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 first 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 10:00 A.M. Central Time and 11:00 A.M. Eastern Time Zone. Before Mr. Rhodes begins, the company has requested that you listen to the following statement regarding forward-looking statements.
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Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part One of this annual report on Form 10-K for the year ended August 29th, 2015. 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. 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 Rhodes. Sir, you may begin.
Good morning, and thank you for joining us today for AutoZone's 2016 first quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer, IT, and ALLDATA, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the first quarter, I hope you 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 globe for another solid quarter. The first quarter has been very busy for us. We continue to organically grow our business while expanding our initiatives designed to drive sales. We expanded our U.S. retail footprint with the opening of another 22 net new stores.
Our commercial business continues to gain traction, growing sales 10% with 55 net new programs open for the quarter. We have the commercial program in 81% of our domestic stores, and we continue to expand our presence in Mexico, opening one store in the quarter. Also, in Brazil, we opened an additional store and now have eight stores in operation. Lastly, we opened two new IMC branches. While we currently have approximately 90% of our total company sales coming from our domestic AutoZone stores, we believe we have great growth opportunities with both electronic commerce and store openings outside the U.S. for many years to come. Along with our key strategic investments, we continue to spend a lot of time on initiatives to drive our core domestic retail business. The DIY operations remain our number one priority, and the business did quite well in the first quarter.
We generated positive traffic and ticket on a same-store basis, and performance was generally consistent across the country. While the macroeconomy is favorable for DIY performance right now, we 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 the industry. Over the past two years, we implemented new methodologies to improve our hard parts placement techniques in all stores. We continued the rollout of more frequent deliveries to an additional 80 net new stores in the quarter.
As we discussed in our last quarterly conference call, this rollout focuses on increasing from once-a-week deliveries from our distribution centers to either three or five times. 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 remainder of the fiscal year, we expect to roll this increased frequency model to approximately 1,000 additional stores, ending the fiscal year with approximately 2,000 stores with this enhanced service level. The implementation of this initiative will create a gross margin headwind of approximately 30 basis points each quarter until we complete the rollout. While this effort will take a few years to complete, we would ultimately expect about two-thirds of our stores to have increased frequency of deliveries. This quarter, we only implemented this initiative in 80 net new stores.
This past quarter, our focus was on rolling out multiple deliveries to our Hub Stores. We focused our efforts on this group of stores because they service so many other stores. Additionally, we continue to be very pleased with our sales results from the Mega Hub stores. We ended the quarter with five Mega Hubs in operation with no new openings this quarter, although we expect to add a handful of additional Mega Hubs over the balance of the fiscal year. As a reminder, these super-sized 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 are exceeding our expectations.
We have been pleasantly surprised to see the sales generated by the new unique SKU additions to their markets, lifting both our retail and commercial businesses. While there is incremental cost to these rollouts in 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, five Mega Hubs support approximately 2,000 stores on a same-day or overnight basis, and once built out, we'd expect to have a network of Mega Hubs in the neighborhood of 25 to 40 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. We also continue to roll out our new store prototype that significantly expands the hard part holding capacity in our stores.
All new stores are opening now with this new prototype. We remodeled 29 additional constrained stores and now have 126 completed locations. Each of these efforts that are focused on improving our availability of inventory have resulted in an increase to our store-level inventories. They've also added incremental costs. Sales have justified our investments, though, and offered convincing proof that we remain on the right track. 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 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 material and meaningful enhancements in the last few years to our availability of inventory. Now it is time to ensure our customers experience and see that substantial change. With traffic up across our stores, we understand and appreciate the need to be appropriately staffed to handle our customers' needs. When a customer has a request for a part, product, or simply advice, our objective is to say to them, "Yes, we've got it." While early in the implementation phase, our team has enthusiastically embraced this notion. With the current positive macro environment, we want to make sure our AutoZoners have the tools and specifically the staff necessary to provide our customers with WOW! Customer Service experience they deserve.
We also continue to make significant systems investments and enhancements to capture data about our customers' shopping patterns across all of our platforms. We believe it is essential to be able to share information and processes seamlessly between our stores, commercial shops, phone, and online experiences in order to meet all of our customers' needs. While we are in the early stages of this work, we believe having a holistic and seamless enterprise-wide perspective of our customers will benefit us greatly over the next several years. In order to support more frequent deliveries to new stores as well as the Mega Hubs, we expect to open two or three distribution centers over the next two or three years. For your modeling purposes, each new distribution center is expected to cost from $40 million-$45 million.
At present, we are in the early stages of planning their openings. We don't expect any domestic distribution center to come online until early 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 and 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 two or three new domestic distribution centers over this time. While our total company CapEx will not be materially different this year from the past, we do expect to incur an approximate 20-30 basis point gross margin headwind from these investments alone.
