Q3 2022 Autozone Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to Autozone 2022 third quarter earnings release Conference call.
At this time, all participants have been placed on a listen only mode and we will open up the floor for your questions and comments after the presentation.
Before we begin the company would like to read some forward looking statements.
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 Exchange Commission for a discussion of it.
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.
Okay.
Thank you. It is now my pleasure to turn the floor over to your host Bill Rhodes, Chairman, President and CEO of Autozone, Sir the floor is yours.
Good morning, and thank you for joining us today for Autozone in 2022 third 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 third quarter I Hope you've 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 at www Dot Autozone Dot com under the Investor Relations link. Please 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 in autos owners everyone everyone across the organization continues to take this responsibility seriously and I'm very proud of how our team continues to respond to COVID-19.
Subsequent variance.
While mass mandates have abated, we continue to make sure. The environments are autos owners are working in and our customers are shopping in or as safe as possible for these times.
Since the start of the pandemic, we have consistently recognized our autos owners in our stores and distribution centers, especially forgiving exceptional service in the face of all the challenges COVID-19 has met for all of US. This quarter. We will start the same by again thanking our autozone is for.
Their dedication to providing exceptional customer service, while helping our customers with their automotive needs.
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 and any regional discrepancies we.
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.
Our domestic same store sales were a solid two 6% this quarter on top of last year's very strong 28, 9%.
On both a two year and three year stack comp sales basis, our trends accelerated.
Our team once again executed at an exceptionally high level and delivered amazing results. Despite the difficult comparisons.
Our growth rates for retail and commercial were both strong with domestic commercial growth north of 26%.
Commercial set a third quarter record with $1.044 billion in sales an incredible accomplishment.
We generated $216 million more in sales this quarter than in Q3 of just last year.
On a trailing four quarter basis, our commercial sales or just under $4 billion versus $3 1 billion a year ago up 27%.
We also set a record average weekly sales per store for any quarter at $16600 versus 13500 last year.
On a two year basis, our sales accelerated from last quarter domestic commercial sales represented.
30%.
Of our domestic auto part sales another record for us compared to just 24, 8% last year, our commercial sales growth continues to be driven by a host of key initiatives. We've been working on for the last several years improved satellite store availability.
Massive improvements in hub and Mega hub coverage the.
The strength of the <unk> brand.
Better technology to make us easier to do business with.
Improved delivery times and.
Enhancing our sales force effectiveness and living consistent with our pledge by being priced right for the value proposition. 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. As a reminder, it was last year's Q3 that had the massive stimulus payments that were distributed to consumers in the U S.
We ran a negative four 5% comp this quarter on top of last year's record positive comps of 24, 8%.
While our DIY two year comp decelerated slightly from Q2s, two year DIY comp, perhaps the more relevant comp is the DIY three year comp which did accelerate.
We were very proud of our DIY results, considering we had such a tough comparison to last year from the data we have available to US we continue to not only retain the enormous share gains in dollars and units. 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 the ending of the enhanced unemployment benefits has substantially exceeded our expectations.
And gives us continued conviction about the sustainability of the massive elevated sales levels, we have experienced since the beginning of the pandemic.
Now, let's focus on the sales cadence our quarter spans a 12 week period, our same store sales increased materially over the first four weeks up 11, 8%.
And then they were down over the middle four weeks by five 2%.
But remember we were comping against the stimulus payments made during this time last year and our same store sales then accelerated over the last four weeks up 3%.
All of these year over year comparisons are really difficult to interpret as so much is going on last year and even the year before.
For Q3, our two year comp was 31, 5% in the four week periods for the quarter increased $23 465, four and 17% respectively.
But our three year comp was 35.
And the four week periods for the quarter increased 29, 744, 7% and 29 eight respectively. What I want to stress is that our two year and three year comp accelerated for the quarter from Q2s, two and three year comparison.
We are encouraged by the sustainability of these enormous sales gains.
Regarding weather in February and March we experienced normal weather trends across the country April however was a little cooler and a little wetter than normal overall, we feel weather did not play a material role in our sales performance.
As we look forward to the summer months, we anticipate normal weather patterns. As a reminder, historically extreme weather caught hot or cold dress parts failure and accelerated maintenance.
Regarding the quarter's traffic versus ticket growth in retail our traffic was down roughly eight 5%, while our ticket was up 4% or.
Our transaction count decline was correlated to last year's Q3 meaningful 16% traffic count increase.
While we had expected a decline in transactions. This quarter, we were pleased to exceed our beginning of the quarter assumptions on transaction count declines.
We're also quite pleased with the ongoing growth in unit share we are seeing in our market share data.
We're very encouraged by the sales trends, we continue to experience in commercial most of the sales growth is coming from transaction growth from new and existing customers.
I have visited our stores and commercial customers extensively this quarter and find it very encouraging to hear the positive comments from our customers and autozone us on our comprehensive offerings.
The tone of our sales calls has changed meaningfully over the last few years as we continue to implement and execute our commercial acceleration strategy.
As we start our final quarter of the fiscal year, we continue to be pleased with the momentum we're seeing in both domestic businesses heading into the summer months.
