Q1 2020 Earnings Call

Good morning, and welcome to the arches own conference call. Your lines have been lethal listen only mode. I did a question and answer session of any concrete.

Please be advised today's call is being recorded if you have any objections. Please disconnect at this time this conference call will be disclosed.

Fourth quarter earnings release.

The company's chairman, President and CEO will be making a short presentation.

The quarter the conference call will probably I'd tiny am central time.

Seven am eastern time before Mr., let's begin the company has requested that you listen to the falling statement regarding forward looking statements.

Certain statements contained in this presentation constitute forward looking statements that are subject to safe Harbor provisions of the private Securities Litigation Reform Act at 1995 forward looking statements typically use words, such as believe anticipate should intend plan, we'll expect estimate project position.

In strategy seek may could and similar expressions. These are based on assumptions and assessments paid by our management in light of experienced a perception of historical trends car conditions expected future developments and other factors that we believed to be appropriate. These forward looking statements or something to a number of risks and uncertainties, including without limitation project product demand energy.

Prices, whether competition credit market conditions cash flows access to available unfeasible financing future stock repurchases the impact of recessionary conditions consumer debt levels change in laws or regulations or in the process to warrant putting terrorist activity inflation the ability to hire trainer retain qualified employees construction delays the compromising.

Confidentiality availability or integrity of information, including cyber attacks historic growth rate sustainability, downgrade or credit ratings damages to our reputation challenges in international markets failure or interruption over information technology systems origin, and raw material cost to suppliers impact of tariffs anticipated impact of newer.

Accounting standards and business interruptions certainly these risks are discussed in more detail on the risk factor section contained in item. One 800 per wanted this annual report on Form 10-K for the year ended August 25, 2018, and these risk factors should be read carefully.

All of these things are not guarantees of future performance, an actual results developments and business decisions may differ from those contemplated by such forward looking statements and events described above and in the risk factor section could materially 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 for.

Well the result of new information future events or otherwise actual results may materially differ from anticipated results.

Good morning.

Thank you good morning, and thank you for joining us today for Autozone, 2021st quarter Conference call with me today, or Bill Giles Executive Vice President and Chief Financial Officer, 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.

Slide complementing our comments today is available on our website www Dot Autozone duck under the Investor Relations linked please click on quarterly earnings conference calls to see them.

To begin this morning, I want to thank all autos owners across the entire organization for their dedicated passionate service to our customers I'm routinely reminded of the tremendous links autos owners go to meet and exceed the needs of our customers well, that's helping a retail customer determined the cause of their problem.

Finally got extremely hard to find part for a commercial customer.

Or an all data at sea Master Tech walking a customer through incredibly complicated repair our autos owners across the Americas serve our customers with compassion.

Care and confidence are all those owners intense focus on the customer is the reason that I believe we have momentum and while we were able to deliver solid results. This quarter. Overall, we were pleased with our performance in Q1.

This morning, we will review our major themes for the quarter, specifically, we'll talk about same store sales performance across most regions and customer segments. Secondly, we will update you on the initiatives, we haven't place to drive sales in both retail and commercial including our ongoing investments in technology and inventory assortment that we believe country.

We need to be a core reason for our sales growth well also touch on the subject the tariffs and the impact of those on our business.

Our total sales grew 5.7% this quarter versus last year. This was faster than Q4's growth of 5.4% adjusted for the 50 Threerd week. This growth was inline with our expectations and was encouraging considering we knew we were up against accelerating commercial growth. This same time last year.

We gained traction in our retail business as our D. I was sales comp was just shy of 1%.

Because of a shift in the timing of our quarter versus last year's first quarter. We knew this would cause a headwind in the results for our overall call, but even with the shift we were quite pleased with our results.

Also the data we have on market share indicated we were growing nicely versus the remainder of the market included in this competitive set we feel we are well positioned for our DIY business to deliver strong performance for the remainder of the year.

Regarding our domestic DIFM business, our sales grew 13.6% year over year. We were very pleased with this result, considering we were up against growth of 11.3% and the first quarter last year.

Considering this was the first quarter, where the DIFM business at the lab double digit sales growth. We knew this would not be an easy task.

It has been encouraging to see our two year commercial comps continue to build.

Our team across the organization from our sales team to our operators merchants technologists marketers credit team to all data and on and on have really bought into providing a compelling differentiated comprehensive experience for our customers and would that approach we are being rewarded with.

Incremental business in the marketplace by our customers.

While we remain smaller than many of our peers and absolute sales volume our growth rate has been very robust going about three times the industry growth rate.

This growth has come from a combination of many initiatives that have been in development for years, including inventory management, our inventory assortment improvements have been mega hub store expansions the ever strengthening reputation of the during last brand across our professional customer base technology enhancements increased engage.

And that of our very strong store operating teams and tremendous efforts on the part of our entire sales organization to effectively convey our value proposition.

