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 third 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 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 forward-looking statement.

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; war and 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 cyberattacks; historic rate sustainability; downgrade of our credit ratings; damages to our reputation; challenges in international markets; failure, interruption of our information technology systems; origin and raw material cost 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 the 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 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.

And now, I’d like to turn the call over to Mr. Bill Rhodes.

Good morning and thank you for joining us today for AutoZone’s 2020 third 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 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, are available on our website, www.autozone.com, under the Investor Relations link, please click on Quarterly Earnings Conference Calls to see them. Since our last earnings release, the world has changed significantly, and so has our business. During our last call, on March 3rd, we were focused on COVID-19, but more from a supply chain disruption perspective. Quickly thereafter, the unprecedented ramifications of the pandemic and its disruption on lives across the globe became a reality. As we have navigated these remarkable times, our first priority has been and will continue to be the health, safety and well-being of our customers and AutoZoners. This quarter was the most remarkable quarter I have ever experienced. In light of that, this will be a different, more detailed update on our business. Our business is typically pretty predictable. As I’ve said many times, our sales fluctuate in a very tight band, but currently that has not been true. We aren’t sure what lies ahead, so we’re going to share a lower level of granularity this quarter, so you have a deeper understanding of the fluctuations and drivers or potential drivers. I know, as we move into the Q&A, you want us to help you “model” our sales performance for Q4. Frankly, we are having a very difficult time forecasting our business week-to-week much less for the next quarter. And who knows what…

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 part sales, which includes our domestic, Mexico and Brazil stores, increased 0.3%. For the trailing four quarters, total sales per AutoZone store were $1,856,000. Now, this compares to an average of $1,814,000 at Q3 ending last year. Total DIFM sales increased 6.7 – decreased 6.7%. In the quarter, sales to our DIFM customers represented 21% of our total sales and decreased approximately $40 million from last year’s Q3. Our weekly sales per program were $9,700 and they were down 9% on a per program basis versus $10,700 per week last year. As Bill mentioned earlier, our DIFM business was materially impacted from the COVID impact, more so than our DIY sales. While certainly one of our most challenged sales performances in many quarters, we would ask listeners to see through this quarter and ask us if we believe we are in good shape for future market share increases and the answer to that question is yes. We feel there may be a real opportunity for us to grow our business in the future. With so many smaller, single proprietary shops still operating across America and having to be closed for an extended period of time creates unforeseen challenges for these shops. We continue to believe we can gain market share into the future. We now have our commercial program in 4,950 stores or 85% of domestic stores. While we did not roll out as many programs this past quarter, it was due to our inability to market to customers. We felt it appropriate to maintain distancing from customer shops, while this past quarter is certainly unique, we…

Thank you, Bill. These certainly are unique and unprecedented times and they require a very different cadence of data gathering, evaluation and decision-making. I am extraordinarily proud of our team across the board for their commitment to servicing our customers, the motoring public, but doing so in a very safe manner. While making so many significant decisions so quickly, we know we won’t get them all right. And that’s okay, but as long as we are making the best decisions with the right motivations and adjusting as we go, we will continue to persevere. We don’t know what lies ahead of us for the next few months or even the next couple of years. But what I know is we have a very resilient business that has performed exceptionally well in a wide variety of economic environments, and we have extraordinary people who are committed to servicing our customers and helping them get to work, go see their family, drive to a close vacation spot or other personal priorities. I wish we could provide you with more clarity on our expectations on business trends for the fourth quarter. But as I stated before, there are too many unknowns. But I want to be crystal clear, our expectations do not include sales remaining as robust as we experienced in the last few weeks of the third quarter. Our expectation is the stimulus money will work its way through the economy rather quickly. Our best guide is annual tax refunds and typically those funds positively impact our business for about three weeks. Frankly, our focus isn’t on what happens this quarter. It’s are we keeping our AutoZoners and customers safe today while providing our customers with their automotive needs. And more importantly, what can we do during this very difficult time to position our company for even greater future success. What really matters is how are we doing a year or two from now? And I continue to be quite bullish on our industry and in particular on our company. Now, we’d like to open up the call for questions.

The phone lines are now open for questions. [Operator Instructions] First question is from Seth Sigman from Credit Suisse. Your line is now open.

