Q2 2021 Autozone Inc Earnings Call
Okay.
[music].
Good morning, and welcome to the Auto Zone Conference call. Your lines have been placed on listen only 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 call will discuss auto zone second quarter.
Earnings release, Bill Rhodes, the company's chairman, President and CEO will be making a short presentation of the highlights of the quarter. The conference call will end promptly at 10, a M. Central time 11, a M. Eastern time before Mr. Rhodes begins the company has requested that you listen to the following state.
Regarding forward looking statements.
Yeah.
Okay.
And where are you going to play the forward looking statement.
Good morning, everyone, obviously of a curve ball so I will read the forward looking statement certain statements contained in this press.
<unk> constitute forward looking statements that are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 forward looking statements typically use words, such as believe anticipate should intend plan will expect estimate project position of strategy seek may could and similar expressions.
These are based on assumptions of assessments made by the company company's management in light of experience and perception of historical trends current conditions expected future developments and other factors that the company believes to be appropriate. These forward looking statements are subject to a number of risks and uncertainties, including without limitation product demand energy prices weather competition of the credit market can.
<unk> cash flow is access to available of peaceful financing future stock repurchases the impact of recessionary conditions consumer debt levels changes in laws or regulations risk associated with self insurance war on the prospect of war, including terrorist activity the impact of public health issues, such as the ongoing global pandemic of of novel strain of the Corona virus.
Inflation of the ability to hire train and retain qualified employees construction delays, the compromising confidentiality availability or integrity of information, including cyber attacks historic growth rate sustainability downgrade of the company's credit ratings damage to the company's reputation challenges in international markets failure or interruption of the Companys information.
All of these systems origin, and raw material cost of suppliers disruption on the company's supply chain due to public health epidemics or otherwise impact of tariffs anticipated impact of new accounting standards and business interruption of certain of these risks and uncertainties are described in more detail on the risk factors section of contained in our.
Item one a under part one of the company's annual report on form 10-K for the fiscal year ended August 29, 2020 of these risk factors should be read carefully forward looking statements are not guarantees of future performance of actual results developments and business decisions may differ from those contemplated by such forward looking statements on events described above and in the risk factors.
Could materially and adversely affect the company's business. However, it should be understood that it is not possible to identify or predict all such risks and other factors that could affect these forward looking statements forward looking statements speak only as of late made except as required by applicable law. The company undertakes no obligation to update publicly any forward looking statements.
Whether as a result of new information future events or otherwise.
Okay, well good morning, and thank you for joining us today for Autozone is 2021 second quarter Conference call with me today of Jamire Jackson Executive Vice President Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax regarding the second quarter I Hope you've had an opportunity to read our press release was released and learn of.
The quarter's results.
Not the press release, along with slides complementing our comments today are available on our website www Dot Autozone dot com under the Investor Relations link please click on quarterly earnings conference calls to see them.
To start off this morning, I'll spend some time talking about our sales results trends over the 12 weeks merchandise categories that drove our performance on any regional discrepancies.
As I've said on our press release this morning.
We could not deliver the kind of results we had without the heroic efforts of our store and supply chain Autozone.
While classified as essential workers essential.
Seems insufficient to describe their remarkable contributions to our company our customers and our results are autozone is have really stepped up during the pandemic has been nothing short of exceptional and our top priority remains being committed to providing all of our autozone is of a safe work environment to be sure to so they can help our.
<unk>, while Jamaica will talk more about this when he discusses the investments we've been making.
I will say the additional emergency time off our Eto. We offered is something we just knew was the right thing to do for our Autozone us. Thank.
Thank you Autozone is again.
Okay, let's turn to our sales results.
Our overall comp sales were up 15, 2% this quarter.
Our growth rates for retail and commercial of both strong this quarter with retail comps being slightly stronger than commercial commercial came on strong at the end of the quarter and comps similarly to retail for the last four weeks.
Let's review of our sales cadence, we told you on our last call. We ran an eight 8% comp for the last four weeks of Q1.
In the first four weeks of this quarter, our sales accelerated to a 10, 7% comp.
As the holidays arrived we saw further acceleration, which was sustained for the balance of the quarter.
We ran of 17, 5% comp pretty consistently over the last eight weeks of the quarter.
This quarter's traffic versus ticket growth was pretty close to split down the middle Although ticket was slightly stronger it was encouraging for us to cease sales inflect upwards, starting in January with both ticket and traffic moving higher.
Growth was stronger this quarter due to hard parts sales mixing higher than what we experienced in the first quarter.
Our number one priority continues to be the health safety and wellbeing of our customers and our autozone.
Throughout the pandemic, we continue to follow all of the National State and local mandates on ordinances and of always kept close tabs on the CDC guidelines, we continue to require mask entering our facilities performed question areas of our team members and many other safeguards like enhanced cleaning protocols providing masks.
<unk> hand, sanitizers and other PPE to our autozone is to ensure safe shopping and work environments at.
And just last week, we announced that we would provide every autozone or with a 100 dollar award once they completed their vaccination for COVID-19.
That's every autozone or including part timers. This is just the next logical step in our efforts to provide a safe working and shopping environment.
I continue to be inspired by our board and our management team's commitment to doing what is right.
Safety first.
You see our values and our culture had been in full force on effect over the last year and this pandemic.
Addressing our supply chain, we've done of solid job with handling the extra demand and our in stock levels have continued to improve.
Of that a little more color on industry drivers of our sales performance. This quarter I'll remind you that we were anxious to see what would happen as we got further and further away from the enhanced unemployment benefits that ended last July.
In the first week of January over $100 billion of stimulus was distributed to Americans. The majority of these funds was for the one time checks as part of the $600 billion stimulus package passed in late December.