We also grew our commercial sales per store at a higher clip than we did in last year's first quarter.

Although we are averaging fewer annual program openings as approximately 85% of our stores already have a program. The programs. We have opened continued to produce for us.

The first quarter marked our third consecutive quarter of averaging more than $10000 in weekly commercial sales per program and we continue to grow our sales with mature customers in mature programs at a substantially improved growth rate the last two years versus previous years, indicating.

Our offerings.

Products coverage customer service and the ability to enhance the customers overall shopping experience, our improved and have been recognized and rewarded by our customers.

Finally, our up and down the street business, otherwise known as the independent repair shops grew faster than our overall commercial business, indicating that the improvements we are making our broad based across different geographies and customer types.

Our autos owners have taken ownership of our success in or adding value to our commercial customers, which has and will continue to have a very positive impact on the business that said, we believe there's still considerable growth opportunities for us in commercial as our market share remains small.

Regarding our domestic DIY business, we generated another positive same store sales result for the quarter and an improvement in percentage growth year over year versus last quarter.

Retail remains a very consistent predictable story for us as it is definitely a more mature customer segment than commercial but a predictable revenue stream and substantial profit and cash flow generator.

All months of our cornerstone positive same store sales and we saw our best performance versus the previous year in November .

On a two year basis, our performance was very consistent each month.

Last quarter, we mentioned to sales impact we were seeing with our Hispanic customer base. This quarter, we do not believe this impacted results either across the country or specifically out in the western in southwestern U.S. markets.

Regionally, we did better out west and we're a little softer in the northeast we believe the sales results in the northeast were being impacted by weather and weather comparisons to last year.

Overall, we were pleased with the performance and consistency in our retail business in Q1 and feel good about the remainder of the year.

With that said as is our historical practice as we enter our second quarter. We believe it is prudent to remind everyone that weather patterns in this quarter can change significantly from year to year and in particular week to week.

The second quarter is always our most volatile quarter from a sales perspective.

Positively and negatively but overtime weather effects normalize as does our sales performance.

In our discussions with investors there seems to be heightened questions regarding the stability of our retail business and its trajectory.

While we cannot predict the future. We certainly can learn from the past we routinely said that our same store sales generally trade in a pretty tight band and that remains true.

At a touch more specificity to that discussion we've had periods of underperformance and overperformance in our retail same store sales, but over the last 25 quarters. Our retail retail same store sales have been positive for 21 of those 25 quarters.

While many casual observer of our industry believe retail is contracting and commercial is accelerating the facts. According to auto care, our industry Association do not support that notion.

Their data has shown both sectors of the industry with very long term consistent growth in the low to mid single digit range with commercial growing slightly faster.

For us we believe in the health of both our retail and commercial business.

So we sound upbeat about our sales opportunities for the remainder of 2020, we are and I'll explain some of the reasons for optimism we have a number of initiatives. We've been executing one major ongoing one is availability once again, we learned that adding inventory in additional parts coverage matters in local markets.

This quarter, we set records for the highest in stock position in our company's history, congratulations to our supply chain team merchant and operators great work.

Additionally, we opened 11, new hub stores this quarter and now have 216 hub locations 37 of which are mega hubs.

We continue to see sales ramping in markets, where hub stores are added.

We see it of course in the hubs themselves, but also in the surrounding markets service by the hub.

We're seeing these larger stores paying for themselves faster and faster in the maturation curve and we're seeing them growing well past the first or second year open.

Our first couple of Mega hub locations opened in 2013, and they are still comping above the overall chain comp.

We'll continue to open hubs for the foreseeable future as we are utilizing them as distribution nodes for hard to find parts, adding to our local market inventory availability.

Hub stores are also helping us with our online orders for next day delivery. It is an efficient way to have and leverage all the product in the local market and improves our ability to meet customer demand regardless of channel in a very cost effective manner.

Next we have been spending a significant amount of time effort and resources to leverage technology to enhance the customer experience. We've invested a great deal in both operating and capital expense to benefit our DIY and DIFM businesses.

Our IP spin as comfortably increased by double digits for the last few years.

The ended the quarter, we began to rollout after a considerable amount of time due diligence and testing a new point of sale system to our stores.

This system Leverages, new architectures and technologies that will expedite the transaction by making the workflow work flow more succinct and logical with touch screen capabilities and will allow us to make future changes much quicker as we replaced very old legacy cold all to enhance the Cubs.

Summer experience.

We've also done some important work behind the scenes that should help our agility by updating our store operating system expanding the number available skews our systems can handle and updating our human capital system.

We're also investing a great deal in our commercial systems as we continued to test. These new technologies, we remain confident that allowing our customers easier means of doing business with us will help commercial continued to grow at an accelerated pace for the future.

[laughter] on last quarter's call. We highlighted what we were seeing what tariffs. We noted that as the result of the tariffs we had experienced a small amount of inflation a departure from the norm.

