Good afternoon, everyone. I'm Michael Lasser, the hardline, broadline retail analyst from UBS. We're super, super excited to have with us the team from AutoZone. For those most for those of you who don't know, even though most of you do, AutoZone has been a model of consistency among retailers for a long time. It's got a stellar track record of generating free cash flow, stable margins and consistent comps.
We're very excited to have with us Phil Daniel, who runs the commercial business Brian Campbell, who many of you know and is infamous for running IR and the Treasury Department there. We're going to quickly use some prepared remarks, and then we'll get into the questions that everyone wants to hear. With that, I'm going
to turn it over to Brian. Good afternoon, everyone. Glad to have you today listening to our presentation. We'll do some prepared commentary. We'll be fast.
Daniel, I promise we'll be fast. But then we'll take questions after that. So nice to see everyone today. It's been a busy day. It stopped raining.
That's nice. Okay. So without further ado, AutoZone. We have an obligatory forward looking statement about who we are and if we give any forward looking statements. The AutoZone pledge is the next page.
AutoZone starts every, I'll say, large get together and meeting with its pledge and a cheer. And these four lines were in 1986, the process of how we come to market, how we take care of stores, how we take care of customers, whatever it takes, to help the customer. And that's the theme of these four lines. We want to make sure that customers are first, and that's the first line, it's on purpose. So if you show up at 9 the store is closing, we let you in.
We ring you out. We take care of your needs. In fact, we get letters every day and we celebrate them about good customer service that was exemplary in a certain store. And those letters are read. I don't even know how many we get a year, Phil, probably thousands of letters.
And that's the customer service aspect of the business. The company overview. We have a whole bunch of stores. We have 5,848 5,846 stores across the U. S, Mexico and Brazil.
We have a branch group of stores or branches called IMC, Inter American Motor Corporation. They sell primary Tier 1 branded auto parts a total of 5,800 stores. So we hope to equip 6,000 this fiscal year. We'll see if we can get there. We have 8 domestic distribution centers.
We also have 2 facilities in Mexico distribution centers. We have a whole bunch of AutoZoner employees, 84,000 plus across our chain. Trailing 4 quarters, we're just about at $11,000,000,000 in sales. We were up 3% and change over the last four quarters. Our EBIT was up 3.9% and change over that same time period.
We have almost $9,000,000,000 in assets. Half of that just about is inventory. The other half is fixed assets, primarily land and buildings. Okay, the U. S.
Landscape, I'll spend the most of my prepared commentary, all of one more minute on this slide. And this is just the industry that we're in. And we tried to mix it up, Michael, to keep you honest. Keep it fresh.
Yes, keep it fresh.
We're keeping this fresh. Yes. And fresh shows how many stores are auto parts stores there are in the United States. There are 36,500 stores across the United States. And remember you guys remember the 5,800 odd stores that you saw in the U.
S, well, Mexico is included in that number, but 5,400 in the U. S, we're a subset of this 36,000 stores. The top 4 players that are publicly traded have 20,000 or 57% of this mix. The reason we created the slide was to show you that there's a whole bunch of independents, 1, 2 down, that slowly but surely has been declining. They've been closing.
So in the box on the right, the takeaway is we're up 3% in square footage over 5 years and the other groups are down 3. So net net on the bars on the bottom, it shows the industry in square footage isn't really growing. But on the other page, if you guys remember, the industry is growing in revenues 3%. So it's allowing productivity per box to increase, which is a good sign for the industry. I'll jump through quickly.
I promise I'll be fast. The EBIT growth, very steady, 7% to 8% EBIT growth, depending upon the years, 10, 5 or 3 years EBIT growth EPS, a little bit faster growth than EBIT growth. We utilize our free cash flow to buy back stock to reduce the diluted share count, so that's helping earnings per share grow in a double digit range. This is our Q2 we reported last week. It seems like months months months ago.
The Q2 was busy for us, to say the least. We did quite well through 9 weeks and not as well the last 3 weeks. Our sales results were tepid, in fact, down 6 odd percentage points we talked about. Tax refunds hurt our company a great deal. The foot traffic declined.