During the quarter there were some geographic regions that did better than others. As there always are this quarter. We saw 54 basis points difference between the northeast and Midwest compared to the balance of the country with a north east and Midwest performing lower.
As the northeast and Midwest were cooler and wetter in April their sales were below last year's results. We do not believe there will be lasting effects on sales performance in the northeast and Midwest due to the slightly cooler April weather.
Heading into the fourth quarter, we continue to believe whether it will have a minimal.
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Now, let's move into more specifics on our performance for the quarter. Our same store sales were up two 6% versus last year's third quarter. Our net income was $593 million and our EPS was $29 three a share increasing nine 6%.
Regarding our merchandise categories and the retail business are hard parts outperformed our sales for categories, but there was less than a 1% difference between them.
As gas prices jumped recently, our sales reserves results in certain hard part categories performed below our plan.
This is unlike the sales floor category categories, which were on plan, we've been especially pleased with our growth rates in many of our categories like batteries that are successfully let some very strong performance last year and easily exceeded our plan assumptions for the quarter. We believe our hard parts business will strengthen as our COO.
Customers return to driving more.
Let me also address inflation in pricing this.
This quarter, we saw our sales increased by seven 8% from inflation.
In line with the cost of goods inflation, which was up similarly at seven 2% on a like for like basis.
We believe both numbers for the fourth quarter could be slightly higher than this past quarter's increases as.
As rising raw material pricing labor and transportation costs are all impacting us and our suppliers inflation has been prevalent in the aftermarket space.
I 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.
It is also notable that following periods of higher inflation, our industry has historically not reduced pricing to reflect lower ultimate costs.
While we continue to be encouraged with the current sales environment. It remains difficult for us to forecast near to mid term sales.
I have previously said as the past five quarters sales have all been consistent on both a two year stack comp basis, and a three year stacked comp basis.
While it's difficult to predict absolute sales levels going forward. We are excited about our growth initiatives, our team's exceptional execution and the tremendous share gains we've achieved in both sectors.
Currently the macro environment, while uncertain remains favorable for our industry.
And even at these near term trends fade. We believe that we are in an industry that is positioned for solid growth over the long term.
For our fourth quarter, we expect our sales performance to be led by the continued strength in our commercial business as we continue executing on our differentiating initiatives, we will as always be transparent about what we're seeing and provide color on our markets and outlook as trends emerge.
Before handing the call over to Jim here I'd like to make sure. The listeners know what our key business priorities are for the remainder of the fiscal year and give some color on those.
First we are focusing on our supply chain.
We have two initiatives in place to drive improved availability.
One is our expanded hub and Mega hub Rollouts.
We believe intelligently, placing more inventory in local markets will lead to our ability to continue to say, yes to our customers more frequently and in turn continue to drive our sales performance.
Secondly, we are expanding our distribution center footprint, we announced opening two new domestic Dcs and one additional DC in Mexico.
These dcs will allow us to not only reduce drive times to stores in market serviced by the new Dcs, but they being larger than the previous Dcs will allow us to carry inventory that is slower turning yet in demand across the country.
We previously relied on our vendor community to carry these skus and ship them once ordered by our stores.
Our D. C strategy is focused on carrying more product and our supply chain that was not available previously these.
These skus will smartly expand our stocked inventory across all 50 states.
And lastly, we plan on continuing to grow our Mexico business, while accelerating growth in Brazil and.
And we are leveraging many of the learnings we have in the U S to refine our offerings in Mexico and Brazil.
Now I'll turn the call over to Jim Meer Jackson generic thanks.
Thanks, Bill Good morning, everyone. As Bill mentioned, we had a strong third quarter stacked on top of a remarkable third quarter last year with two 6% comp growth of 2% decline in EBIT and a nine 6% increase in EPS.
Results for the first three quarters of the fiscal year have been incredibly strong as our growth initiatives continue to deliver great results.
<unk> of our autozone or in our stores and distribution centers have continued to enable us to take advantage of robust market conditions.
Start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q3.
For the quarter total sales were just under $3 9 billion up five 9% and total auto parts sales, which includes our domestic Mexico and Brazil stores were $3 8 billion up five 7%.
Let me give a little more color on sales and our growth initiatives, starting with our commercial business for the third quarter, our domestic D. ISN.
Sales increased 26% to over $1 billion and were up 74% on a two year stack basis sales to our DIY customers represented 27% of our total company sales and 30% of our domestic auto parts sales our weekly sales per program were $16600 up 23%.
As we averaged just over $87 million in total weekly commercial sales.
Once again growth at 26% exceeded our internal expectations and was broad based as both national and local accounts performed very well for the quarter our.
Our results for the quarter represented the highest weekly sales volume for any quarter in the history of the chain I.
I want to reiterate that our execution on our commercial acceleration initiatives is delivering better than expected results as we grow share by winning new business and increasing our share of wallet with existing customers.
Have a commercial program and approximately 86% of our domestic stores, which leverages, our DIY infrastructure and we're building our business with national regional and local accounts.
This quarter, we opened 43 net new programs, finishing with 5276 total programs is.
