Presentation with AutoZone. I'm Denise Chai, Head of Hardline Retail Coverage at Bank of America Merrill Lynch, it's my pleasure to introduce the management of AutoZone. Here we have Rick Smith, Head of Store Operations, and Brian Campbell, Head of Investor Relations. Brian will give us an overview.
Good morning, everyone. Nice to see everyone this morning. Without further ado, last week, we reported our second fiscal quarter of 2014's financial results. That was Tuesday morning, it's kind of fresh on our minds. By the way, before I start the presentation, I'll introduce Rick. Rick has been with AutoZone for 29 years. He predated the name AutoZone. He was with our company when we were Auto Shack. Some fun questions when we talked about it. We changed the name in 1986 or 1987, lots of history with the company. I've been here 15 years with the company, Rick easily exceeds my tenure. In terms of forward-looking statements, that's the proverbial story. The story behind that was it was controversial. There were other retailers with ending names, we just changed the name, let's put it that way. This is our pledge.
Start every meeting at AutoZone with a cheer and pledge. We get together, what does this mean? We live by these four lines. We always want to put customers first. We know our parts and products. We have to make sure our stores look great, we've got the best merchandise at the right price. We're constantly price shopping. We're constantly making sure we've got a good, better, and best assortment in our stores. That means if a customer walks into our store at 8:59 P.M. the store is closing at 9:00 P.M., you stay open. It's that simple. We're constantly training AutoZoners, new and older AutoZoners, to make sure to greet you when you come into the store, ask you, "What are you working on? How may we help you today?" Constantly interaction with customers.
Okay, a little bit of overview about who we are. On this slide, guys, you're going to see several slides, by the way, this morning, to look at consistency in results, we're proud of that. We're trying to build a story and a company that has financial results that are steady for the long run. At the top, who are we? We have almost 4,900 stores domestically. We have over 300 stores in Mexico. We were asked the other day, when did we open our first store in Mexico? It was December of 1998. We open approximately 40 to 50 stores a year in Mexico. We have a handful of stores in Brazil today. We're excited about that opportunity. As a result, you can see our sales. We just did over $9 billion in sales. We have an EBITDA last fiscal year.
Our fiscal year ends in the fall, the end of August. You'll see that we did last year, $2 billion. This is a ramp in sales here. You'll see very steady, 5-odd% over 10 years, very consistent results. These are our strategic priorities. They changed ever so slightly this last year, where the bottom one, digital integration, came into focus. Some retailers talk about, I guess, platform optimization and other terms. This is where we're using our e-commerce platform. I'll explain that a little bit later. We're integrating that with our ALLDATA product, our autozone.com product, our AutoAnything product to cross-sell with our stores. Retail, commercial, and international. That used to be Mexico. Now it's obviously international with growth. I talked to you guys about the sales results. Here's our dollar growth and results the last several years.
You'll see a spike, guys, in 2009, 2010, and 2011, where the ramp was demonstrative. We were a company in an industry that performed very well as the economy had dipped. As consumers kept their cars, maintained their vehicles more aggressively, we were the beneficiary of that. We went ahead and invested in the business during that time. You'll continue to see a nice growth rate there. That's where you see the EBIT of over $1 billion. Last year, just to level set, we had 53 weeks. We stripped out the extra week in the 13-bar chart there to be more comparable. We did the same thing with the EPS growth. Our earnings per share numbers are bigger than a lot of companies you see just because the absolute share count, you'll see in a minute, is a little bit lower than most companies.
We made over $27 a share last year. We're growing in the mid-teen rate. In fact, over the last five years, higher than that, north of 20%. It's been a very steady up to the right story. Our goal is to try to continue that pace. Here was our second quarter results one week ago. We had leverage in gross margin. We picked up 25 basis points. We have a high gross margin rate. Our industry sells a lot of slow-turning, high-service products. A lot of people come in, they don't know what they need. Our average inventory turns just over one time a year. Our operating expenses delevered this past quarter 42 basis points. We invested in the business. We spent and talked about some advertising expense that we implemented in our second quarter, our winter quarter.
