Q4 2022 Autozone Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Otis <unk> 2022 fourth quarter earnings release call.
At this time, all participants have been placed on 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.
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Before we begin please note that today's call includes forward looking statements 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 Securities and Exchange Commission for a discussion of import.
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.
It is now my pleasure to hand, the floor over to Mr. Bill Rhodes, Chairman, President and CEO of <unk>.
Bill.
Yeah.
Good morning, and thank you for joining us today for autos homes 2022 fourth quarter Conference call with me today are Jim Meer, Jackson Executive Vice President and Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax regarding the fourth quarter, Okay at 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 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 recognize our autozone us for their tremendous success this past year.
They far exceeded our expectations from the beginning of the year and in a very challenging environment as our pledge states put our customers first riddle, resulting in additional share gains and terrific sales performance on top of fantastic results and FY 'twenty one.
We grew our overall sales of 11, 1% on top of 15.8% growth last year, resulting in a two year growth that is among the highest we've ever experienced.
Could not have achieved the success without phenomenal contributions from across the organization. This year began with the resurgence of the pandemic ongoing supply chain challenges, a very difficult staffing environment and finished with rising interest rates and inflation at its highest levels in decades.
All as major storylines.
Throughout the year, our team's incredible supply chain efforts to improve our in stock position likely at industry, leading levels helped our sales growth.
These efforts resulted in a positive retail comp and an exceptionally strong commercial comp for both the quarter and the year.
Anyway, you evaluate our FY 'twenty two performance, we had a terrific year, congratulations autozone and thanks for always putting our customers first which led to this success.
This morning, we will review our Q4 overall same store sales DIY versus D. I F M trends, our sales cadence over the 16 weeks of the quarter merchandise categories that drove our performance and any regional discrepancies. We will also share how inflation is affecting our cost and our retails and how we think inflation will.
<unk> our business for FY 'twenty three.
Our domestic same store sales were an impressive six 2% this quarter on top of last year's four 3% on a two year basis, we delivered 10, 5% comp and on a three year basis, a remarkable 32.3% stacked comp.
Our team once again executed an exceptionally high level and delivered amazing results. Despite the difficult comparisons and significant challenges I mentioned above.
Our growth rates for commercial and retail or burst both strong with domestic commercial growth north of 20%. This quarter was our sixth consecutive commercial growth above 20%.
<unk> commercial set a fourth quarter record with $1.442 billion in sales an impressive accomplishment, we generated $260 million more in sales this quarter than in Q4 last year for.
For the fiscal year, our commercial sales were $4 2 billion versus $3 3 billion, just a year ago up over 26%.
Last fall at our National sales meeting, our senior VP of commercial Grant Mcgee declared a stretch goal to achieve $4 billion in sales for FY 'twenty two.
That a lofty goal ultimately wasn't near lofty enough.
We also set a record average weekly sales per store for any quarter at $17000 per store versus 14, four last year.
Domestic commercial sales represented 30% of our domestic auto part sales another record for us compared to just 26% in last year's quarter.
Our commercial sales growth continues to be driven by key initiatives, we've been working on for the last several years.
Improved satellite store inventory massive improvements in hub and Mega hub coverage the strength of the Dura last brand.
Better technology to make us easier to do business with improved delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being quote price strike for the value proposition. We deliver we continue to execute in commercial and we are extremely proud of our team's.
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We're also very proud of our organization's performance in domestic DIY.
We had a positive 1.1% comp this quarter.
While our two year comps decelerated from Q3's, we believe the more relevant comp is the three year and we are higher than last year's quarter at 24.5 versus 21 six for the year. We were very proud of our DIY results. Considering we grew so much in FY 'twenty one to level set we had 11.
1% DIY comp in FY 'twenty, one and for the full year 'twenty two we were up 2.9%. These.
These results are very strong considering the difficult comparison, which was driven by the various forms of stimulus last year.
From the data we have available to us we continue to retain the vast majority of the enormous share gains in dollars and more importantly in units that we built during the initial stages of the pandemic.
And our recent performance gives us continued conviction about the sustainability into FY 'twenty three.
Now, let's focus on sales cadence our quarter span 16 weeks early may through the end of August our same store sales increase materially over the first four weeks to high single digits eight 4%.
The next eight weeks our growth was nearly half dropping to four 9%.
And then it reaccelerate it over the last four weeks up six 8%.
All of these year over year comparisons are difficult to interpret as so much was going on last year and even the year before.
However for Q4, our two year comp was 10, 5% in the four week periods of the quarter increased 10.49, 0.479, and 14, 4% respectively.
But our three year comp was 32.3 and for the four week periods of the quarter increased 35 point to 33.5, 31 and 31% respectively.
We have been encouraged by the sustainability of the enormous sales gains we generated since the beginning of the pandemic.
Regarding weather in May and June we experienced slightly cooler and wetter weather trends across the country by July however, it became very hard across most of the country and it remained unseasonably warm for August overall, we feel weather had a small but slightly positive effect on our sales performance.
As we look forward to the fall months, we anticipate normal weather patterns as a reminder, historically extreme weather cold or hot drives parts failure and accelerated maintenance.
