Bill Rhodes - Chairman, President and CEO Bill Giles - EVP and Chief Financial Officer

Simeon Gutman - Morgan Stanley Matthew Fassler - Goldman Sachs Dan Wewer - Raymond James Seth Basham - Wedbush Securities Seth Sigman - Credit Suisse Michael Lasser - UBS Securities Mark Becks - JPMorgan Bret Jordan - Jefferies & Company Mike Baker - Deutsche Bank Chris Bottiglieri - Wolfe Research Michael Montani - Evercore ISI

Good morning and welcome to the AutoZone Conference Call. Your lines have been placed on listen-only until the question-and-answer session of the conference. Please be advised today's call is being recorded. If you have any objections, please disconnect at this time. This conference call will discuss AutoZone's second quarter financial results. 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 press release 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 credit market conditions, the impact of recessionary conditions, competition, product demand, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, raw material costs of our suppliers, energy prices, war and the prospect of war, including terrorist activity, construction delays, access to available and feasible financing, the compromising of the confidentiality, availability or integrity of information including cyber security attacks, and changes in laws or regulations. Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of this Annual Report on Form 10-K for the year ended August 29, 2015, and these risk factors should be read carefully. Forward-looking statements are not guarantees of future performance, and actual results, developments, and business decisions may differ from those contemplated by such forward-looking statements. And is hence described above, and then the risk factors could materially adversely affect our business. Forward-looking statements speak only as of the date made, except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results.

It is now my pleasure to introduce your host for today's call, Mr. Bill Rhodes. Thank you, you may begin.

