Thank you. I'm Michael Lasser, the Hardline Broadline Food Retail Analyst. And we are very excited to have AutoZone with us. AutoZone is a powerhouse in the auto part in the auto aftermarket. For those who are not familiar, to my far left or far right, sorry, is Tom Newbern, who's Executive Vice President of Store Operations, Commercial Loss Prevention and all that.
I don't know that there's anything else in the business, but he covers a lot. And to my immediate right is Brian Campbell, who really needs no introduction, but he is the VP of Tax, Treasury and Investor Relations. We're super, super excited to have you with us today. As a reminder, please feel free to shoot up questions and we will weave them into our conversation. The auto parts business for what seems like a very stable sector has been over the last few years very volatile.
Now part of that seems to be that the business is a bit more weather sensitive. Do you think that's the case, Tom? And why has that been the case? Actually, I don't think that that is the case. I've been doing this for well over 30 years and the impact of the business by weather is no different today than it has been.
Now over the last couple of years, maybe only once in the last 10 or twice out of the last 20 years, we've actually been impacted by some very mild weather for multiple years in a row. I think that's kind of where we were in 2017. But in general, the weather is going to be what it's going to be in over the course of a year, it'll equal itself out. But it can on a quarter to quarter basis definitely have an impact on our results. And one of the topics for this year is we've seen some bouts of cold, we've seen some precipitation.
Do you think there's been enough cold weather to drive the industry for the rest of the year? Yes, I would without suggesting that I can tell what's going to happen for the balance of the year. We would say that we found the last couple of seasons to be seasonal. So yes, it's been a cold winter, but not extreme. And when I say that I'm looking across 50 states, not the people in Minneapolis would disagree with that.
It's been very extreme, but in Boston, for example, it's been fairly mild. So I would call it seasonal. And I think that I would say with regards to the industry and sales in the industry, it's not going to be a headwind. And if you were to get an extreme heat in the summer, could possibly be a tailwind. But as an industry, I think that it bodes fairly well for us over the next, I guess, 6 to 12 months.
And this is also just a period where tax refunds can be influential. AutoZone has been talked about that in the past. If we see a normal cadence of tax refunds, the weather, do you expect this to be a pretty typical season or given some of the headlines about delayed tax refunds, is that strike a tone of caution? If you would have asked me that question 3 weeks ago, I probably would have had a little panic in my voice because the remittance season absolutely started off way behind last year. But as we've moved through, it's kind of leveled out.
It's still a little behind last year, but nothing like what we were looking for early in the remittance season. So we expect it's going to be over the course of 8 weeks, it should be exactly what we expect. Timing week to week can change and we've seen that, but I wouldn't anticipate any major changes. The only thing that could influence that is if as it's a lower end consumer that we count on the most and if we get too late in the season and it's still fairly cold across the country, it could impact our industry. As that consumer will spend the money, you're just hoping that they're spending it at AutoZone.
And if the weather is right, they will. That's primarily on the DIY side. On the do it for me side, you don't have that type of volatility. And we saw that last year where it was wet and cold late into the spring season and the And it's been delayed. Right.
I guess that the good news is it sets you up for an easier comparison when we get into March April of this year. That's a good way to think about it. It. Another hot topic in the industry has been about tariffs. And AutoZone has had a slightly different perspective on tariffs than some of the other players.
The other players have said, look, we've been impacted by the tariffs. We passed it along. The industry has absorbed it. There really hasn't been an impact to unit demand. AutoZone has been more of the view, look, we've managed through tariffs.
It really hasn't had much of an impact on pricing. Tom, do you have a view on why there's been contrasting perspectives within the industry? Yes. I think it's an interpretation issue. I don't think that there's really that much distance between what one of our larger competitors said and what we've said.
One of the folks said that they thought there's about a 200 basis impact from inflation. We said it's 100. I think if you have to clarify, are you talking about a 200 basis points change in cost or a 200 basis points change in retail and then you'd have to ask us the same question. But I will say that a straight 10% change in tariffs will not impact everybody the same. We buy from different countries, different countries are having different tariff issues.
