Bill Rhodes - Chairman, President and CEO Bill Giles - EVP, CFO and IT Brian Campbell - VP, Treasurer, IR and Tax

Alan Rifkin - BTIG Simeon Gutman - Morgan Stanley Steven Forbes - Guggenheim Securities Matt Fassler - Goldman Sachs Seth Sigman - Credit Suisse Michael Lasser - UBS Seth Basham - Wedbush Securities Kate McShane - Citi Research

Good morning and welcome to the AutoZone Conference Call. Your lines have been placed in listen-only until the question-and-answer session of the conference. Please be advised that today's call is being recorded. If you have any objections, please disconnect at this time. This conference call will discuss AutoZone's third 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 am Central Time, 11 am Eastern Time. Before Mr. Rhodes begins, the Company has requested that you listen to the following statement regarding forward-looking statements.

Certain statements contained in this presentation are forward-looking statements. The 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 up by 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 cost 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 the Annual Report on Form 10-K for the year ended August 27, 2016. 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 events described above and in the Risk Factors could materially and adversely affect our business. Forward-looking statements speak only as of the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results.

Thank you. Now, I'll turn the meeting over to Mr. Bill Rhodes. You may now begin.

Good morning and thank you for joining us today for AutoZone's 2017 third quarter conference call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer and IT; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third 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 Calls to see them. To begin this morning, I want to thank all AutoZoners across the Company for their tremendous efforts during this past quarter. While our results for the quarter were below our expectations, the challenges seem to be broad-based across our industry and other sectors of the economy. The first few weeks of our 12-week quarter were very challenging. On our last conference call, we discussed the impact on the second quarter of the delay in income tax refunds, and that headwind continued for the first five weeks of our third quarter. Our expectations have been that much of those delayed refunds would lead to incremental store sales in Q3 but that never materialized. We don’t have any empirical evidence of where those funds went but they seem to go to some other part of the economy this year. While our March sales did improve, we saw inconsistent week to week performance. It wasn’t until April that we began to see stronger sales results. We can speak at length about delayed income tax refunds and the second consecutive mild winter but the more overarching thing for us was sluggish customer demand across virtually every category, resulting in disappointing sales performance during a specific eight-week period. As we exited the quarter, we felt our sales trends had normalized and were more consistent with our performance from September to mid January, rather than the challenging results we delivered in late January through March. Before getting into more detail about the quarter, I would like to address some of the trends and headwinds that our industry and specifically our business has recently been experiencing. Until our second quarter, we had consistently delivered exceptional performance marked by 41 consecutive quarters of double-digit earnings per share growth. However, there are certain factors present today that have made it more difficult to achieve similar earnings per share growth. We have made decisions to accelerate some investment in our business. We're investing at an increased rate in inventory, capital expenditures with two new domestic distribution centers under construction and we opened a second distribution center in Mexico in the fall and we've increased our operating expenses as part of our more frequent delivery and mega hub efforts. Unfortunately, as we intentionally increased our investment profile, our sales have been below our expectations each of the last two quarters. Simultaneously, we faced several other pressure points. Over the last year, we have experienced accelerated pressures on wages than we have in some time. Some of this is attributable to regulatory changes in certain space and municipalities while the balance and probably the larger portion is being driven by general market pressures with lower unemployment and some specific actions taken in recent years by other retailers. Additionally, after several years of substantially improved shrink performance, the last two years shrink expenses turned against us. We own it and we're working it diligently but as we're moving more inventory to more locations -- our inventory availability initiatives, it's not completely surprising that are shrink results are unfavorable. And there are few other macro trends that are working in our favor right now. After years of benefit to our EPS growth rate, interest expense has begun to turn from a driver to a detractor; the Mexican peso exchange rate has worked against us for the last couple of years also. Our management team has been in this business for a long time and over time we been through many different cycles. Sometimes we had tailwinds and we benefited from those and other times we had headwinds and we have fought against them. Ultimately, we will continue to manage this business for the long term to provide great service for our customers and great opportunities for AutoZoners owners, ultimately delivering strong shareholder value. Our current charge is to determine is some of the decisions that we've made need to be modified, specifically the frequency we deliver in our stores and the significant incremental costs that come with that decision. Our recent performance has been more challenging and some of those headwinds will remain for some period of time. We know that this business model has excelled over decades and we're confident with our AutoZoners leading the charge that that will continue. Now, let me provide more detail on the quarter. For the quarter, our sales increased 1%; our domestic same-store sales were down 0.8%. It was the tail of two periods. In the first five weeks, our same stores sales were down more than 4% and the last seven weeks, our comps increased approximately 2%. We continue to see our Northeastern, Midwestern, and Mid-Atlantic markets underperform the balance of the chain as two consecutive mild weathers negatively impacted these regions. This quarter, there was less [ph] of a drag at approximately 100 basis points but on a two-year basis, this region of the country has materially underperformed the remainder. These regions represent roughly 25% of overall sales. In regards to our three primary merchandised category, those we classify as failure, performed the best while the maintenance category performed the worst. Maintenance challenges were created