In fiscal year 2015, we faced headwinds to our gross margin. We were able to overcome them and post improvements in each of our quarters. We believe in fiscal 2016, we continue to have opportunities for improvement. We also have new headwinds. Now turning to the first quarter's results. Our sales increased 5.6% on top of 8% growth in Q1 of last year. Our domestic same-store sales were up 3.5%. This quarter's sales results were very consistent throughout the quarter, excluding the last two weeks. The last two weeks of Q1 last year were particularly strong due to the extreme cold across much of the country. Remember the polar vortex?
Every year when the first significant cold spell arrives, we experience significant growth in hard parts sales, and customers are reminded of the importance of doing the maintenance work necessary to prepare their vehicles for the winter driving season. Last year, that first cold weather event was pulled forward into Q1, when it usually occurs early in Q2. While weather is always an important factor for sales, over time, the impact evens out. Regionally, the Northwest, Northeast, and Midwest performed slightly below the overall chain. However, these 2 markets were better the year before. In regard to our 3 primary merchandise category splits, discretionary products sales performed the best. Maintenance followed, and then failure-related merchandise. We attribute the recent strength of discretionary category to be due to lower gas prices freeing up money for our customers.
While important, discretionary remains our lowest mix of sales, approximately 80% of total domestic store sales, so the impact of accelerated growth in these categories is not the most significant driver of our overall sales. We are still a failure parts-driven retailer, representing approximately 50% of total sales, and the lack of early winter this year muted our sales in failure-related categories. As I said earlier, both traffic and ticket were positive for our DIY and commercial businesses. For the quarter, we opened 55 net new programs in commercial and have a commercial program in 81% of our domestic store base. While our sales grew 10% on the quarter, our programs opened grew by 7%. While the commercial sales growth rate was a bit slower than last quarter's pace, we continue to be pleased with the progress we are making. We believe our future in this business remains bright.
As part of our strategy of increasing inventory levels in local markets closer to our customers, this past quarter, we opened 2 additional Hub locations and now operate 178 traditional Hubs. In addition to our opening more Mega Hub locations, we also expect to open additional standard Hub locations. Over time, we expect to operate as many as 200-225 stores as Hubs. Regarding IMC, we opened 2 new branches this quarter and are excited by our opportunities. This year, IMC will be busy. We'll open a few more locations this year and expand access to their original equipment inventory to more AutoZone stores. The IMC parts catalog is accessible to around 600 AutoZone locations today, so we see great sales growth opportunities in the future for both our retail and commercial customers. Regarding Mexico, we opened 1 store this quarter and now have 442 total locations.
While foreign currency headwinds persist, Mexico's peso sales have done well. Assuming the peso stabilizes, we expect the pressure on US dollar earnings from our Mexico business to abate starting next summer in the June-July timeframe as we begin to lap the exchange rate increases. For the quarter, the foreign currency headwinds lowered our EBIT growth rate by more than a percentage point. Sales in our other businesses for the quarter were up 4% over last year. As a reminder, our ALLDATA and e-commerce businesses, which includes autozone.com and AutoAnything, make up this segment of sales. Regarding online sales opportunities, there continue to be great opportunities for growth on both a business-to-business basis and to individual customers or B2C. With the continued aging of the car population, we continue to be optimistic regarding trends for our industry in both DIY and DIFM.
As new vehicle sales are reaching all-time highs and gas prices, on average, are down materially, miles driven continue to increase. The lower-income customer benefits the most from lower gas prices relative to income. This trend is encouraging. While we understand recent weather has been warmer and we are up against a quite cold winter last year, we are still optimistic we can grow sales for upcoming quarters. While we focus on both short-term and long-term performance, we remain committed to delivering consistent, strong earnings performance, and extending our streak of 37 consecutive quarters of double-digit EPS growth 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 the fiscal year, our focus remains growing operating profit dollars at acceptable return levels.
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 focused on improving our mobile app and autozone.com to increase our relevancy across our fastest-growing online category. We've 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 very excited about what this initiative can mean. We should also highlight another strong performance in internal invested capital, as we were able to finish the quarter at 31.2%. We are very pleased with this metric, as it is one of the best, if not the best, in all of hard lines retailing. Our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return well in excess of our cost of capital.
It is important to reinforce that we will 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 our entire organization for their commitment to managing the business appropriately and prudently. I'll turn it over to Bill.
