Good morning and welcome to the AutoZone Conference Call. Your lines have been placed on listen-only until the question-and-answer session of the conference. 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 first quarter earnings release. 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 AM Central Time, 11 AM 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, product demand, energy prices, weather, competition, credit market conditions, access to available and feasible financing, the impact of recessionary conditions, consumer debt levels, changes in laws or regulations, war and the prospect of war, including terrorist activity, inflation, the ability to hire and retain qualified employees, construction delays, the compromising of the confidentiality, availability or integrity of information, including cyber attacks and raw material cost of our suppliers. Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of the Annual Report on Form 10-K for the year ended August 26, 2017 and these risk factors should be read carefully. Forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements and events described above and in the Risk Factors could materially and adversely affect our business. Forward-looking statements speak only as of the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results.

I would now like to hand the call over to Mr. Bill Rhodes. Please go ahead.

Good morning and thank you for joining us today for AutoZone’s 2019 first quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the first 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, are available on our website, www.autozoneinc.com. Please click on quarterly earnings calls to see them. To begin this morning, I want to thank all AutoZoners across the company for their tremendous efforts during our first fiscal quarter. Their dedication and commitment to superior service resulted in a strong start to our new year. As we entered the quarter, we knew we had a difficult sales comparison due to the sales favorability we experienced last year from three significant widespread hurricanes. Last year, we highlighted that our sales increased an additional 50 to 60 basis points from the effects of those hurricanes. Unfortunately, this fall, many people were also impacted by the two hurricanes that struck our shores and the terrible wildfires out west. While certain areas experienced significant damage, the effects of the storms weren't as widespread as last year and the impact on our business this year was negligible. Unfortunately, we have AutoZoners and customers who were severely impacted and we've worked diligently to help them where possible. Ultimately, considering the more challenging comparisons to last year, we were pleased with our same store sales growth of 2.7%. Regarding the cadence during the quarter, results were generally consistent, except in the weeks and markets that we were lapping the hurricane events from last year and the last week of our quarter was particularly strong as much of…

Thanks, Bill and good morning, everyone. To start this morning, let me take a few moments to talk more specifically about our domestic, retail, commercial and international results. For the quarter, total auto parts sales, which includes our domestic, retail and commercial businesses along with our Mexico and Brazil stores increased 3.3%. For the trailing 52 weeks ended, total sales for AutoZone store were $1,792,000. Total commercial sales increased 11.3%. In the quarter, commercial represented 21% of our total sales and grew $56 million over last year's Q1. We opened 25 net new programs versus 30 programs opened in our first quarter last year. We now have our commercial program in 4,766 stores or 85% of our domestic stores, supported by 196 hub stores. In 2019, we expect to open approximately 150 new programs. As Bill mentioned earlier, we remain committed to gain market share with our commercial customers and we're encouraged by the initiatives we have in place and feel we can further grow sales and market share. Our Mexico stores continue to perform well. We opened three new stores during the first quarter, ending the quarter with 567 stores. We expect to open approximately 40 new stores in fiscal 2019. Mexico business remains challenged by peso foreign exchange rate movements relative to the US dollar. While our hope is 2019’s exchange rate will settle down and will strengthen relative to the dollar, we are pleased with the Mexico leadership team's ability to manage this business through foreign exchange volatility. Regarding Brazil, we continue to operate 20 stores. We have aggressive plans to open between 15 and 20 additional stores by the end of the fiscal 2019. Our performance continues to improve and we remain optimistic about the long term future of this market. If we can prove success,…

