AutoZone Inc Q2 2023 Earnings Call

Good morning and thank you for joining us today for AutoZone's 2023 second quarter conference call. With me today are Jamir Jackson, Executive Vice President and 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 are available on our website www.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them. As we begin, we'd like to thank and congratulate our AutoZoners across the company for their commitment to delivering exceptional customer service. For the second quarter, our team delivered total sales growth of nine and a half percent versus eight point six percent in the first quarter, in line with our expectations. We were pleased with this performance as we were up against 15.8 percent total sales growth in last year's second quarter. We could not have achieved these results without phenomenal contributions from across the organization. Once again, our AutoZoners' efforts generated double-digit domestic commercial growth and single-digit domestic retail same store sales growth. As we move further and further away from the societal impacts experienced as a result of the pandemic, we are very pleased with our team's ability to not only retain the tremendous growth we experienced over the last three years, but continue to grow on top of those phenomenal levels. Our team is relentlessly focused on getting back to normal, or as I call it, quote unquote, exiting pandemic mode. We must get back to our well-known and highly regarded flawless execution. In all candor, we still aren't there yet, but we also have to reignite our innovation engine. We have some very good initiatives in development in both retail and commercial, and we have some significant improvements underway in our supply chain as we modernize and expand it for the next decade of growth and beyond.

We are halfway through our fiscal year and we are pleased with our performance so far. More encouraging, we feel good about the balance of the year and know our AutoZoners are keenly focused on delivering great service and terrific performance. This morning we will review our second quarter same store sales, DIY versus DIFM trends, our sales cadence over the 12-week quarter, merchandise categories that drove our performance, and some regional callouts. We will also share how inflation is affecting our costs and retails and how we think inflation will impact our business for the remainder of our fiscal year. Let's now move into more specifics on our performance. Domestic same store sales are up 5.3 percent, our net income was 477 million, and our EPS was 24.64 cents a share, increasing 10.5 percent. Our domestic same store sales comp was on top of last year's 13.8 percent and in line with last quarter's 5.6 comp. On a two-year basis, we delivered a 19.1 percent comp, and get this, on a three-year basis, a 34.3 stacked comp. Our team once again delivered amazing results despite the comparison to the last couple of years being the hardest quarterly compare for the entire fiscal year.

Now let me spend a few moments on growth. Our growth dynamics in the quarter, our growth rates for retail and commercial are both strong, with domestic retail sales up nearly five percent and domestic commercial growth north of 13. We continue to set commercial records with 955 million dollars in sales, another impressive quarter as we generated 111 million more in sales than in Q2 last year. On a trailing four quarter basis, we delivered just under 4.5 billion dollars in annual commercial sales, up an amazing 19 percent over last year. We also set another Q2 record for average weekly sales per store at 14,500 versus 13,500 last year. Domestic commercial sales represented 30 percent of our domestic auto parts sales versus 28 this time last year.

It was encouraging to see our transaction trends improving from last quarter. Our retail transactions meaningfully improved and were down just 2.2 percent for the quarter, while our commercial transactions were up mid-single digits and improving. Our average ticket in both retail and commercial experienced solid mid-single digit growth. Ticket growth decelerated from Q1 as we began to lap the acceleration in inflation we experienced this time last year. We're beginning to see signs of product cost and freight inflation slowing, and we expect to see these begin to return to historical norms over time. We are continuing to experience substantially higher wage inflation than historically, in the mid-single digit range, more than double our historical experience. While the staffing environment is substantially improved versus this time last year, we don't envision wage inflation abating soon as there continues to be regulatory and market pressures. Well, we have to manage through these external forces, our focus continues to be on driving profitable market share growth, particularly in units and transactions. Our growth initiatives are doing just that.

Our growth initiatives are doing just that and include new store unit growth, improved satellite store availability, hub and mega hub openings, improvements in coverage, leveraging the strength of the Duralast brand, enhanced technology to make us easier to do business with and more efficient, reducing delivery times, enhancing our sales force effectiveness, and living consistent with our pledge by being priced right for the value proposition we deliver. Our goal remains over time to become the industry leader in both DIY and commercial. Our strategy, execution, and market momentum give us confidence as we move forward.

