Brian Campbell:

Before we begin, please note that today's call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made and the company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our press release.

Phil Daniele:

Good morning. And thank you for joining us today for AutoZone's 2024 third quarter conference call. With me today are Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third quarter, I hope you had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with the slides complementing our comments today, are available on our Web site www.autozone.com under the Investor Relations link. Please click on the quarterly earnings conference calls to see them. As we begin the call, I want to say thank you to our more than 120,000 AutoZoners across all of our businesses for delivering solid earnings results in the face of a difficult macro environment. With our continued focus on providing what we call WOW! Customer Service, our AutoZoners delivered our total sales increase of 3.5%, total company same store sales up 1.9% and on a constant currency basis, total company same store sales of 0.9%. Also, our operating profit grew 4.9% while our earnings per share grew 7.5%. In spite of our lower than planned sales, we managed our business well and we were able to deliver bottom line results that continued to build on the phenomenal results we've had over the last several years. Congratulations to our AutoZoners everywhere who helped us achieve this quarter's growth. Your dedication to delivering on our commitment of WOW! Customer Service is always inspiring. Before I begin my comments on our third quarter sales, as a reminder, the backdrop to this quarter and every third quarter of our fiscal year includes tax refund season. It is roughly a $300 billion influx of cash to our customers. It begins around Valentine's Day and generally last four to six weeks. These dollars matter to our customers and meaningfully impact their shopping patterns in our stores. This year, refund dollars ended up slightly versus the previous year. However, February refund flows were lower than expected and negatively impacted the first three weeks of the quarter's domestic same store sales. While the refund flows did catch up later in the later weeks, we felt the delayed refunds were a drag on our sales results through February and early March, similar to what you may have heard from other retailers. Secondly, the weather was unfortunately cooler and wetter than we had expected and planned, especially in the Northeast and the Midwest markets. As a result, sales in these markets were noticeably below the remaining markets with this pattern more pronounced over the last eight weeks of our 12 week quarter. Again, extreme weather, either hot or cold, drives hard part failures and accelerates maintenance over time, thereby driving higher sales. So on balance, we believe this quarter's sales were impacted negatively by the late start of the tax refund season, while the last eight weeks were impacted by cooler than weather -- than we had planned. Despite these headwinds, we also had many successes. We gained share in our retail business, and we believe we continue to gain share in commercial. We continue to be encouraged by our supply chain initiatives. The construction of our two new domestic DCs are on track for Q2 FY25 opening as well as our continued forward deployment of inventory across both our hubs and our mega hubs. We continue to see progress on our initiatives within our domestic commercial business that give us confidence about accelerated growth. While it is prudent for us to remain cautious on our outlook for the remainder of the year, we believe sales will accelerate over time. We are excited about our commercial initiatives that are providing deeper parts coverage closer to the customer with faster delivery times, improving customer service and thereby, driving sales. For the third quarter, our total company same store sales were 0.9% on a constant currency basis. As we have mentioned, international has become a more important part of our growth story in this quarter. We delivered another strong quarter, up over 9.3% on a constant currency basis. We continue to be very encouraged with both our short term and long term growth prospects we have internationally and we plan to accelerate new store openings and drive operational improvements in these markets over the next several years. Our domestic same store sales were flat this quarter compared to up 0.3% last quarter and up 1.9% in Q3 of last year. As I mentioned previously, we believe our sales were impacted in the first four weeks of the quarter by the delayed tax refund season and the last eight weeks by the mild wet weather pattern across much of the US. Domestically, we ran a negative 0.7% comp across the first four weeks and collectively across the last eight weeks of plus 0.3% comp. Our commercial business grew 3.3% against last year's Q3 growth of 6.3%. Our commercial results were higher in the first eight weeks and relatively consistent, but slightly lower the last four weeks. The last four weeks comparison were the most difficult of the quarter. Weather impact was more pronounced in the last eight weeks of the quarter and it was during this time that the regional performance disparities became more apparent. The Northeast and the Midwest underperformed the remainder of the country by close to 200 basis points over the last eight weeks of the quarter. Commercial transaction counts were up and were partially offset by slightly negative ticket growth, which was attributable to similarly negative inflation on a same SKU basis. We opened 20 net new commercial programs and now have commercial in 92% of our domestic stores. Domestic commercial sales represented 31% of our domestic auto part sales for Q3. Despite the choppiness in our commercial sales results this quarter, we are planning for a stronger growth rate in Q4 behind continued execution of our growth initiatives and somewhat easier comparisons. Commercial sales growth continues to be driven by the key initiatives we've been working on over time, improved satellite store inventory availability, material improvements in hub and mega hub coverage, the strength of the Duralast brand with an intense focus on high quality parts and products and technology enhancements that make us easier to do business with. We are encouraged by our recently launched initiatives focused on improving customer service with faster delivery times. As we roll these initiatives to the majority of the chain, we are anticipating faster growth and accelerated share gains. Regarding domestic DIY, we had a negative 1% comp this quarter versus last year's comp of 0.6%. DIY ran negative 2% across the first four weeks of the quarter, positive 0.1% the second four week segment and negative 0.1% comp over the last four weeks. Regionally, the Northeast and the Midwestern markets underperformed the remainder of the country by approximately 100 basis points over the last eight weeks of the quarter similar to our commercial business. Heading into the fourth quarter, we feel weather should be less volatile and we are planning accordingly. Regarding our merchandise categories in the DIY business, our sales floor categories, and particularly discretionary categories, underperformed hard parts. We also saw several seasonal merchandise categories and weather sensitive hard part categories being off our planned results due to the cooler than expected weather. Regarding this quarter's traffic versus ticket growth, our DIY traffic was down approximately 2% while our ticket average was up only 1%. We expect our average ticket growth will return to more normalized levels in the 2% to 4% range as we get further removed from the higher inflation from the last couple of years. We attribute our previously mentioned DIY share gains to improve customer service levels in our stores and our in-stock nearing pre-pandemic levels, driven by most of our vendor partners returning to more normalized operations, meaning recovering from the pandemic sales surge and supply chain disruptions. As we look forward, we are continuing to focus on flawless execution and delivering WOW! Customer Service will drive our accelerated sales growth in our domestic business. Before handing the call to Jamere, I'd like to highlight and give some color on our international business. At 872 stores opened internationally or 12% of our store base, this business had yet again impressive performance last quarter and should continue to grow at a robust pace for the remainder of fiscal year 2024 and beyond. We are leveraging many of the learnings we have in the US to refine our offerings in our international markets. And before Jamere discusses our financial results, I'd like to remind you of our key objectives for fiscal year 2024. We are focused on growing our domestic commercial business and we believe our improved customer service levels will lead to continued sales growth. We are also focused on our supply chain with two initiatives that are in flight to drive improved availability versus our expanded hub and mega hub rollouts. And secondly, we are making good progress on adding capacity to our distribution network. We have two distribution centers that are nearing completion in the US, one in Chao Chilla, California, and the other in New Kent, Virginia. We are also very close to completing the expansion of our Tapeje Mexico DC. And last quarter, we broke ground on a larger facility that will house our relocated Monterrey, Mexico DC. Our strategy is focused on leveraging the entire network to carry more inventory closer to the customer, driving sales growth with improved speed, expanded parts availability and improved efficiencies. These capacity expansions will underpin our future growth. Now I'd like to turn the call over to Jamere Jackson.

Phil Daniele:

Thank you, Jamere. We are proud of the results our team delivered this last quarter. We remain on track to deliver a solid 2024, but we must continue to focus on superior customer service and flawless execution. Execution and our culture of always putting customer first are what defines us. We are well positioned to grow sales across our domestic and international store bases with both our retail and commercial customers. Our gross margins are solid and our operating expense structure is appropriate for future growth. We are putting our capital investments where they matter most, our stores, distribution centers, and leveraging technology to build a superior customer service experience where we are able to say yes to our customers' needs. Fiscal 2024's top priority has been enhanced execution. We are making good progress. Additionally, we have many strategic projects in varying stages of completion. We will continue opening new mega hub and hubs, completing construction on our new distribution centers and optimizing our new direct import facility. We are also in the early stages of ramping up our domestic and international store growth. As discussed, our international teams posted same store sales comps on a constant currency basis of plus 9.3%, continuing several years of strong growth. While I mentioned all these investments in FY24, AutoZone's biggest opportunity remains growing share in our domestic commercial business. We continue to believe we have a solid plan in place for growth for the foreseeable future. We know our focus on parts availability and WOW! Customer Service will lead to additional sales growth. We are excited about what we can accomplish, and our AutoZoners are committed to delivering the results. Now I'd like to open up the call for questions.

Bret Jordan:

Could you talk a little bit about the cadence? You commented at the end of the quarter in the commercial business ended a bit softer and obviously very early in Q4, but could you give us any color sort of as we've trended sequentially into the fourth?

Bret Jordan:

And then I guess on a calendar year basis, could you just maybe give us some color where you see inflation in pricing for your mix as the compares, I guess, gets…

Operator:

Your next question is from Chris Horvers with JPMorgan.

Jamere Jackson:

Certainly, our gross margins, as it relates to our relationship with vendors, has an opportunity improved. As Phil mentioned previously, we are coming off a period of significant hyperinflation, particularly in the areas like flat -- freight. Quite frankly, we saw snarls across the majority of the supply chain. And it impacted them from the standpoint of having higher labor costs, higher input costs in total. So we're starting to see that abate and that's given us an opportunity to go and negotiate for some deflation as we move forward. We're still in early innings there. And I wouldn't say that all of the inflationary pressures have abated but we're certainly in a much better position today than we were a year ago.

Phil Daniele:

I would say if you kind of broke apart those segments that you just talked about, probably the most challenged group of customers or customers that are -- drive their repair revenue from tires. Tires have definitely been a pressure point. I think that downward trend on tires has probably flattened out a little bit. But I still think the tire segment, in particular, is under some pressure and has been for quite a while. On your other segment of customers, the buy here, pay here lot and used car centers, those have been more challenged as well. You think about there was tons of used cars that were sold over the last two years or so, and I think that's just been slower. Also, as the consumers under a little bit more economic pressure due to inflation, not just in our category but across all of retail and across life at the moment, I think there's more pressure on some of those bigger ticket items like tires. New tires is a pretty big purchase for a customer.

Simeon Gutman:

My first question is on mega hubs. Can you share some math on them? What -- you mentioned 200 over time, can you tell us year-over-year how many should we see per year? And then can you frame the one year lift from them, please?

Phil Daniele:

Hubs are up -- I'll just add on. Hubs are -- these have been great stores for us. I think looking over history, we thought we'd have 30 to 40 of these things in various markets. And now we see line of sight to, like Jamere said, well north of 200 mega hubs. And the hubs are still an important part of our strategy as well, which has slightly less SKU count -- well, 30,000 to 40,000 less SKUs than a mega hub, but both of those store bases are great for us. They help significantly on the commercial side of the business and they lift the DIY market as well. So they're great assets for us and performed better than our normal stores.

Phil Daniele:

Yes, like you said, we don't give guidance, but here's some things that I'll tell you that I'm excited about. One is weather has been challenging. And we -- I think over summer -- summer is going to heat up, we should get some -- the merchandise categories and mix and things of that nature will help our sales as we move a little bit forward. And although slower than we'd like, our commercial initiatives are working and we think those will continue to mature over time. And in a segment where we're underpenetrated in share, below 5% share on the commercial business, we think we have ample opportunity to continue to grow over time with improved service, improved hard part and expanded part availability and better service and delivery on the -- based on the things we talked about, parts investments, mega hub investments and technology investments that will grow our sales. But it won't be -- it's not going to be a hockey stick that turns around in six weeks or something, it's going to take time.

Greg Melich:

I wanted to follow up on inflation, because it sounds like it was still across the box slightly positive in the quarter. And -- but I think I heard in commercial that it was same SKU, slightly negative. So could you just give us a little more of the detail on that?

Greg Melich:

And just to be clear, in the quarter, it was zero?

Greg Melich:

So still discipline and you expect it to normalize, but right now, it's not, it's on the…

Greg Melich:

And then my follow-up was just to understand a little bit more about the consumer trends. I know you've talked in the past that we really haven't seen trade down on the DIY side at all. I'm just curious if that started to show up as a way. I think you mentioned maybe fewer items in the basket. Could you just double click on that a little bit?

Operator:

Your next question for today is from Scot Ciccarelli with Truist.

Phil Daniele:

Let me start with kind of your first -- the first part of your question. Are there things that we can do to improve? The answer is yes. We're in the process now of doubling down on customer service and execution. And on the commercial side, we're continuing on both sides. We're continuing to invest in hard parts coverage and hubs and mega hubs. Those drive sales. On the commercial side, we continue to invest in ways to service the customer better and faster and we like those initiatives that we have. So I think those help to improve our sales execution, if you will. The second part of the question…

Phil Daniele:

Our pricing strategy’s on both DIY, we like where we are and we believe we have the right strategies on both sides of the business. We made those investments several years ago to rightsize those strategies. The industry has been very disciplined on pricing over a long period of time, and we don't see that changing.

Kate McShane:

I just wanted to clarify. I think you mentioned in the prepared comments a mention of store growth. And I wondered if that was more of a domestic comment versus international comment? Should we see an acceleration of the store openings here? And we wondered if just with the sheer amount of growth you've seen over the last few years, do you think some of the demand weakness that you're seeing is just due to the sheer volume of what your current store base is handling?

Phil Daniele:

We just wish they'd come faster. Those -- building new stores takes -- it's a long tail from the time you sign a contract to the time we actually open the doors and start selling parts out of them. It just takes longer than we'd like.

Seth Sigman:

A couple of follow-ups from my side. So when I look at the gap between your DIY business and the commercial business, it just seems narrower than it's been in the past, certainly pre-pandemic and that's been happening in the last couple of quarters. And if you look at DIY down 1%, it's actually not that different than the range we've seen in the past. So it's really commercial at this lower run rate. I know there's a lot of moving pieces here, but it's more of a macro question, right? Do you think that the commercial end customer is just slowing more? And maybe that's deferral, maybe that's trading down, I'm not sure, but I guess that's really what we're trying to figure out. Is that is that commercial end customer that may be more middle income consumer trading down a little bit more?

Jamere Jackson:

And I think part of that, as we think of the commercial market, in general, that's why we've been focused on this notion that we're roughly a five share in what's approaching $100 billion market. Despite the fact that big ticket is pressured across really all of retail and certainly, a big ticket purchase in auto parts is not immune to those dynamics. I mean we still have an opportunity to grow significantly in commercial and an opportunity to grow significantly faster. And so all the things that Phil talked about in terms of our initiatives are the things that we're focused on. And if we do those things and execute on them, then that gives us an opportunity to really accelerate our commercial growth as we move forward.

Phil Daniele:

I think we are seeing success. Again, still relatively small in our rollout and that rollout is not very mature at the moment. But we're leveraging some technology, leveraging the technology to handhelds and other technology in our stores to be smarter about how we deliver and where we deliver a part from. We're ultimately able to get the part to the shop faster than we were previously and we're leveraging all of the assets we have in the local market to get those parts to a customer faster, and we like the results that we're seeing. We believe that as we roll these out, our sales will improve in those markets. And ultimately, we'll provide better customer service and gain new customers as well as share of wallet with existing customers.

Brian Nagel:

So the first question I have, I know that we've already had a number of questions on commercial, so I apologize also asking about commercial. But just in the near term, if I heard the prepared comments correctly, it sounded like you expected a bit of a strength in here into the end of fiscal '24, the fourth period. So the question I have is, as you look at the business, I think comparisons do get easier. But are there specific sort of say, building blocks, which could help to strengthen the business here in the very near term?

Brian Nagel:

My follow-up, again, it's also a follow-up. But just with respect to the consumer, I mean, look, you operate in a unique part of retail. A lot of the spend that happens at your stores is not necessarily discretionary, but there's a lot of chatter out there right now across consumer about maybe some incremental pressures on the lower income consumer. So the question is, are you seeing that -- as you look at your business and the data that’s available to you, are you seeing clearly or somewhat clearly signs of incremental pressure on this core consumer that's affected their shopping patterns?

Operator:

Your next question for today is from Michael Lasser with UBS.

Phil Daniele:

It's a great question, I was wondering when the tough weather questions from a winter perspective would come up, and that was kind of that 16%, 17% range you're talking about. It's a great question. It's frankly one we talk about internally all the time. We've had a pretty soft winter weather pattern for the last two years. And when I kind of look across the country, this winter pattern, we got some pretty good weather from a precipitation, snow and temperatures in the Midwest. We got very soft weather patterns relative to driving, break fix part failures on the Eastern seaboard. Wasn't a lot of snow in New York, Boston, Philadelphia, D.C., and we didn't have a lot of cold temperatures in those markets. And those typically have meant undercar and brake categories performed very well when you have those types of seasonal patterns. We didn't get that this year and frankly, didn't get it last year. So it's a little undetermined what happens in a long period of time where you haven't had those weather patterns with categories in that half of the country. So I think that is yet to be seen. We don't have the inflation that we had probably back in '17, '18 and frankly, over the last two years to be a benefit. But I do think we'll get a better mix of categories going into the summer selling season than we've had in Q3. So I don't know if I'm really answering your question. I think that's yet to be seen and I think it will prove out over the next four months or so.

Jamere Jackson:

So what I'll say is we've run the gross margin play with intensity and our merchandising teams and our supply chain teams have done a fantastic job. You saw last quarter, we had -- this past quarter, we had almost 90 basis points of margin improvement strictly from what we're doing on the merchandising side and what we're doing with the supply chain. I wouldn't suggest that those numbers are going to be as high as we move forward. We are coming out of a period where we had some pretty significant inflation that we got some deflation. And as we mentioned a little bit earlier, we're not getting the ticket necessarily to help us from a gross margin standpoint. So that will be muted some. But we believe that we'll have the potential to offset most, if not all, of the pressure that you see from a LIFO standpoint.

Max Rakhlenko:

So first, on the speed initiative, can you discuss the pace of the rollout? And when we think -- when we should think that it will be in majority or all of the markets that you have mega hubs in?

Max Rakhlenko:

And then just as a follow-up, on the slower mega hubs openings, is that more structural, is it tougher to find boxes in the right areas or is it about execution opportunities on your end? And then it does sound like that the opening should start to accelerate in the next few quarters. Is that right?

Phil Daniele:

And I think the good thing is we know exactly where we want these stores in every metro market or adding multiples to a given city or an individual market that may have a smaller number of stores. We know where we want to be. We want to make sure we get them at the right distance from our current locations. And they've got to have good routes so they're easily accessible to the other markets. And then you got to find the spot that is a great retail location and a great place to do to fulfill and get these expanded parts to our shops and our stores fast. And it's just -- it takes time. We'd love to go faster because they're great boxes for us and they know -- they help us on both DIY and commercial.

Phil Daniele:

Great, thank you. Okay. So before we conclude the call, I'd like to take a moment to reiterate that we believe our industry is in a strong position and our business model is solid. We are excited about our growth prospects for the remainder of the year but will take nothing for granted as we understand our customers have alternatives to shopping with us. We have exciting plans that should help us succeed for the future, but I want to stress that this is a marathon and not a sprint. As we continue to focus on the basics, and strive to optimize shareholder value for the future, we are confident AutoZone will be successful. Lastly, as we celebrate Memorial Day next Monday, I ask that we all remember our country's heroes both past and present. We owe these great Americans a tremendous debt of gratitude. Thank you again for participating in today's call.

Unidentified Company Representative:

Before we begin, please note that today's call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our press release.

