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 that time. This conference call will discuss AutoZone's Second 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 10:00 AM Central Time, 11:00 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 constitute forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, seek, may, could 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 costs 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 this Annual Report on Form 10-K for the year ended August 25th, 2018 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 acquired 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.

May I introduce your speaker for today Mr. Bill Rhodes. Please go ahead.

Good morning. And thank you for joining us today for AutoZone's 2019 Second 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 second quarter, I hope you've had an opportunity to read our press release and learned 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 Conference Calls to see them. To begin this morning, I want to thank all AutoZoners across our organization for their dedication, hard work and for putting our customers first in everything they do again this quarter. Their efforts directly correlate to our success. On the last earnings call, we were optimistic about our second quarter, but cautioned everyone about the inherent volatility the second quarter presents to us every single year. It is our lowest sales quarter. It has a couple of holidays that shift year-to-year and different weather patterns make our week-to-week sales quite volatile. As we entered this winter, we knew we had a more normalized winter last year than the two years before. We also knew that the middle of the quarter last year was very strong due to harsh winter conditions. This year, our sales were generally on plan for the first few weeks. Then they were materially softer in the middle of the quarter on both the one and two year basis. Then when the polar vortex arrived sales rebounded nicely to finish the quarter. We wish we didn't have to focus so much on 'the weather' but in the second quarter in particular it really matters. Just to add an exclamation point, our weekly sales during the quarter had a variance…

Thanks Bill. 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 include our domestic retail and commercial businesses, our Mexico and Brazil stores increased 3.1% and for the trailing 52-weeks ended total sales per AutoZone stores were $1.8 million. Total commercial sales increased 12.9% in the quarter commercial represented 21% of our total sales and grew $59 million over last year's Q2. We are now averaging just under $10,000 a week and commercial sales per program. On a trailing four quarters, we are now selling over $2.3 billion commercially. We now have our commercial program in 4,788 stores or 85% of our domestic stores. And as Bill mentioned earlier, we remain committed to gaining market share with our commercial customers. We are encouraged by the initiatives we have in place and feel we can further grow sales and market share. Our Mexico stores continued to perform well. We opened one new store during the second quarter ending the quarter with 568 stores. We expect to open approximately 40 new stores in fiscal 2019. Regarding Brazil, we now operate 22 stores. We have aggressive plans of approximately 17 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, this market has the potential to be much larger than Mexico, so while challenging the potential side of this market is significant. Gross margin for the quarter was 54.1% of sales, up 115 basis points from last year's second quarter. The increase in gross margin was primarily attributable to the impact of the sale of the two businesses…

Thank you, Bill. While we had a strong start to our fiscal year, we know we have much work to do to finish this year strong. Our spring and summer periods generate a majority of our annual sales, and we'll be opening up a majority of our new stores and new commercial programs during this time period. What keeps us incurs [ph] is the relentless focus we have on servicing our customers better and simplifying our AutoZoners work especially at the store level to reduce clutter and unnecessary tasks that get in the way of making the customer experience better for both our do-it-yourself customer and our professional customer. We believe our industry's fundamentals remain very strong and are likely improving with the price of gas at the pump down versus last year. This upcoming quarter, we are focused on both macro and internally driven initiatives. We are certainly monitoring the pace and amount of tax returns as this could either a significant benefit or a detractor based on the total refund dollars that are processed. And we are most excited with the sales tracks that we have been gaining especially in our commercial business. We are excited about our balanced model for growth around domestic retail and commercial, international, online and Pickup In Store. We believe our hubs and mega-hubs Mexico, Brazil, ALLDATA and e-commerce can all grow their top lines in 2019. To execute at a high level, we have consistently - 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. Service has always been our most important cultural cornerstone and it will be long into the future. Our charge remains to optimize our performance regardless of market conditions and continue to ensure that 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 now nearly 40 years and we continue to be excited about our future. Now, I would like to open up the call for questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Christopher Horvers from JPMorgan. Your line is now open.

