Okay, we've got a great presenter next, in AutoZone, another company that has been here every one of my 19 years running this, and I would imagine, I haven't done the math, I probably should have, but an overwhelming majority of the 50 years we've been here. Company's based in Memphis, Tennessee. Almost needs no introduction, with its just under 7,000 stores in the U.S. and about 1,000 in Mexico, and another 170 or so in Brazil. An absolute machine as it relates to cash flow. Has bought back so many of its shares that it now just has 16.5 million shares.
It's about a $50 billion equity cap company, about $57 billion total enterprise value. We are delighted to have Jamere Jackson, who will be presenting here for the last time. Jamere was just announced as the Incoming CFO at FedEx. We're delighted that he's making his swan song here for number 50, and Brian Campbell, who I've now known for 19 years, who leads the company's investor relations group. We're going to let Eddie kick it off, but Jamere, thank you for being here, and you, and then Brian as well.
Thanks.
Thank you, Brian.
I echo those comments. Congratulations, Jamere.
Thanks, appreciate it.
Good to see you again, Brian. I guess just starting off, just talking about AutoZone, just a quick introduction there. Just talk about the store base, what you are seeing in terms of the current environment, and yeah, we will go from there.
Yeah. So, thanks for being here. It has always been a pleasure. This is always one of the highlights of the AAPEX-SEMA tour, if you will, and we have had some really good opportunities to be here, and appreciate you guys inviting us back year after year. Just in terms of what we are seeing in the environment, I mean, first of all, I would say our industry is very, very strong. I mean, this is an industry that has been remarkably resilient, really through the cycles. If you look at sort of our performance, whether it is looking at it over a 30-year time horizon or 20 or 10 or even here in the near term, we have been remarkably consistent through those cycles as well.
If you think about, what are the things that sort of drive that consistency and that resiliency over time, you have a growing and aging car parc, that is continued to grow. That car parc continues to get older. The average age of a vehicle on the road is now approaching 13 years, and what I will submit to you is that, over the next few years or so, that number is going to eclipse 13 and approach 14. So, you have a car parc that is growing, a car parc that is aging. The complexity of the vehicle continues to improve the technology, if you will, and that technology means that the vehicles are going to stay on the road longer. So, those are sort of secular tailwinds for the business that have a really long runway.
I think closer to home, one of the things that we see as a company is, we see this opportunity for us to continue to grow our business in a meaningful way, both on the DIY side and also on the commercial side of the business. We talked a lot about what the growth in our commercial business means for us for the long term. It's the strategy, if you will, that's underpinning us, announcing a few years ago that we were going to accelerate our store counts.
We now have over 8,000 stores globally. We got 1,000 stores or so in Mexico and 6,900 stores in the U.S., and we're going to continue to grow that number in a meaningful way. The industry backdrop is very, very strong. The car parc's growing, the car parc's aging, and we're executing as well as we've executed probably in the last decade or so.
Yeah, so thinking about tons of fundamental background drivers that's growing the aftermarket, but we are in a more challenging environment with the consumer pressures we're seeing now. Given you guys have the leading DIY business in the industry, talk about what you're seeing in terms of consumer health and how that's trended over the past year.
Yeah, I would say that there hasn't been a whole lot of change in terms of the consumer. I think the low-end consumer has been under pressure really since the stimulus money was sort of drained from the system post the pandemic, and we've sort of operated in that environment ever since. I would say that I wouldn't say that the consumer's balance sheet is getting any worse. The one thing that does change from time to time that tends to have some short-term impact on the business is sort of consumer sentiment, if you will.
As the consumer sentiment sort of wanes, we feel a little bit of pressure primarily in the discretionary portion of our business. If I think about the mix of our business overall, I mean, roughly 16%-18% of that is in sort of discretionary categories, if you will. The lion's share of our business is, where our bread and butter is in failure and maintenance categories that are well north of 80%. Even in situations where a consumer is feeling a little bit of a pinch, the reality is that because their vehicle is so important to them from a mobility standpoint, they tend to pull from other discretionary portions of their wallets to take care of their vehicle, and maintain the ability to operate that vehicle, and mobility is important.
