Q1 2021 Autozone Inc Earnings Call
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Good morning, and welcome to the Autozone Conference call.
Lines have been placed on a listen only mode until the question and answer session of the conference. Please be advised today's call is being recorded if you have any objections. Please disconnect. At this time. This conference will discuss Autozone first quarter earnings release.
Bill Rhodes, the company's chairman, President and CEO will be making a short presentation on the highlights of the quarter.
The conference call income play at 10 am Central time, and 11 am Eastern time, you for Mr. Rhodes begins the company 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 for the private Securities Litigation Reform Act like 95 forward looking statements typically use words, such as believe anticipate should intend plan will expect.
Estimate for check to position strategy seems to be good and similar expressions. These are based on assumptions assessments made by our management in light of experience for perception of historical trends current conditions expected future developments and other factors that we believe to be appropriate. These forward looking statements for search for a number of risks and uncertainties, including without limitation product demand energy price is weather.
Competition credit market conditions cash flows access to available and feasible financing for future stock repurchases to get back to recessionary conditions consumer debt levels changes in laws or regulations war and the prospect of war, including terrorist activity inflation higher train retain qualified employees construction delays to compromise and confidentiality.
Visibility or integrity of information, including cyber attacks historic rate sustainability downgraded our credit rating stamped store reputation challenges in international markets failure interruptions over information technology systems origin, and raw material cost of suppliers disruption in the supply chain due to public health epidemics or otherwise impact of tariffs interest being impacted.
Accounting standards and business interruptions certain of these risks and uncertainties are discussed in more detail in the risk factor section contained in item Onea under part 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 interest me.
Differ from those contemplated by such forward looking statements and events described above and in the risk factors could materially adversely affect our business for looking statements speak only as of the day made except as required by applicable law. We undertake no obligation to update publicly any forward looking statements with a result of new information future events or otherwise actual results may materially differ.
From anticipated results.
Good morning, and thank you for joining us today for all of those 2021 first quarter Conference call with me today are Bill Giles Executive Vice President and Chief Financial Officer, Jimmy or Jackson, Chief Financial Officer elect and Brian Campbell, Vice President Treasurer Investor Relations.
Yes regarding the first quarter, Oh debt up to the read our press releases 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 auto zone Dot com under the Investor Relations link please click on quarterly earnings conference calls to Steve.
[music].
Since our last earnings release in late September much of the world's attention remains focused on COVID-19, including its current and future implications for communities debt.
Mrs and markets.
These time for make extraordinary for all of us.
From the start of the pandemic for this quarter. Our team has had to deal with the challenges. Unlike any we have seen in our company's history.
Well at the start of the pandemic our sales debt, we performed quite well what economic stimulus was implemented in the U.S. and Americans begin to drive more buttons.
By mid April our business began to strength and reached an apex last quarter. When we reported 21.8% same store sales a better same store sales performance in our Companys rich history.
For this quarter ending in late November we are proud to reported 12.3% same store sales I know other historically strong performance.
Well last quarter sales were more consistent particularly across the first 12 weeks of the 16 week quarter this quarter.
So.
Considering the meaningful volatility, resulting and didn't make an economic responses. We are sharing our same store sales cadence for each for the week period for the core we.
We were up 16.5 per se.
Well, 11.4% ending up 8.8% in the last four weeks.
The D. celebration appears to be related to combination of normal seasonality.
And how far away, we work for the benefits of economic stimulus.
This quarter's traffic was far more beneficial to same store sales and ticket growth for quite a while margin.
Let me talk.
In September we could not have effectively forecasted our growth for this quarter same store sales, albeit we would've been much closer than we would have forecasted Q or at the beginning of that for you.
We're continuing to learn as we go into Q1, we felt we would see substantial above normal growth.
For the thought double digit same store sales.
Our number one priority continues to be the hill safety and well being of our customers and our autos ours.
The pandemic, we've continued to follow the myriad of national state and local mandates and ordinances and have always kept close tabs on the CDC guidelines.
We require masks entering our facilities for form questionnaires of our team.
Like many other safeguards like enhance cleaning protocols for body mass and Sanitizers, another PB to our autozoners to ensure safe shopping and work environments.
Last quarter, we talked about the pressure our supply chain was experiencing so make sure we were in stock and replacing the stores on a timely basis I'm very happy to say today, we feel we've made significant progress in this area.
Our in stocks are much improved and our supply chain and most of our vendor partners have done an exceptional job reacting to the unprecedented surge in volumes.
Now last six plus months.
The progress has been significant but at the end of the quarter. We had only closed about half of the gap from our house. So.
Through our normal levels and then stop.
Right a little more color on the drivers of our sales performance. This quarter I remind you that we were anxious to see what would happen as we got further away from the enhanced unemployment benefit as well.
The initial stimulus package ended at the end of July there were still funds being distributed on a state by state basis at lower levels. This fall.
As you recall last quarter, we reported finishing the quarter with comp sales running up 16, and a half percentage.
And you can see we remain strong for this quarter.
Our enhanced sales growth declined over the quarter still historically high levels, we believe that noise around the election.
The reemergence of cold in many areas and the beginnings of seasonal weather patterns hurt when traffic, particularly in the last four week period.
While it remains extremely hard to predict sales performance in the near term, we believe the fundamentals of our business remain quite strong.
During the quarter there were certainly some geographic regions that did better than others as there always are.
All of our regions performed well.