Thanks, Bill. Good morning, everyone. To start this morning, let me take a few moments to talk more specifically about our retail, commercial, and international results for the quarter. For the quarter, total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores, and our 22 IMC branches, increased 5.6%. Switching over to macro trends. During the quarter, nationally, unleaded gas prices started out at $2.51 a gallon and ended the quarter at $2.09 a gallon, a $0.42 decrease. Last year, gas prices decreased $0.64 per gallon during the first quarter, starting at $3.46 and ending at $2.82 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 2.3% in August and 4.3% in September. We don't have October or November data yet. The other statistic we highlight is the number of seven-year and older vehicles on the road, which continues to trend in our industry's favor. For the trailing four quarters, total sales per AutoZone store were $1,773,000. This statistic continues to set the pace for the rest of the industry. For the quarter, total commercial sales increased 10%. In the first quarter, commercial represented 18% of our total sales and grew $39 million over last year's Q1. While the sales trajectory of the business slowed a bit in Q1, we are continuing our efforts to grow this business.
This past quarter, we opened 55 new programs, versus 61 programs opened in our first quarter of last fiscal year. We now have our commercial program in 4,196 stores, supported by 178 Hub Stores. Approximately 1,106 of our programs are three years old or younger, or 26% of the base. Let me take a moment and discuss our commercial program performance. While our average weekly sales per program for the last 12 months are below some peers in our industry at $8,800, our productivity continues to improve. Our focus remains on growing both sales and profits at an accelerated rate compared to our retail business. Looking specifically at mature programs, those at least five years old, they averaged $10,000 per week this past year and grew mid-single digit over last year.
While we will continue to open additional programs over the next several years, we will remain focused on improving the productivity of all our existing programs. We also feel very good about the success we've had in profitably growing the commercial business. 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, and that will continue to be the case, albeit at a slightly moderated pace. 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 are excited about our opportunities in this business for many years to come. Our Mexico stores continue to perform. While we opened one new store during the first quarter, we currently have 442 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 will mark our second DC in the country and support central Mexico store growth. While sales in base currency were above plan this past quarter, the devaluation in the peso remains a material headwind to US dollars reported for operating profit. The peso finished Q1 21% below last year's quarter-end rate. This weakness created a significant headwind on our reported US dollars and EBIT.
As Bill previously mentioned, for the quarter, foreign exchange headwinds lowered our EBIT growth rate by more than a percentage point. While we cannot control movements in functional currency versus planned assumptions, the Mexico leadership continues to do an excellent job managing the peso-denominated business. If the peso stays at these elevated levels, it will continue to pressure our US dollar earnings for the next few quarters. Regarding Brazil, we opened one store in the quarter, resulting in eight stores open at the end of the quarter. While sales growth has been very encouraging, we have been challenged by a weak Brazilian real relative to US dollars as well. While the peso devalued 21%, the real devalued 48% this year versus last. This extraordinary volatility was managed as best as possible. We remain in test phase in Brazil but have been encouraged by our operating performance.
Recapping this past quarter's performance for the company, in total, our sales were $2.386 billion, an increase of 5.6% over last year's first quarter. Domestic same-store sales or sales for stores open more than one year were up 3.5% for the quarter. Gross margin for the quarter was 52.5% of sales, up 45 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 at basically a flat level to last year across merchandise categories with pockets of deflation. Currently, we feel costs will be predictable and manageable. We will remain cognizant of future developments regarding inflation and will make the appropriate adjustments should they arise.
Looking forward, we continue to believe there remains opportunity for gross margin expansion within both the retail and commercial businesses. Our commercial business is growing at an accelerated rate, and it has lower margins, which is adding pressure to our overall gross margins. It is important to note we do not manage to a targeted gross margin percentage. We also understand the headwinds expanding our distribution center deliveries will cause. We'll continue to work diligently to offset these headwinds with a focus on lower acquisition costs. Our primary focus remains growing absolute gross profit dollars in our total auto parts segment. SG&A for the quarter was 34.2% of sales, higher by 17 basis points from last year's first quarter.
The increase in operating expenses as a percentage of sales was primarily due to higher domestic payroll and the impact of IMC, which were partially offset by the favorable comparison to last year's higher legal cost. We continue to believe we are well-positioned to manage our cost structure in response to our sales environment. EBIT for the quarter was $438 million, up 7.2% over last year's first quarter. Our EBIT margin was 18.4%. Interest expense for the quarter was $35 million, compared with $37.1 million in Q1 a year ago. Debt outstanding at the end of the quarter was $4,754,000,000, or approximately $350 million more than last year's balance of $4,402 million. Our adjusted debt level metric finished the quarter at 2.5 times 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. Share repurchases are an important element of that strategy. For the quarter, our tax rate was slightly higher than last year's Q1 tax rate. We expect our annual rate to be closer to 36.5% on an ongoing basis, as the deviation in results is primarily driven by the resolution of discrete tax items that arise. Net income for the quarter was $258 million up 8.3% over last year. Our diluted share count of 31.1 million was down 5% from last year's first quarter. The combination of these factors drove earnings per share for the quarter to $8.29, up 14% over the prior year's first quarter.
