Our next presenter is one of the largest distributors of aftermarket parts in North America. We're lucky to have them. AutoZone. AutoZone has 20 million shares at $2,300, $45 billion market cap. Net debt of $5.9 billion for an enterprise value of $50 billion. Speaking with us today is CFO Jamere Jackson. Thank you, Jamere, for being here.
It's great. Good to be here. Also, Brian Campbell, who's Head of Investor Relations and Treasurer, with me here today as well.
I couldn't tell if you could make it. Thank you, Brian, as well for being here. First of all, congratulations on very impressive results. I think they've been a surprise to us all on the upside. Just to reiterate for everyone, you posted, you know, three-year stack of 32%, in relation to automotive aftermarket, which kinda generally grows 2%-3%. Can you kind of just talk about what you do, what you sell, and how you generate that kind of growth in this type of environment?
Yeah. You know, we've been in the business, obviously, over 40 years. You know, we started primarily on the DIY side of the business. We introduced our commercial program in 1996. Our business has been really remarkably resilient through the cycles. I mean, if you look at our performance over the last decade or so, earnings being consistent and steady up almost 18% compounded annually. You know, from a share price standpoint, we've compounded at about 19.5%, almost 20% compounded annually during this timeframe. Two portions of our business, our DIY customer. It's a customer obviously that comes into our stores, buys parts, gets advice from an AutoZoner across the counter.
Usually we'll have an opportunity for certain things to do installations like batteries and wiper blades and lighting and those sorts of things. That customer gets an opportunity to have expert advice from an AutoZoner. It's been pretty resilient through the cycle. Even as technology has changed over time, we've had a very strong DIY customer. Our DIY business has been roughly, you know, 70%-75% of our domestic auto parts business, pretty consistently through the cycles. You know, what we're really excited about more recently is the growth that we've seen on the commercial side of the business or the Do It For Me side of the business, where, as I mentioned, we, you know, started in this business, really around 1996.
It's grown remarkably. We finished last year a little over $4.2 billion of sales. Grew almost 27%. We have commercial programs in about 87% of our DIY footprint. As I think about our business going forward, it will be a much bigger portion of the story, if you will.
Yeah. Before we kind of touch on that, because it has been amazing growth, do you have a breakout of kind of what you would consider a discretionary maintenance or failure part across what you sell?
Yeah. You know, in our stores, I mean, we typically have our sales floor categories, which has more discretionary portion of the business, if you will. Think of discretionary purchases as things like wash and wax, car mats, hubcaps, those sorts of things. That's been roughly 15% of our business pretty consistently over time. The bread and butter of our business, obviously roughly 85% is in the failure and maintenance categories. Maintenance kinda categories being, you know, things like people that are doing oil changes. Our hard parts are where people are doing, you know, fairly significant maintenance, either under the hood or under the car, if you will.
Yeah. Great. Because I mean, I guess it just leads into the question: Just how are you able to maintain your impressive margins with, you know, the 10% inflation, that-
Yeah. One of the, you know, one of the neat things about our business is that number one, pricing has been very rational during this environment, and it's been rational, quite frankly, for decades. I mean, you know, we have the luxury, if you will, of having a business that has relatively inelastic demand, if you will. If you think about the failure and maintenance portion of our business, which as I said is about 85% of the business, it is largely a break-fix business. You know, as a consumer is experiencing you know, failures of car parts, then they're gonna go spend money to you know, fix those cars over time.
As we've seen inflation, even if it's hyperinflation, we've been able to take those costs and pass it along to our customers in terms of higher retails. Again, the industry has been very rational in this, in this regard and has done that literally for decades.
Yep. Have you seen, I mean, it does not sound like this, but any signs that the consumer is not willing to take any more price increases?
Well, I think a couple of dynamics are there. Number one, you know, as I mentioned, sort of the inelasticity of demand for certain elements of our business. I think a couple things really stand out to us in terms of the market environment. Number one, you know, we're seeing consumers that are faced with lots of inflation in lots of places. If you think of the essential nature of mobility and people having their cars, maybe other discretionary portions of retail outside of our industry are certainly feeling the pain associated with, you know, higher inflation.
