Good morning, everyone. I'll go to the podium for a second, but I wanted to spend one moment here recognizing I don't always have Tom with me. So he's a perfect guy to ask questions to. He's out there every day talking about both retail and commercial strategy. I can talk a little bit about the financial background, but Tom is unique and he grew up in the culture of AutoZone.
We definitely pride ourselves on the fact of years of service and who we are. And I'll jump right in. We just had an earnings release last week, last Tuesday, 1 week ago. It seems like 5 years ago, time flies these days. But we're happy to see you.
Our sales results, we I'll get to that, but we comp north of a 2% same store sales result. Our EPS was up north of 10%. Our gross margins were positive in the quarter as well. We will talk to you a little bit today about where that growth came from and the strategies. We executed well.
We were proud of our results. I know a lot of companies say strong results and things, but we felt very good about how we were executing. We felt executing. We felt from a market share standpoint, we were doing very good things. We get asked a lot of questions about the segments of our business, both domestic and international.
And within the domestic business, of questions we get are on the commercial side, the professional delivery side, which we're newer and growing with. So without further ado, AutoZone, very quickly, guys, has a pledge and a cheer that goes along with it. It was written way back in 1986 by a lady that's now no longer working for the company. She's retired, Linda Ireland. But these four lines define who the company is.
We make sure with all meetings, we start out adhering to the pledge. So AutoZoners in the stores, we help you. If you show up with 1 minute to go and the store is about to close, we're going to stay open. We're going to do the right thing. We're going to go out to your car.
We're going to help you when we have time. We can't overly commit to this, but we're going to help you do an installation. We're going to provide a free loaner tool. We're going to do the things to add that added value from a service standpoint beyond just the part in a business that has a relatively low average ticket. This is our 2nd quarter financial results.
Last year, we sold 2 businesses. They were tiny, but they had an impact on margins. They were lower operating margin and gross margin businesses. So, there is some favorability on the gross margin line for having sold those businesses. They did not make a lot of money.
They were acquired businesses approximately 2, 3 years ago and they were adjunct to the core. And when we stopped growing those businesses and we sold them, you're seeing the comparison look unique. So it's been favorable. There's our sales results. You basically jumped to the bottom line.
We made about $11.50 which is a great story, north of 10%. And it shows that way as well for year to date results, very solid results in that regard. Here's our business, U. S. Retail, U.
S. Commercial and international. And the focus around growth is definitely on the commercial side. We're very steady growers internationally and domestic retail. New store highlights, we're still growing.
If you're looking for retailers and you're talking about, hey, who's still adding brick and mortar, who's still growing comps, we're one of those guys. We continue to open 150 plus domestic stores. We opened 50 odd international stores. And then we also opened store commercial programs. On the commercial side, which we're very proud of and Tom and his team deserve a lot of credit for this is that we've had 4 plus quarters now of sequential improving sales results in commercial.
And to point to that, you'll see that we
did, for
the quarter, dollars 515,000,000 of sales. On a trailing basis, we're north of $2,300,000,000 We are not the largest player in this space, but coming up. We're growing in productivity per program. The takeaway on this slide and have you guys notice is the 9.5% second quarter growth per program versus the trailing 4 quarters growth of 5% change percent, which means the more recent quarters are faster than the other ones. So that's a good story.
We've been able to do some solid things. There's no one secret thing that's going on. It's just executing at the store level better and better. Here's the cash flow. This is a company that has a very strong free cash flow yield, a strong operating cash flow, business north of $2,000,000,000 We spend between $500,000,000 $600,000,000 of CapEx, which allows us to have free cash flow of $1,600,000,000 plus.
It's a very, very strong story in that regard. And I'll tie that to one more thing. We're a very shareholder friendly company. We give that $1,000,000,000 plus 6 back to shareholders. So we have been buying back stock since 1998.
We have bought back some amazing stats. We spent north of $20,000,000,000 on buybacks. We are now below 25,000,000 shares. We're in the 24,000,000 share range. When we started this, we were 168,000,000 shares.
So it's a very steady business, very deliberate and able to be modeled, I would say. From a balance sheet perspective, we have inventory. It's the bulk of the assets that we have. We own 50% of our real estate, but we own all this inventory. We have high AP as well, which is kind of unique.
