AutoZone, Inc.
Q1 2010 Earnings Call Transcript

Published: 8 Dec 2009

[Operator:]

Good morning and welcome to the AutoZone conference call. (Operator Instructions) This conference call will discuss AutoZone's first quarter financial results. Mr. William 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

[Operator:]

Mr. Rhodes, you may now begin.

[William Rhodes:]

Good morning, and thank you for joining us today for AutoZone’s fiscal 2010 first quarter conference call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer, Store Development and IT, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the first 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 complimenting our comments today is available on our website, www.autozoneinc.com. Please click on Quarterly Earnings Conference Calls to see them. We are very pleased to announce for the quarter a same store sales increase of 5.6% and an EPS increase of 26.4%. This past quarter we continued our relentless focus on executing the basics as we believe this translates to a superior customer experience. I’d like to personally thank and congratulate our 60,000-plus AutoZoners across North America for their tremendous dedication and commitment to excellence that led to us achieving our thirteenth consecutive quarter of double-digit EPS growth. During that time period, we have experienced highs and lows from a macroeconomic perspective, yet what remained consistent was our ability to deliver double-digit EPS growth. I think this points to the resilience of our organization to manage our business successfully from a financial perspective while continuing to deliver a superior shopping experience. As I reflect on the past 12 months, I recall fielding questions about what would happen if the financial system stopped working, as it pretty much had, and how would we be able to conduct our business. The questions were around the health of our vendors and what would happen if banks continued to tighten credit. While we hope the worst is behind us, the economy is still not perfect. It goes without saying there are too many people out of work for things to be back to normal. However, we believe our industry and more specifically our company can perform well in virtually all macroeconomic cycles as evidenced by our performance during the boom and bust cycles of the past three years where we delivered double-digit EPS growth in every single quarter. As we look forward we continue to be optimistic regarding our sales potential. We worked tirelessly in 2009 to make sure our stores looked great, we expanded our parts coverage, and improved our AutoZoners’ ability to say yes more frequently. We substantially improved our hub store operating model and we expanded and improved our commercial sales force. These initiatives have allowed us to be prepared for this year. We expect that many of you will be focused on future quarters as we begin to anniversary tougher comparisons from the same store sales perspective. While we don’t have a crystal ball into the future we believe in general, there is not a whole lot different with our customer today than there was two or three quarters ago. Nor do we anticipate significant changes over the next few quarters. The macro challenges remain a headwind for our customers. There is no doubt the financial challenges facing our customers have driven a general sales improvement for our industry. However, and importantly, we believe the initiatives we’ve put in place surrounding our hub store enhancements, hard parts addition, especially our late model coverage, our leadership training for our store manages, enhancements to our Z-net system and our store refresh efforts have contributed to our increase in market share. We believe these initiatives are building momentum in our business. I also want to point out the success we’re seeing across our commercial business. This quarter marks the tenth consecutive quarter of sales growth. We are pleased with the gradual acceleration that we are seeing as our commercial business grew 7.7% this quarter, a nice acceleration from just the last quarter. While sales increased sequentially from our 5.7% increase in Q4 excluding the 17th week and outsized percentage of our growth was driven by our up and down the street customers. These smaller usually independent garages, showed double-digit improvement for the quarter and we feel the enhancements we have made with this customer segment translates well to all customer segments. Additionally I would like to congratulate the organization for delivering another strong performance regarding return on invested capital, as we were able to grow this metric to 24.9% on a trailing four quarter basis. During 2009 we made substantial investments in our business, both operating expense investments and investments of capital, working capital, and capital expenditures, to strengthen our position in the marketplace. We are pleased with the performance in most of our metrics, but our performance in return on invested capital has been especially strong. Return on invested capital is one of our key performance metrics as it highlights the efficiency with which we allocate your capital. We always maintain our diligence regarding capital stewardship. As we begin the second quarter of our fiscal 2010 we feel we’re well positioned to take advantage of continuing growth opportunities that exist in each of our four businesses

[Bill Giles:]

