AutoZone Inc Q4 2023 Earnings Call

Greetings and welcome to AutoZone's fourth quarter 2023 fiscal earnings release conference call. At this time all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note this conference is being recorded. We will now play our safe harbor statement. Before we begin, please note that today's call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent report on Form 10-K and other filings with the Securities and Exchange Commission for discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the company undertakes no obligations to update such statements. Today's call will also include certain non-GAAP measures. The reconciliation of non-GAAP to GAAP financial measures can be found in our press release. It is now my pleasure to turn the floor over to your host, Mr. Bill Rhodes, CEO, Chairman, and President. Sir, the floor is yours.

Thanks Bill, and good morning everyone. I'm honored to be participating in my first earnings release conference call. I will start by reviewing our Q4 overall same store sales, DIY versus DIFM trends, sales cadence over the 16 weeks of the quarter, and merchandise categories that drove our performance, as well as any regional disparities. We will also share how inflation is affecting our growth, our costs, and retails, and how we think inflation will impact our business in FY24. Our domestic same store sales were 1.7 percent this quarter on top of last year's exceptionally strong 6.2 percent growth. I do want to reiterate what Bill said a moment ago: our execution improved materially over the quarter, and that execution, which is a hallmark of our success, will ultimately deliver better results as we move forward. Our domestic commercial business grew 3.9 percent despite lower than anticipated. We believe we grew share and set another fourth quarter record with $1.5 billion in sales. For the full year we generated nearly $4.6 billion, up 8.7 percent from last year. Domestic commercial sales represented 30 percent of our domestic auto parts sales, which is identical to last year. Our commercial sales growth continues to be driven by the key initiatives we have been working on for the last several years: improved satellite store availability, material improvements in hub and mega hub coverage, in addition to aggressive growth in the number of those types of stores. We continue to strengthen the Duralast brand with an intense focus on high quality products, and we continue to deliver technological enhancements to make us easier to do business with. We are also operating more efficiently with improvements in delivery time and enhanced sales force effectiveness. In Q4 we opened 156 net new commercial programs, opening the majority of them late in the quarter, which had minimal impact on sales but positions us well for FY 24 and beyond. With these moves we now have commercial in over 90 percent of our domestic stores. We continue to see tremendous opportunity for commercial sales growth in FY24 and beyond. We're also very proud of our performance in domestic DIY. We had a positive 1.4 percent comp this quarter on top of last year's comp of 1.1 percent. Additionally, for the year we delivered 1.8 DIY on top of a 2.9 DIY comp last fiscal year and an 11.2 percent comp in FY 21. These results are very solid considering the outsized growth we saw during the pandemic. The fact that we continue to retain the vast majority of the share we built during the pandemic and our recent performance gives us continued conviction about the sustainability into FY24.