Relating to the cash flow statement for the first fiscal quarter, we generated $324 million of operating cash flow. Net fixed assets were up 5% versus last year. Capital expenditures for the quarter totaled $87 million reflected the additional expenditures required to open 27 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, Information technology investments. With the new stores opened, we finished this past quarter with 5,163 stores in 50 states, the District of Columbia and Puerto Rico, 442 stores in Mexico and eight in Brazil, for a total AutoZone store count of 5,613. We also had 22 IMC branches open at fiscal quarter end, taking our total locations to 5,635.
Depreciation totaled $66 million for the quarter versus last year's first-quarter expense of $61 million, in line with recent quarter growth rates. With our excess cash flow, we repurchased $400 million of AutoZone stock in the first quarter. At quarter end, we had $698 million remaining under our share buyback authorization. Our leverage metric was 2.5 times at year-end. Again, I want to stress we manage to appropriate credit ratings and not any one metric. The metric we report is meant as a guide only, as each rating firm has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy. Accounts payable as a % of gross inventory finished the quarter at 110.6%. Next, I'd like to update you on our inventory levels in total and on a per-location basis.
The company's inventory increased 7.2% over the same period last year, driven by increased product placement and new stores during the fiscal year. Inventory per location was $624,000 versus $604,000 last year and $610,000 last quarter. Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 31.2%. 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 37th consecutive quarter of double-digit EPS growth, growing this quarter at a rate of 14% over last year. To execute at a high level, we have to consistently adhere to Live the Pledge. We cannot and will not take our eye off of execution. While we study the external environment and react where appropriate, we must stay committed to executing day in and day out on our game plan. 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 we look forward to opening more.
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. 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 in the long run. 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 three quarters, but the future looks bright. Before moving to the Q&A section, I'd like to address some of our recent organizational changes. In late September, Larry Roesel informed us that he was retiring this fall. Larry led our commercial business for eight and a half years, and we experienced tremendous growth during his tenure.
We thank Larry for his incredible contributions to our success and wish he and his wife, Beverly, all the best in retirement. Additionally, Mike Womack recently informed us that he and his family will be moving back to their home in Ohio. Mike has led our human resources organization for three and a half years. Under his leadership, our HR processes have continued to improve. We wish Mike and his family all the best as they return home. In light of these changes, we have elevated three long-term AutoZoners to Executive Vice President, and we have promoted five AutoZoners to Senior Vice President. I am very excited about these individuals, their promotions, and the impact they will have on our business. These are very talented leaders, and they have tremendous AutoZone tenure. On average, these eight AutoZone leaders have over 25 years of AutoZone tenure.
This is a great testament to our unique and powerful culture, it highlights that our diligent work around succession planning is paying dividends. Now we'd like to open up the call for questions.
Thank you, sir. We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one. To unmute your phone and record your name when prompted. To cancel the request, you may press star and then two. One moment please for our first question. Thank you, speakers. Our first question is from Simeon Gutman with Morgan Stanley. Your line is now open.
Thanks. Good morning, nice quarter, guys.
Thanks.
On multiple delivery and DC rollout, I guess DC is eventually coming to the system. I missed some of the prepared remarks. I guess an expectation of maybe sometime late this fiscal year or next. If you think about the cadence of investments, the 20-30 basis points or so from supply chain, how does the DC investment play into that? Does it bump it up? Will you get some other benefit that take it down?
Yes, couple of great questions. First of all, we will open our distribution center in Mexico, our second DC in Mexico, hopefully by this fiscal year or first of next fiscal year. The two DCs that we're working on domestically currently will not open until 2017, hopefully one in the first or second quarter, and the second one in the third or fourth quarter. As you know, those things take time. As those distribution centers open, clearly they will have some capital investments. On the operating expense front, I don't think that they will be a material contributor to drive our operating expenses up or down.
As we do more frequent deliveries, they're going to have some benefits because the stem miles of the transportation routes will be shorter, but obviously they'll have incremental operating expenses of having a new facility and a new management team and all those things. I think those will net out generally.
Okay, one quick follow-up. Granted, it's early days with the multiple delivery, but I imagine in store some of the inventory, the complexion is changing a little, more depth and maybe less safety stock. Is that the case? How are stores acclimating to it? Are there any protocols in store to minimize disruption? Obviously that should be translating into sales.