That's the thing that really stands out. This business is relatively inelastic, just in terms of the mix of products and the necessity of mobility over time, and we continue to ride through these cycles of tougher economic environments or weaker consumer sentiment. The business is just remarkably resilient through the cycles.
As we're seeing this difference with mileage driven continuing to increase, age of the vehicle rising, in a challenging macro environment where consumers may be pulling back on some of the more discretionary spending especially, how are you viewing kind of a level of pent-up demand there is in the environment, and how you can see that unfold over the next, call it, one to three years?
Yeah, I mean, if I think about the customer from a DIY standpoint, I mean, the reality is that, as I said, the lion's share of the demand is relatively inelastic. You do see at different points in time that the consumer will pull back maybe on some of the discretionary portions of the business. But that mix is relatively small, as I mentioned, and the consumer sort of continues to power through that. Our outlook as we look forward is that this is going to be a business that is really, really consistent and steady. I mean, we expect the DIY portion of the business from an industry standpoint to grow kind of low single digits.
We expect the commercial portion of the business domestically to grow kind of mid-single digits, if you will. If I look at our business in particular, we've got a tremendous opportunity to grow share both on the DIY side and on the commercial side of the business. We've had a lot of initiatives that we've put in place to accelerate the growth on the commercial side of the business, and we feel very good about our progress there. Over the next one to three years or so, I would say that we expect our business to perform very, very well against this backdrop, and we're pretty excited about the things that we have in place and what it means for our future.
Bret?
Allocation and new store development, and O'Reilly's ramping up their store base. Do you see this sort of adding to the 36,000 auto parts doors, or are you seeing enough consolidation on the side of the Factory Motor Parts or the O'REs or XL Parts? Are there other folks out there that are giving it up, or is this going to be a much more heavily stored industry in five or eight years?
Yeah, we don't see there being a significant expansion in the number of outlets out there. I mean, this industry has had some consolidation on the fringes for many, many years. So, the smaller independents or the weaker players that don't have the balance sheet, or quite frankly, can't keep up with the demands of the industry, particularly around parts and jamming more parts in the local markets to service the customers. We've seen some consolidation in and around the fringes there. And there have been, to your point, only a couple of players that have sort of soaked up that outlet share, if you will.
So, we certainly see the same opportunity, and one of the things that we've done over time is we've been pretty consistent and steady in terms of adding new outlets. One, because there are more potential trade areas, and two, there's some consolidation in the industry that's going to continue to happen. The winners are going to ultimately be the people that have strong balance sheets, that have the ability to go put the assets in the market to take advantage of a growing and aging car parc. And we're certainly well-positioned to do that.
Do you see that consolidation accelerating? I mean, your decision to ramp up store openings recently, I mean, obviously a lot of capital stress given pandemic and tariffs and all the shocks in the system in the last five years. But are you seeing this industry shaking out quicker now than you might have seen it a few years ago?
No, I don't necessarily see the industry shaking out faster. I mean, one of the things that I mean, this is a really good industry, and there's significant demand, and that demand is continuing to grow. Specifically for us, what drove our strategy to accelerate our store count was more around the fact that we have a pretty fast-growing commercial business. Historically, our commercial business was 20%-25% of the business. And we've been operating in an environment where we had really low market share there. I mean, even in today's world, we're roughly a five share in what's approaching a $100 billion market.
So, as we've continued to invest in a meaningful way in our capabilities on the commercial side of the business, that's given us an opportunity to grow our shares in a meaningful way. Because our commercial business operates inside of our DIY box, if you will, it just made the unit economics so much better, so that as we thought about our growth opportunities into the future, it gave us an opportunity to go and accelerate our store count because we now have a faster-growing commercial business.