Last year, refunds were flowing. Our type of customer, well, they do earn income tax credits or additional child tax credits, and those revenues were not in the marketplace, and we slowed materially from a 2 plus percent comp, and that led to 1% revenue growth. Diluted earnings per share was up 9%. So still, all in all, not a bad quarter for retail in general, but not up to our sort of norm based on the weakness in the last 3 weeks of performance. You can see year to date, these are sort of lower seasons for us.
The spring and the summer are bigger. So year to date looks similar, a little better than the quarter. New store highlights, you can see the mix. We constantly open our stores. They're neighborhood stores.
Our growth strategies, retail, commercial, international and digital. We talked about retail. We plan on opening stores and driving performance through marketing measurements and mega hubs. We'll talk about, I'm sure you get a lot of questions. Commercial, we're doing $2,000,000,000 in commercial.
We had a solid number in the 2nd quarter for revenue growth. It was up 7%. Trailing 4 quarters is 6%. Commercial sales, it's a good trend. In fact, it's last quarter was strong.
In fact, I guess, basically industry leading, faster than the industry's growth rate. International growth, we talk about Mexico. We expect to eclipse 500 stores this year. We're doing well in local currency. We were challenged this past quarter based on exchange rates.
The peso weakened at the end of the calendar year for several reasons, and the translation of those pesos into dollars caused us to actually have a decline year over year for the first time in many quarters in Mexico, and that hindered our overall operating profit for the company. Brazil, we plan on expanding there. We wrote a phrase here that says Phase 2, test phase. We're going to go up to 20 odd 30 stores in Brazil. We're in and around Sao Paulo.
We like the market. Tricky to do business there. Hard to move merchandise around, but we like the potential for that market. Digital integration, we have an all data product, auto anything dot com website, and we also have autozone.com. And last slide, and we're done.
Who we are? We plan on growing sales is 1st and foremost. Then we will grow international square footage. And lastly, we'll manage on cost. We look to grow an earning algorithm of basically mid single digit EBIT growth.
Hopefully, with buybacks and the like, we get to our expectation of a double digit earnings per share growth. And that is AutoZone for many, many years. So thank you for your time.
Well, thank you so much for that informative presentation, Brian. We really appreciate it. We're going to start the Q and A portion. If you do have questions, we've got the CrowdMic app. Please submit them and we'll read them into our conversation.
I want to start with one of the points that you made during your presentation, which was tax refunds. We're getting a lot of questions. Hey, what's going to influence whether or not you get all of the money that potentially wasn't there in your most recent quarter back? And at what point will you have a sense of that? I think
that's a lot of today. Yes.
It does come up a lot.
We've talked about it a lot. So the tax refunds, Brian mentioned what how our comps were going through December, January, February, the last 3 weeks were pretty tough. You described it as bad, worse and worse in the last 3 weeks, sequentially. We our DIY customer, when the tax monies are remitted, say they hit on Wednesday, we can see what was remitted the next day, literally the sales respond the following day. It's that quick.
We don't necessarily know the number the next day, but we can say, well, that was a $3,000,000,000 day or a $10,000,000,000 day. We can see it. And then we generally find out the day after what that was actually released. So it's a pretty material change to our business this time of year. It's kind of always a little bit of trepidation when we look at this quarter.
We know we generally know it's going to happen 1 of the last 3 weeks. In this case, it didn't happen at all, and it pushed outside of this quarter. We get the question, so what does that mean on because it's a real it's a pretty exacerbated spike for DIY. The same type of thing happens in commercial, it's just muted. So commercial generally is a weak in arrears and not quite the same ramp, but it does happen on both sides.
So the question that we've also gotten is do you get it back plus the comp that you would normally get in this quarter? And we'd like to say yes, we think we will. But frankly, we don't really know. Could the customer get distracted in March if they have some additional money and go decide to plant tulips? We don't know the answer to that question.
We hope that we will. If they have a broken car, we hope they'd fix it. And if they have the incremental money, hopefully, they'll spend it on their car. But ultimately,
we won't know that for several weeks still to come. And what category, what jobs are being impacted by this? So is it that someone's muffler has been so noisy for the last 6 months, they get the tax refund and then they actually do it? Or is it even more discretionary than that? How do you see it show
it up on a category basis? The failure business is if a car is down, in other words, the starter is broken and the car won't start, that's not as deferrable, right, because the car is broken down. It's not they don't wait to get a check and figure out to get the go buy a starter because the car is down. It's the incremental brake job or it's the maintenance that I can defer a tie rod and you can drive around with a tie rod end that's loose. Eventually, it's going to break.
