Good morning, and welcome to the AutoZone conference call. Your lines have been placed on listen-only until the question and answer session after conference. Please be advised that today's call is being recorded. If you object, you may 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 10:00 A.M. Central Time, or 11:00 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 are forward-looking statements. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, 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, access to available and feasible financing, the impact of recessionary conditions, consumer debt levels, changes in laws or regulations, war and the prospect of war, including terrorist activity, inflation, the ability to hire and retain qualified employees, construction delays, the compromising of the confidentiality, availability, or integrity of information, including cybersecurity attacks, and raw material costs of our suppliers.
Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of the annual report on Form 10-K for the year ended August 26, 2017, and these risk factors should be read carefully. Forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements, and events described above and in the risk factors could materially and adversely affect our business. 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 as a result of new information, future events, or other ways. Actual results may materially differ from anticipated results.
Good morning, and thank you for joining us today for AutoZone's 2018 first quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer, and Brian Campbell, Vice President of 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, autozoneinc.com. Please click on Quarterly Earnings Conference Calls to see them. To begin this morning, I want to thank all AutoZoners across the company for their tremendous efforts this past quarter. The quarter started out with Hurricane Harvey and finished up with five more natural disasters across North America, causing our AutoZoners and customers living in those regions tremendous disruptions in their lives.
From hurricanes to earthquakes in Mexico to wildfires out west, we incurred cost and property damage in each one. While we were able to get back on our feet quickly with Hurricane Harvey and Hurricane Irma, incurring minimal damage to our stores, Hurricane Maria hit our stores and customers hard in Puerto Rico. We had 43 stores in Puerto Rico. Unfortunately, we still have several that are unable to open due to damage incurred. Our thoughts and prayers continue to go out to all the folks on the island for the horrible effects this storm has had on their lives. Our AutoZoners throughout the organization have responded incredibly well and swiftly so that we have been able to get the vast majority of our stores open very quickly following these disasters so our AutoZoners could service our customers when they needed us most.
Our support for our AutoZoners and customers in Puerto Rico continues so we can aid them in their rebuilding efforts. Now for the business results. Our business strengthened during the quarter with improved same-store sales results, including the acceleration in our domestic commercial sales. As mentioned in our press release, the natural disasters impact both our sales and earnings for the quarter. Following the storms, our sales benefited by an estimated 50 to 60 basis points, while we experienced costs and damages of $9 million, resulting in a net negative estimated impact to EPS of $0.07. We were encouraged that our sales gained momentum from Q4, excluding the estimated disaster benefit. Our sales strengthened in the lighter stages of the quarter. We continued executing our inventory availability initiatives during the quarter, and we are pleased with our results.
All with the focus on improving our ability to say yes to our customers' parts needs, we opened two additional mega hubs and further refined and tested the delivery frequency to our stores to determine the optimal service levels. Our supply chain team implemented various tactics to optimize activity and reduce costs and were able to deliver leverage in our warehouse and delivery costs this past quarter. This marks the first quarter in many where cost increases have abated. We feel very good about the direction costs are headed over the remaining three quarters of fiscal 2018 in our supply chain. With our new Pasco, Washington DC open, combined with our new Ocala, Florida DC and our expansion of our Danville, Illinois D.C. coming online soon, we feel we are positioning our supply chain to improve efficiencies, enhance capacity, and improve service.
We're on the right path and on our plan with these initiatives. Additionally, we saw a nice improvement in our commercial business with sales results in Q1. Total commercial sales increased 6.7% compared to 5.9% in Q4 and 5.7% for all of last year. We continue to grow our business faster than the overall industry by executing on our game plan. We continue to focus on growing business with existing customers. With fewer year-over-year program openings, more of our sales growth is coming from existing customers or new customers in older programs. We believe our inventory availability work is vital to these efforts and is enhancing our position in commercial. We will continue to improve. Before getting into more detail about the quarter, I want to share our perspective on the trajectory of our industry sales.
In recent years, there have been macro headwinds, specifically two consecutive mild winters negatively impacting demand in the upper Midwest, mid-Atlantic, and northeastern markets, along with delayed tax refunds last year that did not translate to an increase in business during that time period in a manner that was similar to previous years. In addition, there has been a lot of discussion concerned around the effects of online sales negatively impacting the industry. While automotive parts and products have been sold online for more than a decade, we simply haven't seen a material shift in our business, past or present. Weather effects will even out over time but remains a negative as the effect of the mild winters has reduced demand for failure and maintenance-related parts.
This past quarter, we continued to see the impact as the Midwestern, mid-Atlantic, and northeastern stores underperformed the remaining country by over 200 basis points in comps. Although these markets have underperformed for the last couple of years, we have begun to see improving trends in the northeastern markets, which encourages us heading into the new calendar year. As history has shown, when extreme cold and significant snowfall returns, those markets traditionally have seen a significant resurgence in sales. These markets are very good markets for us. They're just much more volatile. They underperform in mild weather years and excel in extreme weather years. If we experience more normal weather in these parts of the country in 2018, we would expect stronger sales performance. Turning to our online efforts, we continue to invest in our strategy to enhance the customer shopping experience in an omnichannel world.
