Q3 2021 Autozone Inc Earnings Call
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Greetings and welcome to Autozone, and 2021 third quarter earnings release Conference call.
Time, all participants are in a listen only mode of quest.
And and answer session will follow the formal presentation.
And what should require operator assistance during the conference please correct Steve.
Zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce Bill Rhodes Chief Executive Officer. Thank you you may begin.
Good morning, and thank you for joining us today and for Autozone and 2021 third quarter Conference call with me today are Jim Meer, Jackson Executive Vice President and Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax regarding the third quarter I Hope you had an opportunity of read our press release and learn about the quarter's results.
And if not the press release, along with slides complementing our comments today are available on our website at www Dot Autozone Dot com under the Investor Relations link.
Please click on quarterly earnings conference calls to see them.
I am excited and honored to share with you the exceptionally strong performance our team of 100000, autozone or delivered this quarter and.
And I've said previously throughout this pandemic, we could not deliver the kind of results. We have without the continued exceptional performance of our entire team, especially our store and supply chain Autozone.
As our sales volumes have remained at historic all time highs, our autozone and have met this demand head on with enthusiasm for going the extra mile for our customers.
While we've had have ask a lot of our autozone has over the last year.
Taken on the challenge and continue to inspire and impress us all.
And I also want to reiterate our top priority remains being committed to keeping all of our customers and autozone safe. Thank you all of those owners again not.
Now at our sales results. Our overall same store sales were up 28, 9% this quarter.
Our growth rates for retail and commercial were both strong with commercials growth north of 40%.
This is almost double the growth rate of our DIY business and incredible accomplishment for both businesses, but especially for commercial we achieved our highest weekly commercial sales of all time, we average nearly $70 million of weak and commercial sales. This is incredible considering we averaged 48.
For Q3 of last year for the trailing 4 quarters, we have sold domestically.
$3.1 billion to commercial customers, we are doing some really exciting things and commercial and we couldn't be more proud of our team's recent successes.
Now, let's focus on sales cadence this quarter, we strip at this quarter stretch from mid February to the first week of May and the first 4 weeks our sales comp was approximately 11, 6%. This was lower than the trend we were experiencing at the end of our second quarter. We believe the cause of our sales slowly we're the 1.
Winter storms experienced across the central and South Eastern States.
Sales picked up for the next 4 weeks from mid March to mid April concurrent with the arrival of additional stimulus payments.
The final 4 weeks happened to coincide perfectly with the stimulus payments from last year. It was over these 4 weeks last year, when our sales ramped materially.
And this year over those 4 weeks, we averaged a 14% comp with the last 2 weeks coming down to the mid single digit range.
We continue to maintain solid growth rates post stimulus for Q3, our 2 year comp was 27, 9% on.
On a 2 year stack basis. The first 4 weeks, we're up 17, 9%. The next 4 weeks were up an impressive 49, 9%.
And the last 4 weeks, we're still up 26, 7%.
It was encouraging for us to see sales inflect upward this quarter with both traffic and ticket moving higher on.
Our traffic growth was roughly double the ticket growth rate as the reintroduction of federal stimulus payments and the execution of our growth initiatives drove a material increase and traffic 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.
And the majority of the country performed consistently well normally we talk about the Midwest and northeastern markets underperforming the others no not this quarter. These markets were in line with the rest of the country for both DIY and the I S. M and we believe the winter weather, we experienced in February and bodes well for our future.
Sales opportunities this summer and into the fall and.
And I could not be more proud to say that based on the retail sales data we have for our industry. We continue to enjoy share gains and the shared data we have available for the first 8 weeks of this quarter shows we are growing at a roughly 10% higher rate than the remainder of the industry.
While we are thrilled to have those share gains our charge remains to maintain them heading into the summer and fall months.
Our number 1 priority continues to be the health safety and well being of our customers and autozone.
On last quarter's call. We shared that we would provide every single autozone or with a $100 incentive once they have completed their vaccination for COVID-19.
That's every audit zellner, including part timers and this.
And this was the logical next step and our efforts to provide a safe working and shopping environment as we have with our ongoing PPE efforts, we spent about $1 million during the quarter incentivizing, our autozone us to get that vaccine I continue to be inspired by our board and management team's commitment to doing what is <unk>.
Right and that is putting safety first.
Our culture and our values of taking care of 1 another had been in full force and effect over the last year during this pandemic.
While we continue to be encouraged with the current sales environment, we are cautious about predicting future trends.
The latest round of stimulus payments, certainly accelerated our sales and.
And sales remained at elevated levels through the end of the quarter. However, we can't fully predict what all of the different pushes and pulls on macro trends mean for us.
However, we remain bullish on the industry's ability to grow this year and we believe we are well positioned to gain additional share beyond what we already have.
I'm sure. Many of you would like to know how we're thinking about the sales for the fourth quarter of fiscal 'twenty 1.
I'll remind you that typically and recessionary environment, our business is remarkably resilient.
However, nothing about this global pandemic is typical.
Beyond our primary objective to ensure the safety of our customers and Autozone us our focus is on providing our autozone with the resources they need to provide our customers with an exceptional shopping experience. We are optimistic about the sales environment heading into the fourth fiscal quarter, but we will obviously have the most difficult comp.
Tariffs and and our history at.
As last year's fourth quarter benefited from the April 2020 stimulus package and enhanced unemployment benefits through July and we generated and astonishing 21, 8% same store sales growth last year and Q4.
