汽車地帶 (AZO) 2019 Q2 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 second 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 statement regarding forward-looking statements.

Certain statements contained in this presentation constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, seek, may, could 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; changes 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 confidentiality, availability or integrity of information, including cyber-attacks; and raw material costs of suppliers.

Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of this annual report on Form 10-K for the year ended August 25, 2018, and these risk factors should be read carefully.

Forward-looking statements are not guarantees of future performance, 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.

May I introduce your speaker for today, Mr. Bill Rhodes.

Please go ahead.

Good morning, and thank you for joining us today for AutoZone's 2019 Second 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 second 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 our organization for their dedication, hard work and for putting our customers first in everything they do again this quarter.

Their efforts directly correlate to our success.

On the last earnings call, we were optimistic about our second quarter but cautioned everyone about the inherent volatility the second quarter presents to us every single year.

It is our lowest sales quarter.

It has a couple of holidays that shift year-to-year, and different weather patterns make our week-to-week sales quite volatile.

As we entered this winter, we knew we had a more normalized winter last year than the 2 years before.

We also knew that the middle of the quarter last year was very strong due to harsh winter conditions.

This year, our sales were generally on plan for the first few weeks.

Then they were materially softer in the middle of the quarter on both a 1- and 2-year basis.

Then when the polar vortex arrived, sales rebounded nicely to finish the quarter.

We wish we didn't have to focus so much on "the weather," but in the second quarter, in particular, it really matters.

Just to add an exclamation point, our weekly sales during the quarter had a variance of more than $40 million between the highest and lowest weeks.

When it gets cold, certain products fail, like batteries.

When cold is forecast, anti-freeze sales spike.

When there's snow and ice, plows tear up the roads and create potholes, which lead to other failures.

And when the weather is mild, people do maintenance work like brake jobs.

While the cold temperatures didn't come until the latter half of January, they came and our business responded.

Was it cold enough to have lingering benefits?

Yes, to some extent.

And the lingering effects usually come more from the maintenance items like brake systems, chassis and the like.

As spring begins to arrive, so do tax refunds.

We've begun to see some customers using their refunds in our stores in the last few weeks.

But there is significant speculation in the media and market on whether or not the total refund dollars will be similar to last year or not.

We've seen conflicting reports, but regardless, we are ready to help our customers leverage those refunds to ensure their vehicles are performing well.

Now let's focus on the 2 different customer bases we serve: DIY and DIFM.

We previously mentioned that our DIY market share gains were strong in the first half of last fiscal year and that growth materially subsided in the second half.

During the first half of this year, our market share has continued to grow and improved slightly, which we consider encouraging as we are lapping the large gains we made this time last year.

While DIY same-store sales were slightly positive for the second quarter and for the year-to-date, we are optimistic that business can continue to grow for the remainder of the year.

Our optimism comes from the parts and staffing initiatives we have in place.

If you recall this time last year, we had several major product category conversions underway and several of them did not go as planned.

This year, we are in much better shape as we enter the selling season.

And we have intensified our focus on enhancing the customer service experience.

As part of that effort, we made meaningful pay adjustments to our most tenured hourly AutoZoners to ensure that they are compensated appropriately.

We feel we are well positioned as we enter our peak selling period.

Regarding commercial, our sales growth eclipsed last quarter's double-digit gains, ending up 12.9%, marking the fourth consecutive quarter of accelerating growth.

We are excited about but not surprised by this growth acceleration.

We have been steadily building a stronger foundation and our customers are continuing to notice, recognize and reward those improvements.

Over the last several years, we have substantially improved our inventory availability.

We have worked diligently to enhance the quality of the parts and products we sell, many under the Duralast name.

Our sales force is becoming more tenured and effective, and most notably, recently, we have been increasing the engagement of the local store teams, particularly the store manager and district manager.

And we feel well-positioned to continue strong growth for the balance of the year.

Overall, we are encouraged as we head into the back half of the year.

We are focused on flawlessly executing on the initiatives we have in place.

While we have invested more in our AutoZoners and more in our systems, we have done so with the objective of improving customer-facing activities.

