汽車地帶 (AZO) 2018 Q3 法說會逐字稿

Good morning, and welcome to the AutoZone conference call.

(Operator Instructions) Please be advised today's call is being recorded.

If you have any objections, please disconnect at this time.

This conference call will discuss AutoZone's first (sic) [third] quarter earnings release.

Bill Rhodes, the company's Chairman, President and CEO, will be making a short presentation on the highlights of the quarter.

The conference call will end promptly at 10 a.m.

Central Time, 11 a.m.

Eastern Time.

Before Mr. Rhodes begins, the company has requested that you listen to the following statements regarding forward-looking statements.

Certain statements contained in this presentation are forward-looking statements.

Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy and similar expressions.

These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate.

These forward-looking statements are subject to a number of risks and uncertainties including, without limitation, product demand; energy prices; weather; competition; credit market conditions; access to available and feasible financing; the impact of recessionary conditions; consumer debt levels; change in laws or regulations; war and the prospect of war, including terrorist activity; inflation; the ability to hire and retain qualified employees; construction delays; the compromising of the confidentiality, availability or integrity of information, including cyber attacks; and raw material costs of our suppliers.

Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of the annual report on Form 10-K for the year ended August 26, 2017, and these risk factors should be read carefully.

Forward-looking statements are not guarantees of future performance.

And actual results, developments and business decisions may differ from those contemplated by such forward-looking statements, and events described above and in the risk factors could materially and adversely affect our business.

Forward-looking statements speak only as of the date made.

Except as acquired by applicable law, we undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Actual results may materially differ from anticipated results.

Good morning, and thank you for joining us today.

Good morning, and thank you for joining us today for AutoZone's 2018 Third Quarter Conference Call.

With me today are Bill Giles, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the third quarter, I hope you've had an opportunity to read our press release and learn about the quarter's results.

If not, the press release, along with slides complementing our comments today, are available on our website, www.autozoneinc.com.

Please click on Quarterly Earnings Conference Calls to see them.

To begin this morning, I want to thank all AutoZoners across the company for their efforts that allowed us to deliver solid financial results this quarter.

As we entered the third quarter, we were pretty optimistic about our sales prospects since we were coming off the first reasonably severe winter in the last 3 years.

We anticipated seeing a significant acceleration in the sales of maintenance products as the harsh winter was hard on them, and as the weather improved, our customers would get outside and get caught up on their maintenance work.

Unfortunately, we had a very cold, wet spring through March and much of April, and the anticipated acceleration and maintenance category sales for much of the quarter did not materialize.

Instead, 2 of our top-performing categories were wiper blades and antifreeze, not the categories you want leading the way in the spring.

Additionally, the Northeastern, mid-Atlantic and Midwestern geographies did not excel as expected after the harsher winter.

However, at the end of the quarter, the last 2 weeks when most of the country entered a dry, hot weather pattern, our sales improved materially and in the geographies and the categories that we expected.

While we were disappointed with our sales for the quarter, they performed in line with our expectations from week to week based on the weather patterns we were experiencing, and we were encouraged when our sales responded when the weather turned more favorable.

We continue to be optimistic about the balance of this selling season because we know there is significant deferred maintenance outstanding.

Despite the headline sales performance, we had some encouraging results to highlight.

Our commercial business growth accelerated, increasing over 7% versus last year's third quarter, and our revenue per program grew nicely.

As we continue to enhance many elements of our commercial program, we are encouraged to see our business improve.

We have substantially enhanced our inventory availability over the past 3 years, and those improvements continue to strengthen our competitive positioning in the marketplace.

Additionally, our commercial customers performed their work in garages.

So the negative weather doesn't impact them as much as it does the DIYer.

This fiscal year-to-date, we have opened just over 90 new commercial programs and expect to end the year with approximately 150 new programs.

International continued to perform well for us.

We still expect to grow our international store base in both countries as we see years of opportunity ahead of us.

And we continued to refine and experiment with our omnichannel efforts during the quarter.

We standardized our pricing across the Internet and stores by discontinuing the aggressive promotional discounting for ship-to-home items only.

We have been concerned that offering different promotional offers to customers based on how they wanted their products fulfilled have the potential to create a channel conflict.

As we look to the future, we see an environment where the distinction of online and off-line get very blurred.

Our omnichannel efforts are focused on interacting with the customer through their preferred means: in-store, online, over the telephone, via their mobile device, and then fulfilling that order to meet the customers' desires and time lines in the most cost-effective manner.

And as some of you have noticed, we have also begun to test improved delivery speeds to home customers in select markets.

Across all sectors of the economy, companies are testing new ways to enhance the customer experience.

We, too, are working on a variety of fronts.

Some will work.

Some won't.

But in this age of innovation, it is imperative that we continue to find new ways to improve the customer experience and deepen our relationships with our customers.

We will share more about -- more specifics about this test and others as we learn, adjust and then ultimately, implement.

Today, our online ship-to-home business is quite small relative to the sales of the enterprise, but ceasing the discounting had a negative impact on our sales, which also negatively impacted our overall same-store sales.

Look, our goal isn't to get this balance right today but to learn how best to leverage all of our assets and capabilities over time to strengthen our overall value proposition.

In last quarter's press release, we introduced an adjustment to our GAAP numbers for the divestiture of 2 businesses.

