Welcome to the AutoZone Conference Call. Your lines have been placed on listen only until the question and answer session of the conference. Please be advised, today's call is being recorded. If you have any objections, please disconnect at this time. This conference call will discuss AutoZone's 2nd quarter financial results.
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, 11 am Eastern Time. Before Mr. Rose begins, the company has requested that you listen to the following statement regarding forward looking statements.
Certain statements contained in this press release 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, credit market conditions, the impact of recessionary conditions, competition, product demand, the ability to hire and retain qualified employees, consumer debt levels, inflation, weather, raw material costs of our suppliers, energy prices, war and the prospect of war, including terrorist activity, construction delays, access to available and feasible financing, the compromising of the confidentiality, availability or integrity of information, including cybersecurity attacks and changes in laws or regulations. Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of this annual report on Form 10 ks for the year ended August 29, 2015, and these risk factors should be read carefully.
Forward looking statements are not guarantees of future performance and actual results. Developments and businesses 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.
It is now my pleasure to introduce your host for today's call, Mr. Bill Wells. Thank you. You may begin.
Good morning and thank you for joining us today for AutoZone's 2016 Q2 conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer, IT and All Data and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the Q2, 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 dot com. Please click on quarterly earnings conference calls this season.
To begin this morning, I want to thank all AutoZoners across the globe for another solid quarter. In the Q2, we continued to execute our strategies to organically grow our business. We expanded our U. S. Retail footprint with the opening of another 30 new stores.
Our commercial business continued to grow with sales increasing 8% and we opened 32 net new programs for the quarter. We now have a commercial program in 81% of our domestic stores. And we continue to expand our presence in Mexico, opening 9 stores this quarter. We did not open any new stores in Brazil this quarter and currently have 8 stores in operation. Lastly, we opened 2 new IMC branches, bringing our total branch count to 24.
While we currently have approximately 90% of our total company sales coming from our domestic AutoZone stores, we believe we have great growth prospects in domestic locations, commercial, international and our other businesses. If I could sum up the quarter in a short statement, I would call out our major highlights. I'd say we continued on our game plan of executing our inventory availability and delivery frequency initiatives, while adding more labor hours in our stores in an effort to constantly improve our customers' experiences. While winter temperatures were milder this year than last, we did not see a material change in business trends from 1 month to the next overall. Yes, certain cold weather categories, those that have larger sales during these months were below last year's numbers, while others balanced out our performance.
And yes, as you would expect, our performance in the Midwest and Northeast were below other markets, but they were in line with our expectations considering the weather patterns. Probably the biggest unknown for us this quarter was when would income tax refunds begin to be remitted to consumers by the IRS. By quarter end, total refunds were generally comparable to remittances last year, but they were issued very, very late in our quarter. We feel our retail business is benefiting from a continued focus on customer service, improving parts availability and lower overall fuel prices. Lower gas prices we feel are contributing to Americans driving more.
Regarding commercial, we saw colder weather markets growing sales at a slower pace than other markets. We believe the milder temperatures led to less failure related repairs being done in those particular markets. However, we believe the mild temperatures will not have a material lasting effect on our sales performance heading into the summer. We feel a hot summer is the next thing we'll be watching for in regards to sales performance. Getting back to DIY, our number one business priority, the business did quite well in the Q2.
We generated positive traffic and ticket on a same store basis and performance was generally consistent across the country. While the macro economy is favorable for DIY performance right now, we also continue to gain share and would attribute those share gains to our investments in store labor and our inventory availability initiatives. We are committed to providing Wow! Customer service at every store with every customer. Regarding commercial, we have continued with our inventory placement and distribution strategies to respond to the ever increasing challenge of parts proliferation in our industry.
Over the past 2 years, we implemented new methodologies to improve our hard parts placement techniques in all stores. We continue to roll out of more frequent deliveries to an additional approximately 300 net new stores in the quarter. We now have a total of 1300 locations out of our 5,000 plus locations on multiple weekly deliveries. As we've been discussing, this rollout focuses on increasing from once a week deliveries from our distribution centers to either 3 or 5 times a week. Our results continue to confirm that this new strategy is appropriate.
With the varying weekly sales volumes of our stores, replenishment needs vary as well. Over the remaining two quarters of the fiscal year, we expect to roll this increased frequency model to approximately 700 additional stores ending the fiscal year with approximately 2,000 stores with this enhanced service model. The implementation of this initiative will create a gross margin headwind of approximately 20 to 30 basis points until we complete the rollout. While this effort will take a few years to complete, we would ultimately expect about 2 thirds of our stores to have increased frequency of deliveries. This past quarter's deleverage from deliveries was less than the previous quarter.
I appreciate our team's efforts to manage these rollouts on a cost effective basis. This is a material change in how we do business and our teams are executing it well and managing the cost effectively. Our sales lift from this effort continues to show the investments make economic sense. Additionally, we continue to be very pleased with our sales results from the mega hub stores. We ended the quarter with 5 mega hubs with no new openings this quarter, although we expect to open to add an approximate 5 additional mega hubs over the last two quarters of the fiscal year.
