Q2 2024 Autozone Inc Earnings Call

Company Representative: Greetings. Welcome to the AutoZone 2024 Q2 Earnings Release Conference Call. At this time, all participants are in a listen-only mode.

Greetings and welcome to the Autozone is 2024 Q2 earnings release conference call.

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

Company Representative: A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. Before we begin, the company would like to announce the following forward-looking statements. Before we begin, please note that today's call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded before we begin the company would like to announce the following forward looking 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 1095 forward looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent annual report on Form 10-K, and other filings with the Securities and Exchange Commission for a discussion of important risks.

Company Representative: Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our press release. Good morning. It is. And thank you for it. Sorry for speaking over top of you, Holly.

Uncertainties that could cause actual results to differ materially from expectations forward looking statements speak only as of that they've made and the company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures a reconciliation of GAAP to non-GAAP financial measures can be found in our press release.

Speaker Change: Good morning, and thank you.

Speaker Change: Alright for speaking over top of you Harley.

Company Representative: Good morning, and thank you for joining us today for AutoZone's 2024 second quarter conference call. With me today are Jameer Jackson, Chief Financial Officer, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the second quarter, I hope you had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with the slides complementing our comments today, is available on our website at www.autozone.com under the Investor Relations link. Please click on the quarterly earnings conference call to see them. As we begin this morning, I'd like to say how honored I am to talk with you on behalf of our more than 120,000 AutoZoners, as today marks my first conference call as AutoZone's President and Chief Executive Officer. At Autozone, our first priority is to provide what we call WOW customer service.

Speaker Change: Good morning, and thank you for that.

Speaker Change: Joining us today for Autozone is 2024 second quarter conference call with me today are Jim Meer, Jackson, Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations and tax regarding the second quarter I Hope you had an opportunity to read our press release and learn about the quarter's results if not.

Speaker Change: The press release, along with the slides complementing our comments today are available on our website at www Dot Autozone Dot com under the Investor Relations link.

Speaker Change: Please click on quarterly earnings conference call to see them.

Speaker Change: As we begin this morning, I'd like to say how honored I am to talk with you on behalf of our more than 120000 Autozone yesterday marks My first conference call as Autozone, as President and Chief Executive Officer.

Speaker Change: At Autozone, our first priority is to provide what we call Wow customer service.

Company Representative: This quarter, the efforts of our Autozoners increased our total sales by 4.6% and total company same-store sales by 1.5% on a constant currency basis. Consequently, both our operating profit and earnings per share grew by a very impressive double-digit rate. We continue to build on the phenomenal performance we have had over the last several years. Congratulations to our AutoZoners everywhere who have helped us achieve this amazing growth. Before I begin my comments regarding our second quarter sales, as a reminder, this is always our most volatile quarter to predict, as the timing and severity of winter weather are both meaningful and variable. It is also our lowest sales volume quarter. This year, the Christmas and New Year's Day holidays fell on a Monday compared to a Sunday last year.

Speaker Change: This quarter the efforts of our autos owners increased our total sales by four 6% and total company same store sales by one 5% on a constant currency basis.

Speaker Change: Both our operating profit and earnings per share grew by a very impressive double digit rates.

Speaker Change: We continue to build on the phenomenal performance, we had over the last several years congratulations to our Autozone is everywhere, who helped us achieve this amazing growth.

Speaker Change: Before I begin my comments regarding our second quarter sales as a reminder, this is always our most volatile quarter to predict is the timing and severity of winter weather is both meaningful and variable.

Speaker Change: It is also our lowest sales volume quarter.

Speaker Change: This year, the Christmas and new year's day holidays fell on a Monday compared to Sunday last year for commercial sales. This really mattered Sunday has a very low sales day, one month, while Monday is one of the best.

Company Representative: For commercial sales, this really matters. Sunday is a very low sales day, while Monday is one of the best. While weather across the U.S. was very mild for the first eight weeks of the quarter, we experienced a polar vortex and snow in the last four weeks. This extreme weather helped to propel us to stronger results in DIY, but it muted our sales and commercial results as snow in much of the eastern United States stayed on the ground for an extended period of time. Again, weather extremes, either hot or cold, drive hard part failures and accelerate maintenance over time. For the second quarter, our total company same store sales were 1.5% on a constant currency basis. As international has become a more important part of our growth story, in an area where we are increasingly deploying capital, we will continue reporting on our international performance.

Speaker Change: While weather across the U S was very mild for the first eight weeks of the quarter, we experienced a polar vortex and snow in the last four weeks. This extreme weather helped to propel us to stronger results in DIY, but muted our sales and commercial is snow and much of the eastern United States stayed on the ground for an extended period of time.

Speaker Change: Again weather extremes, either hot or cold drive hard part failures and accelerate maintenance overtime.

For the second quarter, our total company same store sales were one 5% on a constant currency basis.

Speaker Change: As international has become a more important part of our growth story and an area, where we are increasingly deploying capital. We will continue reporting on our international performance.

Company Representative: We encourage you to focus on the same store sales, constant currency number, where International had a strong quarter, up 10.6%. We are very excited about the short and long-term growth prospects for international, and we plan to accelerate new store openings over the next several years. Our domestic same store sales were up 0.3% this quarter compared to 1.2% last quarter and 5.3% in Q2 of last year. Breaking our 12 weeks of sales into the first 8 weeks and then the last 4 weeks, you can see the impact of the holiday shift and the weather volatility. Domestically, we ran a negative 1.8 comp across the first 8 weeks and a positive 4.4% comp in the last 4 weeks. This was even more pronounced when splitting these time frames up between commercial and DIY.

Speaker Change: We encourage you to focus on the same store sales constant currency number where international again.

Speaker Change: Had a strong quarter up 10, 6%.

Speaker Change: We are very excited about the short and long term growth prospects internationally, and we plan to accelerate new store openings over the next several years.

Speaker Change: Our domestic same store sales were up <unk>, 3% this quarter compared to one 2% last quarter and five three in Q2 of last year.

Speaker Change: Breaking our 12 weeks of sales into the first eight weeks and then the last four weeks you can see the impact of the holiday shift and the weather volatility.

Speaker Change: Domestically, we ran a negative one eight comp across the first eight weeks and a positive four 4% comp in the last four weeks.

Speaker Change: This was even more pronounced when splitting these timeframes up between commercial and DIY.

Company Representative: Our commercial business grew 2.7% against very strong sales last year of 13.1%. Although our commercial business finished stronger than we started, our results were below our expectations. Across the 12-week quarter, we were up 4.1% for the first four weeks, then down 0.7% over the second four-week segment, and up 4.4% over the last four weeks. Although better in the last four weeks segment of the quarter, our sales were depressed due to the winter storm shutting down many commercial customers, particularly in the Mid-South. The holiday shift combined with the weather negatively impacted our sales by roughly 2% for the quarter.

Speaker Change: Our commercial business grew two 7% against very strong sales last year of 13, 1%.

Speaker Change: Although our commercial business finished stronger than we started our results were below our expectations.

Speaker Change: Across the trailing 12 week quarter, we were up four 1% for the first four weeks then down seven over the second four week segment and up $4 four over the last four weeks.

Speaker Change: Although better in the last four weeks segment of the quarter, our sales were depressed due to the winter storms shutting down many commercial customers, particularly in the mid south the holiday shift combined with weather negatively impacted our sales by roughly 2% for the quarter. Despite.

Company Representative: Despite all this volatility in commercial sales, we are encouraged that we finished the quarter stronger. Commercial sales growth continues to be driven by the key initiatives we have been working on over time. Improved Satellite and Store Inventory Availability Material Improvements in Hub and Mega Hub Coverage, The strength of Dural Aspirin with an intense focus on high quality products and technology enhancements to make us easier to do business with. We recently launched initiatives focused on improving customer service with faster delivery times in commercial. While very early, we are encouraged by the initial results. In commercial, we continue to see higher growth rates for traffic relative to ticket prices. In Q2, we opened 20 net new commercial programs.

Speaker Change: Despite all of this volatility in commercial sales. We are encouraged that we finished the quarter stronger <unk>.

Speaker Change: Commercial sales growth continues to be driven by the key initiatives, we have been working on over time.

Speaker Change: Improved satellite in store inventory availability material improvements in hub and Mega hub coverage the strength of the <unk> brand with an intense focus on high quality products and technology enhancements to make us easier to do business with.

Speaker Change: We recently launched initiatives focused on improving customer service with faster delivery times and commercial while very early we are encouraged by the initial results.

Speaker Change: In commercial we continue to see higher growth rates for traffic relative to ticket.

Speaker Change: In Q2, we opened 20 net new commercial programs, we now have commercial programs and 92% of our domestic stores.

Company Representative: We now have commercial programs in 92% of our domestic stores. Domestic commercial sales represented 30% of our domestic auto parts sales for Q2. We believe our commercial business will get stronger, and growth rates will improve as we move through the year. Sales growth comparisons get easier in the back half of the year, and our execution, customer delivery times, in-stock levels, and parts availability continue to improve. Regarding domestic DIY, we had a negative 0.3% comp this quarter versus last year's comp of positive 2.7. DIY ran 0.7% across the first four weeks of the quarter, a negative 6.2% across the second four-week segment, and a positive 4.8% comp over the last four weeks. The last four-week time segment was accelerated due to the winter weather.

Speaker Change: Domestic commercial sales represented 30% of our domestic auto part sales for Q2.

Speaker Change: We believe our commercial business will get stronger and growth rates will improve as we move through the year sales growth comparisons get easier in the back half of the year and our execution customer delivery times in stock levels and parts availability continued to improve.

Speaker Change: Regarding domestic DIY, we had a negative <unk>, 3% comp this quarter versus last year's comp of positive two seven D.

Speaker Change: DIY ran 0.7% across the four first four weeks of the quarter a negative six two across the second four week segment and a positive for a comp over the last four weeks.

Speaker Change: The last four week time segment was accelerated due to the winter weather as a reminder, last year the polar vortex hit in the second four week segment.

Company Representative: As a reminder, last year, a polar vortex hit during the second four-week segment. I'd like to add some color on our regional performance as well. The Northeast and Midwest markets underperformed the remainder of the country by 500 basis points in the middle four-week segment, only to swing to a positive 1,250 basis points overperformance for the last four-week segment. For the quarter, we saw 270 basis points of favorable performance in the Northeast and Midwest versus the remainder of the country. Although the Midwest had some extreme cold, we frankly would like to see more winter weather along the East Coast markets, where winter has been persistently mild for more than two years now. Overall, for the quarter, the West performed least favorably.

Speaker Change: I'd like to add some color on our regional performance as well the northeast and the Midwest markets underperformed the remainder of the country by 500 basis points in the Middle four week segment only to swing to a positive 250 basis points over performance for the last four weeks segment for the quarter, we saw a 270 basis.

Speaker Change: Favorable <unk>.

Speaker Change: Performance in the northeast and the Midwest versus the remainder of the country.

Speaker Change: Although the Midwest had some extreme cold, we frankly, we'd like to see more winter weather, along the east coast markets, where the winter has been persistently mild for more than two years now.

Speaker Change: Overall for the quarter, the west performed leased favorably.

Company Representative: Headed into the third quarter, we are planning for a more normal weather pattern, meaning we feel weather will not be a big story one way or the other. Our Q3 performance is always contingent on a normalized tax refund season, and we expect this year to be similar to last year. Regarding our merchandise categories in the DIY business, our sales floor categories underperformed hard parts as we saw more discretionary pullback, particularly from the low-end consumer.

