And 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 days. Thank you. I'm pleased to introduce our first presenting company today AutoZone. And 2 of the company's executives, first to my left, Tom Newburn, Executive Vice President, Store Operations and Commercial and then to his left, Brian Campbell, Investor Relations.
Good morning.
So we'll conduct this as a fireside chat. If at any moment there's questions from the audience, just raise your hand and we'll work your questions into our conversation. So thank you guys for Good to be here. So Tom, let's 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 maybe overtalked lately, car park, other issues, but how are you seeing the backdrop for AutoZone and for the business in general?
Well, there's obviously, Brian, there's always a lot of conversation about industry. The good news for us is when you look at all of the top 4 or 5 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 in the 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 have expected to coming off a fairly severe winter.
And 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 is concern about the trough that was created in 'seven. If in fact that was a headwind, it no longer is. That population of vehicles is now hitting that sweet spot.
So we feel very bullish about the industry, very good.
So on the weather side, having those harsh winter, I mean, should we be thinking that the harsh winter and now that we're transitioning for the most part to spring like conditions, that should help to drive better sales, repair type sales through reports in 2018?
Yes. Obviously, we never give guidance. But what we did say is that we expect with the favorable weather trends that we will see a continuation of what we saw late in the quarter.
Got Talk a bit about there is some we have seen some sales disruptions from maybe from AutoZone and throughout the sector of just within the border towns and immigration rhetoric. I mean to the extent, can you talk a bit about, I mean, what you have seen there is, has that been a real issue and where we are
going from here? What we have seen and 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, but people got back to normal and seem to continue to get out, see the 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. And our business in Texas and Arizona has been very strong. California is hard to say because they've also had some very unseasonably cool weather, but nothing material, I would say. Okay.
And then one of the as I look at your recent results, I think I've noticed what's impressed me maybe most has been the steady improvement in your commercial business. And I know that's been a big focus of yours. We have talked about it for a while. So where are we right now with AutoZone's push into commercial? How do you see that the drivers behind the improved sales, the investments that you have made and kind of where we are going from here?
Well, we have been investing in commercial for the last 7 or 8 years. I would like to think of commercial with really their 3 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 3rd and more difficult leg is to create a culture with all of your store associates that commercial is a priority. And that takes a long time.
We are 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. So, teaching people how to move that strong DIY culture into a strong commercial culture has been the challenge. But that's been our focus for the last 3 years since I've taken responsibility for that entire part of the business. And 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. And we've certainly been growing share for the last several quarters sequentially.
So is the commercial infrastructure for AutoZone now in place?
I would say absolutely, absolutely. That's not to say that there is 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 3 or 4 are at parity, But it's still a fairly unsophisticated customer base. And we think that there is 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.
So right now, as of last quarter, your commercial sales represent about 20% of your overall revenues. You have not articulated a longer term goal. I mean, are there
competitors? Oh.
Have you?
Yes. We won fifty-fifty.
Okay. You do. Okay, great. Thank you.
That is our objective is absolutely to have 50% of our business commercial without losing the mothership, which of course is DIY, but in no way are we satisfied with 20%. So how long would it take
to get to that
50%, fifty percent?
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. And one thing for sure, we're not going to give it away. And we're not going to go buy business. So 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, I mean how the big four represent almost no share to begin with, and we're at the bottom of that. So we see it as nothing but a tremendous opportunity for us. Again, we have the lowest share and it's only 20% of our business and we hope to make it 50% of
the business. 3%.
So 20% of your sales is 3% of that market? Yes. And where as you're growing from 20% to 50%, I mean, where is describe for a second, where is that market share coming from?
I think that it's such a segmented business. There is still a the majority of the do it for me business is captured by WD, small mom and pops, very localized parts distributors. And I think that we all continue to take share there, but AutoZone is definitely taking share from some of our closer end competitors. I mean, all you have to do is look at we're outpacing everyone else with regards to growth. And it's much more organic than it was 3 or 4 years ago when we had program growth of 400 or 500 programs a year.
So we are very bullish on our ability to continue to take share on the commercial side. And again, we're not going to go from 20% to 50% over in the short term, but you can believe that we're not satisfied. And most people would be very satisfied with our last 3 or 4 quarters growth in commercial. We're not. 7%, 8%, 9%, 10% growth for us is not what we are looking for.
