AutoZone Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 21, 2024

There are 14 speakers on the call.

Operator

Greetings. Welcome to the AutoZone's 2024 Q3 Earnings Release Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

The company would like to announce the following forward looking statement.

Speaker 1

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

Speaker 1

A reconciliation of GAAP to non GAAP financial measures can be found in our press release.

Operator

It is now my pleasure to turn the floor over to Phil Danielle, Chief Executive Officer with AutoZone.

Speaker 2

Good morning and thank you for joining us today for AutoZone's 2024 Q3 conference call. With me today are Jamere Jackson, Chief Financial Officer and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the 3rd 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 are available on our website, www.autozone.com, under the Investor Relations link. Please click on the quarterly earnings conference calls to see them.

Speaker 2

As we begin the call, I want to say thank you to our more than 120,000 AutoZoners across all of our businesses for delivering solid earnings results in the face of a difficult macro environment. With our continued focus on providing what we call Wow customer service, our AutoZoners delivered our total sales increase of 3.5%, total company same store sales up 1.9% and on a constant currency basis, total company same store sales of 0.9%. Also, our operating profit grew 4.9%, while our earnings per share grew 7.5%. In spite of our lower than planned sales, we managed our business well and we were able to deliver bottom line results that continue to build on the phenomenal results we've had over the last several years. Congratulations to our AutoZoners everywhere who helped us achieve this quarter's growth.

Speaker 2

Your dedication to delivering on our commitment at Wow! Customer service is always inspiring. Before I begin my comments on our Q3 sales, as a reminder, the backdrop to this quarter and every Q3 of our fiscal year includes tax refund season. It is roughly a $300,000,000,000 influx of cash to our customers. It begins around Valentine's Day and generally lasts 4 to 6 weeks.

Speaker 2

These dollars matter to our customers and meaningfully impacts their shopping patterns in our stores. This year, refund dollars ended up slightly versus the previous year. However, February refund flows were lower than expected and negatively impacted the 1st 3 weeks of the quarter's domestic same store sales. While the refund flows did catch up in the later weeks, we felt the delayed refunds were a drag on our sales results through February early March, similar to what you may have heard from other retailers. Secondly, the weather was unfortunately cooler and wetter than we had expected and planned, especially in the Northeast and the Midwest markets.

Speaker 2

As a result, sales in these markets were noticeably below the remaining markets with this pattern more pronounced over the last 8 weeks of our 12 week quarter. Again, extreme weather, either hot or cold, drives hard part failures and accelerates maintenance over time, thereby driving higher sales. So on balance, we believe this quarter's sales were impacted negatively by the late start of the tax refund season, while the last 8 weeks were impacted by cooler than weather that we had planned. Despite these headwinds, we also had many successes. We gained share in our retail business and we believe we continue to gain share in commercial.

Speaker 2

We continue to be encouraged by our supply chain initiatives. The construction of our 2 new domestic DCs are on track for Q2 FY 2020 5 opening as well as our continued forward deployment of inventory across both our hubs and our mega hubs. We continue to see progress on our initiatives within our domestic commercial business that give us confidence about accelerated growth. While it is prudent for us to remain cautious on our outlook for the remainder of the year, we believe sales will accelerate over time. We are excited about our commercial initiatives that are providing deeper parts coverage closer to the customer with faster delivery times, improving customer service and thereby driving sales.

Speaker 2

For the Q3, our total company same store sales were 0.9% on a constant currency basis. As we have mentioned, international has become a more important part of our growth story and this quarter we delivered another strong quarter, up over 9.3% on a constant currency basis. We continue to be very encouraged with both our short term and long term growth prospects we have internationally, and we plan to accelerate new store openings and drive operational improvements in these markets over the next several years. Our domestic same store sales were flat this quarter compared to up 0.3% last quarter and up 1.9% in Q3 of last year. As I mentioned previously, we believe our sales were impacted in the 1st 4 weeks of the quarter by the delayed tax refund season and the last 8 weeks by the mild wet weather pattern across much of the U.

Speaker 2

S. Domestically, we ran a negative 0.7% comp across the 1st 4 weeks and collectively across the last 8 weeks of plus 0.3% comp. Our commercial business grew 3.3% against last year's Q3 growth of 6.3%. Our commercial results were higher in the 1st 8 weeks and relatively consistent, but slightly lower the last 4 weeks. The last 4 weeks comparison were the most difficult of the quarter.

Speaker 2

Weather impact was more pronounced in the last 8 weeks of the quarter and it was during this time that the regional performance disparities became more apparent. The Northeast and the Midwest underperformed the remainder of the country by close to 200 basis points over the last 8 weeks of the quarter. Commercial transaction counts were up and were partially offset by slightly negative ticket growth, which was attributable to similarly negative inflation on a same SKU basis. We opened 20 net new commercial programs and now have commercial in 92% of our domestic stores. Domestic commercial sales represented 31% of our domestic auto parts sales for Q3.

Speaker 2

Despite the choppiness in our commercial sales results this quarter, we are planning for a stronger growth rate in Q4 behind continued execution of our gross and net growth initiatives and somewhat easier comparisons. Commercial sales growth continues to be driven by the key initiatives we've been working on over time, improved satellite store inventory availability, material improvements in hub and mega hub coverage, the strength of the Duralast brand with an intense focus on high quality parts and products and technology enhancements that make us easier to do business with. We are encouraged by our recently launched initiatives focused on improving customer service with faster delivery times. As we roll these initiatives to the majority of the chain, we are anticipating faster growth and accelerated share gains. Regarding domestic DIY, we had a negative 1% comp this quarter versus last year's comp of 0.6%.