Thanks William, regarding the first quarter for the 12 weeks ended November 21, we reported sales of $1.589 billion, an increase of 7.5% from last year’s first quarter. Same store sales were or sales for stores opened more than one year were up 5.6% for the quarter. We experienced sales growth from both our retail and our commercial customers. Additionally our sales trends throughout the quarter remained generally consistent. Over the quarter there were no material regional sales differences other than the weather impacts previously mentioned. Net income for the quarter was $143 million, an increase of 9.1% versus last year’s first quarter and diluted earnings per share increased 26.4% to $2.82 from $2.23 in the year ago quarter. Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 24.9%. We’re proud to report that this metric continues to improve over last year’s already industry-leading rate. Return on invested capital is a key measure of our success. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. We want to assure all investors we understand the capital we deploy in this business is your capital. Based on our historic and current ability to generate strong cash flow, we are able to strategically invest in those assets we believe will generate an appropriate return. Gross margin for the quarter was 50.3% of sales, up 20 basis points compared to last year’s first quarter. In the first quarter gross margin was primarily impacted positively by leverage on distribution costs due to improved efficiencies and lower fuel cost. While we have not seen a material shift down to our good categories from our better and best categories as the economy weakened we have seen a move to maintenance categories over more discretionary merchandise categories. Commodity related categories continue to be strong growers for our business and they typically have lower gross margins than hard parts discretionary categories. Our Duralast, Duralast Gold, and Valucraft product lines continued to show sales increases in both our retail and commercial businesses. Our customers continue to recognize the value proposition these high quality brands offer. We continue to spend marketing dollars to promote our brands as we feel they can create real competitive advantages for us on an ongoing basis. Looking forward we believe there continues to be opportunity for gross margin expansion. We do not manage to a targeted gross profit margin percentage as our key focus is on increasing absolute gross profit dollars. SG&A for the quarter was 33.9% of sales, down five basis points from last year’s first quarter. This quarter’s results included an increase in pension expense of approximately $2.8 million or 18 basis points which reflects the decline in value of the underlying assets of the plan and it is our expectation that we will incur a similar expense increase in each quarter for the remainder of the year. Additionally we experienced leverage across many operating expenses due to the higher sales volume, however, as William previously mentioned, we accelerated some of our other initiatives that offset a significant amount of this leverage. And we also experienced slightly higher occupancy costs from a greater percentage of our new stores being leased. We feel we are appropriately balancing our expenditures to enhance the customer experience while being fiscally prudent. While William mentioned this previously, we’re excited about our selling opportunities in 2010 and we should stress we feel very comfortable in being able to manage our expense structure in all types of selling environments. EBIT for the quarter was $260 million, up 9.2% over last year’s first quarter. Our EBIT margin improved 25 basis points versus the previous year’s first quarter. Interest expense for the quarter was $36.3 million compared with $31.2 million in Q1 of a year ago, a 16.6% increase. Much of this increase was due to the combination of increasing our debt outstanding by 20% versus last year as well as the additional cost associated with our new three year revolving credit facility offset by lower short-term interest rates. We would expect this higher interest expense run rate to continue for the balance of the fiscal year. Debt outstanding at the end of the quarter was $2.7 billion or approximately $470 million more than last year’s balance of $2.268 million. Our adjusted debt levels at 2.5x EBITDAR is in line with past quarters’ results. As we have previously stated our objective is to manage our debt levels to maintain our investment grade debt rating and at 2.5x adjusted debt to EBITDAR we feel comfortable in our abilities to adhere to that goal over time. However it is our expectation that in any given quarter this may increase or decrease based on our management’s opinion regarding market conditions. We purposely manage our capital structure relative to our cash flow in order to maintain our credit ratings at investment grade while optimizing our cost of capital. For the quarter our tax rate was approximately 36.1%, slightly lower than last year’s first quarter. For the second quarter we expect to run a higher rate, closer to 37%. Net income for the quarter of $143 million was up 9.1% versus the prior year’s first quarter. Our diluted share count of 50.8 million was down approximately 14% from last year. The combination of these factors drove earnings per share for the quarter to $2.82, up 26.4% over the prior year’s first quarter. Relating to the cash flow statement in the first quarter we generated $231 million of operating cash flow. We continue to see opportunities to increase operating cash flow going forward. We repurchased $204 million of AutoZone stock and at the end of the first quarter we had $105 million remaining under our share buyback authorization. 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. We reported an inventory balance of $2.3 billion, up 3.5% versus the Q1 ending balance last year. On a per store basis, we were down about 80 basis points at $508,000. We believe our enhanced hub model will allow us to continue to manage our inventory levels more efficiently. We do however expect to offset some of these inventory reductions with new hard parts coverage. Accounts payable as a percent of gross inventory finished the quarter at 96.7% versus 91.6% in last year’s first quarter. In fact this ratio of over 96% is the highest ratio we’ve ever reported in any quarter at AutoZone. This increase helped our operating cash flow on the quarter. For the quarter total working capital was a negative $186 million versus last year’s balance of a negative $66 million. Net fixed assets were up 4.5% versus last year. Capital expenditures for the quarter totaled $53 million and reflect the additional expenditures required to open 44 new stores this quarter, maintenance on existing stores, and work on development of new stores for upcoming quarters. Specifically related to new store openings, our new stores remain on track and we continue to see opportunity to open domestic stores at a low to mid single-digit growth rate for the foreseeable future. We believe opening stores during this more difficult economic time can be beneficial. We opened 36 net new domestic stores in the quarter for a total of 4,265 stores in 48 states, the District of Columbia, and Puerto Rico. Depreciation totaled $42.6 million for the quarter, higher than last year’s first quarter expense of $40.2 million due primarily to higher capital expenditures for new stores during this past year. AutoZone continues to be one of the few players in our industry to have investment grade debt ratings. Our senior unsecured debt rating from Standard & Poor’s is [BBB] and we have a commercial paper rating of A-2. Moody’s investor service has assigned us a senior unsecured debt credit rating of Baa2, and a commercial paper rating of P, and Fitch has assigned us a senior unsecured rating of BBB as well and a commercial paper rating of F-2. Now I’ll turn it back to William Rhodes.