Speaker Change: Headed into the third quarter, we are planning for a more normal weather pattern, meaning we feel whether will not play a big story, one way or the other our Q3 performance is always contingent on a normalized tax refund season, and we expect this year to be similar to last year.

Speaker Change: Regarding our merchandize categories in DIY business, our sales floor categories underperformed hard parts as we saw more discretionary pullback, particularly from the low end consumer.

Company Representative: Regarding this quarter's traffic versus ticket growth, our DIY traffic was down 2.2%, while our ticket average was up 1.7%. We expect our ticket growth to return to more normalized levels in the 2-4% range as we get further removed from higher inflation last year. We attribute our share gains to improved customer service levels in our stores and our in-stock levels nearing pre-pandemic levels driven by improved productivity in our distribution. While we are up against exceptionally strong same-store sales from a year ago, particularly in commercial, we believe we are making progress. We've made many changes across the organization.

Regarding this quarter's traffic versus ticket growth, our DIY traffic was down two 2%, while our ticket average was up one seven.

Speaker Change: We expect our ticket growth will return to more normalized levels in the 2% to 4% range as we get further removed from higher inflation last year.

Speaker Change: We attribute our share gains to improve customer service levels in our store.

Speaker Change: And our in stock nearing pre pandemic levels, driven by improved productivity in our distribution centers.

Speaker Change: While we were up against exceptionally strong same store sales from a year ago, particularly in commercial we believe we are making progress. We've made many changes across the organization from doubling down on many of our long term execution processes, ensuring that we are hiring the best autozone and reducing turnover our execution has improved.

Company Representative: From doubling down on many of our long-term execution processes, ensuring that we are hiring the best autozoners and reducing turnover, our execution is improving, and we're making steady progress. Before handing the call to Jameer, I'd like to highlight and give some color on our international business. At 859 stores opened internationally, or 12% of our total store base, the business had an impressive performance last quarter and should continue to grow at a robust pace for the remainder of fiscal 2024. We are leveraging many of the learnings we have in the U.S. to refine our offerings in our international market.

Speaker Change: And we're making steady progress.

Speaker Change: Before handing the call to Jim here I'd like to highlight and give some color on our international business.

Speaker Change: At 859 stores opened internationally or 12% of our total store base. The business had impressive performance last quarter and should continue to grow at a robust pace for the remainder of fiscal 2024.

Jim Meer: We are leveraging many of the learnings we have in the U S to refine our offerings and our international markets.

Company Representative: And finally, before Jameer discusses our financial results, I'd like to remind you of our overarching objectives for fiscal 2024. We are focused on growing our domestic commercial business and believe our improved service levels will lead to continued sales growth. We also continue to focus on our supply chain with two initiatives that are in flight and drive improved availability.

Speaker Change: And finally before Jim meter discusses our financial results I'd like to remind you of our overarching objectives for fiscal 2024.

Speaker Change: We are focused on growing our domestic commercial business and believe our improved service levels will lead to continued sales growth.

Speaker Change: We also continue to focus on our supply chain with two initiatives that are in flight and drive improved availability.

Company Representative: First, is our expanded hub and mega-hub rollouts. And secondly, we're making good progress on transforming our distribution network. We have two domestic distribution centers currently under construction in the U.S., in Chowchilla, California, and New Kent, Virginia.

Jim: Versus our expanded hub and Mega hub Rollouts and secondly, we're making good progress on transforming our distribution network. We have two domestic distribution centers currently under construction in the U S Chowchilla, California, and New Kent, Virginia.

Company Representative: We are also nearing the completion of our expanded Tepehe Mexico Distribution Center. Additionally, we have broken ground on a larger facility that will house our relocated Monterey Distribution Center. Our strategy is focusing on leveraging the entire network to carry more inventory closer to the customer, driving sales growth with improved speed, expanded parts availability, and improved efficiency. Now, I'd like to turn the call over to Jameer Jackson.

Jim: We are also nearing the completion of our expanded to pay a Mexico distribution center.

Jim: Additionally, we have broken ground on a larger facility that will house, our relocated Monterey distribution Center.

Jim: Our strategy is focusing on leveraging the entire network to carry more inventory closer to the customer driving sales growth with improved speed expanded parts availability and improved efficiency.

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

Jameer Jackson: Thanks, Phil, and good morning, everyone. As Phil has previously discussed, we had a solid second quarter, marking our fifth consecutive quarter of double-digit EPS growth. This quarter, we delivered 4.6% total company sales growth, with a 0.3% domestic comp, a 10.6% international comp on a constant currency basis, a 10.9% increase in EBIT, and a 17.2% increase in EPS. We continue to deliver solid results, and the efforts of our autozoners and our stores and distribution centers continue to enable us to drive growth in a meaningful way. To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q2. For the quarter, total sales were up $3.9 billion, up 4.6%.

Jim: Thanks, Phil and good morning, everyone. So as previously discussed we had a solid second quarter, marking our fifth sequential quarter of double digit EPS growth. This.

Jim: This quarter, we delivered four 6% total company sales growth with a <unk>, 3% domestic comp of 10, 6% international comp on a constant currency basis, a 10, 9% increase in EBIT and a 17, 2% increase in EPS, we continue to deliver solid results and the efforts of our autozone is in our stores and dish.

Jim: Tribunal centers continue to enable us to drive growth in a meaningful way.

Jim: To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q2 for the quarter total sales were up four $3 9 billion up four 6%, let me give a little color on our sales and our growth initiatives, starting with our domestic commercial business, our domestic <unk> sales increased two 7% to 980.

Jameer Jackson: Let me give a little color on our sales and our growth initiatives. Starting with our domestic commercial business, our domestic DIFM sales increased 2.7% to $980 million, and we're up 15.8% on a two-year stack base. Sales to our domestic DIFM customers represented 25% of our total company sales and 30% of our domestic auto parts sales. Our average weekly sales per program were $14,051, down 2.8% versus last year.

And we're up 15, 8% on a two year stack basis sales to our domestic D. I S. M customers represented 25% of our total company sales and 30% of our domestic auto part sales.

Jim: Our average weekly sales per program were $14051 down two 8% versus last year.

Jameer Jackson: Once again, the weekly sales averages were impacted by the addition of a significant number of immature programs over the last couple of quarters. I'll also remind you that Q1 and Q2 are our toughest comparisons this fiscal year, and we expect our year-over-year comparisons to be somewhat easier in the back half of our fiscal year. 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 20 net new programs, finishing with 5,823 total programs.

Jim: Once again the weekly sales averages were impacted by the addition of a significant number of immature programs over the last couple of quarters.

Jim: I'll also remind you that Q1 and Q2, our toughest comparisons this fiscal year and we expect our year over year comparisons to be somewhat easier in the back half of our fiscal year.

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.

Jim: This quarter, we opened 20 net new programs, finishing with 5823 total programs.

Jameer Jackson: Our commercial acceleration initiatives continue to make progress as we seek to grow share by winning new business and increasing our share of wallet with existing customers. Importantly, we 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 101 mega-hub locations.

Jim: Our commercial acceleration initiatives continue to make progress as we seek to grow share by winning new business and increasing our share of wallet with existing customers and importantly, we 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.

Jim: To support our commercial growth, we now have 101 Mega hub locations, our Mega hubs continue to averaged significantly higher sales than the balance of the commercial programs and grew more than three times the rate of our overall commercial business in Q2.

Jameer Jackson: Our mega-hubs continue to average significantly higher sales than the balance of the commercial programs and grew more than three times the rate of our overall commercial business in Q2. Our Mega Hubs typically carry roughly 100,000 SKUs, drive tremendous sales lift inside the store box, and serve as an expanded fulfillment source for other stores. These assets are performing well individually, and the fulfillment capability for the surrounding Autozone stores is giving our customers access to tens of 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 buildup. On the domestic retail side of our business, our comp was negative 0.3% for the quarter. As Phil mentioned, we saw traffic down 2.2%, offset by 1.7% ticket growth.

Jim: Our mega hubs typically carry roughly 100000 Skus drive tremendous sales lift in sizes, the store box and serve as an expanded fulfillment source for other stores.

Jim: These assets are performing well individually and the fulfillment capability for the surrounding Autozone stores is giving our customers access to tens of 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.

Jim: On the domestic retail side of our business our comp was negative <unk>, 3% for the quarter as Phil mentioned, we saw traffic down two 2% offset by one 7% ticket growth.

Jim: 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 Q2, we continue to see a growing and aging car Park a challenge.

Jameer Jackson: 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 the long-term historical trends for the business, driven by changes in technology and the durability of new parts. While DIY discretionary purchases were challenging in Q2, we continue to see a growing and aging car park, a challenging new and used car sales market, and a consumer that is likely to continue to invest in their existing vehicle. In addition, miles driven are back to pre-pandemic levels.

Jim: New and used car sales market and a consumer that is likely to continue to invest in their existing vehicles. In addition miles driven are back to pre pandemic levels as such we believe our DIY business will remain resilient for the remainder of FY 'twenty four.

Speaker Change: And now I'll 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 an impressive 23, 9% on an actual basis and 10, 6% on a constant currency basis during.

Jameer Jackson: As such, we believe our DIY business will remain resilient for the remainder of FY 24. Now, I'll say a few words regarding our international business. We continue to be pleased with the progress we're making internationally. Our same store sales grew an impressive 23.9% on an actual basis and 10.6% on a constant currency basis. During the quarter, we opened six stores in Mexico to finish with 751 stores, and four stores in Brazil, ending with 108.

Speaker Change: During the quarter, we opened six stores in Mexico to finished with 751 stores and four stores in Brazil, ending with 108, we remain committed to international and given our success, we're bullish on international being an attractive and meaningful contributor the autozone future growth now.

Speaker Change: Now, let me spend a few minutes on the rest of the P&L and gross margins for the quarter. Our gross margin was 53, 9% up 160 basis points, driven primarily by a significant improvement in our core business gross margins at 63 basis points from a non cash $10 million LIFO charge in last year's quarter versus a $14 million LIFO credit. This.

Jameer Jackson: We remain committed to international, and given our success, we're bullish on international being an attractive and meaningful contributor to Autozone's future growth. Now, let me spend a few minutes on the rest of the P&L and gross margins. For the quarter, our gross margin was 53.9%, up 160 basis points, driven primarily by a significant improvement in our core business gross margins by 63 basis points from a non-cash $10 million LIFO charge in last year's quarter versus a $14 million LIFO credit this year.

Speaker Change: Year, excluding LIFO from both years, we had a very strong 97 basis points improvement in gross margin, which increased from last quarter 70 basis point improvement.

Speaker Change: We've had exceptional gross margin improvement and in fact Q2's gross margin was at the highest gross margin rate. We've had since Q2 of FY 2021.

Speaker Change: I'll point out that we now have $43 million in cumulative LIFO charges, yet to be reversed or our P&L and we expect this credit balance to reverse over time, we're currently modeling $15 million and LIFO credits for Q3 based on the deflation experienced in Q1 and Q2. This compares to $17 million LIFO credit we had in Q3.

Jameer Jackson: Excluding LIFO from both years, we had a very strong 97 basis points improvement in gross margin, which increased from last quarter's 70 basis point improvement. We've had exceptional gross margin improvement, and in fact, Q2's gross margin was at the highest gross margin rate we've had since Q2 of FY 2021. I'll point out that we now have $43 million in cumulative LIFO charges yet to be reversed through our P&L, and we expect this credit balance to reverse over time. We're currently modeling $15 million in LIFO credits for Q3 based on the deflation experience in Q1 and Q2.

