Q4 2020 Autozone Inc Earnings Call
Good morning, and welcome to the autos and conference call. Your lines been placed on listen only until the question answer session of the conference. Please be advised today's call is being recorded if any objections. Please disconnect at this time.
The conference call will discuss all divisions fourth quarter earnings release, Bill Rhodes, The company's chairman President and CEO will be making a short presentation on the highlights of the quarter.
Friends coal and probably at 10 am Central time, 11 am Eastern time before Mr. Rhodes begins the company has has requested that you listen to the following statement regarding forward looking statements.
Certain statements contained in this presentation constitute forward looking statements are subject to the safe Harbor provisions of the private Securities Litigation Reform Act.
Forward looking statements typically use words such as believe.
The Beach intend plan will expect estimate project position strategy, she could and similar expressions. These are based on assumptions assessments made by our manager.
In light of experience and perception of historical trends current conditions expected future developments and other factors that we believe to be appropriate.
These statements are sent to a number of risks and uncertainties, including without limitation product demand energy prices, whether competition credit market conditions cash flows access to available and feasible financing future stock repurchases.
Conditions.
Debt levels trees in laws or regulations war and the prospect of war, including terrorist activity inflation higher train retain qualified employees construction delays, the compromising confidentiality availability or tegra of information, including cyber attacks historic reach sustainability downgrade of our credit ratings damage to our reputation.
Ill just international market failure interruptions over information technology systems origin raw material cost of suppliers disruption in the supply chain due to public health epidemics or otherwise impact of tariffs speed impact of new accounting standards and business interruptions certain of these risks and uncertainties are discussed in more detail in the risk factor section contained in item one a lender.
One of the annual report on form 10-K for the year ended August 31, 2019, and these risk factors should be read carefully forward looking statements are not guarantees of future performance and actual results developments and business may differ from those contemplated by such forward looking statements and events described above and the risk factors.
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 forward looking statements were the result of new information future events or otherwise actual results may materially differ from anticipated results.
And now let turn the call over to Mr. Bill Rhodes.
Good morning, and thank you for joining us today for Autozone, 2024th quarter Conference call with me today are Bill Giles Executive Vice President and Chief Financial Officer, Brian Campbell, Vice President Treasurer, Investor Relations and tax and your Mirror Jackson, Our executive Vice President and Chief Financial Officer, ILEC, Jimmy or who joined US just lease.
Last week, we will be observing only today, but we're so glad to have them here and part of our great team.
Regarding the fourth quarter I hope you've had an opportunity to read our press release and learn about the quarter's results if not.
If not the press release, along with our slides complementing our comments today are available on our website www Dot Autozone dot com under the Investor Relations link please click on quarterly earnings conference calls to see them.
Since our last earnings release in late May much of the world's attention has been on covert 19, its current and short term implications and trying to evaluate the long term ramifications of this pandemic.
During Q3's conference call, we shared the incredible volatility we experienced during the third quarter.
Three very distinct performance periods pre covance, where same store sales were up about 6% or so.
In the midst of the stay at home orders, where our comps were down over 20% and then the last four weeks, where our performance was in the low teens following the stimulus checks and at the beginning of the enhanced unemployment benefits.
We shared last quarter that our retail sales increase an incredible 55 zero percent one week from a Monday Tuesday Wednesday.
This quarter sales story was very different.
It was quite consistent and consistently very very strong.
Well last quarter was the most remarkable quarter I've ever experienced this quarter marked another milestone.
Autozone enjoyed its largest quarterly same store sales performance since going public in 1991.
22% to.
22% same store sales growth and that introduced new unfamiliar challenges.
With the significant increase in customer traffic at our retail and commercial sales.
We had two intensely focused on ensuring the safety of our customers and autos owners and that took a tremendous amount of creativity on the part of our team.
Our supply chain, specifically, our distribution centers, our vendor partners and their operations were and continue to be under immense pressure to keep up with the surge in demand we have experienced over the last five months.
Our in stock positions today aren't up to our usual high standards and we are working diligently to get recovered, but our supply chain wasn't built for 25% excess capacity.
I've mentioned, often that our sales are pretty predictable staying in a very tight band well that couldn't be further from the truth since stimulus money began to flow.
That said our sales in both retail and commercial were high but very consistent from the beginning of our quarter and early may through July.
We were anxious to see what happened to our sales performance in August after the enhanced unemployment benefits subsided we are.
We are very happy to report that our domestic same store sales in August while down some from May through July were still up a remarkable 16.5%.
During the quarter there were certainly some geographic regions that did better than others as there always are but all of.
But all of our regions performed well.
I'm sure. Many of you would like to know how we're thinking about sales from both the first quarter and fiscal 21. It remains very difficult for us to predict based on our performance post enhanced our employment, we feel our sales will remain elevated for some time.
And typically in recessionary environments, we perform well but.
But nothing.
Nothing about this global pandemic is typical.
There are simply too many remaining unknowns.
Will the federal government's $300 enhanced our employment benefit be sufficient.
How long will it last will there be an effective vaccine and if so when.
