Next, we are very lucky to have AutoZone, which is headquartered in Memphis, Tennessee. AutoZone is the largest retailer of automotive parts, as we've heard today. Do-it-yourself customers account for 80% of the company's nearly $11 billion in revenue, with an accelerating Do-It-For-Me segment, which composes the remaining 20%. The company had 28 million shares at $590 for an equity market cap of $16.9 billion, net debt of $2.5 billion for a total enterprise value of $19 billion. Joining us here today, we have Bill Giles, CFO, and Brian Campbell. Bill?
First of all, thank you everybody, and thank you for being here. We've got a presentation. We'll run through it, we'll go for whatever pace is comfortable, want to make sure we leave some time for questions. Much of this information that I'll go through, I think you're relatively familiar with, we'll go through today. Certainly know about the company we've got. In fact, actually, just back in August, we celebrated opening our 6,000th store in Memphis, Tennessee, of course. We were really proud to be able to do that. We operate about 5,500 stores here in the U.S., we've got about 500 stores or so in Mexico, we operate about 14 stores in Brazil, we'll talk about that a little bit later.
You can see from a sales perspective, we've had relatively consistent sales growth over the last 10 years, running right around that 5%-6% top-line growth rate overall. Again, the footprint is pretty broad. We're probably the most broadest of any of the other national retailers as far as footprint across the U.S. and the penetration that we have, both West Coast, Northeast, Southeast. Having said that, there is no market that we operate in today that we don't believe there are opportunities for us to continue to open stores. As we mentioned before, I'll show you in a little bit, we open probably about 3% square footage growth rate on an annualized basis. Excuse me.
On our EBIT, you kind of saw that 6% top-line growth from an EBIT perspective, it's been relatively consistent here at 7%, 5%, and 4% on a 10-year, five-year, three-year compound annual growth rate. Again, relatively consistent growth. We'll talk a little bit about the fact that the 3 years are a little bit lower than the 10-year at 7%, it's come down a couple of hundred basis points overall. Our EPS growth is significantly higher than the EBIT growth overall. A lot of that is getting generated from share repurchase. As you guys know, we buy back a fair amount of shares on an annualized basis, anywhere from 5%-7%, or maybe even greater at times.
Our capital allocation strategy is that the first dollar of capital or free cash flow that we generate really goes back into the infrastructure of the organization, whether that be information technology or making our stores look great through refurbishing them, et cetera. The next dollar really goes towards new stores and revenue-enhancing type of assets that we have. Lastly, the cash remaining from that we utilize to repurchase shares, and that's how we give value back to the shareholders. It just so happens that that number dwarfs the first two, and so everybody always thinks of us as immediately going back and buying shares. The first thing we do is invest back in the business overall. You could just see this, our most recent fourth quarter results were on August fiscal year-end, so we just finished up in August.
You can see from this one that operating profit was relatively flat, and that was really the story for the most part for 2017. You can see that we grew EPS at around 7% or so. When you look at it on an annualized basis, you'll see again that operating profit grew at around a 1% or 2%. That was a little bit lower than we've had historically, and we'll talk about that a little bit, and I'm sure you'll have questions on that as well. On return on invested capital, although it's come down a little bit over the last three or four years, it's still an extraordinarily high number at around 30% or so, and we're really more in an investment mode.
In the last year or so, we've put more money into inventory and our inventory availability initiative, trying to get more inventory closer to the end consumer. We've added some assets into our distribution network, so we're in the process of opening two distribution centers, one of which we opened up at the tail end of fiscal 2017. The other one will open up here in another month or so, but most of that work's already been done. We're making investments in order for us to continue to drive sales and drive profits on a go-forward basis. You can see that in the CapEx, and a lot of that is driven by some of the supply chain investments that we've made over just the last year or so, kind of getting from that $500 million number up to about that $575 million.