Our execution is improving as we intensify our focus on the customer.

As I mentioned on last quarter's earnings call, our annual operating theme for 2019 is focused on Drive For Excellence.

A relentless focus on what matters to our customers: exceptional service, fast deliveries, high-quality parts and products, flawless execution, changes in product assortments and store merchandising and on and on.

We are focused on reducing non-selling tasks in our stores in order to reallocate that time, talent and attention to sales activities.

Tariffs have been a hot topic of late, so we'd like to address their impact on us.

The initial tariffs on raw materials weren't significant.

The 10% tariffs were expanded to broader and broader categories.

We did not see a material cost increase from these tariffs in fiscal 2018 because we were able to negotiate and offset some of the tariffs based on the strength of the U.S. dollar.

Looking forward, the U.S. has agreed to postpone plans to increase tariffs from 10% to 25% until later.

At this point, we are waiting like you are.

We will continue to monitor developments closely and working with our industry associations to share our concerns about the potential negative ramifications of ongoing and increased tariffs to our customers and the broader economy.

That said, our industry has much lower elasticity of demand than most other retail distribution sectors.

If your car won't start and you have to go to work, you or someone else has to fix it, period.

This phenomenon has historically allowed our industry to pass on product inflation in higher retails.

To date, the tariffs have not resulted in meaningful incremental inflation in retail pricing, and unless the tariffs increase to 25% or are added to other products we sell, we don't anticipate this being materially different in the second half of the year.

Turning to our omnichannel efforts.

We continue to invest in our strategy to enhance the customer shopping experience by meeting them when, where and how they want to shop.

We have initiatives in place to improve our in-store systems and websites, autozone.com, AutoZonePro, mobile and ALLDATA.

In fact, we are investing more than ever before this fiscal year in improving these systems.

We continued to see rapid growth in website traffic as well as ship to home and Buy Online Pick Up In Store sales.

While representing a very small percentage of our business, we are pleased with the acceleration of growth in our online platforms in both retail and commercial.

And for retail through ship to home, Buy Online Pick Up In Store and through our industry-leading next-day delivery program that allows customers in over 85% of U.S. markets to order as late as 10:00 p.m.

And oh, by the way, we're testing midnight in a couple of markets, and receive their products at their home the very next day.

We are also working diligently to further enhance our digital capabilities with our commercial customers to ensure that they have a great, seamless, intuitive, no-hassle way to interact with us digitally.

In summary, we're pleased with our recent performance and encouraged about our industry and our prospects for the remainder of fiscal 2019 and beyond.

Macro factors are currently in our favor, and we remain committed to not only maintaining but growing our market share in both DIY and commercial.

Now let me provide more detail on the quarter.

For the quarter, total auto parts sales increased 3.1% and domestic same-store sales were up 2.6%.

As a reminder, we sold IMC in the middle of fiscal 2018, so our total domestic sales comparisons include sales from that business in the total number, but those sales have no bearing on the same-store sales results in Q2.

Regionally, our Northeastern, Midwestern and mid-Atlantic markets representing roughly 28% of our sales, performed 13 basis points better than the remaining markets.

During the quarter, we opened 20 new stores in the United States, and our commercial business opened 22 net new programs.

We expect to open approximately 150 net new commercial programs this fiscal year.

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

During the quarter, we continued to expand in Mexico, opening 1 new store.

We also opened 2 new stores in Brazil this quarter, finishing with 22.

Regarding our inventory initiatives, in the spirit of our Yes We've Got It initiative, we continued our efforts around expanding our Hub store network.

We opened 2 additional Hubs this past quarter and now have 171 Hub stores and an additional 27 MegaHubs totaling 198 stores with significantly expanded parts assortments.

As we have seen both our DIY and commercial sales expand in markets where Hub, MegaHubs are added, we will continue to grow the number of Hubs we have this year.

Having opened 4 already, we expect to open as many as 16 Hubs for the full year, with most being MegaHubs.

As a reminder, both our Hubs and MegaHubs are focused on making available additional coverage to the local markets.

Meaning, adding SKUs that would not have been available locally in our network before.

