Q1 2022 Autozone Inc Earnings Call
Good day, ladies and gentlemen, and welcome to Autozone 2022 Q1 earnings release conference call.
At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. Before we begin, the company would like to read some forward-looking statements.
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.
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.
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.
Yeah.
It is now my pleasure to turn the floor over to your host Bill Rhodes, Chairman, President and CEO. Sir, the floor is yours.
Good morning, and thank you for joining us today for Autozone's 2022 first-quarter conference call. With me today are Jim Meer, Jackson Executive Vice President Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax. Regarding the first quarter. Hope you had an opportunity to read our press release and learn about the quarter's results. If not, the press release along with slides complementing our comments today are available on our website www.Autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them.
The quarter's results 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.
Click on quarterly earnings conference calls to see them.
As we begin, we want to continue to stress that our highest priority remains the safety and wellbeing of our customers and Autozoners. Everyone across the organization takes this responsibility very very seriously and I am very proud of how our team has responded. Since the start of the pandemic, we have reiterated consistently that we could not deliver the kind of results we have without the exceptional efforts of our entire team, especially our store and supply chain AutoZoners.
Everyone across the organization takes this responsibility very very seriously and I am very proud of how our team has responded.
Since the start of the pandemic, we have reiterated consistently that we could not deliver the kind of results we have without the exceptional efforts of our entire team, especially our store and supply chain Autozone.
As our sales volumes have remained at historic all-time highs our AutoZoners continue to go the extra mile and surprise and delight our customers by providing wow customer service, regardless of the myriad of challenges that are thrown their way. As part of saying thank you to our Autozoners this past quarter, the company committed $9 million to the Autozoner assistance fund. The assistance fund is an independent nonprofit whose primary mission is to provide assistance to Autozoners who find themselves in a very difficult place.
As part of saying, thank you to our Autozone us this past quarter, the company committed $9 million to the Autozone or assistance fund.
The assistance fund as an independent nonprofit whose primary mission is to provide assistance to autozone us who find themselves in a very difficult place.
We are very fortunate to be able to help our AutoZoners in this way. To me, it's yet another example of our organization living consistent with our values. We can't thank our team of roughly 105,000 Autozoners enough for all they do for our customers, each other, our communities and ultimately our shareholders. This morning, we will review our overall same-store sales DIY versus Difm's trends, our sales cadence over the 12 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 fiscal year.
To me, it's yet another example of our organization.
Living consistent with our values.
We can't thank our team of roughly 105000 Autozone is enough for all they do for our customers each other our communities and ultimately our shareholders.
This morning, we will review our overall same store sales DIY versus Difm's trends, our sales cadence over the 12 weeks of the quarter merchandise categories that drove our performance in any regional discrepancies 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 FIS.
Full year okay.
Onto our sales results. Our domestic same-store sales were an impressive 13.6% this quarter on top of last year's very strong 12.3%. Our team once again executed at an extraordinarily high level and delivered amazing results. Congratulations again to Autozoners everywhere. Our growth rate for retail and commercial were both strong with domestic commercial growth impressively north of 29%. Commercial set a first-quarter record with $900 million in sales. I was reflecting on that this morning, remembering back to the day that we cracked $1 billion in commercial sales for a full year and now we've delivered $900 million in sales in one quarter. An incredible accomplishment.
Our growth rate for retail and commercial were both strong with domestic commercial growth impressively north of 29% commercial.
Commercial set a first quarter record with $900 million in sales I was reflecting on that this morning, remembering back to the day that we cracked a $1 billion in commercial sales for a full year and now we've delivered $900 million in sales in one quarter an incredible accomplishment.
On a trailing four-quarter basis, we had over $3.5 billion in annual commercial sales versus $2.8 billion a year ago up 27%. We also set a record in average weekly sales per store for any quarter, reaching over $14,400 versus 11,500 just last year. On a two year basis, our sales accelerated from last quarter exceeding 40%. Many people want to understand what is driving our tremendous sales growth in commercial.
Year on.
On a two year basis, our sales accelerated from last quarter exceeding 40%.
Many people want to understand what is driving our tremendous sales growth in commercial.
In short, it is not one thing. And I want to repeat that it is not one thing. It's a host, a whole host of key initiatives we've been working on for several years. Those initiatives include improved satellite store availability. Massive improvements in hub and Mega hub coverage and access. The continuing strength of the Duralast brand. Leveraging technology to make us easier to do business with and amplifying our execution strength to improve delivery times. Enhancing our sales force effectiveness in engaging our store operations team deeper in the business. And ensuring that we live consistent with our pledge by being priced right for the value proposition that we deliver.
