Q3 2020 Earnings Call
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This conference call will discuss <unk> earnings release.
The company's chairman President and CEO short presentation.
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I'd now like turn the call Gonna Mr. Bill Rhodes.
Good morning, and thank you for joining us today for all those owns 2023rd quarter Conference call with me today or Bill Giles Executive Vice President and Chief Financial Officer, and Brian Campbell, Vice President Treasurer Investor Relations in Texas regarding the third 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 with slides complementing our comments today are available on our website www dot Autozone dot com under the Investor Relations Lee.
Please click on a quarterly earnings conference calls to see them.
Since our last earnings release, the World has changed significantly and so as our business.
During our last call on March 3rd we were focused on covert 19, but most of my supply chain disruptions perspective.
Typically thereafter leap unprecedented ramifications of the pandemic and its disruption on lives across the globe became a reality.
As we have navigated these remarkable times, our first priority has been and we'll continue to be the health safety and well being of our customers and all those owners.
This quarter was the most remarkable quarter I've ever experienced.
In light of that this will be a different more detailed update on our business.
Our business is typically pretty predictable.
I've said many times, our sales fluctuate in a very tight band.
But currently that has not been true.
We are sure. What lies ahead, so we're going to share a lower level of granularity. This quarter. So you have a deeper understanding of the fluctuations and drivers or potential drivers.
I know as we move into the queuing, Dave you want us to help you quote model our sales performance for Q4.
Frankly, we're having a very difficult time forecasting our business week to week much less for the next quarter.
And who knows what is in front of us This summer.
Well the cases decline and some side.
Well they escalate as we begin to reopen the economy will the government provide additional stimulus.
We will enhance style employment benefits help our business.
Well all of our commercial customer survive.
We have too many unknowns and our focus is on making sure in the short term.
We provide our autos owners with the resources they need to provide our customers what they exceptional experience.
As for the long term to date, we don't see anything that substantially changes are bullish view on our industry well, we must continue to monitor consumer shifts in behavior.
And if the economy enters a deep and protracted recessionary environment.
We believe our customers will focus more on maintaining their current vehicles and it will benefit our business retail in particular as it has in the last three recession's.
As a reminder, our strongest periods of outside sales growth over the last three decades had been the early nineties.
Oh, one O to O nine to 10 and 11.
All coming out of recessionary periods.
Well, we always began these calls by thanking our autos others, what our team has done as an essential retailer and remaining open throughout the crisis to serve the motoring public has been nothing short of phenomenal.
I applaud our entire team.
Many who have had to quickly pivot to new ways of working but I, especially want to call out recognize and show deep appreciation for our store autos owners and our distribution Center Autozoners.
These remarkable people have done a tremendous job throughout this time.
I have made several large changes in how we operate and have done it quickly with tremendous passion and of course with excellence.
Simply can't thank them enough for what they have done for our customers and our company.
Now, let's move into our performance for the quarter. Our same store sales were down 1% versus last year's third quarter. Net income was 343 million in our NPS was $14.39 a share 10% below last year.
Regarding our sales performance.
The core can best be described in three time periods, each basically four weeks long.
Recall that we had a very mild winter and a disappointing sales performance in our <unk> fiscal second quarter.
We shared that we were optimistic about the balance of the year and in particular, the third quarter. As we felt there was pent up demand and unlike other mild winters. Many of the maintenance categories had not been pulled forward and tax refunds were beginning on time and at normal levels.
The first four weeks our sales as expected were quite strong with same store sales up over 6%.
Both retail and commercial are performing quite well with commercial sales growth returning comfortably double digits.
And then for the second four weeks the world change radically literally over night.
Our sales performance immediately decline materially dropping to a one week low of comps down more than 25%.
We began asking ourselves questions, we never fathom to before.
Do we had the liquidity necessary to weather the storm.
Well, we have issues with our debt covenants.
Well, we need to furlough autos owners are reduced compensation.
Quickly and significantly can we stopped capital expenditures and expenses.
We immediately acted to shore up any liquidity concerns we temporarily suspended our share repurchase program.
