Q1 2024 Autozone Inc Earnings Call

Good day, everyone and welcome to Autozone is 2024 first quarter earnings release Conference call.

At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.

Before we begin the company would like to announce the following forward looking statement.

Certain statements contained herein constitute forward looking statements that are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.

Looking statements typically use words, such as believe anticipate should intend plan will expect estimate project position strategy seek may could and similar expressions. These are based on assumptions and assessments made by our management experience and perception of historical trends current conditions expected future developments and other factors.

Appropriate. These forward looking statements are subject to a number of risks and uncertainties, including without limitation product demand due to changes in fuel prices and miles driven or otherwise energy prices, whether including extreme temperatures natural disasters and general weather conditions competition credit market conditions cash flows access to where they won't be able to finance it.

Unfavorable terms future stock repurchases the impact of recessionary conditions consumer debt levels changes in laws or regulations risks associated with self insurance war and the prospect of war, including terrorist activities the impact of public health issues inflation wage inflation people really to hire train and retain qualified employees, including members of management and others.

Personnel construction delays failure or interruption of our information services technology systems issues relating to the confidentiality integrity of availability of information.

Including cyber attacks historic growth rate sustainability downgrade of our credit ratings damage to our reputation challenges associated with doing business in an expanding into international markets origin, and raw material cost of suppliers inventory availability disruption in our supply chain and in fact the terrorists.

New accounting standards, our ability to execute our growth initiatives and other business interruptions certain of these risks and uncertainties are discussed in more detail in the risk factors section contained in item one a under part one of our annual report on Form 10-K for the year ended August 26, 2023. These risk factors should be read carefully quarterly savings are not guarantees of future performance.

Results developments and business decisions may differ from those contemplated.

Such forward looking statements events described above any of the risk factors could materially adversely affect our business. However, it should be understood that it is not possible identify all such risks and other factors that could affect these forward looking statements forward looking statements speak only to the date made except as required.

The law, we undertake no obligation to update publicly any forward looking statements, whether as a result of new information future events or otherwise.

Thank you. It is now my pleasure to turn the floor over to your host Bill Rhodes, Chairman and CEO with Autozone, Sir the floor is yours.

Good morning, and thank you for joining us today for <unk> 2024 first quarter conference call with me today are Phil Danielle CEO elect Jo Mira Jackson, Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax regarding the first quarter Hope you had an opportunity to read our press release and learn about the quarter's results.

If not the press release, along with slides complementing our comments today are available on our website www Dot Autozone dot com under the Investor Relations link please click on quarterly earnings conference calls to see them.

As we begin this morning, we want to thank our autozone is for their contributions during the quarter that resulted our solid performance as our pledge states, we lead with putting customers first which allowed us to grow our total sales by five 1%, while both of our operating profit and earnings per share grew by a very.

Crescive high teens rates.

We have previously said, we have been able to continually build on the phenomenal performance from the pandemic years of 2020 to 2023, our leadership team and I continue to be impressed with our post pandemic sales performance to put this in perspective, our FY 2000.

19 sales were $11 6 billion.

And now.

Our trailing four quarter sales or $17 7, billion% to 50% plus increase over a four year time horizon, Congratulations Aldo as owners everywhere, who made that enormous success possible.

For the first quarter, our total sales our total company same store sales were three 4% and two 1% on a constant currency basis as international has become a more important part of our growth story and an area, where we are increasingly deploying capital last quarter, we began disclosing our global sales.

We encourage you to focus on the constant currency number where international again had a strong quarter up 10, 9%.

Both our Mexican and Brazilian same store sales had double digit growth. We are very excited about the short and long term growth prospects of international our expectations are we will continue to grow both mature store volumes, both in DIY and D. I, a film and we plan to accelerate new store openings over the next several years ultimate.

Getting to a minimum of 200 international new stores by 2028.

Next our domestic same store sales were up one 2% this quarter compared to one 7% last quarter and five 6% in Q1 of last year. Our performance in retail was slightly below our expectations, but still still resilient in the current environment.

Breaking our sales into three four week segments. Our DIY same store sales were roughly 1% for both the first and the last four weeks segments, but were negative 2% in the middle for weeks or October <unk>.

Commercial sales on the other and accelerated for the quarter, but we start is stronger than we finished.

As you know some of the comparisons over the last few years where distorted.

And on a three year basis, the performance of each of the businesses. This quarter was remarkably similar our commercial business grew five 7% against exceptionally strong comps last year importantly, we continue to be encouraged by the new initiatives, we have in place to accelerate top line growth in commercial.

And those efforts are having a positive impact on our performance.

And as we further analyzed our DIY in D. I have them results and specifically our second period sales slowdown our retail business was clearly impacted on a regional basis as we saw a 70 basis point performance gap between the northeast and mid western markets versus the rest of the country.

We continue to attribute this gap in performance to the lack of winter weather last year.

And lack of snowfall.

But enough about what happened to us while not satisfied with our sales performance. We are encouraged as we enjoyed both dollar and unit share gains in our domestic and retail businesses domestic retail and commercial businesses. We previously highlighted that we were not executing at peak levels and we are encouraged to share.

<unk> that we are seeing steady progress our in stock levels are nearing pre pandemic levels turnover, while still elevated is beginning to decline productivity levels in our distribution centers have improved the technology, we deployed to improve service levels to commercial customers is seeing much higher adoption rates leading to decrease.

