Bill Rhodes - President, CEO Brian Campbell - VP, IR

Gary Balter - Credit Suisse John Lawrence - Morgan Keegan Matt Fassler - Goldman Sachs Bill Sims - Citigroup Alan Rifkin - Lehman Brothers David Cumberland - Robert Baird Greg Melich - Morgan Stanley Tony Cristello - BBT Capital Markets Cid Wilson - Kevin Dann Partners Rob Schwartz - JL Advisors Matt Nemer - Thomas Weisel Partners

This is the conference call to discuss AutoZone's second quarter financial results. Bill Rhodes, the Company's President and CEO, will be making a short presentation on the highlights of the quarter. The conference will end promptly at 10:00 a.m. CT, 11:00 a.m. EST. Before Mr. Rhodes begins, the Company has requested that you listen to the following statement regarding forward-looking statements. (Recording of Safe Harbor Statement): Contained in this presentation are forward-looking statements. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, 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: competition, product demand, the economy, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, raw material costs of our suppliers, gasoline prices, war and the prospect of war including terrorist activity, availability of consumer transportation, construction delays, access it to available and feasible financing, and changes in laws or regulations. 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 such events could materially and adversely affect our business. Forward-looking statements speak as of only the date made. Except as required by applicable law, we undertake to 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. Please refer to the risk factor section of the Form 10-K for the fiscal year ended August 27, 2005 for more information related to these risks. In addition to the financial statements presented in accordance with Generally Accepted Accounting Principles, AutoZone has provided metrics in this presentation that are not calculated in accordance with GAAP. For a reconciliation of these metrics, please see AutoZone's press release at the Investor Relations section at www.AutoZoneInc.com.

Mr. Rhodes, you may now begin.