We have 100% plus working capital, AP ratio. So, it allows us to generate funds from working capital. And that comes from the fact that we have proprietary brands, name brands. We procure merchandise where it's manufactured. So, we're buying now more and more directly from Asia, for example, and manufactured.
So, we're buying now more and more directly from Asia, for example, and importing the goods ourselves. And you're also seeing that we have a $5,000,000,000 in debt. And with the buybacks, we have negative shareholders' equity. So, sometimes we get a question like, why is your retained earnings negative? It's not negative.
It's just that we're buying back stock that we went public way back in the early 1990s and we're buying back more than the original sale price of those shares way back. This is a slide we always finish with in our commentary guide. And what we're focusing on these three businesses, in commercial, which we're very proud of and we will talk about, we're asking lots of questions today people are asking about, we're absolutely focused on inventory and placement in markets. We're opening more larger stores. We call them like a mega hub or a hub store that has extra inventory.
We're engaging customers more and more. We're talking to them out in the field. We're going to visit them. We have several 100 sales reps that are out in the field AutoZoners calling on folks. And then lastly, we're focused on predictable profitable growth.
We are not volatile around operating margin or operating profit dollars. We do things deliberately. We do not play the price card on these games. We know that service is how we're trying to differentiate day in and day out in a mainly inelastic demand business. So, lastly, we focus on cost.
We're very consistent, very consistent and strong performers. And again, we're somewhat unique in that we've been asked several times today about recessions. Historically speaking, this has been a business that has done well, this industry in recessionary times. So, we're not predicting those things. We just we will address or cut it off of the past questions that we've received this morning about those things.
So, that is AutoZone and we would love to answer any of your questions. We don't have a ton of time to do it, but thank you for attending our little presentation. There's a microphone down, it's passed or is there something that you don't need it. Okay. Any questions?
Sure. I'll defer as many questions as I can to Tom because the store operators you don't have them every day. So, go ahead, Tom.
So, the question was, what are we seeing with regards to labor inflation, I guess, generally speaking? There was some change probably 24 months ago. Things have settled down now. Really the only pressure we're seeing now is on regulatory and compliance where you've got minimum wage laws that are changing. The pressure we were seeing from the Targets and the Walmarts of the world, that's kind of dissipated.
We're in really good shape. We invested some of our tax benefit back into our people. A significant amount of that went directly to our commercial salespeople and our parts professionals that are on the parts counter. So, we're not having any trouble attracting teammates. It is it's more difficult than you would find at Walmart or something like that.
We are especially retailer customers depend upon our people for advice and technical expertise. So, probably a little different population than you typically have in small box retail.
Sure. The question is around inflation.
Yes. I think that, Dan, it was I think that it's an interpretation that's a little different between some of us. The 2%, you could call 2% we could certainly call 2% for the last 15 years. That's normal just normal average unit retail growth that we've seen for the last decade at least. And when I was listening to their calls, both of their calls, I was a bit surprised.
I think that there's just some clarification that needs to occur. We're not seeing any change in the environment with regards to inflation. Yes, there was the 10% tariffs did not impact a large part of our overall business. In fact, a couple of categories, some pretty big, but it just wasn't material. So, I'm not sure if they're seeing something different, but we've not seen a change.
And the 2% number that was thrown out, that's pretty historical for
us. Yes. I think we're going to end up really actually saying the same thing. It's just the way we're all saying it, you guys, that I don't think there's much difference. It's by and large, it's an industry that has had some inflation.
We answer our question around retails and inflation at average ticket. So, it's hard to necessarily say our guys waiting their inflation on mix or something. But by and large, we're all competing in a similar basis in an industry that traditionally is not very price mainly inelastic in demand because it's either you need the thing or you don't. If something is wrong with your car, it's not running, you come in. And the average ticket in our industry is very low.
It's in the $20 range at retail level. So, it's historically not been one where we'll play the price card to shift volume. It's just not who we are. I'll repeat the question just for folks that maybe are online listening and then I'll let Tom. It was more around competing on commercial.
How do you have to operate differently than retail infrastructure wise and the like to communicate to those customers?
Well, first of all, the beautiful part of the commercial business for AutoZone is that it's we view it as an incremental business. We already have the inventory, we have the brick and mortar and we have the assets. For a commercial program, you're really adding a little bit of hardware and a few people.