As I've said since the outset of the year commercial growth will lead the way in FY 'twenty, two and our results in the third quarter and year to date reflect this dynamic.
We remain confident in our strategy and execution and believe we will continue gaining share delivering quality parks, particularly with our door last brand improved assortment competitive pricing and providing exceptional service has enabled us to drive double digit sales growth for the past seven 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 positioning us for an even brighter future and our commercial and retail businesses.
Let me add a little color on our progress here.
We have discussed over the last several quarters, our Mega hub strategy has given us tremendous momentum. We now have 67 Mega hub locations and we expect to open approximately 11 more over the remainder of the fiscal year.
While I mentioned, a moment ago. The commercial weekly sales per program average was $16600 per program 67, Mega hubs averaged significantly higher sales and are growing much faster than the balance of the commercial footprint.
As a reminder, our mega hubs typically carry over 100000, Skus and drive tremendous sales lift inside the store box as well as serve as an expanded assortment store for other stores.
The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business.
This quarter I visited one of our key markets, where we're testing greater Mega hub density and although it's early innings I am thrilled with the results what.
What we're learning is that not only are these assets performing performing well individually, but the fulfillment capability for the surrounding autozone stores gives our customers access to thousands of additional parks and lifts the entire network.
This strategy is working we're doubling down by raising our near term Mega hub target from approximately 110 to 200 Mega hubs supplemented by our new objective of a total of 300 regular hubs.
Yes, we plan to have 500 total locations with significantly higher levels of expanded parts availability and soon.
By leveraging sophisticated analytics, we're expanding our market reach driving closer proximity to our customers and improving our product availability and delivery times.
Our Autozone is are excited our customers are excited and were building a meaningful competitive advantage.
On the retail side of our business, our domestic retail business was down four 5%, but up 23% on a two year stack. The business has been remarkably resilient because we have gain and maintain significant market share since the start of the pandemic.
As Bill mentioned, we saw traffic down eight 5% from last year's record traffic levels that were fueled by government stimulus. However, we also saw 4% ticket growth as we continue to methodically raise prices in an inflationary environment.
Our DIY business has continued to strengthen behind our growth initiatives and a favorable macro environment.
On a macro basis, the market is experiencing a growing and aging car park and a challenging new and used car sales market for our customers, which are providing a strong tailwind for our business.
Our in stock positions, while still below historic norms continue to improve as our supply chain and merchandising teams have made great progress in a challenging supply chain environment.
We've been able to navigate supply and logistics constraints and have product available to meet our customers' needs.
Our autozone or we're taking care of our customers give us a key competitive advantage that enables us to thrive in this market environment.
We remain confident as the fundamentals of our DIY business remained strong macro conditions are favorable for us and we've had great execution by our teams.
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 the quarter, we opened three new stores in Mexico to finished with 673 stores and three new stores in Brazil, any with 58 and on a constant currency basis, we saw accelerating sales growth in both countries in fact at higher growth rates than we saw overall.
Remain committed to our store opening schedules in both markets and expect both countries to be significant contributors to sales and earnings growth in the future with 12% of our total store base now outside the U S and our commitment to continue expansion in a disciplined way international growth will be an attractive and meaningful contributor to autozone future growth.
Now, let me spend a few minutes on the P&L gross margins for the quarter. Our gross margin was down 54 basis points, driven primarily by the accelerated growth in our commercial business were mixed drove margin pressure, but increased our total gross profit dollars four 8%.
Welcome tradeoff that as a net positive for our business 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.
We're continuing to take pricing actions to offset inflation and consistent with prior inflationary cycles the industry pricing remains rational.
Moving to operating expenses, our expenses were up nine 8% versus last year's Q3, as SG&A as a percentage of sales deleveraged 114 basis points.
The deleverage was driven by payroll as last year's historic DIY comp drove significant and more than appropriate leverage on SG&A, where we simply couldnt staff to the accelerated sales grow fast enough.
We'll continue to invest at an accelerated pace and to.
To underpin our growth initiatives and these investments will pay dividends in user experience and productivity. We will 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 $786 million down two 2% versus the prior year's quarter driven by last year's strong sales performance in DIY.
Interest expense for the quarter was $41 $9 million down 7% from Q3, a year ago, although our debt outstanding at the beginning of the quarter was $6 1 billion versus $5 3 billion in Q3 last year.
We are planning interest in the $61 million range for the fourth quarter of fiscal 2022 versus $58 1 million in last year's fourth quarter.
For the quarter, our tax rate was 23% versus 21, 4% in last year's third quarter. This quarter's rate benefited 284 basis points from stock options exercised while last year had benefited 211 basis points.
For the fourth quarter of fiscal year 2022, we suggest investors model us at approximately 23, 5% before any assumptions on credits due to stock option exercises.
Moving to net income and EPS net income for the quarter was $593 million down six tenths of a percent versus last year's third quarter, our diluted share count of $24 million was nine 3% lower than last year's third quarter. The combination of lower net income offset by lower share count drove earnings per share for the quarter to $29 three up now.
Nine 6% over the prior year's third quarter.