You know, there's no question when you see food prices, rent, utilities, on the customer, you know, even in our industry, in that more discretionary portion of the business, you'll see consumers maybe pull back a little bit there. Again, for the bread-and-butter portion of the business, customers are still spending money. I think the second dynamic that we've seen during this cycle as well is that, you know, the car parc continues to grow. The average age of the vehicle is now over 12 years old. You've had this backdrop, this macro backdrop of challenges associated with the new and used car market where, you know, used car prices are up, you know, probably 40% pre-pandemic. Used car prices are in a similar zip code, maybe closer to 30%.
As consumers have been faced with the alternative in some instances of repairing their vehicle to ride out the other side of a more difficult or a more uncertain environment, the price associated with and the availability associated with new and used cars has caused customers to continue to invest in their vehicles in a meaningful way. That's certainly been a tailwind for our business as we've seen over the last couple of years or so. Again, the industry dynamic has been healthy. You know, if you think about our business as we move through the pandemic, you know, we've had the opportunity to you know, benefit from multiple rounds of economic stimulus, which caused our business to spike.
As you know, some of those purchase occasions tailed off. You know, the hole was basically filled in by inflation and pricing. We won some market share during this timeframe. You've got a macro environment where consumers are inclined to invest in their vehicles to sort of ride to the other side here. You know, we've been able to benefit from those robust market conditions, and our execution has just been fantastic.
Jamere, I have a question for you on just product mix. You have a terrific private label brand. Over the course of the last three years, and in particular, maybe this year, can you discuss if there's been any sort of consumer preference or even professional preference towards a sort of private label versus branded?
Yeah. You know, we've invested in a meaningful way in our Duralast brand, which, you know, quite frankly, you know, calling it a private label brand or house brand is a little bit of a misnomer. It's actually one of the strongest brands in the auto aftermarket.
That's fair.
We're pretty proud of that. It's backed by, you know, a very strong supply chain and supplier network. You know, we think about the investments that we've made in our Duralast Gold and our Duralast Elite products, for example, which in many instances are actually better than the OEM quality products that are on the marketplace. You know, we've done that in a meaningful way, and we've done it over a number of years.
Every time there was an opportunity, quite frankly, for us to go challenge what we were doing with some of our branded products, we've really pushed the envelope, if you will, working with our suppliers to find a way to make Duralast products that are of high quality, that are relevant and, quite frankly, give us an opportunity to control much more of our destiny in terms of our supply chain, our pricing, and certainly our margin structure. We feel very good about that.
You know, one of the places where we've made meaningful progress is particularly on the Do It For Me or the commercial side of the business, where we made meaningful investments in our Duralast brand, and that's actually helped us grow our business significantly on the commercial side of the business, in addition to a number of other initiatives that we put in place.
Yeah. I do wanna talk about the DIFM growth. To touch on the supply chain that you talked about, I mean, we've had some supply chain issues. Can you kind of discuss where you think you are in that trend? Then also, does it impact your decision on to where you're sourcing or your private label business?
Yeah, I mean, you know, obviously, supply chains were challenged across all of industry, and our industry certainly was not immune to those dynamics. We had a couple of things that worked in our favor, one of which is actually having the Duralast brand, which enabled us to move volume in some instances in some critical categories amongst suppliers. You know, when you have a reliance on a single brand, you don't have that flexibility, if you will. We had an opportunity in many instances to move volume between suppliers who may, for any one of a number of reasons, have supply chain challenges, and that worked to our advantage.
I think the second thing that we've done over time is, you know, we've continued to look to diversify that supply base, and, you know, reduce our reliance in some instances on, you know, certain regions of the world, if you will. We were already doing some of that work well ahead of the pandemic, and that certainly paid dividends for us. I'll say this, you know, overall, I think our supply chain did a fantastic job, certainly relative to what you saw in other parts of the economy, really managing their way through a very difficult environment that, you know, started with COVID and COVID lockdowns, supply chain challenges coming, you know, out of Asia. You saw the shipping challenges, you saw material shortages in some places.
