Q4 2023 Autozone Inc Earnings Call

Greetings and welcome to all of those homes fourth quarter 2023, Cisco earnings release Conference call.

At this time all participants are in a listen only mode.

I had a question and answer session will follow the formal presentation.

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Please press star zero on your telephone keypad.

Please note this conference is being recorded.

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Our safe Harbor statement.

Before we begin please note that today's call includes forward looking statements that are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 forward looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent annual report on Form 10-K and other filings.

So the Securities 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 database 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 found in our press.

Release.

Yeah.

It is now my pleasure to turn the floor over to your host Mr. Bill Rhodes, CEO , Chairman and President Sir the floor is yours.

Good morning, and thank you for joining us today for <unk> 2023 fourth quarter Conference call with me today are Phil Danielle our CEO elect Jameer Jackson, Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax regarding the fourth quarter OPE, you've had an opportunity to read our press release.

Laurent 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 thank our autos owners for their incredible contributions during fiscal 2023 that resulted in our solid performance as our plains states. They continue putting our customers first which resulted in total sales growth of seven 4% for the fiscal year while earnings per share.

<unk>, 12.9%. It is important to remember that these results built on the same nominal three year performance from the pandemic years of 2000 22022.

Candidly, Phil Jameer, Tom Newbern, and I felt that at some point, we would see our sales per store migrate closer to pre pandemic levels.

That hasn't happened and at this stage, we do not expect it will.

To put it in perspective, our domestic average weekly sales per store are 33% higher than in 2019.

Growing from $35600, a week to $47300 a week.

This level of growth in sales also drove enormous growth in operating profit, whereas this year 3.474 billion with 61% above 2019, when adjusted for the 2000 1950, <unk> week that is remarkable growth, especially for a 44.

For your old enterprise, we could not have achieved this success without exceptional efforts across the entire organization.

We have several updates for you. This morning first I'm sure you've noticed a new table in our press release, we are now presenting our same store sales results for domestic international and total company. We're also reporting our international same store sales, which includes both Mexico and Brazil.

On both an actual and constant currency basis why the change the answer is international is becoming a larger and larger part of our business and we are investing a sizable amount of our growth capital in those countries as we evaluate important growth metrics. We think it is important to assess it in total.

As we know this is a change we are committed to providing you with each component individually for at least five quarters as our objective is to enhance your visibility.

Next our domestic same store sales were one 7% this quarter compared to one 9% last quarter and about half of our fiscal 2023 growth of three one our performance in retail with respectable and generally in line with our expectations, but as was well documented last quarter are.

Commercial sales performance in the second half of our fiscal year declined meaningfully.

To us unacceptably.

We ended with three 9% growth in domestic commercial sales our performance in both retail and commercial in the first half of the quarter was disappointing.

But during this period, we experienced very mild weather.

As we reach the second half of the quarter and temperatures escalated materially so did our sales specifically for the first eight weeks of the quarter, our retail comps were flat, but increased three 4% in the second half commercial experienced a similar trajectory ending particularly strong in the last four.

Our weeks of the quarter up over 7%.

Regarding regional results, we saw a material performance gap between the northeast and mid western markets versus the rest of the country. The total comp difference was well over 300 basis points and over 450 basis points for commercial we attribute this lack of winter with attribute this to.

The lack of winter weather and snowfall in the latter part of last winter in that region. This has led to lower growth trends in under car categories.

Both of those are things that happened to us not what we did to enhance and improve our performance last quarter. We highlighted that we were not executing at our peak levels. We have made many changes since then and are pleased with the improvements in execution. We are seeing we arent there yet, but we're on a really good path.

We also recently completed another strategic review of our commercial business, we have validated our direction and have some exciting new enhancements that we will be testing over the next few quarters. We also made significant improvements in the information technology that we use to operate our commercial business and we opened many more commercial.

Grams, reaching 90% domestic penetration for the first time in our history.

Even more encouraging is how strong those new openings are starting and how many many weeks are they are just a few weeks old.

Ultimately, we will operate in a favorable and unfavorable macro and weather environment, we want to share our perspectives with you. So you can understand our performance, but ultimately it is our actions that will determine our long term success and we are encouraged by the actions we're taking.

Finally, our strategy supporting our store operations and commercial teams includes several other key elements global new store growth, where we've disappointingly didn't achieve our goals in FY2023 more on that later.

Continued growth with our hubs and in particular Mega hubs, where we are nearing the halfway point of our ultimate goal of having 200 Mega hubs and 300 hubs. It is important to reinforce the continued very strong performance of these stores, especially the mega hubs and particularly in commercial.

Reconfiguring, our global supply chain to fish efficiently process. The enhanced sales, we've achieved and expect to achieve over the next decade, while optimizing our processes for handling more direct import products from many countries and more challenging slow turning parts assortments that are critical to.

Our success and finally, continuing to lean in hard on technology improvements to make our autozone are more knowledgeable efficient and effective.

I'm, giving you the high level soundbites on the quarter's results now I'd like to introduce Phil Danielle to give more in depth color on the quarter Bill.

Thanks, Bill and good morning, everyone I'm honored to be participating in my first earnings release conference call I will start by reviewing our Q4 overall same store sales.

<unk> versus D. I F M trends, our sales cadence over the 16 weeks of the quarter and merchandise categories that drove our performance as well as any regional disparities we.

We will also share how inflation is affecting our gross our costs and retails and how we think inflation will impact our business in FY 'twenty four.

Our domestic same store sales were one 7% this quarter on top of last year's exceptionally strong six 2% growth.