We continue to see growth in our website traffic, particularly mobile, ship-to-home sales, and Buy Online, Pick Up in Store. Buy Online, Pick Up in Store is growing much, much faster than ship-to-home as our customers value the convenience of immediate availability and trustworthy advice our AutoZoners provide them. This also further highlights the importance of inventory availability at the store level. We're also working to enhance our digital capabilities with our commercial customers, they continue to increase their interactions with us over autozonepro.com. We will continue to invest in our omnichannel strategy to ensure we can interact with our customers in the manner that best fits their needs and desires. On the cost front, I have highlighted on the last two quarters conference call the impacts we are experiencing from accelerated pressure on wages.
Those pressures continue to exist and are more than our historical norms. The regulatory changes are going to continue as evidenced by the areas that have passed legislation to increase their wages substantially over the next few years. We are constantly working diligently to find new innovations to better manage our cost structure, those efforts will continue. We believe this particular area will have continued pressure in the current state regulatory and low unemployment environments. Our management team remains committed to managing this business for the long term, to provide great service for our customers and great opportunities for our AutoZoners, ultimately delivering strong shareholder value. We operate in an industry driven by inelastic demand. If the part breaks, our customers need to fix it to get to work and get on with their lives.
Because of this predictability based on miles driven and an aging car population, we remain committed to continually improving our ability to aid customers in saying yes to their needs. Let me provide more detail on the quarter. For the quarter, our sales increased 4.9%, and our domestic same-store sales were up 2.3%. All three months of the quarter, September, October, and November, were positive, with November being stronger on both a one and two-year stacked basis. As I previously said, our northeastern, Midwestern, and mid-Atlantic markets, representing roughly 25% of our state sales, continued to underperform by approximately 200 basis points as a result of two consecutive mild winters. During the quarter, we opened 15 net new stores in the U.S., and our commercial business expanded by 6.7% by opening 30 programs.
Our commercial growth accelerated from last quarter's 5.9% increase as we continued to execute on our strategies to grow sales. We expect to open approximately 150 net new commercial programs this fiscal year. Currently, 84% of our domestic stores have a commercial program. During the quarter, we continued to expand in Mexico, opening five new stores, and we did not open any new stores in Brazil or additional IMC branches consistent with our plans. I'd like to provide an update on our learnings around our multiple frequency of delivery model. As a reminder, multiple frequency of delivery is solely focused on improving the in-stock levels for SKUs that are stocked in those stores while the mega hubs are focused on adding additional coverage to the local markets, meaning adding SKUs that would not have been available locally in our network before.
We made some fairly significant changes to the number of stores on our multiple frequency of delivery test, changed this frequency from three times a week to two times a week in a small set of stores, and we improved our replenishment algorithms in Q4 last year. We've seen improved sales results in the three-times-per-week stores as a result of the replenishment changes that have encouraged us. While the two-times-per-week stores have underperformed, we are not yet prepared to conclude these tests, and as we enter our most volatile selling season, Q2, it will likely be spring before we can make definitive conclusions. While we continue to learn from our frequency of delivery test, we remain committed to the rollout of our mega hub strategy. As a reminder, these super-sized AutoZone stores carry 80 to 100,000 unique SKUs, approximately twice what a hub store carries today.
They provide coverage to both surrounding stores and other hub stores multiple times a day or on an overnight basis. Our sales results thus far in our open mega hubs continue to exceed our expectations, both for retail and commercial. Currently, we have over 4,000 stores with access to mega hub inventory. A majority or about two-thirds of these 4,000 stores receive their service on an overnight basis today, but as we expand our mega hubs, more of them will receive this service same day, and many will receive it multiple times per day. We continue to expect to ultimately operate up to 40 mega hubs. The constraint on the speed with which we can open these is availability and location of real estate. While an average AutoZone location is just under 7,000 sq ft, a mega hub is 30,000 sq ft or more.
Identifying and developing these locations in prime retail areas is challenging, and it takes time. While there are incremental costs to these rollouts, we continue to feel these investments will provide a better customer experience and increased market share. 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 opportunities for advancement, and ensure we do it on a long-term profitable basis to provide strong returns for our shareholders. We will continue to stress the importance of going the extra mile to fulfill our customers' needs, regardless of how difficult the request. With our commitments to service intact, we continued to be share gainers over the quarter.
For the data we have available to us, in fact, our share has continued to improve over the last several months. Regarding Mexico, we opened five new stores this quarter and ended the quarter with 529 stores. Mexico now represents just under 9% of our store base. Sales in our other businesses for the quarter were up 0.9% over last year's first quarter, showing continued improvement each of the last five quarters. As a reminder, our ALLDATA and e-commerce businesses, which include autozone.com and AutoAnything, make up this segment of sales. This compares to being down 0.8% last quarter and reflects stronger performance in AutoAnything's business for Q1. As I previously mentioned, we continue to see strong growth in our Buy Online, Pick Up in Store sales. This strength in Buy Online, Pick Up in Store encourages us to continue investing in our in-store experience.
