For anybody that does not know me, I'm Scott 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 3 of the 4 major public players with us today, including our friends at AutoZone. We have Tom Newburn, who's EVP of Store Operations. And joining us in a moment will be Brian Campbell, Director of Investor Relations.
Now, 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. And 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 is about to join us.
Thank you. So with that as a backdrop, I do have a couple of 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 and A period at the end. But 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? And then we'll have a series of follow ups after that.
Specifically to Amazon, I'm assuming.
From Amazon, Rock Auto, you name it, that's kind of out there trying to compete for those sales dollars.
Well, we think about both of them really quite differently. First of all, we think about them every day. And we pay attention to what's going on every day. And 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 is would be more susceptible. But 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. So 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. Yes, 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 5. So, waiting for a day or even 4 hours in areas where they're able to deliver same day, far less concerned about the do it for me side.
So, Tom, when you think about the profile of somebody who would use an Amazon or a Roc Auto, who do you think it is? Is it a casual user that's just kind of used to using Amazon to order everything? Is it a heavy DIYer who may be shopping for price because he's working on several projects. Like do you have a profile for that company?
Yes. You hit it on the head. Generally, what we've learned about Rock and Rock Auto and Amazon, I think we think of very differently. Rock Auto is primarily appealing to the person working on a project. So I have I've been working on this off road vehicle for the last 3 weeks, and I'm hoping to get it ready in the next 3 weeks.
They have a lot more time. They generally are someone that's much more familiar with the vehicle and has a lot more technical experience than your typical AutoZone customer. So 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. And then when you look at your own business, how much of your business are you doing online today? And is your product profile any different online than it is in the store?
It's broader online. It's not the exact same. But our e commerce business is not material in any way material. And 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. And ultimately, we know when they get back to the store.
And our objective is to make sure providing the content they need and the information about the parts they need. But 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.
BOPIS, which is buy online, pick up at store, is our fastest growing segment. It outpaces everything. We don't offer that same discount in the store. Well, the customers get to that part of the journey and 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 maybe doing it for the first time in 5 or 6 years.
So 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. And I think I've told you this before, but 85% of the population of the United States is within 5 miles of an AutoZone store. So you just it's convenient and that's our value prop.
What is your delivery time on a retail order? I'm just wondering is that are they buying online, pick up store, pick up 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 bought it online in 15 minutes.
But if you were to deliver to that customer?
We don't do home delivery.
Not all.
Half of our business guys has failed the way the car won't drive. So even though you'd like to look on the web and determine and have a lot of choice, you need to get back on. The average guy is coming into our store, just trying to go to work and just survive every day. So 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, get out. And so the store makes a big difference for them. It's just you can't wait on it. And you need to understand too what it is you're supposed to choose because there's 4 or 5 options for everything you're buying with wide price points. So that human interaction is worth a lot.
Thanks, Brian. And then 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? And so there are some industries that we've observed where the vendors are very disciplined. And then there are some where we would call it less disciplined, people are chasing price, etcetera. This is an industry that's never really been characterized by a lot of price elasticity.
But 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 I
think that's a great question. And 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. And we take this one time a year to bring all our vendors in, talk about our strategies, talk about where we're going. And the number one topic with our vendors this year is you have to manage your brand.
And if you're letting your brand be commoditized, then we'll find somebody that won't. And 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 3rd party or it's directly, it doesn't matter to us. If you're going to be one of our partners and you'll be one of our partners. And that message we're delivering that message loud and clear with a stick.
We invite everyone in our industry to do the same.
So 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, like if you guys had to kind of size the different impacts to your sales algorithm, how would you kind of rank order them? Like what do you think has kind of caused the modest slowdown that we certainly have seen?
A couple of things. One is probably a level set folks. We have a unique fiscal quarter in calendar. Nothing makes sense for us in some ways in the Q3 ended in the middle of May and that's the Q3. Well, our Q2 that ended in February finished quite poorly.
And the Q3 started poorly as well. So in the near term, what I'll tell you is it's been definitely impacted our business domestically was income tax season and the timing of when those refunds fell. It's a lower sort of lower income level customer as 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 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 sensitive U. S.
Have had some mild winters up here. The failure related parts in this category of the country has been hard to overcome. So those are the 2 near term challenges, I would say. And it's affected our industry, both retail and commercial as well as on the unit. 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.
So 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. And then 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, etcetera. 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?
Like maybe you're driving your car 10000 or 15000 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 kind of take advantage of that?
We certainly think that's a little further off than some of our other priorities right now. We also think that, that will 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. But I would tell you how we're going to how we defend it is 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.
So 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. So 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 kind of pull 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 comps for yourself comp growth for yourselves as well as everyone else.
Can you kind of 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?
First of all, our commercial strategy and our delivery frequency or inventory strategies are 2 discrete decisions and 2 discrete strategies, 1 not related to the other. And yes, on the frequency of delivery, we are 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. And 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 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 3 plus 1 more of the 3 of the people that are here in our
industry today, plus 1 more represent
a very small share of the 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? It has it's
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.
Commercial will continue to be the biggest grower. And we know our current trends, but many folks ask, hey, what's the next step level change you can take? And so
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. So a lot of this message around our commercial businesses, maybe there's something there for us right now. That's what our point was on the call.
Understood. Thank you. So 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 1, what percentage do you think the typical garage will give the call with their top 2 suppliers? And then number 2, how long does it take to move up that call list?
