Q2 2020 Earnings Call

Good morning, and won't go to the onto his own conference call. Your lines have been plays I listen only answer the question answer session. All the conference. Please be advised today's call is being recorded if you have any objections. Please disconnect. At this time This conference call will discuss Autozone second quarter earnings release.

We live roads, the company's chairman, President and CEO, well be making a short presentation and highlights of the quarter The conference call and probably attending in central time, 11 am eastern time.

Before mr. well, let's begin the company ask your questions that you listen to the following statement regarding your forward looking statements.

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Right above and the risk factors could materially universally effect.

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Now I'd like you turn call over to Mr. Bill Rhodes. Please go ahead.

Good morning, and thank you for joining us today brought a zones 2022nd quarter conference call with me today or Bill Giles Executive Vice President Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax regarding the second quarter, Oh, you've had an opportunity to read our press release and learn about the quarters.

Results, if not the press release, along with slot complementing our comments today is available on our website www Dot Autozone dot com under the Investor Relations Lee. Please click on quarterly earnings conference calls to see them.

Starting this morning, I want to thing all autos onerous across the entire organization for their hard work dedication to delivering great customer service in light of a challenging sales environment this past quarter.

As I mentioned on our last conference call weather during our second quarter, each year can be volatile and can significantly impact our performance.

Coming off of a strong fall selling season, having delivered 3.4% same store sales in Q1, we were confident in our ability to execute remained cautious heading into our second quarter.

And as it has been widely reported the winter weather was much milder in our second quarter than last year.

While our sales were certainly meaningfully below plan and our expectations.

The liver, both net income and eat yes.

The level, we were whats commendable.

We haven't amazingly civil business, yet it has to be executed every day at a very high level across more than 6400 locations in multiple countries and geography in order to make everything work.

This is where our culture continues to guide and differentiate us this past quarter, we continue to focus on our many initiatives not the least of which included incremental inventory placements Mega hub rollouts ongoing enhancements to how we delivered digitally interact with our commercial customers and the.

Rollout of our updated retail Pos system.

We feel both our store presentation that customer service is second to none in our space, but I can also tell you with full certainly we are happy to put this quarter behind us and focus on delivering materially better sales performance for the remainder of the year.

In providing a little more color. This morning, I'll talk about the monthly sales cadence regional sales performance differences retail versus commercial and lastly merchandise categories impacted by the quarter's results.

In regard to cadence for the quarter as we completed the first two thirds of our core.

Our same store sales were positive, but certainly below our plan and expectations as you will recall in the prior year. The winter weather was also mild until the last two weeks of our quarter when the polar vortex arrived.

As we were comparing against a mild winter with another one our same store sales were positive, but our to your growth was considerably softer than it was in our first quarter.

At the end of this quarter.

As we compared against the severe winter weather last year, our performance compared to last year was very poor with combined same store sales down 6% for the last two weeks.

However, on a two year comp store basis. The last four weeks of the quarter were substantially stronger than the first two thirds of the core.

Unfortunately, as we have stated many many times the timing of our second quarter can result in quite volatile sales performance, both good and bad and the timing this year couldn't have been much worse.

In the is weather impacts normalize over time and our focus is on our long term performance.

Our <unk> performance was particularly soften the mid western in northeastern markets, where same store sales ended 580 basis points lower and these northern markets then in our remaining markets.

At an even larger 1700 basis points lower than the remaining markets over the last two weeks of our quarter.

Our sales fell off was more pronounced for our de Ah why business, then commercial but we certainly saw the trajectory of our business slowed during this timeframe for both businesses.

With over 25% of ourselves coming from our mid western in northeastern markets, we could not make up for the sales shortfall from these areas from sales and other markets.

Regarding merchandise mix during the quarter, our cold weather businesses.

Batteries antifreeze and seasonal fluids were down materially in total across retail and commercial combined.

These categories are significant businesses for us, particularly in the winter and they were our worst performing categories and combined were down more than 9% on a same store basis across the country for the quarter and were both down north of 20% the last.

Two weeks of the quarter.

The Testament to our team is how resilient our motto is during changes in performance during certain periods with a very challenged sales environment. Our team delivered 2% growth in EBIT and grew earnings per share 7.8% for the quarter. This clearly didn't meet our expectations or aspirations, but was impressive nonetheless.

Yes, our financial model allows us to grow cash flow and E. P. S steadily.