Previously we relied on shipping these hard to find or slower turning SKUs into a market when the demand arose.

Both of these efforts are designed to enhance our ability to meet our customers' needs for coverage and immediacy.

Along with improving our local parts availability and assortment, we continue to manage this organization to provide exceptional service for our customers, 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 remain focused on the importance of going the extra mile to fulfill our customers' needs regardless of how difficult the request.

Sales in our other businesses for the quarter were down 41.4% versus last year's second quarter, which reflect the sale of AutoAnything during fiscal 2018.

We will continue to make our omnichannel selling efforts a key focus for 2019.

While ship to home, ship to home next day, Buy Online Pick Up In Store and commercial customer order -- ordering are all showing growth and more traffic to our online sites, we continue to see customers primarily doing lots of research online and then coming into the store in order to receive trustworthy advice, Fix Finder, Loan-A-Tool and a host of services that simply cannot be duplicated online prior to making the sale.

Our efforts in 2019 are to make sure our AutoZoners are freed up in-store to provide wow customer service to every single customer.

While our online sales are small, substantially less than 5% of our total sales, the omnichannel experience is very important for the customer experience.

So we will continue to invest in our digital platforms.

With the continued aging of the car population and recently lower gas prices at the pump, these are contributing to our optimism regarding 2019 for both DIY and commercial.

These trends remain encouraging.

Along with our operating theme for 2019, Drive For Excellence, we create key priorities each year.

For 2019, these priorities are customers first, commercial acceleration, omnichannel, leveraging technology and Yes We've Got It inventory initiatives.

We're spending a significant amount of time across the organization, but especially in stores identifying areas where tasks can be simplified, streamlined or eliminated in order to free up time for our AutoZoners to focus intensely on customers and their needs.

We are also making further technology investments to improve our electronic catalog and point-of-sale systems to ensure we are putting customers first.

We believe our current and future technology investments will improve our competitive position and lead to sales growth across all of our businesses.

While these investments are adding to both operating expense and capital expense, we feel this is -- will meaningfully improve the customer shopping experience.

Regarding commercial acceleration, we've been investing in systems to help AutoZoners sell more efficiently and customers conduct business with us easier.

While most of these initiatives won't be rolled out until late calendar 2019 or even later, our focus on increasing the engagement of the broader store team and focusing on existing customers is paying off today.

We are quite pleased with our momentum heading into the new calendar year.

We should once again highlight another strong performance in return on invested capital as we were able to finish our second quarter at 33.5%.

We continue to be pleased with this metric as it is one of the best in all of hardlines retailing.

However, 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, again, thank and reinforce how appreciative we are of our AutoZoners' efforts to continue to meet and exceed our customers' expectations.

We're excited about all the initiatives we are working on throughout 2019, but everything must start with the efforts of our exceptional AutoZoners.

Now I'll turn the call over to Bill Giles?

Bill?

Thanks, Bill.

Good morning, everyone.

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

For the quarter, total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores increased 3.1%.

And for the trailing 52 weeks, ended total sales per AutoZone store were $1.8 million.

Total commercial sales increased 12.9%.

In the quarter, commercial represented 21% of our total sales and grew $59 million over last year's Q2.

We are now averaging just under $10,000 a week in commercial sales per program.

On a trailing 4 quarters, we are now selling over $2.3 billion commercially.

We now have our commercial program in 4,788 stores or 85% of our domestic stores.

And as Bill mentioned earlier, we remain committed to gaining 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 continued to perform well.

We opened 1 new store during the second quarter, ending the quarter with 568 stores.

We expect to open approximately 40 new stores in fiscal 2019.

Regarding Brazil, we now operate 22 stores.

We have aggressive plans to open approximately 17 additional stores by the end of the fiscal 2019.

Our performance continues to improve, and we remain optimistic about the long-term future of this market.

If we can prove success, this market has the potential to be much larger than Mexico.

So while challenging, the potential size of the market is significant.

Gross margin for the quarter was 54.1% of sales, up 115 basis points from last year's second quarter.

