For anybody that does not know me, I'm Scot Ciccarelli, Senior Hardline, Broadline Retail Analyst here at RBC. I've been covering the auto parts sector for probably 15 years now, and as many of you are aware, we are fortunate enough to have three of the four major public players with us today, including our friends at AutoZone. We have Tom Newbern, who's EVP of store operations, and joining us in a moment will be Brian Campbell, Director of Investor Relations. I will tell you that there is fairly significant controversy going on in this particular sector. There are questions about the comp growth slowdown that we've seen and what are the potential causes.
One of the theories out there is that Amazon and e-commerce is starting to suck up incremental dollars, and that can obviously have an impact on the industry because we've seen that happen in many retail verticals before. Mr. Campbell's about to join us. Thank you. With that as a backdrop, I do have a couple questions I'd like to start with, and just for logistics purposes, I do like to leave time at the end for questions, so we will have a Q&A period at the end. First of all, gentlemen, thank you very much for joining us. I guess one of the big questions, how do you guys think about the susceptibility of both your commercial and DIY business to e-commerce? Then we'll have a series of follow-ups after that.
Specifically to Amazon, I'm assuming.
From Amazon, RockAuto, you name it, that's kind of out there trying to compete for those sales dollars.
We think about both of them really quite differently. First of all, we think about them every day. We pay attention to what's going on every day. So far, we're not nearly as concerned as a lot of other people are. We think that we have a fairly deep and wide moat around both of our businesses. Certainly, DIY would be more susceptible. When you think about it in terms of DIY, 15% of our business is discretionary. 50% is failure related, and 35% is maintenance, which will become failure. We worry about that 15% a lot more than we do failure. If it breaks, our customer depends on their vehicle to get to work, to get their children to school, and they can't wait. On the Do-It-For-Me side, they will not wait.
I can deliver the part in 15 minutes, and they complain that I didn't have it to them in five. Waiting for a day or even four hours in areas where they're able to deliver same day, far less concerned about the Do-It-For-Me side.
Tom, when you think about the profile of somebody who would use an Amazon or a RockAuto, who do you think it is? Is it a casual user that's just used to using Amazon to order everything? Is it a heavy DIYer who may be shopping for price because he's working on separate projects? Do you have a profile for that customer?
You hit it on the head. Generally what we've learned about RockAuto and RockAuto and Amazon, I think we think of very differently. RockAuto is primarily appealing to the person working on a project. I've been working on this off-road vehicle for the last three weeks, and I'm hoping to get it ready in the next three weeks. They have a lot more time. They generally are someone that's much more familiar with a vehicle, and has a lot more technical experience than your typical AutoZone customer. They can wait, and they don't need the value proposition that we believe we offer, which is somebody that can help you along the way, and tell you what you need to have, what you need to do, and how to do it.
Okay. When you look at your own business, how much of your business are you doing online today? Is your product profile any different online than it is in the store?
It's broader online. It's not the exact same. Our e-commerce business is not material in any way material. Quite frankly, it's not an area where we spend a lot of time thinking about it as commerce. We do, however, have a very robust website where we see nearly as many visitors per week coming to our website as come in our doors. What we're able to do with those customers that are on our website, we follow them through their purchase journey throughout the website. We know where they run into difficulties. We know things that turn them off. We know when they drop out. Ultimately, we know when they get back to the store. Our objective is to make sure we're providing the content they need, and the information about the parts they need. Ultimately, that customer wants to come in brick and mortar.
I can give you a great example of that. We, like any e-commerce site, do a lot of discounting. We've got 20% off banners all over the website. BOPUS, which is buy online, pick up in store, is our fastest growing segment. It outpaces everything. We don't offer that same discount in the store. Will the customers get to that part of the journey? They have the information they need. They're offered the discount, they decline, and they come to the store, where they will not get that discount because they want to have that interaction with somebody that knows how to do the job. The typical person that's coming to do a repair is going to do that job, may have never done it in their life, or may be doing it for the first time in five or six years.
Looking at something online versus having somebody talk to you about it and talk you through it and make sure, by the way, that you have everything that you need to do the job right, is very important to our customer. I think I've told you this before, but 85% of the population in the United States is within five miles of an AutoZone store. It's convenient, and that's our value prop.
