This summary is based on the second quarter fiscal 2008 earnings call conducted by Autozone Inc. (AZO: chart) on February 26, 2008.

Management:

- President & CEO: Bill Rhodes
- Exec. VP, CFO: William Giles
- VP, Treasurer, IR, Tax: Brian Campbell

Key Investors Issues

- Net income was $107 million or $1.67 a share, up 3.6% from the prior year.
- Sales rose by 3% to $1.339 billion.
- Capital expenditures totaled $50 million and reflect the additional expenditures required to open 34 new stores.

Half Year Highlights:

- Sales increased 3.7% to $2.79 billion from $2.69 billion in 2006.
- Net income rose 5.3% from $227 million or $3.21 a share in the prior year to $239 million or $3.74 a share.
- The firm has repurchased $350 million as part of the stock repurchase program.

Second Quarter Highlights

The firm reported sales of $1.339 billion, an increase of 3% from $1.3 billion in the prior year though same store sales or 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 firm is on the right track.
- Gross profit as a percentage of sales was up 71 basis points versus last year’s quarter while operating expenses as a percentage of sales increased by 53 basis points.
- This resulted in an operating margin of 14.7%, up 17 basis points from last year’s quarter.

Net income was $107 million or $1.67 a share up 3.6% from $103 million or $1.45 a share in the prior year due to revenue growth.

- Total domestic retail sales were up 1.9% as the firm continued to focus on driving sales and profits for long term growth.
- During the quarter, the firm implemented a few aggressive tactics designed to accelerate sales momentum and ran some very aggressive promotions in an attempt to increase store traffic.
- It continued to improve the capabilities of the new Parts Catalogue, Z-net, and continued to highlight this terrific customer service enhancement in the marketing campaign.
- Z-net continues to gain traction with customers as the firm is able to provide better, more comprehensive information to customers and assist them with their needs more quickly.
- Gross margin was 49.9% of sales up 71 basis points as margins benefitted from ongoing category management initiatives, supply chain efficiencies and direct import efforts.

The Duralast, Duralast Gold and Value Craft product lines continue to show sales increases as customers continue to recognize the value proposition these high quality brands offer.

- The direct import initiative is in its early stages and reflects less than 5% of annual cost of goods.
- SG&A was 35.2% of sales, up 53 basis points from last year on deleverage primarily from continued higher occupancy costs and to a lesser extent, an increase in advertising.
- Rent and depreciation were 45 basis points higher than the prior year reflecting a higher percent of leased versus owned stores.

Interest expense was $28.6 million compared with $26.8 million a year ago, while debt outstanding was $2.95 billion or $240 million more than last year.

- The increase in interest expense primarily reflects the higher level of debt.
- The firm purposely manages its capital structure relative to the cash flow in order to maintain credit ratings at investment grade while optimizing capital.
- The firm generated $126 million of operating cash flow and did not repurchase any AutoZone stock as part of the ongoing stock repurchase program.
- The adjusted inventory including pay-on-scan inventory was up 6% versus the previous year’s quarter driven by the new stores opened over the last year.
- Capital expenditures totaled $50 million and reflect the additional expenditures required to open 34 new stores, maintenance on existing stores and work on development of new stores for upcoming quarters.

Operational Highlights:

- The firm continues to reinforce to the organization the importance of putting the customers in everything it dies through continuous training on product knowledge, leadership and culture of customer satisfaction.
- The ongoing refinement of the parts assortment is one of the key operating priorities and it made significant enhancements to the merchandise assortment planning tool and integrated it with an enhanced category line review process.
- Together those process improvements have resulted in additional parts coverage significantly enhancing the ability to meet the demanding needs of customers.

It is gaining traction with the commercial business, by building sales and earnings momentum in this business for the long run.

- Strategies implemented include enhanced sales processes, marketing collateral and training for the commercial AutoZoners all geared to deliver on the objective of building a world class sales organization.
- These efforts combined with the improvements in the core operating processes have begun to build momentum in this business.
- The US economy has certainly been challenged in recent months and those challenges have resulted in softer trends across the broader retail sector.

Update on Commercial:

- Total commercial sales posted an increase of 3.4% versus last year’s quarter and the commercial program is now in 2,223 stores supported by 133 hub stores.
- Given the small share of 1.5% of the overall market, there is significant opportunity to gain further shares.
- Considerable time and effort to has been spent to ensure that the firm expands it hard parts coverage to support commercial customers.
- It continues to expand the number of stores with the additional sales support as well as through developed professional sales materials designed to educate customers and the high quality products carried.
- Stores in Mexico continue to perform well and the firm has opened four new stores bringing total stores in that country to 128 stores.

Key questions and answers from the second quarter earnings call conducted by Autozone Inc. on February 26, 2008.