Now over time, I would also tell you that who cares whether it's 100 basis points or it's 200 basis points, the fact is this industry has always been able to pass those costs along. And even if there is a pullback, which has been a question from a number of you, it's less likely that you'll have to pull back from those price increases. The reason is in this case these tariffs are on steel. So we're primarily talking about a hard part piece, which is turning less than one time a year. So you just don't have the consumer doesn't have the transparency that they would have if it were commodity.
Yes. And so I think we heard that from one of your competitors today that the tariff piece, if it rolls back, while there might be some different changes within the industry, some players might look to roll back, By and large, these prices have gone through and they're based on many different factors, tariffs being one of those. Is that consistent with your Yes, I think that's right. I think the disconnect is in the interpretation of the answers and how the questions are being asked. But historically, there's been no reason for there to be a disconnect between any of the top 4.
Yes. AutoZone has been a regular at this conference for a while and we thank them for that. I had to You know what, we would appreciate a swag back. Yes. We're working on that.
We're working on that. It may say 4 seasons on it. It may come in the plastic variety, but that's fine. But for as long as you guys have been here, we've talked about your commercial business. And some years have been you've seen more traction than others.
It seems like the last few quarters, something has happened that's really injected a lot of life into your commercial business. And just for those who aren't aware, 80% of AutoZone's business is DIY, 20% is commercial and your sales per commercial program is quite lower than your peers. So this is critical to your story. There's a question in here. Can you give us a sense for what catalyzed this more this faster growing commercial business?
Yes. I think that the 13 that we produced last quarter has gotten everybody's attention, but I'm not and nor does our leadership team look at it on a quarter by quarter basis. I think if you look back over the last certainly over the last 4, but you could go back further than that. We've been very focused on a few cultural things with regards to commercial. We've been very focused on the level of engagement by our in store AutoZoners.
And this is not a 1 or 2 quarter change. We've been building the foundation for a long time and we've really focused in on a few specifics over the last 24 months. And I think we're starting to see the benefit from that and we're very excited about it because we don't think it's a 1 quarter step change or a 1 quarter phenomenon. We think that we've built the foundation that we can continue to build on. And give us a sense for some on a deeper level, have you changed the store manager compensation?
Have you given them more training? Have you has the messaging from the home office to the field been any different? Yes, on all of the above. No radical changes in compensation, but if I can take a little time to explain. Please.
Please. Our store managers are responsible for the P and L inside the four walls. That includes the 80% of DIY business and the 20% of commercial business. Most of our stores have very tenured managers who have been focused on DIY for most of their career. So it's not an easy change when you're trying to convince somebody to engage in 20% of their business at a rate that's higher than the 80% driving their P and L.
So we've spent a lot of time on training. As you mentioned, we spent a lot of time on corporate communication. And while we didn't change their comp structure, we certainly weighted with regards to their variable comp. We waited commercial at a much greater than 20% rate. Yes.
And how has that helped AutoZone overcome 2 obstacles that stood in the way of it becoming a bigger player in the commercial business. One of which was the perception that AutoZone is more of a retailer or a DIYer and we know that perception matters in this sector. And 2, the fact that so much of its assortment is built off of the Duralast brand, which may not have always resonated with that commercial customer and in turn you might have had to carry more products, one of which being the Duralast and the same product being a brand that relates to the commercial customer? Well, are those fair? I think they're fair.
I don't Are those fair? I think they're fair. I don't necessarily think that they're accurate. The fact is that we have predominantly been a DIY player. That's where we started and it is the mother ship of AutoZone.
Without DIY, a lot of other things can't happen. But over time, one of the larger players and competitors, Advance was absolutely a retail player. And they made that transition via acquisition. We chose not to. And over time, we have overcome that.
At the end of the day, if you provide a great customer experience and you execute on your plan, they're going to get past that. With I'm sorry? No, go ahead. With regards to Duralast and the role that Duralast plays not only in commercial, but in DIY, that those are old tapes and it's primarily driven quite frankly. We've always led with the Duralast brand And quite frankly, our competitors have sold against that over the last 10, 15, 20 years because it's been easy because they happen to have brands in their backroom and we did and we had the Duralast brand.