What consumer behaviors have changed temporarily which will.
Which ones have changed permanently and many many more questions.
Beyond our primary objective to ensure the safety of our customers in autos owners. Our focus is on providing our autozoners with the resources they need to provide our customers with an exceptional experience as for the long term to date, we don't see anything that substantially changes our bullish view on our industry.
But we must continue to monitor consumer shifts in behavior.
And if the economy enters a deep and protracted recessionary environment. We continue to 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 recessions.
Last quarter I reminded folks the strongest periods weve experienced of outside sales growth over the last three decades have been the early nineties a 102.
910, and 11, all coming out of recessionary periods. This is why we remain optimistic on the industry this upcoming year.
Interestingly after each of those outside sales growth periods. They have never been followed by equivalent declines in the years that follow.
We believe consumer behaviors changed during these recessionary periods, allowing us to showcase our skills and capabilities to new customers and we retain many of those customers in the years that followed.
We always begin these calls by thanking our autozoners what our team continues to do has really been exceptional.
I applaud our entire organization, each and every autozone or across the enterprise from Hawaii to so Paulo from all data to our data zone facility in Mexico.
Every autozone has had to learn new ways to work new ways to meet and exceed the wants and needs and desires of our customers and everyone has met embraced and delivered on that challenge.
I couldn't be more proud of the phenomenal team I had the honor of working alongside us.
Especially want to call out and on behalf of every autos owner recognize our store and distribution center Autozoners. These extraordinary people have been thrown many many curve balls in the last six months and they have met every challenge with tremendous ingenuity.
Courage innovation and passion mode.
Most importantly, they continued to deliver an exceptional service experience for our customers. Thank you autos owners you embodied everything it means to be in autos owner and you deliver on our cultural and service promises every single day.
Now, let's move and our performance for the quarter same store sales were up 21.8% versus last year's fourth quarter. Our net income was $740 million and our EPS was $30.93 a share 36.9% above last year, excluding the extra week in last year's fourth quarter EPS was up an amazing.
47.6%.
Regarding our sales performance, while the consistency from week to week was predictable the volume of business was the outlier. This quarter. Our sales were much higher than we could have forecast at the beginning of the fiscal year and they sustain higher levels than we would have predicted on our last call in may.
While our retail business was stronger than our commercial business. Both businesses had week to week consistent sales performance. Our same store sales were up approximately 24%.
Our share growth in retail over the last four months on the detailed information we have available for our broader set of competitors shows that we have been gaining much much more share than at any time before in both units and dollars.
Our commercial business total sales were up approximately 17% on a 16 week basis in commercial we averaged over $60 million in weekly sales, which was over $12200 in sales per program per week, both new records for us.
Candidly, we are most proud to highlight that we continue to live up to our stated values. When it came to taking care of our autozoners during.
During our third quarter, we announced that all eligible hourly full and part time autos owners across the us would receive emergency time off benefits.
And it would be available immediately.
Remember back to that time.
At that time, we didnt wait to see what others were doing or wait 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 eligible part timers with paid time off up to five.
40 hours.
This additional time off can be used as the autos owner desires and 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 autozoners with choices.
Some are and the more vulnerable populations and more comfortable coming to work.
Others had childcare issues, others were simply anxious while the vast majority were comfortable continuing to come to work and providing great service to our customers in their time of need.
This decision, which was made in a couple of days was aligned with our values in the fourth quarter. We extended the use of emergency time off benefits to our store managers and distribution center advisors, each of whom have been on the frontline supporting and leading their teams through this extraordinary season.
We were honored to be able to make these investments in our autozoners in recognition of what they have done and continue to do for our customers and our organization.
Overall this quarter sales were a record for us, but it is simply impossible and would be irresponsible to extrapolate. These results going forward with so many variables heading into the fall. We continued to manage the business literally from week to week and our field organization continues to do an outstanding job managing the business.
As we said on last quarter's call, we expect that our sales growth will moderate over time, but we continue to believe our products and services will be in high demand during these more difficult economic times.
One thing that we are sure about our team has shown their resiliency and day remain nimble there.
Our ready to react quickly to every single change we remain focused on providing our team with the resources and support they need to live up to our pledge and our.
Is that I will call project categories. These are categories for hobbyist are people, who want to upgrade something we believe that with people having more time on their hands and many having more discretionary money due to enhanced unemployment benefits, often making more than they were making before or a lack of spending on any.
Attainment type categories customers are working on their quote project car or doing that enhancement job they've been constantly putting off.
At the same time, we noted that certain product lines grew at a slower rate compared to the chain average merchandised categories like brakes, rotors, or even motor oil while up from pre coated levels aren't growing at the same rate as the overall store. We believe these categories may be impacted by the decrease in miles driven and in the brain.
Categories, specifically, the lack of severe winter weather last year.
Now lets turn our focus to the balance of the PML for the quarter. Our gross margin was down 33 basis points included in our cost of goods. This quarter was a shift of mix and nine basis points of headwind due to civil unrest expenses. In addition, we have also identified select categories that are more commodity based which.