Now, let me talk about our free cash flow for Q3 for the third quarter, we generated $843 million of operating cash flow and spent $161 million in capital expenditures, allowing us to generate $682 million in free cash flow.
Year to date, we've generated $1 6 billion and free cash flow down 13% versus the prior year.
Primary reason for the decline in free cash flow versus last year as the timing of merchandise inventories and payments this year versus last year, we expect to continue being an incredibly strong free cash flow generator going forward, we remain committed to returning meaningful amounts of cash to our shareholders.
Our balance sheet, our liquidity position remains very strong and our leverage ratio remained below our historic norms. Our inventory per store was up 10, 7% versus Q3 last year total inventory increased 13, 9% over the same period last year, driven primarily by inflation and our growth initiatives.
Net inventory defined as merchandise inventories less accounts payable on a per store basis was a negative $216000 versus negative $167000 last year and negative $198000 last quarter.
As a result accounts payable as a percent of gross inventory finished the quarter at 127, 9% versus last year's Q3 of 123, 9%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program, we repurchased $900 million of Autozone stock in the quarter at quarter end, we had just under $2 $1 billion remaining under our share buyback authorization.
Strong earnings balance sheet and powerful free cash flow. We generated this year has allowed us to buyback over 8% of the shares outstanding since the beginning of the fiscal year, we bought back over 90% of the shares outstanding and of our stocks since our buyback inception in 1998.
Investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. We finished Q3 at two one times EBITDAR, which is below our historical objective of two and a half times EBITDAR. However, we remain.
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To wrap up we had another very successful quarter, we're 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 continues to work, we're growing our market share and improving our competitive positioning in a disciplined way I can.
And I 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 here.
We had very solid results so far in fiscal 'twenty, two and we remain focused on superior execution and customer service. Our culture was built on providing exceptional service and this is what will continue to define our success well into the future.
Looking to the future it is still very difficult to predict the next six to 12 months.
But our perspective is meaningfully morphed over the last two quarters.
On last quarters call, we discussed how most if not all of the growth in sales we experienced since the start of the pandemic was sustainable.
We believed our competitive positioning was materially improved as indicated by our significant retail share gains.
And rapidly accelerated commercial sales growth.
We believe customer behavior may have permanently changed we continue to believe all of this today.
If this holds true it will be the fourth time.
Tom in the last 30 years that the economy and society had been through significant shocks leading to material acceleration in our growth in sales and profits.
Without a corresponding decline back to pre recessionary or pre pandemic levels.
Our industry is unique and it has a very long track record of strong performance with high return and cash flow characteristics.
As we've now lapped the second anniversary of the pandemic. Some of the measurements. We have all used recently to measure our performance will become skewed remember at the beginning of the pandemic our sales dropped radically.
Our retail sales rebounded quickly with the April 2020, stimulus, but commercial's rebound lagged and took several months for Q4 in light of the amazing performance in the back half of 2020, the two year comparison for overall comps won't be comparable.
We would encourage you to migrate to studying three year comps to gauge our fourth quarter performance.
That said soon we look forward to returning to focusing solely on one year comparisons.
We continue to be bullish on our industry and in particular on our own opportunities for 2022, we believe the macro backdrop is in our favor for near and long term.
Our customers across the Americas, they want to get out and drive.
And we are here when they need helpful advice.
Our team has worked diligently and collaboratively with our suppliers and together they've done a very good job dealing with the enormous supply chain challenges that exist for everyone.
We continue to believe we were better in stock than most retailers and I think our results obviously support that belief.
I'd like to share a few other points with you.
It has been a rather noisy earning season for retailers and I want to be clear crystal clear about our business and the environment.
First I believe autozone can manage effectively through this inflationary environment.
Historically, our industry has been disciplined and rational about price about passing along cost increases with higher retails and that is true today.
Second we feel our store staffing levels are appropriate.
And we can and we will manage expenses appropriately for either stronger or weaker sales environments.
Third our current inventory levels are in good shape for the summer selling season, but still not to pre pandemic in stock levels, but certainly our inventory levels are not inflated by any means.
And lastly, while it has been difficult to forecast in this macro environment. The fundamentals of our business are strong and we are continuing to focus on execution one of our hallmarks.
And I'll remind you that in the past recessionary cycles.
Our business and our industry has been remarkably resilient and frankly robust.
For the remainder of fiscal 'twenty. Two we are focused on further growing share, but as always doing so on a very profitable basis last quarter, we announced we would begin construction on three new distribution centers to fuel continued growth two in the U S and one in Mexico expected to open in fiscal 'twenty for these new distribution centers.
Represent a meaningful acceleration in our historic investments in D. C. As during the pandemic, we've learned we need to have more excess capacity.
Secondly, we are targeting to open.
11, more new domestic mega hubs in the U S.
In this quarter Q4.
These mega hubs will enhance our availability and support growth in both our retail and commercial businesses as.
As we have mentioned many times before our Mega hub strategy is at the core of materially improving our inventory availability.
And our results show that they are working.
For the fiscal year, we continue to expect to open more than 200, new stores throughout the Americas with notable acceleration in our Brazil business.
Our fourth quarter will be a busy one from a store development standpoint, 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 autozone is across the stores and distribution centers in particular.
