Good morning and welcome to the AutoZone Conference Call. Your lines have been placed on a listen-only mode 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 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 10:00 a.m. Central Time, and 11:00 a.m. Eastern Time. Before Mr. Rhodes begins, the Company has requested that you listen to the following statement regarding forward-looking statements.

Certain statements contained in this presentation 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 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 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 the Risks 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 businesses, which 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.

Good morning, and thank you for joining us today for AutoZone's 2021 First Quarter Conference Call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer; Jamere Jackson, Chief Financial Officer-elect; 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.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them. Since our last earnings release in late September, much of the world’s intention remains focused on COVID-19, including its current and future implications for communities, businesses and markets. These times remain extraordinary for all of us. From the start of the pandemic through this quarter, our team has had to deal with challenges unlike any we have seen in our company’s history. While at the start of the pandemic our sales dipped, we performed quite well once economic stimulus was implemented in the U.S. and Americans began to drive more. By mid-April, our business began to strengthen and reached an apex last quarter when we reported 21.8% same-store sales, the best same-store sales performance in our company’s rich history. For this quarter, ending in late November, we are proud to report 12.3% same-store sales, another historically strong performance. While last quarter’s sales were more consistent, particularly across the first 12 weeks of the 16-week quarter, this quarter was a bit less so. Considering the meaningful volatility resulting from the pandemic and economic responses, we are sharing our same-store sales cadence for equal-week period of the quarter. We were up 16.5%, then up 11.4%, ending up 8.8% in the last four weeks. The deceleration…

Thanks, Bill, and good morning, everyone. To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q1. For the quarter, total auto parts sales, which includes our domestic, Mexico and Brazil stores, increased 13.1%. For the trailing four quarters ended, total sales for AutoZone store were $1,960,000. This compares to $1,865,000 in Q1 last year. Now let me give a little more color on sales and our growth initiatives. For the first quarter, our domestic do-it-for-me or DIFM sales increased 11.9% to $695 million, another strong quarter for us. In the quarter, sales to our DIFM customers represented 22% of our total sales and increased approximately $75 million from last year’s Q1. Our weekly sales per program were $11,500, up 9.2% on a per-program basis versus $10,600 per week last year. Not only was $11,500 per week the second highest average ever for us, but we were able to average $58 million in total weekly commercial sales, another near record and a tremendous accomplishment for our teams. As you know, commercial sales is an important growth initiative for us, and we are investing in a disciplined way to create a faster growing business. We now have our commercial program in 85% of our domestic stores. This year, we have opened 36 net new programs, finishing with 5,043 total programs as our sales efficiency per store remains at near-record levels. Let me give a little more color on our success in commercial and the growth playbook as we move forward. This past year, we believe we grew share and remain focused on repeating this for FY2021. Fundamentally, we believe that our share gains are underpinned by the investments we made in improving the quality of our parts offering, many in the Duralast…

Thanks, Bill. And let me first say how delighted I am to join AutoZone at this point in my career and the company’s rich history. It’s been a pleasure working with you, and I’m so grateful for the opportunity to lead the world-class Finance & Store Development teams that you’ve built over the years. I’m also fortunate that you’re running through the tape to use a sports analogy which has enabled me to spend valuable time in our stores and distribution centers and learn the business from the ground up. Your track record of building shareholder value as CFO of this company has been impressive. Certainly, not many CFOs post the kind of numbers that you put on the board during your tenure. I wish you enjoy all the best as you write the next chapter. Let me begin on the P&L and gross margins. For the quarter, our gross margin was down approximately 62 basis points. I would categorize the drivers in three buckets. About a third of the pressure is the result of one-time markdowns on COVID-related goods such as hand sanitizer, where we saw a significant slowdown in sales velocity as we moved through the quarter. Another third of the pressure is the result of higher loyalty transactions. As our transaction counts have been up materially the last two quarters, we simply have issued more $20 credits to customers. This has translated into higher sales and profits, but slightly lower margins. Given the share gains we have seen as evidenced by the high single-digit transaction growth that Bill Rhodes mentioned earlier, we are planning for this headwind on gross margins to remain in future quarters. Now, this is a good outcome for our business as we are driving new customers and retention. The remainder of the deleverage…