Thank you. Good morning and thank you for joining us today for AutoZone's fiscal 2006 second quarter conference call. With me today is Brian Campbell, Vice President of Investor Relations and Tax. I hope you've had an opportunity to read our press release and learn about the second quarter's results. If not, the press release, along with slides complementing our comments today, are available on our website www.AutoZoneInc.com. Please click on quarterly earnings, conference calls to see them. To begin, I am pleased to share with you the Company's fiscal 2006 second quarter results. First off, I'd like to start by thanking our entire organization for their efforts in completing our store adjacencies initiative, one of the single biggest store initiatives in our Company's history. Besides improving our customers' shopping experience, this effort will reduce costs associated with planogram changes in the future. I am extremely proud of our AutoZoners and their efforts. While by no means inexpensive to complete, it is now behind us and we are well-positioned for our busiest selling seasons, the spring and summer. Let's talk about the results for the quarter. Regarding the second quarter, for the 12 weeks ended we reported sales of $1.254 billion, an increase of 4.1% from last year's second quarter. Same-store sales, or sales for stores open greater than one year, were up 0.4% for the quarter. Gross profit as a percentage of sales for the quarter was up 78 basis points, while operating expenses as a percentage of sales decreased by 109 basis points. This resulted in operating margin of 14.2%, up 187 basis points from last year's quarter. Operating profit increased 19.9% versus the prior year. During this year's quarter, we experienced additional expenses associated with the introduction of FAS 123R share-based payments, while last year's quarter was negatively impacted by one-time charges associated with the accounting for leases and leasehold improvements. Excluding these items, operating profit decreased 3.4%. Net income for the quarter was $97 million, and diluted EPS increased 7.6% to $1.25 from $1.16 in the year-ago quarter. Excluding this year's expenses related to option expense recognition, and last year's accounting for leases and leasehold improvements, and credits last year related to income tax expense, net income was down 4.3% while EPS were identical to last year at $1.29. Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 22.6%. We have and will continue to focus on ensuring every discretionary dollar invested in this business generates returns that exceed our cost of capital. We have not and will not deviate from our efforts to optimize shareholder value over the long term. We continue to be fiscally prudent with our investments while optimizing our earnings per share. Now I'd like to talk about DIY sales. Total domestic retail sales were up 3.5% for the quarter. During this quarter, we continued to focus on driving sales and profits over the long term. Our customer research and sales results over the past three quarters continue to reaffirm what we've always known; our customers shop with us because we provide them with trustworthy advice. Our customers have told us to focus on the basics, which are incorporated within our AutoZone Pledge to both our customers and our fellow AutoZoners. Based on our pledge at the beginning of this fiscal year, we introduced several customer service initiatives. I'd like to take a moment and address their successes during the second quarter. First, I've stressed that we were working to improve the customer shopping experience by optimizing the number of both off-shelf merchandise placements and sales floor product placements. This included reducing the number of displays to improve customer flow and placing products on our shelves that are compelling and easily obtained based on the job the customer is planning to do. The results of this initiative have been extremely positive. Our customer feedback has told us our stores are easier to shop. Additionally, our AutoZoners have a renewed sense of pride in their stores. In addition, the second quarter marked the completion of the sales floor resets in literally all of our domestic stores. The feedback we have received from both our AutoZoners and customers has been very positive. Second, we've continued to refine and improve our guided initiative we introduced last February. This initiative is designed to provide our customers with the broadest offering of parts and accessories to meet their needs. Simply said, it allows us to say yes more often to our customers. We have significantly improved our ability to provide the right parts for our customers. Our customers are saying they like what they see. Just to add some color on this program, today we are saying yes to our customers special order requests 15% more than we did last year. Later this year, we will introduce our new proprietary parts lookup system, ZNet. ZNet will put more product and repair information in the hands of our AutoZoners and customers, enhancing our offerings even more. Third, I've talked about reducing the amount of fringe or non-automotive related items in our store. By and large, the goal of this initiative was to reaffirm to our DIY customers that we are a company focused on providing the parts and products they need to maintain and accessorize their vehicles. While we carry non-automotive items, we have to make sure that we're stocking the right inventory for our core automotive customer. Current inventory in stores reflects this initiative and we have completed this initiative across all our stores. While the removal of certain non-automotive inventory has had some negative impact on sales, it was minimal. We're focusing on what we do best: selling automotive parts and accessories and providing trustworthy advice. Last year, approximately 1% of our sales for the quarter were driven by fringe products. As we remove these items from our stores, it has allowed us to focus our promotional efforts on our core products. We are keenly focused on ensuring we have the right parts and products in every store to meet our customers' needs. Fourth, I discussed a renewed emphasis on training, including a specific emphasis on our culture. During the quarter, we continued to hold what we WITDJR meetings - What It Takes To Do The Job Right for all AutoZoners. The focus of these meetings is on our cultural practices, to ensure customer satisfaction. Focusing on things like Drop Stop 30-30 -- which is greeting the customer within 30 feet or 30 seconds of entering the store -- and WITDJR, providing our customers with the parts, product, tools and advice they need to do the job right. Unlike the costs incurred in completing our sales floor reset program, we will not stop our training. We do not view these expenditures at costs. Instead, they are investments in one of our most important assets, our AutoZoners. We must provide our AutoZoners with the tools they need to deliver great customer service and training, both cultural and technical is one of those critical tools. Fifth, I mentioned we'd be building cohesive messages throughout our stores, focused on specific jobs like helping customers perform routine maintenance to improve their gas mileage. This theme also will not change. We continue to believe if we provide our customers with the advice and service they need to improve the lives and performance of their vehicles, we'll develop even stronger relationships with them. Our advertising initiatives will continue to focus on building our brands and promoting our exceptional service. We have significantly increased our promotion of the DuraLast brand, one of the top brands in the automotive aftermarket. This exclusive brand of high quality parts and products provides with us a key point of differentiation. Next, our customer rewards program was created to recognize and reward our very best customers. We want to be the only auto parts stores our customers shop. This initiative continues to be built around the proposition that we want to know as much about our customer's shopping habits as possible. We want to know what products our best customers are demanding, and how they're influenced by our offerings in our stores. This program is only one component of driving increased loyalty, and it provides with us important additional information about our customers. Lastly, I talked about expanding the hours of operation at many of our stores. This test has modestly increased our sales, while requiring an investment in store labor, but it ensures that we are available for our customers when they need us. This initiative was born of the belief that we must be the most convenient choice our customers have when shopping for automotive parts and accessories. As I said last quarter, we're listening to our customers and our 50,000 plus AutoZoners. We are focusing intensely on the basics. Simply put, excellent customer service and flawless execution. During the second quarter, gas prices remained relatively constant, fluctuating within a dime on a national basis. We felt minimal impact directly attributable to gas prices this quarter. While AutoZone can do little to control gas prices, we continue to feel that we can do things to drive sales through internally generated programs and initiatives that can offset much of the negative impacts from higher gas prices on our consumers. During the second quarter, we estimate that weather had a modest negative impact on our sales, due to milder weather across much of the country. We believe the warmer winter weather caused a drop in certain failure-related hard part categories, that was primarily offset by increased sales in the preventive maintenance categories. Regarding miles driven, we saw slight monthly increases versus last year, reversing the trend we saw in the first quarter, where miles driven decreased slightly. November miles driven were up 0.7% while December's were flat. January's results have not been released yet. Let me remind everyone of the two statistics we've always felt had the closest correlation to our market growth: Miles driven and the number of seven-year-old and older vehicles on the road. Both have continued to trend in this industry's favor. We don't like to spend considerable time focusing on the impact of gas prices or weather, because neither is controllable by us, and weather impacts will normalize over time. We do monitor these situations to ensure we are providing our customers with the advice and products they need to maximize their vehicle's performance. We believe over the long term that if we execute our game plan, we can overcome any effects of gas prices or weather. Regarding pricing across the industry, we have not seen any material change in the competitive landscape. While we have seen some cost increases driven by higher commodity prices, overall consumer inflation in Q2 was in the low single-digit range. Finally, we've been updating all of you over the last several quarters on our inventory levels per store and what we're doing to ensure we've got the right parts available for our customers. Our inventories finished at $494,000 per store, including POS merchandise, versus $484,000 per store in last year's quarter. Additionally, this inventory is in line with last quarter's $495,000 inventory level. We are determined to invest in one of the most important drivers to both attracting and retaining customers; superior parts coverage. Optimizing inventory levels in this business is one of the keys to success. We continue to leverage our hub stores and Project Got It to ensure we have the parts and products our customers need while optimizing their returns. We will continue to focus on having the right merchandise available by individual store to satisfy our customers. Let me update you on some of our other efforts to drive sales. We continued our strategy of offering good/better/best selection for many product categories. This involves introducing our own brands. Our customers have embraced these brands, and today we believe the DuraLast and DuraLast Gold products are among the strongest in reputation, as well as sales volume, in the automotive aftermarket, due to their overall quality and great value. Over the course of 2006, we will be launching a new selling tool in our stores. That tool is called ZNet. ZNet is a new and significantly improved version of our parts lookup system. It continues to leverage our unique and robust proprietary parts catalog, while allowing to us leverage some of the recent advances in technology. The system and its rollout is on track, and we expect it to be in our stores by the end of this year. Finally, we're continuing our sponsorship with TBC racing, Kenny Wallace and the number 22 car in the Busch series of NASCAR. This initiative, as any other, will be monitored to determine its effect on our business, but our customer and AutoZoner feedback continues to be quite positive. For the trailing four quarters, sales per square foot were $247. This statistic continues to set the pace for the industry. Our new stores are on track to achieve at least a 15% IRR, and we continue to see an opportunity to open thousands of additional stores in the U.S. We opened 41 new stores in the quarter for a total of 3,655 domestic stores. Additionally, we were able to reopen three of the locations closed in the Louisiana and Mississippi markets due to hurricane damage, while 10 remain closed. Growth in square footage continues to be on pace to run in the mid single-digit range for the year. We also relocated four stores this past quarter, and we continue to see opportunities to expand this initiative in the future. Finally, one store was closed during the quarter. Let's now move to commercial. For the quarter, total commercial sales were up slightly from last year's quarter. We now have the commercial program in 2,107 stores, supported by 124 hub stores. We've been very focused over the last several quarters on refining our commercial programs, to ensure we develop a model that meets the needs of our customers while improving profitability. While we would like to see our sales performance accelerate, we are pleased with the progress we are making. Last quarter, I spent time updating everyone on our PDA device rollout. This tool is allowing to us to leverage technology as a core competency in our commercial business, similar to the DIY business. We're now tracking transactions from their inception to completion, and gaining terrific insights on where our biggest potential for profitable sales growth exists. We continue to refine this tool and leverage this information to build a powerful profitable business. During the last quarter, we launched new tests related to our commercial business. Those tests focused on leveraging our strengths and responding to customer feedback. While the tests are small and relatively new, we are pleased with our learnings to date and we are excited about our opportunities for the future. Our model continues to be differentiated by our unique, high-quality brands, our ability to service customers effectively and efficiently and our national footprint overlay for our chain customers. Our customer research continues to tell us the most compelling reason we can give a professional customer to shop with us is delivery reliability. Simply said, "Get me the parts I need when you said you would." The hub stores continue to provide with us fast replenishment of critical merchandise to support both our commercial and DIY businesses. We believe the extended, deeper availability of parts offered to stores supported by our hub network, increases our commercial customer business. Therefore, we will continue to refine this model to determine where extended parts coverage can make a meaningful difference. We believe we have a winning commercial game plan and a team in place to execute that plan. We will be consistent with our initiatives in this business. We will build it right for the long term. Many people continue to ask me, can the commercial business be a material driver to both same-store and overall company sales growth? I absolutely believe this business should and will be a contributor -- and a strong one at that -- to profitable same-store sales. This business continues to be a strong profit generator for us and provides outstanding returns on invested capital. With only about 1.5% of the commercial sector's business, we still have significant opportunity to gain market share in this business. We expect to continue to add programs where appropriate going forward. We will grow this business over the long term, but we will ensure we do it profitably to drive shareholder value. Let's talk about Mexico for a moment. Our Mexico stores continue to perform well. We opened four stores during the quarter, which now gives us 88 stores in Mexico, compared to 3,655 in the United States. Our ongoing commitment remains to prudently and profitably grow the Mexico business. Finally, I want you to know that I'm excited about what I'm hearing from our AutoZoners and our customers. I am confident we are on the right track to produce long-term shareholder value. Now I will turn it over to Brian Campbell to take us through the remainder of the income statement, cash flows, and the balance sheet. Brian.