Then we issued $1.25 billion a bonds on Wednesday March Thirtyth.
We also closed on an additional 364 day 750 million line of credit.
This additional lot of credit was on top of the Unutilized $2 billion a lot of credit already in place.
We were running very pessimistic scenarios and preparing for what we thought could be the worst.
Our team did a tremendous job enhancing our financial position in a chaotic environment in very short order a testament to the team and also to the strong financial position and long term performance of the company.
Simultaneously I'm extremely proud to say that we acted swiftly in support of all of our field autos owners.
Immediately we instituted reduce store hours of operation across the U.S. store base.
It's allowed our stores to enhance our cleaning protocols and allow our autozoners time off in the evening decompress after a very stressful day.
As an essential business, we were determined to be ready to safely service our customers the motoring public each day.
Dismissed taking care of are all those owners as well.
Very early in the crisis, we announced that all eligible hourly full and part time autos owners across the U.S. would receive emergency time off benefits and it wouldn't be available immediately.
We didn't wait to see what others were doing.
Or weighed on any mandates by governments, we felt it was imperative to act swiftly in support of our Autozoners on the front lines.
We provided them with two additional weeks of time off including for the first time in our history, providing part timers with paid time off up to 40 hours.
This additional time off can be used as the autos owner desires.
If they don't use it between now and the calendar year end, we will pay them for those hours in January.
We did this to provide our autos owners with choices.
Somewhere in the more vulnerable populations and work comfortable coming to work.
Others that child care issues.
Others were just anxious while the vast majority were comfortable coming to work.
And providing great service to our customers.
This decision, which was made in a couple of days was aligned with our values and I was honored that our team and our board of directors lived up to the powerful culture, we often a spouse. During this crisis and you know a prices and is when real leaders.
Okay.
This alone was an incremental expense in the third quarter of 65 million.
And combined with other directly related Cobot 19 expenses are SGN day was negatively impacted by about $75 million in the quarter.
In addition to this past quarter's investments in our autos owners, we plan to provide certain other autos owners that were not eligible for the first emergency time off benefit with similar benefits during the fourth quarter.
We are honored to recognize those autos owners, helping our customers every day on the front lives and to say thank you for their efforts.
Based on what we know today, we expect to incur approximately $25 million in additional covert 19 related expenses in the fourth quarter, including this recognition.
Our business retail in particular was beginning to rebound at the end of the second four weeks.
Then at the beginning of the third four week period federal stimulus checks began to arrive and flow through the U.S. economy.
We experienced a significant change in trend moving from negative double digit comps to a significantly positive comps almost immediately.
To put this in perspective.
In two days from a Monday Tuesday Wednesday.
Our retail sales increased by roughly 50% five zero percent in two days.
And we continue to experience extremely robust sales performance through the ended the quarter.
Throughout this crisis, our DIY business has been substantially stronger than DIFM.
Retail began rebounding sooner and reacted stronger than commercial when the stimulus money arrived.
At the end of the quarter, our commercial business turned positive again, but had not yet returned to double digit growth like before the crisis.
Specifically for the quarter, our overall same store sales for each of the four weeks periods were up over 6%.
Then down more than 20%.
Then up in the low teens, ending the quarter down 1%.
Given the extreme volatility in the quarter as I, just outlined and as I've said in the opening it is impossible to know what our future sales trends will be.
Unfortunately, we're forced to manage the business literally from week to week and our field organization has done an outstanding job measuring our managing these extremes, we expect that our sales growth will moderate as the stimulus money works its way through the economy.
But at the same time the nation is re opening.
What will that due to our business, we simply aren't sure.
What we are sure about is our team has been incredibly nimble bad reacted quickly to every single change.
We are no longer assuming there are no other significant shocks to the system asking ourselves some of those very difficult questions. Instead, we're focused on providing our team with the report resources and support they need to live up to our pledge and our autos owners have definitely been and content.
To put our customers first.
Regarding geographies our performance wasn't much worse than some of the most affected areas specifically the northeast mid Atlantic.