So when it breaks, you got to fix it. But if it's loose, can I wait another couple of weeks till I get my tax refund? Yes. So it's those types of categories. The pure failure, car is down and will not move, those don't fluctuate.
It's the discretionary business and the maintenance businesses that see that spike with the tax money. Or it's also the big purchase, I got to replace an engine.
Yes. And then I know the other big topic that's come up quite a bit today, and I'm sure you've been thrilled with addressing is the weather. It's always fun to talk about the weather. But it's the season, the winter season started out encouraging with a cold December. And then it's been another abnormally warm and dry winter in many parts of the country.
Have we had enough cold weather to really make a difference and drive the demand that you would normally see through the spring selling season for this sector?
So I'll take you through winter, and I'll go all the way back to last year. So how do you get this? Last year, so think December of 12, 13, 14 months ago, whatever it is, we didn't get a very cold winter or much precipitation in the Midwest and the Northeast. Both sides of the traditionally cold portions of the country had a very mild winter. So what you don't so what we saw in that year was in February, December, the DIY customer would go do a brake job.
It's nice outside. It's 50 degrees in Detroit. Heck, yes, I'll do my brakes. That's kind of cool. Let's go do that.
So we saw some uptick in those categories. What we didn't see is the failures that happened because of the salt and the ice and the snow getting up underneath the car and causing failures with brakes and suspension parts, shocks and struts and all that kind of stuff. We didn't see those failures last basically Q3 of last year, and that continued on through Q4. So now let's look back just 3 months ago what's happened. December in the Midwest, it was very cold.
Chicago, Minneapolis, all those areas were very, very cold. You also saw the snow. I would also say kind of here, north, you also got a normal winter. It was cold. Boston, north, you got some snow.
Where you didn't see snow was in like New York City, Philly, D. C, those areas of the Mid Atlantic did saw still this year a very mild winter. So I think the Northeast or the Midwest should be normal. I think that there was enough there that you'll get the normal failures. What we don't know is in this area of the Mid Atlantic that normally would get snow and ice in a normal winter pattern, didn't get it, does 2 soft winters equal one normal winter?
And here's how I can get to that. And we don't know, we won't know the answer to this question until we get to May June. But if the car was going to break last year and didn't because you didn't get a harsh winter, right, so you got all the snow, etcetera. But you put another 15,000 miles on those same worn parts, do you then get the failure in the second softer winter? I think the answer to that is yes because the vehicle has another 15,000 miles on it, which is probably 15,000 additional miles is probably worse than 1 year's of salt.
And I think that's true. But we won't know that for sure until we get through June or July.
And it's a really good point. Have you seen instances maybe on a local market basis in the past where there's been 2 abnormally warm and dry winters and 2 bad winters equals a good season still?
Not in the last. I mean, I would say we haven't seen that scenario in the last 10 years. We saw this very similar scenario in 2013 where we got 1 year that was abnormal in a soft mild winter. But you went through a normal cycle the following year, and it was a pretty good year for us the following year. So again, the Midwest, I don't think, is going to be an issue.
It should go back to normal. We don't know about this New York, D. C, Charlotte, North, that kind of section of the country. It's a smaller section
of the country, so that's great. That's good news. I think the market has become accustomed to seeing AutoZone and some of the peers within this sector consistently grow 2%, 3%. In the last few quarters, it feels like it's been a little bit more of a struggle to get to some of those historic growth rates. Have we just been at this time of uniquely abnormal weather?
Or could there be other factors? Could Amazon be taking share? And that's really what we're starting to see. And then I'll have a few more follow ups on that.
I do. I do. I believe that right now in terms of the former is the answer that we have some unique occurrences going on where the industry has been impacted. Now to answer your question about sort of an online discussion, we have a couple of online only pure plays. We have auto anything and autozone.com.
What we find is our kind of customer really does prefer if given the choice to come to the store. And the BOPIS business for us is actually growing at a far faster clip than ship to home. The reason is a lot of our customers, well, the car is not working. They need to get back on the road. It's a do it yourself customer.