This past quarter, by the way, is not our highest volume per store quarter. The wintertime, people don't get out and work on their cars as much as they do in the spring and summer. What's nice about the story is you'll see a consistent combination of net income growth with fewer shares getting to this 18% growth rate. I'll flip to the year-to-date slide, and you see the same trend, not so unique or special, where it's a nice steady trend. That's been pretty consistent for us. 8% net income for the year against 7% coming from diluted shares. 34 million diluted shares year-to-date, 17% EPS growth rate. This is our industry on the retail front. The industry is estimated at $47 billion. We're the industry leader in this space. It's a growing industry, lower growing than the other segment that we're in.
Being dominant, this is job one for us, our retail space. We want to make sure our stores look great all the time to help walk-in customers. The Do It For Me industry is the other side of our business domestically. These are the folks that ask for, usually tax-exempt customers, folks that want the parts delivered to their garages for installation, for customers that drop their cars off in the bays. This is a growing business for us. This industry is slightly greater than the retail space. You see it's at $59 billion. Similar growth in industry rate. We've been growing faster than the industry from a combination of lower volume levels than some peers, as well as opening up stores and programs in our stores for servicing these customers. Overall AZ business, who are we? What are we focusing on?
We're focusing on continuing to add stores. We're opening up commercial programs. You'll see in a second that we have about 74%-75% of our domestic stores selling commercially. We hope to expand that number. We're investing in inventory. We spent a lot of time talking to you folks last week about inventory investment. You'll see that our inventory per store numbers are a little higher this past quarter. That focus on inventory, we believe, will help us sell better retail and commercially, being able to say yes more frequently. We're updating hub stores. For those who would like to ask more about in the Q&A, hub stores are just very large stores in markets that are centrally located to help to deliver and provide harder-to-find parts to surrounding stores. That's been a big push. Internationally, right now we're focused clearly on Mexico with Brazil. That's our international focus.
We're enhancing e-commerce. We focus and spend a lot of time on promoting our e-commerce B2C website as well as B2B. We'll talk about that. Then share opportunities. While the largest share in retail, we're by no means 50% of the market, that's an opportunity. It's a consolidating industry. We can talk about in a minute with what's happened. There's been some larger deals that have been done in our space in the last 12 months as well. Commercially, a lot of opportunity to expand there as well. DIY growth, what are we focusing on? A lot of customer service. We talk about this all the time in our stores. A lot of training. AutoZone has a very unique culture. It's described internally as unique and powerful, along with our cheer and pledge. We recognize people for years of service, going the extra mile. A lot of acronyms.
GOTCHA, going out to the customer car. WOW customer service. We recognize people for doing exceptional work. It's a different culture, and it's unique, and I think it's what separates us, allows us to perform maybe at a higher level, especially on retail than our peers. We're establishing and more aggressive on marketing with our different campaigns, focusing on category management with initiatives on new products. Improving availability that I had talked about. With commercial, we are opening more programs. That said, we've been opening between 350 and 400 store programs a year. What that means is we're hiring commercial specialists in stores, inserting phone lines, adding trucks, little pickup trucks, to deliver auto parts to garages. Several stores didn't have those programs before. It's just a different customer segment. Improving availability and shop technician training. We're talking to our accounts as well to grow. This is commercial.
At the lower left here, you'll see that we grew 12% in sales, trailing four quarters, 13% in sales. This does eclipse the industry growth rate. We've been gaining share in our industry according to industry data that we see, both retail and commercial, both segments individually. That's exciting for us. You'll see that our programs are up 14%. We have a lot of immature programs. Of the 3,500 stores, over 1,000 of them are three years or younger. We're excited about what that growth trajectory can mean for our business. Here's our international model. We're in every state in Mexico. We're also in the Federal District in and around Mexico City. Basically, we're a Northern Mexico to Southern Mexico developer.
It was easy for us because we were in South Texas, we were in the Rio Grande Valley, we were in lower Arizona, California. We moved from Northern Mexico down into Central Mexico into the bottom of Mexico. We're in all states now. It's a good business for us. It's still an immature business. You can see our growth trajectory has been pretty stable at around this 40-odd stores a year. Brazil, it's a new market. Several retailers, American retailers that do business in Brazil have talked about the complexities of the marketplace. We're learning that with our handful of stores every day. It's a highly regulated marketplace, but a wonderful opportunity with customer segment and wealth factor for consumers. We think that's going to be a good opportunity for us going forward. This is our e-commerce platform.