They are less dependent upon service that we have lowered prices in order to be more effectively compete with our non traditional competitors to increase volumes on.
On operating expenses, our team, particularly our store operations and commercial teams continued to manage our expenses during these times well.
As our sales accelerated drastically in a very short period of time, we didnt have the available labor to achieve our desired staffing levels until later in the quarter. So we wish we could have spent more on labor to provide an even better customer experience.
Expenses were up 9.2% versus last year's Q4, excluding the extra week due to our very strong sales results, we were able to leverage operating expenses 315 basis points.
Included in this quarter's expenses were approximately $11 million related to emergency time off and other cobot related expenses.
While the last two quarters expenses related to co would have been significant as we visit stores and distribution centers and talk to our team. This decision strengthen our already unique and powerful culture and show that this organization walks the tall.
We believe there will be long lasting benefits from this decision.
Regarding our balance sheet, our debt was up a bit and our cash and cash equivalents were up dramatically. We now have over $1.7 billion in cash on the balance sheet of which $1.6 billion excess cash increase.
Increasing our debt levels, adding a new 364 day line of credit.
An increasing excess cash were purposeful as we wanted to maximize our liquidity position due to the significant uncertainty.
We also felt we managed our inventory well as our inventory per store growth increased 1.3% versus Q4 last year.
We feel our strong liquidity position heading into the fall months allows us emits flexibility when it comes to thoughtfully reinstituting our share repurchase program.
As I mentioned previously we temporarily paused our stock buyback program in March 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 so.
We expect to gradually restart our buyback program during the first quarter we.
We intend to utilize our ongoing free cash flow to buy back stock and based on our view of the future begin methodically utilizing some of the excess cash we currently have on our balance sheet.
As we did in March if we have concerns about the near term.
We can and will temporarily suspend repurchases again, which is one of the significant benefits of a share repurchase program versus a dividend approach of returning capital to shareholders. We expect to maintain an elevated level of cash and cash equivalents throughout most of this new fiscal year.
In regard to our Capex spend during the quarter. We spent less this year than last year, we paused our development on many stores during the depths of the stay at home orders, which slowed our ability to complete construction and opening new stores. As a result, we finished this year with 113, new us stores versus 154 last year and we opened only.
The 25 stores across all of Mexico, and Brazil for the year for.
For 2021, we would expect to get back to our usual cadence of approximately 150 domestic new stores and roughly 50 international stores.
I'll spend a moment on our integrated retail efforts as covance effect on consumers' 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. This past quarter. We continued to see very strong growth in our online shopping channels.
Buy online pickup in store next day delivery and ship to home in.
In particular, our buy online pickup in store offering grew rapidly.
Four times the growth rate of the ship to home options.
I do want to remind listeners that our online sales still represent a very very small percentage of the DIY business substantially below 5%.
While online purchasing is a smaller business for us the traffic to the website is a tremendous marketing tool for our in store business, we remain committed to improving the shopping experience online in order to help customers identify what they need and allow them a quicker in and out experience once they come to our stores for pickup.
Before I pass the discussion over to Bill Giles to talk about our financial results I'd like to again, thank our autos owners for their extraordinary efforts. During these unprecedented times I cannot thank you enough and I'm confident that I speak on behalf of our shareholders to insight. Thank you.
Autos owners you truly delivered on autos owns promise to provide exceptional customer service.
Now I'll turn it over to Bill Giles Bill Thanks, Mel and good morning, everyone to start this morning, let me take a few moments to talk more specifically about both our domestic and international results for the quarter total auto parts sales, which includes our domestic Mexico, and Brazil stores increased 14.2% for the.
The trailing four quarters ended total sales per Autozone store were $1.914 million. This compares to an average of $1.847 million and Q4 ending last year.
Total DIFM sales increased on a 16 week basis, 16.8% to $976 million an amazing number is this quarter reached several records for us in the quarter sales to our DIFM customers represented 21.5% of our total sales and increase.
Approximately $89 million from last years Q4 last year did have the extra week and excluding that week, our sales were up $140.4 million, our weekly sales program or $12250 and they were up 14.2% on a per program basis versus.
This $10700 per week last year.
As we opened fewer programs. This year at 114, finishing with 5007 total programs our sales efficiency per store has never been higher.
Not only was $12250 a week a record for us, but we were able to average $60 million in total weekly commercial sales and amazing accomplishment while.
While we know many of the industry participants remain comfortably ahead of US currently we know we are on the right path.
This past year, we again believe our sales increases were materially better than the overall industry and we will remain focused on repeating this UNEV wide 21 I should.
I should take a moment to discuss four major things that are making a real difference for us when it comes to commercial first we continue to expand our inventory availability initiative. One major example of this is adding to the number of Mega hub locations. These stores, having opened five this quarter and now numbering 44 in total subset.
Annually increase local market availability mega hubs lift our sales noticeably in the markets, where they open with over 80000 skews or more available same day and even multiple times per day from these mega hub markets. We are able to say, yes materially more than when compared to carrying 40 to 50000 SKU.
Those from a hub.