Our suppliers did a really, really nice job of managing their way through that, and we certainly appreciate it. Our teams did a fantastic job as well. I mean, our in-stock levels, you know, quite frankly, were better than many of our competitors in the marketplace because of those efforts. We were able to benefit in our business. You know, what I'll say is that things have gotten better, significantly better. There's still, you know, some challenges in certain categories, but we've done just a tremendous job of working our way through a very challenging environment. Again, I tip my hat to the entire supply chain, including our suppliers and our folks internally in our merchandising and supply chain areas.
Perfect. I think that touches on the Do It For Me growth questions I have. Just, you know, 27% in fiscal year 2022 is pretty impressive. You know, it went from a business when I started to not being really how I thought of AutoZone and now a big part of how I think of AutoZone. Can you just talk about what you've done over the last few years? Clearly, I'm assuming you've taken share. How have you taken that share, and is it sticky?
Yeah. We've made significant investments in our Do It For Me business over the last several years or so, as part of our commercial acceleration initiatives, inside the company. The first, and I mentioned it a little bit earlier, is the work that we've done to invest in the Duralast brand and the quality of the Duralast brand. That gave us an opportunity to go into shops and say, "This is a brand that we stand behind, and not only will we make good on the product, but we'll also make good on labor associated with failures." That gave shops a lot of confidence and willingness to go try our Duralast brand in a much more significant way.
We've made significant investments in product assortments in our stores, including expansion of our Hubs and Mega Hubs. You know, this gave us an opportunity to put more parts in a marketplace closer to customers. That's given us the ability to move up the call list and, in many instances, be able to fulfill in a significant way. We've invested in technology. You know, we've put handheld technology in the hands of all of our drivers. That enables a customer to do business with us in a much more efficient way than they have in the past. It's improved our delivery times. Our delivery times are probably down 15% or 20% since we invested in that technology.
That's been meaningful to our customers. Then the final one is that, you know, where we had significant price gaps, particularly relevant to warehouse distributors, we've narrowed those in certain categories, in certain markets to make us more competitive. There hasn't been, you know, one initiative, if you will. It's been a myriad of things that we've been working on. Those things have paid significant dividends for us. As you mentioned, we were up almost 27% on a from a growth standpoint last year. We've had 8 straight quarters of double-digit growth, six straight quarters of over 20% growth. Really, the future is very bright.
I mean, this is a business, quite frankly, where we're at 4%-5% market share in what we believe is over a $100 billion market. It's been very fragmented for a long time. The investments that we've made give us a lot of confidence and a lot of excitement about our ability to, you know, grow in a meaningful way going forward. Brian and I were laughing coming out of our last earnings call.
We finally got our Chairman and CEO, Bill Rhodes, to say, "Our aspirations are to be a leader, be the leader not only in DIY, but also in commercial." We were kicking each other under the table and high-fiving after the call because we really do believe we have an opportunity to do both, and we're pretty excited about the growth prospects going forward.
Okay.
In order to earn that share on the Do It For Me side, is there more investment that needs to take place from a human capital perspective? Or do you think that this is all growth from here and therefore, you know, very accretive from a margin and profit perspective?
Yeah. One of the things that really stands out to me, I've been in AutoZone for two years, and as I've spent time with our commercial teams and spent time in the marketplace and with our customers, really struck me just how much of a relationship business the commercial side of the business is. Several years ago, you know, we made a significant investment in putting a professional sales force in the field to go drive our commercial business. In addition to that, because we operate out of our DIY infrastructure largely, as I mentioned, we have a commercial program in roughly 87% of the DIY stores that we have.
You know, we've put our store managers, as part of a process, our district managers, our regional manager infrastructure, all focused on significantly strengthening those relationships from a commercial standpoint. If there was, you know, a place where I think, you know, over time we had a competitive disadvantage, it was, you know, just the depths of some of the relationships for folks who had been in that part of the business in a much more significant way for a lot longer than we had. We've invested. We have the infrastructure that we need to compete there. We're building those relationships.
One of the things that really stands out to me is if you can have strong relationships. You have the parts so that when, you know, a customer calls or does an electronic order and you can say, "Yes, we have it. We can get it to you there in a relatively short period of time," and pricing is not a dissatisfier, then, you know, that's a formula for us to go win in the marketplace. Again, we put the numbers on the scoreboard recently to show that that strategy is working for us.
