Q2 2023 Autozone Inc Earnings Call
Greetings welcome to Autozone for 2023 Q2 earnings release Conference call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Note. This conference is being recorded.
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 1095 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.
Other filings with Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations forward looking statements speak only as of the date made and the company undertakes no obligations to update such statements. Today's call will also include certain non-GAAP measures. The reconciliation of non-GAAP to GAAP financial measures can be.
Our press release.
I will now turn the conference call over to your host Bill Rhodes, Chairman, President and Chief Executive Officer, Sir you may begin.
Good morning, and thank you for joining us today for Autozone is 2023 second quarter Conference call with me today are Joe Jackson, Executive Vice President and Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax regarding the first quarter or is that an opportunity to read our press release and worried about the quarters result.
It's 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'd like to thank and congratulate our autozone is across the company for their commitment to delivering exceptional customer service.
For the second quarter, our team delivered total sales growth of nine 5% versus eight 6% in the first quarter in line with our expectations. We were pleased with this performance as we were up against 15.8% total sales growth in last year's second quarter.
We could not have achieved these results without phenomenal contributions from across the organization.
Once again, our autozone as efforts generated double digit domestic commercial growth and single digit domestic retail same store sales growth.
As we move further and further away from the societal impacts experienced as a result of the pandemic. We are very pleased with our team's ability to not only retain the tremendous growth we experienced over the last three years.
But continue continue to grow on top of those phenomenal levels.
Our team is relentlessly focused on getting back to normal or as I call. It quote unquote exiting pandemic mode, we must get back to our well known and highly regarded flawless execution.
In all candor, we still aren't there yet.
So have to reignite our innovation engine, we have some very good initiatives in development in both retail and commercial and we have some significant improvements underway in our supply chain as we modernize and expand it for the next decade of growth and beyond.
We are halfway through our fiscal year and we are pleased with our performance so far more encouraging.
We feel good about the balance of the year and know our autozone or is are keenly focused on delivering great service and terrific performance.
This morning, we will review our second quarter same store sales DIY versus the ICM trends, our sales cadence over the 12 week quarter merchandise categories that drove our performance in some regional call outs.
We will also share how inflation is affecting our costs and retails and how we think inflation will impact our business for the remainder of our fiscal year.
Let's now move into more specifics on our performance domestic same store sales were up five 3%. Our net income was $477 million and our EPS was $24.64 a share increasing tenant 10, 5%.
Our domestic same store sales comp was on top of last year's 13, 8%.
And in line with last quarter's five 6% comp.
On a two year basis, we delivered at 19, 1% comp and get this on a three year basis.
34.3% stacked comp.
Our team once again delivered amazing results. Despite the comparison to last couple of years being the hardest quarterly compare for the entire fiscal year now let me spend a few moments on growth or growth dynamics in the quarter our growth rates for retail and commercial were both strong with domestic retail sales up nearly 5%.
In domestic commercial growth north of 13%, we continue to set commercial quarterly records with $955 million in sales another impressive quarter as we generated 111 million more in sales than in Q2 last year.
On a trailing four quarter basis, we delivered just under $4.5 billion in annual commercial sales.
Up an amazing 19% over last year. We also set another Q2 record for average weekly sales per store at $14500 versus 13500 last year.
Domestic commercial sales represented 30% of our domestic auto parts sales versus 28% this time last year.
It was encouraging to see our transaction trends improving from last quarter, our retail transactions meaningfully improved and were down just two 2% for the quarter, while our commercial transactions were up mid single digits and improving.
Our average ticket in both retail and commercial experienced solid mid single digit growth.
Ticket growth decelerated from Q1, as we began to lap the acceleration in inflation, we experienced this time last year.
We're beginning to see signs of product cost and freight inflation slowing and.
And we expect to see these begin to return to historical norms overtime, where.
We are continuing to see two experienced substantially higher wage inflation than historically in the mid single digit range more than double our historical experience, while the staffing environment has substantially improved versus this time last year, we don't envision wage inflation abating soon as they are.
Continues to be regulatory and market pressures.
Well, we have to manage through these external forces our focus our focus continues to be on driving profitable market share growth, particularly in units and transactions.
Our growth initiatives are doing just that and include new store unit growth.
Improved satellite store availability.
Hub and Mega hub openings improvements in coverage.
Leveraging the strength of the <unk> brand.
Enhanced technology to make us easier to do business with and more efficient <unk>.
Reducing delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being priced right for the value proposition we deliver.
Our goal remains over time to become the industry leader in both DIY and commercial.
Our strategy execution and market momentum give us confidence as we move forward.