The difference
is there really isn't a difference. 1 is serviced in our store and 1 is serviced in their location. Our culture of customer service is applicable to both sides of the business. Our parts expertise, whether you're doing it yourself or you're a mechanic is equally as important to both sides of the business. Some of the things that we're actually seeing now that I actually attribute some of our success to is our commercial business.
We're still fairly new relative to our close in competitors in that side of the business and we're starting to mature. And we're starting to mature in a really good place, particularly with regards to our people and our culture. I've been in AutoZone for 35 years. It's not unusual to walk into an AutoZone store and our store manager, our parts pros have been there for 20 plus years. It would be probably out of the ordinary if you didn't have somebody in one of our locations over 20 years of experience.
And starting to shift that retail mindset because of 20, 25 years experience and move them to that same culture of service, but now applying it to a customer that just doesn't lock in the door is really some of the things that I think we're starting to see some real benefits from. Our store managers are really becoming more engaged in commercial, partially because we're incenting them to do that. But it's a process and we're in a very good spot in that continuum right now.
Yes. The question is around inventory placement in local markets, how are you sort of utilizing a supply chain? Are you opening every store larger? Are some of them called hub stores? Did those become the larger ones versus more distribution centers?
How are you making those decisions?
Our distribution model is somewhat different than particularly than some of our close in competitors. We don't have nearly as many large distribution centers, 300000 to 500000 square foot centers. But when you consider our mega hubs and our hub network, those are really distribution nodes as well. So the combination of our large square footage DCs and our mega hubs probably put us on par with everyone else with regards to the distribution nodes. We think that we're going to get to probably in the 40 range, 47 range on mega hubs, pretty much in every large major city.
What that allows us to do is and it's particularly important in commercial. Whoever has the product closest to customer is going to win. And it's just the cost of doing business now. You've got to have if you don't have
it, they're going to go to the next person on
the call list. So, I think we've said 40. I think that we'll probably go beyond that. If I could wave a wand, I'd have 40 open tomorrow. It's just the development process takes a lot more time, because we're not looking for just warehouse and distribution space.
We're looking for good retail space as well.
Much like all retail industries hear about speed and delivery and getting it to the consumer faster, the garage or the business customer faster. It's the same thing in our industry and there's so many different cars, makes and models on the road. You have to have the stuff in the local market and you have to get it there faster and faster and that's what drives this model. It makes it hard for the little guy by the way, very hard. Go ahead.
Can you
talk a little bit about your capital allocation, right?
Sure. Sure. 1st and foremost, we open new stores. Our maintenance CapEx by the way is quite low for the company. So, while we spend between $500,000,000 $600,000,000 on CapEx, the maintenance CapEx is a small subset of that number.
We open maybe just north of 200 stores a year and spend several $100,000,000 of that on the stores, those openings. But beyond the $500,000,000 to $600,000,000 we take that off the operating cash and we buy stock with that with the free cash flow. We target to remain investment grade. We work with all 3 rating agencies that rate us and we have a split rating. We are BAA1 with Moody's and we are BBB stable with S&P and Fitch.
And that investment grade is important to us, both the cost spread between being non investment grade and investment grade matters to us. We utilize that to issue bonds. We have $5,000,000,000 in bonds. But first and foremost, we like our positioning. We add leverage as our EBITDAR grows and we're very consistent performers there.
We add maybe $100,000,000 to $200,000,000 a year in debt depending and we constantly try to figure out that sweet spot looking at cost of borrowing all the time. I hope that fully answers the question.
So, what is the leverage you would say in your leverage?
Leverage, we talk publicly about an EBITDAR metric of 2.5 ish times, But we there's no one set metric. I don't want to say that because each one of the rating agencies has different math. 2 of the 3 love to talk about EBITDAR ratios. So, we talk publicly about 1 metric, EBITDAR. But each guy is a little different in math.
So, we talk about lease accounting and adjustments for that. You'll see that going out with a lot of retailers going forward. We will not adopt that until next fiscal year. But we again don't see that as at this point, not any material impact and rating agencies have that. But no, that's roughly in the mid-two range.