This quarter, the sale of these 2 businesses had a nominal impact on our operating profit but given the nature of the businesses, did benefit our gross margin by approximately 40 basis points.

Additionally, our tax rate came in at 27.2%, below our previous expectations at the beginning of the quarter.

We expect a rate in the range of 27% to 28% in Q4 and a lower rate next year as the full year lower federal tax rate is taken into account.

Beginning at the start of our fiscal 2019, we will begin recognizing the full benefit of the changes and expect our ongoing global tax rate to be around 24.5%.

Overall, we expect the Tax Reform Act will benefit net income by over $200 million on an annual basis realized over fiscal 2018 and 2019.

As we consider the enhancement in profitability to the enterprise due to lower corporate tax rates, we discussed during our second quarter conference call proactively investing some of these proceeds in an effort to improve our business for the long term.

We highlighted investing in wages and benefits to maintain our competitiveness with other retailers and investments in technology to improve our service levels across DIY and commercial, both with an enhanced omnichannel emphasis.

Some of these investments are pull-forwards of what has been contemplated in our long-term strategic plans.

We've begun to accelerate some of our technological investments, but that will take some time.

As for wages, we continue to monitor market conditions and plan on executing our changes in our first quarter of next year, in conjunction with our normal annual evaluation process.

Our enhancements will be focused on our more knowledgeable and tenured hourly AutoZoners.

As this investment is unique, we want to add more clarity to you.

We are modeling SG&A dollar growth to be in the 4% to 5% range over last year in our fourth quarter.

We're in the later stages of developing our operating plan for fiscal 2019.

But based on our latest thinking, our expectation is that SG&A would grow in the 6.5% to 7.5% range.

And as the wage adjustments will not become effective until the second half of our first quarter of 2019, that quarter will not bear the full burden of those changes.

The wage changes are designed to ensure we can attract and retain terrific, knowledgeable AutoZoners and to make sure our wages are competitive.

The technology investments are designed to grow sales.

Regarding our internal initiatives and specifically, continually improving inventory availability at the market level, we continue to see a nice pickup in sales from the markets with Mega Hub capabilities.

Mega Hub stores are our stores with approximately 100,000 unique SKUs and provide delivery to surrounding stores and other hubs.

As our plan dictated this quarter, we opened 3 additional Mega Hubs, ending with 21 and are on track to have 25 locations opened by the end of the fiscal year.

Additionally, I would like to recognize our supply chain team for leveraging our warehouse and delivery cost yet again this quarter while starting up a new distribution center in Ocala, Florida.

This marked the third sequential quarter where we have leveraged our costs.

And while we continue to be mindful of fuel cost increases and driver labor shortages across several carriers, we remain encouraged with the direction that our businesses' costs are headed over the remainder of calendar 2018.

As noted earlier, we saw solid performance in our commercial business sales results in Q3.

Total commercial sales increased 7.3% for the quarter.

We continue to grow our business much faster than the overall industry by executing on our game plan.

With fewer year-over-year program openings, more of our sales growth is coming from existing customers or new customers in older programs.

We believe our inventory availability work is vital to these efforts and is enhancing our position in the market.

I continue to give credit for our commercial performance to our store AutoZoners, who are simply getting better at running our model.

Commercial relationships take time to cultivate, and we are encouraged with their efforts.

Turning to our online efforts and specifically, in regards to helping our commercial customers, we are making investments to further enhance our digital capabilities.

Our investments in technology are expected to help our customers get the parts they need faster.

We will continue to invest in our omnichannel strategies to ensure we can conduct business with our customers in the manner that best fits their needs and desires.

On the cost front, I've highlighted the past few quarters the impacts we are experiencing from accelerated pressure on wages.

Those pressures continue to exist and are much more than historical norms.

The regulatory changes are going to continue as evidenced by the areas that had already passed legislation to increase their wages substantially over the next few years.

And more impactful are the current market forces in retail as we all compete for talented employees in a very low unemployment environment.

We are constantly working diligently to find new innovations to better manage our cost structure, and those efforts will continue.

We believe this particular area will continue to pressure us for some extended period of time, which is why we are proactively leveraging a portion of the benefits derived from the recent tax law changes to invest in this incredibly important aspect of our business, our AutoZoners.

Our management team remains committed to managing this business for the long term to provide great service for our customers and great opportunity for our AutoZoners, ultimately delivering strong shareholder value.

We operate in an industry driven by, in many cases, inelastic demand.

If the part breaks or wears out, our customers need to fix it to get to work and get on with their lives.

Because of this predictability based on miles driven and an aging car population, we remain committed to continually improving our ability to aid customers in saying yes to their needs.

Now let me provide more detail on the quarter.

For the quarter, our sales increased 1.6%, and our domestic same-store sales were up 0.6%.

During the quarter, we opened 26 net new stores in the U.S., and our commercial business opened 38 programs.

Year-to-date, we opened 75 net new stores and 91 commercial programs in the United States, 12 new stores in Mexico and 2 stores in Brazil.

We expect to open approximately 150 new domestic stores, 40 in Mexico and approximately 10 in Brazil for a total of 200.

And we expect to open about 150 net new domestic commercial programs.

Currently, 85% of our domestic stores have a commercial program.

Along with improving our local parts availability and assortment, we continue to manage this organization to provide exceptional service for our customers, provide our AutoZoners with a great place to work with opportunities for advancement and ensure we do it on a long-term, profitable basis to provide strong returns for our shareholders.