The fact is now if you ask Duralast is 50% of our sales, it represents about 50%. If you ask our competitors what percentage of their sales are in a private label or a house brand, you're going to find that the growth rate in those brands for everyone has changed so dramatically. They're no longer able to sell against us with that. So we're overcoming that. And with regards to Dural assets, What's our total revenue in Duralast right now, Brian?
It's somewhere between $4,000,000,000 $5,000,000,000 So somewhere between $4,000,000,000 call it 4,000,000,000 possibly $5,000,000,000 a $4,000,000,000 brand in the automotive market. If you had to guess, do you think your Duralast brand has grown faster with DIY customers or faster with DIFM customers? I think that it's the only brand that we offer really. We have a couple of others, but I don't think there's a difference. I mean, we have built a very powerful brand, a lot of name recognition and we're getting credit for quality.
Our merchandising team has done fantastic job and our marketing team building that brand. Yes, for sure. And have customers become more brand agnostic over time? Or it's just that the quality of Duralast has improved so much that it could compete against anyone in the industry?
I will go with the
latter. Certainly, the quality of the Duralast brand stands on its own. But I also think that it is the market is becoming more agnostic because more and more of the product is coming from China and is in a private label brand. Yes. You were kind of you said the recent performance in the commercial business hasn't been a surprise to you, but it may not also be and I'm paraphrasing, may not also be linear.
It may not you don't expect it to go from 10 to 13 to 15. Is that regardless of what I expected, I wouldn't answer that. Okay. Yes. Okay.
But we are It's worth a shot for sure. But I appreciate the dry. Yes. Where you're seeing the growth in the commercial business? Is it new accounts that you're calling on, existing accounts?
How are you finding the success? It's across the board and we measure what we call mature pins, which are customers that have done business with us for over a year. That business is strong and growing. We have a very strong national account business, which is also growing. And we're getting more share of wallet from existing pins and we're getting new customers as well.
So as I said, and I'll go back to your attempt to get me to commit to a sales number, we're very happy with the foundation that we've built and we feel like upon that foundation we can build success over time. Yes. Brian gives me the sales number offline. So it's all good. You see, you now have 30 mega hubs in place.
This industry is all about having the right inventory, right place, right time. It seems like your mega hub strategy has been critical to helping you to deliver some of the success. Can you talk about the near term and longer term impact of your in market availability? Yes. I think what we said was 27, is that right?
And with the possibility of going to 40, With regards to mega hubs, I would say that's our stated objective right now. I can't imagine that we won't get there. And if we see the type of success we've seen thus far, I would not be surprised if it goes beyond the 40 number. We'll deal with that when we get there, but it's been one of the most successful initiatives that we've executed AutoZone in a long time. And is it one of those that once you open a mega hub, the impact is almost immediate?
Absolutely. The minute that we start providing access to the satellite network, they can see that availability in the mega hub through their system in their store. Once we flip that switch and the trucks start moving, we see improving sales. Yes. Tom, you're a long time AutoZoner.
What are your observations around AutoZones technology infrastructure, where it is today, where it needs to be, particularly to have some of these key unlocks like more inventory closer to your customer? Yes. I think that like every other company out there, there's always an opportunity to improve on your IT systems and execution that we're not exempt from that. We have, as we said several quarters ago, decided to invest some of our tax savings back into our IT infrastructure. We're in the process of doing that.
That would certainly be weighted heavily towards commercial. That's not through the pipeline yet. We're not seeing the benefits of any of those investments just yet, but we certainly expect to. And to the extent that we do see benefits, that's not to say that we won't continue to invest and possibly at an accelerated rate if the return is adequate. We're very mindful and I in particular remind people all the time, it's easy to spend a lot of money on IT and the omni channel and it's much more difficult to measure quantitative returns.
So we'll see. Do you think has there been clear areas where the investments that you've made that AutoZone's made have produced returns? Like can you give some specific examples? We've not talked about any of that publicly. And if we happen to find something that knocks it out of the park, we certainly are not going to talk about that publicly.
Riley said the same thing earlier. So it's never too early to start. I'll leave that to someone else. But again, we've got a lot of energy, a lot of effort and we are investing real dollars. But again, it has to drive a return for us.
