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AutoZone Q4 2022 Earnings Call Transcript


Listen to Conference Call

Participants

Corporate Executives

  • William C. Rhodes
    Chairman, President and Chief Executive Officer, Customer Satisfaction
  • Jamere Jackson
    Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf

Analysts

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to AutoZone's 2022 Fourth Quarter Earnings Release Call. [Operator Instructions]

Before we begin, the company would like to read some forward-looking statements. [Technical Issues] Apologies, just 2 seconds. [Technical Issues]

Unidentified Speaker
at AutoZone

Before we begin, please note that today's call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent Annual Report on Form 10-K and other filings 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 under takes no obligation to update such statements. Today's call will also include certain non-GAAP measures, a reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Operator

It is now my pleasure to hand the floor over to Mr. Bill Rhodes, Chairman, President, and CEO of AutoZone. Bill, over to you.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Good morning, and thank you for joining us today for AutoZone's 2022 fourth quarter conference call. With me today are Jamere Jackson, Executive Vice President, Chief Financial Officer and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the fourth quarter, I hope you had an opportunity to read our press release and learn about the quarters' results. If not the press release along with slides complementing our comments today are available on our website www.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them.

As we begin, we want to recognize our AutoZoners' for their tremendous success this past year. They far exceeded our expectations from the beginning of the year and in a very challenging environment as our pledge states put our customers first, resulting in additional share gains and terrific sales performance on top of fantastic results in FY'21.

We grew our overall sales 11.1% on top of 15.8% growth last year, resulting in a two-year growth that is among the highest we've ever experienced. We could not have achieved this success without phenomenal contributions from across the organization. This year began with the resurgence of the pandemic, ongoing supply chain challenges, a very difficult staffing environment and finished with rising interest rates and inflation at its highest levels in decades, all as major storylines.

Throughout the year, our team's incredible supply chain efforts to improve our in-stock position likely at industry leading levels helped our sales growth. These efforts resulted in a positive retail comp and an exceptionally strong commercial comp for both the quarter and the year. Anyway, you evaluate our FY'22 performance, we had a terrific year, congratulations AutoZoners', and thanks for always putting our customers first, which led to this success.

This morning, we will review our Q4 overall same-store sales, DIY versus DIFM trends, our sales cadence over the 16 weeks of the quarter, merchandise categories that drove our performance and any regional discrepancies. We will also share how inflation is affecting our cost and retails and how we think inflation will impact our business for FY'23.

Our domestic same-store sales were an impressive 6.2% this quarter on top of last year's 4.3%. On a two-year's basis, we delivered 10.5% comp and on a three-year basis, a remarkable 32.3% stacked comp. Our team once again, executed an exceptionally high level and delivered amazing results, despite the difficult comparisons and significant challenges I mentioned above. Our growth rates for commercial and retail were both strong, with domestic commercial growth, north of 20%. This quarter was our sixth consecutive commercial growth above 20%.

Additionally, commercial set a fourth quarter record with $1.442 billion in sales, an impressive accomplishment. We generated $260 million more in sales this quarter than in Q4 last year. For the fiscal year, our commercial sales were $4.2 billion versus $3.3 billion just a year ago, up over 26%. Last fall at our national sales meeting, our Senior VP of Commercial, Grant McGee declared a stretch goal to achieve $4 billion in sales for FY'22. That lofty goal ultimately wasn't near lofty enough. We also set a record of average weekly sales per store for any quarter at $17,000 per store versus $14,000 for last year.

Domestic commercial sales represented 30% of our domestic auto parts sales. Another record for us compared to just 26% in last year's quarter. Our commercial sales growth continues to be driven by key initiatives. We have been working on for the last several years. Improved satellite store inventory, massive improvements in hub and mega hub coverage, the strength of the Duralast brand, better technology to make us easier to do business with, improved delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being "priced right" for the value proposition we deliver.

We continue to execute in commercial and we are extremely proud of our team's performance. We're also very proud of our organization's performance in domestic DIY. We had a positive 1.1% comp this quarter, while our two-year comp decelerated from Q3s, we believe the more relevant comp is the three-year and we are higher than last year's quarter at 24.5% versus 21.6%. For the year, we were very proud of our DIY results, considering, we grew so much in FY'21.

To level set, we had an 11% DIY comp in FY'21. And for the full year '22, we were up 2.9%. These results are very strong considering the difficult comparison, which was driven by the various forms of stimulus last year. From the data we have available to us, we continue to retain the vast majority of the enormous share gains in dollars and more importantly in units that we built during the initial stages of the pandemic. And our recent performance gives us continued conviction about the sustainability into FY'23.

Now let's focus on sales cadence. Our quarter span 16 weeks early May through the end of August. Our same-store sales increased materially over the first four weeks to high-single digits, 8.4%. The next eight weeks, our growth was nearly halved dropping to 4.9%. And then it reaccelerated over the last four weeks up 6.8%. All of these year-over-year comparisons are difficult to interpret as so much was going on last year and even the year before. However, for Q4, our two-year comp was 10.5%. And the four week periods of the quarter increased 10.4% 9.4%, 7.9% and 14.4% respectively. But our three-year comp was 32.3%, and for the four-week periods of the quarter increased 35.2%, 33.5% 30.1% and 31% respectively.

