Good morning and welcome to the AutoZone Conference Call. Your lines have been placed in 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 second quarter earnings release. Bill Rhodes, the Company’s Chairman, President and CEO, will be making a short presentation and highlights of the quarter. The conference call will end promptly at 10:00 a.m. Central Time, 11:00 a.m. Eastern Time. Before Mr. Rhodes begins, the Company has requested that you listen to the following statement regarding your 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; cash flows; access to available and feasible financing; future stock repurchases; the impact of recessionary conditions; consumer debt levels; changes in laws or regulations or in the prospect of war, including terrorist activity; inflation; the ability to hire, train and retain qualified employees; construction delays; the compromising of confidentiality; availability or integrity of information, including cyber attacks; historic rate sustainability; downgrade of our credit ratings; damages to our reputation; challenges in international markets; failure or interruption of our information technology systems; origin and raw material costs of suppliers; disruption in our supply chain, due to public health epidemics or otherwise; impact of tariffs; anticipated impact of new accounting standards and business interruptions. Certain of these risks and uncertainties are discussed in more detail in Risk Factors section contained in Item 1A under Part 1 of the annual report on Form 10-K for the year ended August 31, 2019, 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 result of new information, future events or otherwise. Actual results may materially differ from anticipated results. Now, I’d like to turn the call over to Mr. Bill Rhodes. Please go ahead.

Good morning and thank you for joining us today for AutoZone’s 2020 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 learn about the quarter’s results. If not, the press release along with slides complementing our comments today is available on our website, www.autozone.com, under the Investor Relations link. Please click on Quarterly Earnings Conference Calls to see them. Starting this morning, I want to thank all AutoZoners across the entire organization for their hard work and dedication to delivering great customer service in light of a challenging sales environment this past quarter. As I mentioned on our last conference call, weather, during our second quarter each year, can be volatile and can significantly impact our performance. Coming off of a strong fall selling season, having delivered 3.4% same-store sales in Q1, we were confident in our ability to execute, but remained cautious heading into our second quarter. And as it has been widely reported, the winter weather was much milder in our second quarter than last year. While our sales were certainly meaningfully below plan and our expectations to deliver both, net income and EPS at the level we were, was commendable. We have an amazingly simple business, yet it has to be executed every day at a very high level across more than 6,400 locations in multiple countries and geographies in order to make everything work. This is where our culture continues to guide and differentiate us. This past quarter, we continued to focus on our many initiatives, not the least of which included incremental inventory replacements, megahub rollouts, ongoing enhancements to how we…

Thanks, Bill. Good morning, everyone. To start this morning, let me take a few minutes to talk more specifically about our domestic retail, commercial and international results. For the quarter, total auto part sales, which includes our domestic, Mexico and Brazil stores, increased 2.6%. For the trailing four quarters ended, total sales per AutoZone store were $1,867,000, which is up from an average of $1,800,000 at Q2 ending last year. Total commercial sales increased 8.2% in the quarter. Commercial represented 23% of our total sales and grew approximately $42 million over last year’s Q2. Our average weekly sales per program were $9,400, up 5% on a per program basis versus $9,000 per week last year. As Bill mentioned earlier, we expect our sales per program growth to do better in Q3 than this past quarter as we began our summer selling season. We now have our commercial program in 4,942 stores or 85% of our domestic stores. We remain committed to gaining market share with our commercial customers and 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 two new stores during the second quarter, ending the quarter with 608 stores. We remain committed to open stores for many years to come. And regarding Brazil, we now operate 38 stores. Our performance continues to improve and we remain optimistic about the long-term future of this market. This market has the potential to be much larger than Mexico. So, while challenging and currently a drag on earnings, the potential size of the market is significant. Gross margin for the quarter was 54.3% of sales, up 28 basis points versus last year’s second quarter. The increase in gross margin was primarily driven…