We will continue to and stress the importance of going the extra mile to fulfill our customers' needs regardless of how difficult the request.

With our commitments to service [intact], we continued to be share gainers over the quarter according to the data we have available to us.

Now let me review our highlights regarding execution of our ongoing operating theme from 2017 that we carried over into 2018: "Yes!

We've Got It." The key priorities for the year are Great People Providing Great Service!, profitably growing our commercial business, leveraging the Internet, "Yes!

We've Got It." and leveraging IT.

On the retail front this past quarter under the Great People Providing Great Service!

theme, we are committed to supporting our store AutoZoners.

We're focusing on enhanced training to store-level AutoZoners and increasing the share of voice regarding availability with the "Yes!

We've Got It." theme.

We remain aggressive with our technology investments and believe these initiatives will help differentiate us on a go-forward basis.

We realize as customers have become much more tech and mobile-savvy.

We have to have a sales proposition that touches all the ways they desire to interact with us.

Our current and future technology investments will lead to sales growth across all of our businesses.

We should also highlight another strong performance in return on invested capital as we were able to finish our third quarter at 30.8%.

We continue to be pleased with this metric as it is one of the best, if not all -- if not the best, in all of hardlines' retail.

This metric is a key component of our pay-for-performance culture at AutoZone, and we demand our AutoZoners across the organization be accountable for our investment decisions.

Great ideas look wonderful on paper, but it's our job to deliver results.

We are always learning from both successes and failures in our investments.

Our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return well in excess of our cost of capital.

It is important to reinforce that we will always maintain our diligence regarding capital stewardship as the capital we invest is our investors' capital.

Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to thank our AutoZoners for their efforts to continue to meet our customers' vehicle needs.

This is not easy.

I see every day what customers expect from our AutoZoners, and they meet those needs with a smile on their face.

Their efforts make our company what it is today.

We are bullish on our fourth quarter sales potential because we have a great business operated by an exceptional team.

Now I'll turn it over to Bill Giles.

Thanks, Bill, and good morning, everyone.

To start this morning, let me take a few moments to talk more specifically about our retail, commercial and international results.

For the quarter, total auto parts sales, which includes our domestic and international stores, increased 3.2%.

For the trailing 52 weeks ended, total sales per domestic AutoZone store were $1,785,000.

Total commercial sales increased 7.3%.

In the quarter, commercial represented 20% of our total sales and grew $37 million over last year's Q3.

We opened 38 net new programs in the quarter, and we now have our commercial program in 4,683 stores or 85% of our domestic stores, supported by 192 hub stores.

For all of fiscal 2018, we expect to open approximately 150 new commercial programs.

As Bill mentioned earlier, we remain confident we will continue to gain market share with our commercial customers.

We are encouraged by the initiatives we have in place and feel we can further grow sales and market share.

Our Mexico stores continue to perform well.

We opened 4 new stores during the third quarter and year-to-date, opened 12.

We ended the quarter with 536 stores, and we expect to open approximately 40 new stores in fiscal 2018.

And currency volatility remains significant and causes us to be deliberate with our pace of investment.

[Moving] the foreign currency rate of greater than 5% from 1 quarter to the next are common.

Regarding Brazil, we did not open any new stores and now have 16 total stores open.

Our plans are to add 8 more locations over the remainder of the fiscal year.

While still running with an operating loss, our performance has improved and gives us optimism about the long-term future of this market.

As we further scale the business, we will improve operating performance.

Long term, we believe this market has the potential to be much larger than Mexico.

Gross margin for the quarter was 53.5% of sales, up 86 basis points from last year's third quarter.

The gross margin rate benefited from higher merchandise margins and the sale of the 2 business units.

While we continue to be optimistic on gross margin rate for the remainder of fiscal 2018, our primary focus remains growing absolute gross profit dollars in our business.

SG&A for the quarter was 33% of sales, deleveraging 56 basis points.

Operating expenses as a percentage of sales were higher than last year, primarily due to deleverage on occupancy costs and increased store payroll.

Earnings before interest and taxes for the quarter was $546 million in the third quarter.

Interest expense for the quarter was $42 million compared with $36 million in Q3 a year ago.

Debt outstanding at the end of the quarter was $4,955,000,000.

Our adjusted debt-level metric finished the quarter at 2.5x EBITDAR.

While in any given quarter, we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment-grade rating and our capital allocation strategy.

And share repurchases are an important element of that strategy.

For the quarter, our tax rate was 27.2% and 27.3% excluding the slight benefit we received from the exercising of stock options.

We expect our global tax rate to approximate 27% to 28% for Q4 and around 24.5% for fiscal 2019.

I should mention the accounting for stock options this quarter benefited our overall effective rate by a small degree, 8 basis points or $0.01 per share, but this is very hard to model for you and ourselves.

Any credits we receive are derived by stock option exercises that are determined at the discretion of our AutoZoners.

It's just impossible to predict and can cause unusual comparisons year-over-year.

Net income for the quarter was $367 million, up 10.6% versus Q3 last year.

Our diluted share count of 27.3 million was down 5.8% from last year's third quarter.

The combination of these factors drove earnings per share for the quarter to $13.42, up 17.3% over the prior year's third quarter.

Relating to the cash flow statement.

For the third quarter, we generated $503 million of operating cash flow.