As a reminder, these supersized AutoZone stores carry 80,000 to 100,000 unique SKUs of inventory, approximately twice what a normal hub store carries. 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. And we are experiencing sales improvements from both our retail and commercial businesses. While there is incremental cost of these rollouts, including payroll and fuel to execute the extra deliveries, we feel their cost deleverage is relatively modest.
Our current assumption on this rollout is that we won't experience meaningful deleverage from this initiative in fiscal 2016. Currently 5 mega hubs support approximately 700 stores on a same day basis and roughly 2,000 stores in total. And once built out, we would expect to have a network of mega hubs in the neighborhood of 25 to 40 total locations. Consistent with the increased frequency of delivery from our distribution centers, we expect to complete our mega hub expansion over the next few years. 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 profitable basis to provide strong returns for our shareholders.
As I mentioned a few years ago or a few minutes ago, we continue to invest in store labor in order to say, yes, we've got it more frequently. Yes, we've got it is a new operating mantra for us in 2016. We have made meaningful enhancements in the last few years to our availability of inventory and now it is time to ensure our customers experience and see that substantial change. As traffic has increased in our stores, we understand and appreciate the need to be appropriately staffed to handle our customers' needs. When customers have requests for a part, product or simply advice, our objective is to say to them, yes, we've got it.
But still early in the implementation training phase, our team has enthusiastically embraced this notion. And with the current positive macro environment, we want to make sure AutoZoners have the tools and specifically the staff necessary to provide our customers with Wow customer service experience they deserve. We also want to touch on the efforts that are ongoing with regard customer shopping patterns across all of our platforms. We believe it is essential to be able to share information and process seamlessly between our stores, commercial shops, phone and online experiences in order to meet all of our customers' needs. While still in the early stages of this work, we believe having a holistic and seamless enterprise wide perspective on our customers will benefit us greatly over the next several years.
This will be a significant endeavor for us over the next couple of years. We have spent a lot of time mapping through the capture of this data in order to leverage it to better serve our customers. We think this will be a real differentiator for us over the next several years. More to come later on this initiative. Lastly, in order to support more frequent deliveries to new stores as well as mega hubs, we continue to expect to open 2 or 3 distribution centers over the next 2 or 3 years.
At present, we are in the early stages of planning their openings and don't expect any distribution center to come online until fiscal 2017. Fiscal 2016 will incur some capital and operating expenses related to development, but the larger portion of capital spend will be in fiscal 2017 2018. To summarize our plans, we expect to roll out more frequent distribution center deliveries and more mega hub locations over the next few years. We also expect to open 2 or 3 new domestic distribution centers over this time. While our total company CapEx will not be materially different this year from past, we do expect to incur approximately 20 to 30 basis points gross margin headwind from these investments alone.
Now turning to the 2nd quarter's results. Our sales increased 5.3% on top of 7.7% growth in Q2 of last year. Our domestic same store sales were up 3.6%. Our growth in both sales and earnings were very consistent with our results from Q1. This quarter sales results were also very consistent throughout the quarter excluding the last couple of weeks.
During the quarter, tax refunds in total were generally comparable to prior year. However, from a timing perspective, they flowed very late in the quarter. In regard to our 3 primary merchandise category splits in our U. S. Stores, failure related product sales performed the best.
Discretionary had the next highest growth rate followed by maintenance. While all three showed nice growth, we attribute the variance in sales trends between these businesses to the timing of winter events, for example, the polar vortex effects this year versus last. As I said earlier, both traffic and ticket were positive for our DIY and commercial businesses. For the quarter, we opened 32 net new programs and have the commercial program in 81% of our domestic store base. While our total domestic sales grew 6% on the quarter, our domestic commercial sales growth was up 8%.
The total the commercial sales growth rate while still impressive has slowed. Some of the reduction in growth is due to opening fewer new programs in recent years and having a lower percentage of the programs on the maturation curve. Despite this expected change, our sales slowed a bit more than we expected and we are working diligently to gain back that momentum. In recent weeks, we have executed incremental training and have enhanced the focus of our management teams, including store managers on reaccelerating our commercial growth. We believe our future in this business remains quite bright.
As part of our strategy of increasing inventory levels in local markets closer to our customers, this past quarter we opened one additional hub location and now operate 179. In addition to opening over time more mega hub locations, we also expect to open additional standard hub locations. Over time, we expect to operate as many as 200 to 225 stores as hub stores. Regarding IMC, we opened 2 new branches this quarter and continue to be excited by our opportunities. IMC Parts Catalog is currently accessible to over 700 AutoZone locations today and we believe there are great sales growth opportunities in the future for both our retail and commercial customers.
Regarding Mexico, we opened another 9 stores this quarter and now have 451 total locations in Mexico. While foreign currency headwinds persist, Mexico's peso sales have done quite well. Assuming the peso stabilizes, we expect the pressure on our U. S. Dollar earnings from our Mexico business to begin to abate starting this summer in the June to July timeframe as we begin to lap the most significant exchange rate increases.
