Q4 2019 Earnings Call
Good morning, and welcome to the other Zone conference call. Your lines have been placed on listen only until the question and answer session of the conference. Please be advised today's call is being recorded if you have any objections. Please disconnect. At this time this conference call well discuss autozone fourth quarter earnings release.
Build roads and the company's chairman President and CEO will be making a short presentation onto <unk>. The conference call will end, probably at 10 am central time.
I've been am Eastern time before Mr. road to begin the company has requested that you listen to the following statement regarding forward looking statements.
Certain statements contained in this presentation constitute forward looking statements that are subject to safe Harbor provisions of the private Securities Litigation Reform Act at 1995 forward looking statements typically use words, such as believe anticipate should intend plan, we'll expect estimate project position strategy.
Hey, good and similar expressions. These are based on assumptions and assessment, Spain buyer management in light of experience a perception swirl trends car conditions expected future developments and other factors that we believed to be appropriate.
Forward looking statements are subject to a number of risks and uncertainties, including without limitation project, probably demand energy prices, whether competition credit market conditions cash flows access to available unfeasible financing future stock repurchases the impact of recessionary conditions consumer debt levels changed in laws or regulations or in the process to warrant putting Terry.
<unk> activity inflation, the ability to hire training retain qualified employees construction delays the compromising the confidentiality availability worst integrity of information, including cyber attacks historic growth rate sustainability, downgrade or credit ratings damages to our reputation challenges in international markets failure or interruption over information.
Quality systems, [noise] origin, and raw material cost to suppliers impact of tariffs anticipated impact new accounting standards and business interruptions. Certainly these risks are discussed in more detail on the risk factor section.
And at item one a under part one of this annual report on Form 10-K for the year ended August 25, 2018, and these risk factors should be read carefully.
Forward looking statements are not guarantees of future performance, an actual results developments and business decisions may differ from those contemplated by such forward looking statements and events described above it in the first factors section could materially adversely affect our business forward looking statements speak only as of the date made except as required by applicable law. We undertake no obligation to update publicly any forward looking statements.
Well the result of new information future events or otherwise actual results may materially differ from anticipated results.
I would now like to turn nickel over to Mr. Bill Rhodes. Please go ahead.
Good morning, and thank you for joining US today, probably goes 2019 fourth quarter conference call with me today or Bill Giles Executive Vice President Chief Financial Officer, and Brian Campbell, Vice President Treasurer, Investor Relations intact regarding the fourth quarter I hope you've had an opportunity to read our press release and learn about the quarter's results.
Not the press release, along with flood complementing our comments today is available on our website www dot autozone dot com and clicking on Investor Relations.
Please click on quarterly earnings conference calls to see them.
And again this morning, I want to thank all autozoners across the organization, where they are amazing efforts to deliver on our pledge.
Most organizations have a vision indoor mission statement, we don't we're unique we have a pledge pledged to ourselves and more importantly to our customers, where we are committed to delivering exceptional customer service, where our autos owners passion and willingness to go the extra mile allows us to deliver the kind of numbers.
We reported this morning.
All credit goes dark dedicated autos orders overall, we were pleased with our performance in Q4. This morning, We will review the major themes for the quarter, specifically, we'll talk about our continued success with our commercial business, our monthly sales cadence and regional performance.
The impact tariffs head on this quarter's results both on retails and margins and lastly, we'll report on the success, we had on our stated initiatives customers first.
Commercial acceleration.
On the channel.
<unk> <unk> technology, and yes, we've got inventory initiatives.
Our commercial sales grew 21.1% year over year, and 14.1% only 16 week basis and this wasn't no easy task as we were up against a tough for Q4 comparison last year.
It has been encouraging to see our two year commercial comps build every quarter this year.
The quarterly grew 15.7 or 13.4% on a comparable 52 week basis.
This growth represented roughly $350 million more in sales versus last year. Our team did a great job when our commitment to growing this business. During 2019, while we remain smaller than many of our appear as an absolute sales volume our growth rate has been very robust growing more.
More than three times the industry growth rate.
This growth has come from a combination of many initiatives that had been in development for years, including inventory assortment improvements pub and Mega hub expansions the ever strengthening your reputation of the dirlam spread across our professional customer base technology. It has it increased engagement at our very strong.
Same store operating teams and tremendous efforts on the part of our car selling organization to artfully and effectively convey our value proposition.
We also grew our sales per store at a higher clip than we have in the past, although we are averaging fewer program openings now as approximately 85% of our stores have a program their productivity has increased steadily for the quarter, we averaged our highest weekly sales productivity ever at 10007.
Hundred dollars per program.
And we get ourselves with mature customers at a substantially improved growth rate this year versus previous years, indicating our offerings products coverage service and beyond our improved and have been recognized and rewarded by our customers.