Net fixed assets were up 5.6% versus last year.

Capital expenditures for the quarter totaled $112 million and reflected the additional expenditures required to open stores this quarter; capital expenditures on existing stores, hub and Mega Hub store remodels or openings; work on development of new stores for upcoming quarters; investments in our new and expanded domestic DCs; and information technology investments.

With the new stores opened, we finished this past quarter, with 5,540 stores in 50 states, the District of Columbia and Puerto Rico; 536 stores in Mexico; and 16 in Brazil, for a total AutoZone store count of 6,092.

Depreciation totaled $79.8 million for the quarter versus last year's third quarter expense of $75.3 million.

This is generally in line with recent quarter growth rates.

We repurchased $400 million of AutoZone's stock in the third quarter.

At quarter end, we had $897 million remaining under our share buyback authorization, and our leverage metric was 2.5x.

Again, I want to stress we manage to appropriate credit ratings and not any one metric.

The metric we report is meant as a guide only as each rating firm has its own criteria.

We continue to view our share repurchase program as an attractive capital deployment strategy.

As evidence of this commitment, we just recently surpassed $1 billion in annual share repurchases for the 10th consecutive year, bringing our life-to-date share repurchases to $19 billion.

Next, I'd like to update you on our inventory levels in total and on a per-store basis.

The company's inventory increased 3.7% over the same period last year.

Inventory per location was $658,000 versus $653,000 last year and $671,000 just this past quarter.

Net inventory, defined as merchandise inventories less accounts payable on a per-location basis, was a negative $48,000 versus a negative $47,000 last year and a negative $46,000 this past quarter.

As a result, accounts payable as a percent of gross inventory finished the quarter at 107.3%.

I also want to update you that we recently decided to terminate our pension plan.

Our pension plan was frozen at the end of calendar 2002.

We expect to finalize the termination of the plan, including the transfer of plan assets and related liabilities to a third party.

In connection with the termination, we anticipate taking a onetime noncash charge of somewhere in the range of $130 million to $140 million in our fourth quarter.

Again, this is entirely noncash accounting charge, and we are excited to terminate this plan and eliminate the risks and volatility that it could produce.

And finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing 4 quarters of 30.8%.

We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital.

Now I'll turn it back to Bill Rhodes.

Thanks, Bill.

As we head into the fourth quarter, we are encouraged by the traction we are gaining with internal sales initiatives, the investments we are making to improve customer service and product availability, the strength of our industry and the favorable macro trends.

We are optimistic looking forward for the remainder of the selling season.

We're excited to intensify our focus on our core businesses because we see these core businesses as tremendously attractive and in strong markets.

We will continue our domestic and international expansion efforts, growing roughly 200 locations annually.

We will continue to focus on growing our commercial business at an accelerated rate to the market growth.

We will intensify our omnichannel efforts, and we will leverage ALLDATA as the premier tool shops use in the automotive aftermarket.

To execute at a high level, we have to consistently adhere to Living the Pledge.

We cannot and will not take our eye off of execution.

We must stay committed to executing day in and day out on our game plan.

Success will be achieved with an attention to detail and exceptional execution.

Our customers have choices, and we must exceed their expectations in whatever way they choose to shop with us.

We are fortunate to operate in one of the strongest retail segments, and we continue to be excited about our industry's growth prospects for 2018 and beyond.

As consumers continually look to save money while taking care of their vehicles, we are committed to providing the Trustworthy Advice they expect.

It truly is the value-add that differentiates us from any other faceless transaction.

Customers have come to expect that advice from us.

It is with this focus we will implement more enhancements on both our DIY and commercial websites and in-store experience to provide even more knowledgeable service.

We don't ever expect an online experience to replace the advice our customers want, but today's customers do expect more information from a variety of sources on repairing their vehicles.

This aspect of service has always been our most important cultural cornerstone, and it will be long into the future.

Our charge remains to optimize our performance regardless of market condition and continue to ensure we are investing in the key initiatives that will drive our long-term performance.

In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves.

This formula has been extremely successful over the last nearly 39 years, and we continue to be excited about our future.

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

(Operator Instructions) And our first question comes from Michael Lasser of UBS.

Bill, so you mentioned that the quarter turned out a little softer than you expected.

So can we assume that you anticipated a 2% to 3% comp coming into the quarter?

And it finished maybe 150 basis points or so below that?

In your experience, would you expect that you'll recoup half that or more from the weather being delayed from last quarter into this quarter?

That's a terrific question.

And yes, your general expectations of what we were anticipating coming into this quarter are about right.

Yes, and I'd go back to what we talked about in September.

In this industry, our sales over the last 5 years have traded in a very tight band.

This time, we were a little bit disappointed by them.

As we move into the fourth quarter, I don't know whether we'll recoup half of them or most of them.

But as we look forward, we know that there's extensive deferred maintenance, particularly on the maintenance-related parts.

And that maintenance work is going to have to be done at some point in time.

You can see some of it was done in the commercial side because they were working in garages, but we just didn't see the rebound in those under-car categories that we would have anticipated.

And my quick follow-up question is on the SG&A growth outlook for 6% to 7% for next year.

Is that on a 52- to 52-week basis?

And is that going to be just a onetime increase next year?

Or should we think about that as kind of a new run rate for the business?

No, I think of it as more of a -- and I appreciate the clarification, yes.

