汽車地帶 (AZO) 2020 Q1 法說會逐字稿

Good morning and welcome to the AutoZone Conference Call.

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

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

This conference call will discuss AutoZone's first 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; cash flows; access to available and feasible financing; future stock repurchases; the impact of recessionary conditions; consumer debt levels; changes in laws or regulations or in the prospect of war, including terrorist activity; inflation; the ability to hire, train and retain qualified employees; construction delays; the compromising of confidentiality; availability or integrity of information, including cyber attacks; historic growth rate sustainability; downgrade of our credit ratings; damages to our reputation; challenges in international markets; failure or interruption of our information technology systems; origin and raw material costs of suppliers; impact of tariffs; anticipated impact of new accounting standards and business interruptions.

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 section could materially and adversely affect our business.

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

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

Actual results may materially differ from anticipated results.

Good morning.

Bill Rhodes, please go ahead.

Thank you.

Good morning, and thank you for joining us today for AutoZone's 2020 first quarter conference call.

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

Regarding the first 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, is available on our website, www.autozone.com under the Investor Relations link.

Please click on Quarterly Earnings Conference Calls to see them.

To begin this morning, I want to thank all AutoZoners across the entire organization for their dedicated, passionate service to our customers.

I'm routinely reminded of the tremendous lengths AutoZoners go to meet and exceed the needs of our customers.

Whether that's helping a Retail customer determine the cause of their problem, finding an extremely hard-to-find part for a Commercial customer, or an ALLDATA ASE Master Tech walking the customer through an incredibly complicated repair, our AutoZoners across the Americas serve our customers with compassion, care and confidence.

Our AutoZoners' intense full focus on the customer is the reason that I believe we have momentum and why we were able to deliver solid results this quarter.

Overall, we were pleased with our performance in Q1.

This morning, we will review our major themes for the quarter.

Specifically, we'll talk about same-store sales performance across months, regions and customer segments.

Secondly, we'll update you on the initiatives we have in place to drive sales in both Retail and Commercial, including our ongoing investments in technology and inventory assortments that we believe continue to be a core reason for our sales growth.

We'll also touch on the subject of tariffs and the impact of those on our business.

Our total sales grew 5.7% this quarter versus last year.

This was faster than Q4's growth of 5.4% adjusted for the 53rd week.

This growth was in line with our expectations and was encouraging, considering we knew we were up against accelerating Commercial growth this same time last year.

We gained traction in our Retail business as our DIY sales comp was just shy of 1%.

Because of a shift in the timing of our quarter versus last year's first quarter, we knew this would cause a headwind in the results for our overall comp.

But even with the shift, we were quite pleased with our results.

Also the data we have on market share indicated we were growing nicely versus the remainder of the market included in this competitive set.

We feel we are well positioned for our DIY business to deliver strong performance for the remainder of the year.

Regarding our domestic DIFM business, our sales grew 13.6% year-over-year.

We were very pleased with this result, considering we were up against growth of 11.3% in the first quarter of last year.

Considering this was the first quarter where the DIFM business had to lap double-digit sales growth, we knew this would not be an easy task.

It has been encouraging to see our 2-year Commercial comps continue to build.

Our team across the organization from our sales team, to our operators, merchants, technologists, marketers, credit team to ALLDATA and on and on, have really bought into providing a compelling, differentiated comprehensive experience for our customers, and with that approach, we're being rewarded with incremental business in the marketplace by our customers.

While we remain smaller than many of our peers in absolute sales volume, our growth rate has been very robust, growing about 3x the industry growth rate.

This growth has come from a combination of many initiatives that have been in development for years, including inventory management, our inventory assortment improvements, Hub and MegaHub store expansions, the ever strengthening reputation of the Duralast brand across our professional customer base, technology enhancements, increased engagement of our very strong store operating teams and tremendous efforts on the part of our entire sales organization to effectively convey our value proposition.

We also grew our Commercial sales per store at a higher clip than we did in last year's first quarter.

Although we were averaging fewer annual program openings, as approximately 85% of our stores already have a program, the programs we have opened continue to produce for us.

The first quarter marked our third consecutive quarter of averaging more than $10,000 in weekly Commercial sales per program, and we continue to grow our sales with mature customers in mature programs at a substantially improved growth rate the last 2 years versus previous years, indicating our offerings, products, coverage, customer service and the ability to enhance the customer's overall shopping experience are improved and have been recognized and rewarded by our customers.

Finally, our up and down the street business, otherwise known as the independent repair shops, grew faster than our overall Commercial business, indicating that the improvements we are making are broad-based across different geographies and customer types.

Our AutoZoners have taken ownership of our success and are adding value to our Commercial customers, which has and will continue to have a very positive impact on the business.