While smaller in size than the April disbursements, we did see our business pick up nicely and our sales remained elevated throughout the remainder of the quarter. While we continue to be encouraged with the current selling environment, we feel any additional stimulus should lead to a strong sales environment.
During the quarter there were certainly some geographic regions that did better than others as there always are across both our retail and commercial customer basis. We saw the majority of the country performed well with a midwestern and northeastern markets underperforming the others pretty consistently.
Again, these markets, which represent just over 25% of our store base were solid but not as strong as the remaining markets. For example, the spread on comp sales between these markets and the others was approximately 300 basis points for the quarter. We believe of separation was due to lingering effects of a pile of winter last.
Year and colder weather happening later this winter.
But winter did come this year.
Did it.
And the performance GAAP closed.
So we are encouraged about the summertime and believe we won't have to discuss why of mild winter affected comp sales during our upcoming fourth quarter.
And I could not be more proud to say that based on the retail sales data we have for our industry. We continue to experience historically unprecedented share gains the data shows the industry has been growing in the mid single digit range.
Range with our sales closer to three times the industry's growth rate.
While we are thrilled to have these share gains now our charge remains to maintain them heading into the spring and summer months.
I'm sure. Many of you would like to know how we're thinking about sales from both the third and fourth quarters of fiscal 'twenty. One I'll remind you that typically in recessionary environments. Our business is remarkably resilient. However, nothing about this global pandemic as typical.
Beyond our primary objective to ensure the safety of our customers on Autozone is our focus is on providing our auto zone is with the resources they need to provide our customers with an exceptional shopping experience.
We are optimistic about the sales environment heading into the FERC third fiscal quarter, but we will obviously have a much more difficult comparison in the fourth fiscal quarter as last year's fourth quarter benefited from the April 2020 stimulus package.
For now it remains difficult for us to predict sales for the remainder of the year.
This is especially true for the fourth quarter of this year when we're up against the fourth quarter of previous years 21, 8% comp store sales growth.
While we continue to expect our sales growth will moderate over time, we believe our products and services will be in high demand during these more difficult economic times.
Over the long term if the economy enters a deep and protect protracted recessionary environment. We continue to believe our customers will focus more on maintaining their current vehicles. These time periods had benefited our business in the past retail in particular as it has in the last three recessions last quarter, we reminded you.
The strongest periods, we've experienced of outside sales growth over the last three decades have been the early nineties.
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All coming out of recessionary environments. Therefore, we remain optimistic on the industry this upcoming year.
Interestingly after each of those outsized growth periods. They have never been followed by equivalent declines in the years that follow.
We believe consumer behaviors change during these recessionary periods, allowing us to showcase our skills and capabilities to new customers and we retained many of those customers in the years that follow.
Now, let's move into more specifics on our performance for the quarter. Our same store sales were up 15, 2% versus last year's second quarter, our net income was $346 million.
And our EPS was $14 93, a share of 25% above last year.
Sales were higher than we forecasted at the beginning of the quarter and certainly higher than historic norms, both our retail and commercial businesses showed strength in the quarter with DIY same store sales up approximately 16% and commercial total sales growth of approximately 15% for commercial we averaged over 53 million.
And weekly sales, which was over $10500 and sales per program per week.
While average week of sales per program decelerated from last quarter that as normal as the winter months of lower selling months for us moving forward. We remain very encouraged with what we're doing within our commercial business. The initiatives. We have in place are helping our sales.
I'll remind you that this is a highly fragmented $75 billion market and we believe our product and service offerings provide us a tremendous opportunity to significantly grow sales and market share over time.
While there were some geographical differences this quarter there continue to be interesting trends across our merchandise categories, particularly in the retail business are.
Our sales force categories continue to be strong with categories like tools, antifreeze small repair and formats showing strength, but our hard parts business definitely picked up and in fact, our hard parts business Comped in line with our sales floor for the quarter. This was the first quarter since the pandemic began where we saw our hard parts.
ROE in line with sales floor, while business improved in many merchandise categories such as batteries.
Categories like brakes, and rotors are not comping as high as the overall business. We believe this performance GAAP with certain categories will close as miles driven continue to improve.
As for this year's winter. It was later routing, but it did arrive overall, we view of the winter is not having a material impact on our upcoming spring and summer business, one way or the other.
We expect that our sales growth from the pandemic related surge will moderate over time. However, we will continue to invest in growth initiatives in both our retail and commercial that positioned 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.
<unk> gives us significant confidence about our prospects.
On last quarter's call, we announced we will be expensing additional payroll during the second quarter.
The additional expense was to provide <unk> with more emergency time off.
While this is the second time in our history. We've offered eto benefits. We believe it is the least we could do to support our autozone us in the field.
This extra time off of award has been enthusiastically embraced by our team.
<unk> owners have the right to use the benefits to address medical emergencies take time off to get the vaccine take additional paid vacation time off or wait until the end of the calendar year and get paid what remains in there incremental vacation bank.
In January we paid out $31 million $31 million to Autozone is who didnt utilize the eto, we offer them back in March of 2020.
I have to tell you. It was an honor to provide these autozone is with sizeable checks in recognition of their heroic efforts. We feel this is a very important investment in our autozone and and their safety.
I am exceptionally proud to work with a team of leaders and our board of directors, who insure we live consistent with our stated values.
Now it is my pleasure to turn the call over to Jim Meer Jackson, Jim here.
Thanks, Bill and good morning, everyone. As Bill mentioned, we had another outstanding quarter, our growth initiatives are delivering and the heroic efforts of our autozone or is in our stores and distribution centers are driving exceptional results.
