I'm Dan Wewer. I cover the hardline retailers for Raymond James. Thanks for attending the AutoZone presentation. AutoZone leads the do-it-yourself market with a better share, which is currently at about 2%. We have two members of management from AutoZone with us today, Brian Campbell, who is Vice President, Treasurer, and Investor Relations, and Bill Giles, Chief Financial Officer. Following this meeting, we'll have a breakout session in the Cordova one room downstairs. Bill.
Thanks, Dan. Thanks, everybody, for being here this morning. I'm going to walk you through our presentation, some of which you may have seen before. I'll give you a little bit of an overview of AutoZone for those of you who may be a little less familiar with AutoZone, talk a little bit about some of the industry trends, strengths on the growth initiatives, et cetera. From a company overview perspective, you can see that we operate over 5,500 stores here in the U.S., and we've got about 500 or so stores in Mexico as well. For the trailing 12 months, we're at about $11.1 billion. I think from this slide, what's really important is the consistency of the sales growth overall. We've been growing somewhere between that 4%-5% growth rate for the last several years.
From an EPS growth rate perspective, we've been growing double digit certainly over 10 years. In the last three years or so, a little bit lower than that, but around 12%, still solid growth, double-digit growth, et cetera. From a footprint perspective, clearly we're in all 50 states through the U.S., so we probably have one of the broadest footprints of anybody in our industry and certainly any of our competitors as well. In spite of that, we still believe that there's opportunity for us to continue to grow. There is no market for which we can compete in today that we would consider to be saturated, so that we continue to have opportunity for us to expand and grow our footprint. A DIY perspective, it's a fairly large industry. It's about a $57 billion industry.
It's got a compound annual growth rate of about 3.3% or so. As you saw from the original slide, clearly we've been taking market share throughout that time period, growing at about 5% overall growth. As Dan said early at the beginning, we are number one market share on the DIY side. On the do-it-for-me side, the commercial side of the business, that is a much larger industry. DIY being $57 billion, commercial side of the business is actually $74 billion. Again, fairly consistent growth rate over time at about 3.4%, and we have about a 3% market share. We have a much lower market share on the do-it-for-me side of the business, which we believe will continue to be a real opportunity for us to continue to grow.
You can see over time that, again, we're continuing to take market share on this segment of the industry as well, as our growth rates have been certainly well in excess of 3.4%, but it represents about a $2 billion business for us today. One thing I'll just pause and take a second on is really the AutoZone pledge. I know that for all of you long-term fans of AutoZone, you'll have seen this before, but it's a relevant thing, and I always like to spend a few minutes when I'm making a presentation to talk about it. This is our pledge. We do this at the beginning of every meeting. It's an opportunity for us to get everybody in the organization grounded on one particular mission, and that is always that we're putting our customers first. We know our parts and products.
That's going to feed towards training, knowledge. What are we doing in the catalog in order to make sure that we've got the right information to be able to help our AutoZoners provide great customer service? Our stores look great. We're relatively disciplined about capital deployment and our ability to continue to maintain our stores and ensure that they always look great. We've got the best merchandise at the right price, specifically saying not necessarily we'll always be the lowest price, we'll be the right price, and we'll have the best quality merchandise. Second quarter, I'm not going to spend a lot of time on this next slide. You've already seen this. We released our earnings just last week. There's what I would consider to be a lot of activity and noise, if you will, in the P&L.
Let me just take a second to walk you through some of the highlights here in terms of adjusting this for our GAAP numbers. Comp store sales were at 2.2%. That's what we delivered. Gross margin rate was actually up about 13 basis points or so. We did have two adjustments. One was the impairment charge of $193 million. We excluded IMC and AutoAnything, both of those divisions, relatively small. We're in the process of selling or sold those divisions. Our operating profit actually was up for the quarter. When you carve out some of the one-time noise, was up about 3.8%. Relatively solid quarter. You can see that bleeding over to net income. Then when we adjust EPS for both the impairment charge as well as the Tax Reform Act, since that's new this year, our EPS grew at about 9.3%.