Our expectation is that that would come down as we get further away from some of those investments that we're making from distribution center perspective. From an industry trend perspective on DIY, the industry is growing at around 3.3%, and we're using those from the Auto Care Fact Book. It's a $57 billion industry, but it's had relatively steady growth. It's probably a little bit softer, but it's had relatively steady growth over the last 10 years. On the Do It For Me side, where we're selling product to our commercial garages, it's a much larger industry. It's $74 billion, arguably even more bifurcated than on the DIY side of the business. The growth rate, again, is relatively consistent. There's always a lot of debate about which one is growing Faster, slower, et cetera.
Between DIY and DIFM, they're both growing in this 3%-4% kind of range, and frankly, have over the last 10 years on a relatively consistent basis. We represent a relatively small market share at 2.8%. Clearly, we're one of the leaders from a retail perspective, but on the Do-It-For-Me perspective, we have a much lower market share, much more opportunity for us to continue to accelerate our growth on that side. No AutoZone presentation would be complete without me putting the pledge in so that you can all see it. We'll get you all up to do it later. It's really a core part of our culture, and it really is an important thing.
I always bring it up because we start every meeting with this, and it feels kind of corny and hokey, and maybe it is, but it really grounds everybody within the organization relative to what we stand for, et cetera, about putting customers first, knowing our parts and products. We're putting a lot of money into technology, into training in order to be able to ensure that the AutoZoners standing at the counter have the latest information so that they can be able to provide the best service possible to our customers. Our stores look great. You heard me talk about that before when we talked about capital allocation. The first dollar is going to go back to ensuring that our stores look current and fresh, and we've got the best merchandise at the right price. It doesn't mean we'll always have the lowest price.
We'll have the right price based on the value proposition that we are offering our consumers, and we'll have great quality product. DIY growth initiatives. We'll talk about new stores, the mega hubs, adding inventory, and then great people and providing great service. I talked to you before about new store highlights. Again, we don't really compete in any market that we don't believe has the opportunity for us to continue to open stores. We open probably around 3% growth on an annualized basis. We've done a lot of work around the hub stores. I'll just take a moment to explain it. I know you've heard us talk about it before, but I just want to make sure that you understand how the hubs work and how they fit in overall. We've got about 5,500 satellite stores throughout the U.S.
We've got close to 200 hub stores servicing those satellite stores about three times a day. They're delivering product about three times a day to the satellite stores. Satellite store probably has about 23,000-25,000 SKUs in it. A hub store has close to 40,000 SKUs in it. The difference between that 25,000 and 40,000, harder to find SKUs, those are the SKUs that are actually getting back to the satellite stores about three times. We've got about 16 today, mega hubs, and those have about 100,000 SKUs. The mega hubs basically deliver product to a hub store, which will get to a satellite store. Now we're even further out into the tail from a SKU perspective. Those have a lot more inventory availability in the marketplace, so we can get to a customer on a same-day basis.
We talked more about we know our parts and products. Again, we're putting more money into training, both from a technology perspective as well as actual classroom-type training. We're increasing our availability. We're investing more inventory. You can see that our inventory on a per store basis has gone up over time. We are putting more inventory closer to the customer in the field, and that's going mostly through the hubs and mostly through the mega hubs. Our commercial business, again, about 84% of our retail locations have a commercial program attached to them, and we continue to enhance the products and services to those organizations.
Keep in mind, too, by the way, when I talk about inventory availability and everybody always immediately thinks that whatever we're doing is for the commercial side of the business, virtually every tactic and initiative that we do winds up benefiting both sides of the business. Even though it may initially, we have always thought it might be on the commercial side, we find that it winds up positively impacting both sides of the business. Quickly on an international basis, then we'll open it up for some questions. Mexico has about 500 stores. We're opening around 40 stores a year, so maybe around 8% growth rate for Mexico. It's been a good market for us. Brazil has about 14 stores today. We'll probably open another 10 or so this year. We're finally hitting a point where we believe that we can start opening stores.