Now let's focus on the sales cadence over the quarter, which spans 16 weeks, early May through the end of August. As Bill mentioned, our same store sales were flat over the first eight weeks but increased to 3.4 percent over the last eight weeks. We were encouraged by the trends we saw as the quarter ended. Regarding weather, in May and June we experienced cooler and wetter weather trends across the country, which negatively impacted our sales trends. By July however it became very hot across much of the country, and it remained very hot through August. The heat and the associated rebound in sales helped us partially overcome a relatively mild winter, particularly in the Midwest and the Northeast, where weather sensitive hard part categories underperformed our expectation. We anticipate that the summer heat will give us some positive momentum as we head into fall. As a reminder, historically extreme weather, either hot or cold, drives parts failures and accelerated maintenance. Regarding the quarter's traffic versus ticket growth in retail, our traffic was down 0.8 percent while our ticket was up 2 percent. Our transaction count improved as the quarter went along and in fact turned positive over the last eight weeks of the quarter. However, the average ticket being up only 2 percent was the weakest quarterly increase we've seen since FY 2000, as we lap significantly higher inflation a year ago where the ticket was up 8 percent. Regarding commercial trends, we continue to see traffic and ticket growth, but our commercial ticket growth just like retail has shown a marked deceleration compared to recent history as hyperinflation begins to abate. For perspective, our ticket growth was 11 percent in Q4 last year versus roughly 2 percent this year. As expected, some of our commercial customers are experiencing trade down and lower car counts as the consumer comes under economic pressure. In order to continue to grow our comps in 24, we will have to continue to increase share of wallet with our customers. The share data we see continues to encourage us that we are gaining share in the industry despite the macro trends, but recently not in line with our aspirations, which we intend to change. During the quarter there were some geographic regions that did perform differently than others, as there always are. This quarter we saw a material 315 basis point difference between the Northeast and the Midwest compared to the balance of the country, with the Northeast and the Midwest performing lower. As the Northeast and the Midwest experienced a very mild winter with below average snowfall, we've seen less weather sensitive hard parts in this part of the country. Headed into the first quarter of the new fiscal year, we are not anticipating that weather will have a significant impact on sales. Regarding our merchandise categories in the retail business, our sales floor categories outperformed our hard part categories, and our hard part business was essentially flat for the quarter. As I said previously, weather sensitive hard parts were clearly impacted by the milder winter weather, particularly in the Midwest and the Northeast. Let me also address inflation and pricing. This quarter we saw a low single-digit inflation, and as a result our ticket average was up roughly 2 percent. We believe inflation for the first quarter will be similar to the fourth quarter, as the industry is migrating back to pre-pandemic inflation levels and lapping high inflation from a year ago. I want to reiterate that our industry has been very disciplined about pricing for decades, and we expect that to continue. Historically, as costs have increased, the industry has increased pricing commensurately to maintain margins. It is also notable that following periods of higher inflation, our industry historically has not reduced pricing to reflect lower cost, and we believe we have entered one of those periods. For the first quarter of 2024, we expect our DIY sales to be resilient and our commercial trends to improve. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends emerge.

Before handing the call to Jamir, I'd like to highlight and give some color on a few of our key business priorities for the new fiscal year. First, we continue to focus on our supply chain with two initiatives that are in flight to drive improved availability. One is our expanded hub and mega hub rollouts, and secondly we are making good progress on transforming our supply chain. Our strategy is focused on leveraging the entire network to carry more inventory closer to the customer to drive sales growth with speed to customer and expanded availability. Additionally, we plan on continuing to grow our Mexican and Brazilian businesses with 804 stores open internationally. For 12 percent of our store base, these businesses had impressive performance last fiscal year and should continue to grow in 2024. We are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil. Now I'd like to turn the call over to Jamir Jackson.

