Good afternoon, everyone. I'm Michael Lasser, the hardline retail analyst at UBS. I'm very pleased to introduce AutoZone's Vice President of Store Operations, Rick Smith, who's sitting on my far left, and its Vice President of Investor Relations, Brian Campbell, who's familiar to many of us. There's no better way to describe AutoZone as a company or as a stock as just a beast. Between its stronghold on the consumer side of the auto parts market, its best-in-class margin structure, return profile, free cash flow generation, and prototypical capital allocation model, the company has just been doing well by doing good. We hope to hear more about that this afternoon. Brian's going to give a few prepared remarks, then we'll get into the Q&A. Once again, I would remind you that we do have note cards if you want to ask some questions.
With that, thank you very much, Brian.
Thank you. Direct all your questions this afternoon to Rick Smith on your far left. He'll enjoy that very much. Thank you for the intro. Let's see if I can get this going. Yeah, AutoZone, we won't wow you today with new strategies or stories. Much of our modus, our key priorities are the same. We've got one modification, slight one, around e-commerce. We call it digital integration. In general, AutoZone has just sort of been moving forward, advancing every year. It's a pleasure to talk to you as the industry leader on the retail segment. We've been the industry leader in the space since, I guess, basically being a public company. There's been a lot of action in our space, by the way, right now. You might have some questions about that. There's been some consolidation.
There's been a recent acquisition a couple of years ago, and with that merger, there's been some rationalization of square footage. In the last year, there's been another big deal, not done by us, but by others. It affects us and the marketplace. There are 18 slides I've got. They're fast, guys, I promise, and we'll get to the Q&A that can help you guys. The first one is a forward-looking statement. It basically says, "Don't ask tough questions." Okay, the next one here, the AutoZone pledge. All of our meetings start with a cheer and a pledge. It looks like the YMCA cheer from The Village People from years ago with everybody spelling out AutoZone with your hands. These four lines are really what the store employees, all of our store AutoZoners live by, the creed. Basically, always put customers first.
What that means is take care of the customer. Make sure that if they come in a minute before the store closes or come in before the store opens, help them. Do whatever you can. Go out to the customer's car, help them because they're in there for a reason. They've got a need. It's not just they're randomly shopping. Very few of our goods are discretionary in sale. Less than mid-teen, I'll say, percentage of our sales are discretionary, and they usually come along for the ride when a customer is in there buying something they need. It's breakage or oil changes and the things like that. I'll talk about the company's overview, the number of stores. We have just under 4,900 domestic stores. I remember, it seems like yesterday in 2000, we had 3,000 stores.
We celebrated our 5,000th total company store in Alaska a little over a year ago now. We are in two other countries doing business with stores, Mexico and Brazil. Only a handful of stores in Brazil. We have a software company called ALLDATA that conducts business in the U.S., Canada, and Western Europe. A little bit of business in other countries as well, but primarily office-based in Western Europe. What that is technology software for garages to fix cars. How to do aftermarket garages, how do they know how to fix a water pump for an older model Volkswagen Passat? We provide that data when we accumulate it from OE manufacturers. That's our sales line, the bar chart. We've been very steady. You'll see pretty consistent annual growth rates, 5%-7%.
That's driven by a very steady over the last decade square footage growth of around 3%-5% in square footage growth with a low same-store sales, low single-digit same-store sale on average number. You'll see some pickup in sales a couple of years ago in 2008 with the recession. We can talk about that with the impacts on our business and our industry going forward as well. These are our four initiatives, retail, commercial. Those are both domestic initiatives for our 4,000 odd stores. International, Mexico and Brazil, some other ideas, and then digital integration. We have a B2C website, autozone.com. We have another one called AutoAnything, which is high-end performance parts for consumers. That was a business we bought a year ago as a California-based company, like many of them are obviously, but a great fit with AutoZone because they're about customer service.
