AutoZone Earnings Call Insights: New Programs and Gross Margin Outlook

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

New Programs

Dan Wewer – Raymond James: Bill, looks like your commercial sales per program adjusting for the extra week declined slightly in the year just ended. In the past you’ve noted that AutoZone maybe suffering from some diminishing returns in the new programs. It sounds now there was an epiphany that perhaps the problem was more inventory coverage. Do you think the issue is that hubs are not as competitive as full-line distribution centers operated by your competitors or are you indicating the problem is just the breadth of assortment in the hubs, is the challenge?

William C. Rhodes, III – Chairman, President and CEO: Let me just start by taking a little bit of that, Dan. I would say that we’re happy with the productivity of the commercial programs particularly the new programs. I think also keep in mind that as we mentioned we’ve got probably – almost 30% of our programs were three years old or less and we’ve opened close to 800 programs in just the last two years. So, just given an overall maturation curve, you’re going see a little bit of depression on the productivity of the commercial programs taken as a whole. So, I would say that we continue to be pretty pleased with the progress of the commercial programs overall. I think from the hub perspective, we view that more as an evolution. When we added more inventory into those hubs, we recognized that was an opportunity, and so, this continues to evolve. We think real opportunity is to add more inventory into the marketplace, continue to expand our coverage as we’ve talked about in the past. We learned that as we added inventory for – to help support the commercial business by adding later model coverage, we found that actually help the DIY business as well. So we think there’s better and more opportunity for us to leverage the existing infrastructure that we have out there at a higher rate than we have up to this point.

Dan Wewer – Raymond James: You noted that the inventory per store is up a little more than 4% year-over-year, but that’s about the same rate of growth in the prior quarter. Once you lay in these new inventory initiatives, how do you see that inventory per store rate increasing and does that come at the expense of the amount of the share buyback as you invest that cash in inventory instead of buybacks?

William C. Rhodes, III – Chairman, President and CEO: Always keep in mind our first priority is to be – to driving EBIT and to drive return on invested capital, and so we will do it, where it’s financial viable. But to cut to your real – answer to your real question is, yeah, we anticipate that inventory on a per store basis is going to increase likely over the next year or two, as we continue to test more opportunities for us to increase inventory coverage in the marketplace. But again, as you know our DNA is more of a test and then roll-out where it’s financially viable. So our expectation is that, yes, on inventory on a per store basis, it will continue to increase slightly over the next year or so and we’ll just continue to manage that. Obviously, we hope that that’s going to continue to drive EBIT dollars or we wouldn’t be doing it.

Gross Margin Outlook

Alan Rifkin – Barclays Capital: Question for Bill. Bill, with the increased emphasis on adding inventory in hard parts in particular, how should we be thinking about the long-term effects on gross margin given the fact that this category is typically above the corporate average?

William C. Rhodes, III – Chairman, President and CEO: Yeah, Alan, I’m not sure which Bill. Bill Rhodes will take this one to start, if you want to hear from Giles, just ask for it. I think generally the gross margin difference is between hard parts and sales floor categories generally are not that significantly different. So I think you won’t see any material change in our gross margin rate as a result of being more aggressive with hard parts coverage…

Alan Rifkin – Barclays Capital: A question for Bill Gilles. What was the effect of deflation on comps, if any?

William T. Giles – CFO and EVP, Finance, IT and ALLDATA, Customer Satisfaction: We haven’t really quantified that overall. So I’d be guessing a little bit, but it was certainly probably over a point or so over the last couple of quarters. We really saw a fair amount of inflation through fiscal year ’12 probably ’11 and ’12, which kind of helped quite a bit from – say a comp store sales comparison, if you will; but for fiscal year ’13 we’ve begun to anniversary some pretty good increases in inflation and we are just not seeing that right now and frankly, we are not seeing that on the horizon either. So, we will be up against easier compares but we will not necessarily have a tailwind on that. So, I’d be guessing Alan, but I’d give it probably that rough estimate.

Alan Rifkin – Barclays Capital: One more if I may. In an effort to try to quantify what the effect has been on your revenues of expanding the hubs, really looking at the 92 expanding hubs versus the 60 some odd that are not. Are the comps for the expand supported by the stores – excuse me – are the comps for the stores supported by the expanded hubs significantly greater than the comps for the stores for the hubs that you have not yet expanded?

William C. Rhodes, III – Chairman, President and CEO: Yeah, I’d say they are definitely greater. Definition of significantly, I’m not sure I’d go there; but as you know, we would forecast what our expectations are for each one of those, both what the hub store itself is going to do plus all the satellites that are attached to that hub store. As we rolled all through those 92 stores, it has been remarkably close to what our expectation was. So, we are quite pleased with them and yes, they are performing better and as we get the rest of them up, we anticipate that they will perform better as well.

A Closer Look: AutoZone Earnings Cheat Sheet>>

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