Thank you all for attending the 18th Annual Consumer Growth and E-Commerce Conference here by Oppenheimer. Very happy to have you all in attendance today, thank you. I am pleased to introduce our first presenting company today, AutoZone, and two of the company's executives. First, to my left, Tom Newbern, Executive Vice President of Operations and Commercial, and then to his left, Brian Campbell, Investor Relations.
Morning.
We will conduct this as a fireside chat. If at any moment there is questions from the audience, just raise your hand and we will work your questions into our conversation. Thank you guys for attending.
Good to be here.
Tom, I want to start maybe just stepping back and just talking about the overall auto parts sector and the backdrop you see forming. Whether we can talk a little bit about maybe some of the weather trends, which I know may be over-talked lately, car park, other issues. How are you seeing the backdrop for AutoZone and for the business in general?
Well, obviously, Brian, there's always a lot of conversation about in this industry. The good news for us is when you look at all of the top four or five players, we're all saying the same thing. We finally got what we've talked about for several winters now, which was a pretty harsh winter. Unfortunately, it also was a very, very long winter, and we were very cold late into spring. What we said on our most recent call was that once the weather became seasonal, it didn't get terribly hot yet, but once it became seasonal, we started to see things swing the way that we would've expected to coming off a fairly severe winter. We still remain fairly bullish on that. With regards to some of the key drivers, car park, miles driven.
Miles driven still seems to be a tailwind for the industry, as well as the car park. There's concern about the trough that was created in 2007. If in fact that was a headwind, it no longer is. That population of vehicles is now hitting that sweet spot. We feel very bullish about the industry. Very good.
On the weather side, having this harsh winter, should we be thinking that the harsh winter, now that we're transitioning for the most part to spring-like condition, that should help to drive better repair-type sales through reports in 2018?
Yeah. Obviously, we never give guidance. What we did say is that we expect, with the favorable weather trends, that we'll see a continuation of what we saw late in the quarter.
Got it. Talk a bit about, we've seen some sales disruptions, maybe from AutoZone and throughout the sector, of just within the border towns and immigration rhetoric.
Can you talk a bit about what you've seen there? Has that been a real issue in where we're going from here?
What we've seen, we certainly have as dense a population of brick-and-mortar on the border as anybody else in the country. We've seen it play out up and down, quite frankly. It was really tough after the election. People got back to normal and seemed to continue to get out, repair their cars. What we've seen is a difference in some of the border states. California behaves a little differently than Arizona and Texas. Our business in Texas and Arizona has been very strong. California's hard to say because they've also had some very unseasonably cool weather. Nothing material, I would say.
Okay. As I look at your recent results, I think what's impressed me maybe most has been the steady improvement in your commercial business.
I know that's been a big focus of yours. We've talked about it for a while. Where are we right now with AutoZone's push into commercial? How do you see the drivers behind the improved sales, the investments that you've made, and kind of where we're going from here?
We've been investing in commercial for the last seven or eight years. I like to think of commercial with really their three main legs of the stool. First and foremost is assortment. You have to have product close to the customer. If you've heard anything about AutoZone, we've been talking about hubs, mega hubs, different distribution nodes for several years now. We have definitely refined all of the above, and with regards to assortment, we're as good as anybody else out there. The next critical leg is you have to have a sales organization that can go out and tell your story because the business is about relationships, and you're not going to untie old relationships easily unless you just are consistently out there telling the AutoZone story. The third and more difficult leg is to create a culture with all of your store associates that commercial is a priority.
That takes a long time. We're nearly a 40-year-old company that primarily focused on retail for the majority of our time, and we have an incredible amount of tenure in our stores. Teaching people how to move that strong DIY culture into a strong commercial culture has been the challenge. That's been our focus for the last three years, since I've taken responsibility for that entire part of the business. I think that what you're seeing is a very consistent growth in the business, and I think you're going to continue to see that, once again, because it is about relationships. As you continue to execute well, more time, you build more relationships, and you gain more share. We've certainly been growing share for the last several quarters sequentially.
Is the commercial infrastructure for AutoZone now in place?