12 months ago, we bought a company called AutoAnything. It's a performance auto parts retailer. It sells higher-end, bigger-ticket stuff for kind of, the term is a gearhead, but highly accessorized car owners, people that want to spend more money on performance items. That's exciting for us. Heavy on customer service, great call center. Some crossover with products with our website, not a lot. It's a good opportunity to learn about what consumers want with the web only. That was a company that's been in business for approximately 20 years. Before we acquired them. E-commerce, we're growing our autozone.com website as well, and you can see what we're doing here, providing customers with a lot of advice. We've got some videos, how-to's on the website. Today, it's integration.
For as much as people use our websites, they still come in and buy products from us through the stores. This is our final slide this morning, is what our growth trajectories are, guys. Again, summarizing, with retail sales, we hope to continue to grow. We expect and are attempting to continue to gain market share in our industry. Commercial sales growth, a lot of opportunity. We are not the number one player in the commercial space. We hope to tell you in a decade that we are. At this point, we're growing our business, continuing improving. You see a very small market share. There's several players that have been doing it for longer than us in this industry. A very deliberate pace with international, we manage costs very deliberately, that's how you get to a very consistent earnings model.
With anything else, I don't mind sitting down and having Rick and I answer your questions. Thank you.
Thanks so much. While we've got to kick off questions, could you talk a bit about the opportunities that you see for 2014 in both DIY and commercial? A lot of things changed this year between the weather, competitor M&A, and also your own inventory and distribution strategy. Then if you could just drill down more into that inventory and distribution strategy and really what's and when we expect to see the benefits of that.
Sure. Okay.
I'll talk about the distribution strategy and some of the things that we're doing with inventory. We're testing several new approaches or enhanced approaches to the frequency which we deliver our stores. Traditionally, we have a distribution center model where we would deliver our stores once a week. We're looking at increasing that frequency three, four, five times a week in different markets. We have a hub network where we top our stores off three times a day, and the hub will spoke out to satellite stores. We're also tweaking the frequency of how often we deliver our hubs and how often our hubs deliver our satellites. We're testing another concept with a larger hub footprint where we can bring more merchandise into the local market and put it in the network so we can service the commercial customer in a quicker manner.
Those are some of the things that we're doing with the inventory standpoint. The initial test results have been very promising, but the tests have been running through the winter and the fall and the winter, we're really kind of a wait and see to get through our selling season, the spring and the summer, so we can really get a read on the test. Once we've aligned on what the strategy is going forward, the implementation process will be probably somewhere this time next year, we should be able to have most of it baked or directly out in the chain.
Got it.
I would say that 2014, this new year, we spent more time on deliberate growth initiatives than in past years. We're excited. I can personally speak for the fact that we've thought a lot about and questioned assortment, style of store format, what's the right number of SKUs across our chain, more so than we've done in past years. We learned. Because this is a distribution business as much as it's a retail business, you've got to have availability. We spend a lot of time studying others outside our industry. We ask best practices. We're based in Memphis. Obviously, there's some other big distributors based in Memphis we try to learn from.
We're always asking ourselves, "Is there a way to move slow-turning SKUs more efficiently?" Because if you don't have and you can't have available, if you can't say yes, you'll lose a lot of transactions, even the faster-turning SKUs that do get asked for. Many thousands of SKUs in our stores. Our stores carry over on average 20,000 SKUs, basically 22,000 SKUs per store. Many SKUs you need in very slow turning. You've got to be sharp on it, especially with the car population that keeps evolving. Lots of new makes and models every year.
Okay.
How do you think about, you referenced in one of your slides the benefit you got from the credit crisis and people keeping cars longer. With respect to that, how do you now think about, on a go-forward basis, the pickup in car sales, a theoretical average age of fleet that should be getting younger isn't necessarily, and less need for aftermarket parts and service for now while the cars are, relatively speaking, younger?
The age of this, we're watching this very closely to ask for those three years, 2009, 2010, and 2011, the number of new cars sold in the U.S. dipped. That is something that newer car sales, while we do sell parts on newer cars, they're under warranty, simply put. Where does that trend? We look at the absolute car population north of 200 million vehicles. It's a factor for us. It's not the end-all. You would set at the scrappage rate on the back end what's happening with cars. As long as those cars are being purchased, those that are being traded in are being resold in the marketplace, we'll be in good shape.
