So we have AutoZone with us right now. We have Tom Newburn, who is SVP of Store Operations. You've held a similar role, I think, since 1998 or thereabouts and been with the company for about 21 years? 28. 28, wow.
I read maybe an old bio, I guess, even more impressive. And Brian Campbell, Vice President of Investor Relations, who's also been evidently with the company forever as far as I can tell. So 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 towards some demand. You think that this winter has been normal enough that we're going to stop hearing about the weather over the next 6 to 9 months or so?
I certainly hope we'll bounce back and forth. So tell me, I'm deferring. I was just thinking of course you're not ever going to
stop hearing about the weather. Yes, retail.
But you got to be careful. We did as an industry we talked more about the weather this last year than we had in a long time. But 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 part 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 and it continued on for us actually through last quarter where we still had, well, a cold winter, a mild one.
So even recently now that we've seen some more winterized weather, several of the questions this morning have been, hey, how's this month been? Or how's the performance? Probably to our to your disadvantage, we're halfway through. We're not a guidance giver, but it's not a detriment to have winter weather. So I should put it that way.
That's a positive.
So in terms of having the even the winter weather being extended a little bit that may not necessarily be a negative. I mean, 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 up their cars and doing a little bit of work.
It depends. I mean, while the snow, for example, if it's snowing, while it's going on, precipitation is falling, people are inside, then as it warms up, people come outside. So the point is we expect that to have benefits for us on an ongoing basis.
And 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, compare and the week to week weather, the snow and cold and rain changes, we should we certainly hope to see improvements against a weaker compare. If not, then 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.
So going back to some of Bill's comments about the Q4 and into the Q1, you 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 start do you 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 in the year?
We do. We do. In fact, income tax refunds to level set folks through the end of our last quarter, the 1st week of February, the U. S. Treasury Department had remitted about $20,000,000,000 lower in refunds than they had the year before.
And through this last week, we're only down about 8,000,000,000. Dollars So 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. So it should be a race to the finish line for April 15 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. But it does surprise them that people who are expecting refunds have deferred and delayed their refunds until later in the season this year.
But again, we expect that to even out throughout this fiscal quarter that we're
in right now. And just more broadly about the overall consumer environment. I mean, do you feel like the consumer is the consumer impacting the business at all? I mean, obviously, we saw some deceleration. I mean, outside of just the refund issues there, is the consumer healthy enough to continue kind of doing regular maintenance on their cars, etcetera?
Yes. I think that what we'll find is what we've historically seen is when you see 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. But over time, they adjust and there's no reason for us to believe that they won't certainly, particularly when you're talking about our 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. So 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 on to their cars longer and longer. How do you see that has that benefit slowed at all over the last year as SAAR has started to kind of slowly tick back up?
And 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 have 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 and we believe one of our legs for growth for a long time is our B2B business. And 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. So 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 kind of room to run? And how much white spaces 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. And if you would have asked me that question 10 years ago, I'd have had a very different number than I had. In fact, we'd have probably said, okay, we're done. But there is still plenty of greenfields ahead.
And 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. And in particular, commercial opens up more opportunities as well.
Got you. I guess one thing that and we're 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 Auto Anything. Are you seeing any change in e commerce in the market?
Are you seeing any increased competition from the Ebays and Amazons of the world? Or 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, now, now is a big driver. So 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 things.
The average purchase price on the web makes it a challenge for the free shipping factor that you hear about. So the industry isn't perfectly conducive to things. The auto anything transaction for us is a great company, specialized 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. So 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 will grow, but not from what we can see dramatically to be a top line factor for us.
But it will 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. So, 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 5 years or so. And over the last 2 or 3 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. Can you just 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 picking back up maybe as we kind of go throughout 2013? Sure.
First, I'll touch on
the slowing of the program growth. And anybody that's followed us for very long knows that we're always driven by 400 ish programs. And the timing of how we opened those programs was probably not perfect. I mean, there's a ramp time that comes along with opening new program. So opening 90 or 150 programs in the dead of winter is doesn't make a lot of sense.
And 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. And 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. But we'll be doing it in a little more structured manner.
And timing is important. You don't want to have 30% of your new stores open between November December. And a lot of people don't do stuff over holidays, so timing.
And maybe just a little bit on what you think has happened on a per program basis, the slowdown in the growth there. And maybe it has something to do with the weather or the regionality.
I think that if you go back to, 1st
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, etcetera are a much bigger part of our commercial business than they are our DIY business. And 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, New York, you're not likely to break an undercar piece.
If you're not driving through 8 inches of snow 4 or 5 times a week, you're going to have less wear on your brakes. So the results very much followed the geographic areas we've talked about. So there's more pressure in those 3 in particular. And we're not excited about that deceleration. But 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 3 or 4 years.
So I guess when you think about the commercial business, you have a very geared program towards building up your hub stores, using that as 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? And is there still opportunity there to kind of mine the system for greater market share based on the hub and spoke system?
Yes. 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, but the difference between the sales in the last 30% of those SKUs is there's a point of diminishing return. And the willingness for a customer to wait on that part is significantly different than it is in your 20% is driving 80% of your 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. And our hub networks are a big part of the initiatives that 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. And there's really not that much difference.