We also have a B2B business with commercial, where commercial accounts, garages can sign in and buy parts over the Internet. Jumping back to sort of historical trends, this is our EBIT line. Last year, we had a 53rd week. It's carved out in this grid. It's also carved out in the 2008 bar number. You'll see we did about a $1.7 billion in EBIT. Steady growth, slightly greater growth than sales growth in that trend line. Steady. This is our EPS growth, stripping out the extra week, which gave us, I guess, maybe $0.60 last year. We've had steady growth. The EPS growth has come from a combination of net income growth and buyback strategy. AutoZone is a regular annual and quarterly buyer of its own shares.
We can talk about that with dilution in a second. You'll see sort of a steady up to the right curve, which is the attempted trend we're trying to mimic quarter in and quarter out. Here's the second quarter. We just reported this last Tuesday. Our gross margin was up 25 basis points. SGA, we spent more money on a larger comp this past quarter. Our same-store sales number was 4.3%. We invested in the business in the quarter, in the winter months to get ready for the spring. With that, we grew operating profit and net income. You see net income up 9%, and then with fewer shares up seven, so you see an 18% increase in EPS. The percentages look similar, actually, with the year-to-date numbers. Hopefully no coincidence. That steady performance, you're seeing 8% net income, 7% from dilution, 15% from EPS.
A pretty steady story if we went back out, sort of that similar growth rate with EPS. AutoZone talks about 30-plus quarters in a row of double-digit EPS and many quarters now in a row of 15% up. We've been very fortunate in that regard. Well-managed, steady strategy. This is the industry, the retail industry. We are the largest player in this space. This is the walk-in customer with the number one share. This industry is estimated at $47-odd billion, if I can see that far. Steady grower, low grower in industry. In positive times, what represents up economy sort of extraneous or macro factors, extremes in weather, macro economy, employment, unemployment, gas prices. We talk about all those things, basically miles driven, age of vehicles, coming back to those macros, what drives customers into our store.
These are folks with cars, basically 100,000 miles, seven years and older cars. This is the DIFM space, slightly bigger, closer to $60 billion in size, the industry. Growing at slightly faster than retail. We are much tinier in this. This is a big growth focus for us. 75% of our domestic stores have vehicles and professionals, commercial specialists that help garages fulfill their parts needs. This is a great opportunity. Again, very small market share here. We reference 2-plus% market share in this. Our overall growth strategies, very similar year in, year out. Grinding down with about 3%-4% square footage growth every year, adding commercial programs. Big focus this year on inventory and assortment. A lot of math behind that. We talk a lot about that on conference calls, trying to get the inventory right.
You're looking at an industry that's slow turning, low inventory turn, high touch. We're as much a distributor of products in some ways, if you think about us and other industries, distributors as well as retailers and customer service aspect. We've also spent a lot of time talking about hub stores versus distribution centers. These are just really large AutoZone stores in markets to help make inventory available. We talked about international e-commerce and opportunities with share and share growth. Retail is a focus. A lot of our time is spent on customer service and training. When we go out and talk to AutoZone, we have regional sales meetings, an annual sales meeting. It's all driven on market share, how to improve customer service. What can we do to get better? We recognize our AutoZone employees with years of service. It's a badge of honor.
I have a short tenure with 15 years with the company. Rick, a little bit longer with 29 years. I know in today's day and age, when you think about it, most companies don't have this tenure. We do. It's recognized and celebrated. Each year, you wear a collar pin on a Monday showing your years of service. It's a big deal. It's unique, the culture. Commercial growth, we talked about that. Increasing productivity out of the commercial programs and opening commercial programs. Here's our commercial growth. You saw $9 billion in sales last year. We did $1.5 billion, give or take, of that business in commercial. We talk about that as double-digit growth but hopefully a continued opportunity for us. We're excited about what we're doing there. International growth. I promise, guys, we're almost done.