We recognize that the majority of our site traffic is providing information for our customers prior to purchase, our e-commerce platform represents an important part of our omnichannel experience. We see customers doing lots of research to learn about the product and how to do repairs. While these businesses are small for us at less than 5% of our total sales, the omnichannel experience is very important for the customer experience, we will continue to invest in our e-commerce platform. With the continued aging of the car population, we continue to be optimistic regarding trends for our industry in both DIY and DIFM. As new vehicle sales are near all-time highs and gas prices on average are quite low, miles driven continue to increase. The lower-end customer benefits the most from lower gas prices relative to income. This trend remains encouraging.
Regarding our expectations for the winter of 2018, if we return to more normal weather patterns, we expect sales performance to improve as the year moves forward. Now let me review our highlights regarding execution of our ongoing operating theme from 2017 that we carried over into 2018. Yes, We've Got It. The key priorities for the year are great people providing great service, profitably growing our commercial business, leveraging the Internet. Yes, We've Got It, leveraging IT. On the retail front this past quarter, under the great people providing great service theme, we were committed to supporting our store AutoZoners with helping get both the stores themselves and their customers up and running post the disasters. This was no easy task. We're focused on enhanced training to store-level AutoZoners and increasing the share of voice regarding availability with the Yes, We've Got It theme.
We hosted our national sales meeting at the end of September. Our communications were around training our AutoZoners to enhance the customer experience. We also remain aggressive with our technology investments and believe these investments will help differentiate us on a go-forward basis. We realize as customers have become much more tech and mobile savvy, we have to have a sales proposition that touches all the ways they desire to interact with us. Our future and current technology investments will lead to sales growth across all of our businesses. Regarding commercial, we opened 30 net new programs during the quarter. Our expectation is we will continue to open new programs in the range of 150 in 2018. We continue to improve our product assortments and availability, and as we make other refinements to our commercial offerings, we expect the estimated sales potential to grow.
We should also highlight another strong performance in return on invested capital, as we were able to finish the quarter at 29.6%. We continue to be pleased with this metric as it is one of the best in all of hardlines retailing. 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 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 thank and reinforce how appreciative we are of our entire team's efforts to continue to meet and exceed our customers' wants, needs, and desires.
We are bullish on 2018 sales potential because we have a great business operated by exceptional AutoZoners. 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 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, and our 26 IMC branches, increased 5%. For the trailing 52 weeks ended, total sales per domestic AutoZone store were $1,770,000. Total commercial sales increased 6.7%. The quarter commercial represented 19% of our total sales and grew $31 million over last year's Q1. We opened 30 net new programs versus 35 programs opened in our first quarter of last year. We now have our commercial program in 4,622 stores or 84% of our domestic stores, supported by 188 hub stores. Over 700 of our programs are three years old or younger. In 2018, we expect to open approximately 150 new programs.
As Bill mentioned earlier, we remain focused on growing this business as we see this business as our most significant growth opportunity, and we are treating it accordingly. We are committed to having a great sales team supplemented with stronger engagement of our store managers and district managers. We remain confident we will continue to gain market share with our commercial customers. We are encouraged by the initiatives we have in place and feel we can further grow sales and market share. While we have completed the majority of our commercial projects and we have some new thoughts and concepts, they are just that, ideas. We will now move to implement and test these on a small scale in order to refine and enhance them. For competitive reasons, we won't be sharing our detailed findings at this stage.
Once we have proven concepts with concrete plans, we will share our plans. That'll take some time. While we are working on these new ideas, we are continuing with our existing strategies to grow commercial sales and profits. Our Mexico stores continue to perform well. We opened five new stores during the first quarter, ending the quarter with 529 stores. We expect to open approximately 40 new stores in fiscal 2018. Mexico's business was challenged throughout 2016 and 2017 by a weakening peso foreign exchange rate relative to the US dollar. While our hope is 2018's exchange rate will settle down and will potentially be favorable, we've been quite pleased with the way our Mexico leadership team has managed this business through all of this volatility. Regarding Brazil, we continue to operate 14 stores.
Our plans are to grow to approximately 25 total stores by the end of the fiscal year. Our performance continues to improve and gives us optimism about the long-term future of this market. If we can prove success, this market has the potential to be much larger than Mexico. While challenging, the size of the prize is significant. Gross margin for the quarter was 52.8% of sales and was effectively flat for the quarter, with higher merchandise margins being offset by higher inventory shrink results. While our shrink expense is higher in support of inventory availability initiatives, we were pleased with supply chain's ability to leverage costs on a % of sales basis. We believe initiatives we have in place to manage shrink can reduce the leverage over the remainder of the year. Our primary focus remains growing absolute gross profit dollars in our total auto parts segment.