Digging deeper into our domestic DIY business. This past quarter, we delivered a positive two 7% comp on top of last year's eight 4%.
Our DIY results were similar to last quarter's results on a one year and two year basis and accelerated on a three year basis.
As previously said our ticket growth was up 5% versus last year, and we're pleased with our transaction count trends improving as we reported transactions down just 2%.
These results are very strong considering the difficult comparison to last year.
From the data we have available we continued to retain the majority of the dollar share gains we built during the pandemic and we continue continue to grow unit share.
A critical measure measurement of our success our performance gives us continued conviction about the sustainability of our sales growth for the remainder of the year.
As we've shared forever or second quarter is always the most volatile sales quarter due to the holidays, there timing shifts and more importantly, whether specifically.
Extreme temperatures.
Which all can have a tremendous impact on our weekly sales.
This quarter was no different with softer sales at the beginning of the quarter when the weather was mild and wet followed by a large spike around Christmas with the very cold temperatures the country experienced.
We exited the quarter with normalized growth rates.
We do believe we had enough harsh winter weather that we won't be talking about the lingering effects of a mild wet winter weather or mild winter for the next several months.
Our attention has now turned to tax rebate season, which historically dress enormous demand in our category.
Regarding our retail merchandise categories, our sales floor outperformed hard parts with approximately a one 5% difference between them our relative outperformance in sales four categories is attributable to the discretionary categories improvement.
As gas prices naturally have come down and consumer has shown surprising resiliency, our discretionary categories performed better.
The discretionary categories represented approximately 18% of our DIY sales in the quarter.
We were encouraged to see our battery oil and wiper categories performed well and successfully lapped very strong performance last year at.
These categories have exceeded our expectations all year, our friction category for both DIY and commercial performed below our expectations for much of the quarter. However, it bounced back late and we are encouraged by our recent trends.
We believe both our sales floor and hard parts businesses will continue to do well. This spring as we expect miles driven to continue improving while our growth initiatives continue delivering solid results.
Can you also address pricing.
In Q2, we experienced high single digit pricing inflation in line with cost of goods. We believe both numbers will decrease in the current quarter as we begin to lap the onset of high inflation last year.
To be clear, we do not believe inflation is going away, especially wage inflation, but expect it to slow a bit as the economy slows.
I want to highlight that our industry has been disciplined about pricing for decades, and we expect that to continue.
Most of the parts and products, we sell in this industry have low price elasticity, because purchases are driven by failure or routine maintenance historically as costs have increased the industry has increased pricing commensurately to maintain margin rates increasing margin dollars.
It is also notable that following periods of higher inflation, our industry has historically not meaningfully reduced pricing to reflect lower costs.
Over the last three years, we've encouraged investors to keep a keen focus on our two and three year comparisons.
As we return to normal we believe our year over year comparisons will be more and more relevant.
While it's difficult to predict sales were.
We are excited about our growth initiatives, our teams improving execution and the tremendous share gains we've achieved in both sectors.
For our third quarter 2023, we expect our sales performance to be led by the continued strength in our commercial business as we execute on our differentiating initiatives combined with the resilient DIY business.
We will as always be transparent about what we're seeing and provide color on our markets and performance as trends emerge.
Before handing the call to <unk> I'd like to give a brief update on our supply chain initiatives I'll start with our in stock position I spent several quarters talking about how we were not back to where we were pre pandemic.
Pleased to report we are continuing to improve and are very close to our targets are.
Our merchandising and supply chain teams have worked diligently and creatively to get our levels back up and we've made enormous progress there are still a few categories, where we're not where we want to be but we will we have line of sight to putting this behind us.
This has taken a lot of effort by our vendor community and I'd like to publicly thank them for their tremendous efforts as well.
We know this will pay future dividends.
Second our supply chain initiatives that are in flight to drive improved availability are on track.
One we have often highlighted as our expanded hub and Mega hub Rollouts, we know intelligently, placing more inventory in local markets closer to the customer will lead to our ability to continue to say, yes to our customers more frequently and in turn drive sales.
Additionally, we previously announced the development of two new domestic distribution centers and additional capacity in Mexico. All three efforts are under construction and are expected to be completed by early fiscal 2025.
These distribution centers will allow us to not only reduce drive times to stores, but also increase our capacity with.
With their tremendous sales growth we've experienced since 2020, the additional capacity will enable us to carry more slower turning inventory that is not yet in high demand.
I am excited that.
I'm also excited we opened a facility on the West coast recently to handle direct import product on a timelier and more effective and efficient basis. This new west coast facility is already paying dividends by allowing products ordered abroad to be distributed to our other dcs to reduce safety stock and drive productivity.