Speaker 2

DIY ran negative 2% across the 1st 4 weeks of the quarter, positive 0.1 percent the 2nd 4 weeks segment and negative 0.1% comp over the last 4 weeks. Regionally, the Northeast and the Midwestern markets underperformed the remainder of the country by approximately 100 basis points over the last 8 weeks of the quarter, similar to our commercial business. Heading into the 4th quarter, we feel weather should be less volatile and we are planning accordingly. Regarding our merchandise categories in the DIY business, our sales floor categories, in particularly discretionary categories, underperformed hard parts. We also saw several seasonal merchandise categories and weather sensitive hard part categories being off our planned results due to the cooler than expected weather.

Speaker 2

Regarding this quarter's traffic versus ticket growth, our DIY traffic was down approximately 2%, while our ticket average was up only 1%. We expect our average ticket growth will return to more normalized levels in the 2% to 4% range as we get further removed from the higher inflation from the last couple of years. We attribute our previously mentioned DIY share gains to improved customer service levels in our stores and our in stock nearing pre pandemic levels driven by most of our vendor partners returning to more normalized operations, meaning recovering from the pandemic sales surge and supply chain disruptions. As we look forward, we are continuing to focus on flawless execution and delivering Wow! Customer service will drive our accelerated sales growth in our domestic business.

Speaker 2

Before handing the call to Jamere, I'd like to highlight and give some color on our international business. At 8 72 stores opened internationally or 12% of our store base, This business had yet again impressive performance last quarter and should continue to grow at a robust pace for the remainder of fiscal year 2020 4 and beyond. We are leveraging many of the learnings we have in the U. S. To refine our offerings in our international markets.

Speaker 2

And before Jamere discusses our financial results, I'd like to remind you of our key objectives for fiscal year 2024. We are focused on growing our domestic commercial business and we believe our improved customer service levels will lead to continued sales growth. We are also focused on our supply chain with 2 initiatives that are in flight to drive improved availability: 1st is our expanded hub and mega hub rollouts and secondly, we are making good progress on adding capacity to our distribution network. We have 2 distribution centers that are nearing completion in the U. S, one in Chowchilla, California and the other in New Kent, Virginia.

Speaker 2

We are also very close to completing the expansion of our Tepej Mexico DC and last quarter, we broke ground on a larger facility that will house our relocated Monterrey Mexico DC. Our strategy is focused on leveraging the entire network to carry more inventory closer to the customer, driving sales growth with improved speed, expanded parts availability and improved efficiencies. These capacity expansions will underpin our future growth. Now, I'd like to turn the call over to Jamere Jackson.

Speaker 3

Thanks, Phil, and good morning, everyone. As Phil has previously discussed, we had a solid third quarter with 3.5% total company sales growth, flat domestic comp growth, a 9.3% international comp on a constant currency basis, a 4.9% increase in EBIT and a 7.5% increase in EPS. We continue to deliver solid results in the efforts of our AutoZoners in our stores and distribution centers continue to enable us to drive earnings growth in a meaningful way. Start this morning, let me take a few moments to elaborate on the specifics in our P and L for Q3. For the quarter, total sales were $4,200,000,000 up 3.5 percent.

Speaker 3

And let me give a little more color on sales and our growth initiatives. Starting with our domestic commercial business, our domestic DIFM sales increased 3.3% to just under $1,200,000,000 and were up 9.6% on a 2 year stack basis. Sales to our domestic DIFM customers represented 31% of our domestic auto parts sales. Our average weekly sales per program were $16,400 down 2.4 percent versus last year's $16,800 Now as a reminder, we have added over 300 new programs over the last 12 months and these new programs are diluting the overall sales per program. We are, however, extremely pleased that these programs are maturing significantly faster than our historical performance and position us well for the future.

Speaker 3

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 5,843 total programs. Our commercial acceleration initiatives continue to make progress as we grow share by winning new business and look to gain share of wallet with existing customers. Importantly, we have a lot of opportunity in front of us and we will continue to aggressively pursue growth in the highly fragmented commercial market, which we believe is our single largest growth opportunity. To support our commercial growth, we now have 1 103 mega hub locations with 2 net new mega hubs opened in Q3.

Speaker 3

Our mega hubs continue to average significantly higher sales than the balance of the commercial programs and grew more than 3 times the rate of our overall commercial business in Q3. 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 open well north of 200 mega hubs at full build out. These assets are key to our growth plans.

Speaker 3

On the domestic retail side of our business, our comp was down 1% for the quarter. As Phil mentioned, we saw traffic down approximately 2%, offset by approximately 1% ticket growth. Over time, 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 challenged in Q3, we continue to see a growing and aging car park, miles driven back to pre pandemic levels, a challenging new and used car sales market and a consumer that is likely to continue to invest in their existing vehicles. As such, we believe our DIY business will remain resilient.

Speaker 3

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 18.1% on an actual basis and 9.3% on a constant currency basis. During the quarter, we opened 12 stores in Mexico to finish with 7 63 stores and one store in Brazil ending with 109. 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.