For the quarter, the foreign currency headwinds lowered our EBIT growth rate by more than 2 percentage points. At the end of the quarter, the peso was down 29% versus last year and 16% from the end of Q1. Sales in our other businesses for the quarter were up 3% over last year. As a reminder, our all data and e commerce businesses, which include autozone.com and auto anything make up this segment of sales. Each of these businesses operate in increasingly competitive environments and our sales have slowed a bit.
Again, while we understand whether this winter was warmer, we are optimistic for sales this upcoming quarter. The biggest tailwind at the moment in our opinion is the increased miles driven across the country. This leads to more failure and maintenance related demand and benefits both our DIY and DIFM businesses. While we are while we focus on both the short term and long term performance, we remain committed to delivering consistent strong earnings performance and extending our streak of 38 consecutive quarters of double digit EPS growth, which is an important milestone for us. While our delivery frequency initiative and expansion of our mega hubs will add some headwinds on our operating margin for the remainder of fiscal 2016, our focus remains on growing operating profit dollars at acceptable return levels.
Now let me review our highlights regarding execution of our operating theme for 2016, Live the Pledge. The key priorities for the year were great people providing great service, profitably growing our commercial business, leveraging the Internet, improving inventory availability and yes, we've got it. On the retail front this past quarter under the great people providing great service priority, we increased staffing levels in our stores. We've also been aggressive on our technology investments and believe these initiatives will help differentiate us on a long term 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 current and future technology investments will lead to sales growth across all of our businesses. On the yes, we've got it front, we've added training, metrics and most importantly share of voice to educate our store level AutoZoners to help all of our customers with any part, product or advice needs they have. We are excited about this initiative. We should also highlight another strong performance in return on invested capital as we were able to finish the quarter at 31%. We are proud of this metric as it is one of the best, if not the best in all of hardlines retailing.
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 will always Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to thank again our entire organization for executing on our many operating initiatives while providing our customers with great service and managing our expenses appropriately and prudently. Now I'll turn the call over to Bill Giles.
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. For the quarter, total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores and our 24 IMC branches increased 5.4%. Switching over to macro trends, during the quarter, nationally unleaded gas prices started out at $2.09 a gallon and ended the quarter at $1.72 a gallon, a $0.37 decrease. Last year, gas prices decreased $0.55 gallon during the Q2, starting at $2.82 and ending at $2.27 a gallon.
We continue to believe gas prices have a real impact on our customers' ability to maintain their vehicles. And as cost reductions help all Americans, we hope to continue to benefit from this increase in disposable income. We also recognize that the impact of miles driven on cars over 11 years old, the current average, is much different than on newer cars in terms of wear and tear. Miles driven increased in both October, November December and we don't have January data yet. For all of 2015, miles driven finished up 3.5%, an incredibly strong number on a historical basis.
It represents the largest percentage growth in over a decade. The other statistic we highlight is the number of 7 year and older vehicles on the road, which continues to trend in our industry's favor. For the trailing 4 quarters, total sales per average AutoZone store was $1,780,000 For the quarter, total commercial sales increased 8%. In the 2nd quarter, commercial represented 18% of our total sales and grew $30,000,000 over last year's Q2. While the sales trajectory of the business slowed a
bit in Q2, some of
this is due to slower growth from our lower mix of new programs. We have intensified the focus of our entire team, including our store managers on reaccelerating our growth in commercial, and we have recently executed some incremental commercial training programs. This past quarter, we opened 32 net new programs versus 29 programs opened in our Q2 of last fiscal year. We now have our commercial program in 4,228 stores supported by 179 hub stores. Approximately 1100 of our programs are 3 years old or younger, 26% of the base.
With our inventory additions and the support of the IMC acquisition, we are well positioned to grow our base business. Over the last several years, a significant amount of our focus has been on opening new programs, that will continue to be the case, albeit at a slightly moderated pace. This year, we plan on opening around 250 commercial programs, approximately 150 more programs over the next two quarters. We have a very talented sales force and we are enhancing training and introducing additional technology to optimize the productivity of the sales force. We have increased our efforts around analyzing customer purchasing trends and in stock trends.
In summary, we remain committed to our long term growth strategy. We believe we are well positioned to grow this business and capture increased market share. We believe we can scale this business in a profitable manner and we continue to be excited about our opportunities in this business for many years to come. Our Mexico stores continue to perform well. We opened 9 new stores during the Q2.
We currently have 4 51 stores in Mexico. For the year, we expect to open approximately 40 new stores and we are on target to open a new distribution center this calendar year. This will mark our 2nd distribution center in the country and it will support further Central Mexico store growth. As Bill previously mentioned, for the quarter, foreign exchange headwinds lowered our company EBIT growth by over 2 percentage points. While we cannot control movements in functional currency versus planned assumptions, Mexico leadership continues to do an exceptional job managing the peso denominated business.