<unk> delivery times, and we have opened a significant number of new commercial programs, reaching 92% domestic penetration for the first time in our history, even more encouraging is the continued strength in sales where you're seeing from those new program openings as many are only weeks old now I'd like to.

Turn the call over to Phil Danielle to give more in depth quarter on the color on the quarter Phil.

Thank you Bill and good morning, everyone. Our domestic same store sales were one 2% this quarter on top of last year's five 6% growth. While we were up against exceptionally strong same store sales from a year ago, particularly in commercial we believe we are making progress with more room for improvement.

I want to reiterate what Bill said, a moment ago that we've made many changes across the organization from re instituting many of our long term processes to placing share of voice and vitally important areas.

Sharing we are hiring the right Autozone honors and execution is improving meaningfully.

Our domestic commercial business grew five 7%, we still have work to do but we were pleased with the improvements we saw in this business as.

As the business began improving we believe we grew share and set another record for the quarter was $1 1 billion and commercial sales.

Domestic commercial sales represented 30% of our domestic auto part sales for quarter one.

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 inventory availability material improvements in hub and Mega hub coverage.

Adding new hubs and Mega hubs.

The strength of the <unk> brand with an intense focus on high quality products and technological enhancements that make us easier to do business with.

We are also operating more efficiently with improvements in delivery times and enhanced sales force effectiveness.

In Q1, we opened 121 net new commercial programs opening the majority of them in the back half of the quarter.

69 of those 121 programs opened in week seven through 12 of the quarter.

While programs that opened late in the quarter have minimal sales impact on the quarter.

They do position us for sales growth for the remainder of FY 'twenty four and beyond.

As Bill Bill previously shared I want to reiterate we now have commercial and approximately 92% of our domestic stores.

When I was SVP of commercial we didn't have line of sight to reaching that level of penetration. It really is a great sign of the progress that we've made over the last five years or so.

We believe our commercial <unk> business will get stronger and growth rates should improve as we move through the year as comps get easier and our execution, we will continue to improve.

Regarding domestic DIY, we had flat comps this quarter on top of last year's comp of two 6%.

While the data we have available to US indicates we continue to gain share in both dollars and units are comp is below our expectations, but in line with what we are seeing across the industry.

Regarding whether it was quite mild this quarter.

It is this time of year when our sales will fade as the summer sales slowdown into winter. This year October was warmer than last year and sales and weather sensitive hard part categories in the Midwest and the northeast underperformed the remainder of the country.

While our retail comp was flat for the quarter. We saw the first four weeks comps up 1%. The second four weeks Comped down 2% in the last four weeks' comp up 7%.

While our performance clearly improved over the last four weeks of the quarter, we fell short of our own expectations for retail for the full quarter.

As a reminder, historically extreme weather, either hot or cold drives parts failures and accelerated maintenance.

Regarding this quarter's traffic versus ticket growth in retail our traffic was down one 6%, while our ticket was up similarly, we expect our ticket growth will return to more normalized levels in the 3% to 4% range as we get further removed from the large increases from last year due to.

Inflation, particularly due to freight costs.

Regarding our commercial trends, we continue to see higher growth rates for ticket.

For traffic relative to ticket.

During the quarter there were some geographic regions that did better than others. As there always are this quarter. We saw a 230 basis point worst performance between the northeast and the Midwest compared to the balance of the country as the northeast and the Midwest experienced a very mild winter last year was below.

Average snowfall, we sold less weather sensitive hard parts and this part of the country.

Heading into the second quarter, we are planning for a more normal weather pattern.

But as a reminder, that Q2 is always our most volatile quarter as weather fluctuations can be extreme.

Meaning fully impacting our short term sales performance either positively or negatively.

Regarding our merchandize categories in the retail business, our sales floor categories underperformed hard parts as we saw more discretionary pullback from customers.

We do feel the low end consumer started pulling back on discretionary purchases.

Let me also address inflation in pricing this quarter, we saw low single digit inflation and as a result, our ticket was up roughly one 5%. We believe inflation for the second quarter will be similar as the industry is migrating back to pre pandemic inflation levels lapping very high inflation from a year ago.

<unk>.

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 has.

Warwick Lee not reduce pricing to reflect lower cost and we believe we have entered into one of those periods.

For the second quarter, we expect our DIY sales to remain.

More difficult in our commercial sales 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 Meer, I'd like to highlight and give some color on a few of our other 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 distribution network.

Along with having two domestic distribution centers currently under construction.

Our strategy is focused on leveraging the entire network to carry more inventory closer to the customer to drive growth with speed and expanded availability and efficiency.

Additionally, we plan to continue to grow internationally at 840 store 849 stores opened internationally or 12% of our total store base. These businesses had impressive performance last quarter and should continue to grow at a robust pace for the remainder of fiscal 'twenty 'twenty four.

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 Meer Jackson.

Thanks, Bill and good morning, everyone as both Bill and fill a previously discussed we had a solid first quarter stacked on top of an impressive first quarter last year with five 1% total company sales growth one 2% domestic comp growth 10, 9% international comp on a constant currency basis or 17, 4% increase in EBIT.

And an 18, 6% increase in EPS, we continue to deliver solid results and the efforts of our autozone or in our stores and distribution centers have continued to enable us to drive earnings growth in a meaningful way.