Digging deeper into our domestic DIY business this past quarter, we delivered a positive 2.7 percent comp on top of last year's 8.4 percent. Our DIY results were similar to last quarter's results on a one-year and two-year basis and accelerated on a three-year basis. As previously said, our ticket growth was up five percent versus last year, and we're pleased with our transaction count trends improving as we reported transactions down just two percent. These results are very strong considering the difficult comparison to last year. From the data we have available, we continued to retain the majority of the dollar share gains we built during the pandemic, and we continue to grow unit share, a critical measurement of our success. Our performance gives us continued conviction about the sustainability of our sales growth for the remainder of the year.

As we've shared forever, our second quarter is always the most volatile sales quarter due to the holidays, their timing shifts, and more importantly weather, specifically extreme temperatures, which all can have a tremendous impact on our weekly sales. This quarter was no different, with softer sales at the beginning of the quarter when the weather was mild and wet, followed by a large spike around Christmas with the very cold temperatures the country experienced. We exited the quarter with normalized growth rates. We do believe we had enough harsh winter weather that we won't be talking about the lingering effects of a mild, wet winter for the next several months. Our attention has now turned to tax rebate season, which historically drives enormous demand in our category.

Regarding our retail merchandise categories, our sales floor outperformed hard parts with approximately a one and a half percent difference between them. Our relative outperformance in sales floor categories is attributable to the discretionary categories improvement as gas prices naturally have come down and the consumer has shown surprising resiliency. Our discretionary categories performed better. The discretionary categories represented approximately 18 percent of our DIY sales in the quarter. We were encouraged to see our battery, oil, and wiper categories perform well and successfully lap very strong performance last year. These categories have exceeded our expectations all year. Our friction category for both DIY and commercial performed below our expectations for much of the quarter; however, it bounced back late and we are encouraged by our recent trends. We believe both our sales floor and hard parts businesses will continue to do well this spring as we expect miles driven to continue improving while our growth initiatives continue delivering solid results.

Let me also address pricing. In Q2, we experienced a high single digit pricing inflation in line with cost of goods. We believe both numbers will decrease in the current quarter as we begin to lap the onset of high inflation last year. To be clear, we do not believe inflation is going away, especially wage inflation, but expect it to slow a bit as the economy slows. I want to highlight that our industry has been disciplined about pricing for decades and we expect that to continue. Most of the parts and products we sell in this industry have low price elasticity because purchases are driven by failure or routine maintenance. Historically, as costs have increased, the industry has increased pricing commensurately to maintain margin rates, increasing margin dollars. It is also notable that following periods of higher inflation, our industry has historically not meaningfully reduced pricing to reflect lower costs. Over the last three years, we've encouraged investors to keep a keen focus on our two and three year comparisons. As we return to normal, we believe our year-over-year comparisons will be more and more relevant. While it's difficult to predict sales, we are excited about our growth initiatives, our team's improving execution, and the tremendous share gains we have achieved in both sectors.

For our third quarter 2023, we expect our sales performance to be led by the continued strength in our commercial business as we execute on our differentiating initiatives combined with a resilient DIY business. We will, as always, be transparent about what we are seeing and provide color on our markets and performance as trends emerge.

Before handing the call to Jamir, I'd like to give a brief update on our supply chain initiatives. I'll start with our in-stock position. I spent several quarters talking about how we were not back to where we were pre-pandemic. I'm pleased to report we are continuing to improve and are very close to our targets. Our merchandising and supply chain teams have worked diligently and creatively to get our levels back up, and we've made enormous progress. There are still a few categories where we are not where we want to be, but we have line of sight to putting this behind us. This has taken a lot of effort by our vendor community, and I'd like to publicly thank them for their tremendous efforts as well. We know this will pay future dividends. Second, our supply chain initiatives that are in flight to drive improved availability are on track. One we've often highlighted is our expanded hub and mega hub rollouts. We know intelligently placing more inventory in local markets closer to the customer will lead to our ability to continue to say yes to our customers more frequently and in turn drive sales. Additionally, we previously announced the development of two new domestic distribution centers and additional capacity in Mexico. All three efforts are under construction and are expected to be completed by early fiscal 2025. These distribution centers will allow us to not only reduce drive times to stores but also increase our capacity. With the tremendous sales growth we've experienced since 2020, the additional capacity will enable us to carry more slower turning inventory that is not yet in high demand. I'm also excited we opened a facility on the West Coast recently to handle direct import product on a timelier and more effective and efficient basis. This new West Coast facility is already paying dividends by allowing products ordered abroad to be distributed to our other DCs to reduce safety stock and drive productivity. Our supply chain strategy is focused on carrying more products closer to the customer, and we believe it has been a significant contributor to our recent sales success, especially in commercial. Simply put, every time we intelligently add inventory to our network, our sales grow.