Our supply chain strategy is focused on carrying more products closer to the customer and we believe it has been a significant contributor to our recent sales success, especially in commercial.
Simply put every time, we intelligently AD inventory to our network our sales grow.
Lastly, we plan on continuing to grow our business in Mexico, and Brazil, and almost 800 stores combined across the two markets. These businesses had impressive performance again this quarter and they should continue to be key contributors to sales and profit growth for decades to come.
We're leveraging many of the learnings we have in the U S to refine our offerings in Mexico, and Brazil, and Brazil. In particular, we are targeting to expand our store footprint significantly and aggressively over the next five years, we are very excited about our growth prospects internationally.
We are dedicated to growing our business in a disciplined and profitable manner well into the future and we know with our Autozone is leading the charge we will continue to be very successful.
Now I'll turn the call over to <unk> Shamir.
Thanks, Bill and good morning, everyone. As Bill mentioned, we had a strong second quarter stacked on top of exceptionally strong comps from last year. This quarter, we delivered five 3% domestic comp growth of six 9% increase in EBIT.
10, 5% increase in EPS to start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q2.
For the quarter total sales were just under $3 $7 million up nine 5%, reflecting continued strength in our industry and solid execution of our growth initiatives and let me give a little more color on those growth initiatives, starting with our commercial business for the second quarter, our domestic difm's sales increased just over 13% to.
<unk> $955 million and were up just over 45% on a two year stack basis.
Our results for the quarter set another record for the highest second quarter weekly sales volume in the history of the chain.
With national regional and local accounts. This quarter, we opened 41 net new programs, finishing with 5500 total programs as expected commercial growth is leading the way in FY2023 and we continue to deliver on our goal of becoming a faster growing business.
Our strategy and execution continue to drive share gains and position us well in the marketplace. We've delivered double digit sales growth for the past 10 quarters. In addition, we are increasing the penetration of our market, leading all data shop management diagnostic and repair software suite to new and existing commercial customers, which gives us yet another.
Their key competitive advantage and as I have noted on past calls our Mega hub strategy is driving strong performance and positioning us for an even brighter future and our commercial and retail businesses. Once again I'll add some 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 81.
One mega hub locations with one new one opened in Q2, while I mentioned, a moment ago. The commercial weekly sales per program average was $14500.
81, Mega hubs averaged significantly higher sales than the balance of the commercial footprint and grew significantly faster than our overall commercial business in Q2.
Pension of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business.
These assets are not only performing well individually, but the fulfillment capability for the surrounding autozone stores is giving our customers access to thousands of additional parts and lifting the entire network.
We're targeting 25, new Mega hubs for FY 'twenty, three and we remain committed to our objective to reach 200 Mega hubs supplemented by 300 regular hubs, we continue to leverage sophisticated data analytics to expand our market reach placing more parts closer to our customers and improving our delivery times.
We will build on our strong momentum over the remainder of the fiscal year.
Our domestic retail comp was up two 7% in Q2. This business has been remarkably resilient as growth rates remained solid and we've managed to continue to deliver positive comp growth. Despite underlying market headwinds as bill mentioned, we saw traffic down two 2% from last year's levels. However, they improved sequentially.
From Q1, where traffic was down 4%. We also saw a 5% ticket growth as we continue to raise prices in an inflationary environment.
Our DIY business has continued to strengthen competitively behind our growth initiatives. In addition on a macro basis. The market is still experiencing a growing and aging car park and a still challenging new and used car sales market for our customers. These dynamics pricing growth initiatives and macro carpark tailwind of <unk>.
A positive comp despite tough comparisons from last year's stimulus injection and consuming and consumer discretionary spending pressure from overall inflation in the economy. We are forecasting a resilient DIY business for the remainder of FY2023.
Now I'll say, a few words regarding our international businesses, we continue to be pleased with the progress, we're making in Mexico and Brazil. During the quarter. We opened one new store in Mexico to finish was 707 stores and five new stores in Brazil, ending with 81 on a constant currency basis, we meaningfully accelerate ourselves growth in both countries.
Your growth rate than we saw in the overall business, we 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 11% of our total store base currently outside the U S and our commitment to continued expansion in a disciplined way international growth will be an attractive and meaningful contributor to autozone future growth.
Our bullish on international growth and as Bill mentioned earlier, we're adding distribution center capacity in Mexico to improve our competitive positioning in the market.
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 69 basis points and included a 27 basis point headwinds stemming from a noncash $10 million LIFO charts. The.