What we've seen because of this is a little bit less car parts we expect to be sold on those model years I talked about going forward, but we're seeing older cars still remaining on the road with high demand for parts. At this point, our belief is that we'll continue to sell more old parts offsetting the pressure from that lack of new car sales. What will new car sales be this year? I'm not sure. This year, there's unique trends going on in the car market. As many trucks as cars are being sold in the U.S. Truck customers are great customers for us. With credit and spikes with promotions on will this year be much greater than last year? I don't think so.
We look at the car sales as being around 15 million to 16 million, seems like a normal growth rate, and we expect that to continue. We like that. We want new cars. It helps us ultimately. It's just there's ebbs and flows in those cycle years, but it's only one of many factors.
Commercial remains a big opportunity for you. Can you talk about some of the components of Commercial growth, whether it's opening new programs or increasing productivity from existing ones, building the basket, increasing share with existing customers? Can you give some color of what you see going forward?
Commercial is one of our key growth initiatives for the future. We've been adding about 300-400 stores a year in Commercial. We see a lot of green grass in Commercial with all segments. We're relatively new and small in the field, so a lot of upside for AutoZone. As we increase our sales force on the street, we're getting greater penetration. There's several segments in Commercial. There's the nationals, the regionals, some of the government contract players that we're beginning to penetrate. What we've seen in our Commercial productivity is as we open stores, it's a little cannibalization factor from some of our existing stores. As we fill in markets, we'll redelineate those territories, which will take accounts from one store and add it to a new store, then we've got to go back and rebuild that base.
We think Commercial is a very, very promising and strong growth leg for AutoZone into the future.
Great. Typically, how long does the cannibalization last?
It's market-driven, we can pretty much recover from the opening of a new store in probably three to six months.
It takes a while to go out and build new accounts or either penetrate deeper into the accounts that are left into that store.
Right, thanks.
The EV segment is still in its infancy, as you guys think about your long-term strategic planning and the relatively lower parts consumption and parts deterioration that goes into an EV or comes out of driving an EV, how do you think about the impact on your business? Again, understanding that it's in its infancy today. If you look out, the Tesla folks brag there's 18 moving parts on their cars. It's not dissimilar when you look at a Nissan or a Chevy. Thoughts on the EV, what it means for you, what it means for the industry?
EV is a small segment today, but it's something that we will watch closely in development. I don't think anybody really knows how expensive it'd be to repair some of these electronic vehicles at 100,000 miles. As we watch the life cycle grow, I should point out that the sweet spot for walk-in customers for us is basically 100,000 miles, seven-year-old car and older. As these cars age, we'll be able to watch what parts they do have fail. Now, for example, the battery pack in a Tesla, very expensive, I assume, to replace. We do not offer that today. The number of vehicles, though, that are being sold is small relative to car population, we will learn from that.
As that becomes a larger segment, we too will morph to support that segment because there's only so many garages right now, OE, that can handle those cars. The industry will develop, it's a slow-moving change, we are able to watch that. It's not something that happens overnight.
Can you talk a little bit about your past quarter? Seems like things have been going really, really nicely, the last four weeks, demand seemed to slow down, especially in failure parts. Can you talk a little bit about the weather impact there? It seems to me that weather was still pretty poor the last couple of weeks of your quarter. What are the dynamics there?
Yeah. We've been talking a little bit about cadence on results, I appreciate the question because it can get tricky as we talk from one week to the next with performance. We are a volatile business during the winter months. When there's heavy precipitation, people don't go outside and work on their vehicles. We made a point in the conference call of talking about how the last four weeks of our quarter were lower on a same-store sales basis than our first eight weeks. Of those four weeks, in particular, weeks 10 and 11, the last couple of weeks, not the final week, were lower. Those weeks, we were impacted by several store closures and a storm in the southeast along the Atlanta market and up the East Coast that got major population areas that slowed our sales.
What we did talk about was the last week, we saw a rebound again. Basically, the summary of this is cold weather and very hot weather extremes are good for us. Customers have breakage. There's failure on cars. When there's heavy precipitation, rain or snow, people don't go outside with those extremes. It takes a drying out or a reduction in the precipitation before customers go outside. Beyond that, the industry benefited from cold weather. We talked more about how our failure parts sales increased during this time period. I know you folks talk a lot about, when I was up here, sort of potholes in street, and we're not living every day in New York market. We're based in Tennessee, but we don't mind those potholes. That's good for us, and hopefully, that will have a tailwind for the spring and the summer for us.
Those are the kind of things that we benefit from. When you're outside driving and your car falls into one of them, that'll cause damage.