Jamere Jackson:

Thanks, Phil, and good morning, everyone. As Phil has previously discussed, we had a solid second quarter, marking our fifth sequential quarter of double-digit EPS growth. This quarter, we delivered 4.6% total company sales growth with a 0.3% domestic comp, a 10.6% international comp on a constant currency basis, a 10.9% increase in EBIT and a 17.2% increase in EPS. We continue to deliver solid results and the efforts of our AutoZoners in our stores and distribution centers continue to enable us to drive growth in a meaningful way. To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q2. For the quarter, total sales were up -- were $3.9 billion, up 4.6% and let me give a little color on our sales and our growth initiatives, starting with our domestic commercial business. Our domestic DIFM sales increased 2.7% to $980 million and were up 15.8% on a two-year stack basis. Sales to our domestic DIFM customers represented 25% of our total company sales and 30% of our domestic auto part sales. Our average weekly sales per program were $14,051, down 2.8% versus last year. Once again, the weekly sales averages were impacted by the addition of a significant number of immature programs over the last couple of quarters. I'll also remind you that Q1 and Q2 are our toughest comparisons this fiscal year and we expect our year-over-year comparisons to be somewhat easier in the back half of our fiscal year. We now have our commercial program in approximately 92% of our domestic stores, which leverages our DIY infrastructure and we're building our business with national, regional and local accounts. This quarter, we opened 20 net new programs finishing with 5,823 total programs. Our commercial acceleration initiatives continue to make progress as we seek to grow share by winning new business and increasing our share of wallet with existing customers. Importantly, we have a lot of runway in front of us and we will continue to aggressively pursue growth opportunities in commercial, which we believe is our single largest growth opportunity. To support our commercial growth, we now have 101 Mega Hub locations. Our Mega Hubs continue to average significantly higher sales than the balance of the commercial programs and grew more than three times the rate of our overall commercial business in Q2. Our Mega Hubs typically carry roughly 100,000 SKUs drive tremendous sales lift inside the store box and serve as an expanded fulfillment source for other stores. These assets are performing well individually, and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to tens of thousands of additional parts and lifting the entire network. We will continue to aggressively open Mega Hubs for the foreseeable future, and we expect to have north of 200 Mega Hubs at full buildout. On the domestic retail side of our business, our comp was negative 0.3% for the quarter, as Phil mentioned, we saw traffic down 2.2%, offset by 1.7% ticket growth. As we move forward, we would expect to see slightly declining transaction counts, offset by low to mid-single-digit ticket growth in line with the long-term historical trends for the business, driven by changes in technology and the durability of new parts. While DIY discretionary purchases were challenged in Q2, we continue to see a growing and aging car park, a challenging new and used car sales market and a consumer that is likely to continue to invest in their existing vehicles. In addition, miles driven are back to pre-pandemic levels. As such, we believe our DIY business will remain resilient for the remainder of FY 2024. Now I'll say a few words regarding our international business. We continue to be pleased with the progress we're making internationally, our same-store sales grew an impressive 23.9% on an actual basis and 10.6% on a constant currency basis. During the quarter, we opened six stores in Mexico to finish with 751 stores and four stores in Brazil, ending with 108. We remain committed to international and given our success, we're bullish on international being an attractive and meaningful contributor to AutoZone's future growth. Now let me spend a few minutes on the rest of the P&L and gross margins. For the quarter, our gross margin was 53.9%, up 160 basis points, driven primarily by a significant improvement in our core business gross margins and 63 basis points from a non-cash $10 million LIFO charge in last year's quarter versus a $14 million LIFO credit this year. Excluding LIFO from both years, we had a very strong 97 basis points improvement in gross margin, which increased from last quarter's 70 basis point improvement. We've had exceptional gross margin improvement. And in fact, Q2's gross margin was at the highest gross margin rate we've had since Q2 of FY 2021. I'll point out that we now have $43 million in cumulative LIFO charges yet to be reversed through our P&L, and we expect this credit balance to reverse over time. We're currently modeling $15 million of LIFO credits for Q3 based on the deflation experienced in Q1 and Q2. This compares to the $17 million LIFO credit we had in Q3 last year, which means we'll have a $2 million net LIFO headwind in gross profit in Q3. As I've said previously, once we credit back to $43 million through the P&L, we will not take any more credits, and we will begin to rebuild an unrecorded LIFO reserve. Moving to operating expenses. Our expenses were up 6.1% versus last year's Q2 as SG&A as a percentage of sales deleveraged 49 basis points. The accelerated growth in SG&A has been purposeful as we continue to invest in store payroll and IT to underpin our growth initiatives. These investments are paying dividends and customer experience, speed, and productivity. We're committed to being disciplined on SG&A growth as we move forward, and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L. EBIT for the quarter was $743 million, up 10.9% versus the prior year, driven by our positive same-store sales growth and gross margin improvements. Interest expense for the quarter was $102.6 million, up 56% from Q2 a year ago as our debt outstanding at the end of the quarter was $8.6 billion versus $7 billion at Q2 end last year. We're planning interest in the $105 million range for the third quarter of FY 2024 versus $74.3 million last year. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 19.6% and down from last year's second quarter of 21.2%, this quarter's rate benefited 360 basis points from stock options exercised, while last year, it benefited 222 basis points. For the second quarter of FY 2024, we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises. Moving to net income and EPS. Net income for the quarter was $515 million, up 8.1% versus last year. Our diluted share count of 17.8 million was 7.8% lower than last year's second quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $28.89, up 17.2% for the quarter. Now, let me talk about our free cash flow for Q2. For the second quarter, we generated $179 million in free cash flow. We had higher CapEx spending this quarter versus a year ago and we expect to spend close to $1.1 billion in CapEx this fiscal year as we complete the addition of our distribution center capacity expansion ahead of schedule. I'll also remind you that we generate a majority of our free cash flow in the back half of our fiscal year. We expect to continue to be an incredibly strong cash flow generator going forward and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong and our leverage ratio finished Q2 at 2.4 times EBITDA. Our inventory per store was up 1.6% versus last year, while total inventory increased 4.2% driven by new store growth. Net inventory, defined as merchandise inventories less accounts payable on a per store basis was a negative $164,000 versus negative $227,000 last year and negative $197,000 last quarter. As a result, accounts payable as a percentage of inventory finished the quarter at 119.8% versus last year's 127.7%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $224 million of AutoZone stock in the quarter. And at quarter end, we had just over $2.1 billion remaining under our share buyback authorization. We've bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to a leverage target in the 2.5 times area and a disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. So to wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash and returning excess cash to our shareholders. We're growing our market share, expanding our margins and improving our competitive positioning in a disciplined way. And as we look forward to the remainder of FY 2024, we remain bullish on our initiatives to grow sales behind a resilient DIY business, a fast growing international business and a domestic commercial business that remains underpenetrated and should accelerate in the back half of the fiscal year. I continue to have tremendous confidence in our strategy and our ability to drive significant and ongoing value for our shareholders. And now I'll turn it back to Phil.

Operator:

Certainly. At this time, we will be conducing a question-and-answer session. [Operator Instructions] Your first question for today is from Chris Horvers with JPMorgan.

Chris Horvers:

Good morning. Thanks for all the information. My first question for you is, on the domestic Pro business, what's your sense of what the market is actually growing, especially in light of your mix? Obviously, your largest and most relevant competitor has a much smaller mix of national accounts. So I don't think that's obvious to us from the outside. So how are you seeing the performance of national accounts? Are you seeing that start to get better? Do we have to wait to lap that starting in June and July? And how do you think that you're growing relative to the market on the Pro side?

Chris Horvers:

So does that mean that -- I mean, I guess, if you were going to isolate more of the up and down the street account? Or are you seeing better relative performance? And I know you're reluctant to give too much detail in breaking out more detail, but like any commentary of like what the performance gap between like a national account business versus and up and down the street account would be really helpful. Thank you.

Chris Horvers:

Got it. And then on the -- you mentioned tax refund is expected to be normal this year. I mean, based on the data that we track, it does seem to be lagging year-over-year. So can you talk about what you mean in terms of the expectation on tax refunds, it would seem like it actually plays out a little more inverted where you get benefit later this quarter versus some headwinds at the start of the quarter? Thank you.

Chris Horvers:

Got it. Thanks very much.

Bret Jordan:

Hey, good morning, guys.

Bret Jordan:

I guess a question on the competitive landscape as it relates to WDs, they seem to get better after maybe 2022 into 2023 could you talk about the up and down The Street business? Is that a pretty stable competitive environment? Do they still improve? Or are they sort of plateauing?

Bret Jordan:

Yes, WD competitors. It seemed like they were raising their game for a bit after the pandemic and whether they're kind of stable where they are. Are they still -- are they becoming more competitive still?

Bret Jordan:

Great. And then I guess a question on international. O'Reilly has gone and acquired batt, and it seems like there's some Carquest assets for sale out there. Is Canada a market that you think about is -- or are really focused in Mexico and sort of secondarily Brazil?

Bret Jordan:

Not in 2024?

Bret Jordan:

Thank you.

Jamere Jackson:

Thanks Bret.

Michael Lasser:

Good morning. Thank you so much for taking my question. You still see an opportunity to return the commercial business back to a double-digit growth rate over time? Why or why not?

Michael Lasser:

Got you. That's helpful, Phil. Thank you so much. My follow-up question is that AutoZone's gross margin has really been growing nicely for some time now. But at what point does the gross margin get too high such that they invite more competition within the sector, especially on the commercial side?

Michael Lasser:

Thank you so much, Phil, Jamere and Brian, and good luck.

Operator:

Your next question is from Scot Ciccarelli with Truist.

Jamere Jackson:

Yeah. I mean, if you look at what's happened in this industry literally for decades is during periods where we have high inflation or even hyperinflation, we've raised retails to basically cover those additions and cost. And then as those cost pressures abate, this industry typically does not lower retails. So what you're seeing is the natural progression that we've seen from a gross margin standpoint as we're now in a period where things are becoming a little bit more deflationary, it gives us an opportunity to expand our margins, if you will. And we've been very disciplined about doing that as has the entire industry over this time period.

Scot Ciccarelli:

So just to clarify. So unless we see a spike in logistics or freight costs, the assumption should be where your current run rate of gross margin is, should be kind of the forward number we should be thinking of?

Scot Ciccarelli:

Super helpful. Thanks, guys.

Simeon Gutman:

Hey, good morning, everyone. Hey, Phil, I know it's tricky to prescribe when the commercial comps get back to double-digit. Can you give us a sense, I don't know if innings is the right way to think about it, where your efforts are in totality you mentioned faster delivery times, labor normalizing. There's some supply chain investments. So the collective of those, where you are on that journey to where you want to get to?

Simeon Gutman:

Good. I wanted to ask you, I think we asked Jamere when he joined, but since you've taken over, I wanted to ask about the EBIT dollar growth question versus margin. And part of it is timely because one of your competitors has been leading into SG&A, and it seems to be working and you're having a bifurcation in performance now in the sector. So your thought process on that balance and then leaning into SG&A over a longer period of time to take advantage of some displacement.

Simeon Gutman:

Thanks. Good luck.

Operator:

Your next question for today is from Seth Sigman with Barclays.

Phil Daniele:

Yes. We're extremely excited about both of our -- both our hub and our mega hub strategy. And I'll use the previous comments around innings. We think we'll have well north of 200 mega hub and significantly larger growth of hubs. We're roughly in the third inning or so in hub growth -- mega hub growth. If you kind of said that, that strategy works for us. We see significantly higher growth in those stores -- those types of stores, and they help feed harder to find inventory to what we call our satellite stores, the markets that are close to those hubs. So, yes, we believe that is the right strategy. We will continue to modify and enhance our assortment strategies in both our satellite stores and our mega hubs and hubs to get more relevant inventory closer to the customer. The faster we can get those hard-to-find parts into the shop, the better we will grow market share. And by the way, all of that inventory we add for the commercial customer also finds its way to sales on the DIY customer.

Jamere Jackson:

Yes, I mean the math on that is we've added over the last couple of years or so, almost 600 new programs. So, we went back and retrofitted several stores that didn't have commercial programs. If you remember, historically, we ran sort of 80% to 85% of our stores have a commercial program. That number is now up over 92%. We really accelerated that over the last several quarters. So right now, we've got probably 300 to 400 immature commercial programs that are ramping up in terms of sales and efficiency and performance. And as those programs mature, it will certainly provide a tailwind to our business. So when Phil talks about this notion of our commercial business improving from an execution standpoint, we not only have that working in our favor, but we also have these maturing programs that have only been in operation for the last couple of quarters. And so if we think about the commercial business very broadly, I just keep grounding us back to this notion that we're underpenetrated. We have a four or five share in what's approaching a $100 billion market. We've put a number of things in place that are delivering and have delivered exceedingly well for us. And as we move forward, we like the competitive hand that we have with growing mega hub footprints, improving execution and adding more commercial programs it’s our number one growth priority inside the company and we’re all hands on deck there. And the last thing, I’ll just say is as you think about commercial as you think about the back half of this year, the front half of this year, we had – we’re up against 15 comp and then a 13 comp, the back half of the year, the comps get a little bit easier. So the comments that we made earlier in our prepared comments are just along the notion that the comparisons get a little bit easier. And as we have all of these things from an initiative standpoint, working in our favor, it gives us a lot of confidence about our back half execution.

Seth Sigman:

Thank you both. Appreciate it.

Operator:

The next question is from Steven Forbes with Guggenheim Securities.

Jamere Jackson:

Yeah. I think a couple of things stand out to us. The first is that the mega hubs are growing from a commercial perspective and from an overall perspective, significantly faster than our satellite stores. And it's over 3x what we see on a total domestic business basis. So we've been very pleased with the tremendous sales lift that we're getting inside of the box, both on the DIY and the commercial side. I think the second thing that gives us a lot of confidence is we talked about this notion of testing multiple mega hubs in major metro markets. And we've done that over the last few years or so. And the idea there was to jam more Mega Hubs in a market and jam more parts closer to the customer to see really how high is high. And what we experienced in that time frame was the fact that we didn't see the kind of cannibalization that we would have anticipated, which suggested that the number of Mega Hubs that we could actually operate was significantly higher. And if you'll recall, we had Mega Hub targets that went from 100 to North of 200 over a very short period of time. So we like what we see from a sales standpoint. We like what we see from an earnings standpoint. And we -- and it's not only what we're seeing inside the four walls, but it's also the fact that these Mega Hubs are an important fulfillment source for the surrounding satellite stores. So when you put all that together in the mix, I mean, it's a pretty attractive story for us both in terms of sales and earnings and return on investments. And we're going to go as fast as we possibly can to accelerate.

Jamere Jackson:

Yes. I mean we've invested in SG&A in a very disciplined fashion over the last several years or so. And what we've always said is that over time, SG&A growth should be in line with what we see in terms of the top line. Now in the near-term, to your point, we've invested at an accelerated pace behind technology, behind store payroll, all of those things to drive near-term growth for us. And we won't hesitate to go do that. To the extent that there are opportunities for us to invest in SG&A to drive our growth initiatives, we will do that as we've done historically. As we move out and look to accelerate our store growth, there will be some drag on SG&A, but we should be able to manage that within that framework that I talked about.

Phil Daniele:

Thank you.

Greg Melich:

Hi, Thanks. Congrats as a nice quarter. I would just like to follow-up on inflation. So if ticket was up 1.7%, is it fair to say that same SKU inflation was sort of near that number and that -- how did items of basket and mix, et cetera, out in the quarter?

Greg Melich:

Got it. But presumably, that -- a little bit of acceleration in ticket comes from mix and items of basket rather than inflation ticking up, same SKU?

Phil Daniele:

Go back over long periods of time, decades, I mean, this industry has had a slight decline in transactions and units and an increase in ticket average and average unit retails in that somewhere between 2% to 4% range on average, predominantly because of changes in technology, better parts, and some -- it's great to think about belts on a car. Used to -- the average car used to have belts on it today, they have one. And the belt used to be $4 or $5 today about maybe $60 or $70. So that technology change is probably going to continue. And that's been -- it's been a pretty understandable decline in units and a change in average unit retail and we generally have pretty good line of sight to this because the product development takes years and an item may stay in our stores for 20 years. It's the beauty of having a -- frankly, a lower term business that's very predictable.

Jamere Jackson:

Yes. So, from an average wage standpoint, we're thrilled that we're starting to see average wages now with a two handle versus a three or four that we've seen over the last few years or so. So, as things have cooled down, we've seen some of the hyperinflation go away in the labor markets. We're now back to more normalized sort of wage inflation, if you will. Now, in terms of the investments that we're making, nearly every investment that we have from a growth initiative standpoint is underpinned by some changes in technology. Whether that's on the commercial side with what we're looking to do with some of our commercial acceleration initiatives are on the retail side, nearly all of those growth initiatives are underpinned by some changes that we're making in technology. Our technology teams have done a tremendous job doing that in a very cost-efficient way. And we -- and as we move forward, we'll continue to invest in a very disciplined way as we move forward. In terms of the commercial business and how we improve delivery. I mean we've been very efficient in terms of how we've deployed our physical assets in terms of vehicles and our people assets in terms of labor to manage that commercial business over time, and there hasn't been a meaningful change in what we're doing there.

Phil Daniele:

Thank you.

Max Rakhlenko:

Great. Thanks a lot guys. So in the stores where you're piloting the initiatives to improve DIFM services and speed levels, just how is that going versus your own internal expectations? And then how are you thinking about scaling these initiatives over the coming quarters? Just curious how early those are and when you think that they could be ready to go lighter?

Max Rakhlenko:

Got it. It's very helpful. And then can you just speak to your in-store staff retention rates? How are those trending, and if that's translating into improvements in pro satisfaction? And then ultimately, better demand trends in those stores.

Max Rakhlenko:

Great. Thanks. Best regards.

Phil Daniele:

Thank you. Appreciate the question. I think we have time for one last call.

Brian Nagel:

Hi, good morning. Thanks for slipping me in.

Brian Nagel:

So with my first question, I know there's been a lot of questions on commercial, and we recognize this has been an ongoing conversation. There's a lot of moving parts here as we look at the kind of the near-term trends. But I guess not at the risk of being too simplistic. We for a long time have talked about a key measure of success in commercial, so to say, climbing that list. In each individual store climbing that list of the – your mechanic customer. So the question I have is, as you pull and talk to your stores, are you seeing any indications that you're falling further down those lists or maybe the climb up some of these lists stalled?

Brian Nagel:

That's very helpful. And then a quick follow-up just on weather. And in your prepared comments, you talked about some of the sales volatility we saw through the fiscal Q2. and obviously, weather was a key component of that. But I guess the question I have is as you look at the weather, maybe we're not even through winter yet, but as you look at the weather, has it been enough -- has there been enough winter weather, so to say, give you that normal driver business as we head into spring and even in the summer?

Brian Nagel:

Thanks, guys. Thank you.

Operator:

Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

Unidentified Company Representative:

Certain statements contain herein constitute forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, speak, may, could and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe will be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including without limitation, product demand due to changes in fuel, prices, miles driven or otherwise, energy prices, weather, including extreme temperatures, natural disasters and general weather conditions, competition, credit market conditions, cash flows, access to available and feasible financing, unfavorable terms, future stock repurchases, the impact of recessionary conditions, consumer debt levels, changes in laws or regulations, risks associated with self insurance war and the prospect of war, including terrorist activity, the impact of public health issues, inflation, including wage inflation, the ability to hire, train, and retain qualified employees, including members of management and other key personnel, construction delays, failure or interruption of our information services technology systems, issues relating to the confidentiality, integrity, or availability of information, including due to cyber-attacks, historic growth rates, sustainability, downgrade of our credit ratings, damage to our reputation, challenges associated with doing business in and expanding into international markets, origin and raw material costs of suppliers, inventory availability, disruption in our supply chain, impact of tariffs, impact of new accounting standards, our ability to execute our growth initiatives, and other business interruptions. Certain of these risks and uncertainties are discussed in more detail in the risk factors section contained in item 1A under Part 1 of our annual report on Form 10-K for the year ended August 26, 2023. These risk factors should be read carefully. Forward-looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements. Events described above and in the Risk Factors could materially and adversely affect our business. However, it should be understood that it is not possible to identify or predict all such risks and other factors that could affect these forward-looking statements. Forward-looking statements speak only to the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Bill Rhodes:

Good morning. And thank you for joining us today for AutoZone’s 2024 first quarter conference call. With me today are Phil Daniele, CEO-Elect; Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the first quarter, hope you had an opportunity to read our press release and learn about the quarter’s results. If not, the press release along with slides complementing our comments today are available on our website, www.autozone.com, under the Investor Relations link. Please click on Quarterly Earnings Conference Calls to see them. As we begin this morning, we want to thank our AutoZoners for their contributions during the quarter that resulted in our solid performance. As our pledge states, we lead with putting customers first, which allowed us to grow our total sales by 5.1% while both are operating profit and earnings per share, grew by very impressive high-teens rates. As we have previously said, we have been able to continually build on the phenomenal performance from the pandemic years of 2020 to 2023. Our leadership team and I continue to be impressed with our post-pandemic sales performance. To put this in perspective, our FY 2019 sales were $11.6 billion and now our trailing four quarter sales are $17.7 billion, a 50% plus increase over a four-year time horizon. Congratulations AutoZoners everywhere who made that enormous success possible. For the first quarter, our total company same-store sales were 3.4% and 2.1% on a constant currency basis. As international has become a more important part of our growth story and an area where we are increasingly deploying capital, last quarter we began disclosing our global sales comp. We encourage you to focus on the constant currency number where international again had a strong quarter of 10.9%. Both our Mexican and Brazilian same-store sales had double-digit growth. We are very excited about the short- and long-term growth prospects of international. Our expectations are we will continue to grow both mature store volumes both in DIY and DIFM and we plan to accelerate new store openings over the next several years, ultimately getting to a minimum of 200 international new stores by 2028. Next, our domestic same-store sales were up 1.2% this quarter compared to 1.7% last quarter and 5.6% in Q1 of last year. Our performance in retail was slightly below our expectations, but still, still resilient in the current environment. Breaking our sales into three, four-week segments, our DIY same-store sales were roughly 1% for both the first and last four-week segments, but were negative 2% in the middle four weeks or October. Commercial sales on the other hand accelerated for the quarter, but we started stronger than we finished. As you know some of the comparisons over the last few years were distorted. And on a three-year basis, the performance of each of the businesses this quarter was remarkably similar. Our commercial business grew 5.7% against exceptionally strong comps last year. Importantly, we continue to be encouraged by the new initiatives we have in place to accelerate top-line growth in commercial, and those efforts are having a positive impact on our performance. And as we further analyzed our DIY and DIFM results and specifically our second period sales slowdown, our retail business was clearly impacted on a regional basis as we saw a 70 basis-point performance gap between the Northeast and Midwestern markets versus the rest of the country. We continue to attribute this gap in performance to the lack of winter weather last year and lack of snowfall. But enough about what happened to us. While not satisfied with our sales performance, we are encouraged as we enjoyed both, dollar and unit share gains in our domestic and retail businesses -- domestic retail and commercial businesses. We previously highlighted that we were not executing at peak levels, and we are encouraged to share that we are seeing steady progress. Our in-stock levels are nearing pre-pandemic levels. Turnover, while still elevated is beginning to decline. Productivity levels in our distribution centers have improved. The technology we deployed to improve service levels to commercial customers is seeing much higher adoption rates, leading to decreased delivery times and we have opened a significant number of new commercial programs, reaching 92% domestic penetration for the first time in our history. Even more encouraging is the continued strength in sales we are seeing from those new program openings as many are only weeks old. Now, I’d like to turn the call over to Phil Daniele to give more in-depth color on the quarter. Phil?

