Q4 2021 Autozone Inc Earnings Call
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Greetings and welcome to Autozone, It's 2021 fourth quarter earnings release Conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce Brian Campbell. Thank you you may begin.
Yeah.
Before we begin please note that today's call includes forward looking statements that are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 forward looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent annual report on Form 10-K, and other filings with the Securities and Exchange Commission for a discussion of important.
Risks and uncertainties that could cause actual results to differ materially from expectations forward looking statements speak only as of the date made and the company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures a reconciliation of non-GAAP to GAAP financial measures can be found in our press release.
Yes.
Good morning, and thank you for joining us today for Autozone is 2021 fourth 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 fourth quarter I Hope you've had an opportunity to read our press release and learn about the quarter's result.
<unk>, if not the press release, along with slides complementing our comments today are available on our website www Dot Autozone dot com under the Investor Relations link please click on quarterly earnings conference calls to see them.
As I have said previously throughout the pandemic, we could not deliver the kind of results we have without the outstanding 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 has continue to enthusiastically meat and embraced the challenge as.
As we say, they're going the extra mile for our customers and we owe them a tremendous debt of gratitude.
I also want to reiterate our highest priority remains being committed to keeping all of our customers and autozone are safe.
Thank you Autozone is again you are remarkable.
This morning, we will review our overall same store sales DIY versus the FM trends sales cadence over the 16 weeks of the quarter merchandise categories that drove our performance in any regional discrepancies.
We will also share how inflation is affecting our costs and retails and how we think they will impact our business for the remainder of the calendar year.
Okay on to our sales results.
Our domestic same store sales were an impressive 4.3% this quarter on top of last year's historic 21, 8% growth.
This time last year, we had no vision, none of delivering a positive comp this quarter, but our team once again performed at an exceptionally high level, congratulations again to Autozone us everywhere.
Our growth rates for retail and commercial were both strong with domestic commercial growth north of 21%.
Our commercial business set a record this quarter with $1.2 billion in sales for the quarter an incredible accomplishment. Additionally, we reached a new milestone in commercial sales, surpassing $3 billion for the year, finishing with over $3.3 billion in annual sales versus two.
$7 billion in sales a year ago, an impressive 23% increase.
We set new records in annual sales volumes per store, reaching $12600 for the year up from $10600 just last year.
We continued to execute well in commercial and we couldn't be more proud of our team's recent success.
I'm also very proud of our organization on our domestic DIY performance, we ran a roughly flat comp this quarter after increasing well over 20% in last year's fourth quarter.
While our DIY two year stack comp decelerated some from the third quarter, we were expecting substantially more deceleration as we got further and further from the last round of stimulus back in March.
We were quite pleased with the stability of our two year stack same store sales.
In commercial on a two year basis, our sales were very consistent with last year's performance.
Sorry last few quarters performance now lets focus on our sales cadence.
This quarter stretch from early May to the end of August the first eight weeks of the quarter. Our comp was three 1% in the last eight weeks our comp average five 5%.
This strength in the back half of the quarter was attributable to easier comparisons to last year.
Given the dynamics of the past 18 months, we like others, who benefited from the Lumpiness of the pandemic sales believe it is more insightful to look at a two year stacked comp.
For Q4, our two year comp was 26.0%.
On a two year basis, our cadence for each four week period of the quarter was 26, 8%.
28, 2% 25, 5% and 24.0% our two year comp sales trends were remarkably strong and fairly consistent across the quarter.
Regarding whether we experience a noticeably warmer summer out west and in previous years, which helped our sales, but we experienced a milder summer in the Midwest and northeast, which drove our sales to underperformed the chain. There overall weather impacts were neutral on our performance.
Regarding the quarter's traffic versus ticket growth, our retail traffic was down roughly 4%, while our retail ticket was up 3%. This was expected as stimulus stay at home orders and closures of Big box retail automotive service departments.
Drove outsized traffic last year.
Our commercial business saw the vast majority of growth come from transaction growth from new and existing customers.
It was encouraging for us to see sales trends remained strong this quarter and we like the momentum we're seeing in both domestic businesses heading into fiscal year 'twenty two.
During the quarter there were some geographic regions that did better than others as there always are across both our retail and commercial customer bases. We saw the Midwest mid Atlantic and northeastern markets underperform, roughly 400 basis points in comp versus the remainder of the country.
The data suggests that we have actually gained some share in these markets. However, we believe the milder summer weather was a large contributor to our sales comp results there.
And across the country in retail our share trends remained strong despite the reopening of big box retailers automotive service departments network closed this time last year.
We have been very pleased that we have retained the roughly 10%.
Market share we gained in our retail sales floor business last year.
Our number one priority continues to be the health safety and well being of our customers and Autozone us on Q2's call. We shared that we would provide every autozone or with a 100 dollar incentive once they completed their vaccination for COVID-19, that's every autozone or including part timers. This was the logical next step in our efforts to provide.
A safe working and shopping environment as we have with our ongoing PPP efforts.
Spent another $9.0 million in the fourth quarter reimbursing, our autozone or for the vaccine.