The niche is I've got to get going. I'm not an enthusiast. I don't have a second or third car up in the garage. I got to get moving. Now I would say the bigger impact that we've seen is just very unusual is a combination of quite mild weather and then, well, obviously, more recently, which was not perfect timing for AutoZone, this delay in income tax refunds.
But in general, the industry grows consistently. Everything sort of evens out. Michael, you've followed for a long time. If you average things, the industry grows about 3%, 4%. Some years, a little bit faster, some years, a little bit slower.
We're not as good when it's super fast and we're not as bad when it's a little bit slower. I think it all sort of averages itself out. And the reason that we're confident talking about the industry growth rate overall is the number of cars on the road and the miles driven continue to play to the industry's favor. There's a lot of cars, and they're built well, and they're able to stay on the road for a long time. So that allows us, I guess, it gives us some comfort to say, no, everything kind of reverts to the mean.
Some participants in the market
love to
really dig into this Amazon story. And the way they do it is say, well, if you think about the percentage of sales that come from customers who are Amazon Prime and are spending several larger ticket spend. And once you do that, you dimension down into such a small portion of your customer base. So by and Bill, what would be helpful is really give everyone a sense of who your customer is, how that stratifies because I think there's a lot of misperception out there on what how the consumer is coming in and especially on the DIY side, really engaging with AutoZone. So look at the DIY customer, and I'll start by saying what is Amazon good at,
kind of defining them. They're pretty good at offering a product overnight at a pretty good price. If you can save 10% by buying a TV that's $1,000 that's a pretty nice ticket change. That's $100 you could save, 10%, Get it overnight, big deal. They're not really good at returning parts.
Customers don't buy parts that they typically are going to return. If you bought a TV, odds are you've probably never taken it back. They also or they buy repetition. I'm going to get dog food once a month. Somebody I said 2 weeks earlier and somebody said that you must have a big dog.
But if you buy dog food or paper towels or whatever, it's repeat purchases, Amazon is pretty good at that. Let's talk about our customer. Our customer on the DIY side, those average ticket transactions are $25 and they typically have 2 pieces in the transaction. That's kind of what the transaction looks like. So if you're saving 10%, 15%, 20%, you're talking a couple of dollars on the transaction.
The bulk of the customers that shop with us, the bulk of the population is within 3 to 5 miles, 90 plus percent of the population in the U. S. Is within 3 to 5 miles of an auto zone. We've got 40 parking spots in front of our store. It's a 7,000 square foot box.
The customer can only shop in about 4,000 square feet of it. You can walk up to the parts counter, get somebody to help you diagnose your car, and you can have be done with the transaction in less than 5 to 10 minutes, and you're probably already passing us, taking your child to school or going to work. It's just a different customer. The customer that comes into our shop, in our stores, also, we're helping them with a lot of the transactions. Again, the return rates on DIY are pretty high.
There's Again, the return rates on DIY are pretty high. They're low double digit. Just people buy the wrong part, they don't know what they're buying, their car is making a noise, they think it's the shock and it comes out to be the control arm. They need help installing the parts. We've got 150 tools in the back of our stores that we will loan to a customer free of charge, helps them facilitate the job.
When you go to buy an alternator or a set of brakes or whatever, there's all these different things that you need to know to get the right part Tahoe. Is it a JV5, a JV9, a JV11 or a JV12 braking system? Our AutoZoners walk outside and help people determine what those are. Look at the alternator and say, okay, that's a 95 amp Bosch alternator or that's 110 amp Delco. We help people facilitate all those conversations and it's just it's very difficult to do that over the web.
Will Amazon figure some of that stuff out? Sure, probably. But it's a much different interaction. We do check engine lights. I can Amazon do very similar to Walmart.
We've been competing with Walmart in the automotive industry for 30 years. At the end of the day, Walmart sells a lot of the product that we sell in the front of our stores at a cheaper price. Go shop them. You're going to find some pretty big savings. Light bulbs are a good example.
We sell a light bulb the exact same brand. They can be substantially cheaper than we are, but we offer a differentiated product. You'd be amazed at the share we have on light bulbs because we help people install them, we help them get the right one, we get them the bulb grease, we tell them how to install it. Where we don't have great share is where we don't differentiate, where it's hard to do that. A good example is windshield washer fluid.