Good morning, and thank you for joining us today for AutoZone's 2016 second quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer, IT, and ALLDATA; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the second 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.autozoneinc.com. Please click on quarterly earnings conference calls to see them. To begin this morning, I want to thank all AutoZoners across the globe for another solid quarter. In the second quarter, we continued to execute our strategies to organically grow our business. We expanded our US retail footprint with the opening of another 30 new stores. Our commercial business continued to grow with sales increasing 8% and we opened 32 net new programs for the quarter. We now have the commercial program in 81% of our domestic stores and we continued to expand our presence in Mexico, opening nine stores this quarter. We did not open any new stores in Brazil this quarter and currently have 8 stores in operation. Lastly, we opened two new IMC branches bringing our total branch count to 24. While we currently have approximately 90% of our total company sales coming from our domestic AutoZone stores, we believe we have great growth prospects in domestic locations, commercial, international and our other businesses. If I could sum up the quarter in a short statement, I would call out our major highlights, I’d say we continued on our game plan of executing our inventory availability and delivery frequency initiatives while adding more labor hours in our stores in an effort to constantly improve our customers’ experiences. While winter temperatures were milder this year than last, we did not see a material change in business trends from one month to the next overall. Yes, certain cold-weather categories, those that have larger sales during these months were below last year's numbers while others balanced out our performance. And yes, as you would expect, our performance in the Midwest and Northeast were below other markets but they were in line with our expectations considering the weather patterns. Probably the biggest unknown for us this quarter was when would income tax refunds begin to be remitted to consumers by the IRS. By quarter end, total refunds were generally comparable to remittances last year but they were issued very very late in our quarter. We feel our retail business is benefiting from a continued focus on customer service, improving parts availability, and lower overall fuel prices. Lower gas prices, we feel, are contributing to Americans driving more. Regarding commercial, we saw colder weather markets growing sales at a slower pace than other markets. We believe the milder temperatures led the less failure related repairs being done in those particular markets. However we believe the mild temperatures will not have a material lasting effect on our sales performance heading into the summer. We feel a hot summer is the next thing we will be watching for in regards to sales performance. Getting back to DIY, our number one business priority, the business did quite well in the second quarter. We generated positive traffic and ticket on a same-store basis and performance was generally consistent across the country. While the macro-economy is favorable for DIY performance right now, we also continue to gain share and would attribute those share gains to our investments in store labor and our inventory availability initiatives. We are committed to providing WOW! Customer Service at every store with every customer. Regarding commercial, we’ve continued with our inventory placement and distribution strategies to respond to the ever increasing challenge of parts proliferation in our industry. Over the past two years, we implemented new methodologies to improve our hard parts placement techniques in all stores. We continued the rollout of more frequent deliveries to an additional approximately 300 net new stores in the quarter. We now have a total of 1300 locations out of our 5000 plus locations on multiple weekly deliveries. As we've been discussing, this rollout focuses on increasing from once-a-week deliveries from our distribution centers to either three or five times a week. Our results continue to confirm that this new strategy is appropriate. With the varying weekly sales volumes of our stores, replenishment needs vary as well. Over the remaining two quarters of the fiscal year, we expect to roll this increased frequency model to approximately 700 additional stores ending the fiscal year with approximately 2000 stores with this enhanced service model. The implementation of this initiative will create a gross margin headwind of approximately 20 to 30 basis points until we complete the rollout. While this effort will take a few years to complete, we would ultimately expect about two-thirds of our stores to have increased frequency of deliveries. This past quarter’s deleverage from deliveries was less than the previous quarter. I appreciate our team’s efforts to manage these rollouts on a cost effective basis. This is a material change in how we do business and our teams are executing it well and managing the costs effectively. Our sales lift from this effort continues to show the investments make economic sense. Additionally, we continue to be very pleased with our sales results from the mega hub stores. We ended the quarter with 5 mega hubs with no new openings this quarter, although we expect to open – to add an approximately five additional mega hubs over the last two quarters of the fiscal year. As a reminder, these super-sized AutoZone stores carry 80,000 to 100,000 unique SKUs of inventory, approximately twice what a normal hub store carries. They provide coverage to both surrounding stores and other hub stores multiple times a day or on an overnight basis. Our sales results thus far in our opened mega hubs continue to exceed our expectations and we are experiencing sales improvements from both our retail and commercial businesses. While there is incremental cost of these rollouts, including payroll and fuel to execute the extra deliveries, we feel their cost deleverage is relatively modest. Our current assumption on this rollout is that we won't experience meaningful deleverage from this initiative in fiscal 2016. Currently five mega hubs support approximately 700 stores on a same day basis and roughly 2000 stores in total, and once built out we would expect to have a network of mega hubs in the neighborhood of 25 to 40 total locations. Consistent with the increased frequency of delivery from our distribution centers, we expect to complete our mega hub expansion over the next few years. Along with improving our local parts availability and assortment, we continue to manage this organization to provide exceptional service for our customers, provide our AutoZoners with a great place to work with opportunities for advancement and ensure we do it on a profitable basis to provide strong returns for our shareholders. As I mentioned a few years ago -- a few minutes ago we continue to invest in store labor in order to say Yes, We Got It more frequently. Yes, We Got It is a new operating mantra for us in 2016. We’ve made meaningful enhancements in the last few years to our availability of inventory and now it is time to ensure our customers experience and see that substantial change. As traffic has increased in our stores, we understand and appreciate the need to be appropriately staffed to handle our customers’ needs. When customers have request for a part, product or simply advice, our objective is to say to them, Yes, We Got It. While still early in the implementation training phase, our team has enthusiastically embraced this notion, and with the current positive macro environment, we want to make sure AutoZoners have the tools and specifically the staff necessary to provide our customers with WOW! Customer Service experience they deserve. We also want to touch on the efforts that are ongoing with regard to capturing data about our customers’ shopping patterns across all of our platforms. We believe it is essential to be able to share information and process seamlessly between our stores, commercial shops, phone and online experiences in order to meet all of our customers’ needs. While still in the early stages of this work, we believe having a holistic and seamless enterprise-wide perspective on our customers will benefit us greatly over the next several years. This will be a significant endeavor for us over the next couple of years. We’ve spent a lot of time mapping through the capture of this data in order to leverage it to better serve our customers. We think this will be a real differentiator for us over the next several years. More to come later on this initiative. Lastly, in order to support more frequent deliveries to new stores as well as mega hubs, we continue to expect to open two or three distribution centers over the next two or three years. At present we’re in the early stages of planning their openings and don't expect any distribution center to come online until fiscal 2017. Fiscal 2016 will incur some capital on operating expenses related to development but a larger portion of capital spend will be in fiscal 2017 and ’18. To summarize our plans, we expect to roll out more frequent distribution center deliveries and more mega hub locations over the next few years. We also expect to open two or three new domestic distribution centers over this time. While our total company CapEx will not be materially different this year from past, we do expect to incur approximately 20 to 30 basis points of gross margin headwinds from these investments alone. Now turning to the second quarter's results. Our sales increased 5.3% on top of 7.7% growth in Q2 of last year. Our domestic same-store sales were up 3.6%. Our growth in both sales and earnings were very consistent with our results from Q1. This quarter sales results were also very consistent throughout the quarter, excluding the last couple of weeks. During the quarter, tax refunds in total were generally comparable to prior year. However from a timing perspective, they flowed [ph] very late in the quarter. In regard to our three primary merchandise category splits in our US stores, failure-related product sales performed the best. Discretionary had the next highest growth rate followed by maintenance. While all three showed nice growth, we attribute the variance in sales trends between these businesses to the timing of winter events, for example, the polar vortex effects this year versus last. As I said earlier, both traffic and ticket were positive for our DIY and commercial businesses. For the quarter we opened 32 net new programs and have the commercial program in 81% of our domestic store base. While our total domestic sales grew 6% on the quarter, our domestic commercial sales growth was up 8%. The commercial sales growth rate while still impressive has slowed, some of the reductions in growth is due to opening fewer new programs in recent years and having a lower percentage of the programs on the maturation curve. Despite this expected change, our sales slowed a bit more than we expected and we are working diligently to gain back that momentum. In recent weeks, we’ve executed incremental training and have enhanced the focus of our management teams, including store managers on reaccelerating our commercial growth. We believe our future in this business remains quite bright. As part of our strategy of increasing inventory levels in local markets closer to our customers, this past quarter we opened one additional hub location and now operate 179. In addition to opening over time more mega hub locations, we also expect to open additional standard hub locations. Over time we expect to operate as many as 200 to 225 stores as hub stores. Regarding IMC, we opened two new branches this quarter and continue to be excited by our opportunities. IMC parts catalogue is currently accessible to over 700 AutoZone locations today and we believe there are great sales growth opportunities in the future with both our retail and commercial customers. Regarding Mexico, we opened another nine stores this quarter and now have 451 total locations in Mexico. While foreign currency headwinds persist, Mexico's peso sales have done quite well. Assuming the peso stabilizes, we expect the pressure on our US dollar earnings from our Mexico business to begin to abate starting this summer in the June to July timeframe as we begin to lap the most significant exchange rate increases. For the quarter, the foreign currency headwinds lowered our EBIT growth rate by more than two percentage points. At the end of the quarter the peso was down 29% versus last year and 16% from the end of Q1. Sales in our other businesses for the quarter were up 3% over last year. As a reminder, ALLDATA and e-commerce businesses, which include AutoZone.com and AutoAnything, make up this segment of sales. Each of these businesses operate in increasingly competitive environment and our sales have slowed a bit. Again, while we understand weather this winter was warmer, we're optimistic for sales this upcoming quarter. The biggest tailwind at the moment in our opinion is the increased miles driven across the country. This leads to more failure and maintenance related demand and benefits both our DIY and DIFM businesses. While we focus on both the short-term and long-term performance, we remain committed to delivering consistent strong earnings performance and extending our streak of 38 consecutive quarters of double-digit EPS growth, which is an important milestone for us. While our delivery frequency initiative and expansion of our mega hubs will add some headwinds on our operating margin for the remainder of fiscal 2016, our focus remains on growing operating profit dollars at acceptable return levels. Now let me review our highlights regarding execution of our operating theme for 2016: LIVE the Pledge. The key priorities for the year were great people providing great service, profitably growing our commercial business, leveraging the Internet, improving inventory availability, and yes, we’ve got it. On the retail front this past quarter, under the great people providing great service priority, we increased staffing levels in our stores. We've also been aggressive on our technology investments and believe these initiatives will help differentiate us on a long-term basis. We realize as customers have become much more tech and mobile savvy, we have to have a sales proposition that touches all the ways they desire to interact with us. Our current and future technology investments will lead to sales growth across all of our businesses. On the Yes, We’ve Got It front, we've added training, metrics, and most importantly share of voice to educate our store level AutoZoners to help all of our customers with any part, product or advice needs they have. We're excited about this initiative. We should also highlight another strong performance in return on invested capital as we were able to finish the quarter at 31%. We are proud of this metric as it is one of the best, if not the best, in all of hard lines retailing. However our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return well in excess of our cost of capital. It is important to reinforce that we will always maintain our diligence regarding capital stewardship as the capital we invest is our investors’ capital. Before I pass the discussion over to Bill Giles to talk about our financial results, I’d like to thank again our entire organization for executing on our many operating initiatives while providing our customers with great service and managing our expenses appropriately and prudently. Now I will turn the call over to Bill Giles.