I do want to reiterate what bill said, a moment ago, our execution improved materially over the quarter and that execution, which is a hallmark of our success will ultimately deliver better results as we move forward.

Our domestic commercial business grew three 9% despite lower than anticipated. We believe we grew share and set another fourth quarter record with $1 5 billion in sales.

For the full year, we generated nearly $4 6 billion up eight 7% from last year.

Domestic commercial sales represented 30% of our domestic auto parts sales, which is identical to last year.

Our commercial sales growth continues to be driven by the key initiatives, we have been working on for the last several years.

Improved satellite store availability material improvements in hub and Mega hub coverage. In addition to aggressive growth in the number of those types of stores.

We continue to strengthen the Dura last brand with an intense focus on high quality products and we continue to deliver technological enhancements to make us easier to do business with.

We are also operating more efficiently with improvements in delivery time and enhance sales force effectiveness in.

In Q4, we opened 156 net new commercial programs opening the majority of them late in the quarter, which had minimal impact on sales, but positions us well for FY 'twenty four and beyond.

With these moves we now have commercial and over 90% of our domestic stores, we continue to see tremendous opportunity for commercial sales growth in FY 'twenty four and beyond.

We're also very proud of our performance in domestic DIY, we had a positive one 4% comp this quarter on top of last year's comp of one 1%. Additionally for the year, we delivered one 8% DIY on top of a two 9% DIY comp last fiscal year and an 11.

2% comp in FY 'twenty one.

These results are very solid considering the outsized growth we saw during the pandemic. The fact that we continue to retain the vast majority of the share we built during the pandemic and our recent performance gives us continued conviction about the sustainability into FY 'twenty four.

Now, let's focus on the sales cadence.

Over the quarter, which spanned 16 weeks early may through the end of August as Bill mentioned, our same store sales were flat over the first weeks.

But increased to three.

4% over the last eight weeks, we were encouraged by the trends we saw as the quarter ended.

Regarding weather in May and June we experienced cooler and wetter weather trends across the country, which negatively impacted our sales trends.

By July however, it became very hot across much of the country and it remained very hot through August .

The heat and the associated rebound in sales helped us partially overcome a relatively mild winter, particularly in the Midwest and the northeast where weather sensitive hard part categories underperformed our expectation.

We anticipate that the summer heat will give us some positive momentum as we head into fall as a reminder, historically extreme weather either hot or cold drives parts failures and accelerated maintenance.

Regarding the quarter's traffic versus ticket growth in retail our traffic was down <unk>, 8%, while our ticket was up 2%.

Our transaction count improved as the quarter went along and in fact turned positive over the last eight weeks of the quarter. However, the average ticket being up only 2% was the weakness weakest quarterly increase we've seen since FY 2000, as we lap significantly higher inflation, a year ago, where the ticket was up 8%.

Regarding commercial trends.

We continue to see traffic and ticket growth, but our commercial ticket growth just like retail has shown a marked deceleration compared to recent history is hyperinflation begins to abate.

For perspective, our ticket growth was 11% in Q4 last year versus roughly 2% this year as.

As expected some of our commercial customers are experiencing trade down and lower car counts as the consumer comes under economic pressure.

In order to continue to grow our comps in 'twenty four we will have to continue to increase share of wallet with our customers.

The share data, we see continues to encourage us that we're gaining share in the industry. Despite the macro trends, but recently not in line with our aspirations, which we intend to change.

During the quarter there were some geographic regions that did perform differently than others. As there always are this quarter. We saw a material 315 basis point difference between the northeast and the Midwest compared to the balance of the country with the northeast and the Midwest performing lower.

As the northeast and the Midwest experienced a very mild mild winter with below average snowfall we've seen.

Less weather sensitive hard parts in this part of the country headed into the first quarter of the new fiscal year, we're not anticipating that weather will have a significant impact on sales.

Regarding our merchandize categories in the retail business, our sales floor categories outperformed our hard part categories and our hard parts business was essentially flat for the quarter.

As I said previously weather sensitive hard parts were clearly impacted by the milder winter weather, particularly in the Midwest and the northeast.

Let me also address inflation in pricing this quarter, we saw low single digit inflation and as a result, our ticket average was up roughly 2%.

We believe inflation for the first quarter will be similar to the fourth quarter as the industry is migrating back to pre pandemic inflation levels and lapping high inflation from a year ago.

I want to reiterate that our industry has been very disciplined about pricing for decades, and we expect that to continue.

Historically as costs have increased.

The industry has increased pricing commensurately to maintain margins.

It is also notable that following periods of higher inflation, our industry historically has not reduced pricing to reflect lower cost and we believe we have entered one of those periods.

For the first quarter of 'twenty 'twenty four we expect our DIY sales to be resilient and our commercial trends to improve we will as always be transparent about what we are seeing and provide color on our markets and outlook as trends emerge.

Before handing the call 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 continue to focus on our supply chain with two initiatives that are in flight to drive improved availability.

One is our expanded hub and Mega hub Rollouts and secondly, we are making good progress on transforming our supply chain. Our strategy is focused on leveraging the entire network to carry more inventory closer to the customer to drive sales growth with speed to customer and expanded availability.

Additionally, we plan on continuing to grow our Mexican and Brazilian businesses was 804 stores opened internationally for 12% of our store base. These businesses had impressive performance last fiscal year and should continue to grow in 2024.

We are leveraging many of the learnings we have in the U S to refine our offerings in Mexico and Brazil.

Now I'd like to turn the call over to Jim here Jackson.

