汽車地帶 (AZO) 2021 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. (Operator Instructions) 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 of 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 begin, the company has requested that you listen to the following statement regarding forward-looking statements.

Ma'am, are you going to play the forward-looking statement?

Good morning, everyone, obviously, we have a little curveball, so I will read the forward-looking statement.

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 the company's management in light of experience and perception of historical trends current conditions, expected future developments and other factors that the company believes 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; cash flows; access to available and feasible financing; future stock repurchases; the impact of recessionary conditions; consumer debt levels; changes in laws or regulations, risks associated with self-insurance; war and the prospect of war, including terrorist activity; the impact of public health issues, such as the ongoing global pandemic of a novel strain of the coronavirus; inflation; the ability to hire, train and retain qualified employees; construction delays; the compromise in confidentiality, availability or integrity of information, including cyberattacks; historic growth rate sustainability; downgrade of the company's credit ratings; damage to the company's reputation; challenges in international markets; failure and interruption of the company's information technology systems; origin and raw material costs of suppliers; disruption in the company's supply chain due to public health epidemics or otherwise; impact of tariffs; anticipated impact of new accounting standards and business interruptions.

Certain of these risks and uncertainties are described in more detail in the Risk Factors section contained in Item 1A under Part 1 of the company's annual report on Form 10-K for the fiscal year ended August 29, 2020, 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. However, it should be understood that it is not possible to identify, predict all such risks and other factors that could affect these forward-looking statements. Forward-looking statements speak only as of the date made. Except as required by applicable law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Okay. Well, good morning, and thank you for joining us today for AutoZone's 2021 Second Quarter Conference Call. With me today are Jamere Jackson, Executive Vice President, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

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

To start off this morning, I'll spend some time talking about our sales results, trends over the 12 weeks, merchandise categories that drove our performance and any regional discrepancies. As I said in our press release this morning, we could not deliver the kind of results we have without the heroic efforts of our store and supply chain AutoZoners. While classified as essential workers, essential seems insufficient to describe the remarkable contributions to our company, our customers and our results. Our AutoZoners have really stepped up during the pandemic and have been nothing short of exceptional, and our top priority remains being committed to providing all of our AutoZoners with a safe work environment to be sure -- so they can help our customers.

While Jamere will talk more about this when he discusses the investments we've been making, I will say the additional emergency time-off or ETO we offered is something we just knew was the right thing to do for our AutoZoners. Thank you, AutoZoners again.

Okay. Let's turn to our sales results. Our overall comp sales were up 15.2% this quarter. Our growth rates for retail and commercial were both strong this quarter with retail comps being slightly stronger than commercial. Commercial came on strong at the end of the quarter and comped similarly to retail for the last 4 weeks.

Let's review our sales cadence. We told you on our last call, we ran an 8.8% comp for the last 4 weeks of Q1. In the first 4 weeks of this quarter, our sales accelerated to a 10.7% comp. As the holidays arrived, we saw further acceleration, which was sustained for the balance of the quarter. We ran a 17.5% comp pretty consistently over the last 8 weeks of the quarter.

This quarter's traffic versus ticket growth was pretty close to split down the middle although ticket was slightly stronger. It was encouraging us for us to see sales inflect upwards starting in January, with both ticket and traffic moving higher. Our ticket growth was stronger this quarter due to hard part sales mixing higher than what we experienced in the first quarter.

Our #1 priority continues to be the health, safety and well-being of our customers and our AutoZoners. Throughout the pandemic, we continue to follow all the national, state and local mandates and ordinances and have always kept close tabs on the CDC guidelines. We continue to require masks entering our facilities, performed questionnaires of our team members and take many other safeguards like enhanced cleaning protocols, providing masks, hand sanitizers and other PPE to our AutoZoners to ensure safe shopping and work environments. And just last week, we announced that we would provide every AutoZoner with a $100 reward once they completed their vaccination for COVID-19. That's every AutoZoner, including part-timers. This is just the next logical step in our efforts to provide a safe, working and shopping environment.

I continue to be inspired by our Board and our management team's commitment to doing what is right: putting safety first. You see, our values and our culture have been in full force and effect over the last year in this pandemic.

Addressing our supply chain, we've done a solid job with handling the extra demand, and our in-stock levels have continued to improve. To provide a little more color on industry drivers of our sales performance this quarter, I remind you that we were anxious to see what would happen as we got further and further away from the enhanced unemployment benefits that ended last July. In the first week of January, over $100 billion of stimulus was distributed to Americans. The majority of these funds was for the onetime checks as part of the $600 billion stimulus package passed in late December. While smaller in size than the April disbursements, we did see our business pick up nicely, and our sales remained elevated throughout the remainder of the quarter. While we continue to be encouraged with the current selling environment, we feel any additional stimulus should lead to a strong sales environment.

During the quarter, there were certainly some geographic regions that did better than others as there always are. Across both our retail and commercial customer bases, we saw the majority of the country perform well with the Midwest and Northeastern markets underperforming the others pretty consistently. Again, these markets, which represent just over 25% of our store base, were solid but not as strong as the remaining markets. For example, the spread in comp sales between these markets and the others was approximately 300 basis points for the quarter. We believe the separation was due to lingering effects of a mild winter last year and colder weather happening later this winter. But winter did come this year. Boy, did it, and the performance gap closed.

So we are encouraged about the summertime and believe we won't have to discuss why mild winter affected comp sales during our upcoming fourth quarter. And I could not be more proud to say that based on the retail sales data we have for our industry, we continue to experience historically unprecedented share gains. The data shows the industry has been growing in the mid-single-digit range with our sales closer to 3x the industry's growth rate. While we are thrilled to have these share gains now, our charge remains to maintain them heading into the spring and summer months.