So when you think about FY '19 on that increase in SG&A, that's a 52- to 52-week year comparison, and it excludes, obviously, those onetime items like the impairment charge and the pension plan termination.

I think that's more of a onetime investment for us.

Obviously, we're going to continue to make investments here and there.

But those investments on the wage rates and the benefits are really to ensure that we've got the right AutoZoners in place, and we've got great tenured, hourly AutoZoners out there, and we want to make sure that we continue to maintain that and be competitive in the marketplace.

So we think of that as more of a onetime investment, and then we'll be more on a normalized run rate from that point forward.

I think the investment in technology will continue to help drive sales as those enhancements continue to get implemented throughout the year.

Michael, I'd like to add on that front, too.

If you'll recall, back in 2006, we had a similar investment cycle.

We were running about 17.5% operating margins at the time, and we felt like there were some things that we needed to do to improve our execution for the long term.

And we invested about 50 basis points of margin at that point in time, and our margin went down to about 17%.

Of course, over the next 10 years, it improved up to about 19.4%.

We envision this the same way.

These are some things that we have opportunities to enhance our performance over the long term and feel comfortable doing them.

But they're onetime in nature.

Our next question comes from Matt Fassler of Goldman Sachs.

A little more clarity on the investing.

Obviously, you have the divestiture of the 2 businesses that took place I think, respectively, at the beginning of the quarter and then for IMC, towards the middle of the quarter.

And those would, presumably, take some SG&A out of next year.

So are we talking the specific guidance that you gave net of the reduction of SG&A for the sale of those businesses?

No, just to be perfectly clear, both those SG&As will get reallocated.

Those are business units -- for the most part, really were -- did not really contribute a lot of EBIT necessarily.

So we'll redeploy the assets that we had there, both from inventory perspective as well as through -- from an SG&A perspective as well.

So, in other words, as you sell those businesses and presumably, they generated some SG&A, the SG&A does not go down to reflect the disappearance of those sales?

Not in the numbers that I'm giving you.

That's correct.

Okay.

And then, also, if you think about the impact on operating margin overall and the operating margin outlook overall, what's your early thinking on gross margin?

If you think about this particular quarter, your gross margin was up 80 basis points or so, 86 basis points, kind of 46 basis points excluding the impact of that divestiture.

So is some of that momentum sustainable for the business going forward?

Yes, we feel really good about gross margin.

I mean, I think the merchandising organization has done a terrific job as far as improving the sourcing, reducing costs.

The supply chain team has gotten through some -- a tough year on more frequent deliveries, and we've got that stabilized.

They've done a terrific job of opening 2 distribution centers over the last year.

So we feel pretty bullish about gross margin, both from a merchandising cost perspective as well as supply chain as well.

There's no question, we're getting some headwinds on transportation costs, on supply chain.

But the team has done a terrific job of managing expenses and being able to actually leverage supply chain this past quarter.

So outlook-wise, we feel pretty confident.

And then finally, do you have an IMC dollar sales number for this quarter just to clean that out of our models for that partial quarter contribution?

It was relatively small.

I don't have it off the top of my head.

It's not a significant number, but we can -- we'll shoot that out at some point.

Your next question comes from Christopher Horvers with JPMorgan.

Also some follow-ups here on the prior questions.

In thinking about the recoup question, maybe you could give us a sense of sort of what April looked like for you relative to the total quarter because it looks like all the impact was pretty much seen on the DIY side of the business, which, obviously, is a preponderance of your business.

But sort of how did April look relative to the quarter?

Well, April looked -- it looked pretty tough in the first half of the week -- or first half of the month.

The third week improved, and then the fourth week was very, very strong.

But the fourth week was the first time that we had really warm, dry weather.

And, obviously, you can't straight line warm, dry weather all the way through the fourth quarter.

But we were encouraged.

When the weather improved, it met our expectations for what would happen in the business.

So is it fair to -- so it sounds -- so likely, I mean, it would just mathematically had turned negative in April.

So if we're down sort of like, that last week on March to mid-April, if we're down 1 or 2 points, you would think that that's the sort of upside potential or recapture potential as we think about the current quarter?

Yes.

I mean, we'll wait and see as it turns out.

There's no question, April was softer, and the weather wasn't in our favor.

And I think you're hearing that from not just us but from others as well.

And so what that means for the summer, we're bullish.

We hope that, that means more generation of sales from a lot of deferred maintenance that has transpired in the marketplace.

But we'll have to wait and see and see how it shakes out.

Understood.

And then 2 more follow-ups.

So first, as you think about the benefit to gross margin from the divested businesses, is that sort of stayed -- that, that 40 basis points stick around until we lap through it?

I'd say roughly, yes, that's about right.

And then a question for Bill Rhodes.

So big picture, for many years, you did a 2 comp and you drove sort of this low double-digit earnings growth algorithm with about half of that coming from share repurchases.

Now with a lower tax rate, you just drove a high teens earnings on a modestly positive comp.

You talked about SG&A growth next year, but you get a big chunk of the tax savings next year as well.

So I'm just trying to understand how you think about sort of the return to the shareholder in terms of the earnings growth outlook, balancing the tax benefit versus the acceleration of investment.

Yes.

As you think about it, we've said several times that we're going to recoup over $200 million in net income on an annual basis.