Thanks, Bill and good morning, everyone as both Bill and still have previously discussed we had a solid fourth quarter stacked on top of an impressive fourth quarter last year.

Six 4% total company sales growth of one 7% domestic comp of 14, 9% international comp on a constant currency basis, a 10, 8% increase in EBIT and a 14, 7% increase in EPS.

In addition, our results for the entire fiscal year were very strong as total sales grew seven 4% and EPS grew 12, 9%.

We continue to deliver great results and the efforts of our Autozone is in our stores and distribution centers have continued to enable us to grow our business and our earnings in a meaningful way.

Start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q4 for.

For the quarter total sales were just under $5 $7 billion up six 4% for the year. Our total sales were 17 and a half million dollars up seven 4% versus last fiscal year.

I continue to Marvel at the strength of our business since FY 19, our sales are up an amazing, 47% or nearly $5 $6 billion since 2019, let.

Let me give a little more color on sales and our growth initiatives, starting with our domestic commercial business for the fourth quarter, our domestic <unk> sales increased three 9% to $1 5 million and up 25, 9% on a two year stack basis sales to our domestic DFM customers represented 26% of our total company sales and 30 <unk>.

Rent of our domestic auto part sales.

Our average weekly sales per program, where approximately $16700 down one 8% now it's important to point out that our sales per program productivity was impacted materially by the late and core openings of approximately 120, new programs. While these openings depressed the point in time productivity metric, we're encouraged by the growth prospects.

<unk> of these programs and their early contribution to our commercial business. These openings are part of our effort to open more stores with commercial in response to the tremendous opportunity to grow our market share.

Our commercial acceleration initiatives are delivering the expected results as we grow share by winning new business and increasing our share of wallet with existing customers. We now have our commercial program in approximately 90% of our domestic stores, which leverages, our DIY infrastructure and we're building our business with national regional and local accounts this quarter we own.

156, net new programs, finishing with 5682 total programs.

As I've said since the outset of the year commercial growth led the way in FY 'twenty, three and we feel good about our prospects heading into the new year for FY2023 our commercial sales were $4 6 billion up eight 7% versus last year and up 37% from two years ago. Importantly, we have a lot of runway in front of us and we expect to deliver on.

And our goal of becoming a faster growing business.

To support our commercial growth, we now have 98 Mega hub locations with 13, new stores opened in Q4, while I mentioned a moment ago. The commercial weekly sales per program average was $16700 per program. The 98 Mega hubs averaged significantly higher sales and are growing much faster than the balance of the commercial footprint in fact, our commercial mega hub.

This grew twice as fast as 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 service 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. These assets are performing well individually and the fulfillment capability for the surrounding autozone stores is giving our customers access to thousands of additional parts and lifting the entire network.

We have an objective to reach 200 mega hubs supplemented by 300 regular hubs in the near term, our autozone or <unk> and our customers are excited and we're determined to build on our strong momentum.

On the domestic retail side of our business, our DIY comp was up one 4% for the quarter for FY2023 our DIY comp grew one 8% and four 7% on a two year stack basis. The business continues to be remarkably resilient as we've managed to deliver positive comp growth through the cycle.

As Bill mentioned, we saw traffic down slightly in 2% ticket growth as we move forward, we would expect to see slightly declining traffic counts offset by low to mid single digit ticket growth in line with our long term historical trends for the business driven by changes in technology and the durability of new Parks importantly, our DIY business has continued to.

Strengthen competitively behind our growth initiatives.

In addition, the market is experiencing a growing and aging car park and a challenging new and used car sales market for our customers, which continues to provide a tailwind for our business.

These dynamics ticket growth growth initiatives and macro car park tailwind have driven a positive comp we're forecasting a consistent and resilient DIY business environment for FY 'twenty four.

Now I'll say, a few words regarding our international business. As you May have noted we changed our disclosure on our international business and we will continue to do so going forward.

With 12% of our total store base outside of the U S. The current revenue contribution and the gross prospects moving forward, we simply have to share more about international we continue to be pleased with the progress, we're making in Mexico and Brazil. During the quarter. We opened 27, new stores in Mexico to finished with 740 stores and 17 new stores.

In Brazil, ending with 100.

Our same store sales grew 34, 1% on a reported basis and 14, 9% on a constant currency basis, we remain committed to Mexico, and Brazil and given our success in these markets, we will accelerate the store opening pace going forward by 2028 after a robust strategic review of the market and ultimate store count potential.

We've revised our strategy and anticipate opening as many as 200 stores annually in these markets in a disciplined fashion, making this 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 margin for the quarter. Our gross margin was 52, 7% up 118 basis points, driven primarily by a noncash $30 million LIFO credits this quarter for.

For Q4 last year, we had a $15 million LIFO charge, excluding LIFO from both years, we had a 37 basis point improvement in gross margin.

I will point out that we now have $59 million and LIFO charges, yet to be reversed through our P&L and we expect these to largely reverse over FY 'twenty four.

We're currently modeling $15 million and LIFO credits in Q and Q1 as inflation continues to abate and we turn our inventory and as I've said previously once we credit back the $59 million through the P&L, we will not take any more credits and we will begin to rebuild our unrecorded LIFO reserve.

Moving to operating expenses, our expenses were up seven 6% versus last year's Q4 as SG&A as a percentage of sales Deleveraged 34 basis points. The accelerated growth in SG&A has been purposeful as we continue to invest in an accelerated pace in it and payroll to underpin our growth initiatives. These investments will pay dividends in customer experience.