Regarding this quarter's traffic versus ticket growth in retail our traffic was down roughly 7%, while our ticket was up about 8%.
Our transaction count decline wasn't surprising and was driven by lower demand for discretionary sales floor items.
However, we were pleased to be in line with last quarter's three year transaction trends.
We are also quite pleased with the ongoing growth in unit share we are seeing in our market share data.
We're also very encouraged by the sales trends, we continue to experience in commercial.
Our sales growth is coming from transaction growth from new and existing customers along with higher tickets as we price for inflation.
I regularly visit our stores and commercial customers and find it very encouraging to hear the positive comments from our customers and autozone or on our offerings.
The reception our autos owners are receiving from our customers and as importantly, our perspective customers has changed meaningfully over the last few years as we continue to implement and execute our commercial acceleration strategy I'll.
I'll say it now.
But we're determined determined to continue to grow meaningfully faster than the market and were focused on future growth opportunities to keep our momentum.
Our goal stated simply over time is to become the industry leader in both sectors.
As we start our new fiscal year, we continue to be pleased with the momentum we're seeing in both domestic businesses heading into the fall months.
During the quarter there were some geographic regions that did better than others. As there always are this quarter. We saw a 30 basis point difference between the northeast and Midwest compared to the balance of the country with the north East and Midwest being higher.
As the northeast and Midwest were warmer in May and June and their sales accelerated however, this trend reversed itself over the last eight weeks of the quarter as the remainder of the country heat it up those regions grew their comp sales faster than the northeast and Midwest markets.
Heading into the first quarter of the new fiscal year. We continue to believe weather will have only a minimal impact on our sales.
Now, let's move into more specifics on performance for the quarter.
While I said, our same store sales were up six 2% versus last year's fourth quarter. Our net income was $810 million and our EPS was $40.51 a share increasing 13, 4%.
Regarding our merchandize categories in our retail business, our hard parts outperformed sales floor categories with approximately two 5% difference between them.
As gas prices increased our discretionary sales floor merchandise categories, certainly softened the discretionary categories represent approximately 20% of our DIY sales in any one quarter, but this quarter. They were weaker at 19% of the retail mix. This category was down six 5% on the <unk>.
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More recently as gas prices have abated, we're encouraged to see the discretionary categories bounce back a bit in.
In general the categories that are driven by failure due to heat performed well and we were encouraged to see our battery category successfully lapped very strong performance last year and exceed our expectations.
We believe our hard parts business will continue to do well this fall as we expect miles driven to improve while our growth initiatives are delivering solid results.
Let me also address inflation in pricing this quarter, we saw our sales increased by 11% from inflation in line with cost of goods, which was up about 10%. We believe both numbers for the first quarter will be similar.
As rising raw material pricing labor and transportation costs are all impacting us and our suppliers inflation has been prevalent in the aftermarket space.
We believe inflation is stabilizing.
We are seeing transportation costs begin to moderate after reaching historic levels. While we are not seeing product cost deflation yet nor are we seeing any signs that labor wage growth is slowing.
Importantly, I want to point out that our industry has been disciplined about pricing for decades, and we expect that to continue.
Historically as cost or increase the industry is increase pricing commensurately to maintain margins. It is also notable that following periods of higher inflation, our industry has historically not reduce pricing to reflect lower cost.
While we continue to be encouraged with the current sales environment. It remains difficult for us to forecast near to midterm sales. What I. Previously said is that the past five quarters sales have all been consistent on both a two and three year stack comp basis.
Well, it's difficult to predict sales going forward. We are excited about our growth initiatives, our team's execution and the tremendous share gains we've achieved in both sectors over.
Over the past 12 months to 18 months. The overall macro environment has been favorable for our industry. Despite inflationary pressures for some of our customers and even at these near term trends fade. We believe that we are in the industry that is positioned for solid growth over the long term.
For our first quarter 2023, we accept expect our sales performance to be led by the continued strength in our commercial business as we execute on our differentiating initiatives, we will as always be transparent about what we are seeing and provide color on our markets and outlooks as trends.
Emerge.
Before handling the panic call over to Jim here I'd like to highlight and give some color on a few of our key business priorities for the new fiscal year.
First we are focusing on our supply chain with two initiatives that are in flight to drive improved availability.
One is our expanded hub and Mega hub Rollouts.
We know 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 drive our sales.
Secondly, we're expanding our distribution center footprint.
We announced the development of two new distribution centers domestically and one additional D C in Mexico.
These dcs will allow us to not only reduce drive times to stores, but they increase our capacity.
No we didn't expect to grow our business, 30% in three years as we did.
And they will allow us to carry inventory that is slower turning yet in demand across the country.
I'm also excited to announce that we opened a new facility on the West Coast. Just this month to handle direct import product on a timelier basis. This facility will flow products ordered abroad, and distribute them to our other D. CS postponing the inventory allocation and therefore, reducing safety.
Destock.
Our supply chain strategy is focused on carrying more product closer and closer to the customer and we believe it has been a significant contributor to our recent success, especially in commercial.