2.2% comp store sale growth rate, operating margin at about a 3.8% growth, and EPS at about a 9.3% growth rate. Overall, relatively solid quarter. I'm going to skip through the year-to-date stuff because it's all kind of the same. Let's talk a little bit about growth priorities. U.S. retail, obviously, which is about 80% of our overall business first. As we talked about, we've got about 5,400 stores throughout the United States. We're averaging around 6,000 sq ft a store. You've got IMC, which will no longer be in there. Again, the point here is it's a relatively consistent growth rate. We're growing about 3% square footage growth rate on an annualized basis. We're opening about 150 stores in the United States.
We believe there's a significant opportunity for us to continue to gain market share and inventory availability. You'll hear me talk a little bit more about that. We have about 188 hub stores in our chain today. Think about this from the standpoint that we've got 5,500 stores carrying about 25,000 SKUs today, and then the hub stores, which are about 188 hub stores carrying about 40,000 SKUs today. Harder to find parts, and the hub stores are delivering to the satellite stores at about three times a day. If you have a part that you're looking for that's above that 25,000 SKUs, between that 25,000 and 40,000, you're able to get it on a same-day basis. We also talk about multiple frequency tests that you may have heard us talk about over the last couple of years.
That really is about ensuring that our in-stock position within the satellite stores, those individual retail stores, are as high as we need it to be. We're delivering to those stores three times a week. We did a lot of testing over the last year or so. What we've come to the conclusion is that there's a certain level of volume store that it makes sense in. For those volume stores, we're going to be delivering three times a week going forward, and that'll pay for itself and be able to help generate sales. That's one thing we've been working on. Great people, great service. This is one of our initiatives, really focused on training predominantly.
We're focused on training and improving the customer shopping experience overall, as well as increased availability of product, and that's the hub stores and the mega hub stores on top of that. Commercial highlights. We've grown about 4.7% number of programs that we have out there. Overall sales increased for the quarter at about 5.7%. In this past quarter, we lost maybe two selling days due to the holiday shift. Christmas and New Year's Day fell on Monday versus Sunday last year, that impacted our overall sales performance by about 150 basis points or so. We had good performance in commercial, and actually, when you account for the holiday shift, an acceleration over Q1.
We have opportunity to continue to open more and more commercial programs, and really a focus is going to be on availability, our ability to be able to put more inventory into the marketplace through the hub stores and the mega hubs so that we've got an ability to say yes on a more frequent basis to our commercial customers. Keep in mind, we're delivering product to our commercial customers in about 30 minutes. It's real-time delivery. From an international perspective, we've got about 500 stores in Mexico. It represents almost 9% of our overall total store count today. Brazil, we only have about 16 stores. I think we announced that we're going to get to about 24 stores by the end of the fiscal year. In Brazil, relatively small, but huge opportunity for us on a long-term basis.
We believe that that market can be every bit as big as Mexico, if not bigger. In the Mexico business, we actually, I think, celebrated our 20th year anniversary just this past year in Mexico. That business has been good and strong for us overall. From an omni-channel perspective, ALLDATA, I don't know how many of you are familiar with ALLDATA, but that is a software company that basically sells repair. It's a subscription-based business selling repair diagnostic information to garages so that they're able to get OE information in order to help them repair their cars. We've got about 80,000 customers. It's a good tie-in with our commercial business, by the way. autozone.com, where we've got significant number of customers that come to autozone.com. We don't track an enormous amount of commerce business on our .com, on autozone.com.
Our ship to home, buy online, pick up in store, and buy online, pick up in store is the fastest growing channel of distribution that we have. That's growing very fast. Both of those combined are not significant overall, but what is significant is the number of eyeballs that we're getting to the website on a daily and weekly basis. We think that there is a majority of the customers that come into the store have already visited the website, et cetera, which is why we're continuing to invest in our omni-channel. From a cash flow perspective, we continue to generate strong cash flow. Obviously, clearly, the Tax Reform Act is going to be able to help us generate even more cash flow overall. Very healthy balance sheet. Our inventory has grown about 5% overall, but on a per location basis, only grew about 1% or so.