Thanks, Bill and good morning everyone. To start this morning, let me take a few moments to talk more specifically about our retail, commercial and international results for the quarter. For the quarter, total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores and our 24 IMC branches, increased 5.4%. Switching over to macro trends, during the quarter nationally unleaded gas prices started out at $2.09 a gallon and ended the quarter at $1.72 a gallon, a $0.37 decrease. Last year gas prices decreased $0.55 per gallon during the second quarter starting at $2.82 and ending at $2.27 a gallon. We continue to believe gas prices have a real impact on our customers’ ability to maintain their vehicles and as cost reductions help all Americans, we hope to continue to benefit from this increase in disposable income. We also recognize that the impact of miles driven on cars over 11 years old, the current average is much different than on newer cars in terms of wear and tear. Miles driven increased in both October, November and December and we don’t have January data yet. For all of 2015 miles driven finished up 3.5%, an incredible strong number on a historical basis. It represents the largest percentage growth in over a decade. The other statistic we highlight is the number of seven year and older vehicles on the road which continues to trend in our industry’s favour. For the trailing four quarters, total sales per average AutoZone store was $1,780,000. For the quarter total commercial sales increased 8%. In the second quarter, commercial represented 18% of our total sales and grew $30 million over last year's Q2. While the sales trajectory of the business slowed a bit in Q2, some of this is due to slower growth from our lower mix of new programs, we've intensified the focus of our entire team, including our store managers on reaccelerating our growth in commercial and we have recently executed some incremental commercial training programs. This past quarter we opened 32 net new programs versus 29 programs opened in our second quarter of last fiscal year. We now have our commercial program in 4228 stores supported by 179 hub stores. Approximately 1100 of our programs are three years old or younger, 26% of the base. With our inventory additions and the support of the IMC acquisition, we are well-positioned to grow our base business. Over the last several years, significant amount of our focus has been on opening new programs and that will continue to be the case albeit at a slightly moderated pace. This year we plan on opening around 250 commercial programs, approximately 150 more programs over the next two quarters. We have a very talented sales force and we're enhancing training and introducing additional technology to optimize the productivity of the sales force. We've increased our efforts around analyzing customer purchasing trends and in-stock trends. In summary, we remain committed to our long-term growth strategy. We believe we are well-positioned to grow this business and capture increased market share. We believe we can scale this business in a profitable manner and we continue to be excited about our opportunities in this business for many years to come. Our Mexico stores continue to perform well. We opened nine news stores during the second quarter. We currently have 451 stores in Mexico. For the year we expect to open approximately 40 new stores and we are on target to open a new distribution center this calendar year. This will mark our second distribution center in the country and it will support further Central Mexico store growth. As Bill previously mentioned, for the quarter the foreign exchange headwinds lowered our company EBIT growth by over two percentage points. While we cannot control movements in functional currency versus planned assumptions, Mexico leadership continues to do an excellent job managing the peso denominated business. If the peso stays at these elevated levels, it will continue to pressure our US dollar earnings for the next few quarters. Regarding Brazil, we opened no stores in the quarter remaining with 8 stores open. While sales growth has been very encouraging, we have been challenged by a weak Brazilian real relative to US dollars as well. While the peso devalued 29% year-over-year, the real devalued 41% this year versus last. This extraordinary volatility has managed as best as possible, remain in test phase in Brazil but have been encouraged by our improving operating performance. Recapping this past quarter’s performance for the company, in total our sales were $2.257 billion, an increase of 5.3% over last year’s second quarter. Domestic same-store sales, or sales for stores opened more than one year, were up 3.6% for the quarter. Gross margin for the quarter was 52.7% of sales, up 50 basis points. The improvement in gross margin was attributable to higher merchandise margins, partially offset by higher supply chain costs associated with current year inventory initiatives. In regards to inflation, it remains subdued. In fact, in total slightly down last year. Currently we feel costs will be predictable and manageable. We will remain cognizant of future developments regarding inflation and will make the appropriate adjustments should they arise. SG&A for the quarter was 35.8% of sales, higher by 40 basis points from last year’s second quarter. The increase in operating expenses as a percentage of sales was primarily due to a favorable credit card litigation settlement recognized last year's quarter and higher domestic store payroll. We continue to believe we are well-positioned to manage our cost structure in response to our sales environment. EBIT for the quarter was $383 million, up 6% over last year’s second quarter. Our EBIT margin was 17%. Interest expense for the quarter was $33 million compared with $35 million in Q2 a year ago. Debt outstanding at the end of the quarter was $4.845 billion or approximately $415 million more than last year balance of $4.430 billion. Our adjusted debt level metric finished the quarter at 2.5 times EBITDAR. While in any given quarter, we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment-grade rating and our capital allocation strategy; and share repurchases are an important element of that strategy. For the quarter our tax rate was slightly lower than the last year’s Q2 tax rate. This rate was lower than planned. Any deviations to our plan are driven primarily by the resolution of discrete tax items that arise. Net income for the quarter was $229 million and up 8% over last year. Our diluted share count of 30.8 million was down 5.4% from last year’s second quarter. The combination of these factors drove earnings per share for the quarter to $7.43, up 14.2% over the prior year’s second quarter. Relating to the cash flow statement, for the second fiscal quarter, we generated $207 million of operating cash flow. Net fixed assets were up 5% versus last year. Capital expenditures for the quarter totaled approximately $100 million and reflected the additional expenditures required to open 43 new locations this quarter, capital expenditures on existing stores, hub and mega hub store remodels or openings, work on development of new stores for upcoming quarters and information technology investments. With the new stores opened we finished this past quarter with 5193 stores in 50 states, the District of Columbia and Puerto Rico, 451 stores in Mexico and 8 in Brazil, for a total AutoZone store count of 5652. We also had 24 IMC branches opened at fiscal quarter end, taking our total locations to 5,676. Depreciation totaled $69 million for the quarter versus last year’s second quarter expense of $60 million in line with recent quarter growth rates. With our excess cash flow we repurchased $150 million of AutoZone stock in the second quarter. At quarter end we had $548 million remaining under our share buyback authorization and our leverage metric was 2.5 times at quarter end. Again, I want to stress, we manage to appropriate credit ratings and not any one metric. The metric we report is meant as a guide only as each rating firm has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy. Accounts payable as a percent of gross inventory finished the quarter at 109%. Next, I'd like to update you on our inventory levels in total and on a per location basis. The company's inventory increased 3.9% over the same period last year driven primarily by new stores over the last 12 months. Inventory per location was $633,000 versus $631,000 last year and $624,000 last quarter. Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 31%. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. Now, I'll turn it back to Bill Rhodes.