Thank you, Bill. Good morning everyone. Regarding gross profit, gross margin for the quarter was 49.1% of sales, up from 48.4% of sales in the previous year's quarter. We continue to be successful in partnering with our vendors to offer the right products at the right prices to our customers. This effort includes supply chain initiatives, tailoring merchandise mix, and continued implementation of our good/better/best product lines, all allowing to us price our products appropriately and give our customers great value. Key contributors to the quarter's margin improvements were lower procurement costs, removal of low-margin fringe product sales from last year's mix and continued work with our vendor base to manage the procurement and distribution networks. Our vendors continue to work as diligent partners with us to offer the customers the best value proposition in all the automotive aftermarket. Going forward, we believe there continues to be some margin expansion opportunity, albeit at slower pace than the previous couple of years. We would caution everyone not to assume we can continue to generate these 70 plus basis point improvements for the remainder of the year. We believe we can continue to have opportunities in working with our vendors to lower costs and provide the best selection of merchandise for our customers at the right prices. Our initiative to do more direct importing of merchandise from foreign suppliers has begun in earnest. Prior to the start of this fiscal year, we bought virtually all our goods from U.S. vendors that may or may not have been buying from foreign sources. We are increasing efforts to reduce our costs by going straight to the manufacturer where appropriate. This initiative was launched at the end last year, and will continue to take some time to build. We have begun to realize some of the benefits from this program, but it will continue to build over time. Switching over to expenses, SG&A for the quarter was 34.9% of sales, down 109 basis points from last year. However, on a comparable basis, this year included a charge for the expensing of stock options under the new FASB 123R ruling, while last year's quarter included a charge for accounting for leases and leasehold improvements. On a comparable basis, SG&A went up 192 basis points. The increase was due to several events and specific actions. Occupancy costs continued to be up approximately 55 basis points as a percentage of sales versus last year. This was driven by our continued investment in new stores, our owned versus leased store mix, higher property tax mix and maintenance on our existing stores. Additionally, the store adjacency initiative impacted our costs. Over the first half of the year we spent approximately 20 basis points on resetting our stores. We have now completed this initiative. Lastly, we purposely spent more in our stores to address our customers' needs. These initiatives involved expanded hours of operation, enhanced training programs and ensuring clean, well-merchandised stores. Some of these investments we are making now don't have a current quarter payback, but they are necessary to ensure we provide an excellent experience for our customers to deepen the relationship with them. We invest in these initiatives because we believe they will help build profitable sales for the future. We are validating these expenditures through extensive testing and monitoring. The majority of the spending in the quarter is variable and we are controlling these expenditures. We will spend appropriately for the long run. As we said last quarter, we expected these investments to take approximately six to nine months from the end of last year to gain traction, and we continue to adhere to that timeline. We are ready for the second half of this fiscal year. As we enter our key selling seasons, these additional costs will be leveraged over a higher sales base and again, cost control will be a major focus for us for the remainder of the year. Switching to EBIT, EBIT for the quarter was $178 million, up 19.9% over last year. Excluding this year's adoption of FASB 123R and last year's cumulative charges related to accounting for leases and leasehold improvements, EBIT for the quarter was down 3.4% versus last year. Interest expense for the quarter was $24.3 million compared to $23.6 million a year ago. Debt outstanding at the end of the quarter was $1.779 billion, or approximately $120 million less than last year. The increase in interest expense reflects both the ongoing effort to term out the Company's debt on a long-term basis, as well as the year-over-year increase in short term rates. Our debt levels were maintained inline with our guidance of 2.1X our trailing 12-month EBITDAR. We have purposely managed our capital structure relative to our cash flow, in order to maintain our credit ratings and investment grade while optimizing our cost of capital. For the quarter, our tax rate was 37.0%, above last year's rate of 27.8%. Last year's rate did include one-time credits due to AutoZone repatriating $12.4 million of foreign earnings. We are comfortable with our ability to maintain an approximate 37% tax rate for the remainder of the year. Net income for the quarter of $97 million was up 3.1% over prior year; however, on a comparable basis it was down 4.3%. EPS for quarter of $1.25 were up 8% on 77.5 million diluted shares, but again, excluding this year's share-based option expensing and last year's cumulative adjustment for leases and leasehold improvements, as well as credits related to income taxes, earnings per share were identical with last year at $1.29. In the second quarter, we generated $199 million of operating cash flow and we did not repurchase any AutoZone stock as part of our stock repurchase program. We intend to continue to repurchase stock as long as it is accretive to earnings and consistent with our 2.1X adjusted debt to EBITDAR liquidity target, which we have maintained again for the quarter. For the second quarter of the year, we reported yet another industry-leading ROIC of 22.6%. Looking at the balance sheet, inventory per store on the balance sheet, which excludes POS inventory was $460,000 per store versus Q2 of last year of $450,000. Accounts payable as a percentage of gross inventory finished the quarter at 82.9%, above the reported 80.8% last year. We fully expect to improve on this ratio by the end of this fiscal year. This quarter we reported a total of $127 million of inventory on Pay on Scan, which in accordance with GAAP is not reflected on our balance sheet. As we have stated previously Pay on Scan is about aligning the interests of vendors and AutoZone and is one of the programs we use to achieve our financial goals. I would like to point out here that while our balance of inventory on Pay on Scan did decline slightly, our accounts payable to inventory increased. Again as we have said, POS is one more tool in our toolbox to achieve our goal of 100% accounts payable to inventory. Total working capital was at $240 million versus last year's balance of $202 million. We will continue to focus on minimizing working capital, as this reflects our ongoing focus on increasing cash flow. Net fixed assets switching over were up 8% versus last year. Capital expenditures for the quarter totaled $57 million, and reflect the additional expenditures required to open 45 new stores in this quarter, maintenance on existing stores and work on development of new stores for the upcoming quarters. Depreciation related to this totaled $31 million for the quarter. As of February 11, 2006 AutoZone continues to be one of the few players in our industry to have investment grade debt ratings. Our senior unsecured debt rating for Standard & Poor's is BBB+ and we have a commercial paper rating of A2. Moody's Investor Service has assigned us a senior unsecured debt rating of BAA2 and a commercial paper rating of P2. We continue to be comfortable with our long-term debt ratings and leverage ratios. Now I'd like to turn it back to you, Bill.

