and I don't want that to get overstated by any stretch. Now there's a couple of things that made it happen in April this year. Number one, the tax refund benefit that we normally see late January, early February, never materialized. A lot of times, that comes in deferred maintenance, and people get out and do those jobs. That never happened this year. Also, last year, March was particularly strong in the northeast and midwest as we called out, and April was pretty weak. Well, this year, it was very cold and very wet throughout March in that part of the country. All of a sudden, they got some glimmers of improved weather in April, and there was pent-up demand they took -- they did it. But again, I don't want to get too crazy about -- or too exuberant about the performance in those markets in April. One month doesn't make a trend. We got a long way to go. We got a lot of sales that we feel like we're owed in that part of the country. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Okay. That's fair. And then maybe just a bigger picture. I know that you have, for a long time, looked at miles driven as the longest-term indicator of the health of the business, and especially miles driven on older cars. Any thoughts on why we haven't seen any real recovery in miles driven since the recession?

I think that it really kind of speaks a little bit to -- Bill talked about it before. I mean, we don't really necessarily see the economy picking up. Unemployment rate is down a little bit, but the fact is there's still a significant number of people unemployed and maybe even off of the charts. So miles driven has been relatively flat, as you pointed out. Gas prices have been moderately flat. The age of the vehicles continue to increase, so that's helpful for our business over the long haul. Obviously, miles driven on a 10-plus-year-old vehicle is more impactful than it is on a brand-new vehicle as far as maintenance and wear and tear is concerned. So we think that, that continues to create decent demand and decent industry tailwinds overall. But in terms of miles driven, it's been relatively flat, and we don't anticipate that changing dramatically. Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division: Okay. Final quick one, market share. Any sense of how you did?

Yes. We continue to do fine on market share. Our gaps have closed over a period of time, and there have been months where -- in the retail sector, where we've lost a little bit of market share. But they've shown significant improvements as we've seen our sales start to rebound.

Our next question is from Dan Wewer with Raymond James. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: Bill Giles, you commented on your prepared comments that you do not see any structural impediments for your Commercial sales program matching some of your competitors. I guess you're referring to NAPA and O'Reilly. When you indicated no structural impediment, do you think you can achieve that productivity with your current distribution strategy that does not include same-day fulfillment from your large distribution centers?

Although the way to think about it is that we do have same-day delivery out of the hubs. And so when you hear us talk about the 154 hubs that we have out there, the 82 hubs that we have expanded over the last 2 or 3 years, and we'll have several more hubs that will continue to be expanded over the next couple of years, and we continue to really optimize those hubs, both in terms of coverage, as well as delivery, our objective is really to get those products into the marketplace so they can be delivered on a same-day basis out of the hubs. And so the distribution centers will be a backup support for that. But the real key is for us to forward deploy inventory right into the marketplace so that we can get it to the customers as quick as we can. And we think the hub strategy is the one that will get us there. And we obviously have work to do. We're not there yet, but you'll see us continue to invest in hubs, and you'll see us continue invest in inventory. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: When you look at the 3,000 programs that are in place today, do you have a meaningful number that are achieving the same weekly sales volumes as those more established commercial competitors?

We certainly have programs out there that are achieving the numbers that you would see from our established competitors, without question. And so obviously, from our perspective, it's meaningful. And it also indicates to us that -- and that's kind of how we make that statement, is that there's no structural impediments because we actually have programs out there that are actually delivering that. So we know it is possible. Daniel R. Wewer - Raymond James & Associates, Inc., Research Division: And then the last question I had revolves expenses. It sounds like there may have been a few one-timers in the quarter, got a lower incentive comp, talked about a gain on sale of an asset. What do you think is the sustainable growth rate in SG&A going forward?

We're going to manage SG&A -- and you've always heard me say this, is that we're going to manage SG&A given the sales environment that we're operating in. I mean, with respect to the sale on asset, I mean, we always have periodically some sale on assets. The fact of the matter is, the organization really did a good job this quarter, as they do most all quarters, of really tightly managing the expenses based on the sales environment that we are operating in. And so there really wasn't a lot of significant fluctuation, which is why we called out the ones that we did. But I think on a long-term basis, we're going to continue to tightly manage expenses, and we're going to respond to the sales environment that we're competing in.

Our next question is from Matthew Fassler with Goldman Sachs.

This is Matt Vigneau on for Matt Fassler. I had one question about inventory. Would like to ask about the opportunities for incremental investment and your assessments on the returns you're achieving and where the opportunity is greatest within DIY versus Commercial.