As the tariffs were introduced we began to pass those costs onto our customers. We were successful in negotiating with certain vendors, reducing the impact of the tariffs. However, we did have to raise some prices as some of the tariff increases are considerable in particular select product lines, we have been.

Intentionally passing those costs along in Traunches as we absorbed those costs through our weighted average cost accounting method.

If the tariffs remain we intend to pass additional cost increases on through increased retails.

The tariffs as it does have resulted in skew to skew inflation, which differs from our historical experience to date tariffs and their impact on our cost and retail has been manageable and not a significant driver of our business results one way or the other.

Turning to our Omnichannel efforts, we continue to invest in our strategy to enhance the customer shopping experience by meeting customers, when where and how they want to shop, we have initiatives in place to improve our in store systems and websites Autozone Dot Com Autozone Pro mobile the new during the last parts website and all data.

We continue to see growth in website traffic and rapid growth in our ship to home next day delivery and buy online pickup in store sales, but omnichannel will still represents a very small percentage of our business substantially below 5%.

Last quarter, we discussed our next day delivery program that allows customers and over 85% of us markets to order as late as midnight in some markets and receive their products at their homes up very next day.

We continue to see bound Juan pick up in store is our largest omnichannel business pretty wide large margin. This both as model is also growing faster than our ship to home businesses highlighting the importance of our high touch operating model, where customers place a high value on the trustworthy advice.

Our autos owners deliver to them.

Regarding our annual operating theme for 2000 2040 years of while customer service, we continue to push for a relentless focus on what matters to our customers.

Exceptional service.

Fast deliveries high quality parts and products trustworthy advice and flawless execution across the enterprise in 2020, we continue to challenge our leadership teams to reduce the time of redundant or non customer facing activities for our store autos owners by removing their streamlining these tasks.

We know we can improve our levels of customer service. This will continue to be a major focus for us in 2020.

Along with improving our local parts availability and assortment. We continue to manage this organization to provide exceptional service for our customers provide our autos owners with a great place to work with substantial opportunities for advancement and work to ensure we are providing strong returns for our shareholders. In summary, we were play.

Pleased with our performance in remain encouraged with our industry strength in both DIY and DIFM and our prospects for the remainder of the fiscal year.

We believe macro factors such as a relatively low gas prices and increasing miles driven remain largely in our favor and we remain committed to growing our market share in both our DIY and commercial businesses.

For the quarter total sales increased 5.7% and our domestic same store sales were up 3.4%. This performance was generally in line with our expectations.

But we did have an unfavorable comparison in sales due to a calendar shift resulting from our 50 Threerd week. This past year. Our same store sales would have been 68 basis points higher if we were comparing to the same weeks last year.

Regionally the market's west of the Mississippi outperform the eastern half of the U.S. The northeastern admitted lannach markets were our lowest performance, but we see in our underperforming markets consistent performance on the two year stack basis.

During the quarter, we opened 18 new stores in the U.S. at our commercial business opened 24 net new programs currently 85% of our domestic stores have a commercial program and the vast majority of our international stores have a commercial program.

During the quarter, we continue to expand our international footprint opening two new stores in Mexico and two in Brazil.

We should once again highlight another strong performance in return on invested capital as we were able to finish our first quarter at 35.5%.

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 all.

Always maintain our diligence regarding capital stewardship as the capital we invest is our investors capital.

Before I pass and discussion over to builds out to talk about our financial results I'd like to again, thank and reinforce how appreciative. We are of our autos owners efforts to again deliver solid results for our first fiscal quarter of 2012.

I will turn the call over to Bill Giles Bill.

Good morning, everyone.

I'll start this morning, let me take a few moments to talk more specifically about our domestic retail commercial and international results.

For the quarter total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico, and Brazil stores increased 5.8% for the trailing four quarters ascended total sales for autozone store or $1.864 million. This is up from an average of 1000 $1.792 million.

At Q1, ending last year.

Total commercial sales increased 13.6% in the quarter commercial represented 22% of our total sales and grew approximately $75 million over last year's Q1.

We are encouraged to highlight for the quarter, our domestic commercial weekly sales averaged approximately $10600 per program.

The third quarter in a row of sales above $10000. This was an increase of 10.2% from last year's $9600. An average weekly sales for program for our first quarter.

And that $9600 was up 8% over the year before a very strong acceleration.

We now have our commercial program and 4917 stores or 85% of our domestic stores.

As Bill mentioned earlier, we remain committed to gaining market share with our commercial customers. We are encouraged by the initiatives, we havent place and feel we can further grow sales and market share.

Our Mexico stores continue to perform well we opened two new stores during the first quarter ending the quarter was 606 stores, we remain committed to open stores for many years to come.

Garden, Brazil, we now operate 37 stores.

Continues to improve and we remain optimistic about the long term future of this market.

We cannot claim success, yet as very encouraged substantial first or annual operating loss. This market has the potential as to be much larger than Mexico, so while challenging the potential size of the market is significant.

