Jamere Jackson
Chief Financial Officer and Executive Vice President, Finance and Store Development, Customer Satisf at AutoZone
Thanks, Bill. Good morning, everyone. As Bill mentioned, from a sales perspective, we had a strong first quarter stacked on top of an exceptionally strong first quarter last year with 5.6% domestic comp growth. We also had a 4.2% decrease in EBIT and a 6.9% increase in EPS. To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q1. For the quarter, total sales were just under $4 billion, up 8.6%, reflecting continued strength in our industry and solid execution of our growth initiatives.
Let me give a little more color on some of our growth initiatives. Starting with our commercial business, for the first quarter, our domestic DIFM sales increased nearly 15% to $1 billion, and we're up 44.3% on a two-year stack basis. Sales to our domestic DIFM customers represented 29% of our domestic auto part sales. Our weekly sales per program were $16,000, up 11.1%. And our growth was broad based as both national and local accounts performed well for the quarter. Our results for the quarter set a record for the highest first quarter weekly sales volume in the history of the chain. I want to reiterate that our execution on our commercial acceleration initiatives continues to deliver exceptionally strong results as we grow share by winning new business and increasing our share of wallet with existing customers.
We have our commercial program in approximately 88% 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 117 net new programs finishing with 5,459 total programs. As I have said previously, commercial growth will lead the way in FY '23, and we continue to deliver on our goal of becoming a faster-growing business.
Our strategy and execution continue to drive share gains and position us well in the marketplace delivering quality parts, particularly with our Duralast brand, improved assortments in local market availability, competitive pricing, and providing exceptional service has enabled us to drive double-digit sales growth for the past nine quarters. In addition, we are increasing the penetration of our market leading ALLDATA shop management diagnostic and repair software suite to new and existing commercial customers, which gives us yet another key competitive advantage. And as I've noted on past calls, our mega-hub strategy is driving strong performance and positions 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 80 mega-hub locations with two new ones open in Q1. While I mentioned a moment ago, the commercial weekly sales per program average was $16,000, the 80 mega-hubs averaged significantly higher sales and are growing much faster than the balance of the commercial footprint. As a reminder, our mega-hubs typically carry 80,000 to 110,000 SKUs and drives tremendous sales lift inside the store box as well as serves 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, and we remain committed to our objective to reach 200 mega-hubs supplemented by 300 regular hubs. We're targeting at least 25 new mega-hubs in FY '23. We continue to leverage sophisticated data analytics to expand our market reach, placing more parts closer to our customers and improving our delivery times. We're determined to build on our strong momentum.
Our domestic retail business comp was 2.6% in Q1. The business has been remarkably resilient as growth rates accelerated from Q4, and we have managed to continue to deliver positive comp growth despite underlying market headwinds. As Bill mentioned, we saw traffic down 4% from last year's levels. However, they improved sequentially from Q4 where traffic was down 7%. We also saw 7% ticket growth as we continue to raise prices in an inflationary environment. Our DIY businesses continue to strengthen competitively behind our growth initiatives. In addition, on a macro basis, the market is experiencing a growing and aging car park and is still challenging new and used car sales market for our customers. 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 through the quarter, and we're forecasting a resilient DIY business in FY '23.
Now I'll say a few words regarding our international businesses. We continue to be pleased with the progress we're making in Mexico and Brazil. During the quarter, we opened three new stores in Mexico to finish with 706 stores and four new stores in Brazil ending with 76. On a constant currency basis, we saw accelerated sales growth in both countries, in fact at 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 currently outside the U.S. and a commitment to continue expansion in a disciplined way, international growth will be an attractive and meaningful contributor to AutoZone's future growth.
As Bill mentioned earlier, we expect significant growth in store count internationally over the next five years, and we are excited about the future. In the spirit of our growth in store count outside of the U.S., we will celebrate our chain's 7,000th store opening this week in Leon, Mexico. I know Bill looks forward to being there to celebrate this historic event with our AutoZoners, and we couldn't be more proud to celebrate this occasion with our Mexico team.