And one of the areas you are investing is in e commerce as you mentioned. Have you been surprised at the rate of e commerce adoption in this category? I would have to get you to define for everyone e commerce. We really are not we're investing in the omnichannel and really not investing towards e commerce. If a customer wants to do business with us that way, that's fantastic and we want to be able to accommodate that.
But our objective is to drive traffic into our brick and mortar stores. We have a wonderful platform with tremendous amount of information from parts availability to how to video, but our objective is to have somebody walk in our door. And the fact that 85% of the population is within 5 miles of one of our stores, that's what happens with us. There's we just e commerce in and of itself is not a material part of our business and hasn't been. And with that being said, AutoZone is making investments whether it's next day delivery through its partnership some of the logistics providers out there or in store pickup.
So how do you see this omnichannel initiative playing out? If right now your sales are your e commerce sales are low single digit even very small percentage of your total sales base, where is that going to grow to over time? Again, I don't think that we're really focused on e commerce sales. I think we're focused on e commerce influenced sales, which is an entirely different number and quite frankly, a much more important number to us. And that's where our investments are going is how do we use this e commerce platform to influence sales, but primarily through our brick and mortar stores.
Again, if a consumer wants to buy electronically, that's fantastic. We do have next day availability. It's the only type of availability in this industry. We happen to partner with a very good neighbor of ours in Memphis and through their logistical expertise and our product availability and distribution nodes, if you order something in Los Angeles, California by 10 o'clock, it could be on your doorstep by 10 o'clock the next day. And again, that's a very compelling differentiation, but it's still not changing the world because you could also drive 5 minutes and have somebody talk to you about the product.
For the last several years, the threat of Amazon impacting the industry has been a topic of a lot of debate. Well, that conversation was a little hotter 2 years ago when industry trends were a little slower. That seems to have been tampered down more recently as growth has accelerated. Who do you see as the customer who might be going to buy an auto part on Amazon? And how does that compare to the core DIY customer who's shopping at AutoZone?
Look, for our core DIY customer, our customers come to us out of economic necessity. They need that vehicle to be back on the road today, not only today, this morning. You're not going to be able to do that. Where we see as a much more discretionary spend is what you see through some of the larger e commerce sites, I won't say Amazon specifically, from appearance vehicle appearance, floor mats, specialty parts, like if you're building a specialty car or you're building a performance car, but that's not really the heart and soul of our industry's business. So it's there and it's real business, but it's really not dilutive to what we do day to day either on our e commerce site or in our stores.
And one of the keys to the AutoZone success is its ability to attach, sell that whole transaction to the customer. What is it about your store operations that are able to lead it to that outcome? We have great systems to start with and our people have tools in our stores that can help them know exactly what's required to do the job right. It can help them. We encourage interaction between the customer and our AutoZoners and our selling tools can help them engage the customer.
But really it's about hiring and retaining the right people, people that enjoy cars, people that enjoy being around people and people that enjoy our culture. And we spend a lot of time talking about that culture and making sure that they live it every day. And because 2 thirds, 3 quarters of the volume you're doing online is picked up in store, have you had to evolve any of those practices to make sure that when that customer does come in store, you're able to have the complete basket, the complete transaction like you might get if that's a store originated transaction? That's a real risk with buy online, pick up in store. If that customer made that purchase because they're in a hurry, you're much less likely to get that attachment to the basket.
Our opportunity unfortunately is again these buy online pickup at store transactions while they're the biggest part of our e commerce and they're certainly the fastest growing, they represent a few transactions a week in a store. It's hard to create processes and practices around something you do twice a week and be very good at it. So we still have an opportunity there to improve the customer experience with regards to that. And this is my last question on the e commerce. When you pulled back on website promotions a couple of quarters ago, it did cost you a little bit of comp growth.
What did you learn about that composition of that customer who does self select to want to buy online? Well, first of all, it's very difficult to get facts and empirical facts around exactly what changed in that behavior. I think what did we say that was in basis points? 30. 30.
Again, it's a real number, but you can't tie that from an IP address back to a sale that occurred or didn't occur in the store. So what you end up looking at is in many people's opinion is that that promotional activity created a perception about price that ultimately led to somebody coming in a store. And that 20 basis points or 30 basis points we believe because people just don't take advantage of it. We believe it could have created a price perception that drove them somewhere else as opposed to coming to AutoZone. One of the topics we talked to O'Reilly a little bit about earlier was that the DIY segment of the market is pretty well consolidated.