Speaker Change: Last year, which means we will have a $2 million net LIFO headwind in gross profit in Q3.

As I've said previously once we credit back to 43 million through the P&L, we will not take any more credits and we will begin to rebuild and unrecorded LIFO reserve.

Speaker Change: Moving to operating expenses, our expenses were up six 1% versus last year's Q2 as SG&A as a percentage of sales Deleveraged 49 basis points. The accelerated growth in SG&A has been purposeful as we continue to invest in store payroll and to underpin our growth initiatives.

Jameer Jackson: This compares to the $17 million LIFO credit we had in Q3 last year, which means we'll have a $2 million net LIFO headwind in gross profit in Q3. As I've said previously, once we credit back the $43 million through the P&L, we will not take any more credits, and we will begin to rebuild an unrecorded life on reserve. Moving to operating expenses, our expenses were up 6.1% versus last year's Q2 as SG&A had a percentage of sales deleveraged by 49 basis. Accelerated growth in SG&A has been purposeful as we continue to invest in store payroll and IT to underpin our growth initiatives. These investments are paying dividends in 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.

Speaker Change: 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, we will manage expenses in line with sales growth over time move.

Speaker Change: Moving to the rest of the P&L EBIT for the quarter was $743 million up 10, 9% versus the prior year driven by our positive same store sales growth and gross margin improvements.

Speaker Change: <unk> expense for the quarter was $102 $6 million up 56% from Q2, a year ago as our debt outstanding at the end of the quarter was $8 6 million versus $7 billion at.

Speaker Change: At Q2 and last year, we're planning an interest in the $105 million range for the third quarter of FY 'twenty four versus $74 $3 million last year higher debt levels and borrowing rates across the curve are driving this increase.

Jameer Jackson: Moving to the rest of the P&L, earnings per share for the quarter was $743 million, up 10.9% versus the prior year, driven by our positive same-store sales growth and gross margin improvement. Interest expense for the quarter was $102.6 million, up 56% from Q2 a year ago, as our debt outstanding at the end of the quarter was $8.6 billion versus $7 billion at the end of Q2.

Speaker Change: For the quarter, our tax rate was 19, 6% and down from last year's second quarter. A 21, 2%. This quarter's rate benefited 360 basis points from stock options exercised while last year. It benefited 222 basis points for the second quarter of FY 'twenty four we suggest investors model us at approximately 23, 4%.

Speaker Change: Before any assumption on credits due to stock option exercises.

Jameer Jackson: We're planning interest in the $105 million range for the third quarter of FY24 versus $74.3 million last year. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 19.6 percent, down from last year's second quarter of 21.2 percent.

Speaker Change: Moving to net income and EPS net income for the quarter was $515 million up eight 1% versus last year, our diluted share count of $17 8 million was seven 8% lower than last year's second quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $28 89 up seven.

Speaker Change: 72% for the quarter.

Speaker Change: Now, let me talk about our free cash flow for Q2 for the second quarter, we generated $179 million in free cash flow, we had higher capex spending this quarter versus a year ago, and we expect to spend close to $1 1 billion and Capex. This fiscal year as we complete. The addition of our distribution center capacity expansion ahead of schedule.

Jameer Jackson: This quarter's rate benefited 360 basis points from stock options exercise, while last year it benefited 222 basis points. For the second quarter of FY24, we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exchange. Moving to net income and EPS, net income for the quarter was $515 million, up 8.1% versus last year. However, our diluted share count of 17.8 million was 7.8% lower than last year's second quarter.

Speaker Change: I'll also remind you that we generate a majority of our free cash flow in the back half of our fiscal year. We expect to continue to be an incredibly strong cash flow generator going forward and we remain committed to returning meaningful amounts of cash to our shareholders.

Speaker Change: Regarding our balance sheet, our liquidity position remains very strong and our leverage ratio finished Q2 at two four times EBITDAR or.

Jameer Jackson: The combination of higher net income and a lower share count drove earnings per share for the quarter to $28.89, up 17.2% for the quarter. Now, let me talk about our free cash flow for Q2. For the second quarter, we generated $179 million in free cash flow.

Speaker Change: Our inventory per store was up one 6% versus last year, while total inventory increased four 2% driven by new store growth.

Speaker Change: Net inventory defined as merchandise inventories less accounts payable on a per store basis was a negative $164000 versus negative $227000 last year and negative $197000 last quarter. As a result accounts payable as a percentage of inventory finished the quarter at 119, 8%.

Jameer Jackson: We had higher CAPEX spending this quarter versus a year ago, and we expect to spend close to $1.1 billion in CAPEX this fiscal year as we complete the addition of our distribution center capacity expansion ahead of schedule. I'll also remind you that we generate a majority of our free cash flow in the back half of our fiscal year. We expect to continue to be an incredibly strong cash flow generator going forward, and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong, and our leverage ratio finished Q2 at 2.4 times EBITDAR. Our inventory per store was up 1.6% versus last year, while total inventory increased 4.2%, driven by new store growth. Net inventory, defined as merchandise inventories less accounts payable on a per-store basis, was a negative $164,000 versus negative $227,000 last year and negative $197,000 last quarter.

Speaker Change: Versus last year's 127, 7%.

Speaker Change: Lastly, I'll spend a moment on capital allocation and our share repurchase program, we repurchased $224 million of Autozone stock in the quarter.

At quarter end, we had just over $2 $1 billion remaining under our share buyback authorization.

Speaker Change: Bought back over 100% of outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to our leverage target in the two five times area and a disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to <unk>.

Speaker Change: Shareholders.

Speaker Change: So to wrap up we remain committed to driving long term shareholder value by investing in our growth initiatives driving robust earnings and cash and returning excess cash to our shareholders. We're growing our market share expanding our margins and improving our competitive positioning in a disciplined way.

Speaker Change: We look forward to the remainder of FY 'twenty four we remain bullish on our initiatives to grow sales behind our resilient DIY business, a fast growing international business and a domestic commercial business that remains underpenetrated and should accelerate in the back half of the fiscal year I continue to have tremendous confidence in our strategy and our ability to drive significant.

Jameer Jackson: As a result, accounts payable as a percentage of inventory finished the quarter at 119.8% versus last year's 127.7%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $224 million of Autozone stock in the quarter, and at quarter end, we had just over $2.1 billion remaining under our share buyback authorization. We've bought back over 100% of the then outstanding shares of stock since our buyback conception in 1998, while investing in our existing assets and growing our business. We remain committed to a leveraged target in the two and a half times area and a disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. So, to wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash, and returning excess cash to our shareholders.

Speaker Change: And ongoing value for our shareholders and now I'll turn it back to Phil.

Phil: Thank you Jim here I want to stress how proud I am to represent the company is only the fifth CEO over the almost 45 years, we have been in business. As you heard we have a lot of initiatives in flight and we have a great team of autos owners in place to take us to the next level. We truly believe we will continue to improve from here, we are well positioned to grow sales across.

Phil: Our domestic and international store basis with both of our both our retail and commercial customers.

Phil: Our gross margin our gross margins are solid and our operating expense structure is appropriate for future growth.

Phil: We are putting our capital expenditures, where it matters, most our stores our distribution centers and leveraging technology to build a superior customer experience, where we are able to say, yes to our customers' needs.

Phil: Fiscal 2020 for his top priority is enhanced execution. Additionally, we have many strategic projects in various stages of completion, we will continue opening new mega hubs and hubs.

Jameer Jackson: We're growing our market share, expanding our margins, and improving our competitive positioning in a disciplined way. As we look forward to the remainder of FY24, we remain bullish on our initiatives to grow sales behind a resilient DIY business, a fast-growing international business, and a domestic commercial business that remains underpenetrated and should accelerate in the back half of the fiscal year. I continue to have tremendous confidence in our strategy and our ability to drive significant and ongoing value for our shareholders. Now, I'll turn it back to Phil.

Phil: <unk> construction on the new distribution centers and optimizing our new direct import facility.

Phil: We are also in the early stages of ramping up our domestic and international store growth as you noticed our international teams posted same store sales comps on a constant currency basis of 10, 6% much higher than our domestic comps.

Phil: International has been strong for several years now.

Phil: While I mentioned all of these investments in FY 2024.

Phil: Other zones biggest opportunity remains growing share and our domestic commercial business. While Q2 was below our expectations. We believe we have a solid plan in place for growth over the remainder of the year, we know our focus on parts availability and Wow customer service will lead to additional sales growth. We are excited about what we can accomplish and our.

Company Representative: Thank you, Jameer. I want to stress how proud I am to represent the company as only the fifth CEO in the almost 45 years we have been in business. As you've heard, we have a lot of initiatives in flight, and we have a great team of AutoZoners in place to take us to the next level. We truly believe we will continue to improve from here. We are well positioned to grow sales across our domestic and international store bases, with both our retail and commercial customers. Our gross margins are solid, and our operating expense structure is appropriate for future growth. We are putting our capital expenditures where it matters most, our stores, our distribution centers, and leveraging technology to build a superior customer experience where we are able to say yes to our customers' needs. Fiscal 2024's top priority is enhanced execution.

Phil: <unk> owners are committed to delivering results.

Speaker Change: Now I'd like to open up the call for questions.

Speaker Change: Yeah.

Speaker Change: Certainly 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.

Speaker Change: 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.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, we do ask to please limit yourself to two questions. If you have any additional questions you may reenter the queue by pressing star one one moment, please while we poll for questions.

Company Representative: Additionally, we have many strategic projects in various stages of completion. We will continue opening new mega hubs and hubs. We are completing construction on the new distribution centers and optimizing our new direct import facility. We are also in the early stages of ramping up our domestic and international store growth. As you noticed, our international teams posted same store sales comps on a constant currency basis of 10.6%, much higher than our domestic comps. International has been strong for several years now.

Speaker Change: Your first question for today is from Chris <unk> with J P. Morgan.

Chris: Good morning, Kurt good.

Chris: Good morning, Thanks for all the information My My first question for you is on the domestic pro business you know, what's your sense of them.

Chris: What the market is actually growing.

Chris: Especially in light of your mix you know obviously.

Chris: Your your largest and most relevant competitor has a much smaller mix of national account. So I don't think that's obvious to us from the outside so you know how are you seeing the performance of National accounts are you seeing that start to get better or do we have to wait to lap that starting in June July.

Company Representative: While I mention all these investments in FY 2024, Autozone's biggest opportunity remains growing its share in our domestic commercial business. While Q2 was below our expectations, we believe we have a solid plan in place for growth over the remainder of the year. We know our focus on parts availability and great customer service will lead to additional sales growth. We are excited about what we can accomplish, and our Autozoners are committed to delivering results. Now, I'd like to open up the call to questions.

And you know how do you think that your Gulf growing relative to the market on the pro side.

Chris: Yes.

Chris: He kind of segmented the business I think an area of customer growth on the commercial side. That's been more challenged has been the folks that are more focused on under car. So think brakes suspension of those types of areas.

Chris: Related to the tier one of the four corners of the car those are probably been the areas that had been more challenged so for us thats categories like brakes and suspension.

Company Representative: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Chris: We've talked quite extensively about that over the last year.

Chris: And that's probably been where we've been most.

Chris: Challenged.

Chris: I'll go back to the.