Thank you, Bill. Clearly, our sales performance in Q2 was disappointing. We didn’t achieve our plans nor our aspirations. We always know Q2, our shortest, lowest sales season, will be volatile. And this year, due to a very mild winter, our performance suffered and suffered mightily in specific weather-sensitive categories and in particular markets. As we analyze our performance in great detail, we are confident that the key driver this quarter was weather. As we cannot influence the weather and as we know weather impacts normalize over time, our goal is to ensure we understand the drivers of our business and then move on and focus on what we can control. Most of our senior team has been in this business and with this Company for decades. And we have seen this in the past and are focused on delivering optimal performance in the short term in light of the sales environment. But, our real focus isn’t on any single quarters, but building our business for the long term. We all have seen enough cycles to know them when we see them. As we have recited internally, we weren’t brilliant in the first quarter and lost our touch in the second. This too shall pass. With half fiscal 2020 behind us, we believe we continue to be very well positioned to grow sales and earnings for the remainder of the year. Many are now looking at previous mild winters and trying to extrapolate them to the balance of the year, as are we. But, there are always other key factors that impact our industry’s performance, what is the timing of tax refunds, what’s going to happen with summer weather patterns, where are we with the aging of the car park and sweet spots, and on and on and on. In…

Thank you. [Operator Instructions] Our first question is from Michael Lasser from UBS. Your line is now open.

Good morning. This is Atul Maheswari on for Michael Lasser. Thanks a lot for taking our questions.

Good morning.

I know you’re expecting sales to accelerate over the remainder of the year, but can you provide some color on quarter-to-date trends? How much of sales improved compared to the minus 6% that you witnessed in the final two weeks of the quarter, and what’s really driven the improvement?

Yes, sure. I appreciate the question. We have a longstanding practice. We release our earnings usually within two weeks and a couple of days of the end of the quarter. And we have a longstanding practice to not talk about such a short period of time. As we evidence with the last two weeks of the quarter, our business can be incredibly volatile over short periods of time, and we don’t want anybody to try to extrapolate that good or bad for a 12-week quarter. So, we have longstanding practice to not talk about it. What we do say is, the second quarter is certainly more volatile than the third quarter. As we are entering the third quarter, we anticipate tax refunds coming. As I’m sure most of you have noticed, there was a significant amount of tax refund, $67 billion, that were issued last Wednesday that appears to be generally on track with where we were last year, and we’re excited to enter this very important selling season for us.

Thank you. That’s helpful. And then, just a quick one on the calendar shift drag. When should we really expect this drag to reverse and become a benefit? Is that going to be in the third or the fourth quarter of this year?

Yes. It’s - again, one of those things is very hard to tell. As we talked about what happened with the end of the quarter, that could have -- Q2 could have been a net positive or a net negative. In the end, it was a net negative, because of the way that weather hit at the very end of the season. We anticipate we will get what’s happened in the first half of the year back in the second, but it’s going to depend somewhat on what happens around the beginning of the quarter and the ending of the quarters.

Our next question is from Simeon Gutman from Morgan Stanley. Your line is now open.

I wanted to ask you, Bill, first on I guess the timing of bounce back. I know you don’t comment to your last answer. I guess, the question is, do we have to wait for weather or do you -- is that what, we have to wait for weather to normalize or no, it’s not about whether at this point, it’s about tax refunds, and just the timing of the calendar to see the business normalize?

Yes. I think, you’re right, Simeon. I think it’s the latter. As we begin to move into the spring season, what dominates our performance is no longer extreme weather patterns. In the winter time, and a lot of people won’t look at what’s happening with average temperatures, which is an indicator. But, what really matters to us in the winter time is when we get extreme cold for an extended period of time, three, four, five days. That puts a lot of pressure on failure parts. The other part that really matters to us is what’s happening with road conditions. If we get a lot of snow and ice and freezing temperatures, that puts the road conditions in pretty bad shape, which puts more pressure on under car and brake systems. One of the things, as we enter this period of time, it’s more about the maintenance categories. And I mentioned in my prepared remarks that a lot of times everybody wants to compare to what’s happened in the last three or four mild winters, and that’s absolutely right, and we’re doing the same thing. But there are other things that are happening in the environment. One of the things that’s happened in some of the previous mild winters is we had a significant amount of our maintenance businesses that were pulled forward into Q2. You found not only was it not extreme cold temperatures but you had some very nice weekend weather and people did DIY jobs. We did not see that in Q2. So we are anticipating as these tax refunds flow, as the weather improves that we should have more robust maintenance performance.