While we understand you would like more clarity on our expectations for this Q4. This remains a very challenging environment to predict, especially and DIY as many evolving macro factors meaningfully impact our results.
Now, let's move into more specifics on performance for the quarter. Our same store sales were up 28, 9% versus last year's third quarter. Our net income was $596 million and our EPS was $26.48 a share.
84% above last year's third quarter.
Our same store sales growth this quarter was a record for any quarter. Since we became a publicly traded company back and $19.91.
Both our retail and commercial businesses showed strength in the quarter with DIY same store sales up approximately 25%.
And commercial total sales growth of approximately 44%.
For commercial we averaged $70 million and weekly sales, which was approximately $13500 and sales per program per week.
Commercial sales numbers easily set all time records for us.
The initiatives we have in place are helping drive our commercial 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.
Next I'll talk about trends across our merchandise categories, particularly in the retail business. Our sales force categories continued to be strong with categories like tools antifreeze small repair and formats showing strength.
But our hard parts business definitely picked up and our hard parts business Comped in line with our sales force for the quarter. This now represents our second quarter and a row, where we saw our hard parts business grow in line with sales for items, we believe the strengthening of our hard parts business is due to the significant winter weather we.
<unk> <unk>.
Additional stimulus and the pickup and miles driven the nation is beginning to see as people return to a new normal.
Business remained very strong and many merchandise categories, such as accessories, and batteries, notably brakes and rotors, while still slightly below our average growth had a meaningful rebound this quarter due to the winter weather.
As we expect our sales growth from the pandemic related surge will moderate over time, we believe the investments we have made and both our retail and commercial businesses position us to deliver outsized share gains relative to the overall industry.
In addition, we continue to believe our products and services will be and high demand during more difficult economic times and this resiliency gives us significant confidence about our future prospects now.
Now I will turn the call over to Jim Meer, Jackson and Jim here. Thanks.
Thanks, Bill and good morning, everyone. As Bill mentioned, we had another outstanding quarter. Once again, our growth initiatives are delivering and the heroic efforts of our autozone honors and our stores and distribution centers are driving extraordinary results.
Start this morning, let me take a few minutes and elaborate on the specifics on our P&L for Q3.
For the quarter total auto parts sales, which includes our domestic Mexico, and Brazil stores were $3.6 billion up 31, 8%.
For the trailing 4 quarters ended total sales per Autozone store were just over $2.1 million.
This compares to just under $1.9 million and Q3 last year.
Let me give a little more color on sales and our growth initiatives, starting with our commercial business for the third quarter, our domestic DIY FM sales increased over 44% to $829 million sales to our DIY FM customers represented 23% of our total sales on a weekly sales per program where 13th.
$500 up 39, 2% as we averaged nearly $70 million and total weekly commercial sales of.
Our growth was broad based as national accounts, and local and regional accounts, both grew over 40% and the quarter on.
Our execution on our commercial acceleration initiatives is delivering exceptional results as I've said previously we're focused on building a faster growing business with disciplined investments and pricing service and assortment, we have a tremendous market opportunity as we are significantly underpenetrated and it's highly fragmented portion of the market we know.
Now have our commercial program and over 85% of our domestic stores and we're focused on building our business with national regional and local accounts.
This quarter, we opened 19 net new programs, finishing with 5107 total programs.
We continue to leverage our DIY infrastructure and increase our share of wallet with existing customers.
Our strategy is working as we continue to grow share of this past quarter. We are confident that we can continue to gain share as we deliver improvements and the quality of our parks, particularly with our door of last brand make improvements and our assortment and maintain competitive pricing and stay committed to providing exceptional service. These core focus areas.
Have enabled us to drive double digit sales growth for the past 4 quarters and position us well on the marketplace.
As we move forward, we're focused on our core initiatives that we believe will accelerate our growth even further.
First our Mega hub strategy is improving our parts availability and given us tremendous momentum.
We opened 2 more mega hubs this quarter, bringing our total of 50 locations and we expect to open between 4 and 7 more mega hubs by the end of the fiscal year as you might recall from last quarter's conference call. We raised our near term targeted buildout of Mega hubs from 75% to 90 to 100 of 110 Mega hubs help us expand cover.
And say, yes, we have at more frequently and expanding our mega hub footprint delivers a meaningful sales lift to both our commercial and DIY business.
Second our technology investments are improving delivery times and service levels, we continue to make enhancements to our autozone pro system and mobile app to enable faster and more efficient parts ordering.
We're leveraging technology to improve delivery times, and making it simpler to do business with Autozone and all of our efforts are driving efficiency for our sales professionals drivers and customers and will help build of meaningful competitive advantage.
Third we're committed to being price competitive and the strategy is working.
We have a laser focus on the key categories regions and segments of our investments and pricing are leading to accelerated sales growth and higher EBIT dollars were using data science and market intelligence the tests of our approach and different markets and different customer segments and delivering solid results.
We'll continue to lean into this strategy and live up to our plans to have the best merchandise at the right price.
Our execution on the commercial business gives us tremendous confidence and our ability to create and faster growing business.
On the retail side of our business. We're excited about the gains we're seeing and our DIY market share and our initiatives of driving solid share gains our growth and the quarter was broad based across regions and categories and the quarter, we delivered double digit comps and 8 of the 12 weeks and all 12 weeks had positive comps. Despite some weeks having tough comparisons from of.
Year ago, our sales floor of market share as measured by NPD grew nearly 2 points for the first 8 weeks of the quarter.
And we saw double digit growth across both failure and maintenance categories and the quarter.