SG&A for the quarter was 34.6% of sales, higher by 50 basis points from last year's first quarter. Operating expenses as a % of sales were higher than last year, primarily due to storm-related expenses incurred during the quarter and deleverage on occupancy cost. EBIT for the quarter was $469 million, up 2.1% over last year's first quarter. Our EBIT margin was 18.1%. Interest expense for the quarter was $39 million compared with $33 million in Q1 a year ago. We are planning interest at $39.4 million in the second quarter fiscal 2018 versus $34.2 million last year Q2. The higher expense is due to tenor and size of a bond completed this April of $600 million at a 3.75% coupon. Debt outstanding at the end of the quarter was $4.983 billion or approximately $14 million below last year's balance of $4.997 billion.
Our adjusted debt level metric finished the quarter at 2.5 times EBITDAR. While on 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. Share repurchases are an important element of that strategy. For the quarter, our tax rate was 34.6%, down slightly from last year's Q1 of 34.7%. I want to take a moment and remind listeners of our adoption of a new accounting standard. The new standard requires us to recognize the tax benefit received from the gains on employees have on stock options as a credit to income tax expense on the P&L. This past quarter, it lowered our tax rate 52 basis points.
This compares to the benefit we had of 74 basis points to the tax rate in last year's Q1. This accounting change also increases the diluted share count calculation. While the impact on this adoption was minimal to the tax rate at 52 basis points this quarter, it is worth highlighting that it had a 358 basis point impact on our rate in Q2 of last year. Because it is impossible for us to predict when individuals will exercise options, we encourage folks to model us on a rate assuming no stock option impact, roughly 35.5%, and we will report both rates. Net income for the quarter was $281 million, up 1% over last year. Our diluted share count of 28.1 million was down 5.4% from last year's first quarter.
The combination of these factors drove earnings per share for the quarter to $10, up 6.8% over the prior year's first quarter. Excluding the impact of the previously mentioned change in accounting for stock option exercises from both this year's Q1 and last year's Q1, our EPS would have increased at the same rate, 6.8%, for the quarter. Relating to the cash flow statement for the first quarter, we generated $565 million of operating cash flow. Net fixed assets were up 8.2% versus last year. Capital expenditures for the quarter totaled $110 million and reflected the additional expenditures required to open 22 new locations this quarter. Capital expenditures on existing stores, hub and mega hub store remodels or openings, work on development of new stores for upcoming quarters investments in our new domestic DCs, information technology investments.
With the new stores open, we finished this past quarter with 5,480 stores in 50 states, the District of Columbia and Puerto Rico, 529 stores in Mexico, and 14 in Brazil, for a total AutoZone store count of 6,023. We also had 26 IMC branches open at the end of Q1, taking our total locations to 6,049. Depreciation totaled $78 million for the quarter versus last year's first quarter expense of $71.8 million. This is generally in line with recent quarter growth rates. We repurchased $353 million of AutoZone stock in the first quarter, and at quarter end, we had $471 million remaining under our share buyback authorization, and our leverage metric was 2.5 times at quarter end. 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 firm 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 and on a per store basis. The company's inventory increased 6.3% over the same period last year. Inventory per location was $663,000 versus $647,000 last year and $644,000 last quarter. Net inventory, defined as merchandise inventories less accounts payable on a per-location basis, was a negative $52,000 versus a negative $67,000 last year and a negative $48,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 107.8%. Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 29.6%.
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. While we are encouraged with the start of our fiscal year, we are careful to not overcommit to any outcomes when it comes to our second fiscal quarter. The second quarter has perpetually been our most volatile quarter due to weather patterns, the holidays, and timing of tax refunds. Last year, we were impacted negatively by the delay in income tax refunds and the impact of a second consecutive mild winter. We did not foresee the impacts on sales these events would have on our business for the second and third quarters last year. While we are pleased with our progress and the acceleration in our business, we want to highlight some of the potential points of volatility, both positive and negative, in the upcoming quarter.
One, if we experience a cold and high precipitation winter, our sales should be strong later in the quarter and into the balance of the year. Two, tax refund timing should be the same as last year, so it shouldn't have any bearing on our second quarter's results. As for Q3, we don't know if those sales will return. Three, as the holidays shift, we will lose two selling days in our DIFM business, which will negatively impact our sales growth in DIFM. It's important to note this has an insignificant impact on our DIY business. Fourth, we encourage you to be mindful of the significant EPS benefit due to stock option exercises in the second quarter of last year and adjust for this non-operating unpredictable event. We are excited about our balanced model for growth around domestic retail, commercial, international, online, and pickup in store.
We believe our hubs and mega hubs, Mexico, ALLDATA, e-commerce, and our other businesses can all grow their top lines in 2018. To execute at a high level, we have to consistently adhere to Living the Pledge. We cannot, and we will not take our eye off of execution. We must stay committed to executing day in and day out on our game plan. Success will be achieved with an attention to detail and exceptional execution. Our customers have choices, and we must exceed their expectations in whatever way they choose to shop with us. We are fortunate to operate in one of the strongest retail segments, and we continue to be excited about our industry's growth prospects for 2018 and beyond. As consumers continually look to save money while taking care of their vehicles, we are committed to providing the trustworthy advice they expect.