Thanks. Good morning, guys. First question is on the gross margin outlook. Bill, you mentioned that you are focusing more on gross profit dollars. I think in the past you talked about - you saw some opportunities in terms of some gross market rate expansion going forward. So how are you thinking about the merchandise margin going forward? And related to that, did this quarter include any benefit from - through the early timing, or early receipts related to tariffs or anything with managing the tariff through?

I would say probably not. I mean, as we mentioned we had about 70 basis point impact, positive impact from the sale of the two business units, so far it be, a little less than half of that in next quarter. Excluding that our margin remains relatively healthy. So we are up about 44 basis points this quarter. I think the merchandising organization has done a terrific job. They are sourcing the opportunities that they've done and managing inventory. So overall, we've been pretty sharp on our margin. We are going to continue to have pressure on margin as our commercial business continues to grow at significantly faster rate than our DIY business. So we continue to expect to see that margin benefit that you will see [ph] come down a little bit over time, but we'll continue to be driving gross margin dollars.

Understood. And then a follow up on your comment around 4Q, including the 53rd week. As you looked at the consensus numbers, where do you think people aren't picking it up? Is it a sales question, is it expenses, is it earnings? Where do you think the consensus isn't picking up that 53rd week?

Yeah, I'm not calling out that they are not picking it up necessarily. I just wanted to make sure that others - that we highlighted it for anyone who isn't just so that when we get to the fourth quarter there will be no mystery about it and I would encourage you to just go back to 2013 to see how that's kind of laid out. But I'm not calling out anything specifically about the consensus estimates for the 53rd week.

Understood. And then last question, you know, the commercial growth is really impressive as was the acceleration, especially in light of the weather issues in the middle of the quarter. Can you talk about what the primary drivers are, do you think it's the mega hubs that's driving the improvement, is it the sales effort and any delineation there? And then related to that on the mega hubs, are you starting to transition to more same base fulfillment out of the mega hubs? Or is it still primarily an overnight fulfillment stores? Thank you.

Yeah, terrific question Chris. First of all, I think the growth in our commercial business and the acceleration in that growth which we are quite pleased with as well is coming because of a long list of issues that we've been - or initiatives we've been embarking on for the last several years. We really started this inventory availability efforts probably four years ago now. They were first focused on in-store, placements and improvements in inventory there that were more focused on the commercial business. They then evolved to our hub stores and now our mega hub stores. I think the other big thing that we are doing this year is we have really put a lot of focus on getting our in-store teams very focused on customer service in the commercial business. So our store managers are now making sales calls and they are making sales calls, but the biggest thing they are doing is they are making customer service calls. And they are understanding where we're doing really well and their understanding where we have opportunities for improvement. And then they are going back and doing what they do. They are managing the store operations, but focused much more today than a year or two ago on the commercial operations as well. As we look at the mega hubs, one other big element and I want to talk about in commercial, is the Duralast brand. If we had this call 10 years ago, I think most of the people listening to it would have thought that the Duralast brand was a net negative. Make no mistake about it, the Duralast brand is a big positive for our commercial business. And as we've improved the product quality and as we improved the assortments, we are really excited about what it means to our long-term growth potential. As far as your question specifically on the mega hubs and are we increasing the same-day service? Yes, every time we open one, we increase the amount of stores that get same day or even three time a day service. So, whatever stores are attached directly to that mega hub will immediately get three time a day access to that inventory. If there are other hubs that are in the local market that they can get to, those hubs will also get service between one and three times a day on a same day basis. So absolutely as we open more and more mega hubs, we are increasing the same day service.

Thanks, guys.

All right. Thank you.

Thanks.

Thank you. The next question comes from Michael Lasser from UBS. Your line is now open.

Good morning. Thanks a lot for taking my question. Bill, your comments around the late tax refund, should we interpret that to mean that the business has slowed given that tax refund are down materially year-over-year in the last few week?