Yeah, I would say, that was one of the things that we looked at when we first started our test on this program. The store operators like it. They like it a lot. Number one, when the truck comes in, it's in bite-sized pieces, so it's much more easy to work into the daily activities versus being the big event of the week where they have to have all hands on deck. They like it. Yes, it pulls down safety stock, which one of the challenges we have, and we talked about our store of the future trying to eliminate some of the physical constraints that we have in our stores. One thing this does is pull down the safety stock and allows us to put more parts on the shelf. From an operating standpoint, I think it's all systems go and they really like it.
Okay, thanks.
Thank you.
Thank you, speakers. Our next question is from Mr. Dan Wewer with Raymond James. Sir, your line is now open. You may proceed.
Thanks. Good morning, Bill.
Good morning.
You had noted that obviously the commercial revenue growth at 10% is quite good, but you did note that it decelerated from previous quarters. When you look at the results for the stores that are commercial programs that are still being delivered to once a week compared to those that are on a three-to-five-week schedule, was there a deviation in their sales performance?
Yes, Dan, there's clearly a deviation. I would say, first of all, that the benefits that we see from both of the inventory availability initiatives are both on the retail side and the commercial side. I wouldn't say that those stores reacted any differently in comparison than they did in Q4, if that makes sense.
When you looked at the bit of moderation in revenue growth in commercial from 4Q, it was pretty much the same in whether the stores were being shipped to once a week or three to five times per week.
Yeah, I think that's right. As a reminder, when we do the delivery frequency and the Mega Hubs, we see about $1,000 to $1,500 per store if you get both elements of that. That differential seems to be confirmed in everything we've done so far, and we did see a moderation in our sales growth kind of across the board.
Just one other follow-up question on the incremental commercial growth. How is that splitting out between doing more business with existing customers or are your salespeople now engaging new customers and making them aware of your greater capabilities? If you could talk about how that split is developing.
Yeah, I think it's a combination of both. Clearly, as we mentioned, we've grown our mature programs in the mid-single digit rates. We're getting more productivity out of our existing base programs as they continue to mature. Clearly, with our opportunities to say, "Yes, we've got it on a more frequent basis and be able to deliver products more timely," both through more frequent deliveries as well as the Mega Hub network, and being able to communicate that to our customers with our sales force is an important thing and we've been able to do that, and I think we'll continue to gain traction over time.
Bill, if I could just sneak in real quick question. Can you remind us how important are your commercial customers at Firestone and the service part of Pep Boys to AutoZone?
We don't talk about specifics on our commercial customers. Obviously Firestone is one of our great customers. We appreciate their business. I don't want to get into specifics on them. Obviously we don't do much, if any, business with Pep Boys.
Okay. Thank you.
Thank you, speakers. Our next question is from Christopher Horvers with J.P. Morgan. Your line is now open, sir. You may proceed.
Hi, it's actually Mark Becks on for Chris. Historically, the DIY category has been sort of a flat to 1% comp industry, you guys are obviously doing much better than that. What, if anything, has changed on the DIY side outside of the fuel parts declines, and what do you think the rate of the growth in the industry is currently?
Yeah, I think clearly we are seeing some industry strength currently. I think a part of that has to do with what's going on with gas prices. While gas prices initially went down, you didn't see the initial correlation with miles driven increasing. In more recent months, starting really strong in the summer and continuing through September, the latest data we have available, it's showing nice strength. Over long periods of time, we've seen that has a nice correlation with our DIY industry growth. I also say that our performance, I don't think is solely based on industry. We talked about it in the prepared remarks. We're also gaining market share, I think a lot of these initiatives that we have in place, particularly around inventory availability, are beginning to pay dividends. Remember, we're just very early in the early innings.
Two quick follow-ups to that. Who do you think you're taking share from, whether it be on the independent or the national retailers? Then also just with the lower gas prices, have you seen any particular lift that you might be able to quantify or if you've done any historical correlations? For instance, a 1% increase in miles driven would add 25 basis points to the comps.
Yeah, I don't think the analysis that we have is that finite. What I would tell you is we would think that we're getting a benefit of 1%-2% at this point in time in our DIY business. As for who we're gaining market share from, I don't really want to get into that. I'm more focused on are we gaining market share and what are we going to do to gain more of it.
Okay, great. Just last question. You spoke to still being optimistic about growing sales and then talked about a dip in trends the last two quarters. Can you speak to any variability by region that you saw over the last couple weeks? I think it was 50 here in the Northeast this past weekend, and it's supposed to be 60 again this weekend. Thanks.