Thank you, Jamere and welcome. These continue to be unique and abnormal times, and they require us to look at many things differently to manage our business day-to-day. I’m 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 we are learning how to operate effectively in these times, we remain wary of the volatility that can exist, volatility in both the U.S. and our international markets. We are fortunate to have extraordinary people who are committed to servicing our customers and helping them get to work, go see their families or simply get back and forth to school. Our operating theme this year is AutoZone is strong, and I’m honored to say we have come together this year to live this theme like never before. While it’s impossible for us to know what the cadence of the new year sales will be, I want to be crystal clear. We plan conservatively in order to manage our cost structure appropriately. While our domestic retail business continues to do very well, we understand trends will slow in the future. But we believe we have a tremendous ongoing opportunity within our domestic commercial business. While we understand these things, we also feel we are well positioned for continued future share gain opportunities across all the business segments we operate. Our business continues to do very well, but as always we have work to do as we start calendar 2021. First and foremost, our focus will be on keeping our AutoZoners and customers safe, while providing our customers with their automotive needs. Secondly, we must continuously challenge ourselves during these extraordinary times to position our company for even greater future success. We will ultimately be measured…

Thank you. We will now start the Q&A. [Operator Instructions] Bret Jordan with Jefferies. You may go ahead, sir.

Hey. Good morning, guys.

Good morning, Bret.

I guess a little more follow-up on the market share gains. It seems like the second quarter you guys have been picking share up. Could you maybe give us some color both on the commercial and DIY side? Where you're seeing the share donors? And I guess the follow-up question would really be on sustainability. If you're picking up share from WDs given your higher in-stocks, do you see that share sustaining in the sense that those customers stay with you as the WD bring inventory backup? I guess, is your position higher on the call list relatively defensible? Thank you.

Thank you for the question Bret. On the commercial side of the business, you've seen the publicly available numbers and I think first of all, we're at the top of the heap in both the retail and commercial businesses with our public peers. So I think we're doing very well there. Regarding your specific question on WDs, clearly during the worst of times back in Q3, we were in a very different position than some of our smaller competitors. They really shut things down, many of them closed or work reduced hours had less inventory and the like. And I think that that gave us a real opportunity to introduce ourselves and be there for certain customers, that maybe we didn't have the same relationship before. As we've said many, many times the commercial part of this business certainly is a relationship business. And when you're there for customers, you build up some credibility that you can leverage for a long time. So I think that's the bigger issue rather than them getting back to where their normal operating procedures are, that we were there in people's times of need. And I think that people have long memories about that. On the retail side of the business, again, I think we're performing at the highest level of any of our public peers. But I also think that there are other parts of the channel, other channels in the retail sector, mass and online that we did particularly well against during this period of time and continue to do so. Again, I think, is it sustainable or not? That's the biggest charge that we have as a management team. We have this opportunity to introduce ourselves to new customers. And as we said in our prepared remarks, much of our business growth in the retail business is coming from existing customers who are doing more business with us. And I think it's very encouraging that we're – they're participating with us in different categories than they normally do. And so we feel very good about that.

Yes. On the DIFM, on the commercial side, I guess the WDs historically had strong relationships, but might not have had inventory at a point in time. And I guess as their inventory balance has come back up, I guess my real question is, do you see any shift in the cadence of your share gains? Or the WD is becoming more effective competitors or you really holding all of the share that you picked up in the downturn?

Yes. I wish I had better information to answer that question, Bret. We have very specific information on the sales floor categories in our retail business. We don't have that level of information on the commercial business. So we have to – like everybody else look pretty much at the topline numbers and try to extrapolate from there, but we feel like we're doing well. I can't tell you how the WDs are doing as a whole.

Okay. Great. Thank you.

Yes. Thank you.

And our next question comes from Simeon Gutman with Morgan Stanley. You may go ahead.

Hey. Good morning, everyone. And I wish Bill Giles a good send-off again. I think we did it last quarter, but there was a nice message from Bill Rhodes. My first question is on price. I think we've talked about investing in price a little more prominently in the last couple of quarters. Can we talk about the rationale? Any specific areas you're trying to address? Is it price spreads online? Is it DIY, DIFM? And then can you talk big picture around the elasticity of demand? I'm assuming it's not for short-term gains because a lot of the demand is failure base, but how do you think about that?