Additionally, we plan on continuing to grow our Mexico, and Brazilian businesses and almost 800 stores open internationally. These businesses had impressive performance. This past fiscal year and should continue to grow in 2023 and beyond 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 Jr.
Thanks, Bill and good morning, everyone. As Bill mentioned, we had a strong fourth quarter stack on top of a remarkable fourth quarter last year with six 2% domestic comp growth of five 7% increase in EBIT and a 13, 4% increase in EPS our.
Our results for the entire fiscal year were incredibly strong as our growth initiatives continue to deliver great results and the efforts of our autozone or in our stores and distribution centers have continued to enable us to take advantage of robust market conditions.
To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q4.
For the quarter total sales were just over $5 $3 billion up eight 9%.
For the year, our total sales were $16 $3 billion up 11, 1% versus last fiscal year I continue to Marvel at the strength of our business since FY 19, our sales were up an amazing, 37% or nearly $4 $4 billion since 2019.
Let me give a little more color on sales and our growth initiatives, starting with our commercial business for the fourth quarter, our domestic D. I F. M sales increased 22% to $1 4 billion.
43, 2% on a two year stack basis sales to our domestic DFM customers represented 27% of our total company sales and 30% of our domestic auto part sales our weekly sales per program or $17000 up 18, 1% as we exceeded our internal expectations are.
Our growth was broad based with both national and local accounts performed very well for the quarter.
Our results for the quarter set another record for the highest weekly sales volume for any quarter in the history of the chain.
I want to reiterate that our execution on our commercial acceleration initiatives delivering better than expected results as we grow share by winning new business and increasing our share of wallet with existing customers.
We have a commercial program and approximately 87% 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 66 net new programs, finishing with 5342 total programs.
As I've said since the outset of the year commercial Roke led the way in FY 'twenty, two and our results in the fourth quarter and year reflected this dynamic.
For FY 'twenty two our commercial sales were $4 2 billion up 26, 5% versus last year.
Accordingly, we believe we have a lot of runway in front of us and we are delivering on our goal of becoming a faster growing business.
We remain confident in our strategies and execution and believe we will continue gaining share.
Living quality parts, particularly with our door last brand improved assortment competitive pricing and providing exceptional service has enabled us to deliver double digit sales growth for the past eight quarters, our core initiatives are accelerating our growth and position us well in the marketplace and as I've noted on past calls our Mega hub strategy is driving strong performance.
And positioning us for an even brighter future future and our commercial and retail businesses.
Let me add a little more color on our progress as we've discussed over the last several quarters. Our Mega hub strategy has given us tremendous momentum. We now have 78 Mega hub locations with 11, new stores opened in Q4, while.
Well I mentioned, a moment ago. The commercial weekly sales per program average was $17000 per program 78, Mega hubs averaged significantly higher sales and a growing much faster than the balance of the commercial footprint.
In fact, our commercial Mega hub business grew at twice the rate of our overall commercial business in Q4.
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 source for other stores.
The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business.
What we're learning is that not only are these assets performing well individually, but the fulfillment capability for the surrounding autozone stores gives our customers access to thousands of additional parts and lift the entire network. This strategy is working and we have an objective to reach 200 mega hubs supplemented by our objective of a total of 300 regular hubs.
We're targeting up to 25, new Mega hubs in FY 'twenty three.
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 ours and our customers are excited and we're determined to build on our strong momentum.
On the retail side of our business, our domestic retail business comp was up one 1% in Q4. The business has been remarkably resilient as we have managed to continue to deliver positive comp growth despite underlying market headwinds.
As Bill mentioned, we saw traffic down 7% from last year's traffic levels. However, we also saw 8% ticket growth as we continue to raise prices in an inflationary environment for.
For FY 'twenty, two our DIY comp grew two 9% and 14, 1% on a two year stack basis.
Our DIY business has continued to strengthen competitively behind our growth initiatives. In addition 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 continue to provide a tailwind for our business. These dynamics pricing growth initiatives and macro car Park.
Aylwin have driven a positive comp despite tough comparisons from last year's stimulus injection and consumer discretionary spending pressure from overall inflation in the economy.
Our sales were steady throughout the quarter and we're forecasting a resilient DIY business in FY 'twenty three.
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 30, new stores in Mexico to finished with 703 stores in 2014, new stores in Brazil, <unk> was 72.
On a constant currency basis, we saw accelerated sales growth in both countries in fact that have higher growth rates than we saw overall.
We remain committed to our store opening schedule in both markets and expect both countries to be significant contributors to sales and earnings growth in the future.
With 11% 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 rest of the P&L and gross margins.
For the quarter, our gross margin was down 73 basis points, driven primarily by the accelerated growth in our commercial business and a 28 basis points headwind stemming from a noncash $15 million LIFO charge I'd like to address the $50 million LIFO charge. We took this past quarter, which came from the exhaustion of our reserve balance that occurred during the quarter.
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To level set we went from a $335 million reserve balance in Q4 of last year to zero in Q4, this year plus an additional $15 million charge.
