AutoZone Earnings Call Insights: Commercial Program and Weather Impacts

AutoZone (NYSE:AZO) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Commercial Program

Alan Rifkin – Barclays Capital: A couple of questions if I may. First, on the commercial program, can you maybe give a little bit of color on what the productivity levels are for the programs that are under three years old, since it’s such a significant portion compared to the more mature programs? Then, I have a follow-up.

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William C. Rhodes, III – Chairman, President and CEO: Yeah Alan, I don’t want to get into too many specifics on it, but clearly they’re much less mature and they come out significantly below the existing programs. The other thing that I think is important and I’m not sure everybody understands, is as those programs open many times, probably most of the time, the also cannibalize the existing programs. So, some of the growth in the productivity of the commercial programs right now is muted, because we do have those 900 stores that over the last three years have done some cannibalization of the existing programs. At the end of the day, we’re not meeting our aspiration, but the underlying performance of the new programs and the existing programs when you take everything into account, we’re generally pleased with it.

Alan Rifkin – Barclays Capital: So, for the select group of markets Bill, like the west, where you said was better, and let’s say the southeast where weather really was not an impact, those markets collectively performed on your plan?

William C. Rhodes, III – Chairman, President and CEO: I think, for the first two-thirds of this quarter, I would say they were generally aligned with where our expectations were. In the last third of the quarter, frankly the Northeast and Midwest is where we really saw very strong performance as they rebounded in a significant way…

Alan Rifkin – Barclays Capital: Then just lastly real quick the 82 expanded hubs, I mean any sort of color as to how much more productive these hubs are and do you ultimately plan to expand every single one of the 154?

William C. Rhodes, III – Chairman, President and CEO: Our objective is to expand all the 154. Obviously we made great progress so far in getting 82 open in less than three years, 82 expanded or relocated in less than three years. As we get farther down the cycle, because these are real estate deals, we have done the easy ones, now we have more complicated ones ahead. So the pace will likely slow. As for how they are performing, this is the first time that we have ever deployed capital really for our hub stores. If you think originally all we did was take existing space that was there and leverage it to put the product assortments. So the easiest way for me to show you that they are meeting our expectations is we continue to make real estate acquisitions and build buildings because they’re exceeding our expectations – meeting or exceeding our expectations, so we are pretty pleased with them.

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Weather Impacts

Simeon Gutman – Credit Suisse: It’s Simeon Gutman for Gary. Two questions, first Bill Rhodes, you talked a lot about the regionality and so I think that kind of helps explain some of I guess cyclical versus secular arguments. Is there anything else you can point to be at age of vehicles or other factoids that they kind of point to that this I guess a year ago’s downturn was more cyclical?

William C. Rhodes, III – Chairman, President and CEO: Yeah, I think we’re going to stick with what we said for the last year. This isn’t a new story. I think the last three calls we talked about the fact that we thought last winter, the lack of winter in the Midwest and Northeast last year did not cause the same level of maintenance requirements or failure items because the roads weren’t messed up. So far, that prognostication has come to effect but we’re one month into – we’ve seen April comp, and also want to reinforce the two points that we made in our prepared remarks. We’re also a little concerned about the consumer. This economy’s still not booming particularly for the low-end consumer and we’ve seen them being in a difficult situation now for more than four years and they’re all still trying to get readjusted to the reinstitution of payroll taxes…

Simeon Gutman – Credit Suisse: So how should we think about that in terms of weighing off? Obviously the weather is driving, helping the comps and we think it will continue to help the comps as you’ve talked about, but at what level does that get hurt or like what stage, where does that kind of peak out because you still have this macro issue overriding it?

William C. Rhodes, III – Chairman, President and CEO: Gary, here is the deal, that’s what you guys do. You guys are as good at this as we are. We’re going to plan our business conservative like we always do, hope for upside, and make sure that we continue to deliver strong performance. I can’t tell you sitting here today what the number is and you know that that’s not our practice to provide guidance.

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Simeon Gutman – Credit Suisse: Last one, if the weather markets do get better and maintenance category starts picking up, what does that mean for gross margin, does it bode well for gross margin, how does it mix out?

William T. Giles – CFO and EVP, Finance, IT and ALLDATA: I think overall, we’ve had good performance on gross margin. Think back – we had some lower acquisition cost this quarter, frankly for the last three or four quarters, so as we get into Q4, we’ll likely begin to anniversary some of the lower acquisition cost that we experienced over the last year or so. So, we expect gross margin, in and of itself to remain reasonably healthy. Also, in the spirit of full and fair disclosure AutoAnything will obviously have a negative impact to gross margin, that impacted us about 40 basis points this quarter. that’s probably a fair number for next quarter as well and then at some point, we’ll anniversary that and move forward like we say we always manage gross profit on terms of dollars, not so much rate.