Thank you. Great question. Number one, we wanted to call out what happened in the last two weeks of the quarter because it was materially different. It wasn't materially different this year from the other weeks in the quarter. What was materially different was last year. We had that very first significant cold snap, and last year was really significant, and it happened in the last two weeks of the quarter. Our sales spiked during those last two weeks. We all know, it's been a warm fall. The beginning of winter is warm so far. What happens going forward? We don't know. They're calling for it to be a warmer winter. We'll see what happens. I don't think necessarily when you think about average temperatures, is that really the driver?
What we need are a few really abrupt cold snaps because the parts that are on the verge of failing will fail when those cold snaps happen, and we'll get our failure-related business back in those categories.
Thank you, speakers. Our next question is from Mr. Michael Montani with Evercore ISI. Your line is now open. You may proceed.
Hey. Good morning. Thanks for taking the question. I wanted to ask Bill if you could just help contextualize a little bit the benefits that you all would've seen in the spring and summer the last two years from what were sort of, I would say, unusually favorable winter conditions. Just to help us contextualize that as we head into this coming spring and summer period.
Yeah. Clearly, we've said many times over that a harsh winter does benefit us in the spring and summer. We've never been able to go in and say specifically how much it drives us. Clearly, and it really happens with the under car parts. What happens with a tough and particularly a wet, snowy winter is the roads get a lot of damage, and that puts a lot of pressure on chassis systems, on brake systems, and the like. We do tend to benefit from those as the spring thaw happens and into the early parts of the summer.
Okay, great. Just to understand a little bit more, if I could, on the cost side. I was a little bit surprised to see the 15 basis points hit from IMC just because I thought it would've been cycled more or less. Can you discuss a little bit the ins and outs there and how to look at that moving forward as well as the labor costs, which popped up a little bit. Is that due to increases in terms of pay per hour? Do you know? What's kind of driving that? Is it hourly rates to drive service, I think you alluded to?
Yeah, I would say that on the IMC front, we haven't fully anniversaried. It will just anniversary through September, after September. We've also opened five new locations. We went from 17 to 22 locations. Those five locations are adding some incremental expense as they begin to get themselves ramped up. My expectation is that we would see a little bit of headwind from IMC for the next quarter or so as we begin to mature some of the new openings that we have had. From a payroll perspective, it's really probably better service levels overall. I think that we've increased our payroll hours a little bit across the board. We're not seeing a significant amount of wage inflation yet. We've seen a little bit. We anticipate probably a little bit more going forward.
Overall, I would say we've improved our service levels in line with our Yes, we've got it initiative.
Thank you.
Thank you.
Thank you.
Our next question is from Mr. Matthew Fassler with Goldman Sachs. Your line is now open. You may proceed.
Hi, this is Chandni Luthra on behalf of Matt Fasser. Congratulations on a good quarter, guys. My first question is that some of your competitors called out a benefit from the M&A disruption in the space. Could you perhaps throw some color as to what you're seeing in terms of those trends and any impact that you are getting?
Anytime somebody goes through a major acquisition integration, it's a challenge. We're not gonna get focused on what they're doing. We're gonna focus on what we're doing. As we talked about in our prepared remarks, we've got a great strategy. What's gonna matter is whether or not we are able to execute that strategy. I think we're doing that right now, and we got to make sure we continue to do it. What happens with others is gonna happen. There's nothing we can do about it, so we're just gonna focus.
Got it. Okay. My next question's about ALLDATA. There were some press releases in the last quarter about some new partnerships and agreements that you got for this ALLDATA business of yours. Could you perhaps talk about these and the potential of this business going forward in general? Thank you.
Yeah, we've got a few partnerships with a few important vendors and also with customers as well, and that's pretty much ongoing. We will continue to grow the ALLDATA business. We feel good about the ALLDATA business. We think that it's a leader in the industry, and we had signed an agreement with AAMCO, you may have seen referring to, just recently to provide them with service through all their locations. It's a great product, well respected in the industry and has good prospects going forward.
Great. Thanks, guys.
Thank you, speakers. Our next question is from Michael Lasser with UBS Securities. Your line is now open. You may proceed.
Hi, this is actually Mark Carden on today for Michael. Thanks for taking the question.
You bet.
It looks like the gross margin basis point impact from the more frequent delivery initiative ticked up slightly this quarter. Can you guys talk maybe a little bit about what was slightly more costly than expected and what's bringing you guys up to the high end of your expected range looking forward?