I'm very proud of how diligence our organization is an all business climates during the quarter our market share based on the data available to us what slightly positive through the end of January wire sales performance for Q2 was comfortably below our plans and expectations, we haven't seen any material changes.

The market or industry drivers beyond whether.

We're excited to enter our third quarter, where we began to enter our robust selling season, which is starting in earnest right now as federal tax refunds begin to reach our customers.

We have had mild winters in the past, but each cycle is different this year. We expect initially are saying that now normalized tax refund season, we believe both our retail and commercial businesses will improve from this quarter's results.

We're also doing some great things that we feel will benefit sales over time, our mega hubs Stoke store rollout continue along with key investments in technology.

We believe these areas of investment allow us to further differentiate our offerings from our competitors or to close competitive gaps that may exist, allowing us to accelerate further in our industry.

We opened two more mega hubs this quarter and now have 39 locations, our mega hubs provide deep very deep local market coverage for hard to find part. This is critical to both of our sectors, but particularly important to our commercial business and our store and commercial systems have and will continue to receive.

Enhancements this year.

Making it easier for our customers to do business with while simultaneously, making it more efficient for autos ours.

As we enter our all important sales season, our stores look great and our autos owners are doing an excellent job focusing on customer service. We believe we are ready for the remainder of the year.

To provide specifics on the quarter. Our total sales grew 2.6%. This quarter. This compares to last quarter growing at 5.7%.

Oh, yeah, while sales comp weren't down versus last year, well DIFM sales were up 8.2% in total both of these numbers were negatively affected by the calendar shift, causing a 63 basis point headwind for the quarter.

[laughter].

Regarding our domestic commercial business, we were up against 12.9% growth in the second quarter last year, and a harder comparison to last quarter, but we expect that we could reach positive double digit growth.

Well, we did not achieve our targeted double digit goal for the quarter, we feel our team across the organization from our sales team to our operators merchants technologists marketers credit team to all data and on and on haven't really bought into providing a compelling differentiated comprehensive experience for our customers.

Yes.

With that approach, we will continue to be 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 growing significantly more than the industry growth rate. This growth has come from a combination of many initiatives.

That have been in development for years, including inventory assortment of permits hub and Mega hub store expansions the ever strengthening reputation of the during last brand across our professional customer base technology enhancements increase engagement of our very strong store operating teams and tremendous efforts on the pie.

Part of our entire sales organization to effectively convey our value proposition.

We also grew our commercial sales per store at mid single digit rate versus last year's second quarter.

Although we are averaging fewer and you'll program openings as approximately 85% of our stores already have a program. The programs. We have opened continued to produce for US we averaged $9400 in weekly commercial sales per program. This past quarter up 5% over last year, we've grown our sales with mature come.

Drummers immature programs at substantially improved growth rate the last two years versus previous years, indicating our offerings products coverage customer service and ability to enhance the customers overall shopping experience, our improved and have been recognized and rewarded by <unk>.

Finally, our up and down the street business, otherwise known as 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 are autos owners confidence regarding the commercial business can.

10 used to increase and this will continue to have a very positive impact on the business. We believe there remains considerable growth opportunities for us in commercial as our customers are appreciating our new and enhanced offerings.

Regarding our domestic DIY business regionally, we did better out west with the northeast Midwest performing quite poorly versus last year.

As we reminded folks on last quarter's call. The second quarter is always our most volatile quarter from a sales perspective, both positively and negatively but overtime weather effects normalize as does our sales performance in regard to modeling for the upcoming quarters. We feel there are enough tailwinds within the business that we're planning for.

Our sales growth from here for the remainder of the year. We also expect that as our initiatives rollout across the chain for both DIY and DIFM. They will add to improved sales performance in regard to our technology investments, we've invested a great deal in both operating and capital expense to benefit our DIY and DIFM.

Businesses.

Recently, we rolled out our internally developed new Pos system to our stores. This new system leverage this new architecture and technologies that will expedite retail sales transactions by making the workflow more sustained and logical with touch stream touch screen capabilities and allowing us to.

To make future changes much quicker as we replaced some very old legacy code.

We've also done some important work behind the scenes that should help increase our agility by updating our store operating system and implementing a new human capital management system.

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

On last quarter's call. We highlighted that we were what we're seeing with tariffs. We noted that as a result of tariffs we expected to have a higher amount of inflation in our cost of goods on a SKU by SKU basis, then we had in the past.