Thank you, Bill. While we had a strong start to our fiscal year, we are careful to not over commit to any outcomes when it comes to our second fiscal quarter. The second quarter has perpetually been our most volatile quarter due to many things I‘ve already highlighted. We believe our industry’s fundamentals remain very strong and are likely improving with the price at the pump decreasing. We've seen predictions that it will be a relatively harsh winter, but I'm not sure our insights into upcoming winters have traditionally been very strong. I know we will adjust and optimize our performance regardless of conditions and we remain very bullish on the long term fundamentals of our industry, both in retail and commercial. We are excited about our balanced model for growth around domestic, retail commercial, international, online and pick up in-store. We believe our hubs and mega hubs, Mexico, all data and e-commerce can all grow their top lines in 2019. To execute at a high level, we have to consistently adhere to living the pledge. We cannot and will not take our eye off of execution. We must stay committed to executing day in and day out on our game plan. Success will be achieved with an attention to detail and exceptional execution. Our customers have choices and we must exceed their expectations in whatever way they choose to shop with us. We are fortunate to operate in one of the strongest retail segments and as we continue to be excited about our industry's growth prospects for 2019 and beyond. As customers continue to look to save money while taking care of their vehicles, we are committed to providing the trustworthy advice that they have come to expect. It truly is the value add that differentiates us from any other faceless transaction. Customers have come to expect that advice from us. It is with this focus we will implement more enhancements on both our DIY and commercial websites and in-store experience to provide even more knowledgeable service. Service has always been our most important cultural cornerstone and it will be long into the future. Our job 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. This formula has been extremely successful over the last 40 years and we continue to be excited about our future. Now, we'd like to open up the call for questions.

[Operator Instructions] First in queue is from Simeon Gutman of Morgan Stanley.

Good morning, guys and good start to the year. So, Bill Rhodes, two-part question. You talked a lot about this in the prepared remarks. Can you talk about what's been driving this steady improvement in the commercial the past few quarters and now the jump to double digits? And just a second part is, if there's any extent, there's a difference in your answer, how do you narrow the gap over time versus your competitors.

Yeah. I'm not sure that there's a difference. I think it's about blocking and tackling more than anything else, Simeon. As we mentioned in the last call, in the second half of the last year, our execution wasn't up to our standard across the enterprise and we, as a senior management team and across the organization, really re-dedicated ourselves to customer service across the organization and on the commercial side, the biggest thing that we've done is we've enhanced the engagement of the local store team and particularly the store manager. They own that business. They have to own that business. Many of them grew up with retail only as their strength. And so, as we've matured in this business, they're getting more and more involved and I think that's leading to our success.

And if we drill down, if you look at sales per account or the number of accounts that you're selling to from a commercial standpoint, if you look at geography, if you look at stores that are benefiting more from mega hubs, is there anything that distinguishes how the step up is occurring or where it's occurring?

Well, I think there certainly are geographies that are outperforming others and that's always the case based upon weather patterns or what happened last year. Probably, the biggest difference over the last couple of years with our commercial business is for -- from -- for 5, 6, 7 years, we were really focused on opening new programs and that's where our sales growth was coming from. As those new program openings slowed down, we had to figure out ways to grow our business in the -- with existing stores and with existing customers and I think that that's where we've been successful. I would also say that our traditional up and down the street business has been very strong and that speaks to the same thing, just focused on the customer relationship day in and day out, providing fast deliveries. I think the other thing is more and more the Duralast brand is becoming stronger and stronger in the automotive aftermarket, if you looked at it 10 years ago, a lot of people thought it was a weakness. I don't think there's anybody out there that thinks it's a weakness anymore.

Next is Michael Lasser of UBS.

It’s Michael Goldsmith on from Michael Lasser. Thanks a lot for taking my question. So, was there a pickup from the impact of inflation during the quarter until the vehicle parts and equipment CPI accelerated in October and are you starting to see prices go up as a result of tariffs? And then just also, has there been any rising prices in the goods you purchased from vendors, as they experienced some of the cost pressures out there like wages?

That's a great question. I would say that we have seen very moderate inflation overall, but we are seeing a little bit. And so, I would say some of our margin benefit this year continues to be the great work that our merchandising organization is doing at lowering acquisition costs across the board and our ability to continue to pass on retail pricing where appropriate for products that do experience some cost inflation. From a tariff respective, we haven't seen a significant impact on this first round of tariffs. And obviously, the Chinese currency was devalued, so there was some opportunity for us to mitigate some of those tariff increases, but I think our merchandising organization has done a great job of mitigating that. So overall, I’d say, a little bit of inflation, which we think long term will be helpful and continued ability to pass on some retail pricing.

