AutoZone, Inc. $AZO Q1 2023 Earnings Call

Good morning and thank you for joining us today for AutoZone's 2023 first quarter conference call. With me today are Jamir Jackson, 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. As we begin, we'd like to thank and congratulate our AutoZoners across the enterprise for their commitment to taking care of our customers, which led to the strong results they continue to deliver. It has been a busy first quarter of our new fiscal year as every day we strive to get back to normal and exit quote unquote pandemic mode. This quarter we opened our new direct import distribution center on the West Coast, continue to improve our in-stock position, and we had our first full national sales meeting since the pandemic began. In fact, we returned to having national sales meetings in every country where we operate and at all of these meetings, they are critical to our success where we celebrate our past accomplishments and lay the groundwork for our future success. Most importantly, they allow us to inspire each other and grow and nurture our unique and powerful culture. For the quarter, as our teams delivered exceptional service, their efforts led to our overall sales growing 8.6 percent on top of 16.3 percent last year. Our two-year growth rate marks some of the highest ever. We could not have achieved this success without phenomenal contributions from across the organization. Our AutoZoners' efforts generated a positive and accelerating retail same store sales comp along with another strong commercial comp for the quarter. Thank you, AutoZoners, for always putting customers first, which led to this success. This morning we will review our Q1 same store sales, DIY versus DIFM trends, our sales cadence over the 12-week quarter, merchandise categories that drove our performance, and any regional discrepancies. We'll also share how inflation is affecting our costs and our retails and how we think inflation will impact our business for the remainder of FY 23. Our domestic same store sales comp was a solid 5.6 percent this quarter on top of last year's 13.6 percent. On a two-year basis we delivered a 19.2 percent comp and on a three-year basis of 31.5 percent comp. Our team once again delivered amazing results despite these difficult comparisons. Let me spend a few moments on growth dynamics in the quarter. Our growth rate for retail and commercial were both strong with domestic commercial growth of 15 percent. We set a first quarter commercial sales record of over a billion dollars in sales. Another impressive quarter as we generated $138 million more in sales than in Q1 last year. On a trailing four quarter basis, we delivered just under $4.4 billion in annual commercial sales, up an amazing $820 million over last year. We also set a Q1 record for average weekly sales per store at $16,000 versus $14,400 just last year. Domestic commercial sales represented 29% of our Domestic Auto Parts sales versus 27% last year. Our sales growth in the quarter was driven by transaction growth from new and existing customers along with higher tickets as we price for inflation. Our commercial growth of 15%, while still very impressive and well ahead of industry growth, did slow and unfortunately we broke our streak of six straight quarters of 20 plus sales growth. While we could easily explain this resulted from a difficult comparison to last year's Q1 amazing growth of 29.4 percent, we also saw our transaction counts decline nearly four points from the pace we were growing in Q4 of fiscal 22. That said, we continue to be pleased with the results from the key initiatives we have been working on for the last several years: improved satellite store availability, Hub and Mega Hub openings and improvements in coverage, the strength of the Duralast brand, better technology to make us easier to do business with, reduced delivery times, enhancing our sales force effectiveness, and living consistent with our pledge by being priced right for the value proposition we deliver. We believe our offering to our customers is better than ever and we continue to hear great things from our customers and prospective customers about the strength of our value proposition as we continue to execute our commercial acceleration strategy. Our goal remains over time to become the industry leader in both DIY and commercial in every geography where we operate. Our strategy, execution, and market momentum give us tremendous confidence as we move forward. We're also very proud of our organization's performance in domestic DIY. Our growth in retail since the beginning of the pandemic has been remarkable, representing the highest three-year growth we have experienced in my 28-year tenure with the company. We delivered a positive 2.6 percent comp this quarter on top of last year's nine percent, and versus last year's quarter's growth, DIY grew on a two-year basis and on a three-year basis. While our ticket growth was similar to last quarter of just over seven percent, we're encouraged that our transaction count trends improved, decreasing by four percent. These results are very strong considering the difficult comparison driven by the lingering effects of stimulus last year. From the data we have available, we continue to retain the vast majority of the enormous dollar share gains we've built during the initial stages of the pandemic and more importantly we continue to grow unit share, a critical measurement of success for us. And our recent performance gives us continued conviction about the sustainability for our fiscal year. In terms of sales cadence, our total same store sales trends were very consistent, increasing in the mid single digit