What is your delivery time on a retail order? I'm just wondering, are they buy online, pickup in store, is it more for the service or is it more, "You know what? I really do need this part right away?
It's more for the convenience once you're in the store and the experience in the store. Generally, I would say that a part would be ready if a person's bought it online in 15 minutes.
If you were to deliver to that customer?
Oh, well, we don't do home delivery.
Not at all.
Okay, fine.
Half of our business, guys, is failure-related. The car won't drive. Even though you'd like to look on the web and determine and have a lot of choice, you need to get back going. The average guy that's coming into our store, he's just trying to go to work and just survive every day. These are folks that are within a couple of miles of our stores. They're coming in, they're trying to differentiate on choice, get in and get out. The store makes a big difference for them. It's just you can't wait on it. You need to understand, too, what it is you're supposed to choose, because there's four or five options for everything you're buying with wide price points. That human interaction is worth a lot.
Thanks, Brian. One of the things that's differentiated different retail verticals in terms of how e-commerce has penetrated over time has been, what's the vendor behavior?
Right? There's some industries that we've observed where the vendors are very disciplined, then there's some where we would call it less disciplined, people are chasing price, et cetera. This is an industry that's never really been characterized by a lot of price elasticity. I guess the question is, what kind of conversations are you having with your vendors today as you have this 800-pound gorilla, kind of talking about trying to penetrate this sector on a more regular basis?
That's a great question, I think it is something that we've not had enough conversation about. We're having right now our vendor summit back in Memphis, which I'm missing golf right now to spend the afternoon with you all. We take this one time a year to bring all our vendors in, talk about our strategies, talk about where we're going, the number one topic with our vendors this year is you have to manage your brand. If you're letting your brand be commoditized, then we'll find somebody that won't. I think the industry, in general, needs to get a little tougher and make sure that all of our vendors understand MAP pricing, which is Minimum Advertised pricing, is a requirement.
If you're not willing to do that with us and you're willing to commoditize your business to Amazon, whether it's through a third party or it's directly, it doesn't matter to us. If you're going to be one of our partners, then you're going to be one of our partners. That message, we're delivering that message loud and clear with a stick. We invite everyone in our industry to do the same.
I guess one of the natural questions is, if we don't think e-commerce is really impacting the business, we know we've had some weather volatility. If you guys had to size the different impacts to your sales algorithm, how would you rank order them? What do you think has caused the modest slowdown that we certainly have seen?
You want to take that?
Yeah, I can. A couple of things. One is probably to level set folks. We have a unique fiscal quarter and calendar. Nothing makes sense for us in some ways. The third quarter ended in the middle of your May, and that's the third quarter. Well, our second quarter that ended in February finished quite poorly, and the third quarter started poorly as well. In the near term, what I'll tell you is that's definitely impacted our business domestically was income tax season and the timing of when those refunds fell. It's a lower income level customer is a prime customer for AutoZone, and those folks, when they got delayed on their cash, did not come in. The comparison was very difficult. Our results were quite poor. We've also seen volatility with weather and weather trends. We have not done well in the northeastern United States.
Northeastern and the Mid-Atlantic states, because of the weather sensitivity, you guys have had some mild winters up here. The failure-related parts in this category of the country has been hard to overcome. Those are the two near-term challenges I would say, and it's affected our industry, both retail and commercial, as well as online. It may surprise you guys to realize that ship-to-home business was affected the same way, and we believe it was affected across all of retail in our category. I would say it's a lot of near-term things going on that we're affecting, and we look forward to hopefully bypassing those things and having a more normal summer.
Okay, thanks. I wanted to shift gears. Something that I've written about, I asked GPC about, I'll ask O'Reilly about is, we have these new driving services out in the marketplace, Uber, Lyft, et cetera. In theory, we could wind up having maybe the same miles driven out in the marketplace, but there could be a shift in terms of what vehicles are capturing what miles, right? Maybe you're driving your car 10,000 or 15,000 miles less than you were because you're now taking Uber or Lyft or some other driving service more and more. How do you guys think about the potential change being generated by these ride services, and how could AutoZone take advantage of that?
Well, we certainly think that's a little further off than some of our other priorities right now. We also think that if that does occur, and I think it's quite possible that it will, it will be in much more urban areas like we're sitting in here. Certainly not something that I think is going to put miles driven or vehicles on which those miles are driven at risk in Texas.