We're talking about investing less than half of that into the long-term aspect of our business, and we're very comfortable where we're putting those dollars.

We did really focus on 2 things: wages of our hourly AutoZoners, the most tenured and most knowledgeable people that really helped differentiate us in the marketplace, and we want to make sure that we are effectively compensating them in a competitive environment.

And then secondly, we're going to be making some pretty significant investments in technology.

Many of those are things we would have done, but we're accelerating our investments in technology somewhat because of this tax reform.

And so we will have an expanded investment profile next fiscal year.

But once we got beyond that, we feel like we'll be in very good shape.

And so do you feel you're comfortable with sort of the -- continuing to be able to drive sort of a low double-digit type earnings growth algorithm?

I would anticipate once we get on the other side of it that our EBIT growth would be in the 3% to 5% range, and that it'll depend somewhat on the cash flow that we're generating.

And frankly, it depends a little bit on the multiple of the stock as to how much the share repurchase program drives.

There was a period of time we were generating $1.3 billion in share repurchases, and that would mean 5% or 6%, and sometimes it meant 4% or 5%.

So it somewhat depends on other factors as well.

Our next question comes from Simeon Gutman of Morgan Stanley.

I want to focus on the commercial improvement, you mentioned, I think, it was 7%, and I think Bill Rhodes, you implied that it was pretty steady throughout the quarter.

Can you tell us if that 7%, if there is a big range of growth rates during the quarter or what that was?

And you mentioned expanded inventory.

I wonder if you can share more detail.

Is -- are you selling across newer categories, new customers?

Is fulfillment making a difference?

Or is the fact that your in-stock the most important attribute?

You've packed a lot of questions in that.

Let me try to unpack them.

Yes, 7.3% growth for commercial for the quarter, we felt pretty good about that.

It was variable.

It is also variable based upon week-to-week performance of the weather, but it is less variable than the DIY business.

It, too, came out of the quarter pretty strong.

As we think about the things that are driving that business, we've made tremendous investments over the last 3 years in making sure that we have the right delivery frequency for our cost model and optimizing our cost model and also expanding our Mega Hubs.

We're up to 21 Mega Hubs now, looking to be [up] 25 by the end of the year.

Those Mega Hubs really give us enhanced access to hard-to-find inventory.

And as we continue to roll them out, we see that the Mega Hub itself does very well.

The local market that it serves has improved.

And then even the other stores that are attached to other hubs see improvement.

So -- and then the other thing is our team, we spent a lot of time, particularly over the last 2 years, getting our in-store teams focused on the commercial business.

Store managers and district managers intensifying their focus on the commercial business, and I think all of those things together are continuing to pay dividends and will for an extended period of time.

Okay.

My follow-up is just on the backdrop for the industry.

And wondering, I guess, the ultimate question is if this summer will be the ultimate tell for this industry of whether demand is going to bounce back or it's not going to be as good as it was in the past.

And, I guess, part of it, looking at the first quarter or this was your third, some months were good, some months were bad.

I mean, that feels like it was par for the course, granted the wet weather didn't help.

But just curious like why should things get materially better from here?

We think they will, but want to get your thoughts because the weather still seems to be the problem in what was a beginning of a cold quarter.

So trying to think about the summer, if this will be the ultimate tell for a better run rate.

Yes.

I would hate to say 1 quarter is the ultimate tell for the run rate for our industry.

This industry, as you very well know, Simeon, it has been robust for 20 or 30 years.

I did a presentation last week to our vendors at the Vendor Summit and talked about the 20-year run rate of this industry.

And the fact that the DIY market in total has grown about 4% a year for 20 years.

The commercial market's grown about 4.5% a year for 20 years.

Now that's total growth.

That's not a same-store basis.

And I've said time and time again, I'm disappointed with a 0.6% comp, but it's not a minus 6% comp.

I mean, we're continuing to trade within a pretty tight band.

Look back over the last 5 years at the quarterly performance, and it trades 3% to minus 1% or so, minus 1.8%, I think.

So, yes, I just don't think that it's radically changing by any stretch of the imagination.

Our next question comes from Seth Basham with Wedbush.

Just thinking about the SG&A growth outlook, Bill.

As you contemplated it when you spoke to us last year, looking for 60 to 90 basis points of margin pressure from investments.

Based on our math now, looks like you're expecting more pressure than that.

What's changed between then and now as you think about the outlook?

I'd say not much.

I'd say that it's relatively consistent with the way we looked at it before.

And in fact, most of the numbers are coming in pretty close to where we had originally expected them to.

And we always looked at these wages and benefits technology, I think we're relatively consistent on talking about those items as being the places for which we are investing.

There's a handful of other ones that are less significant.

But I would say, for the most part, the investments that we have lined up for next year are pretty consistent with the way we had thought about it.

And now the timing is a little bit different.

We probably will implement more of them, as Bill talked about, in the middle of the first quarter, our fiscal first quarter to coincide with merit increases.

But other than that, I would say it's been relatively consistent.

All right, fair enough.

As you think about the breakdown between benefits, wages and tax, what is that approximately?

I would say that wages and benefits are the lion's share.

Our next question comes from Seth Sigman of Credit Suisse.

A couple of follow-ups here.

First, in terms of the DIY comp, I guess, it was down roughly 70 bps on our math at least.

Obviously, you had a weather impact, but you also cited negative impact from the online promotional changes.