We also grew share and April despite the tremendous growth last year, signifying that those customers have likely change their buying behavior.
Our growth and retail is driven by our continued focused and a few key areas.
First our relentless focus on execution by our Autozone and our stores and distribution centers has been remarkable our supply chain autozone earns a process and handle record volumes and our store autozone or have handled record store traffic and delight our customers to be clear, we are winning and the marketplace and the execution of our Autozone honors, we're taking care of our.
<unk> is a key competitive advantage.
The assortment work and Mega hub strategy continue to improve our coverage and availability of leading to a meaningful lift in sales.
Third we continue to focus on improving the customer shopping experience with our e-commerce efforts.
Online pickup and store next day delivery and ship to home, which were up again significantly this quarter have helped us meet customers, when where and how they want to shop, we're particularly pleased with buy online pick up in store the fastest growing portion of our e-commerce offerings, which enables our customer to shop, our broad array of products online and maintain the.
<unk> to get expert advice from our Autozone honors when they pick up and store. This is of significant competitive advantage versus our pure play competitors.
Fourth and similar to our commercial approach, we're using discipline and sophisticated data analytics to ensure that we are competitively price. This is a data rich environment and our data driven approach tools and capabilities give us a meaningful competitive advantage, we have tested our approach and key categories and markets and this effort is yielding increased top line and gross profit dollar.
Of albeit at slightly lower gross margin. The strategy is working and we're going to lean into this approach more of as we live up to our pledge of having the best merchandise at the right price.
DIY has been a strong contributor to the growth of our company and while comps get more difficult as we lap the accelerated sales growth that we've seen over the past 4 quarters. The fundamentals of our business have never been stronger our strategy and execution are delivering solid results.
Now let me spend of just a few minutes on international we continue to be pleased with the progress, we're making and Mexico and Brazil. During the quarter. We opened 7 new stores in Mexico to finished with 635 stores and 1 new store in Brazil to finished with 47 on a constant currency basis, we continue to see solid sales growth.
More importantly, as those economies stabilize we remain committed to our store opening schedule in both markets and expect both to be significant contributors to growth and earnings and the future.
And I'm, particularly excited about our prospects and Brazil, where based on all of the hard work by our Brazilian Autozone has over the past several years, we're now poised to significantly accelerate our new store growth rate over the coming years.
Now, let me spend a few minutes on the P&L and gross margins for the quarter on gross margin was down 118 basis points, driven primarily by the accelerated growth and our commercial business and our investment and our pricing initiatives as I mentioned, our commercial business grew 44% this quarter and we're also making disciplined pricing and investments to drive top line growth and gross per.
Dollars. The strategy is working our work is translating into higher sales and profits as evidenced by our sales and share growth that outpaced the remaining market this quarter.
Our approach is disciplined and specific to certain categories, where we have rigorously tested and determined which actions moving the sales and gross profit dollar performance and the right direction. We're.
And we're beginning to see some cost inflation and certain product categories, along with rising transportation costs to be clear overall, we have pricing power the industry pricing remains rational and we're pricing accordingly.
All of the actions, we're taking are resulted in us 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 positioning and a disciplined way. This is a good outcome for our business and as such you should expect to see similar margin performance and the fourth quarter we were.
Continue to drive new customers and overtime grow absolute gross profit dollars at a faster than our historic rate and our total auto parts of operating segment.
Moving to operating expenses, our store operations and commercial teams continue to manage our expense as well and this environment. Our expenses were up 11, 3% versus last year Q3, as SG&A as a percentage of sales shows leverage of 550 basis points.
Included in this quarters expenses were over $1 million of Covid related expenses compared to last year's third quarter Covid expenses that totaled $75 million, which included provisions for additional emergency time off.
Excluding this comparison SG&A levered 284 basis points, driven by our exceptionally strong sales growth.
While our SG&A dollar growth rate has been higher than historical averages we remain committed to managing SG&A in line with sales volumes over time.
Moving to the rest of the P&L EBIT for the quarter was $804 million up 63% versus the prior year's quarter. Our EBIT margin was 22% up 432 basis points versus the prior year's quarter driven by the strong top line growth and operating expense leverage I spoke about earlier.
Interest expense for the quarter was just over $45 million down 5% from Q3, a year ago as our debt outstanding at the end of the quarter was just under $5.3 billion versus just over $5.4 billion last year, we are planning interest and the $60 million to $61 million range for the fourth quarter of fiscal 2021 versus $65.6 million.
And last year's fourth quarter.
Our adjusted debt level metric finished the quarter at 2 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 our share repurchases are an important element of that strategy.
Moving to tax for the quarter, our tax rate was 21, 4% versus 22, 8% and last year's third quarter. This quarter's rate benefited 211 basis points from stock options exercised while last year had benefited 26 basis points.
<unk> option exercises aren't predictable and as such they will affect our tax rate and ultimately our net income and EPS.
For the fourth quarter of fiscal 2021, we suggest investors model us at approximately 23, 4% before any assumption on credits due to stock option exercises because we cannot effectively predict this activity, we remain committed to reporting the stock option and impact on the tax rate.
Moving to net income and EPS net income for the quarter was $596 million up 73, 9% versus last year's third quarter, our diluted share count of $22.5 million was lower by 5.5% from last year's third quarter. The combination of strong earnings and lower share count drove earnings per share for the quarter to $26.48.
Up 84% over the prior year's third quarter.