[William Rhodes:]

Thank you Bill, we have a lot of exciting initiatives as previously discussed for the remainder of the fiscal year. Each one of these initiatives is expected to profitably increase sales. In no particular order we will focus on number one, relentlessly hiring, retaining, and training our AutoZoners to make sure we’re delivering on our stated corporate goal of providing the best and trustworthy advice. Secondly, continually refining our product assortment in order to meet all of our customers’ needs; DIY and DIFM. Deploy inventory appropriately across our network with specific emphasis on utilizing our hub and satellite network of stores. Fourth, commercial sales growth, with a pay as you go mentality improving our business with up and down the street national account and public sector customers. We will continue to develop our sales team in order to make this happen. Finally we’ll continue to test our blended concept, our one team initiative. We believe there can be real power in managing our stores as one cohesive unit. This will only strengthen our service levels to all of our customers. While these key priorities highlight some of our key priorities for the year, the most important message for you today is that we’re on track, if not a bit ahead, of our plans for the year and we’re moving solidly forward. We had another very good quarter which again is worthy of congratulating our entire organization for their commitment to living the pledge. Our approach remains consistent. We’re focused on going the extra mile in 2010 and we are very well positioned to do just that. Now we’d like to open up the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Colin McGranahn – Sanford Bernstein

[Colin McGranahn:]

I wanted to focus first on expenses, if I look at the $539 million of expenses in the first quarter compared to the $503 year ago, so a $36 million increase, is there any way you can help break out what some of the dollar values might have been associated with the incremental investment in hub stores, training, accelerated maintenance, etc. Obviously I think you mentioned you’re using this robust growth environment to reinvest, so I’m just trying to get a handle on the actual quantification of what some of that might be.