I'm sure many of you would like to know how we're thinking about sales for both the third and fourth quarters of fiscal '21. I'll remind you that, typically, in recessionary environments, our business is remarkably resilient. However, nothing about this global pandemic is typical. Beyond our primary objective to ensure the safety of our customers and AutoZoners, our focus is on providing our AutoZoners with the resources they need to provide our customers with an exceptional shopping experience. We are optimistic about the sales environment heading into the third fiscal quarter, but we will obviously have a much more difficult comparison in the fourth fiscal quarter as last year's fourth quarter benefited from the April 2020 stimulus package.

For now, it remains difficult for us to predict sales for the remainder of the year. This is especially true for the fourth quarter of this year when we were up against the fourth quarter of previous year's 21.8% comp store sales growth. While we continue to expect our sales growth will moderate over time, we believe our products and services will be in high demand during these more difficult economic times.

Over the long term, if the economy enters a deep and protracted recessionary environment, we continue to believe our customers will focus more on maintaining their current vehicles. These time periods have benefited our business in the past, retail, in particular, as it has in the last 3 recessions. Last quarter, we reminded you the strongest periods we'd experienced of outside sales growth over the last 3 decades have been the early '90s, '01 and '02, '09, '10 and '11, all coming out of recessionary environments. Therefore, we remain optimistic on the industry this upcoming year.

Interestingly, after each of those outsized growth periods, they have never been followed by equivalent declines in the years that follow. We believe consumer behaviors changed during these recessionary periods, allowing us to showcase our skills and capabilities to new customers, and we retained many of those customers in the years that followed.

Now let's move into more specifics on our performance for the quarter. Our same-store sales were up 15.2% versus last year's second quarter. Our net income was $346 million, and our EPS was $14.93 a share, 20.5% above last year. Sales were higher than we forecasted at the beginning of the quarter and certainly higher than historic norms. Both our retail and commercial businesses showed strength in the quarter with DIY same-store sales up approximately 16% and commercial total sales growth of approximately 15%.

For commercial, we averaged over $53 million in weekly sales, which was over $10,500 in sales per program per week. While average weekly sales per program decelerated from last quarter, that is normal as the winter months are lower selling months for us. Moving forward, we remain very encouraged with what we are doing within our commercial business. The initiatives we have in place are helping our sales. I'll remind you that this is a highly fragmented $75 billion market, and we believe our product and service offerings provide us a tremendous opportunity to significantly grow sales and market share over time.

While there were some geographical differences this quarter, there continue to be interesting trends across our merchandise categories, particularly in the retail business. Our sales force categories continue to be strong with categories like tools, antifreeze, small repair and floor mats showing strength. But our hard parts business definitely picked up. In fact, our hard parts business comped in line with our sales floor for the quarter. This is the first quarter since the pandemic began where we saw our hard parts grow in line with sales floor.

While business improved in many merchandise categories, such as batteries, categories like brakes and rotors are not comping as high as the overall business. We believe this performance gap with certain categories will close as miles driven continue to improve. As for this year's winter, it was late arriving, but it did arrive. Overall, we view the winter as not having a material impact on our upcoming spring and summer business one way or the other.

We expect that our sales growth from the pandemic-related surge will moderate over time. However, we will continue to invest in growth initiatives in both our retail and commercial that position us well for the future. In addition, we continue to believe our products and services will be in high demand during more difficult economic times, and this resiliency gives us significant confidence about our prospects.

On last quarter's call, we announced we would be expensing additional payroll during the second quarter. The additional expense was to provide our AutoZoners with more emergency time-off. While this is the second time in our history we've offered ETO benefits, we believe it is the least we could do to support our AutoZoners in the field. This extra time-off award has been enthusiastically embraced by our team. Our AutoZoners have the right to use the benefits to address medical emergencies, take time off to get the vaccine, take additional paid vacation time-off or wait until the end of the calendar year and get paid what remains in their incremental vacation bank. In January, we paid out $31 million to AutoZoners who didn't utilize the ETO we offered them back in March of 2020. I have to tell you it was an honor to provide these AutoZoners with sizable checks in recognition of their heroic efforts. We feel this is a very important investment in our AutoZoners and in their safety. I'm exceptionally proud to work with a team of leaders and a Board of Directors who ensure we live consistent with our stated values.

Now it is my pleasure to turn the call over to Jamere Jackson. Jamere?

Thanks, Bill, and good morning, everyone. As Bill mentioned, we had another outstanding quarter. Our growth initiatives are delivering, and the heroic efforts of our AutoZoners in our stores and distribution centers are driving exceptional results.

To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q2. For the quarter, total auto parts sales, which includes our domestic Mexico and Brazil stores, were $2.9 billion, up 16%. For the trailing 4 quarters ended, total sales per AutoZone store were just over $2 million. This compares to just under $1.9 million in Q2 last year.

Now let me give a little color on sales and our growth initiatives. Starting with our commercial business. For the second quarter, our domestic DIFM sales increased 14.7% to $639 million. Sequentially, commercial growth was nearly 3 points higher than Q1. In the quarter, sales to our commercial customers represented 22% of our total sales, and our weekly sales per program were $10,500, up 11.7%. We averaged $53 million in total weekly commercial sales.

Internally, we have been executing against our commercial acceleration program where we are focused on building a faster-growing business with disciplined investments in pricing, service, technology and assortment. We have a tremendous market opportunity as we are significantly underpenetrated in this highly fragmented portion of the market. We now have our commercial program in 85% of our domestic stores, and we're focused on building our business with national, regional and local accounts.