during the tax refund delay and only gradually improved as the quarter progressed. We do however expect this category to improve its performance during Q4. During the quarter, we opened another 35 new stores in the U.S. Year-to-date we have opened 84 stores and still expect to open approximately 70 more in the fourth quarter. Our commercial business expanded by 40.6%, while opening 56 net new programs. This trend slowed down from last quarter's 7.2% increase, much of which was experienced in the first five weeks of the quarter. We expect to open approximately 200 net new commercial programs for the fiscal year or approximately 95 additional programs in our last quarters. Currently 83% of our domestic stores have a commercial program. We continued to expand in Mexico, opening eight new stores. We didn't open any additional IMC branches or stores in Brazil this quarter. While the domestic business dominates our sales mix and continues to be our primary focus, we believe we have great growth opportunities outside the U.S. Regarding Internet, we experienced improving trends versus our first two quarters as our results improved sequentially as the quarter moved along. When I discuss online, I'm referencing business shipped directly to the customer and not buy online and pick up in-store. Our pick up in store business sales are recorded in store sales and are not in the All Other category. Our pickup in store business continues to grow pretty rapidly, up over 30% for the quarter and higher than the 20% increase we experienced in Q2. Under the Yes! We've Got It theme, we remained focused on improving our closure rates, meaning converting customer requests from pricing and availability into actual sales. In the spirit of satisfying our customers, we are making ongoing significant system investments and enhancements to capture data about our customers' shopping patterns across all our platforms, both domestically and internationally. We understand that we have 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. As our primary objective remains growing our domestic retail and commercial businesses, we continued with our inventory availability initiatives in order to respond to the ever-increasing challenge of parts demand in the industry. This past quarter, we opened one additional mega hub location and now have 14 in operation. We are working diligently on the development of future sites and we expect to open two more during the upcoming fourth quarter and have a handful or more that are currently under development. We continue to be very pleased with our mega hub performance. Additionally, we are continuing development on our two new domestic distribution centers based in Washington state and Florida, and we are expanding our distribution center in Illinois. Our current expectations are for the Washington state facility to come online in this Q4 while the Florida facility and our Illinois expansion will open six to nine months later. We continue to expect each of the two new distribution centers to cost approximately $60 million in capital and have some incremental operating expenses from preopening activities and maturation. Now, I'd like to take a moment to go into more detail on our two inventory availability initiatives. These are two very discrete and different strategies addressing different opportunities. Multiple frequency of delivery is solely focused on improving the in-stock levels for the SKUs that are stocked in our stores. Separately, the mega hubs are focused on adding additional coverage to the local markets, meaning adding SKUs that would not have been available locally in our market -- our network before. Regarding multiple frequency of deliveries, we had roughly 2,300 stores receiving more than one weekly delivery at the end of Q3. While we added 100 additional stores this past quarter, we continued to modify our modeling. As you remember, up until recently, we have serviced the vast majority of our stores once a week. All of our systems, processes and practices have been built and fine tuned for onetime a week delivery. As a result, transitioning stores to more frequent deliveries has resulted in some unintended consequences operationally within our distribution centers as well as our stores. Therefore, we are continuing to closely manage this initiative and continually make adjustments. As our overall performance in recent quarters has been challenging, it has been difficult for us to see the sales benefits from this initiative. We have been reassessing for some time whether or not our new frequency of delivery for higher volume stores of three times a week is providing us with sufficient benefit to justify the cost. While we continue to test, current indications are steering us to lower frequencies of delivery. With these ongoing results, we are in the process of moving a significant amount of these stores to twice a week delivery and some of the lower volume stores back to once a week delivery. We're committed to ongoing testing as we understand the sensitivities to different delivery schedules. Ultimately, we have to make the right investments to enhance our customers’ experience but they have to be financially responsible as well. The second ongoing initiative is the mega hub store concept. We're currently operating 14 mega hubs. We continue to be quite pleased with what the mega hubs allow us to offer our customers. As a reminder, these super-sized AutoZone stores carry 80,000 to 100,000 unique SKUs, approximately twice what a hub store carries today. 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 open mega hubs continue to exceed our expectations. Currently, we have just over 4,000 stores with access to mega hub inventory. A majority or about two-thirds of these 4,000 stores receive their service on an overnight basis, but as we expand our mega hubs, more of them will receive this service same day and many will receive it multiple times a day. We expect to ultimately operate 25 to 40 mega hubs once the implementation is complete. The constraint on the speed with which we can open these is availability and location of real estate. While an average AutoZone location is just under 7,000 square feet, a mega hub is 20,000 to 30,000 square feet or more. Identifying and developing these locations in prime retail areas is challenging and takes time. While there are incremental costs to those rollouts, we continue to feel these investments will provide a better customer experience and increased market share. We’ve not experienced meaningful noteworthy deleverage from this initiative during fiscal 2017. 