Second we are improving our service we are delivering faster and we are supporting our customers with their overall needs better than before we recently began rolling out new technology that will significantly improve our delivery times and the accuracy of the commitments that we make to our customers.
Third we've got our store managers to buy into our commercial sales initiatives. They are not only involved with the commercial effort, but they are fully onboard with driving sales calls and improving our service to our commercial customers. They now own the commercial business in their store and fourth we continued to roll out initiatives that make us.
Much easier to do business with.
We now have our commercial program and 5007 stores or 85% of our domestic stores.
Our Mexico stores continued to be impacted by the pandemic. This past quarter. In addition to impacting sales the weakness in the foreign currency exchange rate put additional pressure on our results. The exchange rate finished the quarter at 21.91 to the dollar and was roughly 15% higher than last year.
This fourth quarter as a result of the devaluation. Our total US dollar sales were down for the quarter versus last year due.
During the quarter, we opened 11, new stores and finished with 621 stores, while the quarter was challenging we believe the negative impacts our short term in nature, we remain committed to our store opening schedules in Mexico for the foreseeable future.
Regarding Brazil, we finished with 43 stores, we opened five new stores in the quarter similar to the U.S., Brazil faced immense challenges with Cobra 19, and stay at home mandates in fact, many of our stores in Brazil. We're focused we're forced to be closed for weeks like our stores in Puerto Rico in both markets our autozoners.
Were very creative and quickly implemented drive through no contact service you should have seen the lines of cars. Currently we view the cobot impact to be 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 53.1% of sales down 31 basis points versus last year's fourth quarter on a 16 week basis. This past quarter's gross margin included approximately $4 million in charges related to damage from civil unrest.
The increase in gross the decrease in gross margin was attributable to lower merchandise margins driven primarily by a shift in mix our pricing.
Our primary focus will continue to be growing absolute gross profit dollars in total auto parts segment.
SG and aim for the quarter was 30.7% of sales leveraging 338 basis points to last year's fourth quarter on a 16 week basis, our SGN AG grew 9.2% over last year's fourth quarter as we discussed in our press release. This morning, we incurred a net $10.7 million in charges.
Related to offer an emergency time off and additional direct Cove it expenses.
As DNA will remain something we manage in accordance with sales volumes as sales pick up we would expect the spend rate to increase and as previously mentioned at times, we havent been able to adequately staffed to the increase in volume as our staffing levels have increased several our labor cost.
EBIT for the quarter was $1 billion $18 million, our EBIT margin was 22.4% interest expense for the quarter was $65.6 million up 14% from Q4, a year ago, the higher expenses related to the $1.25 billion bond issuance and the.
$750 million 364 day credit facility, both completed in the third quarter. We are planning interest at $48 million for the first quarter of fiscal 21 versus $43.7 million in last year's quarter our.
Our higher forecast than last year is driven again by the costs associated with the new bond issuance and the 364 day credit facility.
Debt outstanding at the end of the quarter was $5.513 billion or $307 million above last years Q4, ending balance of $5.206 billion.
Our adjusted debt level metric finished the quarter at 1.9 times EBITDAR, our lower lower than normal credit metric reflects the temporary suspension of share repurchase program, while in any given quarter, we may increase or decrease our leverage metric based on management's opinion regarding debt and equity can do.
Missions, we remain committed to both our investment grade rating and our capital allocation strategy.
And the long and long term our share repurchases are an important element of that strategy.
For the quarter our team.
Our tax rate was 22.3% versus 21.5% in last year's fourth quarter. This quarter's rate benefited 35 basis points from stock options exercised while last year benefited 107 basis points stock option exercises aren't predictable and as such they will affect our tax rate and ultimately our net income and.
EPS for the firm.
For the first quarter of EPS by 21, we suggest investors to model us at approximately 23.5% 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 quarter was $740 million up 41.2% versus last year's fourth quarter, when excluding the 17th week, our diluted share count of $23.9 million was lower by 4.3% from last years fourth quarter. The combination of these factors drove earnings per share for the quarter to $30 or 93 cents.
Cents up 47.6% over the prior year's fourth quarter, excluding the extra week.
Relating to the cash flow statement for the fourth quarter, we generated $1 billion $417 million of operating cash flow. This was up approximately $600 million over last years Q4 with an extra week.
Net fixed assets were up 2.5% versus last year capital expenditures for the quarter totaled 183 point million dollars and reflected the additional expenditures required to open 65, net new stores this quarter capital expenditures on existing stores hub and Mega hub remodels or openings work on development of new store.
As for upcoming quarters and information technology investments.
With the new stores opened we finished this past quarter with 5885 stores in the US 621 stores in Mexico, and 43 in Brazil for a total store count of 6549 depressed.
Depreciation totaled $125.4 million for the quarter versus last year's expense of $118.5 million. This is generally in line with recent growth rates.
We did not repurchase any autos on stock in the quarter versus $692 million last year at quarter end, we had $796 million remaining under our share buyback authorization and our leverage metric was 1.9 times.