This quarter, we opened 45 net new programs, finishing with 5,088 total programs. And our sales efficiency per store remained at near-record levels as we leveraged our DIY infrastructure and increased our share of wallet with existing customers.

Let me be clear, our strategy is working. We believe we grew share and we remain focused on repeating this for the balance of fiscal 2021. Fundamentally, we believe that our share gains are underpinned by the investments we made in improving the quality of our parts, improvements in our assortment and parts covered by model year, more competitive pricing and a commitment to providing exceptional service. These core focus areas have enabled us to drive double-digit sales growth for the past 3 quarters and position us well in the marketplace. And as we move forward, we are focused on our core initiatives that we believe will accelerate our growth even further.

First, our Mega-Hub strategy is improving our parts availability. We opened 1 more Mega-Hub this quarter, bringing our total to 48 locations, and we expect to open between 7 and 10 more Mega-Hubs by the end of the fiscal year. Given the success of our Mega-Hubs and increasing parts availability and driving meaningful sales lift, we're now raising our target from 75 to 90 Mega-Hubs at build-out to 100 to 110. These stores help us expand coverage and say, yes, we have it more frequently.

Second, we are leveraging technology to improve delivery times and service levels. The technology investments we're making in electronic ordering and tracking will significantly improve our delivery times and the accuracy of the commitments that we make to our customers. We're making it simpler to do business with AutoZone, and we're driving efficiency for our sales professionals and drivers.

Third, we are committed to being price competitive. We have a laser focus on the key categories where investment and pricing lead to accelerated sales growth and higher EBIT dollars. We're using data science and market intelligence to live up to our pledge to have the best merchandise at the right price. We like the competitive hand that we have in our commercial business and believe we are in the early innings of a transformational growth story.

Now Bill gave a lot of color on our DIY business which I won't repeat, but I would like to spend a moment on our retail acceleration initiatives. We're excited about the gains we're seeing in our DIY share growth. Like the commercial initiatives I mentioned earlier, we are running an intense playbook in DIY that is driving solid results for our business. First, the assortment work and Mega-Hub strategy that I mentioned earlier drive tremendous benefits to our DIY business. Our investments are improving coverage and availability, leading to a meaningful impact on trial and repeat purchase activity.

Second, we continue to focus on improving the customer shopping experience with the work we have done on the digital front. Our efforts in Buy Online Pick-Up In-Store, next-day delivery and ship to home have helped us meet customers when, where and how they want to shop. We are investing in technology to continue to improve the customer experience and make it easier to shop our broad array of products.

Third and similar to our commercial approach, we have a laser-like focus on being competitively priced in the marketplace. We're using disciplined and sophisticated data analytics to drive pricing decisions in certain categories, categories where we typically compete with nontraditional competitors like mass and online-only sellers in commodities and very slow-moving parts and products. We have tested our approach in key categories and markets, and this effort is yielding increased top line and gross profit dollar growth, albeit at slightly lower gross margins. This is a data-rich environment, and our tools and capabilities give us a meaningful competitive advantage. Again, we're living up to our pledge of having the best merchandise at the right price, and we believe it is helping us create a faster-growing business.

Fourth, we simply have a relentless focus on execution. As Bill mentioned, our AutoZoners in our storage and distribution centers have delivered exceptional results in a tough environment. As I said last quarter, perhaps the best investment we have made in our company is the investment in additional emergency time-off. In return, we continue to see our supply chain process record volume and our store AutoZoners handle record store traffic while still delighting our customers. This focus on execution is a meaningful competitive advantage for us, and we're winning in the marketplace.

Now let me spend just a few minutes on international. First, we continue to be pleased with the progress we're making in Mexico. During the quarter, we opened 7 new stores to finish with 628 stores, and our store sales accelerated sequentially. Like last quarter, the exchange rate again played a role in the U.S. dollar equivalent reported sales. The exchange rate finished the quarter at roughly [77%] higher than last year's second quarter rate. That's 7% higher than last quarter's second rate. And as a result of the devaluation, our total U.S. dollar sales were negatively impacted. While the macro environment has been challenging, we believe we're seeing signs of a turnaround in the Mexican economy. We remain committed to our store opening schedules in Mexico for the foreseeable future.

Regarding Brazil, we opened 1 new store to finish with 46 stores this quarter. The Brazilian real continues to face headwinds and devalued roughly 25% for Q2 over last year. Long term, Brazil will be an important market for AutoZone, and we will invest in a disciplined way.

Now let me spend a few minutes on the P&L and gross margins. For the quarter, our gross margin was down approximately 77 basis points. 37 basis points of margin headwind is due to higher supply chain costs, including a onetime benefit last year that did not repeat this year. The remaining 40 basis points came from our pricing initiatives, loyalty program and mix shift. As I discussed above, we're focused on competitive pricing that will drive top line and gross profit dollar gains.

To be clear, though, the industry's pricing remains rational, and overall, we still have pricing power. We have tested certain categories and taken action when we have the ability to drive both top line and gross profit dollar gains. This is a dynamic market, and we remain disciplined in our approach. The strategy is working. We see our work translating into higher sales and profits, as evidenced by the transaction and share growth that Bill mentioned earlier. As we continue to refine our strategy over the next several quarters, we're planning for higher sales and gross profit dollars that outpace the drag from gross margin rate. This is a good outcome for our business as we're driving new customers and retention.

