Again, I think by now I'm introducing myself in every presentation. I'm Kate McShane. I'm the Apparel and Footwear Analyst, but also the Retailing Cardlines Analyst at Citi. We're excited to be hosting AutoZone today at Citi's Global Consumer Conference. We're happy to introduce Tom Newburn, who's the SVP of Store Operations, of which he's in charge of DIY Commercial and Real Estate and Brian Campbell, VP, Treasurer, IR and Tax.
I think Brian and Tom are going to start out with some opening comments. They have some slides this morning and then we're going to open it up for Q and A. We have some questions that we have planned for the team, but we want to make this kind of casual and open. So any questions that you would like to ask, please just go ahead and do so. I only ask that you press the silver button before you sorry, asking your questions, so it can be heard on the webcast.
And for those on the side, there'll be mics floating around. So thank you so much for joining us.
Thank you, Mr. Gates.
To my right everyone is Tom Hubert. He is Senior Vice President of Store Operations for AutoZone. He manages the 5,000 odd U. S. Stores plus several other activities I'll tell you about.
He has been with the company for 30 years and we were happy to be here today. We reported our earnings 2 days ago. So we're fresh off our numbers. We'll go through a couple of slides talking about the financial results and we look forward to answering your questions. We are a unique industry wrapped around a lot of apparel retailers reporting these days.
So hopefully we'll change the subject to talk about a different retail segment. The first statement here on the slide we always show is a forward looking statement. And I promise our slides will be short and sweet this morning. We won't try to bore you. We just reported our 3rd fiscal quarter.
We have a unique fiscal year. Our fiscal year ends in August. So creating some havoc when reporting with others that are on a calendar year basis. Our Q3 ended here at the beginning of May and not to even create more confusion, but last year we had an extra week in our fiscal year. So even our comparisons are off a week in shift if you picture the 12 week this year versus last year.
Our sales were up 6%. And looking at the results, our gross margin was up 17 basis points. We delevered SG and A expense by 39 basis points and our EBIT was up 20 odd basis points. Our net income was up 7% and our EPS was up 16%. I'll flip to the next slide guys.
It looks very similar to the Q3, the year to date Q3. You'll see net income up 8% and EPS up 17%. That's not by luck. It's a strategy of ours to deliver a goal of mid teen EPS driven by a combination of net income and fewer diluted shares. This is a model and a goal of ours for the last 15 years with management.
We hope to consistently deliver these results this past quarter. I'm trying to remember exactly. I think it's the to remember exactly. I think it's the 31st consecutive quarter of double digit plus EPS growth. So we've basically got 8 years under our belt of doing these kind of results.
And that consistency is sort of the model that we're driving for. Within these results, we delivered a 4% same store sales result for the quarter. That's a domestic same store sales number. We have some international businesses, but we report domestically. Year to date, we're slightly less than that.
I want to say we're 3% same store sales domestically. The last couple of quarters have been very steady at the 4% rate. Here's our model. We have a retail business in the U. S.
We have a domestic commercial business. We are predominantly though a retailer. 80 odd percent of our sales give or take is domestic retail. Commercial business is high teens as a percentage of our mix. We talk a lot about that with inventory assortment and growing that business is a big focus.
We have inventory sorry, international growth. We have 370 odd stores in Mexico. It's growing business, great return business, small for us still. We have a handful of stores in Brazil. And we have a focus right now, something called digital integration.
Outside of the brick and mortar businesses, we have, I'd say, 4 different Internet businesses. We have a product called Alldata that sells directly to garage mechanics, professional installers, how to work. We have autozone.com, which is a retail website for consumers shipped to your house or pick it up in store. We have AutoZone Pro website for commercial garages to order parts on. And we recently bought a website called Auto Anything, California based.
We're 1 year into that model. It's an accessories, more of a performance accessories business. So those are the 4 Internet businesses. Up on the slide is our store growth. Correct, we finished with about 5,300 stores.
Our average store is 6,500 square feet. We opened 30 stores. We opened around 150 stores in the U. S. A year.
We opened around 40 stores in Mexico. We opened another odd ten 5 to 10 stores in Brazil. So basically around 200 stores a year. The next category again is commercial. On the screen commercial, domestic commercial shows that its sales were up 14% for the quarter.