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 long-term profitable basis to provide strong returns for our shareholders. We will continue to stress the importance of going the extra mile to fill our customers' needs regardless of how difficult the request. And to this end in spite of a challenged near-term, we continued to be shared gainers this past quarter. Regarding Mexico, we opened eight new stores this quarter and ended the quarter with 499 stores. And just last week, I was down with our exceptional team in Mexico, celebrating the opening of our 500th stores in Mexico in just 18 years of operation. I'm so very impressed by and proud of the business, the team and most importantly, the culture our team in Mexico has built. In local currency, Mexico experienced a solid quarter. However, Mexico's profit in U.S. dollars declined, given the decrease in the value of the peso to the U.S. dollar. As our peso financial results are converted to U.S. dollars on an average rate over the quarter, we continued to experience headwinds to our net earnings as a result. Based on exchange rate differences this year to last, we experienced another significant headwind to earnings per share. Sales in our other businesses for the quarter were down 2.5% over last year's third quarter. So, it got sequential improvement each quarter since the start of the year. As a reminder, our ALLDATA and E-Commerce businesses which include AutoZone.com and AutoAnything, make up this segment of sales. This compares to being down 3% last quarter and reflects stronger performance in AutoZone.com's business for Q3. Also as I previously mentioned, we continue to see strong growth in our buy online pick up in store sales. This strength in pickup in store encourages us to continue investing in our in-store experience. Pick-up in store, while smaller than home delivery, continues to increase in sales volume. We recognize that the majority of our site traffic is providing information to our customers prior to purchase and our E-Commerce platform represents an important part of our omni-channel experience. We see customers doing lots of research to learn about the products and on how to do repairs. While these businesses are small for us and less than 5% of our total sales, the omni-channel experience is important and we will continue to invest in our E-Commerce platform. With the continued aging of the car population, we continue to be optimistic regarding trends for our industry in both DIY and DIFM. As new vehicle unit sales are reaching all-time highs and gas prices on average are quite low, miles driven continue to increase. The lower end consumer benefits the most from lower gas prices relative to income. This trend remains encouraging. Regarding our expectation for the remainder of 2017, we expect sales performance to improve in Q4 as trends began to improve in April and May. As we exit a disappointing performance from both our Q2 and Q3 results, we remain committed to focusing on the short and the long term. Let me review our highlights regarding execution of our operating theme for 2017: Yes! We've Got It. The key priorities for the year are, one, great people providing great service; two, profitably growing our commercial business; three, leveraging the Internet; four, Yes! We've Got It; and five, leveraging IT. On the retail front, this past quarter, under the great people providing great service theme, we continued with our intense focus on improving execution. We are focusing on enhanced training to store-level AutoZoners and increasing the share of voice regarding availability with the Yes! We've Got It theme. We've been aggressive on our technology investments and believe these initiatives will help differentiate us on a go-forward 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 our businesses. The focus is on making sure AutoZoners can see inventory availability across the entire organization, not just their store, swiftly and accurately. Many have the question how susceptible our industry is to online encroachment, and how bigger the role that is playing in this current industry soft spot. Currently every sector of retail has been and likely will continue to be impacted by this new rule. We have certainly studied the ramifications and continue to do so. While some portions that our industry has migrated in part to online we believe that the trustworthy advice elements combined with the sense of immediacy insulates us more than most sectors of retail and over time today that has certainly proven to be the case. As we assess this, we consider the needs of our customers. When their car loan start and they need to go to work, they can't wait hours or days. When they don’t know what is wrong, they can't afford to purchase multiple products. They rely on us to help them isolate the problem. Our commercial customers have to immediately turn their base because time is money. We believe and are committed to leveraging the power of the digital world to further enhance our unique value proposition and we believe we will continue to succeed. We have seen the current industry sales challenges as being broad-based categorically and more pronounced in certain geographies. Why would that had happened quickly in the later part of January outside of the promotional holiday season and have subsided in April. Our sense is that industry weakness was due to tax reform delays and a second consecutive mild winter. In regards to commercial, we opened 56 net new programs during the quarter. Our expectation is we will continue to open new programs in the range of 95 programs in Q4 of 2017. As we continue to improve our product assortments and availability and as we make other refinements to our commercial offerings, we expect that the estimated sales potential from the market will grow. Our commercial sales performance for the quarter was below our expectations. As with retail, commercial sales improved the last seven weeks of the quarter and were weaker in the Northeast, Mid-West and Mid-Atlantic markets. Our sales growth has decelerated in the last several quarters. Some of the deceleration, as we have previously discussed, has been the result of slower growth in new programs and less maturation of stores opened in recent years. But, we haven't been pleased with our level of growth. So, we have recently embarked on a new strategic planning exercise focused solely on how we can profitably accelerate our market share growth in this very important sector of our industry. We are quite pleased with tripling our sales and more than tripling our profitability in this business in the last nine years. But, what got us to this level won’t necessarily get us to the next level. So, we are going to take an objective look at our approach for the next several months. We will continue to push for current performance but simultaneously explore other possibilities. This continues to be the most significant mid-term growth opportunity as we currently have approximately 3% market share, and we are determined to substantially enhance that over time. We should also highlight another strong performance in return on invested capital, as we were able to finish our third quarter at 30.5%. We continue to be pleased with this metric as it is one of the best in all of hardlines 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 and reinforce how appreciative we are of our entire team's efforts to continue to meet and exceed our customers' wants, needs and desires. We remain bullish on our future performance because we have a great business operated by exceptional AutoZoners. Now, I'll 