Gross margin for the quarter was 53.7% of sales up eight basis points versus last year's first quarter.

Slight increase in gross margin was attributable to higher merchandise margins.

While our accelerated pace of commercial growth has weighed on our overall gross margin, we continue to see opportunities to lower our cost through direct sourcing I do want to stress to remain we remain committed to taking cost out of our business, where appropriate and feel we can save on cost from here.

Our primary focus it's always been growing absolute gross profit dollars and our total autopart segment and we've been pleased with our growth driven by the acceleration we have experienced in commercial.

As DNA for the quarter was 35.8% of sales deleveraging 65 basis points to last year's first quarter. This was in line with our expectations at the beginning of the quarter.

On the cost front, we highlighted on the last few quarters conference calls the investments we have made specifically wage rates and technology for this fiscal year. The de leverage for this quarter was primarily driven by our planned domestic store payroll investments and continuing investments, which negatively impacted operating expenses.

EBIT for the quarter was $500 million, our EBIT margin was 17.9%.

Interest expense for the quarter was 43.7 million up 12.1% from Q1, a year ago, but in line with our expectations. We are planning interest in the $44 million range in the second quarter fiscal 2020 versus 41.4 million last year Q2.

Our higher bike forecast than last year includes our cost associated with the bond issuance. We had this past April .

Debt outstanding at the end of the quarter was $5.287 billion or approximately $130 million above last year's Q1, ending balance of 5.156 billion.

Our adjusted debt level metric finished the quarter at 2.5 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.

Digi and share repurchases are an important element of that strategy.

For the quarter, our tax rate was 23.2% versus 21.7% in last year's first quarter.

This quarter's right only benefit at 33 basis points from stock options exercised while last year it benefited 250 basis points.

Fortunately stock option exercises aren't predictable and they can come in waves driving substantial fluctuations positive and negative and our tax rate and ultimately and our net income and EPS.

For the second quarter of fly 2020, we suggest investors model us at 23% before any assumption on credits due to stock option exercises because it cannot effectively predicts. This activity we remain committed to reporting the stock option impact on the tax rate.

Net income for the quarter was $350 million relatively flat to last year's first quarter because it was depressed by previously discussed higher tax rate due to reduced stock option exercises our diluted share count of 24.5 million was down 6.1% from last year's first quarter.

The combination of these factors drove earnings per share for the quarter to $14.30 up 6.2% over the prior years first quarter.

Assuming a consistent tax rate in both periods EPS would have increased 8.3%.

Relating to the cash flow statement for the first quarter, we generated $447 million of operating cash flow.

Net fixed assets were up 5.2% versus last year capital expenditures for the quarter totaled $101 million and reflected the additional expenditures required to opened 22 net new stores. This quarter capital expenditures on existing stores have been Mega hub Remodels are openings were.

Work on development of new stores for upcoming quarters and information technology investments.

With the new stores opened we finished this past quarter with 5790 stores in the US 606 stores in Mexico, and 37 in Brazil for a total store count of 6433.

Depreciation totaled $89.8 million for the quarter versus last year's first quarter expense of $82.5 million. This is generally in line with recent quarter growth rates.

Effective the first day of this fiscal year September 1st we adopted the new lease accounting standard that required the company to recognize operating assets and liabilities on the balance sheet.

You'll see that we have re court at just under a $2.6 billion and operating lease right of use assets to the balance sheet as displayed in our highlights pages attached to our press release.

Do not expect us to have an impact on our leverage.

We repurchased $450 million of autos on stock in the quarter versus $497 million in last year at quarter end, we had $1.277 billion remain under our share buyback authorization and our leverage metric was 2.5 times again I want to stress, we managed the appropriate credit ratings and.

Not any one metric the metric. We report is meant as a guide only at each rating agency 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 the company's inventory increased 9.1% over the same period last year, driven by new stores, an increase product placement.

Inventory per location was 694000 versus 658000 last year and 674000 last quarter.

Net inventory defined as merchandise inventories less accounts payable on a per location basis was a negative 71000 versus a negative 59000 last year and a negative 85000 last quarter as a result accounts payable as a percent of gross inventory finished the quarter at a 110 per.

3% versus last year's Q1 of 108.9% the solid improvement.

Finally, as build previously mentioned our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 35.5%.

We have and will continue to make investments that we believe will generate returns significantly exceed our cost of capital now I'll turn it back to Bill Rhodes.

Thank you Bill.

We are pleased to report a solid first quarter delivering 3.4% same store sales growth, while strong was inline with our expectations over the last five quarters or so we have made incremental operating expense investments in our business with an expectation that we would improve our competitive position.

And therefore increased market share in both sectors accelerating our sales growth.

We've been pleased with those investments, which were primarily in labor and technology. Our labor investments have resulted in reduced turnover of our most tenured knowledgeable customer facing autos owners and as we begin to deploy these new technologies.