Chris Horvers: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. We do ask that you limit yourselves to two questions. If you have any additional questions, you may re-enter the queue by pressing star one. One moment, please, while we poll for questions. Your first question for today is from Chris Horvers with J.P. Morgan. Good morning, Chris.

Chris: The growth opportunities we have in the commercial at the end of the day, we still have pretty low share and theres, a big opportunity for us to continue to grow share in both terms of share of wallet for the customer as well as new customers.

Chris: So does that mean that I mean, I guess, if you were going to.

Chris: Isolate more of the up and down the Street accounts are you seeing are you seeing better relative performance and I know, you're reluctant to give too much detail and breaking out more detail, but like any any commentary of like that what the performance gap between like a national account business versus.

Company Representative: Thanks. Good morning. Thanks for all the information. My first question for you is, on the domestic pro business, you know, what's your sense of how the market's actually growing, especially in light of your mix? You know, obviously, your largest and most relevant competitor has a much smaller mix of national accounts. So I don't think that's obvious to us from the outside. So, you know, how are you seeing the performance of national accounts? Are you seeing that start to get better? Do we have to wait to lap that starting in June or July?

Speaker Change: Up and down the street account, which would be really helpful. Thank you.

Speaker Change: The national accounts, depending on who they are they.

Speaker Change: They can be wildly positive or negative depending as you pick up business or your mature business et cetera.

Company Representative: And, you know, how do you think that you're growing relative to the market on the pro side? I'd say if you kind of segmented the business, you know, I think an area of customer growth on the commercial side that's been more challenged has been the folks that are more focused on undercars. So think brakes, suspension, those types of areas, you know, related to the tire, one of the four corners of the car.

Speaker Change: I, probably should've mentioned another area that's been challenged for us really for the last 18 months has been the.

Speaker Change: The buy here pay here segment in the used car segment.

Speaker Change: Those have been pretty challenged as well.

Speaker Change: Inventory they had incredible sales coming out of the pandemic and.

Company Representative: Those have probably been the areas that have been more challenged. So for us, that's categories like brakes and suspension, which we've talked quite extensively about over the last year. And, you know, that's probably been where we've been most challenged.

Speaker Change: That's probably been a pretty challenged segment as well.

Speaker Change: Got it and then on the you mentioned tax refunds expected to be normal this year I mean based on the data that we track it it does seem to be lagging year over year or.

Company Representative: But, you know, I'll go back to the growth opportunities we have in the commercial. At the end of the day, we still have a pretty low share. And there's a big opportunity for us to continue to grow share in terms of share of wallet for the customer as well as new customers. So does that mean that, I mean, I guess if you were gonna, you know, isolate more of the up and down the street accounts, or are you seeing better relative performance? And I know you're reluctant to give too much detail and break out more detail, but any, any commentary on the performance gap between like a national account business versus an up and down the street account would be really helpful. Thank you.

Speaker Change: So can you talk about what you mean in terms of the expectation on tax refunds.

Speaker Change: It would seem like it actually plays out a little more inverted where you know you you get benefit later in this quarter versus you know some headwinds at the start of the quarter. Thank you.

Speaker Change: We're effectively two weeks into our quarter I mean, a couple of weeks into our quarter.

Speaker Change: The taxes may be.

Speaker Change: <unk> back a week or two but I think over the 12 week quarter, though we expect them to be pretty similar to last year and the vast majority of the taxes should land with well within our 12 week timeframe. So maybe slightly moved back back a little bit, but not meaningful to the quarter.

Company Representative: Yeah, I would say that the national accounts, depending on who they are, they can be wildly positive or negative, depending on how you pick up business or your mature business, etc. You know, I probably should have mentioned another area that's been a challenge for us for the last 18 months has been the buy here, pay here segment and the used car segment. Those have been pretty challenged as well as it, they've struggled with inventory. But they had incredible sales, you know, coming out of the pandemic. And That's probably been a pretty challenging segment as well. Got it.

Speaker Change: Okay.

Speaker Change: We expect it to be normal.

Speaker Change: Got it thanks very much.

Speaker Change: Your next question is from Bret Jordan with Jefferies.

Bret Jordan: Hey, good morning, guys, Hey, Brian morning breath.

Bret Jordan: I guess a question on the competitive landscape as it relates to W. D. As they seem to get better after maybe 'twenty two into 'twenty three could you talk about the up and down the street business is that a pretty stable competitive environment, they still improve or are they sort of plateauing.

Speaker Change: Well on the I'm, sorry, just to make sure I'm clear on your question questions relative to the wds or to the WD competitors. It seemed like they were raising their game for a bit after the pandemic and whether they are kind of stable where they are or are they still are they becoming more competitive still.

Company Representative: And then on that, you mentioned tax refunds expected to be normal this year. I mean, based on the data that, you know, we track, it does seem to be lagging year over year. So can you talk about what you mean in terms of the expectation for tax refunds? It would seem like it actually plays out a little more inverted where, you know, you get a benefit later in this quarter versus, you know, some headwinds at the start of the quarter. Thank you.

Speaker Change: I think.

It's hard to tell exactly what's going on in their business, but from my sense.

Speaker Change: And.

Speaker Change: We see it in our business as well the vast majority of the supply chain constraints that you had in the latter half of the pandemic have resolve themselves for the most part will still continue to improve in stocks are not quite back to where they were.

Company Representative: We're effectively two weeks into our quarter, you know, a couple weeks into our quarter. And taxes may be, you know, pushed back a week or two, but I think over the 12 week quarter, we expect them to be pretty similar to last year. And it's, you know, the vast majority of taxes should land well within our 12 week time frame. So maybe slightly moved back a little bit, but not meaningful to the quarter. We expect it to be normal. Got it. Thanks very much.

Speaker Change: Previous to the pandemic I suspect they will continue to improve slightly and I would also think that the vast majority of the W. D is that had the inventory issues.

Speaker Change: In the latter half of the pandemic and probably recovered for the most part.

Speaker Change: So I think there are better, but I don't think theyre going to have.

Speaker Change: They're not going to materially get better over the over the next short period of time I would tell you that everybody is pretty much back to.

Company Representative: Your next question is from Bret Jordan with Jeff. Hey, good morning, guys. Hey, Bret. Good morning, Jeff.

Speaker Change: Slightly lower than pre pandemic levels.

Bret Jordan: I guess a question on the competitive landscape as it relates to WDs. They seem to get better after maybe 22 or 23. Could you talk about the up and down street business? Is that a pretty stable competitive environment? Do they still improve, or are they sort of plateauing? On the, sorry, just to make sure I'm clear on your question, your questions relative to the WDs or to the Yeah, WD competitors, it seemed like they were raising their game for a bit after the pandemic, and whether they're kind of stable where they are, or they still be, are they becoming more competitive still? Yeah, I think, you know, it's hard to tell exactly what's going on in their business. But from my sense, the end.

Speaker Change: Right and then I guess a question on international.

Speaker Change: O'reilly has gone and acquired fast and it seems like Theres some card west assets for sale up there is Canada market that you would think about is we're really focused in Mexico and sort of secondarily, Brazil.

Speaker Change: Yes, I would say we have I mean, we've got two markets that we're trying to expand and today, which are which are obviously, Mexico and Brazil, we like where we are in an international footprint.

Speaker Change: Canada is interesting I.

Speaker Change: I would say I would never say, we would not look at Canada, but it does have a pretty.

Speaker Change: Solid competitive base up there.

Speaker Change: And we just think theres better opportunities for us at the moment in the current markets that we have we've got plenty of expansion opportunities in both markets and we.

Speaker Change: We like our performance internationally.

Speaker Change: It doesn't mean, we would never go to Canada, but it's not a focus for us at the moment not in 'twenty four.

Company Representative: We see it in our business as well. The vast majority of the supply chain constraints that you had in the latter half of the pandemic have resolved themselves, and for the most part, will still continue to improve. Stocks are not quite back to where they were prior to the pandemic. I suspect they will continue to improve slightly. And I would also think that the vast majority of the WDs that had inventory issues, you know, in the latter half of the pandemic have probably recovered, for the most part. So I think they're better, but I don't think they're going to have, you know, they're not going to materially get better over the course of the pandemic.

Speaker Change: No.

Speaker Change: Yes, six months left in <unk> 'twenty.

Speaker Change: Yeah.

Speaker Change: And our 24 anyway.

Speaker Change: Thank you.

Speaker Change: Thanks, Brett.

Speaker Change: Your next question for today is from Michael Lasser with UBS.

Michael Lasser: Good morning. Thank you so much for taking my question.

Michael Lasser: You eat in an opportunity rich.

Michael Lasser: The commercial business back to a double digit growth rate over time, why or why not.

Michael Lasser: And Michael.

Michael Lasser: Great question and thanks for the question.

Michael Lasser: At the end of the day, we have when we go back to our comment around share we have very low share in this marketplace. I think we will we will improve from here can I tell you exactly when we're going to get back to double digit growth no.

Company Representative: Over the next, you know, short period of time, I would say everybody's pretty much back to, slightly lower than pre-pandemic level. Right. And then I guess question on international, you know, O'Reilly's gone and acquired a vast, and it seems like there's some car quest assets for sale up there. Is Canada the market that you'd think about is, or are you really focused on Mexico and sort of secondarily

Michael Lasser: I would expect that we would grow faster we have initiatives in place that will we will we will accelerate our sales growth, particularly in the back half of this year and it will.

Michael Lasser: <unk> to.

Michael Lasser: To nail a date when I think we get back to a positive double digit number is frankly tough to do theres a lot of variables in there I think we will see consistent share growth and consistent same store sales in total growth in the commercial market.

Company Representative: I would say we have, I mean, we've got two markets that we're trying to expand in today, which are obviously Mexico and Brazil. And we like where we are in our international footprint. You know, Canada is interesting.

Company Representative: I would never say we would not look at Canada, but it does have a pretty solid competitive base up there, and we just think there are better opportunities for us at the moment in the current markets that we have. We've got plenty of expansion opportunities in both markets, and we like our performance internationally. Doesn't mean we'd never go to Canada, but it's not a focus for us at the moment. Not in 24?

Michael Lasser: For a long time to come.

Michael Lasser: Probably because we are we're better than we were as we continue to expand our hubs and mega hubs improve our assortments.

Michael Lasser: And take share we see a long term growth trajectory for the commercial side of the business.

Speaker Change: Got you.

Speaker Change: The full bill. Thank you. So much my follow up question is that Autozone has gross margin has really been growing nicely for some time now but at what point does the gross margin get too high.

Company Representative: Now. Thanks. We've got six months left in Quint 24. Yeah. In our 24, anyway.

Speaker Change: We invite more competition within the sector, especially on the commercial side.

Company Representative: Thank you. Thanks, Bret. Your next question for today is from Michael Lasser with UBS. Good morning.

Speaker Change: Yes, I don't think were over earning from a gross margin standpoint, we've been very disciplined about.

Michael Lasser: Thank you so much for taking the time to answer my question. Do you still see an opportunity to return the commercial business to a double digit growth rate over time? Why or why not?

Speaker Change: Gross margin expansion, we've been very disciplined about pricing.

Speaker Change: What we're actually seeing in our gross margins today as we come out of a period, where we had very high freight costs. We had a supply base that was very challenged from a cost standpoint. When you looked at what was happening with transportation costs wages and just overall inflation in general as we've moved past those periods. It gives us in <unk>.

Company Representative: Michael, great question. And thanks for the question. At the end of the day, we have, let me go back to our comment on shares. We have a very low share in this marketplace. I think we will improve from here. Can I tell you exactly when we're going to get back to double digit growth? No.