International growth, Brazil and Mexico continuing to grow at about 10%, a little bit more than 10% square footage in Mexico. North to south development from the border towns down to the bottom of Mexico. Still in and around greater Mexico City and Guadalajara, but still have opportunities in those communities. Brazil, tiny. Distribution opportunity that we've got, a facility plus 4 stores. We hope to get our 10th store open sooner than later, we watch this business. I was sitting at lunch listening to Walmart talk about Brazil a little bit. They had referenced that maybe they don't make a lot of money in Brazil. It's easy not to make money in Brazil if you're not careful because it's a highly regulated economy, we watch that to make sure we've got our ducks in order and systems able to remit tax appropriately.
I won't go into a lot of detail, you got to be careful with that in Brazil. Digital integration, ALLDATA, AutoAnything, and our autozone.com website. What this means is, I may not surprise a lot of you, not all of our products are sold on the web. Why is that? It's a lower ticket and there's a lot of advice necessary. "Hey, I'm not sure if I ordered the right thing. I don't know what's wrong. I got a check engine light, and there's something that might be askew." What we find is there's a lot of information on our websites. There's more and more data on how to. We're even providing, for example, through Facebook pages, how-to videos on repair and things for customers, but it's basically driving customers into the store. We're a little different than other retailers in that regard.
It's as much informative as it's selling. We have aspects like BOPIS we can talk about, but it's not a major part of our business. E-commerce, while growing, is still a minority of our sales. We would expect it to remain a little bit smaller over time. By the way, we've got the most traffic in our industry on the web, it's not like somebody else is out there doing something radically different in e-commerce, but it's definitely a growth vehicle for our industry. Finally, the summary, grow. Want to grow sales in these categories and manage expenses to keep delivering steady returns and being shareholder-friendly. While maintaining our investment-grade debt rating. That's it this afternoon. Thank you for listening to us. Without further ado, I'll pass over to Mr. Lasser.
I'm going to let you sit here, so I don't have to do tennis matches.
Okay, you got it.
Kept it warm for you.
Oh, thank you.
A place that I want to start off is a question that we're posing to everybody. As you plan for the year ahead, are you expecting the consumer environment to get better, worse, or stay about the same as compared to last year?
Do you want to take a first stab at what your opinion is?
Sure. I think we would hope that it's going to get better. We're probably planning for it to stay about the same. Coming through this winter, we saw increased customer activity. Looked like the dollar was flowing a little bit easier. A lot of it is weather driven. We had a really tough winter, broke a lot of parts. It drove a lot of traffic to our stores. We're kind of taking a wait and see attitude to get through the spring and our summer selling season before we really come out with a strong position. We feel good about where we're at and what we're seeing. I want to dig further into the weather because it's been such a prevalent topic, retail broadly and auto parts specifically.
Last week, you discussed a bit about seeing less beneficial impacts as the third, fourth, and fifth cold spell hit because those parts that were close to failing broke early in the season. As the weather and as the spring unfolds into the summer, how do you expect the weather to impact your business? You've seen a lot of failure. Now, maybe the spring driving season is going to be tough. A lot of potholes out there. Do you expect to see some of that impact in your business? Then, if it's a cool summer, could some of this cold be nullified because you won't necessarily get the catalysts with the heat? It's like five questions in there.
Take it if you want.
We expect to get a tail from the tough winter. The potholes does a lot of damage to undercar chassis. We expect to reap the benefit of that there. It's deferred maintenance you can defer, but you can't defer it for long. As the roads thaw out and the crews get out there, we think we'll see those vehicles in the shops, and once those vehicles hit the repair shops and they pull the tires, they begin to diagnose other undercar problems, which is a big opportunity for us. Extreme weather obviously benefits us both ways. We're hoping for a warm summer, an extremely warm summer, because we'd pick up the benefit from that also. We are weather driven, but not solely weather driven. There's a lot of repair or failure items that will just naturally occur.
It's just been a tough couple of months, and I guess you guys got snow hitting here today, so it just doesn't seem to be letting up. I do think there's a tail. I don't know how long that tail will carry, and we'll just have to see what the weather's like in the summer.
No need to rush out of this presentation. It's not going to hit for another 6 to 12 hours. As we're parsing your trends a little bit further, in those geographies, since you have such a national presence, in those geographies where the weather was more balanced, it wasn't as extreme, how are the trends?