The difference for the quarter a decline of 42 basis points in gross margin was driven by supply chain costs in our faster growing lower gross margin commercial business.
With this quarter's LIFO charge, we have taken a LIFO credit balance to $106 million as I mentioned last quarter hyperinflation and freight costs as a primary driver for the charges both.
Both the first and second quarter actuals are below the outlook. We gave at the start of each quarter as freight costs have continued to abate over the past few months and we expect this trend to continue as such we anticipate having minimal if any LIFO charges during the third quarter.
Spot rates have come down we have renegotiated some of our long term contracts and the lower costs are reflected in our outlook.
We plan to take P&L gains only to the extent of the charges, we've taken thus far and after we've taken P&L gangs that fully reverse the charges. We have incurred we expect to rebuild our unrecorded LIFO reserve balances we've done historically.
Now moving to operating expenses, our expenses were up eight 8% versus last year's Q2, as SG&A leveraged 24 basis points versus last year.
Our operating expense growth has been purposeful as we continue to invest at an accelerated pace in <unk> and payroll to underpin our growth initiatives. These investments are expected to pay dividends and customer experience speed and productivity, we're committed to being disciplined on SG&A growth 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 $670 million up six 9% versus the prior year's quarter, excluding the $10 million LIFO charge EBIT would have been up eight 5% over last year.
Interest expense for the quarter was $65 $6 million up 54, 5% from Q2, a year ago as our debt outstanding at the end of the quarter was $7 million versus $5 8 billion at Q2 and last year. We are planning interest in the $72 million range for the third quarter of fiscal 2023 versus $42 million and last.
Higher debt levels and expected continuing higher borrowing costs are driving this increase.
This quarter's rate benefited 222 basis points from stock options exercised while last year's benefit was 401 basis points for the third quarter of FY 2023, we suggest investors model us at approximately 23, 4% before any assumption on credits due to stock option exercises.
Now moving to net income and EPS net income for the quarter was $476 $5 million up 1% versus last year's second quarter, our diluted share count of $19 3 million was eight 6% lower than last year's second quarter. The combination of higher net income and lower share count drove earnings per share for the quarter.
The $24 64 up 10, 5% versus a year ago excluding.
Excluding the LIFO charge, our net income would have increased two 6% and our EPS growth would have increased 12, 3%.
Now, let me talk about our free cash flow for Q2 for the second quarter, we generated $210 million in free cash flow versus $260 million a year ago.
To date, we've generated $900 million versus $930 million a year ago, we expect to be an incredibly strong cash flow generator going forward and we remain committed to returning meaningful amounts of cash to our shareholders regarding.
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 10, 7% versus Q2 last year and total inventory increased 13, 9% over the same period, driven primarily by inflation or growth initiatives and in stock recovers.
Net inventory defined as merchandise inventories less accounts payable on a per store basis was a negative $227000 versus negative $198000 last year and negative $249000 last quarter.
As a result accounts payable as a percent of gross inventory finished the quarter at 127, 7% versus last year's Q2 of 126, 8%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program, we repurchased $906 million of Autozone stock in the quarter and at quarter end, we had just under $1 8 billion remaining under our share buyback authorization.
Our strong earnings balance sheet and powerful free cash generated this year have allowed us to buy back 4% of the company's total shares outstanding since the start of the fiscal year.
Bought back well 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 our disciplined capital allocation approach that enables us to invest in the business, while returning meaningful amounts of cash to shareholders our leverage ratio finished.
Q2 at two three times EBITDAR and we remain committed to return to the two five times area during FY2023.
So to wrap up we continue to drive long term shareholder value by investing in our growth initiatives driving robust earnings and cash and returning excess cash to our shareholders. We're growing our market share and we're improving our competitive positioning in a disciplined way our strategy continues to work.
We look forward to the back half of FY2023 we're bullish on our growth prospects behind our resilient DIY business and fast growing commercial and international businesses that are growing considerable share.
Thank you Jim here.
We are proud of the results our team delivered in the second quarter.
But we must we must continue to be focused on superior customer service and flawless execution execution and our culture of always putting the customer first is what defines us.
As Jim Meer said, a moment ago, we continue to be bullish on our industry and in particular on our own opportunities for the remainder of the year. We will continue to invest in initiatives that drive an appropriate return on capital and we continue investing where our returns are the highest.
For the remainder of fiscal 'twenty three we are launching some very exciting initiatives. This year not only would be opening roughly 200 stores across the U S, Mexico, and Brazil, but we will be opening many more mega hub and hub stores.
For the remainder of 'twenty three.
We are keenly focused on relentless execution.