Thank you, Brian. Over the last two quarters we launched many new initiatives that we believe, over the long term, will improve our performance. Many of our initiatives are focused on the basics of our business, which we believe are the most compelling to our customers. We continue to feel confident in our plan. During the quarter, we completed the substantial task of resetting our adjacencies in our stores. This was a sizable task, requiring additional cost and focus, but it was time to ensure that our stores looked great. Completing this project gives us the ability to more effectively manage our various store formats and significantly simplify our merchandising presentation. It was time. We're now done, and we are very pleased with the outcome. In many ways this quarter was a continuation on the first quarter story line. We knew we had to complete the task laid out before us by the end of the second quarter in order to be well-positioned for our busy selling seasons, the spring and summer. We completed those tasks successfully. This past six months has been about positioning us even better for the long run. While some of our initiatives have been completed, most will be ongoing. While we have invested in our business where appropriate, the impact of these initiatives on our operating margin will modestly decline as we enter our peak selling season. While we are always testing new initiatives, always pushing to see what new and creative strategies can be implemented, we are not talking with you today about any major new strategies for the back half of this year. It is simply about executing the game plan we established at the end of last year. The remainder of this year is about flawlessly executing that game plan. Our business has always been simple. Treat our customers right; inspire, motivate and give our AutoZoners the tools they need to succeed and execute flawlessly. The most powerful tool we have is our unique and powerful AutoZone culture. Customer service is our key point of differentiation and AutoZoners across the Company are committed to providing that service to the customer. Let me say, we must continue to make AutoZone the best place to shop as well as a great place to work for our AutoZoners. It's simple. It's about treating people with respect, and in return results will follow. As I noted earlier, we are making investments now that we expect will deliver improved results over the long term. Some of those investments will not have immediate payback, but we know they are the right things to do for the long term in this business. How do we know? We know because as always, they've been tested. We are energized by our AutoZoners' renewed commitment to our culture exhibited in the first half of the year. We remain optimistic about the future as we will focus on continuing to educate our customers on doing those simple things, that while preventive, can mean great savings down the road. Also, as more and more of our kind of vehicles are on the road every day, we continue to be bullish about our future. We believe our business is acyclical. We are simply in a stage in our lifecycle where we have to rededicate our organization to focus on the founding principles that brought us wonderful successes and will guide us well into the future. We have all the tools we need to grow profitably for the future. We have a terrific management team that is very committed to this business. We continue to demonstrate industry-leading financial metrics. Being a disciplined company, we have proven our abilities to manage costs appropriately and invest in incremental initiatives that exceed our stated 15% after-tax IRR hurdle rate. We are focused on operating this Company to profitably grow sales, efficiently deploy capital and optimize long-term shareholder value while maintaining the highest levels of ethics. I thank you today for letting us share with you our Company's past accomplishments and touch on our ongoing initiatives. I look forward to keeping you abreast of our results well into the future. Now I'd like to open up the call for questions.