Additionally, we grew our up and down the street does this faster for the quarter and the year then the overall growth of our commercial business, indicating these improvements are being rewarded across all different types of customers and what more hub stores improved salesmanship and product assortment, where they are very soon.
Well It foundation that we can continue to build on into the future.
Congratulations again to our entire organization for their efforts on delivering a great performance in commercial for 2019 their intense focus on growing this business is absolutely working.
Regarding our domestic DIY business, while generating positive same store sales for the quarter I performance was clearly impacted by slower month of May and a slower first half of the quarter on a two year basis, followed by nice acceleration in the second half.
Retail remains a very solid predictable story for us as it is definitely a more mature customer segment than commercial but a steady revenue stream and substantial cash flow generator. In addition to amaze weaker performance, we saw it underperformance out west and across the southwest.
Additionally, we didn't experience the same level of heat, particularly in the first half of our quarter as normal and our heat related categories performance, well certainly softer this quarter.
Finally, we saw some weakness in certain strong Hispanic markets. While it is very difficult to objectively quantify we have seen this at certain times in the past in select markets with immigration issues are front and center.
What's the data we have available to us our D. I will share was flat this quarter, while commercial grew very nicely for the fiscal year, we gainshare, while our retail business is far more mature that our commercial business. We were pleased with our performance in Q4 and remain optimistic about the new year and beyond.
Our optimism comes from the inventory availability and staffing initiatives that we have in place our constant focus on enhancing the customer service experience is making a difference.
We believe the wage adjustments we made last October will continue to help us attract and retain high quality talent that can continue to provide wow customer service. It is important to remember the high touch nature of this business and the vital role our highly knowledgeable autos owners play.
Help our customers maintain and enhanced their vehicles.
Regarding tariffs on last quarter's call. We went into extensive detail on the lack of skewed askew inflation, we have experienced historically because products are introduced into our assortment at very low scale and as they scale per unit costs decreased due to efficiencies.
This is quite visibly evidenced by our unrecorded substantial LIFO negative reserve.
We also noted last quarter that because of the earlier tariffs we had experienced a small amount of inflation departure from the norm due to tariffs as the new tariffs have been introduced we have begun to pass those cost onto our customers.
As these costs can be significant up to 25% currently on a product and since we use weighted average costing and the cost role in overtime. We have been implementing many of these retail increases in waves attempting to make it less burdensome on our customers. This has resulted in skew to skew.
Inflation increases higher than last quarter, but still quite manageable.
We have not experienced material changes in our gross margins as a result of tariffs, but our prices to our customers have and will continue to increase.
Turning to our omni channel efforts, we continue to invest in our strategy to enhance the customer shopping experience by meeting them, when where and how they want to shop.
We have initiatives in place to improve on our in store systems and websites Autozone Dot com autos Onpro mobile in all data, we're investing heavily in the system to support these shopping patterns, we continue to see growth and website traffic and rapid growth and shipped all next day delivery and buy online pick up in store.
Sure.
Now represent a very small percentage of our business substantially below 5%. We're pleased with how the customer is embracing all of our offerings.
Last quarter, we discussed our next day delivery program that allows customers and over 85% of U.S. markets to order as late as midnight in some markets and received their products at their home the very next day.
We continue to expand the more markets.
I'd be remiss, if I didn't say, we're working diligently to further enhance our digital capabilities with our commercial customers as well.
Improvements what the online commercial offering will be ongoing as we know we have ample opportunities, which once addressed will allow us to make deeper inroads with certain customers that had not bought from us in the past and will allow us to further grow our business with existing customers many of which are the more sophisticated shops.
Well ship to home ship to home next day buy online pick up in store and commercial customer ordering are all showing growth and traffic to our online site is continuing to increase for our retail business. We continue to see customers primarily doing lots of research online and then coming into the store to receive that trustworthy advice.
Yes.
I have help with the fixed thunder or blown up to and host of other services that simply cannot be duplicated online prior to making the sale.
Regarding our initiatives, we have invested more in our autozoners inventories and systems.
With the objective of improving customer facing interactions. We believe our execution is improving as we intensified our focus on the customer.
Regarding our annual operating theme for 2019 drive for excellence, we pushed for a relentless focus on what matters to our customers exceptional service fast deliveries high quality parts and products flawless execution of changes in product Assortments in store merchandising and on and on some of the.
Areas that we didn't execute so well on in 2008.
As part of this initiative, we have challenged our store leadership teams to reduce.
Redundant or non customer facing activities, while we have identified opportunities to improve the effectiveness of our autos owner, we have much additional work to do in 2020.
By removing these tests, we know we can improve our levels of service. This will continue to be a major focus for us next year.
Regarding our inventory initiatives in the spirit of our yes, we've got it initiatives, we continue to expanding our hub store network at the end of the quarter. We had 35 Mega hub stores and 100 hubs and 170 hub stores for a total of 205 locations with significantly expanded parts assortments.