Variance speed and productivity.

We are 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 $1 2 billion up 10, 8% versus the prior year driven by our positive same store sales growth and gross margin improvements, including the LIFO year over year benefit.

EIT for FY2023 was just under $3 5 billion up six 2% versus the prior year also driven by strong top line growth.

Interest expense for the quarter was $108 $7 million up 17% from Q4, a year ago as our debt outstanding at the end of the quarter was $7 $7 billion versus $6 1 billion at Q4 and last year.

We are planning interest in the $88 million range for the first quarter of FY 'twenty four versus $57 $7 million in 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, 4% and up from last year's fourth quarter. A 22, 1%. This quarter's rate benefited 22 basis points from stock options exercised while last year had benefited 70 basis points for the first quarter of FY 'twenty four we suggest investors model us at approximately 23, 4% before.

Any assumption on credits due to stock option exercises.

Our net income and EPS net income for the quarter was $865 million up six 8% versus last year, our diluted share count of $18 6 million was six 9% lower than last year's fourth quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $46 46.

<unk> 14, 7% for the quarter.

For FY2023 net income was two and a half million dollars up four 1% and earnings per share was $132 36 up 12, 9%.

Now, let me talk about our free cash flow for Q4 for the fourth quarter, we generated $1 1 billion of operating cash and $701 million in free cash flow for the year, we generated $2 1 billion and free cash we expect to continue being an incredibly strong cash flow generator going forward and we remain committed to returning meaning.

Full amounts of cash to our shareholders.

Regarding our balance sheet, our liquidity position remains very strong and our leverage ratios remain below historic norms. Our inventory per store was down six tenths of a percent versus Q4 last year, while total inventory increased two 2% over the same period last year, driven by new store growth.

Net inventory defined as merchandise inventory less accounts payable on a per store basis was a negative $201000 versus negative $240000 last year and negative $215000 last quarter. As a result accounts payable as a percent of gross inventory finished the quarter at 124, 9% versus last year's Q4.

129, 5%.

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 over $1 8 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 8% of the shares outstanding since the beginning of the fiscal year we.

We have bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders.

We finished Q4 at two three times EBITDAR, which is below our historical objective of two five times EBITDAR. However, we remain committed to our leverage objective and we expect to return to the two five times target in FY 'twenty four.

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, we're growing our market share and improving our competitive.

<unk> in a disciplined way as we look forward to FY 'twenty four we're bullish on our growth prospects behind our resilient DIY business, a fast growing international business and the domestic commercial business that is continuing to grow share I continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders driven by.

High degree of confidence in our strategy and our exceptional team of Autozone.

One last housekeeping point I'd like to remind you that in FY 'twenty four we will have a 50 <unk> week in our financial results. This extra week will be added to our Q4 results as a result, our fiscal year will now end August 31, 2024 in order to model that Ashford extra week I encourage you to look at our financial breakouts of both our fiscal 2019 and too.

<unk> thousand 13 fourth quarters, which were the last two years, we had the extra week and we show breakouts of the full P&L accordingly.

Now I'll turn it back to Bill. Thank you Jim here as we start a new fiscal year I'd like to take a moment to discuss our operating theme for the new year live the pledge I know this sounds like a very consistent theme for Autozone. In fact, it was the theme we used in my first full year as CEO in 2006 are matched frequently.

What differentiates autozone from others My answer goes back to the same point over and over the culture.

I, our board and our leadership team believe we can never emphasize the culture enough.

The culture is defined by helping solve our customers' challenges and optimizing the performance of their vehicles.

Based on a team based approach recognizing everyone's contributions and performance and putting team goals ahead of personal goals. It sets the standard it exceptional performance not mediocrity.

It's about the Autozone family, calling yourself a family comes with great responsibility.

And it is so much more the pledge and our values summarize our operating strategy succinctly.

As we've accelerated our top line since the onset of the pandemic our competitive positioning is also materially improved.

Our efforts for 2024 will be focused on execution, we have a lot of projects in flight and we need to get them completed and supply chain improvements will remain a key focus in FY 'twenty four we.

We will continue with our additions of Mega hub and hub stores, new distribution centers in international store growth as you noticed our international teams posted same store sales comps on a constant currency basis up 14, 9% much higher than our domestic comp international has been strong for a few years now.

This morning, I'm excited to share after an extensive strategic review of the ultimate number of locations. We can have in the U S. Mexico and Brazil, we are announcing our plans for a much more aggressive global store development plan.

Over the last five years, we've averaged 140 domestic store openings in 50 international openings for a total of roughly 190, new stores a year in the Americas.

We plan on accelerating this pace and aspire to open as many as 500 stores five years from now.

So by FY 'twenty eight we're modeling 500 store openings with the split being 300 in the U S 200 internationally.

<unk> 24, who will remain around 200, but we will ramp from there you may be asking why this change of strategy and why now.

The answer is our profitability per store is materially higher since the beginning of the pandemic.

We continue to find new trade areas, even in our more mature U S markets our growth in commercial has materially changed the economics on a per store basis.

We believe this is just the beginning on commercial and our OFC one of the most important metrics we track is over 50%.

Also our international markets are immature so we continue to see expansion opportunities in Mexico, and Brazil, along with putting a toe hold at some point and other new markets I want to stress that we will be diligent and disciplined.

We have a long track record of performance with high returns and strong cash flow generation. We have no plans on changing that strategy an approach where we believe in evolution over revolution, we believe in continuous improvement and we believe in test and learn we have been and will remain anchored on our capital allocation strategy.