To start this morning, let me make a take a few moments to elaborate on the specifics in our P&L for Q1 for the quarter total sales were $4 2 billion up five 1%, let me give a little more color on sales and our growth initiatives.

Starting with our domestic commercial business, our domestic <unk> sales increased five 7% to $1 1 billion and were up 26% on a two year stack basis sales to our domestic DSM customers represented 26% of our total company sales and 30% of our domestic auto part sales our average weekly sales per program.

Were $15900 down six tenths of a percent it.

It is important to point out that our sales per program productivity was again impacted by a large number of immature programs that have opened over the last five quarters. While these openings depressed the point in time productivity metric. We're encouraged by the growth prospects of these programs in their early contribution to our commercial business, we have intentionally open more stores with commercial.

Grams in response to the tremendous opportunity, we see to grow our market share.

We now have our commercial program in approximately 92% of our domestic stores, which leverages, our DIY infrastructure and we're building our business with national regional and local accounts.

This quarter, we opened 121 net new programs, finishing with 5803 total programs.

Our commercial acceleration initiatives continue to make progress as we grow share by winning new business and increasing our share of wallet with existing customers and importantly, we continue to have a lot of runway in front of us and we will continue to aggressively pursue growth opportunities in commercial which we believe is our single largest growth opportunity.

To support our commercial growth, we now have 100 Mega hub locations with two new Mega hubs opened in Q1, the 100 Mega hubs averaged significantly higher sales in the balance of the commercial programs and grew more than two times the rate of our overall commercial business in Q1.

As a reminder, our mega hubs typically carry roughly 100000, skus and drive tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores fixed.

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 will continue to aggressively open mega hubs for the foreseeable future and we expect to have north of 200 Mega hubs at full build out in.

These are difficult to find boxes in the right locations, but we are keenly focused on rapid expansion and have 45 currently in the pipeline and growing.

On the domestic retail side of our business our comp was essentially flat for the quarter as mentioned, we saw traffic down one 6% offset by one 5% ticket growth as.

As we move forward, we would expect to see slightly declining transaction 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 parts, while DIY discretionary purchases were challenged in Q1, we continue to see a growing and aging car park.

Challenging new and used car sales market and a consumer that is likely to continue to invest in their existing vehicles.

As such we believe our DIY business will remain resilient for the balance of FY 'twenty four.

I will now say a few words regarding our international business. We continue to be pleased with the progress. We're making internationally are same store sales grew 25, 1% on an actual basis and 10, 9% on a constant currency basis.

During the quarter, we opened five stores in Mexico to finished with 745 stores and four stores in Brazil, ending with 104, we remain committed to international and given our success, we're bullish on international being an attractive and meaningful contributor to autozone future growth now.

Now, let me spend a few minutes on the rest of the P&L and gross margins for the quarter. Our gross margin was 52, 8% up 279 basis points, driven primarily by a nine noncash $81 million LIFO charge in last year's quarter versus a $2 million LIFO credits. This year, excluding LIFO from both years, we had a.

Very strong 70 basis point improvement in gross margin, which increased from last quarter's 37 basis point improvement we've had exceptional gross margin improvement and in fact, we're at the highest gross margin rate we've had since FY 2021.

I will point out that we now have $57 million in cumulative lifestyle charges, yet to be reversed through our P&L and we expect this credit balance to reverse over time, we're currently modeling $5 million and LIFO credits for Q2 based on the deflation experienced in Q1 and as I've said previously once we credit back to $57 million through the P&L.

We will not take any more credits and we will begin to rebuild and unrecorded LIFO reserve.

Moving to operating expenses, our expenses were up seven 4% versus last year's Q1 as SG&A as a percentage of sales Deleveraged 68 basis points. The increase in SG&A has been purposeful as we continue to invest in store payroll.

Underpinning our growth initiatives. These investments are paying 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 $849 million up 17, 4% versus the prior year driven by our positive same store sales growth and gross margin improving improvements, including a LIFO year over year favorable comparison.

Interest expense for the quarter was $91 4 million up 58% from Q1, a year ago as our debt outstanding at the end of the quarter was $8 6 billion versus $6 $3 billion of Q1 and last year.

We are planning interest expense in the $98 million range for the second quarter of FY 'twenty four versus $65 $6 million last year.

Higher debt levels and borrowing rates across the curve are driving this increase.

For the quarter, our tax rate was 21, 6% and up from last year's first quarter of 18, 9%. This quarter's rate benefited 147 basis points from stock options exercised while last year. It benefited 446 basis points for.

For the second quarter of FY 'twenty four we suggest investors model us at approximately 23, 4% before any assumption on credits due to stock option exercises.

Moving to net income and EPS net income for the quarter was $593 million up 10% versus last year, our diluted share count of $18 2 million was seven 2% lower than last year's first quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $32 55.

Up 18, 6% for the quarter.

Now, let me talk about our free cash flow for Q1 for the first quarter, we generated $600 million in free cash flow, we expect to continue being in 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 ratio finished Q1 at two five times EBITDAR returning to our long term target our inventory per store was up three tenths of purposes, three tenths of a percent versus last year, while total inventories increased 3% driven by new store growth.

Net inventory defined as merchandise inventory less accounts payable on a per store basis was a negative $197000 versus negative $249000 last year, a negative $201000 last quarter. As a result accounts payable as a percent of inventory finished the quarter at 124, 4% versus last year's one.