Yep. Just, you mentioned having the parts. We haven't really touched on the distribution strategy that you've had over the last few years. Can you kind of discuss that? And are you at the point where you're competitive or, I mean, is there still a runway to go with really optimizing that distribution capacity?
Yeah. I mean, we believe we're competitive. We also believe that we have significantly more opportunity in the marketplace. As I mentioned, we're somewhere between a 4%-5% share today. There is an opportunity for us to grow that significantly. One of the key tenets of that strategy is to put more parts in the market closer to customers. We've talked about publicly our desire to expand our Hub and Mega Hub footprint. Just a little bit of perspective. At a typical satellite store, we'll have, you know, somewhere around 25 to 25,000 SKUs in a satellite. We'll have 45,000-50,000 in a Hub, and we'll have 80,000-110,000 in a Mega Hub. You know, we finished last year with about 78 Mega Hubs in the marketplace.
We have aspirations to go to 200 Mega Hubs. We had a little under 200 Hubs. We expect to have over 300 Hubs. We'll have 500 large box formats to help us. Now, the beauty of those formats, two things. Number one is inside the four walls of our Hubs and Mega Hubs, we see a tremendous lift, both from the DIY side of the business, but also from the commercial side of the business. It's. You know, those big boxes become magnets for customers who see those formats and go, "This is a box that is likely gonna have the parts that I need for the job that I'm taking on." But the other big benefit is the lift to the entire network.
Our Hubs and Mega Hubs serve as a fulfillment source, an important fulfillment source for other satellite program or other satellite stores, if you will, in a marketplace. As we've expanded our footprint there, one of the things that we've been testing is this notion of, you know, can we have a more denser network, if you will, of large box formats, particularly Mega Hubs. We tested that in several markets. Remarkably, for us, we've seen each of those boxes that we've jammed into the marketplace do well on a standalone basis and not cannibalize the existing infrastructure. That's given us a lot of confidence that we can put more of those in the marketplace and really drive our business.
More parts in the market closer to customers, you know, gives us an opportunity to say yes and gives us an opportunity to move up the call list and service those customers in a meaningful way.
Yeah. Those investments have been going on for a while, yet you know, you still generate $4 billion in EBITDA and only CapEx of around $700 million. Is that still kind of a cash flow kind of view that we're gonna look at?
Yeah. I mean, it's a very capital efficient business. Even as we've talked about expanding our Hub and Mega Hub footprint, you know, we still are able to do that within the construct of our normal annual capital allocation plans, if you will. One of the things that you've seen from us last year is we announced that we're investing in a couple of new distribution centers and also improving some of our direct import distribution center capabilities. That'll cause our CapEx to tick up a little bit this year and a little bit next year. You know, the long-term algorithm, if you will, is not changing.
I mean, we'll, you know, add, call it 200 stores or so in the Americas for the next several years, really, as far as the eye can see, just based on the growth that we see in the marketplace. We'll continue to build out this Hub and Mega Hub network as part of that framework, if you will. We'll invest in our existing assets, we'll invest in our growth initiatives, and still, at the end of the day, generate a ton of free cash flow that enables us to continue to invest in growth and do, you know, a meaningful share buyback program, which has been very, very successful.
Right
...for us, over the years.
I did wanna ask you that before. We do have a few questions from the audience. Around 2.1 times maybe net debt to EBITDA. I've been following this company. It's generally around 2.5 times. Has anything changed in terms of your thoughts there, or higher interest rates?
Yeah. I mean, our long-term leverage target is still in the 2.5 times area, if you will. As we went through, you know, the last couple of years with really accelerated growth, you know, we generated a significant amount of excess cash, if you will. We put that to work in terms of doing a much higher buyback. We're still, you know, call it four ticks under our long-term leverage target. We'll continue to march towards that 2.5 times area. We've been, you know, making sure that we do that in a very disciplined way, and we'll continue to do that as we go forward.
The implication for that is, if we can continue to grow our business the way that we have, historically, generate a lot of cash, we'll be able to do some very shareholder friendly actions, over the next few years or so as we get back to that leverage target.