We have been encouraged by the sustainability of the enormous sales gains we generated since the beginning of the pandemic. Regarding weather in May and June, we experienced slightly cooler and wetter weather trends across the country. By July, however, it became very hot across most of the country and it remained unseasonably warm for August overall. We feel weather had a small but slightly positive effect on our sales performance. As we look forward to the fall months, we anticipate normal weather patterns. As a reminder, historically, extreme weather, cold or hot drives parts failure and accelerated maintenance.

Regarding this quarter's traffic versus ticket growth, in retail, our traffic was down roughly 7%, while our ticket was up about 8%. Our transaction count decline wasn't surprising and was driven by lower demand for discretionary sales floor items. However, we were pleased to be in line with last quarters' three-year transaction trends. We are also quite pleased with the ongoing growth in unit share, we are seeing in our market share data. We're also very encouraged by the sales trends we continue to experience in commercial. Our sales growth is coming from transaction growth from new and existing customers, along with higher tickets, as we price for inflation.

I regularly visit our stores and commercial customers and find it very encouraging to hear the positive comments from our customers and AutoZoners on our offerings. The reception our AutoZoners are receiving from our customers, and as importantly, our perspective customers has changed meaningfully over the last few years, as we continue to implement and execute our commercial acceleration strategy. I'll say it now, but we're determined, determined to continue to grow meaningfully faster than the market. And we're focused on future growth opportunities to keep our momentum. Our goal stated simply over time is to become the industry leader in both sectors.

As we start our new fiscal year, we continue to be pleased with the momentum we are seeing in both domestic businesses heading into the fall months. During the quarter, there were some geographic regions that did better than others as there always are. This quarter, we saw a 30 basis point difference between the Northeast and Midwest compared to the balance of the country with the Northeast and Midwest being higher. As the Northeast and Midwest were warmer in May and June, their sales accelerated. However, this trend reversed itself over the last eight weeks of the quarter. As the remainder of the country, heated up those regions grew their comp sales faster than the Northeast and Midwest markets. Heading into the first quarter of the new fiscal year, we continue to believe weather will have only a minimal impact on our sales.

Now let's move into more specifics on performance for the quarter. While I said, our same-store sales were up 6.2% versus last year's fourth quarter, our net income was $810 million and our EPS was $40.51 a share increasing 13.4%. Regarding our merchandise categories in the retail business, our hard parts outperformed sales floor categories with approximately a 2.5% difference between them. As gas prices increased, our discretionary sales floor merchandise categories certainly softened. The discretionary categories represent approximately 20% of our DIY sales in any one quarter. But this quarter they were weaker at 19% of the retail mix. This category was down 6.5% on the quarter versus up 3.5% last year in Q4.

More recently as gas prices have abated we are encouraged to see the discretionary categories bounce back a bit. In general, the categories that are driven by failure due to heat performed well. And we were encouraged to see our battery category successfully lapped very strong performance last year and exceed our expectations. We believe our hard parts business will continue to do well this fall, as we expect miles driven to improve while our growth initiatives are delivering solid results.

Let me also address inflation and pricing. This quarter, we saw our sales increase by 11% from inflation in line with cost of goods, which was up about 10%. We believe both numbers for the first quarter will be similar, as rising raw material pricing, labor and transportation costs are all impacting us and our suppliers, inflation has been prevalent in the aftermarket space. We believe inflation is stabilizing. We are seeing transportation costs begin to moderate after reaching historic levels, where we are not seeing product costs deflation yet nor are we seeing any signs that labor wage growth is slowing.

Importantly, I want to point out that our industry has been disciplined about pricing for decades, and we expect that to continue. Historically, as costs have increased, the industry has increased pricing continuously to maintain margins. It is also notable that following periods of higher inflation, our industry has historically not reduced pricing to reflect lower cost. While we continue to be encouraged with the current sales environment, it remains difficult for us to forecast near to midterm sales. What I previously said, is that the past five quarter sales have all been consistent on both a two and three-year stack comp basis. It's difficult to predict sales going forward. We are excited about our growth initiatives, our team's execution, and the tremendous share gains we've achieved in both sectors.

Over the past 12 to 18 months, the overall macro environment has been favorable for our industry, despite inflationary pressures for some of our customers. And even at these near-term trends fade, we believe that we are in an industry that is positioned for solid growth over the long-term. For our first quarter 2023, we expect our sales performance to be led by the continued strength in our commercial business, as we execute on our differentiating initiatives. We will as always be transparent about what we are seeing and provide color on our markets and outlooks as trends emerge.

Before handling the -- handing call over to Jamere, I'd like to highlight and give some color on a few of our key business priorities for the new fiscal year. First, we are focusing on our supply chain with two initiatives that are in flight to drive improved availability. One is our expanded hub and mega hub rollouts. We know intelligently placing more inventory in local markets will lead to our ability to continue to say, yes, to our customers more frequently and in turn drive our sales.

Secondly, we are expanding our distribution center footprint. We announced the development of two new distribution centers domestically, and one additional DC in Mexico. These DCs will allow us to not only reduce drive times to stores, but they increase our capacity. Note, we didn't expect to grow our business 30% in three years as we did. And they will allow us to carry inventory that is slower turning yet in demand that across the country. I'm also excited to announce that we opened a new facility on the west coast, just this month to handle direct import product on a timelier basis. This facility will flow products, ordered abroad and distribute them to our other DCs, postponing the inventory allocation and therefore reducing safety stock.