Lastly, we plan on continuing to grow our business in Mexico and Brazil. At almost 800 stores combined across the two markets, these businesses had impressive performance again this quarter and they should continue to be key contributors to sales and profit growth for decades to come. We are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil. In Brazil in particular, we are targeting to expand our store footprint significantly and aggressively over the next five years. We are very excited about our growth prospects internationally. We are dedicated to growing our business in a disciplined and profitable manner well into the future, and we know with our AutoZoners leading the charge, we will continue to be very successful. Now turn the call over to Jamir Jackson. Jameer.

Thank you, Jamir. We are proud of the results our team delivered in the second quarter, but we must continue to be focused on superior customer service and flawless execution. And our culture of always putting the customer first is what defines us. As Jamir said a moment ago, we continue to be bullish on our industry and in particular on our own opportunities for the remainder of the year. We will continue to invest in initiatives that drive an appropriate return on capital, and we continue investing where our returns are the highest. For the remainder of fiscal 23, we are launching some very exciting initiatives. This year, not only will we be opening roughly 200 stores across the U.S., Mexico, and Brazil, but we will be opening many more mega hub and hub stores. And we're focused on initiatives to continue driving strong performance in both our retail and commercial businesses. For the remainder of 23, we are keenly focused on relentless execution. We will not accept shortcuts. We remain focused on achieving our store opening goals both domestically and internationally. We're working diligently to expand and enhance our supply chain, and we have to achieve this growth all.

While managing our cost appropriately, simply said, we have to focus on exceptional execution in order to drive continued share gains. We know that investors will ultimately measure us by what our future cash flows look like in three to five years from now, and we welcome and accept that challenge. I continue to be bullish on our industry and in particular on AutoZone, which is led by AutoZoners. Now we'd like to open up the call for questions.

Good morning.

Yeah, that's a fantastic question, Brett. I'll start, and Jamir, if you're welcome to build on it if you want to. First of all, I think it's important for you all to understand as we saw these enormous spikes in the freight cost, we did not pass all those costs along. I'll use brake rotors for instance. The cost of shipping brake rotors from China to the U.S. were astronomical for a period of time. We couldn't pass all that cost on to the industry, so some of this is we will recoup some gross margin percentages that we didn't get in the midst of the freight issue as we look forward. I think you got to separate the gross margin piece from the labor piece. We are going to continue to see elevated wage growth. We've seen it now for probably five years, Brett. We'll continue to monitor that. Our pricing is really more focused on what our product costs are and what those freight costs are. We will be mindful of labor costs, but generally that's not a big driver of what we do with our pricing to the customer. What we need to do is make sure that we're finding ways to be as efficient as possible with the labor that we have, and over time I think wage rates will go back to more normalized growth rates.

Yeah, first of all, at All Data, we're very focused on providing value via our All Data offerings to our customers. At All Data, we also look for ways that we can enhance our commercial relationship at AutoZone with their customers. We've done a lot of that by cross-selling, leveraging our two sales teams to generate leads for each other. So far, we haven't really integrated a lot with the call it up and down the street customer, but we have made some really meaningful progress with some of our national accounts and have some exciting things underway right now that helps integrate us more and more with them over time. That's certainly the vision that we have is how can we be on their desktop as both All Data and AutoZone in a seamless way, but we got to make sure that we don't drive the customer to that; instead, we have a product offering that the customer wants to adopt.

Yep, thank you.