We really don't add a whole lot of value other than maybe we can help somebody pour it in, but it doesn't there's not a whole lot of light that's needed. We don't we can't add anything any value to washer fluid. The bulk of our products we do though. They got to have a core, on an alternator or a starter or a CV shaft. Those transactions are tough.
We take back used oil. Some of these products can't be put on a plane because of aerosols and things like that. So it's just a different customer and it's a tougher transaction.
And building on your insight from competing with Walmart for many, many years, have you seen any pressure on pricing or margins within more of those commodity categories where there might be some overlap? And can you use that as a basis to say, hey, this is an area where there could be some margin pressure or pricing pressure within our business because of some of the online players over time.
Yes, I think there are. We Brian was talking about this earlier today with one of the groups. We've segmented our categories where are we the most risk and where do we have less risk and because we aren't able to differentiate on a product. Again, we're paying attention to them. We don't have our head in the sand in this one.
We will watch what they do, but we have a differentiated model. We've stood on that for 30 plus years. It's helped us across all of our segments, and we'll continue that. And if we've got to be sharp to picer on some items where we don't differentiate the product, we're probably already there because some of those other categories were playing with other people that have the same type of value proposition. And a lot of the products where they where we don't differentiate, that's not necessarily the purchase, the purpose of the purchase at the store level.
They're picking up those products because they're already there for something else, I. E, accessories or air fresheners. We don't differentiate there, but that's not the purpose of the visit. It's an ancillary purchase as they're there in the store.
And we're lucky to still have Phil with us today because the future of AutoZone is on Phil's shoulders because it's going to be in part driven by the commercial business. And Phil is in charge of the commercial business. So AutoZone has put a lot of effort into building its capabilities, its service, its perception within the commercial business over time. If you had to rate and because those three elements are important, inventory availability, service level and perception as a provider of commercial to commercial customers, how would you rate each one of those as far as how far along you are to where you need to be?
That's interesting. So I would say based on the fact that we have 3% share in the commercial market space, I feel like we have opportunities in all of them. One of our biggest initiatives is the mega hubs, which forward places inventory closer to another let me back up a second. Average store has got about 20,000 SKUs in it. We have hub stores, we got 180 plus of those.
They have about 50,000 SKUs, and then a mega hub has about 100,000 SKUs. So we have 13 of those mega hubs that are open today. Those are a big help to commercial. They take that slower turning merchandise and move it closer to the customer. We have frequency at which we visit our stores with the trucks that are going on a route system to those stores.
It takes that inventory, gets it in the hands of the commercial customer faster. By the way, it helps DIY as well. We don't have enough of those today. We have 13. We've said that we want somewhere between 2540.
We're probably closer to the 40. If I had my pick, I'd put 40 of them. I'd put 1 in every major metropolitan city across the U. S. It just takes time to do that.
It's a tough transaction to figure to get the right retail space, the right cost and right location for those stores so that you get them close to the network of roads to get quickly to our stores. So I'd say we're we have an opportunity there. That's probably our biggest opportunity, and we're growing that pretty quickly. Another thing that we've talked about from a commercial perspective is as we've grown the commercial business, we've relied on our sales team, the outside sales folks, to grow the majority of that business. What we're working on today is making sure that our store managers and our district managers are as intertwined in that transaction with the customers.
We've got our district managers now visiting commercial shops with TSMs and without the TSMs to build those relationships, to make sure that if you do lose somebody or you transfer somebody or promote somebody, you don't have a drop off in sales. So we are integrating more of the operations teams with the sales teams, and that will build us a better structure going forward. And then brand is another piece where we're working. We've done a lot of work with our sales team to make sure that they have the appropriate leverage to sell the Duralatch product into the commercial customer shops, make sure they understand the brand, the quality. We spent a lot of years making sure that, that quality is commensurate with other national brands that are out there.
We feel like we're in a really good spot, but you got to tell that story. So where are we? We have legs of growth in all three of those things that you said. Again, we have 3% share. If I was sitting at 9% or 10%, I'd feel differently, but we can grow in all of those.
It just takes time.
Yes. And along those lines, it's also a bit of a balance because you're making investments, maybe sacrificing some margin. The company has been open about the drag on profitability that's required when making some of these investments. So shrink was up a bit in the most recent quarter, gross margin was down. Is it worth sacrificing some gross margin because of some of those outcomes over the next couple of years to become more relevant in the commercial side of the market?