It's a challenging place to operate in. The team down there has done a phenomenal job, and we think we're in pretty good position. We've been pleased with the results that we've had down there so far. From a digital integration perspective, I don't know if you're familiar with the ALLDATA product, but that is a software company that we own out in Elk Grove outside of Sacramento, California, that basically provides repair information for commercial garages. It's done on a subscription-based business. They've got a booth over at SEMA. You should go over, and if you have the opportunity and you're walking SEMA and you want to walk by and just ask them to give you a demonstration on the product and so on. They're introducing a diagnostic product at this show, so that'll be kind of fun to see what they're doing there. Then the dotcom, autozone.com.
Again, we don't do a significant amount of volume on az.com from a commerce perspective, but we get a lot of eyeballs. We have a lot of people coming to the website, looking up the product, looking at the content, looking up repair informations, inventory availability, where the store is located. We know through research that a significant portion of customers that are shopping in our store have come to our website prior to getting to the store. From an omnichannel perspective, that remains a relatively important part. Lastly, from a growth perspective, obviously, we continue to grow square footage growth rate. We're putting more parts into the marketplace. We're expanding our supply chain. We're able to say, "Yes, we've got it on a more frequent basis." On the commercial side of the business, we maintain a small market share.
We believe that we continue to grow that, we're currently growing at probably twice the rate of the industry today. From an international perspective, we've been relatively prudently paced international growth. We've been in Mexico for almost 20 years now, we've been in Brazil for probably four or five years now. We only have 14 stores, but it just gives you an insight relative to how we go about allocating capital and making sure that we've got the right format and structure in place before we go forward with it. I'm going to try to quickly wrap up there so that we at least have a few moments for Brian to sit here and answer questions for the organization. Anyway, with that, John?
Yeah, Bill, over the last several years, you mentioned all this capital that you've put in, whether it's test for inventory, getting that part close for the store, also delivery frequency. How do you balance all of that in this environment with this disciplined cost of capital, I mean, disciplined hurdle rates that you've had over the years?
It's a great question. I'm going to give you a long answer if I can for two seconds, because it's been a bit of a challenge because when you think about this past year, it's been a little bit more challenging, right? We're coming off of two relatively mild winters, which inherently have lowered the demand for our product on both the DIY side and the commercial side. We went through a tax season where we historically get a bump in sales when the tax refund money comes into the marketplace. We didn't experience that this year. We didn't, the industry didn't. Where that money went, I'm not sure, but the same amount of money came into the marketplace as it did last year, about $200 billion. We went through a period of time with a relatively lower demand than we have historically had.
I mention that on the backdrop of your question, John, from the standpoint that we have put money into more frequent deliveries, where we are taking about 2,000 stores and we are delivering from the distribution center about three times a week. The purpose of that is to keep those 25,000 SKUs in stock at a higher level than they would otherwise have been. We turn slow. You would think once a month ought to be enough to deliver, but the reality of it is over 70% of the SKUs in the store are stock one. Once it's sold, you're out. We're trying to figure out how do we get back in stock on a more frequent basis. That test has had a little bit of what I would call inconclusive results.
There's no question that we're improving the sales in many of those stores, but we're uncertain as to whether or not the sales being generated of those stores is enough to cover the cost that it's taking in order to deliver those stores on three times a week. The hub stores and the mega hubs are very clear to us, and we've been very happy with those. We definitely are getting a return on those, and we're going to continue to accelerate the mega hubs. In spite of a tougher sales environment, we elected this year to hang in there with those investments and with those tests. That's part of our culture, and that's part of the discipline of who we are.
Because we were so far into these, we didn't want to bail out just because sales are a little bit soft in what we believe is more of a cyclical issue than it is a secular issue. We went through this year, and it's been a little bit more of a challenging year. Listen, we've got to build the business for the long term, and we're going to put our capital to work. If it doesn't make sense, then we're going to pull that back out again. Does that help?
Thanks.