We opened a healthy number of stores with commercial programs. What we're doing there is we're putting professional commercial specialists in our stores to take phone calls and hire drivers. We have expanded that program count now 76% of our retail domestic stores have a commercial desk.
Too fast. Too fast. Too fast. Too fast.
Too fast. Too fast. Too fast. Too fast.
Too slow. Too slow. You can see guys that we're doing
about $1,600,000,000 in sales commercially, very similar year to date. You can see it's a model. Next slide is a quick cash flow. And you guys can see what we're doing. We bought $900,000,000 in stock.
We bought over $1,000,000,000 of shares for the last several years running 4 plus years. In the last 15 years, we bought over $14,000,000,000 We bought about the market cap of the company back in the last decade. You can also see our debt levels here at $4,400,000,000 Based on leverage metrics, it's allowed us to remain comfortably investment grade with the rating agencies. Next slide and last one I promise is the balance sheet. You can see our inventory per store.
That was a story we talked about in inventory per store and that productivity in our strategy. Working capital, we enjoy the benefit of having negative working capital. We have a very high accounts payable ratio. And you can see as a result of buying back stock at a higher price than it was sent
out publicly, we have a negative
shareholders' equity line, which is counter to what many companies have. It's because of the buyback math, but we're quite profitable company with high cash flow. So that's AutoZone. So we hoped a couple of days ago to paint a very steady picture in maybe a turbulent world for investing. And then we look forward to answering your questions.
Hopefully, you folks are excited about talking about this segment today. Thank you.
Okay. Thank you. I'm going to kick it off with a broad question. Something that we hear a lot from investors is the perspective on the or questions trying to understand the perspective on the health of the consumer. And in retail, I think your segment is probably the segment that best addresses some of the lower end consumer.
So I wondered if you could give your perspective on the health of this consumer. Obviously, there's still very high levels of unemployment and other macro factors at work that are working against the lower end consumer. But can you talk through maybe any changes you've seen over the last couple of quarters? And what feedback you hear from your customers as a result?
Kate is absolutely right. I mean the pressure on the lower end consumer to walk in do it yourself customer has been there. That pressure has existed for the last couple of years. The same culprits are at work. You've got high gas prices, high unemployment.
The wage rate increases for the average American has not been high. And so as a result, you've got sort of stagnation spending. That permeated itself in our sales results through lower maintenance sales. If something on your car breaks, you can't drive, that's what we define as failure related. That business has been strong for us.
Obviously, the past winter was cold. That broke a lot of things. That benefited our industry, benefited ourselves. But deferrable maintenance, we were fortunate to talk about that business coming back a bit in the spring. But it's those categories that are most pressured.
Very similar, but like an oil change, changing your oil every 3000 or 4000 miles maybe stretching it because you don't have the money in your pocket. It's those kind of pressures. So what's offsetting that? People are keeping their cars, they're lasting longer. We're educating consumers on a do the small repairs so you don't get to that failure point.
So that's the difference. Is it changing overnight? I don't think so. I don't think anything is happening real fast out there. I think the challenges exist.
It's a structural issue right now. We root for obviously lower gas prices, higher employment rates for folks. But at this point, I don't think there's a big sea change going on. Less so in the DuPont, it's a little bit wealthier consumer relatively speaking. That business has shown some consolidation macro wise, so that benefits us.
But in the do it yourself space, I'm not sure if we're calling for any change in game plan anytime soon. That's not fair.
I think that's right. I think that the long and the short of it is there has not been a lot of change for the lower end consumer and we really don't see anything down the road that would make us think it's getting any better anytime soon.
Okay. Then if I can just address the offsets then. So the offsets may be a more strapped lower end consumer, some of the factors in the industry where cars continue to age, where the average age continues to go up and I think is at an all time high. So we always hear about the rising SAAR as a threat to the auto part retail business, but we've always thought scrappage rate was probably more appropriate since there are 250,000,000 cars on the road and the star number is 60,000,000. So could you talk at all about the potential for the scrappage rate increasing over the next couple of years and what that could mean.
And also with the new wave of cars entering into the sweet spot of the 7 year point when the cars start to perhaps start to break down go off warranty, Those are the cars that were made during the recession. So the SAAR number was much lower. So can you talk about those two dynamics and how it could impact your business over the next year or 2? And what the offset to that might be?