We have daily replenishment through our hubs. We have daily access 3 to 4 times a day access to the more hard to find parts. It's just it looks a little different, but the results are not that different.
So 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. Again, the productivity of inventory beyond 50,000 SKUs is a question that we will have to deal with.
Got you. So 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? Yes.
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 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 1 or 2 trucks out. And we have a commitment to customers at 30 minutes or less. If you can't do that, then somebody from the retail side will drive. But the notion that one team means we don't have dedicated people to commercial, I think, is not a good starting point. Got you.
So 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? I mean, is it a obviously, even in times where you've had negative comps, you've had margin leverage. But is there a point where you say we need a 1% comp, we need a 2% comp? Or is it just kind of a continually 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. And we've shown for a quarter or a couple of quarters even a negative comp, we have the ability to continue to find leverage. But we're very comfortable with our model in the low single digit range.
And just to answer the way you said it David at the end the latter, just a continual focus on cost management. It's a focus on gross margin enhancement where we can negotiation and then also on saving money in SG and 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 do you think it's is there ever a point where you've reached the best margins you can possibly get to?
It's not for nothing is forever. To your point, commercial is dilutive. It has been. It is continued 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 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. And 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? And is there an opportunity for you to do maybe a site 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 at store, if that's what you want. I think Ryan mentioned we or maybe mentioned in one of the 1 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 is available. But those same folks unlike a lot of consumers want to come into the store. They want the trustworthy advice and they want to feel it, touch it and see it. So we don't 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 leverage the ability to drive them into the store.
So
I think we got one on
the back there. You talked about having the right commercial parts professionals being the key to driving the commercial growth. And 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 all though probably not as robustly as we'd like to have been for a long time. So 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?
And 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 took a it's taken a very long time to ramp that. And I think AutoZone has taken a very methodical approach. You're now entering Brazil, I guess, any very early takeaways from that market and whether or not that there's a belief that the model can work there?
And 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? And Mexico. So at that pace, we can talk about Brazil for another 10 years to get to 300 stores. But we learned a lot in Mexico that we hope to apply in Brazil.
So the pace should be a bit different. But 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. But at the same time, it's the phrase isn't right here, I'm not using it correctly, but a protectionist environment where we procure our goods from in country. We learn 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. But a lot to talk about Brazil. Unfortunately, we have one store. So it's not a lot to talk about at this point. But check back with us.
We're excited about what that can represent.
And more on the way. More on
the way. And 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? Yes. 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. But, yes, I think that's been an exciting place for us, but it's been a deliberate growth pace. So exciting, yes. Continuous growth, yes. And hopefully for many years to come.
Yes. Lots of opportunities. From Mexico City South, development times have been much longer than we experienced on the front there and in the northern part of the country. But we're excited about the continued possibilities there.
Big challenges in foreign currency, obviously exchange rates. So 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. So some retailers blend comps.
In Mexico, the peso does matter the exchange rate. And 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 to the dollar. So 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
more question.
Yes. Hi. I'm from the U. K. And one of the things that's very obvious where I am is that that the DIY skills of the population are declining pretty rapidly in the auto space.
And Halford's the market leader in the U. K. Is now at the stage where he's actually offering to check people's engine oil for them because he can't even do that for themselves. I was wondering are you seeing the same kind of trends in North America at all? And what how do you see your business in 5 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 4 or 5 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 that the economy have become more challenged. I think they're becoming more engaged in DIY. We certainly saw that 4 years ago, and there's no indication that that's changing.
But again, we're a diversified company. We think that the commercial side is a hedge
against that should it occur. Yes. That's not a surprise. I mean, when we went into South America, we also look 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.
But how behaviors have changed, this is kind of a neat metric. But 2 days ago, the U. S. Reported units of cars and light trucks sold for the month of March. And people talked about days earlier, the question was, 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. So you get worn out driving your F-one hundred and fifty around London.
But here people Americans still continue to drive and want to get out and about. But we understand your question. It's just not to that degree thus far in this country.
I don't think the F-one hundred and fifty would fit on most roads in Central America.
We recommend it though.
Maybe a couple of questions on capital allocation. First, 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. And you did see a little bit of, I think, a tick up in guidance for this year on the CapEx side. Where else are you seeing incremental spend going?
And is there a point where that maybe ebbs a little bit after ramping for the last couple of years?
Yes. It's 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 1st 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 bottled this little Internet company that's raised the CapEx spend. But the biggest driver with CapEx changes besides these 2 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. But 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're 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 guys have any do you feel like there's any constraint in terms of finding locations? Or I guess and thinking about why you're purchasing, is that really just a financial decision that that's more attractive?
Or is it the ability to go out and develop a location or something like that?
That? It is certainly a financial decision. We would definitely prefer to buy than lease. But no, there are no noticeable constraints. It's there's still plenty of real estate out there.
But 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 and have the parking and the signage. So yes going into strip malls. But that is interesting fact that you're saying that I guess, membership in these strip malls is not increasing, you're saying?
Certainly. Off the
lows, we see that. Yes. And 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?
No. We've been very steady consistent with our buyback methodology at the prices that we've seen our stock trade historically, we feel like it's a better value for the shareholder to buy the stock back than relatively speaking the dividend. But at some point if the stock became unattractive from an accretion standpoint, we would look at dividends. But 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.
Appreciate it. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.