Jamere Jackson:

Thanks, Phil, and good morning, everyone. As both Bill and Phil have previously discussed, we had a solid first quarter stacked on top of an impressive first quarter last year with 5.1% total company sales growth, 1.2% domestic comp growth, 10.9% international comp on a constant currency basis, a 17.4% increase in EBIT, and an 18.6% increase in EPS. We continue to deliver solid results, and the efforts of our AutoZoners in our storage and distribution centers have continued to enable us to drive earnings growth in a meaningful way. To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q1. For the quarter, total sales were $4.2 billion, up 5.1%, and let me give a little more color on sales and our growth initiatives. Starting with our domestic commercial business, our domestic DIFM sales increased 5.7% to $1.1 billion and were up 20.6% on a two-year stack basis. Sales to our domestic DIFM customers represented 26% of our total company sales and 30% of our domestic auto part sales. Our average weekly sales per program were $15,900, down 0.6%. It’s important to point out that our sales per program productivity was again impacted by a large number of immature programs that have opened over the last five quarters. While these openings depress the point in time productivity metric, we’re encouraged by the growth prospects of these programs and their early contribution to our commercial business. We have intentionally opened more stores with commercial programs in response to the tremendous opportunity we see to grow our market share. We now have a commercial program in approximately 92% of our domestic stores, which leverages our DIY infrastructure and we’re building our business with national, regional, and local accounts. This quarter, we opened 121 net new programs, finishing with 5,803 total programs. Our commercial acceleration initiatives continue to make progress as we grow share by winning new business and increasing our share of wallet with existing customers. Importantly, we continue to have a lot of runway in front of us and we will continue to aggressively pursue growth opportunities in commercial, which we believe is our single largest growth opportunity. To support our commercial growth, we now have 100 mega hub locations with 2 new mega hubs open in Q1. The 100 mega hubs averaged significantly higher sales than the balance of commercial programs and grew more than 2 times the rate of our overall commercial business in Q1. As a reminder, our mega hubs typically carry roughly 100,000 SKUs and drive tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores. The expansion of coverage and parts availability continued to deliver a meaningful sales lift to both our commercial and DIY business. These assets are performing well individually and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to thousands of additional parts and lifting the entire network. We will continue to aggressively open mega hubs for the foreseeable future, and we expect to have north of 200 mega hubs at full build out. These are difficult to find boxes in the right locations, but we are keenly focused on rapid expansion and have 45 currently in the pipeline and growing. On the domestic retail side of our business, our comp was essentially flat for the quarter. As mentioned, we saw traffic down 1.6%, offset by 1.5% ticket growth. As we move forward, we would expect to see slightly declining transaction counts offset by low to mid single digit ticket growth, in line with the long-term historical trends for the business, driven by changes in technology and the durability of new parts. While DIY discretionary purchases were challenged in Q1, we continue to see a growing and aging car park, a challenging new and used car sales market and a consumer that is likely to continue to invest in their existing vehicles. As such, we believe our DIY business will remain resilient for the balance of FY24. I’ll now say a few words regarding our international business. We continue to be pleased with the progress we’re making internationally. Our same-store sales grew 25.1% on an actual basis and 10.9% on a constant currency basis. During the quarter, we opened 5 stores in Mexico to finish with 745 stores and 4 stores in Brazil ending with 104. We remain committed to international and given our success, we’re bullish on international being an attractive and meaningful contributor to AutoZone’s future growth. Now, let me spend a few minutes on the rest of the P&L and gross margins. For the quarter, our gross margin was 52.8%, up 279 basis points, driven primarily by a noncash $81 million LIFO charge in last year’s quarter versus a $2 million LIFO credit this year. Excluding LIFO from both years, we had a very strong 70 basis-point improvement in gross margin, which increased from last quarter’s 37 basis-point improvement. We’ve had exceptional gross margin improvement and in fact, we’re at the highest gross margin rate we’ve had since FY 2021. I will point out that we now have $57 million in cumulative LIFO charges yet to be reversed through our P&L, and we expect this credit balance to reverse over time. We’re currently modeling $5 million in LIFO credits for Q2 based on the deflation experienced in Q1. And as I’ve said previously, once we credit back the $57 million through the P&L, we will not take any more credits and we will begin to rebuild an unrecorded LIFO reserve. Moving to operating expenses, our expenses were up 7.4% versus last year’s Q1 as SG&A as a percentage of sales deleveraged 68 basis points. The increase in SG&A has been purposeful as we continue to invest in store payroll and IT to underpin our growth initiatives. These investments are paying dividends in customer experience, speed and productivity. We’re committed to being disciplined on SG&A growth as we move forward and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L. EBIT for the quarter was $849 million, up 17.4% versus the prior year, driven by our positive same-store sales growth and gross margin improvements including the LIFO year-over-year favorable comparison. Interest expense for the quarter was $91.4 million, up 58% from Q1 a year ago as our debt outstanding at the end of the quarter was $8.6 billion versus $6.3 billion at Q1 end last year. We’re planning interest expense in the $98 million range for the second quarter of FY24 versus $65.6 million last year. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 21.6% and up from last year’s first quarter of 18.9%. This quarter’s rate benefited 147 basis points from stock options exercised, while last year it benefited 446 basis points. For the second quarter of FY24, we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises. Moving to net income and EPS. Net income for the quarter was $593 million, up 10% versus last year. Our diluted share count of 18.2 million was 7.2% lower than last year’s first quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $32.55, up 18.6% for the quarter. Now let me talk about our free cash flow for Q1. For the first quarter, we generated $600 million in free cash flow. We expect to continue being an incredibly strong cash flow generator going forward, and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong and our leverage ratio finished Q1 at 2.5 times EBITDAR, returning to our long-term target. Our inventory per store was up 0.3% versus last year while total inventory increased 3%, driven by new store growth. Net inventory, defined as merchandise inventory less accounts payable on a per store basis, was a negative $197,000 versus negative $249,000 last year, and negative $201,000 last quarter. As a result, accounts payable as a percent of inventory finished the quarter at 124.4% versus last year’s 131%. Lastly, I’ll spend a moment on capital allocation and our share repurchase program. We repurchased $1.5 billion of AutoZone stock in the quarter, and at quarter end we had just over $300 million remaining under our share buyback authorization. The strong earnings, balance sheet and powerful free cash we generated this year has allowed us to buy back 3% of the shares outstanding in the quarter. We have bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. To wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash, and returning excess cash to our shareholders. We’re growing our market share, expanding our margins, and improving our competitive positioning in a disciplined way. And as we look forward to the remainder of FY24, we’re bullish on our growth prospects behind a resilient DIY business, a fast growing international business, and a domestic commercial business that is reaccelerating. I continue to have tremendous confidence in our strategy and our ability to drive significant and ongoing value for our shareholders. And now I’ll turn it back to Phil.

Operator:

[Operator Instructions] Your first question is coming from Bret Jordan from Jefferies.

Jamere Jackson:

Yes. I mean from a margin standpoint, we’re very pleased with the progress that we’re making on margins, both gross margins and total operating margins. In our business in Mexico, which is much more mature than obviously what we have in Brazil, we’ve been very pleased with the actions we’ve been able to take on the merchandising side of the business, and that’s given us a very healthy gross margin in that business. And then, if you also think about the inherent advantages that you have from a cost structure standpoint, particularly with wage rates and labor, it’s a very attractive operating margin structure in Mexico. And we believe as our business in Brazil matures and scales over time that we’ll see similar advantages in Brazil. So net-net, what we’re doing on the international side, while it’s a fast-growing business, it’s also going to have a lot of margin calories that come along with it.

Bret Jordan:

I guess, what kind of scale do you need to tip Brazil into profitability? I mean the incremental margin would seem to be very high in that case.

Bret Jordan:

Okay. Quick follow-up. The U.S. Do-It-For-Me, any channel dispersion, national account, tire service chains versus independents performance?

Operator:

Your next question is coming from Michael Lasser from UBS.

Phil Daniele:

Yes. Thanks. It’s great question. I think as we said, we’re slightly disappointed with our commercial growth for this particular quarter. We’re happy to accelerate it, but we frankly thought it would accelerate a little bit faster. We’re happy with the progress that we’re making. And to your question about double-digit long term, yes, we think we can get back to those types of growth numbers over time, particularly because we have such low share percent on the commercial side of the business in that 4% to 5% range. So over a long time, we believe we will be able to continue to expand our market share. And as we continue to have these newer stores that we’ve opened over the last five quarters continue to mature and we continue to improve our execution, we believe we will continue to grow our comps in the DIFM space.

Jamere Jackson:

Yes. We’re pleased with the progress that we’ve made on gross margins, and it’s really comprised of two pieces. Number one, from a merchandising margin standpoint, we’ve done a great job inside our merchandising organization of finding cost opportunities and pricing opportunities that have given us accretive gross margins, and we’re doing a tremendous job there. Second element of that, quite frankly, has been the work that we’ve done inside the supply chain. If you recall, our supply chain was under tremendous pressure over the last couple of years or so from a cost standpoint, and we’re now starting to see some benefits as some of those pressures have abated. But if you look at this business over the long term, I mean, we have historically been able to churn out positive gross margin improvements in a very-disciplined fashion over time. And that has enabled us to grow our earnings very predictably as we move forward. And when we think about the pricing environment, as we’ve said and we continue to reiterate, pricing is a pretty dynamic environment. We don’t feel like we need to make any pricing investments at this point to be able to operate the business and grow share. But if we do have to make those moves, we’ll certainly do those, if it results in us improving units and ultimately growing EBIT. But at this point, we’re in pretty good shape in terms of where we are from a pricing standpoint and feel that we’re very competitive in the marketplace.

Max Rakhlenko:

So first, can you speak to the competitive environment and if you’re seeing any changes there? And then how would you frame the level of competition today from the WDs compared to both a couple of quarters ago as well as pre-pandemic?

Max Rakhlenko:

Got it. That’s helpful. And then you guys touched on delivery times improving a few times throughout the prepared remarks. So, can you speak to what your average delivery times are now in the markets where you’ve got the megas? And then how much more room do you have to improve? And then just the cadence we should think about in order to get there?

Operator:

Your next question is coming from Chris Horvers from JPMorgan.

Bill Rhodes:

That’s a terrific question, Chris. Let’s step back and talk about this on a long-term basis first. If you think about the retail business, which we have much more experience in the retail business and you think about it over long periods of time, we don’t spend a lot of time talking about the strength of the consumer, much more so when tough times happen, i.e., recessions, those have been the periods where we’ve outperformed more so than any other periods of time. So, we don’t spend a whole lot of time on the consumer. We certainly see in the retail business, there’s some trading down going down the good, better, best product assortments. I think in the commercial side, we have suppositions that we haven’t yet proven because we haven’t been in that business at this level for an extended period of time. I believe we think that there may be some consumers that are trading from DIFM into DIY in certain jobs as they’re trying to save money. The thing I would encourage us all to focus on more so than minor fluctuations in consumer sentiment. As we enter the second quarter, the one thing I always worry about is the weather patterns in the second quarter are extremely volatile, and they can have big impacts on our performance, both positive and negative. And as we’ve said, those impacts of the weather, particularly in the Rust Belt, can have ongoing implications as we get into the spring and summer and even the fall months. If we get significant snow and ice, particularly in the Rust Belt in the Northeast, that bodes well for us. If we don’t, then we’re going to have a little bit of a challenge. To me, that is the more impactful thing that’s going to happen in the near term than consumer sentiment.

Bill Rhodes:

Yes. It’s interesting, Chris, because the beginning of the quarter last year, there was no weather. We had significant weather around the holidays for a couple of weeks and thought, okay, here we go on, our business responded really, really well. And then the January, February, into March, particularly in the Rust Belt, it was lack of snow and ice and fairly moderate temperatures. Unfortunately, we don’t have a meteorologist on staff either. And at the end of the day, we’re running this business for not quarters, not years, but for decades. And the weather implications, they’re going to even out. I just always try to make sure and caution everybody at the beginning of the second quarter that we could have really strong performance and we can have really weak performances driven by weather, and that doesn’t need to change how we approach our strategy over the long term.

Seth Sigman:

I wanted to follow up on commercial. It seems like you’ve really accelerated the rollout of new programs over the last few quarters, obviously, at a time when sales growth on a comp basis has been lower. So, can you just help us better understand what driving that decision right now, particularly as we think about your comment around in-stock levels improving, but not necessarily where you want it to be. So, how do we think about that thought process around accelerating right now?

Seth Sigman:

Okay. And then just a follow-up would be around thinking about the investments that may be required to drive that improvement in commercial. And I think this was talked about in a few different ways, including around pricing, but I’m thinking more from an OpEx, from an SG&A perspective. It’s been growing at a relatively steady 4% rate per store. That seems reasonable. But I’m curious how you’re thinking about that? How you’re planning for that throughout this year? And whether you need to start to see a pickup in your SG&A growth?

Phil Daniele:

You also -- you mentioned price, specifically on the DIFM side. And although we made a price investment several years ago, today, we like our pricing strategy. Now, the pricing is always a pretty dynamic point of our business, and we’ll continue to monitor that. But we like where we are from a pricing strategy today. So we don’t see any major or deviation from our current pricing strategy.

Zach Fadem:

So when you look at the sequential uptick in your commercial business, but also a sequential downtick in DIY, can you help us parse out the impact of broader industry trends versus your own idiosyncratic factors? And as you put these together, is it fair to say that you expect Q2 and fiscal ‘24 as a whole to look a lot like Q1, or are there factors that give you confidence in both DIY and commercial acceleration as we move through the year, even if the industry is slowing?

Zach Fadem:

Got it. And then for Jamere, I just wanted to follow up on the gross margin, up about 280 basis points. I think you said about 208 basis points of that was LIFO. So first question is, how do you expect the LIFO impact to trend in Q2 and going forward? And then, if we look at the other 70 basis points of benefit from the supply chain and merch margins, is it possible to talk a little more about the impact of these two individually going forward as well as the impact of mix?

Operator:

Your next question is coming from Simeon Gutman from Morgan Stanley.

Bill Rhodes:

Yes, we can.

Jamere Jackson:

Well, I think what we’ve said historically, and you’ve seen us certainly behave this way is that as we saw inflation in the business, we took pricing accordingly. And as we come out of that, particularly with things like freight starting to come down, that is an opportunity for us to improve the gross margin profile of the business. The pricing environment has been incredibly rational, has been for decades, and it’s certainly behaving rationally today. And so, we don’t see a need to go deliberately invest gross margin improvements and the pricing to drive demand. But if the case was that we thought that the pricing bands which we’ve established that have helped us grow our market share sort of got out of line, then we would not hesitate to go invest gross margin and be able to go do that to drive units and to drive market share growth. But the environment that we’re operating in today is very, very rational, and we believe that the gross margin improvements that we’re seeing today are an opportunity for us to expand margins and ultimately add more calories to the bottom line.

Bill Rhodes:

I think I’ll go back to what I said, Simeon. I think we understand the retail business very well. As we’ve ramped so significantly in the commercial business, I don’t think we know what the cyclical nature of that business is. We have, as I said, a supposition that there are certain people that in difficult recessionary periods of time will trade down into DIY to do a brake job or a battery job where they might have taken it to a shop before. But remember, the last time we saw a real recession, our commercial business was $1 billion. We should surpass $5 billion this year. So, I just don’t think we have the deep insights that we do in the retail business.

Daniel Imbro:

I want to start on the domestic DIFM growth. I guess, you mentioned, Jamere, in your comments, the recent openings are creating an optical headwind just with more immature programs. What is the expected maturity curve or normal maturity curve for a new commercial program? And is it different in a new build versus when you’re retrofitting and adding commercial to an existing store?

Bill Rhodes:

I think I’d just add also, you can’t think about these new stores as if they’re in isolation. Many of those customers were servicing already from another store and will take 40% of the projected volume from another store because we can service them so much better because we’re in a much closer proximity. So, every one of them is a little bit different. If they’re in a rural area, we really don’t service those customers, so they start from the ground zero. But many of the urban and suburban markets, we have a little bit of a head start already.

Daniel Imbro:

Understood. Helpful color. And then my follow-up, just a question on the private label. How is the Duralast penetration trended in recent quarters? If I’m remembering right, you invested a lot in parts quality in the last couple of years. I would think as the consumer becomes more price sensitive or just earning the value of private label should go up? So I’m curious how that penetration is trending? And are we seeing that trade into that either on the DIFM or the DIY side?

Operator:

Your next question is coming from Seth Basham from Wedbush Securities.

Bill Rhodes:

I think that’s absolutely accurate, Seth. As we’ve said for many years, the quote unquote, I’ve said the dirty little secret about the retail side of this business is that the transactions have been challenged, and they’ve been challenged for over 25 years. They’re challenged for a lot of reasons because the OE manufacturers are making vehicles and their components much better. Used to, you’d had a lot more frequency of failures on those components. Today, they’re not. They don’t fail as much because they have a lot of technology involved in those components. So, what has happened over a very long periods of time is you have this 2% to 4% drag on transactions, but you have an equivalent amount on the average price per piece because the cost of the technology that’s going into those parts. We didn’t see -- we eliminated that transaction drag during the pandemic and, frankly, grew upper single digits in transactions. Today, our transaction count is starting to look a lot more similar to the way it has been in the past. One of the challenges that we’re still dealing with in the retail business is, last year, we had hyperinflation, double-digit inflation. And so, our ticket isn’t up as much as it normally would be. And I think that’s because we’re normalizing getting past that super high inflation from last year. As we think about the DIY business thinking out 3 or 4 or 5 years, first of all, we’re going to have to continue to improve it, and we have efforts underway to do that. But we believe it’s a 3% kind of ticket drag and hopefully more than -- or sorry, transaction drag on a same-store basis and more than offset that from the average unit retail.

Bill Rhodes:

I think everybody thinks that DIFM is going to grow at these very rapid rates and DIY is going to decline. What we’ve seen over a very significant periods of time is DIY usually grows 3% to 4%, and commercial grows 0.5 point to 1 point faster. I think if you rolled out the next three years, unless there’s some big economic shock or something like COVID, that will probably continue to be the case.