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 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 26 IMC branches, increased 1.1%. For the trailing 52 weeks ended, total sales for AutoZone store were $1,768,000. For the quarter, total commercial sales increased 3.6% and the third quarter commercial represented 19% of our total sales and grew $17 million over last year's third quarter. This past quarter, we opened 56 net new programs versus 46 programs opened in our third quarter of last fiscal year. We now have our commercial program in 4,493 stores, or 83% of our domestic stores, supported by 184 hub stores; approximately 900 of our programs are three years old or younger. In 2017, we expect to open approximately 200 new programs. While our trends slowed during third quarter, our April and May sales were in line with our results from earlier this year, which while not meeting our aspirations, is morning encouraging in our trends in February and March. We remain focused on having a great sales team, supplement with strong engagement of our store managers and district managers. We remain confident we will continue to gain market share with our commercial customers and we’re encouraged by the initiatives that we have in place and feel we can further grow sales. And as Bill previously mentioned, while we think our strategy has worked very well over the last nine years, we want to take a first objective look over the next several months. Whether anything material change, we don’t know, but we do know, we will likely implement some tests to continue to learn how best we service our customers and further penetrate this large sector of our industry. Our Mexico stores continued to perform well on local currency basis. We opened eight new stores during the third quarter. At the end of the quarter, we have 499 stores in Mexico. We expect to open approximately 40 new net stores this year and next. As Bill said earlier, we were challenged by difficult foreign exchange rate in regard to the peso. While sales and base currency were above plan this quarter, the devaluation in the peso was much greater than we assumed at the start of the year. This has created a headwind and our EPS was significantly impacted. We do believe the Mexico leadership team has done an exceptional job managing the peso-denominated business. Regarding Brazil, we opened no new stores and currently are operating nine stores. Our plans are to grow between 20 and 25 total stores over the next few years. And while sales growth has been very encouraging, we continue to refine our business model to make sure that it works for us financially. Gross margin for the quarter was 52.6% of sales, down 21 basis points. The decrease in gross margin was attributable to higher supply chain costs associated with the current year inventory initiatives and higher inventory shrink results, partially offset by lower acquisition costs. Compared to the prior year, we have incurred more costs related to our supply chain in support of inventory availability initiatives, along with rising shrink expense after several years of declining expenses. Our primary focus remains growing absolute gross profit dollars in our total auto parts segment. SG&A for the quarter was 32.4% of sales, higher by 25 basis points from last year's third quarter. Operating expenses as a percentage of sales were 32.4%, deleveraging by 25 basis points. As I mentioned, operating expenses as a percent of sales were higher than last year, primarily from fixed cost deleverage due to our comparable stores sales decline, higher sales insurance costs and increasing wage pressures, partially offset by favorability from last year's discrete legal charge and lower incentive compensation. EBIT for the quarter was $530 million, down 1.3% last year's third quarter and our EBIT margin was 20.2%. Interest expense for the quarter was $35.7 million compared with $34.1 million in Q3 a year ago. As we completed a $600 million 10-year bond deal this past quarter, we're planning interest of $51 million in the fourth quarter versus $45.8 million last year's fourth quarter. Debt outstanding at the end of the quarter was $5,153 million or approximately $200 million more than last year's balance of $4,954 million. Our adjusted debt level metric finished the quarter at 2.6 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 32.8% versus last year's Q3 of 34.8%. I do want to take a moment and remind listeners of our first quarter adoption of a new accounting standard. The new standard requires us to recognize the tax benefit received from the gains employees have on stock auctions as a credit income tax expense on the P&L this past quarter, it lowered our tax rate 231 basis points. This accounting change also increases the diluted share count calculation. Net income for the quarter was $331 million, up 1.3% over last year. Our diluted share count of 29 million was down 4.6% from last year's third quarter. The combination of these factors drove earnings per share for the quarter to $11.44, up 6.2% over the prior year's third quarter. Excluding the impact of the previously mentioned change in accounting for stock option exercises, our EPS would have increased by 3.2% for the quarter. Relating to the cash flow statement, for the third fiscal quarter, we generated $445 million of operating cash flow. Net fixed assets were up 7.9% versus last year. Capital expenditures for the quarter totaled about $142 million and reflected the additional expenditures required to open 45 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 initial investments in our new domestic DCs and information technology investments. With the new stores opened, we finished this past quarter with 5,381 stores in 50 states, the District of Columbia and Puerto Rico, 499 stores in Mexico, and nine in Brazil for a total AutoZone store count of 5,889. We also had 26 IMC branches open at fiscal year-end, taking our total locations to 5,915. Depreciation totaled $75,300,000 for the quarter versus last year's third quarter expense of $68,500,000. This is generally in line with the recent quarter growth rates. We repurchased $284 million of AutoZone stock in the third quarter and, at quarter-end, we had $1 billion remaining under our share buyback authorization, and our leverage metric was 2.6 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. Next, I'd like to update you on our inventory levels in total and on a per store basis. Company's inventory increased 7% over the same period last year, driven primarily by new store openings, our ongoing inventory initiatives during the fiscal year and lower sales performance and plans. Inventory per location was $653,000 versus $629,000 last year, and $665,000 just this past quarter. Net inventory, defined as merchandise inventories less accounts payable on a per location basis was a negative $47,000 versus a negative $69,000 last year, and a negative $36,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 107.2%. Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 30.5%. 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.