For the year, we opened an incremental 11 mega hubs, we have consistently seen both our DIY and commercial sales expand in markets, where hub or Mega hubs are added and we will continue to grow the number of hubs.
Last quarter, we announced that our ultimate target is to have between 70 to 90 Mega hope hubs open across the United States.
We had some ways to go and it'll take us a few years to build this out as a reminder, both our hubs and Mega hubs are focused on making available additional coverage to the local markets, meaning adding skews that would not have been available locally in our network before.
Both the inventory in the hub store initiatives are designed to enhance our ability to meet our customers' needs for coverage and immediacy.
Along with improving our local parts availability and assortment. We continue to manage this organization to provide exceptional service for our customers provider autos owners with a great place to work with opportunities for advancement and ensure we do it on a long term profitable basis to provide strong returns for our shareholders.
We remain focused on the importance of going the extra mile to fulfill our customers' needs regardless of how difficult the request.
In regard to our initiatives for 2019 and customers first we've been making technology investments to improve our electronic catalog and point of sale systems to ensure the customer has an efficient and seamless frictionless transaction, we believe our current and future technology investments will improve our competitive position.
Well make our autozoners more knowledgeable and more efficient and ultimately will leave the sales growth across all of our businesses. While these investments are adding to both operating expense and capital expenditures. We are committed to further investments in 2020 to improve the customer shopping experience. Our expectation is our business will experience ongoing.
Selling acceleration and technology investments for the mid to long term, we spent more on development in 2019 than ever before.
Wide margin and we remain committed to improving the technology around helping customers in 2020.
Regarding commercial acceleration, we've been investing in systems to help autos or sell more efficiently and customers conduct business with us easier. While we said last quarter's call. Most of these initiatives won't be rolled out until late in calendar 2019, or even later our focus on increasing engagement of the broader store team and focusing on existing customers.
Is absolutely pay it off today.
In summary, we were pleased with our performance and remain encouraged with our industry strengthen both DIY and DIFM and our prospects for the new fiscal year.
We believe macro factors, such as relatively low gas prices and increasing miles driven remain largely in our favor and we remain committed to growing our market share in both our DIY and commercial businesses not only provide a little more detail on the quarter.
For the quarter total auto parts sales increased 11.9% in total and were up 5.2%, excluding the additional week of sales and our domestic same store sales were up 3% regionally, our north eastern mid western and mid Atlantic markets, representing roughly 28% of our store base.
Performed better than the remaining markets.
Our fiscal year, we opened 209, new stores, including 55 internationally and 152 net new for domestic commercial programs, we closed no stores for the year.
During the quarter, we opened 86, new stores in the U.S. and our commercial business opened 62 net new programs currently 85% of our domestic stores have a commercial program and the vast majority of our international stores have a commercial program.
During the quarter, we continue to expand in Mexico, opening 28, new stores and surpassing the 600 store Mark in Mexico, and amazing accomplishment for our team in Mexico. We also opened 10, new stores in Brazil, this quarter, finishing with 35.
We should once again highlight another strong performance in return on invested capital as we were able to finish our fourth quarter at 35.7%. We continue to be pleased with this metric as it is one of the best and all of Hardlines retailing. However, our primary focus has been and continues to be that we ensure every incremental.
Dollar capital that we deploy in this business provides an acceptable return well in excess of our cost of capital. It is important to reinforce that we will always maintain our diligence regarding capital stewardship as the capital we invest is our investors capital.
Before I pass in discussion over to build outs talked about our financial results I'd like to again, thank and reinforce how appreciative we are.
Of our Autozoners efforts to again deliver solid results for fiscal 2019.
Now I'll turn it over to Bill Giles Bill Thanks, Bill and good morning, everyone to start this morning, let me take a few moments to talk more specifically about our domestic retail commercial and international results for the quarter total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil store.
As increased 11.9%.
However, excluding the extra week of sales total auto parts was up 5.2%.
For the trailing 52 weeks ended total sales for Autozone store was $1.809 million. This is up from an average of $1.778 million at Q4, ending last year total commercial sales increased 21.1%, but increased 14.1% on a 16 week basis.
In the quarter commercial represented 22% of our total sales and grew approximately $103 million over last year's Q4 on a 16 week basis.
We are excited to highlight for the quarter, our domestic commercial sales averaged $10700 in average weekly sales per program. The highest quarterly average weekly sales in our history. This was an increase of 10.6% from last year's $9700 average weekly sales per.
Program for our fourth quarter very strong acceleration.
For the quarter sales were $2.5 billion in great results.
We now have our commercial program in 4893 stores or 85% of our domestic stores as Bill mentioned earlier, we remain committed to gaining market share with our commercial customers and we are encouraged by the initiatives. We have in place and feel we can gert further grow sales.
And market share.