Operator:

Thank you, everyone. This concludes today’s event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Unidentified Company Representative:

Before we begin, please note that today's call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the company undertakes no obligations to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Bill Rhodes:

Good morning. And thank you for joining us today for AutoZone's 2023 fourth quarter conference call. With me today are Phil Danielle, our CEO-Elect; Jamere Jackson, Chief Financial Officer and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the fourth quarter, hope you've had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with slides complementing our comments today are available on our website, www.autozone.com, under the investor relations link. Please click on quarterly earnings conference calls to see them. As we begin, we want to thank our AutoZoners for their incredible contributions during fiscal 2023 that resulted in our solid performance. As our pledge states they continued putting our customers first, which resulted in total sales growth of 7.4% for the fiscal year, while earnings per share increased 12.9%. It's important to remember that these results build on the phenomenal three year performance from the pandemic years of 2020 to 2022. Candidly, Phil, Jamere, Tom Newbern, and I felt at some point we would see our sales per store migrate closer to pre-pandemic levels. That hasn't happened. And at this stage, we do not expect it will. To put it in perspective, our domestic average weekly sales per store are 33% higher than in 2019, growing from $35,600 a week to $47,300 a week. This level of growth and sales also drove enormous growth in operating profit, where this year's $3.474 billion was 61% above 2019, when adjusted for the 2,019, 53 week. That is remarkable growth, especially for a 44-year old enterprise. We could not have achieved this success without exceptional efforts across the entire organization. We have several updates for you this morning. First, I'm sure you've noticed the new table in our press release. We are now presenting our same store sales results for domestic, international and total company. We're also reporting our international same store sales, which includes both Mexico and Brazil, on both an actual and constant currency basis. Why the change? The answer is International is becoming a larger and larger part of our business, and we are investing a sizable amount of our growth capital in those countries. As we evaluate important growth metrics, we think it is important to assess it in total. As we know this is a change we are committed to providing you with each component individually for at least five quarters, as our objective is to enhance your visibility. Next, our domestic same store sales were 1.7% this quarter compared to 1.9% last quarter, and about half of our fiscal 2023 growth of 3.1%. Our performance in retail was respectable and generally in line with our expectations. But as was well documented last quarter, our commercial sales performance in the second half of our fiscal year declined meaningfully and to us unacceptably. We ended with 3.9% growth in domestic commercial sales. Our performance in both retail and commercial in the first half of the quarter was disappointing, but during this period we experienced very mild weather. As we reached the second half of the quarter, and temperatures escalated materially, so did our sales. Specifically for the first eight weeks of the quarter our retail comps were flat, but increased 3.4% in the second half. Commercial experienced a similar trajectory, ending particularly strong in the last four weeks of the quarter, up over 7%. Regarding regional results, we saw a material performance gap between the Northeast and Midwestern markets versus the rest of the country. The total comp difference was well over 300 basis points and over 450 basis points for commercial. We attribute this to the lack of winter weather and snowfall in the latter part of last winter in that region. This has led to lower growth trends in undercar categories. Both those are things that "happened to us, not what we did to enhance and improve our performance." Last quarter, we highlighted that we were not executing at our peak levels. We have made many changes since then, and are pleased with the improvements in execution we are seeing. We aren't there yet. But we're on a really good path. We also recently completed another strategic review of our commercial business. We have validated our direction and have some exciting new enhancements that we will be testing over the next few quarters. We also made significant improvements in the information technology that we use to operate our commercial business, and we opened many more commercial programs, reaching 90% domestic penetration for the first time in our history. Even more encouraging is how strong those new openings are starting and how many -- many weeks -- or they're just a few weeks old. Ultimately we will operate in a favorable and unfavorable macro and weather environment. We want to share our perspectives with you so you can understand our performance. But ultimately, it is our actions that will determine our long term success. And we're encouraged by the actions we're taking. Finally, our strategy supporting our store operations and commercial teams includes several other key elements. Global new store growth, where we disappointingly didn't achieve our goals in FY23, more on that later; continued growth with our hubs and in particular, mega hubs, where we are nearing the halfway point of our ultimate goal of having 200 mega hubs and 300 hubs. It's important to reinforce the continued, very strong performance of these stores, especially the mega hubs, and particularly in commercial; reconfiguring our global supply chain to efficiently process the enhanced sales we have achieved and expect to achieve over the next decade, while optimizing our processes for handling more direct import products from many countries, and more challenging slow turning parts assortments that are critical to our success; and finally continuing to lean in hard on technology improvements to make our AutoZoners more knowledgeable, efficient and effective. I've given you the high level sound bites on the quarter's results. Now I'd like to introduce Phil Daniele to give more in-depth color on the quarter. Phil?

Jamere Jackson:

Thanks, Phil. And good morning everyone. As both Bill and Phil had previously discussed we had a solid fourth quarter, stacked on top of an impressive fourth quarter last year. 6.4% total company sales growth, 1.7% domestic comp, a 14.9% international comp on a constant currency basis, a 10.8% increase in EBIT, and a 14.7% increase in EPS. In addition, our results for the entire fiscal year were very strong as total sales grew 7.4% and EPS grew 12.9%. We continue to deliver great results and the efforts of our AutoZoners in our stores and distribution centers have continued to enable us to grow our business and our earnings in a meaningful way. To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q4. For the quarter total sales were just under $5.7 billion, up 6.4%. For the year our total sales were $17.5 billion, up 7.4% versus last fiscal year. I continue to marvel at the strength of our business since FY19. Our sales are up an amazing 47% or nearly $5.6 billion since 2019. Let me give a little more color on sales and our growth initiatives starting with our domestic commercial business. For the fourth quarter our domestic DIFM sales increased 3.9% to $1.5 billion and up 25.9% on a two year stack basis. Sales to our domestic DIFM customers represented 26% of our total company sales and 30% of our domestic auto parts sales. Our average weekly sales per program were approximately $16,700, down 1.8%. Now it's important to point out that our sales per program productivity was impacted materially by the late in quarter openings of approximately 120 new programs. While these openings depressed the point in time productivity metric, we're encouraged by the growth prospects of these programs and their early contribution to our commercial business. These openings are part of our efforts to open more stores with commercial in response to the tremendous opportunity to grow our market share. Our commercial acceleration initiatives are delivering the expected results, as we grow share by winning new business, and increasing our share of wallet with existing customers. We now have our commercial program and approximately 90% of our domestic stores, which leverages our DIY infrastructure. And we're building our business with national, regional and local accounts. This quarter we opened 156 net new programs, finishing with 5,682 total programs. As I've said since the outset of the year, commercial growth led the way in FY23, and we feel good about our prospects heading into the New Year. For FY23, our commercial sales were $4.6 billion, up 8.7% versus last year, and up 37% from two years ago. Importantly, we have a lot of runway in front of us, and we expect to deliver on our goal of becoming a faster growing business. To support our commercial growth we now have 98 mega hub locations with 13 new stores opened in Q4. While I mentioned a moment ago, the commercial weekly sales per program average was $16,700 per program, the 98 mega hubs averaged significantly higher sales and are growing much faster than the balance of the commercial footprint. In fact, our commercial mega hub business grew twice as fast as our overall commercial business in Q4. As a reminder, our mega hubs typically carry over 100,000 SKUs and drive tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores. The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business. These assets are performing well individually, and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to thousands of additional parts and lifting the entire network. We have an objective to reach 200 mega hubs supplemented by 300 regular hubs in the near term. Our AutoZoners and our customers are excited and we're determined to build on our strong momentum. On the domestic retail side of our business, our DIY comp was up 1.4% for the quarter. For FY23 our DIY crop grew 1.8% and 4.7% on a two year stack basis. The business continues to be remarkably resilient as we've managed to deliver positive comp growth through the cycle. As Bill mentioned, we saw traffic down slightly and 2% ticket growth. As we move forward, we would expect to see slightly declining traffic counts offset by low to mid-single digit ticket growth, in line with the long term historical trends for the business driven by changes in technology and the durability of new parts. Importantly, our DIY business has continued to strengthen competitively behind our growth initiatives. In addition, the market is experiencing a growing and ageing car part and a challenging new and used car sales market for our customers which continues to provide a tailwind for our business. These dynamics, ticket growth, growth initiatives and macro car part tailwind have driven a positive comp. We're forecasting a consistent and resilient DIY business environment for FY24. Now I'll say a few words regarding our international business. As you may have noticed, we changed our disclosure on our international business, and we will continue to do so going forward. With 12% of our total store base outside of the U.S., the current revenue contribution and the growth prospects moving forward, we simply have to share more about international. We continue to be pleased with the progress we're making in Mexico and Brazil. During the quarter, we opened 27 new stores in Mexico to finish with 740 stores, and 17 new stores in Brazil ending with 100. Our same store sales grew 34.1% on a reported basis and 14.9% on a constant currency basis. We remain committed to Mexico and Brazil, and given our success in these markets, we will accelerate the store opening pace going forward. By 2028, after a robust strategic review of the market and ultimate store comp potential, we revised our strategy and anticipate opening as many as 200 stores annually in these markets in a disciplined fashion, making this an attractive and meaningful contributor to AutoZone's future growth. Now let me spend a few minutes on the rest of the P&L and gross margin. For the quarter our gross margin was 52.7%, up 118 basis points, driven primarily by a non-cash $30 million LIFO. credit this quarter. For Q4 last year, we had a $15 million LIFO charge. Excluding LIFO from both years, we had a 37 basis point improvement in gross margin. I will point out that we now have $59 million in LIFO charges yet to be reversed through our P&L and we expect these to largely reverse over FY24. We're currently modeling $15 million in LIFO credits in Q1 as inflation continues to abate, and we turn our inventory. And as I've said previously, once we credit back the $59 million through the P&L, we will not take any more credits and we will begin to rebuild our unrecorded LIFO reserve. Moving to operating expenses, our expenses were up 7.6% versus last year's Q4 as SG&A as a percentage of sales deleveraged 34 basis points. The accelerated growth in SG&A has been purposeful as we continue to invest in an accelerated pace in IT and payroll to underpin our growth initiatives. These investments will pay dividends in customer experience, speed and productivity. We are committed to being disciplined on SG&A growth as we move forward, and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L, EBIT for the quarter was $1.2 billion, up 10.8% versus the prior year, driven by our positive same store sales growth and gross margin improvements including the LIFO year-over-year benefit. EBIT for FY23 was just under $3.5 billion up 6.2% versus the prior year, also driven by strong top line growth. Interest expense for the quarter was $108.7 million, up 70% from Q4 a year ago as our debt outstanding at the end of the quarter was $7.7 billion versus $6.1 billion at Q4 and last year. We're planning interest in the $88 million range for the first quarter of FY24 versus $57.7 million in this past year's first quarter. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 22.4% and up from last year's fourth quarter of 22.1%. This quarter's rate benefited 22 basis points from stock options exercised while last year had benefited 70 basis points. For the first quarter of FY24 we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises. Moving to net income and EPS, net income for the quarter was $865 million, up 6.8% versus last year. Our diluted share count of 18.6 million was 6.9% lower than last year's fourth quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $46.46, up 14.7% for the quarter. For FY23 net income was $2.5 million, up 4.1% and earnings per share was $132.36, up 12.9%. Now let me talk about our free cash flow for Q4. For the fourth quarter we generated $1.1 billion of operating cash and $701 million in free cash flow. For the year we generated $2.1 billion in free cash. We expect to continue being an incredibly strong cash flow generator going forward, and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong. And our leverage ratios remain below our historic norms. Our inventory per store was down 0.6% versus Q4 last year while total inventory increased 2.2% over the same period last year driven by new store growth. Net inventory, defined as merchandise inventory less accounts payable on a per store basis was a negative $201,000 versus negative $240,000 last year, and negative $215,000 last quarter. As a result, accounts payable, as a percent of gross inventory finished the quarter at 124.9% versus last year's Q4 of 129.5%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $1 billion of AutoZone stock in the quarter, and at quarter end we had just over $1.8 billion remaining under our share buyback authorization. The strong earnings, balance sheet and powerful free cash we generated this year has allowed us to buy back 8% of the shares outstanding since the beginning of the fiscal year. We have bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts to cash to shareholders. We finished Q4 2.3 times EBITDAR, which is below our historical objective of 2.5 times EBITDAR. However, we remain committed to our leverage objectives, and we expect to return to the 2.5 times target in FY24. To wrap up, we remain committed to driving long term shareholder value by investing in our growth initiatives, driving robust earnings and cash and returning excess cash to our shareholders. Our strategy continues to work. We're growing our market share and improving our competitive position in a disciplined way. As we look forward to FY24, we're bullish on our growth prospects behind a resilient DIY business, a fast growing international business and a domestic commercial business that is continuing to grow share. I continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders driven by a high degree of confidence in our strategy, and our exceptional team of AutoZoners. One last housekeeping point, I'd like to remind you that in FY24, we will have a 53rd week in our financial results. This extra week will be added to our Q4 results. As a result, our fiscal year will now end August 31, 2024. In order to model that extra week, I encourage you to look at our financial breakouts of both our fiscal 2019 and 2,013 fourth quarters, which were the last two years we had the extra week and we show breakouts of the full P&L accordingly. And now I'll turn it back to Bill.

Operator:

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions]. Thank you. Our first question is coming from Bret Jordan with Jefferies. Your line is live.

Bill Rhodes:

Good morning, Bret.

Bret Jordan:

You called out market share gain in the commercial space in the fourth quarter. Then you said, not in line with your aspirations. But then also said that pricing is rational. What do you think is happening in the space? Are there peers that are showing relatively better in-stocks? Or really was it just your regional footprint and exposure to some of those softer markets that made the difference?

Bret Jordan:

Okay, great. And a big picture question, I guess on the international. When you look at the, obviously different vehicle demographic and economy, but how do you see the underlying growth rates in the DIY and the DIFM segments in Brazil and Mexico, sort of on a longer term basis?

Bret Jordan:

But fair to think an older car base that drives a better underlying growth than U.S.

Bret Jordan:

Great. Thank you.

Operator:

Thank you. Our next question is coming from Simeon Gutman with Morgan Stanley. Your line is live.

Bill Rhodes:

Absolutely is still the goal. Keep in mind, we still have pretty low share in that, 4.5% range or so. So we're under share. And we think there's still tremendous opportunity for us to gain share. Like we said, we're not happy with our performance in the Q4 timeframe. We do feel like we're exiting the quarter at a higher rate, and we believe will continue to improve from this point forward. But we're not back to where we want to be. But we do see line of sight to getting back to that double digit growth over time.

Bill Rhodes:

Well, like I said, we talked, in Q3 or Q4 that our execution in the commercial arena wasn't where we expected it to be. And we've been working on that. We saw that performance and the execution levels improve as we worked through Q4. We're not finished yet. We'll frankly, never be finished. Execution is a long term strategy. But we continue to get better. And we think we continue to improve our business model. Like we said, we've opened up more hubs, more mega hubs. We continue to strengthen our store side assortments. And we're also continuing to leverage the technology enhancements that we've made over the last couple of years. And those will continue to mature. And we're not standing still. That technology enhancements will continue as we move through this next year.

Operator:

Thank you. Our next question is coming from Seth Sigman with Barclays. Your line is live.

Bill Rhodes:

Now on the execution -- thanks for the question. On the execution, I think if you go back to the pandemic, and some of the challenges of the pandemic, we obviously struggled with in-stock. We struggled with staffing, as everybody did. And we struggled with store level execution. Our primary objectives were keep our AutoZoners safe, take care of the customers, keep our stores in-stock. Nothing, there wasn't any -- this big one area that got broken. It was a lot of little things. And at AutoZone, we expect to operate executionally solid every single day. We didn't achieve that. We're continuing to work on that. And we're taking off the execution marks to get back to flawless execution day in and day out. That frankly, takes time and it will continue to improve. We liked the improvements we saw in Q4. I wouldn't say we're done. We think there's still opportunities to improve and we'll continue down that path. It's just part of our culture. Execute flawlessly.

Bill Rhodes:

Yeah. So the first point I'll make on inflation is that, we've been comping hyperinflation relative to our store industry trends for quite some time now. And so as inflation has sort of moderated and faded to sort of the normal rates, those are the dynamics that we've been experiencing. As it relates to our business moving forward, we expect inflation to be in the low-to-mid single digit range that will impact our tickets. On the DIY side, as we've said, we've historically seen transaction counts decline kind of low single digits, if you will. And so we expect to be operating our business closer to historic norms moving forward. In terms of the macro environment, and how that's played out from an inflation standpoint. We haven't seen to this point, sort of a wobble from the consumer. We think it's been a two-speed world for a while where the low end consumer has been under some pressure, but consumers that have higher incomes have been doing well. And the net result of that is our business on the DIY side has been very, very resilient.

Operator:

Thank you. Our next question is coming from Elizabeth Suzuki with Bank of America. Your line is live.

Bill Rhodes:

Yeah, thank you, Liz. We think we're going t o get a great return basically, in all three countries, whether that be urban environments or rural environments. And I go back to when you're running a ROIC of 50%, that shows that we can get really good returns. Yes, we're making this announcement when construction costs are higher, interest rates are higher and on and on. We're making decisions that are 40-year decisions. And we believe we've got a long runway for opening significant amounts of new stores. And once we finished that strategic review back in June, we made the decision that we're going to accelerate and get back to 500 stores a year. Now remember, that'll be between 3% and 3.5% organic store growth. So it's not like we're talking about going to 10% growth. We think having something that's growing in that range makes a lot of sense for the long term.

Elizabeth Suzuki:

Great, thank you. And then, you talked about Mexico and Brazil. Now in Brazil, you're still losing some money there. What does the profit profile look like in Mexico or just for the international operations in total? And how should we think about the impact on the total company margin profile as those stores grow as a percentage of AutoZone's total?

Elizabeth Suzuki:

Great, thank you.

Operator:

Thank you. Our next question is coming from Chris Horvers with JPMorgan. Your line is live.

Bill Rhodes:

Yeah, the 7%, just to be clear, was a total growth in those last four weeks of the quarter. So it improved over the quarter timeframe. I'd like to forecast that we're going to improve from there. It could be bumpy. Nothing's a straight line. I'll tell you, if you think about the weather performance over the quarter, like we said, the beginning parts of the quarter, the first month of May and June, were particularly cool and wet. And although that had probably a more material impact on the DIY side of the business, it impacts commercial as well. And as it got hot, you see those bigger ticket categories, like per se, air conditioning, for example. Those are big categories and big jobs. And as you get those failures due to heat, it helps the comps and the total growth. So we think that weather story will help us a little bit. The hot summer will help us as we move through the beginning of Q4. And then we'll move into a normal weather pattern as we as we go through Q2 and the rest of the year.

Jamere Jackson:

Yeah. So as we think about FY24, I think there are a handful of dynamics that you need to sort of wrap your mind around as you build your models. Number one, we're forecasting a very consistent and resilient DIY business. And Phil and Bill talked about some of those dynamics as part of their prepared comments. The second dynamic that we're focused on, as Phil alluded to, is an improving growth profile in our commercial business, again, we were very pleased with where we exited the fourth quarter. I believe we got the momentum going into the first quarter and next year. I think the third dynamic that you mentioned is around LIFO. We've got $59 million of LIFO that we expect to largely get back through the P&L. So as you're working your way through your modeling, you can expect most, if not all of that, to come back to us this year. And then from an expense profile standpoint we said longer term SG&A will grow in line with sales. We are an investment mode, particularly in IT in some of the areas that are underpinning some of the growth initiatives that we're talking about. So that's how I focus. And then the last one I just mentioned is just on -- from an international standpoint. You've seen us post our international numbers. This morning, we've got two years, quite frankly, where the business has been on fire. And we're very excited about the growth profile in our international business. So as you think about where we are, we feel good about the growth prospects going forward. We think, from a margin standpoint, we've made tremendous strides in gross margin excluding LIFO. And we've got a consistent, resilient domestic DIY business, which still is the lion's share of our businesses as we move forward.

Operator:

Thank you. Our next question is coming from Michael Lasser with UBS. Your line is live.

Bill Rhodes:

Yeah, we don't have terrific data on that. Obviously, we're in our commercial customer shops all the time. And we're hearing the same things. Frankly, we've been hearing it since about February that car counts are down, particularly for people that are in the tire business. And as you know, when a technician takes off a tire, it provides a whole another opportunity for sales. You get a chance to see what's going on with the braking systems and chassis systems and the like. So we don't have a great history on what are the exact members, but we think it is -- has been a softer environment. I think some of that has to do with the economic challenges that we're seeing. We haven't operated in the commercial business at this level for a long period of time. So we don't know the cycles like we do in the DIY business. But I think our belief is when economic pressures happen we get trade down from DIY to DIFM or sorry, from DIFM to DIY in certain cases. And I suspect that's what we're experiencing now. How long will that last? You tell me what the economic cycle is going to look like. And again, we have a lot of discussions about short term sales performance. Our focus is not on the short term sales performance. Our focus is on what are we doing in our business to make our business better competitively? And how are we going to grow sales and share profitably over the long term?