Great. My follow-up is on the commercial strategy. You’ve had great momentum. Can you talk about beginning that the megahub strategy is in and then any incremental inventory investments you plan to make this year?

So, we’ve now opened 39 megahubs. We’ve stated externally that we want to get to 70 to 90. We are very aggressively pursuing those at this point in time, very pleased with the continued performance of our megahubs, and think that they are a key contributor to commercial. They are also a contributor to retail, but very pleased with that progress.

Yes. And I would say, we’re probably in the fourth or fifth inning, I would say, on the megahubs and we’ll continue to roll out on the hub strategies as well. And to Bill’s point, we’ve been very pleased with the performance of both, the megahubs and the hubs, but in particular the megahubs both on DIY and on the commercial side of the business. Now, at the same time, that does create a little bit more inventory in the system as we get more inventory out closer to the customer, but we believe long-term that’s the winning strategy.

Our next question is from Seth Sigman from Credit Suisse. Your line is now open.

Hey, guys. Good morning. I just wanted to follow up on a couple of those points. First just on the commercial side of the business. So, it sounds like the slowdown is really weather related and you’re planning for trends to reaccelerate. Is there anything that you see that would suggest that you can’t get back to double-digit growth in the commercial business in the next quarter or so?

I would say, no. I think that if we look back over the quarter and see our performance, some of that impacted by weather certainly geographically as we talked about on the DIY business with similar on the commercial side of the business as well. So, some of those more cold weather geographies underperformed considerably during the quarter. So, we believe fairly confidently that we’ll get back to a more normalized double-digit growth rate as we head into Q3. So, fundamentally, we don’t believe that we see anything different in the business.

I think adding a little bit of that too. We also -- and we talked about it in our prepared remarks, our up and down the street business continues to perform very, very well. We did see more challenges with our more national account business as many of which are concentrated in the Northeast and Midwest. So, we’re encouraged by that as well.

Okay. Thanks for that. And then, obviously in the quarter, the margin trends were quite healthy despite the sales shortfall. Your prior commentary had suggested an acceleration in operating profit growth as you move through this year, I guess, getting back to at least low-single-digit EBIT growth. Is that still a fair way to think about it? Anymore parameters around that would be helpful. Thank you.

Yes. I think, first of all, I think the organization did a great job of managing the way through a difficult quarter, being able to control SG&A leverage, gross margin and be able to drive EBIT growth of around 2%. And I believe last quarter, we said that we would expect to grow EBIT on a positive basis. And yes, we do expect to get to that low-single-digit, mid-single-digit kind of growth rate on a long-term basis.

Our next question is from Bret Jordan from Jefferies. Your line is now open.

In your prepared remarks, you talked about market share gains. Could you talk maybe DIY versus commercial? And I guess, regionally, did you outperform in any particular market more than other?

Yes, Bret. Great question. I should have clarified that in the prepared remarks. We don’t have good visibility to market share gains and commercial. So, generally, we’re growing commercial at 8% and the market has grown by 4%. We’re pretty confident we’re gaining share. My specific comments about growing share slightly are come up from a few different indications that we have on the DIY side of the business.

Okay, great. And then, I guess a question on inflation. I think, Bill Giles was talking about or maybe it was you, Bill Rhodes, about not a material net benefit for the year. And I guess, the supplier association and a lot of the peers have been talking about 2% to 3% inflation seen in the last 12 months. Is it just that you haven’t elected to pass through the costs you’ve seen come out of China, or I guess, is there something different about you’re addressing inflation versus theirs?