Thank you, Bill. We're very pleased to report our 38th consecutive quarter of double-digit EPS growth, growing this quarter at a rate of 14.2% over last year. To execute at a high level, we have to consistently adhere to living the pledge. We cannot and will not take our eye off of execution. Success will be achieved with a strong attention to detail and exceptional execution. We are confident in our initiatives, and we are pleased with the progress we are making in rolling out our new supply chain model by delivering inventory to our stores on a more frequent basis. In addition, the performance of our mega hubs has been strong, and ahead of our expectations and we look forward to opening more later this year. We believe these initiatives will benefit both our retail and commercial businesses. Our long-term model is to grow new store square footage at a low single-digit growth rate. And we expect to continue growing our commercial business at an accelerated rate. Therefore, we look to routinely grow EBIT dollars in the mid single-digit range or better in times of strength. And we leveraged our very strong and predictable cash flow to repurchase shares, enhancing our earnings per share growth in the double digits. We feel the track we are on will allow us to continue winning for the long run. We believe our steady, consistent strategy is correct. It is the attention to details and consistent execution that will matter. Our belief is, the solid, consistent strategy, combined with superior execution drives success. Our charge remains to optimize our performance regardless of market conditions, and continue to ensure we are investing in the key initiatives that will drive our long-term performance. In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves. We are pleased with our results this past quarter, but we must not be content. We have a lot of work in front of us over the next two quarters, but the future continues to look bright. Now we'd like to open up the call for questions.