As Bill mentioned earlier, we had suspended our share repurchase program as we continue to evaluate cash flow generation and the economy as a whole at this stage based on current conditions and the strength of our business, we expect to be utilizing our free cash flow generated each quarter in order to opportunistically start buying back our program back up it remains.
And will remain a core tool to our model as we believe it is a terrific flexible way to return excess cash flow after appropriately investing in our business to our shareholders.
Next I'd like to update you on our inventory levels in total the company's inventory increased 3.6% over the same period last year, driven by new stores and increased product placement.
Inventory per location was $683000 versus $674000 last year and $685000 last quarter.
Net inventory defined as merchandise inventory is less accounts payable on a per location basis was a negative 104000 versus a negative 85000 last year and a negative 56000 last quarter as a result accounts payable as a percent of gross inventory finished the quarter at.
At 115.3% versus last year's Q4 of 112.6%.
Finally, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 38.1%.
We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital now.
Now I'll turn it back to Bill Rhodes. Thank you.
Thank you Bill.
These continued to be unique and unprecedented times.
And they have required us to look at many things differently to manage our business day to day Im 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 we are learning how to operate effectively in lease terms, we remain wary of the volatility that can exist volatility in both the us and our international markets. We don't know what lies ahead of us for this new fiscal year, but we feel we are much more prepared today for uncertainty than we were at the start of this pandemic.
We will be ready for a wide variety of economic environments, and we have extraordinary people, who are committed to servicing our customers and helping them get to work go see their families dropped to a close vacation spot or get back into the school year.
I wish we could provide you with more clarity on our expectations on business trends for our upcoming first quarter in the new fiscal year, but as I've stated before.
That isn't practical for us with all the unknowns, but I want to be crystal clear.
We plan conservatively in order to manage our cost structure appropriately.
Our domestic retail business was a tremendous surprise for us this past quarter, we understand trends will ultimately slow while we appreciate these things we feel we are well positioned for continued future share gain opportunities in both the domestic retail and commercial segments, we had an outstanding.
In quarter, but we have work to do.
As we start a new fiscal year.
Frankly, our focus isn't on what happens this new quarter.
Are we keeping our autos owners and customer sites today, while providing our customers with their automotive needs and more importantly.
What can we do during these extraordinary terms to position our company for even greater future success what.
What really matters is how are we doing a year or two from now.
I continue to be bullish on our industry and in particular bull.
Bullish on our company.
Before we proceed to questions. We made some exciting organization announcement, a few weeks ago.
We announced that Bill Giles and Bill Hackney.
Two tremendous long term talented leaders plan to retire at the end of the calendar year.
It is impossible to state the tremendous impact each of them have had on our business our culture and our teams.
They will be sorely missed but in their typical fashion. They always put the companys interest ahead of their own.
And they have been sharing with us for a long term that this day would inevitably cone.
As such their teams are prepared.
And we simultaneously announced the addition of two new Fabulous leaders to our team our new E. VP CFO, Jim Your Jackson is with US today, and some home will be joining us soon as our new senior Vice President of merchandising. We are so excited to add these two seasoned highly accomplished leaders to.
Our team it will.
It will be terrific to inject their ideas thoughts and perspectives into our future strategies and tactics, we welcome Jameer and strong and we look forward to celebrating the enormous contributions of bill and Bill.
Now, we'd like to open up the call for questions.
The food lines are now open for questions. If you would like to ask a question over the phone. Please press star one and record your name also.
Also please limit yourself to one follow up question, if youd like to withdraw your question from start to.
First question in the queue is from Michael Lasser with EPS you line is now open.
Good morning, we're keeping my question lease.
Every one of them will flow through luck on your retirement.
We'll go through that.
Thank you.
Recognizing that you want to don't necessarily want to opine on on how to think about.
Autozone.
Moving forward, but as you think.
About your either through the growth that midstream hearing right now from those with category is project related.
As that thing are you operating under the assumption that.
We returned to pre cool good level, even if you call miles driven are structurally lower moving forward.
Yes, I think thats that is one of those other questions that are really hard to say right now Michael and I'll go back to on our last call. If you had told me that our sales would continue for four months.
Additional foremost at those elevated levels I wouldn't have thought that to be true, but they do.
But they did and the biggest news to me was the fact that August still had 16.5% same store sales growth post economic stimulus and our enhanced unemployment benefits.
What happens with miles driven will be an element of it but a lot of the miles that are being driven they're not all the same our customer.
Our core customer there'd habits have changed they're still going to work every day. When you think about the miles driven it's that have declined it's generally higher socioeconomic groups that are working from home.
Our core customers. They haven't worked at home just like our store Autozoners in DC autos owners. They havent worked at home a day. So I don't think all miles driven are the same what.
What happens in the next 12 months frankly is very very difficult for us to predict the piece that I hang on to and we hang onto is generally when economic times are tough.
People prioritize their vehicle at a different level, because they're not going to get a new vehicle in the short term period, and therefore, they change their maintenance and upgrade their vehicles. So as I said earlier the lease.
The last.
Over the last three decades, the best periods of performance for US have all been coming out a recessionary environments will this recessionary environment be the same as those other periods I don't know but.