We expect them to enhance the customer and autos owner experience.

In fiscal 2019, we shared well in advance that we would have accelerating SGN, a expenses, which would lead to reduced EBIT growth for the fiscal year.

We delivered on that commitment and slightly over performed our expectations regarding EBIT in 2019.

As we embark on fiscal 2020, we still have elements of our expense structure that are growing faster than historical rates, but our expectation is to have higher than historical sales growth.

Like we have experienced in the last several quarters for fiscal 2020, our expectation is the higher expected sales growth will lead to EBIT growth rates above the last four quarters and approaching our more typical low to mid single mid single digit levels.

For the new year, we must continue to execute consistently at a high level, which we believe is in our line of sight, we understand we must adhere to living the pledge and doing what is right for customers, we cannot take our eye off of execution, while we studied the external environment and react where appropriate we must keep man.

Turning to our game plan success will be achieved with an attention to detail and exceptional execution.

For the remainder of the year, we've a lot of deliverables from our IP initiatives and we will remain focused on simplifying our store autozoners workloads to reduce clutter and unnecessary test that given the way of making the customer experience better both for do it yourself customer and the professional customers.

We believe our industry fundamentals will remain solid as we see positive year over year miles driven statistics and the aging vehicle characteristics in our markets continue to encourage us about the new year, we remain focused on growing our DIY business and continuing to grow our commercial business well in excess.

Of industry growth rates, we believe our balanced earnings and cash generating model allows us to deliver steady growth as our history suggests.

We promised to remain committed to both executing our strategies and getting better every single day.

I'd like to take this opportunity to again.

Recognize and thing our team of talented dedicated passionate autozoners for what they do each and every day for our customers, which expands opportunities for autos owners allows us to support the communities, we serve and ultimately rewards our shareholders now we'd like to open up the call for questions.

We will now begin the question answer session.

First question comes from Seth Sigman from.

Your line is now open.

Hey, guys. Good morning, Thanks for taking the question and congrats on the quarter.

I wanted to talk about commercial a little bit I mean, obviously a lot of progress over the last 12 months. When you look at the growth of commercial how do we think about growth coming from existing customers versus progress winning new customers and then as you look out over the next 12 months, maybe just talk about some of the incremental drivers that give you confidence that you can sustain the momentum in that.

Thanks.

Yes. Thank you.

Regarding the where the growth is coming from I am even mentioned in our prepared remarks that we are seeing significant growth from mature customers, who happen to be in mature programs. So most of the growth that we're seeing and most of the change in the growth that we're seeing is coming from.

Existing customers that we had whether they were up and down the street or national account customers were just in a trading those customers much deeper than we were before regarding where we go from here. Obviously, we don't have a crystal ball, but I will tell you when we look back over this acceleration over the last five quarters. It has not been one thing it has.

Then due to several different initiatives that we've had in place and frankly been in the works for several years, whether thats inventory assortment improvements, whether thats getting our store managers and district managers involved whether it's the building the reputation in the brand of the during the last products that we so that a whole host of different things that we believe contributor.

To this growth, we don't know what's going to happen in the future, but we do know that we have several other initiatives in front of us on the commercial front, particularly technology initiatives that we have not rolled out yet and we're we're excited about what the prospects are those initiatives will mean in the future.

Okay. Thanks for that Bill and then just a follow up question on pricing trends I think you had talked about raising prices. This year in seizes or trenches I assume there's more starting to come through now.

Can you just talk about the consumer reaction any signs of elasticities. It sounds like your tone on the consumer overall is very healthy just curious what youre seeing in terms of elasticities. Thanks.

It's really hard to see it certainly in certain product categories. We've seen the terrace come in and they've been meaningful but we have not taken the full cost impact because of our weighted average cost accounting model. So those costs come in over time as the inventory turns. So we have moved our retails up as I've said in.

Traunches and when we've seen them go up we have seen some elasticity of demand in certain categories not a ton at the end of the day when we look at the impact of the inflation in the retail and the elasticities. We don't think net net is having a significant impact on our business, yet, but again, we still.

Have a long way to know because we havent absorbed all those costs than than who knows where the tariffs go from here.

Great. Thanks, Bill appreciate it thank you.

Thank you. Our next question is from Michael Lasser from your line is now open.

Good morning, Thanks, a lot for taking my question Bill Rhodes in your prepared remarks, you expressed a lot of optimism about the outlook for the DIY business.

Is that.

What factors are driving that enthusiasm and be do you think thats more of an autos on specifics story, we're a broader industry story because some of your competitors are either seeing decelerating DIY traffic.

Indoor more volatility in the results of their DIY business.

Michael I would say on the same optimism of head for about 25 years.

I believe in the retail business, there's a lot of people as I mentioned that think that the retail business is going away that it's declining and the commercial businesses rapidly growing if you go back to our 1991 annual report we're trying to dispute the myth that retail businesses declined I'm trying to continue to.