That said, we believe there is still considerable growth opportunities for us in Commercial as our market share remains small.

Regarding our domestic DIY business.

We generated another positive same-store sales result for the quarter and an improvement in percentage growth year-over-year versus last quarter.

Retail remains a very consistent predictable story for us as it is definitely a more mature customer segment than Commercial, but a predictable revenue stream and substantial profit and cash flow generator.

All months of our quarter showed positive DIY same-store sales, and we saw our best performance versus the previous year in November.

On a 2-year basis, our performance was very consistent each month.

Last quarter, we mentioned a sales impact we were seeing with our Hispanic customer base.

This quarter, we do not believe this impacted results, either across the country or specifically out in the Western and Southwestern U.S. markets.

Regionally, we did better out West and were a little softer in the Northeast.

We believe the sales results in the Northeast were being impacted by weather and weather comparisons to last year.

Overall, we were pleased with the performance and consistency in our Retail business in Q1 and feel good about the remainder of the year.

With that said, as is our historical practice, as we enter our second quarter, we believe it is prudent to remind everyone that weather patterns in this quarter can change significantly from year-to-year and, in particular, week-to-week.

The second quarter is always our most volatile quarter from a sales perspective, both positively and negatively.

But over time, weather effects normalize, as does our sales performance.

In our discussions with investors, there seems to be heightened questions regarding the stability of our Retail business and its trajectory.

While we cannot predict the future, we certainly can learn from the past.

We've routinely said that our same-store sales generally trade in a pretty tight band.

And that remains true.

To add a touch more specificity to that discussion, we've had periods of underperformance and overperformance in our Retail same-store sales.

But over the last 25 quarters, our Retail same-store sales have been positive for 21 of those 25 quarters.

While many casual observers of our industry believe Retail is contracting and Commercial is accelerating, the facts, according to AutoCare, our industry association, do not support that notion.

Their data has shown both sectors of the industry with very long-term consistent growth in the low to mid-single-digit range, with Commercial growing slightly faster.

For us, we believe in the health of both our Retail and Commercial business.

So if we sound upbeat about our sales opportunities for the remainder of 2020, we are, and I'll explain some of the reasons for our optimism.

We have a number of initiatives we've been executing.

One major ongoing one is availability.

Once again, we learned that adding inventory and additional parts coverage matters in local markets.

This quarter, we set records for the highest in-stock position in our company's history.

Congratulations to our supply chain team, merchant and operators; great work.

Additionally, we opened 11 new Hub stores this quarter and now have 216 Hub locations, 37 of which are MegaHubs.

We continue to see sales ramping in markets where Hub stores are added.

We see it, of course, in the Hubs themselves, but also in the surrounding market serviced by the Hub.

We're seeing these larger stores paying for themselves faster and faster in the maturation curve.

And we're seeing them growing well past the first or second year open.

Our first couple of MegaHub locations opened in 2013, and they are still comping above the overall chain comp.

We'll continue to open Hubs for the foreseeable future as we're utilizing them as distribution nodes for hard-to-find parts, adding to our local market inventory availability.

Hub stores are also helping us with our online orders for next-day delivery.

It is an efficient way to have and leverage all the product in the local market, and improves our ability to meet customer demand, regardless of channel in a very cost-effective manner.

Next, we've been spending a significant amount of time, effort and resources to leverage technology to enhance the customer experience.

We've invested a great deal in both operating and capital expense to benefit our DIY and DIFM businesses.

Our IT spend has comfortably increased by double digits for the last few years.

At the end of the quarter, we began to roll out, after a considerable amount of time, due diligence and testing a new point-of-sale system to our stores.

This system leverages new architectures and technologies that will expedite the transaction by making the workflow more succinct and logical with touchscreen capabilities and will allow us to make future changes much quicker as we replace very old legacy [code] all to enhance the customer experience.

We've also done some important work behind the scenes that should help our agility by updating our store operating system, expanding the number of available SKUs our systems can handle and updating our human capital system.

We are also investing a great deal in our Commercial systems as we continue to test these new technologies.

We remain confident that allowing our customers easier means of doing business with us will help Commercial continue to grow at an accelerated pace for the future.

On last quarter's call, we highlighted what we were seeing with tariffs.

We noted that as the result of the tariffs, we had experienced a small amount of inflation, a departure from the norm.

As the tariffs were introduced, we began to pass those costs on to our customers.

We were successful in negotiating with certain vendors, reducing the impact of the tariffs.

However, we did have to raise some prices.

As some of the tariff increases are considerable in particular select product lines, we've been intentionally passing those costs along in tranches as we absorb those costs through our weighted average cost accounting method.