If the peso stays at these elevated levels, it will continue to pressure earnings for the next few quarters. Regarding Brazil, we opened no stores in the quarter remaining with 8 stores open. While sales growth has been very encouraging, we have been challenged by a weak Brazilian real relative to U. S. Dollars as well.
While the peso devalued 29% year over year, the real devalued 41% this year versus last. This extraordinary volatility has managed as best as possible. We remain in test phase in Brazil, but have been encouraged by our improving operating performance. Recapping this past quarter's performance for the company, in total, our sales were $2,257,000,000 an increase of 5.3% over last year's Q2. Domestic same store sales or sales for stores opened more than 1 year were up 3.6% for the quarter.
Gross margin for the quarter was 52.7 percent of sales, up 50 basis points. The improvement in gross margin was attributable to higher merchandise margins, partially offset by higher supply chain costs associated with current year inventory initiatives. In regards to inflation, it remains subdued. In fact, in total, slightly down last year. Currently, we feel costs will be predictable and manageable.
We will remain cognizant of future developments regarding inflation and we'll make the appropriate adjustments should they arise. SG and A for the quarter was 35.8 percent of sales, higher by 40 basis points from last year's Q2. The increase in operating expenses as a percentage of sales was primarily due to a favorable credit card litigation settlement recognized last year's quarter and higher domestic store payroll. We continue to believe we are well positioned to manage our cost structure in response to our sales environment. EBIT for the quarter was $383,000,000 up 6% over last year's Q2.
Our EBIT margin was 17%. Interest expense for the quarter was $33,000,000 compared with $35,000,000 in Q2 a year ago. Debt outstanding at the end of the quarter was $4,845,000,000 or approximately $415,000,000 more than last year's balance of $4,430,000,000 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 slightly lower than last year's Q2 tax rate.
This rate was lower than planned, but any deviations to our plan are driven primarily by the resolution of discrete tax items as they arise. Net income for the quarter was $229,000,000 and up 8% over last year. Our diluted share count of $30,800,000 was down 5.4% from last year's Q2. The combination of these factors drove earnings per share for the quarter to $7.43 up 14.2% over the prior year's Q2. Relating to the cash flow statement for the 2nd fiscal quarter, we generated $207,000,000 of operating cash flow.
Net fixed assets were up 5% versus last year. Capital expenditures for the quarter totaled approximately $100,000,000 and reflected the additional expenditures required to open 43 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 and information technology investments. With the new stores opened, we finished this past quarter with 5,193 stores in 50 states, the District of Columbia and Puerto Rico. 451 stores in Mexico and 8 in Brazil for a total AutoZone store count of 5,652. We also had 24 IMC branches open at fiscal quarter end, taking our total locations to 5,676.
Depreciation totaled $69,000,000 for the quarter versus last year's 2nd quarter expense of $60,000,000 in line with recent quarter growth rates. With our excess cash flow, we repurchased $150,000,000 of AutoZone stock in the 2nd quarter. At quarter end, we had $548,000,000 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.
We continue to view our share repurchase program as an attractive capital deployment strategy. Accounts payable as a percent of gross inventory finished the quarter at 109%. Next, I'd like to update you on our inventory levels in total and on a per location basis. The company's inventory increased 3.9% over the same period last year, driven primarily by new stores over the last 12 months. Inventory per location was $633,000 versus $631,000 last year and $624,000 last quarter.
Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing 4 quarters of 31%. 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. We are very pleased to report our 38th consecutive quarter of double digit EPS growth, growing this quarter at a rate of 14 point 2% over last year. To execute at a high level, we have to consistently adhere to living the pledge. We cannot and will not take our eye off of execution. Success will be achieved with a strong attention to detail and exceptional execution.
We are confident in our initiatives and we are pleased with the progress we are making in rolling out our new supply chain model by delivering inventory to our stores on a more frequent basis. In addition, the performance of our mega hubs has been strong and ahead of our expectations and we look forward to opening more later this year. We believe these initiatives will benefit both our retail and commercial businesses. Our long term model is to grow new store square footage at a low single digit growth rate and we expect to continue growing our commercial business at an accelerated rate. Therefore, we look to routinely grow EBIT dollars in the mid single digit range or better in times of strength.
And we leverage our very strong and predictable cash flow to repurchase shares, enhancing our earnings per share growth into double digits. We feel the track we are on will allow us to continue winning for the long term. We believe our steady, consistent strategy is correct. It is the attention to details and consistent execution that will matter. Our belief is that solid, consistent strategy combined with superior execution drives success.
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. We are pleased with our results this past quarter, but we must not be content. We have a lot of work in front of us over the next two quarters, but the future continues to look bright. Now we'd like to open up the call for questions.
Thank Thank you. Our first question is from Simeon Gutman with Morgan Stanley. Your line is now open.
Thanks. Good morning. I have a quick question for Bill Rhodes on the commercial sales growth. You mentioned it was a little weaker even absent some noise. And you didn't mention weather in the same breath, but you mentioned some training and labor.