Hi, guys. Good morning. Thanks for taking the question and a nice job managing through the environment. I was hoping you could elaborate a little bit more on the commercial trends that you observed over that last four week period. It sounds like you got back to positive. Just wondering, would you categorize it as sort of a gradual improvement over that four week period tied in with miles driven improving? I mean, I guess how are you thinking about that? And if you could give us a sense on maybe how positive it got over that time period that would be helpful.

Sure. It was very interesting on the commercial business. It took a pretty deep dive. It’s down roughly 30% and it stayed there for three or four weeks. Then it began to rebound. If you look at those last four weeks, it was negative the first two, and then it turned positive the second two, ending it caught in mid-single digits positive. It was also interesting – I can't say whether or not it was tied to miles driven. It certainly began rebounding as the – as the retail business took off when we got the stimulus money in the economy. But also a lot of customers – we saw a significant amount of customers that just stopped purchasing from us altogether for some period of time, our assumption and we tried to reach many of them, is they closed at the beginning of this. And as we got towards the latter part of the quarter, we saw that those non-purchasing customers had decreased substantially, if not completely. So it looks like some of them just closed their shops and went and did whatever they needed to do, stayed at home and then began reopening and our business picked up.

Okay, that's helpful. And then, past the external factors, if you just think about how AutoZone is managing the commercial business with all the disruption and the volatility through the period, do you feel like the strategy has been set back in any way? Are there any limitations to sort of getting back that commercial momentum, that double-digit growth that we've seen in prior periods?

I don't think that our strategy has impacted one bit by what's happened in retail or commercial in any significant way at this point in time. Now, we're going to have to understand and watch what happens with consumer behavior. I don't think anybody really knows as the economies and the cities start reopening, who knows what consumer behavior is going to look like. So far what we're seeing is it looked a whole – looks a whole lot like it did before the pandemic, but I'm sure consumers are going to adjust parts of their behavior and we’ll have to adapt accordingly to that. But on the commercial side of the business, the only thing that's still holding us back is, is we're not doing a lot of face to face sales calls yet. We'll be doing that probably before long, but we're not out there being able to tell our story like we were before.

Understood. Okay, thanks. Best of luck.

Yes. Thank you.

Next question is from Michael Lasser with UBS. Your line is now open.

Good morning. Thanks a lot for taking my question. So I know you’ve been resistant to give us too much help with modeling the current quarter, but in light of your comments around the stimulus dollars potentially lasting around three weeks or so, should we take that to assume that your current quarter to date trends are meaningfully slower than what you experienced in that last four weeks of the third quarter?

Man, you're baiting me, Michael.

Yes, I am sure I am.

And I completely understand, okay. We have a long history of not talking about what's going on intra-quarter because we release our earnings within two and a half weeks of our quarter end. So I just don't want to be giving two and a half week information and people trying to extrapolate that. I wouldn't make the interpretation that our business has gone way down since that point in time, but that's really all I want to say.

Okay. And on your comment around the business development piece of the commercial growth, should – and that may be coming back more slowly than just the underlying growth. Should we assume that more than half of the call it double digit call it 10% growth that the commercial business has been growing over the last several quarters has been coming from new customer additions as a result, we can factor that piece to be lower to come back and that's how we should frame the outlook for the commercial program – for commercial segment from here?

I don't think it would be coming all from new customers. You have to believe that we're building our business with our existing customers, too. And as Seth mentioned in the previous one about our initiatives on commercial, we feel really good about the initiatives that we have in place, and a lot of it has to do with being easier to do business with our commercial customers, getting more inventory closer to our commercial customers, improving the time in which we can deliver that product. And that will continue on, and that's going to benefit both new customers and existing customers. So our ability to be able to grow with our existing customers remains very strong.

Yes, let me just add on to that, too. I mean one of the bigger changes that we saw as our business started growing significantly almost two years ago now, one of the biggest KPIs that improved for us was mature customer growth in mature programs, which said to us that we're becoming more and more important to our most important customers.

Thank you very much and good luck.

Yes, thank you.

Next question is from Simeon Gutman with Morgan Stanley. Your line is now open.

Hey guys good morning. First, just a two-parter on what we were seeing in the prior quarter. Any in states or geographies that were less impacted by COVID or more rural, did you experience a similar roller coaster? And then if you look at the product mix that you were selling, and Bill Rhodes, you gave some color on this, are there any products that where you would either – if I'm washing or waxing my car, I'm pulling forward margin or sales that we may not see that as strong in future periods?

