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 in that he grew up in the culture of AutoZone. We definitely pride ourselves on the fact of years of service and who we are. I'll jump right in. We just had an earnings release last week, last Tuesday, one week ago. It seems like five years ago. How time flies these days. We're happy to see you. Our sales results, I'll get to that, but we come 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'll talk to you a little bit today about where that growth came from and the strategies. We executed well. We're 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 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, lots of questions we get are on the commercial side, the professional delivery side, which we're newer and growing with. 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 retired, Linda Ireland. These four lines define who the company is. We make sure with all meetings, we start out adhering to the pledge. AutoZoners in the stores, we help you. If you show up with one 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, that added value from a service standpoint beyond just the part in a business that has a relatively low average ticket. This is our second quarter financial results. Last year, we sold two businesses.
They were tiny, but they had an impact on margins. They were lower operating margin and gross margin businesses. 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 two, three years ago, and they were adjunct to the core. When we stopped growing those businesses, when we sold them, you're seeing the comparison look unique. It's been favorable. There's our sales results. You can basically jump to the bottom line. We made about $11.50, which is a great story, north of 10%. It shows that way as well for year-to-date results. They're very solid results in that regard. Here's our business, U.S. retail, U.S. commercial, and international. 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 here, who's still growing comps?" We're one of those guys. We continue to open 150+ domestic stores. We open 50-odd international stores. We also open 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+ quarters now of sequential improving sales results in Commercial. To point to that, you'll see that we did, for the quarter, $515 million of sales. On a trailing basis, we're north of $2.3 billion. We are not the largest player in the space, but we're coming on. We're growing in productivity per program.
The takeaway on this slide I'd have you guys notice is the 9.5% second quarter growth per program versus the trailing 4 quarters growth of 5 and change percent, which means the more recent quarters are faster than the other ones. 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 billion. We spend between $500 million and $600 million of CapEx, which allows us to have free cash flow of $1.6 billion+. It's a very, very strong story in that regard. I'll tie that to one more thing. We're a very shareholder-friendly company.
We give that $1.6 billion back to shareholders. We have been buying back stock since 1998. We have bought back some amazing stats. We spent north of $20 billion on buybacks. We are now below 25 million shares. We're in the 24 million share range. When we started this, we were 168 million shares. 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%+ working capital AP ratio. 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.
We're buying now more and more directly from Asia, for example, and importing the goods ourselves. You're also seeing that we have $5 billion in debt. With the buybacks, we have negative shareholders' equity. 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 when we went public way back in the early 1990s, and we're buying back more than the original per sale price of those shares way back. This is a slide we always finish with in our commentary, guys. What we're focusing on these three businesses. In Commercial, which we're very proud of, and we will talk about, we were 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 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 hundred sales reps that are out in the field, AutoZoners, calling on folks. 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 where we know that service is how we're trying to differentiate day in and day out in a mainly inelastic demand business. Lastly, we focus on cost. We're very consistent and strong performers. 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.
We're not predicting those things. We will address or cut it off at the pass questions that we've received this morning about those things. That is AutoZone, and we would love to answer any of your questions. We don't have a ton of time to do it. Thank you for attending our little presentation. There's a microphone, Dan. It just passed, or is there something that
We don't need it.
We don't need it. Okay. Any questions?
Can you talk about what you're seeing in terms of labor cost pressures or general ability to attract new members?
Sure. I'll defer as many questions as I can to Tom, because the store operators, you don't have them every day. Go ahead, Tom.
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 Target and the Walmart 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. We're not having any trouble attracting teammates. It's more difficult than you'd find at Walmart or something like that. We are a specialty retailer. Customers depend upon our people for advice and technical expertise.
Probably a little different population than you'd typically have in small box retail.
During the last earnings conference call, AutoZone indicated that we saw the most inflation pressure for inflation went up in same-store sales, and your competitors were talking about less of that competition. Have you been able to determine at all the difference about the way you're seeing inflation impacting revenues compared to the others?
Sure. The question is around inflation.
Yeah, I think that, Dan, I think that it's an interpretation that's a little different between some of us. The 2%, we could certainly call 2% for the last 15 years. That's just normal average unit retail growth that we've seen for the last decade at least. 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, 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. I'm not sure if they're seeing something different, but we've not seen a change. The 2% number that was thrown out, that's pretty historical for us.
Yeah, I think we're going to end up really actually saying the same thing. It's just the way that we're saying it. It's the way we're all saying it, you guys-
Sorry
I don't think there's much difference. 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 weigh in their inflation on mix or something. By and large, we're all competing in a similar basis in an industry that traditionally is not very price. It's mainly inelastic in demand because it's either you need the thing or you don't. Something is wrong with your car, it's not running, you come in. The average ticket in our industry is very low. It's in the $20 range at retail level. It's historically not been one where we'll play the price cards and shift volume. It's just not who we are. Yeah, go ahead.