Those initiatives include improved satellite store availability.
Massive improvements in hub and Mega hub coverage and access.
The continuing strength of the <unk> brand.
Leveraging technology to make us easier to do business with and amplifying our execution strength to improve delivery times.
Enhancing our sales force effectiveness in engaging our store operations team deeper in the business.
And ensuring that we live consistent with our pledge by being priced right for the value proposition that we deliver.
We continue to execute very well in commercial and we are extremely proud of our team and their performance. We're also very proud of our organization's performance in domestic DIY. We ran a 9% comp this quarter on top of last year's 12 seven. Wow. While our DIY two-year stack comp decelerated slightly from our fourth quarter, it's remarkable to reflect on our more than 20% two-year comp in this sector of our business. From the data we have available to us, we continue to not only retain the enormous 10% share gains we built during the initial stages of the pandemic but modestly build on those gains.
We're also very proud of our organization's performance in domestic DIY, we ran a 9% comp this quarter on top of last year's 12 seven Wow.
While our DIY two year stack comp decelerated slightly from our fourth quarter, it's remarkable to reflect on our more than 20% two year comp in this sector of our business from.
From the data we have available to us we continue to not only retain the enormous 10% share gains we built during the initial stages of the pandemic, but modestly build on those gains.
Our performance, considering the amount of time from the last stimulus and ending and the ending of the enhanced unemployment benefits, has substantially exceeded our expectations and raises our expectations on how sustainable these sales gains may be long term.
Now let's focus on our sales cadence. Same-store sales increased sequentially from September through November. However, this acceleration could be deceiving as last year's comp weakened as the quarter progressed. Given the dynamics of the past 20 months, we like others, who benefited from the pandemic believe it is more instructive to look at two year stacked comps. On this basis, the monthly results were almost identical and very very stable. For Q1, our two-year comp was 25.8% and the four week periods of the quarter increased by 26.3% 26.0% and 25.3% respectively.
Instructive to look at two year stacked comps on this basis. The monthly results were almost identical and very very stable for Q1, our two year comp was 25, 8% and the four week periods of the quarter increased by 26, 3% 2000 <unk>.
6.0% and 25, 3% respectively.
Regarding weather, we experienced warmer than usual weather in the northeastern United States, while the remainder of the country experienced normal trends. Overall, we feel weather did not play a material role in our sales results for the quarter. As we look forward to the winter months, we are encouraged to see forecast estimating a slightly colder than usual winter. Historically, extreme weather be that hot or cold helps drive parts failure.
As we look forward to the winter months, we are encouraged to see forecast estimating a slightly colder than usual winter historically extreme weather b that hot or cold helps drive parts failure.
Regarding this quarter's traffic versus ticket growth in retail, our traffic was up 1%, while our ticket was up 7.5%. This low single-digit transaction count growth continues to be a meaningful acceleration from pre-pandemic levels, although it decelerated versus last year as expected due to the elimination of stimulus, the elimination of enhanced unemployment, stay at home orders and the closure of some big box retail automotive service departments last year. In our commercial business we saw most of the sales growth come from transaction growth from new and existing customers. It was encouraging for us to see sales trends remain strong and we continue to be pleased with the momentum we're seeing in both domestic businesses heading into the winter months.
Regarding this quarter's traffic versus ticket growth in retail, our traffic was up 1%, while our ticket was up 7.5%. This low single-digit transaction count growth continues to be a meaningful acceleration from pre-pandemic levels, although it decelerated versus last year as expected due to the elimination of stimulus, the elimination of enhanced unemployment, stay at home orders and the closure of some big box retail automotive service departments last year. In our commercial business we saw most of the sales growth come from transaction growth from new and existing customers. It was encouraging for us to see sales trends remain strong and we continue to be pleased with the momentum we're seeing in both domestic businesses heading into the winter months.
This low single digit transaction count growth continues to be a meaningful acceleration from pre pandemic levels, although it decelerated versus last year as expected due to the elimination of stimulus.
the elimination of enhanced unemployment, stay at home orders and the closure of some big box retail automotive service departments last year. In our commercial business we saw most of the sales growth come from transaction growth from new and existing customers. It was encouraging for us to see sales trends remain strong
and we continue to be pleased with the momentum we're seeing in both domestic businesses heading into the winter months.
