Good morning. Welcome and thank you for attending the 14th Annual Oppenheimer Consumer Conference here in Boston. My name is Brian Nagel. I am the hardlines analyst at Oppenheimer. I'm very pleased to introduce our next presenting company AutoZone.
Before I turn the podium over to Brian Campbell from AutoZone, I thought I'd just make a couple of quick comments. I followed AutoZone now for a number of years. I think most people in this room would agree that AutoZone really has been the model for a lot of other retailers. This company was early to figure out that. It made a lot of sense and drove a lot of share gains to focus on cost controls, excess cash and then using that cash to aggressively buy back the stock.
The company is very much the leader in the aftermarket auto parts business with both the DIY and then they're growing out their commercial business as well. So we very much view AutoZone as, like I said, the model for other retailers and one of the best run companies in the hardlines retail sector. So with that, I'm going to turn it over to Brian Campbell.
Good morning, everyone. I want to introduce the gentleman that's with me this morning, Charlie Ples, who I have known for many years, 15 plus years at AutoZone. He has been with AutoZone probably 20 plus years and its predecessor company we were talking this morning, being in grocery wholesale. We came from another publicly traded chain called Malone and Hyde many years ago that was associated with Piggly Wiggly grocery stores. That's our predecessor company.
It's funny to talk about that. But many years have gone by. Charlie is the Senior Vice President of AutoZone. He is the Controller and he's also in charge of planning. So a lot of the initiatives that you hear our company talk about run through his group.
So without further ado, why don't we talk a little bit about AutoZone and what we're up to and then answer your questions. It will just be free flowing. You guys hear a lot of presentations about companies. Hopefully, what we're doing is no big surprise to many, but we're trying to keep it interesting and to keep it interesting and trying to focus on our growth initiatives and we're excited about what we're here to talk about this morning. So we're interested in hearing what you folks are thinking as well in this marketplace.
The theme creating customers for life, that is our initiative this year. Every year we have a new slogan, a new theme. It's always around customers. So don't be surprised next fiscal year when we start, it'll have something to do with customers. It'll be a little twig on that niche, but we're all about customer service.
That's what we talk about internally and focusing on helping people every day. Forward looking statement. We just in the last couple of weeks reported our earnings for the 3rd fiscal quarter. Our quarter ended in early May. The quarter that we're in right now is 100 years long, kind of jokingly saying that's a 16 week quarter.
So we won't again report our numbers until the end of September, Bert. But we'll update you here this morning a little bit on what we did present. Before I do that, it's important to talk about our pledge statement. AutoZone has a pledge that and a cheer that goes along with it that at every corporate meeting and every internal meeting, we start off with that verbiage. And you've probably heard it if you ever visit us in person at the corporate office, the tourist support center, you'll hear this cheer.
And we live by this mandate, helping customers, having the right products at the right price and making sure that our stores look great. So this initiative, everyone knows it. And this is really the mantra that all auto owners live by. All right. Here's our fiscal Q3.
Kind of to summarize, you're going to see the quarter and the year look very similar, guys. Our sales grew 6%. We did have an improvement in gross margin, up 17 basis points. We delevered operating expenses and therefore it flowed through to delever operating margin. We have a high operating margin in retail at 20%.
You'll see our net income growth at 7%. You'll see diluted share count, we were about 8% lower than last year. So we were up 16% for the quarter. And that looks very similar guys to year to date for 3 quarters. Sales were up 6%.
Gross margin was up 15%. We delevered year to date operating expenses. We can talk a little about that or I encourage you guys to ask questions about what are you doing there? What are your initiatives to have some deleverage? Operating margin was down there for 11 basis points.
But coincidentally or not so coincidentally, net income growth was similar 8% up. The diluted share count was down 8% and we grew 17%. Just to conceptualize, last week we did a press release reauthorizing share buybacks. We bought $14,000,000,000 worth of stock over the last decade. We have a $17,000,000,000 market cap.