I could not be more proud to say that based on the retail sales for customer segment data we have.
We continue to experience historically right.
For them and share gains.
Historically unprecedented share gains.
The day that shows the industry has been growing in the high single digits and our sales have been growing at close to the double that rate for these categories.
Well, we are thrilled to have these share gains today, our charge is to determine how we maintain them.
I'm sure. Many of you would like to know how we are thinking about sales for both the second quarter and the balance for fiscal 21.
I'll remind you that typically in recessionary environments, our business is remarkably resilient.
Our nothing about this global pandemic is typical.
They're similar to many remaining unknowns like well the federal government passed a second round of stimulus and when will the vaccine being distributed and how effective will it be.
What consumer behaviors have changed temporarily.
Which ones have changed permanently.
All of this raises or.
Our focus on execution remains the same.
Beyond our primary objective to ensure the safety of our customers Autozone, our focus is on providing our autozone with the resources they need to provide our customers with an exceptional shopping experience.
For the long term, we remain bullish on the health of our industry and the economy enters a deep and for attracted recessionary environment. We continue to believe our customers will focus more on maintaining or hurt the sales.
These time periods have benefited our business in the past retail in particular as it has in the last three recessions.
[noise] last quarter I reminded folks the strongest periods, we experienced an outside sales growth over the last three decades of in the early nineties.
Oh, one out too.
Non 10 and 11.
All coming out of recessionary fears.
We remain optimistic on the industry this upcoming year.
Interestingly after each of these outsize growth for years.
They have never been followed by equivalent decline as the years that follow.
We believe consumer behaviors change during these recessionary period, allowing us to showcase our skills and capabilities to new customers.
And we retain many of those customers in the years that follow.
I would be remiss if I did not think are all those numbers for their exceptional efforts.
Wow, Okay raised our entire organization from our stores to our distribution centers from the U.S. to Mexico for Brazil at all day, and our store support teams always though our thanks to our customers who continue to believe in our capabilities to help them with their automotive news.
I couldn't be prouder of our team.
As usual I want to especially recognize on behalf of every autozone for our store and distribution Center Autozoners. These extraordinary people have been challenged more than they ever could have expected and they have met every single Jones. Thank you Autozone gives you a body everything it means to be in Autozone and you deliver on our cash.
All through and service promises every day.
Oh, it's moving more specifics on performance for the quarter. Our same store sales were up 12.3% versus last year's first quarter. Our net income was 442 million and RMBS was $18 or 61 cents a share 30.1% above last year.
Sales were higher than we forecasted at the beginning of the quarter is certainly higher than historic norms, both our retail and commercial businesses showed strength in the quarter with same store sales up approximately 13% and commercial total sales growth of approximately 12%.
In commercial we averaged over $58 million in weekly sales, which was over $11500 in sales per program are we.
Well average weekly sales per program decelerated from last quarter that is normal as we change seasons.
Moving forward, we expect our commercial business to show continued strength as we execute on our growth initiatives and gain additional share in this space I remind you that this is a highly fragmented 75 billion dollar market and we believe our product and service offerings provide us tremendous opportunity so significant.
Gross sales and market share overtime.
Well there are some geographical differences this quarter there continues to be interesting trends across our merchandise categories, particularly in the retail business our.
Our sales for categories continue to be strong as we believe people have more time and many have more money.
Many parts of the economy are still operating at fractions of their normal capacity movie theaters vacation resorts entertainment venues hotels and the like.
Some Americans have the luxury to well work from home.
Eliminating their commute and unfortunately.
While vastly improved from the early days for the pandemic unemployment is still twice the free pandemic right.
This extra time and for some extra funds have been re purpose for that project car or go to the enhancement of.
Our customers have been perpetually putting all.
At the same time, while our sales have increased and merchandise categories like brakes, rotors, and even motor oil they aren't growing as fast as the rest of the categories due to last year's mild winter and lower current miles driven.
We believe miles driven will continue to improve and maintenance parts will increase as miles driven go up.
And we know from history that the muted break it rotor growth is also still being impacted by last years very mild winter.
For this year what are all indications, we have called for a normal weather.
Any but anything normal in this environment would be well.
We expect that our sales growth on the pandemic related Serge will moderate over time. However, we will continue to invest in growth initiatives in both our retail and commercial that position us well for the future.
In addition, we continue to believe our products and services will be in high demand during more difficult economic times and this resiliency gives us significant income confidence about our prospects.
One thing we are certain of is our team continues to perform at an exceptional level I'm. So proud of them across the enterprise, we remain focused on providing everyone with the support Inc.
Herdsmen and resources, they need to live up to our pledge of always putting customers first.
Now I'd like to again, thank our autos owners for their extraordinary efforts. During these unprecedented times in particular I would like to recognize the tremendous contributions of our store and distribution center autos owners and their leaders who have been there for our customers X.
External or internal every day since the beginning of the pandemic.
I ask each of you listening to this call.
To stop for a moment.
And imagine yourself and.
In a public environment.
Five plus days a week.
For the last nine months.
Helping customers.
Well at the same time trying to get yourself.
Your teammates.
Customers.
Ultimately your own family say for the virus.
Seriously.
Seriously stop and think about that.
That is exactly what our team has done.
Our stores haven't closed.
Our distribution centers are operating at breakneck speed.
Thanks to these autos owners in our stores and distribution centers for all they've done.
In the spring, we implemented something innovative and new for all eligible for full and part time hourly autos owners and ultimately for our store managers and DC advisors.