(Operator instructions) The first question is from Gary Balter of Credit Suisse. Gary Balter - Credit Suisse: Thank you. A couple of questions, if I can. First of all, when you look at your results and the 0.4 comp, is there a way to break that down between markets where you are seeing entries from Advance or O'Reilly and the impact that is having, versus more mature markets? So we get an idea of any impact that you're seeing on your comps from competitors?

Gary, first of all, we don't get into regional discussions about our comps on a regional basis. However, obvious a new competitor opens we do see impact from that competitive opening. But, when we look at our comps in all of our stores on a normalized basis, we see consistent performance throughout the country. Gary Balter - Credit Suisse: So there's no change from a competitive entry of being more impacted or less impacted versus the previous periods?

No. That's correct. Gary Balter - Credit Suisse: When you're looking at your commercial business, and you talked about it on the call, when should we be thinking from our side about starting to see some positive trends there from the comp point of view?

This quarter was first time that our sales didn't decline -- in I believe three quarters -- so we're pleased that we're making progress. We'd love to see it be more aggressive than that, but as I've said before, we're going to do it the right way. We're going to be methodical about it. We do have a new test that I talked about in the call that we're learning some new things. It's a very small test, but it gives us the opportunity to make sure that we know what's relevant to our customers. So as we prove those tests, we'll roll them out. Gary Balter - Credit Suisse: Then lastly on the expenses, as we go forward and get into third quarter, fourth quarter, we're still looking obviously at negative leverage. Is there a point in your mind, like is it after we anniversary fourth quarter, maybe into first, where we could start be thinking about either flat or positive leverage on the extended line?

Gary, the way that I've talked about that before, we began testing some of those initiatives in the fourth quarter of last year. At the end of the first quarter of this year, all of those major initiatives have been rolled out. They were rolled out during the course of the first quarter. So once we finish the end of the first quarter, we will be on a comparable basis, and certainly we anticipate leveraging those over time. Gary Balter - Credit Suisse: Okay. Thank you very much.

The next question is from John Lawrence of Morgan Keegan. John Lawrence - Morgan Keegan: Good morning.

Good morning. John Lawrence - Morgan Keegan: Bill, would you just comment a little bit, along those same lines as Gary's question about the import program? When will you really see the next leg up as far as bringing in the imports? I know it's slow to start, but when does that really produce more of an impact?

John, as we mentioned, there's a couple of things. First of all, we have never direct imported, been the importer of record, until the beginning of this fiscal year. That program has begun to ramp up some. We are getting other benefits and have gotten other benefits for a long period of time, about other suppliers or our suppliers going overseas. It will ramp slowly over time, but we're pleased with the progress that we're making today. John Lawrence - Morgan Keegan: Secondly, would you expect; are there any minor or major differences with the advertising campaign in the second half of the year?

You know, I think if you watch what we do with our advertising campaign in the first half of the year there are a few new wrinkles to it. We're going to continue to exploit those new opportunities. One of them is the NASCAR PPC racing number 22 Busch series car, which we began racing two weeks ago. The second piece is, if you've noticed our television advertising, we've had a significant amount of DuraLast commercials where we're out building that powerful DuraLast brand in the consumer's mind. That brand is available only at AutoZone. John Lawrence - Morgan Keegan: Thank you.

Thank you, John.

The next question is from Matthew Fassler of Goldman Sachs. Matt Fassler - Goldman Sachs: Thanks a lot and good morning.

Good morning. Matt Fassler - Goldman Sachs: You were very helpful this morning in helping to break out some of the components of SG&A as they led to some of the de-leveraging this quarter. A couple questions on that. First of all, Brian, you identified 20 basis points associated with resetting and then 55 basis points associated with occupancy. Is the rest of it essentially incremental labor? Or is it negative leverage on a flat comp vis-a-vis labor? Because there's another 100 basis points or so. I just want to make sure that we understand where that increment is coming from.