In past years, it was common for us to have deflation that the cost level, but due to tariffs we began to see cost rise as the tariffs were introduced we began to pass those cost onto our customers through higher retail prices.

We were also successfully negotiating with certain vendors to share the calls from care tariffs. However, we did have to incur some price increases.

As certain tariffs are considerable in particular product lives, we intentionally pass those cost along at higher retails in charges as we absorb those costs do our weighted average cost accounting method.

At this point, we're not planning for any further tariffs on goods imported from China and in fact, we're trying to get tariffs reduced by applying for relief through the U.S. customs office today tariffs and their impact on our cost and retail have been manageable.

As we begin to lap the tariff cost and commensurate retail in creases, we implemented last year, we've been ask about the impact. This will have on same store sales, while we do not expect to incur the same like for like skew inflation as in the past year. We don't believe that tariffs were a material net benefit over the the.

Last year, nor do we think there will be a significant headwind for the next 12 months.

At this point I'd like to talk about any disruption we might be seeing from the ongoing corona virus epidemic.

Well, we have not incurred disruption, thus far we must and are being diligent we have created a contingency plan for each merchandise category sourced from China.

Our teams have done a wonderful job planning for potential scenarios at this point, we have nothing substantial to report, but the longer this outbreak less the more it will impact ourselves and both our and the overall retail industry.

Is currently a very fluid situation as many of the factories have just begun to reopen after an extended Chinese lunar new year holiday summer coming back online quickly, while others quite slowly and certain other then haven't come back online yet the next few weeks, we'll be Chris.

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Turning to our omni channel 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 web sites Autozone Dot com autos Onpro mobile out there are less parts and all data, we continue to see growth and website.

Traffic and rapid growth in ship to home next day delivery and buy online pickup in store sales, but omni channel still represents a very small percentage of our business substantially below 5%.

We continue to see bound line and pick up in stores is our largest omni channel business with this mix of omni channel total sales at over 40% and higher than last year.

BOPUS model continues to grow faster than our ship to home business highlighting the importance of our high touch operating model, where customers plays a high value on the trustworthy advice, our autos owners delivered 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.

We continue to identify and remove all redundant or non customer facing activities for our store autos owners by removing or streamlining. These tasks. We know we can improve our service levels of customer service.

This will continue to be a major focus for us for the balance of the year.

Along with improving local parts availability in 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 provide strong returns for our shareholders in summary, while we were not pleased with our top.

One performance, we were pleased with our operating performance and remain encouraged with our industry strength in both the Iowa and DIFM and our prospects for the remainder of the fiscal year, we believe macro factors such as relatively low gas prices, increasing miles driven remain largely in our favor we remain committed to grow.

And our market share in both DIY and commercial.

Let me provide more detail and what we've accomplished during the quarter.

For the quarter, we opened 25, new stores in the United States and our commercial business opened 25 net new programs currently 85% of our domestic stores on 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 one in Brazil.

We should once again highlight another strong performance in return on invested capital as we were able to finish our second quarter at 35.3%. We continue to be pleased with this metric as it is one of the best then all of Hardlines retailing. However, our primary focus has been and continues to be that we ensure every incremental dollar.

Our capital that we deploy in this business provides an acceptable returns well in excess of our cost of capital.

It is important to reinforce that we will always maintain our diligence regarding capital stewardship as the capital we invest is our investors capital.

Before I pass a discussion over to Bill Giles talk about our financial results I'd like to again, thank our autos owners for their efforts to deliver great service to our customers and solid financial results for the second fiscal quarter of 2020.

Now I'll turn it over to Bill Giles Bill. Thanks, Bill Good morning, everyone to start this morning, let me take a few minutes to talk more specifically about our domestic retail commercial and international results for the quarter total auto parts sales, which includes our domestic Mexico, and Brazil stores increased 2.6%.

For the trailing four quarters ended total sales per Autozone store were $1.867 million, which is up from an average of $1.800 million at Q2 ending last year.

Total commercial sales increased 8.2% in the quarter commercial represented 23% of our total sales and grew approximately $42 million over last year's Q2.

Our average weekly sales per program or $9400 up 5% on a per program basis.

Versus $9000 per week last year.

As Bill mentioned earlier, we expect our sales per program growth to do better in Q3, then this past quarter as we began our summer selling season.