For their commitment to servicing our customers and doing so in a very safe manner.
First and foremost our focus our focus will be on keeping our autos owners and customers safe, while providing our customers with their automotive needs and secondly, we must continuously challenge ourselves during these extraordinary times to <unk>.
<unk> 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 very much 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.
Certainly.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
Limit yourself to no more than two questions.
You also ask about posing your question. Please pickup your handset listening on speaker phone kept provide optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from Bret Jordan with Jefferies. Your.
Your line is live.
Good morning, guys good morning, Brent.
The Mega hubs could you talk maybe about the geographic reach you noted that the <unk> is accelerating and they're in their markets I mean, how far can they support smaller stores geographically.
Well frankly breath there.
Supporting smaller and smaller radius of.
Geography today than they did before because we are getting so many of them. When we first built them. It was not uncommon for them to be supporting stores that were two three maybe even 400 miles away.
A lot of times that would be on an overnight basis. The real the real crux of it is how do we get the stores that are in call. It 30, or 40 miles away from the Mega hub and how can we get them serviced three times a day, that's when we really performed well, but the biggest part of the Mega hub performance is the Mega hub itself.
Of the four walls of the Mega hubs are just continuing every time, we look at them, but every time, we open zone and open more they continued to outperform our expectations and one of the remarkable things is they're not cannibalizing close in stores like we thought they would so.
We talked on the last call remember.
Remember when we first launched the Mega hubs. We said we would have 25 to 40, we're now in the sixties and we're headed to 200 and it just goes to show you the power of these mega hubs.
Great and then one quick follow up you'd noted some impact on hard parts, maybe correlated to higher fuel prices.
Year to date are you seeing any trade down whether it would be in the do it for me or the DIY space.
Given what's going on in inflationary consumer.
Sure Yeah, we're hearing a lot of questions about what's going on with the low end consumer are people trading down our hard parts business I don't want to overstate that I mean, I think I said it was off about 1% during the it is very difficult right now to get clarity on the comparisons letterman. Some people are talking about whether we're saying we don't think.
There was a meaningful impact on our business. What was meaningful was we went up against stimulus from March of last year that lasted for four to six weeks.
That is really the story and so it's hard to say the low end consumer sure their purchases are down versus last year of course. They are they had a massive amount of stimulus in their pocket I think it'll be interesting to see what happens over the fourth quarter are we watching what happens with the low end consumer absolutely, but I also want to remind you.
The comment that I made at the end if you think about the last over the last 30 years. There has been four significant shocks to the economy.
In all four of those shocks our performance and our industry's performance has made a meaningful step up during those shocks recessions and pandemics that our business has gone up and it's never stepped back down.
Great. Thank you.
Yes, Thank you Brett.
Your next question for today is coming from Christopher <unk>.
Well versed with J P. Morgan Christopher your line is live.
Thank you.
So a few questions on on the gross margin front.
As you look ahead, there are some headwinds that seem to be emerging on the on the fuel side, how do you think about <unk>.
Pricing and fuel cost pressures in terms of product pricing and then you know your success in commercial obviously has some expense on gross margin rate. So given those two factors would you think that gross margin continues to see the type of year over year headwinds that.
You saw in the.
Current quarter in the past couple of quarters.
Yeah on the first part of your question I mean, there's no question, we're seeing cost inflation in certain categories. We're also seeing higher transportation costs, we're seeing higher fuel costs.
As we reiterated on the call the industry pricing is rational and we're actually pricing to recover all of those inflationary impacts just as we've done in the past so you've seen us move retail prices up.
As inflation has moved up mid single digits. Our pricing has moved I think our entire industry has done that and as I've said before.
Inflation has been a little bit of our friend in terms of what we see in terms of retail pricing as it relates to our commercial business, we want to be crystal clear.
Our goal is to create a faster growing business with higher margin dollars. This is a much more sustainable way for us to grow our cash and ultimately shareholder value.
Our domestic commercial business grew 26%, it's a mix headwind, we expect our domestic commercial business to continue to outgrow, our DIY business and Thats a tradeoff that we welcome will continue to run a very disciplined playbook on margin expansion opportunities across all of our business which includes.
Things that we're doing from a cost standpoint, raising our prices.
In managing our expenses accordingly, but we like the fact that we've got a commercial business with very strong operating margins that is accretive to the overall business.
Understood that's great and then my other question is somewhat technicals you you think about the fuel impact of the trucks and the cars going from the store to the shops and the mechanics.
Where does that show up in your P&L is that is that an SG&A item and how do you think about your you know the ability to maybe price that in our offset that impact because clearly diesel and gas accelerated over the quarter and that impact should be bigger as you look forward.
If you look at diesel in particular, it's up probably.
Probably 50% versus a year ago that does show up in our SG&A expenses.
So as we're running the cost.
Cost playbook, and we're running our pricing playbook, we have to take all of those things into account and as I've said before when we look at our business in total looking at all of the inflationary impacts.
We're pricing our retails accordingly to make sure that we.
Maintain our margin structure going forward just just for clarity there is pressure in both gross margin and SG&A.