Speaker Change: Opportunity now to start to negotiate deflation with our supply base and at the same time as we took pricing during those higher inflationary periods, we're not giving back retails. So what you're actually seeing is sort of a natural evolution of gross margins. If you will the other thing I'll remind you.

Company Representative: I would expect that we would grow faster. You know, we have initiatives in place that think we will accelerate our sales growth, particularly in the back half of this year. And it will continue. To nail a date when I think we will get back to a positive double-digit number is frankly tough to do.

Speaker Change: Is that you know our supply chain was particularly challenged during this timeframe and as our supply chain has improved its cost performance in its efficiencies, we're seeing some gross margin improvement.

Company Representative: There are a lot of variables in there. I think we'll see consistent share growth and consistent same-store sales and total growth in the commercial market for a long time to come. Partly because we're better than we were as we continue to expand our hubs and mega-hubs, improve our assortments, and take share. We see a long-term growth trajectory for the commercial side of things. Got you. That's helpful, Phil. Thank you so much.

Speaker Change: And.

Speaker Change: From our from our supply chain. So this industry has been very very disciplined for decades, we will continue to be disciplined for decades, we don't believe that we're over earning.

Speaker Change: And it's been a very disciplined approach to gross margin expansion and grown market share over time.

Speaker Change: Thank you so much <unk> Mir and Brian.

Speaker Change: And good luck. Thank you appreciate it.

Speaker Change: Your next question is from Scot Ciccarelli with Chile.

Company Representative: My follow-up question is that Autozone's gross margin has really been growing nicely for some time now, but at what point does the gross margin get too high so that it invites more competition within the sector, especially on the commercial side? Yeah, I don't think we're over-earning from a gross margin standpoint. We've been very disciplined about gross margin expansion and very disciplined about pricing. And what we're actually seeing in our gross margins today is that we come out of a period where we had very high freight costs. We had a supply base that was very challenged from a cost standpoint when we looked at what was happening with transportation costs, wages, and just overall inflation in general.

<unk>.

Scot Ciccarelli: Good morning, guys.

Scot Ciccarelli: Geneva can can I follow up on something you just said so you're trying to negotiate deflation. So is the idea to drive down procurement cost, but fully hold retails.

Scot Ciccarelli: Yes, I mean, if you look at what's happened in this industry literally for decades is during periods, where we have.

Scot Ciccarelli: High inflation or even hyper inflation.

Scot Ciccarelli: We've raised retails to basically cover those additions and cost and then as those cost pressures abate.

This industry typically does not lower retails, so what youre seeing is sort of a natural progression that we've seen from a gross margin standpoint, as we're now in a period, where things are becoming a little bit more deflationary. It gives us an opportunity to.

Company Representative: As we've moved past those periods, it gives us an opportunity now to start to negotiate deflation with our supply base. And at the same time, as we took pricing during those higher inflationary periods, we're not giving back retail prices. So what you're actually seeing is sort of a natural evolution of gross margins, if you will. The other thing I'll remind you is that our supply chain was particularly challenged during this time frame. And as our supply chain has improved its cost performance and its efficiency, we're seeing some gross margin improvement from our supply chain. So this industry has been very, very disciplined for decades and will continue to be disciplined for decades. We don't believe that we're over-earning, and it's been a very disciplined approach to gross margin expansion and growing market share over time. Thank you so much, Phil, Jameer, and Brian.

Scot Ciccarelli: To expand our margins if you will we've been very disciplined about doing that as is the entire industry over this time period.

Scot Ciccarelli: Now, let me go way out of it.

Speaker Change: And I had another just another comment on that.

Speaker Change: I think if you go back and look at some of the gross margin pressures, we had in the specifically in the latter half of the pandemic, where the supply chain was most.

Speaker Change: Stressed some of those costs that we had in logistics either overseas or internal in the U S. Not.

Speaker Change: Not all of those costs got pushed onto the consumer because we didn't want to kill unit demand.

Speaker Change: Hurdle some of that to Juniors point, we took those prices up and as the underlying logistics cost.

Company Representative: Good luck. Thank you. I appreciate it. Your next question is from Scot Ciccarelli with Truist. Good morning, guys.

Speaker Change: Basis comes down that margin is what youre seeing today, we don't think we'll give the pricing back because that's what this industry has been very price rational over to Jim Mears point decades.

Scot Ciccarelli: Can I follow up on something you just said? So you're trying to negotiate deflation. So is the idea to drive down procurement costs but fully hold retail prices? Yeah, I mean, if you look at what's happened in this industry, literally for decades, during periods where we have high inflation or even hyperinflation, we've raised retail prices to basically cover those additions and costs, and then as those cost pressures abate, The Bell Initiative 2019, Can I add another just another comment on that? You know, I think if you Some of those costs that we had in logistics... either overseas or internal in the U.S. Not all of those costs got pushed on to the consumer because we didn't want to kill unit demand. So we've hurdled some of that. To Jameer's point, we took those prices up, and as the underlying logistics costs, we just don't see that retail pricing having to come.

Speaker Change: We just don't see that that retail pricing having to come back down.

Speaker Change: So just just to clarify I don't unless we see a spike in logistics or freight costs. The assumption should be now where your current run rate of gross margin is should be a kind of a forward number we should be thinking of.

Speaker Change: Yes, the only thing that I would add to that is that.

Speaker Change: We do expect our commercial business to grow faster as we move forward and so that naturally.

Speaker Change: We will put some drag on the gross margin.

Speaker Change: Percentage, if you will we'll take that trade off because it'll give us an opportunity to have more gross margin dollars. So they'll likely be a mixed pressure pressure as we move forward with a faster growing commercial business.

Speaker Change: But the underlying fundamentals of what we're seeing in gross margin in terms of deflation in terms of improving supply supply chain profile is something that is sustainable as we move forward.

Company Representative: So just to clarify, so unless we see a spike in logistics or freight costs, the assumption should be that your current run rate of gross margin should be kind of the forward number we should be thinking of. And the only thing that I would add to that is that, you know, we do expect our commercial business to grow faster as we move forward. And so that naturally will put some drag on the gross margin percentage, if you will, but will take that trade-off because it'll give us an opportunity to have more gross margin dollars. So there'll likely be mixed pressure on as we move forward, whether whether faster growing commercial business, but, you know, the underlying fundamentals of what we're seeing in gross margin. In terms of deflation, in terms of improving the supply chain profile, this is something that is sustainable as we move forward. Super helpful.

Speaker Change: Super helpful. Thanks, guys.

Speaker Change: Okay.

Speaker Change: Your next question is from Simeon Gutman with Morgan Stanley.

Simeon Ari Gutman: Hey, good morning, everyone, Hey, Phil I know, it's tricky to prescribe when the commercial comps get back to double digit can you give us a sense I don't know if innings is the right way to think about it where your efforts are in totality, you mentioned faster delivery times labor normalizing, there's some supply chain invest.

Phil: So the collective of those where you are on that journey to where you want to get too.

Phil: Yeah.

Phil: <unk>.

Phil: The part of your question. There is what are we doing that have helped stabilize our business and get it back on a more stable footing.

Phil: No.

Phil: Our in stocks have come back to.

Phil: Very close to pre pandemic levels, we've expanded our hubs and our Mega hubs. We are a long way to go to get to our ultimate goals.

Simeon Ari Gutman: Thanks, guys. Your next question is from Simeon Gutman with Morgan Stanley. Hey, good morning, everyone.

Company Representative: Hey, Phil, I know it's tricky to prescribe when the commercial comps get back to double digits. Can you give us a sense of what it feels like? I don't know if innings is the right way to think about it, where your efforts are in totality.

Phil: North of 200 Mega hubs and.

Phil: Significantly more hubs as well those put hard to find parts in the market, where we can get those parts to our commercial customers in particular faster and also helps DIY.

Company Representative: You mentioned faster delivery times, labor normalizing, and there's some supply chain investment. So the collective of those where you are on that journey to where you want to get to. Yeah, I. The part of your question there is, you know, what are we doing that has helped stabilize our business and get it back on a more stable footing? You know, our in stocks have come back to very close to pre-pandemic levels. We've expanded our hubs and our mega hubs; we have a long way to go to get to our ultimate goal, you know, north of 200 mega hubs. We've got significantly more hubs as well. Those put hard-to-find parts in the market where we can get those parts to our commercial customers, in particular faster. It also helps DIY. It'll take us quite a few innings, if you will, to get to more than 200 of those hubs. They just take longer to set up and get in place.

Phil: It'll take us quite a few innings.

Phil: Innings, if you will to get to more than 200 of those hubs. They just take longer to to setup and get in place, but that is improving our efforts on delivery times. We've put in we've invested in technology. We've been talking about this for quite some time, we continue to leverage the technology, we put in the hands of <unk>.

Phil: Commercial autos owners.

Phil: And we've got some tests in place and some early innings. We're we're we're able to show better delivery times by enabling better technology and leveraging that technology. So.

Phil: That will take time to roll out.

Phil: And it will take time for our auto centers to digest.

Phil: Digest the change management, so in the quarter of it in a number of earnings if we're going to play baseball, which starts pretty soon this year.

Phil: Well, maybe we are in the third or fourth inning.

Phil: But hopefully we'll have a rally in the ninth inning.

Phil: Yes.

Speaker Change: Good and I wanted to ask you I think we ask Jim here when he joined but you know since you've taken over I wanted to ask about the the EBIT dollar growth question versus margin.

Company Representative: But that is improving our efforts on delivery times. We've invested in technology. We've been talking about this for quite some time.

Company Representative: We continue to leverage the technology we've put in the hands of our commercial autozoners, and we've got some tests in place and some early innings where we're able to show better delivery times by enabling better technology and leveraging that technology. That will take time to roll out, and it will take time for our AutoZoners to... digest the change management. So in the quarter of it in the number of innings, if we're going to play baseball, which starts pretty soon this year, we'll, you know, maybe we're in the third or the fourth inning. But hopefully, we'll have a rally in the night, www.larryweaver.com, Good.

And part of it is timely because one of your competitors has been leaning in to SG&A and it seems to be working and you know you're having a bifurcation in performance now in the sector. So.

Speaker Change: Your thought process on that balance and then leaning into SG&A over a longer period of time to take advantage of some displacement.

Speaker Change: Yeah on the SG&A front I would.

Speaker Change: We have we have investments that are some in capex and obviously in SG&A to.

Speaker Change: To the degree we can invest and grow sales and EBIT dollars will make those investments all day every day.

Company Representative: I wanted to ask you, I think we asked Jamir when he joined, but you know, since you've taken over, I wanted to ask about the EBIT dollar growth question versus margin. And part of it is timely because one of your competitors has been leaning into SG&A, and it seems to be working. And you know, you're having a bifurcation in performance now in the sector. So your thought process on that balance, and then leaning into SG&A over a longer period of time to take advantage of some displacement. Yeah, on the SG&A front, I would, you know, I We have investments that are, you know, some in CapEx, and some, obviously, in SG&A.

Speaker Change: I think over time, you should see us get our EBIT.

Speaker Change: Our SG&A growth should start to bend down slightly.

Speaker Change: I wouldn't expect a radical change but.

Speaker Change: We've had a lot of investments as we continue to improve our operational efficiencies in our distribution centers and our stores as our auto centers get longer tenured.

Speaker Change: And we hold on and reduce turnover things of those nature of that nature. They will obviously start bringing down some of the SG&A on the margins but.