Bill Rhodes:

You want me to do Jamere's performance review in public?

Henry Carr :

Thank you.

Seth Basham:

Thanks a lot, and good morning. My question is also on the commercial business, just in terms of where you're not getting as much share, as you expected. Is it in more in the national accounts versus [indiscernible] security accounts? Are there any specific regions that are underperforming your expectations?

Seth Basham:

Understand those being the pressure points, but would you assess those are also the areas where you're not getting as much share as you expected?

Bill Rhodes:

So I'll add that I do think, like we said earlier, we have -- we grew share exponentially over a couple of years. And part of that was because our in-stock position was massively better, certainly than our WD competitors. I think we've ceded some of that share back to them as they've gotten back in-stock.

Bill Rhodes:

I think we're beginning to cycle it now. But as you said, it's going to take some time not every category was the same, not everyone competitor was the same. So we'll probably be dealing with it for six more months but we probably past the height of it.

Bill Rhodes:

Thank you.

Scot Ciccarelli:

Good morning, everyone. Thank you for the time. So I guess I'm still confused, outside of whether what has the main execution challenge has been on the commercial segment? Part one. And then part two, kind of related to that is, what specific changes are you making to the business to help accelerate growth as we kind of roll here into -- further into '24? Thank you.

Scot Ciccarelli:

And then specific changes you're making. Is it just better blocking and tackling for lack of a better term Bill?

Scot Ciccarelli:

Got it. Thank you.

Operator:

Thank you. This does conclude today's conference call. You may disconnect your lines at this time and we thank you for your participation.

Brian Campbell:

Before we begin, please note that today's call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the company undertakes no obligations to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Bill Rhodes:

Good morning, and thank you for joining us today for AutoZone's 2023 third quarter conference call. With me today are Jamere Jackson, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third quarter, I hope you've had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with slides complementing our comments today, are available on our website, www.autozone.com, under the Investor Relations link. Please click on Quarterly Earnings Conference Calls to see them. As we begin, I would like to thank our AutoZoners across the company for their commitment to providing our customers with WOW! Customer Service, which has been the secret to our long-term, consistent success. For the third quarter, our team delivered total sales growth of 5.8%, which included a 1.9% domestic same store sales comp. While our topline results were below our expectations at the start of the quarter, our sales improved later in the quarter as we experienced improved weather. We were pleased to deliver operating profit growth north of 9% and EPS growth of 17.5%. Both our operating profit and EPS growth were the highest growth rates we've had in over a year. As many retailers have reported, March was a tough month, as cool, wet weather impacted customer traffic. In addition, snow accumulations were down significantly in February and March for much of the country, which also had some impact on our business. We mentioned in our last call that weather, particularly during tax refund season, really matters. Unfortunately, it was unfavorable this year, as our results reflect. We also, after rapid growth and extensive market share gains in commercial, experienced some headwinds this quarter and our growth was disappointing to us. We were lapping tremendous growth last year and had some internal and external factors that impacted our growth this quarter. We have had some sectors of this business that had been extremely challenged with rising interest rates and high used car prices. Additionally, during our rapid growth over the last couple of years, we also unintentionally de-emphasized some of our tried and true disciplines. As I've said for the last six months or so, as we exit pandemic mode, we must get back to our well-known and highly regarded flawless execution, which I believe will help us reignite topline growth. We have good initiatives in flight in both our retail and commercial businesses, and we are determined to move with urgency to reaccelerate our sales and share growth. Fortunately, as this difference between our domestic same store sales growth and our total sales growth implies, our international team, particularly in Mexico, delivered very strong sales growth for the quarter. Our teams in Mexico and Brazil continue to do a great job, offering differentiated customer experiences, which is leading to strong sales growth. This morning, we will review our third quarter same store sales DIY versus DIFM trends, our sales cadence over the 12-week quarter, merchandise categories that drove our performance and some regional callouts. We'll also share how inflation is, in fact, impacting our cost in retails and how we think inflation will impact our business for the remainder of FY '23. Moving to the specifics for the quarter, domestic same store sales were up 1.9%; our net income was $648 million; and our earnings per share was $34.12, increasing 17.5%. On a two-year basis, we delivered a 4.5% domestic same store sales comp; and on a three-year basis, a 33.4% stacked comp. Our three-year stacked comp was in line with what we've seen in the last three quarters. Domestic retail sales were up 2.2%, and our domestic commercial growth was 6.3%. We continue to set commercial quarterly records, with $1.11 billion in sales, as we generated an additional $66 million in sales than in Q3 last year. On a trailing four-quarter basis, we delivered $4.54 billion in annual commercial sales, up a strong 14.4% over last year. We also set another Q3 record for average weekly sales per store at $16,800. As I've mentioned earlier, March was a bit of an outlier in the quarter's domestic sales results. We had a greater than 3% comp in February, but fell to a negative 1% in March, before recovering back to just under 4% in April and early May. On a regional basis, we experienced slower growth in the Northeastern and Midwestern markets than the rest of the country. This held true for both our DIY and commercial businesses. Our business on the West Coast was in line with our remaining markets. Average ticket grew 4% in retail and commercial for the quarter, decreasing 1% from last year. After the most significant product cost inflation we have seen in decades, we are seeing those trends moderate and are negotiating some cost reductions from our vendors, as both product cost and freight inflation are slowing or have subsided. Additionally, while not anywhere close to historical norms, we saw wage inflation moderate to approximately 4%. While the staffing environment has substantially improved versus this time last year, we don't envision wage inflation pulling back much from these levels, as there continues to be regulatory and market pressures. While we've had to manage through external forces, our focus continues to be on driving profitable market share growth, particularly in units and transactions. Our growth initiatives did just that this past quarter and included new store unit growth, improved satellite store availability, hub and mega hub openings, improvements in coverage, leveraging the strength of the Duralast brand, enhanced technology to make us easier to do business with and more efficient, reducing delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being priced right for the value proposition we deliver. While our sales moderated this past quarter, we remain focused on growing our share over time and becoming the industry leader in both DIY and commercial. Digging deeper into our domestic DIY business this quarter, we delivered a 0.6% comp. As previously said, our ticket growth was up 4% versus last year and our transaction count trends were down 3%. From the data we have available, we continued to gain both dollar and unit share during the quarter. Our sales floor outperformed hard parts, with approximately a 3% difference between them. Our relative outperformance in sales floor categories is attributable to both discretionary categories improving and the hard parts categories slowing. It was encouraging to see our sales floor items performing so well. Specifically, batteries, oil, and wiper categories performed well and successfully lapped very strong performance last year. These categories have exceeded our expectations all year. Our friction category for both DIY and commercial performed below our expectations. We believe both our sales floor and hard parts businesses will continue to do well this summer, as we expect miles driven improvements, while our growth initiatives continue delivering strong results. Let me also address our pricing strategies. In Q3, we continued experiencing mid-single digit pricing inflation, in line with cost of goods. We believe both numbers will decrease in the fourth quarter, as we are lapping the onset of high inflation last year. To be clear, we do not believe inflation is going away, especially wage inflation, but expect it to slow as the economy slows. I want to highlight that our industry has been disciplined about pricing for decades, and we expect that to continue. Most of the parts and products we sell in this industry have low price elasticity, because purchases are driven by failure or routine maintenance. Historically, as costs have increased, the industry has increased pricing commensurately to maintain margin rates, increasing margin dollars. It is also notable that following periods of higher inflation, our industry has historically not meaningfully reduced pricing to reflect lower costs. We remain excited about our growth initiatives, our team's focus on execution, and the tremendous share gains we have achieved in both our retail and commercial businesses over the last few years. For our fourth quarter, we expect our sales performance to be led by our commercial business, as we execute on opening additional hub and mega hub stores, have an improving in-stock position, and improve customer service. We also believe our DIY business will remain resilient, as the difficult macro environment is pointing customers to continue maintaining their vehicles. We will, as always, be transparent about what we're seeing and provide color on our markets and performance as trends emerge. Before handing the call to Jamere, I'd like to reiterate our plan on continuing to grow our business in Mexico and Brazil, with almost 800 stores combined across these two markets. As previously noted, these businesses had impressive performance again this quarter and they should continue to be key contributors to sales and profit growth for decades to come. We are leveraging many of the learnings we have in the US to refine our offerings in Mexico and Brazil. In Brazil, in particular, we are targeting to expand our store footprint significantly and aggressively over the next five years. We continue to be excited about our growth prospects internationally. We are dedicated to growing our business in a disciplined and profitable manner well into the future and we know, with our AutoZoners leading the charge, we will continue to be successful. Now, I'll turn the call over to Jamere Jackson. Jamere?

Bill Rhodes:

Thank you, Jamere. We are proud of the results our team delivered this past quarter. We remain on track to deliver a solid 2023. But we must continue to be focused on superior customer service and flawless execution. Execution and our culture of always putting the customer first are what define us. As Jamere said a moment ago, we continue to be bullish on our industry and, in particular, on our own opportunities for the remainder of the year. We will continue to invest in initiatives that drive an appropriate return on capital and we continue investing where our returns are the highest. This upcoming quarter will be very busy for us. We'll be opening over 100 stores in the Americas. We'll also remain focused on those initiatives that we have underway to grow sales in both our retail and commercial businesses. As we have mentioned previously, we are doubling down on execution and are focused on driving share gains. We know that investors will ultimately measure us by what our future cash flows look like three to five years from now, and we accept that challenge. I continue to be bullish on our industry and, in particular, on AutoZone and AutoZoners. Now we'd like to open up the call for questions.

Bret Jordan:

Hi, good morning guys.

Bret Jordan:

Could you talk a little bit more about the internal factors that impacted growth? I think you said you'd deemphasized some internal disciplines in the prepared remarks. Could you maybe give us some more color there and maybe what the turnaround time on those disciplines might be?

Bret Jordan:

Okay. And then a question on the Q4 outlook, just given the call out of the weather impact in March, if we go back to past years like '17 or maybe 2012, where real mild winter negatively impacted the early summer. Are you seeing any of that as we go into the fourth quarter or was it really just sort of a one quarter event with the weather?

Bret Jordan:

Okay, great. Thank you.

Operator:

Thank you. Your next question is coming from Christopher Horvers from JPMorgan. Christopher, your line is life. Please go ahead.

Bill Rhodes:

Good morning.

Bill Rhodes:

Chris, I'm going to let Jamere answer that second part if you don't mind. It was his statement. I think he's ready for that, too and I am as well. I think - the businesses trended very similarly. I think one of the things that I also pointed out, it was not just that the weather was poor. The weather hit us at the worst time of the year for us during the all-important tax refund season. You all have seen tax refunds were down a little bit this year. But to us, the bigger implication was the weather was just pretty awful. It was cold and wet and mild during that period of time. And so, we saw both businesses trend down and they both have improved at some level, like I called out in the prepared remarks. Jamere?

Bill Rhodes:

I don't think anything has changed in our commitment. We need to be a double-digit grower in commercial. And we weren't this quarter.

Bill Rhodes:

Yes, I'll take the first part and turn it back to Jamere to talk about LIFO. As far as - first of all, we have not seen meaningful reductions in product costs at this point in time. We have seen meaningful reductions in freight cost. But if you recall, we did not even attempt to pass on all the freight costs to our customers, because we knew it was somewhat of an anomaly, and would reverse course at some order of magnitude. So as we are beginning to see some product costs reductions, I don't anticipate that we will reduce pricing as a result of those. And for one really strong reason, our wage inflation has been more than double what we've experienced in my 28 years here. We have to somehow get paid for that wage inflation, too, in the P&L. And so, if we get some reduction in product costs, I will anticipate that those will be used to offset some of that wage inflation. Jamere, you want to talk about LIFO?

Christopher Horvers:

Thanks very much. Have a great rest of spring.

Operator:

Thank you. Your next question is coming from Simeon Gutman from Morgan Stanley. Simeon, your line is live. Please go ahead.

Bill Rhodes:

First of all, you said same-store I don't think we said same-store maybe Jamere did in his remarks. I just think, Simeon, we've got less than a 5% market share. We have over 15% in the retail business. We have a very fragmented industry in commercial with some competitors that, frankly, don't have a lot of the strengths that we have. I would anticipate us to grow meaningfully ahead of the market. And the market over long periods of time, you know DIFM is running 4%, 4.5%. So we - to me, growing double that, seems like it makes sense. Frankly, we didn't do it this quarter. We've got some work to do to reaccelerate our growth, but we also were celebrating some 25% and 27% growth over this period of time. The other thing that Jamere worked on is, we're not sitting here and sitting on our hands either. We're also working on - what are, the next generation of initiatives that we're going to deploy to make us provide better customer service for our commercial customers and be a better partner with them. I'm excited about some of the things that we're working on. They're not even in test yet. And as you know, we will go off and test them. But we're committed not to a quarter's growth rate in commercial. We're committed to being the largest player in the commercial business over the long run.

Bill Rhodes:

Yes, great question. Yes. Have we seen things in the pricing environment in the commercial sector different than before? The answer is absolutely yes. One of our competitors well-advertised that they had changed their pricing posture. But I want to back up and I want to remind everybody, we did something similar about two years ago. And when we did it, first of all, we had tested it in six markets and then 14 markets before we rolled it to the other 40 some odd markets. We knew what was going to work. And it had nothing to do with our pricing posture versus our close-end competitors. It had everything to do with trying to optimize our value proposition versus the warehouse distributors who hold the vast majority of share in this industry. As we've seen a competitor move their pricing, we see no indications that, that competitor has - is lower than us on pricing. I think that they seem to have reduced that gap similar to what we did. We don't have perfect visibility to it, but that's what we're seeing at this point in time.

Simeon Gutman:

Thank you both.

Operator:

Your next question is coming from Zach Fadem from Wells Fargo. Zach, your line is live. Please go ahead.

Bill Rhodes:

I don't necessarily know that the industry changed. We'll have to see as we get more visibility to what happened across the industry. Certainly, our results changed. I can't go through and parse it piece-by-piece clearly, the weather implications from March or an anomaly that should not repeat themselves. I don't anticipate in the summer-time, they're using not a lot of weather impacts in the summer or fall. They generally have more pronounced in winter and spring, when the weather is more volatile. I think some of these internal things that we're talking about, as I said a minute ago, they're going to take us a little time, because we can start doing the processes again. But the ramifications and the outcomes that come along with those processes and as I said, they're going to take months, but we'll get there. Again, we're playing for the long game.

Jamere Jackson:

Well, I think what we've said historically is we've been very disciplined on SG&A growth, and we've grown SG&A sort of in line with the top line. And you saw this quarter that as sales were a little bit lighter, we were able to deliver upon that. But what I'll also reiterate is that we're going to invest in SG&A in a disciplined way for the things that we need to do to create a faster growing business. One of the areas that I've talked about in the past is the investments that we're making in IT, for example, to improve our speed, to improve our productivity, to improve the way that we're doing business in our stores and improve the experience that our customers have with us. And so to the extent that we need to lean in and invest a little bit more in SG&A to deliver upon that, we will. But this is a business that has been very, very disciplined about managing the SG&A line. And when we need to manage it to deliver a certain result, we'll do that, but we're not going to do that at the expense of our growth initiatives.

Bill Rhodes:

Yes, thank you, Zach.

Steven Forbes:

Good morning.

Steven Forbes:

I wanted to focus on the domestic Mega-hub initiative. So can you first just confirm the year-end target? I think you said '22 to '25 new Mega-hubs versus seven year-to-date. But I just want confirmation on that? And then, can you speak to any bottlenecks or limitations that would potentially prevent a more accelerated ramp in 2024 and beyond or just any comment on how the Mega-hub real estate pipeline looks today?

Steven Forbes:

And then maybe just a follow-up, staying on the footprint opportunities, you talked about international, but curious maybe if you could expand on how you sort of expect the footprint in both Brazil and Mexico to grow over the coming years? And then you also mentioned ROIC, so curious if you could just update us on how the return profile of the international location compares to the company average today?

Steven Forbes:

Thank you.

Operator:

Your next question is coming from Scot Ciccarelli from Truist Securities. Scot, your line is live. Please go ahead.

Bill Rhodes:

I think it's a fair question. And I want to be careful and not to say that all of this was due to those processes. I think that that's an element. We talked about weather. And there's, other things that are happening in the marketplace. So, I don't want to pin at all on that. And you're right. Those things have been going on for probably a year to two years. They're just going to take some - it's not putting those processes back in place. It's going to change it. It's the outcomes that come along with those processes weeks and months later.

Bill Rhodes:

And the only thing I'd add further, we're playing the long game. Yes, we're disappointed with a 6% growth. That's not going to deter us. With in fact it makes us hungrier and work harder, so we're looking at this over the very long-term.

Jamere Jackson:

Yes. I mean, we saw mixed results. We talked a little bit about - the comments about the Northeast and the Midwest that clearly where we underperformed and those are markets that, quite frankly, if we get some decent weather here over the next quarter or so, we could see that rebound and produce a better result. But those are probably two areas regionally where we saw slightly lower performance than we saw across the rest of the chain.

Bill Rhodes:

Thank you.

Michael Lasser:

Good morning, thank you all for taking my question. So Rhodes, your commercial business decelerated at the same time there was a meaningful acceleration in the performance of the commercial businesses of one of your peers. What does that tell you about structural limitation in terms of your commercial business's ability to gain market share?

Jamere Jackson:

From my vantage point, Michael, I mean, again, as we've said before, they grew share, and those results were very impressive, but we also grew share as well. And our focus, again, is on how do we grow faster and win even larger shares than what we've grown over the past quarter or so. And that focus hasn't changed.

Jamere Jackson:

Well, we clearly, as we've talked about, we're a four or five share in what's approaching a $100 billion market. So - and that opportunity for us is to grow our share of wallet with our existing customers. And it's also to grow new business both in national and with locals are up and down the street as we affectionately call them in-house. And we believe that opportunity is still in front of us. So, as we look at our commercial business going forward, what gives us a tremendous amount of confidence, the things that we put in place have worked. We know that we have some things that are in flight today that are very, very promising that we're launching in Q4 and over the next year or so. And we think those things are going to pay dividends for us as well, but it's clearly an opportunity for us to go deeper in the wallets of our existing customers and grow new customers at the same time.

Bill Rhodes:

Thank you.

David Bellinger:

Hi, good morning. Thanks for taking the questions. So if we look back at this quarter, 3% comp in February, close to 4% in April and May as you move past some of these weather and tax refund fluctuations. So is that a good sustainable run rate to think about for comp sales growth from here and as you hold on to price and continue to make these underlying investments in the business?

David Bellinger:

Got it. And then - just a follow-up on your prepared remarks, you talked about the sales floor and some discretionary categories, believe improving, I believe, is what you said. So that seems that odds with some of the other retailer comments out there. So anything to read into that, is there more of a trade-down benefit behind it? And maybe a positive for those types of categories, if we see more indications of just a broader spending slowdown, just how do you think about those specific categories?

David Bellinger:

Great, thank you.

Operator:

Your next question is coming from Greg Melich from Evercore ISI. Greg, your line is live. Please go ahead.

Jamere Jackson:

Yes, that's the right ZIP code. We saw inflation up kind of in the mid-single digit-ish range, if you will. And then there's, always things in the basket and mix that can cause you to have a slightly different ticket print than that.

Greg Melich:

Got it. And then my second question is, you went through weather and geographies. Is there any difference on how the more urban or densely populated stores are performing versus rural? I'm just thinking that's one thing we've seen from de-densification over COVID and with shrink, particularly impacting some retailers, a lot of retailers.

Greg Melich:

And in certain areas, you haven't like chain store hours to sort of either protect employees or anything you have to go to that extreme?

Greg Melich:

Right thanks, and good luck.

Jamere Jackson:

Thank you.

Steven Zaccone:

Great, good morning, everyone thank you for squeezing me in. I wanted to ask on pricing. If we think about mid-single digits in the third quarter, what will it be in the fourth quarter? And as we look to next year, would you still expect it to be a slight tailwind to comps or could it, in fact, be flattish?

Steven Zaccone:

Okay, great, thank you. And then I hate to go back to commercial, but I did want to clarify something and just given your commentary about some of these internal factors, is it fair to think the time line to return to double-digit commercial growth may take a couple quarters? Anything you can say on the time line would be helpful for us as we assess our models?

Steven Zaccone:

Thank you.

Operator:

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you once again for your participation.