Great. Did I see some questions over here?
Sure.
Go ahead.
Yeah. Thanks, Jamere. I want to follow up on the Do It For Me initiative. You kind of mentioned four drivers, the private labels, supply chain, tech, and pricing. I guess across those four, have you seen any competitive responses, whether it's the larger players investing in more tech that maybe you don't have yet or the smaller player leaning in price? I'm just curious, you've gained so much share, how has the market responded, large or small player across those four initiatives?
Yeah, I mean, the market's been very rational. Again, you know, all of the things that we've done across our business, you know, including things like pricing and technology, et cetera, you know, we've seen competitive responses, but none of them have really disrupted the marketplace, and more importantly, none of them have slowed down our momentum.
You know, we've been executing very well in the space over time, and you know, I think, you know, if I think about the Do It For Me market, if you will, I think what we've offered in the marketplace, the way that we've executed, the way that we've taken care of customers, you know, added more parts to the marketplace, made it easier to do business with AutoZone, all those things are resonating really well with our customers. Again, it gives us a lot of confidence about, you know, where we are today and more importantly, the future.
Brian, did you have a question?
Yeah, thanks.
All right.
Hey, just on the inflation, and I guess I really have a mechanical question. You know, everyone's talked about inflation at this conference. You mentioned it. AutoZone has managed the inflationary pressures extraordinarily well. As we look over the next several quarters, you know, if we assume that the rate of inflation will slow, would you expect then that you would see some offset to that in unit demand or just inevitably that means sales growth for AutoZone slows as well?
Yeah. I mean, a couple things. One is, you know, we're still in a pretty significant inflationary environment in the aftermarket. You know, one of the things that really stands out to us is, if you look at sort of the underlying drivers of inflation, and it's probably true not only for our industry, but for others, is, you know, at 3.5% unemployment and, you know, call it wage rates growing with a five handle, if you will, that's pretty sticky. As a result of that, I mean, we're still seeing fairly significant inflation in the aftermarket, and we expect to see that dynamic probably continue for the next few quarters or so, just given the environment that we're in. That's one.
I think the second thing is that with interest rates growing the way that they are and the notion that, you know, rates are gonna continue to grow, that's gonna continue to add cost pressures in the industry that quite frankly, over time, we expect to see that roll its way in the product costs, whether it's because of, you know, the balance sheet pressures that suppliers are feeling or the, you know, the much closer in, they're feeling pressures from things like their supply chain receivables programs, et cetera. We expect to see, you know, inflation, you know, pretty high for at least the next few quarters or so.
That being the case, I think, you know, as there are opportunities for deflation, you may see us not passing as much through from a pricing standpoint, but from a margin accretion standpoint, we should be in pretty good shape because, you know, the other thing about the auto aftermarket that has, again, been remarkably resilient is that coming out of periods where you've had, you know, even hyperinflation, you generally don't see prices coming back down. You know, that deflation, if you will give us an opportunity to have some margin expansion opportunities at some point in the future as well.
Great. I'm just gonna ask one last one, even though we have run up against time. You know, the DIY business has had significant growth. There has been some commentary around some pressures on the more, I guess, discretionary item. Have you seen that stabilize at all, especially as gas prices have come down, you know, from $5 to close to $3.80?
Yeah. We're seeing DIY traffic really be stable. I mean, you know, historically, you've seen on the DIY side, just because of changes in technology and SKUs and those sorts of things, you've typically seen traffic on the DIY side, you know, be down in the low single digit kinda declines. We're seeing things stabilize in sort of that zip code, if you will. The consumer has been remarkably resilient. Again, part of that is, as I mentioned before, the relative inelasticity of demand. Consumers also walked into this cycle with a much better balance sheet and a much bigger safety net. Again, at 3.5% unemployment and 5.5% wage growth.
Right.
Means that everybody's working and everybody's getting a raise, and that's a much bigger safety net than probably many people anticipated. Consumer's been resilient. We really haven't seen a wobble from the consumer at all.
Perfect. Well, thank you so much for being here. Thanks for going over time with us, and thank you for all the answers.
All right, thanks. Always good to see you guys.