Speaker 3

Now let me spend a few moments on the rest of the P and L and gross margins. For the quarter, our gross margin was 53.5%, up 102 basis points, driven by a significant improvement in our core business gross margins and 15 basis points from a non cash $24,000,000 LIFO credit in this quarter versus a $17,000,000 LIFO credit in Q3 of last year. Excluding LIFO from both years, we had a very strong 87 basis point improvement in gross margin. Our merchandising and supply chain teams have done an exceptional job of driving gross margin improvement this year. I will point out that we now have $19,000,000 in cumulative LIFO charges yet to be reversed through our P and L, and we expect this credit balance to reverse over the next couple of quarters.

Speaker 3

We're currently modeling approximately $10,000,000 in LIFO credits for Q4 based on the deflation experienced this past year. Now this compares to $30,000,000 LIFO credit we had in Q4 last year, which means we would have a $20,000,000 net headwind from LIFO in gross profit. As I've said previously, once we credit back the $19,000,000 through the P and L, we will not take any more credits and we will begin to rebuild an unrecorded LIFO reserve. Moving to operating expenses. Our expenses were up 6% versus last year's Q3 as SG and A as a percentage of sales deleveraged 76 basis points.

Speaker 3

On a same store basis, SG and A grew 3.3% as we continue to invest in initiatives that drive speed, productivity and improved customer service. We are committed to being disciplined on SG and A growth as we move forward, and we will manage expenses in line with sales growth over time. Moving to the rest of the P and L. EBIT for the quarter was $900,000,000 up 4.9% versus the prior year, driven by our positive same store sales growth and gross margin improvements. Interest expense for the quarter was $104,000,000 up 41% from Q3 a year ago, as our debt outstanding at the end of the quarter was $9,000,000,000 versus $7,300,000,000 in Q3 last year.

Speaker 3

We are planning interest in the $148,000,000 range for the Q4 versus $109,000,000 last year. Higher debt levels and borrowing rates across the curve are driving this increase along with the extra week that we will have in this year's Q4. For the quarter, our tax rate was 18.1% and up from last year's Q3 of 17.4%. This quarter's rate benefited 4 79 basis points from stock options exercised, while last year it benefited 5 95 basis points. For the Q4, we suggest investors model us at approximately 23.2% before any assumptions on credits due to stock option exercises.

Speaker 3

Moving to net income and EPS. Net income for the quarter was $652,000,000 up 0 point 6% versus last year. Our diluted share count of 17,800,000 was 6.4% lower than last year's Q3. The combination of slightly higher net income and lower share count drove earnings per share for the quarter to $36.69 up 7.5 percent for the quarter. Now let me talk about our free cash flow.

Speaker 3

For the Q3, we generated $434,000,000 in free cash flow. We had higher CapEx spending this quarter versus a year ago, and we expect to spend close to $1,100,000,000 in CapEx this fiscal year as we complete the addition of our distribution center capacity expansion ahead of schedule. I will also remind you that we generate a majority of our free cash flow in the back half of each of our fiscal years. We expect to continue being 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 Q3 at 2.5 times EBITDAR.

Speaker 3

Our inventory was up 7.9%, driven by a combination of inventory per store growth to support our growth initiatives, improvements in in stock levels along with new store growth. Net inventory defined as merchandise inventories less accounts payable on a per store basis was $168,000 negative versus $215,000 negative last year and negative 100 and $64,000 negative last quarter. As a result, accounts payable as a percent of inventory finished the quarter at 119.7 percent versus last year's 126.5%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $735,000,000 of AutoZone stock in the quarter and at quarter end, we had $1,400,000,000 remaining under our share buyback authorization.

Speaker 3

We have bought back over 100 percent of the 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 leverage target of 2.5 times 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 free cash flow and returning excess cash to our shareholders. We're growing our market share, expanding our margins and improving our competitive positioning in a disciplined way. And as we look forward to Q4, we remain bullish on our initiatives to grow sales behind a steady DIY business, a fast growing international business and a domestic commercial business that remains underpenetrated.

Speaker 3

I continue to have tremendous confidence in our strategy and our ability to drive significant and ongoing value for our shareholders. And with that, I'll turn it back to Phil.

Speaker 2

Thank you, Jamere. We are proud of the results our team delivered this last quarter. We remain on track to deliver a solid 2024, but we must continue to focus on superior customer service and flawless execution. Execution and our culture of always putting customer first are what defines us. We are well positioned to grow sales across our domestic and international store bases with both our retail and commercial customers.

Speaker 2

Our gross margins are solid and our operating expense structure is appropriate for future growth. We are putting our capital investments where they matter most. Our stores, distribution centers and leveraging technology to build a superior customer service experience where we are able to say yes to our customers' need. Fiscal 2024's top priority has been enhanced execution. We are making good progress.

Speaker 2

Additionally, we have many strategic projects in varying stages of completion. We will continue opening new mega hub and hubs, completing construction on our 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 discussed, our international teams posted same store sales comps on

Speaker 4

a constant

Speaker 2

currency basis of +9.3 percent, continuing several years of strong growth. While I mentioned all these investments in FY 2024, AutoZone's biggest opportunity remains growing share in our domestic commercial business. We continue to believe we have a solid plan in place for growth for the foreseeable future. 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 AutoZoners are committed to delivering the results.