Thanks. You also, obviously, you have a stellar do-it-yourself business. Can we step back and just talk about your customers? What kind of parts are they buying? What factors are important to them that would drive them to an AutoZone?
DIY?
Yeah.
Yeah, I think that it really is ultimately, and I've thought about this as long as I've been in the business, and you guys are very familiar with the business, it's a high-touch business. Probably 90% of the people that walk into the store are getting assisted because almost all the products that are behind the counter, you have to look up, and you need help with, and the majority of the ones on the sales floor you need, too. Think about if an individual comes into a store because they believe they need a new battery, it's helpful to have AutoZoners there to be able to go and test the electrical system to determine whether or not it's a battery, an alternator, a starter, or frankly, it's something as simple as a $2 cable.
They're able to do that in the store and be able to ensure that the customer is getting the right part. If it's a battery, it's likely that that person is going to come out and actually put the battery into the customer's car, or the wiper blades onto the customer's car, or the light bulbs that they come in to look for, et cetera. It's a very high-touch business, and there's definitely a different experience level that the customer is having by being able to do it inside the store. In some cases, some of those products, whether they be battery starters, alternators, chassis, CV axles, et cetera, there's a core attached to it.
We need the old part back, whether it be on a DIY side or on the commercial side, because that part has to make its way back to the manufacturer to be remanufactured. It's a little bit more complex. It's totally demand-driven, but there is an experience level that happens inside the store that does make a difference, and that's why there's a different value proposition.
Have you provided the breakdown of the parts they're buying, so between maybe failure or maintenance?
We have at a high level. Failure is around 50%, roughly. Maintenance is about, help me, Brian, 35%-40%, maybe, probably closer to 35% or so. Discretionary is probably around 15% or so. That's the way to think through it. On a failure-related part, your car is not working, so you need that part. On a maintenance item, you'll need that part, although you may not necessarily have to have it today, brakes, rotors, et cetera. You may want to be able to buy that and then basically do it on the weekend, et cetera. The discretionary one, think about floor mats, steering wheel covers, seat covers, maybe. Those basically would be it.
Since we talked about the Do-It-For-Me side, I mean, the Do-It-Yourself, just for the remaining, I guess, 20% of the business, I think your Do-It-For-Me at around 6% this year, which is much above industry averages. Can you talk about how you do that, the differences in selling to the two segments, and what's the opportunity going forward?
That's a good question. I think one of the commonalities between the two is really the inventory. We've got to be able to make sure that we're getting that inventory closer to the customer. We're doing that through hub stores and mega hubs and making sure that we're in stock. We're doing that through the three-times-a-week deliveries on the more frequent deliveries. From an infrastructure perspective, we've got a sales force that works. We've got 400-plus territory sales managers that are out calling on customers every day. We've got a commercial specialist inside the retail location that is then calling customers, answering the phone, taking orders, et cetera. It is a different service level because the commercial customer typically knows what they want. From that perspective, we're finding that part, we're getting it to them in 30 minutes or so, roughly, and we're priced competitively.
The most important thing to the commercial customer is that you have the product. We've got to have that product available and in stock, and then we've got to be able to get it there in a reasonable amount of time, and we've got to be competitively priced. Our opportunities are in that order. We've got to be able to continue to work hard at ensuring that we've got inventory in the marketplace, and we've got to be able to improve our delivery times on a more consistent basis as well.
Perfect. Another industry trend we've talked about today is increasing complexity in the market. Companies that are clearly more Do-It-For-Me said there will be the trend towards that, given how difficult it is to do some of this work. How is AutoZone looking at that or combating that?
Yeah, we've heard that for so many years. The reality of it is, from our perspective, is that the vehicles are more complex, yes. One of the advantages is the vehicle can actually tell you what's wrong with it today. If you bring your car into AutoZone with a check engine light on, somebody will be able to put an OBD device in to extract the information, go back into the store, and be able to tell you with some level of probability as to what the issue is with the car. We will be able to show you the part that you would need to repair that. We can sell you the repair information. It's likely you'll be able to, either today, tomorrow, or in the future, go home and see the video on exactly how to repair that item.