If the tariffs remain, we intend to pass additional cost increases on through increased retails.

The tariffs have resulted in SKU-to-SKU inflation, which differs from our historical experience.

To date, tariffs and their impact on our cost and Retail has been manageable and not a significant driver of our business results one way or the other.

Turning to our omnichannel efforts.

We continue to invest in our strategy to enhance the customer shopping experience by meeting customers 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, the new Duralast parts website and ALLDATA.

We continue to see growth in website traffic and rapid growth in our ship-to-home, next-day delivery and Buy Online Pick-Up In-Store sales.

But omnichannel will -- still represents a very small percentage of our business, substantially below 5%.

Last quarter, we discussed our next-day delivery program that allows customers in over 85% of the U.S. markets to order as late as midnight in some markets and receive their products at their home the very next day.

We continue to see Buy Online Pick-Up In-Store as our largest omnichannel business by a pretty wide margin.

This BOPIS model is also growing faster than our ship-to-home businesses, highlighting the importance of our high-touch operating model where customers place a high value on the trustworthy advice our AutoZoners deliver to them.

Regarding our annual operating theme for 2020, 40 years of WOW!

Customer Service, we continue to push for a relentless focus on what matters to our customers: exceptional service; fast deliveries; high-quality parts and products; trustworthy advice and flawless execution across the enterprise.

In 2020, we continue to challenge our leadership teams to reduce the time of redundant or noncustomer-facing activities for our store AutoZoners.

By removing or streamlining these tasks, we know we can improve our levels of customer service.

This will continue to be a major focus for us in 2020.

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 substantial opportunities for advancement and work to ensure we're providing strong returns for our shareholders.

In summary, we were pleased with our performance and remain encouraged with our industry strength in both DIY and DIFM and our prospects for the remainder of the fiscal year.

We believe macro factors, such as relatively low gas prices and increasing miles driven, remain largely in our favor.

And we remain committed to growing our market share in both our DIY and Commercial businesses.

For the quarter, total sales increased 5.7%, and our domestic same-store sales were up 3.4%.

This performance was generally in line with our expectations, but we did have an unfavorable comparison in sales due to a calendar shift resulting from our 53rd week this past year.

Our same-store sales would have been 68 basis points higher if we were comparing to the same weeks last year.

Regionally, the markets west of the Mississippi outperformed the eastern half of the U.S. The Northeastern and mid-Atlantic markets were our lowest performance.

But we see in our underperforming markets, consistent performance on the 2-year stack basis.

During the quarter, we opened 18 new stores in the U.S. and our Commercial business opened 24 net new programs.

Currently, 85% of our domestic stores have a commercial program, and the vast majority of our international stores have a commercial program.

During the quarter, we continued to expand our international footprint, opening 2 new stores in Mexico and 2 in Brazil.

We should, once again, highlight another strong performance in return on invested capital as we were able to finish our first quarter at 35.5%.

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 again deliver solid results for our first fiscal quarter of 2020.

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 5.8%.

For the trailing 4 quarter just ended, total sales per AutoZone store were $1,864,000.

This is up from an average of $1,792,000 at Q1 ending last year.

Total Commercial sales increased 13.6% in the quarter.

Commercial represented 22% of our total sales and grew approximately $75 million over last year's Q1.

We are encouraged to highlight for the quarter, our domestic Commercial weekly sales averaged approximately $10,600 per program, the third quarter in a row of sales above $10,000.

This was an increase of 10.2% from last year's $9,600 in average weekly sales per program for our first quarter.

And that $9,600 was up 8% over the year before, a very strong acceleration.

We now have our commercial program in 4,917 stores or 85% of our domestic stores.

As Bill mentioned earlier, we remain committed to gaining market share with our commercial customers.

We're 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 2 new stores during the first quarter, ending the quarter with 606 stores.

We remain committed to open stores for many years to come.

Regarding Brazil, we now operate 37 stores.

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

While we cannot claim success yet as we are incurring a substantial per-store annual operating loss, 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 53.7% of sales, up 8 basis points versus last year's first quarter.

The slight increase in gross margin was attributable to higher merchandise margins.

While our accelerated pace of Commercial growth has weighed on our overall gross margin, we continue to see opportunities to lower our cost through direct sourcing.

I do want to stress to remain -- we remain committed to taking cost out of our business where appropriate and feel we can save on cost from here.

Our primary focus has always been growing absolute gross profit dollars in our total Auto Parts segment and we've been pleased with our growth, driven by the acceleration we've experienced in Commercial.

SG&A for the quarter was 35.8% of sales, deleveraging 65 basis points to last year's first quarter.

This was in line with our expectations at the beginning of the quarter.