Could talk about the now that you're moving into commercial space and
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?
First of all, the beautiful part of the commercial business for AutoZone is that 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. One is serviced in our store and one 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.
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 at 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. 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 walk 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 at a very good spot in that continuum right now.
Yes.
You mentioned building larger stores and having an auto inventory there and how you look to buy in that versus your regulations for building larger stores versus having professional
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? Do those become the larger ones versus more distribution centers? How are you making those decisions?
Our distribution model is somewhat different, particularly than some of our close-in competitors. We don't have nearly as many large distribution centers, 3 to 500,000 square foot centers. When you consider our mega hubs and our hub network, those are really distribution nodes as well. 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 the customer is going to win. It's just the cost of doing business now. If you don't have it, they're going to go to the next person on the call list.
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.
Yeah, much like all retail industries, you hear about speed and delivery and getting it to the consumer faster or the garage or the business customer faster. It's the same thing in our industry. 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, 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 strategy?
Sure. First and foremost, we open new stores. Our maintenance CapEx, by the way, is quite low for the company. While we spend between $500 million and $600 million 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 hundred million dollars of that on the stores, those openings. Beyond the $500 million to $600 million, 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 three 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. 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 billion in bonds. First and foremost, we like our positioning. We add leverage as our EBITDA grows, and we're very consistent performers there. We add maybe $100 million to $200 million a year in debt, depending, and we constantly try to figure out that sweet spot, looking at cost of borrowing all the time. I don't know if that fully answers the question.
What is the goal then each year with the leverage markup?
We talk publicly about an EBITDA metric of 2.5-ish times, but there's no one set metric. I don't want to say that because each one of the rating agencies has different math. Two of the three love to talk about EBITDA ratios. We talk publicly about one metric, EBITDA, but each guy's a little different in math. 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. We, again, don't see that as, at this point, any material impact, and rating agencies have that. No, that's roughly in the mid-twos range. Yes.
Brian, can you talk about how key is your private label in sort of winning on the commercial side? What's the mix on the DIY for private label and how does that compare to the commercial side?
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.
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. 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. 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. Mostly, our customers love it, both DIY and commercial.
This used to be a question I would get almost every time I was in the room with somebody is, "Well, commercial customers don't really want private label." Duralast is the single largest brand in the automotive aftermarket. It's been accepted. Now, there's been an evolution. 30 years ago, you would've gone in the back room of a typical parts store, and everything was branded. I honestly can't think of two brands that matter today. 10 years ago, there were probably five, maybe six that mattered, but it's all coming off the same line out of the same plants in China right now. 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. Year after year, we're very consistent to say, "It's not private, it's our brand, but it's Duralast." We lead with commercials on it, and it makes a difference, but it takes time. We've built the brand, and it's an exceptional differentiator. I believe that that sticks out relative to our industry as well. In talking to our direct peers, I think that that is really a very strong mechanism for AutoZone that is a key differentiator, our branding. I think they would say the same thing, yes, I think if you ask all of our guests. Yes, please.
How about how important is it to train mechanics on all of the technologies in cars?
Yeah, the question is around trained mechanics in the garages and really the question is deeper than that in technology, shortage of labor and obviously, we're selling parts and fulfilling replenisher needs for those garages. Tom, do you have an opinion or want to talk about it?
Yeah. I think that on the do it for me side, the professional installers, 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. Ultimately, a question will come up, "Well, are cars 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." I went out in the garage, and three minutes later, he's closing the hood with his iPad open and a YouTube video on. I could make the argument that because of technology and data, that vehicles are actually as easy as ever to work on. 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.
You have a car that's 11 years old now. How does that impact your business going forward? How do you look at that?
The question is, someone has a car that's 11 years old. How does it impact your business going forward? I would call you average. Unfortunately or fortunately for us, 11 years is the midpoint.
Yeah, I think that's right. The thing that we pay attention to, 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. What we really pay attention to is scrappage rates. Scrappage rates have not changed. There are more vehicles on the road every day than there were last year. 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.
Yeah, cars last a long time if you maintain them. There's no doubt about it nowadays. Keith, go ahead.
Can you discuss your plans for Mexico and Brazil expansion? As that increases percentage of operations, how does that impact profitability?
Mexico is a great business for us. We've been in Mexico now for over 20 years.
20 years.
Our model in Mexico is essentially just like it is in the U.S. If you walked into a store in Mexico, except for the language, you would think you're in a store in Philadelphia. We continue to plan to grow in Mexico at a rate of 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.
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.