Third 31%.

Lastly, I'll spend a moment on capital allocation and our share repurchase program, we repurchased one $5 billion of Autozone stock in the quarter and at quarter end, we had just over $300 million 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 3% of the shares outstanding in the quarter, we have bought back over 100% of the 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.

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.

We're growing our market share expanding our margins and improving our competitive positioning in a disciplined way.

And as we look forward to the remainder of FY 'twenty four we're bullish on our growth prospects behind our resilient DIY business, a fast growing international business and a domestic commercial business that is re accelerating I continue to have tremendous confidence in our strategy and our ability to drive significant and ongoing value for our shareholders and now I will turn it back to Phil.

Jim here during the quarter, we launched our new fiscal year and I'd like to take a moment to discuss the key takeaways from our national sales meeting in September at.

At the meeting we launched our operating theme for the new year live the pledge while we've used this theme previously it continues to deeply resonate with our autozone or simply put it differentiates us from everyone else. The energy. It's event has never been higher.

Pledge is the core of our culture and I, Our board and our leadership team believe we can never overemphasize our culture.

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

It is based on a team based approach of recognizing everyone's contributions and performance putting team goals ahead of personal goals.

It sets the standard at exceptional performance not mediocrity.

And it's about carrying about people, both our customers and our <unk>.

It's about providing unparalleled career opportunities to avert diverse population of Autozone Our's and it's about the Autozone family, calling yourself a family comes with great responsibility and.

And as so much more to.

The pledge and our values summarize our operating strategy succinctly.

Fiscal 2024 top priority is enhanced execution. Additionally, we have many strategic projects in varying stages of completion, we will continue opening new mega hubs and hubs.

Construction's on our construction on our new distribution centers and the optimization of our new direct import facility or our focus.

As we are also ramping up our dimensional domestic and international store growth to achieve 500 annual new store openings by 2028.

As you noticed our international teams posted same store sales comps on a constant currency basis of 10, 9% much higher than our domestic comp.

International has been strong for a few years now.

While I mentioned all of these investments in FY 'twenty for the number one focus for the remainder of the year will be on growing share in our domestic commercial business we.

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 lead to additional sales growth.

We are excited about what we can accomplish for the remainder of this year.

Finally, I'd like to update you on our leadership transition plan next month, Bill will become executive chair and I will become president and CEO. It will be one of the greatest honors of my life to move into that role and while that role will come with new opportunities and challenges I continue to be very bullish about the.

Prospects because I know, we have an extraordinary culture in a terrific industry and as you have seen an ever evolving but exceptional team as bill and I. Both continue to say and it may sound a little bit cliche, but we both believe it autozone is best days lie ahead of us.

I want to thank bill for his wonderful nearly 19 year tenure, leading this company and thank him for his leadership I am excited about the opportunity to continue to leverage him and his experiences.

In this new role as executive chair.

I also want to thank three other long term senior leaders for their amazing contributions to our success.

Grant Mcgee, Charlie <unk>, and I'll sell teal with their respective 34, 27% and 10 years of service to Autozone.

They have had an enormous contributions and their legacies will be evident in the teams. They have built and the contributions those teams will make over the coming decades.

I congratulate each of them and wish granted Bonnie.

Charlie indoors, and Allen Sue well earned happiness and their next chapters.

Now, we'd like to open up the call for questions.

Certainly everyone. At this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.

We do ask them about posting a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.

We do ask that all participants. Please ask one question and one follow up then reenter the queue.

Once again, if you have any questions or comments. Please press star one on your phone. Please hold while we poll for questions.

Your first question is coming from Bret Jordan from Jefferies. Your line is live.

Hey, good morning, guys.

How are you.

Can we talk a bit more about the international margins since that's going to be a more impactful how it compares to what you see in the U S and I guess, Brazil versus Mexico is there much difference and is there I guess, an investment phase that is going to be required to ramp that.

Yes, I mean from a margin standpoint, we're very pleased with the progress that we're making on.

Margins, both gross margin gross margins and total operating margins.

And our business in Mexico, which is much more mature than obviously, what we have in Brazil, we've been very pleased with the <unk>.

Actions, we've been able to take on the merchandising side of the business.

And that's given us a very healthy gross margin in that business.

And then if you also think about the inherent advantages that you have from a cost structure standpoint, particularly with with wage rates and labor is a very attractive operating margin structure in Mexico, and we believe as our business in Brazil matures and scales over time that we'll see similar advantages in Brazil. So.

Net net what we're doing on the international side, while it's a fast growing business and it's also going to have a lot of margin calories that come along with it.

Yes, I think I would also add we continue to say that in Brazil, we are still losing money there. So.

We are in an investment phase we are ramping up our store count very aggressively but with that comes some operating losses that are kind of consistent with what we've been seeing over the last five or six years.

I guess, what kind of scale do you need to tip, Brazil, and the profitability I mean, the incremental margin would seem to be very high in that case.

That's right, Brett, but frankly, we have a lot of a whole lot of very new stores that are in very new markets. As we are expanding I mean, we've opened 40 stores or so in the last 18 months.

Those stores are very mature so we get to see how those new stores in new markets mature right now, they're causing a pretty good headwind, but not a not unanticipated.

Okay quick follow up.