Yes. I can’t speak for theirs. We have certainly seen SKU-over-SKU year-over-year inflation. And the bigger change isn’t that we’ve seen major inflation, it’s generally that we’ve seen deflation. As you think about it, our parts come into the life cycle and they’re very short run until the costs are more expensive. As the part become -- goes through the bell curve and becomes much more -- much higher volumes, our costs go down. And therefore, we have significant deflation as is shown in our LIFO -- major LIFO reserve that we’ve had forever. In the last 18 months or so, we have seen some inflation. We have been very careful about managing that inflation. And as we said in our prepared remarks, if we had a 25% tariff, we didn’t go out and raise our price 25%. We went out and worked that in, in tranches so that we didn’t shock the customer. Over time, we think we’ve done a pretty good job of rolling those price increases in. We’ve also worked with several of our partners on not pushing the full amount to the customer. There has been some changes in the RMB currency, and we’ve taken advantage of that. So, we’ve been very, I think, judicious about it. We don’t think we saw a big net benefit as costs go up. There is some tampering down of demand. We don’t think we saw a major significant net benefit and therefore we don’t think we’ll see a major significant net deficit.

Our next question is from Seth Basham from Wedbush Securities. Your line is now open.

Thanks a lot and good morning. And my first question is just around the calendar shift. I mean, are we seeing two quarters of a negative impact from calendar shift? When do you expect to get that back? Is that more of a third quarter or fiscal fourth quarter event?

Yes. As Bill said, we’ll have to wait and see to see how the performance is at the end of each of those quarters. Our anticipation is, this is likely more back-end loaded in the second half of the year.

Fair enough. And then, secondly, as it relates to your gross margin, did you saw your supply chain leverage as your primary driver of improvement here. Does that include lower costs you’re getting from sourcing or are you specifically talking about savings within your supply chain and distribution?

That one was pretty much the savings within the supply chain and distribution on a year-over-year basis. We are continuing to try to lower our acquisition costs and believe that overall our margin remains relatively healthy. But for this specific quarter, we were able to leverage down supply chain just by lowering some costs during the quarter.

As a follow-up there, as we think about the impacts of tariff-driven inflation into your business over the last year, and what it means for your inventory balances and your gross margins in last quarters, have you been getting a benefit from that, or would you expect a headwind going forward into the back half of the calendar year?

I think, some of the tariff costs are going to continue to work their way through the average cost of the inventory. And as Bill said, I think, the merchandising organization has done a nice job of being able to feather in the increases to commensurate with the cost increases that we are experiencing. And our expectation is that we will continue to do that. It may be some pressure going forward, but our expectation is that we will be able to manage our way through that.

Our next question is from Michael Montani from Evercore ISI. Your line is now open. Michael Montani, you are maybe on mute.

Hello. Can you hear me?

Yes, we can.

Yes, we can.

Okay, great. Sorry about that. I just wanted to follow up on the inflation front for a minute, if I could and see what kind of an impact did you see to same-store sales from inflation, in particular for this quarter? And then, on a related note what kind of success have you had at this point in getting rebate checks from tariff-related exemptions?

Yes. Just to kind of go backwards first, we’re in that process, I think Bill called it out in the prepared remarks that we’ve gone through and made applications for some rebates relative to tariffs and we’ve had some success, but we have more things in the work. So we’ll see how it is. We don’t think it’ll be material, by the way. But we think it will be certainly a help overall. I think on the inflation side of it, as we said, we will probably have inflation of 2-plus-percent on a year-over-year basis from a SKU to SKU basis. But at the same time, it’s very difficult to measure out what the demand impact is as some of the prices have raised a little bit. So, I think that’s where we would say that we haven’t seen a material impact overall from the inflation relative to comp store sales, because it is kind of a blended number with the demand as well.

And if I could, just follow-up. One housekeeping thing was the CapEx and D&A outlook for this year -- for the full year. And then secondly, any initiatives that you all may have in the pipeline on the productivity front that could help offset some of those wage increases, whether that be automation in the DCs or potential outsourcing et cetera.

Yes. From a CapEx perspective, I think our expectation is around $600 million of CapEx for the year and I believe depreciation is around that $350 million number. I would say overall from a CapEx investment perspective, obviously, first and foremost, we’re investing in our stores, we’re investing in the maintenance of our stores, continue to ensure that they look great. We’re investing in hubs and megahubs along the way. We also have a good -- a sizable investment in technology as well. We continue to invest in technology, both to enhance our existing systems as well as to add new functionality in order to improve our customer experience both on the DIY and the commercial side of the business as well. So, those are the major projects that we kind of continue to work on.