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

The deleverage for this quarter was primarily driven by our planned domestic store payroll investments and continuing IT investments, which negatively impacted operating expenses.

EBIT for the quarter was $500 million.

Our EBIT margin was 17.9%.

Interest expense for the quarter was $43.7 million, up 12.1% from Q1 a year ago, but in line with our expectations.

We are planning interest in the $44 million range in the second quarter of fiscal 2020 versus $41.4 million last year Q2.

Our higher forecast than last year includes our costs associated with the bond issuance we had this past April.

Debt outstanding at the end of the quarter was $5.287 billion or approximately $130 million above last year's Q1 ending balance of $5.156 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 23.2% versus 21.7% in last year's first quarter.

This quarter's rate only benefited 33 basis points from stock options exercised, while last year, it benefited 250 basis points.

Unfortunately, stock option exercises aren't predictable and they can come in waves, driving substantial fluctuations, positive and negative in our tax rate and ultimately, in our net income and EPS.

For the second quarter of FY 2020, we suggest investors model us at 23% 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.

Net income for the quarter was $350 million, relatively flat to last year's first quarter because it was depressed by previously discussed higher tax rate due to reduced stock option exercises.

Our diluted share count of 24.5 million was down 6.1% from last year's first quarter.

The combination of these factors drove earnings per share for the quarter to $14.30, up 6.2% over the prior year's first quarter.

Assuming a consistent tax rate in both periods, EPS would have increased 8.3%.

Relating to the cash flow statement, for the first quarter, we generated $447 million of operating cash flow.

Net fixed assets were up 5.2% versus last year.

Capital expenditures for the quarter totaled $101 million and reflected the additional expenditures required to open 22 net new stores this quarter, capital expenditures on existing stores, Hub and MegaHub remodels or openings, work on development of new stores for upcoming quarters and information technology investments.

With the new stores opened, we finished this past quarter with 5,790 stores in the U.S., 606 stores in Mexico and 37 in Brazil for a total store count of 6,433.

Depreciation totaled $89.8 million for the quarter versus last year's first quarter expense of $82.5 million.

This is generally in line with recent quarter growth rates.

Effective the first day of this fiscal year, September 1, we adopted the new lease accounting standard that required the company to recognize operating assets and liabilities on the balance sheet.

You'll see that we have recorded just under $2.6 billion in operating lease right-of-use assets to the balance sheet, as displayed in our highlights pages attached to our press release.

We do not expect this to have an impact on our leverage.

We repurchased $450 million of AutoZone stock in the quarter versus $497 million in last year.

At quarter end, we had $1.277 billion remaining under our share buyback authorization and our leverage metric was 2.5x.

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

The metric we report is meant as a guide only as each rating agency 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.

The company's inventory increased 9.1% over the same period last year, driven by new stores and increased product placement.

Inventory per location was $694,000 versus $658,000 last year and $674,000 last quarter.

Net inventory, defined as merchandise inventories less accounts payable on a per location basis, was a negative $71,000 versus negative $59,000 last year and a negative $85,000 last quarter.

As a result, accounts payable as a percent of gross inventory finished the quarter at 110.3% versus last year's Q1 of 108.9%, a solid improvement.

Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing 4 quarters of 35.5%.

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.

We are pleased to report a solid first quarter.

Delivering 3.4% same-store sales growth while strong, was in line with our expectations.

Over the last 5 quarters or so, we've made incremental operating expense investments in our business with an expectation that we would improve our competitive position and therefore, increase market share in both sectors, accelerating our sales growth.

We've been pleased with those investments, which were primarily in labor and technology.

Our labor investments have resulted in reduced turnover of our most tenured knowledgeable customer-facing AutoZoners.

And as we begin to deploy these new technologies, we expect them to enhance the customer and AutoZoner experience.

In fiscal 2019, we shared well in advance that we would have accelerating SG&A expenses, which would lead to reduced EBIT growth for the fiscal year.

We delivered on that commitment and slightly overperformed our expectations regarding EBIT in 2019.

As we embark on fiscal 2020, we still have elements of our expense structure that are growing faster than historical rates, but our expectation is to have higher than historical sales growth like we have experienced in the last several quarters.

For fiscal 2020, our expectation is the higher expected sales growth will lead to EBIT growth rates above the last 4 quarters and approaching our more typical low to mid-single-digit levels.

For the new year, we must continue to execute consistently at a high level, which we believe is in our line of sight.

We understand we must adhere to Living the Pledge and doing what is right for customers.

We cannot take our eye off of execution.

While we study the external environment and react where appropriate, we must keep managing to our game plan.

