Very good, everyone. We have AutoZone with us right now. We have Tom Newbern, who is SVP of Store Operations. You've held a similar role, I think, since 1998 or thereabouts.
You've been with the company for about 21 years.
28.
28, wow.
Yeah.
I read maybe an old bio, I guess. Even more impressive. Brian Campbell, Vice President of Investor Relations, who's also been evidently with the company forever, as far as I can tell.
Right.
An interesting time for the aftermarket right now. I'll start with a topic that's become almost nauseatingly repetitive at this point, but obviously last year we had a lot of disruption from the weather. The business really saw a pretty steep deceleration after an early spring that maybe pulled forward some demand. Do you think that this winter has been normal enough that we're going to stop hearing about the weather over the next 6-9 months or so?
I certainly hope we'll bounce back and forth. Tom, I'm deferring.
I was just thinking, of course, you're not ever going to stop hearing about the weather.
Yeah.
It's retail.
I think you've got to be careful. As an industry, we talked more about the weather this last year than we had in a long time. For good reason, guys. I mean, we saw some very strange weather patterns going on in the U.S. last year. In the Northeast, there was almost no winter, very mild, and we had seen a slowdown in hard parts sales in those parts of the country because things didn't break. This past year, with a more normalized winter, to Dave's point, hey, can that generate a benefit to you going forward? We certainly believe a more normalized winter will help our industry. Last year in particular, we talked about the industry challenge starting in April, it continued on for us actually through last quarter, where we still had, well, a cold winter, a mild one.
Even recently, now that we've seen some more winterized weather, several of the questions this morning have been, "Hey, how has this month been?" Or, "How's the performance?" Probably to your disadvantage, we're halfway through. We're not a guidance giver, but it's not a detriment to have winter weather. I should put it that way. That's a positive.
Right. In terms of having even the winter weather being extended a little, that may not necessarily be a negative. Right now, obviously, in New York, we're still not quite getting to spring weather, and we were just talking about in the last meeting, we haven't necessarily seen that break where you would normally see people getting out, washing out their cars, and doing a little bit of work.
It depends. While the snow, for example, if it's snowing, while it's going on and precipitation is falling, people are inside. As it warms up, people come outside. The point is, we expect that to have benefits for us on an ongoing basis.
We certainly believe it will. I think that Bill Rhodes said in his comments as we head through April and start coming up against an easier compare and the week-to-week weather, the snow and cold and rain changes, we certainly hope to see improvements against a weaker compare. If not, our theory about the impact of the very mild winter last year was wrong. We don't think so, but we don't have the answer to that yet.
Going back to some of Bill's comments about the fourth quarter and into the first quarter, he talked a little bit about some of the impacts from delayed tax returns, and obviously you've had a payroll tax increase. How are you feeling about the overall consumer environment and maybe more specifically about your consumer and how they're feeling about their wallets?
Are you seeing maybe as that income tax cycle normalizes a little bit, as people do start to get some of those tax returns coming in, do you feel like things have normalized a little bit versus what seemed to be a very choppy beginning of the year?
We do. In fact, income tax refunds, to level set folks, through the end of our last quarter, the first week of February, the U.S. Treasury Department had remitted about $20 billion lower in refunds than they had the year before. Through this last week, we're only down about $8 billion.
$8 billion.
On a comparable basis, we are like for like actually a little bit better this quarter, all 5 or 6 weeks of it, for this quarter than last year. It should be a race to the finish line for April 15th here. We expect lots of folks, does the IRS, all hands on deck from what we're hearing at the IRS with people filing their tax returns up to the end. It does surprise them that people who are expecting refunds have deferred and delayed their refunds until later in the season this year. Again, we expect that to even out throughout this fiscal quarter that we're in right now.
Just more broadly about the overall consumer environment, do you feel like the consumer is impacting the business at all? Obviously, we saw some deceleration. Outside of just the refund issues there, is the consumer healthy enough to continue doing regular maintenance on their cars, et cetera? Yeah, I think that what we'll find is what we have historically seen is whether it's gas prices or income taxes or payroll taxes, there's a shock to the consumer at first. You've heard that from Walmart and many of the other retailers.
Over time, they adjust, and there's no reason for us to believe that they won't. Certainly, particularly when you're talking about a large part of our customer base, the payroll tax was a surprise to a lot of people, and at the lower income levels, that 2% matters.