Now, let me talk about our cash flow for the third quarter, we generated $1.2 billion of operating cash flow. This was up $535.539 million over last year's Q3.
Our operating cash flow results benefited from the strong sales and earnings previously discussed.
And as we move forward and make the investments that we've discussed to drive growth you can still expect us to be an incredibly strong cash flow generator debt returns meaningful amounts of cash to our shareholders.
So managing our inventory well as our inventory per store growth was up 2.3% versus Q3 last year inventory per store was $701000 versus $685000 last year and $715000 last quarter total.
Total inventory increased 5.1% over the same period last year driven by new stores.
Net inventory defined as merchandise inventories less accounts payable on a per store basis was a negative 167000 versus negative 56000 last year and negative $93000 last quarter. As a result of accounts payable as a percent of gross inventory finished the quarter at 123, 9% versus last year's Q3.
108, 2%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program, we repurchased $900 million of Autozone stock in the quarter as of the end of the fiscal quarter. We had approximately $21.6 million shares outstanding at quarter end, we had just over $1.3 billion remaining under our share buyback authorization.
Year to date, we bought back $2.5 billion of stock or approximately 2 million shares.
Powerful free cash flow, we have generated this year combined with excess cash carryover from last year has enabled us to buyback over 8% of our shares over the first 3 quarters of the year, we remain confident and our near term plans and as such expect to continue reducing the level of cash and cash equivalents on hand through the remainder of this fiscal year are busy.
And this remains remarkably strong and this will enable us to invest and our existing assets grow our business and as I emphasized earlier, returning meaningful amounts of cash to shareholders as part of our disciplined capital allocation approach.
So to wrap up we had another very strong quarter highlighted by exceptionally strong comp sales, which drove a 74% increase and net income and at 84% increase and EPS, we're driving long term shareholder value by investing and our growth initiatives driving robust earnings and cash and returning excess cash to our shareholders our.
She is working and I have tremendous confidence on our ability to drive significant and ongoing value for our shareholders now I'll turn it back to bill.
Thank you Jim here.
These continue to be unique and extraordinary times, our team has done a wonderful job of managing and leading throughout this timeframe I am proud of our team across the board for their commitment to servicing our customers, but doing so and a very safe manner.
At the start of this pandemic last year, we could never have guests the positive impact it would have on our sales.
To be able to report our largest domestic comp sales number ever this quarter 30 years after going public is just amazing.
But with this fortuitous outcome, we knew we had to take advantage of this window of time and experiment.
We've tested to understand the origins of our share gains and potential for retaining those gains as the world goes back to some sense of normalcy. We believe the environment continues to allow us this chance to learn but.
But we will be deliberate.
And we understand the value of the capital invested at our capital is our investors' capital we must have an appropriate return we've worked exceptionally well to deliver on our commitments thus far.
But we must keep focus and continue to deliver there arent a lay ups, we must continue to innovate.
While our domestic retail business continues to do tremendously well, we understand that trends will slow but.
And we're going to work hard real hard.
To gain as much share as possible now in order to limit our future headwinds. Our goal is to retain all of these new customers and new occasions, where existing customers are choosing autozone.
And as we've discussed our domestic commercial business is still and the very early innings of the maturation process.
It is and honored to have reported this morning that we are now doing materially over $3 billion and domestic commercial sales on a trailing 4 quarter basis.
But we hope and we believe the best is yet to come for our commercial business as always we have work to do as we head into our summer selling season, but we are excited to exploit the opportunities that are in front of us.
First and foremost our focus will be on keeping our autozone and customer safe, while providing our customers with their automotive needs.
We must continuously challenge ourselves during these extraordinary times to position our company for even greater future success, we know that investors will ultimately measure us by what our future cash flows look like and 3 to 5 years from now.
Lastly, I continue to be bullish on our industry and in particular very bullish on our company now we'd like to open up the call for questions.
Yeah.
Thank you we will now be conducting a question and answer session.
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We ask that you please limit yourself to 1 question and 1 follow up question 1.
1 moment, please while we poll for your questions.
Our first question is come from the line of Bret Jordan with Jefferies. Please proceed with your questions.
Hey, good morning, guys good morning.
And Brian Brett.
In your prepared remarks, you talked about the improvement in quality of the <unk> parts, obviously started as a driver is <unk>.
Commercial traction could you talk about how maybe higher input cost obviously buying of higher value part is impacting margin versus the price investments.
Yes.
<unk> talked about the fact that we're beginning to see some pretty significant inflation on certain product categories. I don't think that thats been a big driver of our performance in Q3, but it is something that we're very mindful of as we move into Q4 and frankly, we are having to pass some of those costs along to our customers just like we've done for the last 4.
Years.
And and I guess on the price investment conversation I guess, when you think about the DIY business versus the commercial could.
Could you maybe just sort of bucket at 4 is do you see more aggressive price investment on 1 side versus the other and then within commercial.
Are you seeing more competition and national accounts versus regional I guess, where do you see the op.
And I guess, the heat zones of price competition.
Yes, what I'll say in general as debt, we've been very disciplined about the investments that we've been making and pricing as I mentioned this is a very data rich environment, we're using data.
Data driven tools, we're using artificial intelligence.
And data science to help us figure out exactly.
We're at a price, which categories the price, which reasons to price. So it's a very dynamic environment and that in that regard. We're fortunate that we don't have to peanut butter spread this.
Across the chain if you will so what we're doing is very surgical very strategic what I'll say in terms of the competitive response is that the industry remains very rational.