[Bill Giles:]

I’d probably articulate it as hubs and pension and training if you want to begin to prioritize it from a dollar standpoint. Also keep in mind that some of that increase in SG&A is for new stores and overall sales growth because obviously we’re spending payroll into those sales dollars as well. And so and I know you’re focused on SG&A, I think as we look forward on it we believe that the investments that we’ve made are really to beginning to build some momentum and have really become quite attributable to some of the positive results that we’ve had and again as William and I have pointed out before, we feel very confident in our ability to manage our expense structure on a go forward basis and we’ll do it appropriately based on our sales trends.

[Colin McGranahn:]

And just to follow-up on that so if the dollars had grown at essentially the rate of footage you would have been like $527 million, so if they’re incremental I’d say $12 million, would it be fair to say that half of that just went to increased labor given the increased sales in the stores and maybe the other half went to planned reinvestments that you won’t be doing let’s say a year from now.

[Bill Giles:]

I think that’s a fair way to look at it. I don’t want to get into specific numbers but I think that’s probably a fair way to look at it.

[Colin McGranahn:]

And then just a second question, obviously you don’t have a crystal ball, none of us do either, but as you think about the two year compares, the two average trends, or the two year sales trends, and what we saw here in the first quarter, that would seem to imply that as you come up against the second quarter compare you might be looking at negative comp trends. Is that within your realm of what you think is a possible outcome or do you think the initiatives put in place combined with an increasing miles driven environment and continued benefits from dealer closings and trade down ext., do you think that you can maintain a positive comp for the next couple of quarters.

[William Rhodes:]

Now you know we’re not going to answer that one specifically, but I’ll give you some color. Two year trends are one thing, three year trends, three year comps are another, and they tell different stories. What I will say is we’ve done a lot of things over the last year to really improve the operations of our business, both in DIY and in commercial and one of the things that we’ve been very focused on is how are we doing in market share and we continue to grow market share on both sides of the business. Over the last year we’ve certainly had industry tailwinds. Three years before that its arguable we had industry headwinds. I don’t know what’s going to happen over the next 12 months and you know I don’t need to be that focused on it because we can react to changes in our business in a very short period of time. And so I just don’t know what’s going to happen. What I know is going to happen is over the long-term we’re going to be incredibly successful. We have great initiatives in place. We see where they’re helping us grow market share and we’re going to stick with them.

[Operator:]

Your next question comes from the line of Alan Rifkin – Banc of America

[Alan Rifkin:]

You mentioned that you’ve now converted 71 of your 143 hubs which is exactly 50% and that you are seeing a sales lift as you convert the units. Can you maybe provide some color as to how much of a sales lift you’re seeing in the converted hubs and how has that progression been.

[William Rhodes:]

I don’t think we’re going to call out particularly how well they’ve done but I will say that even the stores that we converted last year continue to grow. So its not a one-time pop and we’re continuing to refine that hub store model. As we do at AutoZone we’re methodically rolling it out. We didn’t run out and roll it out to all the stores, but we continue to roll it out and I will say that we have plans to roll out additional stores during this quarter. So we see where its providing us good sales lifts, over our return hurdles of 15% IRRs and we are very excited about what that initiative has done for us on both the DIY and the commercial business. I think a lot of people think its just the commercial play, but when you have 85% of your business in resale, one of the things we always see is when we do things like that, we get tremendous benefits in retail as well.

[Alan Rifkin:]

So would it be reasonable for us to expect that the sales lift you’re seeing though is over and above the corporate average.

[William Rhodes:]

Absolutely.

[Alan Rifkin:]

And then what was the revenues for Mexico in local currency.

[Bill Giles:]

We haven’t broken that out.

[Operator:]

Your next question comes from the line of John Lawrence - Morgan, Keegan

[John Lawrence:]

Would you comment a little bit on the improvement in commercial and some of the up and down the street, you talked about double-digit increases. As you look back to the development of those relationships what would you point to the, is most of it related to inventory. I know you’ve done some systems work and some other things, can you point to some of those successes that led to that.