Speaker 2

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

Operator

Your first question for today is from Bret Jordan with Jefferies.

Speaker 5

Hey, good morning guys.

Speaker 2

Good morning, Bret. Good morning, Bret.

Speaker 5

Could you talk a little bit about the cadence? You commented at the end of the quarter and the commercial business ended a bit softer and obviously very early in Q4. But could you give us any color sort of how we've trended sequentially into the 4th?

Speaker 2

Yes. The commercial business, like we said, has been choppy. The last 4 weeks were the more difficult compares for the quarter. And as we said several times, I hate being the weather man, but this particular spring has been challenging for us from a wet and cooler season. And typically in the latter half of the quarter, we start seeing some improved performance around the hot weather categories like AC Chemicals and AC Hard Parts and battery sales, etcetera.

Speaker 2

And we just didn't get that through the last several weeks of the quarter.

Speaker 5

Okay. And then I guess on a calendar year basis, could you maybe give us some color where you see inflation in pricing for your mix as that compares, I guess?

Speaker 2

Yes. On the inflation front, that has definitely been challenging as we've come off several years of hyperinflation, if you will, at our average unit retail on both the DIY side and the commercial side, frankly. I suspect the average unit retail same SKU inflation would get back to more normal growth levels as we move further and further away from the inflation that we had over the previous years. Now those inflation numbers start to come back as we get in the later quarters of the calendar year and I suspect they'll return to more normalized levels over time.

Speaker 5

Great. Thank you.

Speaker 2

Thank you, Brett.

Operator

Your next question is from Chris Horvers with JPMorgan.

Speaker 6

Hi, good morning. It's Christian Carlino on for Chris. First question on gross margin, Supply chain crisis aside, you've grown the commercial business pretty considerably over the past couple of years. So could you just speak to, I guess, the degree of vendor rebates you've yet to receive and how long you should benefit from this catch up period for all the growth that you've had since prior to the pandemic?

Speaker 3

Certainly, our gross margins as it relates to our relationship with vendors has an opportunity to improve. As Phil mentioned previously, we are coming off a period of significant hyperinflation, particularly in the areas like freight. Quite frankly, we saw snarls across the majority of the supply chain. It impacted them from the standpoint of having higher labor costs, higher input costs in total. So we're starting to see that abate and that's given us an opportunity to go and negotiate for some deflation as we move forward.

Speaker 3

We're still in early innings there, and I wouldn't say that all of the inflationary pressures have abated, we're certainly in a much better position today than we were a year ago.

Speaker 6

Got it. That's helpful. And then now that you're starting to lap some of the earlier signs of maintenance deferral at some of the tire centers, are you starting to see trends improve with that cohort of customers? And just broadly, can you speak to the performance at like the national accounts, the tire centers, the buy here, pay here dealers and then the up and down the street mechanics?

Speaker 2

I would say, if you kind of broke apart those segments that you just talked about, probably the most challenged group of customers are customers that are drive their repair revenue from tires. Tires have definitely been a pressure point. I think that downward trend on tires has probably flattened out a little bit. But I still think the tire segment in particular is under some pressure and has been for quite a while. On your other segment of customers, the buy here pay here lot and used car centers, those have been more challenged as well.

Speaker 2

If you think about there was tons of used cars that were sold over the last 2 years or so. I think that's just been slower. Also as the consumer is under a little bit more economic pressure due to inflation, not just in our category, but across all of retail and across life at the moment. I think there's more pressure on some of those bigger ticket items like tires. Tires is a pretty big purchase for a customer.

Speaker 7

Got it. That's really helpful. Best of luck.

Speaker 2

Thank you.

Operator

Your next question for today is from Simeon Gutman with Morgan Stanley.

Speaker 8

Good morning, everyone. Good morning, Simeon Gutman. Good morning. My first question is on mega hubs. Can you share some math on them?

Speaker 8

What you mentioned 200 over time. Can you tell us year over year how many should we see per year? And then can you frame the 1 year lift from them, please?

Speaker 3

Yes. So certainly from a mega hub standpoint, we're pretty excited about our future there. As we've announced, we'll likely have over 200 mega hubs at full build out. Last year, we opened 20. We're likely going to open less than that this year.

Speaker 3

And we've got work to do, but our pipeline is very strong and our pipeline is robust as we look into FY 'twenty five. So we're going to go as fast as we possibly can. These are big boxes and difficult to find places. But we've done a really good job and worked really hard to fill up that pipeline and you'll start to see that accelerate as we move into FY 'twenty five and beyond.

Speaker 2

Yes. Hubs are I'll just add on. Hubs are these have been great stores for us. I think looking over history, we thought we'd have 30 to 40 of these things in various markets and now we see line of sight to, like Jamere said, well north of 200 mega hubs the hubs are still an important part of our strategy as well, which has slightly less SKU count, well, 30,000 to 40,000 less SKUs than a mega hub, but both of those store bases are great for us. They help significantly on the commercial side of the business and they lift the DIY market as well.

Speaker 2

So they're great assets for us and perform better than our normal stores.