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

For the remainder of the year, we have a lot of deliverables from our IT initiatives, and we will remain focused on simplifying our store AutoZoners' workloads to reduce clutter and unnecessary tasks that get in the way of making the customer experience better, both for do-it-yourself customer and the professional customers.

We believe our industry's fundamentals will remain solid as we see positive year-over-year miles driven statistics.

And the aging vehicle characteristics in our markets continue to encourage us about the new year.

We remain focused on growing our DIY business and continuing to grow our Commercial business well in excess of industry growth rates.

We believe our balanced earnings and cash-generating model allows us to deliver steady growth as our history suggests.

We promise to remain committed to both executing our strategies and getting better every single day.

I'd like to take this opportunity to again recognize and thank our team of talented, dedicated, passionate AutoZoners for what they do each and every day for our customers, which expands opportunities for AutoZoners, allows us to support the communities we serve and ultimately rewards our shareholders.

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

(Operator Instructions) Our first question comes from Seth Sigman from Crédit Suisse.

Congrats on the quarter.

I wanted to talk about Commercial a little bit.

I mean, obviously, a lot of progress over the last 12 months.

When you look at the growth of Commercial, how do we think about growth coming from existing customers versus progress winning new customers?

And then as you look out over the next 12 months, maybe you can just talk about some of the incremental drivers that give you confidence that you can sustain the momentum in that channel?

Yes.

Thank you.

Well, regarding the -- where the growth is coming from, I've even mentioned in our prepared remarks that we are seeing significant growth from mature customers who happen to be in mature programs.

So most of the growth that we are seeing, and most of the change in the growth that we are seeing is coming from existing customers that we had, whether they were up and down the street or national account customers.

We're just penetrating those customers much deeper than we were before.

Regarding where we go from here, obviously, we don't have the crystal ball.

But I will tell you, when we look back over this acceleration over the last 5 quarters, it has not been 1 thing.

It has been due to several different initiatives that we've had in place and frankly, been in the works for several years, whether that's inventory assortment improvements, whether that's getting our store managers and district managers involved, whether it's building the reputation and the brand of the Duralast products that we sell.

There's been a whole host of different things that we believe have contributed to this growth.

We don't know what's going to happen in the future, but we do know that we have several other initiatives in front of us on the Commercial front, particularly technology initiatives that we have not rolled out yet, and we're excited about what the prospects of those initiatives will mean in the future.

Okay.

And then just a follow-up question on pricing trends.

I think you had talked about raising prices this year in phases or tranches, I assume there's more starting to come through now.

Can you just talk about the consumer reaction?

Any signs of elasticity?

I mean, it sounds like your tone on the consumer overall is very healthy.

Just curious what you're seeing in terms of elasticity.

Yes, it's really hard to see it.

But certainly, in certain product categories, we've seen the tariffs come in, and they've been meaningful.

But we have not taken the full cost impact because of our weighted average cost accounting model.

So those costs come in over time as the inventory turns.

So we have moved our retails up, as I said, in tranches, and when we've seen them go up, we have seen some elasticity of demand in certain categories, not a ton.

At the end of the day, when we look at the impact of the inflation in the retails and the elasticities, we don't think net-net is having a significant impact on our business yet.

But again, we still have a long way to go because we haven't absorbed all those costs and then who knows where the tariffs go from here.

Our next question is from Michael Lasser from UBS.

Bill Rhodes, in your prepared remarks, you expressed a lot of optimism about the outlook for the DIY business.

Is that -- a, what factors are driving that enthusiasm; and b, do you think that's more of an AutoZone-specific story or a broader industry story, because some of your competitors are either seeing decelerating DIY traffic and/or more volatility in the results of their DIY business?

Yes.

Michael, I would say I have the same optimism I've had for about 25 years.

I believe, in the Retail business.

There's a lot of people, as I mentioned, that think that the Retail business is going away, that it's declining, and the Commercial business is rapidly growing.

If you go back to our 1991 annual report, we are trying to dispute the myth that the Retail business is declining.

I'm trying to continue to dispel that myth.

And the easiest way for me to do is talk about what has transpired over the last 25 quarters.

25 quarters, 21 of them have had positive same-store sales for AutoZone.

Now I don't know what other people are experiencing.

But I also mentioned and I've continued to mention that our Retail business, in particular, it does not fluctuate that much quarter-to-quarter.

Our performance is in a pretty tight band.

Now this quarter, we did particularly well, especially if you consider the shift -- the calendar shift that impacted us.

That would have been one of our stellar quarters.

We're also going to have quarters that aren't as strong.

That's just the nature of the business, but it trades from slightly down to up 1 or 2 points, and it's been doing that for as long as I've been in this business.