Yeah, It's a fantastic question, Michael. And frankly one that I don't want to spend too much time on. As you well know, we have a - we released our earning so soon after the end of the quarter. So our quarter ended 17 days ago or so. And so I don't like to spend any time on what's going on in such a short period of time, I just don't think it's productive and I know you all are looking at the long-term anyway. But to your point, so far in the tax refund season, through last Friday, which we've all seen the numbers, we're down about 40%. I think it's $100 million through last Friday this time last year and it's $60 billion - $100 billion and $60 billion this year. Clearly that is impactful to our business. We talked every single year over the last decade about the importance of tax refund season. I think that it's going to be really interesting to see what transpires over the next couple of weeks. The child income tax credit and earned income - child tax credit and earned income tax credit both have been delayed. We haven see those dollars. I think the expectation is they will begin to flow this week. We are anxiously awaiting them and we are going to make sure we are in very good shape and prepared to take advantage of whatever tax monies flow. At the end of the day, there is nothing we can do about it. We are ready for them and look forward to seeing those dollars, but nothing else we can do beyond that.

I understood. That's helpful commentary. My follow-up question is your tone around price increases and the impact from tariffs related inflation on your business in the contrast a bit with what the others in the industry are saying. They are calling out clearly a benefit to the comp - their comps from some inflation that pushed through if only because of from a tariff. Why you think what you're seeing is different than them?

Yeah, I think it's a great question. We're asking ourselves the same question, because frankly we're not seeing additional inflation over what we historically have seen. So I'm not sure what they are seeing in their numbers. As I mentioned in our prepared remarks even with the tariffs that we saw at the same times that those tariffs happened the currency fluctuations where tariffs were up and the currencies was up 8%, so we were able to negotiate a significant amount of those increases away. So we haven't seen material changes one way or the other.

Understood. Good luck with the rest of the year.

Thank you, Michael. Appreciate it.

Thank you. The next question comes from Simeon Gutman [Morgan Stanley]. Your line is now open.

I apologize I missed a couple of the first questions. So hopefully this isn't repetitive. My first question is on the gross margin theme, and I assume it's being helped to some degree by private brand. I wanted to ask you how contentious your internal debate is around investing more into price versus letting gross margin go up. Because as you know the bogyman of the space has been online and pricing and we get intrigued by that question a lot. So you are allowing the gross to grow up. How big of a debate is it internally to push pricing down?

Yeah. I would say it's not necessarily debate per se. I mean, we're going to be priced right and within the marketplace, and we're going to remain competitive. And our value of proposition obviously is well beyond just pricing. As Bill actually mentioned in his prepared remarks, there's an awful lot of service that take place for both our DIY customers and our commercial customers both, as far as delivering products to our commercial customers or servicing the customer inside the DIY store with either Fix Finder, testing batteries, testing starters. So there is all sorts of service that takes place inside of store. So it's really beyond just pricing, but we're going to remain competitive in pricing and we're going to just continue to be aggressive about sourcing and finding opportunities to lower acquisition cost that will keep up our margin healthy. We obviously have had good improvement in margin over the last quarter - over the last several quarters. We expect our margin to remain healthy, but we also recognize that as our commercial business grows at an accelerated rate over DIY that will continue to put pressure on margin. So you may not see as big as increases in the future.

Okay. Thanks. And then my follow-up is on the commercial sales, the composition of the 13% gain this quarter. Can you tell us what was a bigger driver, sales for commercial account or the number of accounts that you're picking up?

I would say it's across the board. It was customer account increases, it was average ticket increases, it was new customers, it was up and down the street customers, it was national account customers. We're seeing it, Simeon, across the board. We've seen that momentum continue to grow over about that last year and I think it's because we're working on the foundational elements that are important to the customer.

And can I just follow-up to that, are there certain product categories where your share gains are outsized or are you seeing like breadth across all of your product categories?