Speaker 8

And then can I ask, I know you don't give forward guidance in thinking about fiscal 2020 5, the first half and the second half? Is it fair to think that there's not a hockey stick, but it will be second half weighted. In other words, the top line backdrop improves mildly hopefully from weather, but you are going to lap some big gross margin gains core non LIFO, while you'll need the top line to lever the expenses. So it looks like you could see some second half weighting in next year. Curious if that's some thoughts on sequencing for next year?

Speaker 2

Yes. Like you said, we don't give guidance, but here's some things that I'll tell you that I'm excited about. One is, weather has been challenging and we I think over summer, summer is going to heat up. We should get some the merchandise categories and mix and things of that nature will help our sales as we move a little bit forward. And although slower than we'd like, our commercial initiatives are working and we think those will continue to mature over time and in a segment where we're underpenetrated in share, below 5% share on the commercial business, we think we have ample opportunity to continue to grow over time with improved service, improved hard part and expanded part availability and better service and delivery based on the things we talked about, parts investments, mega hub investments and technology investments that will grow our sales.

Speaker 2

But it won't be it's not going to be a hockey stick that turns around in 6 weeks or something. It's going to take time.

Speaker 8

Yes. Okay, thanks. Good luck in the Q4.

Speaker 2

Thanks, Timmy.

Operator

Your next question is from Greg Melich with Evercore ISI.

Speaker 4

Hi, thanks guys. I wanted to follow-up on inflation because it sounds like it was still across the box slightly positive in the quarter and but I think I heard in commercial that it was same SKU slightly negative. So could you just give us a little more of the detail on that?

Speaker 3

Yes. I think 2 things from an inflation standpoint. Number 1, the backdrop is we're coming off a period of significantly more inflation last year. So as we look at this year and look at that impact on our ticket growth, our ticket growth is lower than it's been historically. And quite frankly, that's had an impact on the top line growth.

Speaker 3

You've heard me say a number of times that while hyperinflation is difficult from a cost standpoint, from a top line standpoint, inflation has been our friend and we just don't have that tailwind right now. We do expect inflation to normalize over time, But the high freight costs that we had and the significant inflation that we had in the industry is just not there right now. And this industry has been very disciplined about passing that inflation through, but also in times where the inflation is not there. We've also been disciplined about the pace with which retails are raised. So we feel pretty good with where we are in total.

Speaker 3

We think inflation is going to return. But right now, it's running significantly lower than it was a year ago and lower than what we've seen historically.

Speaker 4

And just to be clear, in the quarter, it was 0?

Speaker 3

Yes. We saw ticket growth across the business be very muted in the quarter. And we're seeing some inflation in certain categories and other categories you're seeing hardly any inflation. And as we manage our way through that, we just got to make sure that we're pricing dynamically the price for inflation where we see it and in places where you don't see it, obviously, we're being disciplined like this industry has been for a really long time.

Speaker 4

Got it. So still discipline and you expect it to normalize, but right now it's not. It's on the

Speaker 3

It's pretty muted right now.

Speaker 4

Yes, fair enough. And then my follow-up was just to understand a little bit more about the consumer trends. I know you've talked in the past that we really haven't seen trade down on the DIY side at all. I'm just curious if that started to show up as a way, I think you mentioned maybe fewer items in the basket, could you just double click on that a little bit?

Speaker 2

Yes. It's a great question. I think there's a couple of things going on with if you kind of think about average ticket, Some of it frankly has been mix of category, and I'll talk about it in a couple of different ways. One is highly discretionary items have been challenged for a while. Some of those have a great ticket.

Speaker 2

There's probably slightly fewer pieces in the basket, but I think some of that has been driven by the environment and the weather. Big jobs like air conditioning, if you will, those have been definitely muted in the springtime. Those are big jobs that have big ticket, multiple parts in them. When it rains, you're probably going to sell 2 wiper blades. And when it's nice, people decide to do a tune up, you may have all kinds of filters that have significantly more parts transactions, pieces per transaction in them.

Speaker 2

So I think ticket average will improve. It's not going to be improved based on hyperinflation like we've had over the last couple of years, but I do believe it will improve as we move through the summertime and get a better mix of product as we move past some of this more challenging weather scenario.

Speaker 4

That's super helpful. Good luck guys and thank God we didn't talk about 5 year comps.

Operator

Your next question for today is from Scot Ciccarelli with Truist.

Speaker 9

Given the slowdown in sales that obviously we're talking about, is there anything else you guys think you can do to accelerate the sales trends? Or is it just a matter of executing the way you can and you need the broader environment to improve? And then kind of part 2 of this is, is there a point at some stage where if sales stayed sluggish, does it potentially tempt you to go through another round of price investments? I know that wasn't the original intent, but a long period of sluggish sales could potentially raise that temptation, I would think. Thanks.

Speaker 2

Yes. Let me start with kind of your first the first part of your question. Are there things that we can do to improve? The answer is yes. We're in the process now of doubling down on customer service and execution.

Speaker 2

And on the commercial side, we're continuing on both sides. We're continuing to invest in hard parts coverage and hubs and mega hubs. Those drive sales. On the commercial side, we continue to invest in ways to service the customer better and faster and we like those initiatives that we have. So I think those help to improve our sales execution, if you will.

Speaker 2

The second part of the question.