Yes. This is Jamere. What I'll say is a couple of things. First of all, we control our own destiny here. In the results, as it relates to our gross margins, are not a result of cost pressures or pricing spirals within the industry. What we're doing is, we're investing in a disciplined way to improve our competitive positioning. We're improving our overall profitability. And in many ways the productivity we're achieving in operating expenses serves as a bill payer for some of the investments that we're making. What I'll say about pricing is that we're making decisions on pricing, merchandising and investments based on data and discipline. And these are decisions that are resulting in both share gains and higher overall earnings. So I like the playbook that we have as it relates to the pricing.

Okay. Thanks for that. Let me ask maybe a follow-up on stock buyback. I think you mentioned, you may exceed, I guess historic levels. And I think the last amount that you purchased was something in the $2 billion category or $2 billion level on a peak basis. So I mean, is there any way are you planning to eclipse that target? And then, would you take up your leverage short-term? Would it have any impact vis-à-vis the rating agencies? Can you take your leverage up to buyback an outsized amount?

Yes. So let me say this. I mean, this is perhaps one of the most powerful free cash flow stories really in all of industry. And the business model that we have enables us to invest in a disciplined way in growth and return meaningful amounts of cash to shareholders in a very consistent and efficient way. And so what we recognized is that, this model is powerful enough from a cash flow standpoint for us to do that investment in a growth of our business and continue along the journey that we've been, returning meaningful amounts of cash and what the free cash flow that we generate. So we don't see a need today to do anything different in terms of leverage and we also don't see a need today to do anything different in terms of moving off the center line that we have for this disciplined capital allocation strategy.

Okay. Thanks.

Thank you. Our next question comes from Chris Horvers with JPMorgan. You may go ahead.

Thanks. Good morning, guys. I think Bill, the trade from home furnishings to AutoZone is definitely the trade of the century coming to this organization from Linens N' Things, so congratulations, again. So my question – two questions. So first on the do-it-for-me side of the business. Your annual run rate is now 600,000 per program per year. A couple of years ago you were sub 500. And so you look at your peers there in this 800-plus type range. I guess how do you think about getting to that level? Do you think that the service changes, the parts availability changes, the MegaHub strategy and the delivery strategy are sufficient to sort of keep step functioning up to that level of productivity?

Yes. Chris, thank you for the question. A lot of attention gets focused on our close end competitors and rightfully so, and they both outperform us on a sales per program basis and have for a long time. I'm really pleased with what our team has been able to do to begin closing that gap. But we really don't want to get too focused on our close end competitors. We want to think about the industry as a whole. As I mentioned in the prepared remarks, it's a $75 billion market. It is incredibly fragmented, much more so fragmented than the retail side of the business. So I want to make sure that we're focused on the entire market, not our close end competitors. If you look back over the history of time, what our team has been able to do has really helped us as you've noted, accelerate our growth in a significant way. We've vastly improved our inventory assortments in every individual store, particularly as it relates to commercial oriented vehicles. We have this hub and MegaHub strategy, which we are rolling out and continue to outperform, particularly the MegaHubs. Every time we talk about the MegaHubs, we talk about that they have outperformed our expectations. We now have built this fabulous brand called the Duralast brand, which five to seven years ago, people thought it was an inhibitor to our success. Now, everybody else sees it as a real key part and a leverage point for us in the commercial business. Think about the other national brands at a decade ago were so powerful. Many of them are gone. Those that are still around are less relevant today than they were back then. And now we've also built this really strong salesforce, which we didn't have a decade ago. We're now supplementing all of that with some technology tools that are some of the largest investments that we've made in technology to make our teams more efficient and improve our delivery and reliability. So we're very bullish on what the future is and frankly, pretty proud of the progress that we've made today.

Got it. And then in terms of the last four weeks of the quarter, you talked about roughly, an 8.8% in the last four weeks. Some of your peers have talked about disruption in the election week. I was just curious you mentioned that if we took out the election week, would it suggest that, maybe the underlying trend rate is better than that 8.8%. And I'll ask just because we should ask any commentary on what you're seeing so far this quarter?

