Just to keep things moving along here, a very exciting company. Next up, we have the next big four presenter, AutoZone. AutoZone operates over 5,500 stores with 80% exposure to the do-it-yourself customer, but a very quickly growing do-it-for-me base. The company has 26 million shares out at $747 for an equity market cap of $19 billion, net debt of $2.6 billion for an enterprise value of $21 billion. Speaking today for AutoZone is Bill Giles , Chief Financial Officer. Bill, thank you so much for being here.
Great. Well, thanks, Caroline. First of all, thank you very much, and thank you for having us. I appreciate it very much being here today. We're going to go through a few things and just walk a little bit through the industry trends. I'm going to try to leave most of this open for questions so that you guys can get questions, because I think many of you are very familiar with the story overall. We always start with this, and I know it may be very basic, but the AutoZone pledge is relatively important, and we start virtually every meeting at AutoZone, a large meeting, with going through the pledge. I just think it's always important because when I talk about some of our initiatives, et cetera, virtually everything we do, like many companies, comes back to the pledge. Always talk about putting customers first.
We'll talk a little bit about that more, knowing parts and products, again, training, parts knowledge, et cetera. Our stores look great. Pretty disciplined organization around keeping our stores maintained and making impression current. Best merchandise at the right price, and that's all about ensuring the quality of the Duralast brand, ensuring that that's sold at the right price. Caroline did a good job of talking a little bit about the overview of the company. We've got about 6,200 stores, 5,600 here in the U.S., Puerto Rico, and D.C. There's over 500 stores in Mexico. Brazil's early days, and we'll talk about that a little bit later, but there's about 20 stores in Brazil overall, and about 84% or so, about 85% of our stores have a commercial program. There's about 4,700 commercial programs that exist today in the U.S.
Virtually all the stores in Mexico have a commercial program. The last point I'll make on this slide is just when you look at historical net sales, you can see the incredible consistency that exists relative to sales performance between either 4%, 5%, or 6% over a three, five, or 10-year basis on a compound annual growth basis. We've had fairly consistent sales growth. When you look at it from an EPS perspective, those are even more outsized numbers, whether they be 12% on a five-year basis or 17% on a compound annual growth basis. Now, 2018 has a little bit of noise in it. We've took some charges for some impairment charges when we sold our two business units, as well as a write-off for the terminating the pension plan.
At the same time, we had a benefit, clearly, from the Tax Reform Act that really benefit us, and I'll show you some of the impact of that later. On a U.S. footprint basis, I already told you we have 5,600 stores here in the United States. The only point here is that we don't really believe that we operate in any market today that we would consider to be saturated. We believe that there continues to be opportunity for us to continue to grow stores in the United States, albeit faster outside of the United States, but still great opportunity for us to grow stores. On the DIY side of the business, which represents just close to 80% of our overall business, it's a large industry. It's a $59 billion industry growing at about 3.6%.
Everyone asks very frequently about what's the growth rate of the DIY side of the business versus DIFM, and I'll just jump to DIFM for a second. That's an even larger business at $76 billion. I think what is interesting is that the growth rate for both industries is relatively consistent, at least according to the industry association numbers. DIFM may be a little bit faster at 3.7%, but let's call it closer to 4%. DIY at 3.6%, but closer to maybe 3%-3.5%. Both industries, over time, have been very consistent performers and very steady growth. DIFM is certainly a larger industry and frankly, far more fragmented overall at $76 billion. We have about a 3% market share, 17% market share on the DIY side, so significant opportunity for us to grow.
Just quickly, our most recent quarter, we're kind of on an August year-end. That's how our quarters work. We had a 16-week quarter in the fourth quarter. Relatively solid growth overall. You can see on the tax rate basis, net income being up around 13%, obviously driven by favorability on the tax rate side, with EBIT only being up 2%. EPS up 21%, and that's just a combination of us buying back shares, and that's what's really generating. Keep in mind, the Tax Reform Act is going to generate probably $220 million worth of free cash flow and earnings for us on an annualized basis when you think about a 10% gap in the tax rate. That money is going to both be reinvested in the company, I'll talk about that in a minute, as well as used for buying back shares.
We bought back more shares in fiscal 2018 than in any other year. Let's talk a little bit about retail. Again, we open about 150 stores a year, so think of that as maybe a little bit less than 3% square footage growth rate or store growth rate. You'll hear us talk about this both on DIY and DIFM. It's all about inventory, and it's our ability to be able to get more inventory closer to the customer. We have expanded our hub locations as well as our mega hub locations. We have about 200 hub locations today and about 20-25 mega hub locations today. That is all about expanding the number of SKUs.