Our Mexico stores continued to perform well, we opened 28 new stores during the fourth quarter ending the quarter was 604 stores whenever I visit our stores in Mexico, I'm always impressed by our talented team and while how well they have executed our model and in particular embraced our culture, it's always an answer.
Firing visit.
Regarding Brazil, we now operate 35 stores our team in Brazil opened an impressive 15 stores in fiscal 2019 off a base of only 20 stores at the beginning of the year.
Just a tremendous efforts, especially on hiring training and developing our newest autos honors. Our performance continues to improve and we remain optimistic about the long term future of this market.
While we cannot patent claims success, yet as we are incurring an annual operating loss. This market has the potential to be much larger than Mexico.
So while challenging the potential size of the market is significant.
Gross margin for the quarter was 53.4% of sales down 20 basis points from last year's fourth quarter.
The decrease in gross margin was primarily attributable to the lower margin of goods sold primarily from the shift in mix to more commercial business during the quarter.
While our accelerated pace of commercial growth is weighed on our overall gross margin rate, we continue to see opportunities to lower our cost through direct sourcing.
While we see opportunities to increase our gross margin rate, we should encourage folks to model are similar to recent trends with the pressure from the mix shift to commercial.
I do want to stress, we remain committed to taking costs out of our business, where appropriate and feel we can make improvements from here. Our primary focus has always been growing absolute gross profit dollars and our total auto parts segment and we've been pleased with our growth driven by the X.
Celleration, we've experienced in commercial.
As DNA for the quarter was 33.8% of sales lower by 316 basis points from last year's fourth quarter last year. However, we had a large expense for termination of our pension plan. Excluding this $130 million charge from last years numbers are operating expenses this year.
There were higher than last year, but in line with our expectations at the beginning of the quarter.
Operating expenses for the quarter were up 7.6% on an adjusted basis.
Okay.
0.7%.
On the cost front, we highlighted on the last few quarters conference calls the investments we have made specifically wage rates and technology for this fiscal year. The deleverage for this quarter was primarily driven by our plan domestic store payroll investments and continuing investments, which negatively impacted operating expenses for.
The quarter, we want to remind financial model loosen SGN $8 will be up similarly, as a growth percentage does this past quarter as we began the wage rate investments and the later part of Q1 last year.
EBIT for the quarter was $780 million, our EBIT margin was 19.6%.
Interest expense for the quarter was $61.2 million up from Q4, a year ago was the main difference the extra week, we are planning interest in the $44 million range in the first quarter fiscal 2020 versus $39 million last year Q1 are higher forecast and last year.
Includes our costs associated with the bond issuance, we had this past April .
Debt outstanding at the end of the quarter was $5.2 billion or approximately $200 million above last year's Q4, ending balance of 5 billion.
Our adjusted debt level metric finished the quarter at 2.5 times EBITDAR, while in any given quarter, we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment grade rating and our capital allocation strategy.
Okay.
And share repurchases are an important element of that strategy.
For the quarter, our tax rate was 21.4 or 5% and benefited approximately 105 basis points in our rate from stock options exercised during the quarter. Excluding this benefit our rate was 22.5%.
For the first quarter fiscal year 2020, we're modeling 23.5%.
For any assumption on credits due to stock option exercises, because we cannot effectively predict this activity we remain committed to reporting what the stock option benefits mean to the cumulative tax rate.
Net income for the quarter was $565.2 million up 41.2% over the last year.
Our diluted share count of 25 million was down 6.1% from last year's fourth quarter.
Combination of these factors drove earnings per share for the quarter to $22.59.
50.4% over the prior years fourth quarter now adjusting for the extra week this year and the pension expense taken in the fourth quarter last year earnings per share grew 13%.
Relating to the cash flow statement for the fourth quarter, we generated $842 million of operating cash flow net fixed assets were up 4.3% versus last year.
Capital expenditures for the quarter totaled $182 million and reflected the additional expenditures required to opened 124 net new stores this quarter capital expenditures on existing stores hub and Mega hub Remodels are openings work on development of new stores for upcoming quarters and information.
Technology investments with a new stores open. We finished this past quarter with 5772 stores in 50 States the district of Columbia, Puerto Rico and Saint Thomas.
604 stores in Mexico, and 35 in Brazil for a total autos on store count of 6411.
Preciation totaled $118.8 million for the quarter versus last year's fourth quarter expense of 108 million. This is generally in line with recent quarter growth rates.
We repurchased $692 million of autos on stock in the fourth quarter versus $665 million in last year's quarter.
At quarter end, we had $477 million remaining under our share buyback authorization and our leverage metric was 2.5 times again I want to stress, we managed to appropriate credit ratings and not any one metric the metric we report as Matt as a guide only as each rating from has its own criteria.
We continue to view our share repurchase program as an attractive capital deployment strategy.
Next I'd like to update you on our inventory levels in total and on a per store basis.