Perfect. Chris, thanks for getting that normal question in another way. I'll answer it the normal way because we released our earnings so quick in the quarter, so we're two weeks and three days into this quarter. We don't want to talk about what's happening this quarter because we don't want our owners to get focused on two and a half week periods of time. So historically, we have not talked about what's happened inter quarter and we're not going to do that today. We were very specific in showing you what happened in each four-week period during the quarter. We don't generally give that level of clarity either. I want to remind us coming into Q4 that we told you we were up 16.5% in the last four weeks of last quarter. I told you today that we were up 16.5%, the first four-week period. I think a lot of people thought our sales had gone down materially in September, and that wasn't true. Regarding that 8.8 that we had in the last four-week period of time. We were very intentional in saying, yes, the election was going on. We also – in this period of time, sales are driven up and down based upon weather patterns. We get a cold snap, it can be very positive. We get very rainy weather, it can be very negative. So we've given you the cadence. It's very hard for us to talk about and even understand what the next 12 weeks is going to be like, we don't know. These are unprecedented levels. 12.3% same-store sales is the best performance in this company since I’ve joined the company over 26 years ago. It will slow down over time. How fast that happened? I don't know. But I do know we have an incredibly strong business that regardless will continue to outperform over the long-term.

Awesome. Thanks very much. And have a great holiday season.

Yes. You too.

Thank you. And our next question comes from Michael Lasser with UBS. You may go ahead, sir.

Good morning. Thanks a lot for taking my question. Bill and Jamere, congratulations and best of luck to you both. Bill Rhodes in your prepared remarks, you pointed out that during the last 30 years or so, the best – the periods of strongest growth for the industry have been in during times of recession. And subsequently the year after the industry still didn't come negative, do you think this time is different because what's been driving the industry has been some of the discretionary categories rather than the strengths in maintenance and failure, like happened last time. Because there's a perception out there that the DIY business is going to give back a lot of what it's gained this year, when consumers get back out and do what they've been doing previously and because of AutoZone mix of business, it will have – it'll be the most sensitive to softness in the DIY segment whenever that happened?

Well. Really terrific question, Michael. Yes, this time is different. There's no question about it. I’ve said it – I’ve just said it. This is the second best quarter since I've been at the company. The best quarter was last quarter. Will we be able to comp 21.8% same-store sales in Q4? I highly doubt it. Will we give some of that back? Absolutely. The question is, will we give it all back? Are we introducing ourselves to new customers? Or introducing existing customers to new categories for us? Are we kind of standing in that gap for customers? I think we are. And I think we're going to build loyalty with our customers over the long-term. My real question for us is if we had this pandemic, what would our sales have been two years from now? I'm sorry, there's a train outside of the room. If we had this pandemic and you moved forward two years from now and we have 2%, 3%, 4% increase in business that we would have had the pandemic not happen. I think that's a distinct possibility. And if we do, I think we'd be very pleased with that.

Got it. The train is a good euphemism for suggesting that. AutoZone is going to keep chugging along. So that's helpful.

You are always good at those kinds of things, Michael. It is light and it's not a train usually.

Okay. The follow-up is on the gross margin. So it's been down two quarters in a row. There's a perception that this might be the beginning of a longer-term trend, particularly if AutoZone chooses to use some of the flexibility it has on the SG&A side to go and reinvest that into the price or other gross margin driving initiatives. So a), is that true? And b), there's a lot of well-documented pressure on labor, so do you lose some of the flexibility? Or do you foresee losing the flexibility if we treat some other factors that are driving your cost of labor, hurt that side of your P&L? Thank you very much.

I would just jump in and say that look from a gross perspective, it's down two quarters in a row, but frankly, a big chunk of this one was one-time. So you've got a little bit of pressure on some of the things that Jamere pointed out, for example, on loyalty. That's a great example of the fact that to follow on what Bill was talking about, is that we're seeing a tremendous amount of traffic and therefore we're seeing a tremendous amount of new and existing customers. Our existing customers are visiting us more and they're building up more loyalty points. That's fantastic. As we talk about pricing and think about pricing and we're going to be incredibly surgical about it. As Jamere said, it's going to be very data-driven. And at the end of the day, this is about driving gross profit dollars. Ultimately that is what we are most focused on is driving dollars. And as you can see, we're improving operating margin overall because we're leveraging our fixed cost structure based on the sales that we are generating from all of our activities and pricing is just a small example of one of those activities. But I think overall, the way I think about it is, look, I think our gross margin is very healthy. I think it's completely in our control. We have opportunities to improve and reduce our cost through importing, increasing our importing, lowering our acquisition cost. And as Jamere pointed out, we have an opportunity to be surgical about how we price. And so I think there's a lot of pluses and minuses in gross margin. And right now, they're all working to drive sales and drive profits.

