Good afternoon, everyone. I'm Michael Lasser, the hardline/broadline retail analyst from UBS. We're super excited to have with us the team from AutoZone. 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 Daniele, 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 hear some prepared remarks, 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. Daniele, I promise we'll be fast. We'll take questions after that. Nice to see everyone today. It's been a busy day. It stopped raining. That's nice. Without further ado, AutoZone. We have the 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 large get-together and meeting with its pledge and a cheer. These four lines were written in 1986 that prosper how we come to market, how we take care of stores, how we take care of customers, whatever it takes to help the customer, that's the theme of these four lines. We want to make sure that customers are first, that's the first line.
It's on purpose. If you show up at 9:00, 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, 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
thousands of letters, that's the customer service aspect of the business. The company overview. We have a whole bunch of stores. We have 5,846 stores across the U.S., Mexico, and Brazil. We have a group of stores or branches called IMC, Interamerican Motor Corporation. They sell primary or Tier 1 branded auto parts for a total of 5,800 stores. We hope to eclipse 6,000 this fiscal year. We'll see if we can get there. We have eight domestic distribution centers. We also have two facilities in Mexico, distribution centers. We have a whole bunch of AutoZoner employees, 84,000-plus across our chain. Trailing four quarters, we're just about at $11 billion 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 billion 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, I'll have one more minute, on this slide. This is just the industry that we're in, and we tried to mix it up, Michael, to keep you honest.
Keep it fresh.
Yeah, keep it fresh.
Really exciting presentation.
We're keeping this fresh, yes. Fresh shows how many auto parts stores there are in the U.S. There are 36,500 stores across the U.S. 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 four players, they're all publicly traded, have 20,000 or 57% of this mix. The reason we created this slide was to show you that there's a whole bunch of independents, one, two down. It slowly but surely has been declining. They've been closing. 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%.
Net net on the bars on the bottom, it shows the industry and square footage isn't really growing, but on the other page, if you guys remember, the industry is growing in revenues 3%. It's allowing productivity per box to increase, which is a good sign for the industry. I'll jump through quickly, and I promise I'll be fast while we're here. The EBIT growth, very steady, 7%-8% EBIT growth, depending upon the years, 10, five, or three 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, that's helping earnings per share grow in a double-digit range. This is our second quarter. We reported last week. It seems like months and months ago. The second quarter was busy for us, to say the least.
We did quite well through nine weeks and not as well the last three weeks. Our sales results were tepid, in fact, down six-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, while they do earn income tax credits or additional child tax credits, those revenues were not in the marketplace, we slowed materially from a two-plus% comp, that led to 1% revenue growth. Diluted earnings per share was up 9%. 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 three weeks of performance. You can see year-to-date, these are sort of lower seasons for us.
The spring and the summer are bigger, 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 have lots of questions. Commercial, we're doing $2 billion in commercial. We had a solid number in the second quarter for revenue growth. We've got 7%. Trailing four quarters is six. Commercial sales, it's a good trend. In fact, 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, 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 gonna go up to 20-30 stores in Brazil. We're in and around São Paulo today. We like the market. It's tricky to do business there, hard to move merchandise around, but we like the potential for that market. Digital integration, we have an ALLDATA product, autoanything.com website, and we also have autozone.com. Last slide, and we're done. Who we are.
We plan on growing sales is first and foremost, 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 years. Thank you for your time.
Well, thank you so much for that informative presentation, Brian. We really appreciate it. We're gonna start the Q&A portion. If you do have questions, we've got the CrowdMics app. Please submit them, and we'll weave them into our conversation. I wanna 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 gonna influence whether or not you get all of the money that potentially wasn't there in your most recent quarter back? At what point will you have a sense of that?
I'll back up. Make sure I take this one.
All of that?
It's come up a lot today.
It has come up a lot. We've talked about it a lot. The tax refunds, Brian mentioned how our comps were going through December, January, February. The last three weeks were pretty tough. You described it as bad, worse, and worse in the last three weeks sequentially. The 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 billion day or a $10 billion day." We can see it. Then we generally find out the day after what was actually released. 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 generally know it's going to happen one of the last three weeks. In this case, it didn't happen at all. It pushed outside of this quarter. We get the question. It's a pretty exacerbated spike for DIY. The same type of thing happens in commercial. It's just muted. Commercial generally is a week in arrears and not quite the same ramp, it does happen on both sides. The question that we've also gotten is, do you get it back plus the comp that you would normally get in this quarter? We'd like to say yes, we think we will, 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 fix it. If they have the incremental money, hopefully they'll spend it on their car, ultimately, we won't know that for several weeks still to come.