Yeah. There is one category in particular where our gains are high, but it's not driving our overall performance and that's because there are some supply disruptions in the marketplace. Those things are always happening. As we talked last year, we had several high disruptions on our behalf last year. But it's really across the board from - but mainly focused on our hard points. There is not a lot of commodity sales growth. It's maintenance and failure of parts is where we're growing our business.

Okay. Thank you both. Good quarter.

Thank you.

Thank you.

Thank you. The next question comes from Dan Wewer from Raymond James. Your line is now open.

Yeah. Thanks. Bill you talked a lot about the big growth in Mexico and Brazil. Can you remind us how the economics of the stores compared to the U.S. perhaps talk about sales per store and operating margin rate? And then also curious as to why you're more upbeat long term about Brazil and Mexico, is it just the size of the population or there other benefits?

Yeah, terrific questions. We haven't gone into a lot of specifics of our business in either one. Mexico, we've been there for 20 years now and we have a really nice robust business, and the team down there has done a fantastic job and they really leveraged the AutoZone culture. The proudest thing that I have every time I'm down there is just to look and see how much they've replicated what has made AutoZone special in the United States. As for Brazil, I was actually there last week. We had to talk a whole lot about that business except we mention that we're losing a sizable amount of money down there today. We have 22 stores. We've been there for six years, 6.5 years now. It's slow going because we're trying to make sure that we figure it out. The one thing that we have solved for sure is that it works for the Brazilian customer. The customer traffic flow that we have down there is really terrific. It's exciting to see every time I go down there, I get inspired and encouraged about what could be. The economics don't work for us yet. That's because we have 22 stores. We've got a big overhead structure in place and warehouse structure in place. We're still developing the vendor relationships that we need and we're optimistic about the future, but we haven't passed that final test phase yet. What makes us excited and the reason we're there is it can be a really, really sizable market. So the size of the prize could be significant. One of the things we talked about last year when we sold IMC and AutoAnything is that they just couldn't ever be material drivers of the performance of AutoZone. Well Brazil is the exact opposite of that. We could easily have 1000 stores in Brazil if we can make it work for us financially, but we have not finished checking that box yet.

Okay. And then just second question on the accelerated SG&A spend in 2019. Do you expect the SG&A growth to increase at the same rate in fiscal year '20? Or does that moderate closer to historic levels?

It should moderate to more historical levels. I mean, we made some significant investments this year both on wages where we really invested in our most tenured and talented AutoZoners that are facing our customers every day. That investment was made at the tail end of Q1. And so when we - we will continue to have an accelerated SG&A growth rate until the point in time in which we anniversary that. And we also have been making some technology investments throughout the year as well. But Dan, I think if you look past FY '20 or fiscal year '20 when you get past the first quarter of fiscal year '20 then you should begin to see some more historical growth rates on our SG&A spend.

Okay. Great. Thank you.

Thank you.

Thank you. Speakers, the next question comes from Seth Basham from Wedbush Securities. Your line is now open.

Thanks a lot and good morning.

Good morning.

My question for you is around mega-hubs build and you talked about increasing your mega-hub count and success [ph] best strategy. Can you give us some perspective for the mega-hubs that have been open for more than a year and markets that they serve, do they continue to outcome the company average?

Yeah, I would say particularly the mega-hub itself will significantly outcome because it's got a significant inventory assortment. But the stores attached to it will generally grow certainly in the first year more and then it will moderate, but they will continue to outcome a little bit.

That's helpful perspective. So when you think about the improvement in commercial sales trends in the last few quarters, how would you attribute the breakdown between increased availability through your mega hub and hub strategy relative to your increased engagement in the store teams?

You know, I think the bigger thing that we've changed year-over-year is the engagement of the store teams. This mega hub and inventory availability work, as I mentioned a few minutes ago, that's been going on for four years. We continue to get better and better at it and I think the customer continues to appreciate it more and more, just like they are continuing to appreciate the Duralast brand more and more. But I think the big - the biggest change that we made is the store manager into district manager engagement and it really makes a difference.