[Operator Instructions] Thank you. Our first question is from Simeon Gutman with Morgan Stanley.

Thanks, good morning. I have a quick question for Bill Rhodes on the commercial sales growth. You mentioned it was a little weaker even absent some noise, and you didn’t mention whether in the same breath, but you mentioned training and labor. So can you share with us what you think the void is on why – what’s not happening on the training or labor side that’s causing a little like, I don’t know if it’s slippage or noise in the commercial sales results?

I would start with one of the things we made specific mention of was that we have fewer stores going through the maturation cycle, and also the stores that are in that maturation cycle were opened later in our development process, which means they had lower potential than the ones that were opened sooner. So we’re seeing some of our slowdown and it’s completely attributable to lower new program growth. But that said, we were still below our expectations for the quarter. Some of that we would attributable to some weather patterns particularly in the Midwest and Northeast but not all of it. Frankly we’re not exactly sure all the reasons that we had a little bit of a slowdown, but we are very focused on taking our one team concept and getting our district managers and our store managers along with our sales team really reengaged in a big way and in a materially significant -- more significant way than in the past. And I think that will pay us dividends for the long term.

And then a follow up, somewhat related to that, if you look at the markets with increased -- stores that are benefiting from increased frequency, are you making the customers in those stores aware of that or are they just seeing it through improved parts availability?

Yes, we're not marketing to them, number one, it’s being done on a store by store basis. Clearly, the local markets will have it or not, but we’re not marketing it to them, we’re just showing it to them and they are yes percentage when they ask for parts.

Thank you. Our next question is from Matthew Fassler with Goldman Sachs.

My question focuses on inventory. Your inventory grew, I believe, at a slower rate than cost of goods for the first time in quite a while. And this is, as you’re ramping up availability. If you could talk about the moderation in year-on-year growth, whether you expect it to continue and impact, if any, would have had on sales as you went through the quarter?

I think when you look over time we've actually increased our inventory quite a bit. And so now it’s at a 630,000 per store location level, we feel pretty good about that. As Bill mentioned in the prepared remarks, we spend a lot of time on analyzing placements and so the merchandising organization has done a great job over the last, I would call it, 12 to 15 months, of better determining workplace inventory. I think the more frequent delivery will be able to optimize inventory location as well and obviously we will increase -- we've increased some inventories, we’ve added some of these mega hubs. So I would expect our inventory levels on a per location basis to be approximately where they are now. They might have some increases as we roll out a few more mega hubs but not significant increases.

So basically growing more or less in line with sales if the trajectory continues as it is?

Exactly right.

And then my very quick follow-up, you quantified the impact of FX on EBIT and it’s not an insignificant number relative to your algorithm. How much -- I'm not sure how much detail you’ve given on that in the past, how much does that impact in the quarter you just reported or how does that compare it to recent quarters?

Yes, what we said on this quarter was that we thought it was about 200 basis points or so, and I think last quarter if I remember right, we said somewhere around 100 basis points or so. And so it has had a big impact and we’re going to anniversary that somewhere towards the middle to the tail end of Q3 relative to the spike that we saw in the peso. But I am sure there is a whole lot of other macro things going on at the same time that are impacting the peso, including lower gas prices et cetera. So there is a lot of what we call natural hedges going on. So it isn’t singular but if we were to single that out, it did almost a 200 basis point impact on EBIT. So we expect that to probably impact us just a little bit in Q3 and then we will fully anniversary it in Q4.

And just for your closure on this point, it sounds like just probably both translational and transactional impact, up to the point – to the extent you’re selling products sourced in the US south of the border?

Not necessarily. I mean there is obviously translation transaction from a balance sheet perspective. But it’s mostly transactional from just the Mexico results.

Our next question is Dan Wewer with Raymond James.

Thanks. Bill, your explanation about the slower rate of program growth makes sense. But then presumably that would benefit the sales per program because they are more mature. But again it looks they were up by less than 1% sales per program during the second quarter. So trying to reconcile that trend with the rollout and the apparent success with the mega hub and distribution frequency initiative?