In our Western markets, California, I happen to live in L.A., we didn't get a weather. We didn't get a winter. It's been very mild, no rain. Our business in the East and in the Midwest was definitely stronger than our business out West. The business out West was positive, and it carried the day, but in comparison, the weather definitely had a positive impact on our colder markets.
Okay. There's this idea of deferred maintenance, this ever-growing pool of eventual products that will be bought. What's it going to take to get that pool of deferred maintenance potentially unleashed? Mark? Well, the industry did do better.
Do you think some of the deferred-
I can't say that it's at all done, no.
Is it gone?
I think that what the question is that you're really asking is, what's the consumer's mindset around almost maintaining the vehicle and maintenance sales on deferred maintenance? What we categorize as failure is something that broke, and the car doesn't drive, and so you've got to go get the car fixed. That's about 50% of our sales. It's the maintenance piece that's in the high to mid-30s that's important for us. How do we communicate with the consumer to say, "Hey, come in, make sure you're maintaining the vehicle so it doesn't die on you when these extremes happen"? What drives it a lot, it's education of the consumer. It's some shock factor. Is it macro with their pocketbook? Is it weather? I would tell you that extremes do benefit and wake up consumers to that impact. I would say we've been talking about the deferred maintenance.
I don't want to oversell that. I don't want you to oversell it like it's a tidal wave coming. I think it seems like that's been a metric that's been out there, and it's always there. Hopefully, we take advantage of it, and consumers come in and buy more items when there's these extraneous items that happen. I think it's going to be out there for a little while. I don't want to oversell it.
Within the deferred maintenance bucket, what are the big pools? Is it tires? Is it chassis, brakes? What can you delay and push off?
You can delay brakes. You can put off repairs that aren't going to stop your belt replacements. Your belt may be fraying, but your car is still running. Anything that really doesn't stop the car, that's not critical to the operation of the vehicle, the consumer has a choice, do I do it now, or do I do it when it fails? We believe that a lot of that is starting to show up.
It's been deferred for quite a while. The pent-up demand, you can't hold off forever.
It's just the categories, again, that aren't catastrophic.
For those who've been following AutoZone for a long time, one interesting tidbit about the presentation was, historically, the company and the industry has talked about cars that are seven years old and older. Given what happened to the car in 2008 after being pretty stable up until that point, we may start to see the vehicle population change. Have you already started to experience some of that potential impact in your business? Is it too difficult to tell? How do you see these cohorts, these smaller and smaller cohorts flowing through, have a potential impact on the industry?
It's slow-moving. The trends, if I referencing, you're talking about maybe some changes in volume of units or the type or the age of vehicle, the average age of our cars that we're repairing. We're seeing a widening of the bell curve. We talked about seven and older as sort of the apex on the camel's hump for parts sales, but that's expanded. It's widened itself out. What's happened is customers have kept their cars longer. It's no longer at the peak seven. What we do is we measure the warranty parts sales by model year and track that over time and look at that retail and commercially and say, "How's that changing? How's it evolving?" What surprises us every year is there's ever older cars with a larger percentage of sales that are well north of seven years making up our sales.
You reference cars or lack of cars, maybe you're indicating 2009, 2010, and 2011, where there weren't a lot of cars sold. We have to watch that sort of pocket or donut hole in sales as that's moving through the python. What's helped our industry has been the retaining of the older vehicles, not just the falling off and the scrappage rates. The number of cars on the road has been relatively static at the $250-odd million. Actually, I think it increased in the latest quarter of the data we saw. What's happening is those who are buying cars aren't always those that have the oldest cars, so they're the folks that are economically able to buy and spend on the new vehicles, and so they're flipping those maybe six- and seven-year-old vehicles back into the used population, which are basically new cars for our customers.
Okay. Are you seeing differences and divergence amongst your commercial business versus your consumer retail business as far as the age of the cars that you're serving? Or is it mimicking?