U S do it for me any channels dispersion national account Tyre service chains versus independents performance.

Yes, there is.

If you if you kind of looked at the business and talking about the.

The big traditional nationals, and the up and down the street or the local shop, those folks have performed pretty well the national accounts, particularly the ones that are focused on tires have been where we've struggled the most and this really goes back to a lot of the weather conversations we had from last year those two.

Organizations, just arent getting the tires off at the same rate they take the power off they see the calipers frozen or lots of rust on those parts in there and they get the job that's just not happening at the same rate. It has previously.

Okay, great. Thank you.

Thank you. Your next question is coming from Michael Lasser from UBS. Your line is live.

Good morning. Thank you so much for taking my question given the performance of the domestic commercial business. This quarter. While there was an acceleration it did fall short of that double digit level that you had anticipated over the long run do you still think this is achievable.

We'll eventually and.

Is it more dependent on the performance of the industry to be stronger in order for Autozone, you achieve that goal.

Yeah. Thanks, Thanks for the Great question I think as we said we are slightly disappointed with our commercial growth for this particular quarter, we're happy that it accelerated but we frankly thought it would accelerate a little bit faster.

We're happy with the progress that we're making into your question about double digit long term.

Yes, we think we can get back to those types of <unk>.

Growth numbers over time, particularly because we have such low share of percent on the commercial side of the business in that four to five range.

So over a long time, we believe we will be able to continue to expand our market share and as we continue to have these newer stores that we've opened over the last five quarters continue to mature and we continue to improve our execution. We believe we will continue to grow our comps in the DSM space.

Got you. Thank you very much for that my follow up question is on the gross margin. It seems like there is a benefit right now from costs coming down retails remaining stable how long is that sustainable and is there a case, where it might make sense to go back some prices in certain.

Erie is.

In order to drive that the retail business to grow a bit faster.

The coming quarters. Thank you.

We're pleased with the progress that we've made on gross margins and it's really comprised of two pieces number one from a merchandising margin standpoint, we've done a great job inside of R. R.

Merchandising organization, a finding cost opportunities and pricing opportunities that have given us accretive gross margins and where we're doing a tremendous job. There second element of that quite frankly has been the work that we've done inside the supply chain.

Recall, our supply chain was under tremendous pressure over the last couple of years or so from a cost standpoint, and we're now starting to see some benefits as some of those pressures have abated.

But if you look at this business over the over the long term I mean, we have historically been able to churn out.

Positive gross margin improvements in a very disciplined fashion over time in that.

Enabled us to grow our earnings very predictably as we move forward.

And when we think about the pricing environment as we've said and we continue to reiterate pricing is a pretty dynamic environment. We don't feel like we need to make any pricing investments at this point to be able to operate the business and grow share but.

But if we do have.

To make those moves will certainly do those if it results in us improving units and ultimately growing EBIT, but at this point, we're in pretty good shape in terms of where we are from a pricing standpoint, and feel that we're very competitive in the marketplace.

Thank you very much and have a great holiday.

W tumor.

Thank you. Your next question is coming from Max with Lingo from TD Cowen Your line is live.

Great. Thanks, a lot. So first can you speak to the competitive environment and if youre seeing any changes there and how would you frame the level of competition today from the <unk> compare it to both a couple of quarters ago as well as pre pandemic.

Yes.

Ill break that up into two parts. If you think about the the DIY competition we've.

We had a very stable base of competitors there for a very long period of time.

That business is pretty stable and there's not a whole lot of.

New or changing strategies that appears from from the competition on the on the <unk> side. If you kind of think about or what we call. Our close in competitors of the public folks I'm not a lot of changes there other than what O'reilly did a.

A year and a half ago or so on their pricing strategy on the W. D side.

I think you kind of have to look at pandemic time versus today, one of the things that we believe is they really struggled with some in stock in some key categories over the pandemic.

Over the last.

Say year or so it appears that they have become.

More in stock on those key categories like everybody has but they were probably more acutely impacted than a lot of the public players and they have returned to more normal levels.

As a reminder, we will we are still not back to our pre pandemic levels of in stock, but we're pretty darn close.

Got it that's helpful. And then you guys touched on delivery times, improving a few times.

The prepared remarks, so can you speak to what your average delivery times are now in the markets, where you've got the megas and then how much more room do you have to improve and then just the cadence we should think about it.

To get there.

Yes.

Yes, just the delivery times can be wildly different depending on proximity of the part and how close that shop may be to a given store or hub and mega hub and the delivery times on Mega hub inventory, what we call expanded parts can differ wildly if it has to be related to a store or.

<unk> delivered directly.

Our average delivery times, you're kind of thinking in that 30 minute range. So a 10% improvement in delivery times is pretty meaningful but it may be three to five minutes and that matters. When a customer is sitting there trying to turn their base. So we believe we will continue to leverage and improve our delivery times.

And that's a key strategy for us because it's a measure of customer service.

Great. Thanks, a lot and best regards.

Thank you.

Thank you. Your next question is coming from Chris <unk> from J P. Morgan Your line is live.

Thanks, Good morning, and congratulations to everybody. So I wanted to follow up on the the question more broadly about the consumer you talked about some of the tire businesses remaining weak he talked about some discretionary.

Front room pressure in DIY I guess how.

How much of this do you think is just a.

A deferral that's building that you typically see.