And also some of our stores in Puerto Rico in Brazil were down considerably as we were forced to close end or operate under extreme restrictions.
Certain markets rebounded pretty quickly like the Pacific northwest, while others like New York.
As you would expect has been slower to recover.
Our best performing areas have generally been in the middle of the country.
There have been very interesting trends and some of our merchandise categories, specifically in the retail business.
[noise] certain categories have been quite challenged like wipers enlighten as people have stayed home more and have not been is active at night or during periods of inclement weather.
Other categories had been strong, particularly post stimulus.
After a very mild winter our battery sales have been strong, especially as people park their cars for extended periods, after which the batteries fail or our discharged.
We've also seen some surprisingly strong categories that I'll call project categories. These are categories for hobbyist or people, who want to upgrade something.
People are more time on their hands. So they're working on their project car doing that enhancement job they've been constantly putting off before.
Now before moving beyond our sales trends, there's been some significant dialogue regarding short term impact of miles driven on our business.
We had touted miles driven as a key macro factor that impacts our industry's performance for decades.
However, there had been times when the correlation with miles driven and our industry sales performance do not have a strong correlation.
Like during the great recession.
We believe that during select generally shorter periods of time other factors like new car sales unemployment and the like are more important and miles driven is less important.
Now, let's turn our focus to the balance of the piano for the quarter. Our gross margin was up two basis points, along with past storylines around tariffs supply chain and mix between DIY and DIFM sales, we've been a very steady performer in regard to gross margin.
Operating expenses, our team, particularly our store operations and commercial teams did a remarkable job of managing our expenses during the massive volatility I noted earlier.
Imagine.
Trying to manage payroll in line with sales when you have a 50% change in sales in two days.
Yes on the surface, we had material de leverage but the majority of that de leverage was associated with our decision to provide enhanced benefits for our hourly autos owners in the form of emergency time, all costing us approximately $65 million in the quarter.
Well, a very significant and expensive decision.
As I've visited stores and talk to our team. This decision strengthen our already unique and powerful culture and showed that this organization walks the wall.
I believe there will be long lasting benefits from this decision.
Additionally, we had other directly related cobot expenses of approximately $10 million. Excluding these unique charges. Our overall operating expenses were below the prior years quarter.
Regarding our balance sheet, our debt came down a bit in our cash was up.
Both were purposeful as we were mindful of cash conservation. We also felt we managed our inventory well as our inventory per store growth declined 0.5% versus Q3 last year. We feel we have strong liquidity heading into our summer season and can handle many of the future unknowns.
As I mentioned previously we temporarily paused our stock buyback program.
It was certainly the right decision at the time as there was too much uncertainty in the business and in the world.
Our share repurchase program has been a very important part of our capital allocation strategy and it will continue to be.
We haven't restarted repurchases, yet, but as we gain better visibility to our business trajectory, we intend to continue to leverage our free cash flow after a robust investments in our business to reduce share count.
Our current thinking is to continue to operate at reasonably similar credit metrics to the past while expense excluding the extraordinary unique covert 19 expenses, we discussed above.
Our last quarters conference call, we discussed impacts from the supply chain and goods, we receive from China in particular today, we're in good shape and have no significant disruptions to report.
While we created contingency plans for each merchandise categories sourced from China, We ultimately did not have to implement them.
Unfortunately, the covert stories shifted to become more of a U.S. centric story and away from the supply chain disruptions.
That said that portion of this pandemic and the tariffs have made us think differently about supplier diversity, we need to also consider country diversity as well going forward.
There will be certain of our plans that are disruptive as a result of the crisis. Some known today, while others will emerge over time for instance, we paused art store development activities for about a month as we tried to get a better understanding on where this was headed.
We did this in the United States, Mexico and Brazil.
We have subsequently restarted development work in the municipalities that allow us to do so.
As a result, we will not meet our new store opening goals for the year.
We are pushing in an orderly fashion to get back to opening new stores as quickly as possible, but in this environment arbitrary goals in dates are not terribly important.