To start this morning, let me take a few minutes to elaborate on the specifics on our P&L for Q2 from.
For the quarter total auto parts sales, which includes our domestic Mexico, and Brazil stores were $2 9 billion up 16%.
On a trailing four quarters ended total sales per Autozone store were just over $2 million. This compares to just under $1 9 million in Q2 last year.
Now, let me give a little color on sales on our growth initiatives, starting with our commercial business for the second quarter, our domestic <unk> sales increased 14, 7% to $639 million sequentially commercial growth was nearly three points higher than Q1.
In the quarter sales to our commercial customers represented 22% of our total sales on a weekly sales per program were $10 $500 up 11, 7%.
We averaged $53 million in total weekly commercial sales and.
Internally, we have been executing against our commercial acceleration program, where we are focused on building a faster growing business with disciplined investments in pricing service technology and assortment, we have a tremendous market opportunity as we are significantly underpenetrated in this highly fragmented portion of the market we know.
Now have our commercial program in 85% of our domestic stores and we're focused on building our business with national regional and local accounts. This quarter. We opened 45 net new programs, finishing with 5088 total programs and our sales efficiency per store remains at near record levels as we leverage our DIY.
Infrastructure and increase our share of wallet with existing customers.
Let me be clear our strategy is working and we believe we grew share and we remain focused on repeating this for the balance of fiscal 2021.
Fundamentally we believe that our share gains are underpinned by the investments we made in improving the quality of our parks improvements in our assortment and parts covered by model year more competitive pricing and a commitment to providing exceptional service.
These core focus areas have enabled us to drive double digit sales growth for the past three quarters and position us well on the marketplace.
And as we move forward, we are focused on our core initiatives that we believe will accelerate our growth even further.
First our Mega hub strategy is improving our parts availability, we opened one more mega hub this quarter of bringing our total of 48 locations and we expect to opened between seven and 10 more mega hubs by the end of the fiscal year.
Given the success of our Mega hubs, and increasing parts availability and driving meaningful sales lift we're now raising our target from 75% to 90 Mega hubs. It build out of 100 to 110. These.
These stores help us expand coverage and say, yes, we have it more frequently.
Second we are leveraging technology to improve delivery times and service levels.
Technology investments, we're making in electronic ordering and tracking will significantly improve our delivery times and accuracy of the commitments that we make to our customers.
We're making it simpler to do business with Autozone, and we're driving efficiency for our sales professionals and drivers.
We are committed to being price competitive we have a laser focus on the key categories, where investment and pricing lead to accelerated sales growth and higher EBIT dollars were.
We're using data science and market intelligence to live up to our pledge to have the best merchandise at the right price.
We like the competitive hand debt, we have on our commercial business and believe we are in the early innings of of transformational growth story.
Now Bill gave a lot of color on our DIY business, which I will repeat but I would like to spend a moment on our retail acceleration initiatives. We're excited about the gains we're seeing in our DIY share growth like the commercial initiatives I mentioned earlier, we are running an intense playbook in DIY that is driving solid results for our business first the assortment work and Mega.
Hub strategy that I mentioned earlier drive tremendous benefits to our DIY business, our investments are improving coverage and availability leading to a meaningful impact on trial and repeat purchase activity.
We continue to focus on improving the customer shopping experience with the work we've done on the digital front our efforts in buy online pickup in store next day delivery and ship to home have helped us meet customers, when where and how they want to shop.
We are investing in technology to continue to improve the customer experience and make it easier to shop, our broad array of products.
Third and similar to our commercial approach, we have a laser like focus on being competitively priced in the marketplace, we're using disciplined and sophisticated data analytics to drive pricing decisions in certain categories categories, where we typically compete with nontraditional competitors like mass and online only selling sellers in commodities and very slow moving part.
And products, we have tested our approach in key categories and markets and this effort is yielding increased top line and gross profit dollar growth, albeit at slightly lower gross margins.
This is a data rich environment, and our tools and capabilities give us a meaningful competitive advantage again, we're living up to our pledge of having the best merchandise at the right price and we believe it is helping us create a faster growing business.
We simply have a relentless focus on execution as bill mentioned, our autozone or in our stores and distribution centers have delivered exceptional results in a tough environment as I said last quarter, perhaps the best investment we have made in our company is the investment in additional emergency time off and return we.
To see our supply chain process record volume in our store autozone or handle record store traffic, while still delighting our customers. This.
This focus on execution is a meaningful competitive advantage for us and we're winning in the marketplace.
Now, let me spend just a few minutes on international.
First we continue to be pleased with the progress we're making of Mexico. During the quarter. We opened seven new stores to finished with 628 stores and our store sales accelerated sequentially like last quarter. The exchange rate again played a role in the U S. Dollar equivalent reported sales exchange rate finished the quarter at roughly 77% higher than last year's.
Second quarter rate that 7% higher than last quarter second rate.
And as a result of the devaluation, our total U S. Dollar sales were negatively impacted.
The macro environment has been challenging we believe were seeing signs of a turnaround in the Mexican economy, we remain committed to our store opening schedule in Mexico for the foreseeable future.
Regarding Brazil, we opened one new store to finished with 46 stores. This quarter. The Brazilian real continues to face headwinds in devalued roughly 25% for Q2 over last year.
Long term, Brazil will be an important market for autozone, and we will invest in a disciplined way.
Now, let me spend a few minutes on the P&L on gross margins for the quarter on gross margin was down approximately 77 basis points 37 basis points of margin headwind is due to higher supply chain costs, including a one time benefit last year that did not repeat this year the.
The remaining 40 basis points came from our pricing initiatives loyalty program and mix shifts as I discussed above were focused on competitive pricing that will drive top line and gross profit dollar gains to be clear, though the industry pricing remains rational and overall, we still have pricing power we have tested certain categories.