But thats the best analogy that we have at this point.
Okay. That's helpful and my follow up question on on your gross margin how much the lowering prices on commodity items impact the gross margin in the quarter.
You bet.
Have any effect on your ability to gain share mainly within the commercial side of the business and do you expect to cause this strategy further over the next couple of quarters that said, we'll continue to have a lingering impact on the gross margin.
Yes, a good question, Michael I would start by first saying most of the gross margin impact was product mix shift. So we had some categories like lighting breaks that typically have higher margins than our average and those underperform the quarter batteries as an example outperformed during the quarter.
And they typically have slightly lower margins than the average so thats what drove it a little bit but yes. We did provide we did find opportunities for us to lower select category as a commodity is where we're really not adding a lot of service and it's an opportunity for us to be more competitive and we did gain market share in many of those cash.
Goriest during the quarter. So we think it was the right decision and long term it will help drive sales and ultimately help drive gross profit, but to dimensionalize that it was probably a single digit basis point impact.
That's helpful and best of luck. Thank you.
Thank you.
Next question is from Simeon Gutman with Morgan Stanley. Your line is now open.
Thanks, Good morning, everyone I have a question on sales and then a question on margin. Mike first question on sales Bill Rhodes you mentioned, the 16 and a half through August a couple of times and I think towards the end of your prepared remarks, you said sales will ultimately.
Revert back in.
Is there anything more you can talk about on September sorry to be so short term and if we get cares too do you think we will see a bigger impact than in DIY or commercial.
Okay. So you know this our long history as we report earnings so quickly after the end of our quarter usually.
Three quarters of the year within two and a half weeks at the end of the year because of year end. We go three and a half weeks I just don't want to talk about trends in September because I, just don't want people focusing that that much attention on such a short period of time. That's why we were so crystal clear about what happened in August that we did see a 16 and.
5% comp in August so I want to leave it at that Simeon I understand your desire to hear more.
But I don't want us extrapolating, two or three weeks.
Fair enough and then I guess I'll throw the follow up and then I don't know if you have a thought on the.
If cares too will help commercial or DIY more but the follow up is also on gross margin and in the past.
I don't know if you provided a rule of thumb of the market has that gross margin for autozone could be up on average from 10 ish basis points or so a year is that still a fair framework the idea maybe or or is there a lower threshold given you reserve the right to invest back in price and then if it was down a.
Little in 2020 does that mean, it could be up a little bit more than sort of typical algorithm in 2021.
But let me answer your first follow up question on the carriers Act and then bill take the.
Take the gross margin with as far as the cares Act. If there was a carriers I think it's now for.
And we provided additional.
Enhanced unemployment benefits I think you see more of the benefit on the DIY side of the business, because that's where the most financially fragile customers or you look back to what happens every year when tax refunds come out and it's the DIY business. They both pickup but the the iweb business picks up even more so I think it would be beneficial in both sides may.
More beneficial to the Wassa.
On the growth side I would just say that we.
We grew.
Grew gross profit dollars by 20% our focus again on driving gross profit dollars and so where we can find opportunities to invest back in the business, we're going to do that and over time.
Retail and commercial prices will go up and down based on.
Based on market conditions, so again, our standpoint as like our margins in a really healthy place right now and we've got great opportunities for us to lower costs through lower acquisition opportunities and so weve on a category by category basis, we feel really good about where our margin is theres always going to be some shift and proud.
Next sale mix, that's going to impact the margin.
Got it okay, Thanks, Bill and congratulations.
Okay.
Next question is from Seth Sigman with credit Suisse. Your line is now.
Great Hey, guys. Good morning, Congrats on the quarter and Bill Giles Congrats on your announced retirement as well.
I wanted to focus a little bit more on that 16.5% exit rate obviously, the very strong trend can you.
Can you just discuss the DIY and commercial trends that you saw as you move through the quarter and then the second part of it is if you can talk about the types of projects that you see getting done and whether you have any concerns that sales are being pulled forward or you believe that what you've seen is largely projects that had been delayed from earlier in the year. How are you thinking.
Got that.
Some terrific questions in there as far as of the last question did we pull projects forward I think the project work is kind of I call. It the never doing now category. These are projects that people thought that they would do some time, but they never had the the time to do them and therefore, when they had the time and they had.
Incremental disposable income they tackled those jobs.
I do our bit battery business as Bill said has been very very strong.
A lot of reasons, we believe it's been strongest because a lot of people park their vehicle for some extended period of time once they restarted the battery had been discharged. Some so are those some failures that might have happened this coming winter when it got cold that's the only piece that I I wonder if that might have a bit of.
No pull forward, but we'll see when we get into next year what was the first part of your question.
Just the DIY versus commercial trends as you move through the quarter.
Yes.
D. I walk started I mentioned that went up 50% in two days back in April and so it ramped really quickly the commercial business lagged it but it continued to build very methodically over the course of the quarter as we got into August both businesses took a little bit of a step down.
When that enhanced unemployment benefit went away.