It's a great question. Frankly, I don't have a great answer for you. As you know, you've been following this industry for a long time. One of the dirty little secrets of the industry is that for decades, basically for the 28 years that I've been in this business, there has been transaction count declines, and they've gone down over time because the technology that has gone into the parts and products that we sell have increased, and therefore the price of those products have increased. I often use the example of spark plugs. Back when I got in this business, we only sold copper-clad spark plugs and they were 59 cents and they would last 30,000 miles. Today we sell iridium spark plugs, it costs $11.99 and they'll last a hundred thousand miles. There's many, many examples like that. A 2.2% decline in retail transaction counts is historically very good. I just would caution everybody, as I've mentioned in my prepared remarks, Q2 is our most volatile quarter every year, and it is really driven by weather patterns. So I don't want to read too much into an improvement in Q2. We were very excited to see it. Let's see how we do in Q2 and Q3. We're also still going up against the massive surge in growth that we had since 2019 as a result of COVID. So what we're focused on is, we thought for a period of time that some of the sales growth that we experienced during COVID we would give back. We're sitting here and have been for the last year saying, I don't think we're going to give it back, and now we're saying, look, we think we can grow from here and maybe have normalized growth rates and maybe even accelerated slightly growth rates to what we experienced historically because of our growth initiatives. That's the way we're thinking about it. Does that make sense?

Certainly does. I mean, one of the things that we've been really clear about is that we're going to grow SG&A in a disciplined way as we create a faster growing business. The two ways that we've done that: one is investing in labor to maintain high levels of customer service. You saw us do that throughout the pandemic and it paid great dividends for us during that time frame. The other thing we've talked about is investing in a disciplined way in IT, which is enabling growth in both our DIY and our commercial business. Every one of our growth initiatives, whether it's on the retail side of the business or the commercial side of the business, includes some element of improving the customer experience. And those things have required us to accelerate some of our investments in IT. We like those investments. They are improving the customer experience, they're also improving the experience for our AutoZoners, and quite frankly, we think we'll get benefits in terms of productivity in the future.

Thank you.

Great question. So a couple things I'll highlight. As I mentioned, we've had 10 straight quarters of double-digit sales growth, and quite frankly, six of the last eight have been above 20%. We like the competitive dynamics in the marketplace today. We also like the fact that we're underpenetrated. We're a 4 out of 5 share in a huge market that's approaching $100 billion, so there's a tremendous opportunity for us to create a faster growing business. If we look at our business on a two-year stack basis, we're over 45%, so we like where we are from a commercial standpoint and all the initiatives that we have in place: improving the quality of our Duralast brand, expanding our assortments with our Mega Hubs, improving our delivery times, leveraging technology, and the competitive pricing dynamics that we saw in the marketplace a couple of years ago that we addressed give us a lot of confidence about it. So we've been comfortably double digits. You've heard us say that our goal is to continue to grow that share, and growth in that share means that we aspire to have a business that's growing double digits really as far as the eye can see.

Yeah, that's a great question. I wish I could answer. There's just so many pushes and pulls right now in the economy with our costs that I'm not sure we can answer that. That seems like a reasonable assessment, but we're just going to manage through it just like we have. We've gone through some pretty big cycles over the last 24 months, and we're going to manage our business appropriately whether it's 5% or 7%, we're just going to manage through it.

I think that's a reasonable assumption. We hope that we can continue to grow transactions. I talked about the challenges that are related to that, but our goal is to grow transactions. I also mentioned in the prepared remarks that we're very focused on unit growth. We believe that's the lifeblood of this organization, and we're focused on how do we grow units over the long term in both our retail and commercial business. We've been very pleased with the unit market share gains that we've had over the last three years, and we're continuing to grow unit share even after the growth we've had over the last three years.

Thank you.

Well, terrific questions. I want to be clear about one thing. I don't believe the vast majority of the growth that we've seen in the commercial business over the last three years was a result of the pandemic. There's no question the outsized growth in our DIY business was mainly attributable to the pandemic. I don't think that was the case with commercial. I'm sure it had some positive effects, but I think the strategy that we began to deploy about four years ago have really been the driver of our commercial performance. Now, as we continue to further mature on that strategy, we have seen some deceleration in our commercial growth. It's still fantastic, but it's not growing in the 20s. Our goal now is what's next? And we're working on that even as we speak. What are the next levers that we're going to pull to continue to grow in the commercial business? Just a reminder, we've got mid-teens market share in the retail business, and we have about four percent total market share in the commercial business. So we've got a tremendous runway in front of us. When you talk about certain markets and what do we see, we certainly have some markets that are more mature than others. I would say the most encouraging thing to me is to see how broad-based the acceleration has been in our 61 regions that we have across the United States. But I was in a market last week, arguably our most mature market, I'm not going to tell you where that is, and it has significant hub coverage and it has significant mega hub coverage, and in that market we continue to grow at very rapid rates. And so I am particularly optimistic as we continue to deploy the strategy of mega hubs. So we still have roughly a little over 80 mega hubs today. We're going to 200, and hopefully in short order, and then we're going to get to 300 hub stores. So that'll be 500 stores in the United States with materially different product assortments than we've had historically. To me, that is the biggest part of our strategy.