Well for the emergency time off for Ito as we call.
In essence, it amounted to two extra weeks of vacation.
It gives them the flexibility to ensure their sales.
Neil with child care issues care for a sick family member.
For most importantly.
Stay home state.
Stay home and they were showing any symptoms it is.
His work and it's worked exceptionally well.
Many of them as use this benefit while a significant portion of sales.
And we'll receive meaningful sales should they choose next month.
At 800, 1600 dollar or more bonus for most of our hourly autozone.
When we roll this new benefit out as you would expect we share that it was a one time extraordinary benefit.
Who knew then that the pandemic would still be raising at the turn of the calendar year.
So two weeks ago, we announced our team that we would allow them to carry over any unused easier.
Or be paid out in January at their election.
But every single Autozone move as unused normal vacation would be allowed to carry it over six months past the normal debt load.
And most importantly, we will be extending all eligible pull apart hourly autozone store managers and DC advisors in the U.S. with another week of Ito at the beginning of the new calendar year.
This is an expense that will be recognized in our second quarter of approximately $50 million.
And as I told our autos owners on the wins day before Thanksgiving when I made the announcement.
So large expense for.
It is more importantly, a tremendous investment in them and their safety.
I'm exceptionally proud to work with a team of leaders and a board of directors, who ensure we live consistent with our stated values.
Now it is my pleasure to turn the call over to Bill Giles Bill, Thanks, Bill and good morning, everyone.
I'll start this morning, let me take a few moments to elaborate on the specifics in our.
You know for Q1 for the quarter total autoparts sales, which includes our domestic Mexico, and Brazil stores increased 13.1% for.
For the trailing four quarters, ending total sales per autozone store, a $1.960 million. This compares to $1.865 million in Q1 last year.
Now, let me give a little more color on the sales and our growth initiatives for the first quarter, our domestic do it for me or DIFM sales increased 11.9% to $695 million another strong quarter for us.
In the quarter sales to our DIFM customers represented 22% of our total sales increased approximately $75 million from last years Q1, Our weekly sales per program were $11500 up 9.2% on a per program basis.
This $10600 per week last year.
Only was 11500 per week and the second highest average ever for us.
Well, we were able to average $58 million in total weekly commercial sales.
Another near record and a tremendous accomplishment for our teams.
As you know commercial sales is an important growth initiative for us and we are investing in a disciplined way to create a faster growing business. We now have our commercial program in 85% of our domestic stores. This year Weve opened 36, net new programs, finishing with 5043 total price.
Yes, as our sales efficiency per store remains at near record levels.
Give a little more color on our success in commercial and the growth playbook as we move forward.
This past year, we believe we grew share and remain focused on repeating this graph on slide 21.
Fundamentally we believe that our share gains are underpinned by the investments we made in improving the quality of our parts offering many in the Duralast brand improvements in our parts coverage by model year, and a commitment to providing exceptional service.
These core focus areas have enabled us to drive double digit sales growth for the past few quarters and position us well in the marketplace.
As we move forward, we are focused on several initiatives that we believe will accelerate growth first we continue to expand our inventory availability initiatives by adding mega hub locations.
We opened three new Mega hubs this quarter, bringing our total to 47 these.
These store substantially increased local market availability, and we see a meaningful lift in sales and the markets where they all that.
With over 80000, skews or more we deliver same day and often multiple times for a day just stores and Mega hub markets.
This means the store can say, yes, we have it significantly more than when they are sourced from a hub and carries 40 to 50000 skews.
Second we are improving our service continually by upgrading service levels with our parts professionals and drivers we are delivering faster and we are supporting our customers with overall needs better than before.
We recently implemented a chain wide of the U.S. technology that will significantly improve our delivery times and the accuracy of the commitments that we make to our customers.
They're using our one team approach we have further integrated our commercial business in our stores, where we offer programs. This means that store management and the entire teams focused on driving sales and improving service to our commercial customers.
Fourth we continue to invest and disciplined way and initiatives that make us more competitive in the marketplace and much easier to do business with we like our growth prospects in commercial and believe our growth initiatives will help us create a faster growing auto's out.
Oh gave a lot of color on our DIY business, which I won't repeat but I would like to spend a moment on our integrated retail efforts.
As covance effect on customers ability to get out and shop group.
We ramped up our strategy to enhance the customer shopping experience by meeting customer is when where and how they wanted to shop as fast for do we continue to see very strong growth in our byline pick up in store shopping channel.
While our other two options next day delivery and shipped to haul were also up nicely our buy online pick up in store operating continued its rapid growth.
Pickup at store grew faster than our ship to home option as customers continue to value interaction with our experience in the store advisors, while our online sales remain less than 5% numbers DIY business traffic to the website as a tremendous marketing tool for our in store business, we remain committed to improve.
I mean, 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 into our stores for pick up.
Our Mexico stores continued to be impacted by the pandemic. In addition to impacting sales the weakness in the foreign currency exchange rate put additional pressure on our resolve the exchange rate finished the quarter at 20.6 to the dollar and was roughly 6% higher than last year.
As first quarter rate.
As a result of the devaluation our total U.S. dollar sales were negatively impacted.
During the quarter, we did not open any new store as and finished with 621 store as well.
While the macro environment has been challenging we believe we are seeing signs of a turnaround for the Mexican economy, we remain committed to our store openings schedule in Mexico for the foreseeable future.