Okay that makes sense and then just a follow up on commercial I do think the most important trend in the quarter was the strength you saw in commercial obviously reflects a lot of the things that you've been doing over the last couple of years can you just update us on the hub strategy frame for us how markets perform when you add a hub to the network and then how are you thinking about growth.
Publications at this point, particularly given all the disruption in retailing in the real estate opportunities that may come up thanks.
Great question, Seth, Yes, we think that there is continued opportunity as we mentioned before we are going to continue to expand our mega hubs. As we said we have 44 open today, we've targeted 75, plus mega hubs in the future, we're well on our way to accomplishing that over the next couple of years. We've got about 200 hubs today, we think on a longer term basis, we could on.
It was double that number.
So we're excited about it the markets do perform well when we introduce those hubs into the marketplace and so we're certainly getting an adequate return and excited about the sales volume that is generated from that and you are right that there are more and more boxes that are available in the marketplace I just have to be in the right place.
And that hopefully will be an opportunity for us as we move forward.
Next question is from Christopher Horvers with JP Morgan Your line is now open.
Thanks, Good morning, guys. So a couple of follow ups on the hurricane in August and Hurricanes, how much to what degree that impacted.
The 16.5% and perhaps as you Peel that hurricane back on did do it for me actually monitor rate post stimulus.
Okay. So the hurricane this was not a massive hurricane except for the people that were directly impacted so it was a pretty small area.
Area that was hit our sales were softer in that last week not disproportionately softer, but they were softer we did lose a store in lake Charles Louisiana. Fortunately, we know of no autos owners that were significantly impacted as a result of that hurricane or the one that happened a week and a half ago.
As far as commercial moderating both moderated in the August period of time.
That's that's what we saw this step down a little bit, but we were frankly tickled to death was 16.5% comps in August.
Yes, really really strong and then from a from a regionality perspective as you saw.
Some of the flare ups of Cove Ed.
Over the summer did you see any change in your business.
Any deceleration or acceleration and as you think about some of the harder hits areas around Cove. It earlier. This spring for example, the northeast how how did that those areas performed over the quarter back.
Back in the spring there was a clear delineation between the hardest hit areas and the rest of the country. This summer there was very little differentiation and certainly little differentiation that you could attribute to covert you would see some weather patterns as we always do but I would I would say that the cobot impact.
In the summertime was on remarkable.
And then on the northeast.
Im sorry, northeast the northeast did that as miles driven has gotten less worse, there as that as that part of the country seeing a more marked improvement.
It has rebounded back to being more normal with the rest of the markets.
Understood. Thanks, very much and congratulations to all thank you.
Thank you appreciate it Chris.
Next question is from Zack Fadem with Wells Fargo. Your line is now open.
Hi, This is David Lance on for that thanks for taking our questions.
So as you continue to take share in the commercial side was just curious if you could comment on how this business has changed as a result of the pandemic and whether we you would view the double digit growth is sustainable going forward.
Well I think one of the things that happened in the pandemic is everybody that run was operating a business started running down case scenarios US included I talked about it on the last call that we were asking ourselves questions that I've never thought we would ask ourselves questions like liquidity.
In the midst of the depths of the pandemic.
We did two things one we invested in our Autozoners. Other people were say in how to cut more costs like Crazy. We said how do we stand in the GAAP for the most important thing we have which is our autozoners, we provided them without emergency time off benefit. The other thing that we did was we didnt.
Layoff or furlough, one single person not.
Not one as a result of the pandemic and we kept our operations as normal as possible, yes, we cut back our store hours of operation.
But that was about it.
Other people, particularly the less sophisticated less well capitalized people many of which were on the commercial side of the business.
They reacted very swiftly and very.
Homes strongly and they let people go they cut back their service level and so it provided us an opportunity to over serve our customers during that period of time certainly from a competitive point of view I think that that has a long standing empire, whether or not we can grow commercial 10% into the foreseeable future.
It's anybody's guess, what I know is we're winning in the marketplace. If you look at our growth over most of the periods over the last 10 years, our growth versus the the competitive landscape has been significantly better two or three times many times, what the industry growth rate is and we feel really good.
About where we are.
Yeah.
Great and then just one more from US how do you think miles driven plays out when you think through the moving parts around extended work from home, but also the higher demand from used cars in the population shift to the suburbs.
Feels as though the miles driven is getting better each month I mean, obviously it was down maybe close to 1% in back in July but if you look at the current fuel sales that would imply that miles driven is down in the.
Mid to low single digits at this point so our expectation is that Thats a number that is going to continue to improve and back to Bill's point earlier that relative to our customers, it's very likely that theyre miles driven as not necessarily negative they are more likely than not essential workers needing to be.
Able to get to work and able to operate their car. So our expectation is that we'll continue to get better and that.
And that is probably already a little bit better for our customer kind of jump in on that as well and I just want to remind everybody to go back to the Oh 809 period of term and one miles driven dipped during that period of time, the correlation between miles driven and our sales performance was and the IND.
History sales performance was broken.
And we attribute that to the fact that there were a lot of people are our trends were more aligned with what was going on with employment.