Brian Campbell:

Before we begin, please note that today’s call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning’s press release and the company’s most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made and the company undertakes no obligations to update such statements. Today’s call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Bill Rhodes:

Good morning. And thank you for joining us today for AutoZone’s 2023 second quarter conference call. With me today are Jamere Jackson, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the first quarter, I hope you have had an opportunity to read our press release and learn about the quarter’s results. If not, the press release, along with slides complementing our comments today, are available on our website www.autozone.com under the Investor Relations link. Please click on Quarterly Earnings Conference Calls to see them. As we begin, we would like to thank and congratulate our AutoZoners across the company for their commitment to delivering exceptional customer service. For the second quarter, our team delivered total sales growth of 9.5% versus 8.6% in the first quarter, in line with our expectations. We were pleased with this performance as we were up against 15.8% total sales growth in last year’s second quarter. We could not have achieved these results without phenomenal contributions from across the organization. Once again, our AutoZoners’ efforts generated double-digit domestic commercial growth and single-digit domestic retail same-store sales growth. As we move further and further away from the societal impacts experienced as a result of the pandemic, we are very pleased with our team’s ability to not only retain the tremendous growth we experienced over the last three years, but continue to grow on top of those phenomenal levels. Our team is relentlessly focused on getting back to normal or, as I call it, quote-unquote, exiting pandemic mode. We must get back to our well-known and highly regarded flawless execution. In all candor, we still aren’t there yet. But we also have to reignite our innovation engine. We have some very good initiatives in development in both retail and commercial, and we have some significant improvements underway in our supply chain, as we modernize and expand it for the next decade of growth and beyond. We are halfway through our fiscal year and we are pleased with our performance so far. More encouraging, we feel good about the balance of the year and know our AutoZoners are keenly focused on delivering great service and terrific performance. This morning, we will review our second quarter same-store sales, DIY versus DIFM trends, our sales cadence over the 12-week quarter, merchandise categories that drove our performance and some regional call-outs. We will also share how inflation is affecting our cost and retails, and how we think inflation will impact our business for the remainder of our fiscal year. Let’s now move into more specifics on our performance. Domestic same-store sales were up 5.3%, our net income was $477 million and our EPS was $24.64 a share, increasing 10.5%. Our domestic same-store sales comp was on top of last year’s 13.8% and in line with last quarter’s 5.6% comp. On a two-year basis, we delivered a 19.1% comp, and get this, on a three-year basis, a 34.3% stacked comp. Our team once again delivered amazing results despite the comparison to the last couple of years being the hardest quarterly compare for the entire fiscal year. Now let me spend a few moments on growth, our growth dynamics in the quarter. Our growth rates for retail and commercial were both strong, with domestic retail sales up nearly 5% and domestic commercial growth north of 13%. We continue to set commercial quarterly records with $955 million in sales, another impressive quarter as we generated $111 million more in sales than in Q2 last year. On a trailing four-quarter basis, we delivered just under $4.5 billion in annual commercial sales, up an amazing 19% over last year. We also set another Q2 record for average weekly sales per store at $14,500 versus $13,500 last year. Domestic commercial sales represented 30% of our domestic auto parts sales versus 28% this time last year. It was encouraging to see our transaction trends improving from last quarter. Our retail transactions meaningfully improved and were down just 2.2% for the quarter, while our commercial transactions were up mid-single digits and improving. Our average ticket in both retail and commercial experienced solid mid single-digit growth. Ticket growth decelerated from Q1 as we began to lap the acceleration in inflation we experienced this time last year. We are beginning to see signs of product cost and freight inflation slowing, and we expect to see these begin to return to historical norms over time. We are continuing to see -- to experience substantially higher wage inflation than historically in the mid single-digit range, more than double our historical experience. While the staffing environment is substantially improved versus this time last year, we don’t envision wage inflation abating soon as there continues to be regulatory and market pressures. While we have to manage through these external forces, our focus continues to be on driving profitable market share growth, particularly in units and transactions. Our growth initiatives are doing just that and include, new store unit growth, improved satellite store availability, hub and mega-hub openings, improvements in coverage, leveraging the strength of the Duralast brand, enhanced technology to make us easier to do business with and more efficient, reducing delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being priced right for the value proposition we deliver. Our goal remains over time to become the industry leader in both DIY and commercial. Our strategy, execution and market momentum give us confidence as we move forward. Digging deeper into our domestic DIY business this past quarter, we delivered a positive 2.7% comp on top of last year’s 8.4%. Our DIY results were similar to last quarter’s results on a one-year and two-year basis and accelerated on a three-year basis. As previously said, our ticket growth was up 5% versus last year. We are pleased with our transaction count trends improving as we reported transactions down just 2%. These results are very strong, considering the difficult comparison to last year. From the data we have available, we continued to retain the majority of the dollar share gains we have built during the pandemic and we continue to grow unit share, a critical measurement of our success. Our performance gives us continued conviction about the sustainability of our sales growth for the remainder of the year. As we have shared forever, our second quarter is always the most volatile sales quarter due to the holidays, their timing shifts, and more importantly, weather, specifically extreme temperatures, which all can have a tremendous impact on our weekly sales. This quarter was no different, with softer sales at the beginning of the quarter when the weather was mild and wet, followed by a large spike around Christmas with the very cold temperatures the country experienced. We exited the quarter with normalized growth rates. We do believe we had enough harsh winter weather that we won’t be talking about the lingering effects of a mild winter weather or mild winter for the next several months. Our attention has now turned to tax rebate season, which historically drives enormous demand in our category. Regarding our retail merchandise categories, our sales floor outperformed hard parts with approximately a 1.5% difference between them. Our relative outperformance in sales for categories is attributable to the discretionary categories improvement. As gas prices naturally have come down and consumer has shown surprising resiliency, our discretionary categories performed better. The discretionary categories represented approximately 18% of our DIY sales in the quarter. We were encouraged to see our battery, oil and wiper categories performed well and successfully lapped very strong performance last year. These categories have exceeded our expectations all year. Our friction category for both DIY and commercial performed below our expectations for much of the quarter. However, it bounced back late and we are encouraged by our recent trends. We believe both our sales floor and hard parts businesses will continue to do well this spring, as we expect miles driven to continue improving, while our growth initiatives continued delivering solid results. Let me also address pricing. In Q2, we experienced high single-digit pricing inflation in line with cost of goods. We believe both numbers will decrease in the current quarter as we begin to lap the onset of high inflation last year. To be clear, we do not believe inflation is going away, especially wage inflation, but expect it to slow a bit as the economy slows. I want to highlight that our industry has been disciplined about pricing for decades, and we expect that to continue. Most of the parts and products we sell in this industry have low price elasticity, because purchases are driven by failure or routine maintenance. Historically, as costs have increased, the industry has increased pricing commensurately to maintain margin rates, increasing margin dollars. It is also notable that following periods of higher inflation, our industry has historically not meaningfully reduced pricing to reflect lower cost. Over the last three years, we have encouraged investors to keep a keen focus on our two-year and three-year comparisons. As we return to normal, we believe our year-over-year comparisons will be more and more relevant. While it’s difficult to predict sales, we are excited about our growth initiatives. Our team is improving execution and the tremendous share gains we have achieved in both sectors. For our third quarter 2023, we expect our sales performance to be led by the continued strength in our commercial business as we execute on our differentiating initiatives, combined with the resilient DIY business. We will as always be transparent about what we are seeing and provide color on our markets and performance as trends emerge. Before handing the call to Jamere, I’d like to give a brief update on our supply chain initiatives. I will start with our in-stock position. I spent several quarters talking about how we were not back to where we were pre-pandemic. I am pleased to report, we are continuing to improve and are very close to our targets. Our merchandising and supply chain teams have worked diligently and creatively to get our levels back up, and we have made enormous progress. There are still a few categories where we are not where we want to be, but we will -- we have line of sight to putting this behind us. This has taken a lot of effort by our vendor community, and I’d like to publicly thank them for their tremendous efforts as well. We know this will pay future dividends. Second, our supply chain initiatives that are in flight to drive improved availability are on track. One we have often highlighted is our expanded hub and mega-hub rollouts. We know intelligently placing more inventory in local markets closer to the customer will lead to our ability to continue to say, yes, to our customers more frequently and in turn drive sales. Additionally, we have previously announced the development of two new domestic distribution centers and additional capacity in Mexico. All three efforts are under construction and are expected to be completed by early fiscal 2025. These distribution centers will allow us to not only reduce drive times to stores but also increase our capacity. With the tremendous sales growth we have experienced since 2020, the additional capacity will enable us to carry more slower turning inventory that is not yet in high demand. I am excited that -- I am also excited we opened a facility on the West Coast recently to handle direct import product on a timelier and more effective and efficient basis. This new West Coast facility is already paying dividends by allowing products ordered abroad to be distributed to our other DCs to reduce safety stock and drive productivity. Our supply chain strategy is focused on carrying more products closer to the customer and we believe it has been a significant contributor to our recent sales success, especially in commercial. Simply put, every time we intelligently add inventory to our network our sales grow. Lastly, we plan on continuing to grow our business in Mexico and Brazil at almost 800 stores combined across the two markets. These businesses had impressive performance again this quarter and they should continue to be key contributors to sales and profit growth for decades to come. We are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil. In Brazil, in particular, we are targeting to expand our store footprint significantly and aggressively over the next five years. We are very excited about our growth prospects internationally. We are dedicated to growing our business in a disciplined and profitable manner well into the future, and we know, with our AutoZoners leading the charge, we will continue to be very successful. Now I will turn the call over to Jamere Jackson. Jamere?

Bill Rhodes:

Thank you, Jamere. We are proud of the results our team delivered in the second quarter. But we must, we must continue to be focused on superior customer service and flawless execution. Execution and our culture of always putting the customer first is what defines us. As Jamere said a moment ago, we continue to be bullish on our industry, and in particular, on our own opportunities for the remainder of the year. We will continue to invest in initiatives that drive an appropriate return on capital and we continue investing where our returns are the highest. For the remainder of fiscal 2023, we are launching some very exciting initiatives. This year not only we would be opening roughly 200 stores across the U.S., Mexico and Brazil, but we will be opening many more mega-hub and hub stores, and we are focused on initiatives to continue driving strong performance in both our retail and commercial businesses. For the remainder of 2023, we are keenly focused on relentless execution. We will not accept shortcuts. We remain focused on achieving our store opening goals, both domestically and internationally. We are working diligently to expand and enhance our supply chain and we have to achieve this growth, all while managing our costs appropriately. Simply said, we have to focus on exceptional execution in order to drive continued share gains. We know that investors will ultimately measure us by what our future cash flows look like in three to four years from now and we welcome and accept that challenge. I continue to be bullish on our industry, and in particular, on AutoZone, which is led by AutoZoners. Now we would like to open up the call for questions.

Bret Jordan:

Hey. Good morning, guys.

Jamere Jackson:

Hi, Bret.

Bill Rhodes:

Yeah. It’s a fantastic question, Bret. I will start, and Jamere, you are welcome to build on it if you want to. First of all, I think, it’s important for you all to understand, as we saw these enormous spikes in the freight cost, we did not pass all those costs along. I will use brake rotors, for instance. I mean the cost of shipping brake rotors from China to the U.S. were astronomical for a period of time. We couldn’t pass all that costs on to the industry. So some of this is we will recoup some gross margin percentages that we didn’t get in the midst of the freight issue. As we look forward, I think, you have to separate the gross margin piece from the labor piece. We are going to continue to see elevated wage growth. We have seen it now for probably five years, Bret. We will continue to monitor that. Our pricing is really more focused on what our product costs are and what those freight costs are. We will be mindful of labor costs. But generally, that’s not a big driver of what we do with our pricing to the customer. What we need to do is make sure that we are finding ways to be as efficient as possible with the labor that we have, and over time, I think, wage rates will go back to more normalized growth rates.

Bret Jordan:

Okay. Great. And then a quick question on ALLDATA. I think you would mentioned expanding the user base. Is there a way to make that a product selling tool as they use your shop management software, is there a way to link it to your inventory or make it more transactional?

Bret Jordan:

Great. Thank you.

Operator:

Your next question for today is coming from Seth Sigman at Barclays.

Bill Rhodes:

It’s a great question. Frankly, I don’t have a great answer for you. As you know, you have been following this industry for a long time, one of the dirty little secrets of the industry is that for decades and basically for the 28 years that I have been in this business, there has been transaction count declines and they have gone down over time, because the technology that has gone into the parts and products that we sell have increased, and therefore, the price of those products have increased. I often used the example of spark plugs. When I got in this business, we only sold copper clad spark bugs and they were $0.59 and they would last 30,000 miles. Today we sell Iridium spark plugs, it costs $11.99 and they will last 100,000 miles. There’s many, many, many examples like that, 2.2% decline in retail transaction counts is historically very good. I just -- I would caution everybody, as I have mentioned in my prepared remarks, Q2 is our most volatile quarter every year and it is really driven by weather patterns. And so I don’t want to read too much into an improvement in Q2, we were very excited to see it. Let’s see how we do in Q2 and Q3. We are also still going up against the massive surge in growth that we had since 2019 as a result of COVID. So what we are focused on is, we thought for a period of time, that some of the sales growth that we experienced during COVID, we would give back. We are sitting here and have been for the last year saying, I don’t think we are going to give it back, and now we are saying, look, we think we can grow from here and maybe have normalized growth rates and maybe even accelerated slightly growth rates to what we experienced historically, because of our growth initiatives. That’s the way we are thinking about it. Does that make sense?

Jamere Jackson:

Certainly does. I mean one of the things that we have been really clear about is that we are going to grow SG&A in a disciplined way as we create a faster growing business and the two ways that we have done that. One, is investing in labor to maintain high levels of customer service. You saw us do that throughout the pandemic and it paid great dividends for us during that timeframe. The other thing we have talked about is investing in a disciplined way in IT, which is enabling growth in both our DIY and our commercial business. Every one of our growth initiatives, whether it’s on the retail side of the business or the commercial side of the business, includes some element of improving the customer experience and those things have required us to accelerate some of our investments in IT. We like those investments. They are improving the customer experience. They are also improving the experience for our AutoZoners, and quite frankly, we think we will get benefits in terms of productivity in the future.

Bill Rhodes:

Thank you.

Zach Fadem:

Hey. Good morning. Could you walk us through the sequential performance for commercial in a little bit more detail as last quarter stepped down a touch on a multiyear basis, while this quarter bounced back nicely. So the question is, could you walk us through what you think could be driving the fluctuation in the do-it-for-me transactions from Q1 to Q2? And then with the three-year commercial compare looking a bit tougher, is it fair to assume that double-digit growth can sustain in the second half of the year?

Zach Fadem:

Got it. That’s helpful. And Jamere, just to clarify your gross margin commentary, you mentioned no negative LIFO impact in Q3. Does that mean your LIFO balance of $106 million remained stable in Q3 and Q4 or is it fair to expect that line to gradually or maybe more drastically shrink sequentially? And then big picture, is it fair to say that 52% gross margin is a fair run rate for the business going forward?

Zach Fadem:

Got it. Thanks for the time.

Operator:

Your next question for today is coming from Scot Ciccarelli at Truist Securities.

Bill Rhodes:

Yeah. That’s a great question. I wish I could answer. There’s just so many pushes and pulls right now in the economy with our cost that I am not sure we can answer that. That seems like a reasonable assessment, but we are just going to manage through it just like we have. We have gone through some pretty big cycles over the last 24 months and we are going to manage our business appropriately, whether it’s 5% or 7%, we are just going to manage through it.

Bill Rhodes:

I think that’s a reasonable assumption. We hope that we can continue to -- we want to grow transactions. I talked about the challenges that are related to that, but our goal is to grow transactions. I also mentioned in the prepared remarks that we are very focused on unit growth. We believe that’s the lifeblood of this organization and we are focused on how do we grow units over the long term in both our retail and commercial business and we have been very pleased with the unit market share gains that we have had over the last three years and we are continuing to grow unit share even after the growth we have had over the last three years.

Bill Rhodes:

Thank you.

Brian Nagel:

Hey, guys. Good morning.

Bill Rhodes:

Good morning.

Bill Rhodes:

Well, terrific questions. I want to be clear about one thing. I don’t believe the vast majority of the growth that we have seen in the commercial business over the last three years was a result of the pandemic. There’s no question. The outside growth in our DIY business was mainly attributable to the pandemic. I don’t think that was the case with commercial. I am sure it had some positive effects. But I think what -- the strategy that we began to deploy about four years ago have really been the driver of our commercial performance. Now as we continue to further and further mature on that strategy, we have seen some deceleration in our commercial growth. It’s still fantastic, but it’s not growing in the 20s. Our goal now is what’s next and we are working on that even as we speak. What are the next levers that we are going to pull to continue to grow in the commercial business? Now just a reminder, we have got mid-teens market share in the retail business and we have about 25% or about 4% total market share in the commercial business. So we have got a tremendous runway in front of us. When you talk about certain markets and what do we see, we certainly have some markets that are more mature than others. I would say the most encouraging thing to me is to see how broad-based the acceleration has been in our 61 regions that we have across the United States. But I was in a market last week, arguably our most mature market, I am not going to tell you where that is. And it has significant hub coverage and it has significant mega-hub coverage and in that market we continue to grow at very rapid rates. And so I am particularly optimistic, as we continue to deploy the strategy of mega-hubs, so we still have -- we have roughly a little over 80 mega-hubs today. We are going to 200, and hopefully, in short order and then we are going to get to 300 hub stores. So that will be 500 stores in the United States with materially different product assortments than we have had historically. To me, that is the biggest part of our strategy.

Bill Rhodes:

Yeah. I mean, we always see that. But what my point was, we have been through years where we just didn’t have a winter and it’s not just the spring, frankly, it’s as much in the summertime where we just don’t see the parts failures on the failure side of the business that we do historically and the maintenance side. It’s snow and ice and cold or all put stress on automobiles and we generally see that over the next six months to eight months once the winter subsides. So that’s what I was really getting at. I do have a bit of caution right now. I talked about tax rebates that are flowing right now. The one thing that I worry about a little bit is, we haven’t had great weather in the last week or so. We need to get some good weather, so DIYers can crawl underneath their cars, while these tax rebates are flowing, because we see a massive surge during this time of the year when our customers have more discretionary dollars.

Bill Rhodes:

Yeah. Thank you.

Operator:

Your next question for today is coming from Simeon Gutman at Morgan Stanley.

Jamere Jackson:

Yeah. So, clearly, used cars are still in tight supply and prices are up. We have seen prices moderate a little bit year-over-year, but they are still up 24% or so over a two-year basis. I think the second dynamic associated with that is, the fact that financing costs have gone up fairly significantly as well. So you have got interest rates that have made financing a vehicle, whether it’s new or used, significantly more expensive. I think the combination of those two dynamics puts tremendous pressure on consumers and what we have seen historically is that when the consumer is under pressure, whether it’s a recessionary cycle or it’s a cycle where new and used car prices spike, they tend to hang on to their vehicles longer, invest in repairing those vehicles and ride to the other side of tougher market conditions and we certainly think that, that’s going to be the case. So while the prices have come down, we still see a very tight market that’s out there today, and quite frankly, a market that’s significantly more expensive than what consumers experience prior to the pandemic.

Bill Rhodes:

There’s no question that the cost of doing business are structurally higher. And I just want to make sure I amplify this point, our wage rates are up double, more than double what they normally are and that is stick to your ribs inflation. It will be with us forever. But that’s going to continue. And it’s been going on for five years, not at this level, but we had acceleration before the pandemic and once the pandemic hit, it went up significantly more. But we have been able to manage it. We are looking for creative ways like always to be more and more efficient. But we can’t drive that level of efficiency in a 43-year-old business without some kind of structural change, which we will be looking for, but we haven’t identified at this point in time.

Operator:

Your next question for today is coming from David Bellinger at Roth MKM.

Jamere Jackson:

Yeah. I mean what we have seen in total is that, our business has been remarkably resilient across both our upper income consumers, but also the lower end consumers. And again, that’s because the lion’s share of our business, our bread and butter categories, if you will or brake fix/failure, maintenance related sort of categories. The knock on effect of that is that to the extent that folks are making purchases for those bread and butter products if you will, then the discretionary categories tend to ride along with that as the basket gets built. So we have been fortunate in that regard. And the other thing that I don’t want to underestimate and I actually want to underscore, is the fact that, we have been very focused on our growth initiatives and our growth initiatives are about driving more customers and more purchase occasions for AutoZone. And as a result of that, we are seeing the opportunity for us to continue to win some market share. So some of that sequential improvement that you are seeing in traffic is actually the impact of some of the things that we have been doing from a growth initiative to drive more customers into our store.