Maybe when it wasn't so in vogue, in 1998, we initiated a share buyback program. We had a little over 160,000,000 shares. Today, we have a diluted share count of 34,000,000 on a year to date basis. So part of our model is to grow net income. That is our operating capital structure model.
Net income at mid single digit range, buyback shares that gives us 5 to high single digit diluted share count reductions to have a flow through of EPS of mid teen rate without a lot of volatility, knock on wood. That's the model. We also utilize leverage. You'll see that here in a second, but we target a stable BBBBA2 rating with Moody's and Standard and Poor's. So on retail, let me just jump to that real quickly.
This is AutoZone. We have 4,900 domestic stores. We have 370 plus Mexico stores. We have 5,300 stores overall. We have 4 stores in Brazil.
So if you guys are World Cup watchers, Charlie and I were joking. We said that Mexico played Brazil the other day in a soccer match to a draw and we noticed it. The whole country everybody goes crazy with soccer and it played to a draw. So both countries and management teams were crazy fanatical for that game. And here's our story.
We have we're the largest we're tied basically for the largest auto parts number chain out there with a couple other players in our space. Our commercial model, we're talking about that, some of that deleverage we talked about on SG and A. We're growing this business. We have 3,700 of the 5,000 odd stores have a commercial desk in them. What that means is we're taking phone calls and delivering auto parts to garages.
We sell about $1,600,000,000 worth of the $9,000,000,000 in sales a year we do coming from this business. This is a growth vehicle for us. We're doing a lot of initiatives, a lot of expenditures, a lot of investment in this side of the business. This is our cash flow. You'll see that we have an EBITDA number north of basically $2,000,000,000 We have $4,000,000,000 of debt.
Here's our buyback math. We bought back $900,000,000 year to date in stock versus $827,000,000 last year, very consistent year over year. Here's our balance sheet. Our inventory has been a big initiative for us. Our inventory is up year over year 9% on a per store basis.
Inventory is up 12%. So that's some of the projects that we're working on. And last but not least, these are our initiatives for initiatives for growth. Who are we? We constantly focus on being 1st and foremost a retailer, helping folks that walk in with their service needs.
How can we help you? What are folks working on every day? Our AutoZoners ask. And then we're focused on growing commercial. And lastly, international profit growth, big focus on CentralSouth America for us.
And then lastly, management on cost initiatives. So that's our company. And hopefully you guys are interested in asking some questions. And without further ado, Charlie and I can answer them. Thank you.
Right, Charlie, maybe I'll start it off. I'll start it off with some bigger picture questions. But I think right now our capacitors are 2 bigger things on what others want. 1 competition over the past few quarters, several quarters. And how should we think about that basically going forward?
So competition, I think the competition has always been healthy in this space, continues to be. There's from our perspective, hasn't been a significant change in the landscape. All the players in that space in our space tend to be fairly rational as far as pricing is concerned, and that's good for the business as well.
And the weather, it is nice. And I know that Boston, coincidentally has had a very difficult winter. So I feel for folks that are natives up here, but that's good for our industry, especially if cold weather beats up roads. I don't mean to be tongue in cheek about it, but when people bounce through potholes, it damages under cars or vehicles. So our hope is that there will be a tail associated with those that cold weather.
Last quarter, we did benefit and we talked about on our conference call, the benefits in the cold weather markets of that having a benefit for us. I mean, there's pushes and pulls on all this stuff. But in general, we've been pretty consistent for the last, I guess, 24 weeks reported. We've basically run a 4 comp as a retailer. So hopefully, does that mean we can continue that?
No guarantee. So what we're hoping to do is keep benefiting from sort of weather swings. I'll tell you that the industry will benefit if it gets hot. So we hope that the weather will continue in that trend.
Question there in the back.
Can you talk about the off-site of aging of the auto fleet? And number 1, how much further you think you can go? And number 2, what sort of a tailwind that's meant for your business?
Off-site, yes. I want to make sure you could repeat that off-site fleet?
The aging of the auto fleet.
The aging of the auto fleet.