Companies inventory increased 9.5% over the same period last year, driven by new stores and increased product placement.
Inventory per location was 674000 versus 636000 last year and 688000 last quarter.
Net inventory defined as merchandise inventories less accounts payable on a per location basis was a negative $85000 versus a negative $75000 last year and a negative $58000 last quarter. As a result accounts payable as a percent of gross inventory finished the quarter at 112.
0.6%.
Finally, as Bill previously mentioned our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters.
35.7%, we have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital now I'll turn it back to Bill routes. Thank you Bill we're pleased to report a solid fourth quarter and fiscal year at 3% same store sales.
Our fiscal 2019 was our best Comping year since 2015.
For the new year, we must continue to focus on executing at a high level, which we believe can and has been a competitive advantage.
Executed a high level, we have to consistently adhere to living the pledge, we cannot and will not take our eye on execution, while we study the external environment and react where appropriate we must stay committed to executing day in day out on our game plan success will be achieved within attention to detail an exceptional execution.
2020, we have a lot of deliverables from our IP initiatives and we will remain focused on simplifying our store autos owners workloads to reduce clutter and unnecessary test that given the way of making the customer experience better for both the do it yourself customer and the professional customer we believe our industry fundamentals will remain strong.
And as miles driven are expected to increase over the remainder of the year and while there has been many forecast otherwise the vehicle Park has continued to age and the internal combustion engine remains the dominant vehicle of choice.
Before I conclude the call I want to take this opportunity to reflect on fiscal 2019.
We were able to build on past accomplishments and deliver some impressive results.
In recognition of the dedication passion and commitment of our Autozoners I want to highlight what day as one very strong team delivered in 2019.
Both retail and commercial experienced positive same store sales in every quarter. Our total sales grew by 5.7% on a 52 week basis and set an all time sales record at 11.9 billion.
Our commercial sales aggressively accelerated from 7.3% growth last year to 13.4%. This year on a 52 week basis with growth in mature customer sales and productivity per program the highest in our history.
We made significant and meaningful investments in our tenured store hourly autos owners and it has improved our performance.
Research confirms impressively that quote more technicians shoes during the last parts and we continue to leverage the power of the Duralast brand expanding into new categories or park types.
On the back of a stellar performance at our Mega hubs, we expanded our vision of the future more than doubling the ultimate plans to 70 to 90 Mega hubs.
We opened our 600 store in Mexico, and we opened 15, new locations in Brazil off of a base at the beginning of the year of only 20.
We continue to accelerate our investments in technology, leveraging technological enhancements in every facet of our business.
Leveraging our very strong and predictable cash flow we repurchased.
Record $2 billion in autos on stock in fiscal 2019 since inception, a 1998, we have now repurchased a cumulative 21.4 billion and we've reduced our share count from 152.1 million to 24 million.
Most importantly, our team has continued to live our pledge and leverage our unique and powerful culture to deliver exceptional service to our customers.
Who rewarded us with incremental business.
I'd like to take this opportunity to again recognize and thank our team of talented dedicated passionate autos owners, but what they do each and everyday for our customers, which expands opportunities for autozoners allows us to support the communities, we serve and ultimately rewards our shareholders. We're excited about our balanced model for gas.
Both around domestic retail commercial international online and pick up in store, we believe our hubs and Mega hubs, Mexico, Brazil, all data and digital can all grow their top lines this upcoming year.
To execute at a high level, we must adhere to living the pledge, we cannot and we will not take our eye off of execution success will be achieved with an attention to detail and thoughtful execution.
Service has always been our most important cultural cornerstone and it will be long into the future.
Now, we'd like to open up the call for questions.
Thank you we will now begin the question in under section.
Our first question is from Seth Sigman from credit Suisse.
Your line is open.
Hey, guys. Good morning, Thanks for taking the question in a congrats on the progress this quarter and for the year.
I wanted to just follow up on the point on the cadence in the quarter you talked about some challenges earlier in the quarter and then obviously an improvement later in the quarter.
You just clarify was that specific to DIY or did you also see that trend in commercial and then as we think about add a that trend in the second half for the quarter is that more representative of the run rate of the business and how we should be thinking about the first quarter here. Thanks.
Fantastic question. Thank you.
Couple of things one weather effects are always more exaggerated in the retail business at least for us at this stage in our development than they are in the commercial business. So commercial we'll see whether implications, but not nearly to the same extent that retail we'll see them.
So the ones that we were talking about specifically were more retail oriented.
Part of what happened was we had a very late spring and so may was particularly soft and then June was soft to not on a on a comp store basis, because we'd had a really strong June the year before.
We think June July and August we're much more normalized and we hope that there will indicative of what we're going to experienced in the first quarter, but we don't know what's going to happen with whether other effects, but we feel very good about our performance in Q4.
Of course, Okay. And then you did mentioned that prices have started to increase.