Majority of the diesel is in their warehouse and distribution costs, which is in gross profit and then are we have one of the largest light duty fleets in our commercial and field management folks and so there's a lot of pressure on SG&A as well.
Right and then the idea is you're going to manage pricing to help offset that the light duty expense pressure in SG&A.
That's right both of them, both the light duty and heavy duty.
Got it thanks very much best of luck. Thanks.
Thanks, Chris.
Okay.
Your next question for today is coming from Simeon Gutman with Morgan Stanley .
Good morning, everyone.
First question is on some of the margin and growth comments Humira just made.
Given the success you have in D. I F. M are you, making trade offs between how much quicker you can grow and the margin dilution and then meaning can you grow even quicker.
Maybe a bigger detriment to margin or are you seeing less detriment to margin expansion is happening in commercial.
I'll say it crystal clear no we are not constraining our growth based upon the margin characteristics of the <unk> business. We said it for a million years D. I affirm today opera.
Brexit lower gross margins and lower operating margins.
But it grow it operates in operating margins the way we look at it on generally an incremental basis in the mid teens, we will grow that business as fast as humanly possible.
If we could add another $4 billion in sales and the corresponding operating income that comes with that tomorrow with the limited amount of incremental capital that we have to deploy we would do it tomorrow.
We were very focused on operating profit dollars and as we look forward I would just encourage you all to look at our business from a gross margin point of view how are we doing in DIY and how are we doing in commercial and our goals will be to marginally increase those gross margins over time, if we do that.
And that puts in the commercial business grows at 26% and it puts pressure on the overall gross margin so be it.
Fair enough.
And Bill I was intrigued by some of the comments you made about some permanent changes to the industry.
Will you underscoring how resilient the businesses or are you also thinking that maybe the business or the industry can grow at a faster rate than it has historically.
I don't know that I would say it can grow at a faster rate the industry itself I clearly think that we can.
And maybe some of our close in competitors can grow faster in the commercial business because that is still so fragmented, but the bigger part of my question. My point is this is the most remarkably resilient business I've ever seen and I don't understand why when we have a recession, our business goes up and we come in.
Out of it in our business never goes down it seems to flatline and then grow from there it's amazing to me.
Okay. Thanks, good luck.
Thank you Simeon.
Your next question for today is coming from Michael Lasser with UBS.
Good morning, Thanks, a lot for taking my question.
The roads on the topic of recessionary environment and the impact that it has on the auto aftermarket.
One of the drivers during those periods that people shifting away from buying new cars.
And are more interested in the need to maintain their existing card into the dynamic. This time around could be influenced by the fact that new car used car sales.
But because of the supply constrained to the industry might not as.
As much of a counter cyclical boosted the pain in the past.
Yeah, I think all of that makes perfect sense Michael.
I wish we had empirical evidence that could tell us that's exactly what's happened.
I will tell you. If you asked me a year ago, if we were going to retain the kind of sales gains that we've grown over the first two years of the pandemic I would've said I doubt it but there's also been other pressures that have happened clearly the lack of new cars and the elevation of pricing. The radical elevation of pricing have you used cars has our <unk>.
Customers view on how long theyre going to have that vehicle changing to much longer than it normally is when that happens they seem to take better care of their cars. I think we also didn't envision the inflation impact that we're seeing and clearly that's I talked about some traffic declines some significant traffic declines eight.
5% in the retail business that was up against 16% traffic growth last year.
I'll take a two year comp of seven 5% traffic all day long.
But inflation and the ability to pass that inflation on has helped US. That's another key element of this industry is the elasticity of demand in this sector of retail is probably unparalleled and so as this inflation has come through it has helped us get through that period of time as well.
My follow up question is you've clearly gained market share we compare here.
The result to a variety of indicators that's pretty obvious.
Your messaging is that it is the result of.
Many different factors one of which does.
It would be that you've made some price investments initially on the DIY side more recently.
Inside one of your competitor did vocal about making.
Price investment.
Especially on the <unk> side with <unk>.
This point do you feel the need to make further price investment either on.
The DIY side or on the commercial side either.
The effort to either maintain or grow all this year that you've gained in the last couple of years okay.
The short answer is absolutely no.
The longer answer is we made very marginal price investments on the retail business, we've far lap those probably six months or so ago. They were very targeted to specific highly visible commodity related items and we're focused on our comparisons versus mass that that's in the past.
About this time last year in fact, we have now annualized at we completed rolling out the pricing changes that we made in our commercial business.
Again, I want to be crystal clear the growth that we saw in commercial over the last couple of years is not a result of pricing investments alone. They are an element. There's many other elements the mega hubs and hubs the dura last brands, we've rolled out it.
Had the single largest technology investment in the company's history focused on commercial and commercial deliveries our delivery times are dropping.
So we've done a lot of different things and we lowered our pricing to make sure that we were focused on pricing versus a different competitive set.
All of that together has worked and has worked really really well at this point in time, we do not have any additional pricing.
Actions being tested nor being considered we believe and we're very happy with our prices today in retail and commercial except that we need to pass inflation cost along as they come in we will be very focused on trying to keep the same kinds of competitive positioning, but we need to pass on the inflation.