Our AP to inventory ratio continues to remain over 100%. I think we finished the quarter at around 108% for the quarter. Really strong cash flow. Just lastly, I would just tell you overall from a retail perspective, again, we're continuing to invest in our AutoZoners. We are continuing to invest in inventory availability in the marketplace, getting more inventory closer to the customer, either more frequent delivery to the existing stores, increasing the number of hubs that we have at 188 hubs. Keep in mind, those hubs have SKUs between 25,000 and 40,000 SKUs. Then we have about 16 mega hubs, and the mega hubs have between 40,000 and 100,000 SKUs. Today, with about 16 mega hubs, we can get a SKU to that customer within a day, about one, next day at worst case scenario.
We plan to expand that to about 40 mega hubs. Then at that point, we'll have same-day coverage on 100,000 SKUs in the marketplace. That'll benefit both the retail side of the business as well as the commercial side of the business. From an international perspective, we continue to grow international at a pretty good prudent pace. Both Mexico has been a great business for us, and now we kind of embark on Brazil and expect to continue to grow that out over the next 10 to 15 years. That's going to be my quick pitch because I wanted to leave some time for questions so that Brian and I could take some questions from the audience. I'm going to stop there because I know you know most of the story and you've heard it before. Yes, sir.
As you know, last year, you, your company, and your competitors' companies struggled to get down because of Amazon was here. I just wanted to know what you do. If you were able to measure anything at all, just by getting back there and having on your list recently.
Yep
I'm looking forward to printing copies of Amazon, like that is what happened then. What have you hired from Amazon to defend yourselves against Amazon for auto parts? I know you do that, but that's kind of like a lot of auto parts.
Sure
Could you talk about that?
Yeah. Let me just repeat it a little bit, so in case you didn't hear. The question was really about Amazon. If you recall last year, there was a lot of noise in the marketplace about it. Obviously, it had a fairly significant impact on the stock throughout that period. The question really is, what are you seeing? How is it impacting your business overall? In some cases, we're seeing people buy product from Amazon, have it delivered to their neighborhood garage for their car to be repaired, and what are you seeing? We haven't seen anything really differently necessarily out of Amazon over the last two years, I would say, necessarily. They're increasing their SKU count on the website, et cetera.
We're not seeing necessarily an impact to our business per se, nor are we seeing them go to market differently necessarily than they have over time. What I would say is that from our perspective, our value proposition is really the service that transfers into the store. When you're shopping for an item and you think about batteries, rotating electrical starters, alternators, et cetera, those are things you can come in and we can test that equipment for you. Because at the end of the day, we don't want to sell you a $120 battery when you need a $3 cable in order to be able to really fix the problem that you have. We're all about ensuring that we do what it takes to do the job right, and we want to be able to help you get through that process.
When you think about rotating electrical, when you're thinking about buying wiper blades and want to be able to put those wipers on your car, and always not the easiest thing to do, I can tell you from experience. Light bulbs, having somebody come out to the car to look at what you got. There's a process and an experience that takes place in the store that is just very different than what you'll get online. We are conscious of certainly the online threat and what it can mean, et cetera. We're not seeing an impact per se, and we're not necessarily seeing it impact our business. It doesn't mean that we're immune to it. It doesn't mean that we don't watch it. It doesn't mean that we don't react at some level.
We believe that our customer service is what's going to differentiate us on a long-term basis. Not to mention that we have Duralast product. Over 50% of our product is private label product. Many of these products also have a core attached, so there's a two-way transaction going back and forth. We respect that it is a threat. Amazon is a great competitor and a great retailer, but we believe that the value proposition that we have continues to drive our business and continues to allow us to take market share. Does that answer it?
Yeah, it does.
Okay. That's a good question. Anything else you have, Brian? I certainly haven't stumped the audience.