It's incremental expenditures on many initiatives. It's associated with store initiatives around training. That's been a very big effort for us over the last couple of quarters. It's around extra hours of operation at the beginning of the day. It's about making sure that the stores are appropriately set and fixed for our customers, just their general shopping experience. Matt Fassler - Goldman Sachs: As you think about some of those, would you consider some of those to be essentially one-time investments to right the ship, after which the spending on them probably abates a bit? Or are those spending dollars sort of permanent parts of the cost fixture?

Matt, I'll take that. First of all, I don't think there's anything that we do that's a permanent decision. We're always looking at ways that we can do things better. Matt Fassler - Goldman Sachs: Sure.

We have made these specific investments at this point in time, the majority of which, as I said on the call, are going to be ongoing. Now that doesn't mean the expense levels are always going to be the same. We're going to find new and more efficient ways to drive productivity throughout our Company. Hopefully as we do that, we'll be able to leverage those expenses. Matt Fassler - Goldman Sachs: That leads me to a follow-up along those lines. Obviously you just came out of your seasonally softest quarters. Are most of the investments, both the resets for example -- which sounds like those dollars just go by the wayside at this point -- and then some of the others that you mentioned that are baked into the rest of the pie; are most of those fixed dollar expenses that you leverage on the seasonally stronger top line? Or, do they flex along with the sales?

Great question, Matt. First of all, the resets are completely done. So all of those expenses are behind us. We're moving forward with them. The majority of them, I don't like to call them fixed, but the levels are relatively constant on a period-to-period basis. Most of those expenses, if not all of them, are actually variable, so as we fine-tune our things and determine what works better and what doesn't work better, we can modify them over time. But they should be levered over the second half of the year if we continue to spend at those levels. Matt Fassler - Goldman Sachs: The second question I would like to ask relates to inventory. The inventory dollars grew to a slightly greater degree than cost of goods this quarter. Can you talk about how the inventory compares to plan? Whether that might have tied into the warmer January and the unseasonal nature of the weather? What kind of inventory growth would you anticipate going forward relative to your sales growth?

Matt, first of all, we don't talk about what our plans are, but I'm pleased with where our inventory levels are. We continue to maximize our inventory levels -- and don't forget the majority of them are financed by our vendors. As you know this industry, they still have the phenomenon of parts proliferation going on where there are newer models coming in every single year and they require additional parts. It is critically important that we have the right parts in our stores available for our customers. Over time, inventory will grow slightly. We don't anticipate significant levels of growth, but it will grow slightly. Matt Fassler - Goldman Sachs: Okay. Thanks a lot, guys.

Thanks, Matt.

The next question is from Bill Sims of Citigroup. Bill Sims - Citigroup: Thank you and good morning.

Good morning, Bill. Bill Sims - Citigroup: Can you talk about your plans to build out the cohesive message in the store? Does that involve new sign packages? When do you plan on rolling out the message? Who are you targeting, et cetera?

We're constantly rolling out new sign packages in our stores. If you go out today and look, an example of that would be our performance chemical planogram which has been rolled out in the last few weeks. We have new blade signs that speak to customers as to what products are available there and why you need to use them. So we are constantly working on different sign packages. If you look at our end caps, you will see that many of our end caps are getting to messages to tell people why they need to do the routine maintenance that they need to, all triggered to drive the $60 billion in undone maintenance. Bill Sims - Citigroup: Second question, although I think Brian does an excellent job on the conference call, you are in need of a CFO. Can you give us an update about where you stand in that process?

Well, thank you for complimenting Brian. I think does he a great job. As I said last quarter, I want to compliment not only Brian but our entire finance staff. We have a terrific group of finance leaders and they're doing a great job in the absence of a CFO. That being said, I'm anxious to get one as well, but I'm anxious to get the right one. We continue to be in our search, and I don't have any announcements to make today. Bill Sims - Citigroup: All right. Thank you.

Thank you, Bill.

The next question is from Alan Rifkin of Lehman Brothers. Alan Rifkin - Lehman Brothers: A couple of questions if I may. Bill, with the resets being such an important part of the strategy going forward, can you maybe just provide a little bit of color as to how the earliest resets are performing? Either from a sales or comps standpoint or from a return standpoint? Then I have a follow-up.

I'm not going to get into specific performance on those resets. They're new, they are just recently completed, but we're excited about them. They were something that was required to be done. We were not putting our best foot forward to our customers, particularly when we had merchandise that was designed to be on a low gondola on a high gondola. So this significantly improves the overall presentation to the customer and we're excited about it for the future. Alan Rifkin - Lehman Brothers: But no commentary on the progression of comps in even the earliest resets?

No, I'm not going to get into individual comp discussions on one individual tactic. We've got a lot of different things that we're doing, a lot of different initiatives in all our stores. Alan Rifkin - Lehman Brothers: On the commercial side, do you anticipate any costs going forward due to a maybe more concerted effort in terms of adding to the dedicated commercial sales force?

We're looking at making sure that we build a very profitable model for the future. As the commercial business grows, obviously there's incremental costs that go into it. Are we looking at different things that will drive incremental expenses? Absolutely, we're looking at them, but they're also going to have to drive incremental profitability. So I don't anticipate that you're going to see a major ramp-up in expenses that's not driven by a ramp-up in profitable sales. Alan Rifkin - Lehman Brothers: Okay. Thank you very much.