They were mentioning stats that they thought top players in the DIY side have about 70% of the share. On the commercial side, it's closer to 50%. So A, do you think those are reasonable statistics? And do you agree with those? And B, as the largest player in the DIY business, where is there room for you to continue to take market share?
I'll start with the first question and I don't want to suggest I don't believe them, but I don't know where they got those from and those are significantly different than the way we see share on both DIY and commercial. So I'll say I'm not sure that I agree, won't disagree without facts. But there continues to be a tremendous amount of opportunity. A, one of the biggest opportunities we have is continue to educate and train our AutoZoners because technology is changing and customers are wanting our expertise. So we have to make sure that we stay on top of that and not only provide the best service, but retain the best people.
And I believe that continues to allow for opportunity on DIY. There continue to be greenfields across the country. We're opening about 150 stores a year, have been for as long as I can remember and don't really see that changing, certainly not in the near future. And most of those green or a large part of those greenfields still remain on the coast in some large urban areas. We still find that to our own surprise often that our store density is incredible and we have the ability to open stores 2 to 3 miles away in some of these larger urban areas and still have a lot of incremental sales growth.
So we're encouraged by the number of people that are coming into DIY that remain in DIY. I personally think that unlike what a lot of people say, the change in technology and information available, I believe makes DIY easier today than it ever has been. And I have a living example of that. My 22 year old son asked me to help him do something on his car. I told him no.
And he went Because you were coming here. He went to AutoZone and he bought the part and I went out in the garage and looked at him and he had his iPad open and he had taken care of it in about 10 minutes. I could never have done that 35 years ago. So there's an argument to be made that DIY is more accessible today than it ever has been. And I think information is a big part of that.
Based on your answer, does it it seems like you're saying, look, there's still more share for AutoZone to be gained on the DIY side within the traditional competitive set of players that you're against today. Both traditional and non traditional, I would say. In non traditional. Do you see the smaller players who may be only casually participate in DIY, some warehouses or Mom and Pops. Mom and pops, they're going to continue to consolidate and maybe the mass merchants or lesser tier players as an opportunity to gain share?
Certainly, regardless of whose numbers you believe with regards to the combined share, there's a lot left out there. There's still a lot of smaller independent players. There's a lot of players out in some rural markets where we're not participating. So we believe that the opportunities continues to exist and we plan to have industry growth of about 3% a year. I think there is starting to be a conversation that's percolating about when do we reach that saturation point of the industry where AutoZone's got 6,000 stores, O'Reilly's got 6,000 stores, Advance has 6,000 stores?
And is that the point like what are you looking for from an internal metric perspective to say, hey, we're getting closer to saturation? I've 1st of all, we're not worried about anybody else's 6,000 stores but our own. And we continue to find opportunities not only to expand in markets where we currently don't play, but in our existing markets. And all I can tell you is that the number that we thought where we thought saturation was 20 years ago is wild was wildly different 10 years ago and where we thought it was 10 years ago, we believe there's more opportunity today. So I just don't think that I can answer the question.
Yes. But we look at it. We just haven't found it yet. Because at the same time you are planting the seeds for future growth within the international markets, Mexico, Brazil. Can you give us a sense of what you've learned early in your life cycle in these markets?
How is the profitability of these markets going to unfold over the next few years? I would go back and say about the domestic market first that one of the things that continues to provide tremendous opportunity for our organic growth is the fact that we have such a small share in commercial. So as we continue to grow that commercial base and that percentage, that mix of business changes, it will open up additional opportunities for us domestically as well. With regards to international, I'll go to Brazil first. We have 18 stores, I think, 20 maybe that are open now.
We're going to open another handful. It's a test and we hope to be wildly successful, but where we are right now is testing our model. The good news is that the consumer loves us and we were able to successfully take the model that we have in the United States and successfully take the model that we have in the United States and transplant it into Brazil and the consumer loves it. There are a few other things to work out if you've ever done business there. It's a tough environment.