[William Rhodes:]

I think its across the board and I don’t think that there’s one single initiative that’s driven it. The one we’ve really been focused on over the last 12 months in particular is creating what we call this world class sales force and very pleased with how Larry Roesel and his team have been really working hard on engineering approach to how we make sales calls. And as I mentioned we rolled out a sales force automation tool back in the early part of the summer that allows us to send our commercial outside sales folks directly to the specific accounts and we’re seeing benefits from that. But we continue to work on the systems front. We continue to work on improved parts coverage. And really excited to see the momentum. The one thing we didn’t call out is one of the reasons our sales growth is improving is because we’re beginning to lap that customer loss that we had last year. And that’s why we’re calling out specifically the up and down the street business. That’s really a good indication of how our overall business is trending in the commercial business and its been doing well for awhile but continues to accelerate that growth rate.

[John Lawrence:]

And secondly can you comment a little bit on Duralast, product development, how many SKU’s, what part of the business is it and are we still seeing growth in that mix.

[William Rhodes:]

Duralast and Duralast Gold and some other products of our brands, all continue to grow. They’ve been well received. They continue to grow in both the DIY and DIFM side of the business. There haven’t been significant category conversions to Duralast because we’ve done most of those categories. But they continue to gain traction.

[Operator:]

Your next question comes from the line of Dan Wewer - Raymond James

[Dan Wewer:]

In the release you noted that the lower fuel cost is benefiting cost of goods sold, of course going forward we’re reaching the anniversary of that. You’re sounding very positive on gross margin rates for the balance of the year, I was curious, is it the fact that you’re lapping the loss of [CarMax] from a year ago and replacing it with these down the street commercial customers and I’m assuming that’s a better mix, a better margin business. Is that the key reason for the optimism on margin rate going forward or are there some other catalysts in place in cost of goods sold that could begin to kick in.

[Bill Giles:]

I wouldn’t say that that’s the key reason, I think that we had some benefits this quarter from supply chain efficiencies. I think as we look out our gross margin from a product standpoint continues to remain very healthy and so we see continued opportunities we’ve articulated in the past between lower acquisition costs and just managing category penetrations and offerings and as we look through that we believe that again our margin remains fairly healthy. It was positive. It was healthy this quarter and we expect it to have a little bit of improvement as we go forward.

[William Rhodes:]

And I think the other thing and we called it out in our prepared comment, we think our gross margin rate is biased to the upside and I think that’s to Bill’s point, on the product side as well as the distribution side. And I would like to call out that Bill Graves and his supply chain team continue to do a fantastic job and all of those benefits didn’t come from fuel, they also came from efficiencies in our supply chain.

[Dan Wewer:]

On the SG&A growth in future periods, you noted that you could cut back the reinvestment rate if same store sales did flow, just trying to get a better understanding and perhaps following up on Colin’s question earlier, what would the items that you would begin to cut back on reinvestment if same store sales were up one or two instead of six.

[Bill Giles:]

I think you’re going to look at basically payroll levels overall to some extent. We’re going to be able to support our customer service levels at appropriate levels based on sales trends. I think that the rate of investments that we’ve made over the past can be moderated based on what we’re seeing from our sales projections. Again we’re going to make investments that we believe are paying us back from a sales perspective and if we don’t see that payback, if something were to change, then we’re going to make [altercations] to the investments that we’ve made to compensate for that. But I think overall the organization has had a pretty good track record of being able to control variable components of the expense structure fairly quickly in response to sales trends. So we feel pretty nimble about it. And we feel pretty confident about the investments that we’ve made up to this point and the contributions that they’re making to our sales trends.

[Operator:]

Your next question comes from the line of Tony Cristello - BB&T Capital Markets

[Tony Cristello:]

One question I wanted to ask a little bit about is the hub concept and I know you talked about a little bit in the prepared remarks and then some Q&A, but when you look at the 70 locations or so that you’ve converted to date, is there a geography difference in the ones you went about saying, hey the first 50% are going to be the ones that are located more toward the up and down the street toward the commercial customer toward where we think we can get the bigger lift. And the balance of the 70 or so that are left are ones that are more in a DIY oriented market or is that not the approach you took.