Our supply chain strategy is focused on carrying more product closer and closer to the customer. And we believe it has been a significant contributor to our recent success, especially in commercial. Additionally, we plan on continuing to grow our Mexico and Brazilian businesses and almost 800 stores open internationally. These businesses had impressive performance this past fiscal year and should continue to grow in 2023 and beyond. We are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil.

Now I'll turn the call over to Jamere Jackson. Jamere?

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

Thanks, Bill, and good morning, everyone. As Bill mentioned, we had a strong fourth quarter stacked on top of a remarkable fourth quarter last year with 6.2% domestic comp growth, a 5.7% increase in EBIT and a 13.4% increase in EPS. Our results for the entire fiscal year were incredibly strong as our growth initiatives continue to deliver great results. And the efforts of our AutoZoners and our stores and distribution centers have continued to enable us to take advantage of robust market conditions.

To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q4. For the quarter, total sales were just over $5.3 billion up 8.9%. For the year, our total sales were $16.3 billion up 11.1% versus last fiscal year, I continue to marvel at the strength of our business since FY'19, our sales are up an amazing 37% or nearly $4.4 billion since 2019.

Let me give a little more color on sales and our growth initiatives, starting with our commercial business. For the fourth quarter, our domestic DIFM sales increased 22% to $1.4 billion. And we're up 43.2% on a two-year stack basis. Sales to our domestic DIFM customers represented 27% of our total company sales and 30% of our domestic auto parts sales. Our weekly sales per program were $17,000, up 18.1% as we exceeded our internal expectations. Our growth was broad based as both national and local accounts performed very well for the quarter. Our results for the quarter set another record for the highest weekly sales volume for any quarter in the history of the chain. I want to reiterate that our execution on our commercial acceleration initiatives is delivering better than expected results. As we grow share by winning new business and increasing our share of wallet with existing customers.

We have our commercial program and approximately 87% 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 66 net new programs finishing with 5,342 total programs. As I've said, since the outset of the year commercial growth led the way in FY'22 and our results in the fourth quarter in year reflected this dynamic. For FY'22, our commercial sales were $4.2 billion, up 26.5% versus last year.

Importantly, we believe we have a lot of runway in front of us and we're delivering on our goal of becoming a faster growing business. We remain confident in our strategies and executions and believe we will continue gaining share, delivering quality parts, particularly with our Duralast brand, improved assortments, competitive pricing, and provide an exceptional service has enabled us to deliver double-digit sales growth for the past eight quarters.

Our core initiatives are accelerating our growth and position us well in the marketplace. And as I've noted on past calls, our mega hub strategy is driving strong performance and positioning us for an even brighter future in our commercial and retail businesses. Let me add a little more color on our progress. As we've discussed over the last several quarters, our mega hub strategy has given us tremendous momentum. We now have 78 mega hub locations with 11 new stores open in Q4. While I mentioned a moment ago, the commercial weekly sales for program average was $17,000 per program. The 78 mega hubs averaged significantly higher sales and are growing much faster than the balance of the commercial footprint.

In fact, our commercial mega hub business grew at twice the rate of our overall commercial business in Q4. As a reminder, our mega hubs typically carry over a 100,000 SKUs and drive tremendous sales lift inside the store box, as well as serve as an expanded assortment source for other stores. The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business. What we're learning is that not only are these assets performing well individually, but the fulfillment capability for the surrounding AutoZone stores gives our customers access to thousands of additional parts and lifts the entire network. This strategy is working. We have an objective to reach 200 mega hubs supplemented by our objective of a total of 300 regular hubs. We're targeting up to 25 new mega hubs in FY'23.

By leveraging sophisticated analytics, we're expanding our market, reach, driving closer proximity to our customers and improving our product availability in delivery times. Our AutoZoners and our customers are excited and we're determined to build our strong momentum. On the retail side of our business, our domestic retail business comp was up 1.1% in Q4. The business has been remarkably resilient as we have managed to continue to deliver positive comp growth, despite underlying market headwinds.

As Bill mentioned, we saw traffic down 7% from last year's traffic levels. However, we also saw 8% ticket growth as we continue to raise prices in an inflationary environment. For FY'22, our DIY comp grew 2.9% and 14.1% on a two-year stack basis. Our DIY business has continued to strengthen competitively behind our growth initiatives. In addition, on a macro basis, the market is experiencing a growing and aging car park in a challenging new and used car sales market for our customers, which continue to provide a tailwind for our business. These dynamics, pricing, growth initiatives and macro car park tailwinds have driven a positive comp despite tough comparisons from last year's stimulus injection and consumer discretionary spending pressure from overall inflation in the economy.

Our sales were steady throughout the quarter, and we're forecasting a resilient DIY business in FY'23. Now I'll say a few words regarding our international business. We continue to be pleased with the progress we're making in Mexico and Brazil. During the quarter, we opened 30 new stores in Mexico to finish with 703 stores and 14 new stores in Brazil ending with 72. On a constant currency basis, we saw accelerated sales growth in both countries. In fact, at a higher growth rates than we saw overall. We remain committed to our store opening schedules in both markets and expect both countries to be significant contributors, to sales and earnings growth in the future. With 11% of our total store base now outside the U.S. and our commitment to continue expansion in a disciplined way, international growth will be an attractive and meaningful contributor to AutoZone's future growth.

Now, let me spend a few minutes on the rest of the P&L and growth margins. For the quarter, our gross margin was down 73 basis points driven primarily by the accelerated growth in our commercial business and a 28 basis points headwind stemming from a non-cash $15 million LIFO charge. I'd like to address the $15 million LIFO charge we took this past quarter, which came from the exhaustion of our reserve balance that occurred during the quarter. The level set, we went from a $335 million reserve balance in Q4 of last year to zero in Q4 this year, plus an additional $15 million charge.