Can you just give us a sense of how meaningful that may have been?

It's not terribly meaningful.

It could be in the 20, 30 basis points range overall.

Our online ship-to-home business is not a very big business for us.

And so we wanted to make sure that we were incentivizing our customers to interact with us regardless of the channel that they wanted.

And so we made some changes, and it negatively impacted the ship-to-home business, but it's not a big part of our overall business.

Okay.

And then on the SG&A, if I'm specifically looking at the fourth quarter, can you just help us bridge that 4% to 5% growth versus the 3% this past quarter?

I guess just what are the incremental drivers in the fourth quarter?

I think we'll probably continue to see a little bit of wage pressure from that market overall.

We do have some of the technology investments that are coming in during the fourth quarter as well.

So those are some of the pressure points.

Just finally, as I think about next year, given your positive comments around gross margin, do you think that operating margin can actually be flat or even up with the investments you're making, excluding the extra week?

I think excluding the extra week, we'll have to wait and see.

We don't really want to give guidance on that relative to what our EBIT's going to be or even our operating margin.

As I've mentioned before, we feel good about gross margin.

The organization has done a good job from a sourcing perspective, from merchandising, reducing cost, supply chain has done a good job.

Obviously, we have some investments that we're going to take, undertake in SG&A, and we think that will create momentum in the business.

Our next question comes from Elizabeth Suzuki from Bank of America Merrill Lynch.

Great.

Can you just talk about what you're seeing in inflation and whether that benefit is starting to come through in the top line or in gross margins at all?

Yes, it's a great question.

I don't think we're seeing any significant impacts from inflation at this point in time.

Obviously, oil prices have started to move up of late, and we're mindful of that.

But so far, we haven't seen any material impacts to that.

As you know, we've dealt with inflationary impacts over long periods of time, and our industry and particularly our AutoZoners have been able to handle it pretty well.

Okay, but so even inflation in terms of the product itself and price inflation, you're not seeing any of that yet?

It's not terribly material.

We see pushes and pulls.

As you know, we have a significant effort going on to direct source, and that's also helping lower our acquisition costs.

Great.

And then sort of a longer-term question, I mean, what do you see as the most important drivers going forward in 2019 and 2020 that really gives you confidence that the domestic sales rate can get back to those mid-single-digit rates you talked about?

Or just that average over the last 20 years?

Because if things aren't radically changing, what do you think are the catalysts that get things going on again from the 1% range back up into mid-single digits?

I think number one, we control our own destiny, and I have a high degree of confidence in our team to continue to deliver.

We've got some really exciting initiatives that we're working on.

I think the biggest driver of our performance over the long term is going to be how do we perform in commercial.

It is the single biggest growth opportunity that we have in front of us.

Today, we've got about 3% market share.

We're still pretty immature in that business.

We've got a lot of things that we're working on to improve that business, and they're showing that we're gaining traction.

So I continue to be very bullish about this business over the long period of time.

Our next question comes from Matt McClintock from Barclays.

I'd actually like to focus on the comment about strengthening the overall value proposition and really focusing online.

Clearly, you don't believe price or those promotions were a part of that value proposition, and you're talking about investments to strengthen that.

And I'm just trying to understand the disconnect between that.

Like what could you do now that you couldn't do before online to strengthen that value proposition that allows you to wean yourself off a price or promotions?

And number two, why did it -- why is all this coming through right now?

What was the driver behind this change?

Yes.

Great questions.

The driver to us is if you think about over the longer term, where is this headed?

How are you going to do determine whether a transaction is online or off-line?

It's not going to be online or off-line.

It could be over the phone.

It could be over the mobile device, over your desktop.

It's how are we going to be interacting with customers, and we want to make sure that we don't create channel conflicts.

We feel like our value proposition is incredible, and we feel like a big part of that is the knowledge and Trustworthy Advice that our AutoZoners deliver to their customers and be that over the phone, be that over chat, be that in the store.

And we want to make sure that we're incentivizing our customers to engage with us.

We don't want to create channel conflicts.

So that's what drove our decision.

Our next question comes from Kate McShane of Citi.

My first question was just with regards to what you're seeing with the competitive response when you open a Mega Hub?

Or maybe more specifically, have you seen any change in the competitive response as you open more?

Yes.

I don't think we've seen any competitive changes as a result of opening individual Mega Hubs.

And all of us in the industry are taking different tactics.

If one of our competitors opens a new distribution center, we don't change our operating model in that market, and I haven't seen any material changes across any of the markets where we've opened these Mega Hubs.

Okay.

And then my second question is about wages.

I just wondered if you have any more detail about where the planned increase will put you in perspective amongst other retailers and just how tight are you finding this labor market for, those that you want to hire.

Well, I think the labor market is continuing to get tighter as we've gotten further into the economic cycle.

We have very, very low historical unemployment rates.

We -- make no mistake about it.

We're continuing to hire great people every day.

Our turnover rate is down slightly.

So it's not like we're dealing with a catastrophic situation.

We're just trying to make sure that we continue to stay out in front of this situation.

If you look at the regulatory environments, California and certain parts of the Northeast, you can clearly see what's in front of us from what those regulatory environment changes are going to be.

The bigger question is -- and you've read all of the retailer announcements of what they're doing with wages this year or over the last 2 years or what they're going to be doing over the next couple of years.