I'll kind of go to the crux of that. There's 2 different angles on it. Starting in 2,009, the United States there were less vehicles sold than normal. You heard about 17,000,000 vehicles sold in the U. S.
And 'seven and 'eight and then there was a dip. So in 2,009, 'ten, 'eleven less vehicles were sold. Around 10,000,000 fewer vehicles across those 3 years cumulatively were not sold. As fewer of those vehicles are moving through the pipeline out of warranty, we're asked oftentimes, hey, will that hurt you? That won't help us, to be blunt.
But what's benefited our industry is a lot of the old ones have remained, most of them in fact have remained on the road. Last year there was an uptick in units sold and it flowed through to more registered vehicles. Last year, there were over 252,000,000 vehicles registered instead of just the 250,000,000. So the incremental 2,000,000 we got back up to 15 +1000000 vehicles remain in the marketplace. People are flipping vehicles, selling used cars, and it's benefiting.
We are repairing and customers are repairing older cars. So what does it mean? There's a few less new ones, a few more old ones. And beneficially speaking, it's sort
of been a push
at this point.
It's not been
a thesis for us. Speaking, it's sort of been a push at this point. It's not been a thesis for us in talking about the health of the industry. And you've seen the life extend for those
what used to be 7 year old vehicles and sweet spas shifting between 7 10 years.
Yes. And what we the label we talked about OKV was 7 years and older. And 7 years, if you think about most Americans drive 12,000 to 15,000 miles a year. So at 7 years, you basically hit 100,000 miles on your car. And that means it's an older vehicle and you're working on stuff and tooling around your car.
The age life cycle has stretched out. We still like 7 years and older. That's a sweet spot. People are still working on their car. But there's absolutely no doubt about it that the camel, the bell curve of repairs continues to elongate, stretch out.
And the sweet spot isn't just 7 years at the pump, but past that.
People are keeping them longer and the family unit is now growing as far as number of vehicles per family. So those older vehicles are coming not only just going away from them, but going to the young ones. So you see that life extending. In
the commercial space, we
have a
little bit of a it's a priority in that market space. We have kind of a
of services?
So we kind of think about it in 2 different forms like national accounts is 1. And that was the chain, I think, you referred to at the end. And then what we call up and down the street customers, which are the independents. And both are very important to us. And we service those customers equally through our process would really the focus on getting the parts there that they need in a timely fashion.
The mix of our business is predominantly the independents. It's well more than a majority of the business. How we focus isn't so much one particular type of customer, it's around the program itself. So we really are driving around a store and saying who's there and really trying to get the bigger accounts. Basically guys that have bigger garages and more cars moving in and out.
So we're agnostic, I guess, to which type of customer. But the fact is we are a majority independent.
And you're really focused around the proximity of the store and all of those shops that are within proximity of the store. So it could be that your majority around that locations independence and if it is that's who we're servicing.
Well, we want to grow. There's not a ratio of our mix of business that we're focused on, but we were showing up here on one of the slides a 1,000,000,000 600,000,000 in sales. And there is a productivity gap from ourselves to the industry leader in this space on a per program basis or in absolute sales. We're also pretty new at it. We're a chain that established a sales force in 2007.
The industry leader has been doing it for 80 years. So as we've matured and gone out and called on customers, it's street by street and store by store, we would expect to improve on that productivity gap. A measuring stick is the highest productive player out there. We would look at them as being probably 40% more productive than we are today on a per program basis. But we also understand that it takes a little time and there's a ramp associated with it.
So some of those inventory initiatives are there to help us to close that gap. Okay. Thank you. We absolutely think about it. It's debated internally, but at this point, the answer is no.
We look at the buyback strategy as being a consistent strategy. If we were inconsistent or a one time buyback or that would be fair. What we've tried to articulate our strategy in buyback is it's the most cost conscientious. It has EPS ramifications that compound that benefit us. We believe and we're so consistent we almost look at the buyback to say if folks really need a dividend, we would encourage peeling back a share or 2 and creating your own dividend.