<unk>.

While I spent time talking about our store development strategies for the future that is not the key focus for us in FY 'twenty for the number one focus will be on growing share in our domestic commercial business. We believe we have a solid plan in place for growth over the next 12 months, we know our focus on parts availability and better customer service will.

Will lead to sales growth, we're excited as we start 2024.

This time of year I always enjoy reflecting on the past our team achieved some impressive milestones this year $17 $5 billion in sales racing past the $17 billion milestone.

DIY comps of one 8% most impressively 15, 9% on a three year basis.

Commercial sales are now $4 6 billion I personally distinctly remember our goal of $1 billion not that long ago.

Average weekly sales domestically of 47600, equating to just under $2 5 million per store annually, our Mexico and all data teams. Both broke multiple records in Brazil is poised for significant growth in store count and getting to profitability breakeven on the path.

The substantial profitability in the future, we bought back $3 7 billion and Autozone stock the second highest ever only behind last year's $4 4 billion.

And our team has grown our EBIT by 61% and four years that's remarkable.

But we can't rest on our laws.

And we aren't without our challenges thats for sure as I've said on several occasions, we have to exit pandemic mode.

Got to get back to taking care of the customer and this requires us close to flawless execution as possible. We have to make sure every store staff right every hour of every day, our processes need to function correctly always we have to meet our store opening goals and timelines simply put we have to remain the execution machine that we.

Have always been.

On June 26, we announced a leadership transition plan and yesterday, we announced the next evolution of Autozone Senior most leadership team.

I've had the honor and privilege of being part of this team for nearly 29 years now and it has been one of the most rewarding experiences of my life.

We as part of that leadership transition plan announced that I would step away from the president and CEO roles, but romaine executive Chairman in January .

As a board we've been contemplating this transition for many many years and began a very robust well defined disciplined process nearly three years ago. Our goal was to identify a successor and ensure that success or had a fabulous team with them.

Think we've accomplished that goal.

The company will be in fantastic hands with Phil Danielle leading it. He loves this business is a car fanatic and has been here for 30 years and in the industry for nearly 40 years with Zamir Jackson, leading the finance and store development teams and Tom newer now serving as our Chief operating Officer. In addition to the balance of our talented executive team.

Our company is in terrific hands, while it will be bittersweet for me I'm excited that Phil and the board have asked me to continue to be very involved for the foreseeable future ultimately onno, Phil Jameer, Tom and I all know.

This is a team sport and ultimately it's not about the senior most leaders in this organization.

It's about in our case, the pledge our values and most importantly, our culture, which at its core is all about having the best most passionate autozone is taking care of customers and the organization prioritizing autozone and their development or we say as we say caring about others.

Yesterday, we announced the other organization changes with the promotion of Bill Hackney to executive Vice President merchandising marketing and supply chain I congratulate Bill a 38 year autozone or who knows this business exceptionally well and has always been a top performer.

So announced that three terrific long term leaders will be retiring around the end of the calendar year I, Thank and congratulate grant Mcgee Charlie plus at <unk> for their partnership leadership and friendship for all these years they leave Autozone, a massively better organization then they found it.

Many years ago, so changes in the air frankly, it always is it was amazing to me to see how much our leadership has changed over mine near 30 year tenure at Autozone to me that's why the culture.

While the culture is so important in this organization with a phenomenal culture, it's not about individuals'. It's about the team it's about the goals and it's about performance as we began this transition filling out both shared that not only do we both feel we embody the culture. Both of US believe were products of this color.

Sure.

We've learned extraordinary lessons from our three decades at Autozone. Most importantly, always put the customer first execution wins people want to play on winning teams and be recognized for their performance details matter listen to those closest to the customer and so much more filling our both continue to see.

And it may send unlike a cliche, but we believe it auto zones best days lie ahead of US now we'd like to open up the call for questions.

Yeah.

Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

We do ask that you try and limit your questions today.

Uh huh.

For time purposes.

One moment, please while we poll for questions.

Thank you. Our first question is coming from Bret Jordan with Jefferies. Your line is nice.

Hey, good morning, guys.

Brett Good morning, you called out market share gain in the commercial space in the fourth quarter, but then you said not in line with your aspirations. But then also said that pricing is rational what do you think is happening in this space are there peers that are showing relatively better in stocks or really was it just your regional footprint and exposure to some of those softer.

<unk> that made the difference.

Terrific question, Brett and Theres, a lot of different elements as you would expect again.

Again, we are not satisfied with our commercial growth at this level and we are going to change that and we're encouraged about the direction that we're heading.

Part of it Brett is a comparison versus last year and you mentioned in stocks.

Last year 18 months ago, we got very aggressive with some key categories and what a lot of merchandise when frankly, a lot of our less sophisticated competitors were not great in stock positions. As we are beginning to lap that significant outsized growth last year, that's certainly a challenge for us and we are beginning to.

Get past that point in time, we also mentioned that we've had some challenges in the Midwest and northeast, particularly with under car categories, and particularly in commercial where we just didn't have the winter that we so desperately want need and we've suffered in those under car categories.

Okay, Great and then a big picture question I guess on the international when you look at that obviously different vehicle demographic and economy, but how do you see the underlying growth rates in the DIY and the difm's segments in Brazil and Mexico.

Sort of on a longer term basis.

Yeah, It's a great question and what we've been in Mexico for nearly 25 years now.

Theres just not great data there Brett.

And so you don't have.

Terrific kind of information that we get from the auto Care Association.