I continue to be inspired by our board and management team's commitment to doing what is right putting safety first while caring deeply for our autozone.
We are strongly encouraging our autozone is to get the vaccine as our culture and values of taking care of one another had been on display for the past 18 months.
Now, let's move into more specifics on our performance for the quarter. Our same store sales were up four 3% versus last year's fourth quarter.
Our net income was $786 million and our EPS was $35.72 a share 15, 5% above last year's fourth quarter.
Our domestic retail same store sales were down slightly for the quarter, while our commercial business remained remarkably strong.
Commercial total sales grew approximately 21%.
We averaged $74 million in weekly sales, which was approximately $14400 in sales per program per week, which was easily and all time record for us.
The initiatives that we have in place are meaningfully helping our commercial business.
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 for categories continue to outpace the hard part categories with categories like wipers fluids and lighting all showing strength.
Our hard parts business was in line with our expectations and ran roughly flat with last year, we were especially pleased as last year. Our hard parts business was very strong, especially in categories like batteries. We believe our hard parts business will continue to strengthen as our customers drive more.
Let me also address but we are seeing from inflation and pricing in our space.
This quarter, we saw retail sales impacted positively by about 2% year over year from inflation, while our cost of goods was basically flat.
We believe both numbers will be higher in the first quarter as cost increases in many merchandise categories work their way through the system.
We could see low single digit inflation in retails as rising raw material labor and transportation costs are impacting us and our suppliers. We have no way to say how long it will last but our industry has been disciplined about pricing for decades.
While we continue to be encouraged with the current sales environment. It is difficult to forecast near term sales. What I will say is this past quarter sales were better than we expected and we exited the fiscal year with strong fundamentals in our business.
For FY 'twenty to our sales performance will be led by the continued strength in our commercial business as we execute on our initiatives.
Both DIY and commercial have gained considerable share that we're maintaining and but we believe that we are in an industry that is positioned for solid growth for the long term.
We will earn our fair share and we hope to exceed expectations. In addition, we continue to believe our products and services will be in high demand during more difficult economic times and this resiliency gives us significant confidence about our future prospects.
As we progress through the year, we will as always be transparent about what we're seeing and provide color on our markets and outlook as trends emerge.
Now I'll turn the call over to Jim Meer Jackson Jamaica.
Thanks, Bill and good morning, everyone.
Bill mentioned, we had another great quarter, our growth initiatives are continuing to deliver strong results and the efforts of our autozone or is in our stores and distribution centers have enabled us to maintain strong results.
To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q4.
For the quarter total auto parts sales, which includes our domestic Mexico and Brazil stores were.
$8 billion up 8% and.
For the total year, our total auto parts sales were $18.0 billion up 15, 9%.
Now, let me give a little more color on sales and our growth initiatives, starting with our commercial business for the fourth quarter, our domestic <unk> sales increased 21% to $3.0 billion and were up 31% on a two year stack basis.
Sales to our <unk> customers represented 24% of our total sales on a weekly sales per program or $14400 up 18% as we averaged $74 million in total weekly commercial sales.
Once again, our growth was broad based as national and local counts all grew over 20% in the quarter.
For the full year, our commercial sales grew 22, 6% and 29% on a two year stack basis.
Our execution of our commercial acceleration initiatives to delivering exceptional results as we focus on building a faster growing business, but disciplined.
The investments, we're making are helping us grow share and we're making tremendous progress in growing our business in this highly fragmented portion of the market.
We now have our commercial program in over 86% of our domestic stores and we're focused on building our business with national regional and local accounts.
This quarter, we opened 72 net new programs, finishing with 5179 total programs.
We continue to leverage our DIY infrastructure and increase our share of wallet with existing customers in fiscal year 'twenty two commercial growth will lead the way.
Our growth strategies continue to work as we continue to grow share.
We're confident in our strategies and execution and believe we will continue gaining share we remain focused on delivering improvements in the quality of our parks, particularly with our door last ramp making improvements in our assortments, maintaining competitive pricing and staying committed to providing exceptional service.
These core focus areas have enabled us to drive double digit sales growth for the past five quarters and position us well in the marketplace as.
As we move forward, we're focused on our core initiatives that we believe will accelerate our sales even further let me highlight one key initiative that is driving our performance and positioning us for an even brighter future and our commercial and retail businesses and that is our mega hub strategy.
Our Mega hub strategy has given us tremendous momentum and we are doubling down we now have 58 Mega hub locations and we expect to open approximately 20 more over the next 12 months.
As a reminder, our mega hubs typically carry roughly 100000, skus and drive tremendous sales lift inside the store box as well as serve as a fulfillment source for other stores fixed.
The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business and we're testing greater density of Mega hubs to drive even better sales results with.
With this effort, we are leveraging sophisticated analytics to help us expand our market reach give us closer proximity to our customers and improve our product availability and delivery times.
I will remind you that our current Mega hub strategy envisions our expansion to a total of 100 to 110 Mega hubs.
However, as these assets continue to outperform our expectations, we would expect to expand significantly further.
We are excited about this work and its ability to further accelerate our commercial growth.