As a category and as you start to see the slowdown the consumer front consumer starts. The first is are you seeing evidence of that.

And do you think we're still in the point of that sort of getting worse before ultimately that that demand potentially potentially releases.

It's terrific question Chris.

No.

Step back and talk about this on a long term basis first.

If you think about the retail business, which we have much more experience in the retail business and you think about it over long periods of time, we don't spend a lot of time talking about the strength of the consumer much more so when when tough times happen I E. Recessions those have been the periods, where we've outperformed.

More so than any other periods of time, so we don't spend a whole lot of time on the consumer we certainly see in the retail business, there's some trading down going to going down the good better best product Assortments.

I think in the commercial side, we have some positions that we haven't yet proven because we haven't been in that business at this level.

For an extended period of time I believe we think that there may be some consumers that are trading from DIY.

Him into DIY in certain jobs as theyre trying to save money.

The thing I would encourage us all to focus on more so than minor fluctuations in consumer sentiment as we entered the second quarter. The one thing I always worry about is the weather patterns in the second quarter are extremely volatile and they can have big impacts on our performance both positive and.

Negative and as we've said those those impacts of the weather, particularly in the rust belt can have ongoing implications as we get into the spring and summer and even the fall months, if we get significant snow and ice, particularly in the rust belt in the northeast that bodes well for US. If we don't then we're going to have a little bit of a.

Challenge to me that is the more impactful thing thats going to happen in the near term than consumer sentiment.

So as a follow up to that I think last year in December was pretty good in terms of the weather impact right. So it would seem like as you look past today, you know that.

The comparison gets tough, but it was a record warm winter last year. So I guess as you look into your Crystal ball do you think there's sort of a it ends up being a bit of a weaker start in stronger finish to the second quarter.

Yeah, it's interesting Chris because the beginning of the quarter last year. There was no weather, we had significant weather around the holidays for a couple of weeks and thought okay. Here. We go on our business responded really really well and then the January February and March, particularly in the rust belt. It was.

Lack of snow and ice and fairly moderate temperatures. Unfortunately, we don't have a meteorologist on staff either.

And at the end of the day, we're running this business for not quarters not years, but for decades and the weather implications are going to they're going to even out I just always try to make sure and caution everybody at the beginning of the second quarter that we get a really strong performance or we could have really weak performance is driven by weather.

And that doesn't need to change how we approach our strategy or the long term.

Got it thanks, very much have a great holiday.

You too thank you.

Thank you. Your next question is coming from Seth Sigman from Barclays. Your line is live.

Hey, good morning, everyone I wanted to follow up on commercial it seems like you've really accelerated the rollout of new programs over the last few quarters, obviously at a time when sales growth on a comp basis has been lower so can you just help us better understand what's driving that decision right now, particularly as we think about you.

Your comment around in stock levels, improving but not necessarily where you want it to be so how do we think about that thought process around accelerating right now.

Yeah. That's a great question if you if you.

I even mentioned it in the prepared remarks, if we go back to when I was SVP of commercial.

The.

The facts are our per store performance has improved.

On a per store basis, the productivity of those individual stores looking.

Looking back over a decade's worth of time, we went through this phase, where we had less than 50% of our stores around 50% of our stores had commercial and we slowly slowly we ramped up to roughly <unk> <unk>.

70, <unk> low 80% of our stores in commercial.

Then we had a period of time, where we really focused on per store productivity.

And that's been going on for the last several years, let's say five to seven years today, we are at a spot where we've had stores that previously didn't have commercial in them and we look at the market differently with a much different share ownership where.

Where we believe those stores are now predict productive and we're opening them. If you kind of forecasted that out into the future. We think we probably opened the vast majority of those stores that previously didn't have commercial there'll probably be some but I don't think youll see this large.

Opening of previously opened stores that didnt have commercial programs that do today.

But we think those stores over time will be as productive as the stores. We have that have been opened for a long period of time.

We'd like that productivity model going into the future.

Okay. Thank you for that and then just a follow up would be around thinking about the investments that may be required to drive that improvement in commercial and I think this was talked about in a few different ways, including around pricing, but I'm thinking more from an opex from an SG&A perspective.

It's been growing at a relatively steady 4% rate per store that seems reasonable, but I'm curious, how you're thinking about that how you're planning for that throughout this year and whether you need to start to see a pickup in your SG&A growth.

We like the investment profile that we have today.

And we have been very very clear that we're investing in SG&A on a pretty accelerated pace and have done so over the last couple of years or so and thats come in the form of of store payroll, particularly around our commercial program, but also.

And these are the kinds of things that are enabling us to drive the growth initiative and commercial for example, Phil mentioned, what we're doing on delivery times.

The work that we're doing to improve our delivery times is all underpinned by investments that we've made in technology that make it easier for us to deploy drivers and quite frankly give us a better opportunity to tell our customers.

Exactly where our drivers are in the route and how fast they're going to get the parts. So those are some of the examples of things that we've invested in and we're going to continue to do that and in that investment profile is going to pay dividends for us in terms of speed in terms of productivity in terms of better results in terms of customer service.

You also you mentioned price specifically on the <unk> side, and although we made a price investment several years ago today, we like our pricing strategy now.

The pricing is always a pretty dynamic.

Point of our business and we will continue to monitor that but we like where we are from a pricing strategy. Today. So we don't see any major.

Deviation from our current pricing strategy.