All of the investments we are making suggest that we're growing our DIY and DIFM businesses at roughly double the rate of the overall market or better, and we're committed to capturing our fair share and improving our competitive position in a disciplined way. Again, our primary focus will continue to be growing absolute gross profit dollars at a faster than historic rate in our total auto parts operating segment.

Regarding operating expenses, our teams, particularly our store operations and commercial teams, continue to manage our expenses well in this environment. Our expenses are up 12.5% versus last year's Q2. But included in this quarter's expenses were approximately $40 million related to emergency time-off and other COVID-related expenses, which represented 4.2% of the overall SG&A growth. We believe our decision to provide emergency time-off for the heroic efforts undertaken by our AutoZoners during the pandemic was absolutely the right thing to do. As I said last quarter, this is perhaps one of the most important investments we have made, maybe ever. We will continue to manage SG&A in line with sales volumes.

Moving to the rest of the P&L. EBIT for the quarter was $482 million, up 18.1% versus the prior year's quarter. Our EBIT margin was 16.6%, up 32 basis points versus the prior year's quarter. Interest expense for the quarter was just over $46 million, up 4% from Q2 a year ago. The higher expenses related to the $1.25 billion bond issuance and the $750 million 364-day credit facility, both completed in the last fiscal year's third quarter. We are planning interest in the same $46 million to $47 million range for the third quarter of fiscal 2021 versus $47.5 million in last year's third quarter.

Debt outstanding at the end of the quarter was just over $5.5 billion versus last year's Q2 ending balance of just under $5.5 billion. Our adjusted debt-level metric finished the quarter at 2x EBITDAR. While in any given quarter, we may increase or decrease our leverage metric based on debt and equity market conditions, we remain committed to both our investment-grade rating and our capital allocation strategy. And long term, our share repurchases are an important element of that strategy.

Moving to tax, our tax rate was 20.6% versus 17.7% in last year's second quarter. This quarter's rate benefited 265 basis points from stock options exercise. While last year, it benefited 412 basis points. Stock option exercises aren't predictable, and as such, they will affect our tax rate and ultimately our net income and EPS. For the third quarter of fiscal 2021, we suggest investors model us at approximately 23.5% before any assumption on credits due to stock option exercises. Because we cannot effectively predict this activity, we remain committed to reporting the stock option impact on the tax rate.

Moving to net income and EPS. Net income for the quarter was $346 million, up 15.6% versus last year's second quarter. Our diluted share count of 23.2 million was lower by 4.1% from last year's second quarter. The combination of these factors drove earnings per share for the quarter to $14.93, up 20.5% over the prior year second quarter.

Let me talk a few minutes about our cash flow. For the second quarter, we generated $356 million of operating cash flow. This was up approximately $150 million over last year's Q2. Our operating cash flow results benefited from the strong sales and earnings previously discussed. We repurchased $900 million of AutoZone's stock in the quarter versus $315 million last year. At quarter end, we had approximately $718 million remaining under our share buyback authorization, and our leverage metric was 2x.

Regarding our balance sheet, our debt was flat with last quarter, and our cash and cash equivalents remained significantly higher than historical levels. We now have $1 billion in cash on the balance sheet, of which approximately $830 million is excess cash. Our liquidity position remains strong.

We're also managing our inventory well as our inventory per-store growth was flat versus Q2 last year. Inventory per store was $715,000 versus $713,000 last year and $702,000 last quarter. Total inventory increased 2.8% over the same period last year driven by new stores and improved product assortment. Net inventory, defined as merchandise inventories less accounts payable on a per-location basis, was a negative $93,000 versus negative $41,000 last year and negative $99,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 113% versus last year's Q2 of 105.7%.

Lastly, I'll spend a moment on capital allocation and our share repurchase program. As you will recall, we restarted our buyback program during the first quarter. We said that we intended to utilize our ongoing free cash flow to buy back stock, and based on our view of the future, began methodically utilizing some of the excess cash we currently have on our balance sheet. As we said last quarter, if we have concerns about the near term, we will simply temporarily suspend repurchases again, but we feel comfortable with our strategy and our execution. As I mentioned, we spent $900 million on stock repurchases, representing 752,000 shares. We remain confident in our near-term plans, and as such, expect to continue reducing the level of cash and cash equivalents on hand through the remainder of this fiscal year. This will enable us to grow our business and return meaningful amounts of cash to shareholders as part of our disciplined capital allocation strategy.

So to wrap up, we had a very strong quarter, highlighted by exceptionally strong comp sales, which drove a double-digit increase in net income and EPS. We remain confident in our ability to drive long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash and returning excess cash to our shareholders. Our growth initiatives are delivering, and this gives me tremendous confidence in our ability to drive significant and ongoing value for our shareholders.

And now I'll turn it back to Bill.

Thank you, Jamere, and I have to take a moment and recognize you. Your grasp of the fundamentals of this business in less than 6 months is extraordinary, and thank you for being here. We're so glad you joined the team.

These continue to be unique and extraordinary times, and they continue to require us to look at many things differently while managing our business day to day. I'm extraordinarily proud of our team across the board for their commitment to servicing our customers, the motoring public, but doing so in a very safe manner. While we are learning how to operate effectively in these times, we remain wary of the volatility that can exist, volatility in both the U.S. and our international markets. We are fortunate to have extraordinary people who are committed to servicing our customers and helping them get to work, go see their families or simply get back and forth to school. They've worked exceptionally well to deliver on our commitments thus far, but we must stay focused, and we must continue to deliver. There are no layups. We must continue to innovate and we must continue to execute.