Said differently, we recognized $350 million in higher costs this past year. Basically all of the reduction in our reserve came from higher inventory freight costs. This charge does not show up in our cash flow statement this quarter because the accounting for LIFO adjust the weighted average cost through the P&L to the last-in higher priced items. In a nutshell, it assumes everything you sold in the quarter was at the last-in higher prices. We're still modeling for higher freight costs through the end of the calendar year, which in turns means we are modeling LIFO charges through the first half of the new fiscal year. In the first quarter, we anticipate up to $100 million in LIFO charges, and we're forecasting a similar amount for the second quarter. I will note that if freight costs abate, as we expect them to, then we'll see these charges reverse and we'll begin to rebuild LIFO reserve balance.

Moving to operating expenses. Our expenses were up 8.4% versus last year's Q4 as SG&A as a percentage of sales leveraged 12 basis points driven by strong sales growth. The growth in SG&A has been purposeful as we continue to invest in an accelerated pace in IT and payroll to underpin our growth initiatives. These investments will pay dividends and customer experience speed and productivity. We're committed to being disciplined on SG&A as we move forward, and we will manage expenses in line with sales growth over time.

Moving to the rest of the P&L. EBIT for the quarter was $1.1 billion up 5.7% versus the prior years' quarter driven by our strong sales growth. For FY'22, EBIT was just under $3.3 billion up 11.1% versus the prior year also driven by strong top line growth. Interest expense for the quarter was $64 million, up 10.1% from Q4 a year ago as our debt outstanding at the end of the quarter was $6.1 billion versus $5.3 billion at Q4 in last year. We're planning interest in the $55 million range for the first quarter of fiscal 2023 versus $43.3 million in this past year's first quarter, higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 22.1% and flat with last year's fourth quarter. This quarter's rate benefited 70 basis points from stock options exercise, while last year, it benefited 215 basis points. For the first quarter of FY2023, we suggest investors model us at approximately 23.5%, before any assumption on credits due to stock option exercises.

Moving to net income and EPS. Net income for the quarter was $810 million up 3.1% versus last year's fourth quarter. Our diluted share count of 20 million was 9.1% lower than last year's fourth quarter. The combination of higher net income and lower share count drove earnings for share for the quarter to $40.51 up 13.4% over the prior year's fourth quarter. For FY'22, net income was $2.4 billion up 11.9% and earnings per share was $117.19 up 23.1%.

Now let me talk about our free cash flow for Q4. For the fourth quarter, we generated $1.2 billion of operating cash flow, spent $300 million in capital expenditures allowing us to generate $900 million in free cash flow. For the year, we generated $2.5 billion in free cash versus $2.9 billion in the prior year, the decline in free cash flow versus last year was due to a change in working capital this year versus last year. We expect to continue being an incredibly strong free cash flow of 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 ratios remain below our historic norms. Our inventory for store was up 18.4% versus Q4 last year, and total inventory increased 21.5% over the same period last year, driven primarily by our growth initiatives and inflation. Net inventory defined as merchandise inventories, less accounts payable on a per store basis was a negative $240,000 versus negative $203,000 last year and negative $216,000 last quarter. As a result, accounts payable as a percent of gross inventory finished a quarter at 129.5% versus last year's Q4 of 129.6%.

Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $1 billion of AutoZone stock in the quarter. And at quarter end, we had just under $1.1 billion remaining under our shared buyback authorization. The strong earnings balance sheet and powerful free cash we generated this year has allowed us to buy back over 10% of the shares outstanding since the beginning of the year. We have bought back over 90% of the shares outstanding of our stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to this discipline capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. Our leverage metric finish Q4 at 2.1 times EBITDAR, which is below our historical objective of 2.5 times EBITDAR, however, we remain committed to this objective. We expect to return to the 2.5 times target during FY'23.

So to wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash and returning excess cash to our shareholders. Our strategy continues to work. We're growing our market share and improving our competitive position being in a disciplined way. And as we look forward to FY'23, we're bullish on our growth prospects behind a resilient DIY business and a fast growing commercial business that is continuing to grow share. I continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders.

And with that, I'll turn it back to Bill.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Thank you, Jamere. As we start a new fiscal year, I'd like to take a moment to discuss our operating theme for the New Year. Last night, we kicked off our national sales meeting with our amazing President's Club winners, our very best store managers. This week, we will embrace our theme for the year, accelerate together. We are very excited to have our field leadership team in Memphis for the next four days. And I cannot wait to congratulate everyone on their year and thank them for their phenomenal results. They delivered exceptional results in fiscal '22, and we remain focused on superior execution and customer service heading into fiscal '23.

Our culture was built on providing exceptional service, and this is what will continue to define our success well into the future. As we've accelerated our top line, our competitive positioning has materially improved and customer behavior may have permanently changed post pandemic, if this hold true, it'll be the fourth time in the last 30 years that the economy and society have had significant shocks leading to material acceleration in our growth in sales and profits, without a corresponding decline back to pre-recessionary or pandemic levels.