It truly is the value add that differentiates us from other faceless transactions. Customers have come to expect that advice from us. With this focus, we will implement more enhancements on both our DIY and commercial websites and in-store experiences to provide even more knowledgeable service. We don't ever expect an online experience to replace the advice our customers want. Today's customers do expect more information on repairing their vehicles. This aspect of service has been our most important cultural cornerstone, and it will continue to be for a long time. Our charge remains to optimize our performance regardless of market conditions and continue to ensure we are investing in the key initiatives that will drive our long-term performance. In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves.
This formula has been extremely successful over the last 38 years, and we continue to be excited about our future. Now I'd like to open up the call for questions.
Thank you. We will now begin the question and answer session of today's conference. To ask a question, press star, followed by the number one on your phone. Unmute your phone and record your name when prompted. Your name will be required to deduce your question. To cancel your question, press star followed by the number two. Our first question is coming from Alan Rifkin of BTIG. Your line is now open.
Thank you. Congratulations on a nice quarter. Bill Rhodes, certainly you expressed your enthusiasm about the mega hub strategy. What's the revenue lift to your store base once they move to being supported by a mega hub? Related to that, what is the average revenue per store for these stores versus stores that are still not supported by mega hubs? Thank you very much.
Yeah, thank you for the comment, Alan. I would say that the mega hub service in and of itself can drive between one and 2% growth in the local store. Far as the volumes go, the volumes are all over the spectrum because we're trying anybody that's within a reasonable service area, we're providing service to them from mega hubs. They may be on the low end of the scale, or they may be on the high end of the scale. Generally, they'll grow between one and 2%. Some of the factors within that depend on whether or not they're serviced multiple times a day or once a day or serviced on an overnight basis.
A big part of our strategy now is, as we mentioned, about 4,000 of our domestic stores already have mega hub service, many of those today are only getting it on an overnight basis. We continue to expand our mega hubs, which by the way, we couldn't be more pleased with, we continue to expand it, we'll have more and more that'll get same day service versus overnight service, and some of those will even get multiple times per day service from that mega hub. It's all part of our objective to enhance inventory availability across the local marketplace.
Okay, understood. A follow-up, if I may, Bill. With respect to your vendor base, what if anything are you now seeing in terms of more vendors possibly taking Dorman's lead and implementing MAP pricing in terms of e-commerce? What has its effectiveness been thus far?
I think it's number one, we've had many vendors that have had MAP pricing or some form of MAP pricing for years, if not decades. Dorman recently went, I believe they went in October, so I think it's a little bit too early to tell what happens. They're making those decisions on their own. We certainly support our vendors in a way of making sure that there's price transparency, and we're all providing great values to our customers over time. That's their decisions, not ours.
Thank you. Best of luck for a happy holiday season.
You too, Alan. Thank you.
Thank you. Our next question is coming from Christopher Horvers of JPMorgan. Your line is now open.
Thanks. Good morning.
Good morning.
I wanted to follow up on the mega hub commentary. What's the gating factors on servicing the store same day and multiple times per day? Is it a cost thing? Is it systems? Is it you just don't have the right facilities? Can you talk about that and maybe sort of quantify as you moved from an overnight to a same-day and multiple times per day, how does the business respond?
Sure. Thanks for the opportunity to clarify that, Chris. That's an excellent point. One of our mega hubs, for instance, is in Los Angeles. Today that store may be providing service to San Diego, but it's doing it on an overnight basis. As we potentially build a mega hub in a San Diego type market, all of a sudden those stores can move from overnight service to same-day service. It's simply the proximity of this location or the store to the mega hub. If they're within 100 miles, we might be able to service them three times a day. If they're 200 miles, we might be able to get there one time a day. If they're 400 miles, we got to get there overnight.
I understand. I think long term, you've talked about perhaps 40 to 50 mega hubs and I think around 18 right now. How does that sort of two-thirds of the stores being fulfilled or sorry, maybe one-third fulfilled in same day. How does that progress over time? If you get to 45 to 50, what's the service look like to the stores on a same-day basis?
Yeah, we haven't laid it out because part of it is we're looking and learning about the economics of this as we go. As you mentioned, we have 18 today. We said in our prepared remarks, we're going to 25 this year. Hopefully, if we can get them all open, that's our plan. When we originally rolled it out, we said 25 to 40, we've made a small tweak in what we're saying. We don't talk about 25 anymore because we're going to be there by the end of the year. We say up to 40, the more we learn about it, someday that number could go up as well. It's been one of those initiatives that continues to outperform our expectations, as it outperforms our expectation, it allows us to expand it further.
I also think it's important to understand we're also not competing in a stagnant environment. Our competitors are also be them the public companies that you're accustomed to or the warehouse distributors. Everybody's changing their operations, we're looking at ways to enhance our competitive position.
The last question I have, is there anything as you look at the tax bills that are in front of the House and the Senate, is there anything in there that sort of could be either positive for you? I understand the potential corporate tax benefit, is there anything in those bills that concerns you from a financial or business operation perspective? Thanks very much.