In the U. S, it's pretty common to hear about maybe 15,000,000 cars and trucks sold annually. That was a common number for many years. It peaked in the mid-twenty 17,000,000 odd vehicles. In 2009, 2010, 2011, there were less vehicles sold.
So basically Kate's addressing the fact that in those 3 years 2009, 2010, 2011, there were about 10,000,000 less vehicles sold than normally. And it's that lack of vehicles that are now 5, 6 years old that if they're moving through their life cycle, will you lose part sales because they're just a raw less vehicles in that count. That's a fact. There are less of those. Now early in the life cycle it impacts the do it for me sector more calling the garage sector.
But later on that will impact the do it yourself sector. But level setting it, there are 250,000,000 registered vehicles that with an average age over 11 years old have benefited us on the back end. So they basically offset each other. It has not been as big a story for our industry because cars remain on the road. People are fixing those older cars using them as their primary source of transportation.
The fact is older cars break more frequently. Their average price points are lower on older cars. Newer cars, it's a higher purchase price for parts, but they don't break as frequently. So it's bigger ticket, less transactions. Older cars, more transactions look at lower ticket, But it's offsetting.
So is it a headwind in particular for those? It has been. But we've been fortunate the older vehicles remain in the life cycle. So we're still basically bullish because of the sheer number of cars out on the road.
Okay. If I can move over to the DIY segment, which is still 80% or more of your business. It does seem that there is this increased emphasis by your competitors on DIFM with consolidation in particular. So can you comment at all about what the share gains may or may not have been over the last year or 2? And what is the future of DIY?
And how do you hope to address that and continue the momentum in your business as maybe your competitors step away from it a little bit?
I haven't noticed them stepping away from it. I would like to see them
do that
because we believe that the DIY business is still as you saw up there when we listed our priorities. U. S. DIY is our number one priority. It's the monster that keeps everything else going for AutoZone and allows us to make all these other investments that will pay off for us down the road.
We find DIY very healthy. There's nothing and we just talked about SAAR and scrappage rates. Unless we saw scrappage increase at a significant amount, there's no reason to believe that DIY would not remain strong because those cars that's at 11, 12, 13, 14 year mark are unlikely to be on a lift in a Firestone or original equipment shop. So we're very bullish. It's still our number one priority.
And I don't know, I'd like to see our competitors turn away from it, but I don't think they are either. I think that we're all finding DIY still is a big lever in our industry. With regards to share, I don't think we've talked specifics about share, but we continue to see gains on both sides of the business both DIY and do it for me. And we anticipate there has been some consolidation over the last year. That has not played out yet.
We would anticipate that there will be some continued consolidation within those groups of stores. Haven't seen that yet, but would think at some point soon we would see a rationalization of those that store base.
Is there a question? Hi. Just somewhat of an ancillary question, but what are your thoughts on all these product recalls in the automotive industry? And why is this happening? And is there any benefit to you?
Or is it not really relevant? Thank you.
Well, fortunately for us, the ones that have been on the news lately are all OE. And we don't sell OE parts. So we're it's not had an impact on us.
I don't know if you have. No. I think that older vehicles it is a common though to see and hear about recalls. It's just that's the wave that you're hearing about right now. But what you're seeing is a lot of cars out there with this certain age that are still being driven that are being impacted by these kind of things.
So anyways, I can't say that's a big impact for us right now.
Okay. Just to jump back to the DIY side and the competition you're seeing on DIY. Have you seen a lot of change in terms of the competitive environment from the mass merchant side or the online side for the DIY business in particular?
I can tell you that there's a lot of impact from some of the bigger box guys. They continue to compete aggressively and are solid competitors for us in our space.
Yes. I think that's right. But nothing that has been any type of step change with regards to some of the big box guys getting more or less involved in our segment. On the online side, we like to think unlike many other retailers, we're somewhat insulated. You heard Brian talk about the fact that we have 50% of our revenue greater than 50% of our revenue comes from items that break.