Our industry is unique and it is a very long track record of strong performance with high returns and consistent cash flows. We would also encourage you to migrate, to studying our performance on a one-year comp basis to gauge our performance. As we believe the business is steady enough to talk about year-over-year comps going forward. This time of year, I always enjoy reflecting on the past. This year in particular, it's a rewarding experience. Our team delivered some really impressive milestones, $16.3 billion in sales racing past the $15 billion milestone, DIY comps at 2.9% most impressively 21.6% on a three-year basis.

Commercial sales blew past $4 billion ending at $4.23 billion, average weekly sales domestically of $46,300 per store per week equating to over $2.4 million per store annually. Our Mexico and ALLDATA teams, both broke numerous records and Brazil is poised for significant growth in store count. We bought back a record breaking $4.4 billion in AutoZone stock. And our team has grown our EBIT by roughly 50% in three years. Yes, that's 50%, and that is remarkable. But we can't rest on our laurels and we aren't without our challenges. That's for sure.

Our greatest challenge, which we will spend time discussing this week with the team is, "exiting pandemic mode". In addition to our fanatical customer focus and our phenomenal culture, a huge part of our historical success has been flawless execution. In all candor, we haven't been flawlessly executing, in the depths of the pandemic, it was impossible. And our teams appropriately made trade-offs. We have to ensure that some of those trade-offs do not result in "new norms or worse", numbness or bad habits, those new norms can't and won't be tolerated. We have to make sure our in stock levels finally recover to our historic levels and they recover soon. Our vendors must return to providing us with the right amount of merchandise at the right time.

Every store has to be staffed, right, every hour of every day. Our processes need to function correctly. Always we have to meet our store opening goals and timelines. simply put we have to remain the execution machine. We have always been an exit pandemic mode. I've had the honor of being part of this team for nearly 28 years now. And it has been one of the great privileges of my life. I could not be more proud of our AutoZoners across the organization for their commitment to passionately serving our customers. We must continuously challenge ourselves during these extraordinary times to proposition our company for even greater future success and rest assured we are doing just that. We know that investors will ultimately measure us by what our future cash flows look like three to five years from now. And we very much welcome that challenge. I continue to be bullish on our industry and in particular, on our team at AutoZone.

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

Questions and Answers

Operator

Thank you, Bill. [Operator Instructions] Thank you. Your first question is coming from Bret Jordan of Jefferies. Bret, please ask your question.

Bret Jordan
Analyst at Jefferies Securities

Hey, good morning guys.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Good morning, Bret.

Bret Jordan
Analyst at Jefferies Securities

On the supply chain comment, could you maybe give us an update where we are as far as fill rates go and the cadence of improvement? It does seem to some commercial customers finding parts is still a bit of a challenge.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Yeah. Thank you, Bret. It's still quite challenging. And it's moved. I've talked about it over time. It moves from one category to another one. Most of our hard part categories, we're in pretty good shape on. We have some challenges in areas like filtration. But generally, we're in pretty good shape, but we are still a couple of points behind our overall in-stock rate that we had before the pandemic. It's been very stubborn, frankly. We're looking to push through it. But every time we think we've got it solved in other category rears its ugly head.

Bret Jordan
Analyst at Jefferies Securities

Okay. And then in the prepared remarks, you mentioned price right and obviously, a big topic this year. Are you seeing anything in the market pricing, whether it be in the DIY against the non-traditionals? Is anything changing in pricing cadence?

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

No, we're not seeing anything changed in terms of pricing cadence. We've been very disciplined about the pricing that we put in the marketplace. Again, we've been pricing to recover inflation and been doing that pretty consistently. And as I've said before, our industry has been very disciplined over time as it relates to this, and we're not seeing anything that throws us out of whack there.

Bret Jordan
Analyst at Jefferies Securities

Great. Thank you.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Thanks, Bret.

Operator

Thank you very much. Your next question is coming from Steven Zaccone of Citi. Steven, please ask your question.

Steven Zaccone
Analyst at Citigroup

Great. Good morning, everyone. Thanks for taking my question. So our question was on the DIY side of the business. You cited resilient expectations for this year and thinking about the business on a one-year basis. Do you see the potential to comp positive again in fiscal '23? And within that context, you cited some weakness on the discretionary side. How do you expect that to perform over the balance of the year now that gas prices have come down a bit?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Sure. Well, first, on the latter part of the question, we addressed it a little bit in our prepared remarks that when gas prices were $5.50 a gallon on average across the country, we saw an immediate reduction in our discretionary products. As those gas prices have come back down, we've seen discretionary products improve. You have to be careful because it's such a small part of our business, but we've certainly seen it improve.

As for whether or not we can see positive comps in DIY for FY '23, as you know, we don't give guidance. There's a lot of uncertainty in the marketplace with inflation, with rising interest rates and the like. But I will tell you -- I'll answer it this way. This latter part of the fourth quarter was much stronger than we were expecting it to be in June and July. And so that gives us some confidence that at least for now, the DIY business is really quite strong. And frankly, as strong if not stronger than we thought it would be back in the early months of the summer.

Steven Zaccone
Analyst at Citigroup

The follow-up I had was just thinking about the commercial business from a higher level. You said you've grown past the $4 billion sales target that you had. How should we think about the multiyear path for that business? And I guess, what are the strategies you're focused on for the next chapter of growth?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

I think the strategies that we're focused on for the next chapter of growth are the same ones that we've been working on for about five years. We're going to continue to make sure that we've got the best coverage in the marketplace. That considers being in the best situation in the local store. It also means expansion of hubs and mega-hubs. We've talked about growing our mega-hubs from today's 78 to 200. So, we're just over -- just under 40% of the way there, and we're moving pretty quickly. Same kind of trajectory on the hub stores, we're around 200. We want to get to 300 of those.