range for each of the four week periods. In addition, for Q1 our two-year comp was 19.2 percent and our three-year comp was 31.5 percent, and relatively consistent over the four week periods. We are incredibly pleased with the sustainability of the very large sales and share gains we generated since the beginning of the pandemic. Weather did not have a material impact on our sales this quarter. On a national basis, weather trends were very similar to last year. Regionally, we saw less rainfall in the West and Southeast than last year, but overall we didn't feel this drove our results materially. This winter's weather forecast calls for a slightly colder winter, as we've recently experienced cooler weather beginning sooner. As a reminder, historically extreme weather (cold or hot) drives parts failures and accelerated maintenance. During the quarter, there were geographic regions that did better than others, as there always are. This quarter we saw comp sales in the Northeastern and Midwestern markets underperform the balance of the country by about 260 basis points. We believe our underperformance in these markets was driven by milder and wetter weather this year. For our second quarter, winter weather is likely to meaningfully influence our results. As a reminder, our Q2 is historically by far and away the most volatile sales quarter as weather patterns can greatly vary week to week and we have key holidays that fall on different days of the week. At the moment, our forecasting team is telling us winter will likely be colder than last year's Q2, and if that happens, that would be a positive for our outlook. Now let's move into more specifics on our performance. Same store sales were up 5.6%, our net income was $539 million, and our EPS was $27.45 this year, increasing 6.9 percent. Regarding our merchandise categories in the retail business, our hard parts outperformed sales floor categories with approximately a one percent difference between them. With elevated gas prices, our discretionary categories remain soft. The discretionary categories represented approximately 18 percent of our DIY sales and were down two and a half percent versus up eight percent last year. In general, the categories that are driven by failures performed well, and we were encouraged to see our battery category successfully lap very strong performance last year and again exceed our expectations. We believe our hard parts business will continue to do well this winter as we expect miles driven to improve while our growth initiatives are delivering solid results. Let me also address inflation and pricing. In Q1, we experienced 11 percent pricing inflation in line with cost of goods which was also up 11 percent. We believe both numbers will decrease slightly in the current quarter as we begin to lap the onset of high inflation last year. But 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, thereby increasing margin dollars. It's also notable that following periods of higher inflation, our industry has historically not meaningfully reduced pricing to reflect lower costs. While we continue to be encouraged with the current sales environment, it still remains challenging for us to forecast near to midterm sales as the economy impacts our customers. As I've said on the past six quarterly calls, sales have been consistent on both a two-year and three-year stacked comp basis. While it's difficult to predict sales going forward, we are excited about our growth initiatives, our team's execution, and the tremendous share gains we have achieved in both sectors. Over the past year and a half, the overall macro environment has been favorable for our industry despite inflationary pressures for our customers. And even if these near-term trends fade, we believe that we are in an industry that is positioned for solid growth over the long term. For our second 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 the 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 over to Jamir, I'd like to give a brief update on a few of our key business priorities for the new fiscal year. First, we continue focusing on our supply chain with two initiatives that are in flight to drive improved availability. One is our expanded Hub and Mega Hub rollouts. We know intelligently placing more inventory in local markets will lead to our ability to continue to say yes to our customers more frequently and in turn drive sales. Secondly, we're expanding our distribution center footprint. We announced the development of two new domestic DCs and one additional DC in Mexico. These DCs will allow us to not only reduce drive times to stores but also increase our capacity. Note that we didn't expect to grow our business 30 plus percent in three years as we have, and the additional capacity will enable us to carry more slower turning inventory that is not yet in high demand. I'm also excited to announce that we opened a facility on the West Coast to handle direct import product on a timelier basis. This facility will flow products ordered abroad and distribute them 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 success, especially in commercial. And we have initiatives in place to continue our growth trajectories in both our domestic retail and commercial businesses. Additionally, we plan on continuing to grow our Mexico and Brazil businesses. At almost 800 stores combined, these businesses have had impressive performance again this quarter and 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 significantly and aggressively expand our store footprint over the next five years. We are very excited about our growth prospects internationally. Now I'll turn the call over to Jamir Jackson.