Can you guys give us a sense of the impact it may have had on comps this quarter and in general how is the consumer responding in your view I know you talked about raising prices in waves, but if you could talk about how you're seeing the consumer respond initially that would be helpful. Thank you.
Yes, so far I would say that we're seeing a.
Good response from the consumers.
I think that the merchandising organization is doing great job of kind of.
Measuring these increases in as they roll through our weighted average cost and so it's still early days and so I would say that we don't haven't seen a significant impact.
From a sales perspective or from a margin perspective necessarily from the tariffs.
But we'll continue to monitor and continue to manage that way going forward.
Okay, great. Thanks, guys.
Thank you.
Thank you assess and our next question is from Simeon Gutman from Morgan Stanley .
Simeon Gutman your line is open.
Thanks, Good morning.
So I wanted to ask first on gross margin I have two two related questions. So bill Giles I think you mentioned that our gross margin should be similar going forward I think to recent trends.
Thank you also said you want to make improvement. So can you reconcile those two and then in terms of the timeframe that we should extrapolate that is that for Q1 or is that for the whole year and then as tariffs role in does it make it harder to show improvement in that and that trend line all depends on it you last density.
Well that's a good question, let me try to unpack that a little bit we always believed that we have opportunity to improve our gross margin, we're always looking for opportunities to.
Improve sourcing so that we can lower our cost and then as Bill mentioned before we recognize that the Duralast brand is incredibly strong brand and there are further opportunities for us to continue to roll that across other categories.
As we continue to evolve that brand.
Secondly, I would say that.
I'm thinking more on a shorter term basis and not trying to extrapolate out the entire year, but as we continue to accelerate our commercial business at a double digit rate that's going to continue to apply pressure on gross margin. So that's kind of the way we're thinking about isn't the impact this quarter was around 20 basis points or so so.
We're all about growing the business, we're all about gross margin dollars, an EBIT growth and that's our primary focus.
And we'll let the margin will continue to manage the margin hard and we'll continue to look for opportunities to reduce cost, but as our commercial business grows we'll continue to put a little pressure on our absolute gross margin rate.
Got it Okay. That's helpful. My follow up is on a SGN, a and I guess trading profit for growth. Maybe so you stepped up a lot in fiscal 19.
You seem to be getting a pretty good return and you've invested on the steady pace overtime are you debating whether it makes sense to spend even in a higher rate and trade a little more profit for growth.
I would say that the investments that we've made and then various specific and very targeted so our investments to this point of them on wage adjustments that we believe were appropriate and we believe we're getting benefit from those wage adjustments as we move forward. We recognize that we will continue to have some wage pressure mostly from regulatory.
Activity that is taking place across the country. So we recognized that wages will continue to be a little bit of pressure point, maybe not as high as it was when we proactively invested in wages and then technology.
That's a smaller component, but it's still an investment and so those are the specific areas and we will continue to invest in technology and as Bill mentioned in our prepared remarks last year was probably one of the highest years. We've spent on technology and we expect to continue to invest even more in technology as we move forward. So those are the two areas.
And yes, you're right we will play in the environment that we are in and sales of them strong and we've been able to manage our way through that and continued to generate earnings results.
Okay. Thank you.
Thank you.
And our next question is from Zack Fadem from Wells Fargo.
Your line is open.
Hey, good morning, first one on the commercial growth.
If you could speak a little more about the makeup of the growth in the quarter, what would you attribute to new commercial programs and then on the comp component to what extent would you categorize the growth is as independent mom and pop versus national or regional accounts, and maybe you could speak to some of the puts and takes here around the various customer categories.
Yes terrific question.
First of all we were very excited about the growth than we had in the commercial business across all different customer segments. I did say in our prepared remarks that the up and down the street customer which of those small mom and Pops grew at a faster rate than the rest of the commercial business and were well make that point clear for to make sure you.
No that this is a wide spread growth our growth in mature customer sales I also said was at an all time high level.
So we were very excited about how it came across different markets different customer segments, just across the board, which tells us that all the different things that we're working on from getting our store managers and district managers more engaged to the hub initiatives that we've had to the inventory initiatives that they're all working in tandem which is exactly what we were hopeful.
Got it and on the investments you called out for 2020 curious if you can speak a little more about what you're doing differently versus the investments in 2019 and bill on your comment I just want to confirmed that we should think about asked DNA grows up in this segment and.
Happy ish range similar to what we saw this quarter on a 52 week basis, and if theres any extra commentary that you'd add on on cadence or duration that spending in 2020.
Yes, I would say that the seven advertise the right number to think about and I'll give you more update as we move along through the year, but certainly for the next quarter. That's the way I would be thinking about it.
Relative to what we did last year and how we're thinking about it moving forward as I said I think we'll continue to invest in wages. Most much of it will be in response to regulatory pressures and then we will continue to escalate some of our technology investments and they will occur both on the commercial side of the business on the retail side of the business we've met.
