Good morning, and welcome to the AutoZone Conference Call. Your lines have been placed and listen only until the question and answer session of the 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 am Central Time or 11 am 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, change 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 and 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 ks 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 otherwise. Actual results may materially differ from anticipated results.
Good morning and thank you for joining us today for AutoZone's 2018 Q1 conference call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the Q1, I hope you've had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with slides complementing our comments today, are available on our website, www.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 5 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 hurricanes Harvey and Irma incurring minimal damage to our stores, Hurricane Maria hit our stores and customers hard in Puerto Rico. We have 43 stores in Puerto Rico and 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 $9,000,000 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, and 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 a focus on improving our ability to say yes to our customers' parts needs, we opened 2 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 1st quarter in many where cost increases have abated and we feel very good about the direction costs headed over the remaining 3 quarters of fiscal 2018 in our supply chain.
And with our new Pasco, Washington DC open, combined with our new Ocala, Florida D. C. 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 businesses 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 and 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 2 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 concern 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 underperformed 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 pickup in store. The buy online pickup 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 and they continue to increase their interactions with us over autozonepro.com. We will continue to invest in our omni channel 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 calls 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 and those efforts will continue, but 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. Now 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 3 months of the quarter, September, October November were positive, with November being stronger on both a 1 and 2 year stacked basis. As I previously said, our Northeastern, Midwestern and Mid Atlantic markets, representing roughly 25% of our sales, continued to underperform by approximately 200 basis points as a result of 2 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 continue 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 5 new stores, and we did not open any new stores in Brazil or additional IMC branches consistent with our plans. Now 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 tests. Changes to frequency from 3 times a week to 2 times a week in a small set of stores, and we improved our replenishment algorithms in Q4 of last year. We've seen improved sales results in the 3 times per week stores as a result of the replenishment changes that have encouraged us. While the 2 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 delivery test, we remain committed to the rollout of our mega hub strategy. As a reminder, these supersized AutoZone stores carry 80,000 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 2 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 on average AutoZone location is just under 7,000 square feet, a mega hub is 30,000 square feet or more.
Identifying and developing these locations in prime retail areas is challenging and it takes time. While there are incremental cost 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 shared gainers over the quarter.
For the data we have available to us and in fact our share has continued to improve over the last several months. Regarding Mexico, we opened 5 new stores this quarter and ended the quarter with 5 29 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 Q1, showing continued improvement each of the last five quarters. As a reminder, our all data and e commerce businesses, which include autozone.com and auto anything 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. Also, as I previously mentioned, we continue to see strong growth in our buy online, pick up in store sales. Strength in 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, and our e commerce platform represents an important part of our omni channel experience. We see customers doing lots of research to learn about the products and how to do repairs.
While these businesses are small for us at less than 5% of our total sales, the omni channel experience is very important for the customer experience and we will continue to invest in our e commerce platform. With continued aging of the car population, we continue to be optimistic regarding trends for our industry in both DIY and BIFM. 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 and 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 and helping get both the stores themselves and their customers up and running post the disasters. And this was no easy task. We're focused on enhanced trading 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 and 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 20 18. As 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 retailer. However, our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return well in excess of our cost of capital. It is important to reinforce that we 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. Now I'll turn the call over to Bill Giles. Bill?
Thanks, Bill, and 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 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 percent and the quarter commercial represented 19% of our total sales and grew $31,000,000 over last year's Q1. We opened 30 net new programs versus 35 programs opened in our Q1 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 3 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 project 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, but that will 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 5 new stores during the Q1 ending the quarter with 5 29 stores. We expect to open approximately 40 new stores in fiscal 2018.
Mexico's business was challenged throughout 2016 2017 by weakening peso foreign exchange rate relative to the U. S. Dollar. Our hope is 20 eighteen'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. So while challenging the size of the price 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 percent of sales basis. We believe initiatives we have in place to manage shrink can reduce the deleverage over the remainder of the year. Our primary the quarter was 34.6 percent of sales, higher by 50 basis points from last year's Q1. Operating expenses as a percentage 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 $469,000,000 up 2.1% over last year's Q1.