Got you. I guess thinking about the aftermarket more specifically, over the last few years, you've had a fairly robust tailwind from the aging of the car fleet. New vehicle sales were very low. People are holding onto their cars longer and longer. Has that benefit slowed at all over the last year as SAR has started to slowly tick back up? Do you see that changing the dynamics at all for the aftermarket maybe over the next 6 to 12 months or so?
I don't know if we've had a public point of view. Certainly, I don't think you would see any change over the next 6 to 12 months. The only thing that could possibly make that kind of change would be there would have to be a step change in scrappage, and we've not seen that. I'm not sure when the last time that actually occurred. To the extent that the vehicle age starts to get younger.
One of our legs for growth, we believe one of our legs for growth for a long time is our B2B business. We think we're set up nicely to take advantage of any shift because we believe that's what it would be, is simply a shift from DIY to do it for me with a younger car base.
Got you. I guess thinking about the overall market just a little bit more for a second, there's been a huge consolidation story in this industry for an extended period of time, at least 10 years now. We were talking in the last meeting about some of the smaller players being consolidated or share maybe bleeding from some of the regional players. You still have a very robust store growth plan in the U.S. business. Do you think that continues, and how much more room to run, and how much white space is there still in the U.S. for even the core DIY business?
We're on, and have for the last, I'm not sure, several years, been on a pace for about 150 new stores a year. I am also responsible for store development and am very familiar with those numbers and what it looks like 10, 15 years from now. If you would've asked me that question 10 years ago, I'd have had a very different number than I have. In fact, we'd have probably said, "Okay, we're done." There is still plenty of green fields ahead. While the number is finite, we don't see the end, and we believe that our model will continue to evolve to allow us to go into smaller trade areas. In particular, commercial opens up more opportunities as well.
Got you. I guess one thing that, and we were talking about this last night at a real estate panel, one thing that can influence the ultimate market size is e-commerce. It's not a part of the ecosystem we really talk about a lot with regards to auto parts. You did make an acquisition recently of a business called AutoAnything. Are you seeing any change in e-commerce in the market? Are you seeing any increased competition from the eBay and Amazon of the world? Is it still, given the level of maintenance and break-fix that's in the business, still a relatively long-term evolution for you guys?
I think that e-commerce will play a more important role in our space, but it's over time. It's a strange commentary to have right now for a company because it's such a top-of-mind point for so many folks. In our space, especially for hard parts, the demand factor, needing it now, now, is a big driver. As a result, there haven't been as many hard parts sold as people in our audience here might think. In fact, those that do buy are more willing to wait on things. The average purchase price on the web makes it a challenge for the free shipping factor that you hear about. The industry isn't perfectly conducive to things. The AutoAnything transaction for us is a great company, specialized, excuse me, in accessories. It's a higher purchase price. It's a more high-end product, customized accessories for cars.
It wasn't our niche before. Do we think it's going to grow? We do, but I wouldn't expect us to be talking about it as a share shifter in the next couple of years. It'll grow, but not, from what we can see, dramatically to be a top-line factor for us. It'll be a key point for us, and we want to stay out in front of it. We believe we've got the best technology in the space, and we want to be a driver in that evolution, not a follower.
Right. Tom, you mentioned the commercial business a couple of times. Maybe you could switch gears to talking about the commercial business a little bit. It's been a huge growth driver for AutoZone for probably about the last five years or so. Over the last two or three quarters, you've definitely seen a little bit of a deceleration there, at least on a per program basis. You saw a significant surge in the number of programs, which probably contributes to that as well. Could you talk a little bit about what you think happened there and maybe why there's now been a little bit of an air pocket in new program growth as well, and how you see that And picking back up maybe as we kind of go throughout 2013.
Sure. First, I'll touch on the slowing of the program growth. Anybody that's followed us for very long knows that we're always driven by our financial performance first. I think last year we opened 400-ish programs, and the timing of how we opened those programs was probably not perfect. There's a ramp time that comes along with opening a new program. Opening 90 or 150 programs in the dead of winter doesn't make a lot of sense. Not to mention the fact that opening 400 programs puts a lot of stress on the organization. The key to successful commercial business is making sure that you have the right human assets, because it is ultimately a relationship business first. If you can't find the appropriate human assets, then you're better served to slow your growth.
Now, we believe that we'll certainly open at least 300 this year and have a fairly aggressive plan beyond this year. We'll be doing it in a little more structured manner. Timing's important. You don't want to have 30% of your new stores open between November and December. A lot of people don't do stuff over holidays, so timing.
Maybe just a little bit on what you think has happened on a per program basis, the slowdown in the growth there. Maybe it has something to do with the weather or the regionality of it.