It's mimicking. The curve is mimicking itself. It's an earlier curve for commercial, as you'd expect. It's easy to jump to the point where after three years or 36,000 miles, when a majority of the cars come out of warranty, that's when aftermarket garages get business, and they do. There's more folks retaining their cars and keeping them out with a sweet spot of five, six, and seven years old now that are going to aftermarket garages and getting repaired.
I want to move to some of what you alluded to about the changes within the industry, some of the consolidation that's taken place. Rick, you've got a great vantage point being in charge of stores on what happens at a local level when there is some of this change happening. We're seeing a couple of the bigger players consolidate. When that happens, there's the potential for disruption and market share to go to other players. How quickly, at a local level, do you tend to see it? What tends to be the catalyst for change? What can AutoZone do to get its fair share of any business that potentially could be up for grabs?
We see it at the point where the work in the store begins, whether it's the nameplate change or the remodeling or the flushing of inventory as you begin to consolidate vendors or the consolidated company begins to consolidate vendors and push through that merchandise. The communication within their organization, the employees get nervous not knowing what's going to happen. We'll first start to see it through rumblings on the streets. People get nervous. People get scared. Then the business opportunity presents themselves when they physically start the remodel process. Because in order to remodel a store, you're either shutting the store down or majorly disrupting the business during that process, which displaces customers. The opportunity for us is as they begin to evaluate what units they keep versus what units they close due to overlap.
We're positioned in most of our markets pretty well, where there's usually an AutoZone in between. You're going to ask customers if you close brand A and say we're going to funnel that business to brand B, there's a good chance there's an AutoZone in between those two locations. We've got an excellent opportunity. We invested into the business in the second quarter from a labor standpoint, from an inventory standpoint. We're running several inventory initiatives to increase our ability to say yes and have the part there, especially for the commercial side, quicker. We're experimenting with our delivery model, hubs versus distribution centers. We've added SKUs. As you've seen, our inventory took a significant increase in this last quarter as we begin to forward place inventory, which we believe puts us in a position to capitalize on the transition and the acquisition.
Overall, because there's no new square footage being added to the market, you got two players that already exist. It's a net neutral force. Both of them are doing business now. It's just really how they rationalize and what they morph into as they decide how they're going to digest it.
How much at a local level, more of an opportunity is for all the big guys, and this is an industry that's becoming increasingly consolidated, to take share at the expense of those smaller players, the warehouse distribution guys, the small jobbers. We see the industry statistics, but in the field, how much more opportunity is there?
We think there's a lot of opportunity with the smaller player, the mom-and-pop players, who aren't capitalized very well. They don't have the ability to add the inventory to get the terms, to do some of the things to combat what the larger players are doing. That process has been going on for quite a while. I think we're losing about 500 jobbers a year, mainly being replaced by the big three or the big players in the industry. As much as we add square footage, the dropout rate is on the other side in the smaller players.
At a practical, in a real-life example, as O'Reilly came into the Western market where you live.
Yeah
Perhaps that impact was not as intense on you because there are some other smaller players who felt the pain a little bit more acutely and lost more share such that it was just redistributed amongst the larger players. Is that?
That's a fair assumption.
Okay. I want to talk a little bit about the inventory that you're putting into the marketplace. The question came up previously, prior to this, how your customers know about it. Maybe you could expand on that. Just as importantly, how do your employees know about it? Is it just a matter of when they go into the system, they're able to get the part more rapidly? Can you illuminate how that process works?
Yeah. Our systems are linked together, so when they look up a part in any store across the chain within AutoZone, you can see the inventory. If I look up a bottle of water in my store and I've got two and the customer wants three, I can hit an availability button, which will show me where that water's placed in the next five closest stores to where this store is located. I can type in a store number anywhere in the chain, and I can see real time the inventory that that store has. We've also done a lot of internal marketing to introduce the new SKUs that we brought in to the AutoZoners. They get excited about increased parts coverage. They love saying yes. They love taking care of the customer. They're pretty excited as we add the inventory.
It makes their job a lot easier. Between internal marketing and the systems that AutoZone has, there's instant visibility to the inventory as we add.