An exceptional execution in order to drive continued share gains.
We know that investors will ultimately measure us by what our future cash flows look like in three to five years from now and we welcome and accept that challenge I continue to be bullish on our industry and in particular on Autozone, which is led by autos owners now we'd like to open up the call for questions.
Certainly at this time, we will be conducting a question and answer session.
To ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, while we poll for questions.
Your first question for today is coming from Bret Jordan at Jefferies.
Under the talk of lower transportation supply chain cost, but higher wage inflation.
In this environment, where some of your inputs are going to come down and maybe you've got the opportunity to capture margin as is just customer prices stay firm.
Are we less likely to see this over our excess margin because we've got either price investment from peers or wage inflation that might offset some of the cost of good benefit.
Yeah, It's a fantastic question, Brett I'll start and Jim Meer, you're welcome to.
Build on it if you want to.
First of all I think it's important for you all to understand as we saw these enormous spikes in the freight costs, we did not pass all of those costs along.
I'll use brake rotors for instance, I mean, the the cost of shipping brake rotors from China to the U S were astronomical for a period of time, we couldn't pass all that cost on to the industry. So some of this is we will recoup some gross margin percentages that we that we didn't get in the midst of the freight issue.
As we look forward I think you had a separate the gross margin piece from the labor piece, we're going to continue to see elevated wage growth we've seen it now for probably five years Brett.
We will continue to monitor that our pricing is really more focused on what our product costs are and what those freight costs or.
We haven't seen the moves and actions by our nearing competitors impact our business really at all most of those moves quite frankly were targeted in much the same manner.
Our moves were a couple of years ago, which was how do we all improve our.
Competitive hand relative to the warehouse distributors. So we haven't seen much of an impact there and as a result of that we don't see it.
Need to make pricing actions to sort of counter whats being done in the marketplace by some of our newer competitors.
Okay, Great and then a quick question on all that I think you'd mentioned expanding the user base is there a way to make that up product selling tool as they use your shop management software is there, but we don't like it to your inventory or make it more transactional.
First of all at all data, we're very focused on providing value.
We are all data offerings to our customers at all the data. We also look for ways that we can enhance our commercial relationship at autozone with their customers. We've done a lot of that by cross selling.
Leveraging our two sales teams to generate leads for each other.
So far we haven't really integrated a lot with the call it up and down the street customer, but we have made some really meaningful progress with some of our national accounts and have some exciting things underway right now that helps integrate us more and more with them over time that certainly the vision that we have is how can we.
Alright, thank you.
Okay.
Hey, everybody good morning.
My first question is just around the improvement in transactions or ticket count I guess that coincides with less average ticket growth, but bill to your point, there really shouldn't be a lot of elasticity in this business since it's more need based right. So is there something else that you would point to that's driving that acceleration in transactions. Thank you.
So a great question frankly, I don't have a great answer for you as you know you've been following this industry for a long time, one of the Dirty Little secrets of the industry is that for decades and basically for the 28 years that I've been in this business Theres been transaction count declines.
They've gone down over time, because the technology that has gone into the parts and products that we sell have increased and therefore the price of those products have increased often used. The example of spark plugs back when I got in this business, we only sold copper clad sparkplugs and they were 59 cents and they would last 30000 miles.
Today, we sell Iridium Sparkplugs cost $11 99, and the last 100000 miles there's many many many examples like that.
Two 2% decline in retail transaction counts is historically very good I, just I would caution everybody as I've mentioned in my prepared remarks.
Q2 is our most volatile quarter every year and it is really driven by weather patterns and so I don't want to read too much into an improvement in Q2, we were very excited to see it lets see how we do in Q2 and Q3, we're also still going up against the massive surge in growth that we had since 2019 as a result of COVID-19.
Some of the sales growth that we experienced during COVID-19, we would give back.
We're sitting here and have been for the last year, saying I don't think we're going to give it back and now we're saying look we think we can grow from here and maybe have normalized growth rates and maybe even accelerate it slightly growth rates to what we experienced historically because of our growth initiatives. That's the way we're thinking about it that makes sense.
I guess when we look at your SG&A growth up high single digits is it fair to assume that you know that already reflects autozone investing in its people investing in its infrastructure does that already reflect some of those cost pressures that you're referring to.
Certainly does I mean, one of the things that we've been really clear about is that we're going to grow SG&A in a disciplined way as we create a faster growing business and the two ways that we've done that.
Maintaining high levels of customer service, you saw us do that throughout the pandemic and in place.