If your car doesn't run, you're not likely to go online and wait a couple of days to get that part. And our consumer in particular depends on that car to get them to and from work or to and from school. So we believe we're somewhat insulated. But we're aware of what's going on. We're investing in digital integration as you saw on the Board and Brian mentioned, making sure that we are keeping an eye on the omnichannel.
But certainly, I think that we're at less risk than some other soft line.
Okay. I'm just going to move on to commercial because I think that's where we're seeing and hearing the most change from AutoZone. So it seems like you've really stepped up the focus on this business over the last year, certainly in terms of testing and testing some changes. Just was curious what the impetus was? And can you walk us through what you're changing?
Why you're looking at it this way? And where we are in the timeline of what you'd like to eventually achieve for the commercial business?
The commercial business for us has been sort of an evolution as we've opened up programs every year. We have hired sales force in place, I guess, 5 years running give or take of building a sales force. So it's still basically a young business for us. It's lower productivity than what we believe the opportunities exist for it to be. So this past year, we spent a lot of time about inventory initiatives as being an opportunity to jump start that business.
We focused on late model products, hard parts assortments for newer cars and trucks, placing those in stores, forward placing them that inventory in the market. We showed earlier inventory per store number that's increased because of these initiatives. And our expectation with that sales force and with that availability is to basically climb up the call list, get bigger tickets, be able to sell more items per basket because we're deemed to be able to compete effectively with all kinds of customer needs. But we're still learning in that business. A lot of opportunity.
Again, with only mid teensales growth, we're excited by what the future bears. So we get a lot of questions about them, say, hey, when can it be blank percent of your business? We want retail to continue to grow, but this is clearly a great opportunity for us. It's a wonderful return on capital business because there's very little capital required to use the same store. And we see it having growth for many years to come, a combination of growing productivity in older programs and still opening new programs.
We have about 75% of our stores with commercial
today. So you'll continue to
hear us opening stores with commercial plus growing sales. There's a big push on with that with this inventory. So that will play itself out over the next several quarters.
And how are you approaching the growth of this business aside from having the availability and the It's market specific. I
It's market specific driven time and talking. Give an example how do you communicate the message with customers?
We have it's really grassroots. It's not typical retail type marketing other than brand and we do spend a fair amount of our marketing budget on our brand. But it's grassroots. We have 4 50 sales guys and gals that are out on the street every day. And in this business, recency and frequency equals sales.
So the more often that we can have our face in the shop talking to those that are ordering the parts, the more likely we are to get that next call. So it's far less requiring than a typical retailer, but more requiring of again grassroots.
I'm sorry, did you have a question?
You used the word lower productivity. Could you just see a more is that rep salesperson productivity in the commercial business? And if so, could you talk about any benchmarks you're looking towards?
It's difficult because from a competitor standpoint, nobody publishes their exact sales. But we're informed regularly, oh, you can sell more or the productivity per program, revenue per program is lower than X name the company. So we and a lot of this is due to the fact that we have very young programs. They're immature. So our expectation is to take older programs and grow the sales and then plus develop a newer one.
I would be remiss. I want to jump around on the question. Tom mentioned it. We have a new advertising and marketing campaign around a mixed martial arts fighter that's out this past quarter. And hopefully, you folks have been able to see it.
It's a gentleman named Chuck Liddell and that we're promoting our brand the Duralast brand quite a bit on television and radio. So hopefully you folks have had a chance to see it. But it's basically the tough parts factor. So we're identifying ourselves as being tough the quality of our parts. So Tom has talked about building a brand not just the AutoZone brand, but the brand of Duralast.
And if you've had a chance to keep an eye out for that I encourage you to because we spent money on developing that tough factor in identifying us as somebody to go through for lasting quality.
It seems that sort of looking through this aging fleet and how they eventually leave the dealership, the dealerships clearly aren't going to die. I mean, I guess, you're always going to have a service option at any dealer. So they're getting very aggressive, oil changes for life and discounted tires, they'll compete with anybody on the tire basis. I mean, what are you seeing there? And is there can you show some numbers that the dealers are actually losing share versus where you'd expect them to be or where they have been in the past?