The increase in gross margin was primarily attributable to the impact of the sale of the 2 businesses completed last fiscal year and higher merchandise margins.

While we were asked about gross margin assumptions and the direction they will be headed, our primary focus has always been growing absolute gross profit dollars in our total auto parts segment.

SG&A for the quarter was 37.7% of sales, lower by approximately 667 basis points from last year's second quarter.

Operating expenses as a percentage of sales benefited 800 basis points versus last year's Q2 due to the impairment charge related to the sale of the 2 businesses, partially offset by the planned increase in store payroll, primarily domestic, and investments in technology.

On the cost front, we highlighted on last few quarters' conference calls the investments we would be making, specifically wage rates and technology for this fiscal year.

For the remainder of the year, we feel that consensus numbers for SG&A generally reflect those investments.

However, I would also remind everyone that fiscal 2019 includes a 53rd week.

I bring this up to make sure analysts model that last quarter accordingly.

And we encourage everyone to look to the last time we had a 53rd week, which was Q4 2013 as a litmus test for modeling.

EBIT for the quarter was $400 million.

Our EBIT margin was 16.3%.

Interest expense for the quarter was $41 million, up slightly from Q2 a year ago.

We are planning interest in the $44 million to $45 million range in the third quarter of fiscal 2019 versus $42 million last year.

Debt outstanding at the end of the quarter was $5.1 billion or approximately $70 million above last year's Q2 ending balance of $5 billion.

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 17.9% (sic) [17.8%].

Along with Tax Reform, we benefited 386 basis points in our rate from stock options exercised during the quarter.

Excluding this benefit, our rate was 21.7%.

Because it is impossible to predict when individuals exercise options, we encourage everyone to model us on a rate assuming no stock option impact at roughly around 24%, and we will report both rates.

Net income for the quarter was $295 million, up 1.8% over last year.

Our diluted share count of 25.7 million was down 8% from last year's second quarter.

The combination of these factors drove earnings per share for the quarter to $11.49, up 10.7% over the prior year's second quarter.

Relating to the cash flow statement for the second quarter, we generated $368 million of operating cash flow, and net fixed assets were up 4.6% versus last year.

Capital expenditures for the quarter totaled $97.7 million and reflected the additional expenditures required to open 23 net new stores this quarter, capital expenditures on existing stores, Hub and MegaHub remodels or openings, work on the development of new stores for upcoming quarters and information technology investments.

With the new stores opened, we finished this past quarter with 5,651 stores in 50 states, the District of Columbia and Puerto Rico; 568 stores in Mexico; and 22 in Brazil for a total AutoZone store count of 6,241.

Depreciation totaled $83.8 million for the quarter versus last year's second quarter expense of $79.4 million.

This is generally in line with recent quarter growth rates.

We repurchased $350 million of AutoZone stock in the second quarter.

At quarter end, we had $635 million remaining under our share buyback authorization, and our leverage metric was 2.5x at quarter end.

Again, I want to stress we manage to appropriate credit ratings and not any 1 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.

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

The company's inventory increased 5.4% over the same period last year, driven by new stores and increased product placement.

Inventory per location was $690,000 versus $671,000 last year and $658,000 this past quarter.

Net inventory defined as merchandise inventories less accounts payable on a per location basis was a negative $58,000 versus negative $46,000 last year and a negative $59,000 last quarter.

As a result, accounts payable as a percent of gross inventory finished the quarter at 108.5%.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in a return on invested capital for the trailing 4 quarters of 33.5%.

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.

Thank you, Bill.

While we had a strong start to our fiscal year, we know we have much work to do to finish this year strong.

Our spring and summer periods generate a majority of our annual sales, and we'll be opening up a majority of our new stores and new commercial programs during this time period.

What keeps us encouraged is the relentless focus we have on servicing our customers better and simplifying our AutoZoners' work, especially at the store level, to reduce clutter and unnecessary tasks that get in the way of making the customer experience better for both our do-it-yourself customer and the professional customer.

We believe our industry's fundamentals remain very strong and are likely improving with the price of gas at the pump down versus last year.