And over that last 25 years, there's been a market share shift from smaller independent and regional players to the larger players.

Over time, should we see more share being shifted between and amongst the larger players just because there's less consolidation and fragmentation within the market?

I think you're going to continue to see it come from those smaller folks.

That's what's happened overall.

When I got in this business, there were about 35,000 Auto Parts outlets.

Today, there's about 35,000 Auto Parts outlets.

Now a lot more of them are in the hands of us and our close end competitors, but there's still a whole lot out there that aren't by us.

Okay.

And then my second question is you've deployed a lot of investment, a lot of technology.

And I think you're seeing good returns on that, and that's what's driving some of the very healthy growth within your DIFM segment.

How much more opportunity -- and you mentioned further technology investments you're going to be rolling out.

How much more opportunity is there to deploy investments to generate these types of returns?

And should -- how should we think about the growth rate of SG&A dollars, specifically in the next couple of quarters as a result of that?

As I said in the prepared remarks, we're going to continue to have elevated SG&A expenses.

We've spent a lot of time working on some substantial new technology-oriented initiatives that, frankly, you haven't seen yet.

And therefore, we haven't begun to expense them yet.

They're showing up through the capital expense line, but because we haven't deployed them, we're not depreciating them.

Those are coming.

There are some on the DIY side, like I mentioned, the new POS system.

We also have several on the Commercial side that will be coming over the next 6 months or so.

Our next question is from Simeon Gutman from Morgan Stanley.

I just want to follow up on Michael's question.

I think the first one on the DIY business.

Bill, I think you said we expect the strength or strong results to continue, specifically around DIY.

I know you don't really give guidance, especially by segment, but does that suggest that the run rate of DIY should improve going forward?

Or that the consistent and healthy trends continue going forward?

Yes.

What I'm trying to say is, remember, DIY, it trades in a very tight band.

We had a strong quarter this quarter.

I don't know what's going to happen next quarter or the quarter after that.

But overall, we believe in the long-term health of the DIY business.

That's the message that I'm trying to make sure that we convey.

I also want to put an exclamation point of something else that I said in the script.

And that is that the second quarter is always very volatile.

And part of it has to do with when the quarter ends.

It ends right around Valentine's Day, which is when the seasons shift, when tax refunds begin to hit the marketplace.

So I don't know what's going to happen in the second quarter.

It's always volatile, and we just want to make sure everybody realizes that.

Got it.

Okay.

My follow-up is, you also made a comment towards the ending of the call about how EBIT growth should approach some of the -- your historic rates over time.

If you look at the balance right now where your comps are growing nicely, you seem to be taking share in the industry, you are investing, but your implication that it's going to approach it over time, means that these investments can subside and the top line momentum should continue.

And another way of asking it is why not maintain the current algorithm in which EBIT growth continues to grow steadily, maybe at a lower rate, but you continue to take market share, which seems like you're able to do, and there's lots of it.

So I guess, how much the debate is there?

Why not continue a higher level of investment to continue growing at an appropriate rate as long as the market is giving credit for it?

Yes.

I think, overall, I mean, our objective, as Bill said, is over the long-term to grow our EBIT at a low to mid-single-digit rate.

We've got a fair number of investments that were current that we've made and that we're currently working on, as Bill highlighted, many in technology and many, for example, in the Hubs and MegaHubs, which we've had terrific results on and we'll continue to invest in Hubs and MegaHubs, which will also elevate some of our inventory levels as well.

So we're going to continue to invest in the business as we gain momentum.

I think we have a fairly long track record of being able to manage both margin and expenses in light of this kind of sales performance that we are producing, and we continue to expect to do that over the long haul.

Our next question is from Matt McClintock from Raymond James.

Congrats on the quarter as well.

I was wondering if we could just follow up on Seth's question just about Commercial -- the Commercial business in general.

I think you said that the bulk of the gains have been coming from mature markets, mature customers.

I was wondering, is the growth rate from new customers or the contribution from new customers accelerating as well?

That's my first question.

I think it's accelerating as the entire business accelerates.

The point that we're trying to make sure is that the biggest change that we've seen over the last 6 quarters or so has been our mature customer growth has changed significantly.

Okay.

That's helpful.

And then as you look today, now that you've actually comped the comp or compared against more difficult growth rates within that business, taking a step back a year ago versus today, would you say that you're more optimistic about the growth potential for that business than you were a year ago?

And -- meaning, longer term, do you think that your comp algorithm could actually accelerate from here simply from that confidence that you just saw this quarter?

Well, our confidence isn't going to determine whether we're successful or not, unfortunately.

I think we certainly have a higher level of confidence because we've done it for 5 quarters.

I would say, more importantly than that, we're encouraged by the initiatives that we have in front of us.