And then recognizing that weather can have an influence, how does your outlook for industry growth next year compare to a normal year and maybe what would a normal year look like at this point?

I would just -- we don't give guidance. I want to be very careful on that. I would just encourage you to go back and look at what's happened over the last 6 or 7 years. I’ve spent some time about a little over a year ago talking about how tight demand is of our industry's performance and our performance. It just doesn't fluctuate significantly and I just turn you back to look at what's happened since 2013 for instance. 2013 was a bad year with weather and our sales were softer. ’14, ’15, ‘16 were stronger, so we'll see what happens.

Next question is from Seth Sigman of Credit Suisse.

Bill Rhodes, following up on one of your points, thinking about some of the challenges that you highlighted in the fourth quarter and I'm talking about the product changeovers, the impact from pulling away from that online promotion, I'm just curious if you can elaborate a little bit more on the changes you made in the first quarter and if the issues that you were facing, were those fully addressed in the quarter? In other words, there was no drag on this quarter at all from some of those issues lingering?

Well, we obviously corrected the online promotions about a week and a half before the beginning of our first quarter. So that was up and running the entire quarter and oh, by the way, it was enhanced by our next day delivery program that was in 80 plus markets at the beginning of the quarter and ended in 95 plus markets. So, we had some benefit of rolling next day, but that's not a material driver. As far as the product category changeovers, most of them had recovered by the beginning of the quarter, but some of them still hadn't and frankly there's still a couple of them that we still have some lingering effects, but the vast majority of it was behind us, as we came into the quarter.

And then my question, my follow-up is on the DIY business. One of your competitors had talked about weaker traffic and consumers maybe deferring some maintenance due to higher gas prices and product inflation and obviously that was as of September, but I'm just curious is that something that you guys have seen also and if so, are there any signs that that's starting to reverse, particularly in light of your commentary and optimism for the lower gas prices that you're now starting to see?

Seth, I would say that that commentary is inconsistent with our experience. And I would also say, I'd add an exclamation point to it and we're talking about a different period of time. This quarter started at the beginning of September, ran through mid-November. That is inconsistent with what we experienced and in fact we spent a lot of time coming into this quarter, talking about the fact that we had those massive hurricanes last year. If you remember, they were significant in all of Southeast Texas, in particular, Houston. And then you had the whole South Texas and central or sorry, South Florida and Central Florida were impacted and then Puerto Rico where we have a significant presence, those were all impacted. But we were expecting to have a pretty tough compare coming into this quarter and the performance that we had was certainly an acceleration of the performance that we had in the summer.

Next question is from Mike Baker of Deutsche Bank.

First, I wanted to ask you about the commercial business and I was intrigued by something you said that you were just implementing new systems for that business, but they won't really even kick in until the end of the year. So just to be clear, you're seeing an acceleration without even the benefit of those and if that's the case, when do you expect commercial to go over time, as you put in those systems, as you have to sort of target percent of sales or anything along those lines.

I would say that relative to the systems, I mean, we're always working on some things in order to enhance our ability to be able to do business with our customers on an easier basis, whether that be billings, looking at activity, et cetera. There's a host of things that we're working on today and will likely launch later in the calendar year of 2019. We feel great about the commercial business growth rate that we achieved in this quarter, being up double digits. We still said it's one of the strongest performances we've had in a few years and so we feel good about the momentum and I think a lot of it is really gets back to the blocking and tackling. So the systems will be a benefit, but there's a whole host of other things that we're doing every single day in order to help drive commercial. So we feel good about where we are.

One more question, just the – can you tell us your buy online, pick up in store percent of e-commerce where I guess customers are coming in -- for going at 20% discount to come into the stores, what percent of your online sales is that?

We haven’t given a lot of clarity on that. So think about it as three different buckets. Ship to home, our next day delivery program and buy online, pick up in store. Buy online, pick up in store is the largest of those three segments by a pretty significant margin. So yes, it says that the customer needs that trustworthy advice. They need to figure out what do they need to fix, how do they fix it, do they need the tools, do they need to fix finders, all those things, that's what drives them into the store and that's why this is the perfect channel in my opinion for an omnichannel experience, not just an online experience.