With regards to Mexico, we've been there for 20 years now, Brian, maybe a little more. We are very happy with that business. There are complications with the exchange rate and a few other things, but our model works. I could take you and drop you off in a store in Brazil or Mexico or Philadelphia. And other than the language, you probably wouldn't notice a lot of difference.
Yes. And so you see still a lot of room for growth within? That is absolutely what we're hoping for. Yes. Back on the domestic market, you've made some investments in your SG and A.
Part of that is to deal with some rising labor costs. Can you give us a sense for what you see from a labor perspective today? Is it more so because we're just in a tight labor market or is there more competition amongst the players particularly for really good talent? I would back that up and I would say it a little differently. We invested we made a decision to invest SG and A in our people, not as a result of the market itself.
There's been some inflation in the wage market over the last couple of years, which has been a bit of a change, particularly from minimum wage requirements in some very large markets like California and New York, from some of the larger retailers like Walmart, Target saying they're going to pay everybody X amount an hour. That we've kind of gotten past that and we're back on a normal glide path now. But the SG and A that we invested was targeted directly at some very important players in our stores, primarily our commercial sales managers. Secondly, our parts sales managers and those not only those very specific positions, but also those AutoZoners with the most experience in those positions. So we're just trying to make sure that we are able to hire and retain the best help in that parts specialist position.
Do you see this you've obviously earned a pretty healthy return on some of those investments in light of the commercial growth in light of the success you're having? Do you see there is an opportunity to further push on that such that you consider this more of a longer term strategy? Yes. We'll see. We are a retailer and we do have turnover and we took quite a risk in making that investment.
So far, I would say that we're very happy with the decision we made. And if we see that the results follow, maybe we'll do something else and maybe we'll push it further. I can't answer that question right now. Some others in retail are talking about using technology to try and replace some of the more basic tasks that a person in the store does as a way to offset some of that rising pressure on wages. Where do you see the opportunity within the AutoZone store to use technology to make the store more efficiently run?
1 of the first of all, we're a small box retailer. On any given hour, we may have less than 3 people in the store. So it is going to be imperative that we figure out how to create efficiencies in the store. I think that one of the examples is through the omnichannel. If we can push more of the work and let allow our customers to do more of the work from their laptop, their mobile device or then when they get to the store, if they're more educated and or maybe they're buying it at home and picking buying online, picking up in the store.
That will create some efficiencies, but there will absolutely for all small box retailers, if things continue to progress like they are to find a way to create efficiencies and offset some of that labor costs. Brian, artificial intelligence. Are you scratching the surface of that right now? We're looking at everything. Brian's gotten off way too easy.
And this is a little bit of a softball. One of the more compelling elements of AutoZone's financial algorithm is that it maintains a consistent leverage ratio which provides debt capacity. So as long as you're growing your adjusted EBITDA, that provides more and more capacity. And at the same time, your AP to inventory ratio is north of 100%. And so you just turn out free cash flow in a rising interest rate environment.
How do both of those elements of the model change?
Interest rates are a cost of input for everyone. And for us, obviously, higher interest rates for our cost of borrowing both short and long term will go up and that will have an impact. We have to manage that accordingly. We've laddered out our debt. We have, as escaped me, I believe 9 publicly traded bonds, it's potentially 10 and they all stagger and usually 1 a year comes to.
And those future rates, we have to model and we plan for slightly higher interest rates. Now interest rates are bouncing all over the place. So you guys see it every day. It's like 1 minute treasuries are higher, 1 minute are lower. But we have to assume and budget for a steady increase.
It's just that will be managed because the way we've laddered out the debt. With vendors, we have the same sort of exposure. They will come to us with those questions as well and say, hey, our cost of input are higher. Can we pass that through? And we have to negotiate that.
So it's all sort of in the sauce. You have to it's cost of doing business.
So if interest rates were to rise, they're really you've planned for that or you can manage through that and there really shouldn't be any major change to your algorithm? Well, for doing business, we like rates lower. It's
I think all of you would agree with me, but we also understand and appreciate the fact that rates are rising and we must plan for it. We have no choice. We have to manage that.
Well, please join me in thanking AutoZone for their time and insights today. It's been a really good conversation.
Thank you.