The unit economics are better. The returns on invested capital under those scenarios are going to be great for us, and we've seized that opportunity. Consolidation is part of it. Certainly, we continue to find new trade areas for us to go plop down stores, but a growing commercial business really underpins the entire strategy, if you will.
Jamere, your tenure at AutoZone, it's Michael Lasser from UBS. Your tenure at AutoZone has coincided with initially some experiments and investments in figuring out the right supply chain, not only for the commercial side of the business, but also for the DIY side of the business. As the right supply chain was determined, that has driven some investments in the business to accelerate the commercial growth.
You've articulated a lot of confidence over the years about what you've seen in terms of the runway with the commercial growth. Do you think from here, as you depart, it can be linear in terms of the continued market share gains? Is it going to be more stops and starts? And to what extent do further investments need to be made in order to unlock the next level of commercial share gains for AutoZone?
Yeah, I'm more bullish today than I was a year ago, three years ago, four years ago, five years ago about this business because of the investments that we've made. I got to be a little bit careful that I don't bid up Phil and the team going forward. But when I look at our long-range plan and I look at the investments that we're making in the business going forward, the future is incredibly bright. You talked about some of those investments that we made in the heart of the pandemic when there was lots of volatility and uncertainty.
We were doubling down on investing in our supply chain by putting a new distribution center on the East Coast and the West Coast. We added new direct import facilities, all of these things to support us actually being in a position to add more parts in the local market closer to the customer because that's a winning formula for us. In this environment, we've also expanded the number of mega hubs. These are our large box formats that carry 100,000 SKUs that give us the ability to jam more parts in the local market and service our customers both on the DIY side and also the commercial side. We've invested in the quality of the Duralast brand.
We've put a professional sales force on the field. We've done all of the things that we needed to do from a pricing standpoint and really have a great pricing strategy there. When I add up all of those things, supply chain, hubs and mega hubs, investing in the Duralast brand, investing in the sales force, making sure that we were priced right, those are the things that have underpinned our strategy and, quite frankly, the things that have us so bullish about the future. It isn't just enough to say that, "Gosh, we have low market share."
You actually have to go put points on the board and allocate capital and do the things in your organization to take advantage of that opportunity. And this team has done that and really poised to have a fantastic balance of the decade and really grow the business in a significant way in the future. And you've heard me say over the years that all of these investments that we're making give us an opportunity to be a faster growing and still high margin business, and that's exactly the plans that we have in place.
Jamere, as you're talking about the future, let me pop in just for one. As you're talking about the future, I can think of few industries that would benefit from AI more than aftermarket parts retail and distribution. Maybe talk about investments in technology and how it helps from a parts lookup, inventory placement, commercial ordering. How are you utilizing AI and where do you think that goes?
Yeah. Nearly every one of our growth objectives, if you will, is underpinned by some investment that we're having to make in technology. I can tell you that in our industry where you've got massive parts proliferation, where you have a growing car parc over time, there are just certain things that we do inside this industry that are ripe for investments in technology, and specifically investments in AI to help us do what we do much more efficiently. One of the things that our merchants and our supply chain has done over time is really fine-tune the algorithm, if you will.
When you have as many parts as we have in this industry and you have as much parts proliferation as we've had, the key has always been to figure out how much inventory do we forward deploy at a satellite store versus a hub versus a mega hub versus what's in a distribution center, or quite frankly, how much you still get shipped directly from a vendor. Tweaking that algorithm over time to make sure that you've got the right assortments in the right location so that you can service the customer is really the name of the game, if you will.
We're using technology more and more to be able to go do that. We're excited about the application of technology there. I think the other place where we're also excited about is our ability to use that technology to provide better sort of in-store trustworthy advice, if you will. One of the things we don't always talk about is we've got a business called ALLDATA, which sits inside our business that has repair data on roughly 95% of the vehicles in operation.