Next we have Chris Horvers of JPMorgan.

This is Jerry Sullivan on for Chris. Your peers reported seeing some pressure from rising fuel costs. What was your experience with fuel this quarter and if fuel was a headwind to margins, were there any offsets on your delivery?

Fuel was a little bit of a headwind, it wasn't significant, but obviously, as you see it as we do as well, we're encouraged by fuel prices coming down as of recent. So I think it was a little bit of a headwind in Q1, not significant, not worth calling out, but we hope that moderates going forward.

Next is Matt McClintock of Barclays.

So, two questions. The first one is just the next day delivery, follow up on that. I think you were 80% of cities or the country last quarter. Now, you're 85%. Can you give us a sense of the uptake in terms of consumer interest in that offering that you've seen and is that accelerating and how should we think about that in year 2, year 3. Is this something that will build with brand awareness?

That's a great question and frankly one that I'm not sure we have wonderful answers to, because we're new on this journey as well. Yes, we went from 80% of the US population to 85% of the US population, including Puerto Rico. I would not expect us to get to 100% and I would think that our growth from here would be fairly limited, because you're talking about less dense areas of the United States. Is it continuing to grow? Absolutely. It's also, I would say, a minuscule part of our business today. So I don't want to get pumped as up as some massive change in our offering. It is a really good offering for a customer who needs that service and we are certainly the only ones in our sector and frankly probably leading all of retail for a customer to be able to order something as late as 10 PM and have it on their doorstep the next day. But it is again a very small part of our business. I hope it grows and I hope that it satisfies customers and meet some of their needs that couldn't be met yesterday.

And then just as a follow up, you did a good job of outlining all the improving macro drivers of the business and optimism as we progress through the year, can you talk a little bit about tax refunds? There's a lot of noise out there about that potentially being a pretty strong positive as we get to that season in the spring?

I think we're still trying to learn what's going to happen with tax refunds and frankly every year, we are. What's the timing? That seems to be more certain this year than it was a couple of years ago. The real question is, what are people's withholding rates going to be versus the tax credits that they're getting and this is all a brand new world for everybody. So I don't think we have very good visibility into what that's going to mean. At the end of the day, I can't do anything about it except market into it. We will be marketing into tax season, regardless of whether it's bigger or smaller. So that's where we are at this point.

Next, we have Seth Basham of Wedbush Securities.

My first question is on SG&A guidance. Previously, you guys had talked about 6.5% to 7% SG&A growth for this fiscal year, excluding the impact of the 53rd week, is that time -- is that guidance still intact?

Yeah. I would say that guidance is still intact and that would be a little bit towards the lower end of that range, but I would say that that guidance is still intact.

And then my follow up is around the commercial programs. You talked about the engagement of store managers helping drive improvement in commercial sales, can you talk about what you've done to engage them and when you’ve made such changes, including any changes to the incentive compensation structure?

We haven't made any changes to the incentive compensation structure. What we have done and again, you have to remember, we did grow up as a retailer. We were a retailer long before we ever got in the wholesale business and most of our management team grew up as retail first, I call it, when they think, they're fastball, it's retail. So one of the things we don't over the last, I guess, starting in the fourth quarter is, we started getting our store managers to make sales calls directly to the customers. So leave the store and go in the shop and make sales calls. In doing so, they certainly get a better understanding of the commercial business, they also have the opportunity to hear from their customers face to face what's going well and where there are opportunities for improvement and that has just driven their engagement at a very different level than it was before. I applaud our team for coming up with this approach and I think it's working at this point in time.

Thank you. Next line is from Greg Melich of MoffettNathanson.

I had a couple of questions. One is – and congrats on the quarter, guys. You mentioned, I think, last quarter that the removal of promotions online had hurt comps by 40 bps. Is it fair to assume that putting them back on sort of gave you that -- part of that reacceleration or does it take time for that to kind of come back? And then I had a follow up?