Sorry to belabor this, but I've heard that anyone can find SKU. It's not like it's unique, but online catalogs or even other systems, obviously, people are I'm just trying to see how it all integrates. I'm just curious, do you have a sense of what the overall penetration of online sales is?
Yeah, the penetration of online sales overall in our category?
Yeah.
Yeah, I think it's probably Don't quote me exactly on it, but I think it's probably in that 8%-9% kind of range. Maybe it's pushing 10% or so. I suspect that some form or another over time, catalog business had similar type of penetration. It might be a little bit higher today than it might've been 10 years ago between catalog and online sales overall. It is growing. This clearly is growing overall. You also have to think about the type of products that Like Performance and accessories is a good category. We don't have a huge penetration in Performance and accessories per se, but that's probably a good category that may lend itself more to online sales. It's very SKU-intensive. It can be customizable, et cetera.
For items like batteries, which you can't mail, wash and wax that are typically chemical-based and are usually hazardous and are unable to be mailed as well, or products that have cores attached where we need the old product back, or at least the manufacturer needs the old product back and we like to facilitate that for them, are less susceptible to it.
I kind of look at it by SKU basis. Do you manage certain categories, probably 60%-80%, through the mail-in piece? Something like that core, send it back, get my money back for a while. Have you broken it down by those categories to see where you're stronger or where those are?
We have. We've looked at it from a category perspective to see what's susceptible and what isn't susceptible and other things that we want to change. We're not seeing necessarily a change in our sales trends relative to those categories. We don't believe that we're getting necessarily impacted from that. You're right about things like brakes, et cetera, which is a bigger job, and that's not one that you have to do today. You could order it today and do it this weekend, et cetera. With 75% of the population living within five miles of an AutoZone, there is value and convenience to that as well. Keep in mind also that we have a Loan-A-Tool program.
If you're a weekend warrior, and you may not have all the tools necessary to do certain jobs, we have those jobs that we're happy to loan to you just so that you don't have to go out and spend $60-$70 on a tool that you're just going to use once for. You had a question.
Yeah, I was going to ask you about the windfall from tax reform. Do you have a plan of exactly how you're going to try and allocate those funds?
The question really was around tax reform. On our call, one of the things we said, which I'm glad you asked the question, was is that we are estimating that we will generate about $200 million from the Tax Reform Act, no more complicated than a 35% rate going to 24% on $2 billion worth of pre-tax income. From our perspective, we're looking at reallocating about 60 to 90 basis points, reinvesting back into the business. Less than half of what the tax reform bill would be generating for us. Our viewpoint on that is that, and our message really was, is that, look, we're going to get probably a one-time, ad infinitum, $200 million benefit. We recognize that there's an opportunity. We want to reinvest a portion of that amount.
We have yet to finalize what we're going to invest and where we're going to invest in it, and what period of time. From a transparency perspective, we wanted to acknowledge the fact that we will reinvest some of it. We gave an estimate of 60 to 90 basis points, which equates to just less than half of the $200 million. We said it would probably be somewhere over 12 to 18 months. Probably wages and benefits may be one. That seems to be one that we're hearing from a lot of other retailers and competitors. We're sensitive to the fact that that may take place in the marketplace, and we need to be able to react to that, and be able to respond to it, and so we can ensure that we're getting the right people and continue the tenure.
Probably some, at a lesser degree, some technology things that we could be doing over the next few years that maybe we can accelerate and pull in, and be able to do them on a sooner basis so that we can be able to get the value of those investments sooner than we would have otherwise gotten. That's roughly how we're thinking about it from a tax reform perspective.
With distributed power being so invested in why is our mega hub approach so much more to adding more distribution instead of more at a private location?
Yeah. The question really was is that on how are you thinking about mega hubs, is that really more efficient than adding distribution centers? Just to go backwards for a second, if I may, we're adding two distribution centers in the last 12 to 15 months. I didn't mention that, I should have. We have a distribution center in the northwest part of the United States that opened up about six to eight months ago, and we have another distribution center that is within about 40 miles of here, that will be opening up in the next month or so. That will give us about 10 distribution centers, which we think is the right footprint for the United States for us in terms of being able to deliver out to the stores, et cetera.