I'm good investments on commercial in order to be able to be an easier place to do business with for our commercial customers and provide better service there and we recognize that there are opportunities on the retail side as well to improve customer service through technology, and then obviously like any mature company. We're also changing out legacy systems as we move along and we've had a big effort on that.
Over the last couple of years.
Got it makes sense I appreciate the time guys.
Alright, thank you.
Thank you and our next question is from Michael Lasser from you.
Michael Your line is open.
Good morning, Thanks, a lot for taking my question No Road Workweek Autozone has been a mid single digit operating income grower.
And buying back enough stock double digit yeah.
Sure.
Your operating margin.
Five out of <unk>.
It sounds like between faster growth and.
Investment.
We should have already.
Around the operating margin.
The near term.
You are reasonable back that autozone.
Hi.
Algorithm that it.
Yeah.
Yeah. They said another great question, Michael if you look at it overtime, we had a remarkable streak I believe a 41 straight quarters, where we grew at double digit EPS growth a lot of things have changed since that point in time, but a lot of the things haven't changed we still want to grow our EBIT in the low to mid single digits and with our share repurchase program.
We hope to push our growth close to if not over 10%, but I don't think we'll have another streak like we had we had 41 straight quarters, but thats within the reasons other than of the model as we grow commercial we will have without a doubt pressure on our gross margins and pressure on our EBIT margins.
And we're not focused on what is the overall operating model.
Margin for the company, we're focused on what are we going to do to grow operating profit dollars at a reasonable growth rate.
And get very good returns when the capital that we deployed to get that growth rate.
Just a follow up that you mentioned that thing.
You're alluding to that.
Mean that.
No I mean, given Mike Marshall.
Yes, if needed.
So we show up your gross margin what exactly.
Well you about <unk>.
I would say that the changes are really the acceleration I commercial business and so as we've seen that grow from a mid single digit high single digits, a low double digit that's the significant component of the change certainly that we've seen in the past and that's what we expect in the future so from that perspective and.
Back to your margin question is that that continues to put a little bit of pressure on margin, but we're all about taking market share in growing the business and growing dollars and so that's really where our primary focus is and so far we've executed on that on both fronts, but particularly in commercial.
Well John .
Something for the investing you need there's been a lot of debate about the impact.
Nice increases in inflation in response.
With the skeptic, saying look industries growing faster.
But it's pushing more leach.
And more price increases.
Units aren't growing as fast or the numerous not responding.
Positive as it had been too.
That's within that maybe you can quantify what impact.
Our comp was from inflation, how do you want to that point.
Yeah, it's hard to tell a little bit on the inflation part of it I mean, there's absolutely a component of inflation, that's baked into our comp store sales improvement, whether or not that inflation results at any.
Pressure point from a demand perspective, it's hard to tell so it's kinda two dimensional there, but look I would say that there is definitely a component of the same store sales at a somewhat driven by inflation, but overall.
It was a healthy growth overall and keep in mind also that our inventory turn as the 1.3. So the costs are coming through at a relatively slow right and so we're increasing our retailers as we're seeing that Costco throws so.
It's a double edged sword, we wished inventory turn was faster but in this particular case, it's been a little bit of a benefit for us. So we've been able to kind of measurably improve our retail prices in order to offset those cost as we move along and we will continue to do that going forward, so won't be as lumpy as increasing our retail prices all at once.
Thank you and good luck.
Thank you.
Thank you.
Our next question is from Chris Horvers from JP Morgan, Chris Your line is open.
Thanks, Good morning, guys yeah.
Question.
Oh questions. There you know as you as you think about the commercial business and and the strength that you saw in July and August would you would you classify this this past summer at the end of the day the July and August period, as normal and so there's no sort of headwinds nor nor tailwinds as you think about what could happen.
And over that this fall period.
And then more on the weather as you think about fall. If we have you know sort of like a warmer September and October is that just is that does that really have any impact to the business given good business given that it's sort of temporary or could that creates a headwind to that business.
Let's start with the second part of it the weather effects in our business are generally very muted in the fall or there's not a lot of rainfall that happens in the fall generally the temperatures are or maybe warmer than last year, but they're not extreme temperatures that would put excess of stress on a vehicle parts. So I don't think it.
We've called out whether as a major initiatives outside of Hurricanes in the past. So if we get a hurricane and like we did in Houston or in south Florida than than that can be a bigger issue and what was the first part of your question Chris.
How would you classify the weather this past summer July August Gingerly, I don't I don't think you'd have to I don't think it had a big effect on our commercial business. As we went into and you were asking is there something coming headwind or tailwind as we went into the fourth quarter. The real question for US was how could we lap the accelerated growth that we had last year in Q4, that's really when our growth.
Started to begin to grow or Bill and we'll we'll have the same impact in Q1 Q2 in Q3, where we'll be up against stronger and stronger comps, but our momentum has been pretty consistent.