I will tell you how we defend it.
Yeah
Uber will be AutoZone's best customer. Those miles are still being driven, those cars are still going to break, and they're going to have to buy parts from someone. It will require different strategies in the out years and how you think about your fleet businesses in the out years, but it's still business there, and it's business that we will go after, if it were to occur.
Got it. There's been a lot of questions regarding your commercial business. Over the years, frankly, you guys have kind of made a greater emphasis at certain times and then pulled back from the commercial and then made a greater emphasis. Most recently, you talked about reducing frequency of delivery. It comes at a time where we have somewhat slower comp growth for yourselves as well as everyone else. Can you talk about how you guys are thinking about the commercial business going forward? What's your commitment to it? How much more do you think you need to invest, or how should we see that part of it evolve?
Yeah. First of all, our commercial strategy and our delivery frequency or inventory strategies are two discrete decisions and two discrete strategies, one not related to the other.
Okay.
Yes, on the frequency of delivery, we're in the process of going back and taking a look at that, making sure that we're getting the appropriate benefit for the cost. The costs are real, and the benefit that we're seeing is not what we had hoped it would be, so we're going to go take a look at it. We'll have an answer, and everybody will know about that, I would suggest probably by the fall. With regards to commitment to commercial, I don't think that at, certainly not at any point in the last 10 years have we not been fully committed to commercial. We understand it is our single largest opportunity for growth domestically, and there's no question about that.
What we talked about on our most recent conference call was an initiative to go back in, reevaluate our commercial strategy, not run away from where we are, but simply reevaluate it and see what we're missing. The fact is that three of the people that are here in our industry today, plus one more, represent a very small share of the overall commercial business. The majority of the commercial business is going somewhere else. Our question is, what is it about our value proposition that is locking us into this tight group, and what do we have to do to go after the 70% or the 65% that's remaining? Don't let there be any question about our commitment to the commercial business. It's where we spend currently 20% of our business and 60%-70% of our time.
So-
Commercial will continue to be the biggest grower. We know our current trends, but many folks ask, "Hey, what's the next step-level change you can take?" What we're going to do in this environment where you saw some players doing less well, we're going to go after that business a little bit, and that's what we're doing. We want to see if there's some dislocation out there. A lot of this message around our commercial business is maybe there's something there for us right now. That's what our point was on the call.
Understood. Thank you. One of the things that I think characterizes this industry is you do have an inordinate amount of business that kind of goes to the first call and the second call from a commercial garage. Number one, what % do you think a typical garage will give the call with their top two suppliers? Then number two, how long does it take to move up that call list?
Yeah. All anecdotes here.
Sure.
I would suggest that first call is probably representing about 60%, maybe a little north of that, of a shop's business. Nobody gets 100%. Rarely are you going to get more than that 60% number. Number one, because nobody can possibly have everything they need, and they have to have a second source because they've got cars on the racks. What's required to move up? The same thing's required to move up no matter which segment you're going after, and I think it's more important to talk about a segmentation. There are segments of the commercial business in shops where we're absolutely first call. It's kind of part of that conversation we're having now is how do we get more penetrated in segments where we're under-penetrated now. The work's the same.
You've got to make sure that you're providing great service, you've got to make sure that you have the parts available, and you've got to make sure you have a relationship, which means you've got to have a culture in your organization, in your stores, that understand the importance of relationship. Then you wait for somebody to make a mistake.
When you, and you may have just, I guess, partially answered that, but when you think about where you are absolutely the number one call, is there any underlying common characteristic or common denominator among those customers?
Yeah, we're learning that now. I'm probably not ready to go into that as that's part of the work we're doing right now that we discussed on the call. Understanding segmentation is going to become very important and productive for AutoZone.
Segmentation meaning nationals, regionals, locals?
Nationals, regionals, whether it's a value player, whether it's a brand player, whether it's a fleet player. Just making sure, again, our objective is start to penetrate 65% of the business that the top four are not getting now.
If we were to take the flip side of that, using those same brackets, are there certain ones that are harder for AutoZone to penetrate simply because you do have the focus with the Duralast brands?