Thank you, Alan.

The next question is from David Cumberland of Robert Baird. David Cumberland - Robert Baird: Thanks. Bill, you talked about the many things that AutoZone has done to improve store conditions. From where you stand now, what is the opportunity to improve further, perhaps after the peak season?

I think the biggest opportunity we have is to make sure we go and execute the game plan that we have. This business is not rocket science. It's making sure that you've got the parts in your stores that are relevant to your customers and we're making sure that our AutoZoners are providing them where that wow customer service that they do so well. I'm not here -- as I said on the call -- I am not here to talk about a whole bunch of new initiatives. We think the initiatives that we have today are the right initiatives and we're very focused on making sure we execute them very efficiently. David Cumberland - Robert Baird: Thanks. On the ZNet rollout, what are some of the benefits you've seen in tests of that?

Well, it's not being tested with customers at this point in time. So we'll see that over the course of this next quarter. But we're really excited about the power that it gives us. It leverages a lot of the latest and greatest advances in technology from broadband to GUI interfaces, but it gives us the ability to take a lot of the information that we have and deliver it to our customers. A lot of technical information, a lot of information on how to do the repair specific to that vehicle. It also gives us the ability to improve our special order programs, where we can show people visual parts in the stores when we don't have them available. David Cumberland - Robert Baird: Thank you.

Thank you.

The next question is from Gregory Melich of Morgan Stanley. Greg Melich - Morgan Stanley: Hi, thanks guys. How much of the inventory increase is due to direct sourcing and inflation? I think you mentioned that inflation was low single digits?

Yes, we said inflation was low single digits. The overall impact of importing is insignificant on the inventory number at this point in time, Greg. I just want to point out that the inventory levels per store, including Pay on Scan goods, were about identical with the first quarter. Greg Melich - Morgan Stanley: Okay. So if you look at it on a year-over-year basis, getting the records that we're seeing --

Where we are seeing that change was the Pay on Scan, the dollar amount has dropped, but the accounts payable leverage has increased. So we'll take advantage where appropriate to work with our vendors to make sure that we manage working capital and our product assortment appropriately.

I think it is important to point out that our net inventory investment was down significantly for the quarter. Greg Melich - Morgan Stanley: Despite the start of direct sourcing?

Correct. Greg Melich - Morgan Stanley: Okay. Then a second question is the SKU counts. You talked about the proliferation of parts, increase to Pay on Scan, et cetera. You've taken SKUs out of these non-automotive things on the front. Could you update us, what is the SKU count of a typical store? Or is that up or down, taking some out, but there's a proliferation that continues?

Our average SKU count is still generally 22,000 SKUs per store, but that is determined at the individual store level. Certainly we've taken some things out, the fringe products, but there weren't a tremendous amount of SKUs with that. What we are doing is making sure that every individual store has the right products in that store to service its specific trade area. We've been able to continue to do that at relatively the same SKU count levels. Greg Melich - Morgan Stanley: So that's relatively unchanged. Again, inflation on inventory wasn't significant?

It is in certain product categories. Obviously anything oil-related you've seen significant inflation on those, but generally we have not. Greg Melich - Morgan Stanley: Thanks.

Thank you.

The next question is from Tony Cristello of BBT Capital Markets. Tony Cristello - BBT Capital Markets: Thanks, good morning, gentlemen.

Good morning.

Good morning, Tony. Tony Cristello - BBT Capital Markets: One question, you talked about the warmer January and how that impacted the mix of the chemical type business, less the hard parts. What does that do though as you enter the spring or the early summer? Does that have an impact then on what the customer will typically buy then? Is your mix going to have to be skewed one way or another?

First, I don't think we anticipate any significant shifts in our mix due to the things that happened in January. Again, I don't want to overplay that. We said it was modestly different for the period of time due to slightly warmer weather, but I don't want to make a big deal out of that. Tony Cristello - BBT Capital Markets: Okay. With respect to the commercial side of the business, the DuraLast brand continuing to gain traction. What are you seeing with respect to the commercial installers themselves? Have they bought into the AutoZone-branded product with their installs? Are they still hesitant to use that or any one sort of an outside-branded product?

I think the first way to say it is, ever since we've launched this program we've had significant proprietary brands. They weren't the DuraLast brand, they were a bunch of ancillary brands, like Ultra Spark spark plug wires and Albany brake pads. What we've done over the last 18-24 months is bundle a lot of those brands under the DuraLast brands. These are incredibly high quality parts. We also, a couple of years ago, put in some significant tests to drive branded products into our stores, into our commercial stores and what we found out was the customers ended up purchasing the DuraLast or proprietary brands. So we are very comfortable with our DuraLast strategy in the commercial side of the business. Tony Cristello - BBT Capital Markets: Are you then -- part of the changes of wanting profitable sales is that focusing more on getting that DuraLast brand to the installer, or are you indifferent to which product he may or may not choose?

Tony Cristello - BBT Capital Markets: Commercial sales were relatively flattish, and the store count of commercial sales, do you expect that mix to start to grow then again at some point?

We expect as we open new stores, some of those stores are going to end up having the commercial program. We're always looking at markets where we don't have the commercial program to see if it will support our commercial program profitably. I expect us to see an increase in commercial stores over time. Tony Cristello - BBT Capital Markets: Okay. Thank you.

Thank you, Tony.