The purpose of those distribution centers is really driving those 25,000 SKUs and ensuring that we're in stock on those. From a mega hub perspective, mega hubs is really about getting that longer tail, providing an ability to say yes. They're not really replenishing the retail stores. They're really adding an additional, in terms of the retail store, 80,000 SKUs, or in terms of comparing it to a mega hub, 60,000 SKUs into the marketplace. Those two don't carry. It's really about adding choice and availability, and that's the purpose of the mega hubs. We think that getting to somewhere close to 40 will allow us a footprint across the United States that'll provide us an ability to say yes to a customer on the same day. Today, it may be next day, but it'll allow us the ability to say yes on the same day.
Does that help?
What kind of same store sales should we be thinking about over the years?
I think that, over time, one of the things we talked about is I think we've averaged around a 1.9 comp over the last four or five years or so. The industry is growing at around 3% or so. We had a great winter from our perspective. We had a harsh winter this year, I think that'll give us some tailwind as we move forward. From a comp store perspective, the last history may be a way to think about it over a longer period of time. There'll always be fluctuations, but it's hard for me to give you an exact number.
Is it becoming more difficult to focus on costs in this economic environment, or how have you been able to manage that?
It's certainly not more harder to focus on it. There's some aspects of the cost that are a little bit harder, I think wages and benefits have been one that we recognize that we'll probably invest a little bit more in that. That one has been one that has been there over the last year or so. That's one that we continue to address and want to be proactive about. From a technology perspective, obviously, all corporations are investing more and more in technology because the customers demand it. Everyone is being much more mobile, et cetera. For us to be able to communicate and interact with our customer, we're going to have to have more technology introduced into the stores as well as online. Those are the two areas that I would say I think there's always opportunities for us to continue to reduce cost.
I think on the wage side of it, the one good byproduct of that is that the beneficiary of a lot of the wage increases is really the lower-end consumer, which is our customer. We believe that a lot of the actions that are taking place in terms of salary and wages are actually going to wind up benefiting our customers. We'll see if that translate into sales improvement over time, but it certainly is going to be beneficial to our customer base.
If you had to put a bullet point system on car parc, car park, weather, and Amazon or online threat, not looking for a exact number
Yeah
Magnitude would be great. Do you think it has to do with how we scale those three issues? Because that Amazon is a real-
Yeah, I put Amazon at the bottom, and not because they're not a great company and they're a threat and so on and so forth. We just have a different value proposition. I think the weather, we had two mild winters in a row leading up to this year, and that seemed to have even more impact than I might have thought it would have, but it certainly had a lingering impact. I think that weather is a short-term event, even though we're talking three years. We had a very harsh winter this year, so I think that's going to be beneficial over the next 12 months or so. The car park is in good shape, as 11.7 years is the average age of a vehicle, and that has been relatively steady over time, but it continues to grow, and that's a good thing for us.
What was the other one?
Everyone talks about the sweet spot.
Yeah.
It should now start to grow. I'm just trying to figure out, if we don't have the industry doesn't see an acceleration in comp in 2018, are we going to be saying, "Well, it's going to be 20 more years because of the inflation?
I think it would be a slight acceleration. One good thing about the industry, it has relatively consistent growth, it's on the edges. You know what I mean? It's a two and a half to three and a half, kind of a growth rate between high and low. The good news is the industry remains relatively healthy. The car park is healthy. Miles driven continues to grow. Even new car sales, which don't really impact us short-term, they're selling a lot more SUVs and pickup trucks today than ever before. That's going to be beneficial to our business on a long-term basis. It's a healthy industry, even getting healthier. I would think about it from those stratospheres. Thanks. Good question.
We need to complete the presentation. We'll continue the breakout sessions for the oversea teams.
Thank you