So look for us to opened less than 200 stores globally. This fiscal year.
I'll spend a quick moment out our omni channel efforts as cobot nineteens effects on customer's ability to get out and shop group.
We ramped up our strategy to enhance the customer shopping experience by meeting customers, when where and how they wanted to shop.
We initiated a curbside pickup option then amazingly short period of time. Additionally, we saw a very strong growth in our online shopping channels buy online pickup in store next day delivery and ship to home in particular, our buy online pickup in store offering grew rapidly at over doubled the broke.
Of our ship to home options I do want to remind listeners that omni channel or autozone still represents a very small percentage of the DIY business substantially below 5%.
Before I pass the discussion over to build jobs to talk about our financial results I'd like to again, thank our autos owners for their extraordinary efforts during these unprecedented times.
Can I, thank you enough.
Nor can the rest of the management team and I'm confident that I can speak on behalf of our shareholders too and say. Thank you autos owners you truly are essential and you are exceptional.
Now I'll turn the call over to Bill Giles.
Thanks, Bill and good morning, everyone to start this morning, let me take a few moments to talk more specifically about our domestic retail commercial and international results for the quarter talked a lot of hard sales, which includes our domestic Mexico and Brazil stores increased 0.3%.
For the trailing four quarters total sales for Autozone store were $1.856 million now. This compares to an average of $1.814 million at Q3 ending last year.
Total DIFM sales increased 6.7 decreased 6.7%.
In the quarter sales to our DIFM customers represented 21% of our total sales and decreased approximately $40 million from last year's Q3.
Our weekly sales per program were $9700 and they were down 9% on a per program basis versus $10700 per week last year.
As Bill mentioned earlier, our DIFM business wasn't materially impacted from the Covance impact.
More so than our DIY sales, while certainly one of our most challenged sales performances in many quarters, we would ask listeners to see through this quarter and ask us. If we believe we are in good shape for future market share increases in answer to that question is yes, we feel there may be a real opportunity for us to grow our business in the future.
With so many smaller single proprietary shops still operating across America, and having to be closed for an extended period of time rates unforeseen challenges for these shops. We continue to believe we can gain market share into the future.
We now have a commercial program in 4950 stores or 85% of domestic stores.
While we did not rollout as many programs this past quarter. It was due to our inability to market to customers, who felt at appropriate to maintain distancing from customer shops. While this past quarter is certainly unique we remain encouraged by the initiatives we have in place and feel we can further grow sales and market share.
Much like the impact cobot had on sales in the U.S. our stores in Mexico were also impacted in addition, the impacting sales weakness in the foreign currency exchange rate put a dash additional pressure on the business at the start of the quarter exchange was below 20 pesos to the dollar but.
Weakened throughout finishing 26% weaker at 24 pesos to the dollar.
During the quarter, we opened two new stores and finished with 610 stores, while the quarter was challenging we believe the negative impacts much like with the U.S. Our short term in nature, we remain committed to our store opening schedules in Mexico for the foreseeable future.
Regarding Brazil, we finished with 38 stores, we opened no new stores in the quarter similar to the U.S., Brazil face the same challenges with Pelleve and sickness and stay at home mandates.
Much like Mexico, we view the covenant back short term in nature for our Brazil stores as well our commitment to growing our Brazilian business has not wavered.
Gross margin for the quarter was 53.6% of sales up two basis points versus last year's third quarter.
Our primary focus Wilkinson continued to be growing absolute gross profit dollars in our total auto parts segment.
SGN eight for the quarter was 35.9% of sales deleveraging 201 basis points to last year's third quarter.
Our SGN a grew 5.8% over last year's third quarter as we discussed in our press release. This morning, we incurred approximately $65 million in charges related to offering emergency time off to eligible full and part time or autos honors and another $10 million, an additional direct cove and expenses.
Excluding these extraordinary charges operating expenses were below last year.
As we have demonstrated over time, our organization is very good at adapting to the environment. We are operating in.
As gene a will remain something we manage in accordance with sales volumes a sales pick up we would expect to spend rate increase.