So we have lots of growth still in front of us on hubs and mega-hubs, and we're continuing to test new philosophies and new coverage even in those. We're going to continue to focus on the Duralast brand. We're leveraging technology to make our people more efficient and to reduce our delivery times. We're always making sure that we're priced strike. We've got a lot of different strategies, and that's the thing to me that's most encouraging is it's not one single thing that's making this happen. It's a holistic substantial improvement in our competitive positioning in the marketplace.

At the end of the day, we got around 4% share in commercial. I said on the call today, the first time we've ever said it. We want to win and be the largest in both sectors. And it's going to take us a while, but that's our goal. And I'm very pleased with the progress that we've had with 20% growth over six consecutive quarters, that's pretty phenomenal regardless of how the industry is growing.

Steven Zaccone
Analyst at Citigroup

Very helpful. Thank you.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Yeah. Thank you.

Operator

Okay. Your next question is coming from Simeon Gutman of Morgan Stanley. Simeon, please ask your question.

Simeon Gutman
Analyst at Morgan Stanley

Good morning, everyone. I'll be the LIFO person for the call. So the LIFO charges because of freight, non-cash. If you look out 12 to 18 months, do you get back all the charges to earnings either freight subsides or you take credits? Or you actually just raise price when over time to recoup this?

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

Yes, Simeon. So what we're modeling right now, as we said, is up to $100 million in the first quarter due primarily to higher freight. We are starting to see freight moderate some in the spot markets. However, what I'll remind you is that when we were in this environment of trying to make sure that we had capacity, we were incurring higher freight charges just so that we could secure capacity. So as those short-term contracted capacity dynamics happen from freight start to roll off, we'll start to see the benefits of what we're starting to see in the marketplace, which is a moderating freight market. You could see this in the back half get better, barring any disruptions. But right now, from a forecast standpoint, we're modeling somewhere in the neighborhood of close to $100 million in the first quarter and something similar in the second quarter.

From a pricing standpoint, what we've said is that when there's hyperinflation on things like freight, where, for example, container costs went up seven times what we normally pay and then spike back down over time, you typically don't price to recover those kinds of spikes. What you do is you wait for the market to sort of moderate and your price accordingly to what you see the long-term impacts are going to be. So we're continuing to price in a disciplined way. We're monitoring what's happening in the freight markets. It will come back. It's already starting to come back. And what you'll see is that we'll get credits coming back through the P&L to offset the charges that I've talked about for the first and the second quarter. And then as we get back to our normal market conditions, you'll see us rebuild that reserve balance over time.

Simeon Gutman
Analyst at Morgan Stanley

Okay. I'll ask something different for the follow-up. If you look at the units in DIY, they're probably negative. So, can you talk about the stacks there whether it's stabilizing and thinking about reversion or even elasticity, does the DIY units, do they stay negative or they work back to flat through fiscal '23?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Simeon, you followed us for a lot of years, and you've heard me say many times that the dirty little secret of our industry is that there's downward pressure on units and have been for decades. So oftentimes, we'll be down 3% or 4% in units and customer count. A lot of that is driven by improvements in automobile technology. So easy example is spark bugs. He used to buy spark bugs and they were copper spark bugs and they would last for 30,000 miles. Now you buy Iridium spark bugs and they last 100,000 miles.

Now the old copper spark bugs used to cost $0.59. Now Iridium's are oftentimes over $10. So, there's an upward pressure on cost or peaks -- price per piece and a downward pressure on units. I think our downward pressure in the fourth quarter was more exaggerated than it typically is, mainly because of the incredible performance that we've seen over the last three years. I think there's been some moderation. There was also a little bit of moderation as we said, because of the discretionary items, accessories and the like. Is that helpful?

Simeon Gutman
Analyst at Morgan Stanley

Yeah. That's helpful. Appreciate it. Thanks. Good quarter.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

All right. Thank you.

Operator

Your next question is coming from Michael Lasser of UBS. Michael, please ask your question.

Michael Lasser
Analyst at UBS

Good morning. Thanks a lot for taking my question. Understanding that you don't provide guidance, but in light of the $100 million LIFO charge this quarter and next quarter, coupled with rising interest expense and what looks to be a slightly higher tax rate year-over-year, is it best that we assume this is going to be a sub algorithm year even if you comp in the traditional 3% to 4% range and buy back a similar amount of stock that you have been buying back?

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

From an operating standpoint, we will be spot on the algorithm that we've typically had. You do have some dynamics associated with LIFO this year where if you model in a couple of quarters of LIFO charges in the $100 million range, it will have a non-operating impact on our gross margins. So if you're thinking about modeling it that way, then certainly, that's potentially the case. But we'll come back to you. We'll be very transparent about what we're seeing. As we said, we're starting to see some moderation in the dynamics that are causing us to take a LIFO charge. As we get through the first and the second quarter, we could see some moderation there and that could change how you ultimately end up for the fiscal year.