Said differently, we recognized $350 million and higher costs this past year.
Basically all of the reduction in our reserve came from higher inventory of both freight costs. This charge does not show up in our cash flow statement this quarter because of the accounting for LIFO adjust the weighted average costs through the P&L to the last day and higher priced items.
In a nutshell it assumes everything you sold in the quarter was that the last and higher prices.
We're still modeling for higher freight cross through the end of the calendar year, which in turn means we are modeling LIFO charges through the first half of the new fiscal year.
In the first quarter, we anticipate up to a $100 million and LIFO charges. We are forecasting a similar amount for the second quarter.
We will note that if freight costs abate as we expect them to then we will see these charges reverse and will begin to rebuild a LIFO reserve balance.
Moving to operating expenses, our expenses were up eight 4% versus last year's Q4 as SG&A as a percentage of sales leveraged 12 basis points driven by strong sales growth.
Growth in SG&A has been purposeful as we continue to invest at an accelerated pace in it and payroll to underpin our growth initiatives. These.
These investments will pay dividends in customer experience speed and productivity, we're committed to being disciplined on SG&A as we move forward and we will manage expenses in line with sales growth over time.
Moving to the rest of the P&L EBIT for the quarter was $1 1 billion up five 7% versus the prior year's quarter driven by our strong sales growth for.
For FY 'twenty to EBIT was just under $3 $3 billion up 11, 1% versus the prior year also driven by strong top line growth.
Interest expense for the quarter was $64 million up 10, 1% from Q4, a year ago as our debt outstanding at the end of the quarter was $6 1 billion versus $5 3 billion at Q4 and last year.
We are planning interest in the $55 million range for the first quarter of fiscal 2023 versus $43 3 million and this past year's first quarter higher debt levels and borrowing rates across the curve are driving this increase.
For the quarter, our tax rate was 22, 1% flat with last year's fourth quarter. This quarter's rate benefited 70 basis points from stock options exercised while last year. It benefited 215 basis points for.
For the first quarter of FY 2023, we suggest investors model at approximately 23, 5% before any assumption on credits due to stock option exercises.
Moving to net income and EPS net income for the quarter was $810 million up three 1% versus last year's fourth quarter, our diluted share count of $20 million with nine 1% lower than last year's fourth quarter. The.
The combination of higher net income and lower share count drove earnings per share for the quarter to $40 51 up 13, 4% over the prior year's fourth quarter.
For FY 'twenty two net income was $2 4 billion up 11, 9% and earnings per share was $117 19 up 23, 1%.
Now, let me talk about our free cash flow for Q4 for the fourth quarter, we generated $1 2 billion of operating cash flow spent $300 million in capital expenditures, allowing us to generate $900 million in free cash flow.
For the year, we generated $2 $5 billion of free cash versus $2 9 billion in the prior year the decline in free cash flow versus last year was due to a change in working capital. This year versus last year, we expect to continue being an incredibly strong free cash flow generator going forward and we remain committed to returning meaningful amounts of cash to our shareholders.
Regarding our balance sheet, our liquidity position remains very strong and our leverage ratios remain below our historic norms. Our inventory per store was up 18, 4% versus Q4 last year and total inventory increased 21, 5% over the same period last year, driven primarily by our growth initiatives and inflation.
Net inventory defined as merchandise inventories less accounts payable on a per store basis was a negative $240000 versus negative $203000 last year and negative $216000 last quarter.
As a result accounts payable as a percent of gross inventory finished the quarter at 129, 5% versus last year's Q4 of 129, 6%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program, we repurchased $1 billion of Autozone stock in the quarter and at quarter end, we had just under $1 $1 billion remaining under our share buyback authorization.
The strong earnings balance sheet and powerful free cash we generated this year has allowed us to buy back over 10% of the shares outstanding since the beginning of the year, we've bought back over 90% of the shares outstanding of our stock since our buyback inception in 1998, while investing in our existing assets and growing our business we remain committed to this.
Capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders or.
Our leverage metric finished Q4 at two one times EBITDAR, which is below our historical objective of two five times EBITDAR. However, we remain committed to this objective we expect to return to the two five times target due in FY 'twenty three.
So to wrap up we remain committed to 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 with growing our market share and improving our competitive position in a disciplined way and as we look forward to.
FY 'twenty three we're bullish on our growth prospects behind our resilient DIY business and a fast growing commercial business that is continuing to grow share.
Continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders and with that I'll turn it back to bill. Thank.
Thank you generics as we start a new fiscal year I'd like to take a moment to discuss our operating theme for the new year last night, we kicked off our national sales meeting with our Amazing President's club winners our very best store managers. This week, we will embrace our theme for the year accelerate together we are very excited.
Our field leadership team in Memphis for the next four days and I cannot wait to congratulate everyone on their year and thank them for their phenomenal results. They delivered exceptional results in fiscal 'twenty, two and we remain focused on superior execution and customer service heading into fiscal 'twenty three.
Our culture was built on providing exceptional service and this is what we will continue to define our success well into the future.
As we've accelerated our top line, our competitive positioning has materially improved and customer behavior may have permanently changed post pandemic.