I don't think there's anything in the tax bills that we're aware of today that would concern us per se. As you mentioned, the tax rates being lower on a corporate basis for most retailers will be very beneficial. We expect it to be a positive. We'll wait and see what ultimately comes out of committee and what gets signed, including the timing of the implementation and plan accordingly. Certainly from a capital allocation strategy, we expect our strategy to continue to remain intact and feel really good about it.
Thank you. Have a great holiday.
You too.
You too.
Thank you. Our next question is coming from Matt Fassler of Goldman Sachs. Your line is now open.
Thanks so much. Good morning. My first question relates to the sales outlook. I think on last quarter's call, you as a company offered a somewhat subdued perspective on the sales potential for the business. Understanding that you got a bit of a bump from the hurricane, the sales accelerated nicely. They certainly exceeded Wall Street expectations. You're talking about the potential for the business to pick up. I'm not sure if it's off current levels or from prior assumptions if the weather turns seasonable in the fourth quarter rather than in the calendar fourth quarter and into winter. Anything change in the backdrop or anywhere else to alter your read on or your prognosis of the forward here? Is it just that the business did pick up and showed its potential? Is there something else happening in the world that drove your incremental enthusiasm here?
Thanks, Matt, for that question. I think it's a great question. If you'll recall in the last quarter, I talked about the fact that the perception of our industry's performance over the last two or three quarters was that we had reached a new all-time low in performance. I was very careful to talk about that that truly wasn't the case. If you looked at our industry's performance or AutoZone's performance over a five or ten-year period of time, that our performance last year was operating within the normal bands of what we've experienced. They were towards the lower end, but we weren't dealing with catastrophic performance. I cautioned everybody because with that notion of, oh, things are so bad, then all of a sudden the pendulum's going to swing and they're going to be fantastic.
We want to say, no, we believe they will get better and operate in this normal band. I think I talked about we were like a 140 basis points below our average for the last five years. We were trying to say, yeah, we think that they will improve, particularly when some of these factors, these macro factors that we can't do anything about, like two mild winters and delayed tax refunds. Once those normalize, we believed and continue to believe we would go back to that normal band. In Q1 We outperformed our expectations, but part of that outperformance was the 50 or 60 basis points from the hurricane-impacted markets. We are pleased with the performance that we've seen in our stores sales, both on the retail and particularly on the commercial side in Q1.
I was also very intentional about making comments about Q2 only because Q2 is incredibly volatile. If the weather hits and hits at the right time, our sales could be really strong. If we have a third consecutive mild winter, it'll take some momentum out of it. We just have to be careful, and part of what I'm trying is, let's understand that Q2 is a very low volume quarter. We're closed a few days during the quarter. It's our lowest volume quarter of the year, and I, for one, don't want to put too much focus on Q2. If we get a strong winter, we believe Q2 and the latter part of Q2 will be strong. More importantly, we believe the balance of the year will be more positive.
We also continue to believe that we will operate in that normalized band that we've been in for five or 10 years.
Bill, that's very helpful. A quick follow-ups to that. On the storm sales, was that kind of a one-time pop, or is there any spillover into subsequent quarters in your view?
I think there'll be a little bit of spillover into Q2 from it, Matt. What generally happens when the storm hits, we're closed for days. So we actually take a net negative for the first week or so. As the markets begin to recover, we see increased economic activity, and it lasts for three or four months. It depends on the order of magnitude of the storm. We would expect to see some benefit, probably not a benefit that we'd be calling out on the next quarter, but some benefit early in the second quarter.
Finally, while you're clearly testing and probing a lot with supply chain, absent from the dialogue this quarter was the impact to gross margin of excess supply chain costs. Should we consider that chapter essentially closed and no longer look for much gross margin impact from that?
I wouldn't characterize it as closed per se, Matt, you're totally right. We've anniversaried a lot of the impact that we've had, we expect it to be more normalized going forward. I think the supply chain team has done a terrific job of managing it in spite of opening two distribution centers over the last six months.
Thank you very much, guys.
Thank you.
Thank you. Our next question is coming from Simeon Gutman of Morgan Stanley. Your line is now open.
Good morning. It's Joshua Siber on for Simeon. Can you talk about what's driving the commercial improvement, whether you can parse it out between industry growth versus internal drivers?
Yeah, I haven't seen enough. It's very hard to see the industry growth perspective on commercial on a short-term period. Over the long term, we believe we have a pretty good handle that it's growing around 4.5%. In short terms, it's hard to see that. I think what is improving in our performance is our team's core blocking and tackling is getting better. We've been talking a lot about getting the store managers and the district managers more engaged in the business, and I think that that's helping over time. Our sales teams continue to get better and better. Inventory availability was the biggest reason we were doing the mega hubs and the MFD were to try to spur on commercial growth, and I think those efforts are beginning to help us in commercial.
I think it's also important to highlight we grew almost 7%, so we're close to 2X the growth of the market.
Okay, my follow-up, you mentioned if we return to more normal weather, I'm curious how you'd characterize the winter so far.