Not only that general repair, ultimately for your year, make, model car that you actually have. I think the technology is actually going to wind up allowing people to do things that they couldn't have otherwise done before, because again, the car will self-diagnose itself. You'll be able to get a lot more information, both from AutoZone as well as online, in order to be able to repair it. We're pretty bullish on that from the DIY perspective. We hear that all the time, and we've heard it 40 years ago, and my guess is we'll hear it 40 years from now.
Brian.
Yeah, actually, along those lines, Bill.
Sorry.
Regarding vehicle complexity, we've seen Johnson Controls for a number of years tout AGM batteries as something that they can sell for 2x the price of a typical lead-acid battery, three times the margin. Starting to get a little bit into the cycle there. Is that at all an opportunity for you, from a sales perspective, to effectively double the price of the battery that you're selling there and maybe get a little more margin out of it?
Yeah, I think in some cases, and that's something good battery for us, and it's done fairly well. It's not as broad-based, but it's definitely got a marketplace for it. That one has done particularly well. I also think it's a good example of two things that are inherent in the industry. One of which is that we've had a lack of inflation from a product perspective for a fair amount of time, mostly commodity-driven. There's always some level of inflation from a technology perspective, the AGM battery being a perfect example of one, and it happens in other places within the market as well. What happens is that there's more technologically advanced products that wind up having higher prices, hopefully higher margins, and we may see you less frequently. From a traffic perspective, it gets more challenged.
From an AOV perspective, that's where we see increases in the AGM battery, would be a perfect example of one where that's going to be at a higher price, hopefully higher margin, but we may see you less frequently. It's a good example because it does actually take place in other categories as well, so it's a pretty good example.
Great. Obviously, companies have been talking about the weather.
Yep.
Have you provided any data points on what kind of drag that has been to your comp, to not just explain what's going on in terms of that?
A little bit. I'm just going to go back in memory, so I may not be 100% right, but I think about two years ago, we talked about the fact that, I always use this example, which some of you guys have already heard me say, if you put your finger on Madison, Wisconsin, and drive it down to Washington, D.C., and you take that whole upper Northeast corridor. I think about two years ago, we said that the delta was about 400 basis points in comp performance between that side of the United States and the rest of the country. I think last year was probably, since we're anniversarying some of it, but then you're still getting reduction in demand, was about 150 basis points.
It's clear to us from what we can see relative to the performance of that piece of the country, not only just as a blanket overall, but also in some of the key categories that really do wind up having demand driven from weather perspective. We can see it. There's no question in our mind that the two mild winters back to back would wind up having a reduction in demand overall. The tax refunds weren't helpful. As we go through the year, hopefully we'll have a more normalized winter. If tax refunds wind up having the impact that they have historically, that'll be a bump. If they don't, we're just going to anniversary what happened last year. It's probably not going to be no harm, no foul type of event.
The winter, hopefully we'll have more harsh winter this year and be more normalized winter, I should say.
Okay. I didn't think I would be the one that had to ask this.
Uh-oh
To address the elephant in the room, obviously there's been a ton of conversations around Amazon entering the industry at this point. Can you talk about what you've seen in terms of e-commerce competition and also what you're doing on the omni-channel side, which I believe shown tremendous growth for your business, and any trends there?
Shocking that nobody would bail you out. It's unbelievable. Yeah, we haven't seen an impact, certainly from a pricing perspective, from an online. I'm not saying that we're immune by any means, but you had asked a question at the very beginning relative to the types of things that go on inside the box relative to conducting a transaction. There is a different value proposition that is taking place inside of AutoZone stores versus what you get online. There's certainly a concern, and we get that, and we see it, and we're tracking the pricing, et cetera. There is a gap in the prices. There's a gap in our price in Walmart, and there has been for 30 years, and we operate in the same parking lot as Walmart.