So can you share with us what you think the void is on why what's not happening on the training or labor side that's causing a little like I don't know if it's slippage or noise in the commercial sales results?
Yes, I would start with one of the things we made specific mention of was that we have fewer stores going through the maturation cycle. And also the stores that are in that maturation cycle were opened later in our development process, which means they had lower potential than the ones that were opened sooner. So we're seeing some of our slowdown that is completely attributable to lower new store new program growth. But that said, we were still below our expectations for the quarter. Some of that we would attribute to some weather patterns, particularly in the Midwest and Northeast, but not all of it.
Frankly, we're not exactly sure all the reasons that we had a little bit of a slowdown, but we are very focused on taking our OneTEAM concept and getting our district managers, our store managers along with our sales team really reengaged in a big way and in a materially significant a more significant way than in the past. And I think that will pay us dividends for the long term.
And then the follow-up somewhat related to that. If you look at the markets with increased or the stores that are benefiting from increased frequency, are you making the customers in those stores aware of that? Or are they just seeing it through parts availability?
Yes. We're not marketing to them. Number 1, it's being done on a store by store basis. Clearly, local markets will have it or not, but we're not marketing it to them. We're just showing it to them in their yes percentage when they ask for parts.
Okay. Thanks. Nice results.
Thank you.
Thank you. Our next question is from Matthew Fakher with Goldman Sachs. Your line is now open.
Thanks a lot. Good morning. My question focuses on inventory. Your inventory grew, I believe, at a slower rate than cost of goods for the first time in quite a while. And this is as you're obviously ramping up availability.
If you could talk about the moderation in year on year growth, whether you expect it to continue an impact, if any, it would have had on sales as you went through the quarter?
Yes. Actually, I think when you look over time, we've actually increased our inventory quite a bit. And so now at the 630,000 first store location level, we feel pretty good about that. As Bill mentioned in the prepared remarks, we've spent a lot of time on analyzing placements. And so the merchandising organization has done a great job over the last, I would call it, 12 to 15 months of better determining where to place inventory.
I think the more frequent delivery, we'll be able to optimize inventory location as well. And obviously, we'll increase we've increased some inventory as we've added some of these mega hubs. So I would expect our inventory levels to on a per location basis to be approximately where they are now. They might have some increases as we roll out a few more mega hubs, but not significant increases.
So basically growing more or less in line with sales as the trajectory continues as it is?
Exactly right.
And then my very quick follow-up, you quantified the impact of FX on EBIT and it's not an insignificant number relative to your algorithm. How much I'm not sure how much detail you've given on that in the past. How much does that impact in the quarter you just reported? Or how does that compare to recent quarters?
Yes. What we said on this quarter was that we thought it was about 200 basis points or so. And I think last quarter, if I remember right, we said somewhere around 100 basis points or so. And so it has had a big impact and we're going to anniversary that somewhere towards the middle to the tail end of Q3 relative to the spikes that we saw on the peso. But I'm sure there's a whole lot of other macro things going on at the same time that are impacting the peso, including lower gas prices, etcetera.
So there's a lot of, as we call it, natural hedges going on. So it isn't singular. But if we were to single that out, it did have almost a 200 basis point impact on EBIT. So we expect that to probably impact just a little bit in Q3 and then we will fully anniversary it in Q4.
And just to get closure on this point, it sounds like just probably both translational and transactional impact to the point that you're to the extent that you're selling products sourced in the U. S. South of the border?
Not necessarily. I mean, there's obviously translation transaction from the balance sheet perspective, but it's mostly transactional from just the Mexico results.
Got it. Thank you so much.
Thank you. Our next question is from Dan Huber with Raymond James. Your line is now open.
Thanks. Bill, your explanation about the slower rate of program growth makes sense, But then presumably that would benefit the sales per program because they're more mature. But yes, it looks like they're up less than 1% sales per program during the Q2. So trying to reconcile that trend with the rollout and the apparent success with the mega hub and distribution frequency initiatives?
Yes. First, I would start with, one of the things that happened in the quarter on the more frequent delivery program, we did not roll out any significant amount of stores on that program until very, very late in the quarter. It just doesn't make sense to roll out things during the holiday season. So those over 300 stores that went on that program went on the last couple of weeks of the quarter. So you weren't able to see that benefit in there.
As I said earlier, Dan, some of the slowdown in commercial was clearly the maturation cycle, but some of it is we were frankly disappointed marginally disappointed with our performance in commercial. Our team has all hands on deck. We had a spring sales meeting last week and that was the predominant topic and I am highly confident that our team will take the ball from here and reaccelerate our growth.
You had a great opportunity to evaluate what's the benefit from the mega hub coverage, what's the benefit from the increased delivery frequency. And then I think you also have 500 stores that have the mega hub access and multiple delivery availability. When you think about those 2 different initiatives, where do you seem to be getting the biggest sales payback?