[William Rhodes:]

No I don’t think that that’s the approach that we took. There were several factors. Number one was where did we have the space because it takes a lot more space to do it so where were the locations where it made the most sense from space. I will say that we did lean towards the west coast because the competitive environment on the west coast is changing and we wanted to make sure that we were absolutely had our best foot forward.

[Tony Cristello:]

And when you look then at the stores that are associated with some of these converted hubs, have the planograms or the inventory stocks that you’ve done in those stores themselves changed. If we were to walk in those stores would they be different today than they were 12 months ago before they associated with that converted hub.

[William Rhodes:]

What you would be able to see on the sales floor would not have changed at all. Now remember we’ve previously talked about some micro merchandising initiatives but those are not related at all to the hub stores. So the sales floor sets are exactly the same as they would have been. Now the hard part sets are changing over time and that’s where we talked about, we’re able to take some of the slower moving, the slowest of the slow moving SKUs out of those satellite stores because we can get them from the hub store three times a day. So we don’t have to have it sitting on the shelf and that’s been able to help us lower our inventory rates and our plan is that that will help us over the long-term lower inventory rates, but right now we’re primarily reinvesting those dollars into increased coverage in the hub stores themselves.

[Tony Cristello:]

When you look at a hub store today if you took the number of hub stores in total and averaged it out, across your domestic store base and maybe you’d have 30 stores per every hub store, is that the same ratio that the converted hubs are servicing as well and/or is it different.

[William Rhodes:]

Its not terribly different. But the one thing that’s changed over the last six months or so is we’ve also increased the amount of stores that are serviced by the hub stores by providing what we call in courier service so stores that are outside of our typical hub network are now in a lot of cases getting one time per day delivery. So almost every store in our chain now, maybe except for like 30 or so are now getting some form of hub service, which has been great for those outlying stores in the rural markets in particular.

[Tony Cristello:]

And then I guess you did comment about adding some staffing for the commercial side of the business, was that totally external sales or have you done some kind of commercial staffing in the stores as well to supplement.

[William Rhodes:]

We’re always coming in and out with commercial staff based on the volumes in those stores, but there’s been no structural change in the internal store structure. What we’re primarily talking about was our outside sales folks or territory sales managers as we call them.

[Tony Cristello:]

So how many do you have today versus say 12 months ago.

[William Rhodes:]

We’re up over 200 now. When we came into 2009 we were substantially below 150.

[Operator:]

Your next question comes from the line of Greg Melich – Morgan Stanley

[Greg Melich:]

Two questions, one is could you give us the sense of the traffic and the ticket in the quarter and how that’s been trending. And then a follow-up as well.

[Bill Giles:]

We’ve actually historically had always had strong ticket and our traffic has usually done [inaudible] negative to slightly flat but over the past year and this past quarter, we’ve seen positive out of both. Both actually drove it and I would say that ticket was probably a little bit heavier than traffic, but overall both drove it pretty positively.

[William Rhodes:]

But the material change that we’ve seen over the last year has been traffic.

[Bill Giles:]

Yes, traffic has really been the biggest change and that’s been the biggest driver. The positive aspects of the ticket have been relatively constant. Its been the change in the traffic and that’s where we believe is leading to our increase in capturing of market share.

[Greg Melich:]

[inaudible] about a year ago, was that when we had the big acceleration in comps earlier this year, that was driven by more traffic than ticket.

[Bill Giles:]

That’s correct.

[Greg Melich:]

And then second is I noticed the ALLDATA and other business looked like it slowed a little bit, it was still up but only up 0.09%, was there anything going on in there in terms of timing. It just seems that with the commercial business doing well and with more service business going on and some of these dealers probably having moved from new car dealerships to independents, that there would have similar growth there.