Regarding Brazil, we finished with 45 stores, we opened two new stores in the quarter like the U.S. and Mexico, Brazil faced challenges with COVID-19 stay at home mandates and foreign exchange headwinds.
The Brazilian real devalued roughly 30% for Q1 year over year, we view the common impact to be short term in nature for Robert <unk>, Brazil stores as well.
Our commitment to growing Brazil, Brazilian business has not wavered.
Now I'll pass it off to our CFO elect in a new member of our team Jumeirah Jackson to take us through additional piano items, and our cash flow and balance sheet highlights for before I do I would like to personally welcome Jim Mayer. So our team. We are also excited to have him here. He has been a very quick study and we all look forward to his valuable comps.
For views ins for many years to come Jim here.
Thanks, Bill and let me first day, how delighted I am to join auto zone at this point in my career and the company's rich history.
For the pleasure working with you and I am so grateful for the opportunity to lease a world class Finance and store development team built over the years.
I'm also fortunate that you're running through the tank use a sports analogy, which has enabled me to spend valuable time in our stores and distribution centers and learn the business from the ground up north.
Your track record of building shareholder value for this company has been impressive certainly not many see as opposed to kind of numbers you put on the board during your tenure.
Wish you into all the best as you write the next chapter.
Let me begin on them for you know gross margins for the quarter. Our gross margin was down approximately 62 basis points.
Categorized drivers in three markets.
The pressure as a result, one time markdowns on cold and related goods, such as hand, sanitizer, where we saw significant slowdown in sales velocity as we move through the quarter.
Another third for the pressure as a result of higher loyalty transactions as our transaction accounts have been up materially over the last two quarters. We simply have issued more 20 dollar credit is the customers. This is translated into higher sales and profits, but a slightly lower margins.
Given the share gains we have seen as evidenced by the high single digit transaction growth and Bill Rhodes mentioned earlier, we are planning for this headwind gross margins to remain in future quarters now.
Now this is a good outcome for our business as we're driving new customers and retention.
The remainder of the de leverage was driven primarily by mix and some price and investments, we're making in select merchandise categories to improve our competitive position.
For our industry remains extremely rational when it comes to pricing all of the investments. We are making suggest that we are growing our DIY and DIFM businesses at roughly double the rate of the overall market for better we're committed to capturing our fair share and improving our competitive positioning in a disciplined way.
Our primary focus will continue to be growing absolute gross profit dollars, our total autoparts segment.
Regarding operating expenses, our team, particularly our store operations and commercial teams continue to manage our expenses well. During these times our expenses were up 6% versus last year's Q1 due to our very strong sales results were able to leverage operating expenses 222 basis points.
Moving in this quarter's expenses were approximately $5.2 million related to emergency time off and other corporate related expenses.
We believe there will be long lasting benefits from our decision to provide immersed in time off for the for ROIC efforts undertaken by our hours owners during the pandemic.
This is perhaps one of the most important investments we have made maybe ever.
We will continue to manage as DNA in line with sales volumes.
Moving to EBIT EBIT for the quarter was $615 million up 23% versus the prior year. Our EBIT margin was 19.5 for 760 basis points versus the prior quarter.
Interest expense for the quarter was just over $46 million up 5.6% from Q1, 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 last years.
Third quarter.
We are planning an interest in that same 47 million dollar range for the second quarter of fiscal 2021 versus 44.3 million last year for second quarter.
The increase in Q2 is driven by the same reasons noted for Q1.
Debt outstanding at the end of the quarter was just over five and a half million dollars for approximately $228 million about last year's Q1, ending balance of just under $5.3 billion.
Our adjusted debt level metric finished the quarter at 1.9 times EBITDAR while.
While in any given quarter, we may increase or decrease our leverage metric based on debt and equity market conditions, we remain committed to both for our investment grade rating and our capital allocation strategy and long term share repurchases are an important element of that strategy.
For the quarter, our tax rate was 22.2% versus 23.2% in last year's first quarter. This.
This quarter's rate benefited 144 basis points from stock options exercise, while last year had benefited 33 basis points.
Stock option exercises are predictable and as such it will affect our tax rate and ultimately our net income for the yes.
For the second quarter of fiscal year 2021, we suggest investors model was at approximately 23 and a half dozen before any assumption on credit is due to stock option exercises because we cannot effectively predict this activity we remain committed to reported stock option impact on the tax rate.
Moving to net income in NPS net income for the quarter was $442 million up 26.3% versus last year's first quarter, our diluted share count of 23.8 million shares was lower by 2.9% from last year's first quarter. The combination of these factors drove earnings per share from quarter to $18.
61 cents up 30.1% over the prior years first quarter.
Now moving to cash flow for the first quarter, we generated $683 million of operating cash flow.
This was up approximately $236 million over last years Q1.
Our operating cash flow results were driven by the exceptionally strong earnings that Bill mentioned earlier and working capital.
Net fixed assets were up 3% versus last year capital expenditures for the quarter total of $113 million, reflecting the spending to opened 41 net new stores this quarter investments in existing stores hubs and mega hubs and information technology investments.
With the new stores opened we finished this past quarter with 5924 stores in the U.S. 621 stores in Mexico, and 45 in Brazil for a total store kind of 6590 for fiscal year 2021, we expect to get back to our usual cadence of approximately a 150 domestic stores roughly 50 internet.
Total stores.
Depreciation total is $9.6 million for the quarter versus last year's expense of $89.7 million.