I would say absolutely. That's not to say that there's not room for improvement. One of the things that we did talk about on our last call was investing some of the tax windfall back into the business, and a big part of that is going to be IT investment into the commercial side of the business. I would say now that the majority of the big three or four are at parity. It's still a fairly unsophisticated customer base. We think that there's a lot of opportunity to get some first-mover status with regards to digitalization and creating just a more digital customer journey on the commercial side.
Right now, or as of last quarter, your commercial sales represent about 20% of your overall-
revenues. You have not articulated a longer-term goal. Other competitors-
Oh. Oh.
Have you?
Yeah.
Oh, tell me.
We want 50/50.
Okay. Good. Thank you.
Our objective is absolutely to have 50% of our business commercial without losing the mothership, which of course is DIY. In no way are we satisfied with 20%.
How long will it take to get to that 50/50 split?
I can't tell you that. It's certainly going to be a longer haul because again, at AutoZone, we've got some fairly stringent financial disciplines. One thing for sure, we're not going to give it away.
We're not going to go buy a business. It's a slower march for AutoZone than some of you would like, for sure. The way I look at it is at 20% of our business and what share overall. Hell, the big four represent almost no share to begin with.
That's right. Yeah.
We're at the bottom of that. We see it as nothing but a tremendous opportunity for us. Again, we have the lowest share, it's only 20% of our business, we hope to make it 50% of our business.
About 3%.
3%.
20% of your sales is 3% of that market.
Yeah.
As you're growing from 20 to 50, describe for us where that market share coming from?
I think that it's such a segmented business. The majority of the do-it-for-me business is captured by WDs, small mom and pops, very localized parts distributors. I think that we all continue to take share there. AutoZone is definitely taking share from some of our closer in competitors. All you have to do is look at we're outpacing everyone else.
With regards to growth. It's much more organic than it was three or four years ago when we had program growth of 400 or 500 programs a year. We are very bullish on our ability to continue to take share on the commercial side. Again, we're not going to go from 20 to 50 in the short term, but you can believe that we're not satisfied. Most people would be very satisfied with our last three or four quarters growth in commercial. We're not. A seven, eight, nine, 10% growth for us is not what we're looking for.
Just one final question on commercial. It seems that what you've done so far is largely organic.
Could there be purchases in there? Could you accelerate their growth through select acquisitions of some sort?
Yes. You obviously could. There are certainly some constraints with that. The players out there that you would probably be rolling up would be some of the smaller WDs, some of the smaller players. Our experience has been that they value their inventory much more than we do. It is their business, that they own most of it, and it just doesn't have that much value to us. It's possible, but I would say that a more organic journey will continue for AutoZone.
Shifting away and talking about, so we clearly have the operational investment in commercial. I've asked a lot of my companies the same thing. As we get the windfall from lower taxes, how does AutoZone look at the other areas where you may be putting those dollars to work? Specifically, we've talked a lot about wages, so maybe we want to talk about the commitment you're making to higher wages in your stores.
As part of the conversation that we had last quarter was trying to give everyone an idea of where those investments will go. We are going to make a significant investment, probably about, I would say, 30% of the total will be in wage. This is not a blanket increase across 85,000 associates. We've identified the key and most critical positions in our store, which is our parts sales managers on the front counter, our commercial sales managers behind in the back counter. Those are the two positions that will see 80% of the investment we make. We're not just doing a blanket investment for those two job codes. We're looking at who's been here the longest, who has the most value, particularly on the commercial side.
If you turn a commercial sales manager, you're going to see that book of business walk away for a while, and it takes a while to get it back. Again, it's a relationship business. We feel like it's not only an investment in getting better people, but also mitigating the risk of losing some of our key people in our stores.
As we think about the, we've talked a lot about the wage increases, from your perspective, is it a catch-up to where the industry is? Is it a reflection of where the industry's going? Then also, I guess, maybe the third piece of that would be how should we think about as we look beyond this year? Is this a one-time step up, or should we expect these type of increases to persist?
It is a one-time step up, and it's fairly permanent. Once that's done, we would anticipate getting back to a normalized growth in wage rate. I've heard numbers anywhere from 4%, but that would be high for us. Normal for us is in that 2%-2.5% growth range. That's what you could anticipate going forward. The question on are we trying to catch up? Generally, no. We have 4,600, 4,700 commercial programs and 5,400 stores across the country, each operating in their own small marketplace. We were off in some places but not across the board, and our approach was to go look at every market median where we do business and understand what the median pay is, and where we were below, make it right. If we were above, we left it alone, and if we were just right, that's where we are.