[William Rhodes:]

Remember that is ALLDATA and the e-commerce business as well. Clearly ALLDATA has a tremendous amount of market share and there have been contractions in the number of independent dealerships and also ALLDATA sales into dealerships, some dealerships that work on multiple makes and models. So its been somewhat challenging but they’ve done a fabulous job over a very long period of time and we’re very bullish about their future as well.

[Greg Melich:]

Its not a price [inaudible] or anything like that, it number of units.

[William Rhodes:]

Right.

[Operator:]

Your next question comes from the line of Matt Fassler - Goldman Sachs

[Matt Fassler:]

First question was regarding market share gain you talked about in commercial and DIY, I was just wondering if you could talk about what you’re seeing from the competitors on that front and then the follow-up would be on the record payables ratio, could you talk about what has been the driver of that and how should we think about it going forward.

[William Rhodes:]

I’ll start with your second one first, on the drivers of it, one of the things that’s happened in the last 12 months is over a long period of time we’ve had deteriorating inventory turns and over the last 12 months we’ve been able to stabilize that and in fact grow it ever so slightly which has been very encouraging. And our merchandising team continues to work very well with our vendors and finds opportunities for us to extend our terms with those vendors. So the combination of those two factors led us to an all time high and nearing our goal of 100%. On the market share front, what I will say is we continue to see market share gains in DIY and DIFM. We continue to see them across all the major geographic areas. They’ve been relatively consistent across all the major geographic areas and we’re growing it in each one of those areas and each business. As to what they’re doing, we’ll let them focus on what they’re doing. We are very confident with our consistent strategy that’s focused on improving the customer experience.

[Operator:]

Your final question comes from the line of Michael Lasser – Barclays Capital

[Michael Lasser:]

It sounds like you have a big opportunity next year to improve your conversion rate of some of the traffic increases that you’ve seen last year and a lot of the initiatives that you’re implementing are focused on that area, is that a fair characterization and have you seen anything in the last several weeks to support that belief.

[William Rhodes:]

I don’t want to get into any last several weeks, because we’ve entered a new quarter now and we’ll stop talking as of the end of the quarter. I think our organization has done a fantastic job of capitalizing on the increased customer count that we’ve seen over the last year. And I think a lot of it has been a result of them giving great service to our customers, both in the store, on the phone, all the nitty gritty details of running a retail operation. I think our inventory assortment is so much better than it was three years ago. That that’s helping drive our improvement. And then of course the macro changes I think have also made people focus on maintaining their vehicles better.

[Michael Lasser:]

And then on the advertising, will some of the changes that you’re making this year result in accelerating increases in total ad expenditures and do you view that as a necessity to continue to grow traffic.

[Bill Giles:]

We don’t, I think that the advertising expenditure will be relatively consistent to last year. Our messaging has been fine tuned and continues to be targeted. So we’re pretty pleased with our overall marketing program and expect that to continue.

[Michael Lasser:]

The discretionary category moved from under 20% last quarter to 15% of sales this quarter, I imagine there’s some seasonality in that number or otherwise it would suggest that the sales of those products slowed considerably during the period. So is that the case and if the economy does continue to improve, how do you think about the performance of these items in that scenario.

[Bill Giles:]

I think that’s a good way to look at it. Its more of a seasonal aspect of it. But as the economy improves we expect that category to probably improve somewhat and we certainly had a correlation when the economy pulled back a little bit but we continue to execute at a high level across the board particularly on the maintenance, the hard parts, and the failure related items.

[William Rhodes:]

Before we conclude the call I’d just like to take a moment to reiterate that our business model remains very solid. Our customers continue to tell us we’re improving on our efforts to meet or exceed their needs and our market share data confirms their opinions. We have a solid plan for 2010 and a culture that is second to none. But I want to stress that this is a marathon and not a sprint. Our focus is on our critical success factors as we continue to focus on the basics and never take our eye off of optimizing long-term shareholder value. We are highly confident AutoZone will continue to be incredibly successful. And finally I’d like to wish our AutoZoners and everyone listening this morning, the best during the upcoming holiday season and a very prosperous and happy 2010. Thank you very much for participating in today’s call.