And taken action when we have the ability to drive both top line and gross profit dollar gains. This is a dynamic market and we remain disciplined on our approach of strategy is working we see our work translating into higher sales and profits as evidenced by the transaction and share growth that Bill mentioned earlier as we continue to refine our strategy.
Over the next several quarters, we're planning for higher sales and growth gross profit dollars that outpaced the drag from gross margin rate. This is a good outcome for our business as we are driving new customers and retention.
All of the investments we are making suggest that we're growing our DIY and <unk> businesses at roughly double the rate of the overall market or better and we are committed to capturing our fair share and improving our competitive position in a disciplined way again, our primary focus will continue to be growing absolute gross profit dollars at a faster than historic Ray.
In our total auto parts operating segment.
Regarding operating expenses, our teams, particularly our store operations and commercial teams continue to manage our expenses well in this environment.
Our expenses are up 12, 5% versus last year's Q2, but included in this quarters expenses were approximately $40 million related to emergency time off and other cohort related expenses, which represented four 2% of the overall SG&A growth. We believe our decision to provide emergency time off for the heroic efforts undertaken by our on <unk>.
During the pandemic was absolutely the right thing to do as I said last quarter. This is perhaps one of the most important investments we have made maybe ever.
We will continue to manage SG&A in lines of sales volume.
Moving to the rest of the P&L EBIT for the quarter was $482 million up 18, 1% versus the prior year's quarter. Our EBIT margin was 16, 6% up 32 basis points versus the prior years quarter interest expense for the quarter was just over $46 million up 4% from Q2 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 fiscal year's third quarter.
We are planning interest in the same $46 million to $47 million range from the third quarter fiscal 2021 versus <unk> $47 5 million in last year's third quarter.
Debt outstanding at the end of the quarter was just over $5 5 billion versus last year's Q2, ending balance of just under $5 5 billion.
Our adjusted debt level metric finished the quarter of two times EBITDAR, 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 of our investment grade rating and our capital allocation strategy and long term our share repurchases are an important element of our strategy.
Moving to tax our tax rate was 26% versus 17, 7% in last year's second quarter. This quarter's rate benefited 265 basis points from stock options exercised while last year. It benefited 412 basis points stock.
Stock stock option exercises aren't predictable and as such they will affect our tax rate and ultimately our net income and EPS.
For the third quarter of fiscal 2021, we suggest investors model us at approximately 23, 5% before any assumption on credits due to stock option exercises.
We cannot effectively predict this activity, we remain committed to reporting the stock option impact on the tax rate.
Moving to net income and EPS net income for the quarter was $346 million up 15, 6% versus last year's second quarter, our diluted share count of $23 $2 million was lower by four 1% from last year's second quarter. The combination of these factors drove earnings per share for the quarter to $14 93 of 20.
Eight 5% over the prior year second quarter.
Let me talk a few minutes about our cash flow.
For the second quarter, we generated $356 million of operating cash flow. This was up approximately $150 million over last year's Q2.
Our operating cash flow results benefited from the strong sales and earnings previously discussed.
We repurchased $900 million of Autozone stock in the quarter versus $350 million last year at.
At quarter end, we had approximately $718 million remaining under our share buyback authorization and our leverage metric was two times.
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 a $1 billion in cash on the balance sheet of which approximately $830 million as excess cash or liquidity position remains strong. We're also managing our inventory well as our inventory per store growth was flat versus Q2 last year inventory per store was $715000 versus 713000 last year in <unk>.
$102000 last quarter.
Total inventory increased two 8% over the same period last year, driven by new stores and improved product assortment net inventory defined as merchandise inventories less accounts payable on a low on a per location basis was a negative $93000 versus negative $41000 last year and negative $99000 last quarter as.
As a result accounts payable as a percentage of gross inventory finished the quarter at 113% versus last year's Q2 of 105, 7%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program as you will recall, we restarted 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 of 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 strategy and our execution.
As I mentioned, we spent $900 million on stock repurchases, representing 752000 shares we remain confident in our near term plans NSX expect to continue reducing the level of cash and cash equivalents on hand through the remainder of this fiscal year.
This will enable us to grow our business and returning meaningful amounts of cash to shareholders as part of our disciplined capital allocation strategy.
So 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 EPS. We remain confident in our ability to drive long term shareholder value by investing in our growth initiatives driving robust earnings and cash and returning excess cash to our shareholders or grow.
Initiatives are delivering and this gives me tremendous confidence in our ability to drive significant and ongoing value for our shareholders and now I'll turn it back to bill. Thank.
Thank you, Jim Meer, and I have to take a moment and recognize you youre.
Your grasp of the fundamentals of this business in less than six months is extraordinary and thank you for being here, we're so glad to join the team.
These continue to be unique and extraordinary times and they continue to require us to look at many things differently, while managing our business day to day of.
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 these times, we remain wary of the volatility that can exist volatility on both the U S and our international markets.
We are fortunate to have extraordinary people, who are committed to servicing our customers and helping them get to work go see their families are simply get back and forth of school.
We have worked exceptionally well to deliver on our commitments of thus far but we must stay focused and we must continue to deliver there on a lay ups. We must continue to innovate and we must continue to execute.
While our domestic retail business continues to do tremendously well, we understand trends will slow in the future.
On the work, we're going to work as hard as possible to gain as much share as possible and limit our headwinds and we continue to see a tremendous ongoing opportunity within our domestic commercial business. Our business continues to do very well and we are still in the early innings of growth, but as always we have work to do.
<unk> as we head into as we head into our spring selling season.