We repurchased $678 million autozone stock in the quarter versus 450 million last year at quarter end, we had $117.6 million remaining under our share buyback authorization.
Regarding our balance sheet, our debt was flat with last quarter, and our cash and cash equivalents remains significantly higher than historical levels. We now have over $1.7 billion in cash on the balance sheet of which one and a half million dollars is excess cash.
Quickly position remains strong as we have both a multiyear and a 364 day credit facility totaling $2.75 billion that remains untapped.
We're also managing our inventory or low as our ending inventory per store growth was up 1.2% versus Q1 last year.
Inventory per store was $702000 versus $694000 last year and $683000 last quarter.
Total inventory increased 3.7% over the same period last year, driven by new stores and improved product assortment net.
Net inventory defined as merchandise inventories less accounts payable on a per location basis was negative $99000 versus negative $71000 last year and negative $104000 last quarter.
As a result accounts payable as a percentage of gross inventory finished the quarter at 114.1% versus last quarters Q1 of 110.3%.
Well, let me spend a few minutes on capital allocation and our share repurchase program. This.
This past quarter, we restarted our share repurchase program as we mentioned on last quarter's call, we expected to gradually restart our buyback program during the first quarter.
We said that we intended to utilize our ongoing free cash flow to buy back stock and based on our view for the future begin methodically utilizing some of the excess cash we currently have on our balance sheet.
As we said last quarter, if we have concerns about the near term, we will simply temporarily suspend repurchases again, but we feel comfortable with our ongoing strategy. This past quarter, we spent $678 million on stock repurchases, representing 584000 shares we remain confident in our near term plans and as such.
Expect to systematically reduce the level of cash and cash equivalents on hand.
For the remainder of this fiscal year and return meaningful and historically unprecedented amounts of cash to shareholders as part of our disciplined capital allocation strategy.
To wrap up we had a very strong quarter highlighted by exceptionally strong comp sales, which drove a double digit increase in net income and as we remain confident in our ability to drive long term shareholder value by first investing in our growth initiatives driving robust earnings in cash and returning excess cash to our share.
Your orders are.
Ill remind you that our business remains remarkably resilient through the cycles and investments we are making today in our products and services position.
Position us well in the near and long term.
Let me give you just a few initial impressions of my short time here in the <unk> and the Cfos here.
This is a tremendous business with an incredibly bright future.
We have a world class leadership team with deep domain expertise and a passion for winning in the marketplace I.
I have experienced first hand, the dedication and heroic actions of our autozone firms in the stores and distribution centers and as a longtime customer I know that they are the reason why we are delivering exceptional results.
And finally, our execution on our growth initiatives give me great confidence in our ability to grow our business and build tremendous value for our shareholders I will turn it back to Bill Rhodes.
Thank you, Jim Air and well.
These continue to be unique and abnormal times.
And they have required us to look at many things differently to manage our business day to day let.
I'm 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're learning how to operate effectively lease terms, we remain wary of the volatility that can exist.
Relative to the above the us at our international markets.
We are fortunate to have extraordinary people, who are committed to servicing our customers and helping them get worse.
We'll see their families are simply get back and forth to school.
Our operating thing this year is autozone strong.
I'm honored to serve we've come together this year to live this thing like never before.
While it is impossible for us to know what the cadence for the new year sales will be I want to be crystal clear, we plan conservatively in order to manage our cost structure appropriately.
Our domestic retail business continues to do very well, we understand trends will slow in the future, but we believe we have a tremendous ongoing opportunity within our domestic commercial business. While we understand these things. We also feel we are well positioned for continued future share gain opportunities across all.
For the business segments, we operate.
Our business continues to do very well, but as always we have work to do as we start calendar 2021 first.
First and foremost our focus will be on keeping our autozoners and customer sales, while providing our customers with our automotive needs. Secondly, we must continually challenge ourselves. During these extraordinary times to position our company for even greater for future success, we will ultimately be measured what our future cash flows look like.
Three to five years from now.
Lastly, I continue to be bullish on our industry and in particular bullish on autozone.
Before we proceed acuity.
I want to take the Liberty of.
Publicly thing to exceptional leaders.
Over 37 years ago.
Bill Hackney, followed and his father's footsteps and joint that's extraordinary enterprise.
And over those 37 plus years Bill leveraged his knowledge of virtually every part of this business and his deep understanding of our customers to our and our customers' benefit.
He will be missed.
And almost 15 years ago build.
Bill Giles trade at home goods for Autoparts and boy work, we fortunate.
I've had the honor to partner with Bill ever since he joined the company.
How many Ceos have the privilege to host 59 consecutive earnings release calls with the same world class CFO.
Well, it's been a great team member and advisor for our entire organization and we thank you Bill.
Well, we will miss both of them as our founders father, J.R. Junior often said quote no individual builds the business they build an organization and the organization builds the business.
Both of these autozone is for allied embraced that mentality is built tremendous teams.
We wish you and your families. The best of luck in your next chapter and thank you for all you've done for each of us.
Now, we'd like to open up the call for questions.
Thank you we will now start day Q any at this time, if you would like to ask a question you May press star one on your telephone.
Please unmute your phone is on state your first and last day month prompted to withdraw. Your question you May Press Star two you will be allowed one question and one follow up one moment. Please for the first question.
Bret Jordan with Jefferies. You May go ahead Sir.
Hi, good morning, guys.
Good morning, Brett.