We're seeing and rational pricing across the industry and the response.
To that extent, it's been pretty muted. So our strategy is working our goal is to create a faster growing business with higher margin dollars. It's a much more sustainable way for us to grow cash and ultimately <unk>.
Shareholder value and.
On the commercial side, what we're what we're seeing as debt.
All of the initiatives that we put in place, which priced at just 1 element of it and I would argue it's probably the smallest element of it.
You mentioned and investments that we're making and our <unk> brand.
Including some of the offerings that we have endured last goal.
Those things are very meaningful to our customers and <unk>.
<unk> that we've made and technology that have helped us be easier to do business with its helping us lower our delivery times.
As a significant impact on the business.
The work that we're doing around Mega hubs.
Greece, our parts availability is huge for us and huge for our customers. So when you put all of those initiatives together. That's why we're so bullish on the commercial growth and what I'll say is that even as we move through this environment that commercial growth is sticky once we win those customers and continue to delight those customers and we're competitively.
Price.
Gives us a lot of confidence about our future prospects in this area of the market.
Great. Thank you.
Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.
Hey, everyone. Good morning, I'm going to stick on the pricing topic. My first question is did you get more aggressive and this quarter and it looks like the margin compression got a little worse and there were some other factors, but and if you did.
Why now and just to be clear are these price investments more on the DIY side on the DAA of him.
If semi and good morning, and thank you for the question.
Clearly there on both sides of the business. We've had very targeted approach on the DIY side that has been focused more on 2 different spectrums of the business..1 on commodity products that are highly available and lots of different environments and then 2 on very slow moving hard to find parts of them, but maybe are valued.
Proposition is at is different.
It is when you can walk and the store and get immediate product availability. The DIY piece is smaller than the commercial piece today.
And we've done that work and it's all in place and.
And on the commercial side, we did get more aggressive we didn't get more aggressive because we took prices to a different level. We continued to roll out the pricing initiatives that we're working we originally started with 6 regions and we went to 14 regions as of the beginning of this quarter. This has been rolled out the pricing initiatives and our commercial business had.
And rolled out across the chain. So youll see this mature over the next year. So we don't plan on having around 2 of these pricing initiatives. What we've seen is these have worked as you know and the commercial business pricing transparency isn't what it is and the retail business, but also more importantly.
And the competitive set is vastly different when you think about the large players if you add all of us up and the commercial sector. We're around 20% of the market share. So these pricing initiatives are not designed versus our traditional and channel competitors theyre more making sure that we have the right pricing and value.
And that gets other sectors of the industry.
Got it okay, and I guess the follow up is and the same I guess at the same vein. So it seems like Youre, having success with this strategy.
On the 1 hand, and showing that there is some elasticity of demand and now we're going to be going through.
Some inflation and you're already starting to see at.
And I would think in theory, the industry would try to pass that along.
Are there any sort of disconnect or how should we think about and an inability to pass along pricing.
If the customer is showing elasticity if that makes any sense and might you lean into pricing more next year.
Yes, working and you have inflation, yes, yes, I would say its elasticity of demand for us, but it's not driving elasticity of demand for the industry.
I think in some respects, it's improved our competitive position not against our end channel competitors, but against other competitors and that's proven to be successful as we think about and inflationary environment I know autozone will make sure that we pass those costs along to our consumers just like we always.
Half.
And I don't think that that'll be any different than normal.
Okay, Thanks, and good luck.
Alright, thank you.
Thank you. Our next question comes from the line of Christopher <unk> with Jpmorgan. Please proceed with your question.
Okay.
Thanks, and good morning, so I'll stick to the pricing and signed 2 for my first question.
It seems like the transition here is is the rollout of the commercial side, but you're also going to be you're going to start lapping through.
On the DIY price investment so as.
As we think about <unk> and <unk> would seem like the peak gross margin pressure is now and then that starts to moderate as we lap through the DIY side of the business.
Rice of investments is that fair.
Yes, that's the right cadence to think about 1 of the things that bill mentioned as debt.
We don't have a round 2 planned here so.
And as we rolled.
The price investments through the entire chain and all of the categories that we're going to roll it through you'll start to see us anniversary this and the back half of next year, So and.
And again, we're pleased with the execution of those those initiatives again, it's 1 element of the strategy. If you will it certainly gets a lot of a lot of attention but.
We would not be in a position.
And even be talking about making pricing investments, if we werent executing so well on all of the other elements of the strategy and when I think about again at work that we've done on assortment I think about the work that we're doing to lean and the technology.
Things have been the foundation of our they and enablers for US too and then focus on this element of being <unk>.
Competitively priced and.
And I said on a couple of times and my prepared comments about having the best merchandise at the right price.
That combined with the other things that we're working on.
Give us a meaningful competitive advantage and it's why we're so bullish about being a faster growing business and the future.
Yes and.
That leads to my follow up.
If you look back versus 2 years ago to try to neutralize versus what happened last year and gross margins down 120.
Operating margin is up more than 200 basis points, given the share gains and the sales leverage.
And that you're driving so.
You'll have continued gross margin headwinds.
But as you think at the operating margin line into next fiscal year's at fair to think that and the operating margin can at least be flat if not better as we look out given the increased scale and share gains that you've driven.
But we've done a couple of things and this environment, where we've had accelerated sales number 1 we've had outstanding.
Outstanding leverage on the SG&A line, which quite frankly has served as a little bit of of bill payer for some of the investments that we're making.
And gross margin.
And we do have the ability as we as we move forward to continue.