Our domestic retail business continues to do tremendously well. We understand trends will slow in the future. We're going to work. We're going to work as hard as possible to gain as much share as possible and limit our headwinds, and we continue to see a tremendous ongoing opportunity within our domestic commercial business. Our business continues to do very well, and we are still in the early innings of growth. But as always, we have work to do as we head into our spring selling season.

First and foremost, our focus will be on keeping our AutoZoners and our customers safe while providing our customers with their automotive needs. Secondly, we must continuously challenge ourselves during these extraordinary times to position our company for even greater future success. We will ultimately be measured by what our future cash flows look like 3 to 5 years from now.

Lastly, I continue to be bullish on our industry and, in particular, on AutoZone.

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

Our first question comes from Michael Lasser, UBS.

Bill Rhodes, I want you to elaborate a bit on the pricing investments and other investments that have been weighing on your gross margin. Do you view this as a temporary condition, that once you get beyond the next few quarters, your gross margin will stabilize? Or is this going to be the beginning of a longer-term trend of your gross margin continuing to be down for the foreseeable future?

Well, thank you for the question, Michael. Yes. As you've seen over time, we've been very artful in how we've been able to manage gross margin for not just years but decades. We found some particular specific opportunities where we found places to invest and improve our value proposition to our customers. They're very specific pieces, both in the retail business and the commercial business.

I don't know exactly what's going to happen a year from now. Our team is going to continue to innovate. We are constantly raising prices, and we are constantly lowering prices, trying to find that sweet spot where our customers value -- the value that they're getting the best. So I don't know exactly what it's going to be over the long term.

But if you recap what Jamere said, the gross margin, we had about 40 basis points, which was a onetime negative from last year. So all the things that were embedded in there, of which price was one of them, accumulated to 40 basis points. Frankly, I'm not that smart to know what the gross margin is going to be within 40 basis points 2 or 3 years from now.

Okay. And you articulated a lot of confidence that your commercial growth can accelerate this year. How -- what's driving you to make that statement? Are you seeing some customer wins that already give you the visibility that it can accelerate?

Yes. We talked, I guess, probably 3 years ago that we were embarking on a new commercial study, and we developed a new strategy that we began rolling out probably 18 months or so ago. And we're still in the early innings of rolling out that strategy. It has many different elements. I mean this Hub and Mega-Hub portion of the strategy, which is taking years, but it is making a meaningful difference, a very meaningful difference in our ability to say yes to our customers. And it's leaning towards commercial, although it's helping DIY tremendously as well. That's an element of it.

We've rolled out new technology in our commercial business, handheld technology, which allows us to be able to better understand what our delivery times are and manage our delivery times better. We're significantly already reduced our delivery times in the last 6 months, and we think we have more room to go. We've also enhanced our website and our ability to communicate and be easy to do business with, with our commercial customers. So I don't think it's -- and then, of course, the ongoing evolution and building of the Duralast brand.

So it's not one individual issue. It's an amalgamation of all these different issues coming together and improving our competitive position. Not to mention, during the global pandemic and the stay-at-home and safe-at-home orders, we were there for our customers every day. And that allowed us to introduce ourselves at a different level to some customers, and I think that has resulted in stickier long-term relationships.

Our next question comes from Simeon Gutman, Morgan Stanley.

I think you touched on this in the prepared remarks. Can we talk about price elasticity and some of the investments you're making? I think in the past, there hasn't been a lot of elasticity in price in this category. And can you talk about the immediacy of some of the reaction you're seeing from consumers? Or is this, "Hey, we're doing well. We're investing for the future. So the customer, when they come back a year from now or a few quarters from now, we're in a better position."

Yes. I would say a couple of things. First, as I said in our script, and it's pretty clear from the data that we have, the strategy is working. What we're seeing is the benefits of top line growth. We're seeing our share numbers go up. We're seeing strong traffic. We're seeing ticket. We're seeing unit growth. So all of the metrics point to the fact that the strategy is working.

What we're not seeing is we're not seeing a ton of cost pressures that are material, and the industry pricing remains rational. So what we're doing as part of this strategy is very surgical. In other words, we're not peanut-butter-spreading price declines across the business, but we're being very surgical, using very sophisticated data and analytics. And those are the things that give us a lot of confidence that what we're doing makes a lot of sense for the consumer and makes a lot of sense for us. So as we move forward, we're going to continue to lean into this strategy. And our approach is delivered in the marketplace.

Listen, I -- as I spent time over the last 6 months or so, I like the competitive hand that we have. If we can continue to delight our customers the way we have over the past year or so and we live up to this pledge of having the best merchandise at the right price, this will continue to be a win for our shareholders, and we're going to see the results in the bottom line of our business.

Okay. And then my follow-up is just on pricing for 2021 or calendar '21. Are you -- what are you seeing in terms of pricing? Can inflation be a bigger driver than it was in prior years?

Well, I mean, our approach on inflation, quite frankly, is to be disciplined. Where we see commodity price inflation, we have to be disciplined enough to take price to recover that. And that's something that we've done over time in the business. What we're seeing today is we don't see any material increases that have us concerned. But if we do, we will be disciplined to make sure that we're taking price to recover those bumps that we see from commodity pricing.

So even in an environment where we're trying to be as surgical as we can about the pricing moves that we make, and as Bill said, we're taking price up and price down where it makes sense for us to take pricing, we do have pricing power, and we're disciplined enough to take price where we see commodity inflation.

Our next question comes from Christopher Horvers, JPMorgan.