And just one final question on commercial, I mean it seems that what you have 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. And 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.
So it would it's possible, but I would say that a more organic journey will continue for AutoZone.
So shifting away and talking about so we clearly have the investment or the operational investment in commercial, but I have asked a lot of my companies to send it, as we get to lower 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 you want to talk about the commitment you're making higher wages in your stores?
Yes. As part of the conversation that we had last quarter was trying to give everyone an idea of where those investments will go. And we are going to make a significant investment probably about, I would say, 30 ish percent of the total will be in wage. But 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 2 positions that will see 80% of the investment we make. And we're not just doing it blank a blanket investment for those 2 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 to 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.
So 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.
So as we think about the and we've talked a lot about the wage increases, from your perspective, is that more of a is it a catch up to where the industry is? Is it a reflection of where the industry is going? And then also I guess maybe the third piece of that would be how should we think about as we look beyond this year? Is it was 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. But 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% to 2.5% growth range, and that's what you could anticipate going forward. The question on are we trying to catch up, generally no, but we have 46, 4700 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. But it was definitely not an across the board change.
And Brian, maybe from a you discussed in your recent comments, while you guys discussed the overall impact of this, maybe you could talk a bit about that, the overall impact of the SG and A from these efforts?
Basically, we looked at it as an opportunity and Tim 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. So there was discussion around how much SG and A is enough, what is the growth rate going forward. We were not looking to sort of reset bars. What we are doing is, we expect to have a return on our investments.
But 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.
Shifting gears a bit, I mean, look one of the biggest questions I get and I so I want to talk a bit about this is just online competition. And not just for AutoZone, it's really for every traditional retail life out there. The markets are concerned, worried about what impact companies such as Amazon could have on your sector. We have talked a lot about. I mean, overall, how do you view online competition within your space?
And 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, not it's immaterial for AutoZone, it's immaterial for Advance O'Reilly's and everyone else. And 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 5 from or another 10 from the other 2 close in guys, we are very close to the customer. In AutoZone's case, 85% of the population of the country is within 5 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 and 20 or 25 won't work. So 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 and we offer no discounting on buy online, pick up at store. So even if you're online on our website and you see a banner that says $20 off $100 purchase, if you come into the AutoZone store to make that purchase, you're not going to get that discount. And the vast majority of our customers chose to come into our stores. So we believe our value proposition is strong. It certainly is our people and our knowledge.
And 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 guys, our industry retailers in general. Our space is unique a little bit in that the size of the business being done ship to home is so small. So as much as we could wow you with big words about how fast we can deliver your doorstep, at this stage, because there are so many questions that get asked about what do I need, what I need to have delivered, It's just a hard business to do directly over the Internet. They still 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. So I just want to differentiate a little bit of the shopping experience. It's a lot of information on the web, but not as much purchasing on the web.
So Brian, have you been able to track how many of your customers now are visiting the web, your autozone.com before they come to the store?
We are. We absolutely do. We have done that for quite some time and a shopping transaction initiates on the web a great deal of time, a great deal. But it's just that, it's search, it's identifying if it's available, trying to learn about options for what they need, but it's more how to, but not as much actual procurement.
And to that end, what type of investment have you or continue did you continue to put behind sort of say content on autozone.com, so in order to assist that customer?
I think when you think in terms and you hear people talk about the omni channel and we would certainly prefer to focus on the omni channel as opposed to e commerce because commerce is 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. And 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. And it's millions of them a week and we are able to follow that transaction from the time they hit our catalog to the time they find themselves in local stores.
So 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 omni channel investments and been able to quantify and monetize them. And we don't necessarily see that either. We think it's an Annie. You have to have a functional website and provide the content the customers need.
But we are not chasing them through an e commerce route. We are chasing them into our brick and mortar stores.
But you have to identify who your better customers are. We are 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. So we are constantly identifying and trying to communicate with those customers who are better and the Internet is just one way that they start their shopping journey, I will say, as opposed to just completing.