Speaker 3

The second part is on pricing. From a pricing standpoint, as I mentioned before, we've been very disciplined on pricing. And we executed around the pricing initiatives a couple of years ago. It helped us grow our shares and improve our units. We like where we're priced today and we don't see the need to go move the needle on pricing as a way to go accelerate sales growth.

Speaker 3

I'll just remind you that the lion's share of the demand in this business is relatively inelastic. So this industry has been disciplined about pricing for decades, and we continue to see that being the case. And to Phil's point, I mean, we're committed and doubling down on our growth initiatives. It's improving the quality of our parts, it's expanding the assortments with mega hubs, it's improving delivery times, leveraging technologies, being competitive on pricing, all those are the kinds of things that are driving our business as we move forward and we're pretty excited about the future.

Speaker 2

Yes, our pricing strategies on both DIY, we like where we are and we believe we have the right strategies on both sides of the business. We made those investments several years ago to right size those strategies. The industry has been very disciplined on pricing over a long period of time, and we don't see that changing.

Speaker 10

Understood. Thanks a lot guys.

Speaker 2

Thank you.

Operator

Your next question is from Kate McShane with Goldman Sachs.

Speaker 11

Good morning. Thanks for taking our question. I just wanted to clarify, I think you mentioned in the prepared comments a mention of store growth. And I wondered if that was more of a domestic comment versus international comment. We see an acceleration of the store openings here?

Speaker 11

And we wondered if just with the sheer amount of growth you've seen over the last few years, do you think some of the demand weakness that you're seeing is just due to the sheer volume of what your current store base is handling?

Speaker 3

Yes, we've talked several quarters ago about our aspirations to expand and accelerate our store growth in the back half of the decade. We historically have built about 150 stores, give or take a few in domestically. And we think that we can significantly expand that number as we move forward. The drivers there obviously are the growth opportunities that we see in DIY, but also a significant growth opportunity in commercial. And as we look at that, along with the expanded trade areas in the U.

Speaker 3

S, there's an opportunity for us to expand our business domestically, and we're going to do that by accelerating our store growth as we move through the balance of the decade. And then internationally, we've been extremely pleased with what we've seen in Mexico, and we like the growth prospects that we've seen in Brazil. And you've seen what we posted in terms of same store sales comp growth now for several quarters. And there's an opportunity for us to go faster there as well. So that accelerated store growth is certainly a part of our future growth strategy, and it will help us become a faster growing business as we move forward.

Speaker 3

And then your comment about the capacity of our stores, I mean, one of the things that we've done over time is we've continued to optimize the footprint of our satellite stores and then augment that with what we've done with hubs and mega hubs to jam more parts in a local market closer to customers. It's an important part of the growth strategy, both on the DIY and the commercial side of the business, and we'll continue to do that as we move forward, which is one of the reasons why we talked about expanding the number of mega hubs that we have and our mega hub count will be north of 200 at full build out.

Speaker 2

We just wish they'd come faster. Building new stores takes it's a long tail from the time you sign a contract to the time we actually open the doors and start selling parts out of them. It just takes longer than we'd like.

Speaker 11

Thank you.

Operator

Your next question is from Seth Sigman with Barclays.

Speaker 12

Hey, good morning, everyone. A couple of follow ups from my side. So when I look at the gap between your DIY business and the commercial business, it just seems narrower than it's been in the past, certainly pre pandemic. And that's been happening in the last couple of quarters. And you look at DIY down 1%, it's actually not that different than the range we've seen in the past.

Speaker 12

So it's really commercial at this lower run rate. And I know there's a lot of moving pieces here, but it's more of a macro question, right? Do you think that the commercial end customer is just slowing more? And maybe that's deferral, maybe that's trading down, I'm not sure. But if that's really what we're trying to figure out, is that commercial end customer that maybe more middle income consumer trading down a little bit more?

Speaker 2

Yes, that's tough to figure out exactly what's going on in commercial when you start talking about how is a customer migrating up or down the cost curve, if you will. We don't get near the segmentation on the commercial side that we do on the DIY side and the retail side of the business. But is the customer trading down? I think if you look at some of the segments that we have that are more challenged, thinking tires, tire purchase could be well north of $1,000 for a customer. That segment has been challenged, for sure.

Speaker 2

Some of the new car and used car dealer segments have been a little more challenged, partly because I think they're not selling as many units. So those two segments have been challenged. So if you think our customers migrating down because of bigger jobs or down the good, better, best column? I think that's probably true that a customer may if they may have normally taken a carb to a OE dealer, do they then migrate to a Firestone or something of that nature, and do they migrate to the UDS customer, do the job themselves. I think you could see that, but it's very hard to understand how customers move on the commercial side of the business.

Speaker 3

And I think part of that, as we think of the commercial market in general, is why we've been focused on this notion that we're roughly a 5 share in what's approaching $100,000,000,000 market, despite the fact that big ticket is pressured across really all of retail and certainly big ticket purchase in auto parts is not immune to those dynamics. I mean, we still have an opportunity to grow significantly in commercial and an opportunity to grow significantly faster. So all the things that Phil talked about in terms of our initiatives are the things that we're focused on. And if we do those things and execute on them, then that gives us an opportunity to really accelerate our commercial growth as we move forward.

Speaker 12

And just on that last point around accelerating commercial, you mentioned a number of initiatives around service and delivery. You just help us better understand operationally what is actually changing? Are you adding people? Are you adding routes? And just how to think about that?