We now have our commercial program and 4942 stores or 85% of our domestic stores, 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 continued to perform well we opened two new stores during the second quarter ending the quarter with 608 stores, we remain committed to open stores for many years to calm.

Regarding Brazil, we now operate 38 stores our performance continues to improve and we remain optimistic about the long term future of this market. This market has the potential to be much larger than Mexico, so while challenging and currently a drag on earnings the potential size is the market is significant.

Gross margin for the quarter was 54.3% of sales up 20 basis points versus last year's second quarter. The increase in gross margin was primarily driven by supply chain leverage.

While our accelerated pace of commercial growth has weighed on our overall gross margin, we continued to see opportunities to lower our cost through sourcing I do want to stress, we remain committed to taking cost out of our business where appropriate I.

Our primary focus has always been growing absolute gross profit dollars in our total auto parts segment and we have im pleased with our growth driven by the acceleration we have experienced in commercial.

As DNA for the quarter was 38.1% of sales.

Deleveraging 37 basis points to last year's second quarter.

This was lower than our first quarters deleverage of 65 basis points back our as DNA grew 3.6% over last year second quarter as we lap salary increases initiated in last year's first quarter and as our sales were challenged our team aggressively manage costs and we returned to a more hard historically run rate.

SG enable remains something we managed in accordance with sales volumes as sales pick up we would expect to see spend rate to increase.

The deleverage for this quarter was primarily driven by our planned and ongoing domestic store payroll investments, which negatively impacted operating expenses.

EBIT for the quarter was $407.9 million, our EBIT margin was 16.2%.

Interest expense for the quarter was $44.3 million up 7.2% from Q2, a year ago, but in line with our expectations. We are planning interest at $44.7 million for the third quarter fiscal Twoq 2020 versus 43.2 million last year.

Our higher forecast than last year has driven mainly by the associated with the bond issuance. We had an April of 2019.

Debt outstanding at the end of the quarter was $5.451 billion or $340 million above last year's Q2, ending balance of $5.111 billion.

Our adjusted debt level metric finished the quarter at 2.6 times EBITDAR, while at 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 allocation strategy and share recur.

Just as are an important element of that strategy.

For the quarter, our tax rate, the 17.7% versus 17.8% in last year's second quarter. This quarter's rate benefited 412 basis points from stock options exercised while last year at benefited 389 basis points stock option exercises aren't predictable and as such they will affect our tax rate.

Ultimately our net income any P S.

For the third quarter, if that's why 2020, we suggest investors model us at approximately 23% before any assumption on credits due to stock option exercises.

Because we cannot effectively predicts this activity we remain committed to reporting the stock option impact on the tax rate.

Net income for the quarter was $299.2 million up 1.6% versus last year's second quarter, our diluted share count of 24.2 million was down 5.8% from last year second quarter. The combination of these factors drove earnings per share for the quarter to $12.39 up 7.8 per.

Sent over the prior year second quarter.

Relating to the cash flow statement for the second quarter, we generated $205 million, an operating cash flow.

Fixed assets were up 4.8% versus last year capital expenditures for the quarter totaled $89.2 million in reflected the additional expenditures required to open 28, net new stores. This quarter capital expenditures on existing stores have been Mega hub Remodels are openings work on development.

New stores for upcoming quarters, and information technology investments with the new stores opened we finished this past quarter with 5814 stores in the U.S. 608 stores in Mexico, and 38 in Brazil for total store count of 6461.

Depreciation totaled $90.7 million for the quarter versus last year's second quarter expense of $83.8 million. This is generally inline with our recent quarter growth rates, we repurchased $315 million with autism stock in the quarter versus $350 million last year at quarter end, we had nine.

$862 million remaining under our share buyback authorization and our leverage metric was 2.6 times again I want to stress, we managed to 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 7% over the same period last year, driven by new stores and increased product placement inventory per location was $713000 versus 690000 last year and 694000 last quarter.

Net inventory defined as merchandise inventories less accounts payable.

On a per location basis was a negative $41000 versus a negative $58000 last year and the negative $71000 last quarter. As a result accounts payable as a percent of gross inventory finished the quarter at a 105.7% versus last year's Q2 of 108.5%.

Finally, as Bill previously mentioned our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters up 35.3%.

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

Thank you Bill.

Clearly our sales performance in Q2 was disappointing we didnt achieve our plans nor our aspirations. We always know Q2, our shortest lowest sales season will be volatile and this year due to a very mild winter our performance suffered and sub Burton mightily.