Our EBIT margin was 18.1%. Interest expense for the quarter was $39,000,000 compared with $33,000,000 in Q1 a year ago. We are planning interest at $39,400,000 in the Q2 of fiscal 2018 versus $34,200,000 dollars last year Q2. The higher expense is due to tenure and size of a bond completed this April of $600,000,000 of the 3.75% coupon. Debt outstanding at the end of the quarter was $4,983,000,000 or approximately $14,000,000 below last year's balance of $4,997,000,000 Our adjusted debt level metric finished the quarter at 2.5x EBITDAR.
While in any given quarter, we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment grade rating and our capital allocation strategy and share repurchases are an important element of that strategy. For the quarter, our tax rate was 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 and 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 of 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 percent and we will report both rates. Net income for the quarter was $281,000,000 up 1% over last year.
Our diluted share count of 28,100,000 was down 5.4% from last year's Q1. The combination of these factors drove earnings per share for the quarter to $10 up 6.8% over the prior year's Q1. 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 percent for the quarter. Relating to the cash flow statement for the Q1, we generated 560 $5,000,000 of operating cash flow. Net fixed assets were up 8.2% versus last year.
Capital expenditures for the quarter totaled $110,000,000 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 quarter investments in our new domestic DCs and information technology investments. With the new stores opened, we finished this past quarter with 5,480 stores in 50 states with 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 $78,000,000 for the quarter versus last year's Q1 expense of $71,800,000 This is generally in line with recent quarter growth rates.
We repurchased $353,000,000 of AutoZone stock in the Q1. And at quarter end, we had $471,000,000 remaining under our share buyback authorization and our leverage metric was 2.5x@quarterend. Again, I want to stress we managed 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. 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 6 $63,000 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 4 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 over commit to any outcomes when it comes to our 2nd fiscal quarter. The Q2 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 2nd 3rd quarters last year.
While we are pleased with our progress and the acceleration in our business, we will highlight some of the potential points of volatility, both positive and negative in the upcoming quarter. 1, 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. 2, 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. 3, as the holidays shift, we will lose 2 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. 4th, and we encourage you to be mindful of the significant EPS benefit due to stock option exercises in the Q2 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 All Data 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. It is the 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, But 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. Our first question is coming from Alan Ryfken 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? And then 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.
Yes. Thank you for the comment, Alan. I would say that the mega hub service in and of itself can drive between 1% 2% growth in the local store. As 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 for mega hubs. So they may be on the low end of the scale or they may be on the high end of the scale.
But generally, they'll grow between 1% 2 percent. 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 MegaHub service, But many of those today are only getting it on an overnight basis. As we continue to expand our mega hubs, which by the way we couldn't be more pleased with, as we continue to expand it, we'll have more and more that will get same day service versus overnight service. And some of those will even get multiple times per day service from that mega hub.
So it's all part of our objective to enhance inventory availability across the local marketplace.
Okay, understood. And 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 Doorman's lead and implementing map pricing in terms of e commerce? And what has its effectiveness been thus far?
I think it's number 1, we've had many vendors that have had MAP pricing or some form of MAP pricing for years, if not decades. Doorman 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 that's making sure that there's price transparency and we're all providing great values to our customers over time, but that's their decisions not ours.
Thank you. Best of luck for happy holiday season.
You too, Alan. Thank you.
Thank you. And our next question is coming from Christopher Horvers of JPMorgan. Your line is now open.
Thanks. 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? 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 move 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. So 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, then all of a sudden those stores can move from overnight service to same day service. It's simply the proximity of this location for the store to the mega hub. It's got to be if they're within 100 miles, we might be able to service them 3 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. And so I think long term, you've talked about perhaps 40 to 15 mega hubs and I think around 18 right now. So how does that sort of 2 thirds of the stores being fulfilled or so maybe 1 third fulfilled in same day, how does that progress over time? And if you get to 45 to 50, what's the service look like to the stores on a same day basis?
Yes, 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. But when we originally rolled it out, we said 25 to 40.