Thank you very much and good luck.

All right. Thanks, Seth.

Thank you. The next question comes from Bret Jordan from Jeffries. Your line is now open.

This is Mark Jordan on for Bret. Good morning.

Good morning.

Just looking at the commercial growth here again, digging a little deeper, it sounds like you're taking share here and just thinking about the growth, are we taking maybe some national accounts or signing a more independent garages, just trying to think where it's going from here?

Yeah, as I mentioned in a minute ago, we're re seeing really good growth on both the up and down the street accounts, the national accounts, the specific sectors of the national accounts from the tire stores to the - buy here, pay here folks. We're really picking it up across the board. There's not really a standout difference. And as I mentioned, we're also seeing it in maintenance and failure parts primarily.

Okay. Great. And then just one more on mega hubs and hubs here, it looks like maybe 12 more in the back half of the year, mostly mega hubs. How should we think about the cadence of those openings? Are they more maybe - Q3, Q4 weighted?

Yeah, I think we'll probably just be ratably open throughout the remainder of the year.

Okay. Thank you for taking my questions. Thank you.

Thank you. Have a good day.

Thank you. Speakers, the next question comes from Brian Nagel from Oppenheimer. Your line is now open.

Hi. Good morning.

Good morning.

Nice quarter.

Thanks.

I too wanted to discuss a bit the commercial growth, I know there's a number of questions on it already. But if you look into your business you know, clearly the rate of sales growth in commercial has pick up very nicely, however, you're taking market share, you know, this comes on the hills now of several years of significant investment in the business. So with regard to the investment, how much opportunity remains to so to say continue to build out the infrastructure of your commercial operation from here or is it more a function of continue - just continue to gain share?

I think it's a fantastic question and one that frankly we can't answer for you today. When you think about it, our retail business has 15% market share. Even with all this excitement that we have around how well we're going, we still have 3% share in commercial. We got a long way to go. What do we do to crack that code to get it to 5% share, 10% share, 15% share over time, I think we're still trying to figure that out. What I am excited about is while we're trying to figure out some bigger potential possibilities, we are doing the day-to-day blocking and tackling which is leading to our accelerated growth and it feels like it's more sustainable when you do it that way.

Got it. And then within that as a follow-up to that, are there markets and I understand there is competitive dynamic. But are there other markets within your system that you have - you do enjoy outsized market share in the commercial side that could sort of say serve as a roadmap for the business in general?

There is clearly markets that - you know, maybe the market share might be double what it is in some markets. But we don't have 10% or 15% share in any markets. We're going to. We just haven't figured it out yet.

Got it. And then there's one final question. With regard to wage inflation, I think you may have address this in prepared comments, and we talked a lot about higher wages is a somewhat of a negative headwind to earnings growth. Where are we on that front?

Well, we've been talking about higher wages and higher wage growth at AutoZone for over a couple of years now. We did take that significant step as Bill mentioned in the latter part of the first quarter and we significantly increased the compensation of our most tenured and talented and knowledgeable AutoZoners at the hourly level. The ones that are closest to the customer. That will anniversary itself as he mentioned in the latter part of this first quarter. That said, I do think that you have two parts of the wage story that's been going on. One is the regulatory fees, where in places like California they are on a path to $15 an hour and that's going to happen every year or every six months depending on if you are in a municipality or at the state level. So those increases are going to continue. It still feels like to us that there is even outside of the regulated areas that there is more wage pressure than there has historically been. I think that has a lot to do with where we are in the economic cycle right now. Will that continue? I think it depends on what happens with the economic cycle.

Thank you very much.

All right. Thank you. Have a great day.

All right. Well, thank you all for joining us today. 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 process for the year. We do not take anything for granted as we understand our customers have alternatives. We will continue to execute on our game 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 are confident AutoZone will continue to be successful. We thank you for participating in today's call. Have a great day.

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