This fell that myth and that you. This way for me to those talk about what has transpired over the last 25 quarters 25 quarters 21 of them have had positive same store sales for autozone.

Now I don't know what other people are experiencing but I also mentioned enough continued to mention that our retail business in particular, it does not fluctuate that much quarter to quarter inch our performance isn't a pretty tight band now this quarter, we did particularly well.

Especially if you consider the shift.

The calendar shift that impacted us that would've been one of our stellar quarters. We're also going to have quarters that aren't as strong. That's just the nature of the business, but it trades from slightly down to one or two points and it's been doing that for as long as I've been in this business.

In over that last 25 years theres been a market share shift from smaller independent in regional players to the larger players over time should we see more share being shifted between and amongst the larger players just because there's less consolidation and fragmentation within the market.

I think you're going to continue to see come from those smaller folks that's what's happened overall when I got in this business. There were about 35000 auto parts outlets. Today. There is about 35000 auto parts outlets now a lot more of them are in the hands of us in our closest competitors, but theres still a whole lot out there that are aren't bias.

Okay and then my second question is.

You've deployed a lot of investment a lot of technology and I think you're seeing good returns on that and that's what's driving some of the very healthy growth within your.

DIFM segment, how much more opportunity and you mentioned further technology investments are going to be rolling out how much more opportunity is there to deploy investments to generate these types of returns in should how should we think about the growth rate of EXINI dollars specifically in the next couple of quarters as result of.

That.

As I said in the prepared remarks, we're going to continue to have elevated SGN a expenses. We've we've spent a lot of time working on some substantial new technology oriented initiatives.

That frankly, you have seen yet and therefore, we haven't begun to expense them, yet, they're showing showing up through the capital expense line, but because we haven't deployed them. We're not depreciating them those are come and there's some on the DIY aside like I mentioned, the new POS system. We also have several on the commercial side that we.

Will be coming over the next six months or so.

Okay. Good luck and have a good holiday.

Thank you to Michael.

Thank you. Our next question is from Simeon Gutman from Morgan Stanley . Your line is now open.

Thank you good morning, everyone I just want to follow up on Michael's question I think the first one on the DIY business.

Bill I think you said, we expect the strength are strong results to continue specifically around DIY I know you don't really give guidance.

Specialty by segment, but does that does that suggest that the run rate of DIY why should improve going forward or that the consistent healthy trends continue going forward.

What I'm trying to say is remember the out why does it trades in a very tight band we had a strong quarter. This quarter I don't know, what's going to happen next quarter the quarter after that but overall, we believe in the long term health of the DIY business. That's the message Im trying to make sure that we convey also want to put an exclamation point or something.

All set us up in the script.

And that is that the second quarter is always very volatile and part of it has to do with when the quarter ends. It ends right around Valentine's day, which is when the seasons shift when tax refunds begin to hit the marketplace.

I don't know what's going to happen in the second quarter is always volatilities want to make sure everybody realizes that.

Got it Okay. My follow up is you also made a comment towards.

The ending of the call about how EBIT growth should approach some of that your historic rates over time.

If you look at the balance right now where your comps are growing nicely you seem to be taking share in the industry. You are investing but your your implication that it's going to approach. It overtime means that these investments can subside and the topline momentum should continue.

And another way of asking it is why not maintain the current algorithm in which EBIT growth continues to grow steadily maybe at a lower rate and but you continue to take market share, which seems like you're able to do and there's lots of itself I guess, how much. The debate is there why why not continue a higher level of investment to continue growing at an appropriate rate as long as the mark.

It's giving credit for it.

I think overall I mean, our objective as bill said as over the long term to grow our EBIT at a low to mid mid single digit rate, we've got a fair number of investments.

The or current than we've made and that we're currently working on as Bill highlighted many and technology and many for example in the hubs and Mega hubs, which we've had terrific results on and we'll continue to invest in hubs and Mega hubs, which will also elevate some of our inventory levels as well. So we're going to continue to invest in the business as we gain momo.

Benson I.

I think we have a fairly long track record of being able to manage.

Both margin and expenses in light of this kind of sales performance that we are producing and we continue to expect to do that over the long haul.

Okay. Thanks happy holidays.

Two.

Thank you. Our next question is from Matt Mcclintock from Raymond James Your line is now open.

Yes, good morning, everyone congrats on the quarter as well.

I was wondering if we could just follow up on Seth's question, just about commercial and commercial business in General I think you said that the bulk of the gains have been coming from mature markets, which are customers.

Was wondering is the growth rate from new customers with the contribution from new customers accelerating as well Thats My first question.

I think it's I think it's accelerating as the entire business accelerates the point that we're trying to make sure is the biggest change that we've seen over the last six quarters or so has been our mature customer growth has changed significantly.

Okay. That's helpful. And then as you look today now that you've actually develop or compared against more difficult.

Growth rates within that business.