And 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. And the more we learn about it, someday that number could go up as well. We just it's been one of those initiatives that continues to outperform our expectations.
And as it outperforms our expectation, it allows us to expand it further. But 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 is changing their operations and we're looking at ways to enhance our competitive position.
And then 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 corporate tax potential corporate tax benefit, but is there anything in those bills that concerns you from a financial or business operation perspective? Thanks very much.
Sure. Yes, I don't think there's anything in the tax bills that we're aware of today that would concern us per se. Obviously, as you mentioned, the tax rates being lower on a corporate basis for most retailers will be very beneficial. And so 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.
But 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.
Thank you. And 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. So understanding that you got a bit of a bump from the hurricane, the sales accelerated nicely.
They certainly exceeded Wall Street expectations. And 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 Q4 rather in the calendar Q4 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 2 or 3 quarters was that we had reached a new all time low in performance. And I was very careful to talk about that, that truly wasn't the case. But if you look at our industry's performance or AutoZone's performance over a 5 or 10 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 it was not we weren't dealing with catastrophic performance. I cautioned everybody because with that notion of all things are so bad, then all of a sudden they're going to the pendulum is 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 140 basis points below our average for the last 5 years. And so we were trying to say, yes, we think that they will improve, particularly when some of these factors, these macro factors that we can't do anything about, like 2 mild winners and delayed tax refunds, once those normalize, we should we believed and continue to believe we would go back to that normal band.
Now in Q1, we outperformed our expectations, but part of that outperformance was the 50 or 60 basis points from the hurricane impacted markets. But 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. But 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 3rd consecutive mild winter, it will 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 1, don't want to put too much focus on Q2. If we get a strong winner, we believe Q2 and the latter part of Q2 will be strong and more importantly, we believe the balance of the year will be more positive.
But we also continue to believe that we will operate in that normalized band that we've been in for 5 or 10 years.
Bill, that's very helpful. 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. And so we actually take a net negative for the 1st week or so. And then as the markets begin to recover, we see increased economic activity and it lasts for 3 or 4 months. It depends on the order of magnitude of the store, but 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.
Great. And then 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. So should we consider that chapter essentially closed and no longer look for much gross margin impact from that?
Yes. I wouldn't categorize this as close per se, Matt, but you're totally right. We've anniversaried a lot of the impact that we've had. And so we expect it to be more normalized going forward. And I think the supply chain team has done a terrific job of managing it in spite of opening 2 distribution centers over the last 6 months.
Thank you very much, guys.
Thank you.
Thank you. And our next question is coming from Simeon Gutman of Morgan Stanley. Your line is now open.
Good morning. It's Joshua Seiber 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?
Yes, I think I haven't seen enough and 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. And inventory availability the biggest reason we are doing it, the mega hubs and the MFD, are 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. And my follow-up, you mentioned if we return to more normal weather, so I'm curious how you'd characterize the winter so far?
I don't think you need to even try to characterize it. You know we're not running this business for a couple we're 2 and a half weeks into our quarter and you know who knows what's going to happen. So it will 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 will really be the deciding factor.
Okay.
Thanks a lot.
Yes. Thank you.
Thank you. And 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. So 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 a reason to believe there would be a further step up at some point?
No, we think that that 5% range captures those headwinds and 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 has done a terrific job of managing their way through that. And 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. So those are some of the things that are a little bit of headwinds. We think we can manage our way through those, but I think that that's a pretty good run rate to look at.
And 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.
And then 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? And 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. I mean, to answer the first part of the question, we haven't seen a significant amount of inflation. And frankly, we haven't for probably a couple of years now. And so, historically, we've had been able as an industry to push much of that cost along to the consumer. So today, we don't see that changing necessarily, but we'll have to wait and see when it comes.
Thanks very much.
Thank you. And our next question is coming from Michael Lasser of UBS. Your line is now open.
Good 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?
And why would that be the case?
I think number 1 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. So 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 DIF emers. So 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?
Yes. 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. So the question really is, you're asking what's going to happen below the EBIT line and obviously that's going to increase. But 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. And our next question is coming from Matt McClintock of Barclays. Your line is now open.