First and foremost our focus will be on keeping our autozone us and our customers safe, while providing our customers with their automotive needs. Secondly, we must continuously challenge ourselves. During these extraordinary times to position our company for even greater future success, we will ultimately be measured by 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 on Autozone now.
Now, we'd like to open up the call for questions.
Our first question comes from Michael Lasser of UBS. Your line is now open.
Good morning, Thanks, a lot for taking my question.
Bill Rhodes.
All of you to elaborate a bit on the pricing investments and other investments that have been weighing on your gross margin do you view this.
As a temporary condition and once you get you on the next few quarters gross margin will stabilize.
Or is this going to be the beginning of of longer term trend of your gross margin continuing to be down for the foreseeable future.
Well. Thank you for the question Michael.
Yes, as you've seen over time, we've been very artful on how we've been able to manage gross margin for not just years, but decades. We've found some particular specific opportunities where we have found places to invest and improve our value proposition to our customers. They are very specific pieces both on the retail.
And the commercial business.
I don't know exactly whats going to happen on a year from now our team is going to continue to innovate we're constantly raising prices and we're constantly lowering price is trying to find that sweet spot, where our customers value the value of that they're getting the best So I don't know exactly what it's going to be over the long term, but if you recap of what Jimmy.
<unk> said that.
The gross margin, we had about 40 basis points, which was of one time negative from last year.
So all of the things that were embedded in there of which price was one of them.
Accumulated of 40 basis points, frankly, I'm not that smart to know what the gross margin is going to be within 40 basis points, two or three years from now.
Okay.
You articulated a lot of companies.
Commercial growth.
In.
Salary year.
How what's driving you to make that statement.
<unk>.
Customer wins that debt already give you the visibility that it can accelerate.
Yes, we talked I guess, probably three years ago that we were embarking on a new commercial study and we developed a new strategy that we began rolling out probably 18 months or so ago and we're still in the early innings of rolling out that strategy. It has many different elements.
Hub and Mega hub portion of the strategy, which is taking years, but it is making a meaningful difference of very meaningful difference in our ability to say, yes to our customers and it's leaning towards commercial although it is helping DIY tremendously as well that's an element of it we've rolled out new technology in our commercial business handheld <unk>.
<unk>, which allows us to be able to better understand what our delivery times are and manage our delivery times better we're significantly already reduced our delivery times in the last six months of we think we have more room to go we've also enhanced our website and our ability to communicate and be easy to do.
With with our commercial customers. So I don't think it's and then of course, the ongoing evolution and building of the <unk> brand. So it is not one individual issue. It's an amalgamation of of all of these different issues coming together and improving our competitive position not to mention during the global pandemic.
And the state stay at home and safer at home orders, we were there for our customers every day and that allowed us to introduce ourselves at a different level to some customers on and I think that has resulted in a stickier long term relationships.
Thank you.
Thank you.
Our next question comes from Simeon Gutman Morgan Stanley Your line is open.
Good morning, everyone. I think you touched on this in the prepared remarks can we talk about price elasticity and some of the investments Youre, making.
In the past there hasnt been a lot of elasticity in price in this category and can you talk about the immediacy of some of the.
The reaction you're seeing from consumers or is this hey, we're doing well we're investing for the future. So the customer when they come back a year from now on a few quarters from now on.
On a better position.
Yes, I would say a couple of things first as I said in our script and it's pretty clear from the data that we have the strategy is working on what we're seeing.
The benefits of topline growth, we're seeing our share numbers go up we're seeing strong traffic, we're seeing ticket, we're seeing unit growth. So all of the metrics.
Two the fact that that the strategy is working but we're not seeing is we're not seeing a ton of cost pressures that are material.
On the industry pricing remains rational so what we're doing as part of this strategy is very surgical in other words, we're not peanut butter spreading.
Price.
Declines across the business, but we're being very surgical using very sophisticated data and analytics and those of the things that gives us a lot of confidence that what we're doing makes a lot of sense.
For the consumer and it makes a lot of sense for us. So as we move forward, we're going to continue to lean into this strategy.
Our approach is delivering in the marketplace.
And I as I spent time over the last six months or so I like the competitive hand that we have we can continue to delight our customers. The way we have over the past year or so and we live up to this pledge of having the best merchandise at the right price.
This will continue to be a win for.
Of our shareholders and we're going to see the results on the bottom line of our business.
Okay and then my follow up is just on pricing for 2021 or calendar 'twenty. One are you seeing what are you seeing in terms of pricing kind of inflation be a bigger driver than it was from prior years. Thank you for that.
I mean, our approach on inflation quite frankly is to be disciplined where we see commodity price inflation, we have to be disciplined enough to take price to recover that.
That's something that we've done over time in the business, what we're seeing today.
As we don't see any material increases that have us concerned, but if we do we will be disciplined to make sure that we're taking price to recover those bumps that we see from from commodity pricing so even in an environment where.
We're trying to be of surgical as we can about the pricing moves that we make and as Bill said, we're taking price up in price down where it makes sense for us to take pricing, we do have pricing power and we're disciplined enough.
Take price, where we see commodity inflation.
Okay. Thanks, Jim and good luck on the back half.
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Our next question comes from Christopher J.
J P Morgan.
Your line of Hi, Good morning, It's Chris It's Krishna <unk> on for Chris.
It might of been touched on an earlier question just wondering on the gross margin outlook.
Is it going to be one of <unk> 22, when you start to lap these higher loyalty redemptions and markdowns bleeding start to get flat to up gross margin and similarly with the one time impact this year that was from lapping of that supply chain leverage last year correct.
That's right. So as we said we had about 77 basis points of.
Deleveraged this quarter about 40% of that was related to supply chain cost in the other.