I think one aspect or aspect that we as an investment community often miss with AutoZone in your sector broadly is just the underlying service within your stores. So talk a bit about, we discussed before, but the loaner tool program, how important that is for your customers and then also private label, what share of your sales now are products that are basically inclusive of AutoZone?
I'll take the latter first. The majority of the sales behind our counter, so the majority of our hard parts are private label. We have only a few branded categories and 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 loaner tool is a great example of that.
If you are a do it yourselfer, there could be jobs you're highly unlikely to have the tools. We'll give those to you 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 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 or we can refer you directly to one of our installers who can do it for you.
So it is and it's another example of how we bridge that customer service culture from DIY to do it for me. I think if you spent much time as a do it yourself or shopping in AutoZone store, there are examples of the strength of our culture everywhere, loaner tool, check engine light, they are willing to go out and put on wiper blades or install a battery for you, just a few of them.
The one thing that requires that communication, that interaction two way is the amount of returns that happen in our business. So we have to be very sharp on communicating if there is 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. So there is a lot of visiting back and forth with the store and 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 sort of a normal retail.
Sorry, yes, question from the audience.
I'm sorry, I didn't hear the first part of the question, something regarding cash flow. Yes. 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.
Well, we pushed I think your second part of your question was how do you identify what projects to complete to work on? 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.
So you are looking at a business that has very, 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. So 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 are rigorously testing things all the time. We are spending more capital.
Our CapEx is north of $500,000,000 these days. We are investing not only in stores which is predominantly the majority of the spend, but a lot of IT investment development and that is around systems in stores and on the Internet as Brian was asking earlier. But we continue to have very, 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. And 200 of the 300 we closed in 1 year when we bought a company with overlap.
So we only closed 100 stores. We may close 1 or 2 stores a year. It was a very high cash flow returning business, but it's a high service business. So 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 is no reason to believe that we are not going to expect the same return on any investments we make and we didn't make that very clear. We are not just out spending $100,000,000 and not expecting a return on that.
We didn't change our model or change our expectations with regards to returns.
Can I ask about online pricing? Some of your vendors have talked about using that pricing and not using that pricing
Yes, 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. But 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 and it makes it very difficult for anyone else to price exactly to us or to really understand where our pricing is at. But yes, we would prefer our vendors have that 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.
Yes. A lot of what is on the Internet today is 3rd party like hosted 3P kind of concept. And so 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. So price points they change all the time.
It's very dynamic pricing depending upon the SKU you look at. So we are 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 are going to definitely identify and work with that customer to meet the pricing accordingly. But it's an industry that's going toward MAP pricing as you are saying. We are hearing more about those same things of course.
We are a proponent of that. We think it look the argument is we would say it would benefit a vendor, but we can't speak on their pricing.
Yes and 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 that pricing or not using that pricing, we are 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 3rd party logistics. They can't do anything with the part that's returned. They can't do anything with the core that's returned.
But we believe in our value proposition, we believe in the value of our culture and the value of our AutoZoners, and we're not going to chase anybody's pricing, particularly online, because radically different value prop. We don't sell a lot of collision parts, AutoZone. Yes, we certainly would, but not a significant amount. That's not 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 awesome. Awesome. I thought of you, do you have another one?
So maybe we can talk about this. Let's just include it. Just a little comment, we haven't talked yet about international operations. With Mexico and Brazil, how you view growth in those countries relative to the United States, particularly Brazil which is a much smaller country for you guys at this point?
Mexico is a great business for AutoZone and it is a replicate of what you see in the U. S. And those are the countries that we are looking at as we think about continued economic or 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. And that's what you have in Mexico.
It's worked out incredibly well for us. We have about 540, 50 stores in Mexico. I think we're 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, but we just don't know enough there yet to think. Now we know this, our model works.
Customers love us and the revenue is certainly there. It's just the environment is a bit difficult at times.
So It's like both countries right now are wrapped up in World Cup. So if you guys are soccer fans, we're cautious on Sunday sales. If when Germany lost a match, there was a large screen and everything shuts down in Mexico, so it's a soccer country and the Brazilians have a thing or two to say about the Mexican team. So it's going to be competitive, but it affects our business.
Well, thanks guys. Really appreciate your time.
Thank you.
Appreciate it. Thanks for tuning.