But what I want to make sure that people understand is that this certainly is an operational deficiency. It's simply non-cash LIFO accounting. And we're continuing to run the business in a very disciplined way, which means that as we've seen pricing impacts on our product costs, we're continuing to take pricing. We'll continue to drive our growth initiatives. We're going to be a very strong cash flow generator. And the most important part of the operating model in our mind is that cash is going to mean that we're going to invest in our business, and we're going to return a meaningful amount of that to shareholders this year.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Hey Jamere, let me jump in and amplify a couple of points, too. First of all, I've been involved with this company since before we went public in 1991. This is the first time we've ever had a LIFO charge period. These are uncertain times or unique dynamics, especially with the level of inflation that we've seen in cargo freight going from $1,800 to over $20,000 per container. Those numbers have moderated significantly now, but we do have some long term -- or some midterm contracts, call them six to 12 months where we had to secure capacity. It is our full expectation -- and I don't know if it will happen this year or not. It's going to depend on freight costs. It is our full anticipation whatever charges we take in Q1 and Q2 ultimately will be reversed, and we will go back to zero and then we'll start building a LIFO reserve that we don't record. So, we think this $100 million to $200 million charge will be temporary, and it will reverse and it could be -- the back half of this year, could be next year, but that is fully our expectation.

Michael Lasser
Analyst at UBS

Okay. So just to clarify, your point being, yes, for maybe this year on a GAAP basis, your EPS algorithm might be a little bit lower than it's been historically, but that's just a GAAP reporting number, the cash flow characteristics of the business aren't changing. And so, if that's the correct interpretation, is it fair to assume that eventually the gross margin can get back to 52% or better over time as this accounting situation reverses and perhaps you start to see the benefits of deflation in your product cost while you keep your retails flat or growing?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Yeah, as far I don't want to specifically say 52% gross margins is what the future is going to look like. As you've seen, there are pressures on gross margin as we continue to grow this commercial business at such an accelerated rate. That pressure is likely going to continue. But just like you said, the GAAP charge, let's just say, it was $200 million for the first half of the year. A year from now or 18 months from now, you're also going to have to think about when that $200 million comes back through the P&L. And so, we would encourage you to look at it, excluding the LIFO charges, both as it's a penalty for us now and when it's a benefit for us whenever that happens.

Michael Lasser
Analyst at UBS

Understood. Thank you so much and good luck.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Yeah. Thank you.

Operator

Your next question is coming from Scot Ciccarelli from Truist Securities. Scot, please ask your question.

Scot Ciccarelli
Analyst at Truist Securities

Good morning, Scot Ciccarelli. So, I guess I have another question on kind of the same SKU inflation outlook. I mean while you guys are still seeing double-digit same SKU inflation, year-over-year comparisons do start to become much more difficult over the next few quarters. So, how should we think about the comp cadence as those comparisons start to become difficult?

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

Well, from a comp cadence standpoint, a couple of things I'll point you to is, remember, the first two quarters of last year, we have well over 13% domestic comps. And those are toughest two quarters from a comp standpoint and then you start to see that comp sort of moderate in the back half of the year. And we encourage you for the full year to look at our comps on a year-over-year basis. And the things that we've talked about is, again, we have a resilient DIY business, albeit in a marketplace that has some volatility and some uncertainty associated with it. We've been very disciplined and our growth initiatives are delivered.

And then probably the most important part of our story is the commercial story where we're continuing to see accelerated growth in commercial, driven by all the initiatives that Bill talked about and the fact that we're a four or five share in a large and growing market. So, that's how you should think about our comps. And again, the first half comps obviously are going to be a little bit tougher just given the fact that we printed over 13% in the first two quarters of last year.

Scot Ciccarelli
Analyst at Truist Securities

Yeah. That's helpful. And then just a quick follow-up here. Does the increase in interest rates and higher interest costs change your expectations at all for your debt-to-EBITDAR targets? Or maybe how aggressive you plan to be on your buyback program?

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

They don't. A couple of things I'll point you to. One is we've been at roughly a 2.1 times metric. So, we have a lot of dry powder to get back to our 2.5 times metric. We continue to stress that as we move through this period where our business has grown on an accelerated basis, and we have confidence in our growth prospects going forward. And we're going to move back closer to or at that 2.5 times target. So that gives us a lot of financial firepower to, first of all, invest in our existing assets and grow our business, but also to give meaningful amounts back to our shareholders. So you'll see us continue to drive free cash flow and get our leverage metrics back to the 2.5 times. And that means that we'll be able to do some exciting things for shareholders in the future.

Scot Ciccarelli
Analyst at Truist Securities

Got it. Thank you.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Thank you.

Operator

Your next question is coming from Kate McShane of Goldman Sachs. Kate, please ask your question.

Kate McShane
Analyst at Goldman Sachs

Hi, good morning. Thanks for taking our question. We wondered within DIFM, if you're seeing similar demand trends from national accounts and independents? And also in DIFM, how is private label playing a role in this expanded business? Is it becoming a higher percentage of your mix?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Yeah. Terrific questions, Kate. I'll take the last one first. Duralast continues to perform exceptionally well in the DIFM sector. We've rolled it into more categories. In the last few years, we've rolled it into shocks and struts. We've rolled out a Duralast Gold type performance chassis program, and we've rolled out Duralast elite brake pads. Each of these have been well received in both the retail and the commercial market, where 10 years ago, everybody would say, we couldn't be successful in commercial because of the Duralast brand. I think, the exact opposite is true. It has become a real strength for us. Remind me the first part of your question, sorry.

Kate McShane
Analyst at Goldman Sachs

Just demand trends from national accounts and independents.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Yeah, sorry. I think they're very, very similar. Both are doing very well. There's not a discernible difference between the two right now.

Kate McShane
Analyst at Goldman Sachs

Thank you.