If this hold true it will be the fourth time in the last 30 years that the economy and society have had significant shocks leading to material acceleration in our growth in sales and profits without a corresponding decline back to pre recessionary or pandemic levels.
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Our industry is unique and it is a very long track record of strong performance with high returns and consistent cash flows.
We would also encourage you to migrate to studying our performance on a one year comp basis to gauge our performance as we believe the business is steady enough to talk about year over year comps going forward.
This time of year I always enjoy reflecting on the past this year in particular, it's a rewarding experience.
Our team delivered some.
Really impressive milestones.
$16 $3 billion in sales racing passed the $15 billion milestone.
DIY comps of two 9% most impressively 21, 6% on a three year basis.
Commercial sales blew past 4 billion ending at $4 to $3 billion.
Average weekly sales domestically, a $46 $3000 per store per week equating to over $2 4 million per store annually.
Our Mexico and all data teams both broke numerous records and Brazil is poised for significant growth in store count.
We bought back a record breaking four $4 billion in Autozone stock.
And our team has grown our EBIT by roughly 50% in three years, yes, that's five zero and that is remarkable.
But we can't rest on our laurels and we aren't without our challenges that's for sure our greatest challenge, which we will spend time discussing this week with the team is quote exiting pandemic mode.
In addition to our fanatical customer focus and our phenomenal culture, a huge part of our historical success has been flawless execution.
In all candor, we havent been flawlessly executing in the depths of the pandemic it was impossible and our teams appropriately made trade offs.
We have to ensure that some of those trade offs do not result in quote new norms are worse numbness or bad habits.
Those new norms can't and won't be tolerated, we have to make sure our in stock levels finally recover to our historic levels and they recover soon our vendors must return to providing us with the right amount of merchandise at the right time.
<unk> store has to be staffed right every hour of every day.
<unk> is need to function correctly always we have to meet our store opening goals and timelines simply put we have to remain the execution machine. We have always been an exit pandemic mode.
I've had the honor of being part of this team for nearly 28 years now and it has been one of the great privileges of my life I could not be more proud of our autozone or across the organization for their commitment to passionately serving our customers.
We must continuously challenge ourselves during these extraordinary times.
<unk> positioned our company for even greater future success and rest assured we're doing just that.
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 our team at Autozone.
Now, we'd like to open up the call for questions.
Thank you Bill.
And gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your handset now.
We ask that you would limit your questions to a maximum of two per person.
If you wanted to stay on a speaker phone. Please ensure you pick up your handset to provide optimum sound quality. Please hold while we poll for questions.
Thank you. Your first question is coming from Bret Jordan of Jefferies. Bret. Please ask your question.
Hey, good morning, guys morning, Bret.
On the supply chain comment could you maybe give us an update where we are as far as bill rates go and the cadence of improvement it does seem talking to some commercial customers finding parts is still a bit of a challenge.
Thank you Brett it's still there is still quite challenging and it's moved I've talked about it over time it moved from one category to another one most of our hardware hard part categories. We're in pretty good shape and we have some challenges in areas like filtration.
But generally we are in pretty good shape, but we're still a couple of points behind our overall in stock rate that we had before the pandemic. It is it's been very stubborn frankly.
We're looking to push through it but every time, we think we've got it solved another category rears its ugly head.
And then on the prepared remarks, you mentioned priced right at obviously, a big topic. This year are you seeing anything in the market pricing whether it be in the DIY against the non traditional as is anything changing changing in pricing cadence.
No we're not seeing.
Anything changed in terms of pricing cadence, we've been very disciplined about the <unk>.
Pricing that we put into the marketplace again, we've been pricing to recover inflation.
<unk> been doing that pretty consistently and as I've said before our industry has been very disciplined over time as it relates to this and we're not seeing anything that drove this out of whack there.
Thank you.
Thanks, Brett.
Thank you very much. Your next question is coming from Stephens <unk> of Citi. Steven Please ask your question.
Great. Good morning, everyone. Thanks for taking my question. So my question was on the DIY side of the business you cited resilient expectations for this year and thinking about the business on a one year basis do you see the potential to comp positive again in fiscal 'twenty three and within that context, you cited some weakness on the discretionary side, how do you expect that to perform over the balance.
For the year now that gas prices have come down a bit.
Sure well first on the on the latter part of the question, we addressed it a little bit in our prepared remarks that when gas prices were $5.50 a gallon on average across the country. We saw an immediate reduction in our discretionary products as those gas prices have come back down we've seen discretionary products improve.
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You have to be careful because it's such a small part of our business but.
But we've certainly seen it improve astro whether or not we can see positive comps in DIY for FY 'twenty three as you know we don't give guidance.
There's a lot of uncertainty in the marketplace with inflation with rising interest rates and the like but I will tell you I'll answer it this way.
This latter part of the fourth quarter was much stronger than we were expecting it to be in June and July and so that gives us some confidence that at least for now the DIY business is really quite strong and frankly as strong if not stronger than we thought it would be back in the early months of the summer.
Okay. Thank you.