I don't think you need to even try to characterize it. We're not running this business. We're two and a half weeks into our quarter, who knows what's going to happen. It's supposed to start getting cold this week. It's not about what happens between Thanksgiving and December 15th. It's really what happens from December 15th to February 10th. That'll really be the deciding factor.
Okay. Thanks a lot.
Yep. Thank you.
Thank you. Our next question is coming from Seth Sigman of Credit Suisse. Your line is now open.
Thanks a lot, and good morning. One question just on the cost side. Your expenses grew roughly 5.5% excluding the hurricane. I know you talked about a number of future headwinds, and you talked about that last quarter as well. I'm just wondering, is this the run rate to think about? Does this 5.5% essentially capture those headwinds, or is there reason to believe there'd be a further step up at some point?
No, we think that that 5% range captures those headwinds. Those headwinds are, as Bill talked about before, you've got a little bit of wage rate pressure that continues to exist, although the team's done a terrific job of managing their way through that. We have a little bit of occupancy pressure as you're seeing that coming from mega hubs and hubs, as well as we're seeing rising real estate tax costs across the country as well. Those are some of the things that are a little bit of headwinds. We think we can manage our way through those, I think that that's a pretty good run rate to look at.
Do you start to lap some of that in the second half of this fiscal year? You did see a pickup in expenses late in the year last year.
I think late in the year, we'll start to lap some of that.
Okay, great. My follow-up is just around pricing. I'm wondering, are you starting to see any signs of inflation? Did that impact the quarter at all? Just in general, a lot of talk about price transparency in the category and in retail in general. Do you feel like if you see inflation, you'll be able to push that through?
We have historically. To answer the first part of the question, we haven't seen a significant amount of inflation. Frankly, we haven't for probably a couple of years now. Historically, we've had them able, as an industry, to push much of that cost along to the consumer. Today we don't see that changing necessarily, we'll have to wait and see when it comes.
Thanks very much.
Thank you. Our next question is coming from Michael Lasser of UBS. Your line is now open.
Morning. Thanks a lot for taking my question. Bill Rhodes, you mentioned that Midwest and the Northeast continue to underperform, yet the business accelerated in large part because of the commercial program. Should we take that to mean that your commercial business within those underperforming regions also underperformed? Why would that be the case?
I think, number one, both parts of our business saw acceleration during Q1. Commercial is a little bit more visible to you because we call it out specifically, but both of them improved in Q1. As we look at what's going on with the industry, part of what's happened is those mild winters have put less strain on the undercar component. Think about chassis and brake components and shocks and struts. That didn't go away when the summer went. That lack of wear and tear has continued, and those jobs are done by both DIYers and DIFMs. That's why it impacts both markets in a similar fashion.
My follow-up question is on the potential for a sharp reduction in your tax rate. If that happens, how would you think about the prospect of returning the benefits back to shareholders versus redeploying the savings back into the business?
Yeah, I think that we kind of think about it as, we feel good about our capital allocation strategy. That remains intact. It serves us well over time. We'll continue to invest in those initiatives that we believe will result in adequate returns to the corporation overall. We'll continue to invest in our infrastructure, and we'll continue to execute our capital allocation strategy. Time will tell, I mean, the bill hasn't been signed yet, so we'll have to wait and see what's in the final bill and the timing of it.
I guess I was less so referring to capital allocation and more so the margin structure of the business. If your earnings growth is going to sharply accelerate, would you look to maybe slow down that earnings growth acceleration?
Well, of course, the earnings growth will be below the EBIT. The question really is, you're asking what's going to happen below the EBIT line, and obviously that's going to increase. We don't see from a tax perspective, something changing fundamental to the operating margin of the organization.
Okay. That's very helpful. Thank you very much.
Thank you. Our next question is coming from Matthew McClintock of Barclays. Your line is now open.
Hi, yes. Good morning, everyone.
Morning.
Bill, I'm just trying to conceptualize the volatility in your business due to weather. As we think about the potential for the weather to finally cooperate this quarter and maybe going forward, is that something that would potentially drive a closing of the 200 basis point gap in those regions that you're experiencing this year? Or is that something that could actually drive a closing of the multiple years of gap that you've had in those regions relative to the company average?
Yeah, I think there's no question about it. As I mentioned, those are really good markets for us and historically really good markets. Because the weather patterns can be so extremely different, they're more volatile. It's not as predictable as California, for instance, where the weather patterns are pretty predictable what you're going to get. You don't know what you're going to get in the upper Midwest, therefore, we just have to deal with it. There's nothing we can do to plan our business any differently or anything like that. We just have to kind of ride the storm on both the good side and the bad side.
Okay. I think you were pretty clear about online competition and nothing really to see there. Could you maybe talk about non-traditional competition in the brick-and-mortar channel, big box competition or other non-specialty auto parts stores?
Yeah. I guess I would say it very similar to what we said about online, the mass merchants, they've been competing in our industry for longer than I've been here. I haven't seen any significant change in how they're going to market or impacting our business one way or the other.