Mr. Mayor? Fiscal 2023 is off to a solid start, but we must continue to be focused on superior customer service and flawless execution. Execution and our culture, a 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 new year. Our team continues to work collaboratively with our suppliers and together we've done a good job improving our in-stock position, but we still are a couple of hundred basis points below our historical norms. We're also being smart about adding new inventory coverage. We're meeting the ever-growing needs of our customers, especially our commercial customers, by being able to say 'yes, we've got it.' It's a requirement. For the remainder of fiscal 23, we are launching some very exciting initiatives. Not only will we be opening roughly 200 stores across the U.S., Mexico, and Brazil, but we'll be opening more Mega hubs and hub stores and we're focused on initiatives in place to continue driving strong performance in both our retail and commercial businesses. For the remainder of fiscal 2023, we are keenly focused on relentless execution. We will not accept shortcuts. Our vendors must return to providing us the right amount of merchandise at the right time. Every store has to be staffed right every hour of every day, and our processes need to function correctly always. We have to meet our store opening goals and timelines. Simply put, we have to focus on...

Exceptional execution has made a difference for us for decades. We know that investors will ultimately measure us by what our future cash flows look like three to five years from now, and we very much welcome that challenge. I continue to be bullish on our industry, and in particular on AutoZone. Now we'd like to open up the call for questions.

Can I jump in and add a little color on one other element? Not on LIFO, but on our normal product cost. Many of those freight costs are being capitalized as part of the inventory cost, so we're going to have elevated product costs outside of LIFO, for you know, in a business that's turning one and a half times a year, for nine months or a year, whatever the case may be. Once those freight costs abate, we'll continue to have pressure on product costs for an extended period of time.

Yeah Brian, so when we're talking about traffic, we're predominantly talking about our DIY business. I will be first to tell you that our DIY strength in Q1 was stronger than we expected, considerably stronger than we expected. And yes, our traffic counts are down 4%, but that was measurably better than the 8% in Q4. Remember, and you've been following this industry for a long time, there is a natural drag on DIY traffic counts that have been happening for 25 years. As technology has gotten better and better on the products that we sell, they last longer, but there's also inherent inflation in those product costs as technologies are added. So a 4% traffic decline in the DIY business is not abnormal in normal times. And to see it down 4 after the growth that we've seen over the last three years was very encouraging to us.

You bet. Thank you. Thanks.

Well, that's a strong, strong statement, Simeon, 'in the all clear'. You know, I think we still have a level of anxiety on what the next year or so is going to look like coming off of unprecedented growth over the last three years. If we were on this call last year, we had expectations that our same store sales would decline, and they didn't; they were up considerably and they were positive DIY. Here we are again, comping off a positive DIY number with another positive DIY number. So I think the farther we get away from the pandemic and the more resiliency we see in the DIY business, the more confidence we have that the gains that we picked up during the pandemic are sustainable. That said, I wouldn't characterize it as quote unquote 'all clear'.

Yeah, I look at the macro in a pretty broad way. You've got a couple dynamics going. One, you have an aging and growing car park. And used car prices, while they've started to abate, they're still up almost 30% over the last two years. New car prices are up closer to 20%, and you're in an environment where you have rising interest rates that have made financing more challenging. So we do believe that it is still a little bit of a tailwind for our business. And more importantly, we've been managing our business to take advantage of all the robust market opportunities that we have, and this is just one portion of that. As we've talked about, the growth that we're seeing is not just that macro strength, but inflation has been our friend to some extent, driving higher prices. Volumes held up under those dynamics, and our growth initiatives have helped us create a faster growing business in both DIY and DIFM. So when you take the combination of what you're seeing from inflation, from our growth initiatives, from the work that we've done with hubs and mega hubs, and this macro strength, those are all the things that are in the soup, if you will, in terms of how our business is growing.

Yep, you too, Sammy.

Sure. Okay. Yeah, our in-stock position today is meaningfully better than it was this time last year, 18 months ago. It's up a little bit from this time last year, it's up a little bit from Q4, but we're still about 200 basis points below our historical expectations and experiences. When will it resolve itself? Frankly, Kate, I would have thought it had been resolved by now, but there are certain product categories that are still a challenge, and we're looking to continue to find new sources in some of those categories and new geographies in some of those categories to help us get past it. But we feel pretty good about where we are. We feel very good about where we are competitively.