It was definitely not an across-the-board change.
Yeah. Brian, you discussed in your recent commentary, you guys discussed the overall impact of this. Maybe you could talk a bit about that, the overall impact of the SG&A from these efforts.
Yeah, basically, we looked at it as an opportunity. Tom sort of hinted at this. We had an opportunity where we have savings from income tax to make sure to be proactive on wage, but really also things like technology, to make sure that we're not just meeting the peers in the industry, but leapfrogging, attempting to leapfrog those kinds of things. There was discussion around how much SG&A is enough, what is the growth rate going forward? We were not looking to sort of reset bars. What we're doing is we expect to have a return on our investments. We were just trying to introduce the fact that we would be proactive where possible because of the savings that we were enjoying with income tax.
Okay. Shifting gears a bit. Look, one of the biggest questions I get, I want to talk a bit about this, is this online competition.
Not just for AutoZone, it's really for every traditional retailer I follow. The market's concerned, worried about what impact companies such as Amazon could have on your sector. We've talked a lot about it. Overall, how do you view online competition within your space? With that, talk a bit about AutoZone's online efforts themselves.
With regards to our space, the e-commerce side of the automotive industry is immaterial. It's immaterial for AutoZone, it's immaterial for Advance, O'Reilly's, and everyone else. I'll just use the AutoZone example. First of all, the majority of our business is failure related. It's broken. My car doesn't run. That gives us the ability to defend our industry where some other retailers probably could not. Secondly, if you think about all the distribution points, we have 5,400. Add another 10 from the other two close-in guys, we're very close to the customer. In AutoZone's case, 85% of the population of the country is within five miles of an AutoZone. They prefer to come to the store. If you think in terms of a failure-related item or a maintenance item, most of the customers are doing this job for the first time.
If it's not the first time they've done the specific job, it's the first time they've done the job on that vehicle. If you look up a brake job online, if you go to some of the non-traditional players, you're going to get 20, 25 possibilities for a single application. 20 or 25 won't work. Having somebody that can help you get through that and identify the right part for your car as well as any additional parts that you may need, our customers are voting by coming into our stores. One of the things that we talked about recently is we got caught up in a lot of the promotional activity that's not uncommon in most e-commerce businesses. We made the decision that we weren't going to do that anymore.
Most of our customers, the buy online, pick up at store side of the business is the fastest growing piece of our e-commerce business by far, we offer no discounting on buy online, pick up at store. Even if you're online on our website and you see a banner that says $20 off a $100 purchase, if you come into the AutoZone store to make that purchase, you're not going to get that discount. The vast majority of our customers chose to come into our stores. We believe our value proposition is strong. It certainly is our people and our knowledge. Not only do we believe it's worth it, but the customers do as well.
We spend a lot of time talking about e-commerce, you guys. Our industry, retailers in general, our space is unique a little bit in that the size of the business being done shipped to home is so small. As much as we could wow you with big words about how fast we can deliver to your doorstep, at this stage, because there's so many questions that get asked about what do I need, what do I need to have delivered? It's just a hard business to do directly over the internet. Customers still want to come in and ask a lot of questions. A majority of our customers come in, and they ask at the front counter, "Hey, what do I need?" They just don't browse the store. I just want to differentiate a little bit of the shopping experience.
It's a lot of information on the web, not as much purchasing on the web.
Brian, have you been able to track how many of your customers now are visiting the web, autozone.com, before they come to the store?
We are. We absolutely do. We've done that for quite some time. A shopping transaction initiates on the web a great deal of the time. A great deal. It's just that. It's search, it's identifying if it's available, trying to learn about options for what they need. It's more how-to but not as much actual procurement.
To that end, what type of investment have you, or do you continue to put behind, sort of say, content on autozone.com in order to assist that customer?