Yes. I would say they're equally opportunistic. One of the things that we find as we continue to invest in inventory, particularly to hubs, as well as the individual satellite stores or the individual retail stores themselves, is that we get inventory productivity out of both Commercial and DIY, which is the beauty of the model overall, is that we have an ability to really leverage the inventory from both a DIY and Commercial perspective. Every time that we add inventory, many times it may be focused on Commercial. The fact is that we get benefits out of both. And so from a return perspective, obviously, we have stringent return metrics overall. But at the end of the day, we need to make sure that we've got adequate coverage in the marketplace, and we're going to continue to invest in inventory to ensure that we have adequate coverage in the marketplace in order for us to further gain market share. I don't know if that answers it, but that's how we look at it.

Our next question is from John Lawrence with Stephens.

Bill, would you start off with just talking a little bit on the Commercial side? Through this volatility you talked about the last couple of years, how would you talk about sales force productivity, who they're calling on, the chains or the independents, and how does that sort of ebb and flow throughout this volatility?

Yes. I think I'd start with how pleased we are with the development of our sales force. You step back 5 years ago, we didn't have a sales force, and now we have a very professional sales force. And our organization has really spent a tremendous amount of time training our sales force to do it the AutoZone way, and also providing them with the tools, a lot of which are technological tools, to make them incredibly efficient, and also gives us great insights into where they're spending their time and what are the results when they spend their time in certain areas. But as far as trying to say where they're spending their time based upon the class of trade, I would say they're spending a lot of time on both the national accounts and on the independent up and down the street operators. Both of those are -- provide us tremendous opportunities, and they're both performing fairly well.

And secondly, could you give us a sense of what percentage of inventory or sales is Duralast products at this point?

Our Duralast product continues to be probably just over 50%. You've seen over time, if you allow me to stretch back for a couple of years, where we've actually introduced it into some additional categories that previously we may have thought were impossible, Wiper Blades being a great example of that. So as we continue to look forward, obviously, there's fewer opportunities because we're taking advantage of a lot of those opportunities. But we still believe there's opportunities for us to continue to introduce the Duralast brand into other categories. But today, it's just over 50% with a slight increase.

And lastly, AutoAnything. Bill, is there anything -- I know it's early, but anything you've seen conceptually, strategically that's different than you thought? Or opportunities that you see that you could share at this point?

Yes, I think that's right, John. It's a little too early to share much. I mean, it's -- we're very excited about the acquisition. We're very excited about the team at AutoAnything. We're excited about the customer base that they have, the categories that they really penetrate strongly that are opportunistic for us. And I think the synergies between the 2 organizations are just starting to take place. So overall, we're pleased with the acquisition. And we think, strategically, on a long-term basis, it'll be a great fit for our customer.

Our next question is from Bret Jordan with BB&T Capital Markets. Bret David Jordan - BB&T Capital Markets, Research Division: A couple of quick questions and one just housekeeping. What was the SG&A impact on the lower incentive comp in the quarter?

Around 10 points or so. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then I guess as you look into the current quarter and the closing of the gap on regional performance, it was 500-odd bps last year in Q4. We've got a few weeks of May under our belt. Is the trend continuing there that you can close that gap going forward?

Yes, Bret. I don't want to get into what the trends in May since the end of the quarter are. We have a very strong practice of releasing our earnings very quickly after the end of the quarter. So here we are talking about this quarter after 2 weeks and 3 days. And I just -- I don't think it's prudent for anybody to get into what's going on in the last 2-week trends. So we tried to give you as much color as possible on April so you could understand that. But as a general practice, we don't want to get into the new quarter. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then one last question sort of following up on John's on the inventory trend and Duralast brand potential. As you build out the Commercial mix and you add incremental hard parts, is that something that is going to be a longer-term headwind to the Duralast mix as a percentage of sales? I mean, are the Commercial customers looking for branded product? Or are you getting traction, convincing them that the Duralast product line is as good as the branded alternative?

No, we get a lot of traction actually on the Duralast brand, and so we don't believe that, that's anything but positive. And so if we thought that there was a branded product that would make a difference, we'd introduce it. But the fact is, and we've done it many times before, have found that the Duralast product -- it's a high-quality product and we get it into the hands of our Commercial customers, and they see it. And obviously, we back it up with warranties, et cetera. And so that product continues to be received well. And so we certainly don't see that as a hurdle for us to get over, just the opposite. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. And then one last question. In AutoAnything and some of the more discretionary product mix that they carry, are you saying that category working better across the stores as well as discretionary coming back at all, beyond what you've added in the AutoAnything mix?