All of our efforts are building meaningful competitive advantage and gives us tremendous confidence in our ability to create a faster growing business.
On the retail side of our business our domestic retail business was down just 40 basis points, but up 23, 4% on a two year stack for the full year. The retail business was up 11, 2% and 18, 7% on a two year stack basis. The business has been remarkably resilient as we have gained and maintain.
Nearly 300 points of market share since the start of the pandemic.
We are excited about the initiatives that drove the tremendous sales and share growth and a relentless focus on execution by our autozone is in our stores and distribution centers has been remarkable we are winning in the marketplace and the execution of our autozone as we're taking care of our customers remains a key competitive advantage.
As we exit fiscal 'twenty, one I'm really pleased with the competitive positioning of our DIY business and our outlook going forward.
The work we've done on improving the customer shopping experience expanding assortment, leveraging our hub and Mega hub network and maintaining competitive pricing have led to tremendous results over the last two years.
<unk> has been a strong contributor to the growth of our company and while comps are difficult because of our strong past performance. The fundamentals of our business have never been stronger our strategy and execution are delivering solid results.
Now I'll say, a few words regarding our international business, we continue to be pleased with the progress, we're making in Mexico and Brazil during.
During the quarter, we opened 29, new stores in Mexico to finish was 664 stores and five new stores in Brazil. The finished with 52 on a constant currency basis, we saw accelerated sales growth in both countries. Most importantly, as those economies stabilize we remain committed to our store opening schedule in both markets and expect both to be <unk>.
<unk> contributors to sales and earnings growth in the future.
Now, let me spend a few minutes on the P&L and gross margins.
For the quarter, our gross margin was down 82 basis points, driven primarily by the accelerated growth in our commercial business, where the shift in mix, coupled with the investment and our initiatives drove margin pressure, but increased our gross profit dollars by six 4%.
I mentioned on last quarter's call that we expected to have our gross margin down in a similar range to our third quarter, where we were down 118 basis points. However, the team has been focused on driving margin improvements primarily through pricing actions that offset inflation to drive a better than expected outcome is.
As Bill mentioned earlier in the call, we're beginning to see cost inflation in certain product categories, along with rising transportation costs to be clear overall, we have pricing power and consistent with prior inflationary cycles. We have been successful thus far at passing these higher cross through our retail overall the industry pricing remains rational.
And we're pricing accordingly.
All of the actions, we're taking are resulting in us growing our DIY MDI FM businesses at a significantly faster rate than the overall market and we're committed to capturing our fair share while improving our competitive positioning in a disciplined way.
We should expect our margins in the first quarter to be down in a similar range to the fourth quarter. We are however focused on driving new customers to autozone and overtime growing absolute gross profit dollars at a faster than historic rate in our total auto parts operating segment.
Moving to operating expenses, our expenses were up nine 2% versus last year's Q4, as SG&A as a percentage of sales deleveraged 33 basis points.
The deleverage was primarily driven by higher payroll expenses to support our sales and customer service initiatives and higher it investments that underpin our growth initiatives.
These dynamics were partially offset by lower pandemic related expenses in the previous year.
While our SG&A dollar growth rate has been higher than historical averages we've been focused on maintaining high levels of customer service during a period of accelerated growth and taking care of our autozone orange during these difficult times.
We'll continue to be disciplined on SG&A growth as we move forward and manage expenses in line with sales growth over time.
Moving to the rest of the P&L EBIT for the quarter was just over $1 billion up two 6% versus prior year's quarter, driven by strong top line growth EBIT.
EBIT for fiscal year 'twenty, one was just over $11.0 billion up 21, 8% versus fiscal year 'twenty.
Interest expense for the quarter was just over $58 million down 11, 5% from Q4, a year ago as our debt outstanding at the end of the quarter was just under $8.0 billion versus just over $10.0 billion last year.
We are planning interest in the $46 million to $48 million range for the first quarter of fiscal 2022 versus $46 million in last year's first quarter.
For the quarter, our tax rate was 23% versus 22, 3% in last year's fourth quarter. This quarter's rate benefited 215 basis points from stock options exercised while last year had benefited 35 basis points for.
For the first quarter of 2022, we suggest investors model us at approximately 23, 6% before any assumptions on credits due to stock option exercises.
Moving to net income and EPS net income for the quarter was $786 million up six 1% versus last year's fourth quarter, our diluted share count of $22 million was lower by eight 1% from last year's fourth quarter. The combination of higher earnings and lower share count drove earnings per share for the quarter to $107.0
Up 15, 5% over the prior year's fourth quarter.
Net income per share for fiscal year, 'twenty, one with $114.0
A remarkable 32, 3%, reflecting our outstanding top line performance and lower share count.
Now, let me talk about our cash flow for the fourth quarter, we generated $4.0 billion of operating cash our operating cash flow results continued to benefit from strong sales and earnings previously discussed.
You should expect us to be an incredibly strong.
Cash flow generator going forward and we remain committed to returning meaningful amounts of cash to our shareholders.
Regarding our balance sheet, we now have nearly $3.0 billion in cash on the balance sheet and our liquidity position remains strong.