Yes. So our commercial business by in and of itself is pretty profitable. At the end of the day, it does not have the margin rate that the DIY business does. But at the end of the day, if I can grow GP and EBIT dollars, that's a good story for us. So yes, as commercial grows as a percentage of the volume, it will put pressure on rate.
Historically, we've been able to slightly offset that by better purchasing or direct import or various other tactics to change the margin rate. So even in that case, I'm not so sure it's going to delever at a massive rate. It will kind of be on the margins, I think.
And there's a the story goes that as cars become more complex, more computerized, less mechanical, it's hard to do any repair yourself. The DIY business is going to see customers migrate out of that side of the market into the DIFM side of the market. As you see it, is it a continued gradual movement? Or do we reach a critical mass in the vehicle population, the nature of the consumer population, where it just a flood starts? And you want to be there because you got to you're going to be able to capture your fair share of that flood.
It's kind of funny. I've been selling I started selling auto parts when I was 16 years old, went through high school and college selling auto parts. And I can remember back in the late '80s, everybody said, Golly, this electronic ignition is just going to kill the industry. And I remember standing on a parts counter going, golly, customers just don't understand this electronic ignition. We've been through 2 different types of ignition cycles at this point.
People repair the DIYer repairs their car because of economic necessity. That's been true. It's funny. Bill Rhodes has even read articles how many times of articles that were written in the 'eight, literally 190 8 of the death of the DIY or 19 50
That's when Brian started. Yes, that's when Brian started.
1950, the death of the DIY or because they can't work on this type of vehicle. And it just has not manifested itself. People if your car is broken and you don't have 3x or 4x the money to take your car to a shop, you're going to find a way to do it yourself. It is amazing. Google will help you fix just about anything, if you'll take the time and figure it out.
So as things have become harder to do, some a lot of the stuff that's happened on a vehicle where before you kind of had to understand that if a car did this, it's probably this, this and that. Today, most of the time, it's a failure and you replace the part. You don't have to do a lot of diagnosis. We frankly help people with that. They bring their car to us.
We can plug it in and generally tell them what's wrong. So in some aspects, it's become easier. The DIY debt has been forecast since the turn of the century, and I mean the 1900s. And
along these lines, we just got a question about Tesla and electrics. Presumably, your answer would be the same that while electrics will comprise a greater percentage of the vehicle population over the long run, in the foreseeable future, it's not going to
have an impact on the aftermarket? Yes. Well, so and even take an electric vehicle, electric vehicle still has a lot of the components on electric vehicle are the same. It still has a braking system. It still has a charging system.
It still has a suspension system. All those things are still going to fail. As you put all this technology in a car, things are still going to fail. And what generally happens is those failures become more expensive. And I would the percentage of electric vehicles in the vehicle population, it's been 3% or 4% of the cars that have been made annually, even in 2,009 or whatever it was when they had the rebate on vehicles.
It jumped, I think, to 5 of the vehicles made in that particular year. There's 260 plus 1,000,000 vehicles. It's going to take a long time for them to even get to 10% of the vehicle makeup. If you ask Ford and Toyota and all of those companies today that are manufacturing vehicles, they themselves do not see electric vehicles being a big chunk of their the vehicle population that they produce. Tesla is going to do what, 150 cars, 150,000 cars, 200,000 cars?
It's not a big percentage of the fleet. It's just not going to be.
It goes in the loop on the commercial conversation. What have been the common attributes in those stores where you have seen success? You've rolled out the increased frequency of delivery. You've rolled out some of the service elements in those stores that may not have seen as much success.
I would say where we see the boat success is where you see all of those pieces coming together. We've got a good outside sales team. We have the best inventory assortments together. We've got a store manager that is involved and a district manager that's involved. When we get that, we see pretty good growth.
Yes, I mean really good growth.
And on the competitive landscape from your some of your more traditional competitors, have you noticed any changes in our pricing or availability that have interfered with your ability to penetrate the market? We've gotten a lot
of questions about Advanced Auto Parts in particular. They said a lot of different things. At the end of the day, the industry has been fairly rational. We haven't seen people do a lot of irrational things. We haven't seen crazy pricing.