Okay. Thanks. And just the productivity side?

On the productivity, we’re always working on different productivity initiatives. But, if you’re talking about are we changing the way we go to market in our supply chain by implementing a tremendous amount of new automation or those kind of things, at this point, we’re not. We’re constantly looking at the calculations of where the IRRs make sense. As wage pressure goes up, it changes the economics and we’ll continue to look at it, but we don’t have anything to talk about significantly currently.

Our next question is from Zach Fadem from Wells Fargo. Your line is now open.

Hey, guys. First question on coronavirus. You touched on supply chain. Curious, if you have any thoughts on the potential impact to miles driven and how that could impact your business.

It’s a very interesting question. As you would expect, over the last month or so, we have been very-focused on the supply chain aspects of coronavirus. And in the last week or two, more and more focused on what’s happening here in the United States and ultimately, Mexico and Brazil. We see no indications at this point in time of any demand destruction as a result of coronavirus. But just like we said with the supply chain, it’s an incredibly, incredibly fluid situation. I think, the next couple of weeks to a month are going to be critical to see what actually happens. We don’t have good insights into that.

Got it. And then, just bigger picture on the car park. Curious, if you could speak to where you think we’re at in terms of the sweet spot? How long do you believe the current tailwind can last? And whether it’s more of a benefit to your DIY or your commercial business? Thanks.

There’s a lot packed into that question. Yes, we haven’t been big on talking about the ramifications of the car park over the last 12 years. We all know that there was a significant divot in new car sales in 2009. And as those cars came into the “sweet spot’, there was a headwind for a while and now it looks like it’s turned into a tailwind. I think it’s on the margin in both instances. What we like to see is steady state new vehicles coming on the road, $16 million, $17 million. The scrappage rate doesn’t appear to change much at all. And therefore, we just have a steady state of new cars. I don’t think there’s anything in the next two or three or four years, that’s going to be radically different than what we’ve seen in the past.

Our next question is from Guru Wright with Daniel Imbro from Stephens Inc. Your line is now open.

Hey, guys. This is Andrew on for Daniel. I just got a quick question here. I was wondering, your commentary has sounded pretty upbeat on the second half. What gives you this confidence and how could you weight that between Company-specific initiatives and improving demand outlook?

Yes, terrific question. I think what gives us the confidence is that we’ve been here before. As I mentioned in our prepared remarks, most of our management team has been here for decades. We’ve seen times of strength; we’ve seen times of softness. We certainly saw softness in the second quarter. As we’re looking at the second half of the year, we have concerns and we also have things that we’re very positive about. On the concern side, I mentioned earlier that the roads, particularly in the Midwest and the Northeast haven’t had the kind of difficult conditions that put stress on brake systems and under car systems. That’s likely to be a bit of a headwind as we go through the second half of the year. That said, unlike some other previous winters, we didn’t see this significant pull forward of demand in those exact categories, which are heavily maintenance categories. So, we’re looking at where we are. We absolutely are disappointed with the second quarter, but we don’t see anything that changed as a result of the second quarter other than those road conditions. And therefore, we’ve made zero changes in our plans for the second half of the year. Again, to us, we are disappointed. We hate a bad quarter. But we’re not managing this business for quarter-to-quarter. We’re managing this business for long terms. And that’s the approach we’re going to continue to take and we’re very optimistic that just like we’ve been very successful over the last decades, we’re going to continue to be successful as we look forward.

I’m showing no further questions in the queue. I’d like to turn the call over back to Mr. Bill Rhodes for final comments. You may proceed.

Great. Thank you. Before we conclude the call, I’d just like to take a moment to reiterate that we believe 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 an exciting plan that should help us succeed this fiscal year. But I want to stress that this is a marathon, 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. Thank you for participating in today’s call. And have a great day.

And that concludes today’s conference. Thank you all for your participation. You may now disconnect.