All up I had was just thinking about the commercial business from a higher level.
Blown past the $4 billion sales target that you had how should we think about the multi year path for that business and I guess what are the strategy here focused on for the next chapter of growth.
Yeah, I think the I think the strategies that we're focused on for the next chapter of growth are the same ones that we've been working on for about five years.
We're going to continue to make sure that we've got the best coverage in the marketplace that is that considered as being in the best situation in the local store. It also means expansion of hubs and Mega hubs, we've talked about growing our our mega hubs from today's 78 to 200. So we are just over.
Just under 40% of the way there and we're moving pretty quickly.
Same kind of trajectory on the hub stores.
Around 200, and we want to get to 300 of those so we have lots of growth still in front of us on hubs and Mega hubs and we're continuing to test new philosophies and new coverage even in those we're going to continue to focus on the <unk> brand.
We're leveraging technology to make our people more efficient and to reduce our delivery times were always making sure that we're priced right. We've got a lot of different strategies and that's the thing to me Thats. Most encouraging is not one single thing Thats, making this happen, it's a holistic substantial improvement in our competitive <unk>.
Physicians in the marketplace at the end of the day, we got around 4% share in commercial.
I said on the call today is the first time, we've ever said that we want to win and be the largest in both sectors and it's going to take us a while but thats our goal and I'm very pleased with the progress that we've had with 20% growth over six consecutive quarters, that's pretty phenomenal regardless of how the.
Industry is growing.
Very helpful. Thank you.
Yes. Thank you.
Your next question is coming from Simeon Gutman of Morgan Stanley . Please ask your question.
Good morning, everyone I'll be the LIFO person for the call. So the LIFO charges because of freight noncash. If you look out 12 to 18 months.
Do you get back all the charges to earnings either freight subsides or you or you take credits or are you actually just raised price when that when overtime to recoup this.
Yes, I mean, so what we're what we're modeling right now as we said is up to a $100 million.
In the first quarter due primarily to higher freight we are starting to see freight moderate some in the spot markets. However, what I'll remind you is that when we were in this environment of trying to make sure that we had capacity.
We were incurring higher freight charges, just so that we can secure capacity so as.
Those short term contracted capacity.
Dynamics happened from freight start to roll off will start to see the benefits of what we're starting to see in the marketplace, which is a moderating.
Freight market.
You could see this in the back half get better barring any disruptions, but right now from a forecast standpoint, we're modeling somewhere in the neighborhood of close to $100 million in the first quarter and something similar in the second quarter from a pricing standpoint, what we've said is that when there is hyper inflation on things like freight where for example.
Container cost went up seven X, what we normally pay.
And then spike back down.
Overtime <unk>.
Typically don't priced.
Recover those kinds of spikes. What you do is you wait for the market to sort of moderate and your price accordingly to what you see the long term impacts are going to be so we're continuing to price in a disciplined way we're monitoring what's happening in the freight markets. It will come back it's already starting to come back and what Youll see is that we will get credits coming.
Back through the P&L to offset the charges that I've talked about for the first and the second quarter and then as we get back to a normal.
Market conditions, Youll see us rebuild that reserve balance overtime.
Okay.
I'll ask something different for the follow up if you look at the unit.
In DIY.
They're probably negative.
So can you talk about the stack, there, whether it's stabilizing and thinking about reversion or even elasticity.
The DIY units do they stay negative or they work back to flat through fiscal 'twenty three.
You know Simeon you followed us for a lot of years and you've heard me say many times that the dirty Little secret of our industry is that there is downward pressure on units and have been for decades, So oftentimes will be down 3% or 4% in units and customer count a lot of that is driven by improvements in automobile.
<unk>.
So.
The Easy example is spark plugs you used to buy Sparkplugs and they were copper spark plugs and they would last for 30000 miles now you buy uredium spark plugs and they last a 100000 miles now.
The old copper spark plugs used to cost 59 cents now iridium oftentimes over $10. So there is an upward pressure on cost per piece price per piece and a downward pressure on units.
Our downward pressure in the fourth quarter was more exaggerated than it typically is.
Mainly because of the incredible performance that we've seen over the last three years I think there's been some moderation. There was also a little bit of moderation as we said because of the.
Discretionary items accessories, and the like is that helpful.
Yep that's all.
I appreciate it thanks, good quarter alright.
Alright, thank you.
Your next question is coming from Michael Lasser of UBS, Michael Please ask your question.
Good morning, Thanks, a lot for taking my question.
Thank you.
I'll provide guidance, but in light of the $100 million LIFO charge this quarter and next quarter, coupled with rising interest expense and what look.
Slightly higher tax rate year over year.
Yes.
This is going to be.
So the algorithm year Nathan.
Comp in a traditional 3% to 4% range and buyback.
Similar amount of stock that you had been buying back.
From an operating standpoint.
We will be spot on the algorithm that we've typically had.
You do have some dynamics associated with LIFO this year.
Where if you model in a couple of quarters.
LIFO charges in the $100 million range it will have a.
Non operating.
Impact on our gross our gross margins. So if you're thinking about modeling it that way then certainly that potentially the case.