I think that if you go back to, first of all, that it follows DIY, and on a regional basis, it very much looks like what's going on with our DIY business. Maintenance items, under-car specifically, brakes, chassis, et cetera, are a much bigger part of our commercial business than they are our DIY business. In those geographic areas, we've talked about the Midwest, the Plains, Upper Midwest, New England. The lack of winter we keep talking about really has an impact on those categories. If you don't drive over a pothole in Buffalo, N.Y., you're not likely to break an under-car piece. If you're not driving through eight inches of snow four or five times a week, you're going to have less wear on your brakes. The results very much follow the geographic areas we've talked about, so there's more pressure in those three in particular.
We're not excited about that deceleration, the one thing that we are very pleased with is we continue to grow share, and we have several metrics we use to measure that, and each would indicate that we're experiencing the same type of share growth that we have over the last three or four years.
I guess when you think about the commercial business, you have a very geared program towards building up your hub stores, using that as a key point of improving the distribution network to build out the speed of delivery to local garages. How far along do you think you are on that path? How big can the hubs be? Is there still opportunity there to kind of mine the system for greater market share based on the hub-and-spoke system?
There's certainly more opportunity. We have expanded 77 of our hubs to allow for far more SKUs. I'm not sure where the tipping point is, the difference between the sales in the last 30% of those SKUs, there's a point of diminishing return, the willingness for a customer to wait on that part is significantly different than it is in your 20% is driving 80% of your business. We certainly think that forward placement of that inventory will continue to be an opportunity for us. How to maintain the most productive inventory, it continues to be important to us, our hub networks are a big part of the initiatives we think that will continue to help differentiate us between our competitors. A lot of talk about the difference between our distribution model and that of some of our competitors, there's really not that much difference.
We have daily replenishment through our hubs. We have daily access, three to four times a day access, to the more hard-to-find parts. It looks a little different, the results are not that different.
When you think about those 77 hubs that have been expanded, I think your typical hub has about 40,000 SKUs or thereabouts. How many SKUs does an expanded hub have?
We're capable of holding up to 75,000 SKUs now, and we have a number of initiatives out there that would allow us to go beyond that. The productivity of inventory beyond 50,000 SKUs is a question that we will have to deal with.
Got you. You mentioned before the issue of finding the right people to run those commercial programs. Could you give us a sense, I know certain stores have a one-team approach where it's more of a blended approach between the existing DIY associates as well as parts professionals. Can you give us any sense of how that mixes versus programs with a dedicated commercial specialist who's on the phone all day with local garages?
Yeah. The vast majority of our stores have a dedicated commercial sales manager. The notion of blending or the one-team approach is not necessarily having everyone answer the phone. It would be more along the lines of having everyone with the ability to answer the phone should they need to, rather than have a second backup commercial sales manager. You may depend more on the folks on the floor. Everyone should be able to drive and make a delivery in the event that you have one or two trucks out, and we have a commitment to customers of 30 minutes or less. If you can't do that, somebody from the retail side will drive. The notion that one team means we don't have dedicated people to commercial, I think is not a good starting point.
Got you. AutoZone has had a phenomenal culture of driving margins and maintaining profitability, even in an environment where comps have been sometimes not that robust. Is there a certain level where you think about being able to drive leverage out of the model? Obviously, even in times where you've had negative comps, you've had margin leverage, is there a point where you say, "We need a 1% comp, we need a 2% comp," or is it just a culture of continually driving costs out of the business?
We certainly plan around a very conservative number. If we're low single-digit comps, we feel very comfortable with our ability to continue to lever the business, we've shown, for a quarter or a couple of quarters, even a negative comp, we have the ability to continue to find leverage. We're very comfortable with our model in the low single-digit range.
Just to answer, the way you said it, David, at the end, the latter, just a continual focus on cost management. It's focusing on gross margin enhancement where we can, negotiation, and also on saving money in SG&A, leads to Tom's answer, being able to leverage at low levels.
I guess as part of that, gross margins have been just a constant surprise almost to the upside, despite the headwind of a business that's growing phenomenally in commercial that should be dilutive to margins. Is that an area where you still think there's opportunity, or is there ever a point where you've reached the best margins you can possibly get to?
Nothing is forever. To your point, commercial is dilutive. It has been. It'll continue to be dilutive. We do not expect commercial to have the same gross margins as retail at any time in the future. Bigger customers expect better pricing. It's part of the industry formula. In terms of opportunity, we have developed a lot of our brands, and over time, that has helped AutoZone, I won't say manage, but expand its operating margins. We have taken advantage of that through negotiation, either through direct sourcing or with our current vendor base primarily, and reduced our cost structure because of it. Is it ongoing? There continue to be opportunities, we feel, but no, to lesser degrees, we continuously believe.