Thanks Bill. This quarter we reported our second consecutive quarter of challenged sales and profitability performance following 41 quarters of double-digit growth and EPS. Clearly, some of our recent challenges have been macro like timing of IRS refunds, rising wages and interest rates and peso weakness, but macro challenges and benefits come and go. We also have some areas where we need to improve our performance and that is where our attention is focused, determining the right frequency of delivery to our stores from a cost benefit perspective; figuring out why our shrink results deteriorated and correcting those efforts; reaccelerating our sales in both retail and in particular in commercials; finding new ways to leverage our most important asset, our AutoZoners in an accelerating wage environment where personal touch and trustworthy advice really matter and differentiate us. While we are disappointed our recent performance as a Company and as a team, we have been through both periods of difficulty and periods of tremendous success. Over any extended period, our Company successes have been remarkable. While we need to challenge ourselves, our decisions, processes and strategies, we also need to remember our tremendous record of success and reinforce some of our guiding principles; evolution over revolution and superior execution with consistent strategy is a winning formula. Simultaneously as we are faced with more difficult circumstances, we must step back and take a more objective view of what is working and what may not be. As we are in that stage, we see so many things that our team continues to do exceptionally well. But we also see some areas of opportunities, more areas from accelerated experimentation. After so many years of unprecedented performance, I am proud of our team for their steadfast commitment to our culture, strategy and approach and for their dissatisfaction with our current performance. Having exceptional that executes extremely well, our focus remains on being successful over the long run. That success will be attributable to our approach to levering our unique and powerful culture and focusing on the needs of our customers. 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. We must stay committed to executing day in and day out on our game plan. Success will be achieved with an attention to detail and exceptional execution. Our customers have choices; we must exceed their expectations in what the way they choose to shop with us. We are fortunate to operate in one of the strongest retail segments and we continue to be excited about our industry's growth prospects for 2017 and beyond. As consumers continually look to save money while taking care of their cars, we are committed to providing the trustworthy advice that they expect. It truly is the value-add that differentiates us from any other faceless transactions. Customers have come to expect that advice from us. It is with this focus we will implement more enhancements on both our website and in-store experience to provide even more knowledgeable service. We don't ever expect an online experience to replace the advice our customers want, but today's customers do expect more information on repairing their vehicles. This aspect of service has always been our most important cultural cornerstone, and it will be long into the future. 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. This formula has been extremely successful over the last 38 years and we continue to be excited about our future. Now, I'd like to open up the call for questions.