Okay. Coming back to a previous subject, there was a question from the audience on, do you expect to see some of the legacy independent Carquest locations go to others? Could AutoZone potentially look to be a greater partner with some of those independent locations? Might they go to NAPA? What's going to happen with some of the independents?
It's still speculative at this point. We don't have a franchise operation, we're sitting back and watching how that will play out. You give an example about CSK stores in California. What we watch closely is overlap of existing stores and then acquired stores with chains. Where there's close proximity, that's where we'll try to watch more closely and determine the impact on the local market. No, I can't say that AutoZone We'll probably sit back and watch and make sure our stores look good and invest appropriately, as Rick was saying. No, we historically have not been a big player on acquisition in that regard.
Maybe the best way that AutoZone can grab that share is by rolling out more and more commercial depth. There's been a lot of focus amongst the market on the productivity of AutoZone's commercial programs, and especially those programs that have been rolled out more recently. From the metrics we look at, there's some obscurity in there. Can you give us a sense of how the productivity of the recently added programs compares to those that have been in the system for a long period of time? Are you just finding fewer and fewer areas of white space to add programs that can be as productive as your legacy programs?
We continue to see nice growth out of the new programs, and it's actually, the numbers are exciting for us. It will continue to allow us and give us confidence to open at this pace around 350 to 400 programs a year. The volatility from quarter to quarter, for example, the metric of maybe productivity per program can get a little choppy in lower volume quarters like this past winter where we were affected maybe disproportionately in commercial with some garage closings around this weather. While our stores remained open, some of the garages didn't. They would close a little earlier. No, I think that there's always examples. There's no one garage or no one program that operates the same. We have some cannibalization if new programs are open and we'll shift accounts that physically happen to be with an address closer to an existing store.
Because our penetration is pretty low in commercial and the number of accounts that we service is still relatively low, the ability to climb up that first call is a great opportunity for us. I can't say that we're not at the point where we need to be talking about large issues about what's happening with this store or this store. Really, for us, it's around the inventory that we added. It didn't all get placed in our stores, for example. By the end of the quarter, we're watching that. Hopefully, that can benefit the commercial programs. We look forward to closing the gap. There's no key metric. We just want to keep growing our productivity levels in commercial with what you know from the other major players in the space. No, there's nothing really new or different between old and new programs for AutoZone.
When you look at those programs that have much more deeply penetrated their market, they may be much higher on the call list. What factors, what features do they share versus those that just have had a harder time breaking in, maybe third or fourth call?
A lot of it is this business is still very relationship building. It's up and down the street. Some of those relationships are hard to crack, and you just got to keep going at it, putting on your hard hat every day, making your sales calls, and we continue to gain traction in that area. We're comfortable and made a strategic decision several years ago that our approach would be to grow this business profitably rather than just grow for the sake of growth. There are ways and opportunities to juice the top line. You can discount. You can do a lot of things to drive top-line sales. We don't believe that that's sustainable. We are just very methodical that we're going to grow the business in a very measured way, and we've been executing that strategy, and I believe we're comfortable. We'd always like to see more.
From a timing standpoint, we open a disproportionate amount of our stores at the very end of the quarter due to weather. We had stores planned. It's really hard to put a truck out there on the road when there's ice all around.
Yeah.
A lot of our stores got opened in the last couple of weeks, which diluted that number or makes that productivity look a little bit worse than it actually is. Overall, I think we're comfortable with the strategy.
I'm curious about the company's perceived perception. Does that make sense? The company's belief and how it's perceived within the commercial side of the market. Maybe one of the drawbacks of being so dominant on the retail side is that it's looked at as more of a DIY player. Do you think that there's that perception the company's had to overcome, and then how does the increase in inventory that's been put in the marketplace potentially work to help overcome that perception issue, if it does exist?
I'm sure the perception exists in certain markets, in certain areas, and a lot of that perception was driven by our competitors. For a long time, AutoZone was late to the game with salespeople on the streets. We were telling our commercial story with our salespeople from inside the store, and you had our competitors had salespeople out there saying they're a retailer. As we've increased the number of salespeople we have, and they're out there telling the AutoZone story and the customer's experiencing the AutoZone relationship, we're slowly but surely, we believe, winning that argument. Our products are accepted. Our brands are accepted, and we're seeing penetration. There always could be more.