We are also managing our inventory well as our inventory per store growth was up four tenths of a percent versus Q4 last year total inventory increased three 7% 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 $203000 versus negative $104000 last year and negative $167000 last quarter.
As a result accounts payable as a percent of gross inventory finished the quarter at 129, 6% versus last year's Q4 of 115, 3%.
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 $22.0 million shares outstanding at quarter end, we had just over $418 million remaining under our share buyback authorization and over $900 million of excess cash for.
For the full year, we bought back $7.0 billion of stock or approximately $8.0 million shares the powerful free cash flow. We have generated this year combined with excess cash carried over from last year has enabled us to buyback over 11% of our shares outstanding at the beginning of the year.
We have bought back nearly 90% of the shares outstanding of our stocks since our buyback of inception in 1998, while investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach, where we expect to have powerful free cash flows that will enable us to invest in the business and return.
Meaningful amounts of cash to shareholders.
So to wrap up we had another very strong quarter highlighted by strong comp sales, which drove a six 1% increase in net income and a 15, 5% increase in EPS, we are driving long term shareholder value by investing in our growth initiatives driving robust earnings and cash and returning excess cash to our.
Shareholders. Our strategy is working and have tremendous confidence in our ability to drive significant and ongoing value for our shareholders now I'll turn it back to bill.
Thank you Jim Meer nice job.
Also congratulations on your one year out ozona anniversary that you celebrated last week and fantastic.
As we start a new fiscal year I'd like to take a moment to discuss our operating theme for the new year. It is go the extra mile.
And we will be hosting our annual national sales meeting here in Memphis next week to formally announce this theme.
Being in person for the first time in two years, yes, we're going to host our Autozone US who are vaccinated and wearing masks in person and we're going to celebrate all they have accomplished over the past two years.
I can't tell you how excited I am about next week.
2022 will again be focused on superior customer service and flawless execution in fiscal 'twenty. Two we are launching some very exciting initiatives.
We will be announcing some significant expansions to our supply chain to fuel the growth of our domestic and Mexico businesses. We are also targeting to open 20, new domestic mega hubs in the U S that will enhance our ability and support growth in our retail and commercial.
<unk> businesses.
We will open approximately 200, new stores throughout the Americas with notable acceleration in our Brazil business.
These capacity expansion investments reflect our bullishness on our industry and our own growth prospects, we are being disciplined yet we are being aggressive.
Lastly, I want to reiterate how proud I am of our team across the board for their commitment to servicing our customers and doing so in a very safe manner.
At the start of the pandemic last year.
Could never have guessed the positive impact it would have on our sales.
First and foremost our focus will be on keeping our autozone and customers safe, while providing our customers with their automotive needs and secondly, 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 three to five years from now.
And we welcome that challenge I continue to be bullish on our industry and in particular on Autozone.
Now, we'd like to open up the call for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pickup your handset before pressing the star keys, we ask that you. Please limit yourself to one question and one follow up question. One moment. Please while we poll for your questions.
Our first question is coming from the line of Bret Jordan with Jefferies. Please proceed with your questions.
Hey, good morning, guys.
Brian Brett.
On the share gains could you give us a little bit more color I guess as far as where the share is coming from is it warehouse distributors or from other two step distributors amendment.
I guess are there particular categories that you are seeing relative outperformance and then I guess the cadence you talked about maintaining the 10 points of share you'd picked up last year is that slowed post COVID-19 disruption or are you still seeing the share gains.
Continuing.
Terrific, so I'm going to bifurcate, it and talk about retail and then come back and talk about commercial and then <unk> jump in and clarify anything from Miss it so our head of Moscone.
First of all on the retail business, we have very quantity quantifiable data that we received it is not on the hard parts business. So think about it as everything in front of our parts counter including batteries in spark and plus batteries and spark plugs. So we have real life data that has a larger set of data.
Then just our traditional closed end competitors. So we have facts. There we grew share very significantly this time last year and as we began to lap those <unk>.
A largest share gains in our company's history, we anticipated we might lose some of that share. We haven't lost any of it I mean, it's on the margin it's slightly positive slightly negative month to month, but we basically grew our share in that dataset by 10%. So we moved from roughly 30% share to <unk>.
33% sure I've never seen anything like that and I'm really proud of our organization for sustaining that share over time.
On the commercial side of the business, we don't have that kind of quantifiable data.
But we obviously look at what's going on in the overall market, we look what's going on with our close in competitors and other competitors and it's pretty clear when youre growing at these kinds of growth rates that we are significantly outgrowing the market.
Probably by multiples two or three times the market growth.
We're all is that coming from.
You probably have as good insights into that as we do we look at the.
Publicly available data, we see that where we're doing very very well in both the retail business in the commercial business I think that the standout for US right. Now is the growth that we have in the commercial business.
And our belief is it's because of not the pandemic, it's because of the initiatives that we've embarked on over the last three years as we implemented this latest round of strategy work, where we're really working on making sure. We've got the best parts coverage, we're continuing to amplify the <unk> brand.