Okay. Thanks, guys I appreciate it.

Thank you.

Thank you. Your next question is coming from Zach Adam from Wells Fargo. Your line is live.

Hey, good morning, So when you look at the sequential uptick in your commercial business, but also a sequential downtick in DIY can you help us parse out the impact of broader industry trends versus your own idiosyncratic factors as you put these together is it fair to say that you expect Q2 and fiscal.

<unk> 24, as a whole to look a lot like Q1 or are there factors that give you confidence in both DIY and commercial acceleration as we move through the year, even if the industry slowing.

A separate the two first of all we've been in the retail business for a very long time, we've had lots of periods of time, where we grow in the zero to 2% kind of range, we're coming off a period of time and the pandemic, where our retail volumes went up 25% to 30% and we are frankly tickled to death to still be Ho.

Adding onto those retail volumes and we believe we've retained about 85% of the share that we gained during that three year period of time. So we were very pleased with that we always want to grow faster. We were basically flat. This quarter, we're trying new things, but we're pleased with where we are in the retail business. We are pleased with where we are in the commercial.

<unk> business, but let's don't forget this quarter's comp of five seven is comping against about a 15% comp last year. So so while we didn't meet our goals or aspirations in the quarter, 5% or two we're not disappointed we're not discouraged we know we have a long runway to go in the commercial.

<unk>.

Again, we're going to play this and Deca.

Decades, not quarters and years, we feel like the depending on the weather in the second quarter.

Probably going to look similar to <unk>.

Plus or minus a percent or two similar to what we've seen in the first quarter, our hope and our plan is to accelerate particularly on the commercial side of the business as we enter the second half of the year and we continue to improve our execution.

Got it and then for Jimmy or just wanted to follow up on the gross margin up about 280 basis points. I think you said about 208 basis points of that was LIFO. So first question is how do you expect the LIFO impact to trend in Q2 and going forward and then if we look at the other 70 basis point.

The benefit from the supply chain and merch margin is it possible to talk a little more about the impact of these two individually going forward as well as the impact of mix.

Yes, so if you think about LIFO.

We've got about $57 million or so that we still need to get back through the P&L before we.

Sort of wrap up that piece of our discussion hopefully.

We expect this quarter to be in.

Five call it five to 10 ish ZIP code, depending on what we see in terms of deflation.

And the cadence going forward is likely going to be in that ZIP code. If it changes as we've done in the last few quarters and so we will give you our latest update and our latest guidance.

And as you think about what we're doing from a gross margin standpoint again, if you look at our business over the long term we've typically.

Driven gross margin improvement.

From a merchandising standpoint in that call it 30% to 35 bps.

Range and what we said after we came out of the pricing changes that we made a couple of years or so ago that we would continue to run that play with discipline.

In intensity and be able to drive that from a supply chain standpoint again, we are we are improving in supply chain, but it is largely because our supply chain was under tremendous pressure for a couple of years or so so I wouldn't expect that portion to be 40 bps every single quarter, but we're making steady.

It's there in last quarter in particular was a tough quarter from a supply chain standpoint, and our teams have done a great job of turning that around.

I appreciate the time guys.

Thank you Keith.

Thank you. Your next question is coming from Simon Gutman from Morgan Stanley. Your line is live.

Once again <unk> are you there.

Hello Simeon.

Hey can you hear me now.

We can how are you assuming okay, sorry about that I guess, the air Bud don't work.

I wanted to ask about gross margin and get your temperature on this that the input cost environment is somewhat unique.

Word pricings coming in a little bit freight costs are coming down is it a unique moment you mentioned, you're not going to you don't see a need to reinvest in price what happens to any excess because this industry is pretty good pricing power prices.

Prices come down or is that potential benefit to the gross margin.

Well I think what we've said historically and you've seen us certainly behave this way is that.

As we saw inflation in the business.

We took pricing accordingly.

And as we come out of that particularly with things like freight starting to come down that is an opportunity for us to improve the gross margin profile of the business.

The pricing environment has been incredibly rational has been for decades, and it's certainly behaving rationally today. So we don't see a need to go deliberately invest gross margin improvements and the pricing to drive demand.

If the case was that.

We thought that.

The pricing bands, which we've established that have helped us grow our market share sort of got out of line and we would not hesitate to go invest gross margin to be able to go do that to drive units and to drive market share growth, but the environment that we're operating in today is very very rational and we believe that the gross margin improvements that we're seeing today or an opportunity.

Entity for us to expand margins and ultimately.

Add more calories to the Bottomline.

Yes, and then my follow up just on the health of the business in any way do you think that DIY softness is a lead or could preclude the progress that you'd like to make on commercial I heard Bill Rhodes comment regarding it could take a little bit longer but how do you think about the connected activity of both of these businesses.

Yeah.

I'll go back to what I've said, Simeon I think we understand the retail business very well as we ramp so significantly in the commercial business I don't think we know what the cyclical nature of that business is we have as I set a sub position that there are certain people that in difficult recessionary periods of time, we will.

Trade down into DIY to do a brake job or a battery job, where they might have taken it to a shop before but remember the last time we saw.

A real recession, our commercial business was $1 billion here.

We shouldn't Pat surpassed $5 billion. This year. So I just don't think we have the deep insights that we do in the retail business.

Thanks, guys. Good luck.

Thank you.