Great dividends for us during that timeframe. The other thing we've talked about is investing in a disciplined way and IP, which is enabling growth in both our DIY and our commercial business every one of our growth initiatives, whether it's on the retail side of the business or the commercial side of the business.
<unk> some element of improving that.
And those things have required us to accelerate some of our investments in IP, we like those investments they are improving the customer experience are also improving the experience for our autozone and quite frankly, we think we'll get.
Benefits in terms of productivity in the future.
Okay, great. Thanks very much.
Your next question is coming from Zach Sedum at Wells Fargo.
Hey, good morning could you walk us through the sequential performance for commercial and a little bit more detail as last quarter stepped down at touch on a multiyear basis, while this quarter bounced back nicely. So the quest.
<unk> could you walk us through what you think could be driving the fluctuation in the do it for me transactions from Q1, Q2, and then with the three year commercial compare looking a bit tougher is it fair to assume that double digit growth can sustain in the second half of the year.
Yeah, Great question. So a couple of things I'll highlight as I mentioned, we've had 10 straight quarters of double digit sales growth and quite frankly six of the last eight have been above 20%.
We like the competitive dynamics in the marketplace. Today, we also like the fact that we're underpenetrated.
And a.
Huge market, that's approaching $100 billion.
If we look at our business on a two year basis on a two year stack basis, we're up over 45% so.
We like where we are from a commercial standpoint, and all the initiatives that we have in place improving the quality of our Dura last brand expanding our assortments with our mega hubs, improving our delivery times, leveraging technology and the competitive.
Pricing dynamics that we saw in the marketplace. A couple of years ago that we addressed it gives us a lot of confidence about it. So we have been comfortably double digits, you've heard us say that our goal is to continue to grow that share and growing that share.
That we aspire to have a business that's growing double digits really as far as the eye can see.
Got it that's helpful and Jim here just to clarify your gross margin commentary you mentioned no negative LIFO impact in Q3 does that mean your LIFO balance of 106 remained stable in Q3, and Q4 or is it fair to expect that line to gradually or maybe.
Yes, so first on LIFO.
What we said is that we anticipate minimal if any LIFO charges in <unk>.
And by the fourth quarter, and certainly into FY 'twenty, four we could potentially see that.
It will take several quarters for us.
Work, our way through 106 million based on our current forecast today.
But we'll be very transparent about what we're seeing and what gives us this confidence quite frankly is that as I mentioned before we're seeing freight moderate.
And as such you know in the back half of this fiscal year barring any disruptions like we've seen in the past we're.
We're not expecting to take any charges against possibly see is flipping back the gains.
Terms of our gross margin run rate.
<unk> said that our commercial business is going to grow faster than our DIY business and that's going to put.
Let's call it 35 to 40 basis points of headwind.
On our gross margins going forward now that doesn't mean that you can expect our gross margins to deteriorate in the perpetuity. We're still running the same plays with intensity inside the company to drive margin improvement that will mute some of that if not offset all of it. So we feel pretty good about those initiatives, our merchants and our supply chain.
Teams are doing a tremendous job as bill mentioned before not only working on in stocks, but driving margin improvement and as some of the cost pressures ease in the marketplace and some of the cost pressures that are our vendors and suppliers have been seeing it gives us an opportunity to go work.
On margins in a more fulsome way going forward.
Got it thanks for the time.
Yep.
Your next question for today is coming from Scot Ciccarelli.
Securities.
Oh, Hi, guys I just had a quick question on the your.
Your your outlook for same SKU inflation for the rest of the year. I know you said you think it's going to moderate somewhat I was wondering do you think that would get to like the mid single digits or low single digit range.
Yeah, that's a that's a <unk>.
With our cost that I am not sure. We can answer that that seems like a reasonable assessment, but we're just going to manage through it just like we have you know we've gone through some pretty big cycles over the last 24 months and we're going to manage our business appropriately, whether it's 5% or 7%, we're just going to manage through it.
Got you that makes a lot of sense and then just a follow up on an earlier question I know you mentioned transactions kind of accelerated in the quarter kind.
And it really kind of offset some of the ticket detail do you think that could continue to happen or is there any data points do you think that that might not happen again in the second half I think that's a reasonable assumption. We hope we can continue to you know we want to grow transactions I talked about the challenges that are related to that but our goal is to grow transactions also mentioned in the prepared.
Remarks that were very focused on unit growth.
Aleve, that's the lifeblood of this organization and we're focused on how do we grow units over the long term in both our retail and commercial business and we've been very pleased with the unit.
Market share gains that we've had over the last three years and we're continuing to grow unit share even after the growth we've had over the last three years.
Great. Thank you.