So we don't have great data down there, we're working to try to see if we can get some better data, but what we know is we've been in Mexico now as I said, almost 25 years and we.

<unk> two <unk>.

<unk> significantly and think that we have a lot of growth left in front of us not just in new stores, but on same store sales are still categories, where we are massively underpenetrated. There are still categories. We don't participate in at all.

And as we've learned more about that business, we're continuing to grow same things happen in Brazil were just much earlier in Brazil.

But fair to think an older car base that drives a better underlying growth in U S.

I think in Mexico, clearly the core basis is older and Theres a lot of U S. Cars. There's also a lot of Mexico manufactured vehicles in Brazil is very different in that the size of the vehicles and those particularly the engine sizes in Brazil are massively smaller I mean, if you have a two liter engine in Brazil, that's a big core many of them are 1.4.

World leaders and the like so.

So we still got a lot to learn in Brazil, but we're excited about where we are where we believe we see a path to great success, but we're still losing money there we got to fix that over the next couple of years.

Great. Thank you.

Thank you.

Thank you. Our next question is coming from Simeon Gutman with Morgan Stanley Your line is life.

Good morning, everyone and congratulations to the retirees and the promoter used my first question is I may have missed it is double digits still a goal for commercial and if so what's the what how should we think about the timeframe to getting there.

Absolutely is still the goal keep in mind, we still have pretty low share in that four 5% range or so so we are under share and we think there's still tremendous opportunity for us to gain share.

Like we said, we're not happy with our performance in the Q4 timeframe, we do feel like we're exiting the quarter at a higher rate and we believe we will continue to improve from this point forward, but we're not back to where we want to be but we do see line of sight to getting back to that double digit growth over time.

And then maybe to follow up the the way you've built the business in commercial it's been methodical and you've had some periods of faster growth, but it's been cumulative and my question is now that you're you're focused on and again.

How does how do we get comfortable with the timing that you know prescriptive or your business Reaccelerate call. It in the next few quarters versus why not take the year to get some of the traction from the things that youre working on.

Well you know like I said, we talked in Q3 or four that our execution in the commercial arena wasn't where we expected it to be and we've been working on that we saw that performance and the execution levels improve as we worked through Q4, we're not finished yet.

Well frankly never be finished execution as a as a long term strategy, but we continue to get better and we think we continue to improve our business model like we said we have opened up more hubs more mega hubs, we continue to strengthen our store side Assortments and we're also continuing to leverage the technology enhancements that we've made over the.

Last couple of years and those will continue to mature and we're not standing still that technology enhancements will continue as we move through this next year.

Yeah. Thank you good luck.

Thank you. Our next question is coming from Seth Sigman with Barclays. Your line is nice.

Hey, good morning, everyone and I'll add my congrats as well on all the new roles. He wanted to follow up on the commercial business and that last point. If you could maybe just elaborate on the execution shortfalls that you've seen you know what are we talking about here is that availability is it something more sales related just any more context on that and how you're fixing that and the response so.

Far and then I'll add a follow up thank you.

Now on the on the execution. Thanks for the question on the execution.

If you go back to the pandemic and some of the challenges of the pandemic. We obviously struggled within stock we struggled with staffing as everybody did.

And we struggled with in store level execution of our primary objectives were keep our autozone are safe take care of the customers keep our stores in stock.

You know nothing there wasn't any of this this big one area that got broken it was a lot of little things and at Autozone, and we expect to operate execution Lee solid every single day.

We didn't achieve that we're continuing to work on that and we're taking off the execution marks to get back to flawless execution day in and day out that frankly takes time.

And we will continue to improve we like the improvements we saw in Q4 I wouldn't say we're done we think there's still opportunities to improve and we will continue down that path. It's just part of our culture execute flawlessly.

Got it Okay. That's helpful. And then I wanted to follow up on another point made earlier about traffic and volume improving through the quarter and I think that coincides with inflation moderating can you just give us a little bit more perspective on what you've seen historically as it relates to elasticity and then just in general how are you thinking about inflation.

For this coming fiscal year.

Yes, so the first point I'll make on inflation is that you know we've been comping hyperinflation relative to our historic industry trend for quite some time now and so as inflation and sort of moderated invaded too.

Sort of the normal rates.

You know those are the dynamics that we've been experiencing as it relates to our business moving forward.

Inflation to be in.

In the low to mid single digit range that it will impact our tickets on the DIY side as we've said, we've historically seen transaction counts.

Decline kind of low single digits, if you will and so we expect to be operating our business.

Ulcer to historic norms moving forward in terms of the macro environment and you know and how.

How thats played out from an inflation standpoint.

We haven't seen to this point sort of a wobble from the consumer.

We think it's been a two speed world for a while where the low end consumer has been under some pressure, but consumers that have.

Higher incomes have been doing well and the net result of that is our business on the DIY side has been very very resilient.

Okay. Thank you.

Thank you. Our next question is coming from Elizabeth Suzuki with Bank of America. Your line is nice.

Great. Thank you I just a question on expansion in store right. I mean, just given that the cost of construction and the cost of capital has gone up quite a bit in the last couple of years how are you.

Thinking about capital allocation, just you know it seems like store growth is a pretty big part of your long term plans.

Just thinking about where that capital can be best deployed in which areas, maybe maybe rural areas or international where you think you can get the best return.

Thank you Elizabeth.

We think we're going to get a great return basically in all three countries, whether it be urban environments or rural environments, and I'd go back to when Youre running a rossi of 50%.

That shows that we can get really good returns, yes, where were making this announcement when.