Specific weather sensitive categories and in particular markets as we analyze our performance in great detail. We are confident that the key driver this quarter was weather.

As we cannot influence the weather and as we know weather impacts normalized overtime. Our goal is to ensure we understand the drivers of our business and then move on and focus on what we can control.

Most of our senior team has been in this business and with this company for decades and.

And we have seen this in the past and are focused on delivering optimal performance in the short term in light of the sales environment, but our real focus isn't on any single quarters, but building our business for the long term.

We all have seen enough the cycles to know them when we see them.

As we have recited internally, we work brilliant in the first quarter and lost our touch in the second.

This too shall pass.

With half fiscal 2020 behind US we believe we continue to be very well positioned to grow sales and earnings for the remainder of the year.

Many are now looking at previous mild winters and trying to extrapolate them to the balance of the year as our week.

But they're always other key factors that impact our industry's performance what does the timing of tax refunds, what's going to happen with severe weather patterns, where are we with the aging of the car park and sweet spots and on and on and on.

And then we believe our sales will strengthen from here and our focus remains on managing this business to the optimum profitability based on the current industry sales environment, which will run through normal marginal cycles from time to time.

Our team did just that in the second quarter.

As we look to the balance of the year, we commit that we will manage this business well and we will manage it for the long term.

Business model is amazingly consistent we generate a healthy amount of cash flow each and every year and this year will be no different each year, we target to generate as much or more operating cash flow as the year before and this year. We have the same target. Let me reiterate we believe we were in good shape for them.

Back half of the year.

For the new year, we must continue to execute consistently at a high level, we understand we must adhere to living the plays and doing what is right for our customers. We cannot take our eye off of execution success will be achieved with attention to detail and exceptional execution for the remainder of the year, we have a lot of.

Deliverables from our IP initiatives, and we will focus 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 for both of the Iwear and the professional customer.

We remain focused on growing our DIY business and continuing to grow our commercial business well in excess of industry growth rates, we promise to remain committed to both at executing our strategies and getting better every single day.

I'd like to take this opportunity to again recognize and thank our team of talented dedicated passionate autozoners for what they do each and every day for our customers, which expands opportunities for Autozone allows us to support the communities, we serve and ultimately rewards our shareholders now we'd like to open up the call for questions.

Yes.

Thank you we will now begin a question answer session for today's conference all participants if you'd like to ask a question. Please press star followed by the number one on your phone.

Your phone and recorded in England.

Your earnings acquired teach it easier question to cancel your class.

Our first questions from Michael Lasser from.

Your line is now open.

Good morning. This is my Sweeney on for Michael Lasser, Thanks, a lot for taking my questions.

Good morning, Good morning, I know youre expecting stands to accelerate or the remainder of the year, but can you provide some color on quarter to date trends how much of sales.

Improved compared to the minus 6% that you're witnessing the final two weeks of the quarter.

Yes. Thank you took into improvement yes sure I. Appreciate the question we have a longstanding practice we release our earnings.

Usually within two weeks on a couple of days at the end of the quarter and we have a longstanding practice to not talk about such a short period of time as we evidence with the last two weeks of the quarter our business can be incredibly volatile over short periods of time, we don't want anybody to try to extrapolate that good or bad for a 12 week quarter. So.

We have a longstanding practice to not talk about what we do say is.

The second quarter, certainly more volatile.

In the third quarter as we are entering the third quarter, we anticipate tax refunds calming as I'm sure. Most of you have noticed there was a significant amount of tax refunds $67 billion that were issued last Wednesday.

That appears to be generally on track with where we were last year and we're excited to enter this very important selling season for us.

Thank you that's helpful. And then just squeak one on the calendar shift a drag when should we really expect is tracked arson become a benefit that kind of being heard all the fourth quarter. This year. Yeah. It's again one of those things, it's very hard to tell as we talked about what happened with the ended the quarter that could have Q2 could have been a net positive oren.

The net negative in the end there was a net negative because of the way the weather hit at the very end of the season.

We anticipate we will get what's happened in the first half of your back on the second but it's going to depend somewhat on what happens around the beginning of the quarter in the ending of quarters.

Okay.

Our next questions from senior investment from Morgan Stanley. Your line is now thanks.

Good morning, everyone.

I wanted to ask you Bill first on the I guess the timing of bounced back I know you don't comment to your last answer I.