Speaker Change: Yes, we would invest in a kind of I think maybe in part of your question is.

Speaker Change: Would we take lower margin rates in commercial is a mix of sales like Jimmy mentioned to get higher gross profit dollars absolutely.

Company Representative: To the degree we can invest and grow sales and EBIT dollars, we'll make those investments all day, every day. You know, I think over time you should see us get our EBIT; our SG&A growth should start to bend down slightly. I wouldn't expect a radical change, but, you know, we've made a lot of investments. As we continue to improve our operational efficiencies in our distribution centers, in our stores, as our AutoZoners get longer tenures, and we hold on and reduce turnover, things of that nature, they will obviously start bringing down some of the SG&A on the margins. Yeah, we would invest in a kind of, I think maybe part of your question is, Would we take lower margin rates in commercial as a mix of sales, like Jameer mentioned, to get higher gross profit dollars? Absolutely. You know, I think we can slightly expand our margins on both DIY and commercial over time. And in an effort to increase EBIT dollars, we'll do that all day long. Those are good ones.

Speaker Change: I think we can slightly expand our margins on both DIY and commercial over time, yes.

Speaker Change: And in an effort to increase.

Speaker Change: EBIT dollars will do that all day long those are good those are good exchanges for us.

Speaker Change: Thanks, and good luck.

Speaker Change: Thanks, Jamie.

Speaker Change: Your next question for today is from Seth Sigman with Barclays.

Seth I. Sigman: Hey, good morning, everyone I wanted to follow up on a couple of those points around the commercial you know a lot of noise. This quarter, if you step back.

Seth I. Sigman: There was a lot of momentum in this business pre 2020, and then you clearly outperformed very significantly for multiple years right and then the business has slowed reverting back to maybe more like industry growth I'm not sure, but I guess the real question is what gives you confidence that this is the right go forward strategy, particularly from a supply chain perspective.

Seth I. Sigman: As you think about the next leg of growth Mega hubs has been the central part of that strategy is that right or are there other options that you've thought about I'd love to get some perspective on that thank you.

Company Representative: Those are good exchanges. Thanks, good luck. Thanks, everybody. Your next question for today is from Seth Sigman with Barclays. Hey, good morning, everyone. I wanted to follow up on a couple of those points around the commercial, you know, a lot of noise this quarter. But if you step back, you know, there was a lot of momentum in this business pre 2020, and then you clearly outperformed very significantly for multiple

Seth I. Sigman: Yeah.

Speaker Change: We're extremely excited about both of our both our hubs and our Mega hub strategy.

Speaker Change: And you know us.

Speaker Change: Use the previous comments around earnings.

Speaker Change: We think we'll have well north of 200 Mega hubs.

Speaker Change: Significantly larger growth of hubs.

Seth I. Sigman: And then the business has slowed, reverting back to maybe more like industry growth. I'm not sure. But I guess the real question is, what gives you confidence that this is the right go forward strategy, particularly from a supply chain perspective, as you think about the next leg of growth? You know, mega hubs have been the central part of that strategy. Is that right? Are there other options that you've thought about?

Speaker Change: We're roughly in the third inning or so.

Speaker Change: And hub growth Mega hub growth.

Speaker Change: If you kind of said that.

Speaker Change: That strategy works for us, we see significantly higher growth in those.

Speaker Change: Stores those types of stores and they help speed and harder to find inventory to what we call. Our satellite stores the markets that are close to those hubs.

Company Representative: I'd love to get some perspective on that. Thank you. Yeah, we're extremely excited about both our hub and our mega-hub strategy. And I'll use the previous comments around innings.

Speaker Change: So yes, we believe that is the right strategy, we will continue to modify and enhance our assortment strategies in both our satellite stores and our mega hubs and hubs to get more relevant inventory closer to the customer the faster we can get those hard to find parts into the shop, the better we will grow market share.

Company Representative: You know, we think we'll have well north of 200 mega hubs and, you know, significantly larger growth in hubs. We're roughly in the third inning or so of hub growth, mega hub growth. If you kind of said that, that strategy works for us.

Company Representative: We see significantly higher growth in those. And by the way, all of that inventory we add for the commercial customer also finds its way to sales for the DIY customer. Okay, thank you for that.

Speaker Change: And Oh by the way all of that inventory, we add for the commercial customer also finds its way to sales on the DIY customer.

Speaker Change: Okay. Thank you for that I guess just.

Company Representative: I guess just thinking about the programs that you've added over the last year or so. You've talked about the drag from some of these newer programs. Any perspective on how the new programs are ramping up and if that's any different than what you've seen in the past? Thanks.

Speaker Change: About the programs that you've added over the last year or so you've talked about the drag from some of these newer programs just any perspective on how the new programs are ramping and if that's any different than what you've seen in the past. Thanks.

Company Representative: Yeah, I mean, the math on that is we've added almost 600 new programs over the last couple of years or so. So we went back and retrofitted several stores that didn't have commercial programs. If you remember, historically, we ran sort of 80% to 85% of our stores had a commercial program. That number is now up over 92%.

Speaker Change: Yes, I mean the.

The map on that is we've added over the last couple of years or so almost 600 new programs. So we went back and <unk>.

Speaker Change: Retrofitted several stores that didnt have commercial programs. If you remember historically, we ran sort of at $80 to 85% of our stores had a commercial program that number is now up over 92%, we really accelerated that over the last several quarters.

Company Representative: We really accelerated that over the last several quarters. So right now, we've got probably 300 to 400 immature commercial programs that are ramping up in terms of sales, efficiency, and performance. And as those programs mature, they will certainly provide a tailwind to our business. So, you know, when Phil talks about this notion of our commercial business improving from an execution standpoint, we not only have that working in our favor, but we also have these maturing programs that have only been in operation for the last couple of quarters. And so, you know, if we think about the commercial business very broadly, I just keep grounding us back to this notion that we're under-penetrated.

Speaker Change: So right now we've got <unk>.

Speaker Change: 300 to 400 immature commercial programs that are ramping up in terms of sales and efficiency and performance.

Speaker Change: As those programs mature it will certainly provide a tailwind to our business. So when Phil talks about this notion of our commercial business improving from an execution standpoint, we not only have that working in our favor, but we also have these maturing programs that have only been in operation for the last couple of quarters and so.

Speaker Change: If we think about the commercial business very broadly.

Speaker Change: I just keep ground on its back to this notion that we're underpenetrated, we have a four or five share and what's approaching 100 billion dollar market. We've put a number of things in place that are delivering and have delivered.

Company Representative: We have a four or five share in what's approaching a $100 billion market. We've put a number of things in place that are delivering and have delivered exceedingly well for us. And as we move forward, you know, we like the competitive hand that we have with growing the mega-hub footprint and improving execution by adding more commercial programs. It's our number one growth priority inside the company, and we're all hands on deck there. The last thing I'll just say, as you think about commercials, is if you think about the back half of this year, the front half of this year, we're up against a 15 comp and then a 13 comp.

Speaker Change: Exceedingly well for us and as we move forward, we like the competitive hand that we that we have with growing mega hub footprints with with improving execution with adding more commercial programs.

Speaker Change: Number one growth.

Speaker Change: Priority inside the company and and you know we're all we're all hands on deck, there and the last thing I'll just say as you think about commercial was just when you think about the back half of this year than the front half of this year, we had you know where.

Speaker Change: We're up against a 15 comp and then a 13 comp in the back half of the year.

Company Representative: The back half of the year, the comps get a little bit easier, so the comments that we made earlier in our prepared comments..., or just along the notion that the comparisons get a little bit easier. And as we have all of these things from an initiative standpoint working in our favor, it gives us a lot of confidence about the back half. Can I, let me add a little bit to that too, specifically around new stores, and I'll maybe give a little bit of a history lesson here. You know, if you go back to FY 2017 or those types of years, our productivity per store was on a pretty heavy diet of opening up new programs. And then we decided, from a strategy perspective, we would slow down our new store openings per commercial and really start trying to drive per- Back then, our per-store productivity was in the $7,000 to $8,000 range.

Speaker Change: Comps get a little bit easier. So the comments that we made earlier in our prepared comments.

Just along the notion that the comparisons get a little bit easier and as we have all of these things from an initiative standpoint, working in our favor it gives us a lot of confidence about our back half execution.

Speaker Change: You cannot let me add a little bit on to that too specifically around new stores and I'll, maybe take a little bit of a history lesson here. If you go back to.

Speaker Change: FY 2017, or those types of number years, our productivity per store, we had been on a on a pretty heavy diet of opening up new programs.

Speaker Change: And then we decided from a strategy perspective, we would slow down our new store openings for commercial and really start trying to drive per store productivity back then our per store productivity was in the seven to $8000 range today as Jo Mira quoted earlier in the prepared comments, we're significantly higher than that.

Company Representative: Today, as Jamir quoted earlier in the prepared comments, we're significantly higher than that. The other thing that's happened is as we open up new programs in today's environment versus years ago, they are maturing at a faster rate and getting to a higher, you know, more plateaued rate. We like that math. You know, we're probably not gonna open up. We'll have about 600 stores in the next two years or so, like we have done in recent history. That will probably slow a little bit.

Speaker Change: The other thing that's happened is as we open up new programs in today's environment versus years ago. They are maturing at a faster rate and get to a higher more plateaued rate. So.

Speaker Change: We like that math.

Speaker Change: Probably not going to open up.

Speaker Change: 16, or 600 stores in the next two years or so like we have over the recent history that will probably slow a little bit.

Company Representative: But we like the way the new stores come out of the box and the maturity curves that we get versus, frankly, 2017 or 2018. Thank you both. I appreciate it. Thanks. The next question is from Steven Forbes with Guggenheim Securities. Good morning, maybe just a follow up on Seth's question. And just like, you know, a way to sort of maybe contextualize the mega hub strategy for us. Is there any way to think through or maybe discuss, you know, the contribution to growth or how ROI is trending behind these investments versus what the potential should be as we look out sort of a couple of years, like any sort of numeric contextualization of where we are in the maturity curve of the initiatives? Yeah, I think a couple things stand out to us.

Speaker Change: But we like the way the new stores come out of the box and the maturity curves that we get versus frankly 2017 or 18.

Speaker Change: Thank you both I appreciate it.

Speaker Change: Thanks.

Speaker Change: The next question is from Steven Forbes with Guggenheim Securities.

Steven Forbes: Good morning, maybe.

Steven Forbes: And maybe just a follow up on <unk> question and just.

Steven Forbes: As a way to sort of maybe contextualize the mega hub strategy for us.

Steven Forbes: Is there any way to think through or maybe discuss the contribution to growth or are how our ROI is trending behind these investments versus what the potential should be as we look out sort of.

Steven Forbes: A couple of few years.

Steven Forbes: Any sort of numeric contextual ovation of of where we are in the maturity curve of the initiatives.

Speaker Change: Yes, I think a couple of things stand out to us. The first is that the mega hubs are growing from a commercial perspective and from a from an overall perspective significantly faster than our satellite stores in.

Steven Forbes: The first is that the mega hubs are growing from a commercial perspective and from an overall perspective significantly faster than our satellite stores. And, you know, it's over 3x what we see on a total domestic business basis. So we're very pleased with the tremendous sales lift that we're getting inside of the box, both on the DIY and the commercial side. I think the second thing that gives us a lot of confidence is that we talked about this notion of testing multiple mega hubs in major metro markets. And we've done that over the last few years or so.