Now you said something I want to make sure that I'm not saying.

I'm not saying our sales are going to accelerate from here in Commercial.

I don't know.

But I feel like we will continue to outperform the industry by, hopefully, a substantial margin.

If that's 10% or 15% or I don't know, but I'm really excited about the initiatives that we have in front of us.

And basically, the momentum that we're building in the marketplace from our inventory availability to the power of the Duralast brand, to the service that our customers are seeing from our AutoZoners, just as I talk to customers, I see a whole different level of confidence that our customers have in us and our ability to service their needs.

Our next question is from Liz Suzuki of Bank of America.

Could you talk about private label penetration broadly?

And what percentage of your sales is in private label currently?

And what the next initiatives are for the Duralast brand?

Yes.

I mean, we feel terrific about the Duralast brand, which is the largest brand -- about the largest brand in aftermarket Auto Parts and we have -- over 50% of our sales come from our private label product.

And merchandising organization has done a terrific job of continuing to expand that brand across categories.

And it continues to have a very high penetration and is very well received by the customers, both on the DIY side and on the Commercial side, both.

And so our expectation is that we'll continue to develop the brand, broaden it out, continue to find further opportunities in other categories where we can do further line extensions on Duralast, and Valucraft and Duralast Gold brand all together.

And are there certain product categories where Duralast is not currently high in your lineup of product and where you think there's a big opportunity?

I think on some of those would be some of the ones that are more dominated by national brands, for example, in oil and those kinds of categories that maybe there already is an existing dominant national brand.

But in many categories, we find that there continues to be significant opportunities for both Duralast and other private label product that we have.

Our next question is from Michael Baker of Nomura.

Within the margin outlook, it sounds like -- your sales have been up 5% each of the last 2 quarters, adjusting for the extra week in the fourth quarter.

And you're talking about profits up low to mid-single digits, so I guess that might imply some chance for margins to still be down.

Is that right?

And can you talk about your expectations of gross margins versus SG&A?

Yes.

I mean, your math is right.

And I would say that gross margin, we feel good about.

I mean, this quarter, we had it relatively flat.

I think it was up 8 basis points on gross margin.

So we feel pretty good about our ability to be able to continue to manage gross margin.

Obviously, we get continued pressures from tariffs, et cetera, but the merchandising organization has done a great job of continuing to find opportunities to lower our cost.

So we feel pretty good about the health of gross margin.

And yes, on the SG&A front, we're going to continue to make the investments that we have made, many of which are focused on wages as well as technology over the long haul.

And so we expect there to be a little bit of pressure on that.

But again, as Bill mentioned before, and we've mentioned, that our goal is to continue to grow EBIT on a low to mid-single digit over the long term.

Okay, understood.

And then a quick follow-up.

Just on the calendar shift, how does that impact 2Q where I think you pick up a February week, but lose a November week?

Yes, I think it depends on what happens in that week in February.

As I talked about a couple of times already, that particular point in the calendar is very volatile.

The last time we had this, it was very favorable to our second quarter results.

We don't know what will happen this time, but we'll let you know.

It could easily be favorable or it could easily be unfavorable.

It just depends on that what happens right around Valentine's Day.

Our next question comes from Zack Fadem from Wells Fargo.

Could you talk a little more about the comp impact in markets where MegaHubs are added and how that compares to the overall fleet?

And then just as the Hub presence matures, could you walk us through the comp trajectory and how those markets tend to perform after the opening?

Yes.

I would say on the MegaHub markets, I mean, we continue to see good performance out of them.

And not to dissect it too much, but it depends on how broad the market is and how close in the market is.

And keep in mind that we only have 37 MegaHubs today.

And frankly, the vast majority of them are relatively immature.

So I think we're still identifying what we believe to be the maturation curve from a sales perspective on MegaHubs, but we continue to be encouraged by the year-over-year improvement that the MegaHubs perform.

Hubs have a little bit more maturity to them.

But again, we're doing things that are helping drive the business overall, adding more inventory, et cetera.

So it becomes a little noncomparable when you look at some of the Hubs today versus what they were like maybe 5 years ago in terms of what we've done inside the box to be able to drive sales.

So the short answer is, is that the maturation curve of both Hubs and MegaHubs is still evolving.

We continue to be very pleased with the investments that we're making and see that the improvements that we can drive and we'll continue to invest in that category.

Got it.

That makes sense.

And could you also speak to the margin trajectory of the Commercial business, whether you've seen any improvement in incremental margins as that business has gained scale?

And are there any opportunities that you think are out there to drive higher Commercial margins now that you're slowing the new Commercial program investments?