Continue to price and at very disciplined way.
And when we're in an environment where.
And there is inflation and are quite frankly that gives us an opportunity to price and we are seeing cost inflation in certain categories.
But with a rational industry pricing environment, we're going to price to recover those inflationary impacts so.
Going forward as we think about managed and the managing the business and we're going to manage the business to maximize the cash that we generate inside of the business grow our EBIT dollars and kind of give us that.
And.
Tremendously powerful free cash flow and.
And you can tweak margins by up by a point or a point and a half doesn't change the underlying store here, which is this is a business that is generating a tremendous amount of cash.
And we're putting that to work by investing and our existing assets.
Investing in our growth initiatives and return returning meaningful amounts of cash to investors and a meaningful way that portion of the autozone model.
It does not change even with all of the things that we've talked about this morning and tons of investments.
Understood Thanks very much.
Okay.
Thank you our next questions come from the line of Michael Lasser with UBS. Please proceed with your questions.
Good morning, Thanks for taking my question how are you I thought it would be consistent and asked about pricing bachman.
The bottom line as well.
Is it worth it and help frame this question.
And just think of 1% Inc.
At 1% investment and your pricing and its most recent quarter what that means.
$35 million of sales that you are investing back into pricing to get something more than that and any.
Given quarter prior to the pandemic autozone with regularly and average of $70 million and year over year sales increase and so now we're having to invest almost half at Mt.
Drive these share gains.
How do you find that point at.
And it really becomes worth at Ross.
We as the longer that you do this and the more attention going on track from your competitors and.
And 1 of the fundamental underpinning for why investors and allocate capital to the space.
Of the margin stability and.
<unk> could call into question and that margin stability.
I understand your point your point about the $35 million investment is exactly right and Thats 1 of the things that we've wrestled with over time is clearly there is a sales headwind before you even begin talking about picking up the gross profit dollars, but as I said earlier, Michael we've tested this we've tested it.
Extensively for over a year again these are very surgical pricing investments, they're not across the board and.
Some of our commercial our closed end competitors may follow us they may not on some of these things, but thats really not where our focus has been on making sure that we have the right value proposition, it's been making sure that we're priced right with other competitors that are outside of the close and competitors, we feel like we.
We are doing exceptionally well with that I think also I want to go back to what Jim Meer said this strategy is not a pricing strategy.
This strategy, which we have been working on for over 3 years now it had the single largest technology investment and our company's history on it.
We rolled out handheld devices, where we improved our website, all making us much easier to do business with and substantially lowering our delivery times, we continued to invest and the <unk> brand.
Yeah.
And that's 1 of the strongest brands and the automotive aftermarket if not the strongest people used to think that that was a headwind now people understand that it is a tremendous asset we've continued to rollout hubs and mega hubs, where we have substantially improving our immediate availability of parts and products. So this is a whole.
<unk> strategy of which pricing is an element of it and I understand what you are saying that a lot of people of invested in this sector for years because of the.
Margin characteristics, not just gross margin characteristics, but the overall operating margin characteristics and Michael you've been around long enough to remember in 2005, when I came into this role and we made of and SG&A investment everybody said. Okay. This is the beginning of the SG&A at the beginning of the operating margins going from 17.
And of half down to 12 of what happened.
Over time, we found a way to increase our operating margins Im not sure if that will happen from here, but these are very marginal investments to make sure that we are and the right competitive position against all channels.
Okay, Alright, I think the bucket and we gain a little bit more comfort.
You did at or.
Very clear about at a timeframe associated with it at.
And what youre, suggesting before and but we're going to do this for another 4 quarters.
And while it's going to be a bit more intense over the next couple of 2 at Chili's.
Starts.
After that and so.
And then just a quick follow up for engineer, how will of higher commercial mix.
In the business in fiscal 'twenty to impact the gross margin. So we can frame out. These 2 pieces as we try and model of the business moving forward. Thank you.
Hi, Michael before I turn the second part over to <unk> I want to hit your earlier part I was very clear and my comment a few minutes ago that as of now we have rolled out this commercial pricing initiative across the vast majority of the chain and as Jim Meer said, there is no act 2 under development or under construction.
Iteration, so as we annualize this time next year, we'll be Annualizing those investments.
So and in terms of our commercial mix.
We're very bullish about.
Our commercial business and as we talked pretty extensively about today and last quarter, we are investing in and.
On a disciplined way and our commercial business.
At this past quarter, our national accounts, and our regional and local accounts both grew over 40%.
We are pleased to see the nationals actually snap back car counts are up staffing has improved miles driven is improving.
And we're Underpenetrated, we think we're roughly a 4 to 5 share and Ah.
$75 billion category, so, there's a tremendous opportunity to create a faster growing.
Business here and as we execute on this growth playbook and see significant share gains.
And we will likely be in a position, where we see a little bit of of mixed drag from.
And commercial on the overall margins and that's going to be perfectly. Okay. This will be a faster growing and still high margin business.
As we as we move forward and as we see that growth materializes, we'll be very transparent about what our expectations are.
Okay. Thank you very much and good luck.
Thanks.
Thank you. Our next question is come from the line of Scot Ciccarelli with RBC capital markets. Please proceed with your questions.
Good morning, guys love to ask.
And the investment question, but I just didn't do that team.
Thanks, Scott Yeah, you guys talk all of them you.
You talked about teen product inflation, starting to ramp can you talk about the potential impact on the cost side of the ledger, particularly on wages getting net.
And employment environment.