It's Christian Carlino on for Chris. Just -- it might have been touched on in an earlier question. Just wondering on the gross margin outlook, is it going to be 1Q '22 when you start to lap these higher loyalty redemptions and markdowns, where you start to get flat to up gross margins? And similarly, were there -- the onetime impact this year, that was from lapping the supply chain leverage last year, correct?

That's right. So as we said, we had about 77 basis points of deleverage this quarter. About 40% of that was related to supply chain costs, and the other -- roughly, 40 basis points is the supply chain costs, and the remainder is the initiatives that we talked about.

And what I'll say about our outlook in the future is that we're going to continue to lean into the strategy that we have today because in this environment, what we're seeing is it's working. We're getting top line. We're getting EBIT dollar growth, and we're going to lean into that as we move forward. So we won't be date-certain necessarily about when you'll see an inflection point because we're in the early innings of this strategy, and it's delivering for us.

Let me add to that for just a second, too. You mentioned loyalty, and we don't know what's going to happen to loyalty costs as we go forward. The reason our loyalty costs are up is because our customers are doing more repeat business with us. The biggest part of our growth is coming from existing customers returning to our stores more frequently. We are tickled to death with that. I hope it continues next year and is another pressure point because it means we're gaining additional share, and it's a very profitable share gain for us.

Got it. That's very helpful. And then when you think about the lagged impact of the weather, both the better winter weather on whole and the recent events in Texas, these events in Texas hurt in the near term, but you would expect a net positive as we get to the summer.

Absolutely. And yes, you're right. There's a temporary -- while people are locked down, our business suffers and suffers significantly. But when things warm up, our business rebounds immediately and for a sustained period of time. More importantly, those conditions put significant incremental wear and tear on certain undercar parts. And there's a lag effect that will typically last 9 months or so for us, and it's something we were talking about before the pandemic, the fact that our business was expected to be soft last spring and summer because we had a mild winter. Well, when the pandemic hit, that changed everything. But this year, we shouldn't have to be talking about a mild winter dampening our results in the spring and summer.

Our next question comes from Bret Jordan, Jefferies.

Talking a little bit about the share gains, could you maybe bucket for us where you're seeing maybe more or less? Are you seeing more of these share gains from warehouse distributors in the 3-step model? Or are you seeing an improving cadence and share gain from 2-step peers? Maybe if you could talk about sort of where you see the shifts and some of the nontraditional channels on the DIY side as well.

Yes, terrific question. Yes. You have to bifurcate it between what's going on in the retail sector versus what's going on in the commercial sector, both of which we're gaining share 2 or 3x -- we're growing 2 or 3x faster than the industry growth rates by all indications we have. We have really good data on the retail share gains. We don't have as good a data, but we can look at headline growth numbers in the commercial gains.

On retail, we are picking up a lot of share from what's traditionally, we believe, in the mass channel. I think a lot of people are not frequenting those large stores at the same rate that they did in the past. And what we're focused on is making sure, as we're getting those incremental visits, that we are going above and beyond, so we get those visits in the future.

I think also, as this brick-and-mortar omnichannel strategy comes to place, I think we're also not losing share that we might have been losing before to the online channel, and in fact, maybe gaining some of that share back over time.

In the commercial sector, I think it's hard to say where the share is coming from. We are less than 4% market share in the commercial industry today. I think it's likely coming from probably multiple different places. We certainly have intensified our understanding of what the wholesale distributor market is doing, and we're paying more attention to them and our competitive analysis and building our strategy. And we think that over time, we've significantly changed our competitive position, particularly against the WDs. You think about what we've done with assortment, what we've done building a sales force. Now we've got this technology that we have in place, which is going to improve our deliveries, I think that our competitive positioning in the marketplace is vastly different than what it was 4, 5 years ago.

Okay, great. And then a question on supply chain. You mentioned that batteries were strong in your category remarks. Do you see any categories or particular areas that there is a shortage, either in stocks in the market in general? And I guess, obviously, we hear a lot about some of the import issues and freight costs. But is your -- I guess are you seeing any shifts in your supplier base to sort of diversify around that?

Yes. Certainly, Bret. We've experienced significant supply chain disruptions over the last 11 months. Certainly a lot less today than we had, call it, June, July, August. I think I mentioned on one of these calls, we couldn't get sandpaper for a while. We had trouble with fuses. We had trouble with tools. I mean we just had such enormous surges in certain parts of our business that we couldn't keep up, and many of those came with an extended supply chain that ran into China or Asia.

We've worked through most of those. I have to give our team and our battery suppliers some kudos that the battery business has been as strong as it's been for as long as it's been. And then we had this huge, cold surge or cold snap, and we did just fine. Our team was very creative and worked with lots of different suppliers to make sure we were in good shape. So we don't have any acute needs right now. Some issues on the edges. Our in-stock position has significantly improved, but it's not back to our normal levels yet, probably going to take a few more months.

Our next question comes from Seth Sigman, Credit Suisse.

I wanted to follow up on the DIY business. Earlier in the year, I think there was a concern that the DIY strength at the time, this is back in the spring of last year, the strength at the time meant that maybe sales were being pulled forward. As you see the DIY business pick up here again, I guess that would suggest that, that wasn't really true. So I guess how do you think about pull-forward and just the strength that you're seeing in the DIY business right now and I guess just the sustainability of it?

That's a terrific question, Seth. I'm not sure how to answer it all. Clearly, I think we talked that we were worried. If anything, we might have pulled forward some battery business because those cars parked last spring, and they sat for 5 or 6 weeks. As soon as the safer-at-home orders went away, our battery business boomed. But that battery business has sustained really high levels ever since. We've seen no dip in our battery business. We've seen weeks where we're going up against tough winter weather where it might be softer. But overall, it has exceeded our expectations over the last 11 months.