Even for the quarter was 491.
Millions $700000, our EBIT margin was 17.7%.
Interest expense for the quarter was $47.5 million up 9.7% from Q3, a year ago and higher than our plan the higher expenses related to the $1.25 billion bond issuance and the 750 million dollar 364 day.
Credit facility, both completed this past quarter.
We are planning interesting $68 million for the fourth quarter of fiscal 2020 versus 61.2 million last year.
Our higher far forecast than last year is driven again by the cost associated with the new bond issuance and the 364 day credit facility.
Debt outstanding at the ended the quarter was 5.418 billion, our 266 million above last year's Q3, ending balance of 5.152 billion. Our adjusted debt level metric finished the quarter at 2.6 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 allocation strategy and share repurchases are an important element of that strategy.
For the core our tax rate was 22.8% versus 19.5% in last year's third quarter.
This quarter's rate benefited 26 basis points from stock options exercised while last year and benefited 259 basis points.
Stock option exercises aren't predictable and as such they will affect our tax rate and ultimately our net income in MPS.
For the fourth quarter at 520, 20, we suggest investors model us at approximately 23.7% before any assumptions on credits due to stock option exercises because we cannot effectively predict this activity we remain committed to reporting the stock option impact on the tax rate.
Net income for the fourth border was $343 million down 15.5% versus last year's third quarter, our diluted share count of 23.8 million was lower by 6.2% from last year's third quarter. The combination of these factors drove earnings per share for the quarter to 14.
There are some 39 cents down 10% over the prior years third quarter.
Relating to the cash flow statement for the third quarter, we generated $651 million of operating cash flow net fixed assets were up 1.4% versus last year capital expenditures for the quarter totaled 83.3 million and reflected the additional expenditures required to open 23 net new stores.
This quarter.
Capital expenditures on existing stores have been Mega hub Remodels are openings work on development of new stores for up upcoming quarters and information technology investments.
With the new stores opened we finished this past quarter with 5836 stores in the U.S. 610 stores in Mexico, and 38 in Brazil for a total store count of 6484.
Depreciation totaled $91.7 million for the quarter versus last year's third quarter expense of 84.9 million. This is generally in line with recent quarter growth rates, we repurchased $166 million Nevada's on stock in the quarter versus 466 million last year at quarter end, we had 790 so.
6 million remaining under our share buyback authorization and again, our leverage metric was 2.6 times again, when I stress, we managed to appropriate credit ratings and not anyone metric. The metric we report as men as a guide only as each rating agency has its own criteria.
As Bill mentioned earlier, we have temporarily suspended our share repurchase program as we continue to study future cash flow generation over.
Over time, however, we continue to view our share repurchase program is an integral to our capital allocation strategy remains and will remain a core tool to our earnings per share model.
Next I'd like to update you on our inventory levels in total the company's inventory increased 2.7% over the same period last year driven by the new stores, an increase product placement inventory per location was 685000 versus 688000 last year and 713000.
Last quarter.
Net inventory defined as merchandise inventories lost accounts payable on a per location basis was a negative 56000 versus negative 58000 last year and a negative 41000 last quarter.
As a result accounts payable as a percent of gross inventory finished the quarter at 108.2% versus last year's Q3 of 108.7%.
Finally, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 34%.
We have and will continue to make investments that we believe will generate returns it significantly exceed our cost of capital.
Now I'll turn it back to Bill Rhodes. Thank you Bill.
They certainly are unique and unprecedented times and they require a very different cadence of data gathering evaluation and decision making.
Extraordinarily proud of our team across the board for their commitment to servicing our customers the motoring public but doing so in a very safe manner.
While making so many significant decision. So quickly we know we won't get them all right and that's okay, but as long as we're making the best decisions with the right motivations and adjusting as we go we will continue to persevere.
We don't know what lies ahead of us for the next few months or even the next couple of years, but what I know is we have a very resilient business that has performed exceptionally well in a wide variety of economic environments and we have extraordinary people, we were committed to servicing our customers.