The next question is from Cid Wilson of Kevin Dann & Partners. Cid Wilson - Kevin Dann & Partners: Good morning. First let me also reiterate, I think Brian Campbell is also doing a great job, he seems to be doing very good.

Thank you, Cid. Cid Wilson - Kevin Dann Partners: No problem. One question that I have is, can you give us any update on your DC logistics and any plans on either opening or relocating DCs?

Sure. Cid, I think you recall that last quarter we announced that we closed our distribution center, or were in the process of closing our distribution center in Lafayette, Louisiana. During this quarter that was actually closed and was consolidated into our new distribution center in Terrell, Texas, just outside of Dallas. We currently have seven distribution centers servicing the entire country. We think we've got a great strategy for the future and we are continuing to go forward from there. Cid Wilson - Kevin Dann Partners: Thank you. My second question is with the depreciation numbers, they were a little lower than what I would have expected. Can you help me understand the depreciation numbers and how you got to that level?

Sure, Cid. On a run rate, we're looking at very similar rates from the first quarter. So I think that there was an adjustment last year on a comparable basis. Last year we had a cumulative catch-up based on a change in accounting principles that was approximately $18 million, or just north of that, in depreciation. But over the last couple of quarters we've been running at this similar rate. What has increased depreciation on an ongoing basis over the last couple of quarters here has been the increase in capital expenditures, with the ramp-up of new store openings and the like. So this run rate going forward will be basically static, if not climbing relative to the capital expenditures. Cid Wilson - Kevin Dann Partners: Also, can you talk a little more about the increased coverage of your DuraLast brands and whether you're pleased with what you're seeing? I know that the advertising that I've been seeing has been very geared towards the DuraLast brand specifically, so obviously there's an initiative on your part to try to increase the brand equity. Could you comment a little more about that? Is that something we can expect to see the rest of this year?

Yes, Cid, as I mentioned earlier, first of all we have great quality products in DuraLast brand, and we are very excited. They give us a great product that we can offer to our customers at a great value. So we're going to continue to leverage and build that brand. It's an enormous brand, probably the biggest brand in the automotive aftermarket. So it gives us a key point of differentiation as we go forward and we're going to continue to push it. Cid Wilson - Kevin Dann Partners: My last question is, I don't want to beat on a dead horse regarding the weather, but you mentioned that you saw only a modest impact from the warmer weather. Is it reasonable to assume that it was something like just less than a percent, or can you give us any quantified guidance on that?

Sure, Cid. In fact, within range, it would have been in that range, because the percentage, our overall comping, slightly positive. It just wouldn't have moved the needle that much.

I think it's important Cid, also to remember we operate across the country, and weather patterns, even this year, were different in different regions of the country. So because of that we're somewhat hedged against the weather impacts. Cid Wilson - Kevin Dann Partners: Okay. Thank you very much.

Thank you, Cid.

Rob Schwartz - JL Advisors: I just want to follow up, given whatever the weather impact was in January, can you discuss trends since then as we've come into February and we finished the investment and the resets?

Rob, we traditionally do not provide that guidance going forward. As a result, we are up against our busiest selling seasons. The second quarter was our most challenging same-store sales comparison, but we feel like we're now complete with our adjacencies and we're well positioned to move forward. Rob Schwartz - JL Advisors: Thank you.

Sure, Rob. Have a nice day.

The next question is from Matt Nemer of Thomas Weisel Partners. Matt Nemer - Thomas Weisel Partners: Good morning, everyone. The first question is on ZNet. Can you give us a little bit more color on who the technology providers might be, how fast you plan to roll it out? Do you do it nationwide or by region? And whether that's expensed or capitalized?

A significant amount of it is going to be capitalized, obviously the hardware. The hardware has been rolling to our stores over the course of the last six to eight months and that's being capitalized. The software is primarily being developed in-house or by -- certainly being designed in house and some components of it are being written by outside providers who are writing the codes themselves. What was the third part of your question? Matt Nemer - Thomas Weisel Partners: Well, I guess how quickly has it rolled out, or what is the rollout plan?

Until we get it rolling, we don't know with certainty what's going to happen, but we anticipate it being in the majority of our stores by the end of the year. You asked will we roll it out regionally? Yes, we will roll it out regionally because we want to leverage the trading aspect of it. Matt Nemer - Thomas Weisel Partners: Second, we appreciate the breakout on SG&A expense. Of the third category, which is a little over 100 basis points, is there any way to rank training versus store hours, versus the look of the stores?

I think we have intentionally stayed away from the specifics of it. We've got a lot of different initiatives that we are deploying and I don't want to get into individual tactics at that level.

It's important to point out, all of them were movers in that number. Matt Nemer - Thomas Weisel Partners: Okay, that's helpful. Lastly, on new store locations, can you give us a feel for what regions you are looking to expand in to?

We're continuing to look -- there's obvious small areas where we don't have great penetration. The Pacific Northwest, the Northeast, South Florida, but we're looking at virtually every market across the country. As we've mentioned before, we've opened a tremendous amount of new stores in Memphis over the last 18 months. So we're looking at all kinds of different markets. Matt Nemer - Thomas Weisel Partners: Great. Thank you.

Thank you. Before we conclude the call I wanted to take a moment to reiterate that we know we have an incredible business built on a strong foundation of disciplined processes, focused on delivering great customer service. All of us at AutoZone are pleased with our efforts thus far and are confident we will continue to be incredibly successful, while always optimizing long-term shareholder value. I thank you very much for participating in today's call. Thank you.

That concludes today's conference. You may disconnect at this time.