Yes, so we're seeing cost inflation in certain categories. We're also seeing some.
And some higher transportation costs.
But as I said before the industry pricing is rational and this has always been and industry, that's priced to recover those inflationary impacts and where pricing and accordingly in this environment as well on transportation costs in particular.
We've had some contracted rates that are below the spot market. So this is protected us to some extent, but we will see more of those as we move forward from a labor standpoint, it's a very tight labor market and you have to look no further than what you are seeing amongst other retailers or.
Even in your local neighborhoods with the pressure of that local restaurants are seeing.
We're certainly not immune to those dynamics, but the value proposition of having a.
Career opportunity at Autozone, and we think gives us a little bit of a competitive advantage.
Our store operations teams and our distribution center teams and our supply chain and doing a fantastic job of recruiting.
Talent.
We're working really hard to retain talent in this environment and as we also believe that from a macro standpoint as.
Some of the enhanced unemployment benefits start to ease.
And be retracted, we think that will.
Sort of on stick the labor market to a certain extent, but all of the efforts that we're doing inside of our company.
Attract talent.
As quite frankly, 1 of the reasons that we've been able to put up the kind of numbers that we put up on both our DIY and our commercial business.
And just as a follow up is there any kind of estimate regarding what might happen to labor costs at <unk>.
We actually did eventually get a federal mandate at $15 of Alabama.
Well I think of couple of things.
And we'll potentially happen there 1 is debt.
We will see we will see labor costs start to go up and.
And different environments, we're already seeing.
Some markets were.
Labor costs have gone up and that and that ZIP code and what you have to be able to do is.
More importantly, you have to be able to price. Accordingly, so that you don't have the the margin and profitability drags and so when I think about the impacts of inflation and it isn't just what we're seeing and product cost of transportation costs, but labor is a part of that equation and we will be disciplined enough to.
And our price accordingly, and that environment is well, let me jump in there.
As you know Scott, we've been doing with accelerated labor.
Inflation for some time for 5 years and.
We have many markets, where we're already at $15 or above I was recently and Seattle.
On our minimum wage in Seattle at $16.70.
And we are figuring out of way to make sure that we manage through that and part of that is our pricing has to be different and we have that kind of change and our labor component of our cost structure.
Excellent. Thanks, a lot guys.
Thank you Scott.
Thank you our next questions come from the line of Zach data Wells Fargo. Please proceed with your questions.
Hey, good morning, guys.
And I think look back over the past year and your business at an accelerated to a double digit growth rate despite of double digit decline and miles driven and now that miles driven and starting to recover and return to growth do you expect this dynamic to be of tailwind for your business. Despite the tougher compares or are there any other puts and takes that we should keep in mind.
Clearly, we said over a long long period of time that miles driven is a good indicator of what.
Of how our business is going to perform however, we've also said and we said this back and the great recession that in certain times, it's not a good predictor of what happens and our business clearly if you just straight line what happens to miles driven you would've never forecast what happened to us over the last year, because miles driven were down significantly, but there was a new <unk>.
Element called Federal stimulus and we were talking this morning.
Our family of 4 over the last 4 years at last 4 quarters has picked up over $10000 and federal stimulus that does not count unemployed enhanced unemployment benefits that is just the stimulus for our customer that has a tremendous amount of money and.
Many of those customers turn to their automobiles and enhance them repaired them or whatever the case may be clearly as miles driven to return there will be some small tailwind, but I don't think that it will be nearly enough to offset the headwind that will come from us.
<unk> those tremendous amounts of of economic stimulus that we're in the environment.
Got it and is it possible to breakout the makeup of the commercial growth across new customers versions of existing customers are national's versus independent and then when you think about your average weekly commercial sales in that mid 13000 range was that relatively stable through the quarter.
And at the air to call that a new run rate for the business.
And we're calling at that internally and we're putting the pressure on the team we've got to keep that I think that there is some level of end of.
Stimulus, that's been and our commercial performance as well, but not nearly to the extent that it has helped accelerate the DIY business. So we have big expectations to continue to grow commercial at fairly robust rates going forward.
Clearly the DIY piece will be more challenged as we head into Q4 and.
And really frankly, the next 12 months, but commercial we think is a much stickier business.
Yes, we picked up new customers more importantly, we penetrated our existing customers with new categories of our deeper levels of their business as Jim Meer said as far as the tradeoff between the up and down the street customer or the national account customer.
Before this quarter are up and down the street business was performing much better than our national account business.
This quarter of the National account business was generally in line with our up and down the street business and as we talked of those leaders their businesses have improved.
Along the same lines.
Got it I appreciate the time to debt.
Thank you.
Thank you. Our next question is come from the line of Michael Baker with da Davidson. Please proceed with your questions.
Okay.
Hi, everyone and this is Kenny I'll back on for Mike Baker.
Good day, great job on the quarter end and I know you guys touched on recently about how stimulus might have impacted the commercial sales versus DIY.
And kind of curious about within that 44% growth and commercial up how much would you attribute to the mega hubs, so kind of checking on the stimulus and the pricing initiatives.
At the Mega hub impact yes.
So parts availability is.
A big piece of.
The story that we have and the commercial market today, when we put a mega hub and.
And a market 2 things happen number 1 we see a lift in sales and the 4 walls. If you will of the Mega hub.
It also gives us an opportunity as were selling to commercial accounts and it gives us an opportunity to tell the commercial accounts and that area. If you will that we have.