During the quarter there were some geographic regions that did better than others as there always are. While last quarter we saw roughly 400 basis point gap in comp performance between the northeast and Midwestern markets versus the remainder of the country. We did not see that gap this quarter. In fact, the northeast and Midwestern markets slightly outperformed. The market data suggests that we continue to gain share in most markets across the country.
Sure data suggests that we continue to gain share in most markets across the country.
Now, let's move into more specifics on performance for the quarter. Our same-store sales were up 13.6% versus last year's first quarter, our net income was $555 million. And our EPS was $25.69 a share increasing an impressive 38.1%. Regarding our merchandize categories in the retail business, our sales floor in hard parts categories grew at a similar rate this quarter. As Americans get back to driving more, we've seen maintenance and failure-related categories perform well. We've been especially pleased with our growth rates in select failure related businesses. Like batteries that have successfully lapped very strong performance last year. We believe our hard parts business will continue to strengthen as our customers drive more.
And our EPS was $25 69, a share increasing an impressive 38, 1%.
Regarding our merchandize categories in the retail business our sales floor in hard parts categories grew at a similar rate this quarter as Americans get back to driving more we've seen maintenance and failure related categories performed well.
We've been especially pleased with our growth rates in select failure related businesses.
Batteries that have successfully lapped very strong performance last year, we believe our hard parts business will continue to strengthen as our customers drive more.
Let me also address what we are seeing from inflation in pricing. This quarter, we saw our sales impacted positively by about 4% year over year from inflation. While our cost of goods was up about 2% on a like for like basis. We believe both numbers will be higher in the second quarter as cost increases in many key merchandise categories continue to work their way through the system. We could see mid-single-digit inflation in retails as rising raw material pricing, labor and transportation costs are all impacting us and our suppliers. We have no way to say how long this will last but our industry has been disciplined about pricing for decades and we expect that to continue.
This quarter, we saw our sales impacted positively by about 4% year over year from inflation.
While our cost of goods was up about 2% on a like for like basis.
We believe both numbers will be higher in the second quarter as cost increases in many key merchandise categories continue to work their way through the system.
We could see mid single digit inflation in retails as rising raw material pricing labor and transportation costs are all impacting us and our suppliers. We have no way to say how long this will last but our industry. Our industry has been disciplined about pricing for decades and we.
We expect that to continue.
While we continue to be encouraged with the current sales environment. It remains difficult to forecast near to mid-term sales. What I will say is that the past three-quarters sales have all been consistent on a two-year stack comp basis in both our DIY and commercial businesses have been remarkably resilient.
Resilient.
While it's difficult to predict absolute sales levels. We are excited about our growth initiatives, our execution and the tremendous share gains we have achieved in both sectors and are maintaining and or continuing to grow those gains.
Currently, the macro environment, while more uncertain than normal is certainly favorable for our industry. And if these near term trends fade. We believe that we are in an industry that is positioned for solid growth over the long term. For FY '22, our sales performance will be led by the continued strength in our commercial business as we continue executing on our differentiating initiatives.
For FY 'twenty to our sales performance will be led by the continued strength in our commercial business as we continue executing on our differentiating initiatives.
As we progress through the year, we will as always be transparent about what we are seeing and provide color on our markets and outlooks as trends emerge. Now I'd like to turn the call over to [Jamir] Jackson. Thanks, Bill and good morning, everyone. As Bill mentioned, we had a strong second-quarter. Our growth initiatives continue to deliver strong results and the efforts of our AutoZoners in our stores and distribution centers have enabled us to take advantage of robust market conditions.
Now I'd like to turn the call over to Jim Meer Jackson, Jr. Thanks, Bill and good morning, everyone. As Bill mentioned, we had a strong second quarter our growth initiatives continue to deliver strong results and the efforts of our autozone is in our stores and distribution centers have enabled us to take advantage of robust market conditions.
To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q1. For the quarter, total auto parts sales, which includes our domestic Mexico, and Brazil stores were $3.6 billion up 16.2%. Let me give a little more color on sales and our growth initiatives, starting with our commercial business for the first quarter, our domestic DIFM sales increased 29.4% to $900 million. And we're up 41% on a two-year stack basis. Sales to our DIFM customers represented 25% of our total sales in our weekly sales per program were $14,400 up 25% as we averaged $75 million in total weekly commercial sales.
For the quarter total auto parts sales, which includes our domestic Mexico, and Brazil stores were $3 6 billion up 16, 2% let.
Let me give a little more color on sales and our growth initiatives, starting with our commercial business for the first quarter, our domestic <unk> sales increased 29, 4% to $900 million.