I guess the question is it do we have to wait for weather or do you is that what we have to wait for whether to normalize or no. It's not about whether at this point, it's about tax refunds.

And just the timing of the calendar to see the business normalize yeah, I think you're right I mean, I think it's the latter as we begin to move into the spring season, what dominates our performance is no longer extreme weather patterns in the wintertime at a lot of people want to look at what's happening with average temperatures, which is an indicator but right.

Really matters to us in the wintertime is when we get extreme cold.

For an extended period of time, three four or five days that puts a lot of pressure on failure parts of the other part that really matters to us is what's happening with road conditions, if we get a lot of snow and ice and freezing temperatures that puts the road conditions in pretty bad shape, which puts more pressure on undercar brake systems.

One of the things as we entered this period of time, it's more about the maintenance categories.

And I mentioned in my prepared remarks that a lot of Toms everybody wants to compare to what happened in the last three or four mild winters and that's absolutely right and we're doing the same thing, but there's other things that are that are happening in the environment.

One of the things that happened in some of the previous mild winters is we had a significant amount of our maintenance businesses that were pulled forward into Q2.

You found not only was it not extreme cold temperatures, but you had some very nice weekend weathered and people did the why jobs. So we did not see that in Q2. So we're anticipating as these tax refunds flow as the weather improves that we should have more robust maintenance performance.

Great. My follow up is on the commercial strategy you've had excuse me great momentum can you talk about beginning that the Mega hub strategy is in and then any incremental inventory investments you plan to make this year.

Yeah, great questions. So we've now opened 39 Mega hubs, we've stated externally that we want to get to 70 to 90.

We are very aggressively pursuing those at this point I'm very pleased with the continued performance of our Mega hubs and think that they are a key contributor to commercial there also a contributor to.

Retail, but very pleased with that progress.

And I would say where capital in the fourth or fifth ending I would say on the Mega hubs and a and we'll continue to roll out on the hub strategy as well and to Bill's point, we've been very pleased with the performance of both the Mega hubs in the hubs, but in particular, the mega hubs, both on D. iwai and on the commercial side of the business now at the same time that does create a little bit more inventory in the.

System, as we get more inventory out closer to the customer.

But we believe long term this winning strategy.

Okay. Thanks, Good luck the rest of the a year.

Thank you.

Our next questions from Seth Sigman from credit Suisse Your lines now.

Hi, guys. Good morning, just wanted to follow up on a couple of those points versus on the commercial side of the business. So it sounds like the slowdown is really weather related and you're planning for trends to Reaccelerate is there anything that you see that would suggest that you can't get back to double digit growth in the commercial business in the next quarter or so.

I would say now I think that if we look back over the quarter and see our performance some of that impacted by weather certainly geographically as we've talked about on the DIY business with similar on the commercial side of the business as well so some of those more cold weather geographies underperformed considerably during the quarter.

We believe fairly confidently that we will get back to a more normalized double digit growth rate.

As we head into Q3, so fundamentally we don't believe that we see anything different in the business I think adding a little bit to that too. We also we've talked about in our prepared remarks are up and down the street business continues to perform very very well, we did see more challenges with our more national account business as many of which are car.

Absent traded in the northeast and Midwest, So what we're encouraged by that as well.

Okay. Thanks for that and then obviously in the quarter the margin trends were quite healthy. Despite the sales shortfall. Your prior commentary had suggested an acceleration and operating profit growth as you move through this year.

I guess getting back to at least low single digit EBIT growth is that still a fair way to think about it anymore parameters around that would be helpful. Thank you.

Yeah, I think in the first of all I think the organization did a great job of managing their way through a difficult quarter of being able to control SGN, a leverage gross margin and be able to drive EBIT growth of around 2% and I believe last quarter, We said that we would expect to.

Grow EBIT on a positive basis, and yes, we do expect to get to that low single digit.

Mid single digit kind of growth rate on a long term basis.

Okay. Thank you.

Our next questions from Bret Jordan from Jefferies. Your line is now open.

Morning, guys.

Good morning.

In your prepared remarks, you talked about market share gains.

Talk maybe DIY versus.

Commercial and I guess, what regionally you did outperform in any particular market more than another.

Yeah, Brett right Great question, I should clarify that in the prepared remarks, we don't have good visibility to market share gains and commercial so generally we're growing commercial at 8% in the markets growing by four we're pretty confident we're gaining share by specific comments about growing share slightly our come up from a few different indications that we.