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

Yeah. Thank you.

Operator

Your next question is coming from Daniel Imbro of Stephens Inc. Daniel, please ask your question.

Daniel Imbro
Analyst at Stephens Inc.

Yeah. Hey, good morning guys. Thanks for taking our questions. Bill, you discussed your new supply chain investment, I think it's on the West Coast for direct importing. Obviously, direct importing is tough especially with fill rates are so important. There's been some changes on your merchandising management internally. So can you just walk through the pros and cons, I mean, growing the direct import business, maybe how you manage that risk in the supply chain backdrop?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Yeah. First of all, we've been -- thanks for the question. Terrific. We've been direct importing for years. We've got a strong team of people in China today and import from China and Taiwan and Vietnam and Turkey and India. We've got a very robust direct import program that will continue to grow, and it's been a very important part of us managing our product cost over long periods of time. What we're doing today is we're going to make it more efficient for us. So, we've opened in the beginning stages of opening a direct import facility in California. We also announced that we're going to be opening a new distribution center in New Kent, Virginia and attached to that new distribution center will also be a direct import facility.

What this is going to allow us to do is continue to import, but instead of having to buy in quantities that are going to ship from China or Turkey or India by distribution center, we're going to flow them into this direct import facility and it allows us to do postponement on the allocation of the inventory by probably 45 days, which will make us be able to reduce our safety stock in a significant way and make us more efficient. I'm really excited about this new program.

Daniel Imbro
Analyst at Stephens Inc.

Thanks for all that color. And Jamere, I want to follow up on the SG&A side. I think Do-It-For-Me or commercial delivery costs are actually in that line. So can you talk about maybe on a store level basis, what the SG&A initiatives are that you're implementing, just impressed you're able to leverage that despite the growth in commercial? So trying to understand what's happening on the non-commercial delivery, kind of the core SG&A side of the business?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

So we've continued to run the playbook that we've always run inside the Company on SG&A, where we're very disciplined about cost. We tend to try to run our SG&A line to be somewhat close to what we're seeing from a sales standpoint. And so, there's a laundry list of tactics that we run every single year to make sure that we're delivering productivity from an SG&A standpoint. Every function is involved in that. So it isn't just the store functions that are a part of that. And those are the things that are, quite frankly, give us a lot of confidence that we're able to manage that line item in line with what we're seeing on the top line over time. Naturally, from a payroll standpoint, we continue to invest in the payroll line to deliver on the customer experience that our customers expect. And as the sales growth has been accelerated, we've tried to make sure that we put the hours in and the labor into our stores to be able to deliver on that promise and that experience, and it's been successful for us. And quite frankly, it's driving our top line growth.

Daniel Imbro
Analyst at Stephens Inc.

Great. Well, thanks so much for all the color. Best of luck.

Operator

Thank you very much. Your next question is coming from Greg Melich of Evercore. Greg, please ask your question.

Gregory Melich
Analyst at Evercore/ISI

Hi, thanks and congrats on a great year and quarter, guys.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Thanks, Greg.

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

Thanks, Greg.

Gregory Melich
Analyst at Evercore/ISI

The inflation number of 11% for this company in DIY, you said ticket was up 8%. Is it fair to say that the difference between the 11% and the eight is all just items in the basket at DIY? Or is there some -- there's inflation that's less in retail?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

It's basket and mix that are driving the difference there.

Gregory Melich
Analyst at Evercore/ISI

Okay. So I should assume inflation is the same in DIY?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

That's right.

Gregory Melich
Analyst at Evercore/ISI

Got it. And then the second question is, and maybe it ties a little bit into the margins in LIFO. Any thoughts in terms of how far AP inventory can go? Any changes in terms there? If you did, would that help you get some more of these products in certain categories? How should we think about the AP inventory ratio?

Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone

We have a strong program that are driving the AP to inventory numbers. The other thing I'll point to is that our turns are elevated relative to where we've been historically, 1.5 times versus probably being somewhere in the 1.2 times to 1.3 times. And that's given us some goodness there in terms of the AP inventory ratio. It may move around a few points or so, but we're going to continue to be aggressive on the programs that we've put in place.

Gregory Melich
Analyst at Evercore/ISI

Got it. Now my last one would be trade down. Is there any sign of that? You talked a lot about the strength in commercial in Duralast Gold and Elite, but if you look across the box, including DIY, are we seeing consumers starting to shift anywhere?

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Yeah, it's a great question, Greg. It's something that we have been studying really since probably May. We have seen it at times on the margin. But really -- I mean, we've really looked for it hard. We have not seen it in mass by any stretch of the imagination at this point in time.

Gregory Melich
Analyst at Evercore/ISI

Got it. Well, good luck.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

All right. Thank you.

Operator

Okay. I'm going to hand back over to Bill now. We have finished the question-and-answer section. Bill, over to you.

William C. Rhodes
Chairman, President and Chief Executive Officer, Customer Satisfaction at AutoZone

Okay. Well, before we conclude the call, I just want to take a moment to reiterate that we believe our industry is in a strong position, and our business model we know is solid. We are excited about our growth prospects for the year, but we will take nothing for granted as we understand our customers have alternatives. We have exciting plans that should help us succeed for the future, but I want to stress again that it's a marathon and not a sprint. As we continue to focus on the basics and strive to optimize shareholder value for the future, we are confident AutoZone will continue to be very successful.

Thank you for participating in today's call. Have a great day.

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