We're up 41% on a two year stack basis sales to our DIY FM customers represented 25% of our total sales in our weekly sales per program were $14 $400 up 25% as we averaged $75 million in total weekly commercial sales.
Once again, our growth was broad based as national and local accounts, both grew over 25% in the quarter.
Our execution of our commercial acceleration initiatives is delivering exceptional results as we focus on building a faster growing business, but disciplined 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 approximately 86% of our domestic stores.
And we're focused on building our business with national regional and local accounts.
This quarter, we opened 32 net new programs, finishing with 5211 total programs.
We continue to leverage our DIY infrastructure and increase our share of wallet with existing customers as I said on last quarter's call in fiscal year 'twenty two commercial growth will lead the way in our first quarter results reflect this dynamic.
Our growth strategies continue to work as we continue to grow share we are confident in our strategies and execution and believe we will continue gaining share.
Delivering quality parts, particularly with our newer last brand improvements shortcuts competitive pricing and providing exceptional service has enabled us to drive double digit sales growth for the past six quarters.
Our core initiatives are accelerating our growth and position us well in the marketplace and notably our Mega hub strategy is driving strong performance and position us for an even brighter future and our commercial and retail businesses.
To add a little more color on our progress.
As I mentioned last quarter, our Mega hub strategy has given us tremendous momentum and we're doubling down we now have 62 Mega hub locations and we expect to open approximately 16 more over the remainder of the fiscal year 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.
The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY businesses and we're testing greater density of Mega hubs to drive even stronger sales results.
By leveraging sophisticated predictive analytics and machine learning, we are expanding our market reach driving closer proximity to our customers and improving our product availability and delivery times.
These assets continue to outperform our expectation and we would expect to open significantly more than a 110 locations. We've previously targeted.
In commercial we are building a meaningful competitive advantage and we continue to have confidence in our ability to create a faster growing business.
On the retail side of our business, our domestic retail business was up 9% and up 21, 4% on a two year stack.
The business has been remarkably resilient as we have gained and maintained over three points of market share since the start of the pandemic.
Bill mentioned, we saw an increase in traffic versus the prior year as our initiatives are continuing to drive tremendous sales and share growth along with a relentless focus on execution by our <unk> and our stores and distribution centers.
These initiatives include improving the customer shopping experience expanding assortment, leveraging our hub and Mega hub network and maintaining competitive pricing.
These dynamics, along with favorable macro trends in miles driven a growing car park and a challenging new and used car sales market for our customers have continued to fuel sales momentum in DIY.
And the execution of our Autozone, we're taking care of our customers gives us a key competitive advantage.
I'm also very pleased with the competitive position of our DIY business and our outlook going forward our in stock positions, while still below where we would like for them to be are continuing to improve as our supply chain and merchandising teams have made great progress in a challenging supply chain environment.
Been able to navigate supply and logistics constraints and have product available to meet our customers' needs.
It's 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 remains strong.
Now I will say a few words regarding our international business. We continue to be pleased with the progress, we're making in Mexico and Brazil. During the quarter. We opened two new stores in Mexico. The finished with 666 stores and one new store in Brazil to finished with 53.
On a constant currency basis, we saw accelerated sales growth in both countries. We remain committed to our store opening schedule in both markets and expect both to be significant contributors to sales and earnings growth in the future with approximately 10% of our store base now outside the U S and our commitment to continue expansion in a disciplined way international growth will.
And attractive and meaningful contributor to autozone future growth.
Now, let me spend a few minutes on the P&L and gross margins for the quarter. Our gross margin was down 65 basis points, driven primarily by the accelerated growth in our commercial business, where the shift in mix coupled with the investments in our initiatives drove margin pressure, but increased our gross profit dollars by 14, 9%.
Mentioned on last quarter's call that we expected to have our gross margin down in a similar range. This quarter as we saw in the fourth quarter of last fiscal year, where we were down 82 basis points how.
However, the team has been focused on driving margin improvements primarily through pricing actions that offset inflation to drive a better than expected outcome.
As Bill mentioned earlier in the call, we're continuing to see cost inflation in certain product categories, along with rising transportation and distribution center costs were.
We're continuing to take pricing actions to offset inflation and consistent with prior inflationary cycles. The industry pricing remains rational. We would expect our margins in the second quarter to be down in a similar range as the first quarter. All of the actions we've taken have resulted in us growing our DIY MTI.
All of the actions we've taken have resulted in us growing our DIY MTI.