Bill Rhodes:

Yeah. We are definitely not in double digits in any markets that I am aware of. I would think maybe we are at 6% in that kind of ballpark. But look, if we have 16% or whatever share in retail, my thing is why can’t we have that in commercial and that’s the kind of thought process we need to have. I think one of our challenges is, sometimes we think about where we are and it limits what we think about the possibilities. We are trying to eliminate some of those glass ceilings, and say, why don’t we have the same amount of share in both, which would mean the commercial business would be meaningfully larger than the retail business?

David Bellinger:

Great. Thank you.

Operator:

Your next question for today is coming from Michael Lasser at UBS.

Bill Rhodes:

Well, I think, as I said before, I think, part of what’s changed is some of the massive improvements that we have made in our -- from our new strategy on commercial acceleration have matured more, but they are not mature. And so we are -- I would just say it this way, we are very pleased with the commercial growth that we have experienced over the last six months. And as I also said, we are looking for those next items that are in the next part of our strategy, they are going to drive accelerated growth.

Atul Maheswari:

Got it. It makes sense. Thank you for that. And then as a quick follow-up, I know you talked about tax refunds, but how are you thinking about near-term trends given some of the data source that tax refunds are lower year-over-year and then there’s potentially some headwinds from Snap as well?

Atul Maheswari:

Thank you. Good luck to the rest of the year.

Jamere Jackson:

Thanks.

Operator:

Your next question…

Operator:

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

Brian Campbell:

Before we begin, please note that today’s call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning’s press release and the Company’s most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the Company undertakes no obligation to update such statements. Today’s call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Bill Rhodes:

Good morning and thank you for joining us today for AutoZone’s 2023 first quarter conference call. With me today are Jamere Jackson, Executive Vice President, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Text. Regarding the first quarter, I hope you have had an opportunity to read our press release and learn about the quarter’s results. If not, the press release along with slides complementing our comments today is available on our website www.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them. As we begin, we’d like to thank and congratulate our AutoZoners across the enterprise for their commitment to taking care of our customers, which led to the strong results they continue to deliver. It has been a busy first quarter of our new fiscal year, as every day we strive to get back to normal and exit ‘‘pandemic mode’’. This quarter, we opened our new direct import distribution center on the West Coast, continued to improve our in-stock position, and we had our first full national sales meeting since the pandemic began. In fact, we returned to having national sales meetings in every country where we operate and at ALLDATA. These meetings, they are critical to our success, where we celebrate our past accomplishments and lay the groundwork for our future success. Most importantly, they allow us to inspire each other and grow and nurture our unique and powerful culture. For the quarter, as our teams delivered exceptional service, their efforts led to our overall sales growing 8.6% on top of 16.3% last year. Our two-year growth rate marks some of the highest ever. We could not have achieved this success without phenomenal contributions from across the organization. Our AutoZoners’ efforts generated a positive and accelerating retail same-store sales comp along with another strong commercial comp for the quarter. Thank you, AutoZoners, for always putting customers first which led to this success. This morning, we will review our Q1 same-store sales, DIY versus the DIFM trends, our sales cadence over the 12-week quarter, merchandise categories that drove our performance and any regional discrepancies. We’ll also share how inflation is affecting our costs and our retails and how we think inflation will impact our business for the remainder of FY ‘23. Our domestic same-store sales comp was a solid 5.6% this quarter, on top of last year’s 13.6%. On a two-year basis, we delivered a 19.2% comp, and on a three-year basis, a 31.5% stacked comp. Our team once again delivered amazing results, despite these difficult comparisons. Let me spend a few moments on growth dynamics in the quarter. Our growth rates for retail and commercial were both strong with domestic commercial growth of 15%. We set a first quarter commercial sales record and over $1 billion in sales, another impressive quarter as we generated $138 million more in sales than in Q1 last year. On a trailing four quarter basis, we delivered just under $4.4 billion in annual commercial sales, up an amazing $820 million over last year. We also set a Q1 record for average weekly sales per store at $16,000 versus 14,400 just last year. Domestic commercial sales represented 29% of our domestic auto parts sales versus 27% last year. Our sales growth in the quarter was driven by transaction growth from new and existing customers along with higher tickets as we price for inflation. Our commercial growth of 15%, while still very impressive, and well ahead of industry growth did slow. And unfortunately, we broke our streak of six straight quarters of 20% plus sales growth. While we could easily explain this resulted from a difficult comparison to last year’s Q1 amazing growth of 29.4%, we also saw our transaction counts decline nearly 4 points from the pace we were growing in Q4 of fiscal ‘22. That said, we continue to be pleased with the results from the key initiatives we have been working on for the last several years. Improved satellite store availability, hub and mega hub openings and improvements in coverage, the strength of the Duralast brand, better technology to make us easier to do business with reduced delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being priced right for the value proposition we deliver. We believe our offering to our customers is better than ever, and we continue to hear great things from our customers and prospective customers about the strength of our value proposition as we continue to execute our commercial acceleration strategy. Our goal remains, over time, to become the industry leader in both, DIY and commercial in every geography where we operate. Our strategy, execution and market momentum give us tremendous confidence as we move forward. We’re also very proud of our organization’s performance in domestic DIY. Our growth in retail since the beginning of the pandemic has been remarkable, representing the highest three-year growth we have experienced in my 28-year tenure with the Company. We delivered a positive 2.6% comp this quarter on top of last year’s 9%. And versus last year’s -- quarter’s growth, DIY grew on a two-year basis and on a three-year basis. While our ticket growth was similar to last quarter, of just over 7%, we are encouraged that our transaction count trends improved, decreasing by 4%. These results are very strong considering the difficult comparison, driven by the lingering effects of stimulus last year. From the data we have available, we continue to retain the vast majority of the enormous dollar share gains we built during the initial stages of the pandemic. And more importantly, we continue to grow unit share, a critical measurement of success for us. And our recent performance gives us continued conviction about the sustainability for our fiscal year. In terms of sales cadence, our total same-store sales trends were very consistent, increasing in the mid-single-digit range for each of the four-week periods. In addition, for Q1, our two-year comp was 19.2% and our three-year comp was 31.5% and relatively consistent over the four-week periods. We are incredibly pleased with the sustainability of the very large sales and share gains we generated since the beginning of the pandemic. Weather did not have a material impact on our sales this quarter. On a national basis, weather trends were very similar to last year. Regionally, we saw less rainfall in the West and Southeast than last year. But overall, we didn’t feel this drove our results materially. This winter’s weather forecast calls for a slightly colder winter with, as we’ve recently experienced, cooler weather beginning sooner. As a reminder, historically, extreme weather, cold or hot drives parts failures and accelerated maintenance. During the quarter, there was geographic regions that did better than others as there always are. This quarter, we saw comp sales in the Northeastern and Midwestern markets underperform the balance of the country by about 260 basis points. We believe that our underperformance in these markets was driven by milder and wetter weather this year. Four our second quarter, winter weather is likely to meaningfully influence our results. As a reminder, our Q2 is historically by far and away the most volatile sales quarter as weather patterns can greatly vary week-to-week. And we have key holidays that fall on different days of the week. At the moment, our forecasting team is telling us winter will likely be colder than last year’s Q2. And if that happens, that would be a positive for our outlook. Now, let’s move into more specifics on our performance. Same-store sales were up 5.6%, our net income was $539 million, and our EPS was $27.45 a share increase$0.45 a share, increasing 6.9%. Regarding our merchandise categories in the retail business, our hard parts outperformed sales floor categories, with approximately 1% difference between them. With elevated gas prices, our discretionary categories remain soft. The discretionary categories represented approximately 18% of our DIY sales and were down 2.5% versus up 8% last year. In general, the categories that are driven by failures performed well and we were encouraged to see our battery category successfully lap very strong performance last year and again exceed our expectations. We believe our hard parts business will continue to do well this winter as we expect miles driven to improve, while our growth initiatives are delivering solid results. Let me also address inflation and pricing. In Q1, we experienced 11% pricing inflation, in line with cost of goods, which was also up 11%. We believe both numbers will decrease slightly in the current quarter, as we begin to lap the onset of high inflation last year. But, to be clear, we do not believe inflation is going away, especially wage inflation, but expect it to slow a bit as the economy slows. I want to highlight that our industry has been disciplined about pricing for decades and we expect that to continue. Most of the parts and products we sell in this industry have low price elasticity, because purchases are driven by failure or routine maintenance. Historically, as costs have increased, the industry has increased pricing commensurately to maintain margin rates, thereby increasing margin dollars. It’s also notable that following period’s higher inflation, our industry has historically not meaningfully reduced pricing to reflect lower costs. While we continue to be encouraged with the current sales environment, it still remains challenging for us to forecast near to mid-term sales as the economy impacts our customers. What I previously said on the past six quarterly calls is sales have been consistent on both a two-year and three-year stack comp basis. While it’s difficult to predict sales going forward, we are excited about our growth initiatives, our team’s execution and the tremendous share gains we have achieved in both sectors. Over the past year and a half, the overall macro environment has been a favorable for our industry despite inflationary pressures for our customers. And even if these near-term trends fade, we believe that we are in an industry that is positioned for solid growth over the long term. For our second quarter of 2023, we expect our sales performance to be led by the continued strength in our commercial business, as we execute on our differentiating initiatives combined with the resilient DIY business. We will as always be transparent about what we are seeing and provide color on our markets and performance as trends emerge. Before handing the call over to Jamere, I’d like to give a brief update on a few of our key business priorities for the new fiscal year. First, we continue focusing on our supply chain with two initiatives that are in flight to drive improved availability. One is our expanded hub and mega hub rollouts. We know intelligently placing more inventory in local markets will lead to our ability to continue to say yes to our customers more frequently and in turn drive sales. Secondly, we are expanding our distribution center footprint. We announced the development of two new domestic DCs and one additional DC in Mexico. These DCs will allow us to not only reduce drive times to stores, but also increase our capacity. Note that we didn’t expect to grow our business 30%-plus in three years as we have, and the additional capacity will enable us to carry more slower turning inventory that is not yet in high demand. I’m also excited to announce that we opened a facility on the West Coast to handle direct import product on a timelier basis. This facility will flow products ordered abroad and distribute them to our other DCs to reduce safety stock and drive productivity. Our supply chain strategy is focused on carrying more products closer to the customer. And we believe it has been a significant contributor to our recent success, especially in commercial. And we have initiatives in place to continue our growth trajectories in both, our domestic retail and commercial businesses. Additionally, we plan on continuing to grow our Mexico and Brazilian businesses. At almost 800 stores combined, these businesses have had impressive performance again this quarter and should continue to be key contributors to sales and profit growth for decades to come. We are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil. In Brazil in particular, we are targeting to significantly and aggressively expand our store footprint over the next five years. We are very excited about our growth prospects internationally. Now, I’ll turn the call over to Jamere Jackson. Jamere?

Bill Rhodes :

Thanks, Jamere. Fiscal 2023 is off to a solid start. But we must continue to be focused on superior customer service and flawless execution. Execution and our culture, a culture of always putting the customer first is what defines us. As Jamere said a moment ago, we continue to be bullish on our industry and in particular on our own opportunities for the New Year. Our team continues to work collaboratively with our suppliers. And together, we’ve done a good job improving our in-stock position. But we still are a couple of hundred basis points below our historical norms. We’re also being smart about adding new inventory coverage. We’re meeting the ever-growing needs of our customers, especially our commercial customers, by being able to say, yes, we’ve got it. It’s a requirement. For the remainder of fiscal ‘23, we are launching some very exciting initiatives. Not only will we be opening roughly 200 stores across the U.S., Mexico and Brazil, but we’ll be opening more mega hubs and hub stores. And we’re focused on initiatives in place to continue driving strong performance in both, our retail and commercial businesses. For the remainder of fiscal 2023, we are keenly focused on relentless execution. We will not accept shortcuts. Our vendors must return to providing us the right amount of merchandise at the right time. Every store has to be staffed right, every hour of every day, and our processes need to function correctly, always. We have to meet our store opening goals and timelines. Simply put, we have to focus on exceptional execution. It has made a difference for us for decades. We know that investors will ultimately measure us by what our future cash flows look like three to five years from now, and we very much welcome that challenge. I continue to be bullish on our industry and in particular on AutoZone. Now, we’d like to open up the call for questions.

Brian Nagel:

Hi. Good morning. Nice quarter. So, the first question I have, just with respect to freight costs, and Jamere you talked about this in your comments, and you mentioned the LIFO issues. But I guess the question I have is as we think about your freight costs now and what you’re seeing, where are you now tracking say, versus pre-pandemic? And then, even maybe putting some of the accounting noise aside, at what point could this become a tailwind to gross margins, as it really starts to work through the P&L?

Bill Rhodes:

Can I jump in and add a little color on one other element, not on LIFO, but on our normal product cost? Many of those freight costs are being capitalized as part of the inventory cost. So, we’re going to have elevated product cost outside of LIFO for -- in a business that’s turning 1.5 times a year for nine months or a year, whatever the case may be, once those freight costs abate. So, we’ll continue to have pressure on product cost for foreseeable -- for an extended period of time.

Bill Rhodes:

Yes, Brian. So, when we’re talking about traffic, we’re predominantly talking about -- we are talking about our DIY business. I will be first to tell you that our DIY strength in Q1 was stronger than we expected, considerably stronger than we expected. And yes, our traffic counts are down 4%, but that was meaningfully better than -- I believe it was 8% in Q4. Remember -- and you’ve been following this industry for a long time, there is a natural drag on DIY traffic counts that have been happening for 25-years. As you know, technology has gotten better and better on the products that we sell, and so they last longer. But there’s also inherent inflation in those product costs as technologies are added to the products. So, a 4% traffic decline in the DIY business is not abnormal in normal times. And to see it down 4% after the growth that we’ve seen over the last three years was very encouraging to us.

Simeon Gutman:

Good morning, everyone, and Bill, congratulations on the anniversary. My question is actually a follow-up to what you just mentioned, Bill. The traffic or I guess we will look at -- we try to call it units, I don’t know if you would say that they’re synonymous. It did look like it improved sequentially on a single-year basis. We don’t see what the stacks have looked like, I think, on traffic or units. And curious if underlying stacks are also improving such that this is the rebasing and we are in the all clear in terms of units probably done reverting and the negative numbers are normalizing back to that negative 4% that you mentioned.

Jamere Jackson:

Yes. The only thing I’d add to that is when we look at our business in our bread and butter failure and maintenance categories, our volume trends have been strong, as Bill mentioned in his prepared comments. The relative inelasticity of demand there gives us a lot of confidence about that business. But in our discretionary categories, we were down 2.5%. And if you think about where consumers are feeling the most pressure today and where that pressure actually manifests itself, it manifests itself in discretionary purchases. And so, the fact that our discretionary business trends actually improved quarter-over-quarter, give us a lot of confidence about the future. That being said, there’s still a lot of volatility and uncertainty, as Bill mentioned. We’ll continue to manage our business accordingly.

Jamere Jackson:

Yes. I look at the macro in a pretty broad way. You’ve got a couple of dynamics going. One, you have an ageing and growing car part. And used car prices, while they’ve started to abate, they’re still up almost 30% over the last two years. New car prices are up closer to 20%. And you’re in an environment where you have rising interest rates that have made financing more challenging. So we do believe that it is still a little bit of a tailwind for our business. And more importantly, we’ve been managing our business to take advantage of all of the robust market opportunities that we have, and this is just one portion of that. I think as we’ve talked about our business and the growth that we’re seeing, it’s not just that macro strength, but inflation has been our friend to some extent, driving higher prices, volumes held up under those dynamics. And our growth initiatives have helped us create a faster-growing business in both DIY and DIFM. So, when you take the combination of what you’re seeing from inflation, from our growth initiatives, from the work that we’ve done with hubs and mega-hubs and this macro strength, those are all the things that are in the soup, if you will, in terms of how our business is growing.

Kate McShane:

You had mentioned at the beginning of the call about your improving in-stock position. I wondered if you could talk a little bit more about that and where you see yourself by the end of ‘23 from an in-stock position? And then, I’ll follow up with my second question. Thank you.

Kate McShane:

And is there an expectation that you’ll want to do better than the 200 basis points where you are below those expectations? And in terms of how much your sourcing has changed, has it been meaningful since where you used to source pre-pandemic?

Operator:

Your next question is coming from Chris Horvers from JP Morgan.

Jamere Jackson:

Yes. I mean, we expect LIFO charge in the second quarter to be somewhere in the $40 millionish range, if you will. And so that will be significantly less pressure from a gross margin standpoint.

Jamere Jackson:

Yes. So, from an SG&A standpoint, I mean, we’re going to continue to grow SG&A in a disciplined way as we create a faster-growing business. As I said, we were flat as a percentage of sales this past quarter. But we’ve been investing, and we’ve been investing to maintain high levels of customer service. And we’ve been investing because many of our growth initiatives, both on the retail and the commercial side of our business, are underpinned by investments in IT. So IT investments, in particular, are an enabler to what we’re doing from a growth standpoint. As you know, wage pressure is a macro labor market issue, and we certainly haven’t been immune to those dynamics. Historically, our wages have run in the, call it, the 2% ZIP code. It’s been running closer to 5%. And so that’s put some pressure on us. But what I’ll say about SG&A over time is that we will continue to manage it in line with the top line. We’ve been opportunistic as our business has grown to invest at an accelerated pace in some areas to support the growth in our business and to maintain great levels of customer service, and we’ll continue to be very-disciplined about it going forward. And I’m sorry, what was the first part of your question again?

Jamere Jackson:

No. We’ve said that our faster-growing commercial business is likely going to put 35 basis points to 45 basis points of pressure on our gross margins. You saw that in this quarter. And we continue to expect our commercial business to grow significantly faster than our DIY business. And those are the kinds of headwinds that you’ll see from a margin standpoint as we move forward.

Michael Lasser:

Bill, your tax in the commercial business remains quite consistent, but it did slow on a one-year basis. Do you think that’s more related to something happening out of AutoZone where the log diminishing returns are taking over such that you’re still generating similar amount of incremental sales, but it’s just on a larger base, or is there something happening in the underlying trend of the commercial segment itself?

Michael Lasser:

And is this now a more realistic run rate? It will still grow double digits? Is it hard to maintain that 20% that you have been achieving? And my follow-up is one of your competitors recently announced that they’re going to make some price investments. This comes on the heels of another competitor emulating what you had done and make price investments. At what point should we call this a trend, and increased price transparency is just leading to a little bit more price competition within the commercial segment of the auto part retail sector?

Operator:

Your next question is coming from Daniel Imbro from Stephens.

Bill Rhodes:

Sure, Daniel. Thank you. One of the things that we’ve rolled out over the last couple of years is handheld devices for everybody that’s in the store picking the products and everybody that’s delivering to a commercial customer. And that helps us ensure that we have the exact right product, and it helps us manage delivery times, which we have brought our delivery times down about 20% since we deployed that technology. The other big part of it -- and there’s a lot of different technology things that we’re doing along the way. But the other big one that we’ve done is really how we interact digitally with our commercial customers and -- from providing them access to invoices to making us more seamless to operate together, just trying to take the pressure points out and make a frictionless transaction with us. The handheld pieces have been deployed. We’re continuing to refine the technology. And I suspect that those refinements will probably take up to another year or so. I think the digital integration is less far along. We have more newer ideas that we have yet to embark on, on the digital integration with our customers. And so, that’s got to probably have two or three years of legs to it.

Jamere Jackson:

Yes. Well, there are lots of things that will impact when we actually see the reversal of the charges that we take. The biggest one, as we mentioned, is the pace with which freight comes down and we get out of some of the contracts that we’re in. And as I said before, we won’t be date certain about when that actually happens, but we do anticipate that happens. So, it’s moving in the right direction for us. And given that our inventory turns at, call it, 1.5 times, you should expect it to take two or three quarters potentially for us to have all of those costs worked their way through and us to see it turn the other way. So, we’ll give a more fulsome update on our next quarter call. And as I said before, we’ll be very transparent about what we’re seeing.

David Bellinger:

The first one on commercial. It seems like the transaction counts maybe have been a bit slower this quarter. So, is there anything to read into that? And what type of consumer or customer activity are you seeing? Is there some type of deferral coming into play? Just any other details around the commercial counts would be helpful?

David Bellinger:

Got it. And then, just on the commercial program growth, that seemed to step up a little in Q1. It was about 5% year-over-year. Can you give us an update on how those programs are maturing? Is it still something like three to five years for those units to gain some material traction, or are you now seeing an accelerated pace in ramp-up, just given all the progress in the commercial business and the mega hub strategy?