Yeah, our sourcing has not changed a significant amount at this point in time. We do have some objectives to diversify the geographies with which we source, basically every category. As far as having higher expectations for in-stock, right before the pandemic we had reached an all-time high which was 100 basis points ahead of where we were historically. So our supply chain team will need to break our old high, which was 100 basis points higher, so that'd be about 300 basis points ahead of where we are right now. And I think they'll get there, it may take a little more time.

Thank you. Have a great day.

That's a great question, Michael, and one that frankly I'm not sure that I can factually answer. I will start with 15% growth in our commercial business. We are all excited about that, especially coming off of the growth that we've had the last couple of years. So we are pleased with the performance in our commercial business. You know, it's widespread. The slight slowdown that we've experienced is across the board. It's not national accounts, it's not up and down the street, it's not our Provantage customers. We've seen a general slowdown across different customer bases and across geographies. So I don't think that it's anything that we've done at AutoZone. I think we've grown very fast and we grew 15% on top of it, and we're pleased with that.

Yeah, I'll leave it to you guys to define the trends that you want to do. What I can tell you is our pricing investments that we made about 18 months ago had nothing to do with our close-in competitors. They were focused on looking at our value proposition versus the 80% of the market that's outside of our close-in competitors and trying to make sure that we were priced right for the value proposition that we were delivering. We've been very pleased with that and pleased with our belief that our outside growth over the last couple of years has been driven not by our taking share from our close-in competitors, but taking share from the broader market. And so I'm not seeing anything by any indications based upon either of our close-in competitors' pricing that we see anything very different.

Thank you.

Sure, Daniel. Thank you. One of the things that we've rolled out over the last couple of years is handheld devices for everybody that's in the store picking the products and everybody that's delivering to a commercial customer. That helps us ensure that we have the exact right product and it helps us manage delivery times, which we have brought our delivery times down about 20% since we deployed that technology. The other big part of it – and there are a lot of different technology things that we're doing along the way – but the other big one that we've done is really how we interact digitally with our commercial customers, from providing them access to invoices to making us seem more seamless to operate together, just trying to take the pressure points out and make a frictionless transaction with us. The handheld pieces have been deployed; we're continuing to refine the technology, and I suspect that those refinements will probably take up to another year or so. I think the digital integration is less far along. We have more new ideas that we have yet to embark on on the digital integration with our customers, and so that's probably got two or three years of legs to it.

Yeah, you know, we're doing a lot of studying on both our retail and commercial customers because if you think about it, this is a pretty unprecedented environment. I know I've never seen inflation rates in the upper single digits and lower double digits. So we're paying particular attention to what customer behaviors are happening. As a reminder, we certainly have more experience in the DIY business than we do in the commercial business. In the last economic shocks, the last four economic shocks in the U.S., our business has significantly outperformed normal periods of time. So we're monitoring that to make sure we understand particularly what's going on with the low-end consumer. And then I think, you know, the expectation – and we don't have nearly evidence here at this point in time – but I believe that there's an expectation that some commercial jobs that would normally be done DIFM can trade down into the DIY sector. So we're watching those kinds of trends, but we don't see anything yet that is alarming to us. We continue to monitor it, and again, we're pretty darn pleased with 15% growth in our commercial business.

Sure. Well, we certainly stepped up openings in the first quarter, but remember we're at about 88% of our stores have the commercial program today. There's no vision that we're going to be 100% or anywhere close to that. As you would imagine, the per store and per program economics of our commercial business over the last couple of years have changed pretty meaningfully, so there are programs that now make sense to be open that two years ago we might not have. We would service them from another program. So that's what you're seeing. We may open another 100 or so, but I wouldn't expect a massive growth rate in commercial openings. And you're exactly right, it typically takes four or five years for those programs to mature. I think as we've gotten stronger, they come out of the gate higher than they did before, and we'll see if the maturity lasts as long as it used to. The one place that is very different, they mature – we don't know how long it takes for them sure – but they come out of the gate much higher. Our mega hubs, it's amazing to see the volumes that we do almost day one coming out of a mega hub.

All right, thanks. I look forward to it.

Great, thank you. Before we conclude the call, I want to take a moment to reiterate: we believe our industry is strong and our business model in particular is solid. We will 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 again 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 very successful. I want to wish everyone a happy and healthy holiday season and thank you for participating in today's call and for your interest in our company. Have a great day.