Speaker 12

And it sounds like you've had some success early on in some of the markets where you have deployed some of these changes. Any sense on the lift that you're seeing there that gives you that confidence? Thanks.

Speaker 2

Yes. I think we are seeing success. Again, still relatively small in our rollout and that rollout is not very mature at the moment. But we're leveraging some technology, leveraging the technology to handhelds and other technology in our stores to be smarter about how we deliver and where we deliver apart from. We're ultimately able to get the part to the shop faster than we were previously, and we're leveraging all of the assets we have in a local market to get those parts to a customer faster and we like the results that we're seeing.

Speaker 2

We believe they as we roll these out, our sales will improve in those markets and ultimately will provide better customer service and gain new customers as well as share of wallet with existing customers.

Speaker 10

Okay. Thanks guys.

Speaker 2

Thank you.

Operator

Your next question for today is from Brian Nagel with Oppenheimer.

Speaker 10

Hi, good morning. Thanks for taking my questions.

Speaker 2

Good morning.

Speaker 10

So the first question I have, I know we've already had a number of questions on commercial, but so I apologize for also asking about commercial. But just in the near term, if I heard the prepared comments correctly, it sounds like you expected a bit of a strength in here into the end of fiscal 2024, the 4th period. So the question I have is, what as you look at the business, I think comparisons do get easier, but are there specific, sort of say, building blocks which could help to strengthen the business here in the very near term?

Speaker 3

Yes. I think you got 2 dynamics. 1, as you mentioned before, is that the comparisons do get a little bit easier in the Q4 if you look at our grow over numbers. But the second one is just initiatives that Phil talked about. I mean, we're we've been really focused on jamming more parts in the local markets and we've done a great job of doing that and that's paying dividends for us.

Speaker 3

And then we've been focused on service and delivery speeds. And if we can win the game in terms of parts availability, we're jamming those parts in the local market and we can get them to the customer faster. Those are things that are going to drive our business as we move forward. So again, we're excited about where we are and excited about the opportunity to accelerate our growth as we move forward. There are always macro challenges that you have to fight your way through and big ticket is pressured, but you combine the fact that we're under penetrated, we've got a full slate of growth initiatives in place.

Speaker 3

Those are the things that get us excited about the future.

Speaker 10

Thanks, Jamey. Then my follow-up, again, it's also a follow-up. But just with respect to the consumer, I mean, look, you operate in a unique part of retail. A lot of the spend that happens to your stores is not necessarily discretionary. But there's a lot of chatter out there right now across consumer about maybe some incremental pressures on the lower income consumer.

Speaker 10

So I think the question I have is, are you seeing that as you look at your business and the data that's available to you, are you seeing clearly or somewhat clearly signs of incremental pressure on this core consumer that's affecting their shopping patterns?

Speaker 2

Yes. I think big ticket, I think, has been a challenge for the consumer in all of retail, not just us. Like you said, big pieces of our business are break fix, starter, alternator, battery, your car is down, you've got to fix it. And those tickets, while they're large, they're not it's not 1,000 of dollars. It's the starter and alternator could be a couple of $100 certainly puts pressure on the low end consumer to have that money come out of pocket, and they're under pressure.

Speaker 2

But discretionary categories have been under pressure for frankly quite some time. They all exploded during the pandemic when there was a lot of money in the consumer's pocket, and they've certainly been more challenged over the last 18 months to 24 months and that continues. But maintenance items, I think as customers get more cash strapped, they look at, if I take care of my car, I know that it will perform better and save me money in the long run. So maintenance items have a tendency to start to trickle up over time. And then the failure items, if you're going to get the car back on the road, you've got to purchase it.

Speaker 2

We don't have a lot of good, better, best categories. We have some in brakes and a couple of other categories, but that's not a big piece of our business. The vast majority of our sales are on application parts that have you have one choice and the customer buys that part to get their car back on the road. We think that will continue.

Speaker 10

Well, thanks guys. I appreciate all the color.

Speaker 2

Thank you. Thanks.

Operator

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

Speaker 2

Good morning, Michael. Good morning. Thank you.

Speaker 13

Phil, how would you compare and contrast this year for the aftermarket to 2017, which was the last year of challenged trends within the industry. And in your mind, is it really just a function of more cooperative weather that will drive an acceleration for the industry from here? Or do you think something else needs to happen in order for the backdrop to be more favorable?

Speaker 2

It's a great question. I was wondering when the tough weather questions from a winter perspective would come up and that was kind of that 16%, 17% range you're talking about. It's a great question. It's frankly one we talk about internally all the time. We've had a pretty soft winter weather pattern for the last 2 years.

Speaker 2

When I kind of look across the country, this winter pattern, we got some pretty good weather from a precipitation snow and temperatures in the Midwest. We got very soft weather patterns relative to driving break fix park failures on the Eastern seaboard. Wasn't a lot of snow in New York, Boston, Philadelphia, DC, and we didn't have a lot of cold temperatures in those markets. And those typically have meant undercar and brake categories perform very well when you have those types of seasonal patterns. We didn't get that this year, frankly didn't get it last year.

Speaker 2

So it's a little undetermined what happens in a long period of time where you haven't had those weather patterns with categories in that half of the country. So I think that is yet to be seen. We don't have the inflation that we had probably back in 2017, 2018 and frankly over the last 2 years to be a benefit. But I do think we'll get a better mix of categories going into the summer selling season than we've had in Q3. So, I don't know if I'm really answering your question.