And helping them get to work go see their family drive to a close vacation spot or other personal priorities.
I wish we could provide you with more clarity on our expectations on business trends for the fourth quarter, but as I stated before there too many unknowns, but I want to be crystal clear.
Our expectations do not include sales remaining as robust as we experienced in the last few weeks of the third quarter. Our expectation is the stimulus money will work its way through the economy, rather quickly. Our best guide is I know tax refunds and typically those funds positively impact our business for about three weeks.
Frankly, our focus is it on what happened this quarter.
Yes are we keeping our autos owners and customers save today, while providing our customers with their automotive needs and more importantly, what can we do during this very difficult.
To position our company for even greater future success.
What really matters is how are we doing a year or two from now.
And I continue to be quite bullish on our industry and in particular on our company.
Now, we'd like it opened up the call for questions.
So let's now open for questions. If you like to ask a question. Please press star one and record your name and please limit yourself to one follow up question to withdraw your question Chris start to one moment for the first question.
First question is from sets from credits.
Hey, guys. Good morning, Thanks for taking the question in a nice job managing through the environment.
What do you can elaborate a little bit more on the commercial trends that you observed over the last four week period. It sounds like you've got back to positive just wondering would you categorize it as sort of a gradual improvement over that four week period tied in with miles driven improving M&A. It gets how are you thinking about that and if you could give us a sense on maybe.
How positive it got over that time period that would be helpful.
Sure I'm you know is very interesting on the commercial business. It took a pretty deep dive is down roughly 30% and it stayed there for three or four weeks then it began to rebound. If you look at those last four weeks. It was negative the first two and that it for positive second to ending.
Call. It mid single digits positive is also interesting I can't say, whether or not it was tied to miles driven it's certainly began rebounding as the merger as the retail business took off when we got the stimulus money in the economy.
But also a lot of customers, we saw a significant amount of customers that just stop purchasing from us altogether for some period of time, our assumption and we try to reach many of them as they closed at the beginning of this and as we got towards the latter part of the quarter, we saw that those non purchasing cost.
Mers had decreased.
Substantially if not completely so it looks like some of them closer shops, and when did whatever they needed to do stayed at home and then again reopening in our business picked up.
Okay. That's helpful and then ill pass the external factors. If you just think about how autozone is managing the commercial business with all the disruption in the volatility through the period do you feel like this strategy has been set back in any way are there any limitations just sort of getting back that commercial momentum that double digit growth that we've seen in prior periods.
I don't think it our strategy is impacted one bit by what's happened in retail or or commercial and any significant way at this point in time, no. We're going to have to understand at watch what happens with consumer behavior I don't think anybody really knows as the as the economies in the city's start reopening who knows what consumer behavior is going to look like.
So far what we're seeing is it looked a whole looks a whole lot like it did before the pandemic, but I'm sure consumers are going to adjust parts of their behavior and we'll have to adapt accordingly for that but on the commercial side of the business. The only thing that still holding US back is is we're not doing a lot of face to face sales calls yet we'll be doing that.
Hopefully before long but.
We're not out there have been able to tell our story like we were before.
Understood. Okay. Thanks best of luck.
Yes. Thank you.
Next question is from Michael Lasser, Yes. Your line is open.
Good morning, Thanks, a lot for taking my question.
Well I know you.
And then give it too much help with modeling the current quarter, but in light of your comment around the stimulus dollars potentially lasting.
Three weeks or so should we take that to assume that your current quarterly D train our meaningfully lower than what you experienced in that lab or are we.
Third quarter.
And your begged me Michael.
Yes, Ryan.
And I completely understand okay, we have a long history of not talking about what's going on intra quarter.
Because we release earnings within two and a half weeks of our quarter end. So I just don't want to be given two and a half week information and people trying to extrapolate that I wouldn't make the interpretation that our business has gone way down as since that point in time, but thats really all on a site.
Okay and on your comment around the business development.
Commercial growth.
In that maybe coming back more slowly than just the underlying growth should we assume that more than half for the call. It double digit call it 10% growth that the commercial.