As far as sustainability of these sales surges, the thing that keeps resonating with me is if you think about our business over really long periods of time, when our customers have incremental time, and specifically, incremental money, our business outperforms normal periods of time. And it's been that way for the last decade when we get tax refunds. How much have we talked in this environment about the surge we see during tax refund season, which is just beginning right now? We've seen it every single year. And when tax refunds moved back 3 weeks, we had to spend a lot of time talking about it because it moved out of 1 quarter into another quarter.

It's just evidence that when our customer, who I often term is financially fragile, when they get some incremental dollars, we seem to get a disproportionate share of those funds. And we saw it again in January when the stimulus came out. It wasn't nearly the stimulus that we saw last April. But within a day, we saw that those funds showing up in significantly improved business for us. And that sustained itself through the end of the quarter.

Now we're talking about another stimulus, which could -- frankly can dwarf what happened last April. If that comes, what does that mean to our business? All the indications we have is it would be very strong for our business because each time we've seen those incremental dollars, our business has performed better than normal.

Okay. And Bill, I guess you mentioned the gap between retail and commercial narrowing the last 4 weeks of the period. Did that actually mean that commercial accelerated through the period and exited at a stronger rate? And if so, can you just elaborate on that as well? I mean do you think that's stimulus or something else?

Yes. I don't think the stimulus plays nearly as much in the commercial business as it does the DIY business. And I think most of the end consumers in the commercial business are higher socioeconomic -- higher up on the socioeconomic ladder. So that incremental money doesn't mean as much to them. Both businesses were doing really well. Commercial is continuing to rebound.

But there are still elements of the commercial business that aren't as strong as they were pre-pandemic, particularly some of our national account players, the up-and-down-the-street business has been stronger than the national account business. And again, I think that, that has to do with the end consumer that is servicing or picking the UDS business versus picking the national account business.

Our next question comes from Zach Fadem, Wells Fargo.

This is David Lantz on for Zach. So within the 15% growth in commercial, how much would you attribute to new Mega-Hubs? And can you talk about how performance in commercial business tends to evolve once you open a Mega-Hub in a certain market?

Yes. So the key with Mega-Hubs is that it increases the number of SKUs that we have available, and it enables us to say, yes, more. And so to the extent that we have that coverage and those parts available, that bodes well for us as we're going into our existing customers and our new customers.

What I'll say about commercial is that we grew 15%. We grew significantly with locals and nationals, but probably the one story that I want people to continue to focus on is that we're underpenetrated. I mean a 4% share gives us a tremendous opportunity to create a faster-growing business. So as we execute on this growth playbook that we talked about, we're seeing significant share gains. We're pleased with that execution in the marketplace. And the Mega-Hub strategy, the things that we're doing with technology, the fact that we're laser focused on being competitively priced, all of these things give us an opportunity to create a faster-growing business, and we're pretty excited about it.

And then just one more for me. Can you talk about the impact that you think the rollout of electric vehicles is happening in the industry and what you think could happen over the long term there?

Yes. First of all, we believe there's going to be a market, and AutoZone is going to be a big player, just as we are today with the internal combustion engine. Our strategy is simple. We're just going to follow the consumer, just like we've done in the past. We're not wed to internal combustion engine technology. We've significantly changed our assortment over time to reflect the latest technology, so this is not an accidental threat for us. We're operating from a position of strength.

If you think about our business today, we're already supplying parts and supplies to the EV market, things like wiper blades. We have world-class capabilities in supply chain and merchandising. We have great relationships and partnerships with the OEMs who have a seat at the table today and can help us forecast the volumes and the timing of the market changes, and we have this tremendous retail footprint and commercial business that gives us distribution points.

So as we think about the parts and supplies that are at risk with electric vehicles versus internal combustion engines, there will be offsets. I mean there will be -- clearly, there'll be some things that are at risk, but there will be offsets to those. And there'll be opportunities for us in both DIY and DIFM.

So listen, despite what we see in headlines and announcements from the OEMs, we're a bit cautious because the market has some near-term challenges that we're watching closely. First of all, consumer adoption is uncertain, roughly 2% of the market today, and it's growing slowly. And if you look at the U.S. in particular, the charging infrastructure is not ready for prime time. The rapid charging stations need to be built out. It's going to be expensive. It's probably going to take some combination of public and private partnerships. The business model there has an uncertain path to profitability. And quite frankly, we think there's going to be some need for some pretty significant power grid investments. But we do believe there's going to be a market, and we're going to be a player, and we're simply going to follow the consumer.

Our next question comes from Michael Baker, D.A. Davidson.

This is Katy on for Mike Baker. Kind of tagging on to one of the previous questions asked, I was wondering if you guys saw any difference in what your retail customers spent between the 2 rounds of stimulus, and if you saw any sort of category shift between those.

Yes. I don't think we've really seen any significant category shifts. I mentioned the battery business has been particularly strong. We've seen -- we talked about the sales floor business being really strong. What we have seen in recent -- in this quarter is a resurgence of our hard parts business, in particular some of the failure-related items. I think some of that has to do with actually getting into winter and having a more normal winter this year.

We've also talked about our maintenance products not being at the same levels that we're experiencing the rest of our business, things like brakes and rotors and the like. And I think that that's personally a hold on from the lack of winter last year and the fact that miles driven are down and those maintenance items for some of the higher socioeconomic groups may be negatively impacted.