When you talk about, I think one of the items that's been a very big contributor has been actual product acquisition. Has that primarily been in that private label product where maybe you're going out to vendors and saying, "It's going to have a Duralast label on the box, but we can play various vendors against each other?
Yes. That's a big driver.
Correct.
Great. With that, I want to open it up a little bit to the floor in case there are any questions.
For your DIY customer, are those customers now using the internet to see what parts they need before they come into the store? Is there an opportunity for you to do maybe a ship-to-store type delivery where I look and see, "Oh, I want a head gasket. I need these brake calipers, and I want to make sure the store has it before I show up.
We currently offer buy online, pickup in store, if that's what you want. I think Ryan mentioned, or maybe mentioned in one of the one-on-ones, we believe that we lead the industry in internet traffic. We have a tremendous number of visitors getting into our catalog to do just what you said, to make sure that the part's available. Those same folks, unlike a lot of consumers, want to come into the store, that they want the trustworthy advice, and they want to feel it, touch it, and see it. While e-commerce continues to be a big possibility for us, we actually, with regards to our initiatives, think of it in terms of leveraging the internet, not just e-commerce, because we are seeing more and more people shift to getting that advice via the internet, but they're still coming in the store.
Actually, a lot of possibilities for us to continue to lever the ability to drive them into the store.
We got one in the back there.
You talked about having the right commercial parts professionals as being the key to driving the commercial growth. What's the strategy in acquiring that talent? Is it going out and offering a compelling package to an independent or competitor, or are you developing those people internally, it just takes time to do that?
It's a fairly good mix. We've been in the commercial business, although probably not as robustly as we'd like to have been, for a long time. We have a generation of associates that understand commercial, have worked in commercial, and have been developed and a succession plan in place internally. We also have a sales force of 400 people that are out visiting accounts every day and asking those accounts, "Who are you doing business with? Who's the best out there?" When possible, we certainly like to hire somebody that can bring a book of business with them, and that's particularly important in the development of new commercial programs.
I guess one place to touch on is international expansion. AutoZone has had a robust business in Mexico for many years now. It's taken a very long time to ramp that, and I think AutoZone's taken a very methodical approach. You're now entering Brazil. I guess, any very early takeaways from that market, and whether or not there's a belief that the model can work there. Does the experience in Mexico give any greater conviction in the ability to ramp that business quicker?
Your first statement is right. We've been methodical, haven't we, in Mexico? At that pace, we can talk about Brazil for another 10 years to get to 300 stores. Wait, we learned a lot in Mexico that we hope to apply in Brazil, the pace should be-
That's the first one
A bit different. In fairness, Brazil is a very exciting market. There are things we've learned.
It's very tough.
It's lots of decentralized competition, not a lot of national chains. It doesn't look like our market. At the same time, the phrase isn't right here, I'm not using it correctly, a protectionist environment where we procure our goods from in-country. We learned Brazil is very much a VAT or a sales tax society, so when you move goods across different states within Brazil, it's a protected environment, so you have to have your paperwork in line. A lot to talk about Brazil. Unfortunately.
One store.
One store. It's not a lot to talk about at this point. Check back with us. We're excited.
Right
About what that can represent.
More on the way.
More on the way.
I guess, and maybe just going back to Mexico, I think it's probably about 5% of the business today. Is there still a significant amount of opportunity in that market to continue to grow off of before we have maybe a few more years of waiting to talk about Brazil more significantly?
I think Mexico continued to be a steady grower, certainly at the pace that we're at. Mexico has been a very solid story for AutoZone. We basically have moved north to south. We entered on the border towns and went south. We don't have a large presence still in Guadalajara and Mexico City. As we're growing in those towns, that offers a lot of opportunity for us. Yeah, I think that's been an exciting place for us, but it's been a deliberate growth pace. Exciting, yes. Continuous growth, yes, and hopefully for many years to come.
Lots of opportunities from Mexico City south. Development times have been much longer than we experienced on the Frontera and in the northern part of the country. We're excited about the continued possibilities there.
Big challenges in foreign countries, obviously exchange rates. A lot of people get focused on dollar equivalents. We report a domestic same-store sales result. We do not report a North American same-store sales result, some retailers blend comps. In Mexico, the peso does matter, the exchange rate. For many years it sat at 10 pesos to the dollar, then it went to 13 pesos. Now more recently, the peso has settled back in as the Mexican economy has gotten stronger at around 12 pesos to the dollar. The economy is getting healthier. Mexico continues to be a very solid place to invest for American companies as well as domestic.