And so in these tough economic times I think the correlation between miles driven breaks it comes back together in more normal terms, but it definitely is not a good contributor in short term recessionary environments.
Great. Thanks, so much.
Next question is from Michael Baker with D.A. Davidson Your line is now.
Hi, Thanks, I wanted to ask a question on SGN A. I. It was up as we think about 6% per foot when you adjust for the extra week.
Want to try to understand is to sales are probably going to slow which means that maybe the M&A growth would slow but that again that M&A growth made was understated because you didnt have the labor you needed earlier in the quarter. So how do we think about that going forward for instance, if you continue to comp in the low to mid.
Good teen level does that answer in a per foot go up.
In the next quarter.
Yes, good question, Michael and as you know our game plan is that we're going to play.
Play in the environment that were in so if sales are continue to be strong we're going to continue invest back into that as bill mentioned before we probably ended the quarter in reasonably good shape from the standpoint of labor and service, but certainly at the beginning of the quarter, we were trying to catch up a little bit so on an overall basis I would expect.
The us to continue to invest in labor as our sales continue to be strong and we're going to find other opportunities for us to be able to make investments when our business is really strong because again, it's all about the future and it's all about our long term growth and ensuring that were creating a great service environment for our customers both on the retail side and the commercial side.
Okay that makes sense. So just to follow up on that presumably if we were to be able to look at it on a month by month basis or something along those lines yesterday per foot in August it towards the end of the quarter was up more than 6% and thats, maybe the trajectory. We should think about going forward is that as long as we assume that sales are.
We remain pretty strong as is that fair.
I would just on a relative basis. It would have increased as the quarter budget fourth quarter progressed, yes.
Okay. Thanks, I appreciate that thanks, Michael.
Next question is from Daniel Brims with Stephens, Inc. Your line is now open.
Yes, Thanks for taking my question good morning, guys.
Congrats to Bill Giles engineer welcome to the team.
Okay. Thank you.
Sort of a growth margin Bill I think the Mcgratty talked about in the last 12 months has been a focus on direct sourcing and kind of growing that initiative can you update us on where that stands and then your recent hire of Dong, whom obviously experience in the global roofing Department can you talk about how she add to that capability going forward. Yes. Great question. In fact, we spent a lot of time and effort.
Surgery building our.
Foreign sourcing office by buying office over in China, and so we continue to find opportunities and a lot of different categories for us to be able to find air.
Areas, where we can reduce our acquisition costs one of the other things. Its pandemic taught US was that we also want to ensure that we're not too dependent on any particular geographic area of the world and so the team is going to be continuing to find other opportunities throughout the world in order for us to be able to source product so that will actually.
I think reduce our risk on a long term basis and should also find other opportunities for us to lower our acquisition cost song will come to us with a significant amount of experience in this area and we're excited about her joining the organization and helping the great team that we've already built.
Overseas buying product everyday but song, we'll be able to add a lot of value in that area as well.
Great. Thanks for the color and then Bill Rhodes a follow up on maybe a higher level industry question. I mean, you just discuss some of the different is why youre, gaining so much share and obviously it sounds like it's coming from the independent operators.
We think through the long term impact to that how long can the independent keep losing share before we start to see maybe a more rapid pace of independent door closures or how do you think that longer term what are the impacts of that as you keep getting this year.
From that base. Thanks.
Well Thats a terrific question.
I've been in this industry for over 25 years, and I've seen the consolidation happen and autism was a significant participant of it in the late Ninetys all the way through 2008 or so.
On the commercial side. This consolidation is much more challenging on the retail side of the business everybody was looking for geographic expansion and we.
And we can all take reasonably the same size boxes and overtime turn them into our standard prototypes.
On the wholesale side.
It's not as easy we don't need the wholesalers inventory, we don't need their distribution, we don't need their locations.
We need their customers and is there more efficient ways for us to get their customers by winning in the marketplace as what we've learned over time, we did dip our toe into the water with our acquisition of I'm seeing that didn't work out very well for us we believe our strategy and approach to approaching the market will win over time, if you look at what we've done in some of our.
Close and competitors, we've all substantially changed our inventory of so.
Our inventory assortments over the last five to 10 years we've.
We've all built really strong sales forces.
And we're continuing to chip away at some of the competitive differentiation that was in the marketplace I think that thats whats happening with share over time. These companies many of the independents, they're not working for a return on the capital, though they're working for their salaries and so.
What happens them overtime, I think they have longer staying power than other enterprises would so I think it will take time, but I do think that there is a lot of pressure on independent operators in this commercial side of the business today and thats not going to let up.
Great. Thank you whats the color and best of luck.
You bet. Thank you.
I would now like to turn the call back over to Mr. Bill Rhodes.
Okay before we conclude the call I want to take a moment to reiterate that we believe our industry is very strong and our business model is solid will.
We'll take nothing for granted as we understand our customers have alternatives to shopping with US we will continue to focus on the basics as we strive to optimize shareholder value in F Y 2021. Thanks.
Thank you for your time and thank you for your interest in our Great company stay safe and B will.
This concludes today's call. Thank you for your participation you may disconnect at this time.