Taking a step back a year ago versus today would you say that you're more optimistic about the growth potential for that business anywhere a year ago.

Leading longer term do you think that your comp algorithm could actually accelerate from here.

Simply from that that confidence that you just saw this quarter.

Well, our covenants and going to determine whether we're successful or not unfortunately, I think we've certainly have a higher level of confidence because we've done it for five quarters I would say more importantly than that we're encouraged by the initiatives that we have in front of US you said something I want to make sure that that I'm, not saying I'm not saying our sales are going to accelerate from here and.

Commercial I don't know, but I feel like we will continue to outperform the industry, but hopefully have substantial margin.

Thats, 10% or 15% or.

No, but I'm really excited about the initiatives that we have in front of us and basically the momentum that we're building in the marketplace from our inventory availability to the power of the during last brand to the service that our customers are seeing from our autos owners just.

Two customers I see a whole different level of confidence that our customers, having us and our ability to service their needs.

Perfect. Thanks for the color happy holidays.

Okay.

Thank you. Our next question is from Liz Suzuki.

America. Your line is now open.

Great. Thanks for taking my question.

About private label penetration broadly and what percentage of sales private label currently and what the next initiatives are for the Darla.

Yes, I mean, we feel terrific about the Daryl last brand which is.

The largest brand about the largest fran aftermarket auto parts and we have over 50% of our sales come from our private label product and merchandising organization has done a terrific job of continuing to expand that brand across categories.

And.

And it continues to have a very high penetration is very well received by the customers both on the DIY side and on the commercial side both.

So our expectation as it will continue to develop the brand broaden that out continue to find further opportunities and other categories, where we can do further line extensions on their last and value Grafton during last gold brand altogether.

And our there are there certain product categories, where dara losses, not currently hi in your lineup of products.

I think opportunity.

I think on some of those would be some of the ones that are more dominated by national brands for example, in oil and and those kinds of categories that maybe there are already as an existing dominant national brand, but in many categories. We find that there continues to be significant opportunities from both there are less than other private label product that we have.

Great. Thank you.

Thank you our next question.

Michael Baker of Nomura. Your line is now open.

Thank you within the.

The margin outlook it sounds like your sales have been up 5% each block two quarters adjusting for the.

After a weak in the fourth quarter, when you're talking about profits up low to mid single digit. So I guess that might imply some chance from margins to still be down is that right and can you talk about your expectations of gross margins versus M&A.

Yes, I mean, your math is right and I would say that.

Gross margin, we feel good about I mean this quarter, we had a relatively flat I think was up eight basis points on gross margin.

So we feel pretty good about our ability to be able to continue to manage gross margin. Obviously, we get continued pressures from tariffs etcetera, but that merchandising organization has done a great job of continuing to find opportunities to lower our cost.

So we feel pretty good about the health of gross margin and yes on the SDMA front, we're going to continue to make the investments that we have made many of which are focused on wages as wireless technology over the long haul and so we expect there to be a little bit of pressure on that but again as bill mentioned before and we've mentioned that our goal is to continue to grow EBIT.

On a low to mid single digit over the long term.

Okay understood and then a quick follow up just on the calendar shift how does that impact to Q, where I think you pick up a February weak, but lose a November week.

I think it depends on what happens in that week in February as I've talked about a couple of times already that that particular point in the calendar is very volatile. The last time. We had this it was very favorable to our second quarter results. We don't know what will happen. This time, but we'll let you know it can easily be favorable or it could easily be.

Unfavorable it just depends on that what happens right around Valentine's day.

Understood appreciate that thank you.

Thank you.

Thank you. Our next question comes from Zach Fadem from Wells Fargo. Your line is now open.

Hey, good morning could you talk a little more about the comp impact in markets, where mega hubs are at and how how that compares to the overall fleet and then just as the hub presence matures could you walk us through the comp trajectory and.

How those markets tend to perform after the opening.

Yeah, I would say on the on the Mega hub markets. I mean, we continue to see good performance out of them in.

Not the dissected too much but it depends on how broad the market is and how close in the market as and keep in mind that we only have 37 mega hubs today and frankly, the vast majority of them are relatively mature. So I think we're still identifying what we believed to be the maturation curve from a sales perspective on mega hubs.

To be encouraged by the year over year improvement to the Mega hubs.

Form hubs have a little bit more maturity to them, but again, we're doing things that are helping drive the business overall, adding more inventory et cetera. So it becomes a little non comparable when you look at some of the hubs today versus what they were like maybe five years ago in terms of what we've done inside the box.

To be able to drive sales. So the short answer is that.

The maturation curve of both hubs in Mega hubs is still evolving we continue to be very pleased with the investments that we are making and see that the improvements that we can drive and we'll continue to invest in that category.

Got it that makes sense and could you also speak to that margin trajectory of the commercial business, whether you've seen any improvement in incremental margins as that business has gained scale and are there any opportunities that you think or are out there to drive higher commercial margins now that you're slowing the new commercial program.