But we'll come back to you we'll be very transparent about what we're seeing as we said, we're starting to see some moderation.
And and the dynamics that are causing us to take a LIFO charge as we.
We get through the first and the second quarter, we could see some moderation there and that could change how you ultimately end up for the fiscal year, but what I want to make sure that people understand that this certainly is an operational.
Deficiency, it simply noncash LIFO accounting.
And we're continuing to run the business in a very disciplined way, which means that as we've seen.
Pricing impacts in our product costs, we're continuing to take pricing will continue to drive our growth initiatives, we're going to be a very strong cash flow generator and the most important part of the operating model in our mind is that cash is going to mean that we're going to invest in our business and we're going to return a meaningful amount of that to shareholders. This year.
Jimmy let me jump in and amplify a couple of points to first of all I've been involved with this company since before we went public and $19 91. This is the first time, we've ever had a LIFO charge period. These are uncertain times of unique dynamics, especially with the level of inflation.
That we've seen in cargo freight going from $1800 to over $20000 per container those numbers have moderated significantly now, but we do have some long term some mid term contracts call. It six to 12 months, where we had to.
Secured capacity.
It is our full expectation that I don't know if that will happen this year or not it's going to depend on freight costs. It is our full anticipation whatever.
Charges, we take in Q1 and Q2 ultimately will be reversed.
And we will go back to zero and then we will start building.
LIFO reserve that we don't record. So we think this $100 million to $200 million charge will be temporary and it will reverse in <unk>.
It could be at the back half of this year could be next year, but that is fully our expectation.
Okay. So.
Just to clarify your point being yes for maybe this year on a GAAP basis, Youre EPS algorithm might be a little bit lower than it's been historically, but that's just a GAAP reporting number the cash flow characteristics of the business aren't changing in so if that's the key.
Correct interpretation is it fair to assume that eventually the gross margin can get back to 52%.
We're at or better over time as this accounting situation reverses and perhaps do you start to see the benefit of deflation in your product costs, while you keep your retails flat or growing.
Yes, I don't want to specifically say, 52% gross margins is what the future's going to look like as you have seen there are pressures on gross margin as we continue to grow this commercial business at such an accelerated rate.
That pressure is likely going to continue.
But just like you said the GAAP charge, let's just say it was $200 million for the first half of the year.
A year from now or 18 months from now you are also going to have to think about when that $200 million comes back through the P&L and so we would encourage you to look at it.
Excluding the LIFO charges, both as its a penalty for us now and when it's a benefit for us whenever that happens.
Understood. Thank you so much good luck.
Thank you.
Your next question is coming from Scot Ciccarelli from Jewish Securities Scott.
Ask your question.
Good morning, Scot Ciccarelli.
So I guess I have another question on kind of the same SKU inflation outlook I mean, while you guys are still seeing double digit same SKU inflation year over year comparisons do you start to become much more difficult over the next few quarters. So how should we think about the comp cadence at those.
Comparisons start to become more difficult.
Well from a comp cadence standpoint, a couple of things out.
You too is remember the first two quarters of last year, we have well over 13% domestic comps and those are.
Toughest two quarters from a comp standpoint.
And then you start to see that.
Comp sort of moderate in the back half of the year and we encourage you for the full year to look at our comps on a on.
On a year over year basis.
And the things that we've talked about it.
William DIY business, albeit in a market place that has some volatility and some uncertainty associated with it we've been very disciplined on our growth initiatives are delivering and then.
Probably the most important part of our story is the commercial story.
We're continuing to see accelerated growth in commercial driven by all the initiatives that bill talked about and the fact that we're a four or five share and a and a large.
<unk> growing market. So that's how you should think about our comps and again the first half comps, obviously youre going to be a little bit tougher just given the fact that we printed over 13% in the first two quarters of last year.
Yeah. That's helpful. And then just a quick follow up here does the increasing interest rates and higher insurance costs change your expectations at all for your debt to EBITDAR target there, maybe how aggressive you plan to be on your buyback program.
They don't a couple of things I'll point you to one is we've been at roughly a two one times metric.
We have a lot of dry powder to get back to our two five times metric.
We continue to stress it as we move through this period, where our business has grown on an accelerated basis and we have confidence in our growth prospects going forward and we're going to move back closer to or at that two five times target. So that gives us a lot of financial firepower to first of all invest in our existing app.
Assets and grow our business, but also to get meaningful amounts back to our shareholders. So youll see us continue.
To drive free cash flow and get our leverage metric back to the two five times and that means that we'll be able to do some exciting things for shareholders in the future.
Got it thank you.
Thank you.
Your next question is coming from Kate Mcshane of Goldman Sachs. Please ask your question.
Hi, good morning, Thanks for taking our question.
We wondered within <unk>.
If youre seeing similar demand trends from national accounts and independents.
And also in the ISR, how is private label playing a role in this expanded business is it becoming a higher percentage of your mix.
Yeah terrific questions Kate I'll take that.