Greg, it definitely was 40 basis points. That was the direct portion and I would say it absolutely came right back. So yes, that was a difference. The question that we had that really is very difficult to answer is there's a lot of customers that are going to our website and our competitors’ websites to look for pricing and availability. If we're out there, without a promotion and others are out there with a promotion, does a customer dig deeper into the website, because of a price perception and therefore even though they're doing in-store purchases, do they -- do we get at a disadvantage about not being that promotional effort? I don't know what the answer to that is. So it's definitely at least 40 basis points. It could be more than that.

And you mentioned tariffs before, could you help us frame that a little bit? It sounds like it's being mitigated really well. What percentage of your cost of goods sold or sales, however you want to cut it, are on the current section 301 list? In other words, if in 60 days or 90 days, if we end up going to 25%, just help us frame what's on the list and what isn't as of today?

I don’t have a number off the top of my head, Greg, to give you exactly what percentage of our CGS is impacted by the current tariffs that are going. Obviously, you’re right. The next round is going to be broader, if it does happen, and obviously, at a higher rate. So there will be some impact from that. Traditionally, the industry's had a very good track record of being able to pass on increased prices to consumers. So we currently expect that to continue, but we'll wait and see.

Was the 2.7 comp this quarter, was that all basket or was there some traffic or transaction count growth?

It's all -- it's predominantly basket. It's not really driven by traffic.

Next is Scot Ciccarelli of RBC.

This is actually [indiscernible] on for Scot Ciccarelli this morning and really nice quarter everybody. A quick question on the commercial side and you talked a lot about it already this morning, but given the industry trends, I guess, how would you think about or how would you attribute the success particularly in this quarter to longer term factors such as the cyclical recovery versus maybe shorter term factors such as the better weather.

I wouldn't really chalk it up to either of those. You have to remember, our market share is only 3% in the commercial business and I think what we do dwarfs anything that's going on in the macro environment. And if you look at the succession of our growth the last three quarters, we've accelerated the growth and basically doubled where we were about a year ago. I don't think there's anything in the macro that would be contributing to that. And I also think, I don't want to overstate that it was what we did in the fourth quarter with sales calls or anything else. This has been a long standing program to improve our commercial business. If we look at the work that we've done over the last three years on inventory availability, our ability to say yes to our commercial customers needs is vastly different than it was a few years ago. And as I mentioned earlier, the Duralast brand is becoming a really strong brand in the commercial side of the aftermarket. That was not the case years ago, but I think it's more about what we're doing and less about the macro factors.

And our next question in queue is from Bret Jordan of Jefferies.

Just about a follow up question on the commercial. It sounded as if a lot of what you're picking up is sort of up and down the street independent, commercial customers as demand here is going out, could you talk about what your mix of that independent versus national account is in commercial.

Yeah. I would say it's certainly way over 50%. It's the core of our program and we're spending a lot of time and energy building that side of the businesses as the national accounts as well, but that is a healthy part of the business and continues to grow.

Any feeling for where you’re taking that share from? Is that mostly the independent distributors that are giving up the smaller commercial customer?

Let me back to what Bill said before, we have such a very small market share today. We view everything as very green field and with significant opportunities. I'm sure we're taking a little bit from everyone.

And Bill, just a question I guess on inflation for next year, obviously, we don't know what the tariffs will amount to, but when you think about just material costs and higher rates on factoring expense, what do you think is sort of a base case for inflation in 2019?

I think it's probably, I don't know for sure, so I hate to get pinned down on a number, but it's probably in the 1% to 2% range.

Thank you. And that was our last question. Back to you, Bill.

Okay. Before we conclude the call, I'd like to take a moment to reiterate that our business model continues to be solid. We are excited about our growth prospects for the year. We do not take anything for granted, as we understand our customers have alternatives. We have a solid plan to succeed this 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're confident AutoZone will continue to be successful. We thank you for participating in today's call and we'd like to wish everyone a very happy and healthy holiday season and a prosperous New Year. Thanks for your time.

That concludes today’s conference. Thank you for your participation. You may now disconnect.