Now let me spend a few minutes on the rest of the P&L and gross margins. For the quarter, our gross margin was down 242 basis points driven primarily by a 203 basis point headwind stemming from a noncash $81 million LIFO charge. The difference for the quarter, a decline of 39 basis points in gross margin, was primarily driven by our faster-growing, lower-gross margin commercial business. With this quarter's LIFO charge, we've taken our LIFO credit balance to $96 million. As I mentioned last quarter, hyperinflation and freight costs are the primary drivers for the charges. We're still modeling for higher freight costs through the end of the calendar year, and we anticipate approximately $40 million in LIFO charges during the second quarter. Both the first quarter actuals and our second quarter outlook are below the outlook we gave last quarter as freight costs have continued to abate over the past few months. As spot rates have come down, we've also renegotiated some of our long-term contracts and the lower costs are reflected in our outlook. We expect freight costs to continue to abate, and I want to remind everyone that at some point we expect to see these quarterly charges reversed, and we will begin to rebuild our LIFO reserve balance. We plan to take P&L gains only to the extent of the charges we've taken thus far. And after we've taken P&L gains to fully reverse the charges we've incurred, we expect to rebuild our LIFO reserve balance as we've done historically.
Moving on to operating expenses, our expenses were up 8.6% versus last year's Q1 as SG&A as a percentage of sales were flat with last year. Our operating expense growth has been purposeful as we continue to invest at an accelerated pace in IT and payroll to underpin our growth initiatives. These investments are expected to pay dividends in customer experience, speed, and productivity. We're committed to being disciplined on SG&A growth as we move forward, and we will manage expenses in line with sales growth over time.
Moving to the rest of the P&L. EBIT for the quarter was $723 million, down 4.2% versus the prior year's quarter. Excluding the $81 million LIFO charge, EBIT would have been up 6.6% over last year's quarter. Interest expense for the quarter was $57.7 million, up 33.4% from Q1 a year ago as our debt outstanding at the end of the quarter was $6.3 billion versus $5.3 billion in Q1 in last year and our variable rates have increased significantly. We're planning interest in the $60 million range for the second quarter of fiscal 2023 versus $42.5 million in last year's second quarter. Higher debt levels and expected higher borrowing costs across the curve are driving this increase. For the quarter, our tax rate was 18.9% and below last year's first quarter rate of 21.9%. This quarter's rate benefited 446 basis points from stock options exercise, while last year it benefited 159 basis points. For the second quarter of FY 2023, we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises.
Moving the net income and EPS. Net income for the quarter was $539 million, down 2.9% versus last year's first quarter. Our diluted share count of 19.6 million was 9.1% lower than last year's first quarter. The combination of lower net income offset by lower share count drove earnings per share for the quarter to $27.45, up 6.9% over the prior year's first quarter. Excluding the LIFO charge, our net income would have increased 8.3% and our EPS growth would have been 19.2%.
Now let me talk about our free cash flow for Q1. For the fourth quarter, we generated $794 million of operating cash flow and spent $114 million in capex, allowing us to generate $680 million in free cash flow versus $676 million a year ago. 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 ratios remain below our historic norms. Our inventory per store was up 14.4% versus Q1 last year and total inventory increased 17.6% over the same period last year, driven primarily by inflation, our growth initiatives and in-stock recoveries. Net inventory, defined as merchandise inventories less accounts payable, on a per store basis was a negative $249,000 versus negative $207,000 last year and negative $240,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 131% versus last year's Q1 of 129.4%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $900 million of AutoZone stock in the quarter, and at quarter end we had just under $2.7 billion remaining under our share buyback authorization. The strong earnings, balance sheet, and powerful free cash we generated this year has allowed us to buy back almost 2% of the shares outstanding at the start of the fiscal year. We have bought back well 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 disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. We finished Q1 at 2.2 times EBITDAR, which is below our historical objective of 2.5 times. However, we remain committed to this objective, and we expect to return to the 2.5 times target during FY '23.
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 positioning 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 fast-growing commercial and international businesses that are growing considerable share. I continue to have tremendous confidence in our industry, our business, and the opportunity to drive long-term shareholder value.
Before I turn it back to Bill, on December 5th, we celebrated the Bill's 28th year anniversary with the company, and I want to say congratulations to you Bill and it's been a remarkable run.