I think we have one-
Yeah, hi. I'm from the U.K., and one of the things that's very obvious where I am is that the DIY skills of the population are declining pretty rapidly in the auto space. Halfords, the market leader in the U.K., is now at the stage where it's actually offering to check people's engine oil for them because they can't even do that for themselves. I was wondering, are you seeing the same kind of trends in North America at all? How do you see your business in five or 10 years' time in terms of the mix of the B2B as opposed to the DIY market?
No, I don't think we have seen that here. In fact, you mentioned some of our accelerated growth over the last four or five years. We feel like we've seen a reintroduction to do it yourself as our economy has gotten tougher and the folks at the lower end of the economy have become more challenged. I think they're becoming more engaged in DIY. We certainly saw that four years ago, there's no indication that that's changing. Again, we're a diversified company. We think that the commercial side is a hedge against that should it occur.
Yeah, that's not a surprise. When we went into South America, we also looked at Western Europe. Western Europe is definitely, in our opinion, more the do-it-for-me market for several reasons, as you look at those kind of things. How behaviors have changed, this is kind of a neat metric, but two days ago, the U.S. reported units of cars and light trucks sold for the month of March. People talked about days earlier, about, hey, the growth in this industry, and what will happen, more cars are being sold. Cars actually were negative last month, in March, down. Trucks were up 7%. We, uniquely so different than Western Europe, love trucks and driving. The benefit here is that the price of gas is a lot cheaper per gallon. You get worn out driving your F-150 around London.
Here, people, Americans still continue to drive and want to get out and about. We understand your question. It's just not to that degree thus far in this country.
I don't think the F-150 would fit on most roads in Central Europe.
We recommend it, though.
Maybe a couple of questions on capital allocation. Firstly, maybe touching on CapEx. Obviously, you've got the ongoing project of expanding the hub stores and continuing to build out the retail square footage. You did see a little bit of, I think, a pickup in guidance for this year on the CapEx side. Where else are you seeing incremental spend going? Is there a point where that maybe ebbs a little bit after ramping for the last couple of years?
Yeah. We are maniacally focused on capital. We are a company that, at every section, has to debate its capital deployment. What is the return, both in the first year and then on a mature basis for the investment? The last couple of years, we have spent more capital on modernization improvements in our hub network, which is a difference, these 77 stores that Tom had talked about. We have, this year, bought this little internet company that's raised the CapEx spend. The biggest driver with CapEx changes, besides these two, is the mix of owned versus leased stores, as our new stores remain around this 150-ish domestic, 50-odd-plus international. If we buy more, we spend a little more on CapEx. If we lease more, we spend a little less. Other than that, no major changes. We're not out proposing any large IT investment structures today.
Last night, we had a real estate panel, and we were talking about development in the U.S. and the fact that despite the fact that occupancy in most retail centers is now at a fairly healthy level, you really haven't seen that much development. Do you feel like there's any constraint in terms of finding locations? I guess, in thinking about why you're purchasing, is that really just a financial decision that's more attractive, or is it the ability to go out and develop a location or something like that?
It is certainly a financial decision. We would definitely prefer to buy than lease. No, there are no noticeable constraints. There's still plenty of real estate out there. Development times, we're moving into focused a lot on the West Coast and in New England and South Florida and a couple of markets that just are difficult to develop.
What trips us up a little bit is in strip malls or out front of the strip mall. We would prefer to be out front on the pad.
Right.
Have the parking and the signage. Yeah, going into strip malls. That is an interesting fact that you're saying that, I guess membership in these strip malls is now increasing, you're saying.
Certainly. Off the lows, we see that.
Yeah. Maybe just one last quick one on dividends versus repurchases. We've seen AutoZone has been really maybe a case study in share repurchases. Lately, we've seen a bit of a transition across the market from repurchases to dividends. Any update in the thought process there? Any kind of commentary on where that would go over time?
We've been very steady, consistent with our buyback methodology. At the prices that we've seen our stock trade at historically, we feel like it's a better value for the shareholder to buy the stock back than, relatively speaking, the dividend. At some point, if the stock became unattractive from an accretion standpoint, we would look at dividends. At this point, we like our strategy.
Got you. Great. Well, Tom, Brian, thank you very much for the time, and thank you for being with us.
Thank you for inviting us.
Thank you. Appreciate your time.
Thank you for inviting us.