Yes, but first, I would start with -- one of the things that’s happened in the quarter on the more frequent delivery program, we did not roll out any significant amount of stores on that program until very very late in the quarter. It just doesn't make sense to roll out things during the holiday season. So those over 300 stores that went on that program, went on the last couple of weeks to the quarter: So you weren’t able to see that benefit up there. As I said earlier, Dan, some of the slowdown in commercial was clearly the maturation cycle but some of it as we were frankly disappointed, marginally disappointed with our performance in commercial. Our team has all hands on deck and we had a spring sales meeting last week, and that was the predominant topic and I'm highly confident that our team will take the ball from here and reaccelerate our growth.

That’s a great opportunity to evaluate what’s the benefits from the mega hub coverage, what’s the benefit from the increased delivery frequency and then I think you also, what, 500 stores that have both the mega hub access and multiple delivery availability. When you think about those two different initiatives, what do you think to be getting the biggest sales payback?

They were both performing at or above our expectations. Frankly the mega hubs are outperforming our expectations. And by the way, mega hubs which – a couple of them are multiple years old, are continuing to grow, so we’re really excited that the maturation continues two, two and half years later. As we said before, the combination of those two programs is driving a benefit of between a $1000 and $1500 per program, or first store that they get [ph], and that holds true. In fact, if anything is a little bit stronger, are towards the higher end of that as we roll it out.

Bill, just real quickly, can you give an example or two of what you're focusing on, the increased education or training in the commercial initiative, just an example of what kind of conversations or teaching will be taking place at the store level?

I would say one big thing is a lot of our AutoZoners, myself included, grew up on the retail side of the business, we didn’t grow on the wholesale side of the business. And so to use a baseball analogy, our fastball is retail. Well, we've got to develop a fastball that’s also commercial and so we're really focused on getting everybody in the organization taking our whole one team notion to the next level, and that includes getting our district managers and our store managers along with the sales team even more focused on growing the commercial business. Those are a talented group of people and I am highly confident that they will embrace that notion and take us to the next level.

Thank you. Our next question is from Seth Basham with Wedbush Securities.

My first question is just on the success of the delivery initiatives. When you think about the stores that received increased deliveries earliest in the development of this rollout, are they still out-comping control group stores?

I would say as they anniversary that they are not comping on the delivery frequency. They are not comping at a higher level. They pretty much get that benefit very early, because it’s all about the customer calling, and yes, we have the product at a higher level than we had it before. So the benefit is almost immediate. There's not a marketing halo except to the extent that, when we say yes on a water pump we may also get the hose sales as well but all those benefits are pretty much immediate. I wouldn’t anticipate that they would grow year-over-year.

So the mega hubs that are maturing –

Different than that. The mega hubs are continuing to grow. And I think that as the more we say yes for hard-to-find parts, the more customer calls us first versus somebody else for harder to find parts.

And then secondly just looking at your gross margins on a really strong quarter, can you provide a little bit more insight into how you’re reducing your product acquisition cost so much?

There’s a variety of things that merchandising organization is doing in order to improve quite frankly sourcing. And so one of the things we talked about last quarter is that we’re increasing our global sourcing efforts and identifying opportunities there. I’d say that’s still early on, so there's more opportunity for that as we look out over the next several quarter, several years frankly. So I think there's opportunities there, it’s mostly acquisition costs to be honest.

Thank you. Our next question is from Seth Sigman with Credit Suisse.

I just want to follow up on that gross margin point. So clearly a lot of momentum in gross margin helping offset some of the investments that you've made. How do you think about that playing out in the second half of the year? So just wondering if you'll see greater impact in Q3 and Q4 from the increase in delivery frequency, because you pointed out you’re adding 700 stores in the second half, you only added 300 in that first half which was kind of late in the quarter. So I was just wondering how that plays out and if you will continue to see some of those offsets.

We've added more than that. And so we will probably add – the way to think about it is we’ll probably add about 300 stores a quarter on the more frequent delivery. And so we will probably have this ratable pressure of about 20 to 30 basis points from a supply chain perspective. We've had opportunities to offset that through merchandising tactics working with our vendors as well as lower acquisition costs. So it's difficult to predict out exactly what gross margin will do over the next couple of quarters. But I think we feel pretty good about this quarter's results and we’d expect something similar maybe not quite the strong going forward.

Okay, that's helpful. And then just as we think about the strength in the retail side of the business, how do we think about the pace versus prior quarters? It’s kind of hard to see with FX, just wondering did it accelerate versus prior quarters? And just in general, how should we be thinking about the drivers there between the inventory availability initiatives? Obviously there's a lot of disruption in the market as well. And then also I think you pointed out just improvements you're seeing within your customer base.