That's a very good question, and that's spot on. We were 37 basis points de-leveraged due to supply chain, and we had articulated at 25-30, it was a little bit higher. I think part of that is really just as we continue to roll out new programs with activity. If you look at the quarter in a little bit more finite detail, we probably rolled out about 300 programs onto the program this quarter, although we took off a couple of hundred programs, that got us to that net 80. There was a lot of activity that occurred during the quarter, and as we begin to ramp this up, our handling costs, our internal costs to deliver more frequently will rise a little bit.
Also keep in mind that this quarter and particularly next quarter as well, are slightly lower volume quarters, we really won't have the opportunity to leverage quite as much as we might during the summer months, so to speak. I think that overall, we feel pretty good about the estimates that we've given on an annualized basis, although on any given quarter, they may fluctuate a little bit.
Great. That's really helpful. I guess as a follow-up, can you talk about the performance in the stores that have seen the greater delivery frequencies implemented? Has it been, I guess, consistently higher across the board? Are you guys seeing some variability?
Yeah, that's a great question. We do see variability. That's the reason why we're going to go forward with a strategy that says, roughly two-thirds of our stores are going to see three to five times per week deliveries, and a third of them are going to continue to see one time a week delivery. The big variable that drives it, as you would expect, is store volume. You're talking about replenishment levels and the more product that you sell, the more frequently you need to replenish it. We do see significant variability, but it's along the volume scale.
All right, great. Thanks, guys.
All right, thank you.
Thank you. Our next question is from Bret Jordan with Jefferies. Your line is now open. You may proceed.
Hey, good morning, guys.
Morning.
Good morning.
A quick question on the store level SG&A investment. I guess if we were looking, are we thinking about adding employees or maybe changing the mix of employees and getting sort of higher-end parts pros as you grow that commercial business?
I wouldn't say it would be changing the mix necessarily. I think that as the commercial business continues to grow, we will continue to invest in commercial sales pros, as you call them, in the organization. I think really the comparison this year versus last is that we increased our service levels relative to where we were last year. I think last year we probably cut back a little bit more than we wanted to. I think actually we probably might have even called that out last year, that we thought our service levels were not at the level that we wanted them to be. So this year, we didn't want to repeat that mistake, and so we stuck with our model during the quarter, and I think we delivered better service levels.
Okay, follow up on the hard part-centric store prototypes. As you've reset some of the legacy stores, do you see doing more of those or are you sort of where you are at where you need to be from a distribution and a hard parts availability standpoint?
I think as far as resetting some of those stores, as we talked about, we've got a new store prototype, so all the new stores that open will be under that prototype. We've gone back, I can't remember, I think it's about 126 stores that we've already remodeled on that new store prototype. We will continue to do that. Frankly, I suspect we'll get into the hundreds of stores. I don't see that being 1,000 stores necessarily because we're going to have physical constraints as we go through the process. Where we can find opportunities to add more hard parts into space-constrained stores, we're going to continue that.
Is the performance of that hard part, the new prototype store, meaningfully different than the legacy mix?
It's different enough for us to justify the investment. We can debate what meaningful is, but those stores are performing better and those hard parts are moving.
Yeah, if I can add on to that. Number 1, the new prototype is not materially more expensive than the old prototype. As we open new stores, there's no meaningful cost differential. The real benefit comes in the really, really space-constrained stores that we have. Remember, we still have a lot of 3,800 sq ft stores or 5,000 sq ft stores. When those stores are performing at high volumes and we're able to go in and remodel them to the elements of this new prototype, that's where we can really see a differential.
Great. Thank you.
Thank you.
Thank you, speakers. Our next question is from Curtis Nagle with Bank of America Merrill Lynch. Your line is now open, sir. You may proceed.
Thanks very much. Just on for Denise today. Two quick questions. One, it looks like the comp total sales variance narrowed a bit from recent trends. Just curious if that's from the peso or something else. Two, any commentary on new store growth for this year, if you could comment on that?
Sure. Great questions. First of all, on the peso, our same store sales are domestic only. The peso variances aren't impacting our same store sales at all. If you look at last quarter, our same store sales did 4.5%. They did 3.5% in Q1 of 2016. You can almost point directly to the last two weeks' performance as to why that's different. As we mentioned in the prepared remarks, we went up against the polar vortex last year in those two weeks. We had phenomenal weeks. This year we had good weeks, but they were up against phenomenal weeks. That's basically the differential in our same store sales for the quarter.
Just any commentary on new store growth, if you could.
Yep. We opened 158 stores last year, I believe it was, or 57. We plan to open about 150 stores this year on a domestic basis. We're looking to grow Mexico around 40 stores, and Brazil, we're kind of taking them one at a time.
Okay, thanks very much.
Thank you.
Thank you, speakers. Our next question is from Mr. Anthony Cristello with BB&T Capital Markets. Your line is now open, sir. You may proceed.