The investments.

I would say I don't think that were.

See I think the margin for commercial continues to remain healthy and there are obviously opportunities for us to improve margin on both sides of the business, but at the same time keep in mind that we're growing commercial it at a rapid right, but we're also making some investments and thats, helping drive that so over the long term I would expect margins to him.

Through the some of those investments become more mature.

But over the shorter term I would expect our margins to remain stable.

Got it makes sense appreciate the time.

Thank you.

Thank you. Our next question comes from Greg Badishkanian.

Of Citi. Your line is now open.

Hey, Good morning. This is David Challenger on for Greg. Thanks for taking my questions sure. So I want to talk about that the allied business a bit as well.

Just take a step back and look at the big picture, so employing employment levels still strong coupled with low gas prices across most of the country. So at this point should you should DIY potentially be comping at the higher end of that tight band that you talked about maybe you were to 1% or so just trying to gauge where that business is now and what's the correct to run rate for comps and.

Hi lie for where we are in the cycle.

Oh, great questions I keep going back to it trades in such a tight band and it's really hard to say, we certainly think lower gas mileage is beneficial we think miles driven increases are beneficial, but theres. So minuscule that theyre just not big drivers of the business overall, we think.

The most important driver of what happens with the DIY business is what our autozoners due to provide great service to our customers and I think we're doing a really really good job of that right now the morale of this organization of our our teams in our stores in particular.

No, they're winning they feel like there when they feel good about it and I think that thats translating into better service, which is translating into better performance.

Got it and then my follow up on on the expense growth. So up high single digits again here in Q1, and you've been cleared that that's going to remain elevated.

But with the acceleration in comp sales, we've seen over the past few quarters is there any thought as to pushing on these tech in store base investments, even even further and above your initial plans now that we're seeing the benefit come through the topline, yes, that's a great question.

Most of those investments take time, and so there's a lot of things in the pipeline. So we might like to accelerate some of them, but there is.

Certain amount that we can digest as an organization, there's a certain pace at which we can develop those initiatives. So we will continue to work hard will continue to drive them, where we can.

But I expect it to be a little bit more steady state.

Alright, Thanks, again and congrats on nice quarter. Thank you. Thank you.

Thank you last question comes from Greg.

From Evercore ISI.

Okay.

Hi, Thanks.

I'll make account.

So.

First I want to circle back thanks for your the incremental on the tariffs I know, we started to see some exemptions coming through.

And also but we still the timing of pricing through what's already happened could you help us understand is that is that any potential benefit maybe from.

Refunds coming from any exemptions on certain products and then when we think about.

Further price increases is it is it just a simple is taking one the tariffs went up and then think about your inventory turn in once a year is to one it would actually flow through.

I think the second part of that is absolutely right, Greg and it's going to depend on the category certain categories turned faster or slower than other categories. So as we turn that inventory the cost or cost in our gross margin increase and we're trying to manage that consistent with how we manage the retail increase.

As for the sole purpose of not shocking the system, we've had lots of different cost increases over the years for a variety of reasons, whether that's all based prices going up led steel or whatever the case movie, but when it's 25%.

Significant increase in so we're trying to do that over three or four traunches, so not to shock the system and and try to provide the customer with as good a value as we can for as long as we came.

So far I'm very pleased with how our.

Our merchants have managed those issues.

The first part of your question Greg. The first part was we've started to see some exemptions.

To your on certain products skews because that is that happened in for you guys anything material. We have filed some extent some some exceptions don't know all the answers at this point in time.

Some of them would impact us in a beneficial way, if we were able to get them.

Got it and then on inventory I know that's been it's been growing up 9%.

Is that a timing issue or is it just a up against a lower comparison, what should we think about that as a normal growth rate back towards sales in coming quarters, I don't think of it back towards sales in coming quarters, you have some inflation baked in there as well on on the inventory and then again I think a couple of points that I'm going to.

For the build pointed out.

Highest in stock level, however for the Corporation.

Continued investments in hub and Mega hubs.

Again inventory closer into the customer wins, and we're going to continue to go down that path. We want to continue to maintain our inventory ratio above 100% and we have successfully.

I think that will probably be.

At this level, a little bit lower maybe but not certainly at a sales growth rate.

That's great congratulations guys and have great holiday it too happy holidays, Greg.

Okay before we conclude the call I'd, just like to take a moment to reiterate that we believe our business model continues to be solve it.

We're excited about our growth prospects for the year, we do not take anything for granted as we understand our customers have alternatives. We have an exciting plan that should help us exceed 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 focused on optimizing long term shareholder.

We are confident autozone will continue to be successful. We thank you for participating in today's call and we'd like to wish our autos owners and everyone on the call a very happy and healthy holiday season, and a prosperous new year. Thank you very much.

And that concludes today's conference. Thank you for your participation you may now.