Profit dollars growing which is exactly what we're what we're shooting for so we like where we are we're going to continue to lean into this strategy you will see a little bit of a drag from a margin standpoint from commercial mix, but net net it will be good for our business in total. Thanks, everyone happy holidays. Yeah, you too Simeon thank you. Thank you. Our next question today is coming from Michael Lasser at UBS. Your line is live you may begin.
Thanks, everyone happy holidays.
Yeah, you too Simeon thank you.
Thank you. Our next question today is coming from Michael Lasser at UBS. Your line is live you may begin.
Good morning, Thanks for taking my my question do you mention at this point in the cycle. The perception was that the DIY business was going to be comping negative.
As you pointed out a comp of 9% in the quarter with a little less than half of it likely coming from price increases.
Why has it not fluid otherwise the perception early in the pandemic was that.
Marginal or incremental customer was that more affluent consumer who is working from home had more time on their hands.
Some work on their car as a result is that still the incremental customer or has it evolved.
Some of the underlying dynamics like fewer new car sales.
Stimulator.
Other factors.
Fantastic question, Michael I wish I could tell you with certainty.
It was built by X Y and Z, Let me just share some of our thoughts, but our thoughts are evolving and we don't have clear insights into the strength of it which we're tickled to death to have but we can't explain every element of it clearly an element right. Now is increased inflation. So are our traffic count as <unk>.
Positive slightly positive in the retail business normally because of changes in technology and the improvement.
Improvement of quality of parts, we've typically had 335% deceleration in transaction counts. So despite the enormous customer count growth. We had last year, we're still growing customers and growing them much faster than we have let's say on average over the last 10 years, but we also have an inflation benefit.
Let's call it 4% or so on top of that so that is a significant element.
When we believe what we believe was the biggest thing that happened to us in the pandemic was we had a lot of what I call our financially fragile customers those lower associate economic customers that had two things that they don't typically have.
They had time because many of them were furloughed and.
And they had money.
Because they were living off of stimulus and significant enhanced unemployment.
We anticipated as those two things ended in March 15th of <unk> 21 in early September of 'twenty, one on enhanced unemployment that we would see it slowdown I think there are some other dynamics that are happening you mentioned, new and used car sales.
One of the things that we believe has happened and the recessions over the years as people change their perspective on how long theyre going to keep their car and so they focus on how they maintain it right versus thinking theyre going to get a new car in six months. So don't worry about it I think this environment of new car.
Some shortages and used car prices being up I think the last time I saw something like 38% I think people in particular are more challenged economically customers are thinking I'm going to have this car for a long time I better take care of it and I think that also all levels of consumer appear to still be <unk>.
Very very healthy financially versus historical norms and as we've seen for years any periods, where there is a tax refund or something we see a big spike in our business stimulus we saw big spikes in our business. So I think the fact that they still have more discretionary income the normal bodes well for our business.
It's showing up in our results and likely stays with us for some period of time, how long Youre guess is as good as mine.
Well I guess isn't that good.
I'm sure you're getting a little bit better, but my follow on Hasnt been very good either.
My follow up question is.
One of the key debate.
Youre investing Keith right now what is the algorithm look like.
Going forward historically auto growth algorithm has been modest new store growth, 2% to 4% stable.
Stable margins and healthy share repurchases to belabor doubled.
Yes.
Jim you made the point that.
Building a faster growing business. So does the algorithm change moving forward, especially commercial team.
The increases in puts pressure on your gross margin would you be willing to accept a formula over the long run.
Slightly higher same store sales growth.
Even if that meant about this theme.
<unk> dollar growth that you've had.
Sure.
<unk> gross margin pressure over the longer run and as part of that.
I think <unk> mentioned that Cogs inflation of 2%.
Price increases were 4%.
<unk> gross margin benefit this quarter from that spread doesn't that we're both in the quarters ahead.
Yes, three very complex questions I think the answers are yes, yes, and yes, let me let me start and then I'll, let <unk> talk about it as well, yes. We've had a long term algorithm that says how do we grow store count in the 2% to 3% how do we grow EBIT growth in the 3% to 5%.
Times and may be faster in these recessionary environments, how do we leverage our consistent and predictable free cash flow to share fiduciary purchases that push us in and around double digit EPS growth for a sustained period of time.
Remember, Michael we had I think 41 consecutive quarters of double digit EPS growth. So that's still long term generally the model that we believe.
However, we've had the most incredible six straight quarters, we've ever seen.
There could be a deceleration to get us to whatever the new normal is I would've thought we would've experienced that by now I feel better about our sustainability of holding on to these significant sales growth over a longer period of time at different levels and I would have thought six and 12 months ago, but once so we may have.