But at this point, the cost benefit on accretion math says we're still benefiting from buyback over dividend. But we do rerun the math internally. But at this point, the buyback is still the primary strategy.
Brian, how should we think of it as I jump in there for some of the buyback? And you mentioned the numbers when you're prepared going down to 34,000,000 shares. Maybe a bit of an unfair question, but what's the end game? Next year, there will be a conference will be less shares. In Europe, there will be less shares.
There will be less shares. How should we think about what ultimately you guys are working towards with this very aggressive and productive buyback?
There are some retailers and some other big companies that have gone through time and cycles of trying to buy back. And there's a few guys that you guys can probably mention the names of some of the serial buyer backers that are out there. Some no longer exist that started some of these strategies in the '70s. But for us, as long as the daily volume of trading is there enough for us to be able to not move the market, we want to disappear into the woodwork and do our part. We'll continue to do it.
What's the end game? Maybe Charlie and I are vying for the last year, that strategy. But it's the math would tell you that as long as it continues to work, it's probably no change. I don't think you'll just see fewer shares, probably lower daily volume traded, but a similar percentage of buyback to market cap.
And you've seen over the years, the number of shares obviously have decreased on the purchase simply because of the math, higher price.
I mean, there's no doubt about it. We talk to folks in this room. Absolutely the highest cost of our capital is shareholders. I mean, we love you guys in the room. It's nice to have you.
We're shareholders, Charlie and I, but it's an expensive form of capital. It absolutely is. When you look at the debt markets, liquidity in the commercial paper markets, it's difficult to justify a secondary offering for example. You're not going to see autos on doing that anytime soon.
I have two questions. The first is with respect to your suppliers. Has anything changed in the last 5 years? And where is it going in the next 5 years? Okay.
So I just want to get a picture on the supply side. Are you seeing different things within your industry and in particular to yourselves? And the second question, and I should preface this by saying that I'm not familiar with your company. In fact, I'm coming from a different marketplace. Is there anything on the insurance side that is impacting where you think your industry will go, so in terms of auto insurance that may be different from the last 5 years?
I'll take the first one. So on the supplier side, over the years, you've seen some consolidation depending on categories. The larger players obviously have maintained their strength. Batteries is an example that's maintained its strength. Some of the hard part guys have seen pressures from overseas competition, but a lot of those guys have embraced that competition and have worked to create their own supply chains through that process.
But by and large healthy industry, they're impacted obviously by what happens within our space, whether it's our competitors or us and the consolidation on that side as well. But by and large, over the past 5 years, you hadn't you really haven't seen much change in the players that are in that space.
On the auto insurance side, the auto insurers are probably an easier way to answer that, like what's happening in their world and are they changing on how they have cars maintained. Again, a bulk of our business, 80 odd percent of it is people just walk in. They're just getting quick repairs. The inverse of that is garages that are repairing things. Auto insurers will get involved in sort of collision related We cater to the under the hood and the under car and then also the interior of the car inside the driving department.
So body panels, siding bumpers, small accidents, collision shops, We're glad to supply parts to them. But what the insurers are providing in the credit and the OE brand versus aftermarket on the body panels and things, that's constantly being debated. It is changing over time. It doesn't directly affect us, but it's in our sphere, if you know what I mean. But there's not really a story there.
It's not one of our slides, let's say, but it's in the lifecycle of cars. But I can't say anything's fast moving there.
And what we do supply to those collision shops, in addition to parts is we through all data, we supply software for them to be able to locate parts on cars and be able to do those repairs.
Yes. One hint, guys, is that sometimes people are fist fighting, but can I what's the brand I can use to replay, repair, repair your car kind of thing or the body panel and that's debated, but it doesn't play necessarily directly in our niche?
In the do it yourself marketplace, the diagnostic requirements start
Yes. We arguably, we've been hopefully at the forefront when I say that talking about this. We have a software company that we bought in the mid-90s, 1996 if I remember, but it's called Alldata and Alldata service diagnostics definitely benefits us. It is a subscription based service, basically Internet based. It used to be before the Internet proliferation.