Yes. We've obviously -- it's relatively new at the moment. AutoAnything is being operated relatively separate from the AutoZone stores at the moment. And so we're continuing to evolve and develop AutoAnything. But there are certainly SKU-intensive categories that exist on AutoAnything that lend themselves to online shopping, and so that's our focus at the moment. Long term, there will be some opportunities for us to integrate the 2. But at the moment, they're being operated as a standalone. Bret David Jordan - BB&T Capital Markets, Research Division: Okay. So you haven't changed. I've seen some stores that seem to have a heavier discretionary mix in some performance parts and appearance accessories, that you're not changing your SKU mix on the Retail format in some markets to sort of test that product out?

No more than we would normally. I wouldn't equate it to an AutoAnything transaction.

Our next question is from Greg Melich with ISI Group.

I've got a follow-up on inflation, which is something that used to sort of run around 2% in the industry and then seemed to go away last year. Could you give us an update on where we are with that and also the promotional environment, given that everyone seems to able to buy stuff cheaper than they did a couple of years ago?

Yes. I think you hit it. I mean, the fact is, is that I think probably -- you're right. About 2 years ago, we had some inflation last year. It was relatively moderate. And so far, this year, we're seeing it relatively moderate. And that's why in our prepared remarks, as Bill said, we're seeing the pricing index not really look as though it's going to be increasing much. So we don't see inflation being a positive or a negative necessarily. It's kind of a neutral overall. From a promotional perspective, I would say that we're not really seeing anything different in the marketplace promotionally. I mean, there's certainly a category or a product here and there that might have some increased promotional activity for a short period of time. But on an overall basis, I would say that we're not necessarily seeing any kind of a change in promotional activity per se. There will always be some price adjustments, but not any kind of promotional activity per se.

Great. And then just looking at the quarter, Bill, I think in your prepared remarks, you mentioned that the 2-year comp was better as well. Were you referencing April in that regard? Or were you talking just about the quarter?

Yes, that was specifically about April. We did have a very strong April, and I didn't want people to think it was a one-year lap. So it was 2 years we've grown same-store sales.

Got it. And you -- so now that you look at all the Easter shifts and the weather and all that, do you think the base that we're working with now for this quarter is something that's more normal?

I hope so. I think what we've been saying for the last 9 months is once we annualize that crazy winter last year in 2011 and 2012, we would anticipate more normalized run rates. And so I think we're sticking with that at this point in time.

And then just also taking into -- taking into account also the macro effects that Bill talked about before with the payroll tax, that's the one factor that we don't really know, on a long-term basis, what the impact is to our consumer.

Got it. And then just lastly on SG&A, given some of the puts and takes there and how you historically were able to bring that dollar growth down to basically flat or just up 1% or 2% way back when comps were flattish for a sustained period, how do you think about SG&A now? It seems like it should, just on a dollar basis, grow more than it would have 6 or 7 years ago, given the growth in Commercial. Am I thinking about that right? Or...

Yes, I think you are. I think the fact is, is that we want to continue to invest in the business. We want to make sure that we're continuing to deliver WOW! Customer Service and being able to take market share. So we're all about making sure that we've got a good face to the customer and that we're providing great service. And we're going to invest properly to do that. That starts all the way from training to customer service, to hubs and to inventory, et cetera.

Our final question today is from Aram Rubinson with Nomura.

This is actually Chris Bottiglieri on for Aram Rubinson. My question is, as a newer entrant to the commercial space, what changes do you expect to make in order to reach the next level of growth in your existing markets? Do you see that driven more by pricing? Is it going to be a change to sales or service?

I think it's going to remain sticking with our strategy. You've never heard us talk about price being a key driver. We don't think -- we want to be a trusted partner with our Commercial customers, and that means we want to sell them at a reasonable price. We want to have the inventory that they need. We want to get it to them as quick as humanly possible and really build a long-term relationship that certainly is broader than price. All right. Before we conclude the call, I'd like to take a moment to reiterate that our business model continues to be solid. We're excited about our growth prospects for the year. We'll not take anything for granted, as we understand our customers have alternatives. Our culture remains our key point of differentiation from our competition, and we must not lose sight of the importance of basic store execution in order to remain very successful. We have a very solid plan to succeed for the remainder of the fiscal year, but I want to stress that this is a marathon and not a sprint. As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be very successful. Before we close, also, I'd just like to wish everybody a very happy Memorial Day. And obviously, our thoughts are with those folks in Oklahoma who went through so much devastation yesterday. So thank you for participating in today's call.

Thank you. This does conclude today's conference. Thank you for joining. You may disconnect at this time.