Thank you very much for the color.
Yep. Thank you.
Thank you. Our next question is coming from Dan Wewer of Raymond James. Your line is now open.
Yeah. Thanks. Bill, since 2009, AutoZone's gross margin rate has increased about 260 basis points. Do you think there is a gross margin expansion thesis going forward? Or do you think that current gross margin rates, maybe, give or take 10 basis points is what the next, say, three or four years would look like?
Yeah, I think as we think about it, Dan, we think of it more positively than that. We continue to believe that there are opportunities for us to expand gross margin. Certainly, as we continue to increase some of our direct import initiative, that'll help reduce some of our acquisition costs. We continue to believe that there are opportunities to lower acquisition costs. There will probably continue to be opportunities to optimize the expenses both in supply chain and in shrink. We'll always continue to have some pressures from a competitive set and an industry set relative to promotions, et cetera. I think overall, we're somewhat bullish relative to gross margin going forward. If you look over time, you're right. We've done a terrific job in spite of a lot of things going on, of continuing to increase our gross margin.
It remains healthy, and we feel pretty positive about it going forward.
Just a follow-up question on the sales benefits from the Mega Hubs. I think in response to Alan's question, you talked about a one or two percentage point benefit. Is there a difference if a store is getting same-day coverage from a Mega Hub compared to the next day example that you talked about with San Diego?
Yeah, there certainly is a difference, Dan. It's probably not as big as you would expect because you got to remember, these SKUs that we're talking about are really on the tails of the bell curve. Having them available even for next day, they'll be there first thing in the morning. When you talk about some rural markets or those kind of things, that's pretty amazing that we can get them there. There is a difference, but it's not 50% or so.
Okay, great. Thank you.
Yep, thank you.
Thank you. Our last question is coming from Steven Forbes of Guggenheim. Your line is now open. Steven Forbes, your line is now open.
Let's go ahead and take the next question.
Thank you. Our next question is coming from Michael Baker of Deutsche Bank.
That worked out well for me. I want to follow up on Mr. Wewer's question and Bill Giles, your answer about gross margins continue to have some pressure from a competitive set and industry set relative to promotions. Has that changed at all with some online guys doing a little bit more in your business? Or is that sort of the outlook you've always had?
That's the outlook we've always had. I wouldn't say that we've seen any change necessarily from that perspective whatsoever. I was just trying to balance out positive aspects of gross margin offset by some of the pressures that you might always consider. Overall, again, we continue to believe our margin remains healthy and we've got a positive outlook.
Yeah. Okay. Thanks. That makes sense. Two more quick follow-ups, if I could. One, you said, I think it was Bill Rhodes that said at one point that if the weather cooperates, you'd expect trends to get better in the back half of the quarter. Is that just simply a function of you just have much more difficult compares, as I recall from last year, early in the quarter, and the compares get much easier in the second half? Or is there some other reason why weather would only impact the back half of the quarter?
Yeah, I think, I said the back half of the quarter and also the balance of the year. Last year, we did get a cold snap, and it was kind of December 1 to Christmas. We had some real strong sales during that period of time, and then it got warm. If the weather hits, it's going to hit a little bit later than it did last year, and we should see the strength in the back half. The other part of it is there's kind of the tale of two stories on what happens with this extreme winter weather. One is when it gets really cold really fast, we get an immediate bounce in our business, like in batteries.
What happens over time and the longer tail on the winter is when the road conditions get bad, we'll get a longer tail on undercar parts, chassis, brakes, ride control, those kind of things. Those aren't things that you wake up that day and your car can't get you to work. Those are things that they put more stress on the components, the maintenance cycles accelerate. That will put a tail not only for the back half of Q2, but on into Q3 and some into Q4.
Okay. Yeah, that makes sense. If I could ask one more quick one here, hopefully a quick answer. With some of the pluses and minuses on the gross margin that you described and wages and other costs higher, what kind of same-store sales number do you need to get back to a double-digit earnings growth? Let's assume that the tax rate stays similar to where it is now, because obviously, if it goes to 20%, you're going to grow your earnings 10% or higher. Let's assume that doesn't happen.
Yeah, we don't think about it on a same-store sales basis like that, Mike. I know everybody wants to be able to think through it that way. I think we're just thinking about there's opportunities for us to improve gross margin. We talked about the operating expense growth rates. Just those are the ways you should be thinking through your model overall. Look, we feel great about the health of the industry. We feel good about the momentum that we've got, we're encouraged by the business.
Okay. I really appreciate the time. Thanks, guys.
Thank you, Mike. All right. Before we conclude the call, I'd like to take a moment to reiterate that our business model continues to be very solid. We're excited about our growth prospects for the year. We will not take anything for granted as we understand our customers have alternatives. We have a solid plan to succeed this fiscal year, I want to stress that this is a marathon and not a sprint. We continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be very successful. We thank you for participating in today's call, we'd like to wish everyone a very happy and healthy holiday season and a prosperous new year. Thank you for your time today.
That concludes today's conference. Thank you for your participation. You may now disconnect.