And the only thing I'll add is, you've talked a little bit about operating expenses and wage pressure. You saw this last quarter, our teams did an outstanding job of really driving productivity and we run the productivity play with intensity inside the company, and we've been able to manage our labor costs sort of in line with volume. There will be pockets of wage pressure, as you mentioned in certain regions, but quite frankly, we're committed to investing in our AutoZoners regardless of what happens with the regulatory environment. And quite frankly, that's one of the reasons why we're so good at driving productivity inside of the company. So again, we control our own destiny as it relates to these things and we're going to invest in a disciplined way to move the needle on earnings as a whole.

Understood. Thank you so much and good luck.

Thank you, Michael.

Thank you. Our next question comes from Matthew McClintock with Raymond James. You may go ahead, sir.

Hi. Thanks, everyone. And honestly amazing results, so I don't even know what to say. Good job guys. The whole team…

Thank you.

Jamere also welcome. Really happy to have you. I can't wait for you to talk more because honestly, this is a great company. So you made a good choice to be honest with you. So at end of the day, my biggest question here is, end of the day, I'm trying to think about your commercial growth was pretty outstanding this quarter and vehicle miles driven is still negative. And I'm trying to think through this because end of the day, are you trying to say that people now are coming back to work? The professionals that normally would go to mechanics are coming back to work and that's why they're starting to go to mechanics. And that's why the commercial business is good or end of the day, the exit rate of what your commercial business is doing right now. Should be pretty higher than what it is right now, if vehicle miles driven increases. So that's kind of – anything you can say toward that would be very helpful? How you think about the commercial business and the growth you did this quarter given that honestly, it should get better from here?

Yes. Another fantastic question. Thank you. As you look at the commercial business, you're exactly right, that miles driven are down and they’ve been down for a period of time. I would also tell you that another thing that's muting the commercial business is the lack of winter that we had last year. Tire sales were down. Maintenance sales were down, brakes, rotors, which I’ve talked about specifically in the prepared remarks. The other thing that's happening in that sector is the independent part of the sector is performing much better today than the national accounts, if you will. And I think those things will change over time. As you see, we get back into a normal weather pattern, but again, we're having this opportunity to introduce ourselves, particularly to some of these up and down the street accounts at a different level than we have on the past. I don't believe that people are “returning to work”. We don't see it yet in a significant miles driven improvement. It improved vastly in the summertime, but then it's kind of been fairly steady over the recent months we've seen. But I’ll remind you that not all miles driven are the same. So people that are driving to work in some of these urban cores, generally aren't our core customer. Our core customer has not had the luxury just like our AutoZoners that are in the stores and the distribution centers. Our core customer doesn't have the luxury to work from home. They're doing manual labor. They're providing service economy kind of jobs. And so I don't think that our core customers really seen a significant change in their driving behaviors.

So if I could follow-up on that and just ask this question, just because you've made so many investments in the commercial business, and I agree you guys are very good in DIY, right? But because you made so much investment in the commercial business over the years, isn't that a sticky business? And doesn’t that kind of imply that next year? The comparisons aren't that difficult because once somebody goes to you, they kind of don't go back. Is that a fair way to think about this?

I think it's a very fair way to think about it. And I'll just remind you, when we got serious about the commercial business was 2008. We were doing about $750 million annually at that point in time. In the last 12 years, we've more than tripled the business, getting close to quadruple in the business. And it's been pretty darn sticky along the way. That's certainly our hope. And as we're launching many of these new initiatives that are only going to amplify our service advantage, as we've now shored up our inventory assortments, we’ve built this brand and we've got somebody telling our story and our salesforce, we feel pretty good about the future. Will it be a straight line? No, it never is. But we've had a pretty strong trajectory over the last 12 years of growing that business much faster than the industry has grown.

Look, guys, I really appreciate the color. Thank you very much.

Thank you. Appreciate it.

All right. Before we conclude the call, I want to take a moment to reiterate, we believe our industry is strong and our business model is solid. We'll take nothing for granted as we understand our customers have alternatives to shopping with us. We're 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 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 and we'd like to wish our AutoZoners and everyone on the call, a very happy and most important, a healthy holiday season and a prosperous new year. Thank you very much. Have a great day.

And thank you. This concludes today's conference call. You may go ahead and disconnect at this time.