As it comes through Us and calls.
Thank you very much and good luck.
Thank you Mike.
Your next question for today is coming from Mike Baker with Davidson.
Okay. Thanks, guys yeah.
I don't know if you can answer this but just curious why do you think weather didn't have an impact on your business.
Had an impact on all your competitors businesses and many other seasonal businesses.
Why would your business be different, particularly as you over index to DIY, which I think is probably a little bit more weather sensitive than the commercial business.
It's a very fair question.
The information we have was it was as I said slightly cooler and slightly.
Whether the real question or the real discussion for this quarter was not weather it was stimulus and I don't know how you fare it out.
Half a point or a one point change in weather dynamics. When you are talking about two year comps of 30% that were driven by stimulus. So we're trying to focus on the major elements and make sure. We communicate to you. What we think are the real drivers and the frankly the drivers that will help you understand and understand our long term trends the weather.
It was marginally different.
And I can't Ferreted out and a 30% two year comp.
Okay, That's fair enough and then one other.
Follow up.
You did say.
Hard parts are down you said only a 100 basis points, you don't want to make too big of a deal of it but you did say you thought it was because of gas prices. So are you implying there again, we don't want to make a big deal of it but did you are you think do you think people are just driving less on the higher gas prices and then you said that should get better.
Does it get better only when gas prices come back down.
Should we think.
Elements that happened so you've had two elements that happened to miles driven were still rebounding from the pandemic decrease of miles driven now you've got the gas prices implications, what we've seen historically in the past Mike as well.
When gas prices hit $4, a gallon you can see a direct correlation with with those prices and a decline in miles driven what we said historically as we've seen people when it gets to those elevated levels.
They changed their behavior, they change where they live they change where their work obviously with remote work in those kinds of things that could be different nuances. This time, a lot of people are saying, yeah, but $4. A gallon back then would be the equivalent of five whatever today that may be true I don't know if thats the case or not this has happened in pretty short order and I think we need to watch what happens.
The miles driven over time as.
As we think about it it will be a short term phenomenon just like it has been in the past our focus isn't about next quarter or even the quarter. After that our focus as I said is how do we think about driving this business to drive long term cash flow at really high return rates and think out three to five years gas prices have come in.
And it doesn't really impact how we manage the business day to day.
Fair enough I appreciate the color. Thank you.
Yes. Thank you.
Your next question for today is coming from Scot Ciccarelli with curious securities.
Okay.
Good morning, guys. So you mentioned, obviously that the Mega hubs, you know quite a few times and the positive impact that you see on yourselves.
Is that way to potentially quantify the sales lift that you experience in a market when you open a mega hub.
Yes, a couple of things stand out to us as we said.
We've tested greater density, we're seeing two dynamics one.
Is the business plan that we build usually justifies the mega hub.
Based on what happens inside the four walls and so we're seeing those sales be largely incremental as bill mentioned, we're not seeing the cannibalization. What we've tested is as we put more mega hubs in the market and jam more parts of the market.
Those satellite stores are benefiting.
Tremendously because they are leveraging the inventory and the availability from those mega hubs and Theyre seeing an overall lift as well we haven't talked specifically about what the quantification is but I can tell you that it's significant and that is what's giving us confidence.
Take our target from 110 to 200 and quite quite honestly will likely go beyond that as we continue to test and learn more in the future.
Engineered as it's been.
Hubs kind of mature do they follow a new store maturity type curve.
They do but one of the things that we're experiencing right now and particularly with the growth in our commercial business is that the ramp for the Mega hubs has been faster than what we've seen.
In the past.
And that is because we have put those additional parts into the marketplace. While we are doing.
Doing all the work that Bill mentioned, our commercial acceleration initiatives those mega hubs are ramping up.
<unk> faster than we ever anticipated.
Very helpful. Thank you.
Your next question for today is coming from Daniel <unk> with Stephens.
Yeah, Good morning, guys and congrats on the quarter.
I wanted to ask a higher level question on the do it for me side, obviously, you've been gaining share, but when you're not winning the business from an operational standpoint is there a consistent area of feedback you hear from customers, where you need to improve or any consistent learning that youre seeing at the where you can still improve to gain more share when youre not winning that business.
Yes, it's a really great question.
I mentioned it in the call and I've been I've been out in the field a whole lot in the last three months.
<unk>.
And the tone of the conversations with our commercial customers be that national accounts at the senior leader level.
In our commercial shops has just the tenor of the conversations have changed its a question of how can I give you more business versus the age old things of it was about availability. It was about the <unk> brand. The <unk> brand conversation has turned from a significant negative to a positive.
And now with our availability it has meaningfully changed so.
I'm not really hearing that.
We always can get better on delivery times, and if anybody wants to tell you why theyre not giving you business. That's a very easy one well now we have actual data that says you are right. We are delivering to you to slow your average deliveries or 31.
And 37 seconds, and we apologize for that we're going to work to get that better and so we've got new tools at our disposal, we got much better inventory assortments that <unk> brand is amazing and so the tenor of those conversations.