What categories, what jobs are being impacted by this? Is it that someone's muffler has been so noisy for the last six months, they get the tax refund, then they actually do it? Is it even more discretionary than that?
Yeah.
How do you see it showing up on a category basis?
The failure business is if a car is down, in other words, the starter's broken and the car won't start. That's not as deferrable because if the car's broken down, they don't wait to get a check and figure out to 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 end. You can drive around with a tie rod end that's loose. Eventually, it's gonna break. When it breaks, you got to fix it. If it's loose, can I wait another couple of weeks till I get my tax refund? Yeah. 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. It's also the big purchase.
I got to replace an engine.
Yeah. 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. The winter season started out encouraging with a cold December, 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?
Yeah, I'll take this one. You got the next one. I'll take you through winter, I'll go all the way back to last year. How do you get this? Last year, 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 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, yeah, I'll do my brakes. That's kind of cool. Let's go do that. 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. You didn't see those failures last basically Q3 of last year. That continued on through Q4. Now let's look back just three 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 New York City, Philly, D.C. Those areas of the Mid-Atlantic saw still this year a very mild winter. I think 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 two soft winters equal one normal winter? Here's how I can get to that. We don't know. We won't know the answer to this question until we get to May and June. If the car was going to break last year and didn't because you didn't get a harsh winter, so you got all the snow, et cetera, 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.
Yeah.
Because the vehicle has another 15,000 miles on it, which is probably 15,000 additional miles is probably worse than one years of salt. I think that's true, but we won't know that for sure until we get through June or July.
It's a really good point. Have you seen instances maybe on a local market basis in the past where there's been two abnormally warm and dry winters and two bad winters equals a good season still?
Not in the last 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 one year that was abnormal.
Yeah.
You went through a normal cycle the following year, and it was a pretty good year for us the following year. 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 subsection of the country, that's great. That's good news.
I think the market had become accustomed to seeing AutoZone and some of the peers within the 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? Then I'll have a few more follow-ups on that.
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. To answer your question about sort of an online discussion, we have a couple of online-only pure plays. We have AutoAnything and autozone.com. What we find is our kind of customer really does prefer, if given the choice, to come to the store. The BOPUS 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's 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.
I would say the bigger impact that we've seen that's just very unusual is a combination of quite mild weather, then, obviously more recently, which was not perfect timing for AutoZone, this delay in income tax refunds. In general, the industry grows consistently. Everything sort of evens out. Michael, you follow 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. 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. That allows us, I guess, or 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, a larger ticket spend, and once you do that, you dimension down into such a small portion of your customer base. Brian and Phil, 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 how the consumer's coming in, and especially on the DIY side, really engaging with AutoZone.
Look at the DIY customer. 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. Or they buy repetition. I'm going to get dog food once a month. I said two weeks earlier, and somebody said that you must have a big dog. If you buy dog food or paper towels or whatever, it's repeat purchases. Amazon's 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 two pieces in the transaction. That's kind of what the transaction looks like. If you're saving 10%, 15%, 20%, you're talking a couple of dollars on the transaction. The bulk of the population is within three to five miles. 90%-plus of the population in the U.S. is within three to five miles of an AutoZone. 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 be done with a transaction in less than five 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. They're low double digit. Just people buy the wrong part. They don't know what they're buying. Their car's 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 JB 5, a JB 9, a JB 11, or a JB 12 braking system?
Our AutoZoners walk outside and help people determine what those are. They look at the alternator and say, "Okay, that's a 95-amp Bosch alternator, or that's 110-amp ACDelco." We help people facilitate all those conversations. It's very difficult to do that over the web. Will Amazon figure some of that stuff out? Sure, probably. It's a much different interaction. We do check engine lights. I akin Amazon to 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.
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 there's not a whole lot of life that's needed. We can't add 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. It's just a different customer, and it's a tougher transaction.
Building on your insights 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? 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?
Yeah, I think there are. 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? 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. If we've got to be sharp pricer on some items where we don't differentiate the product, we're probably already there because some of those other categories we're playing with other people that have the same type of value proposition.
A lot of the products where we don't differentiate, that's not necessarily 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.
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. AutoZone's put a lot of effort into building its capabilities, its service, its perception within the commercial business over time. If you had to rate, because those three elements are important, inventory availability, service levels, and perception as a provider 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. 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. Let me back up a second. Our average store's 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. 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 25 and 40. We're probably closer to the 40. If I had my pick, I'd put 40 of them. I'd put one 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. I'd say 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. We are integrating more of the operations teams with the sales teams, and that'll build us a better structure going forward. 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 Duralast product into the commercial customer shops, make sure they understand the brand, the quality. We've spent a lot of years making sure that that quality is commensurate with the other national brands that are out there. We feel like we're in a really good spot, but you got to go tell that story. 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.