Yes, terrific questions. So as I mentioned in the prepared remarks, the middle part of the country, Simeon, whether it was urban, suburban or rural, all had the same roller coaster. Maybe not – didn't go down quite as far but certainly went down significantly. They just rebounded faster, and they've increased more during this period of time. As far as the product categories, yes, there's been a lot of changes, some really interesting trends in the product categories. For instance, right now, we're seeing more work in paint and body than we've seen in a long time. And it's across the board. It's Bondo. It's sandpaper. It's paint. People just have time on their hands and they are doing some of those projects that they haven't done before. Excellent question about does that mean we're pulling some businesses forward or that we're going to have a headwind or a tailwind because of gross margin, I don't think any of that is true. I think we're probably pulling some work that was never going to happen before, and it's happening now.

Okay, thanks for that. And then my follow-up, I know you mentioned it’s really hard to predict the environment. I don't know if there is a working hypothesis at AutoZone regarding miles driven, unless it's just taking week-to-week and month-to-month, but if there is, if you can share it. And then any different posture from the business as far as looking to acquire share vis-à-vis smaller businesses, which I know you haven't done a lot of that in the past, but I wonder if that – if this is some change that we can expect.

Yes. You want to take the latter part of that?

Yes. I think that from a share perspective, we're going to continue to do what we've been doing in terms of organically growing and taking market share. We believe that there's significant opportunity. Now given the current environment, I suspect that some players in the industry will continue to be challenged. And so that may create opportunities or not, but we're going to continue to stick with our strategy, and a lot of that is organic growth.

On the first part of your question, Simeon, on miles driven, we were very intentional in our prepared remarks to talk about miles driven. I think AutoZone was actually the one that came out with that notion 25 years ago or so that there was an important factor underlying the trajectory of the industry. And we’ve held to that and believed that however, and we learned during the Great Recession that during certain periods of time, it is not correlated very well at all with the industry same-store sales. We saw that in 2009, 2010 and 2011. That there are just other factors and our thought is when people have a high degree of unemployment, people aren’t buying new cars and the like that miles driven aren’t as important as they were.

Okay. Thank you.

Yes. Thank you.

Next question is from Mike Baker from Nomura. Your line is now open.

Hi. Thanks guys. So a couple of longer-term questions. I know, you said you’re not really at this point changing your strategy, which makes sense. But longer-term, do you think there’s going to be any change to consumer behavior with respect to DIY versus DIFM with some – a lot of jobs now, people getting used to working from home and if not going to the office, maybe not every day, but certainly working from home a couple days a week. Does that dictate longer-term that the whole industry might move more towards DIY in a way from commercial, which I think would be a reverse of trends that we saw pre-COVID?

Yes. Terrific questions. Many of which we’re thinking through and we certainly don’t have definitive conclusions at this point in time. I think on the shift between DIY and DIFM, there’s been a long pattern of both sectors of the industry growing pretty well. DIY has been – our DIFM has been growing slightly faster than DIY, but DIY has continued to grow almost every single year. A lot of people are starting to talk about work-from-home. I think that they’re also not thinking about who our customer is, for the most in particular, on the DIY side of the business. Our customers’ generally are financially fragile customer. They’re not going to have the opportunity to work-from-home. They’re working blue collar jobs in a lot of cases. And so their shift in work, even during the crisis wasn’t to go work at home, they had to be out doing their jobs. As we’ve seen, we rolled out curbside pickup, which was really great. Our team did it in a remarkably short period of time. And we’ve seen all of our digital sales grow through Buy Online Pick-Up In-Store, which includes curbside. We’ve seen our next day delivery grow and we’ve seen our ship to home grow. The biggest growth that we’ve seen is in our Buy Online and Pick-Up In-Store. And as I’ve been out in stores, I’ve yet to see a customer do a curbside order. And as I talked to AutoZoners, I ask them, are you getting a lot of curbside orders? And they say, no. Once the customers realize that we’re open, in fact, they’ll come to the door and say, can we come inside? Then they want to come in and interact with our most important asset, which is our AutoZoners. So as people start returning to this new normal, it seems like their behaviors are pretty consistent with the way they were in the past. Now our Buy Online and Pick-Up In-Store is basically double what it was pre crisis right now. But that’s still a very, very small percentage of our business.