I think when you think in terms and you hear people talk about the omnichannel, we would certainly prefer to focus on the omnichannel as opposed to e-commerce, because commerce just isn't a big part of this industry's business. Data and information and delivering trustworthy advice digitally is the priority. We're a data-driven company, if you think about the number of vehicles on the road and each individual component, customers need to have information, and that's what they're coming to the website for. It's millions of them a week. We are able to follow that transaction from the time they hit our catalog to the time they find themselves in a local store. We're making the investments, but it's really trying to find the right balance.
I don't think that there are many companies that can say that they've made these massive omnichannel investments and been able to quantify and monetize them. We don't necessarily see that either. We think it's a ante. You have to have a functional website and provide the content the customers need. We're not chasing them through an e-commerce route. We're chasing them into our brick-and-mortar stores.
You have to identify who your better customers are. We're doing things like we have a loyalty program. If you purchase a certain number of transactions of goods, then you get a discount or rebate back to those folks. We're constantly identifying and trying to communicate with those customers who are better, the internet is just one way that they start their shopping journey, I'll say, as opposed to just completing it.
I think one aspect, or an aspect that we as an investment community often miss with AutoZone and your sector broadly, is just the underlying service within your stores. Talk a bit about, we discussed before, but the Loan-A-Tool program. How important that is for your customers. Then also private label. What share of your sales now are products that are basically exclusive to AutoZone?
I'll take the latter first. The majority of the sales are behind our counter, the majority of our hard parts are private label. We have only a few branded categories, that continues to go down, not just for AutoZone, for the industry every year. Customer service, trustworthy advice have been key to our culture for nearly 40 years. The Loan-A-Tool is a great example of that. If you're a do-it-yourselfer, there could be jobs you're highly unlikely to have the tools. We'll give those to you for free. You bring them back, no charge. We'll do a lot of diagnostic work in the parking lot. If you have a vehicle, you probably had a light come on on your vehicle. If you bring it to AutoZone, we can plug in in the parking lot and tell you what the diagnosis may be.
We can help you find the part to do the job, we can refer you directly to one of our installers who can do it for you. It's another example of how we bridge that customer service culture from DIY to do-it-for-me. I think if you've spent much time as a do-it-yourselfer shopping in an AutoZone store, there are examples of the strength of our culture everywhere. Loan-A-Tool, check engine light, the willing to go out and put on wiper blades or install a battery for you are just a few of them.
Yeah. The one thing that requires that communication, that interaction two-way, is the amount of returns that happen in our business. We have to be very sharp on communicating if there's a problem, where to take the product back, how to ask questions with returns. A lot of customers buy things they don't need. They ask questions, have they bought enough product? There's a lot of visiting back and forth with the store, that's important to get across, I think. That it's a higher sort of a return business than what you would think in normal retail.
Yeah. Sorry. Yeah. Question from the audience.
Yeah. Could you talk a little bit about one of your uses of cash flow and two, your internal
I'm sorry, I didn't hear the first part of the question, but something regarding cash flow.
Cash flow.
Well, it's a great business and it's a great industry and it generates a lot of cash as you know. Most of our free cash flow goes back into the business that once we've built stores and funded our operation, we buy back stock, and we will continue to do that. Our leadership and our board all agree that that is still the best investment for AutoZone outside of operating our business, is buying back our shares. Any other?
Well, I think your second part of your question was how do you identify what projects to complete or to work on? Is that?
Yeah. Your regional
It's very high. We have a very high rate of return. We have a 30% return on capital after tax as an overall business. We ask every incremental project to hurdle 15% after tax over the life of the project. You're looking at a business that has very high returns on it. Now, where that comes from is we have a very high gross margin business, but we also carry a lot of inventory to get there. You have a lot of slow-turning items in the store. Unique SKUs are over 100,000 in a market, for example. Lots of little items. To make sure that items hurdle, we're rigorously testing things all the time. We are spending more capital. Our CapEx is north of $500 million these days.
We're investing not only in stores, which is predominantly the majority of the spend, but a lot of IT investment development. That is around systems in stores and on the internet, as Brian was asking earlier. We continue to have very high results, high returns. It's amazing. We were talking last night. Out of the 5,500, 5,600 U.S. stores, for example, how many U.S. stores have you closed since you've been public for almost 30 years? The answer is 300. 200 of the 300 we closed in one year when we bought a company with overlap. We only closed 100 stores. We may close one or two stores a year. It's a very high cash flow returning business, but it's a high service business. A lot of touch, a lot of questions, a lot of movement of merchandise around.