Along those lines, it's also a bit of a balance because you're making investments, maybe sacrificing some margin. The company's been open about the drag on profitability that's required when making some of these investments. 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?
Yeah. Our commercial business by and of itself is pretty profitable.
At the end of the day, it does not have the margin rate that the DIY business does. At the end of the day, if we can grow GP and EBIT dollars, that's a good story for us. Yeah, 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. Even in that case, I'm not so sure it's going to de-lever at a massive rate. It'll kind of be on the margins, I think.
The story goes that as cars become more complex, more computerized, less mechanical, it's harder 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're going to be able to capture your fair share of that flood?
It's kind of funny. I started selling auto parts when I was 16 years old, went through high school and college selling auto parts. I can remember back in the late '80s, everybody said, "Golly, this electronic ignition is just going to kill the industry." I remember standing on a parts counter going, "Golly, our 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 '08, literally 1908, of the death of the DIYer, 1950-
That's when Brian started.
Yeah. That's when Brian started. 1950, the death of the DIYer because they can't work on this type of vehicle. It just has not manifested itself. If your car is broken and you don't have 3 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. As things have become harder to do, 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, 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. In some aspects, it's become easier. The DIY death has been forecast since the turn of the century, and I mean the 1900s.
Along these lines.
It just hasn't manifested itself.
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 % of the vehicle population over the long run, in the foreseeable future, it's not going to have an impact on the aftermarket.
Yeah. Even take an electric vehicle. A lot of the components on an electric vehicle are the same. 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. What generally happens is those failures become more expensive.
Yeah.
I would, the percentage of the electric vehicles in the vehicle population, it's been 3% or 4% of the cars that have been made annually. Even in 2009 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 million 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 the vehicle population that they produce. Tesla's going to do what, 150,000 cars, 200,000 cars? It's not a big percentage of the fleet. It's just not going to be.
Closing 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 had seen as much success.
I would say where we see the most 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's involved and a district manager that's involved. When we get that, we see pretty good growth. Yeah. I mean, really good growth.
On the competitive landscape from some of your more traditional competitors, have you noticed any changes in pricing or availability that have interfered with your ability to penetrate the market?
We've gotten a lot of questions about Advance Auto Parts in particular. They've said a lot of different things. At the end of the day, the industry's 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. 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.
One issue that the industry has been burdened with for the last few years is a lack of inflation. Given the incredible pricing power of the aftermarket, it's been a key element of the equation that's been missing. 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's going to come back, and how quickly does it tend to materialize? If it's going to be a second-half story, would you know about it now?
Yeah, I would say there hasn't been giant rumblings of base costs and raw materials coming through. When we did see that back in, I was in merchandising back in 2007, 2008, 2009. 2006, 2007, and 2008, I guess, when you saw oil going through the roof and steel going through the roof. Plastic costs were going up because of 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, who knows what's really happening, but steel is generally bought in Australia, and it's moved to China. It's manufactured in China. You have the raw material cost may be going up there. We buy that product in USD, which is strengthening, so you probably have an offset of the two.
Yeah, steel may be going up, but it may not manifest itself here in the U.S. because of the strengthening dollar. At this point, it's not coming through.
Bill Rhodes was pretty open, your CEO, about the possibility of a border tax. 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.
Yeah.
Brian 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 are stated as not being deductible going forward. That portion, the law has stated it's 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. 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.
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 stay so busy is because the company's purchased at least 4%-5% of its shares per year for a long time. Would you consider other ways to return capital to shareholders, maybe open up the shareholder set to those who focus on dividends, 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. Obviously, depending upon and variable to the stock price, we would consider that. Again, to this point, we have not entertained it, we fully appreciate what that tool in our toolbox could represent. Just at this point, we have said no to it, anything's possible.
Is that because you want to keep the flexibility, as you're concerned that businesses enjoyed wonderful operating margins over the long run, should the market interpret it that maybe you don't feel as confident about your ability to sustain operating margins over the long run?
You're slipping that in there, Brian.
Yeah.
Softball
This is what they call a big finish.
Yeah, big finish.
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 a sale and a capital gain on the tax for that share. Again, it's sort of a virtuous circle. By buying back shares, the power of the earnings per share model is retained within the business entity as opposed to cash leaving that circle and going to another's pocket. We totally understand the value proposition and look at it all the time.
We've just, at this point, felt that buybacks have mattered a little more than dividends.
It's always enjoyable to hear from the team at AutoZone, especially the pledge which you started off. Thank you so much. Please join me in appreciating and thanking the AutoZone team for their time today.
Thank you for being here.