I think the consumer gets the difference and understands the difference in what the value proposition is between the two. From our perspective, we're going to continue to invest in az.com because it's important for us to ensure that we have a great omni-channel experience for our customers if they want to transact online, which some do, but it's not a significant portion of our business, or if they want to come and get information and be able to transact it inside the store. Keep in mind, 80% of the U.S. population is within five miles of an AutoZone store, there's a convenience factor there. There's also a comeback factor there on the core product that I mentioned. There's also a Loan-A-Tool program, so if you're doing a job and you don't have the tool, you don't have to go out and buy that tool.
We'll loan it to you to get through the job, et cetera, and get back to it. What we've got to be able to do is find those points of differentiation and make sure that we are executing them at the highest level on an everyday basis. We'll continue to watch prices. We'll see what's enough. We're getting pressure, but at the moment, we don't see a lot of pressure from that. It is and has been a somewhat inelastic industry, and it really is a demand-driven industry. If we knock off the price of an alternator, it's not going to change the demand.
Okay, I guess last question. I feel like AutoZone's increasingly used private label brands, but currently there are some questions around trade negotiations and deals, including NAFTA. How do you see that affecting your business, if at all?
That's a great question. I'll sidestep it for the moment because I'm not sure we have an answer on that one. We know that there's a lot going on on that, and we do get a fair amount of product from Mexico, et cetera. We obviously get a ton of product from overseas as well. We've got a new buying office that we established in Shanghai about a year ago. That's going to help us increase our direct import and lower our acquisition costs. We'll have to continue to monitor it, and I'm sure you'll keep us posted.
Great. Terrific. Thank you.
Hey, yeah, Mario, what's your cash tax rate?
That's why I brought Brian Campbell.
That's why I had to ask, so he would say something.
32.
32% cash tax?
Yep.
What multiple of EBITDA do you want to have your debt at? You're 2.2 right now?
2.5.
2.5?
EBITDA.
Okay.
CapEx, same numbers in the last three or four years?
Pretty much. I'd say $570.
Why go any higher? Incrementally, you're justifying your stock buyback. I mean, you've gone from 154 million to 27 million shares in the last umpteen years.
Correct.
I know. You've leveraged up your payables. You leveraged up your balance sheet. Your EBITDA has been flattish.
Just this year.
Okay. The question is, do you buy it because you think it's materially undervalued to support it or to grow EPS, as you've done, obviously? Which of the above.
We'll say-
Where do you get concerned about the leverage overhang?
While we utilize the buyback as uses for our free cash, we actually choose to open new stores and maintain our existing stores first and foremost. This past year, in fact, we did purchase a little less stock than we did previous years. We move that number around, Mario. Anywhere from $1 billion to $1.5 billion. We want to grow the business. We see great growth opportunities in Commercial, first and foremost, and to grow internationally. Lots of opportunities. It's just that for us, the difference is a discussion more maybe you're asking between a dividend and buyback.
Yeah, I'm not a big fan of a dividend. Paying a triple tax for my clients.
We would agree.
Yeah.
Yeah.
Your dividend is how high again?
Zero point zero.
Zero. Yeah.
You'd say it's the utilization of the free cash or the buyback.
Yeah, I think you're better off buying back stock because to those that stay in the company, we're better off over an extended period of time.
Agreed.
Yeah.
Okay. Since Mario did bring it up, your payables, we have discussed a little about the potential increase in the interest rates. Has there been any discussions around that?
We'll be exposed a little bit to increase in interest. I think Brian, quite frankly, he's sitting here, he's done a terrific job of managing the capital structure and managing our debt overall, I think we've managed it well. We'll be a little bit more exposed if interest rates go up, and they have. It'll be a little bit of an impact to us.
Perfect. Well, we've definitely run past time, thank you so much for being here. It's a pleasure, we do appreciate you.
Thank you to you.