Thank you. Good morning.
Good morning.
The first question I had was relative to the IMC, the import business. I think you said you had 22 locations, and those were able to service about 600 stores. Can you talk about how that business has evolved, how important that is relative to the future growth, and where you'd like to see that business in terms of touchpoints relative to your existing store base?
Yes, great question. All right, a couple things. Number one, when we acquired IMC just over a year ago, they had 17 branches. We've now opened five new branches. We stand at 22 open locations. Those IMC branches are servicing 600 AutoZone stores, but that's not a function of how many branches we have. That's a function on some short-term system limitations that we have at AutoZone to be able to serve up that catalog in our AutoZone stores. We did some short-term solutions that have allowed us to get into those 600 stores so we could test it. Now we're having to go back and do the more robust work to industrialize those system improvements. That will be coming later in the year, which will allow us to expand how IMC services the AutoZone stores.
I want to also be careful to not overstate the implications of IMC servicing AutoZone stores. Yes, we will leverage IMC, but that's not going to be the big driver of our commercial business. The main primary reason we bought IMC is because we think IMC in and of itself is a good business, and we will continue to expand that business, as we've shown with the five stores that we've opened to date.
Is that a business that can double or triple? I'm just trying to understand. It's a great business, and the import side of the business is going to continue to grow given the car park and how that's evolving.
Yeah. If you take a look at the industry leader in the import side of the business, they've got well over 100 locations. I don't see why we can't do the same over time.
Okay. If I could have just one follow-up on sort of another business that can contribute. The ALLDATA side, and I know you've talked about some wins and such, but how much of that business do you get sort of a lead into where you should be structuring your commercial side and what parts you need to be carrying? Because I guess that's a system that's in place with your installer base and probably developing relationships before you may have some of those well-established relationships at a store level.
There is some of that. There is an ability for us to be able to extract some information. I think that we still have a lot of work to do relative to acquiring more information out of ALLDATA in order to improve some of the synergies across our commercial business as well. I would categorize it as it is helpful on identifying certain trends, but we still have a long way to go in doing that.
Okay. Thank you for your time.
Thank you.
Thank you, speakers. Our last question is from Mr. Seth Basham with Wedbush Securities. Your line is now open. You may proceed, sir.
Thanks a lot. Good morning.
Morning.
My question is around Mega Hubs. It sounds like you're having some good success in rolling out Mega Hubs and getting lifts from the stores they're servicing. Can you provide any more detail on what type of lift you're seeing specifically out of those stores from Mega Hubs?
We haven't gone into the specific distinctions between inventory delivery frequency and Mega Hubs. What we continue to say is if you have both of the programs, they're going to add between $1,000-$1,500. That also varies because some of the Mega Hubs, the stores that are serviced by that Mega Hub are serviced by them three times a day directly, while other stores are serviced by other Hub stores that get deliveries three times a day, then other Hub stores get overnight deliveries. There's quite a bit of variability in it, but we continue to be pretty comfortable saying if you get frequency of delivery and Mega Hubs, it means about $1,000-$1,500 per store.
Gotcha. In terms of your growth pace of Mega Hubs, you've talked to around 25-30 over the next two years. What's the limiting factor in slowing that rollout if you're having pretty good success with the ones you already have out there?
Yeah, it's just as simple as number one, we wanted to go test this program until we got five up and running. We made the decision in the late summer, early September to move forward with this strategy. It's a function of the real estate development pipeline. Remember, even for a regular AutoZone store, it can take us two years to get a store open. It has nothing to do with anything other than our real estate pipeline and how long it's going to take us to do that. Trust me, we are pushing very hard on that front.
Got it. That's good to hear. Lastly, not to spend too much more time on the weather, I just want to understand since the weather was unfavorable at the end of the quarter, how has your business progressed into the fiscal second quarter?
Yeah. Everybody always wants us to talk about that, and we stay away from that. Unlike a lot of organizations that'll have their conference call four to six weeks after their end of the quarter, it's only been two weeks and two days. I think it's not a good prudent strategy for us to talk about what's happened in the first couple of weeks, and we've been consistent about that for a long time. I don't want to break that. I will say this, weather normalizes over time. I also want to reiterate that a really cold winter is great, but what we really look for is just a few good hard cold snaps, and that's when we really see big spikes in our business in certain failure-related categories.
Got it. Well, good call and good luck.
Okay. Thank you very much.
Thank you, speakers. At this time, I would like to hand the call back to you, Mr. Bill Rhodes.
Thank you. Before we conclude the call, I'd like to take a moment to reiterate that our business model continues to be solid. We are 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, safe holiday season and a prosperous new year. Thank you very much.