Thank you. [Operator Instruction] The first question comes from the line of Mr. Alan Rifkin from BTIG. Your line is now open, sir.

Question for Bill Rhodes, starting with respect to the comps, I appreciate all the color that you have described throughout the quarter but Bill, can you segregate the impact of the tax refund versus the weather on the quarter overall? And can you also talk about the comp performance of the stores that is supported by the mega hubs versus the stores that are not? Then I have a follow-up please.

Okay. Regarding separating the comps between the weather and the tax refund, it's really difficult to do that Alan. I wish I can give you more clarity. I would like to go on little more detail on the tax refund. As we mentioned on our last call, we fully expect that those refunds have been shifted later in the cycle and we would actually see a benefit from those in Q3. For whatever reason that we don’t quite understand, those refund dollars never seem to show up. I don’t know -- if I went to say things, [ph] you hear some of that; as I go to remittances to Mexico, did they show up in other sectors in retail or other sectors of economy, we don’t know. But it does not appear that they came into our sector in any meaningful way. And we’ve watched it very closely and we have monthly reporting on market share from two different sources and both of those sources continue to show that our market share gains were very similar throughout this period of time. We just had an eight-week period, three weeks in last quarter and five weeks in this quarter, we were just significantly impacted; it was kind of like when the calendar turned in April, things went back to normal like they were in the fall and early winter. Regarding the mega hubs, we continue to see that it provides a benefit when our store get turned on to it, very significant benefit, 1% to 1.5% range when they get fully turned on to full service out of mega hubs.

And my follow-up, if I may, your decision to increase your operating expense obviously is well documented. But certainly, when you started to do that, I don’t believe you foresaw the difficulty in the environment. What is your ability and willingness going forward, if sales continue to be a little bit below your plan; what is your willingness to cut back on some of the discretionary spending and expenses [technical difficult]?

I think there are several things in that question, Alan. First of all, as we increase this investment profile, not only the sales get weaker but several of the things that have been industry tailwinds and our financials are macro tailwinds and our financials turned against this, so it was a little bit of a double whammy. As we look at it going forward, yes, we're going to change our cost structure where we can. The biggest question we’re focused on right now is, we think there is some opportunities to decrease the multiple frequency of deliveries that we’ve rolled out over the last couple of years. Unfortunately, we've not been able to quantifiably see that we're getting a sufficient benefit out of that. So, we're going to continue to test and take some of these stores down to two times a week, we can set a three times a week and hopefully make a final decision in the next six months or so on where we will be long-term. We will pull back some of those costs. What we won’t do is pulling [ph] back cost at the point we're not providing great service to our customers. We're in this for the long-term and sometimes we're going to have periods of little bit weakness and sometimes going to have great periods of strength. We’ve got to manage this business for the long-term.

Thank you. The next question comes from the line of Mr. Simeon Gutman from Morgan Stanley. Your line is now open.

Bill, you mentioned that the last seven weeks were up 2%, can you share with us if that 2% run rate was relatively uniform during the period, or volatile? And then, related to that, is the run rate that you are seeing today, because you did mention May, does that -- do you feel like it resolved the debate, whether the industry is healthy, there was just a bunch of noise? I mean how do you know there is just some pent up demand that’s being realized in the late part of last quarter and early part of this quarter?

Great questions, Simeon. When we talked about May, we were talking about May that we was still in the same part of our portal. As we think about the sales environment, what we noticed was there was a very distinct eight-week period of time where it acted very differently. Go back to the fall, September through mid-January, it was pretty consistent. Now, we have fluctuations week-to-week and you asked about in April that we see fluctuations. Of course, we do because the weather patterns in April are so different. But the expectations week to week based upon the weather that we were experiencing was more consistent with our expectations. That was not the case in that February to March period of time.

I guess looking back at the last, I don’t know, a year, it feels like the industry has become a little less consistent, maybe a little less predictable. Looking back at it, do you feel like it’s explainable by a bunch of these small things or relatively large things? And you mentioned, you are requisitioning a lot of things and some of it is strategic but on the industry as a macro, can you share with us what your requisitioning, what we should be thinking through just given some of the bumps that this industry, which is not normally used to it has experienced over the last year or so?

Yes, that’s a great question. So, as I think about the industry sales environment and when I think about AutoZone’s sales performance over the last year as compared to other years, we have come off to very, very mild winters. I have mentioned it in the prepared remarks, what we have experienced over of two year period of time in the Northeast, Midwest, and Mid-Atlantic is alarming. I don’t think that has anything to be with what's going on in those markets. I think it has to do with what's going on with the weather pattern. We can see it in specific categories that are very related to snow, ice, salt potholes, mainly under car items. So, I think very strong as that has as impacted our industry's performance. And then, this whole tax refund thing, this year, it was just a tremendous anomaly. I can't explain it; I don’t know where those dollars went but that has been such a big driver of our industry sales over the last five or six years and it just went away this year, it was non-existent. And the other thing on AutoZone’s front is our commercial sales are decelerated. They decelerated because we were doing a lot of things on opening new programs and our sales were benefiting from that. As we’ve gotten further down that maturation, we hadn’t had [ph] the same benefit from those. But we continue to gain market share in both retail and commercial. We believe the sales environment is going to continue to be pretty strong.

The next question comes from Mr. Steven Forbes with Guggenheim Securities. Your line is now open.

Given the dichotomy of the P&L impact, you mentioned right between the mega hub rollout and as compared to frequency delivery rollout both top and bottom line, if you decide to further slow down the rollout of the frequency initiative, does that free up resources to ramp in mega hub initiatives or is the bottleneck really finding real estate? Just give us some color on the urgency around that initiative, given the potential benefit and just the business restrains relating to rollout of it.