Speaker Change: It's over three X.

Speaker Change: What we see on a total domestic business base and so we've been very pleased with the tremendous sales lift that we get that we're getting inside of the box both on the DIY and the commercial side I think the second thing that gives us a lot of confidence as we talked about this notion of testing multiple mega hubs in major metro markets and we've done that.

Speaker Change: Over the last few years or so and the idea there was to jam more mega hubs in our market and jam more parts closer to the customer to see really how high is high and what we experienced in that timeframe was the fact that we didn't see the kind of cannibalization that we would have anticipated which some.

Company Representative: And the idea there was to jam more mega hubs in a market and jam more parts closer to the customer to see really how high the density is. And what we experienced in that time frame was the fact that we didn't see the kind of cannibalization that we would have anticipated, which suggested that the number of mega hubs that we could actually operate was significantly higher. And if you'll recall, we had mega hub targets that went from 100 to north of 200 over a very short period of time.

Speaker Change: Adjusted that a number of mega hubs that we could actually operate with significantly higher and if you'll recall, we had mega hub targets that went from 100 to north of 200 over a very short period of time. So we like what we see from a sales standpoint, we like what we see from an earnings standpoint.

Company Representative: So we like what we see from a sales standpoint. And we like what we see from an earnings standpoint. And it's not only what we're seeing inside the four walls, but it's also the fact that these mega hubs are an important fulfillment source for the surrounding satellite stores. So when you put all that together in the mix, I mean, it's a pretty attractive story for us, both in terms of sales and earnings and return on investments. And we're going to go as fast as we possibly can to accelerate that. Thank you for that. Maybe just a quick follow-up on the outlook for expense growth. I think you mentioned how it should curve downward.

Speaker Change: And we and it's not only what we're seeing inside the four walls, but it's also the fact that these mega hubs are an important fulfillment source for the surrounding satellite stores.

So when you put all that together in the mix I mean, it's a pretty attractive story for us both in terms of sales and earnings and return on investments and we're going to go as fast as we possibly can to accelerate.

Speaker Change: Thank you for that and maybe just a quick follow up on the outlook for expense growth I think you mentioned how it should.

Speaker Change: <unk> curve downward.

Company Representative: But obviously, we also have this store growth acceleration plan, you know, looking at the 26 and beyond. And so maybe just help you provide additional clarity on why there's sort of no disconnect in maybe sort of leaning into the investment cycle ahead of a ramp in store growth? I mean, is there any risk that EBIT margin could or should take a step back as you sort of ramp up the business for a more accelerated growth period?

Speaker Change: But obviously, we also have this new store growth acceleration.

Speaker Change: Plan looking out to 'twenty, six and beyond and so maybe just help provide additional clarity on why there's sort of no disconnect in maybe.

Speaker Change: Sort of leaning into the investment cycle ahead of a ramp in store growth I mean is there any risk that EBIT margin.

Speaker Change: Could or should take a step back as you sort of ramp the business for a more accelerated growth period.

Company Representative: Yeah, I mean, we've invested in SG&A in a very disciplined fashion over the last several years or so, and what we've always said is that, over time, SG&A growth should be in line with what we see in terms of the top line. Now in the near term, to your point, we've invested at an accelerated pace behind technology, behind store payroll, all of those things to drive near-term growth for us, and we won't hesitate to do that to the extent that there are opportunities for us to invest in SG&A to drive our growth initiatives. We will do that as we've done historically as we move on and look to accelerate our store growth. There will be some drag on SG Your next question is from Greg Melich with Evercore ISD. Thanks, congrats guys, that was a nice quarter.

Yes, I mean, we've invested in SG&A and a very disciplined fashion over the last several years or so and what we've always said is that over time SG&A.

Speaker Change: Growth should be in line with what we see in terms of the top line now in the near term to your point you know we've invested at an accelerated pace behind.

Speaker Change: Behind technology behind store payroll all of those things to drive near.

Speaker Change: Near term growth for us and we won't hesitate to go do that to the extent that there are opportunities for us to invest in SG&A to.

Speaker Change: To drive our growth initiatives.

Speaker Change: We will do that as we've done historically as we move out and look to accelerate our store growth.

Speaker Change: There will be some drag on SG&A, but we should be able to manage that within that framework that I've talked about.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Your next question is from Greg Melick with Evercore ISI.

Greg Melich: Hi, Thanks, Congrats guys and a nice quarter.

Greg Melich: I'd like to follow up on this and on inflation. So if the ticket was up 1.7%, was it fair to say that same-skew inflation was sort of near that number and that, you know, how did items and baskets mix, etc.? out in the corner.

Greg Melich: I'd like to thank all up on.

Greg Melich: Yeah and on.

Greg Melich: Inflation, so if ticket was up one 7%.

Greg Melich: Is it fair to say that the same SKU inflation was sort of near that number and that you know how did how did items in a basket mix et cetera.

Company Representative: Yeah, so what we've seen on ticket growth is, you know, something in the low single digits right now. And we're seeing same-skew inflation somewhere in that same zip code. Greg, I think the important thing to recognize from an inflation standpoint is that we came off a period of significantly higher inflation, that's tempered some. Most of that inflation was driven by freight. So as freight costs have come down, we've seen some of that inflation start to come down as well. And I think the overarching point is that, you know, we're continuing to be very disciplined about pricing; where there is an opportunity for us to take retail, we will do so. And where there's an opportunity for us to get deflation and our costs to drive gross margin, we'll do that as well.

Greg Melich: The quarter.

Speaker Change: Yes, so what we've seen on ticket growth was you know something in the low single digits right now and we're seeing the same SKU inflation somewhere in that same ZIP code, Greg I think the important thing to recognize.

Speaker Change: Recognized from an inflation standpoint, as we came off a period of significantly higher inflation. That's tempered. Some most of that inflation was driven by freight so as freight costs have come down we've seen some of that inflation start to come down as well.

Speaker Change: The overarching point is that you know, we're continuing to be very disciplined about pricing, where there are opportunity for us to take retails, we will do so and where there's an opportunity for us to get deflation in our costs to drive gross margin, we'll do that as well we're not expecting.

Company Representative: We're not expecting, you know, sort of the same levels of inflation to drive ticket growth that we have seen in the last year or so. And so you should expect that at some point, the normal lies back in that low to mid single digit range to offset the decline that we naturally see on the DIY side from transactions. Got it, but presumably that a little bit of acceleration and ticket comes from from Mick, and Items in Basket rather than Inflation Ticking Up, same SKU.

Speaker Change: Sort of the same levels of inflation to drive ticket growth that we have in the last year or so and so you should expect ticket at some point the normalized back in that.

Speaker Change: Low to mid single digit range to offset the decline that we naturally naturally see on the DIY side from transactions.

Speaker Change: Got it, but presumably that a little bit of acceleration in ticket comes from from mix.

Speaker Change: Items in a basket rather than inflation ticking up.

Speaker Change: Hugh.

Company Representative: I think that's right. And you know, as we move forward, I mean, it's a pretty dynamic environment out there. Even from an inflation standpoint, we'll stay very, very close to and be disciplined about how we manage our business. Go back over long periods of time, decades, I mean, this industry has had a slight decline in transactions in units and an increase in ticket average and average unit retails in that somewhere between 2 to 4% range on average, predominantly because of changes in technology, better parts, and some, you know, think about belts on a car used to The belt used to be four or five bucks; today, a belt may be $60 or $70.

Speaker Change: I think Thats I think thats right.

Speaker Change: And you know as we as we move forward I mean, it's a pretty dynamic environment out there even from an inflation standpoint will stay for very close to it and be disciplined about how we manage our business.

Speaker Change: Okay.

Speaker Change: Go back over long periods of time.

Speaker Change: Decades, I mean, this industry has had a slight decline in transactions and units.

Speaker Change: And an increase in ticket average.

Speaker Change: And average unit retails and that somewhere between 2% to 4% range on average.

Speaker Change: Predominantly because of changes in technology better parts and some.

Speaker Change: It's great to think about belts on a car Houston average car used to have more belts on it today. They have won the Nobel it used to be four or five bucks today about maybe 60 or $70. So that technology change is probably going to continue and.

Company Representative: So that technological change is probably going to continue, and there's been a pretty..., understandable decline in units and a change in average unit retail. And we generally have a pretty good line of sight to this because product development takes, you know, years, and an item may stay in our stores for 20 years. It's the beauty of having, frankly, a lower-term business that's very predictable. I'd love to follow up on SG&A and investment there. Mr. Stramir, could you set us straight on what wage inflation is running now and what you're looking at for the next few quarters? And if you think about these pilots that you're doing on faster delivery, it sounds like it's a lot of tech investment. But are there delivery people as well?

Speaker Change: That's been a it's been a pretty.

Speaker Change: Understandable decline in units and a change in average unit retail and we generally have pretty good line of sight to this because the product development takes years and an item may stay in our stores for 20 years. It's a it's the beauty of having a frankly, a lower term business, it's very predictable.

I'd love to follow up on SG&A and investment there.

Speaker Change: Or Australia, or maybe could you level set us on just what wage inflation is running now what's your what youre looking at and so the next few quarters.

Speaker Change: And if you think about these pilots that youre doing on the faster delivery. It sounds like it's a lot of tech investment.

Speaker Change: But is there are there delivery people as well just help us understand that a little bit more the reacceleration of commercial there.

Company Representative: Just help us understand that a little bit more, the reacceleration of commercial there. Yeah, so you know, from an average wage standpoint, we're, we're thrilled that we're starting to see average wages now with a two handle versus a three or four that we've seen over the last few years or so. So as things have cooled down, we've seen some of the hyperinflation go away. In the labor markets, we're now back to a more normalized sort of wage inflation, if you will.

Speaker Change: Yes, so from an average wage standpoint.

Speaker Change: We're thrilled that we're starting to see average wages now with a with a two handle versus a three or four.

Speaker Change: We've seen over the last.

Speaker Change: A few years or so.

Speaker Change: So as.

Speaker Change: Things have cooled down we've seen some of the hyperinflation go away in the labor markets. We're now back to a more normalized.

Sort of wage inflation, if you will in terms of the investments that we're making nearly every investment that we're that we have from our growth initiatives standpoint is underpinned by some changes in technology.

Company Representative: Now, in terms of the investments that we're making, nearly every investment that we have from a growth initiative standpoint is underpinned by some changes in technology, whether that's on the commercial side with what we're looking to do with some of our commercial acceleration initiatives or on the retail side. Nearly all of those growth initiatives are underpinned by some changes that we are making in technology. Our technology teams have done a tremendous job of doing that in a very cost-efficient way.

Speaker Change: Whether that's on the commercial side with what we're looking to do with some of our commercial acceleration initiatives are on the retail side nearly all of those growth initiatives are underpinned by some changes that we're making in technology. Our technology teams have done a tremendous job doing that in a very cost efficient way and <unk>.

Company Representative: And, you know, we and as we move forward, we'll continue to invest in a very disciplined way as we move forward, you know, in terms of the commercial business and you know how we improve delivery. I mean, we've been very efficient in terms of how we've deployed our physical assets in terms of vehicles and our people assets in terms of labor to manage that commercial business over time, and there hasn't been a meaningful change to what we're doing. Well, great. Thanks and good luck!

Speaker Change: And as we move forward, we will continue to invest in a very disciplined way as we move forward now in terms of.

Speaker Change: The commercial business and how we improve delivery I mean, we've been very efficient in terms of how we've deployed our physical assets in terms of vehicles and our people assets in terms of labor.