This upcoming quarter, we are focused on both macro and internally-driven initiatives.

We are certainly monitoring the pace and amount of tax returns as this could be either a significant benefit or a detractor based on the total refund dollars that are processed.

And we are most excited with the sales traction we have been gaining, especially in our commercial business.

We are excited about our balanced model for growth around domestic retail and commercial, international, online and Pickup In Store.

We believe our Hubs and MegaHubs, Mexico, Brazil, ALLDATA and eCommerce can all grow their top lines in 2019.

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.

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 conditions and continue to ensure that 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 now nearly 40 years, and we continue to be excited about our future.

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

(Operator Instructions) The first question comes from Christopher Horvers from JPMorgan.

First question is on the gross margin outlook.

Bill, you mentioned that you're focusing more on gross profit dollars.

I think in the past you've talked about -- you saw some opportunities in terms of some gross margin rate expansion going forward.

So how are you thinking about the merchandise margins going forward?

And related to that, did this quarter include any benefit from -- through the early timing -- early receipts related to tariffs or anything with managing the tariff through?

I would say probably not.

I mean, as we mentioned, we had about a 70 basis point impact, positive impact from the sale of the 2 business units, so it'd probably be a little less than half of that in next quarter.

But excluding that, our margin remains relatively healthy.

So we're up about 40 basis points this quarter.

I think the merchandising organization has done a terrific job.

They're sourcing the opportunities that they've done and managing inventory.

So overall, we've been pretty sharp on our margin.

We are going to continue to have pressure on margin as our commercial business continues to grow at a significantly faster rate than our DIY business.

So we continue to expect to see that margin benefit that you will see come down a little bit over time.

But we'll continue to be driving gross margin dollars.

Understood.

And then a follow-up on your comment around 4Q, including the 53rd week.

As you look at the consensus numbers, where do you think people aren't picking it up?

Is it a sales question?

Is it expenses?

Is it earnings?

Where do you think the consensus isn't picking up that 53rd week?

Yes, I'm not calling out that they're not picking it up necessarily, I just wanted to make sure that others -- that we highlighted it for anyone who isn't, just so that when we get to the fourth quarter, there will be no mystery about it.

I would encourage you just to go back to 2013 to see how that kind of laid out.

But I'm not calling out anything specifically about the consensus estimates for the 53rd week.

Understood.

And then last question, the commercial growth is really impressive, as was the acceleration, especially in light of the weather issues in the middle of the quarter.

Can you talk about what the primary drivers are?

Do you think it's the MegaHubs that's driving the improvement?

Is it the sales effort?

And any delineation there?

And then related to that, on the MegaHubs, are you starting to transition to more same-day fulfillment out of the MegaHubs?

Or is it still primarily an overnight fulfillment to stores?

Terrific questions, Chris.

First of all, I think the growth in our commercial business and the acceleration in that growth, which we're quite pleased with as well, is coming because of a long list of issues that we've been -- or initiatives we've been embarking on for the last several years.

We really started this inventory availability efforts probably 4 years ago now.

They were first focused on in-store placements and improvements in inventory there that were more focused on the commercial business.

They then evolved to our Hub stores, and now our MegaHub stores.

I think the other big thing that we are doing this year is we have really put a lot of focus on getting our in-store teams very focused on customer service in the commercial business.

So our store managers are now making sales calls, and they're out making sales calls, but the biggest thing they're doing is they're making customer service calls.

And they're understanding where we're doing really well and they're understanding where we have opportunities for improvement.

And then they're going back and doing what they do.

They're managing the store operations but focused much more today than 1 year or 2 ago on the commercial operations as well.

As we look at the MegaHubs -- one other big element that I want to talk about in commercial is the Duralast brand.

If we had, had this call 10 years ago, I think most of the people listening to it would have thought that the Duralast brand was a net negative.

Make no mistake about it, the Duralast brand is a big positive for our commercial business.

And as we've improved the product quality, and as we've improved the assortments, we are really excited about what it means to our long-term growth potential.

As far as your question specifically on the MegaHubs and are we increasing the same-day service.