Roughly 40 basis points as the supply chain costs and the remainder is the initiatives that we talked about on what I'll say about our outlook in the future is that we're going to continue to lean into the strategy that we that we have today.
Because in this environment, what we're seeing is it's working we're getting top line, we're getting EBIT dollar growth and we're going to lean into that as we as we move forward. So we won't be date certain necessarily about when youll see an inflection point because we are in the early innings of this strategy and it's delivering for us and let me add to that for just a SEC.
Two you mentioned loyalty.
We don't know whats going to happened of loyalty costs as we go forward. The reason our loyalty costs are up is because our customers are doing more repeat business with us the biggest part of our growth is coming from existing customers returning to our stores more frequently.
We're tickled to death of that I hope. It continues next year and is another pressure point because it means we're gaining additional share and it's a very profitable share gain for us.
Got it Thats very helpful.
When you think about the lagged impact of the weather.
The better winter weather on whole and the recent events in Texas.
These events in Texas hurt in the near term, but you would expect of net positive as we get to the summer.
Absolutely and yes, you are right. There is a temporary while people are locked down our business suffers of surface suffers significantly.
But when things.
Warm up our business rebounds immediately and for a sustained period of time more importantly.
Those conditions put significant incremental wear and tear on certain under car parts and Theres a lag effect that will typically last nine months or so for us and it's something we were talking about before the pandemic.
The fact that our business.
<unk> is expected to be solved last spring and summer because we had a mild winter while on the pandemic hit that changed everything but this year, we shouldnt have to be talking about a mild winner of mild winter dampening our results in the spring and summer.
Got it thank you very much and best of luck.
Thank you.
Our next question comes from Bret Jordan Jefferies. Your line is open.
Hey, good morning, guys.
Good morning.
Talking a little bit about the share gains and could you maybe bucket for us where youre seeing maybe more or less are you seeing more gift share gains from warehouse distributors in the three step model or are you seeing an improving cadence on share gain from from two step peers, maybe if you could talk about sort of where you see you see the shifts.
And some of the nontraditional channels on the DIY side as well.
Yes terrific question on yes, you have to bifurcate between what's going on in the retail sector versus what's going on in the commercial sector, both of which were gaining share of two or three times, we're growing two or three times faster than the industry growth rates by all indications. We have we have really good data on the retail share gains.
We don't have as good of data, but we can look at headline growth numbers in the commercial gains on retail we are picking up a lot of share from what's traditionally we believe in the mass channel.
Lot of people are not frequently those large stores at the same rate that they did in the past.
And what we're focused on is making sure as we're getting those incremental visits that we are going above and beyond so if we get those visits in the future.
I think also as as this brick and mortar omni channel strategy comes to place I think we're also not losing share that we might have been losing before to the online channel and in fact may be gaining that some of that share back overtime.
In the commercial sector.
I think it's hard to say, where the shares coming from we're less than 4% market share in the commercial industry today.
It's likely coming from probably multiple different places.
We certainly have intensified our understanding of what the wholesale distributor market is doing and we're paying more attention to them on our competitive analysis and building our strategy and we think that over time, we've significantly changed our competitive position, particularly against the <unk> you think about what we've done.
With assortment what.
What we've done building a sales force.
And now we've got this technology that we have in place, which is going to improve our deliveries I think that our competitive positioning.
Positioning in the marketplaces vastly different than what it was four five years ago.
Okay, great. Thank you and then a question on supply chain.
You mentioned that batteries were strong and year category of remarks, do you see any categories.
Or particular areas that there is a shortage either in stocks in the market in general.
And I guess, obviously, we hear a lot of out some of the inboard issues in freight costs, but is your I guess what are you seeing any of any shifts in your supplier base to sort of diversify around that.
Yes, certainly Brett lease we've experienced significant supply chain disruptions over the last 11 months certainly a lot less today than we had call. It June July August I think I mentioned on one of these calls we couldnt get sandpiper for Awhile, we had trouble with fuses we had trouble with tools.
We just had such enormous surges in certain parts of our business that we couldnt keep up and many of those came with an extended supply chain that ran into China or Asia.
Worked through most of those I have to give.
Our team and our battery suppliers some kudos.
The battery business has been as strong as it's been for as long as it's been and then we had this huge cold search or cold snap and we did just fine our team was very creative and worked with lots of different suppliers to make sure. We were in good shape. So we don't have any acute needs right now.
<unk> issues on the on the edges, our in stock position has significantly improved but it's not back to our normal levels yet.
Are we going to take a few more months.
Okay, great. Thank you.
Thank you.
Our next question comes from.
Sigman Credit Suisse. Your line is now open.
Thanks, Hey, guys. Good morning, I wanted to follow up on the DIY business earlier in the year I think there was a concern that the DIY strength at the time. This is back in the spring of last year. The strength at the time net debt may be sales were being pulled forward as you see the DIY business pick up here again, I guess that.
Suggests that that wasn't really true. So I guess, how do you think about pull forward and just the strength that youre seeing on the DIY business right now and I guess, just the sustainability of it. Thank you.
That's a terrific question Seth I'm not sure out of answer at all.
Clearly I think we talked that we were worried if anything we might have pulled forward some of battery business because those cars parked last spring and they set for five or six weeks as soon as the safer at home orders went away our battery business boomed, but that battery business has.
This sustained really high levels ever since we've seen no dip in our battery business, we've seen weeks, where we're going up against tough winter weather, where it might be softer, but overall it has exceeded our expectations over the last 11 months.
As far as sustainability of these sales surges.
The thing that keeps resonating with me is if you think about our business over a really long periods of time.
When our customers have incremental time, and specifically incremental money on.