Struction costs or higher interest rates are higher and on and on we're making decisions that are 40 year decisions and.

And we believe we've got a long runway for opening significant amounts of new stores and once we finish that strategic review back in June we made the decision that we're going to accelerate and get back to 500 stores a year now remember that will be between three and three 5% organic store growth. So it's not like we're talking about going to 10% growth.

We think things are having something thats growing in that range makes a lot of sense for the long term and the only thing I'll add lives is that to your point around capital allocation. This doesn't change our long term capital allocation framework.

Managing our leverage target of two five times EBITDAR gives us a tremendous amount of financial firepower to invest in our existing assets to invest in this growth profile of that bill is talking about but also to give meaningful amounts of cash back to shareholders. So it doesn't change our long term capital allocation framework as we move forward.

Great. Thank you and then you talked about Mexico, and Brazil, and now in Brazil, I are still raising some money. There what is the profit profile look like in Mexico or just for the international operations in total and how should we think about it.

The impact on the total company margin profile as the stores grow as a percentage of artisan shuttle.

Well, it's certainly a tale of two countries, we are losing money in Brazil, we haven't disclosed specifics in Mexico, but I'll just say that we are very pleased with the profitability profile and particularly the return profile.

Mexico.

Great. Thank you.

Thank you.

Thank you. Our next question is coming from Chris Harvard <unk> with J P. Morgan Your line is night.

Thanks good.

Morning, I also wanted to follow up on the commercial side, you talked about 7% in the last four weeks so to clarify was that comp.

And as we look forward you know clearly all gets was hot and you got a weather bump there. So you talked about improving from what you've seen I guess, what's the right trend line to think about of the seven versus the two and a half that you actually did for the quarter.

Yeah. The seven just to be clear was a total growth in those last four weeks of the quarter.

So it improved over the over the quarter timeframe.

You know I'd like to forecast that that's that we're going to improve from there it could be bumpy nothing's a straight line I'll tell you you know if you think about the weather performance over the quarter like we said the beginning parts of the quarter. You know the first months of May and June were particularly cool and wet and although that had probably.

We have more material impact on the DIY side of the business and impacts commercial as well and as it got hot you'll see those bigger ticket categories like air conditioning.

<unk> for example, those are big categories in big jobs, and as you get those failures due to heat it helps the comps and the total growth. So we think that weather story will help us a little bit the hot summer will help us as we move through the beginning of Q4, and then we'll move into a normal weather pattern as we as we go through Q2 and the rest of the year.

Got it and then okay got it so the 7% was total so that the the comps I didn't do it on do it for me it was more like a <unk>.

Five I guess is that right and then as you think about 'twenty for any other high level comments I know you don't guide Jimmy here, you talked about some LIFO tailwind that you know.

Persist early and then probably turn to some year over year headwinds anything else to think about in the P&L in terms of SG&A per store or other comments on gross margin and so forth. Thank you.

So as we think about FY 'twenty four I think there are a handful of dynamics that you need to sort of wrap your minds around as Youre building. Your models number one we're forecasting a very consistent and resilient DIY business and fill and bill talked about some of those dynamics as part of their <unk>.

Their prepared comments.

The second dynamic that we're focused on as Phil alluded to is an improving growth profile and our commercial business again, we were very.

We were very pleased with where we exited.

The fourth quarter.

Minimum going into the first quarter and next year I think the.

Third dynamic that you mentioned is is around LIFO, we got $59 million of LIFO that we expect to largely get back through the P&L. So as you're working your way through.

Your modeling you can expect most if not all of that to come back to us. This year and then from an expense profile standpoint.

We said longer term SG&A will grow in line with sales we are in investment mode, particularly in it.

And some of the areas that are underpinning some of the growth initiatives that we're talking about so.

That's how I'd focus and then the last one.

I just mentioned, it's just on from an international standpoint, you've seen us.

Post our international numbers.

Morning.

Two years quite frankly, where the business has been on fire and we're very excited about the growth profile in our international business. So as you think about where we are we feel good about the growth prospects going forward, we think from a margin standpoint.

We've made tremendous strides in gross margin, excluding LIFO and you know, we've got a consistent and resilient domestic DIY business, which still is the lion's share of our business as we move forward.

Thank you.

Thank you. Our next question is coming from Michael Lasser with UBS. Your line is nice.

Hi, This is Henry car on behalf of Michael Lasser, Hi, Good morning, and thanks, a lot taking a question.

We've been hearing about elevated levels of deferred maintenance and wheat car counts in the industry when thinking about returning to a sustainable high single digit or low double digit growth in commercial.

Factoring in this occurrence.

The reaffirmed goal and is there any way to quantify it.

Yeah, we don't have terrific data on that obviously, we are in our commercial customer shops, all the time and we're hearing the same things frankly, we've been hearing it since about February that car counts are down, particularly for people that are in the tire business and as you know when when a technician takes off entire provides a whole new.

Another opportunity for sales you get a chance to see what's going on with the breaking systems and chassis systems and the like.

So we don't have a great history on what are the exact numbers, but we think it is has been a softer environment I think some of that has to do with the economic challenges that we're seeing we have operated in the commercial business at this level for a long period of time. So we don't know the cycles like we do in the DIY business, but I think our belief.

Is when economic pressures happen, we get trade down from DIY to D. I F.

Sorry from Difm's DIY in certain categories and I suspect that's what we're experiencing now how long will that last you tell me what the economic cycle is going to look like.