We have on the D a wide side of the business.

Okay, Great and then I guess a question on inflation I think bill Giles was talking about or maybe as you build roads about not immaterial net benefit for the year and I guess the supplier Association a lot of appears have been talking about you know 2% to 3% inflation seen in the last 12 months is it just you haven't elected to pass.

Through the costs you have seen come out of China, or I guess is there something different about you're addressing inflation versus theirs.

I can't speak for there's we have certainly seen skew over skew year over year inflation and the bigger change isn't that we've seen major inflation, that's generally that we've seen deflation.

You think about it our parts come into the lifecycle and they're very short runs until the cost are more expensive as the part become goes through the bell curve and becomes much more much higher volumes our costs go down and therefore, we have significant deflation as shown in our LIFO major LIFO reserve that we've had for.

Forever.

And the last 18 months or so we have seen some inflation.

We have been very careful about managing that inflation and as we said in our prepared remarks, if we had a 25% tariff we didnt go out raise our price, 25%, we went out and work that in tranches. So that we didnt shots the customer.

Over time, we think we've done a pretty good job of rolling those price increases in we've also worked with several of our.

Partners on not pushing the full amount to the up to the customer there's been some changes in the RMB currency and we've taken advantage of that so we've been very I think judicious about it.

We don't think we saw a big net benefit as costs go up there is some.

Tapering down of demand, we don't think we saw a major significant net benefit and therefore, we don't think we'll see a major significant net deficit.

Great. Thank you.

Thank you.

Our next questions from.

Gosh I'm from Wedbush Securities. Your line is now open.

Thanks, a lot and good morning, and my first question is just around the calendar shifts we've seen two quarters of negative impact from the calendar shift.

When do you expect to get that back is that more than third quarter fiscal fourth quarter event.

Yeah as Bill said, we'll have to wait and see to see how the performance is at the end of each of those quarters. Our anticipation is it's likely more back end loaded.

In the second half of the year.

Fair enough and then secondly, as it relates to your gross margins you say supply chain leverage as your primary driver improvement here does that include lower costs, you're getting from sourcing or are you specifically talking about savings within.

Supply chain and distribution.

That was pretty much the savings is inspiring and distribution on a year over year basis, we are continuing to try to lower our acquisition cost and believe that overall, our margin remains relatively healthy but for the specific quarter.

We were able to leverage on supply chain just by Lawrence some costs during the quarter.

And the follow up there as we think about the impacts of tariff driven installation.

And to your business over the last year. It means through inventory balances in your gross margins in the last quarters, you've been getting a benefit from that and would you expect headwind going forward into the back half of the calendar year.

I think as some of the tariff costs are going to continue to work their way through the average cost of the inventory and as Bill said I think the merchandising organization has done a nice job of being able to feather in the increases to commensurate with the cost increases that we are experiencing and our expectation is that we will continue to do that it may be some.

Crusher going forward, but our expectation is that we'll be able to manage our way through that.

Great. Thank you very much.

Our next question is from Michael Montani from Evercore ISI. Your line is now open.

Michael Montani.

And maybe a mute.

Hello can you hear me.

Yes, okay.

Okay, great sorry about that just wanted to follow up on the installation front from it and if I could and see what kind of an impact did you see to same store sales from inflation in particular for this quarter and then unrelated note you know what kind of success. If you had at this point in getting rebate checks from carefully to exemptions.

Yeah, just to kind of go backwards first and we're in that process I think bill called it out in the prepared remarks that weve.

Gone through and made applications for some rebates relative to tariffs and we've had some success that we have more things in the park. So we'll see how that as we don't think going to be material by the way, but we didn't will be certainly help overall I think on that on the inflation side of it and as we said you know we probably have inflation of two plus percent on a year over year basis from a skew.

To skew basis, but at the same time, it's very difficult to measure out but the demand impact is some of the prices of raised a little bit. So I think that's where we would say that we haven't seen immaterial impact overall from the inflation relative to comp store sales.

Because it is kind of a blended number with the demand as well.

Okay. Thanks, Dennis I could just follow up from one housekeeping thing was the Capex in DNA outlook for this year. So the full year and then secondly, any initiatives that you all may have in the pipeline.

On the productivity front that could help offset some of those wage increases whether that be automation in the dcs or potential outsourcing et cetera.