It was more CDs and DVDs, but it helps garages fix cars. And so it's all makes and all models. And it's technical service bulletins and all that stuff. But the technology of helping that crossover one stop to help retail customers, the availability, It's there. I mean, people are using the Internet more to learn how to fix cars.
There's no doubt about it that I'll say digital integration and technology will help customers, especially younger people that are more tech savvy, work on cars and that's a big push for us. It's one of the 4 we talked about retail, commercial, international, international. The other initiative that we have internally is something called digital integration where we're trying to amalgamate the Internet sites that we have along with all data to help provide more data. We think that that's the big push how to because most customers like most of you guys when you go into a store you'll say hey I want to go buy a tube of toothpaste. Do you know what you want?
Most guys that when they come into our stores or order parts, they ask questions. We're not sure exactly. What are you hearing about this? And that advice matters a lot.
And you have we've got one of the larger banks of videos that YouTube videos on how to repair this part, this issue or that issue. So we see a lot of hits on our YouTube sites for repair and for information.
Can you just talk a little bit about the evolution of technology? There's stainless steel and mufflers, so the muffler exhaust the evolution of replacement parts. Certainly, the ignition, solid state, there's less repair. And I'm just curious where that's been and where you think it's going.
We had an example. If you remember the coil and all in plug illustration where you had most cars in the 70s 80s, they had a single coil and you had a spark plug that came to it. And so over the years, we had one of our merchants do an example of that process. He showed the evolution of that coil. And back then you paid $20 for a coil.
These days, you find that you have a coil ignition attached at each cylinder. So now you had instead of a $20 part, you've moved to 6 parts or 8 parts that fail probably at the similar rate, but they're $25 a piece. So what we've seen is the evolution has really been an evolution of parts proliferation. So you've seen a lot of SKUs where used to one starter would fit 15 different models or 5 different models. Now you've got 15 different models of starters for each of those cars and the prices have gone up.
So cost on the individual part has gone up. And that tends to impact your number of transactions, but the ticket moves up to essentially offset that. So those are 2 things you've seen. You've seen parts proliferation where there's more SKUs and everybody has to carry more inventory for that matter at higher dollar cost overall. And so there is some concession from the span of how long things last.
But when you do have to do the repair, it costs you more from an overall perspective.
It will sound like a commercial, but the discretionary purchases in our stores are very low. They're in the mid teen to high teen percentage of the mix. In fact, of the hard parts that we sell, the inverse L, the inverse of that mid teens, basically more than half of that 80% plus is failureoid stuff. I mean, literally, the car works or it doesn't. You mentioned changes in mufflers.
That's either you need it or you don't. Stainless steel, lifetime warranty kind of stuff. Sure, those businesses have evolved. But brake pads are more of a maintenance item over time. You have the more driving, it wears down like a razor head on a pencil.
You have to repair the car. So what we're mindful of is the health of the consumer for those folks that are financially strapped. There's a lot of Americans that are based on certain price points. They might drive that car a little longer and you might hear a squeaking a little bit longer or you change and stretch out the oil changes. Instead of doing it every 3, 4, 5, you're doing it every 7, 8, 9, 10.
So that's the kind of stuff we mine based on segmentation. Failure, which we benefit from in our industry, you either fix it or your car doesn't work. And so that benefits our industry. And that's 3. And that's basically half of the business.
And the other stuff, we're encouraging you to maintain your car. Please get in and do those things to save it, David, and make it drive longer.
And Brian mentioned earlier, the trustworthy advice, it becomes even more critical, the more complicated things become. Great examples, fuel pumps used to be to where you could actually access them on the bottom of the cars. Now they're inside the gas tank. So it's not as easy to do that job. And once you do, you want to make sure whatever you take that part out of there, it lasts.
You don't want to have to do it again. And so we've been really focused on helping customers understand how to do those jobs and then ensuring that the quality parts are there for them to make it last.
I think, Martin, you mentioned that pricing in
your industry is usually very rational.