They've got a tremendous amount of data and a number of data sets there that can actually help us help the customer, even in our DIY stores, understand what repairs need to have, exactly what parts they need to buy, et c. We're really excited about the future there. In fact, we're going to be talking about some of that here at the show, the data sets that we have and the technology that we have. We've got a number of assets. We're making a number of investments. This isn't an organization that changes a bunch of things that are shiny and new, and AI isn't a buzzword for us. It's where the opportunity is for us to have real applications that make a meaningful difference in our business.
Hey, Jamere. Thanks a lot. Max Rakhlenko, TD Cowen. The goal is to open roughly 120 mega hubs over the next three years. That will get you to 300, which is the long-term goal. If we were to look ahead to that point, can you just dimensionalize how different your supply chain infrastructure and parts coverage will look then compared to where we are today with roughly 170 mega hubs?
Yeah. As I mentioned, the name of the game in terms of winning with the customer is, can I have enough parts in the local market to service our customers there? If I think about our commercial customer, for example, the number one KPI, if you will, is parts availability. Do you have the part? Then the second KPI is, how fast can you get it to me? If you have the parts and you can get it to the customer fast, you can close the sale, win the order, delight that customer, and get repeat business. Our entire strategy around mega hubs is making sure that we have enough parts in the local market close to the customer to be able to deliver on that promise, if you will.
We have continued to evolve how we use those mega hubs over time. Historically, we have used mega hubs primarily as a source to almost replenish our satellite stores, if you will. More and more, we are using those mega hubs to deliver parts directly from the mega hub to the customer. There is a meaningful advantage there in terms of speed and parts availability that we are taking advantage of. We went from this notion of having 75 mega hubs to 110- 175, and now have a near-term target of 300.
Quite frankly, as we see the business going forward, that number is likely to be more than 300, because the reality is that our desire to put more parts in the local market close to the customer, and the customer's need for those parts on a parts availability basis and also for speed, is just going to require us to continue down that strategy. It has been a winner for us. As we look at our business with mega hubs, and particularly when we connect satellite stores to mega hubs, we see a meaningful lift in sales with those additional parts, and we are continuing to invest in a meaningful way in that strategy.
Right. Hey, Jamere, congrats on the new role. You will be missed here. Take it in a different route. Just with regard to cost inputs, tariffs and other inflation, maybe the update there of how AutoZone continues to manage those factors.
Yeah. Last year was an interesting environment with tariffs on, tariffs off, tariffs increasing. I was just mentioning a little while ago that we had our war room, if you will, on here is what is happening with tariffs, and then here is what our game plan is. We were constantly revising and updating our strategy. What I will say is that, you fast-forward a year later, and we and the rest of the industry has a pretty good handle on what we see and how to go behave in that environment. As you all know, last year, the IEEPA tariffs were rolled back.
We have a pretty healthy direct import business. We got direct refunds associated with that. Most of that landed in the fourth quarter of last year. Many of our domestic suppliers that are also paying tariffs have gotten refunds, and that represents an opportunity for us to recoup some of that cost that we absorbed last year as well. I would say purely from a tariff standpoint, the industry is in pretty good shape. You heard us when we talked about our outlook for the year.
Even though we had a big lump of tariffs coming in the fourth quarter, we did not view that as a discrete item that we could not sort of comp over, if you will, because of this notion that we are going to continue to see benefits from that as we move forward, both in terms of checks that are being written, but probably more importantly, and where we have more long-term calories, if you will, is actually cost reductions that are coming out of the supply base.
I would say the other side of the coin, though, just from a cost standpoint, is we continue to see pretty significant inflation in the industry. More recently, it is driven by what we are seeing with commodities. Oil, in particular, is driving a significant amount of inflation. The good news about our business is that, when we see those kinds of cost inputs, if you will, we have pricing power, and given the necessity of the parts and products that we provide, we generally pass those through to the customers and maintain our margin rates through inflationary cycles.