I think that if you have a shop that is absolutely a brand, considers themself a brand shop, that's going to create an objection that our sales force has to overcome. Interestingly enough, there are only less than a handful, literally less than one handful of significant brands remaining. The conversation is more about legacy, I think, and more about history than it is about reality. Duralast is our number one brand. If you ask NAPA that same question, they don't have any brands. Everything is NAPA-branded. If you ask O'Reilly's, who probably is coming in next, the majority of their sales are not in branded products. It is an objection. It's a real objection. It's also part of a legacy because there just aren't that many brands left.
What is private label or the Duralast brand to you? I think you guys have historically said over 50% or over 60%. Has that percentage changed much over the last, call it, five years?
Commercial is primarily hard parts behind the counter, and that is predominantly the Duralast brand. It's gone up slightly because of that. It's roughly 50%.
I think it's important to note it's 50% of our total. It is much more than 50% of our commercial business because commercial's almost all hard parts. This brand conversation's been out here forever, 10 years for sure. In the last eight years, we've gone from $800 million to $2 billion, and we haven't changed our brand philosophy. It's obviously not as big a concern for our customers as it may be. I think it's thrown up as an objection when they lack a different objection.
Understood. To be considerate of time, I'd like to open up the floor for questions.
I think you mentioned that half your customers, their cars are not working, and they need your products. I think you mentioned that you don't spend a lot of time thinking about delivery to your customers. If their car was not working-
We do not currently deliver home delivery for customers. Let me be clear.
Correct.
Right.
If you think this through, now they can't drive their car to the store, presuming the ones that only have one car.
Doesn't it behoove you to start thinking about it a little bit more?
Absolutely.
Can you repeat the question for the people on the call?
Yeah, I'm sorry. The question was, should we not be considering home delivery? The answer is absolutely. We should be considering home delivery. Doesn't mean we're going to do it. In many cases, it's not something that we could do. If you're familiar with our customer base, I can't send people to those locations. Places where FedEx won't go, quite frankly. It is something we are considering and something that, again, a lot of conversation about Amazon. I think that five or six or 10 years from now, that's going to be a different conversation than we're having today. We're aware of it, and it's something that we're prepared to do. If the world changed tomorrow, we could pull it off.
We're a neighborhood store, our stores are located within walking distance.
Yeah. 85% of the U.S. population lives within five miles of an AutoZone store.
Part of the allure here is in coming into the store is you need the diagnosis. If your car won't start, but you're not sure what's wrong with it, even if somebody drove to your house and stared at you for five seconds, what we're doing in the store is we have some technology that allows us to really help troubleshoot. That's in the store. It's easier for somebody to jump their car or get something just to get it going, or come in with a part in their hand or a friend to get by. It's just not a far distance from the store. The store is being utilized for a testing site as much as for a delivery zone.
Understood.
Have refurbished parts been taking a lot of market share? Yeah, the question is, have refurbished parts been taking a lot of market share? I have no indication that that's the case at all. There is a marketplace for refurbished parts. It's primarily in big-ticket items like engines out of wrecked vehicles. LKQ, big player in that space. We've not seen any change in what we've been asked for or in our category sales for that matter.
The average ticket for us guys is really low. This whole internet discussion that we were having earlier, our average ticket is just north of $25. It's quite low. To buy used parts from someone off a junkyard, it doesn't carry the warranty. You pick it, you own it. There's some risk there. Again, most of our customers are just trying to get back on the road.
Anyone else from the field? David?
Yes. Back to the weather issue, it seems like the most benign explanation. It seems like the most consistent explanation among the four major companies. I was just in a presentation where it said it probably is the biggest single thing. I just want to ask, do you have an estimate on whatever kind of period you want to look at, a rolling four quarters or however you might want to look at it, as to how much, what you might call abnormal weather has affected your sales?
David, I can't repeat that question because I can't remember where it started, ultimately, do we understand the impact of weather to our sales? The answer is absolutely we do, because we always deal in category-level information, and there are specific categories that are driven by or influenced by weather. We've never talked about that, I don't think.
No, there's a way that I would tell you, we're a very consistent player in the short run. A year from now, let's just say we're doing quite a bit better, and you're going to come into this room and say, "Oh my gosh, I can't believe you're doing so much better," and now you're off to the races. What I want you guys to remember from a meeting like this is take a look at our average comp over the last 15 years. It's a very consistent number. The deviation from that number from one quarter to the next is effectively these macro shock factors. It's a relatively easy math formula to calculate. You'll see that what is that? It's a seasonal refund season or a weather factor or a recession with an answer, those are the things.