Thank you. Your next question is coming from Daniel <unk> from Stephens, Inc. Your line is live.

Yeah, Hey, thanks, good morning, everybody. Thanks, taking my questions.

Third on the domestic DFM growth I guess, you mentioned in your comments that recent openings are creating an optical headwind just put more immature programs. What is the expected maturity curve or normal maturity curve for a new commercial program and is it different in a newbuild versus when you're retrofitting and adding commercial to an existing store.

Sure.

That's a great question, yeah, it's not it's not necessarily different between a net new store in one store that's been open for some number of years and then you add the program later.

But those maturity curves as you would as you could probably imagine they ramped pretty quick on the very front end and then it kind of you know it has a hockey stick over those first couple of years and then they tend to grow.

Consistently after that.

Keep in mind and I'll go back to one of the things. We said earlier, we think an individual store should grow for a pretty long period of time based on the fact that we continue to improve execution and Oh by the way, we only have 4% to 5% market share in that market share. Although it may be slightly different depending on the size of the city or the market that we're competing in we're.

Still at a pretty low share specifically relative to the you know the WD space, who owns the vast majority of that share.

I would just add also.

You can't think about these new stores as if they're in isolation many of those customers. We're servicing already from another store and we will take.

40% of the projected volume from another store because we can service them. So much better because we are in much closer proximity. So every one of them is a little bit different than they are in a rural area. We really don't service those customers related to start from the ground zero, but many of the urban and suburban markets. We have a little bit of a head start already that's true it's a net.

Opportunity to help service them better.

Therefore, you get more share of wallet.

Understood helpful color and then my follow up just a question on the private label I guess, how is that there are less penetration trended in recent quarters. If I'm remembering right you invested a lot in parts quality. The last couple of years I would think of the consumer becomes more price sensitive or just earning the value of private label should go up so I'm curious how that.

Penetration is trending and are we seeing that trade into that either on the D. I F M on the DIY side.

Yes.

Keep in mind, so the <unk> investment in product quality and brand perception has been going on for decades, frankly, but I think we really accelerated that probably 10 years ago, maybe a little more.

As we think about our family of brands.

Dural last has.

Essentially a couple of tears dural AST <unk> gold platinum and we have some other private labels, but for the most part.

We are generally speaking we go for coverage first over choice. So we don't have a whole lot of good better best up and down we do in some categories like batteries and brakes and things of that nature, but for the most part we may have a <unk> brand and that's what we have in some cases, we have a.

Total pro brand, which would be a opening price point, but we don't have a whole lot of choice in our stores, where generally speaking coverage one except in key categories brakes batteries being the best example.

Got it appreciate the color best of luck guys.

Great. Thank you.

Thank you. Your next question is coming from Seth Buschmann from Wedbush Securities. Your line is live.

Thanks, a lot good morning, Thanks for squeezing me in.

Just wanted to follow up on the DIY business and weather aside it seems like you expect the DIY business to not only remain resilient, but also potentially improve a little bit. If you are anticipating a slight decline in transactions in the low to mid six digit ticket growth.

That's an accurate read.

I think thats absolutely accurate Seth.

As we said for for many years the quote unquote I've said, the dirty Little secret about the retail side of this business as if the transactions had been challenged and they've been challenged for over 25 years. They are challenged for a lot of reasons because the OE OE manufacturers are making vehicles and their components.

Much better used to you'd had a lot more frequency of failures on those components today theyre not they don't feel as much because they have a lot of technology involved in those components. So what has happened over very long periods of time as you have this 2% to 4%.

Drag on transactions, but you have an equivalent amount on the average price per piece because the cost of the technology, that's going into those parts. We didn't see that we eliminated that transaction drag during the pandemic and frankly grew upper single digits and transactions today, our transaction count is starting to.

Look a lot more similar to the way it has been in the past one of the challenges that we're still dealing with in the retail businesses last year, we had.

Hyper inflation double digit inflation and so our ticket isn't up as much as it normally would be and I think thats because were normalizing getting past that super high inflation from last year as we think about the DIY business thinking out three or four or five years first of all we're going to have to continue to improve it and we have efforts underway to do.

But we believe it.

3% kind of ticket drag and hopefully more than sorry transaction drag on a same store basis and more than offset that from the <unk>.

Average unit retail.

That's helpful and just thinking about calendar 2024, if you look at the growth rate expectations for DIY versus D. I F. M on an industry basis, which one would you expect to accelerate more from 'twenty three.

I think everybody thinks that <unk> is going to grow with these very rapid rates in DIY is going to decline what we've seen over very significant periods of time is DIY, usually grows 3% to 4% and commercial growth a half a point to a point faster I think if you rolled out the next three years.

Ours, unless there's some big economic shock or something like Covid that will probably continue to be the case.

I appreciate it thank you guys.

Thank you.

It seems appropriate set that you got to ask Bill. The last question that he probably gets to answer on these calls.

So before we conclude the call I'd like to take a moment to reiterate we believe that our industry is in a strong position and our business model is solid.

We are excited about our growth prospects for the year, but we will take nothing for granted as we understand that 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 not a sprint as we continue to focus on the basis basics and strive to optimize shareholder value for the future.

We are confident autozone will be successful.

Lastly, I want to wish everyone, a happy and healthy holiday season, and thank you for participating in today's call.

Okay.

Yeah.

Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.