A lot of supply chain stuff going on behind the scenes.
Definitely appreciate the question about our return on capital, as one of the mistakes that we made last quarter on our call was talking to you all about investments back in the company. Apparently, some investors don't like it when businesses reinvest because we certainly got slapped around for it. We have an incredibly high return on our capital. There's no reason to believe that we're not going to expect the same return on any investments we make, and we didn't make that very clear. We're not just out spending $100 million and not expecting a return on that. We didn't change our model or change our expectations with regards to returns.
Yes.
Hi. Can I ask about online pricing? Some of your vendors have talked about using MAP pricing and not using MAP pricing. Is MAP pricing applied for the e-commerce sales? Can you just kind of talk about what the policy is and what you've seen from vendors and what that dynamic has been?
Yeah. It's all over the board. We certainly can't tell our vendors how to price. We would prefer MAP pricing because there is such transparency online that's not any different in this business than any other. The one thing that Brian mentioned earlier that does shield us somewhat from some of those pressures is the majority of our sales are through our private label. It makes it very difficult for anyone else to price exactly to us or to really understand where our pricing's at. Yes, we would prefer our vendors have MAP pricing, but that's their business, and they have to make those decisions, and we have to make decisions on who we do business with.
Yeah. A lot of what is on the internet today is third party, like hosted 3P kind of concept. It's sort of the Wild West at times with what item you find and we kind of talked about returning goods. It is tricky to return some of these items. Price points, they change all the time. It's very dynamic pricing depending upon the SKU you look at. We're going to make sure in the stores if a customer came and said, "Hey, I found something that's random on somewhere X, Y, or Z," we're going to definitely identify and work with that customer to meet the pricing accordingly. It's an industry that's going toward MAP pricing, as you're saying. We're hearing more about those same things. Of course, we're a proponent of that.
Look, the argument is we would say it would benefit a vendor, we can't speak on their behalf.
Yeah. We would obviously. They have to make their own decisions. The one thing that I will say regarding that, regardless of whether our vendors are using MAP pricing or not using MAP pricing, we're not going to chase anybody else's retails. We have a very distinct value proposition for many of the things that we've already talked about, particularly the ability to the third-party logistics. They can't do anything with the part that's returned. They can't do anything with the core that's returned. We believe in our value proposition. We believe in the value of our culture and the value of our AutoZoners, we're not going to chase anybody's pricing, particularly online, because radically different value prop. Yes.
Does the business benefit at all from increased accident rates?
We don't sell a lot of collision parts, AutoZone. Yes, we certainly would, but not a significant amount. Those type of repair shops are not a large part of our business.
We probably have time for one more question if there is one out there. It's Austin.
Austin. Oh. Do you have another one?
Maybe we can talk about this. This is included.
Jack is ready. Jack.
Just a little comment. We haven't talked yet about international operations with Mexico and Brazil and how you view growth in those countries relative to the U.S., particularly Brazil, which is a much smaller country for you guys at this point.
Mexico is a great business for AutoZone. It is a replicate of what you see in the U.S. Those are the countries that we're looking at as we think about continued international expansion. We're looking where can we take our model, what we do best, and simply put that in another country without having to change our model and our operating programs. That's what you have in Mexico. It's worked out incredibly well for us. We have about 540, 550 stores in Mexico. I think we're at 14 or 16 in Brazil now. Brazil is a test. It is not material to anything we do. We're still in the process of learning a lot. Those 14 or 16 stores we have have all been organic. They too look just like an AutoZone store you would see anywhere in the U.S.
We just don't know enough there yet to think. Now we know this, our model works. Customers love us. The revenue is certainly there. It's just the environment's a bit difficult at times.
It's funny, both countries right now are wrapped up in World Cup. If you guys are soccer fans, we're cautious on Sunday sales. When Germany lost a match there was a large scream and everything shuts down in Mexico, seemingly. It's a soccer country, and the Brazilians have a thing or two to say about the Mexican team. It's going to be competitive, but it affects our business.
Well, thanks, guys. We appreciate your time.
Thank you. Appreciate it.
Thanks for attending.