And again, we have a lot of discussions about short term sales performance. Our focus is not on the short term sales performance. Our focus is on what are we doing in our business to make our business better competitively and how are we going to grow sales and share profitably over the long term.

Thank you and just as a quick follow up I believe the Mega hubs came in at 13 and fourth quarter and.

Not mistaking that might be a little bit short of where you were targeting for 22% to 25 for full year fiscal year 'twenty. Three are most of these openings is going to roll into 2020 threes are another way, we should think about it.

Do you want me to do Jim mirrors performance review and public areas.

The generator to say any pay you to ask that question.

You know obviously store development falls under my purview, we are short of where we where we need to be filled and bill talked about.

Things that we need to execute better on certainly what we're doing from a store development standpoint fits squarely in that category as I said last quarter. We got 20 opened this past fiscal year, we would've liked that number to be closer to 25, but what I will tell you is that our pipeline is very strong as we move into FY 'twenty four.

And we're committed to getting to the to the 200 number so you'll see us start to accelerate that mega hub targeting and it's important for our business. It's important not just for the commercial business, but also for the DIY business because of the outsized growth that we see in our Mega hub. So we're working our way through it and we will get better as we move forward.

Thank you.

Thank you. Our next question is coming from Seth Basham with Wedbush Securities. Your line is nice.

Thanks, a lot and good morning, My commercial but my question is also on our commercial business just in terms of where you're not gaining as much share as you expected is it more of a national accounts versus the up and down the street. He passed are there any particular regions that are underperforming expectations.

Yeah. I mean, there is you know the national account versus the what we call the uds accountant or account or the general repair shop down the street the business' growth between the two has been pretty consistent frankly.

I will say within some of those national accounts I think it's been more around two segments that have not performed as well for US recently, one is the used car market kind of the buy here pay here growth has not been as good in the used car markets that are sold within new car dealerships those markets haven't been as good for us and like Bill mentioned.

And earlier the groups that deal with tires.

<unk> have been softer we didn't have a great.

Winter those tire changes going from a summer tire to a winter tire and vice versa didn't happen like you would normally expect and as Bill mentioned when you pull that tire often you get to see that the brakes arrested in the calipers frozen and the suspension parts aren't working as well as they should be or maybe something's broken that opportunity to get the wheel.

Off just generates a bigger repair now.

Now the other thing is as people push maintenance off there becomes more failures in the repair cycle, so longer term pushing that deferred maintenance off is good for us.

But those have been the pressure points over the last couple of months.

Understand so as being the pressure points, but would you assess those are the areas, where you're not getting as much share as you expected.

Yeah, I don't I don't know that we're not gaining share in those categories I think over the last couple of years. We know we've got significant share in some of those categories.

Believe everybody would be down pretty commensurately.

And some of those categories arent going to return to a more normal cycle until you go through another winter cycle of snow so.

There'll be depressed, we will see those categories be under a little bit of pressure until we get through another normal winter cycle.

Oh add about.

I do think like we said earlier, we have we grew share exponentially over a couple of years and part of that was because our in stock position was massively better certainly than our WD competitors I think we've seen some of that share back to them as they've gotten back in stock.

Yeah. That's exactly my follow up is gonna be bill just thinking about that in stock position and let me start to cycle that improvement by our competitors is that here in the fiscal first quarter or is it going to take another couple of quarters.

Think we're beginning to cycle. It now, but as you said, it's going to take some time not every category was the same not every competitor was the same it'll.

It will probably be dealing with it for six months six more months, but we probably passed the height of it.

Great. Thanks, guys.

Yes. Thank you.

Thank you our final question today will be coming from Scot Ciccarelli with truth.

Mine is nice.

Good morning, everyone and thank you for the time, so I guess I'm still confused outside of weather, what what had the main execution challenge has been on the commercial segment.

Part one and then part two kind of related to that is what specific changes are you making to the business to help accelerate growth as we kind of roll here into further into 24. Thank you.

Yes, Thanks Scott.

I think the answer is there's not one single thing I think we've tried to make that clear.

As we've said for the last two quarters.

We were operating differently during the pandemic everybody had to operate differently, because we were having to make decisions on the fly every day as we've come out of the pandemic. We lost a few of our disciplines. These are things like writing the right schedule, we've experienced exceptionally high turnover, we don't have the same.

Level of experience in our stores that we had then and we just got to get back to making sure that we're dotting the i's and crossing the Ts and were delivering parts on time.

Then we've got the right in stock levels and on and on and on there is not one major thing these are.

Paper cuts, but those that has been the hallmark of this organization.

<unk> put our execution up against anybody and we werent as sharp as we needed to be and we're making those improvements today.

Yeah.

And then specific changes youre, making is it just better blocking and tackling for lack of a better term belt.

I think that that is the biggest change that we're making but that's not the sole thing that we're doing Phil mentioned that <unk> got a lot of technology that we've deployed in the commercial business over the last six months, we've really refine that technology.

We're excited about what it means we have two or three major.

And a logical enhancements that are coming in the first quarter or two this year specifically in the commercial business that are all focused on how to execute better how do we drove decreased delivery times, how do we make sure that we're delivering the right parts at the right time and we're excited about that.

Got it thank you.

Alright, thank you.

All right before we conclude the call I want to take a moment to reiterate we believe our industry is in a strong position and our business model is solid.

We're excited about our growth prospects for the year, but we will take nothing for granted as we understand our customers have alternatives. We have exciting plans that should help us succeed 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 very successful. Thank you for participating in today's call have a great day.

Thank you. This does conclude today's conference call you may disconnect. Your lines at this time and we thank you for your participation.