It has such a good blend, Steven. We feel really good about the mega hubs and the results that we have had. And you are spot on that there are some real estate constrains relative to our ability to open up more and more mega hubs. You will see us continue to open up mega hubs and the speed at which that we open them up will be somewhat contingent upon finding the right available real estate in order to do that from more frequent delivery standpoint. Look, we are an analytically driven company, and if we do not see the benefits from the investments that we are making, we are going to make adjustments to that. So from that perspective, yes, we believe that we will basically reduce expenses from that perspective in the future as we make adjustments to that.

And then, maybe a follow-up on the frequency of delivery rates. Have you identified which stores will revert, if so, back to the two times or one time for weak delivery? And then, maybe just touch on what parameters are going to drive that decision? I would imagine it's not simply just sales, right, given the service aspect of the business; I would imagine competition may play a role in a decision. Just maybe you could touch on some of the parameters that are going to drive that decision process?

Yes, that’s a host of those things but frankly you have hit on the right one, sales can be a big driver, distance, number of stores on a route et cetera. So there will be a number of factors there. But sales are going to be heavily weighted, because again we have adequate return on the investment dollars that we are putting forth and right now we don’t believe that we are not going to make adjustments to it.

Thank you. The next question comes from the line of Mr. Matt Fassler from Goldman Sachs. Your line is now open.

My first question relates to your thought process on the economics of some the investments that you necessarily -- you might want to pull back. What's the ROI, the financial ROI calculation that you have done to determine whether it works for you? And if you do back away, where would we see some of the investment, would it be gross margin, SG&A, CapEx et cetera?

Yes. Matt, it's not as much an ROI calculation because the capital that we are deploying to do this is not that significant. We are opening these two distribution centers, not because of multiple frequency of delivery, but because we need an incremental distribution capacity. But this is more about how are we going to -- better than a breakeven on the sales environment for the operating expense increases that we have experienced. So, the vast majority of the difference will be seen in gross margins; there will be a little bit of it in the SG&A but most of it will be in gross margins.

Is that a function of the frequency of truck runs diminishing and consequently the supply chain cost coming down?

Yes, it's predominantly supply chain; it's truck runs but it's also extra tours to the distribution centers, so labor in the DCs.

And do you feel like there is any -- I mean obviously there is a trade off, do you feel like there has been some sales benefits to you from this that would dissipate or do you feel like it hasn’t really moved the needle?

I think there has been some very minor improvements in sales which would go away, but it's not material, unfortunately. If it was, we continue to do it. And I want to be careful here. We have not made final decisions. This is a very complicated analysis to do. So, we are still doing some work over the next several months to figure out what the right frequency for us is. One of the things we are realizing is that many years ago in our hub stores, we started doing kind of feeder replenishment out of those stores to the outlined store that they service and so that’s one of the reason we are not getting the same kind of benefits out of the multiple frequency of delivery. We were already [indiscernible] highest probability SKUs that we sell; so that benefit didn’t exists for us.

And then, my second question, speaking about what changed this quarter, if we look at sales per store or kind of back into comp, DIY didn’t really decelerate, almost all of the deceleration related to commercial. How should we dimensionalize that as you think about both the macro factors you discussed related to taxes and whether -- and also to some of the changes in investment posture they have for that space? And do you agree with my read of the numbers by the way?

I agree with your read of the numbers versus last quarter but you remember, last quarter got killed at the end, particularly DIY. So, I think both businesses have been impacted during that eight-week period of time pretty significantly. And our commercial business has decelerated more than we would have expected. By the way that’s why we're going back and taken another strategic look at commercial. I'm really excited about what we're going to be doing. It’s going to take us some time but we're going to take a fresh look at what we’re doing in commercial and what are our long-term strategies there.

Thank you. The next question comes from the line of Mr. Seth Sigman from Credit Suisse. Your line is now open.

My first question is around the international performance; just wondering if you could quantify the impact from FX and also the impact from results in Mexico and how those may have underperformed.. And just as you think about the state of that business, are there adjustments that you're making or any signs of stabilization there?

I would say, the core base business continues to do well, if you just look at it on a local currency basis, the business continues to perform strong. We're very pleased with what the team has done down there et cetera; from a foreign currency exchange impact on our EPS growth rate, it is probably a little less than 1% of an impact from a growth rate prospective. So, it continues to be a bit of a headwind. So, for us, it’s really about the exchange rate; there is not a lot of strategies that we're necessary going to change. We feel pretty good about the position of Mexico, we're excited about 500th store opening as Bill mentioned earlier. So that business continues to go well but hopefully the peso will turn around a little bit in future.

And then regarding the gross margin, if you back out the supply chain impact and the shrink impact this quarter, it still says that the benefit from lower acquisition cost would be less than prior quarters. So, when you peel back to gross margin, can you just give us a sense of what some of the underlying drivers are there?