We've got great people doing great things, we're rolling out our Mega hubs strategy now we've implemented some technology to help us be more efficient and we've also made sure that we're priced right not necessarily versus our close in competitors, but we've looked deeper and looked at the warehouse distributors and making sure that our value proposition.
Is appropriate for the kind of service that we're delivering so those are my thoughts generic do you have anything to add yes, I think a couple of things stand out to me one is that.
And as you mentioned our business has been remarkably resilient.
And you combine that with the great execution that we have and it's driving exceptionally strong results.
As we get further away from the Lumpiness of the stimulus payments.
It's clear that our share gains have been maintained bill talked about what we're seeing on the on the sales for market share. We've got great results and Readouts from our loyalty programs that gives us a lot of confidence.
And our teams are doing a great job of executing on the commercial side, we're continuing to see those significant share gains behind the.
The business that are behind the initiatives that bill talked about in a couple of things really stand out to me. It's broad base. So its national accounts and its local accounts that are growing over 20% we've seen the national snap back over the last year as car counts are up in staffing has improved and miles driven is improving.
Our team is doing a fantastic job of executing with those customers. So we have a tremendous amount of confidence.
As we move forward into the year and this is helping us create a faster growing business.
Great. Thank you and just a quick question on the accounts payable I think that's a record at 129% of inventory is there a number or a range, we should think about that being in going forward.
Can it go higher than this.
It's benefited over the last year quite frankly, because our turns have been up significantly in an accelerated.
Sales environment, we don't expect it to go much higher than where we currently are but we're continuing to do all the things that we can to manage working capital.
Both with our suppliers and with our partners and you know, how but I wouldn't expect.
It to go much higher just based on the tremendous amount of terms that we've had over the last year or so.
Alright, great. Thank you.
Thank you Brett.
Thank you. Our next question is coming from the line of Greg Melick with Evercore ISI. Please proceed with your questions.
Hi, Thanks.
Two questions one are.
You mentioned 200 stores in the Americas could you just sort of walk us through the breakdown of what would be domestic and in those other markets.
Basically is that a run rate we should use going forward. If you look about look at the opportunities and I had a follow up.
Yes, you can expect us to be in that ZIP code probably for the next couple of years or so.
Roughly two thirds of that.
Or more going to be in.
And sort of the U S market. If you will we've been looking at doing 150 to 170 stores or so based on the opportunities that we see in the marketplace.
You could see us do.
30 to 50 stores in Mexico dependent on the market conditions or so and then the remainder coming from Brazil, I think the good news for US is that we see tremendous market opportunities.
Both in the U S and in Mexico, and we've talked about on our previous earnings call that we've been testing our market potential in Brazil for really the last decade, or so and we think Brazil can be a very big market for us.
So we've got great potential there.
We made some leadership changes as well so Tom Newbern is leading.
Our international efforts going forward Parmesan fantastic operator has a ton of experience.
And we look forward to that being a much bigger part of our story and our strategy as we go forward.
Great and the second question is linked to product availability and inflation I think you mentioned that costs are going up industries rationally pass through was it fair to say the fourth quarter that inflation is maybe now running three to four in the top line and how do you think about that going forward.
We're not seeing it at that level, yet Greg I think we will see it at that level.
As you know it takes some time for those price increases to work themselves through the system and right now is a little bit different in that you are seeing direct product cost inflation, but the the hyper inflation that we're seeing frankly is in the transportation or are not directly in all of the product cost and so we're having to be thoughtful about how.
Do we ultimately pass those price increases or cost increases on through retail prices in both the domestic both the retail and the commercial businesses. We think that you will see it more in the range you're talking about in Q1 and Q2.
If not even a little bit higher but that seems to be where we're headed.
Got it and product supply there hasnt been an issue in terms of getting products no there absolutely significant issues and getting products. This we are running.
The lowest level of in stock that I can ever remember, it's it's three or 4% below where we normally run it moves from one category to the other this is the most difficult supply chain environment that I have ever seen but I will tell you are.
Supply chain and merchants are working so well and so closely with our vendors and finding new suppliers, along the way, where we have two in the spot market or other areas that I think we are doing.
Competitively and when I say competitive I'm talking about retail in general.
Very proud of where we are but very dissatisfied with it on a historical basis.
Got it but comparatively affiliate and a better than typical spot in your space just that it is tight out there.
And Greg I think we looked at our outperformance versus the market in both retail and commercial the one piece that we really didn't highlight that I would highlight as autozone has been known as an execution machine for decades long before I got here and I think that our core flawless.
<unk> has been a big contributor to our success over the last 18 months in these uncertain times.
Well congrats to you and the team.
Thank you very much.
Thank you our next questions come from the line of Chris <unk> with J P. Morgan. Please proceed with your questions.
Thanks, Good morning, guys.
So you spoke to.
To your contracts overall with some moderation in July and then in August can you share what that trend look like for the DIY versus the commercial side of the businesses or what drove that the moderation.
And then related to that as you think about August.
Did given the easier compare in DIY did that flipped back to positive on a one year basis.