Just to reiterate and remind you again, a satellite store or a store that you guys would shop in every day, hopefully, is about 23,000 SKUs, and a hub store would be about 40,000 SKUs. That would service probably around 30 stores or so. Then a mega hub store would be up to 100,000 SKUs, so much longer-tail, et cetera. It's all about our ability to be able to say yes to a consumer and be able to get that product same day, or maybe in a case of a mega hub and a very long-tail product, maybe the next day. I will mention on the recent tax reform again. We probably have about $220 million for the benefit of the Tax Reform Act, and we're going to take a little less than half of that and reinvest that back in the business this year.
Some will be in the form of payroll and wage rate adjustments. We believe that over time, there may be some markets that we have gotten a little out of sync with relative to where we are in the marketplace. It's a very surgical view by our operations team to go through on a market-by-market basis, and frankly, a position-by-position basis in order to ensure that our more tenured and our more experienced parts salespeople were getting their wages adjusted more reflective of the market rates. That's something we just implemented recently, actually, over the last few weeks overall. In addition to that, there will be some technology investments that are made as well in order to be able to interact with our consumer on a friendlier basis, particularly on the commercial side of the business.
I talked a little bit about the store highlights and the growth. Again, we'll probably open about 200 stores a year and about 150 on the DIY side. Same on DIFM. We've got about a 3% growth rate in stores. I'll just pause there for a second because as those of you who are familiar with the story on DIFM or the commercial side of the business, our most recent quarter, we grew sales at about 8.8%. That's about more than double what the industry is. We're taking market share. In fairness, we have a 3% market share, so we've got plenty of opportunity to take market share. More importantly, you can see that we're growing our program count at around 3%.
Rewind the tape maybe three or four years ago, we were growing commercial at a low double-digit growth rate. We were expanding the number of commercial programs at around 10% or so. We feel great about the organic growth that we're getting out of our base business. A 3% growth rate on the number of commercial programs, and yet an 8.8% increase overall. We want to maintain that high single-digit and approaching low double-digit growth rate on commercial. Again, this one is the same kind of thing. It's all about providing, enhancing the product availability for the customers and expanding the network as well. Obviously, we're focusing on both national accounts and small accounts, or what we call up-and-down the street accounts overall. Balance sheet continues to remain in really good shape overall.
Our inventory turns are a little bit slower at about 1.4 to 1.3. Debt continues to maintain at that 2.5x adjusted debt to EBITDAR number. International. Actually, about 10% of our overall store base today is international, so that's grown at a nice rate. Mexico grows at about 40 stores a year overall. Brazil, we've been at it for almost five years now, and we have about 20 stores there. We think we're at a point now where we understand the model and we're continuing to accelerate our growth down there. Frankly, it'll take several years before that becomes a more significant part of the company. Frankly, probably 10+ years. We're excited about Brazil, and we think Brazil could be even bigger than Mexico on a long-term basis. On the digital side of things, obviously, AZ.com, we've got buy online, pickup in store.
Also on the ship to home, we announced over the last six months or so, specifically on our last earnings call on September 25th, that we have next-day delivery in about 85% of our markets. In those markets, typically where we have a hub store, et cetera, and a customer wants to get online and order a part as late as 9:00 P.M., in some markets, as late as 10:00 P.M., they are able to do that and then actually get that part the next day. Again, it's a relatively small percentage of our business today, and I think it'll probably stay a smaller percentage. Again, it's all about providing the customer with a service level of being able to shop when and where they want to overall.
autozonepro.com, which would be the electronic ordering aspect of the commercial side of the business, continues to make investments in that and make that a little bit friendlier for our commercial customers. ALLDATA, I don't know how many of you are familiar with ALLDATA. It's based in Sacramento, California. It's a software company that basically provides repair diagnostic information to commercial garages on a subscription basis. That's a great company. I don't know how many of you are going to go to SEMA. If you have an opportunity to go to SEMA and want to stop by the booth, I think they give you some pretty good demonstrations of some of the product, both repair, manage, which would be kind of a shop management system, and then more recently, enhanced diagnostics. We think that'll be a great product that'll continue to compete well.
