This summary is based on the third quarter fiscal 2008 earnings call conducted by AutoZone, Inc. (AZO: chart) on May 20, 2008.

Management:

President & CEO: Bill Rhodes
Executive VP & CFO: William Giles
Vice President & Treasurer: Brian Campbell

Key Investors Issues

- EPS were $2.49 per share compared to $2.17 per share last year.
- Net income was $158.6 million compared to $151.6 million in the year-ago quarter.
- Revenue rose 3% to $1.52 billion, from $1.47 billion in the prior-year period.

Third Quarter Highlights

Sales were $1.517 billion, an increase of 3% from last year’s third quarter.

Same-store sales for stores open more than one year, were down 0.3%. While retail sales showed a modest deceleration versus the previous quarter, customer satisfaction surveys continued to confirm that the company is improving the customer shopping experience.

In the second quarter gross profit as a percentage of sales was up 32 basis points versus last year’s quarter while operating expenses as a percentage of sales increased by 30 basis points.

This resulted in an operating margin of 18%, up approximately two basis points from last year’s quarter.

- Operating profit increased 3% versus the prior year.
- Net income was $159 million and earnings per share increased 14.7% to $2.49 from $2.17 in the year-ago quarter.
- Continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 23.3%. This increase showed improvement versus last quarter and a more material increase versus last year’s third quarter.

- Return on invested capital is a key measure of success.
- Total domestic retail sales were up 1.5%. The company continued to focus on driving sales and profits for long-term growth.
- The company experienced regional discrepancies in sales performance driven by many factors, both positive and negative. Naturally weather was a contributor to sales performance as it always is. This quarter the weather was cooler and wetter than the previous year. However, over time the weather impacts tend to balance out.
- The company continued to improve the capabilities of new parts catalogue, Z-net, and continued to highlight customer service enhancement in marketing campaigns.

Unleaded gas prices started out high at $2.96 a gallon and went up from there finishing the quarter at $3.61 a gallon.

- This 22% increase was the highest this year. However, last year as well experienced high prices finishing at just over $3 a gallon.
- Gas prices had a negative impact on sales performance. Regarding miles driven, the company saw a decrease in miles driven in January and February; neither March nor April is available yet. However through February, miles driven decreased for four straight months versus the previous year, a decrease that hasn’t been seen in many years.
- Overall consumer price inflation remained in the low single-digit range.

Total commercial sales posted an increase of 6.3% versus last year’s quarter.

- The company has the commercial program in 2,233 stores supported by 136 hub stores. With such a small share, approximately 1.5% of the overall market, the company believes there is opportunity to gain further share.
- There continues to be a subset of commercial programs, approximately 1,200 supported by additional selling tools.

Gross margin was 50.2% of sales, up 32 basis points compared to last year’s third quarter.

Margins continued to benefit from ongoing category management initiatives, supply chain efficiencies and continued focus on lowering acquisition costs, which include increasing direct import efforts. Over the last several quarters, these efforts have been partially offset by an increase in product cost, specifically related to oil-based products and other commodities.
Duralast, Duralast Gold and Valucraft product lines continue to show sales increases.

- SG&A was 32.2% of sales, up 30 basis points from last year. Deleverage came primarily from continued higher occupancy costs, specifically rent and depreciation were approximately 17 basis points higher than last year’s second quarter which reflected higher percentage of lease versus owned stores.
- EBIT earnings before interest and taxes were $273 million, up 3% over last year. Interest expense was $25.3 million compared with $27.1 million a year ago.
- Debt outstanding at the end of the quarter was $1.932 billion or approximately $7 million less than last year. The decrease in interest expense reflects lower short-term borrowing costs. Adjusted debt level at 2.1x adheres to r historical guidance of 2.1x.

Tax rate was approximately 36%, below last year’s rate of 36.3%.

- As this quarter’s rate included the settlement of the relatively small discrete tax event, the company expects to return to a more normalized run rate of approximately 37% for the last quarter of 2008.
- Share count of 63.8 million was down approximately 9% from last year. The combination of these factors drove earnings per share to $2.49, up 14.7% over the prior year.
2008 fiscal year has an extra week in it.

Relating to the cash flow statement in the third quarter the company generated $204 million of operating cash flow and did not repurchase any AutoZone stock.

Year-to-date the company has repurchased approximately $350 million as part of stock repurchase program compared to approximately $464 million during the same time period last year. The company accelerated a portion of annual purchases during the first quarter.

The company reported an inventory balance of $2.1 billion, up approximately 6% versus the third quarter ending balance last year.

- However last year’s number excluded $31 million in pay-on-scanned inventory which was not included in GAAP numbers. The company has slowly reduced inventory balance held as pay-on-scan over the last several years. The company has approximately $7 million in inventory on pay-on-scan program.
- Adjusted inventory including pay-on-scan inventory was up approximately 5% versus the previous year’s quarter. This increase is primarily being driven by new stores opened over the last year representing approximately 4% more square footage then last year. Therefore on a per-store basis the company reported $508,000, up from last year. The company has added additional parts coverage through category line reviews.
- Accounts payable as a percent of gross inventory finished the quarter at 88.9%. Total working capital was $3 million versus last year’s balance of $71 million.

Net fixed assets were up 5.7% versus last year.

- Capital expenditures totaled $58 million and reflected the additional expenditures required to open 37 new stores this quarter along with maintenance on existing stores, work on development of new stores for upcoming quarters and the expected summer opening of new eighth new distribution center in Hazelton, Pennsylvania. Specifically related to new store openings, new stores are on track to achieve at least a 15% IRR and the company continues to see ample opportunity to open stores in the US at a mid single-digit growth rate for the foreseeable future.
- The company opened 32 new stores for a total of 4,032 stores in 48 states, the District of Columbia and Puerto Rico. The company relocated three stores this past quarter and continues to see opportunities to expand this initiative in the future.
- Depreciation totaled $38 million, higher then last year due primarily to new stores. AutoZone continues to be one of the few players in industry to have investment grade debt ratings.
- Senior unsecured debt rating from Standard & Poor’s is BBB plus, and the company has a commercial paper rating of A2. Moody’s Investor Service has assigned the company a senior unsecured debt credit rating of DAA2 and a commercial paper rating of P2.

Key questions from the third quarter earnings call conducted by AutoZone, Inc. on May 20, 2008.

Gary Balter (Credit Suisse): You had a lot of inventory on the commercial side into the box to help drive the sales. How much more inventory can you add?

Bill Rhodes: It is important to note first that we have added inventory, as we mentioned $70 million last year and on track to do a similar amount this year but we have been aggressive in managing out excess and non-productive inventory. We are focused on making sure that we make room for that new product, both physically and financially and that has been a big part of our strategy and will continue to be as we go forward. The lifespan of the commercial products is much shorter than it is on the retail side and so it causes us to constantly update even more frequently our product assortment so you will see it churning more then it did historically when we were just focused on retail.