Yes, I would say, I don't think that we're seeing -- I think the margin for Commercial continues to remain healthy, and there are obviously opportunities for us to improve margin on both sides of the business.

But at the same time, keep in mind that we're growing Commercial at a rapid rate, but we're also making some investments, and that's helping drive that.

So over the long term, I would expect margins to improve as some of those investments become more mature.

But over the shorter term, I would expect our margins to remain stable.

Our next question comes from Greg Badishkanian of Citi.

This is [David Ballinger] on for Greg.

So I want to talk about the DIY business a bit as well.

So if we just take a step back and look at the big picture.

So employment level was still strong, coupled with low gas prices across most of the country.

So at this point, should DIY potentially be comping at the higher end of that tight band that you talked about, maybe 0% to 1% or so?

I'm just trying to gauge where that business is now.

And what's the correct run rate for comps in DIY for where we are in the cycle?

All great questions.

I just keep going back to it trades in such a tight band that it's really hard to say.

We certainly think lower gas mileage is beneficial.

We think miles driven increases are beneficial, but they're so miniscule that they're just not big drivers of the business overall.

We think the most important driver of what happens with the DIY business is what our AutoZoners do to provide great service to our customers.

And I think we're doing a really, really good job of that right now.

The morale of this organization, of our teams in our stores, in particular, they know they're winning, they feel like they're winning, they feel good about it.

And I think that that's translating into better service, which is translating into better performance.

Got it.

And then my follow-up on the expense growth, so up high single digits again here in Q1.

And you've been clear that that's going to remain elevated.

But with the acceleration in comp sales we've seen over the past few quarters, is there any thought as to pushing on these tech- and store-based investments even further and above your initial plans now that we're seeing the benefit come through over the top line?

Yes, that's a great question.

Most of those investments take time.

And so there's a lot of things in the pipeline.

So we might like to accelerate some of them, but there is a certain amount that we can digest as an organization.

There's a certain pace at which we can develop those initiatives.

So we will continue to work hard.

We will continue to drive them where we can.

But I expect it to be a little bit more steady state.

All right.

Congrats on a nice quarter.

Thank you.

Thank you.

Our last question comes from Greg Melich from Evercore ISI.

So I'll make it count.

So first, I want to circle back.

Thanks for your -- the incremental on the tariffs.

I know we started to see some exemptions coming through and also -- but we still have the timing of pricing through what's already happened.

Could you help us understand, is that any potential benefit maybe from refunds coming from any exemptions on certain products?

And then when we think about further price increases, is it just as simple as taking when the tariffs went up and then think about your inventory turning once a year as to when it would actually flow through?

Yes, I think that the second part of that is absolutely right, Greg, and it's going to depend on the category.

Certain categories turn faster or slower than other categories.

So as we turn that inventory, the cost -- the costs in our gross margin increase, and we're trying to manage that consistent with how we manage the retail increases for the sole purpose of not shocking the system.

We've had lots of different cost increases over the years for a variety of reasons, whether that's oil-based prices going up, lead, steel, whatever the case might be.

But when it's 25%, that's a significant increase.

And so we're trying to do that over 3 or 4 tranches, so not to shock the system and to try to provide the customer with as good a value as we can for as long as we can.

So far, I'm very pleased with how our merchants have managed those issues.

What was the first part of your question, Greg?

The first part was we've started to see some exemptions from the USTR on certain product SKUs.

Is that happening for you guys on anything material?

We have filed some exceptions.

Don't know all the answers at this point in time.

Some of them would impact us in a beneficial way if we were able to get them.

Got it.

And then on inventory, I know that it's been growing, up 9%.

Is that a timing issue?

Or is it just up against a lower comparison?

What should we think about that as a normal growth rate, back towards sales in coming quarters?

I don't think it will be back towards sales in coming quarters.

You have some inflation baked in there as well on the inventory.

And then again, I think a couple of points that I'm going to refer that Bill pointed out, highest in-stock level ever for the corporation, continued investments in Hubs and MegaHubs.

Again, inventory closer into the customer wins, and we're going to continue to go down that path.

We want to continue to maintain our AP-to-inventory ratio above 100%, and we have successfully.

I think that we'll probably be at this level, a little bit lower maybe, but not certainly at the sales growth rate.

That's great.

Congratulations, guys, and have a great holiday.

You too.

Happy holidays.

Thanks.

You too, Greg.

Okay.

Before we conclude the call, I'd just like to take a moment to reiterate that we believe 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 have an exciting plan that should help us 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, and we'd like to wish our AutoZoners, and everyone on the call, a very happy and healthy holiday season and a prosperous New Year.

Thank you very much.

And that concludes today's conference.

Thank you for your participation.

You may now disconnect.