So I wanted to know why you think that is and what
Well, the thing about price, he said bluntly is if you put it on sale because a majority of the stuff is solely or it breaks or it doesn't, either you need it or you don't, to put it on sale, the industry realizes it probably just gives up margin, said bluntly. Now the other side of that is the maintenance items or the discretionary items. That stuff is the stuff that's put on sale. That's the stuff that see in window signage that, hey, buy 1, buy 1, get 1, that kind of item. So why doesn't it benefit?
Because price transparency is out there between the Internet and just knowledge. And so people realize if one guy drops price, the transparency is there. For example, everybody sort of matches it. So it becomes a zero sum game.
And the items that you normally, as Brian said, that you see it's that's that discretionary side on oil as an example, everybody has the same brands and they're highly visible brands. And so it's not something that you couldn't match if they were going that way. So we tend to all be very rational in that space because they are, as he said, highly visible brands.
The alternative for the walk in customer is the do it for me. The do it for me has labor associated with it. So in some industries you hear about it. The cost of the parts tend to be a little bit cheaper than the cost of the labor. So there's always an alternative.
The average ticket on the parts tends to be a little more elastic on the pricing. Some people say when you get do you see price pass throughs from manufacturers as there's cost increases? The industry over time has benefited with its ability to pass price through because the average ticket is not a big number. Our retail average ticket for example is in the mid to the mid It's a low price.
Are you excited about Brazil and Mexico or is it just a small
No, we're excited about it. But the way that we go developing it is methodical. And so for many years to come, you'll continue to see growth.
And Brazil specifically, because it's really, really early in its stage of growth. I mean, we only have 4 stores. And as we've said before, we'll probably grow at another 5 and then pause just to make sure that we get our model and to a place to where you could scale it. And so it's going to take some time. Just as Mexico did in the early days, it took time to get it to the point to where it is today and an exciting proposition for us.
We really manage it. Mexico has never closed a store of the 370. I certainly never had one closure. And the benefit of that is I would say, Charlie, I give him kudos. Charlie and his team in managing it, we've really been smart about how to handle the foreign currency and exchange rate.
You see some wild deviations. Mexico in the mid-90s had real fluctuations with the peso. And of course, we report everything in dollars. So we've got that really well anchored down. We're sourcing in country.
We've done that all greenfield. In these markets, there's not a lot of people that look like us. So in fact, there's almost no one. So we built everything greenfield in Mexico. We're doing that in Brazil.
That's why we're methodical about the approach. But if you were sort of the runner of the business in Mexico, you'd love the business. It's just a methodical pace. We open basically 40 to 50 stores a year in Mexico kind of strategy.
And when you see the stores in Mexico, as Brian said, they look just like the stores in the U. S. The model travels very well.
Here we have time for one more quick one. We're going to have to wrap it up.
Just really quick, the of the parts that you do sell, how many of them would you say are NAFTA made? And how many of them are made abroad? How many of them are made in North America, including Mexico? And how many of them are made abroad of the parts that you sell manufactured? Best guess.
A majority are made offshore outside of the U. S. And Mexico, but there's a fair amount that are made in Mexico now. Are you speaking specifically of
the parts that are purchased for Mexico? Are you speaking of the parts that
Each country Mexico supplies its own purchasing. It has its own buying organization. It's buying. We do very little direct purchase. We're growing that business.
Now indirectly the answer is you'd laugh. There are some very large American manufacturers that I could tell you that's an American product. If you really get down in the supply chain, it might not be all manufactured, let's just say. So it's going indirectly from sources. I would say a majority still comes from Asia, but it's evolved.
It's a world economy where stuff is manufactured.
And when you think in terms of Mexico as an example, quite a bit of the product that we sell down there is actually sourced in Mexico.
It's like Mexico, there's heavy duties for importation from China because it's a direct competitor for manufacturing in the maquilador industry. Now in Brazil, it's highly defensive. 100 percent source there. They do Brazilian authorities do not want you to be shipping stuff. That's why you see China was saying that you're buying a pair of Nikes in Brazil, you're going to pay more
money.