Industry Issues - Pay-on-Scan

The Automotive Aftermarket Suppliers Association (MEMA's aftermarket market segment association) and the MEMA Financial Services Group will continue to keep its members updated on any new Pay on Scan developments.

In case you missed it, AutoZone held its second quarter 2003 Earnings Conference Call yesterday. To listen to the 54 minute webcast, you can go to this link:

http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=AZO&script=1010&item_ id=715614

The last 28 minutes of the call is the question and answer section where financial analysts pose questions to AutoZone leadership. Several of the questions dealt with inventory issues while one analyst asked specifically about the Pay on Scan proposal. Below is an excerpt from the call where inventory and POS are discussed.

If you would like to communicate with us, feel free to e-mail us at pfoley@mema.org or call me at 919-406-8840.

We hope the excerpt is of value.

Excerpt from March 5 Earnings Conference Call:
(note that the following is an excerpt and appears the way it was transcribed)

David Burman, Bowman Capital: Could you elaborate on the balance sheet? I'm not that familiar with your practice in terms of what your capital structure intention is. Just looking at it and the debt level has gone up a little and you have a lot of share buy back program. What sort of struck me as a little odd in the balance sheet is the amount of accounts payable. It's about five months worth if I'm doing my calculations correctly. That's the highest I've ever seen.

Steve Odland, Chairman and CEO, AutoZone: Sure, let me start with accounts payable - yes we've had tremendous success in terms of getting our accounts payable as a percentage of inventory up. Your calculation is correct - that we have approximately five months of worth of accounts payable. That is largely because of the successes we've had in category management in terms of negotiating with our vendors as well as the fact we're one of the only investment grade credits. Therefore the extension of credit can be advantageous versus extension of credit to others.

Burman: That's quite an amazing number. Out of curiosity, last year was four months right?

Odland: It's up from about 66% of inventory to 70% of inventory.

Burman: Are they ok with it?

Odland: Vendors have been working very closely with us and making sure that we've got the right parts and have their products in our stores. We negotiate on the terms payables.

Burman: How many different vendors is that? Is there a lot of them or is any account more than 20% or 30% of your business?

Odland: No. We've discussed this over time at length on the payables. If they don't have their parts in our stores, they don't have any sales. So, for a lot of them, this is a tremendous way for them to get the exposure of their parts in our stores. We work very, very closely with them to make sure we've got appropriate stock conditions, appropriate sales, appropriate innovation going on. It's part of management process that we introduced 18 months ago. We entered in discussions of whether appropriate levels of credit terms and appropriate levels of payables. These are all very carefully negotiated. We work with them to make sure we've done factoring and so forth to help them lower their borrowing cost. It's a very partnership oriented.

Burman: As debt goes up doesn't it give you a lot more leverage with them. they have to give you bigger discounts. You've got them where you want them so to speak.

Odland: No. Our debt has actually...

Burman: No, no, no. You owe them a lot of money. Can you get more discounts from them? It's an incredible number.

Odland: Discounts and vendor funding and so forth don't have anything to do with credit terms. Our vendor funding relates to performance and advertising and those kinds of things. It's a different discussion as it relates to payables. Payables discussion is that we are in a low gross inventory turn business and you've got to have the parts in there and we've got to make sure the appropriate parties are participating.

Burman: Related, is there much obsolescence with inventory related to some of those payables?

Odland: We have to make sure right parties are engaged in taking responsibility for the financing of those. As we said on this call as on previous calls, this is not fashion-oriented stuff, not perishable and so there's very little, if any risk of obsolescence, marks downs or any of that kind of thing. It's totally returnable to vendor.

Burman: Totally returnable to vendor. Ok, I understand that.

Odland: That's why you have to look at inventory differently in this channel.

Burman: When you look at total debt, and capital structure that you want other than accounts payable could be construed as very lucrative but it's obviously not. How comfortable are you with buying back more shares?

Odland: What we've said is that we will continue to buy back our shares with our excess cash flow as long as we believe it's needed.

Next Question -- Brian Riley, AG Edwards: Congratulations on the quarter and congratulations on your continued repurchasing of your stock. I think most of your shareholders are totally on board with that idea. My question has to do with pay on scan opportunity. I've talked to a number of your suppliers, and in the conversations, the word opportunity never came up. It's viewed sort of as a very disruptive method of doing business from their perspective. And in the process of doing this consignment of inventory, who will be paying for inventory that has to be done on their behalf? And are your computer systems up to snuff to handle that and process returns and so forth?

Odland: I'm not sure who you've talked to. We announced in January at a vendor summit where we had all of our key suppliers there the opportunity and our intent to move from our current method of payables to a pay on scan direction. We're not flipping the switch on this thing. What we are doing is we are meeting one-on-one with each vendor and discussing their business with them and figuring out with them how we build business together and the appropriate way to implement this type of thing.

Riley: Are your computers up to date to handle this kind of thing and have you looked at the costs?

Odland: Our computer systems are very advanced and fully capable of taking everything on that we've talked about.

Riley: Then who will be paying for inventory that has to be done on behalf of the suppliers. Some of them have banking relationships where they borrow based on their inventory. If you're a banker lending to somebody with inventory as collateral and that collateral is now in 3,000 of your stores or warehouses. If I was a banker I don't think I'd be real comfortable with that type of lending.

Odland: Frankly, we're not hearing that from our suppliers. We are working individually with each one of vendors and working to make sure that we do the right things for their business and our business. Important thing is that we want our suppliers focused on the end customer. We want them to plan their manufacturing instead of being hit with a purchase order which gyrates their manufacturing system. We want them to manage their inventory through our system and have better accessibility and visibility through the entire supply chain. We think this will have benefits for them through that vendor managed process and it will help smooth out their manufacturing. There's a lot of things. This is something we're doing individually and carefully with each of our suppliers.