Yes. So if you if you look at the trends that we saw and we saw most of the moderation obviously in our DIY business, where our comps were.
Significantly higher last year in the fourth quarter.
But a couple of things stand out to US again, as we move further and further away from the Lumpiness as the stimulus payments that we talked about.
Our business was pretty resilient.
And so our business actually outperformed our expectations our commercial business has been.
Remarkably resilient as well and if you think about the commercial business. It's a lot stickier the relationships that we built with our commercial customers.
<unk> is driving that business and as we see the macro environment improve.
Those are things like car counts those are things like miles driven.
That our commercial customers are staffing have been able to get their staffing levels back to where they need to be.
That business has been very very strong.
As we as we exited the quarter.
It's been our past practice, we typically don't.
Talk about what we see in the early innings of the following quarter, but what I will say is that as.
As we as we exited.
The fourth quarter.
We are very pleased with the trends that we were we were seeing and it gives us a lot of confidence about not only the first quarter, but the year in total.
And then.
So did DIY in that last four weeks that you spoke to the DIY turn back to being positive.
It was it was close to being flattish in that last four weeks or so.
And again, when we get to the the first quarter.
We got much easier comps if you will so that ought to give you some idea of what we're seeing in terms of trends.
Moving into the first quarter.
It makes a lot of sense, so I guess.
On the pricing side.
So just to summarize there it doesn't sound like you've seen any sort of fallout because of unemployment insurance expiring here in September.
On the price side, you've invested in price and DIY to retain the share commercial to retain the share how do you feel about where your price gaps are in the market currently.
And are things playing out the plan I E. There's not a necessarily a step up here from a price investment perspective that you feel you need to make to in order to continue these great share trends.
We believe the price investments are behind us.
When we look at the moves that we made last year.
Going to start to anniversary those going into this year and.
And as we said the strategy is working the way you see it in the numbers, we put on the board in terms of our DIY results in our commercial results and prices just been one element of the strategy. So all the other things that we've talked about from an execution standpoint, and making sure that we have the right assortments the investments that we've made in our products. The technology that we have on the commercial side.
Those things combined with competitive pricing have underpinned the growth story that you see here.
So.
As we're in this inflationary environment as Bill mentioned, we're being very disciplined we are moving.
Retail is up on the commercial one.
DIY side, the industry has been very rational, but we're maintaining those.
Competitive price differentials, if you will that have underpinned the share growth that we've seen over the last year or so and thats whats really important it's not an absolute price point of view is if you will but it's a relative price point.
But as we have opportunities to take price up we're certainly doing that.
Awesome have a grateful thanks very much.
Thank you.
Thank you. Our next question is come from the line of Michael Lasser with UBS. Please proceed with your questions.
Good morning, Thanks, a lot for taking my question Bill the industry had seen tremendous DIY growth over the last several quarters as consumers have largely been staying at home have had more time on their hands to do projects on their card why wouldnt. The industry gave a lot of that volume back.
We get back.
Tom.
Of normalcy.
If that's the case how can.
Managing the P&L to maintain the algorithm that the market.
For model is done.
Terrific question, Michael I'll take the first part I'll, let Jim Meer figure out the second floor.
On the sales side your logic is very sound.
If you look at our.
Our business overall is up roughly 25% versus pre pandemic levels.
You've been watching this industry for a long time I've been watching it longer and it's generally a nice grower, but in the.
The industry grows around 4% a year to grow 25% over 18 months is pretty phenomenal I think as we said in our prepared comments we expected.
Our sales to step down some this summer.
You saw the last round of stimulus in March every time, we've seen stimulus we can see a direct correlation to our sales really grow at an exponential rate when that happens and then tail off some but they never go back to where they were and we spent a lot of time talking about the share gains that we have seen.
Because we do think that that is beyond what's going on with Covid I think it's somewhat related to COVID-19.
Our teams have done a really really good job of making sure that we have product of making sure that our customers and our autozone or spill safe in our stores I Wouldnt crew, we spent a lot of money, making sure that we create a safe environment in our stores and I would encourage you all to go in our stores and <unk>.
So look at us versus our competitors go look at us versus other retailers. It is a very in this interesting time, a very comfortable shopping environment as comfortable as you can find I believe.
And so I think that customers have changed their shopping behaviors that are not necessarily wanting to go to a big box store I think there are some online retailers that deemphasize this category during the pandemic.
Fortunately for US, we don't give guidance because it would be very difficult to tell you what's going to happen in Q3 or Q4, just like it would have been difficult to tell you. This time last year, what would happen in Q4 this year.
We are very confident that we will win in the marketplace.
By leveraging our flawless execution.
The industry trends will be the industry trends, but I would refer you all back to think about.
On a long term historical basis.
There had been before this period three times in my career, where I've seen substantially above industry performance, our industry performance above the norm and that was a 93% 94.
<unk> and <unk>.
Oh 910, and 11 all of those were coming out of very difficult economic environments. This pandemic seems to be behaving a lot like that just an exponential fashion.
What was the interesting thing out of those most.
The best times that we've seen was.
Following each one of those times, we didn't step back down as an industry to where the performance was before.