Yes, Suneet? Sure. The question is around the private label and mix and what does it look like from what is being sold on the commercial side that mix to the retail side. Okay.
I would say overall and I think that what we've said publicly is that it's well over 50% of our business is in our private label brand, primarily the Duralast brand. And it's equal on both sides. DIY wouldn't be any different than commercial other than your hard part mix, which the majority of our hard parts are in the Duralast brand. So commercial is obviously a higher percentage of hard parts, so it's a higher percentage of Duralast. We're really happy with our private label strategy.
It allows us to continue to find margin opportunities. It allows us to enhance our direct importing work that we're doing now, again, finding margin opportunities. But mostly our customers love it, both DIY and commercial. And this used to be a question I would get almost every time I was in the room with somebody as well commercial customers don't really want private label. Duralast is the single largest brand in the automotive aftermarket and it's been accepted.
Now, there's been an evolution. 30 years ago, you would have gone in the backroom of a typical parts store and everything was branded. I honestly can't think of 2 brands that matter today. 10 years ago, there were probably 5, maybe 6 that mattered. But it's all coming off the same line out of the same plants in China right now.
And I know because I go there once a year and I watch them.
We're very deliberate in marketing and share of voice around the private label brand. So year after year, we're very consistent to say, it's not private, it's our brand, but it's Duralast. So we lead with commercials on it and it makes a difference, but it takes time. But we've built the brand and it's an exceptional differentiator. I believe that that sticks out relative to our industry as well.
If you in talking to our direct end peers, I think that that is really a very strong mechanism for AutoZone that is a key differentiator, our brand. And I think they would say the same thing, guys. I think if you ask all of our guests. Yes, please. Yes.
The question is around train mechanics in the garages and really the question is deeper than that in technology, shortage of labor and how obviously, we're selling parts and fulfilling replenishing replenishing needs for those garages. But Tom, do you have an opinion or you want to talk about it? Yes.
I think that on the do it for me side, the professional installers are they're incredibly well trained. They have continuing education processes just like you would if you're an accountant or a lawyer. On the DIY side, I think that it's probably easier today to get that education because of the availability of data. And ultimately a question will come up, well our car is too difficult to work on. I would argue with anybody that they're easier to work on today than they ever have been.
Components are plug and play. I have a 22 year old son. He asked me to change his headlight for him the other day. I'm like you've lost your mind. Go figure it out.
He's well, I'll go to AutoZone. They'll do it for free. I said you go to AutoZone and buy it. They're not going to do it for you. And I went out in the garage and 3 minutes later he's closing the hood with his iPad open and a YouTube video on.
So, I could make the argument that because of technology and data that vehicles are actually as easy as ever to work on. But on the professional side, if you go to a reputable mechanic, a Firestone or any good shops in your neighborhood, the professional installers today are awesome and incredibly well trained. Yes? The question is, someone has
a car that's 11 years old and how does it impact your business going forward? I would call you average. Unfortunately or fortunately for us, 11 years is
the midpoint. I think that's right. The thing that we pay attention to and we look at car park, miles driven, all of the other things, age of vehicle, the longer it's on the road, the better it is for AutoZone. And what we really pay attention to is scrappage rates and scrappage rates have not changed. There are more vehicles on the road every day than there were last year.
So as long as those cars are on the road, a 12 year old car, a 13 year old car today is entirely different than it would have been in 1980. You can't tell the difference. They run like brand new.
Yes, cars last a long time if you maintain. There's no doubt about it nowadays. Here you go,
Mexico is a great business for us. We've been in Mexico now for over 20 years. And our model in Mexico is essentially just like it is in the United States. If you walked into a store in Mexico, you would except for the language, you would think you're in a store in Philadelphia. Brazil and we continue to plan to grow in Mexico to rate them 40 or 50 stores a year.
Brazil is a different story. That's a test. We have 20 plus stores open there. The great news for AutoZone is what we're hoping is that it's another Mexico. The consumer acceptance of our model is every bit as good as it is in the U.
S. Or Mexico. They love us there. And there's no other model like us. Now many of you probably know much better than I do.
Doing business in Brazil can be very difficult. But our model works and top line revenue, we're very happy with, but we've got to figure out how to do business in the country.
Without further ado, I'll pass it back to Dan. Dan?