They are both performing at or above our expectations. Frankly, the mega hubs are outperforming our expectations. And by the way, the mega hubs, which several couple of them are multiple years old are continuing to grow. So we're really excited that the maturation continues 2, 2.5 years later. As we've said before, the combination of those two programs is driving a benefit of between $1,000 $1500 per program or per store that they get them.
And that holds true. In fact, if anything, it's a little bit stronger or towards the higher end of that as we roll it out.
And Bill, just real quickly, can you give an example or 2 of what you're focusing on the increased education or training in the commercial initiative? Just an example of what kind of conversations or teaching would be taking place at the store level.
I would say one big thing is a lot of our AutoZoners, myself included grew up on the retail side of the business. We didn't grow up on the wholesale side of the business. And so to use a baseball analogy, our fastball was retail. Well, we've got to develop a fastball that's also commercial. And so we are really focused on getting everybody in the organization, taking our whole one team notion to the next level.
And that includes getting our district managers and our store managers along with the sales team even more focused on growing the commercial business. Those are a talented group of people and I'm highly confident that they will embrace that motion and take us to the next level. Okay. Thank you. All right.
Thank you.
Thank you. Our next question is from Seth Bashan with Wedbush Securities. Your line is now open.
Thanks a lot and good morning. Good morning. My first question is just on the success of the delivery initiatives. When you think about the stores that received increased deliveries earliest in the development of this rollout, are they still out comping Control Group stores?
I would say as they anniversary that they're not comping on the delivery frequency, they're not comping at a higher level. They pretty much get that benefit very early because it's all about the customer calling in. Yes, we have the product at a higher level than we had it before. So the benefit is almost immediate. There's not a marketing halo except to the extent that when we say yes on a water pump, we may also get the wholesale as well.
But all those benefits are pretty much immediate. So I wouldn't anticipate that they would grow year over year.
Got it. So the mega hubs that are maturing
Different than that. The mega hubs are continuing to grow. And I think that is the more we say yes for hard to find parts, the more customer calls us first versus somebody else for a harder to find part.
Got it. Okay. That's very helpful. And then secondly, just looking at your gross margins, another really strong quarter. Can you provide a little bit more insight into how you're reducing your product acquisition costs so much?
There's a variety of things that the merchandising organization is doing in order to improve, quite frankly, sourcing. And so one of the things we talked about last quarter is that we're increasing our global sourcing efforts and identifying opportunities there. I'd say that's still early on. So there's more opportunity for that as we look out over the next several quarters, several years, frankly. So I think there's opportunities there.
It's mostly acquisition costs, to be honest. Very good.
Thanks a lot.
Nice results.
Thank you.
Thank you. Our next question is from Seth Sigman with Credit Suisse. Your line is now open.
Thanks. Good morning, guys. I just wanted to follow-up on that gross margin point. So clearly, a lot of momentum in gross margin helping offset some of the investments that you've made. How do you think about that playing out in the second half of the year?
So just wondering if you'll see greater impact in Q3 and Q4 from the increase in delivery frequency. I think as you pointed out, you're adding 700 stores in the second half. You only added 300 in that first half, which was kind of late in the quarter. So just wondering how that plays out and if you'll continue to see some of those offsets?
Yes. And we've added more than that. And so we'll probably add the way to think about it is we'll probably add about 300 stores a quarter on the more frequent delivery. And so we'll probably have this ratable pressure of about 20 to 30 basis points from a supply chain perspective. We've had opportunities to offset that through merchandising tactics, working with our vendors as well as lower acquisition costs.
So it's difficult to predict out exactly what gross margin will do over the next couple of quarters, but I think we feel pretty good about this quarter's results and we would expect something similar, maybe not quite this strong going forward.
Okay. That's helpful. And then just as we think about the strength in the retail side of the business, how do we think about the pace versus prior quarters? It's kind of hard to see with FX, but just wondering, did it accelerate versus prior quarters? And just in general, how should we be thinking about the drivers there between the inventory availability initiatives?
Obviously, there's a lot of disruption in the market as well. And then also, I think you pointed out, just improvements you're seeing within your customer base.
Yes. I would say that it felt pretty steady overall, I think, from the performance of the retail business for the quarter with the exception of the flow of the tax money and that's created some volatility overall. And clearly, as you pocket the United States, there was probably a little bit of a weather impact up in the Northeast and there's a minor impact in the south central area from oil. But other than that, it seems like it's been relatively stable and consistent throughout there. And then just if I heard you correctly, I just wanted to make a footnote to one thing.
You said the same store sales are domestic based, so the foreign exchange rate wouldn't have had any impact on that. No, understood.
Thank you. Our next question is from Michael Lasser with UBS. Your line is now open.
Good morning. Thanks a lot for taking my question. Bill Rhodes, so you're making progress with the inventory availability initiatives. Your sales per commercial program is still several $100,000 below some of the other players in the industry. Do you think what the current initiatives that you have in place are going to be able to enable the company to meaningfully close that gap over time?
Or do you have to do something else to get there?