We're the small man on the totem pole right now, but we're gaining momentum, and there's not a wall of resistance that would lead us to believe that there's something wrong or askew, or we need to radically change how we're going about it.
Rick, these dirty tactics exist in the brokerage industry, too. On the DIY business, it's long been a slower growth sector. On the traffic side, maybe there's been some migration out of the DIY business towards the DIFM side as cars become more complex. Do you expect that that's going to continue? Does the company reach some point where traffic, some inflection point where traffic is not sufficient enough to cover the fixed costs and that becomes more punitive on the margin structure of the business? Maybe you can talk about traffic, and you can talk about the margin.
Yeah. From the traffic standpoint, we believe that this is a slow growth business, we're not expecting radical changes in the traffic flow or the growth pattern of the business. We believe, and we're very bullish on DIY. We believe it's a strong business. It's a vibrant business. What a lot of people misunderstand is most of our DIY customers work on their vehicles out of economic necessity, not by choice. It's pretty tough to take your car to have somebody diagnose it for $100, and they haven't fixed anything. A lot of our customers don't have the option. I started in this business a little over 30 years ago, and when I first started, the prediction was that DIY was dying because electronic ignition was introduced in the late '70s, early '70s.
Here we are 30 years later, and we're still saying DIY is dying. The American consumer is a very resilient individual when it comes to the ability to do what they need to do to keep their lives going. When you talk about the complexity of vehicles, one of the things that the manufacturer's done that's pretty, actually sophisticated is you open your hood, you just see a hood cover today. It's intimidating. You don't see any parts. You don't see the engine. But if you pop off those five or six screws and you take the hood cover off, guess what? There's an alternator under there. There's belts under there. There's a starter. There's all the same systems that were on the vehicle you grew up with is on the vehicles today. The difference is the computer technology on vehicles today, which has a benefit.
It's pros and cons. The benefit is you can read a sensor now, it tells you exactly what the problem is. Our challenge at AutoZone is how do we educate the consumer to how to fix that problem. We spend a lot of time and make strategic investments in educating the consumer and the AutoZoner with data from the companies that we have, the data that we have from the industry, and educating people that they can do the job themselves. We think there's going to be a strong DIY market for a long time to come, and we think that people will continue to figure out the complexity. We'll continue to provide the tools, the diagnostic equipment for free to our customers to help them do that.
This is it. The complexity of the jobs and the cost of lifetime warranties that have been introduced in our industry has raised the average ticket. With the lifetime warranties, it's put pressure on the traffic count. Michael, to your point, a lot of this is driven by just the evolution of what's being sold. It used to be much more simplistic, lower priced stuff.
It's not necessarily that it's migrating between one side of the market, it's just cars are breaking down less, so you just need to make the changes last, and that probably continues, but you get the engineering complexity benefit to your ticket that more than offsets it.
Yeah. Like an electronic control module, the brain of the car, is an expensive item.
Yeah.
That wasn't for sale, as Rick was saying, in the early '70s. That's changing, just basically.
Brian, one thing you touched on in your prepared remarks is that the industry, at this point, has a very small penetration of e-commerce. I think one of the themes that we've heard throughout the day today is that the pace of disruption, the pace of change within the consumer behavior, within the way the consumer wants to shop, is accelerating. Perhaps e-commerce represents a very low portion of the total today. What's to prevent Amazon, eBay, who are businesses that are heavily focused on supply chain and inventory availability, from offering a greater disruption, at least on the DIY side of the business?