Understood. Thanks. And if I could follow-up on that – again, in terms of the long-term. You mentioned a couple of times potential for commercial customers that were either closed or they might end up needing to close permanently. I guess the question is, have you seen any of that yet? Or is that just what you think could happen or potentially might happen? Or again, are you starting to see just commercial customers, smaller ones just go out of business and is that an opportunity for share gains? Thanks.

Yes, we absolutely saw commercial customers close on a temporary basis. Probably, as indicated by we had zero purchases from them for weeks, call it 5% to 10% of our commercial customers. It's very interesting as the stimulus money came in, as the commercial business began to pick up. One of the interesting things we've seen is, we were worried about our commercial receivables. Well, we're seeing that our commercial customers are in fact catching up on the receivables that they got behind on in the crisis. So I don't see any big wave of commercial customers that are closing. I'm sure that they are on the margin, certain commercial customers that were nearing retirement or we're teetering on the edge of not being solvent and they're going to go away. But I don't think that that business is going to go away. The customer might – that particular shop might go away, but then the work is just going to move to another shop. So I don't see any significant shifts yet at this point in time.

Okay. Thanks. I appreciate the color.

Absolutely. Thank you.

Next question is from Matthew McClintock from Raymond James. Your line is now open.

Yes. Good morning, everyone. And it's great to hear your voices, I hope to hope god everyone sounds good. The one question I have is just, you talked about supplier diversity, you talked about country diversity, and I just wanted you to dig a little bit more into those comments and maybe just discuss the overall fragility of your supplier base and how your way of thinking towards the supply chain is – not supply chain, but your suppliers is changing. Thank you.

Sure. For a long time, we've been working on making sure that we have diversity in particular categories, vendor diversity. And as – it's actually again thinking about this long before the crisis hit, but the crisis made it even more acute at this point in time. But as you think about what's happened with China with the tariffs over the last year or so, it's significantly increased our cost structure at a moment’s notice and what having all of certain categories, even if we had two or three or four vendors, all of those vendors would were in China take rotors and steel products, for example. All of those are coming out of China, when that happens and you get slapped with a 10% or 25% tariff, your costs went up 10% or 25% overnight. So we need to be thinking as we always have about vendor diversity, we also need to think about country diversity and this situation COVID-19 only made that, that much more important.

Thank you very much. I appreciate it.

Thank you.

Next question is from Chris Horvers with JPMorgan. Your line is now open.

Thank you, and good morning. So I wanted to ask about the early part of the quarter, actually, up more than 6%. Now granted, you probably got some of the worst part of the winter behind you given the timing of your quarter, but it does seem like you've outperformed peers in that first four weeks. So you talked about the strength of the commercial business based on the data that you see, where you outperforming, did you gain share DIY and did it have anything to do with perhaps, weather or delayed tax refunds a year ago?

Yes, I think overall, I mean, like we gain market share during that time period and overall for sure. And so we feel pretty good about that. I think also we were in the heart of the tax season and so we were able to execute very well on that. There was also – to be fair, there was probably a little bit of the 53rd week shift in that time period as well that benefited us, but it was a strong period for us. We had mentioned at the end of Q2 that we felt pretty good about starting Q3 and all the things that we thought we had in place, et cetera, from a supply chain perspective, from inventory initiatives. And so we were strong on both fronts and so we were pretty well positioned as we headed into Q3 and it showed up in our first four weeks of our numbers.

And then what was the shift? The past couple of quarters that’s hurt you, so what was the shift benefit in this quarter?

It was probably less than a 100 basis points for sure, probably closer to 40 to 50 during that time period.

Got it. And then my follow-up on gross margin, so you did had negative comp, but you didn't deleverage, it seems like in the supply chain was there some benefits that came in, in terms of the DIY mix, that was an offset and just typically you do give some commentary about how you think about gross margin on a go-forward basis? Do you still see the sourcing benefits coming through and should we expect some modest positive there?

Yes, I think that we'll continue to see some modest positive it’s a very good way to say Chris, in terms of our ability to be able to continue to expand our supply, our sourcing capabilities. When you think about the gross margin overall for this quarter, couple of interesting parts is that, one is that the commercial business was actually at a decrease. So although that typically is a headwind for us, it was not so much of a headwind in this quarter. Now at the same time, from a retail perspective, although we were very strong in the retail side of the business, couple of categories that Bill mentioned before are lighting, wipers that typically have higher margin were less sold as people were certainly driving less at night. So those two categories probably were a little bit of a headwind, so that kind of mixed out. And we wound up having kind of a flattish gross margin, so frankly we feel really good about the health of our gross margin, right and would continue to expect it to be strong and slightly positive as we move forward.