Thanks Phil, and good morning everyone. As both Bill and Phil have previously discussed, we had a solid fourth quarter stacked on top of an impressive fourth quarter last year: 6.4 percent total company sales growth, a 1.7 domestic comp, a 14.9 international comp on a constant currency basis, a 10.8 percent increase in EBIT, and a 14.7 percent increase in EPS. In addition, our results for the entire fiscal year were very strong as total sales grew 7.4 percent and EPS grew 12.9 percent. We continue to deliver great results, and the efforts of our AutoZoners in our stores and distribution centers have continued to enable us to grow our business and our earnings in a meaningful way. To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q4. For the quarter, total sales were just under $5.7 billion, up 6.4 percent. For the year, our total sales were $17.5 billion, up 7.4 percent versus last fiscal year. I continue to marvel at the strength of our business. Since FY 19, our sales are up an amazing 47 percent or nearly $5.6 billion. Let me give a little more color on sales and our growth initiatives, starting with our domestic commercial business. For the fourth quarter, our domestic DIFM sales increased 3.9 percent to $1.5 billion, and up 25.9 percent on a two-year stack basis. Sales to our domestic DIFM customers represented 26 percent of our total company sales and 30 percent of our domestic auto parts sales. Our average weekly sales per program were approximately $16,700, down 1.8 percent. Now it's important to point out that our sales per program productivity was impacted materially by the late in-quarter openings of approximately 120 new programs. While these openings depress the point-in-time productivity metric, we're encouraged by the growth prospects of these programs and their early contribution to our commercial business. These openings are part of our effort to open more stores with commercial in response to the tremendous opportunity to grow our market share. Our commercial acceleration initiatives are delivering the expected results as we grow share by winning new business and increasing our share of wallet with existing customers. We now have our commercial program in approximately 90 percent of our domestic stores, which leverages our DIY infrastructure, and we're building our business with national, regional, and local accounts. This quarter we opened 156 net new programs, finishing with 5,682 total programs. As I've said since the outset of the year, commercial growth led the way in FY 23, and we feel good about our prospects heading into the new year. For FY 23, our commercial sales were $4.6 billion, up 8.7 percent versus last year and up 37 percent from two years ago. Importantly, we have a lot of runway in front of us, and we expect to deliver on our goal of becoming a faster growing business. To support our commercial growth, we now have 98 mega hub locations with 13 new stores open in Q4. While I mentioned a moment ago the commercial weekly sales per program average was $16,700 per program, the 98 mega hubs average significantly higher sales and are growing much faster than the balance of the commercial footprint. In fact, our commercial mega hub business grew twice as fast as our overall commercial business in Q4. As a reminder, our mega hubs typically carry over 100,000 SKUs and drive tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores. The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business. These assets are performing well individually, and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to thousands of additional parts and lifting the entire network. We have an objective to reach 200 mega hubs supplemented by 300 regular hubs in the near term. Our AutoZoners and our customers are excited, and we're determined to build on our strong momentum. On the domestic retail side of our business, our DIY comp was up 1.4 percent for the quarter. For FY 23, our DIY comp grew 1.8 percent and 4.7 percent on a two-year stack basis. The business continues to be remarkably resilient as we've managed to deliver positive comp growth through this cycle. As Bill mentioned, we saw traffic down slightly and 2 percent ticket growth. As we move forward, we would expect to see slightly declining traffic counts offset by low to mid single digit ticket growth, in line with the long-term historical trends for the business driven by changes in technology and the durability of new parts.

Importantly, our DIY business has continued to strengthen competitively behind our growth initiatives. In addition, the market is experiencing a growing and aging car park and a challenging new and used car sales market for our customers, which continues to provide a tailwind for our business. These dynamics, ticket growth, growth initiatives, and macro car park tailwinds have driven a positive comp. We're forecasting a consistent and resilient DIY business environment for FY 24. Now I'll say a few words regarding our international business. As you may have noted, we changed our disclosure on our international business and we will continue to do so going forward. With 12 percent of our total store base outside of the U.S., the current revenue contribution and the growth prospects moving forward, we simply have to share more about international. We continue to be pleased with the progress we're making in Mexico and Brazil. During the quarter we opened 27 new stores in Mexico to finish with 740 stores, and 17 new stores in Brazil ending with 100. Our same store sales grew 34.1 percent on a reported basis and 14.9 percent on a constant currency basis. We remain committed to Mexico and Brazil, and given our success in these markets, we will accelerate the store opening pace going forward. By 2028, after a robust strategic review of the market and ultimate store account potential, we've revised our strategy and anticipate opening as many as 200 stores annually in these markets in a disciplined fashion, making this an attractive and meaningful contributor to AutoZone's future growth.