Yes, every time we open one, we increase the amount of stores that get same-day or even 3x a day service.

So whatever stores are attached directly to that MegaHub will immediately get 3x a day access to that inventory.

If there are other hubs that are in the local market that they can get to, those hubs will also get service between 1 and 3x a day on a same-day basis.

So absolutely, as we open more and more MegaHubs, we're increasing the same-day service.

The next question comes from Michael Lasser from UBS.

Bill, your comments around delayed tax refund, should we interpret that to mean that the business has slowed given that tax refunds are down materially year-over-year in the last few weeks?

Yes.

It's a fantastic question, Michael.

And frankly, one that I don't want to spend too much time on.

As you well know, we have a -- we release our earnings so soon after the end of the quarter.

So our quarter ended 17 days ago or so.

And so I don't like to spend any time on what's going on in such a short period of time.

I just don't think it's productive, and I know you all are looking at the long-term anyway.

But to your point, so far, in the tax refund season, through last Friday, which we've all seen the numbers, we're down about 40%.

I think it's $100 million through last Friday this time last year and it's $60 billion -- $100 billion and $60 billion this year.

Clearly, that is impactful to our business.

We've talked every single year over the last decade about the importance of tax refund season.

I think that it's going to be really interesting to see what transpires over the next couple of weeks.

The child income tax credit and earned income -- or child tax credit and earned income tax credit both have been delayed.

We haven't seen those dollars.

I think the expectation is they'll begin to flow this week.

We are anxiously awaiting them, and we are going to make sure we are in very good shape and prepared to take advantage of whatever tax monies flow.

At the end of the day, there's nothing we can do about it.

We're ready for them and look forward to seeing those dollars, but nothing else we can do beyond that.

Understood.

That's helpful commentary.

My follow-up question is your tone around price increases and the impact from tariff-related inflation on your business seems to contrast a bit with what the others in the industry are saying.

They're calling out clearly a benefit to the comp -- to their comps from some inflation that's been pushed through if only because of -- from the tariff.

Why do you think what you're seeing is different than them?

Yes, I think it's a great question.

We're asking ourselves the same question because frankly we're not seeing additional inflation over what we historically have seen.

So I'm not sure what they're seeing in their numbers.

As I mentioned in our prepared remarks, even with the tariffs that we saw, at the same times that those tariffs happened, the currency fluctuations -- where tariffs were up 10%, the currency was off 8%.

So we were able to negotiate a significant amount of those increases away.

So we haven't seen material changes one way or the other.

The next question comes from Simeon Gutman.

I apologize, I missed a couple of the first questions.

So hopefully, this isn't repetitive.

My first question is on the gross margin being -- and I assume it's being helped to some degree by private brand.

I wanted to ask you how contentious your internal debate is around investing more into price versus letting gross margin go up.

Because as you know, the bogeyman of this space has been online and pricing, and we get -- I'm sure you get that question a lot.

So you're allowing the gross to go up.

How big of a debate is it internally to push pricing down?

I would say it's not necessarily a debate, per se.

I mean, we're going to be priced right and within the marketplace.

And we're going to remain competitive.

And our value proposition, obviously, is well beyond just pricing.

As Bill actually mentioned in his prepared remarks, there's an awful lot of service that takes place for both our DIY customers and our commercial customers both, as far as delivering products to our commercial customers or servicing the customer inside the DIY store with either Fix Finder, testing batteries, testing starters.

So there's all sorts of service that takes place inside the store.

So it's really beyond just pricing, but we're going to remain competitive in pricing and we're going to continue to be aggressive about sourcing and finding opportunities to lower acquisition cost.

That will keep up our margin healthy.

We obviously have had good improvement in margin over the last quarter, over the last several quarters.

We expect our margin to remain healthy, but we also recognize that as our commercial business grows at an accelerated rate over DIY, that will continue to put pressure on margin.

So you may not see as big of increases in the future.

And then my follow-up is on the commercial sales, the composition of the 13% gain this quarter.

Can you tell us what was a bigger driver, sales per commercial account or the number of accounts that you're picking up?

I would say it's across-the-board.