Really radically different than they were just three or four years ago.
Got it that's helpful and engineer maybe more a financial question I know you just talked about the maturity curve of the new Mega hubs in D C, but but with <unk> coming online in 11 Mega hubs I guess in the near term what kind of SG&A pressure should we expect I would assume there's inherent deleverage.
Just from Preopening costs, and then as they ramp so kind of what kind of headwinds we anticipate that put on on the SG&A line over the coming quarters.
I mean, it will clearly be some pressure on SG&A, but what I'll say is that we've been very disciplined about managing our SG&A expenses and quite frankly, when we have to make these kind of investments.
Number one they have great payoffs associated paybacks associated with them, but number two we look for bill payers elsewhere in the P&L to be able to go do that.
But what we've done over time and what we'll continue to do as we invest in a very disciplined way and growth and we're not afraid to delever SG&A, if we need to to support that growth because of the long term. It's the right thing for our business. So.
We have a plan over time to manage SG&A in.
In line with our in line with our sales growth, but in the short term you may see us spike it up from time to time to support the investments in growth.
We've done that not only what the capacity investments that you've talked about we've done it with our it expenses over time, and we'll continue to do that going forward.
Got it thanks, so much best of luck.
Thank you.
Your next question is coming from.
<unk> with bank of America.
Great. Thank you for taking my question regarding the comment you made about gross margin.
Yeah.
Okay perfect.
Yes.
Our overall gross margin how can we think about tracking improvements in market.
Categories, like where will we see that so okay.
I think two things Youll see number one we will continue to have.
Mixed pressure associated with our <unk>.
Commercial business going forward and we'll be very transparent about what we see there, but all of the playbook that we've historically run on.
Managing gross margin, taking pricing actions in categories driving down costs in certain categories. All of those tactics will still be in play and you'll see us over time, you know make positive improvements in gross margin. It's just that we're starting off.
In an environment, where our commercial business is growing significantly faster than DIY and that's going to be a margin pressure that we are.
Welcome because of the nature of the business and the fact that it's growing our overall gross profit dollars. So we'll be very transparent about it as we as we move forward.
As a tradeoff that we welcome.
Yes that makes sense I mean is there.
Our rule of thumb that we should think about is the differential in gross margin between commercial and retail in general.
Well it will depend on how fast the commercial business actually grows.
Look at the differential this quarter.
It was significant which actually drove.
Gross margin deleverage this quarter.
What I would say that if you were on an apples to apples basis in terms of growth rate, we would have actually seen gross margin.
The positive this quarter, but you've got the mix headwind there that's a welcome trade off and we are delivering.
Great. Thank you.
Thank you.
Your next question for today is coming from Zach Sadam with Wells Fargo.
Hey, good morning.
The elevated used vehicle pricing and lack of new cars available just curious how you think that's impacted your addressable market and to what extent scrap rates had declined out there with your customers.
And as we inevitably go back to an environment, where new cars come back on or used vehicle prices start to come back down to what extent do you think that would be a headwind for the industry.
Well I think you've got a dynamic here where clear.
Clearly the macro environment associated with used cars.
Is has a significant impact on what youre seeing in the car park the.
A dynamic associated with new cars is similar.
If you look at the data on used cars. They are up 23% year over year up 50% pre pandemic. If you look at what's happening with dealer lots right now, they're probably carrying about a third of the inventory that they were pre.
Pre pandemic. So it is a significant driver what youre seeing though is that the car park is actually aging people are hanging onto the vehicles longer in fact, the data that came out. This morning shows that it has now picked up the 12.2 years is the average age of a vehicle on the road.
And those things are all producing producing a tailwind for us.
I think what we are focused on you know as a as a business is one managing our business.
With the vehicles that are in operations, making sure that we have the <unk> the assortment to go deal with that.
And as you know there are changes in the car park or changes in technology, there changes in consumer behavior, we just manage our business accordingly, and we've done that historically over time and it's been a good outcome for us.
And then with the step up in Mega hub density is it fair to assume that double digit commercial growth remain the norm for your business through fiscal 'twenty, three and do you view the opportunity ahead more about getting denser with existing customers or expanding your reach to newer customers that maybe you haven't.
Been able to serve at this point.
We will continue to see our commercial business had very strong growth.
And the initiatives that we've talked about.
Whether it's the things that we're doing with assortment things that we've done with technology. The things that we've done with pricing all of those things are driving significant growth in our commercial business and we expect that trend to continue for us.
Thanks for the time.
Great. Thank you.
Four we conclude the call I want to take a moment to reiterate we believe our industry is in a strong position and our business model is solid we're excited about our growth prospects for the year, but we will take nothing for granted as we understand our customers have alternatives. We have exciting plans that should help us exceed for the future, but I want to stress that this is a merit.
And not a sprint as we continue to focus on the basics and strive to optimize shareholder value for the remainder of FY 'twenty. Two we are confident autozone can continue to be successful.
Lastly, as we celebrate Memorial day next Monday, we should remember all of our countries heroes, both past and present.
These Americans.
Mendes debt of gratitude.
Thank you for participating in today's call have a great day.
Yeah.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.