A lot of that stuff hasn't necessarily manifested itself on the street where we've seen a significant increase in somebody trying to hire our people or the ability to go hire people easier. Those things haven't really happened. So I'd say it's pretty steady as she goes at this point. Nothing that I see that this train is coming down the track and we got to look for it.
One issue that the industry has been burdened with for the last few years is the lack of inflation. Given the incredible pricing power of the aftermarket, it's been a key element of the equation that's been missing. So are you seeing any signs, especially with base metals, the price of base metals starting to bounce off
the bottom, oil's up from where it's
a year ago. Are you hearing any signs from vendors or in the stores that inflation is going to come back? And how quickly does it tend to materialize? Like, if it's going to be a second half story, would you know about it now? Yes.
I would say there hasn't been giant rumblings of cost, base cost and raw materials coming through. We did see that back in I was in merchandising back in 2007, 'eight, 'nine, 'six, 'seven and 'eight, I guess, when you saw oil going through the roof and steel going through the roof, plastic costs were going up because of the oil and all that stuff. That came through pretty quick, and we were negotiating against that a lot. That's not happening right now. Steel has come up a couple of different times, and I think what you're who knows what's really happening.
But steel is generally bought in Australia, and it's moved to China. It's manufactured in China. So you have this the raw material cost maybe going up there, but then we buy that product in U. S. Dollars, which is strengthening.
So you probably have an offset of the 2. So yes, steel may be going up, but it may not manifest itself here in the U. S. Because of the strengthening dollar. So at this point, it's not coming through.
And Bill Rose was pretty open, your CEO, about the possibility
of a Board attack. He's been very vocal in some of the efforts to educate our key constituents on what the prospects of that might mean. How much contingency planning is being done by AutoZone to be prepared for that? You can take this one. Yes.
Ryan just woke up. There's not a lot
you can do. I mean at the end of the day, the products that we buy directly under the proposed law, our state is not being deductible going forward. So that portion the law is stated as resetting the ETR lower, the effective tax rate, but then adding in or layering in this additional lack of deductible product. Our position obviously is with a limited supply of goods being able to be purchased from the U. S, our position is we would buy it locally if we could.
So our position is we will deal with it. We want to do the right things for the American consumer and for the government. We understand the challenges that are at hand. But at this moment, we're not a proponent of the bat tax. But again, we're not a huge direct importer and even indirect.
We're probably a little less than some retailers. But if anything, it runs the risk of being inflationary to the consumer because it would most likely cause retail prices to have to go up for that aspect.
Brian, I think part of the reason why you stayed so busy is because the company has purchased at least 4% to 5% of its shares per year for a long time. Would you consider other ways to return capital to shareholders, maybe open up the shareholders set to those who focus on dividend perhaps? Every year,
we look at the math behind it. Up to this point, we have felt that from a return on capital basis and impact on shareholders that buybacks have been more valuable. But obviously, depending upon and variable to the stock price, we would consider that. Again, to this point, we have not entertained it, but we fully appreciate what that 2 on our 2 box could represent. Just at this point, we have said no to it, but anything is possible.
Is that because you want to keep the flexibility as you're concerned that businesses enjoy wonderful operating margins over the long run? So should the market interpret it that maybe you don't feel as confident about your ability to sustain operating margins over the long run?
Or You're just flipping that in there by the way.
Yes, that was that's a big ball, but it's
what they call a big finish. Yes, big finish. We're running over now. I would tell you that for us, we've continuously felt that the value on a multiple basis has represented a good return for the shareholders. We felt like by buying back shares, it has only benefited those that have remained shareholders to hold their stock.
Our position has been that if investors are interested in dividends, we encourage folks to be opportunistic and sell a share, for example, and generate their own return through sale and a capital gain on the tax for that share. But again, it's sort of a virtuous circle. By buying back shares, the power to the earnings per share model is retained within the business entity as opposed to cash leaving that circle and going to another's pocket. But we totally understand the value proposition and look at it all the time. We just, at this point, felt that buybacks have mattered a little more than dividend.
It's always enjoyable to hear
from the team at AutoZone, especially the pledge which you started off. So thank you so much. Please join me in appreciating and thanking the AutoZone team for their time today. And
thank you for being