I think we believe strongly in our current strategy. We believe this inventory availability initiatives are going to make a material difference in both our retail and commercial businesses. Discussion we're having today about taking our one team approach to the next level is really going to get our organization, which is an incredibly strong execution oriented organization and that will help take us to the next level. Where do we end up? When I sit back and think about it, a lot of people want to talk about moving from $9,000 a week to $13,000 or $14,000 a week.
If you think about it, the DIFM business is bigger than the DIY business. Over time, I'd love for our DIFM business to be bigger than our DIY business. That's going to take years, if not decades. But I don't want to set our sights to any short term target that would limit our thinking.
And has the most immediate impact from the increased inventory availability been to the DIY business?
No. I would say it's the most immediate impact is on both sides of the business. In fact, if anything, it is slightly disproportionate to the commercial business, which is what you would expect, particularly on the mega hub because these are later model products that are harder to find.
Then my follow-up question is, so with that being said and the slowdown in growth on the sales per commercial program basis within the quarter, was that was there any consistency or pattern that you saw because it doesn't sound like it was the stores that are getting the increased inventory availability. If anything, those are doing better than average, so it suggests that there's some other bucket of stores that is slowing.
Yes. I wouldn't say it's some other bucket of stores. I would say it was generally across the board. Certain markets where there were weather impacts were hitting slightly more than others, but it was generally across the board.
Okay. Thank you so much. All right. Thank you.
Thank you. Our next question is from Chris Horvers with JPMorgan. Your line is now open.
Hi. It's Mark Bechs on for Chris. I just want to come back to the commentary around the tax refunds. I think you said it was comparable at quarter end. Just wanted to fully understand.
So does that mean you wouldn't anticipate any sort of impact as you move into Q3? Or do you think there's still some lift from the delayed tax refunds for the next quarter?
Yes. What we said was at the end of the quarter, total refunds were generally consistent with where they were last year, but they really flowed very late in the quarter. There was a massive amount of refunds that were processed the Wednesday before our quarter ended. We obviously had a very nice weekend. Did we get all the benefit that we normally get in the quarter?
Probably not, but it's really hard to say. In the past, we've called out 2 different times that we thought the tax refund timing either benefited us or hurt us by 100 basis points in sales for the quarter. We didn't quantify at this time. So it was clearly our thoughts are clearly less than that, but there's probably a bit of it that's going to flow into the Q3.
Okay, that's helpful. And then just one other quick follow-up. I'll let Bill Giles jump in here. Maybe I'm reading a little too much into it, but the repo activity was a little bit of a modest deceleration in the quarter. I think historically that's kind of followed your cash flow and you've taken out debt in the middle of the year to support a ramped repo in the back half, but maybe any insight you might be able to give there?
Thanks.
You said it spot on. That's exactly right. The second quarter is typically a slightly lower cash flow quarter. We obviously bought more stock this quarter than we did last year at this time because of the IMC acquisition that we incurred last year. But share repurchases is a little bit lighter in Q2, but we'll ramp that back up as we head towards the back end of the year.
Great. Thanks.
Thank you. Our next question is from Bret Jordan with Jefferies. Your line is now open.
Hi, good morning guys.
Good morning. Good morning.
On the IMC that you just mentioned, you said it's got catalog availability to 700 of your stores. Could you talk about how it's impacting those stores commercial business?
Yes. As we've said for a long time, the number one reason we're in the IMC business is for the IMC standalone business. It's a business that we're very excited about on a long term basis. But it does provide for those customers, those AutoZone commercial customers that do some high end import business, it does provide us to increase our ability to say yes on those special needs. So when you think about that business today, it's maybe a couple of $100 per store per week in incremental sales.
It's not meaning a huge difference in the commercial business, but it is a nice help. And anytime you can say yes to something that they really need, then that helps you move up the call list over the long term.
Great. Thank you. And then in other, you mentioned that between all that and e commerce slowed a bit. Was it e commerce? And I guess is there anything changing in that space?
Or is it just sort of general slowing around the seasonal category? Is Rock Auto or Amazon having any impact?
I would say that we're not seeing much difference from an e commerce perspective overall, and I think it's just that's from steady. I think all data has had a little bit more competitive pressure in the marketplace and that's probably slowed their growth a little bit. So that's kind of more what you're seeing there.
There. Our next question is from Mike Baker with Deutsche Bank.
Hi, thanks. Two questions. 1, just bigger picture. You said at one point earlier in the call that the economy is favorable for DIY right now. Does that imply that you think it's more favorable for DIY than the commercial business?
And if so, why is that and has that changed at all?
Yes. I would say we are number 1, much more educated on how the economic cycles impact our DIY business than we are the DIFM business just because we've been in that business for so much longer and we have a much more mature business. Clearly, the economic cycle that we're in with lower gas prices, which are leading to really, really high miles driven is very favorable for us. Those same impacts those same indicators should impact the commercial business, But we believe at this stage in our commercial business development, it's much more on us and our development of that business than it is on economic macro factors.