I guess, a little more follow up on the market share gains. It seems like the second quarter you guys have been picking share off could you maybe give us some color both on the commercial and DIY side.
Where you're seeing the the share daughters, and I guess the follow up question would really be on sustainability, if you're picking up share from W.D.'s given your higher in stocks debt.
Do you see that share sustaining in the sense that the.
Those customer stay with you as the WD is bring inventory back up I guess is your position higher on the call. This relatively defensible. Thank you.
Thank you for the question Brett on the commercial side of the business have you seen the publicly available numbers that I think first of all we're at the top of the eight in both the retail and commercial businesses with our public peers. So I think we're doing very well there regarding your specific question W.D.'s clearly day.
For the worst of times back in Q3, we were in a very different position than some of our of our smaller competitors.
Really shut things down many of them closed or work for reduced hours had less inventory and the like and I think that that gave us a real opportunity to introduce ourselves and be there for certain customers that maybe we didn't have the same relationship before as we've said many many times the commercial part of those business certainly as a relation.
Chip business and when you're there for customers you build up some credibility that you can leverage for a long time. So I think that that's the bigger issue rather than them getting back to where they are normal operating procedures are that we were there in people's times of need and I think those people have long memories about the other retail side of the book.
So.
Again, I think we're performing at the highest level of any of our public peers, but I also think that there are other parts of the channel other channels and the retail sector mass and online that we did particularly well a guest during this period of time and can.
When used to do so again I think is that sustainable or not that's the biggest charge that we have as a management team. We have this opportunity to introduce ourselves to new customers and as we said in our prepared remarks much of our business growth for the retail business is coming from existing customers, who are doing more business.
As with those.
And I think it's very encouraging that were there for.
Participating with us in different categories and they normally to the.
So we feel very good about the.
Yeah on the D. I have found the commercial side I guess, the WD is historically have strong relationships, but might not have had inventory at a point in time and I guess as their inventory balances come back up I guess my real question is do you see any shift in the cadence of your share gains or the WD is becoming more effective competitors or are you really holding.
All of the share that you picked up in the downturn.
Yes, I wish I had better information to answer that question, Brett we have very specific information on the sales force categories that our retail business. We don't have that level of information on the commercial business. So we have to like everybody else look pretty much at the topline numbers and try to extrapolate from there, but we feel like we're doing well I can't tell you how the W.
These are doing as a whole.
Great. Thank you.
Yep. Thank you.
And our next question comes from Simeon Gutman with Morgan Stanley You May go ahead.
Hey, good morning, everyone and I wish Bill Giles a good send off again I think we did it last quarter, but it was a nice message from Bill Rhodes on my first question is on price.
We've talked about investing in price a little more prominently in the last couple of quarters can we talk about the rationale.
Any specific areas you are trying to address that price spreads online is a DIY DIFM and.
And then can you talk big picture around the elasticity of demand I'm, assuming it's not for short term gains because a lot of the demand is failure base, but how do you think about that.
Yes. This is Samir no one else is a couple things first of all we control our own destiny year results.
It relates to our gross margins.
Our non result of cost pressures for pricing spirals within within the industry. What we're doing is we're investing in a disciplined way to improve our competitive position.
We're improving our overall profitability.
And in many ways the productivity for achieving in operating expenses serves as a bill payer for some of the investments that we're making what I'll say about pricing.
Pricing is that we're making decisions on pricing merchandising and investments.
Based on data and disciplined and these are decisions that are resulting in both share gains and higher overall earnings. So I like the playbook that we have is that as it relates to the pricing.
Okay. Thanks for that let.
Let me ask for maybe a follow up on on stock buyback. I think you mentioned you may exceed I guess historic levels and I think the last amount that you purchased for something of a $2 billion category or 2 billion dollar level on a per week basis. So I mean is there anyway are you planning to eclipse that target.
And then you know would you take up your leverage short term would it have any impact vis-a-vis. The rating agencies can you take your leverage up to buy back an outsized amount.
Yes, So let me let me say this I mean this is perhaps one of the most powerful free cash flow story really in all of the industry.
The business model that we have.
Enables us to invest in a disciplined way and growth and return meaningful amounts of cash to shareholders in a very consistent and efficient way and so what we what we recognize is that.
This model is powerful enough from a cash flow standpoint for us to do that investment in the growth of our business and continue along the journey that we've been returning meaningful amounts of cash and you know what the free cash flow that we generate so we don't see a need today to do anything different.
In terms of leverage and we also don't.
You need to day to do anything different in terms of moving off the center line that we have for this disciplined capital allocation strategy.
Okay. Thanks.
Thank you. Our next question comes from Chris Horvers with JP Morgan you May go ahead.
Thanks. Good morning, guys. Thanks, guys I think you know bill the the trade from home furnishings to Autozone has definitely that the trade of the century coming to this organization from linens and things so congratulations again.
So my question two questions. So first on the do it for me side of the business.
Your annual run rate is now 600000 per program per year.
A couple of years ago, you were some 500 and so you look at your peers. During this 800 plus type range I guess how.
How do you think about getting to that level.
Do you think that the service changes the parts availability changes the Mega hub strategy in non delivery strategy are sufficient to sort of keep step functioning up to that to that level of productivity.
Yes, Chris Thank you for the question.
A lot of attention gets focused on our close in competitors and rightfully so and they both outperformed most all of the sales per program.
Basis and have for a long time.