I'll wrap it up, and then Brian and I will open it up for questions. I think both sides of the business remain very healthy. There's a lot of macroeconomic factors that are in our favor relative to age of vehicles being at around 11.6 years, about 260 million vehicles registered in the U.S. Gas prices on a relative basis remain relatively low. Miles driven continues to be positive. On the commercial side of the business, we feel pretty good about the recent trajectory of the growth rate on that. We've gone from a mid-single-digit to a higher single-digit growth rate and feel we've got good momentum on that. We're continuing to invest in our supply chain, build hub stores, mega hubs, putting more inventory closer to the store.
From an international perspective, that's been a great business for us, and we will, as we say here, prudently grow that business over time. Those are the points. There's some other things that we can mention, but I'll pause there, and we'll open it up for questions to the group. Over to [Carolina].
Great. Yes, please feel free to ask questions. I'll just start with some basic fundamentals. Just a review of your customer. What do they go in? What do they need? Is that failure maintenance, accessories? And how do you compete for them? And if you do provide it, what's their average order size?
Yeah, that's a good question. When you think about our customer, if we're starting on the DIY side of the business, always keep in mind that the very vast majority of our customers are coming to us out of economic necessity, and that they've got a car that they need to be able to either fix from a failure-related part, or they need to be able to maintain that, and they don't have the ability to take it to a garage to be able to get that work done. From us, although we may have hobbyists, et cetera, but for the majority of the people, they're doing it out of economic necessity. From an average ticket perspective, it's a relatively low average ticket. We're in the mid to high 20s from an average ticket perspective.
On the commercial side of the business, again, we're servicing both up and down the street, which is the vast majority of the customer base there, and then the national accounts as well. There was another aspect to the question that I missed.
I'm sure there was. Can you talk about what factors you compete on when-
Thanks for reminding me. Keep in mind that a lot of it is service-related, by the way, too. When a customer comes into the store, and think about failure is probably 45% of our sales. Maintenance, failure, your car obviously doesn't operate. Maintenance is probably a high 30%, and then discretionary or accessory-based business is the remaining piece of it. Keep in mind that when a customer comes into the store, they typically have a problem, so they need advice and help. We touch a lot of customers that come into our store. They may have a check engine light on.
We're able to take our Fix Finder device, put it in the OBD onboard device, and be able to extract information out of the car, put that into a system, and then be able to tell them with a high degree of probability what that P code really means. We can sell them the part. We can print out the repair information. We could loan them a tool if they have to. Many people don't want to buy a tool for one particular job. We can loan them a tool, and if it's a job that's over their head, we can refer them to a commercial garage.
I mention that from the standpoint that there's a lot of experiences that happen inside the box that are unable to happen online, and whether that be checking your electrical system to determine whether it's a starter, alternator, battery, or possibly a $2 cable, and you don't want to go through the process of replacing that. Replacing a light bulb, we'd have to be able to install that for you, wiper blades, et cetera. When you think about it's a relatively high-touch business because most people need help and support when they come into the store to ensure they've got the year, make, model, engine type, and the right part, and then they have the ability to be able to take their old part and compare it.
Also keep in mind that several of the parts that we sell have a core attached, and we want to send them back to the manufacturer, whether that be a battery, starter, alternator, CV axle, et cetera. There's a variety of products that have a two-way transaction there.
Great. Just from the breakdown you gave us, there's a significant exposure to failure in maintenance parts demand. You touched on it, but your whole distribution network, can you expand on that and how quickly you're able to get a part either for the do-it-yourself customer or now this growing do-it-for-me business?
Yeah, we're working hard on that in order to do better. A DIFM customer typically is expecting us to deliver the part, and we do in 20-30 minutes. In the vast majority of cases, those parts exist within the store. In some cases, they may exist in the hub store, and that may be a couple of hours later. It's just important for us to be able to communicate to the customer at what point in time they will actually receive the product. As we continue to expand out the hubs and the mega hubs, that's when we're getting more and more SKUs closer to that end customer today. Although the mega hubs service the entire country, they're spread out.
As we continue to add more mega hubs, and we expect to add 10 this year, going from 25-35, we'll be able to get more product closer in line in order to help support that supply chain.
To touch on some of the initiatives you talked about, you said that you have this additional, I think, $259 in cash. You talked about the initiatives that you're completing now. One of them, I believe, or what you touched on, is getting that to that customer, whether it be same day or overnight. Can you just talk about what you've mentioned there?