Thank you.
Your next question for today is coming from Brian Nagel Oppenheimer.
Hey, guys good morning.
Good morning.
So my first question, it's a bit of a bit of a follow up to a prior question, but just with respect with regard to the commercial growth we've seen substantial growth there for a while.
As you move past the.
Effects of the pandemic and the growth rates moderate but still stayed very healthy.
Yes.
You look at some of the markets that are maybe more mature for autozone.
Always give you insight into either from a market share perspective, or more closer to a terminal type growth rate for that business.
Well terrific questions.
I want to be clear about one thing I don't believe the vast majority of the growth that we've seen in the commercial business over the last three years was a result of the pandemic. There's no question the outside growth in our DIY business was mainly attributable to the pandemic I don't think that was the case with commercial.
Sure. It had some positive effects, but I think what the strategy that we began to deploy about four years ago have really been the driver of our commercial performance now as we.
We continue to further and further mature on that strategy, we have seen some deceleration in our commercial growth, it's still fantastic, but it's not growing in the twenties. Our goal now is what's next and we're working on that even as we speak what are the next levers that we're going to pull to continue to grow in the commercial business.
Just a reminder, we've got mid teens market share in the retail business and we have about 25% or about 4% total market share in the commercial business. So we've got a tremendous runway in front of us when you talk about certain markets and what do we see we certainly have some markets that are.
More mature than others.
I would say the most encouraging thing to me is to see how broad based the acceleration has been in our 61 regions that we have across the United States.
But I was in a market last week.
Arguably our most mature market I'm not going to tell you where that is.
And it has significant hub coverage and it has significant mega hub coverage.
And in that market, we continue to grow at very rapid rates and so I am pretty.
<unk> optimistic as we continue to deploy the strategy of Mega hubs. So we still have we have roughly a little over 80 Mega hubs today, we're going to 200 and hopefully in short order and then we're going to get to 300 hub stores. So that'll be 500 stores in the United States with materially different product.
Since then we've had historically to me that is the biggest part of our strategy.
Now that that's very very helpful. Appreciate it and then just a quick follow up different topic.
We've mentioned in the prepared comments that you think the weather.
If you look at the weather and it seem to be very variable.
Across the United States. This year are you seeing it much in the way of it that's kind of spread your comps between those markets, which have been weather impacted versus those who have been less impacted.
Yeah, I mean, we always see that.
But what my point was we have been through years, where we just didn't have a wet winter and it's not just the spring frankly, it's as much in the summertime, where we just don't see the parts failures on the on the failure side of the business that we do historically in the maintenance side.
Snow and ice and colder all put stress on automobiles.
So that's what I was really getting at I do I do have a bit of caution right now ive talked about tax rebates that are flowing right now the one thing that I worry about a little bit is we haven't had great weather in the last week or so we need we need to get some good weather, so diyer skin crawl underneath their cars, while these tax rebates.
The year, when our customers have more discretionary dollars.
Very helpful. Thank you.
Yep. Thank you thanks.
Your next question for today is coming from Simeon Gutman.
At Morgan Stanley .
Hi, This is Jackie Stefan on for Simeon Congrats on a good quarter I guess first just on the used car cycle again that kind of seem to be ongoing tailwind for the industry.
Yes, so clear.
Clearly used cars are still in tight supply.
<unk> prices are up and we've seen prices moderate a little bit year over year.
Up 24% or so.
Over over a two year basis, I think the second dynamic associated with that is the fact that financing costs have gone up.
It's a recessionary cycle or it's a cycle, where new and used car prices spike.
Tend to hang onto their vehicles longer invest in.
Repairing those vehicles and ride to the other side of of tougher market conditions, and we certainly think that that's going to be the case. So while the prices have come down we still see a very tight market. That's out there today and quite frankly in a market that's significantly more expensive than what consumers experience prior to the pandemic.
Got it that's really helpful. Thanks, and just quickly another on the wage inflation I guess that kind of feels like the most stubborn cost pressure as you mentioned in your prepared remarks, you said way to.
There's no question that the cost the cost of doing business are structurally higher.
And I just wanted to be make sure up amplify this point our wage.
Wage rates are up double more than double what they normally are and that is stick to your ribs inflation it'll be with us forever.
But that's that's going to continue and it's been going on for five years not at this not at this level, we had acceleration before the pandemic and once the pandemic hit it went up significantly more but we've been able to manage it we're looking for creative ways like always to be more and more efficient, but we can't we can't drive.
That level of efficiency and a 43 year old business.
Without some kind of structural change, which we will be looking for but we haven't identified at this point in time.