I'm really pleased with what our team has been able to do to begin closing that gap, but we really don't want to get too focused on our closest competitors. We want to think about the industry as a whole as I mentioned in the prepared for US. It's a 75 billion dollar market. It is incredibly fragmented much more so fragmented business.
Retail side of the business, so I want to make sure that we're focused on the entire market not our closest competitors. If you look back over the history of.
Our team has been able to do.
Is really helped us as you know to accelerate our growth.
Significant would we vastly improved our inventory assortment in every individual store, particularly as it relates to commercial oriented vehicles. We have this hub and Mega hub strategy, which we are rolling out and continues to outperform particularly the mega hubs every time, we talk about for the Mega hubs, we talk about the beta.
Outperformed our expectations, we now built for us, but fabulous brand called the durable asset ratio was five to seven years ago people thought was an inhibitor to our success now everybody else sees that as a real key part and a leverage point for us in the commercial business think about the other Nash.
Flow brands that a decade ago or so powerful many of them are gone those that are still around or less relevant today than they were back then and now. We've also built this really strong sales force.
Which we didnt have a decade ago.
We're now supplementing all of that with some technology tools that are some of the largest investments that we've made in technology to make our teams more efficient and improve our delivery and reliability. So we're very bullish on what the future is and frankly pretty proud of the progress that we made for the.
Got it.
And then in terms of the the last four weeks for the quarter you talked about you know roughly at an 88 and the last four weeks. Some of your peers have talks about disruption in <unk> and the election week I was just curious you mentioned that if we took out the election week.
What it suggests that maybe that the underlying trend rate is it's better than that eight.
And I'll ask just because we should ask it any commentary on what you're seeing so far this quarter.
Perfect Chris Thanks for getting that normal question out of the way I'll answer that.
We released our earnings so quick in the quarter. So we're two weeks and three days into this quarter. We don't want to talk about what's happening this quarter, because we don't want to our owners to get focused on two and a half week period of time. So historically, we've not talked about whats happened intra quarter, and we're not going to do that the.
We did we were very specific in showing you what happened in each for week period during the quarter, we don't generally give that level of clarity either.
I want to remind us coming into Q4 that we told you we were up 16 and a half for so I'm in the last four weeks of last quarter. I told you today that we were up 16, and a half per se, but first for week period, I think a lot of people thought our sales had gone down materially in September and that wasn't true regarding the eight.
Eight that we had in the last four week period of time.
We were very intentional and say, yes. The election was going on we also in this period of time sales are driven up and down based on weather patterns, we get a cold snap it could be very positive we get very rainy weather. It can be very negative. So we've given you the cadence we are.
It's very hard for us to talk about and even understand what the next 12 weeks is going to be like we don't know these are unprecedented levels of 12.3% same store sales is the best performance in this company since I've joined the company over 26 years ago.
It will slow down over par how fast that happens I don't know, but I do know we have an incredibly strong business that regardless will continue to outperform over the long term.
Oh, seven thanks, very much and have a great holiday season.
You too.
Thank you and our next question comes from Michael Lasser with yes, you.
You May go ahead Sir.
Good morning, Thanks, a lot for taking my question Bill engine Mir Congratulations and best of luck to you both bill.
Bill Rhodes in your prepared remarks, you pointed out that during the last 30 years and so the best the periods its strongest growth for the industry have been during times of recession.
In subsequently you're off to the industry. So the income negative do you think this time is different because what's been driving the industry has been some of the discretionary category rather than the strength and momentum failure like like capital last time has there's a per.
Perception out there that the DIY business is going to give back a lot of what a team this year when.
For get back out and do what they bid for previously and because of Autozone mix of business.
And then it will be the most sensitive to.
Software from the DIY segment whenever that happens.
Well really terrific question Michael Yes. This time is different Theres no question about it.
I've said I've just said this is the second best quarter since I've been at the company.
The best quarter was last quarter will we be able to cop, 21.8% same store sales in Q4 I highly doubt it will we give some of that back absolutely. The question is will we give it all back.
Are we introducing our sales to new customers well be introducing existing customers to new categories for us are we kind of standing in that gap for customers. I think we are and I think we're going to build loyalty with our customers over the long term my real question for us is it.
If we hadn't had this pandemic.
What what our sales have been two years from now so are there is a trade outs.
For the there if we had net pandemic.
As you move forward two years for them and we have 234%.
Increased in business that we would have had the endemic not happen I think thats a distinct possibility and if we do I think we'll be very pleased with that.
Don.
The train is a good.
Good.
Euphemism for Justin that you Autozone is going to keep chugging along so that's helpful and the neural is good for those kind of things Michael Yes. It is light and it's not a train usually.
Okay. The follow up is on the gross margin. So it's been down two quarters in a row, there's a perception that this might be the beginning of a longer term trend, particularly if autozone chooses to use some of the flexibility. It has its own unique side to go and reinvest that into.
Two.
Price or other other gross margin.
Driving initiatives. So a is that true in the Inc.
There's a lot of well documented pressure on labor. So do you lose some of the flexibility.
For seem moving the for flexibility if we treats and other factors that are driving your cost labor Oh hurt hurt that that's out of your PNM. Thank you very much.
I would just jump in and say that look from a gross perspective, it's down two quarters in a row, but Frank frankly, a big chunk of this one was one time, so you've got a little bit of pressure on some of the things that jump here pointed up for example on loyalty.
A great example of the fact that too.