Yeah from a capex perspective.

I think our expectation is around $600 million of Capex for the year and I believe depreciation is around that 350.

Million dollar number.

I would say overall from a capex investment perspective, obviously first and foremost are invested in our stores or investing in the maintenance of our stores to continue to ensure that they look great.

We're investing in hubs and Mega hubs, along the way. We're also have a bit a sizable investment in technology as well.

We continue to invest in technology, both to enhance our existing systems as well as to add new functionality in order to improve our customer experience both on the DIY and the commercial side of the businesses both.

So those are the major projects that we kind of continue to work on.

Okay, Thanks, and just a productivity side.

Yeah on the productivity, we're always working on different productivity initiatives, but if you're talking about a week changing the way we go to market in our supply chain by implementing a tremendous amount of new automation or those kind of thing at this point, we're not we're constantly looking out the calculations of where the are ours makes sense as wage pressure goes up it changes the economics and will.

Continue to look at it but we don't have anything to talk about significantly currently.

Okay. Thank you.

Our next question from.

Greetings from Wells Fargo. Your line is open.

Hey, guys first question on Corona virus, you touched on supply chain curious if you have any thoughts on the potential impact to miles driven and how that could impact your business.

It's a very interesting question.

You know as as you would expect over the last month or so we have been very focused on the supply chain aspects of Corona virus add in the last week or two more and more focused on what's happening here in the United States, and ultimately Mexico and Brazil.

We see no indications at this point in time of any demand destruction as a result, the corona virus, but just like we said, but the supply chain is an incredibly incredibly fluid situation I think the next couple of weeks, two a month or going to be critical to see what what actually happens.

We don't we don't have good insights into that.

Got it and then just bigger picture on the car Park curious if you could speak to where you think where at in terms of the sweet spot. How long do you believe that current tailwind can last and whether it's more of a benefit to your DIY. Why are you are commercial business. Thanks.

A lot back into that question, Yeah, we haven't been a big on talking about the ramifications of the car park over the last 12 years. We all know that there was a significant divot in new car sales in 2000.

And that as those cars came into the quote unquote sweet spot there was a headwind for awhile and now it looks like it's turned into a tailwind I think it's on the margin in both instances what we like to see is steady state new vehicles coming on the road 16 17 million. This graph a drake doesn't.

Appear to change much at all.

And therefore, we just have a steady state a new car I don't think Theres anything in the next two or three or four years, that's going to be radically different than what we've seen in the past.

Got it appreciate the time Bill Yeah. Thank you have good day.

Our next question from grew right.

Daniel Embryos from Stephens, Inc. Your line is now open.

Hey, guys. This is Andrew on for Daniel I.

I just got a quick question here I was wondering your commentary.

The second half what can do this confidence and how could you weigh that between company specific initiatives and.

Yeah terrific question I think what gives us the confidences that we've been here before.

As I mentioned in our prepared remarks, most of our management team has been here for decades, we see times of strength, we've seen times of softness we certainly saw softness in the second quarter as we're looking at the second half a year.

We have concerns and we also have things were very positive about on the concern side I've mentioned earlier that the the roads, particularly in the Midwest and the northeast haven't had the kind of a difficult conditions that put stress on brake systems in undercar systems, that's likely to be a bit of a headwind.

As we go through the second half of the year that said unlike some other previous winters. We didn't see this significant pull forward of demand in those exact categories, which are heavily maintenance categories.

So we're looking at where we are we absolutely are disappointed with the second quarter, but we don't see any thing.

That changed as a result of the second quarter other than those road conditions and therefore, we've made zero changes in our plans for the second half of the year again to US. We're disappointed we hate a bad quarter, but we're not managing this business for quarter to quarter. We're managing this business for long terms.

And that's the approach we're going to continue to take and we're very optimistic that just like we've been very successful over the last decades, we're going to continue to be successful as we look forward.

Right.

Good.

Alright, thank you.

<unk>.

Showing no further questions in queue I'd like to turn the call over back to this.

Sure Bill Rhodes for final comments you May proceed.

Great. Thank you before we conclude the call I just like to take a moment to reiterate that we believe our business model continues to be solid 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 not a sprint as we continue to focus on the basics and focused on optimizing long term shareholder value. We are confident autozone will continue to be successful. Thank you for participating today's call and have a great day.

That concludes today's conference. Thank you all for your participation you may now disconnect.