Well, we have some step down as an industry, maybe but I don't expect it and I certainly don't expect autozone to go back to the levels that we were performing before it will step back a little bit maybe I don't know if this is unchartered waters, but I do think we have reintroduced ourselves too.
Some customers and I think our existing customers have started relying on us on a more frequent basis and I believe many of those shopping habits.
We will have changed forever.
On the commercial side of the business.
It's somewhat related to the <unk>.
<unk> I think we're winning in a big way in the marketplace. I think we have changed our competitive position because of all the initiatives that we have so I am and I think we are quite bullish on the long term of our commercial business.
<unk> talking about the P&L from a P&L standpoint, here's the interesting thing for US I mean, we have a tremendous amount of confidence in our business going forward.
And if you recall this is a business that.
Has an algorithm that works at.
At low to mid single digit top line growth.
With high margins that spits off a lot of cash that we invest in our existing assets, we invest to grow our business and we returned a lot of that to shareholders over the last couple of years or so we've had the opportunity to have outsized topline performance and you've seen us ratchet up the things that we.
We've done so.
<unk> increased the level of investments that we've made in our existing infrastructure, we talked about what we're doing to expand the capacity in our distribution centers and our supply chain Bill talked about it in his in his comments this morning.
Seen us invest in our in our growth initiatives and we've had an outsized return to shareholders. So the algorithm works it's worked for us in.
In the past.
It's worked for us during this environment, where we've had accelerated sales where we've done even more than we've done in the past.
Got a tremendous amount of confidence in our growth prospects going forward, we're going to have tremendous financial firepower to grow this business and return cash to shareholders and that quite frankly is the autozone algorithm.
That's very helpful and my follow up question is you seem to get that your gross margin is stable.
Stabilised.
Because you have lapped some of the price investments that you've made where there's other factors.
That will also contribute your gross margins on pace to be 22, 7% this year.
Is down almost 100 basis points from the peak.
Are you, suggesting that you can get back to the peak level or now that you use.
That lower.
The right way to think about the gross margin moving forward.
Yes, I think we're not projecting that we're going to get back to any particular level Michael.
What we are saying is for the most part the actions that we've taken in retail are done many of those actions are behind US. We are very pleased with the competitive position that we have we've always been pleased with our competitive position with our close in competitors, but we've looked a little bit beyond that to those.
Competitive that I'll call or a half a step away in the commercial business, we took much more significant pricing actions.
On the margin in DIY, they were fairly significant in commercial but we finished those actions at the beginning of this past quarter call. It in June so and those took some time to roll in we started it with six markets and we went to 14 markets and we rolled it to the chain. So we are beginning to annualize the first smaller.
Tranches of that and we will annualize that in the.
In the beginning of next year's fourth quarter, we feel really good really good about the actions that we've taken they are an element the element of our strategy, but as you can see in our commercial performance. We are winning in the marketplace in a big way so.
So we will annualize that in nine months or so we do not have the next tranche of pricing strategies that we are planning to do in DIY or in commercial. This was this is what we wanted to do and I think we're very pleased with how both have played out.
Yes, the only thing that I'll add there is that our core capability.
Inside the company Hasnt changed the things that we've historically worked on in.
In terms of assortment.
Awesome work that our merchants have done over the years the things that we see in terms of the industry's pricing dynamics those things haven't changed so the core fundamentals in our core capability of the business Hasnt.
It hasnt changed over time.
Often said that as we go through these dynamics, we tend to look at gross margins and pricing at a point in time.
But over the long term, we've been very very disciplined.
As we've seen inflationary impacts hit.
Hit the business, we've been very disciplined about raising pricing.
And often said that inflation is our friend in that in that in that regard. So our core capabilities to expand margins Hasnt changed what we've done as Bill said is we've made some fundamental changes in terms of where we needed to be competitively in certain categories that have improved the growth rate of our business and nothing else.
About our businesses. This change so all the great work that we've done in the past, we still have that capability going forward.
Very helpful. Thank you so much.
Thank you.
Thank you. Our next question is come from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.
Hey, everyone nice results.
And maybe continuing on the gross margin thread.
Maybe a comparator phrase what I heard from the last answer which is.
After these price investments.
That's the new base and then from there we.
Could move back into that.
Where we were pre these price investments, which could have been up a little down a little sort of subject to the normal Jimmy I'll use that inflation maybe mix issues.
But is there anything different about the go forward once we lap these price investments and how you think the gross margin progression because I think previously you know it's flattish maybe even up a little bit is there anything wrong with that thought process and in the out year. Thank.
I think you said it better than I did Simeon the only thing that I would add to it is and you mentioned mix if our commercial business continues to grow at a substantially accelerated rate versus our retail business that will provide.
Incremental headwind.
Okay got it Okay. That's fair and then my follow up maybe for you Bill because you had the quote in the press release about it.
Aspiring or aiming for growth prospects in this current fiscal year I assume you mentioned.
Is meant to be sales curious if it can be sales and EBIT or one could be without the other and then.
'twenty two is a complex year because of what you are lapping is there any reason, we shouldn't be back to algo by 'twenty three.