Understood, best of luck. Thanks guys.

Thank you.

Next question is from Brian Nagel with Oppenheimer. Your line is now open.

Hi, good morning. Congrats on managing a tough environment really well.

Thank you.

So the question I had a number of – a number of retailers now have called out the benefits of the stimulus payments from their sales trajectory as you did, is there – as you look at the data, is there a way to separate out? What benefit you may have gotten from consumers actually putting to work those stimulus checks versus just an overall underlying improvement of consumer confidence as that was taking place in the economy?

Yes, that's a fantastic question. I can't do it with data. I can tell you when your business changes 50% in two days, that there's a pretty strong correlation that consumer behavior changes take more time than that.

Okay. That's helpful. The second question I had also, I apologize for getting too much into the weeds here we've watched your commercial business grow so nicely over the past few years. So we talked a lot about AutoZone really moving up that call list with your individual mechanic customers. Clearly there's disruptions here with all this going on and you called that, I guess Bill Giles called it out in his prepared comments, but have you seen any indications that one reason or another, that AutoZone has fallen down in individual mechanics?

Absolutely not, I think if anything, we're moving up that list. There are certain players in the commercial side of the industry that don't have the financial strength that we have. We've been there throughout the entire crisis, taking care of our customers and getting better and better every day. So I think if anything, we moved up that list and the crisis and I don't hear a lot of people talking about their commercial business being positive like we said, ours was for the last two weeks of the quarter.

Very helpful. I appreciate it. Thank you.

Next question is from Bret Jordan of Jefferies. Your line is now open.

Hey, good morning, guys

Good morning.

When you think about the diversifying your supply chain geographically, I guess how long a process is that? And I guess is there a capacity or adequate capacity in other manufacturing markets that could really sort of fill the hole that China would leave? And would that still be on the back of private label? Or do you have to start buying branded parts to get into other manufacturing markets?

I think it would definitely be on private label side more so than branded parts for sure. With this, what we've been doing with the China products anyway. Certainly Bret, it would take a considerable amount of time, but it's one of those things, if you don't ever start it, then you'll never get there. We've already begun some of that work. In fact, right before the crisis, I can remember having a conversation about some of our folks go into Turkey and we're like, are we comfortable with them going to Turkey? But those kinds of markets, Vietnam, South Korea, we've been working those markets for some time, India. And Mexico is bigger than anybody outside of China. So we're going to continue to cultivate those relationships and learn those new suppliers over time.

Okay. And then a question on the market share consolidation, I mean it does sound as if some of these smaller distributors have been pretty stressed in this recent environment? If you think about potential door closures, how much contraction do you think we could actually get it? There's 36,000 auto parts stores out there. How many do you think we come out of this with?

And that's the age-old question. I mean, I think it's been 34,000 to 36,000 auto parts outlets for 20 years or so. I just – I don't have a good insight into that Bret. I wish I did, but obviously hard times are going to put more pressure on folks than good times are. I would expect a higher percentage than we've seen over the last five years. But does it go up 10% or does it go up 25%? I don't know.

Okay. And if I could whip it a housekeeping question for Bill Giles, I guess on the leverage ratio, do you need to be down at 2.5 to start the buyback or can you start the buyback at 2.6 as you ended the quarter?

Yes, no, I mean we certainly, we ended the last quarter 2.6. So I think that anywhere in that neighborhood where we would be comfortable. So those are the credit metrics that we've always said.

Yes. I think the other part of that too is when we think about our business, we're going to pull out those COVID-related expenses. So if you pull them out, that also changes the leverage metric a little bit.

Great. Thank you.

Thank you.

And now I'd like to turn the call back over to Mr. Bill Rhodes.

Okay. Before we conclude the call, I want to pivot and encourage us all to take all the precautions we can take to keep everyone safe and healthy. Yes, we're taking precautions that inconvenience us. But during these times, our personal actions matter. And as we celebrated Memorial Day yesterday, we should remember all the heroes of yesteryear, but also remember today's heroes. They all matter. May God bless America during this challenging time. Thank you for being with us today.

This concludes today's call. Thank you for your participation. You may disconnect at this time.