Yes. I would say actually we feel really good about what the merchandising organization has done relative to continuing to find opportunities to lower acquisition costs. We mentioned a couple of quarters ago about our activity around direct importing and we continue to increase that. So, the team has done a nice job there, continuing to increase that. So, I feel really good about the health of the gross margin rate today and going forward. It may be a little bit less but it’s still very healthy and it’s very well positioned. So, we have a couple of very identifiable expense items that are putting some headwind on gross margin, both of which we believe are just near-term headwinds and we will be able to work our way through those. But lowering acquisition costs is something that we think is there for a while.

Thank you. The next question comes from the line of Mr. Michael Lasser of UBS. Your line is now open.

Bill Rhodes, what do you think the long run rate or the comp of this business is? Is it materially different than what has been in the past, especially you're going to come up against the much easier comparison you are running at 2% comp or so right now, shouldn’t it be better than the 2% as you anniversary some of the easier trends that you saw last year?

I don’t want to get into what's going to happen as we go into individual quarter comparisons but I'll go into what your original question is. What has changed with the macro outlook for sales in this industry over the long term? I would answer that absolutely nothing. We had an eight-week period of time, which we believe we can very easily attribute to the tax refund delays and two mild winters. But I don’t see anything else in this industry that has changed really at all.

Based on that comment, do you think a 2% run rate is still a realistic long-term expectation, reasonable expectation of business, if nothing changed? [Ph]

Again, I don’t want to get into giving guidance. What I'll tell you is I think the industry performance over the long term has not changed by any significant level. And the one challenge that we have in our sales performance compared to what it's been over the last five years is that our commercial business is not growing at the same rate that it was growing before as we opened all those new programs. We have to take that on and we have to find ways to accelerate the market share gains that we are already getting in commercial. And that will be a critical element of our story over time.

And my follow-up question is you are making a lot of tweaks of your delivery, availability and frequency, and replenishment, do you think if you were to lower prices, your sales would increase?

I have been in this business for 22 years. I can't add up five times without seeing lower prices lead to higher sales.

Our next question comes from the line of Mr. Seth Basham of Wedbush Securities. Your line is now open.

My first question is just on your long-term growth algorithm, Bill. You previously stated the mid single digit EBIT growth and double digit EPS growth, is that still how you see about the business?

I think over the long term, we would -- that would be -- continue to be our goal. I did highlight, in the short-term, we have a disproportionate amount of things, some of which are decisions we have made or things we have done to ourselves and some of them are kind of a disproportionate amount of macros things that are current and are headwinds for us. I think in the intermediate term, we have some more challenges to get to those numbers. Over the long-term, particularly if we are able to reaccelerate our commercial business, that will continue to be our goals and aspirations.

And then secondly, my follow-up question is drawing inventory per store. We have seen a rise in that mix for the last couple of quarters. Are you comfortable with the levels you are at; do you expect to see some declines going forward? How should we be thinking about that and the potential impact down the road on margins and sales?

I think as we move forward, we expect that number to hang where it is little bit, maybe come down a little. You saw that came down consecutively from last quarter on a per store basis. So, inventory levels are little bit higher than we would have desired; some of that was sales related; some of that also is some of the activities that have relative to opening up mega hubs, direct import activity et cetera. So, some of that is for good reasons. But, we expect it to moderate going forward.

Thank you. Our next question comes from the line of Ms. Kate McShane from Citi Research. Your line is now open.

With regards to the comps, there are other macro factors; it seems like less improvement in the unemployment rate and slightly higher gas prices year-over-year. Just wanted to see what your perspective was on those impacts to the overall comp? And I may have missed in prepared comments but just talk a little bit about traffics into your stores and how that’s changed over the last couple of quarters?

Okay. Regarding those macro trends that you talked about, regarding unemployment and increased gas prices, the only time we’ve really seen unemployment be a key driver of our performance is when it has been significant increases like during the great recession. And for whatever reason that seems to be a driver of our business rather detractor of our business. On gas prices, clearly, we want them to be as low as possible. But the only time we’ve really seen -- or call them out as material contributors to our success or headwinds for us, have been when they really got up around $4 a gallon. So, I don’t think we believe move from 2 to 250 is going to make any significant difference on our performance. Regarding traffic, clearly our traffic was down this quarter, particularly on the retail side of the business, it was one of the softer quarters that we have had. It has not performed any different than it has over the long term during this April period of time, in order it perform any differently in the fall. We do have an industry -- as an industry, our long term challenge was traffic going down but at the same time cost of products going up as the quality improves on the products that we sell, we have been doing that last 20 years.

Thank you.

All right. Thank you. Before we conclude the call, I just like to wish everyone a nice Memorial Day weekend and thank you everyone that have served in our process. [Ph] But we are excited about our growth prospects for the year. We will not take anything from 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 are confident AutoZone will continue to be very successful. Thank you for participating in today's call.

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