Only thing different I heard on the call was just additional capital investments Bill that you mentioned in terms of investment not sure if those hit the P&L any different but if you could speak about.
Theoretically the out year progression.
Yeah, it's an interesting well I would've told you FY 'twenty two would have been the normalized year. This time last year, Simeon, but I just can't tell you what's going to happen in the environment I mean, we're sitting there.
We'll get people with mask on Geneva, now taken our mask on and off to answer questions I would've never drift. We were here in June right. We all took our mask offering.
And we're done with them and here, we are with Delta variance I can't tell you what's going to be in front of us I do think the algorithm of the company is not going to change. The only thing that you highlight that is different right. Now is we will spend a little bit more on capex one of the things that we've learned.
Is that we probably operated our supply chain to the optimal level is I keep calling it to three decimal points.
We didn't plan our supply chain to have sustained 25% surge in volume for 18 months that has put an enormous strain on our facilities more importantly on our people. So as we think about the future we're going to be a little bit more aggressive.
To have a little bit more capacity in our supply chain to handle the volatility that we have seen for the first time in my career over this period of time, so that'll be over over a couple of year period, probably a couple of hundred million dollars a year.
And incremental capital that will spin, but as we've said all along.
Our capital allocation strategy is one <unk>.
<unk> to invest in the existing assets that we have to have them perform at an optimal level to invest in every growth aspect that we can that will provide us a reasonable investor IRR and then three whatever we have left over we'll return to shareholders that algorithm is going to stay the same.
<unk> 2023 were back to whatever normal is it will be interesting to see what happens in the sales environment.
As we enter whatever the new normal is.
I can understand people think that the sales environment might be challenged as we lap. These enormous growth in FY 2020, one I would've thought the same thing a year ago.
Getting more and more confident that some of this is structural and some of this is permanent what percentage. Your guess is as good as mine I've never seen a global pandemic before.
Got it okay. Good luck thanks. Thank.
Thank you Simeon.
Thank you. Our final question is come from the line of Liz Suzuki with Bank of America. Please proceed with your questions.
Great. Thank you. So I guess first just a question on same SKU inflation.
And that the retail business had about two percentage points of benefit there was that consistent in the commercial channel as well.
Yes, we saw similar inflation.
Both retail and commercial.
Great and as we think about just modeling the impact of cost increases when did you really start to experience an acceleration of cost inflation and as you sell out that inventory could there be a period, where youre able to raise price on products. All of that may have been acquired before costs really went up which would enable some gross margin expansion just.
As we think about modeling the cadence of the sell in versus sell out how should we think about that.
Yes, it's a good point.
We started to see that.
Cost inflation really at the tail end of the third quarter and pretty much all of the fourth quarter.
Our merchants have done a fantastic job of.
Negotiating timing.
And also we've done a fantastic job of making sure that we got retail has raised in a way that kept us competitive in the marketplace.
In a way that cost actually ends up flowing through the system.
You typically will have a little bit of margin accretion at least in the early innings as you raise retails before all of the cost increases make their way through and to the extent that we see price increases come there are times, where we actually move a little bit early so those are things that can actually help you at least in the near term.
Get a little bit of margin accretion and get out ahead of what youre seeing from an inflation standpoint, and that's no different than what we've done in the past.
Great.
Sorry, one more follow up just on cost just as you think about.
Yeah rising wages.
Your average entry level minimum wage for at Autozone.
Do you have your expectations for how that could trend going into next year.
Yeah, we really havent disclosed our average entry level wage, but what I, what I will tell you is for the last four years I've been talking about we've been operating in the toughest labor and market I've ever seen in our wage inflation has been significant.
It has basically doubled the wage inflation. During this period of time. It is very very difficult to get new Autozone US who joined the company and I hear that from all of our retail peers.
Fortunately in the last five weeks or so.
Things have changed a little bit I don't know if thats directly related to the.
Change in enhanced unemployment or not.
But we have seen a meaningful improvement in the ability to hire people in both the distribution centers and the stores over time, but we are dealing with the most significant inflation in the labor market that I've ever seen and really don't anticipate that slowing down materially until.
The labor market freeze up some.
Yeah, it's a macro issue.
Certainly we're not immune to the market dynamics there what I will say is that we've done a very good job of sort of managing it.
Our operations teams, both on the stores and the supply chain side.
Working really hard to manage turnover in this environment, we've been competitive in the marketplace and then when it when it's all said and done we do have pricing power that underpins our capability too.
Price to be.
With the influx of the impacts of inflation, whether its product cost or transportation costs or.
What we're seeing in terms of labor.
That's that's one of the things about this industry that discipline in this industry that gives us a lot of confidence.
Great. Thank you very much.
Thank you.
Okay before we conclude the call I want to take a moment to reiterate we believe our industry is strong and our business model. A model is solid will take nothing for granted as we understand our customers have alternatives to shopping with US. We will continue to focus on the basics as we strive to optimize shareholder value in FY 'twenty.
Two and beyond we thank you for participating in today's call today's call have a grateful.
Okay.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and have a great day.