A slowdown at some point, but I don't believe once we get to whatever the new normal is that the algorithm changes any you asked would we be willing to.
To grow the commercial business at a faster rate.
At the expense of gross and operating margin percentages and I would say an emphatic yes.
We are focused on how do we grow gross profit dollars and operating profit dollars at an accelerated rate, while we make sure we get great returns and I think any organization is running roughly a 40% ROIC.
<unk> that we know how to how to leverage our capital structure.
Jameer anything that you would say differently or do you want to address his last point I think a couple of things stand out to me and Bill answered your question I think.
Very clearly.
Our goal has always been to grow our gross.
Gross profit dollars, we have the luxury of having in this environment a faster growing business with higher margin dollars overall and I would argue this is a more sustainable way to grow cash and ultimately shareholder value what doesn't change in about the algorithm is the most important part of the algorithm, which is this is a business.
That is going to generate a tremendous amount of cash that enables us to grow our business and return a significant amount of cash to shareholders over time, so as we've gone through this period and we see an opportunity to accelerate the growth in our commercial business by creating a faster growing business overall.
Ultimately, meaning that we're a more profitable company on a dollar basis and thats going to lead to more cash.
And we're going to grow the business and return a significant chunk of that to shareholders. So long term what I've been saying is that while the geography changes a little bit the algorithm at the bottom line doesn't change. This is a business that generates a ton of cash.
And has tremendous firepower to grow and return cash to shareholders.
Anything to add about the timing between price increases and cost.
Yes, so from the standpoint of price increases and cost increases.
<unk> been very disciplined about making sure that when we see cost increases coming.
We've taken retail pricing, sometimes we will take those in anticipation of those those cost increases.
Usually a catch up over time, but what I will say to you is that this is a pretty dynamic market and that there are always.
<unk> opportunities and cost increases that are that are coming our way our teams have done a tremendous job of managing this mix such that we've historically found ways to have margin accretion when we go through this environment and the most important part of that is that this is an industry that has been disciplined and rational.
We expect this to continue.
We don't expect.
Ultimately for the cost increases.
To be a margin drag over the business. We've done it we've done a fantastic job of managing that dynamic in the past and we'll continue to do so in the future.
Thank you very much best of luck to market and have a good holiday season.
Thanks.
Thank you. Our next question today is coming from Zach Freedom at Wells Fargo. Your line is live you may begin.
Hey, good morning, guys.
First I wanted to follow up on Michael's last question.
If you look at your business over the last three to four years. Your commercial mix has shifted from roughly 20% of your sales mix to now closer to 25% while your EBIT margins have expanded by about 100 basis points. During this time. So the question is as your business continues to evolve and you start to think about.
30% or 35% commercial mix, how does this impact your EBIT margins and to what extent should we view that 19, 20% level.
Stable with or without the change in mix.
Well I think a couple of dynamics are associated with that number one.
The commercial business naturally will be.
Margin drag for US just based on the nature of the business, but you've got to remember we have a large DIY business.
That we are continuing to drive.
Efficiencies and margin expansion in that in that DIY business over time, such that there isn't a cliff associated with <unk>.
Margins over time, so what you can expect from US is that we will continue to push.
To drive margin expansion in our in our business overall commercial will be a drag, but we will continue to work on things from a productivity standpoint, and naturally you may you may see some of that impact our EBIT margins, but from a.
Total EBIT dollar standpoint, we'll be in pretty good shape and it will be a great story and again I always come back to this notion that for.
From an earnings standpoint, and from a cash standpoint, the most important part of this algorithm is that we're going to have tremendous firepower to grow the business and return a bunch of cash to shareholders. Let me jump in on that too I think when you look at what's happened over the last three or four years to margins do you need to make sure that we don't lose sight of.
What happened to our DIY business over the last two years, our same store sales and DIY are up 20% on a two year basis, we're getting.
<unk> of leverage because of that outside sales group, our hope and my hope is that we maintained all of it or certainly a significant amount of it that's yet to be seen but that change the economics of the operating margin in the DIY business, our focus whether it's nine.
17% or 20% is to make sure that we're growing operating profit dollars at a good return and sometimes our margin our operating margin might go down because.
Ive said.
Many times, if we could double our commercial business at a substantially lower operating margin Tomorrow, we would do it.
Because it doesn't require a lot of capital and it would grow our operating profit dollars tremendously.
Got it that's helpful and on the DIY side, obviously, a lot of noise out there on the state of the lower income consumer rates, we move further and further away from stimulus.