Sure. Just to clarify, in case I was not clear on the incremental cash that we're generating from the Tax Reform Act, a lot of that is going to go back into the wage rate in order to be able to adjust the wage rate, then some is going to go back into technology in order to improve our technology base overall. On an ongoing basis, we'll continue to invest in the hubs and the mega hubs over time and the supply chain. We added two distribution centers in the last 24 months, that was a lot of activity for the organization as well. We're continuing to build that out, and that's baked into our base business, if you will, overall. Those incremental pieces were really that wage rate adjustment and then a little bit of a bump in the technology investments overall.
Great. You said 8.8% do it for me growth, and that's only on new programs of 3%. You would think some of that is organic or share gains. What do you see there? How do you think you're able to pick that up?
I think it's really just us working harder. I think that some of the things that we're doing is we're continuing to evolve the territory sales managers, the sales force that's out there, et cetera. They're getting more tenured in place. I think we're doing better at being able to say yes on the parts coverage. We're expanding the assortment. We're also getting them delivered sooner than we were before. We're also allowing our store managers to get more engaged. We're adding incremental hours to our store managers so that they can get out and visit commercial customers, et cetera, so that a commercial customer doesn't just have a commercial specialist. They now have what we call the captain of the ship, where the store manager will go out and visit commercial customers, create the relationship.
As you guys well know, it's all about a relationship business, that's an important thing over time.
I just wonder if you could tell us this breakdown, how does it compare with the online in terms of failure, maintenance, and discretionary? How did your prices compare on store and your online store?
Yeah. For the most part, the prices compare the same online and in-store. The only one difference I would say is that we do have a promotion online where there's a 20% off, roughly. It changes every now and then. We actually had that on for a period of time. We took it off back in February just to see what would happen over a six-month time period. We had a pretty good idea what would happen. It's a little unique in this channel that nobody else really seems to have this kind of promotion except for us and our competitors. We took it off. No one really followed. We didn't want to be by ourselves, so we put it back on again. The volume is relatively small.
Relative to failure, the only thing I would say on the failure, it's probably a little bit more maintenance than it is failure because batteries you can't ship. That kind of pulls them out of the equation from an online perspective. Overall, what I do find interesting, by the way, is that the volume of ship to home and buy online, pickup in store combined is relatively small. It's growing fast, but it's a very small base. It's a single-digit penetration. The one thing that is interesting, since you brought it up, is that on the ship to home, you have this ability to get a 20% off discount when you ship to home. If you buy online, pick it up in store, we want to keep the integrity of the price inside the store the same, so we don't allow that discount.
Yet still 50% or even greater of the people that get online to order something, buy online, and pick it up in store. They want to be able to go to the store. Keep in mind, 85% of the population is within five minutes of an AutoZone, so there's a convenience factor to that. They want to be able to talk to somebody, and they want to be able to see the part and say, "Hey, is that the right part? Did the holes smash up? Is this the right thing?" Get some advice. There's value in that service.
Bill, how many shares are out today at the moment?
25 and a half.
28.5?
25.5.
25.5. I was just looking at a number. It was 155 million, I guess that was about 20 years ago.
Yes. We bought back $20 billion worth.
Incredible shrinking company.
It is.
Independent of that, you saved $220 million in cash taxes. Of that amount, eight was in the past fiscal year.
Yep.
Two-thirds of that, $160 million. You've got $80 million incrementally if everything is constant in the current year. You're starting to give the benefit to the teammates effective November 1st, apparently.
100% right.
You got two months with a lower tax, and you got one month with the higher cash. I'm just trying to kind of dot. What was the thinking of not doing it earlier?
Great point.
We're.
Yeah, why don't we do it right off the bat, per se.
You have the drag in the first half of 20 What year is next year? 2019.
Yes. It would have been a lot easier had we done it at the beginning, et cetera. What happens is that we recognized that it wasn't going to be peanut butter, and that it was going to be in certain markets here and there, et cetera. It was somewhat strategic. On a normalized basis, this is the time of the year that we do reviews and people get raises, usually around November 1st. We wanted to integrate it with that point so that we both got a raise. Yours was just much higher because your market was being adjusted, as opposed to you got something and I didn't get anything. We wanted to coincide it at the same time.
It would've been a lot easier financially to have done it earlier, but it's better for the Zoner to do it at that time.
Do you have a number on that? I mean, if everything else constant but the incremental associated with the tax benefit was XYZ?
I would say that we probably are going to generate about $220 million, and a little less than half of that, so maybe just a little less than $100 million, will go back to reinvest both wages and technology, not just wages.