To manage that commercial business overtime, and there hasn't been a meaningful change in what we're doing there.

Speaker Change: Well, great Thanks, and good luck.

Company Representative: Thank you. Your next question is from Max Raklenko with TD County. Great, thanks a lot, guys.

Speaker Change: Thank you.

Speaker Change: Your next question is from Max <unk> with TD Cowen.

Max: Great. Thanks, a lot guys.

Max Raklenko: So in the stores where you're piloting the initiatives to improve GIFM service and speed levels, just how is that going versus your own internal expectations? And then how are you thinking about scaling these initiatives over the coming quarters? Just curious how early those are, and when you think that they could be ready to go wider. It's a...

Max: So in the stores, where you're piloting the initiatives to improve <unk> service and speed levels, just how is that going versus your own internal expectations and then how are you thinking about scaling these initiatives over the coming quarters. Just curious how early those are and why you think that they could be ready to go lighter.

Company Representative: Thank you for the question. And it's early innings in that we've been testing some stuff, you know, how to use the data. You know, we've had our own, you know, if you think about our handhelds and a lot of technological enhancements that we made over the last couple of years. And now we've got a pretty robust set of data where we can look and figure out what are the best and most efficient ways to use our assets. It is early innings, but we like what we see, and we're in the process of rolling that out. There's some change management that we have to work through. There are some changes in technology that our autozone workers need to be comfortable with and some changes in operations in the stores.

Speaker Change: Yes, it's.

Speaker Change: Thank you for the question, it's early innings in that we've been testing some stuff.

Speaker Change: How do you use the data we've had or are you know if you think about our handhelds and a lot of technology enhancements that we made over the last couple of years and now we've got a pretty robust set of data, where we can look and figure out what are the best and most efficient ways to use our assets both.

Speaker Change: Human assets are a great auto zones in our trucks and where the inventory is how do we get the parts to the customer the fastest to improve customer service. It is early innings, but we like what we see and we're in the process of rolling that out is it does there is some change management that we have to work through there's some.

Speaker Change: <unk> and technology that autos owners need to be comfortable with and some changes in operations in the stores, but we like what we see and.

Company Representative: But we like what we see, and we've had some positive feedback on that. We're happy with what we see, and we think it will improve customer service in the shop. And we'll get the parts faster to the customer without having to drive the car any faster because we want to be safe. Okay. It's very helpful. And then can you just speak to your in-store staff retention rates? How are those trending?

Speaker Change: We've had some pauses and evaluate and then move a little further pause and evaluate and move a little further but we're happy with what we see and we think it will it'll improve customer service to the shop, and we will get the parts faster to the customer.

Speaker Change: Having to drive the car faster because we want to be safe.

Speaker Change: Got it that's very helpful. And then can you just speak to your in store staff retention rates, how are those trending and if thats translating into improvements in parole satisfaction, and then ultimately better demand better demand trends in those stores.

Company Representative: And if that's translating into improvements in customer satisfaction and then ultimately better demand trends in those stores? I'll say two things have happened. One is, and we've mentioned it a couple of different times, you know, we have, if you think about staffing as a whole, it's not back to pre-pandemic levels, but it's better than it was during the pandemic. You know, we still have work to do to get retention and turnover back down to pre-pandemic levels, both in our stores and in our distribution centers, but it is improving, and we like the trends that we're seeing. Although we'd love it to be faster,

Speaker Change: Yeah, I'll say two things have happened one is you know and we've mentioned it a couple of different times. We are if you think about staffing in whole, it's not back to pre pandemic levels, but it's better than it was during the pandemic, we still have work to do to to get retention.

Turnover back down to pre pandemic levels, both in our stores and in our distribution centers, but but improving and we like the trends that we're seeing although we'd love it to be faster. The other thing we did on commercial engineers mentioned in a couple of times, we've opened up roughly 600 stores.

Company Representative: The other thing we did on commercial, and Jameer mentioned it a couple of times, you know, we opened up roughly 600 stores in slightly over two years. As we did that, obviously, that takes your, you know, the commercial specialist and the TSM and things of that nature, those really high-caliber people that were concentrated in some stores. We expanded pretty quickly. So you got new promotions, and people got to learn their jobs and learn those new shops and get really ingrained with those long-term relationships. And that will continue to get better as we move forward. So it's kind of like two elements.

Speaker Change: And slightly over two years as we did that you know obviously that takes your commercial specialist in the TSM and things of that nature of those really high caliber people that were concentrated in some stores. We expanded pretty quickly. So you got new promotions and people got to learn their job and learn those new shops and get really ingrained with those.

Speaker Change: Long term relationships and that will continue to get better as we move forward.

Company Representative: Great. Thanks a lot. Best regards. Thanks. Thank you. Appreciate the question. Okay, I think we have time for one last call. The next question is from Brian Nagel with Oppenheimer. Hi, good morning.

Speaker Change: So it's kind of two elements.

Speaker Change: Great. Thanks, a lot.

Speaker Change: Best regards.

Speaker Change: Thank you I appreciate the question.

Speaker Change: Okay. I think we have time for one last call.

Speaker Change: The next question is from Brian Nagel with Oppenheimer.

Brian Nagel: Thanks for stopping me in. All right. So my first question, I know there's been a lot of questions about commercial, and we recognize this has been an ongoing conversation, there's a lot of moving parts here, as we look at the kind of nearer-term trends, but I guess, not at the risk of being too simplistic, I know we have talked about this for a long time, at www.zacharyfadem.com, Yeah, I mean, to say we' Is there always opportunities to improve? The answer is yes. Go back to our share comments that we've made several times.

Brian Nagel: Hi, good morning, Thanks for slipping me in.

Brian Nagel: Morning, Brian.

Brian Nagel: So it was my first question I know, there's been a lot of questions on commercial.

Brian Nagel: Recognizing that this has been ongoing conversations.

Brian Nagel: A lot of moving parts here as we look at the kind of the near term trends, but I guess, that's not the risk would be too simplistic, but in a week for a long time talked about you'll keep measure of success in commercial so to say climbing that list you know in each individual store climbing that list of them. You are your are your customers. So the question I have is.

Brian Nagel: As you as you pull and talk to your stores are you seeing any indications that you're falling further down those lists or maybe the climb up somebody's Wizards stalled.

Speaker Change: Yeah, I mean to say, we're falling down the list I don't I don't think that would be a good characterization.

Speaker Change: Is there are always opportunities to improve the answer's, yes go back to our share comments that we've made several times, we still have under 5% share we believe.

Company Representative: We still have under 5% share, we believe. And as we get better and mature in relationships, open up new stores, get better in new stores, and drive parts availability and what we call internally "time to shop," the quicker we can get those parts to the shop, the better we'll be. And, you know, this, I think there's a bit of a misnomer that, you know, a customer has the first call. They don't all have every part that's needed in a particular shop. So a customer will have multiple people they call.

Speaker Change: And we will as we get better and mature and relationships open up new stores get better in new stores and drive parts availability and what we call internally time to shop. The quicker we can get those parts to the shop, the better will be.

Speaker Change: And.

Speaker Change: I think there's a bit of a misnomer that.

Speaker Change: Customer has a first call.

Speaker Change: They they all nobody has every part that's needed in a particular shop. So a customer will have multiple people they call.

Company Representative: You know, we think we will continually move up the call list and gain a larger share of wallet for each customer. But to say that you're always the first call with any particular customer is pretty rare. It's pretty rare for a customer to put all of their eggs in one basket because nobody's got all the parts. It's virtually impossible.

We think we will continually move up the call list and gain a larger share of wallet for each customer, but to say that youre always first call with any particular customers.

Speaker Change: That's pretty rare for a customer to put all their eggs in one basket.

Speaker Change: Because nobody has got all the parks, it's virtually impossible theres too. Many skus. So I think we will continue to get better I think we've gotten better from where we were and we've got a long road in front of us to continue to take market share and gained new customers.

Company Representative: There are too many... So I think we will continue to get better. I think we've gotten better from where we were, and we've got a long road in front of us to continue to gain market share and gain new customers. That's very helpful.

Speaker Change: That's very helpful. And then a quick follow up just on weather.

Company Representative: A quick follow-up, just on weather. You know, and in your comment, you talked about some of the sales volatility we saw throughout fiscal Q2, and obviously, weather was a key component of that. But I guess the question I have is, as you look at the weather, maybe we're not even through winter yet. But as you look at the weather, has it been enough? Has there been enough winter weather, so to say, to give you that normal driver business as we head into the spring, even the summer? Yeah, great question.

Speaker Change: In your prepared comments you talked about some of the sales volatility we saw through through the fiscal Q2, and obviously weather was a big component of that but I guess the question I have is as you look at the weather, maybe we're not even through winter yet, but as you look at the weather hasn't been enough has there been enough winter weather so to say give you that normal.

Speaker Change: Our driver business as we head into spring and even summer.

Speaker Change: Yeah, Great question.

Company Representative: And time will tell if we're not you're not completely through what winter weather, as you said. I think if I could lay out the weather calendar that I'd love to have, like I said, I would love to have more really cold winters in the big cities on the eastern seaboard. I mean, if you're in New York, you got a little bit of snow this year, and it was gone within 24 hours. It's a heck of a lot more than you got last year. But you know, New York, Philadelphia, DC; those areas really haven't had a lot of really extreme cold weather. The Midwest did, And the eastern half of the Northeast, or the western half, I'm sorry; I've got some pretty cold weather. But the big metro cities along the east coast just really haven't had them for more than two years now.

Speaker Change: Time will tell we're not you're not completely through wet winter weather as you said I think if I if I could lay out the weather calendar that I'd love to have like I said I would love to have more really cold winter in the big cities on the eastern Seaboard I mean, if you're in New York, you've got a little bit of snow this year and it was gone within 24 hours.

Speaker Change: It's a heck of a lot more than you got last year, but New York.

Speaker Change: Philadelphia D C. Those areas really haven't had a lot of really extreme cold weather the Midwest did.

Speaker Change: In the eastern half of the of the northeast or the western half I'm, sorry, I got some pretty cold weather, but the big Metro cities, along the East Coast, just really haven't.

Speaker Change: For more than two years now so I would love to have had more there, but that's something that we can control we're going to do our best to go grow market share in those companies and those are areas of the country no matter what.

Company Representative: So I would love to have had more there, but that's something that we can't control. We're going to do our best to grow market share in those countries and in those areas of the country, no matter what.

Company Representative: So thanks for the follow-up question. Alright guys, thank you. All right, so before we conclude the call, I'd like to take a moment and reiterate that 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 our customers do have alternatives. We have exciting plans that should help us succeed in 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 drive to optimize shareholder value for the future, we are confident Autozone will be successful.

Speaker Change: So thanks for the follow up question.

Speaker Change: Hi, guys. Thank you.

Speaker Change: Thank you.

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

Speaker Change: We are excited about our growth prospects for the year, but we will take nothing for granted as we understand our customers do have alternatives.

Speaker Change: We have exciting plans that should help us succeed in the future, but I want to extract that this is a marathon and not a sprint as we continue to focus on the basics and drive to optimize shareholder value for the future. We are confident autozone will be successful.

Company Representative: Thank you for participating in today's call. Thank you. This concludes today's conference, and you may disconnect your lines at this time.

Speaker Change: Thank you for participating in today's call.

Speaker Change: Yeah.

Speaker Change: Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Speaker Change: Yeah.