Our business outperforms normal periods of time, and it's been that way for the last decade, when we get tax refunds, how much of we talked in this environment about the surge we cedar in tax refund season, which is just beginning right now.
We've seen it every single year and win and win tax refunds moved back three weeks. We haven't spent a lot of time talking about it because it moved out of one quarter into another quarter. It's just evidence of when our customer often term is financially fragile.
When they get some incremental dollars, we seem to get a disproportionate share of those funds.
And we saw it again in January when the stimulus came out of it wasn't nearly the stimulus that we saw last April but within a day within a day, we saw that those funds showing up in significantly improved business for us and that sustained itself through the end of the quarter now we're talking about another stimulus.
And frankly could dwarf what happened last April if that comes what does that mean to our business all of the indications. We have is it would be very strong for our business because each time, we've seen those incremental dollars are businesses has performed better than normal.
Okay. Thank you for that and Bill I guess, you mentioned the GAAP between retail and commercial commercial narrowing of last four weeks of the period does that actually mean of commercial accelerated through the period and exited at a stronger rate and if so can you just elaborate on that as well I mean, do you think that stimulus or something else.
Yes, I don't think the stimulus plays nearly as much in the commercial business is it does the DIY business and I think most of the in consumers in the commercial business are higher socioeconomic.
Higher up on the socioeconomic ladder, so that incremental money doesn't mean as much to them.
<unk>.
Both businesses were doing really well commercial is continuing to of rebound, but there's still elements of the commercial business that arent as strong as they were pre pandemic.
Particularly some of our national account players that up and down the street business has been stronger than the national account business and again I think that that has to do with the in consumer of the servicing theyre picking the uds business versus picking the national account business.
Okay, great. Thank you so much.
Yep. Thank you.
Our next question comes from Zacks Laden Wells Fargo. Your line is open.
Hi, This is David Lance on for Zach Thanks for taking our questions.
So within the 15% growth in commercial how much would you attribute to new Mega hub and can you talk about how performance in commercial business tends to evolve once you opened.
Mega hub in a certain market.
Yes, so the key with Mega hubs as debt it increases the number of Skus that we have available and it enables us to say, yes, more and so to the extent that we have that coverage in.
And those parts available.
That bodes well for us as we're going into our existing customers and are in our new combustor or new customers. What I'll say about commercial is that we grew 15% we grew significantly with locals of nationals.
Probably the one story that I want people to continue to focus on its debt. We're underpenetrated I mean of 4% share gives us a tremendous opportunity to create a faster growing business. So as we execute on this growth playbook that we've talked about we're seeing significant share gains.
We're pleased with that execution in the marketplace.
On the Mega hub strategy, the things that we're doing with technology. The fact that we are laser focused on being competitively priced all of these things give us an opportunity to create a faster growing business and were pretty excited about it.
Thanks, and then just one more from me can you talk about the impact that you think the rollout of electric vehicles is having on the industry and what you think could happen over the long term there.
Yes first of all we believe there is going to be of market and autozone is going to be a big player.
Just as we are today with the internal combustion engine our strategy is simple.
We're just going to follow the consumer just like we've done in the past, we're not wed to internal combustion engine technology.
We've significantly changed our assortment over time to reflect the latest technology. So this is not an existential threat for us we're operating from a position of strength.
Think about our business today, we're already supplying parts and supplies of the EV market things like wiper blades, we have world class capabilities in supply chain and merchandising with great relationships and partnerships with the Oems who have a seat at the table today.
Can help us forecast of volumes and the timing of that of market changes and we have this tremendous retail footprint and commercial business.
That gives us distribution points so.
As we think about the parts and supplies that are at risk.
With electric vehicles versus internal combustion engines, there will be offsets I mean, there'll be clearly there'll be some things that are at risk, but there will be offsets of those and there'll be opportunities for us in both DIY and <unk>.
So listen despite what we see in headlines in announcements from the Oems.
We're a bit cautious because of the market has some near term challenges that we're watching closely first of all.
Consumer adoption is uncertain of roughly two percentage of the market today, and it's growing slowly and if you look at the U S. In particular.
Margin infrastructure is not ready for prime time.
Rapid charging stations need to be built out it's going to be expenses, it's probably going to take some combination of public and private partnerships on the business model. There is on as an uncertain path to profitability.
And quite frankly, we think theres going to be some need for some pretty significant power grid investments, but we do believe there's going to be of market and we're going to be of player and we're simply going to follow the consumer.
Thanks.
Our next question comes from Michael Baker D. A Davidson your line is now open.
Hi, everyone Katy on for Mike Baker. Thanks, So much for taking my question kind.
Kind of tie on to on the previous question I was wondering if you guys saw any difference and what your retail customers spent between the two.
On the similar lines and if you saw any sort of category shifts between thank you.
Yeah, I don't think we've really seen any significant category shifts I mentioned the battery business has been particularly strong we've seen we talked about the sales floor business being really strong what we have seen in recent in this quarter is a resurgence of our hard parts business in particular some of the failure related items.
I think some of that has to do with actually getting into winter and having a more normal winter of this year. We've also talked about our maintenance products not being at the same levels that were experienced in the rest of our business things like brakes, and rotors and alike, and I think that thats personally of hold on from the lack of winter last year and the.
The fact that miles driven are down and those maintenance items for some of those higher socioeconomic groups may be negatively impacted.
Okay, great. Thank you so much and then just again real quickly on the cash balance I know you guys mentioned.
Being fairly confident about more of share repurchases through the end of the year and I was just wondering if there are any of their plans are sort of strategic investment.
All of that excess cash.
Well, what we've said is that.