They definitely do today, offering up automotive parts for sale, both players. We are doing business with and partnering with eBay. We have our shingle through their website today. We are close with them. You'll see the AutoZone name through eBay. We know their management well. In questioning the disruption factor of the large, all-inclusive selling formats, it will go that way. The pace with which it goes, we have chosen to be at the forefront of it instead of being disrupted on the back end by someone else. We understand that our investments in e-commerce Is e-commerce as profitable, for example, at selling as retail? It's not. For most retailers, it's not. There's no surprise there. In terms of understanding and driving foot traffic, we want to make sure that as the consumer evolves, we're their first thought.
Can an autozone.com website be that dominant position, or do you have to go through the likes of an Amazon or an eBay? It is still tricky because our average ticket is small, so the free shipping is hard in this space. It is substantially less than you might think. It's in the $20 range retail, so it makes it not a super profitable transaction for retail shipping. Plus, a lot of people order things and order the wrong things. You just don't have the right size of blank. You have to look it up. I'll tell you, though, you can find every part you need somewhere out there on the web, as all the other products. It's just at this point, it's still an information-gathering issue for most people.
We've got three questions from the audience and one minute and 45 seconds left. The question to you about your supply chain, do you feel like your replenishment capabilities for your stores are where they need to be for you to effectively compete on both sides of the market?
I think that we have several tests that we're in the middle of right now. The results of those tests are very promising. Some of them are recency and frequency, how often we deliver our stores. Some of them is the method or methodology, whether it's through the distribution centers or through our hub stores or mega hub stores. We believe that the strategic investments we've made over the last couple of quarters for the additional inventory and then the study of the placement of that inventory and putting it at the closest point to the customer so that we can say yes quicker, puts us in a good position.
An unrelated question, are dealerships gaining share from garages, and what's the impact to AutoZone?
They are, I'm parroting the same information, guys, that you have access to when you talk to the publicly traded folks. They would prefer and keep busy with warranty jobs. There's only so many dealerships out there, and yet there's millions of cars for repair. Is there share gain or an attempt at share gain? Yes. There's an attempt to grow that business because there's a decent margin for the dealerships. We feel like, especially for us, they're actually an opportunity for selling for us as they fix and repair a lot of used cars now as much as new cars. Again, we sort of tailor ourselves to the out-of-warranty parts as much.
The final question from the audience was, the company owns a lot of real estate versus leasing. What goes into that decision?
Our stores are really. It's funny. We don't need to relocate a lot of stores. As a retailer, we might be unique if I told you since being public, we've closed a little over 300 stores out of 5,000. 200 of the 300 were closed when we acquired a chain in 1998 because they were across the street. That means we closed 100 stores in 25 years. You say, "Well, how is that possible?" It's because as neighborhoods evolve, we tend to do better. It's something that you don't need to relocate a store. In terms of ownership, we look at the present value math on the lease versus purchase, and after you pick the multiple, eight times rents, present value of a lease stream, after eight or 10 years, the ownership looks awfully good.
I will tell you can test property taxes much easier with the local tax municipalities if you own the property. You can challenge common area maintenance fees much better. Plus, you get the upside for owning. It's just easier. You just don't pop in and out of sites like you do with other retailers.
The last question, as we're running out of time, is AutoZone's shareholder value algorithm is mid-single-digit EBIT growth, repurchase 10% of its shares, and drive mid-teen EPS growth. Under what conditions would you fall short of those outcomes?
How would they change?
Well, not how would they change. Would the market have to get a lot worse? Would you not be able to comp 2%, and then you'll see some de-leverage? What would have to happen that you wouldn't be able to achieve that algorithm?
Yeah, I was talking earlier, we've had many quarters in a row where we've been able to achieve that, and those have been in more challenging sales times for us and in very good times. What exogenous, what material factors impact? I can tell you if there's a dislocation where folks stop driving. You could come up with the same macro factors.
Yeah.
In general, it's a pretty stable industry. I won't go into much more detail. It's because it's slower moving, the technology doesn't happen overnight. We're repairing older cars, not new cars. No one asked us about electric vehicles today. We appreciate that, but we'll catch up with that in a couple of years. I would tell you that nothing happens. You can kind of see the patterns ahead of time, which makes this industry kind of nice.
Well, that's a good place to stop. Thank you very much.
Thank you, everyone.