Speaker 2

I think that's yet to be seen, and I think it will prove out over the next 4 months or so.

Speaker 13

Okay. My follow-up question is on the underlying gross margin trend outside of the LIFO benefit. It sounds like the LIFO could be about a $20,000,000 drag in 4Q. How much more room do you have to improve the underlying gross margin to offset that type of headwind that you're going to experience, especially as you move into next year where comps could remain uncertain and the market was still expecting double digit EPS growth?

Speaker 3

So what I'll say is, we've run the gross margin play with Intensity and our merchandising teams and our supply chain teams have done a fantastic job. You saw last quarter, we had this past quarter, we had almost 90 basis points of margin improvement strictly from what we're doing on the merchandising side and what we're doing with supply chain. I wouldn't suggest that those numbers are going to be as high as we move forward. We are coming out of a period where we had some pretty significant inflation that we got some deflation. And as we mentioned a little bit earlier, we're not getting the ticket necessarily to help us from a gross margin standpoint.

Speaker 3

So that will be muted some. But we believe that we'll have the potential to offset most, if not all of the pressure that you see from a LIFO standpoint.

Speaker 13

Thank you very much and

Speaker 9

good luck.

Operator

Your final question for today is from Max Bryklinko with TD Cowen.

Speaker 7

Great. Thanks a lot guys. Good morning. Good morning. So first, on the Speed initiative, can you discuss the pace of the rollout and when we think when we should think that it will be in majority or all of the markets that you have mega hubs in?

Speaker 2

We've been working on this for probably a year, year and a half and we started seeing the results that we really liked earlier this year and started ramping it up. We are probably in the middle innings, if you will, of rolling that out to our stores. We've got in our networks. We've got some more to go and we'll continue to add incremental stores as we move through the process. But I would say we're in middle innings.

Speaker 2

We do believe that as we roll this out, again, we believe we get better customer service, faster time to shop, and we believe with that better customer service, we'll gain new customers and grow share of wallet. It won't be an immediate snap, but we like the efforts and the growth that we're seeing in those markets.

Speaker 7

That's great. And then just as a follow-up, on the slower mega hub openings, is that more structural? Is it tougher to find boxes in the right areas? Or is it about execution opportunities on your end? And then it does sound like that the opening should start to accelerate in the next few quarters.

Speaker 7

Is that right?

Speaker 3

The openings will definitely accelerate and Phil is sort of smiling at me because I own store development as part of my finance responsibilities. And so this is one of my primary objectives for this year. They are big boxes and hard to find locations. We've been working through what we need to do from an execution standpoint. I will say it's anybody that's doing new store construction across the business know how challenging the market has been over the last couple of years or so.

Speaker 3

But we've worked our way through a lot of those challenges this fiscal year. We like the pipeline that we've built and we expect to see that accelerate as we move into FY 'twenty five.

Speaker 2

I think the good thing is we know exactly where we want these stores in every metro market or adding multiples to a given city or an individual market that may have a smaller number of stores. We know where we want to be. We want to make sure we get them at the right distance from our current locations and they've got to have good routes, so they're easily accessible the other markets. And then you've got to find the spot that is a great retail location and a great place to do, to fill and get these expanded parts to our shops and our stores fast. And it's just it takes time.

Speaker 2

We'd love to go faster because they're great boxes for us and I know they help us on both DIY and commercial. Okay. So before we conclude the call, I'd like to take a moment to reiterate that we believe our industry is in a strong position and our business model is solid. We are excited about our growth prospects for the remainder of the year, but we'll take nothing for granted as we understand our customers have alternatives to shopping with us. We have exciting plans that should help us succeed for the future, but I want to stress that this is a marathon and not a sprint.

Speaker 2

As we continue to focus on the basics and strive to optimize shareholder value for the future, we are confident AutoZone will be successful. Lastly, as we celebrate Memorial Day next Monday, I ask that we all remember our country's heroes, both past and present. We owe these great Americans a tremendous debt of gratitude. Thank you again for participating in today's call.

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Key Takeaways

  • AutoZone delivered 3.5% total sales growth in Q3, with domestic same‐store sales flat, international same‐store sales up 9.3% (constant currency), operating profit up 4.9% and EPS up 7.5%.
  • Sales were pressured by a delayed $300 billion tax refund season and cooler, wetter weather—particularly in the Northeast and Midwest—but the company still gained share in both retail and commercial channels.
  • The domestic commercial business grew 3.3%, now spans 5,843 programs (92% of stores), and benefits from 1,103 mega hubs that carry expanded SKUs and speed delivery; management targets over 200 mega hubs at full build-out.
  • International operations again outperformed, with an 18.1% actual same‐store sales increase (9.3% cc), growing the base to 872 stores and planning accelerated openings and operational improvements across Mexico and Brazil.
  • Supply-chain investments remain on track—two new U.S. distribution centers due Q2 FY’25 and expanded hub/mega hub rollouts—fueling a 102 bp gross-margin lift to 53.5% and generating $434 million in Q3 free cash flow amid $1.1 billion in CapEx.
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Earnings Conference Call
AutoZone Q3 2024
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