I have said oftentimes that inflation is a bit of our friend in this industry because of that pricing power when you are able to raise your retails to maintain your margin rates. Now, in doing so, you have got to be responsible to the customer. We have very healthy discussions with our suppliers about how much should they absorb in the near term, what's the pace with which those cost increases are going to come to us, and what's the pace with which we're going to raise prices over time. You have to do that in a disciplined way. I'd say overall, a little bit more of an inflationary environment will keep average tickets elevated for some period of time. Quite frankly, we and the rest of the industry will manage through that dynamic pretty well.
The mechanics of just Quick, the mechanics of passing along tariffs, same as the mechanics of passing along other inflation?
Yeah, I mean, the mechanics are pretty much the same. I mean, tariffs are going to be part of your product cost. You can solve for that in a couple of different ways. You can solve for that Tariff refund by taking a one-time check. Like, for example, we had tariffs that were refunded to us in the fourth quarter.
Or as you're recouping tariffs from the rest of your supply base, it's part of the cost negotiation process that we go through every single year with every one of our suppliers. In some cases, the color of money that we will choose will be product cost reductions as opposed to giving us a slug of money in the form of a check. But the process is the simple one. It's ultimately going to find its way through product costs and will ultimately deal with pricing going forward, based on what we're seeing in product costs.
Thanks. Greg Melich with Evercore ISI. Just the other side of the equation on inflation, thanks for taking us through all that. It sounds like defending gross margin rate is still the strategy over some time. What about consumer reaction to the compounding effects of inflation? Do you think that is showing up with some deferral or items coming out of basket? I am just trying to unpick a little bit of what has happened over the summer and even into the fall of just how are consumers responding to that cumulative inflationary effect?
Yeah, I mean, in the short term, our business is not 100% immune to the consumer feeling inflation and maybe changing their purchase behavior. But I will give you a little bit of perspective. If you think about our business on the DIY side, our average ticket is a little over $40. So, even if we see significant inflation, in terms of what the consumer feels on a transaction, it is just not a ton of money. And if you think about the number of times that a consumer is in our store, I mean, typically they are buying one or two items when they are in the store. The average dollar ring is $40 or so.
Consumers do not generally walk in and get a bunch of sticker shock and say, "I am going to walk out." What you do find from time to time is when you see things like fuel prices or gas prices being elevated, consumers will maybe consolidate trips, they will maybe defer some things about fixing a vehicle over time. But eventually, that all sort of comes back to us in the business because if you delay critical maintenance or delay something that is a failure, then you end up with a larger job and a more catastrophic job.
Generally speaking, you feel maybe some short-term deferrals that ultimately find its way back through. And so you can see maybe transactions wobble a little bit in the short term, and then they come back. And that is, again, that is the beauty of this business and this industry is that the demand signals are really about age of the vehicles, how many miles are being driven, and we continue to move forward really in good cycles and bad. And arguably, in tougher cycles where you see a consumer under pressure, they tend to hang onto their vehicles, and they will invest in a meaningful way to keep those vehicles running.
And in this environment where you have got a lot of inflation, you have got the average cost of a new vehicle being $50,000 , interest rates are high, consumers paying $700 a month for a new car, $500 a month for a used car, they are generally going to hang onto their vehicles, and that is going to be a tailwind for our business as we move through. And we have seen that play out really through the cycles.
Jamere, thank you very much for being here. We just fully wish you the best. It's been a great five years, and you and I knew each other before you were at AutoZone, and really looking forward to seeing what you do at FedEx. Thank you for being a part of number 50, Brian, you as well. It's always great to have you all as an anchor on this day. Brian, we'll see you next year, and Jamere, maybe I'll see you in Memphis.
Yeah, sounds good. Hey, thanks. It's been a pleasure, and thanks for having us.