So that's my follow up so you do you know obviously millions you.
Did have some moderating impact on your your commercial comps, but yet you did accelerate.
The stock. So how are you thinking about modeling that business going forward should and your ability to sustain calm stocks against those harder comparisons or even potentially accelerate them continue to.
Go back to one thing that I said earlier in the call and that is that the effects of whether in the commercial business are very small in comparison to the retail business. So I don't want you to think that May and June were very soft because they work in the commercial business. There there were softer in the retail business, but the commercial business has been strong every period of 2000.
19.
And what's in front of US, we don't though and we don't give guidance, but we feel very good about the level of execution that we had we feel very good about the initiatives that we have in place so for they've worked really well.
Understood best of luck.
Alright, thank you.
Thank you and our next question from Bret Jordan.
Your line is open.
Hi, good morning, guys.
Good morning.
I got a question on the tariffs side as well, but kind of a reversal I guess, we've seen some exclusions granted on was Wanna into and do you have any ceiling for sort of what that might be as far as alleviating some of the terror pressures and and how you might experienced some rebating from suppliers, who have taken price increases, but we'll see those reversed.
You know, but rather give you an honest answer I don't know the answer to that as far as I don't think a significant necessarily.
It certainly hasn't them something that we've talked about a lot spent a lot of time here.
So I don't think it's a it's a material number to us.
Okay and then a question on your accounts payable obviously, we're getting north of 110% present on inventory, what's the upper bound on that I can you take that as you build the inventory balances you.
You know as we've talked about this and the last several quarters, maybe year or so I think at some point in time, we're trying to maintain that number.
At around that level and so as we make investments in inventory and you heard bill talk about it on hubs and Mega hubs that we continue to open and that really helps drive a little bit of our overall inventory balance, but it does get inventory closer to the customer and it benefits both retail and the commercial side of the business. So that's what puts pressure.
Little bit on the inventory and you've seen our inventory turn go down slightly over time from 151 for one three and so our goal is really to kind of maintain that.
Counts payable to inventory balance at around that level, and we'd be able to maybe maybe able to improve it slightly but our objective is really to maintain it around that level.
Right. Thank you.
Thank you.
And our next question is from Scott Ciccarelli from RBC capital markets. Scott Your line is open.
Hey, guys Scot Ciccarelli.
I I know you've made a lot of changes to the commercial business over the last few years, especially on the product availability side, but I also know.
You got your store managers I'm much more involved I'm really over the last year in trying to cultivate sound those relationships. So operationally can you help us understand you know specifically how this store managers to become more involved on the commercial front and is that something that starts to slow now that you're kind of reaching the anniversary pointed that or do you think you can comment.
Pain that double digit growth rate in commercial because that's something that builds over time. Thanks.
Thank you Scott.
We believe that our store managers and our district managers are much more involved in the commercial business today than ever before we started with our store managers beginning to make sales calls in the fourth quarter of last year.
Yeah, there out making sales calls, but the real thing that they're doing is they're learning from the customer what's important to them and they're learning. How we are executing is that when they get back to the store with 13, they can and do what they do like nobody else. They can enhance our service for our customers before because they didnt.
Have a direct connection to those commercial customers. They really didn't know where our service advantages were they didnt know where our shirt service shortcomings were coming from now they have direct line of sight to that.
I think we ought to significant benefit out of that last year. I think we will continue to benefit from that for the next few years as some of them got very quickly got up to speed very quickly others, not so quickly and they're all in different places on their understanding of the commercial business and their comfort with the commercial business.
Yeah, there should be a pretty long tail to it sounds like I. Appreciate it. Thanks I wouldn't think so the first time, we've done it. So we don't have empirical evidence that says it has a three year tail on it but as I'm out in the stores and I'm talking to the commercial or to the store managers their level of knowledge is vastly different than it was 18 months ago and that's what.
Gets me excited.
Got it thanks, though.
Right. Thank you.
Thank you fight.
Right.
I'll turn the call over back to Mr. Bill Rhodes.
All right before we conclude the call I want to take a moment and call out that we're hosting our national sales meeting here in Memphis. This week. This week, we will be recognizing our company's very best performance performers on announced our new operating theme for the year. We will celebrate this past year successes and focus on where we didn't meet our.
Objectives. This week as for our field autos owners and we enthusiastically welcome them to our hometown of Memphis, Tennessee.
As our business model continues to be solid and we're excited about the new year, we don't take anything for granted as we understand our customers have alternatives. We will continue to execute on our game plan, but I want to stress at this is a marathon and not a sprint as we continue to focus on the basics and focused on optimizing long term shareholder value we are confident.
Autozone will continue to be successful. Thank you all very much for your interest in our company and for participating on today's call have a great day.
And that concludes today's conference. Thank you for your participation.
Yeah.