We're going to take our free cash flow on our number one priority has been and will continue to be to invest in our business in a disciplined way.
On the free cash flow that we generate inside of the business gives us tremendous financial firepower to both invest in our business in a disciplined way and return significant amounts of cash to investors in the form of our repurchases currently.
We've got tremendous confidence in that plan.
And we're going to continue to execute as we finish out the balance of the year.
Okay, great. Thank you guys so much.
Thank you.
Sure.
Okay.
Our next.
Question comes from Michael Mantovani Evercore ISI. Your line is now open.
Hey, good morning, and thanks for taking my question, it's Mike mentality on for Greg.
Just wanted to ask two questions I had one for Bill and then a follow up for Geneva, If I could.
So first of all for Bill.
Obviously theres been a lot of investment in technology, and multi channel and I'm wondering bill if you could just expand a little bit.
So you cannot go over there.
What percentage of the <unk>.
<unk> business today is kind of digital ordering do you think about that almost $3 billion business.
On the same question for your retail business, we've been thinking 4% to 5% type range, but is that true.
And then related with just net.
You can talk about Fedex initiative.
As well as focus just kind of some incremental color on what's working well in those two areas.
Yes, Greg.
There's a lot of unpack there Mike. Thank you for the question I really hate this new setup with Bill and Jim Meer used to if somebody said bill and it was a hard question I would just look at Giles and let him answer on.
You put it on my list.
So let's talk about our digital business in the in the commercial sector.
It's not like the retail system, where our customers really pick on a channel they're picking the way they want to order parts. So there are two primary ways. They order parts they pick up the phone and call us.
Or they go online and click buttons.
With we fulfill it the exact same way regardless of how they initially interact with us.
We've been doing a lot of work trying to make.
Doing it digitally with us easier and we've made significant strides really proud of the team that's been doing that work over the last couple of years in particular and we've also made a lot of other back office things easier for the customer. We've also done some work with all data to make all data more ingrained in the purchase decision with the customer.
So im really pleased of where we are with that and we are seeing significant growth, but the vast majority of.
Of our interactions with customers today are still over the phone, we believe and hope over time that our percentage of digital penetration of the commercial business will continue to increase at a pretty rapid pace.
On the on the retail side of the business, we kind of have three different businesses that we interact with we have buy online pickup in store.
We have traditional ship to home, which comes out of our fulfillment center or we have next day delivery, which is the program that you mentioned with Fedex we're.
We're leveraging our hubs and mega hubs and customers can order with us as latest 10 PM midnight on a couple of markets and we'll have it on their doorstep. The next day.
Each one of those three businesses is growing significantly.
Really high rates faster than the rest of the business, but our buy online pickup in store is growing at twice the rate of our ship to home and next day delivery business and that again shows us once again I remember.
The way we price in the online World. If you do shift of home or next day delivery on most purchases you can generally get a 20% discount.
But our customers are electing to do buy online pickup in store with us at twice the growth rate of ship to home next day delivery, which again proves to us the notion that we have to be on Omnichannel provider, we've got to have great stores and great customer touch points convenience.
And knowledge that our that our Autozone has provided our customers is very valuable to our customers. So.
So I hope I'll unpack that okay for you.
Great. Thank you Bill that was helpful. And then sort of Jimmy I guess, you can have the tougher question.
We get this from investors, which is really around the minimum wage and basically we saw Walmart go up to 15 plus in our we've been thinking you all are kind of 13% to 14 in our range, but the heart of the question really is when.
We try to analyze this we think it could be of 100 debt plus headwind to.
To the P&L in isolation, but then we think there is a lot of 11, you I'll have to pull on a kind of mitigate and one thing for example, as COVID-19 costs seem to be running about 100 bps.
So is this a case where.
We should be kind of confidence that you all can kind of mitigate some of these headwinds to the extent that this happens in a rational way.
Just any color that you can share there on productivity initiatives pricing power will be super helpful.
Yes, so a couple of things.
About this one one is.
We do think that there'll be several mitigates at our disposal as we move into this environment, it's still uncertain.
On <unk>.
What we'll see in the cadence that we will see that these are all things that we've been contemplating for a while the first thing I'll say is that we've done a tremendous job inside of our operations really driving productivity.
And over time, what that's meant for US is that we have a highly productive workforce here that is delivering and you can see that in this environment, where we have accelerated sale.
Sales growth.
CNS getting very.
A very decent leverage.
With our with our with our our teams in the field. So that's one of the second thing is the reality is when there are inflationary pressures in the business, whether theyre commodities our wages.
You have to be disciplined as a company to make sure that you.
You recover those and so we're very disciplined on the pricing front whenever we see cost inflation from any area of the P&L, we find ways to offset that.
With pricing and we believe we're going to have that pricing power.
Power and of the future and then I think the third thing that stands out to me as it relates to minimum wages, we're going to do what's right for our autozone as that's always been our philosophy.
Inside the company and so the cadence with which the legislation happens will have an impact on that but across our business. Today. We're always focused on doing what's right for the autozone and making sure that we're competitive in terms of acquiring labor and so to the extent that there are changes that happened on the wage.
Landscape, we're going to be competitive there and we're going to have a business debt enables us to be competitive in the future.
Great. Thank you for taking the questions.
You bet.
All right before we conclude the call I want to take just a moment to reiterate we believe our industry is strong and our business model is solid will 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 have an exciting plan that should help us exceed this fiscal year.
But I want to stress like always that this is of marathon and not a sprint as we continue to focus on the basics and focus on optimizing long term shareholder value. We're confident autozone will continue to be very successful. Thank you for participating in today's call have a great day and stay safe.
Thank you for your participation on today's conference you may disconnect at this time.
Okay.