We find a lot of companies that, for example, accelerated payments into their defined benefits or defined contributions to take the tax deduction. Anything else you do that we should have been aware of that kind of smoothed earnings for the next fiscal year?
Yeah, no, not really. I would say that nothing really from that perspective at all. I mean, we terminated the pension plan back in the fourth quarter.
Yeah. No, I got that.
That's done and so, but no, I'd say no.
Thank you.
Yeah. Thank you.
All right. Do we have a
Hi, Brian.
Hi, Bill. Under the idea that your stock is trading at 12 times earnings, lower than it's historically been. You've got a lot working in your favor. Part of that is obviously the concern about online and what's going to happen. Why not, or would it be feasible to announce a regional partnership with Amazon, pick a state, whatever, Florida, why not? Say, Amazon, you can order on Amazon, and you're doing effectively the delivery for them, in that area, and you see your stock go up three turns in a day.
Likely, substance over form, because the reality of it is, you can get online today and order that product and get it the very next day. We think that we've got a great platform for people to be able to utilize, I do think it comes back to service inside the store, I think that there's a need for service inside the store, that's what the consumer wants, that's what they come to the store for. There are an enormous number of touchpoints that exist inside of a store. Plus, I think we've got a good website, we've spent a lot of time and money working on this next day delivery. Again, it's not a huge volume today, but it's available. I think that provides the consumer with a great opportunity.
Back to me. I'm not sure I let the enemy into the tent. Independent of that, if I had the same number of units sold, same mix
Same quantity. What are you projecting for increase in prices, can you maintain the gross margin on that price increase for what you're buying into the current fiscal year versus the past year?
It's a great question. I think that it's interesting that this industry, from our perspective, has had very little inflation over time. We've had a little bit, but not a lot. You've had kind of some stagnation for about three years. Now, obviously, the tariffs kind of swing you in a pretty big way. You had a 10% tariff rate. Most of that has been passed through to the consumer today, it wasn't 100% 10% because the yuan's kind of come down, we've renegotiated prices, et cetera. I don't really know on the next 25% tariff increase, the industry has a great track record of being able to pass on price increases to the consumer, certainly it feels as though the consumer's in as good a shape as they've been in a long time to be able to bear some of that cost.
We think that actually the inflation could be helpful at some point in time. I always say good news, bad news. The bad news is our inventory turns at 1.3 times. The good news is our inventory turns at 1.3 times, so increased cost is going to take a while to flow through on a weighted average cost basis. An ability to be able to pass on cost will maintain our margin and may be able to give us a little bit of upside if we can get it accelerated a little bit.
Let me chisel that and get into the weeds just one more time.
I love it.
Assuming that all parts were sourced domestically, no tariffs.
Okay.
What do you think the price increases look like?
Moderate.
Moderate?
Yeah.
Greater than nothing?
Yeah, greater than nothing, but low single digit.
Great. Lastly, since we talked about price increases, we've also talked about how your share count at 25 and a half now. A lot of how you've been able to do that is these terms, these extended terms. We heard yesterday interest rates are rising. How do you think that affects this program going forward?
Yeah, I think that, we've had high interest rates and then really low interest rates for a sustained period of time, now they seem to be ramping up overall. Frankly, we look at it as an input cost. It's one of many input costs. Wages are an input cost, interest is an input cost, commodities are an input cost. It's an input cost to the overall product. It is one of many things that drive the product cost.
Yep. Since the last question, we've talked about a lot of, I guess, input costs rising with the interest rates, with the price, with the labor, with potential tariffs. Now we also have higher gas prices. Do you have any comments on how that might affect demand? At what point and what price at the pump do you think that might affect your business?
It's a good question. I don't know if we know for sure, but it doesn't feel as though the price at the pump today is one that we're concerned about by any means. We recognize that it has increased a little bit. Clearly, on the supply chain side, diesel's putting a little bit of pressure on supply chain. That's putting a little bit of pressure on that aspect of gross margin. From a consumer's perspective, if we go back in time, it feels to us as though that $4 seemed to be a crossover point a little bit, where it applied some pressure to the consumer, and we feel like we're pretty far away from that today.
Great. Bill, Brian, thank you so much for being here. I have so many questions, we've run out of time. Obviously, trading only at 12-ish times our earning investment, great opportunity. Thanks a lot for being here to share with us today.
Thank you very much for having us.
Thank you.
Thank you.