I would say that it felt pretty steady overall I think from the performance of the retail business for the quarter, with the exception of the flow of the tax money and that created some volatility overall. And clearly as you pocket the United States, there was probably little bit of a weather impact up in the Northeast. And there is a minor impact in the south-central area from oil. But other than that it seems like it’s been relatively stable and consistent throughout that. And then just, if I heard you correctly, I just wanted to make a footnote to one thing you said. The same store sales are domestic based so the foreign exchange rate wouldn’t have had any impact on that.

Thank you. Our next question is from Michael Lasser with UBS.

Bill Rhodes, so you’re making progress with the inventory availability initiative, your sales per commercial program billed several hundred thousand dollars below some of the other players in the industry. Do you think what -- the current initiatives that you have in place are going to be able to enable the company to meaningfully close that gap over time, or do you have to be something else to get there?

I think we believe strongly in our current strategy. We believe these inventory availability initiatives are going to make a material difference in both our retail and commercial businesses. And I think this discussion we’re having today about taking our one team approach to the next level is really going to get our organization which is an incredibly strong execution oriented organization, that will help take us to the next level. Where do we end up? When I sit back and think about it, a lot of people want to talk about moving from $9000 a week to $13,000 or $14,000 a week. If you think about it, the DIFM business is bigger than the DIY business. Over time I'd love for our DIFM business to be bigger than our DIY business. That’s going to take years if not decades, but I don’t want to set our sights to any short-term target that would limit our thinking.

Has the most immediate impact from the increased inventory availability been to the DIY business?

No. I would say the most immediate impact is on both sides of the business. In fact, if anything, it is slightly disproportionate to the commercial business, which is what you would expect particularly on the mega hub because these are the later model products that are harder to find.

And then my follow-up question is, so with that being said and the slowdown in growth on the sales per commercial program basis within the quarter, was that – was there any consistency or pattern that you saw because it doesn’t sound like it was the stores that are getting the increased inventory availability, if anything, those are doing better than average. So I guess there's some other bucket of stores that is growing?

I wouldn’t say it some other bucket of stores. I would say it was generally across the board, certain markets where there were weather impacts were hit slightly more than others. But it was generally across the board.

Thank you. Our next question is from Chris Horvers with JPMorgan.

Hi, it's Mark Becks on for Chris. I just want to come back to the commentary around the tax refund. I think you said it was comparable at quarter end. Just wanted to fully understand, so does that mean you wouldn't anticipate any sort of impact as you move into Q3? Or do you think there's still some lift from the delayed tax refunds for the next quarter?

What we said was, at the end of the quarter total refunds were generally consistent with where they were last year. But they really flowed very late in the quarter. There was a massive amount of refunds that were processed the Wednesday before our quarter ended. We obviously had a very nice weekend. Did we get all the benefit that we normally get in a quarter? Probably not, but it's really hard to say, in the past we’ve called out two different times that we thought the tax refund timing either benefited us or hut us by 100 basis points in sales for the quarter. We didn't quantify it this time, so it was clearly – our thoughts are it was clearly than that. But there's probably a bit of it that’s going to flow into the third quarter.

That's helpful. And then just one other quick follow-up, I will let Bill Giles jump in here. Maybe I'm reading a little too much into it, but the repo activity was a little bit of a modest deceleration in the quarter. I think historically that's followed your cash flow, and you've taken out that in the middle of the year to support a ramped repo in the back half. Maybe any insight you'd be able to give there. Thanks.

You said it spot on, that’s exactly right. The second quarter is typically a slightly lower cash flow quarter. We obviously bought more stock this quarter than we did last year at this time because of the IMC acquisition that we incurred last year but share repurchases is a little bit lighter in Q2 but we’ll ramp up back up as we heads towards the back end of the year.

Thank you. Our next question is from Bret Jordan with Jefferies.

On the IMC you just mentioned, you said it's got catalog availability to 700 of your stores. Can you talk about how it's impacting those stores' commercial business?

Yes, as we said for a long time, the number one reason we’re in the IMC business is for the IMC standalone business. It’s a business that we’re very excited about on a long-term basis. But it does provide for those customers, those AutoZone commercial customers that do some high-end import business it does provide us to increase our ability to say yes on those special needs. So when you think about that business today, it’s maybe a couple hundred dollars per store per week in incremental sales, it's not a meaning -- huge difference in the commercial business but it is a nice help. And any time you can say yes to something that they really need, then that helps you move up the call list over the long term.

And then in other you mentioned that, between ALLDATA and e-commerce slowed a bit. Was it e-commerce, I guess, is there anything changing in that space or is it just sort of general slowing around the seasonal category, is RockAuto or Amazon having an impact?

I would say that we are not seeing much different from an e-commerce perspective overall. And I think that’s just some steady – I think ALLDATA had a little bit more competitive pressure in the marketplace and that probably slowed their growth a little bit. So that’s kind of more of what you’re seeing now.

Thank you. Our next question is from Mike Baker with Deutsche Bank.

Hi thanks. Two questions. One, just bigger question. You said at one point earlier in the call that the economy is favorable for DIY right now. Does that imply that you think it's more favorable for DIY than the commercial business? And if so, why is that, and has that changed at all?