It is imperative that our AutoZoners, being such an important part of our value proposition, that we make sure that we've got the best people, and we're going to make sure we continue to compensate them comparatively.

Our next question comes from Zach Fadem with Wells Fargo.

I wanted to follow up on your comment on oil prices.

Just given your perspective, is there a high watermark for fuel price in which miles driven and thus, sales start seeing negative impact?

And with $72 oil today, I'm curious where do you think we are on that demand elasticity curve.

Yes, that's a terrific question.

And what we've seen over the long period of time, we've talked about it publicly, is there seems to be a real tipping point around $4 a gallon.

Now we're a long, long way from $4 a gallon today.

But we've had periods of time where we got there.

And clearly, we saw impacts in miles driven during those periods of time, but we're a long way from $4 a gallon.

Got it.

And when you think about the work you've done on inventory availability, could you talk us through some of the incremental benefits that you typically see when you open a new Mega Hub?

And also with the new DCs coming on as well, could you walk us through just general expectations for sales lift, given the better-anticipated availability?

Yes.

I wouldn't say that the distribution centers are designed to really drive sales.

They're designed to drive improvements in costs because they're going to be servicing closer areas, so you're reducing the stem miles.

But they'll have slight improvements in service because of a little bit -- orders would get there a little bit quicker.

But it's really more of a cost efficiency play.

When you think about expanded coverage, our strategy on that is our Mega Hubs, and our Mega Hubs would carry close to 100,000 SKUs.

As we open those, we significantly improve the yes percentage, our ability to say yes to our customers in those stores.

We always, always see a significant improvement in both retail and commercial in that store's sales.

And those stores generally are leveraging that 100,000 SKUs, over 20 to 30 other stores that are in their hub network, if you will.

And they're delivering those parts to those stores 3 times a day, and we see significant growth in those stores.

Then those Mega Hubs are also going to service -- some of them don't service any more hubs, but several of them service 4 to 6 to 8 additional hubs, and those can be on a same-day or overnight basis, but we see improvements in sales by every store that's touched by the Mega Hubs.

Our next question comes from Bret Jordan of Jefferies.

On your test of free next-day delivery, did you get anything from that?

Is that something you're going to expand?

Did it really meaningfully drive the online sales in those markets?

Yes, as I mentioned in the prepared remarks, we're testing a variety of different things, and I appreciate the fact that you guys are so observant that you caught on to this test.

But I don't want to make big deal out of it yet because it's early in our test, and we're trying lots of different things to make sure that we can service our customers.

The one thing that we know is speed of delivery matters.

And so we're working on ways that we can deliver to our customers as quickly as possible, and that's one of the elements that we're testing.

Let us get a little bit farther along in the test, and then we'll give you more clarity about where it is and what our plans are.

Did you get any commercial customer buy-in to that program?

I mean, given the fact that it's quicker than your average online transaction, did you see that it shifted beyond DIY at all?

And then just as a follow-up question on that commercial.

In the commercial growth that you saw, which is pretty strong, could you talk whether there was a bias to smaller shop or national account focus there?

Yes, I would say we're continuing to perform very well with both what we call the up and down the street and the national accounts.

So we feel very good about both of them.

As far as whether or not the commercial customer is taking advantage of the next-day delivery program, I'm sure some of them are.

That's not what it's designed to do.

And you've got to remember, we're delivering to these commercial customers usually in 30 minutes.

Next-day would be a significant deterioration in service.

So it's really designed for the DIY customer.

Okay.

I'm just wondering whether the hard-to-find parts mix might on a next-day delivery be something you could shift to commercial customers?

Obviously, you're not going to have -- stock everything in your stores [above] 30 minutes.

Yes, that's a great point, Bret.

But let's go back to what we were just talking about on the Mega Hubs.

So the Mega Hubs have that extensive parts coverage.

So if it's a hard-to-find part, it's generally going to come out of that Mega Hub, and it can get there sooner than next day, in most cases.

Our next question comes from Greg Melich from MoffettNathanson.

This is Mike Montani on for Greg.

Just quickly, can you clarify sort of the quarter, was transaction count positive or negative?

Yes, transaction count was down for the quarter a little bit and -- but we continue to have good performance on our average transaction value.

Okay.

And then just in terms of the reinvestment from the tax savings, we were initially thinking like 35% to 50% reinvestment.

So, obviously, majority, retention.

And just quickly doing some math here, I'm kind of getting the inverse of that now.

Can you just help me understand, did anything actually change there from your perspective on retention versus reinvestment?

Or is that just kind of a...

That's pretty consistent I think on that one.

I think that the dollar amounts are pretty consistent.

As we said, we've got about $200 million worth of benefit from the Tax Reform Act, and that probably a little less than half of that would be reinvested back in the business and a little more than half of that would go back to shareholders.

As of this time, there are no further questions.

I'll now turn the call back to the speakers.

Please proceed.

Great.

Thank you.

Before we conclude the call, I'd like to wish everyone a nice Memorial Day weekend and thank everyone that has served in our Armed Forces.

We're excited about our growth prospects for this year.

We will not take anything for granted as we understand our customers have alternatives.

We have a solid plan for future success, but I want to stress that this is a marathon and not a sprint.

As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be successful.

Thank you for participating in today's call.

Have a great day.

Thank you, and that concludes today's conference.

Thank you all for joining.

You may now disconnect.