Considering the uptick in gas prices food CPI and just overall broad based inflation could your business could you talk about what youre seeing out there and it doesn't seem to be impacting your business at all curious how you think about the disconnect there.
Yes first start with you have to remember that our business is generally an inelastic business.
For some reason whenever the low end consumer has excess cash we see a significant pop in our business, but I'll go back to what I said earlier, we historically haven't seen it revert back to the norms.
Look at our business in the quarter, our retail business, our transaction count was meaningfully better than it normally would be we're also seeing that we grew share by 10% during the depths of the crisis and we're continuing to modestly grow share on top of that up.
Would have anticipated we would give some of that back we're not and then you layer in the fact that there is this inflation and thats, probably accelerating our growth by about 4%. We don't think that Theres a lot of elasticity in that inflation at this point in time. The bigger question is the one that you are bringing up.
We continue to see significant inflation across the market does that put more and more pressure on particularly the low end consumer.
And ultimately do we see a deceleration as a result of that.
Think thats.
Logical thesis, but we've had a lot of logical thesis during this pandemic that haven't come.
<unk> come to fruition.
I'd just add that.
That piece of that thesis, if you will where we're at.
A long way from that being the case and if you just look at the things that bill talked about three things one share growth.
Inflation being our friend in this favorable macro environment, that's what gives us a lot of confidence here in the near term about our business.
And we're continuing to perform very well in this environment against that backdrop.
Thanks, So much guys happy holidays, congrats to Mark.
Yes. Thank you very much Zack heavy holidays to you too.
Thank you. Our next question today is coming from Chris <unk> at Jpmorgan. Your line is live you may begin.
Thanks, Good morning, guys. So bill you talked a lot about consistency of on a monthly basis on a quarterly basis on a two year stack basis.
But also historically you've talked a lot about the impact to the business on shifting tax refund timing in different periods.
If you held the stock into this next quarter, obviously, that's a really impressive number but you will also run into the stimulus payments from January So I guess what are your thoughts. There do you think you saw lift last year on the DIY side of the business and do you think that.
That would cause that two year stack to break.
Great question, Chris and I am very happy that <unk> has not allowed us to reverse our long term history of not giving guidance.
I don't know the answer to it right.
Yes, we will be going up against the stimulus payments around the first of the year, yes, we're going to be something we've talked about a lot historically will be going up against some pretty significant weather event towards the end of our quarter and beginning of the next quarter.
For us, we're going to maximize our performance and optimize our performance with whatever sales environment. We have we don't have to change. If we thought we were going to be plus two or down 2% on a historical basis, we don't have to change how we operate and if we lap that stimulus.
And we have a little bit of a headwind for four weeks so be it we're running this business for the long term as I've said in the prepared remarks, the valuation needs to be placed on this company depends on how our investors and particularly our long term investors.
Our cash flow is going to be three to five years from now and that's the lens that we're looking at if we go through a tough quarter, because our business is up 25% from pre pandemic. So be it we need to make sure that we're making the investments today that will allow us to continue to have this amazing cash flow generation.
<unk>.
For the long term.
Got it and then it makes sense and then in terms of the.
The investments that you're making this year can you can you give us some expectations term of.
Capex and will this create will the investment cycle, our investment program for this year create pressure and opex like in terms of.
One might say.
Appropriate relationship between say.
Top line growth versus SG&A dollar growth might have that could be impacted.
Yes, I mean, we're able to do this within the framework of our long term financial model if you will.
We'll have some accelerated capex this year.
Build out the initiatives that bill talked about.
But if you look at sort of where we are in terms of our cash generating capability of the amount of free cash flow that we'll generate this year.
Certainly won't impact anything that we're doing from a capital allocation or our ability to return cash to shareholders. So this is sort of a multi year.
Investment cycle, if you will.
<unk> talked about the capacity investments that we're making in our supply chain and I've talked about things that we need to do from an it standpoint, we've talked about.
The growth that we're going to do in our store base and we're able to do that within the framework of.
Our financial model, if you will without making material changes to the P&L.
Got it thanks very much.
Yes.
Thank you.
Our next question today is coming from Brian Nagel at Oppenheimer. Your line is live you may begin.
Hi, good morning, Congrats on another really incredible quarter nicely done.
Thanks, Brian.
So the first question I have.
I think it goes to the comments you were making humira in the prepared remarks, but with regard to supply chain.
Sounds like what Youre, saying all of a sudden continues to manage this manage through the challenges quite well.