Understood. Okay. That makes sense. And I guess as a follow-up to that DIY in commercial growth, who do you think you're taking market share? And are you taking more or less share in DIY or DIFM?
Clearly, your DIFM business is growing faster, but is that indicative of the market growing faster or are you taking more share?
Well, I think clearly we're taking share in both businesses. We're probably taking a disproportionate share in the commercial business. But again, because we're later to the party than many of our competitors, and so we're earlier in the maturation cycle. As far as getting into specifics, I'll let you all look at individual company's performance and make those determinations for yourself.
Understood. Thanks for the color.
Thank you.
Thank you. Our next question is from Chris Bottiglieri with Wolfe Research. Your line is now open.
Hey guys, thanks for taking the question. First question I have was your gross margin has been very robust. Obviously, a lot of this is probably acquisition costs, but I would think there's some other drivers. Just want to get your thoughts. How much of this directionally would be just oil based products you're getting in the market keeping pricing versus cost coming down, integration benefits of IMC and then just general oil benefits on your transportation network?
Are some of those in there? And so just to go backwards, there's a little bit of benefit certainly from lower gas prices and fuel costs that's going to impact supply chain and then frankly, probably SG and A a little bit as well. And then in addition to that, actually the inflation deflation has been relatively moderated. I mean there's more deflation a little bit in categories like oil. And frankly, deflation typically is not helpful for us from a margin perspective.
So inflation would be a little bit better for us on a long term basis.
But I would
say that I would give a credit back to the merchandising organization from an acquisition perspective, working with the vendors, optimizing where we're buying the inventory, going direct and certainly opportunities as well, increasing private label product where we have opportunities to do so. We're pretty well penetrated in private label today, but there continues to be opportunities for us to expand our penetration on private label and that has helped a little bit. So many of the improvements that I would say that we've seen, not all, but the majority are sustainable. And so I think that we've got a good playbook to continue to do that. And having said that, as we mentioned, we continue to still have headwinds from just lower margin businesses growing at a faster rate and then some of the initiatives that we have from an inventory perspective.
Got you. Okay. And then just one follow-up on related question. So you guys are obviously well ahead of the rest of the party in terms of putting together a DIY program. It's still on a monetary value.
It seems that you exceed your competitors. Are you seeing any kind of impact from some of these traditional DIFM customers, competitors using DIY programs in terms of rewards? Can you talk about retention rates or number of members, anything you can just give context to how your own rewards loyalty programs have performed?
Yes. Our loyalty program, which we've had in some form for basically a decade continues to perform very well as an important part of our value proposition to our customers. As other people have gotten into the loyalty program, we obviously paid very close attention to it. But at the macro level, our DIY business is performing very well right now. And so I think we're confident with what we're doing.
We're confident with the benefits that we're getting out of loyalty program and look forward to continue to perform well.
All right, great. Thanks a lot guys.
Thank you. Thank you.
Thank you. Our next question is from Michael Montani with Evercore ISI. Your line is now open.
Hey, guys. Thanks. It's Mike Montani on for Greg Melick. Just had a quick one on CapEx. Can you guys just give
a little bit more color on
what you think this year will be and then the outlook for the next couple of years given the expectations for the DCs and mega hubs? And then I had a follow-up.
I think that we probably said that we'd pay you somewhere around $600,000,000 or so for fiscal year 2016. At this pace, we'll probably be a little bit lower than 6 $100,000,000 For next year, probably back closer to that $600,000,000 maybe a little bit over that, depending on how we finish up this year. And then the following year, I think we'll probably migrate down into the mid-500s or so once we get the distribution centers open. But that would really be the only aberration, if you'll call it, from a CapEx perspective. Other than that, we're opening square footage at around 3% and continue to invest in our existing base stores to make sure that they look fresh and current every day and then also to invest in technology in order to make sure our platforms can support our business as we grow.
Great. Thanks. And then if I could, just on the margin side, you mentioned obviously higher wage costs. Can you help understand how much of that is really headcount per store, increased hours versus like wage rate and then any kind of health care expense that you guys might be seeing or not seeing?
Yes. I think mostly of
our payroll is really intentional investment in our payroll dollars in the stores in order to improve customer service as well as the training that Bill talked about earlier. From a wage rate perspective, I would say that we're continuing to see an increase in wage rates, but not anything different than what we had expected to see and frankly not much different than what we've seen in prior years. Obviously, around the country there's pocketed areas. But for the most part, it's been steady as she goes. From a health medical perspective, we're not seeing any significant changes necessarily to our current cost rates.
So that seems to be pretty much in check as well.
Great. Thank you, guys.
Thank you.
Thank you. At this time, I would like to hand the call back to Mr. Bill Gross for closing comments.
Okay. Before we conclude the call, I'd just like to take a moment to reiterate that our business model continues to be solid. We're excited about our growth prospects for the year. We'll 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. Thank you for participating on today's call.
Thank you, speakers. And that concludes today's conference. Thank you all for joining. You may now disconnect.