Hi, yes. Good morning, everyone. Good morning. Bill, I'm just trying to conceptualize the volatility in your business due to weather. As we think about the potential for weather to finally cooperate this quarter and maybe going forward,
is that something that would
potentially drive a closing of the 200 basis point GAAP in those regions that you're experiencing this year? Or is that something that could actually drive the closing of the multiple years of GAAP that you've had in those regions relative to the company average?
Yes, I think there's no question about it. And as I mentioned, those are really good markets for us and historically really good markets. But because the weather patterns can be so extremely different, that 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, and therefore, we just have to deal with it.
There's nothing that we plan with 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. And then I think you were pretty clear about online competition and nothing really to see there. But could you maybe talk about nontraditional competition in the brick and mortar channel, big box competition or other, non specialty auto parts stores?
Yes. 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. And so 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.
Yes. Thank you.
Thank you. And our next question is coming from Dan Weaver of Raymond James. Your line is now open.
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 3 or 4 years would look like?
Yes. I would I think as we think about it, Dan, we think of it more positively than that. And so 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 will help reduce some of our acquisition cost. And so we continue to believe that there are opportunities to lower acquisition cost.
There will probably continue to be opportunities to optimize the expenses both in supply chain and in shrink. But we'll always continue to have some pressures from a competitive set and an industry set relative to promotions, etcetera. So I think overall, we're somewhat bullish relative to gross margin going forward. And 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. So it remains healthy, and we feel pretty positive about it going forward.
And then just a follow-up question on the sales benefits from the mega hubs. I think in response to Alan's question, you had talked about a 1 or 2 percentage point benefit. Is there a difference if the store is getting same day coverage from a mega hub compared to the next day example that you talked about with San Diego?
Yes, 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. And so having them available even for next day, they'll be there first thing in the morning. And when you talk about some rural markets or those kind of things, that's pretty amazing that we can get them there. So there is a difference, but it's not 50% or so.
Okay, great. Thank you.
Yes, thank you.
Thank you. And our last question is coming from Steve Forbes of Guggenheim. Your line is now open. Steve Forbes, your line is now open.
Let's go ahead and take the next question.
Thank you. Our next question is coming from Mike Baker of Deutsche Bank.
Worked out well for me. I want to follow-up on Mr. Weaver's question and Bill Giles your answer about continue to gross margins continue to have some pressure from a competitive set and industry set relative to promotion. Is that changed at all with some online guys doing a little bit more in your business? Or is that 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. But overall, again, we continue to believe our margin remains healthy and we've got a positive outlook.
Yes. Okay. Thanks. That makes sense. Two more quick follow ups, if I could.
One, you said, I think it was Bill Rose 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?
Yes, I think and I said the back half of the quarter and also the balance of the year. So last year, we did get a cold snap and it was kind of December 1 to Christmas. And so we had some real strong sales during that period of time and then it got warm. Also, so 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 2 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. But 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 under car parts, chassis, brakes, ride control, those kind of things. Those are 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 and so the maintenance cycles accelerate. So that will put a tail not only for the back half of Q2, but on into Q3 and some into Q4.
Okay. Yes, that makes sense. If I could ask one more quick one here, but hopefully a quick answer. But with some of the pluses and minuses on the gross margin that you described in wages and other costs higher, what kind of same store sales number do you need to get back to a double digit earnings growth? And 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, but let's assume that doesn't happen.
Yes, we're not really we don't think about it on a same store sales basis like that, Mike. And everybody wants to be able to think through it that way. I think we're just thinking about there's And so just those are the ways you should be thinking through your model overall. But I mean, look, we feel great about the health of the industry. We feel good about the momentum that we've got.
And so 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, but I want to stress that this is a marathon and not a sprint. As we continue to focus on the basics and focus on optimizing long term shareholder value, we are confident AutoZone will continue to be very successful.
We thank you for participating in today's call and we'd like to wish everyone a very happy and healthy holiday season and a prosperous New Year. Thank you for your time today.
And that concludes today's conference. Thank you for your participation. You may now disconnect.