You'll be surprised at how consistent our comp is. You have to look at it over an annual basis for 15 straight years. The reason it's so consistent is the car parc. The number of cars in the population and the age of those cars is driving that traction.
How about the whole digital thing for cars, that you can't really do it yourself anymore since the cars are lasting longer and there are more people that need to just come to you than do it yourself anymore?
That's a great question, common. I think what you're asking are cars becoming more difficult to work on, and how does that affect our industry? I've been selling parts, particularly for AutoZone, for 33 years. I have seen very little change in the actual makeup of a vehicle. It very much looks the same as it did 100 years ago. The major components are a platform, a drivetrain, those parts still break. It's dressed up, and it looks different. At the end of the day, it's really not that different. In fact, I could make the argument that it's actually easier to work on a vehicle because all I've got to do is plug my phone in or Bluetooth my phone to a computer, and it tells me what's wrong.
Rather than having to tear into five things, likely what it is is going to be a sensor that I can simply plug and play. Take this one out, plug this one in, put the top back on it, and you're on the road. It's a great question. With that, cars are, I wouldn't say more complex, but I would absolutely say more reliable. They're breaking less. The thing is, when they do break, it costs a lot more. I used to sell spark plugs eight at a time for $0.69 a piece. Now I sell four at a time for $15 a piece. There have been puts and calls. Do I?
Not to me.
Well, if you want a spark plug.
When we first went public in 1991 with 500 stores, we were private for several years then, nine years. In the first letter to shareholders, we addressed the complexity of vehicles, because when we did our IPO and talked to investors, that was the number one question. Basically, 20 years later, still the same question. What you do is you evolve with it.
Right.
The technology is helping us to help you to diagnose. It's out of economic necessity that they're coming to the store, not because they're just gadget heads.
Just a follow-up on the diagnostic tools. If the diagnostic tools are perhaps making it easier for people to just come and DIY or at least keeping the population relatively static, you mentioned the DIY value prop is you really help people figure out what they need done. How do you reconcile the fact that one of the counterfacts for the business is the emergence of new diagnostic technologies, obviously, that you need to stay current with to help?
Well, we also are a software services business called ALLDATA. Quite frankly, we'll be on the cutting edge of that technology and best capable to provide customer with whatever data they need and from whatever tool they need, including a diagnostics tool. Yeah, it's a bit of a rub, but again, I think AutoZone's best suited to deal with it if it becomes a problem because we have the most data, and we have the best data.
We help you with the choice. A lot of our customers don't have the tools to do replacements, so we'll offer something like a loaner tool free of charge, and we'll give you five different options. On a web, you don't know. For example, if I'm on YouTube, I can figure out how to do the repair. I'm just not sure which part. It may surprise you guys, our return rate is super high. Super high. Double-digit high in rates. Even with a small ticket, it's because people learn as they go. They might buy the wrong part. They might figure it out. They might damage the part. There's a lot of hand-holding that goes on with a transaction.
One last thing. We don't do a lot of credit card transactions, guys. I hate to tell you this, but we're heavy in cash.
I think he's going back to that whole digital or Amazon conversation.
It's not about our customers.
Our customers are not necessarily members of Prime.
I think he's referencing credit card data.
Oh, okay.
Yeah. You did mention the RockAuto to kind of have the right name, but you didn't specifically mention Amazon as a competitor and who the customer is that's going to Amazon.
Mm-hmm. Well, I didn't mention them by name, my bad. That's who we've been talking about. Again, our customers come to us out of economic necessity. 50% of what they need, they need right this instant because their car doesn't run. Back to Brian's point, different reason, only 25% of our transactions are in credit. Our customer's not the person sitting at home shopping through Prime. They have to have it now. The example I think I gave within our own website is they're foregoing discounts because they want to come in the store and talk to somebody about the job. That is our value proposition. It'll have to evolve. Listen, we don't have our head in the sand about Amazon is not the issue right now.
May very well become the issue 10 years from now, but we will evolve to an answer 10 years from now as well.
I think that's all we have for time. Guys, appreciate it.
Thank you all.
Good job.