Question I have is as you look at the challenges out there are you starting to see some.
Some of these bottlenecks that are saved subsiding.
Is there a path towards.
Obviously, you can take some time.
Path towards the supply chain for your improving significantly.
It's a great question Brian.
I think the answer is yes, but it's ever changing and I want to stop for just a second and really say.
Thank you to our supply chain team and our merchants.
You're talking about collaboration these folks have been working unbelievably hard now for 20 months trying to figure out how we deal with this enormous surge in volume so round numbers, our business is up 25% or more since the pre pandemic level, our supply chain our manufacturer.
<unk> and their supply chains, nobody built for 25% excess capacity that would last for 20 months. Our teams have done a really really really good job of managing through that said, we have challenges our in stock levels are not where we want them to be they havent been the whole time and they'll go down a little bit.
I'll come up a little bit, but we're generally three or 4% below the in stock levels that we want on a weekly basis to your point are we seeing things change that gives us optimism about the future and the answer is yes, but as soon as we do we see another part of the supply chain that is more challenged.
And a lot of respects, we're playing a little bit of whack a mole in the beginning it was particular.
Categories Sandpaper now its tools and brake rotors, we also back in the summertime, we couldnt get capacity to get enough.
Container loads from Shanghai to the U S. Now it's can we get them through the ports in the U S and our team's been really creative about getting the ships, but now also finding different ports across the country to go to so we are seeing it get better, but we are nowhere out of the way.
<unk> seen that.
Next month, we're going to be back into it we are about to face Chinese new year, which is always a difficult time in any supply chain. So it'll be interesting to see how we manage through that.
Nope as late spring early summer, we get back to some semblance of normality, but every time, we thought okay. This one is easing there's been another part of the supply chain that has shown.
Challenges.
Yes, it's very very helpful. Thank you.
The second question I have I guess kind of more strategic in nature as well, but we talk about just the sales growth in the sales growth has been phenomenal and you look at it.
Comps have been extraordinarily resilient, even as the economy has moved away from the pandemic.
When a stimulus so of course I have is as you think about the business to the extent that you start seeing signals that maybe this is EBIT sales growth was even more sustainable than you. Initially thought is there a point at which you would start to.
Invest more aggressively in <unk>.
Back even the business.
They are even places you would want to put more money more investment to work in the business Reinvestments there sales gains I.
I think we already have Brian.
Talk.
In my prepared remarks, we're going to make the most significant investments that we've seen in our supply chain.
Because we've seen this the surge in volume and I don't want to spook everybody are our capex is going to be up 100 $150 million kind of range over last year.
But we will have an elevated level in our supply chain for a couple of years.
We've talked about as a team I think over the long term, we've optimized our supply chain to the third decimal point when you've been through a surge in volume like we've experienced over the last 20 months.
That was probably a little pennywise and pound foolish and so we're going to be a little bit more aggressive with our supply chain investments. We've clearly made a ton of investments in our commercial business over the last four years from inventory assortments to mega hubs and hubs.
Investments in the <unk> brand to <unk>.
Investments in price investments in technology, the single largest technology investment we've ever made as a company.
Is what underpins this commercial strategy.
And we're beginning to see benefits from it but we've got a ton of benefits left in front of us on the commercial side of the business. So I think we've been making investments at an accelerated rate and when you have the kind of profitability characteristics that we have today. We're looking at are there. Other places that we can invest I also want to say one place that.
We've invested very aggressively that I don't think others have done it nearly at the same level as we've invested in our people leaving.
We've invested in our people and accelerated wage rates, we've invested in our people and our culture through things like emergency time off the last time I tallied up what we'd invested from emergency time off vaccine incentives and those kinds of things we were.
$135 million range, and then we announced again today that we added $9 million to our Autozone is assistance front, we believe in times like this if we're going to have values that we state. It's imperative that we live consistent with those values and I think we've walked that will very clearly during the pending.
No.
Very helpful. Congratulations again to all thank you.
Alright. Thank you I appreciate it Brian So before we conclude the call I just want to take a moment to reiterate that we believe our industry is strong and our business model is solid will take nothing for granted as we understand our customers have alternatives to shopping with US we will continue to focus on the basics as we strive to optimize shareholder.
Value for the remainder of fiscal 2022.
Lastly, we want to wish everyone, a happy healthy and safe holiday season, and a very prosperous new year. Thank you for your time today and thank you for your interest in Autozone take care.
Thank you ladies and gentlemen, this does conclude today's event.
We thank you for your participation have a wonderful day.
Sure.