Parts available significantly more parts available than we would otherwise and that gives us a meaningful lift in sales. So a big piece of that strategy that we've talked about is improving on assortment.
And mega hubs and the marketplace.
And <unk> to the market.
We have more parts available on the marketplace and then taken advantage of that opportunity.
And we've talked about lots of things that drive.
Our commercial business, but and the top 1 or 2 is parts availability and if we if we.
We have the parts if we can get them there.
And a reasonable amount of time, they're competitively priced we're easy to do business with.
That gives us a tremendous tailwind for this business and that's what we're excited about.
Okay, great. Thank you and then just sort of a follow up and this is edmar.
And Brian question, where at.
And you guys seeing and most opportunity for your share gains I mean does it seem like.
The industry and sort of through the thick of.
Store closures is there kind of.
Approaching what could be the end of the pandemic and and just kind of curious about what youre seeing and the industry. Thank you.
Yes, I think I think the share gains and we got because of store closures of really over around may of last year.
We continued to grow share gains as consumer behaviors have changed.
Think about not whether or not of stores open but thinking about your own personal shopping habits are you go on and more convenient smaller box stores I think we've seen a lot of that across all kind of channels, including ours and.
Part of our desire is how do we know that we're getting those new customers or frankly, more so new occasions from existing customers. How do we make sure that we provide them a stellar shopping experience now and permanently change those shopping behaviors. So we keep those occasions going forward, that's what we're really.
Because on yeah, just to build on that 1 of the things we've been paying a lot of attention to internally.
Just a tremendous success that we're having and our loyalty program and our loyalty member sales are up.
And 32% versus last year, and when I look at the stats around the number of members that are.
Earning rewards the number of members that are redeeming rewards.
The spend for those loyalty customers relative to last year on a per transaction basis and the retention rates all of those numbers are up.
And so that gives us a lot of confidence that the things that we've done and <unk>.
Terms of our in store execution are driving driving great results. So as we think about share gains on lots of things that are part of that mix.
And including some of the dynamics that you talked about on a macro basis, but our execution has just been fantastic and this environment and the data around our loyalty programs. Certainly suggests that we're doing the right things and those of the kinds of sales that are a lot stickier.
And when you have nonmember sales.
Thank you our next questions come from the line of Brian Nagel with Oppenheimer. Please proceed with your questions.
Good morning, great.
Great quarter and good morning, Thank you.
So the first question I wanted to ask.
You build this goes back to earlier in your prepared comments you talked about just the cadence of sales through the period.
Yes.
Did you and what was kind of the exit rate.
And as the quarter concluded.
And I noticed a bit of a follow up to all of other questions, but if you look at the business now do you think stimulus is still driving at now or was that largely been burned through.
We exited I don't have the numbers right in front of me because I went through quoted some of them and the script and we were very intentional about that to talk about those 4 week differences. So that you can see as we were before stimulus we were seeing a slight deceleration of our sales coming out of Q2, then when stimulus happened I think we said.
We were up roughly 50% and I think it was 49.9 and.
And then.
We came out the other side and on a 2 year basis, we were still up 26, 7% and those last 4 weeks.
Our comps as we exited the quarter of the last 4 weeks this year or 14%.
With the last 2 weeks coming down to the mid single digit range. So what we have seen is that stimulus.
Stimulus dollars of came in March.
Stayed and had a lingering effect and helping drive our business longer than we would have expected similar to what happened last summer. If you remember our business was really really strong post the April stimulus now last year, you had the enhanced unemployment benefits at $600 of week.
Versus $300 of weak this year, so clearly that will be a headwind as we look at Q4, but not completely does.
And does that help.
That's very helpful. I appreciate it.
And then my second my follow up question would be something maybe bigger picture, but if you look at the commercial business and obviously a lot of.
Cross currents of at this point, but commercial has been a bright spot for autozone for wild at strengthen here lately as you look out at worst what do you view is still of a slack within your model and Youre talking about opening the new Mega hubs and launching new programs and how should we think about the real drivers going forward, particularly as we pull out of this COVID-19 crisis.
As <unk> mentioned we.
<unk> 50 Mega hubs now we're on a path to over 100 to 110, so we will more than double the amount of Mega hubs that we have today and I will tell you Jim Meer who's in charge of store development has a big bogey out there to make that happen very fast and youll see a significant amount of of Mega hubs come on.
On line this quarter and over the next year. So I think that that will help us and a big way as Jim Meer said this business about parts availability at was that way. When we started 42 years ago, It's still that way to day. If you don't have it you can't sell it and were getting parts closer and closer and closer to our customers I also talked about all of this technology.
<unk> that we've rolled out and we're still on the very early innings of that we've seen reductions and <unk>.
Our delivery times, but we are looking for significantly bigger larger reductions and delivery times as this technology matures as our team.
Understand how to utilize it and how to change.
Getting parts and products frankly out of the building is our biggest focus not necessarily the dropdown.
Yes.
Okay.
I appreciate it thank you.
Alright, Thank you very much on <unk>.
Before we conclude the call I want to take a moment to reiterate that we believe our industry is strong and our business model is solid and we're excited about our future growth prospects, but we take nothing for granted as we understand our customers have alternatives. We have exciting plans that should help us succeed for the future, but I want to stress at this.
As of marathon and not of 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.
And lastly.
As we celebrate Memorial day next Monday, we.
We should remember all of our countries heroes.
Both past and present.
These Americans a tremendous debt of gratitude.
Thank you all for participating at today's call have a great day.
Okay.
Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time at.
Great day.