Well, we don't with regards to part sales or how aggressive they are, we really don't compete with dealers. In fact, they are a growing customer for us Because of exactly what you've said historically, if you've ever had to you guys are all from Manhattan, you probably don't even have a car. But if you've ever had to take a car to a dealer, the parts and the markup on those parts have always been significant. If you go 10 years ago, you'd go for an oil change at Jiffy Lube for $19.99 at the dealer, it'd be $39.99 They're becoming much more aggressive to compete with all of those other installers. And as a result of that, they are also marketing aftermarket parts.
We're seeing they can't come in with those low cost options on tires or anything else without going for aftermarket parts. So we're actually seeing that as a big opportunity for us. We have seen a significant increase in our business to that customer as opposed to being a competitor. For us? Certainly, because they're buying their parts from us.
So for some of the installers, I'm sure that they would prefer not to have to compete with the brand OE brand. For us, it's another place for us to sell our parts.
It's difficult. The dealerships are there's a certain number of them. The OE dealerships also could do the traditional U. S. Nameplate dealers in the country and they have a limited number of bays.
And as they sell more cars, the fact is they end up filling up their bays with repair under warranty more so than even outside of warranty. We don't sell the tires. The tires have been a tricky business for a long, long time, many years low margin and high maintenance. We don't supply those. But I think that's been a growing customer base for us and we've worked in partnership with many of the larger chains that you know about.
There seems to be 2 trends going on
in the marketplace that are just starting to take root.
1 is of course a lot of the parts in the car now are moving more towards technology. The other one is hybrid cars. How do those 2 trends affect you and the marketplace you're serving in DIY? Will they tend be incapable of dealing with some of the DIY things that they would work on in the past? And let me take the hybrid first.
That's still everything on that vehicle is the same as any other vehicle with the exception of the engine, which is much higher use on battery. We are working in partnership with our battery vendor to make sure we understand that and at which point those batteries will be actually out on the aftermarket. But everything else, in fact, they actually are creating a little more wear than your typical engines because of the amount of braking that the actual batteries are charged on starting and stopping. So we don't see that as a lot of potential business yet. Certainly at some point, those batteries will have to be replaced, but they're really big and they're really heavy and they'd be very hard to handle in one of our 6,500 square foot stores.
On just the overall technological changes in vehicles, we found that to be very beneficial for us. Again, as I said with the hybrid car, everything is the same. It still looks a little different. It looks a lot different, but it's still an internal combustion engine. It's just got a lot of plastic around it.
It's still a drivetrain and a chassis that's the same as in design as it has been for 50 years. They have brakes, they have steering, they have an engine. It just looks a little different. The beauty of it is that it's actually easier to work on, because rather than change 8 spark plugs for those of you who have ever done that type of work, You just replace a sensor. You plug a diagnostic tool right under your steering wheel and it tells you what you need to replace.
And it's as simple as unscrewing it, unplugging it, screwing it back in and plugging it back in. And we sell an awful lot of those are called engine management components and we sell an awful lot of them. It's intimidating to look under the hood, but it's all the same. And they are lasting a little longer. But fortunately for us their retails are significantly higher than they used to be as well.
You get a healthy runway to repair those vehicles because they enter our sweet spot for walk in business over
the past 5 years. So you kind of get a trend for how many what's the car population like for them and stock the stores accordingly. So at this point, it hasn't been a game changer one way or the other. It's a small percentage of the car population still.
I'm going to ask one last question, and then we might have time for one more afterwards. But the word consolidation has come up a couple of times now today. And we've seen a couple of bigger deals happen over the last couple of years. What's AutoZone's view? I mean, you've been using your cash returns directly to shareholders, but what is the company view on acquisitions and consolidation?
And would you participate in that over the next couple of years?
I would say that our position is opportunistic. With the footprint that we have, it's a little more difficult for us to make sense of a larger acquisition because there's so much overlap now. And there really aren't that many large players left. There are some regional folks that we may or may not be interested in, but it's primarily smaller independents that are left. And unfortunately, their biggest asset is their inventory.
They own it. It is their business for them and we generally don't want it. So unless a nice regional player comes along, it's unlikely that we would be overly engaged in any type of consolidation. We're anticipating seeing what happens with the most recent consolidation from one of our competitors. And we think that that's going to benefit everyone because there is a significant amount of overlap between those two companies and we would anticipate there would be some store closures, which we feel pretty good about.
Any other questions?
Thank you.