The last one first <unk> continues to perform exceptionally well in the <unk> sector, we've rolled it into more categories in the last few years, we've rolled it into shocks and struts, we've rolled out a dour last gold type performance chassis program and we've rolled out <unk> elite brake pads each.
Each of these have been well received in both the retail and the commercial market, where 10 years ago, everybody would say we couldn't be successful in commercial because of the <unk> brand I think the exact opposite is true it has become a real strength for us.
Remind me the first part of your question started.
Just demand trends from national accounts and independents, yes, sorry.
I think they are very very similar both are doing very well.
There's not a discernible difference between the two right now.
Thank you.
Thank you.
Your next question is coming from Daniel <unk> with Stephens incorporated Daniel Please ask your question.
Yeah, Hey, good morning, guys. Thanks for taking my questions.
Bill you discussed your new supply chain investment I think it's on the west coast for direct importing obviously direct importing it tough, especially with bill rates are so important.
There's been some changes on your merchandising management internally. So he can walk through the pros and cons of big growing the direct import business, maybe how you manage that risk in supply chain backdrop.
Yes first of all we Ben Thanks for the questions terrific. We've been direct importing for years, we've got a strong team of people.
In.
China today, and import from China, and Taiwan, and Vietnam in Turkey, and India. We've got a very robust direct import program that will continue to grow and it's been a very important part of us managing our product cost over long periods of time.
What we're doing today is we're going to make it more efficient for us. So we've opened.
In the beginning stages of opening of direct import facility in.
In California, we also.
<unk> announced that were going to be opening a new distribution center in new can't Virginia and attached to that new distribution Center will also be a direct import facility. What this is going to allow us to do is continue to import but instead of having to buy in quantities that are going to ship from China, or Turkey or India.
By distribution center, we're going to slow them into this direct import facility and it allows us to do postponement on the allocation of the inventory about probably 45 days, which will make us be able to reduce our safety stock in a significant way and make us more efficient I'm really excited about this new program.
Thanks for all that color and engineer one follow up on the SG&A side.
<unk>.
Do it for me or commercial delivery costs are actually in that line. So can you talk about maybe on a store level basis, what the SG&A initiatives are that you're implementing just impressed you are able to leverage that despite the growth in commercial so trying to understand what's happening on the the noncommercial delivery kind of the core SG&A side of the business.
We've continued to run.
The playbook that we've always run inside the company on SG&A, where we're very disciplined about costs, we tend to try to run our SG&A line.
To be somewhat close to what we're seeing from a sales standpoint, and so there is a laundry list of tactics that we run every single year.
To make sure that we're delivering productivity from an SG&A standpoint.
Every function is involved in that so it isn't just the store functions that are a part of that and those are the things that are quite frankly gives us a lot of confidence that we're able to manage that line item in line with what we're seeing on the topline over time naturally from a payroll standpoint.
We've continued to invest in the payroll line.
To deliver.
To deliver on the customer experience that our customers expect and as the sales growth has been accelerated we've tried to make sure that we put the hours in the labour ended up into our.
In our stores to be able to deliver on that promise and that experience and it's been successful for us and quite frankly, it's driving our topline growth.
Great. Thanks, so much for all the color best of luck.
Thank you very much. Your next question is coming from Greg <unk> of Evercore, Greg. Please ask your question.
Hi, Thanks, and congrats on a great year and quarter guys. Thanks.
Thanks, Greg Thanks, Greg.
Inflation number of 11% for the company.
In DIY is the ticket was up eight is it fair to say that the difference between the 11 in the eight is all just items in the basket of DIY or is there some.
There's our inflation thats less than retail.
Basket, it's basket of mix, that's driving the difference there.
Okay. So I should assume inflation is the same.
And DIY.
All right.
Got it and then the second question is and maybe it ties a little bit into the margins on LIFO.
Any any thoughts in terms of how far AP to inventory can go any changes in terms there.
You did would that help you get some more of these products in certain categories. How should we think about the AP to inventory ratio.
Well, we have a strong program.
That are driving the AP to inventory numbers.
The other thing I'll point to is that our terms are.
Elevated relative to where we've been historically.
One five times versus probably being somewhere in the one two to one three times and that's given us.
Some goodness there in terms of the AP to inventory ratio.
It may move around a few points or so, but we're going to continue to be aggressive on the programs that we've that we've put in place.
Got it and then my last one would be trade down.
Is there any sign of that you talked a lot about the strength in commercial enduro last Golden elite, but if you look across the box, including DIY are we seeing consumers starting to.
Shift anywhere.
It's a great question, Greg and something that we have been studying really since probably may we have seen it at times on the margin, but really I mean, we really look forward hard we have not seen it in mass by any stretch of imagination at this point in time.
Got it well good luck.
Alright, thank you.
Okay, I'm going to hand back over to Bill now we have finished the question answer session.
Okay, well before we conclude the call I just want to take a moment to reiterate that we believe our industry is in a strong position and our business model. We know 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.
I want to stress again that is a marathon and not a sprint as we continue to focus on the basics and strive to optimize shareholder value for the future. We are confident autozone will continue to be very successful. Thank you for participating in today's call have a great day.
Yeah.