It was customer account increases.

It was average ticket increases.

It was new customers.

It was up and down the street customers.

It was national account customers.

We're seeing it, Simeon, across the board.

We've seen the momentum continue to grow over about the last year and I think it's because we're working on the foundational elements that are important to the customer.

And can I just follow up to that, is it -- are there certain product categories where your share gains are outsized?

Or are you seeing, like, breadth across all of your product categories?

There's one category in particular where our gains are high but it's not driving our overall performance and that's because there are some supply disruptions in the marketplace.

Those things are always happening.

As we talked last year, we had several supply disruptions on our behalf last year.

But it's really across the board from -- but mainly focused on hard parts.

It's not a lot of commodity sales growth.

It's maintenance and failure parts is where we're growing our business.

The next question comes from Dan Wewer from Raymond James.

Bill, you talked a lot about the big growth in Mexico and Brazil.

Can you remind us how the economics of those stores compare to the U.S.?

Perhaps talk about sales per store and operating margin rate.

And then also curious as to why you're more upbeat long-term about Brazil than Mexico.

Is it just the size of the population or are there other benefits?

Yes, terrific questions.

We haven't gone into a lot of specifics on our business in either one.

Mexico, we've been there for 20 years now.

And we have a really nice, robust business that the team down there has done a fantastic job, and they really leveraged the AutoZone culture.

The proudest thing that I have every time I'm down there is just to look and see how much they've replicated what has made AutoZone special in the United States.

As for Brazil, I was actually there last week.

We haven't talked a whole lot about that business except we've mentioned that we're losing a sizable amount of money down there today.

We have 22 stores.

We've been there for 6 years -- 6.5 years now.

It's slow-going because we're trying to make sure that we figure it out.

The one thing that we have solved for sure is that it works for the Brazilian customer.

The customer traffic flow that we have down there is really terrific.

It's exciting to see.

Every time I go down there, I get inspired and encouraged about what it could be.

The economics don't work for us yet.

That's because we have 22 stores, we've got a big overhead structure in place and warehouse structure in place.

We're still developing the vendor relationships that we need, and we're optimistic about the future, but we haven't passed that final test phase yet.

What makes us excited and the reason we're there is it can be a really, really sizable market.

So the size of the prize could be significant.

One of the things we talked about last year when we sold IMC and AutoAnything is that they just couldn't ever be material drivers of the performance of AutoZone.

Well, Brazil is the exact opposite of that.

We could easily have 1,000 stores in Brazil if we make it work for us financially, but we have not finished checking that box yet.

Okay.

And then just second question on the accelerated SG&A spend in 2019.

Do you expect the SG&A growth to increase at the same rate in fiscal year '20?

Or does that moderate closer to historic levels?

It should moderate to more historical levels.

I mean, we made some significant investments this year both on wages where we really invested in our most tenured and talented AutoZoners that are facing our customers every day.

That investment was made at the tail end of Q1.

And so when we -- we will continue to have a accelerated SG&A growth rate until the point in time in which we anniversary that.

We also have been making some technology investments throughout the year as well.

But, Dan, I think if you look past FY '20, or fiscal year '20, when you get past the first quarter of fiscal year '20, then you should begin to see some more historical growth rates on our SG&A spend.

Speakers, the next question comes from Seth Basham from Wedbush Securities.

My question for you is around MegaHubs, Bill.

You talked about increasing your MegaHub count and success of that strategy.

Can you give us some perspective, for the MegaHubs that have been open for more than a year and markets that they serve, do they continue to out-comp the company average?

Yes, I would say particularly the MegaHub itself will significantly out-comp because it's got a significant inventory assortment.

But the stores attached to it will generally grow, certainly in the first year more and then it will moderate but they'll continue to out-comp a little bit.

That's helpful perspective.

So when you think about the improvement in commercial sales trends in the last few quarters, how would you attribute the breakdown between increased availability through your MegaHub and Hub strategy relative to your increased engagement of the store teams?

I think the bigger thing that we've changed year-over-year is the engagement of the store teams.

This MegaHub and inventory availability work, as I mentioned a few minutes ago, that has been going on for 4 years.