Yeah, I mean we always see that. But what my point was, we've been through years where we just didn't have a winter. And it's not just the spring, frankly, it's as much in the summertime where we just don't see the parts failures on the failure side of the business that we do historically, and the maintenance side. And it's snow and ice and cold all put stress on automobiles, and we generally see that over the next six to eight months once the winter subsides. So that's what I was really getting at. I do have a bit of caution right now. I talked about tax rebates that are flowing right now. The one thing that I worry about a little bit is we haven't had great weather in the last week or so. We need to get some good weather so DIYers can crawl underneath their cars while these tax rebates are flowing, because we see a massive surge during this time of the year when our customers have more discretionary dollars.

Yep, thank you. Thanks.

Yeah, so clearly used cars are still in tight supply and prices are up. We've seen prices moderate a little bit year over year, but they're still up 24% or so over a two-year basis. I think the second dynamic associated with that is the fact that financing costs have gone up fairly significantly as well. So you've got interest rates that have made financing a vehicle, whether it's new or used, significantly more expensive. I think the combination of those two dynamics puts tremendous pressure on consumers. And what we've seen historically is that when the consumer is under pressure, whether it's a recessionary cycle or it's a cycle where new and used car prices spike, they tend to hang on to their vehicles longer, invest in repairing those vehicles, and ride to the other side of tougher market conditions. And we certainly think that that's going to be the case. So while the prices have come down, we still see a very tight market that's out there today, and quite frankly, a market that's significantly more expensive than what consumers experienced prior to the pandemic.

Yeah, we're definitely not in double digits in any markets that I'm aware of. I would think maybe we're at six percent, maybe in that kind of ballpark. But look, if we have 16% or whatever share in retail, my thing is, why can't we have that in commercial? And that's the kind of thought process we need to have. I think one of our challenges is sometimes we think about where we are and it limits what we think about the possibilities. We're trying to eliminate some of those glass ceilings and say, why don't we have the same amount of share in both, which would mean the commercial business would be meaningfully larger than the retail business. And the good news for us is it's not just focused on new customers, but it is increasing our share of wallet with our existing customers. And to Bill's point, that's where we're focused as a company, getting what we believe our fair share or what our entitlement should be. We're pretty excited about those initiatives going forward.

Thank you.

I think as I said before, I think part of what's changed is some of the massive improvements that we've made in our new strategy on commercial acceleration have matured more, but they're not mature. And so we are very pleased with the commercial growth that we've experienced over the last six months. And as I also said, we're looking for those next items that are the next part of our strategy that are going to drive accelerated growth. And we're continuing to win market share. I would venture to say that the commercial market is not growing as fast as we're growing, which the knock-on to that is that we're growing market share, and we're pleased with our progress.

Yeah, well, we've never talked about SNAP. I don't think that that's a big driver for our business. The data we have available to us shows that tax refunds are remarkably similar to the way they were last year and are slightly up. We look at that data, it usually comes out on Mondays, and we see where the big drops happened. Last week was a big drop as it was last year on tax refunds. So as far as we're concerned, we see everything on track. We're hoping that we get some great weather that's very conducive to DIY, and that those customers come to us.

Thank you very much.

Well, before we conclude, I want to take a moment to reiterate. We believe 2023 will continue to be a solid year for our industry, and our business model is working. We must take nothing for granted as we understand our customers have alternatives to shopping with us. We have exciting plans that should help us succeed for the future, but I want to stress that this is a marathon and not a sprint. As we continue to focus on the basics and strive to optimize shareholder value for the future, we are confident AutoZone will continue to be successful. Thank you for participating in today's call. Have a great day.