I would say we're number one much more educated on how the economic cycles impact our DIY business than we are the DIFM business just because we’ve been in that business for so much longer and we have a much more mature business. Clearly the economic cycle that we’re with lower gas prices which are leading to really really high miles driven is very favorable for us. Those same impacts, those same indicators should impact the commercial business but we believe at this stage in our commercial business development it’s much more on us and our development of that business than it is on economic matter of factors.

Understood, that makes sense. And I guess as a follow-up to that DIY and commercial growth, who do you think you're taking market share, and are you taking more or less share in DIY or DIFM? Clearly your DIFM business is growing faster, but is that indicative of the market growing faster or are you taking more share?

I think clearly we’re taking share in both businesses, we’ve probably taken a disproportionate share in the commercial business. But again because we’re later to the party than many of our competitors and so we’re earlier in the maturation cycle. As far as getting into specifics, I’ll let you all look at individual companies’ performance and make those determinations for yourself.

Thank you. Our next question is from Chris Bottiglieri with Wolfe Research.

The first question I had was, your gross margin has been robust. Obviously a lot of this is for the acquisition cost, but I'd think there are some other drivers. Just want to get your thoughts. How much of this directionally would be just oil-based products -- keeping pricing versus cost coming down, integration, benefits of IMC and general oil benefits on your transportation network?

Some of those in there, and so just to go backwards, there's a little bit of benefit certainly from lower gas prices and fuel cost that’s going to impact supply chain and then frankly probably SG&A a little bit as well. And then in addition to that – actually inflation deflation has been relatively moderated, I mean there is more deflation a little bit in categories like oil. And frankly deflation typically is not helpful for us from a margin perspective. So inflation would be a little bit better for us on a long-term basis. But I would say that, I would give the credit back to the merchandising organization from an acquisition perspective working with vendors, optimizing where we are buying the inventory, going direct in certain opportunities as well, increasing private-label products where we have opportunities to do so. We’re pretty well penetrated in private-label today but there continues to be opportunities for us to expand our penetration on private-label and that has helped a little bit. So many of the improvements that I would say that we have seen, not all but the majority are sustainable. And so I think we’ve got a good playbook to continue to do that. And having said that, as you mentioned we continue to have headwinds from just lower margin businesses growing at a faster rate and then some of the initiatives that we have from an inventory perspective.

And then just one follow-up unrelated question. So you guys were obviously well ahead of the rest of the party in terms of putting together a DIY program. And still on a monetary value, it seems you'd exceed your competitors. Are you seeing any impact from some of these traditional DIFM customers on competitors using DIY programs in terms of rewards? Can you talk about retention rates or number of members, anything to give context to how your own rewards loyalty program has performed?

Our loyalty program which we’ve had in some form for basically a decade continues to perform very well, it’s an important part of our value proposition to our customers. As other people have gotten into the loyalty program, we obviously paid very close attention to it. But at the macro level our DIY business is performing very well right now. And so we’re confident with what we’re doing, we’re confident with the benefits that we’re getting out of the loyalty program, and look forward to continuing to perform well.

Thank you. Our next question is from Michael Montani with Evercore ISI.

It's Mike Montani on for Greg Melich. Just had a quick one, on CapEx, can you guys give a little more color on what you think this year will be and then the outlook for the next couple years given the expectations for the DCs and mega hubs? And then I had a follow-up.

I think that we probably said that -- somewhere around $600 million or so for fiscal year ’16, at this pace it will probably be a little bit lower than $600 million for next year, probably closer to that 600,maybe a little bit over that depending on how we finish up this year and then the following year I think we’ll probably migrate down into mid 500 or so once we get the distribution centers opened. But that would really be the only aberration if you’d call it, from a CapEx perspective. Other than that we’re opening square footage at around 3% and continue to invest in our existing base stores to make sure that they look fresh and current every day and then also to invest in new technology in order to make sure our platform can support our business as we grow.

And then if I could just on the margin side, you mentioned obviously higher wage costs. Can you help understand how much of that is really headcount per store, increased hours versus wage rate and then any kind of healthcare expense that you guys might be seeing or not seeing?

Yes, I think mostly of our payroll is really intentional investment in our payroll dollars in the stores in order to improve customer service as well as the training that Bill talked about earlier. From a wage rate perspective, I would say that we’re continuing to see an increase in wage rates but not anything different than what we had expected to see and frankly not much different than what we’d seen in prior year. Obviously around the country there is pocketed areas, but for the most part it’s been steady as she goes. From a health medical perspective, we’re not seeing any significant changes necessarily to our current cost rates, so that seems to be pretty much in check as well. End of Q&A

Thank you. At this time I would like to hand the call back to Mr. Bill Rhodes for closing comments.

Okay. Before we conclude the call, I'd just like to take a moment to reiterate that our business model continues to be solid. We're excited about our growth prospects for the year. We'll not take anything for granted as we understand our customers have alternatives. We have a solid plan to 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're confident AutoZone will continue to be very successful. Thank you for participating on today's call.

Thank you. And that concludes today's conference. Thank you all for joining. You may now disconnect.