For modeling Bill was talking about is that we're seeing a tremendous amount of traffic and therefore, we're seeing a tremendous amount of new and existing customers. Our existing customers are visiting us more and they are building up more loyalty points. That's fantastic as we talk about pricing and think about pricing, we're going to be incredibly surgical about at this juncture said, it's going to be very day.
Weighted driven and at the end of the day. This is about driving gross profit dollars.
Ultimately that is what we are most focused on is driving dollars and as you can see we're improving operating margin overall consumer leveraging our fixed cost structure based on sales that were generating from all of our activities and pricing is just a small example of one of those activities.
But I think overall the way I think about it does look I think for gross margins very healthy thing it's completely in our control we have opportunities to improve and reduce our costs through.
Importing increasing our importing lowering our acquisition cost and.
And as a as to mirror pointed out we have an opportunity to be surgical about how we price and so I think there's a lot of pluses and minuses in gross margin and right now, they're all working to drive sales and drive brands and the only thing I'd add is you talked a little bit about operating expenses and wage pressure you saw in this last quarter and our team.
Did an outstanding job of.
Really driving productivity and we run.
Brian the productivity play with intensity inside the company and we've been able to manage.
Our labor cost sort of in line with volume.
We'll be pockets of wage pressure you mentioned in certain regions, but quite frankly, we're committed to investing in our orders owners, regardless of what happens in the regulatory environment and quite frankly, that's one of the reasons why we are so good at driving productivity inside the company. So again, we control our own destiny as it relates to these things and we are going.
To invest in a disciplined way.
So moving the needle on earnings.
As a whole.
Understood. Thank you so much and good luck.
Thank you Mark.
Thank you. Our next question comes from Matthew Mcclintock with Raymond James You May go ahead Sir.
Hi, Thanks, everyone and honestly.
Honestly Amazing result, so I don't even know what to say the job guys.
The whole team. Thank you for Claire.
Damir also welcome really happy to have you.
Can't wait for you to talk more because honestly this is a great company. So.
You made a good choice for them So day.
Let's see here.
Is.
End of the day I'm trying to think about your commercial growth was pretty outstanding this quarter in vehicle miles driven it's still negative.
And I'm trying to think through that because.
Good day are you trying to say that people now are coming back.
To work the professionals that normally would go to mechanics are coming back to work and that's why they're starting to go to mechanics, and that's why the commercial business is good or with.
End of the day exit to exit rate of what your commercial business is doing right now should.
It would be pretty higher than what it is what it is right now it vehicle miles driven increases so that's kind of.
Anything you could say toward that would be very helpful. How you think about the commercial business and the growth you did this quarter.
Given that.
Honestly it should get better for you.
Yeah. Another fantastic question. Thank you.
As you look at the commercial business, you're exactly right. The miles driven are down and they've been down for a period of time I would also tell you that another thing that's muting. The commercial business is the lack of winter that we had last year tire sales are down maintenance sales are down breaks rotors without talked about this.
Typically in the prepared remarks, the other thing thats happening in that sector is the independent part of the sector is performing much better today than the than the national accounts. If you will and I think bill to change those those things will change over time as you see we get back into a normal weather pattern, but again were.
For this opportunity to introduce ourselves, particularly for some of these up and down the street accounts for the different level than we have in the past I.
I don't believe that Steve were quote returning to work, we don't see it yet another significant miles driven improvement it improved vastly in the summertime, but then it's kind of been fairly steady over the recent months we've seen for.
I remind you that not all of the house driven or the site.
So people that are driving to work in some of these urban cores.
Generally our core customer our core customer has not had the luxury just like our our autos owners that are in the stores and the distribution centers, our core customer doesn't have the luxury to work from home.
They are doing.
Manual labor they are providing service economy kind of jobs and so I don't think that our core customer has really seen a significant change in their driving behaviors.
So if I could follow up on <unk> just ask this question just because you you made so many investments and the commercial business and I agree that you guys are very good and the iwai right but.
Because you may have so much investment and the commercial business over the years.
Isn't that a sticky business.
It doesn't that kind of imply that next year the comparisons aren't that difficult.
Because once somebody goes to you they kind of don't go back.
Is that a fair way to think about that.
He is a very for a way to think about it I'll just remind you when we got serious about the commercial business was 2008, we were doing about $750 million annually at that point.
And the last 12 years, we've more than tripled the business getting close to quadruple in the business and it's been pretty darn sticky along the way that's certainly our hope and those were launched in many of these new initiatives.
That are only going to amplify our service advantage as we've now shored up our inventory Assortments. We built this brand and we've got somebody up selling our story and our sales force, we feel pretty good about the future will it be a straight line, though it never is but we've had a pretty strong.
Trajectory over the last 12 years of growing that business much faster than the industry has grown.
Look guys I really appreciate the color. Thank you very much.
Thank you I appreciate it all.
All right before we conclude the call I want to take a moment to reiterate we believe our industry is strong and our business model is solid.
We'll take nothing for granted as we understand our customers have alternatives to shopping with US. 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 succeed this fiscal year, but I want to stress that this is a marathon and non us.
Brent.
As we continue to focus on the basics and focus on optimizing long term shareholder value. We are confident autozone will continue to be successful.
We thank you for participating in todays call and we'd like to wish our autozone nurse and everyone on the call a very happy and most important a healthy holiday season, and a prosperous new year.
Thank you very much have a great day.
And thank you. This concludes today's conference call. You May go ahead and disconnect at this time.