Now let me spend a few minutes on the rest of the P&L. Gross margin for the quarter was 52.7 percent, up 118 basis points, driven primarily by a non-cash $30 million LIFO credit this quarter. For Q4 last year we had a $15 million LIFO charge. Excluding LIFO from both years, we had a 37 basis point improvement in gross margin. I will point out that we now have $59 million in LIFO charges yet to be reversed through our P&L, and we expect these to largely reverse over FY24. We're currently modeling $15 million in LIFO credits in Q1 as inflation continues to abate and we turn our inventory. And as I've said previously, once we credit back the $59 million through the P&L, we will not take any more credits and we will begin to rebuild our unrecorded LIFO reserve. Moving to operating expenses, our expenses were up 7.6 percent versus last year's Q4, as SG&A as a percentage of sales deleveraged 34 basis points. The accelerated growth in SG&A has been purposeful as we continue to invest in an accelerated pace in IT and payroll to underpin our growth initiatives. These investments will pay dividends in customer experience, speed, and productivity. We are committed to being disciplined on SG&A growth as we move forward, and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L, EBIT for the quarter was $1.2 billion, up 10.8 percent versus the prior year, driven by our positive same store sales growth and gross margin improvements including the LIFO year-over-year benefit. EBIT for FY 23 was just under $3.5 billion, up 6.2 percent versus the prior year, also driven by strong top line growth. Interest expense for the quarter was $108.7 million, up 70 percent from Q4 a year ago, as our debt outstanding at the end of the quarter was $7.7 billion versus $6.1 billion at Q4 last year. We're planning interest in the $88 million range for the first quarter of FY 24 versus $57.7 million in this past year's first quarter. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 22.4 percent, up from last year's fourth quarter of 22.1 percent. This quarter's rate benefited 22 basis points from stock option exercises, while last year had benefited 70 basis points. For the first quarter of FY 24, we suggest that investors model us at approximately 23.4 percent before any assumption on credits due to stock option exercises. Moving to net income and EPS, net income for the quarter was $865 million, up 6.8 percent versus last year. Our diluted share count of 18.6 million was 6.9 percent lower than last year's fourth quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $46.46, a 14.7 percent increase. For FY 23, net income was $2.5 billion, up 4.1 percent, and earnings per share was $132.36, up 12.9 percent. Now let me talk about our free cash flow for Q4. For the fourth quarter, we generated $1.1 billion of operating cash and $701 million in free cash flow. For the year we generated $2.1 billion in free cash flow. We expect to continue being an incredibly strong cash flow generator going forward, and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong, and our leverage ratios remain below our historic norms. Our inventory per store was down six-tenths of a percent versus Q4 last year, while total inventory increased 2.2 percent over the same period last year driven by new store growth. Net inventory, defined as merchandise inventory less accounts payable on a per store basis, was negative $201,000 versus negative $240,000 last year and negative $215,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 124.9 percent versus last year's Q4 of 129.5 percent. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $1 billion of AutoZone stock in the quarter, and at quarter end we had just over $1.8 billion remaining under our share buyback authorization. The strong earnings, balance sheet, and powerful free cash we generated this year has allowed us to buy back 8 percent of the shares outstanding since the beginning of the fiscal year. We have bought back over 100 percent of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. We finished Q4 at 2.3 times EBITDA, which is below our historical objective of 2.5 times EBITDA. However, we remain committed to our leverage objective, and we expect to return to the 2.5 times target in FY 24. To wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash, and returning excess cash to our shareholders. Our strategy continues to work. We're growing our market share and improving our competitive positioning in a disciplined way. As we look forward to FY 24, we're bullish on our growth prospects behind a resilient DIY business, a fast-growing international business, and a domestic commercial business that is continuing to grow share. I continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders, driven by a high degree of confidence in our strategy and our exceptional team of AutoZoners. One last housekeeping point: I'd like to remind you that in FY24 we will have a 53rd week in our financial results. This extra week will be added to our Q4 results. As a result, our fiscal year will now end August 31st, 2024. In order to model that extra week, I encourage you to look at our financial breakouts of both our fiscal 2019 and 2013 fourth quarters, which were the last two years we had the extra week, and we showed breakouts of the full P&L accordingly. And now I'll turn it back to Bill.