And I just think from a macro standpoint, if you look at unemployment being at three 4% or so and wage rates being in the you know what.
A five handle on them and we're in a in a dynamic where the combination as bill said in his remarks, the combination of market pressures.
And regulatory pressures, which as you know an increasing push to raise minimum wage rates. This is an environment that we have to plan for in the future, but good news again about our industry is that you know as we've seen inflationary impacts whether its product cost or wages.
Right I mean, we have typically seen this be an industry that is very disciplined about passing those costs along to consumers given the relative elasticity of the demand for our bread and butter products.
We expect that to not cause our business to wobble at all.
Okay.
Your next question for today is coming from David Bellinger.
N K N.
Hey, good morning, Thanks for taking the questions.
Are you seeing differences across demographics, meaning is the discretionary improvement also occurring with your lower or call. It the lowest income customer base as well.
Yeah, I mean, what we've seen in total is that.
Our upper income consumers, but also the lower end consumers and again, that's because the lion's share of our of our business, our bread and butter categories. If you will or break fix failure maintenance related categories.
On effect of that is that you know to the extent that folks are.
Making purchases for those bread and butter products. If you will in the discretionary categories tender right along with that is is the basket gets built so.
We've been fortunate in that regard and the other thing that I.
Don't want to underestimate I actually Wanna underscores the fact that we've been very focused on our growth initiatives and our growth initiatives are about you know.
Driving more customers more purchase occasions for Autozone and as a result of that we're seeing.
The opportunity for us to continue to win some market share so some of that.
Sequential improvement that Youre seeing in traffic is actually the impact of some of the things that we've been doing from a gross growth initiatives to drive more customers into our store.
Thanks to Humira.
And my follow up on the.
4% market share you highlighted before in commercial.
Do you have a sense of where the.
The more mature markets are tracking in terms of market share and.
Should we think about that as potentially in the double digits at this point in a path to where some of these newer programs can get to in due time.
Yeah.
Definitely not in double digits in any markets that I'm aware of.
And that kind of ballpark, but look if we have 16% or whatever share in retail. My my thing is why can't we have that in commercial and that's the kind of thought process. We need to have I think one of our challenges is sometimes we think about where we are and it limits. What we think about the possibilities. We're trying to eliminate some of those glass ceilings.
And say why don't we have the same amount of share in both which would mean the commercial business would be meaningfully larger than the retail business.
And the good news for US is it's not just focused on new customers, but it is increasing our share of wallet with our existing customers and to Bill's point, that's where we're focused as a company is getting what we believe our fair share of what our entitlement should be we're pretty excited about those initiatives going forward.
Great. Thank you.
Thank you.
Your next.
Question for today is coming from Michael Lasser at UBS.
Good morning. This is to my story on for Michael Lasser, Thanks, a lot for taking our questions.
Our first question is on the commercial business.
Compared to last year, when we give our regulatory doing 20% plus.
Now going into 13% to 15%.
What has changed is it just fewer new customer additions are less ticket per customer.
But I think as I've said before I think part of whats changed is some of the massive improvements that we've made in our from our new strategy on commercial acceleration have matured more but theyre not mature and so we are I would just say it. This way we are very pleased with the commercial growth that we've experienced over the last six months.
As I also said we're looking for those next items that are in the next part of our strategy, they're going to drive accelerated growth.
We're continuing to win market share I mean, I would venture to say that the commercial market is not growing.
As fast as we're growing which the knock on to that is that we're growing market share and we're pleased with our progress.
Got it.
It makes sense. Thank you for that and then as a quick follow up I know you talked about tax refunds.
How are you thinking about near term trends given.
Some of the data source that tax refunds are lower year over year, and then there is potentially some headwinds from snap as well.
Yeah, we've never talked about snap I don't think that that's a big big part driver for our business are the data we have available to us shows that tax refunds are remarkably similar to the way they were last year and are slightly up.
We look at that data it usually.
It comes out on Mondays, and we see where the big drops happened last week last week was a big drop as it was last year on tax refunds, so as far as we're concerned we see everything on track.
We're hoping that we get some great whether thats very conducive to DIY and that those customers come to us.
Thank you good luck with the rest of the year.
Thank you very much.
Well before we conclude.
Sorry, I thought you were done.
I'll go ahead before we conclude the call I want to take a moment to reiterate we believe 2023 will continue to be a solid year for our industry and our business model is working we must take nothing for granted as we understand our customers have alternatives to shopping with US we have exciting plans that should help us exceed for the future, but I want to stress.
That this 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 successful. Thank you for participating in today's call have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.