We continue to get better and better at it, and I think the customer continues to appreciate it more and more, just like they're continuing to appreciate the Duralast brand more and more, but I think the big -- the biggest change that we made is the store manager and district manager engagement, and it really makes a difference.

The next question comes from Bret Jordan from Jefferies.

This is Mark Jordan on for Bret.

Just looking at the commercial growth here again, digging a little deeper, it sounds like you're taking share here.

And just thinking about the growth, are we taking a -- maybe some national accounts or signing up more independent garages?

Just trying to think about where it's coming from here.

Yes.

As I mentioned a minute ago, we're seeing really good growth on both the up and down the street accounts, the national accounts, the specific sectors of the national accounts from the tire stores to the buy here pay here folks.

We're really picking it up across the board.

There's not really a standout difference.

And as I mentioned, we're also seeing it in maintenance and failure parts primarily.

Okay, great.

And then just one more on the MegaHubs and Hubs here.

Looks like maybe 12 more in the back half of the year, mostly MegaHubs.

How should we think about the cadence of those openings?

Are they more, maybe pinned to -- Q3, Q4 weighted?

Yes.

I think they'll probably just be ratably opened throughout the remainder of the year.

Speakers, the next question comes from Brian Nagel from Oppenheimer.

Nice quarter.

I, too, wanted to discuss a bit just the commercial growth.

I know there's been a number of questions on it already.

But if you look at your business, clearly, the rate of sales growth in commercial has picked up very nicely here lately.

You're taking market share.

Now this comes on the heels now of several years of significant investment in the business.

So with regard to that -- to the investment, how much opportunity remains to -- so to say you continue to build out the infrastructure of your commercial operation from here?

Or is it more a function of just continuing to gain share?

I think it's a fantastic question and one that, frankly, we can't answer for you today.

When you think about it, our retail business has 15% market share.

Even with all this excitement that we have around how well we're going, we still have 3% share in commercial.

We've got a long way to go.

What do we do to crack that code to get it to 5% share, 10% share, 15% share over time?

I think we're still trying to figure that out.

What I'm excited about is while we're trying to figure out some bigger potential possibilities, we're doing the day-to-day blocking and tackling, which is leading to our accelerated growth.

And it feels like it's more sustainable when you do it that way.

Got it.

And then within that, as a follow-up to that.

Are there markets -- and I understand there's a competitive dynamic to this.

But are there other markets within your system that you have -- you do enjoy outsized market share in the commercial side that could sort of, say, serve as a roadmap for the business in general?

There's clearly markets that -- where maybe the market share might be double what it is in some markets.

But we don't have 10% or 15% share in any markets.

We're going to.

We just haven't figured it out yet.

Got it.

And then just one final question.

With regard to wage inflation, I think you may have addressed this in prepared comments.

But we talked a lot about higher wages as somewhat of a, I guess, headwind to earnings growth.

Where are we on that front?

Well, we've been talking about higher wages and higher wage growth at AutoZone for over a couple of years now.

We did take that significant step, as Bill mentioned, in the latter part of the first quarter, and we significantly increased the compensation of our most tenured and talented and knowledgeable AutoZoners at the hourly level.

The ones that are closest to the customer.

That will anniversary itself, as he mentioned, in the latter part of this first quarter.

That said, I do think that you have 2 parts of the wage story that have been going on.

One is the regulatory piece where, in places like California, they're on a path to $15 an hour.

And that's going to happen every year or every 6 months depending on if you're in a municipality or at the state level.

So those increases are going to continue.

It still feels like, to us, that there is -- even outside of the regulated areas, that there is more wage pressure than there has historically been.

I think that, that has a lot to do with where we are in the economic cycle right now.

Will that continue?

I think it depends on what happens with the economic cycle.

All right.

Well, thank you all for joining us today.

Before we conclude the call, I'd like to take a moment to reiterate that our business model continues to be solid.

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

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

We will continue to execute on our game plan to succeed this fiscal year, 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.

We thank you for participating in today's call.

Have a great day.

That concludes today's conference.

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