All anecdotes here, but I would suggest that first call is probably representing about 60%, maybe a little north of that of the shops business. Nobody gets 100%. Rarely are you going to get more than that 60% number. Number 1, 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 is 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. And 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. But the work is 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. And then you wait for somebody to make a mistake.
So 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?
Yes, 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. But understanding segmentation is going to become very important and productive for AutoZone.
Segmentation meaning like nationals, regionals?
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, the top 4 are not getting that.
So if we were to take the flip side of that, is there certain 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?
Yes. I think that if you have a shop that is absolutely a brand, considers themselves a brand shop, that's going to create an objection that our sales force has to overcome. Interestingly enough, it's there are only a hand less than a handful, literally less than one handful of significant brands remaining. So 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 talk to 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. But there it is an objection. It's a real objection.
But it's also part of legacy because there just aren't that many brands left.
And what is private label or the Doro Last brand, Tammy? I think you guys have historically said over 50% or over 60%. Has that percentage changed much over the last call it 5 years?
Well, commercial is primarily hard parts behind the counter and that is predominantly the Duralast brand. So it's gone up slightly because of that. But it's roughly 50%.
It's again, 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 is almost all hard parts. And again, this brand conversation has been out here forever, 10 years for sure. In the last 8 years, we've gone from $800,000,000 to $2,000,000,000 And we haven't changed our brand philosophy. So 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. On the to be considerate of time, I'd like to open up the floor for questions.
I think you mentioned that
That we do not currently deliver to home delivery for customers, let me be clear. Right. Absolutely.
Absolutely. Can you kind of repeat the question for
the people? Yes, I'm sorry. The question was, should we not be considering home delivery? And the answer is absolutely. We should be considering home delivery.
It 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. But it is something we are considering and something that, again, a lot of conversation about Amazon. I think that 5 or 6 or 10 years from now, that's going to be a different conversation than we're having today.
But 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 neighborhood stores. So our stores are located within what percent?
Yes. It's 85% of the U. S. Population lives within 5 miles of an AutoZone store. So it's
So part of the allure here is coming into the stores, you would need the diagnosis. So if your car won't start, you're not sure what's wrong with it, even if somebody drove your house and stared at you for 5 seconds. What we're doing in the store is we have some technology that allows us to read and help troubleshoot. And so that's in the store. So it's easier for somebody to jump their car or get some 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 site.
Yes, 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. But we've not seen any change in what we've been asked for or in our category sales for that matter.
Yes, 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 So it's quite low. And to buy used parts from someone Alpha Junkyard, it just doesn't carry the warranty. You pick it, you own it. So there's some risk there.
Again, most of our customers are just trying to get that 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 4 major companies. I was just in a presentation where it said it probably is the biggest single thing. So I just want to
ask you to have an estimate on whatever kind of
period you want to look at or
David, I can't repeat that question because I can't remember where
it started. But 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
But there's a way that I would tell you. We're a very consistent player in the short run. So 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.
So 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 and the deviation from that number from 1 quarter to next is effectively these macro shock factors. It's a relatively easy math formula to calculate. You'll see what is that, it's a seasonal refund season or a weather factor or a recession with an answer. And those are the things.
You'll be surprised at how consistent our comp is. But you have to look at it over an annual basis for 15 straight years. And the reason it's so consistent is the car park. The number of cars in the population and the age of those cars is driving that traction.
That's a great question, Tom. And 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, and those parts still break. It's dressed up and it looks different, but 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. And rather than having to tear into 5 things, likely what it is, is going to be a sensor that I can simply plug and play. So take this one out, plug this one in, put the top back on it and you're on the road.
But it's a great question. But with that, cars are, I wouldn't say more complex, but I would absolutely say more reliable and they're breaking less. But the thing is, when they do break, it costs a lot more. I used to sell spark plugs 8 at a time for $0.69 apiece. Now I sell 4 at a time for $15 apiece.
So there have been puts and calls. Do I?
It's not the meter.
Well, if you want or smart plug.
When we first went public in 1991 with 500 stores, we were private for several years, 9 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. And basically 20 years later, it's still the same question. But what you do is you evolve with it. 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 gathering it.
Well, we also are a software services business called Alldata. And 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. But yes, it's a bit of a rub. But again, I think AutoZone is best suited to deal with it if it becomes a problem because we have the most data and we have the best data.
We can help you with the choice. A lot of our customers don't have the tools to replace them, so we'll offer something like a loaner tool free of charge. And we'll give you the 5 different options. On a web, you don't know, like for example, if I'm on YouTube, I think how to do 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. And even with a small ticket, it's because people learn as they go, they might buy a new car, they might figure it out, they might damage the car. There is a lot of handover that goes on with the transaction. We don't do a lot of credit card transactions, guys. I hate to tell you this, but we're heavily in cash.
I think he's going back to
that whole digital or Amazon conversation.
Our customers are not necessarily members of Prime.
I think he's referencing Craig, our data, but Okay.
Well, I didn't mention them by name, my bad. That's who we've been talking about. And 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.
So our customer is not the person sitting at home shopping through Prime, and they have to have it now. And 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. And that is our value proposition. It will have to evolve. Listen, we don't have our head in the sand about Amazon, but 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 the time. Guys, appreciate it.
Thank you. Good job.