Okay, great. And then just again, real quickly on the cash balance. I know you guys mentioned being fairly confident about more share repurchases through the end of the year, and I was just wondering if there are any other plans or sort of strategic investments to use some of that excess cash.

Well, what we've said is that we're going to take our free cash flow, and our #1 priority has been and will continue to be to invest in our business in a disciplined way. The free cash flow that we generate inside the business gives us tremendous financial firepower to both invest in our business in a disciplined way and return significant amounts of cash to investors in the form of our repurchases currently. We've got tremendous confidence in that plan, and we're going to continue to execute as we finish out the balance of the year.

Our next question comes from Michael Montani, Evercore ISI.

It's Mike Montani on for Greg Melich. Just wanted to ask 2 questions. I had one for Bill and then a follow-up for Jamere, if I could. So first off, for Bill, obviously, there's been a lot of investment in technology and multichannel. And I'm wondering, Bill, if you could just expand a little bit, if you care to go there. What percentage of the B2B business today is kind of digital ordering, if you think about that, almost $3 billion business.

And then the same question for your retail business. We've been thinking probably 4% to 5% type range, but is that true? And then related was just if you can talk about FedEx initiative as well as BOPUS, just kind of some incremental color on what's working well in those 2 areas.

Yes. Great. There's a lot to unpack there, Mike. Thank you for the question. I really hate this new setup with Bill and Jamere. Used to, if somebody said Bill, and it was a hard question, I would just look at Giles and let him answer it. But you put it on me this time.

So let's talk about our digital business. In the commercial sector, it's not like the retail system where customers really picking a channel. They're picking the way they want to order parts. So there are 2 primary ways they order parts. They pick up a phone and call us or they go online and click buttons, and we fulfill it the exact same way, regardless of how they initially interact with us. We've been doing a lot of work trying to make -- doing it digitally with us easier, and we've made significant strides. Really proud of the team that's been doing that work over the last couple of years, in particular.

And we've also made a lot of other back-office things easier for the customer. We've also done some work with ALLDATA to make ALLDATA more ingrained in the purchase decision with the customer. So I'm really pleased where we are with that. And we are seeing significant growth, but the vast majority of our interactions with customers today are still over the phone. We believe and hope, over time, that our percentage of digital penetration in the commercial business will continue to increase at a pretty rapid pace.

On the retail side of the business, we kind of have 3 different businesses that we interact with. We have Buy Online Pick-Up In-Store. We have traditional ship to home, which comes out of our fulfillment center; or we have next-day delivery, which is the program that you mentioned with FedEx, where we're leveraging our Hubs and Mega-Hubs. And customers can order with us as late as 10 p.m., midnight in a couple of markets, and we'll have it on their doorstep the next day.

Each 1 of those 3 businesses is growing significantly, really high rates faster than the rest of the business. But our Buy Online Pick-Up In-Store is growing at twice the rate of our ship to home and next-day delivery business. And that, again, shows us, once again, and remember, the way we price in the online world, if you do ship to home or next-day delivery, on most purchases, you can generally get a 20% discount. But our customers are electing to do Buy Online Pick-Up In-Store with us at twice the growth rate of ship to home or next-day delivery, which again proves to us the notion that we have to be an omnichannel provider. We've got to have great stores and great customer touch points. Convenience and knowledge that our AutoZoners provide to our customers is very valuable to our customers. So I hope I unpacked that okay for you.

Great. That was helpful. And then for Jamere, I guess you can have the tougher questions, which we get this from investors, which is really around the minimum wage. And obviously, we saw Walmart go up to $15-plus an hour. We've been thinking you all are kind of $13 to $14 an hour range. But the heart of the question really is when we try to analyze this, we think it could be 100 bp plus headwind to the P&L in isolation, but then we think there's a lot of levers you all have to pull to kind of mitigate. And one thing, for example, was COVID costs seem to be running above 100 bps. So is this a case where we should be kind of confident that you all can kind of mitigate some of these headwinds to the extent that this happens in a rational way? Just any color that you can share there on productivity initiatives, pricing power would be super helpful.

Yes. So a couple of things about this one. One is we do think that there will be several mitigants at our disposal as we move into this environment. It's still uncertain about what we'll see and the cadence that we will see that. These are all things that we've been contemplating for a while.

The first thing I'll say is that we've done a tremendous job inside of our operations, really driving productivity. And over time, what that's meant for us is that we have a highly productive workforce here that is delivering. And you can see that in this environment where we have accelerated sales growth, you're seeing us getting very decent leverage with our teams in the field. So that's one.

The second thing is the reality is that when there are inflationary pressures in the business, whether they're commodities or wages, you have to be disciplined as a company to make sure that you recover those. And so we're very disciplined on the pricing front. Whenever we see cost inflation from any area of the P&L, we find ways to offset that with pricing, and we believe we're going to have that pricing power into the future.

And then I think the third thing that stands out to me as it relates to minimum wages, we're going to do what's right for our AutoZoners. That's always been our philosophy inside the company, and so the cadence with which the legislation happens will have an impact on that. But across our business today, we're always focused on doing what's right for the AutoZoners and making sure that we're competitive in terms of acquiring labor. And so to the extent that there are changes that happen in the wage landscape, we're going to be competitive there, and we're going to have a business that enables us to be competitive in the future.

Right. Before we conclude the call, I want to take just a moment to reiterate, we believe our industry is strong and our business model is solid. We'll take nothing for granted as we understand our customers have alternatives to shopping with us. We're excited about our growth prospects for the year. We have an exciting plan that should help us succeed this fiscal year. But I want to stress, like always, 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 very successful.

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

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