David Bellinger:

Thank, Bill. Enjoy the trip to Mexico.

Operator:

The next question is coming from Mike Baker at D.A. Davidson.

Jamere Jackson:

Yes. It’s primarily basket mix that’s impacting that. One of the things we’ve been very disciplined about is moving retails, as we see cost and we’ve been very transparent about what we’re seeing there and been very disciplined about what we’re doing. This is the entire industry.

Jamere Jackson:

It could actually mean the types of products that are being purchased relative to what we saw in the previous period.

Jamere Jackson:

Again, as we talked about the consumer, if you think about it from a macro standpoint, I mean, clearly, the consumer is feeling the pinch of inflation on multiple fronts. And quite frankly, inflation is going to erode consumer spending overall. But in our business, where we see the primary pressures in our discretionary categories and our bread and butter failure and maintenance categories, the demand has been there. And the actions that we’ve taken from a pricing standpoint have not impacted volume in a meaningful way, so. The other thing I’ll say about just the consumer in general is it’s clearly a two-speed world. The middle and upper end consumers have stronger balance sheets, and they’re continuing to spend in a meaningful way and the lower end consumer is pitched. So, what we’re seeing from our business standpoint is quite frankly consumers, when they have an opportunity, as Bill mentioned, to potentially trade into DIY from DIFM for certain things, they will do that. And these are the kinds of things that we’d expect consumers to do over time. But I wouldn’t read anything into the fact that tickets are 1 point or 2 below what we’ve seen historically, most of that again is mix related.

Bill Rhodes:

For sure, Mike. No question about it. If you recall -- you followed us for a year. So, one thing that we said that really does matter to our customer is gas prices, and particularly when they get over $4 a gallon. We’ve said that for the last 15 years, there just seems to be something special about that $4 a gallon. Obviously, we’re below that level now. But there’s a lot of puts and takes that are going on with the customer today. We’ve never seen this kind of combination. You got near double-digit inflation. You’ve got low-end wage inflation that’s up 5%, 6% across the marketplace. You’ve got gas prices that went up exponentially and then quickly came back down. So, we’re spending a lot of time looking at different stratus of our customer bases, particularly on the DIY side. And while we see some people trading down into -- on the good, better, best spectrum, we’re not seeing any significant moves at this point in time. But we’re obviously paying a lot of attention to it because these are kind of unprecedented underlying factors that are going into it.

Bill Rhodes:

Great. Thank you. Before we conclude the call, I want to take a moment to reiterate, we believe our industry is strong, and our business model in particular is solid. We will take nothing for granted as we understand our customers have alternatives to shopping with us. We have exciting plans that should help us succeed for the future. But I want to stress again that this is a marathon and not a sprint. As we continue to focus on the basics and strive to optimize shareholder value for the future, we are confident AutoZone will continue to be very successful. I want to wish everyone a happy and healthy holiday season. And thank you for participating in today’s call and for your interest in our company. Have a great day.

Brian Campbell:

Before we begin, please note that today's call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the Company's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the Company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Bill Rhodes:

Good morning and thank you for joining us today for AutoZone's 2022 fourth quarter conference call. With me today are Jamere Jackson, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the fourth quarter, I hope you've had an opportunity to read our press release and learn about the quarter's results. If not the press release, along with slides complementing our comments today, are available on our website, www.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them. As we begin, we want to recognize our AutoZoners for their tremendous success this past year. They far exceeded our expectations from the beginning of the year and in a very challenging environment as our pledge states put our customers first, resulting in additional share gains and terrific sales performance on top of fantastic results in FY '21. We grew our overall sales of 11.1% on top of 15.8% growth last year, resulting in a two-year growth that is among the highest we've ever experienced. We could not have achieved this success without phenomenal contributions from across the organization. This year began with the resurgence of the pandemic, ongoing supply chain challenges, a very difficult staffing environment and finished with rising interest rates and inflation at its highest levels in decades, all as major storylines. Throughout the year, our team's incredible supply chain efforts to improve our in-stock position, likely at industry-leading levels, helped our sales growth. These efforts resulted in a positive retail comp and an exceptionally strong commercial comp for both the quarter and the year. Any way you evaluate our FY '22 performance, we had a terrific year. Congratulations AutoZoners, and thanks for always putting our customers first, which led to this success. This morning, we will review our Q4 overall same-store sales DIY versus DIFM trends, our sales cadence over the 16 weeks of the quarter, merchandise categories that drove our performance and any regional discrepancies. We will also share how inflation is affecting our cost and our retails and how we think inflation will impact our business for FY '23. Our domestic same-store sales were an impressive 6.2% this quarter on top of last year's 4.3%. On a two-year basis, we delivered 10.5% comp and on a three-year basis, a remarkable 32.3% stacked comp. Our team once again executed at an exceptionally high level and delivered amazing results despite the difficult comparisons and significant challenges I mentioned above. Our growth rates for commercial and retail were both strong, with domestic commercial growth north of 20%. This quarter was our sixth consecutive commercial growth above 20%. Additionally, Commercial set a fourth quarter record with $1.442 billion in sales, an impressive accomplishment. We generated $260 million more in sales this quarter than in Q4 last year. For the fiscal year, our commercial sales were $4.2 billion versus $3.3 billion just a year ago, up over 26%. Last fall, at our National Sales Meeting, our Senior VP of Commercial, Grant McGee, declared a stretched goal to achieve $4 billion in sales for FY '22. That lofty goal ultimately was a near lofty enough. We also set a record average weekly sales per store for any quarter at $17,000 per store versus $14,400 last year. Domestic commercial sales represented 30% of our domestic auto parts sales, another record for us compared to just 26% in last year's quarter. Our commercial sales growth continues to be driven by key initiatives we have been working on for the last several years. Improved satellite store inventory, massive improvements in hub and mega-hub coverage, the strength of the Duralast brand, better technology to make us easier to do business with, improve delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being quote priced right for the value proposition we deliver. We continue to execute in commercial, and we are extremely proud of our team's performance. We're also very proud of our organization's performance in domestic DIY. We had a positive 1.1% comp this quarter. While our two-year comp decelerated from Q3's, we believe the more relevant comp is the three-year and we are higher than last year's quarter at 24.5% versus 21.6%. For the year, we were very proud of our DIY results considering we grew so much in FY '21. To level set, we had 11% DIY comp in FY '21. And for the full year '22, we were up 2.9%. These results are very strong, considering the difficult comparison, which was driven by the various forms of stimulus last year. From the data we have available to us, we continue to retain the vast majority of the enormous share gains in dollars and more importantly, in units that we built during the initial stages of the pandemic. And our recent performance gives us continued conviction about the sustainability into FY '23. Now let's focus on sales cadence. Our quarter spans 16 weeks, early May through the end of August. Our same-store sales increased materially over the first four weeks to high single digits, 8.4%. The next eight weeks, our growth was nearly halved, dropping to 4.9%. And then. it reaccelerated over the last four weeks, up 6.8%. All of these year-over-year comparisons are difficult to interpret as so much was going on last year and even the year before. However, for Q4, our two-year comp was 10.5% and the four-week periods of the quarter increased 10.4%, 9.4%, 7.9% and 14.4%, respectively. But our three-year comp was 32.3% and for the four-week periods of the quarter increased 35.2%, 33.5%, 30.1% and 31%, respectively. We have been encouraged by the sustainability of the enormous sales gains we generated since the beginning of the pandemic. Regarding weather in May and June, we experienced slightly cooler and wetter weather trends across the country. By July, however, it became very hot across most of the country, and it remained unseasonably warm for August. Overall, we feel weather had a small but slightly positive effect on our sales performance. As we look forward to the fall months, we anticipate normal weather patterns. As a reminder, historically extreme weather, cold or hot, drives parts failure and accelerated maintenance. Regarding this quarter's traffic versus ticket growth, in retail, our traffic was down roughly 7%, while our ticket was up about 8%. Our transaction count decline wasn't surprising and was driven by lower demand for discretionary sales floor items. However, we were pleased to be in line with last quarter's three-year transaction trends. We are also quite pleased with the ongoing growth in unit share we are seeing in our market share data. We're also very encouraged by the sales trends we continue to experience in commercial. Our sales growth is coming from transaction growth from new and existing customers, along with higher tickets as we price for inflation. I regularly visit our stores and commercial customers and find it very encouraging to hear the positive comments from our customers and AutoZoners on our offerings. The reception our AutoZoners are receiving from our customers and as importantly, our prospective customers has changed meaningfully over the last few years as we continue to implement and execute our commercial acceleration strategy. I'll say it now, but we're determined, determined to continue to grow meaningfully faster than the market, and we're focused on future growth opportunities to keep our momentum. Our goal stated simply, overtime is to become the industry leader in both sectors. As we start our new fiscal year, we continue to be pleased with the momentum we are seeing in both domestic businesses heading into the fall months. During the quarter, there were some geographic regions that did better than others as there always are. This quarter, we saw a 30 basis point difference between the Northeast and Midwest compared to the balance of the country with the Northeast and Midwest being higher. As the Northeast and Midwest were warmer in May and June, their sales accelerated. However, this trend reversed itself over the last eight weeks of the quarter. As the remainder of the country heated up, those regions grew their comp sales faster than the Northeast and Midwest markets. Heading into the first quarter of the new fiscal year, we continue to believe weather will have only a minimal impact on our sales. Now let's move into more specifics on performance for the quarter. While I said our same-store sales were up 6.2% versus last year's fourth quarter, our net income was $810 million and our EPS was $40.51 a share, increasing 13.4%. Regarding our merchandise categories in the retail business, our hot parts outperformed sales floor categories with approximately a 2.5% difference between them. As gas prices increased, our discretionary sales for merchandise categories certainly softened. The discretionary categories represent approximately 20% of our DIY sales in any one quarter. But this quarter, they were weaker at 19% of the retail mix. This category was down 6.5% in the quarter versus up 3.5% last year in Q4. More recently, as gas prices have abated, we are encouraged to see the discretionary categories bounce back a bit. In general, the categories that are driven by failure due to heat performed well, and we were encouraged to see our battery category successfully lapped very strong performance last year and exceed our expectations. We believe our hard parts business will continue to do well this fall as we expect miles driven to improve while our growth initiatives are delivering solid results. Let me also address inflation and pricing. This quarter, we saw our sales increase by 11% from inflation, in line with cost of goods, which was up about 10%. We believe both numbers for the first quarter will be similar. As rising raw material pricing, labor and transportation costs are all impacting us and our suppliers, inflation has been prevalent in the aftermarket space. We believe inflation is stabilizing. We are seeing transportation costs begin to moderate after reaching historic levels, but we are not seeing product cost deflation yet nor are we seeing any signs that labor wage growth is slowing. Importantly, I want to point out that our industry has been disciplined about pricing for decades, and we expect that to continue. Historically, as costs have increased, the industry has increased pricing commensurately to maintain margins. It is also notable that following periods of higher inflation, our industry has historically not reduced pricing to reflect lower cost. While we continue to be encouraged with the current sales environment, it remains difficult for us to forecast near to midterm sales. What I previously said is that the past five quarter sales have all been consistent on both a two- and three-year stacked comp basis. While it's difficult to predict sales going forward, we are excited about our growth initiatives, our team's execution and the tremendous share gains we've achieved in both sectors. Over the past 12 to 18 months, the overall macro environment has been favorable for our industry despite inflationary pressures for some of our customers. And even if these near-term trends fade, we believe that we are in an industry that is positioned for solid growth over the long term. For our first quarter of 2023, we expect our sales performance to be led by the continued strength in our commercial business as we execute on our differentiating initiatives. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends emerge. Before handing the call over to Jamere, I'd like to highlight and give some color on a few of our key business priorities for the new fiscal year. First, we are focusing on our supply chain with two initiatives that are in flight to drive improved availability. One is our expanded hub and mega-hub rollouts. We know intelligently placing more inventory in local markets will lead to our ability to continue to say yes to our customers more frequently and in turn, drive our sales. Secondly, we are expanding our distribution center footprint. We announced the development of two new distribution centers domestically and one additional DC in Mexico. These DCs will allow us to not only reduce drive times to stores, but they increase our capacity. We didn't expect to grow our business 30% in three years as we did, and that will allow us to carry inventory that is slower turning yet in demand across the country. I'm also excited to announce that we opened a new facility on the West Coast just this month to handle direct import product on a timelier basis. This facility will flow products ordered abroad and distribute them to our other DCs postponing the inventory allocation and therefore, reducing safety stock. Our supply chain strategy is focused on carrying more product closer and closer to the customer, and we believe it has been a significant contributor to our recent success, especially in commercial. Additionally, we plan on continuing to grow our Mexico and Brazilian businesses and almost 800 stores open internationally, these businesses had impressive performance this past fiscal year and should continue to grow in 2023 and beyond. We are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil. Now, I'll turn the call over to Jamere Jackson. Jamere?

Bill Rhodes:

Thank you, Jamere. As we start a new fiscal year, I'd like to take a moment to discuss our operating theme for the new year. Last night, we kicked off our National Sales meeting with our amazing President's Club winners, our very best store managers. This week, we will embrace our theme for the year, Accelerate Together. We are very excited to have our field leadership team in Memphis for the next four days and I cannot wait to congratulate everyone on their year and thank them for their phenomenal results. They delivered exceptional results in fiscal '22, and we remain focused on superior execution and customer service heading into fiscal '23. Our culture was built on providing exceptional service and this is what will continue to define our success well into the future. As we've accelerated our top line, our competitive positioning has materially improved and customer behavior may have permanently changed post-pandemic. If this holds true, it will be the fourth time in the last 30 years that the economy and society have had significant shocks leading to material acceleration in our growth in sales and profits without a corresponding decline back to pre-recessionary or pandemic levels. Our industry is unique, and it is a very long track record of strong performance with high returns and consistent cash flows. We would also encourage you to migrate to studying our performance on a one-year comp to gauge our performance as we believe the business is steady enough to talk about year-over-year comps going forward. This time of year, I always enjoy reflecting on the past. This year, in particular, is a rewarding experience. Our team delivered some really impressive milestones, $16.3 billion in sales racing past the $15 billion milestone. DIY comps of 2.9%, most impressively, 21.6% on a three-year basis. Commercial sales blew past $4 billion, ending at $4.23 billion. Average weekly sales domestically of $46,300 per store per week equating to over $2.4 million per store annually. Our Mexico and ALLDATA teams both broke numerous records, and Brazil is poised for significant growth in store count. We bought back a record-breaking $4.4 billion in AutoZone stock, and our team has grown our EBIT by roughly 50% in three years. Yes, that's five-zero, and that is remarkable. But we can't rest on our laurels, and we aren't without our challenges. That's for sure. Our greatest challenge, which we will spend time discussing this week with the team, is "exiting pandemic mode." In addition to our fanatical customer focus and our phenomenal culture, a huge part of our historical success has been flawless execution. In all Candor, we haven't been flawlessly executing. In the depths of the pandemic, it was impossible and our teams appropriately made trade-offs. We have ensured that some of those trade-offs do not result in "new norms or worse, numbness or bad habits." Those new norms can't and won't be tolerated. We have to make sure our in-stock levels finally recover to our historic levels and they recover soon. Our vendors must return to providing us with the right amount of merchandise at the right time. Every store has to be staffed right every hour of every day. Our processes need to function correctly always. We have to meet our store opening goals and time lines. Simply put, we have to remain the execution machine we have always been an exit pandemic mode. I've had the honor of being part of this team for nearly 28 years now, and it has been one of the great privileges of my life. I could not be more proud of our AutoZoners across the organization for their commitment to passionately serving our customers. We must continuously challenge ourselves during these extraordinary times to position our company for even greater future success and rest assured, we are doing just that. We know that investors will ultimately measure us by what our future cash flows look like three to five years from now, and we very much welcome that challenge. I continue to be bullish on our industry and, in particular, on our team at AutoZone. Now, we'd like to open up the call for questions.

Bret Jordan:

On the supply chain comment, could you maybe give us an update where we are as far as fill rates go and the cadence of improvement? It does seem to some commercial customers finding parts is still a bit of a challenge.

Bret Jordan:

And then in the prepared remarks, you mentioned price right and obviously, a big topic this year. Are you seeing anything in the market pricing, whether it be in the DIY against the non-traditionals? Is anything changing in pricing cadence?

Operator:

Thank you very much. Your next question is coming from Steven Zaccone of Citi. Steven, please ask your question.

Bill Rhodes:

Sure. Well, first, on the latter part of the question, we addressed it a little bit in our prepared remarks that when gas prices were $5.50 a gallon on average across the country, we saw an immediate reduction in our discretionary products. As those gas prices have come back down, we've seen discretionary products improve. You have to be careful because it's such a small part of our business, but we've certainly seen it improve. As for whether or not we can see positive comps in DIY for FY '23, as you know, we don't give guidance. There's a lot of uncertainty in the marketplace with inflation, with rising interest rates and the like. But I will tell you -- I'll answer it this way. This latter part of the fourth quarter was much stronger than we were expecting it to be in June and July. And so that gives us some confidence that at least for now, the DIY business is really quite strong. And frankly, as strong if not stronger than we thought it would be back in the early months of the summer.

Bill Rhodes:

I think the strategies that we're focused on for the next chapter of growth are the same ones that we've been working on for about five years. We're going to continue to make sure that we've got the best coverage in the marketplace. That considers being in the best situation in the local store. It also means expansion of hubs and mega-hubs. We've talked about growing our mega-hubs from today's 78 to 200. So, we're just over -- just under 40% of the way there, and we're moving pretty quickly. Same kind of trajectory on the hub stores, we're around 200. We want to get to 300 of those. So we have lots of growth still in front of us on hubs and mega-hubs, and we're continuing to test new philosophies and new coverage even in those. We're going to continue to focus on the Duralast brand. We're leveraging technology to make our people more efficient and to reduce our delivery times. We're always making sure that we're priced strike. We've got a lot of different strategies, and that's the thing to me that's most encouraging is it's not one single thing that's making this happen. It's a holistic substantial improvement in our competitive positioning in the marketplace. At the end of the day, we got around 4% share in commercial. I said on the call today, the first time we've ever said it. We want to win and be the largest in both sectors. And it's going to take us a while, but that's our goal. And I'm very pleased with the progress that we've had with 20% growth over six consecutive quarters, that's pretty phenomenal regardless of how the industry is growing.

Simeon Gutman:

I'll be the LIFO person for the call. So the LIFO charges because of freight, non-cash. If you look out 12 to 18 months, do you get back all the charges to earnings either freight subsides or you take credits? Or you actually just raise price when over time to recoup this?

Simeon Gutman:

I'll ask something different for the follow-up. If you look at the units in DIY, they're probably negative. So, can you talk about the stacks there whether it's stabilizing and thinking about reversion or even elasticity, does the DIY units, do they stay negative or they work back to flat through fiscal '23?

Simeon Gutman:

Yes. That's helpful.

Michael Lasser:

Understanding that you don't provide guidance, but in light of the $100 million LIFO charge this quarter and next quarter, coupled with rising interest expense and what looks to be a slightly higher tax rate year-over-year, is it best that we assume this is going to be a sub algorithm year even if you comp in the traditional 3% to 4% range and buy back a similar amount of stock that you have been buying back?

Bill Rhodes:

Jamere, let me jump in and amplify a couple of points, too. First of all, I've been involved with this company since before we went public in 1991. This is the first time we've ever had a LIFO charge period. These are uncertain times or unique dynamics, especially with the level of inflation that we've seen in cargo freight going from $1,800 to over $20,000 per container. Those numbers have moderated significantly now, but we do have some long term -- or some midterm contracts, call them 6 to 12 months where we had to secure capacity. It is our full expectation -- and I don't know if it will happen this year or not. It's going to depend on freight costs. It is our full anticipation whatever charges we take in Q1 and Q2 ultimately will be reversed, and we will go back to zero and then we'll start building a LIFO reserve that we don't record. So, we think this $100 million to $200 million charge will be temporary, and it will reverse and it could be -- the back half of this year, could be next year, but that is fully our expectation.

Bill Rhodes:

Yes. I don't want to specifically say 52% gross margins is what the future is going to look like. As you've seen, there are pressures on gross margin as we continue to grow this commercial business at such an accelerated rate. That pressure is likely going to continue. But just like you said, the GAAP charge, let's just say, it was $200 million for the first half of the year. A year from now or 18 months from now, you're also going to have to think about when that $200 million comes back through the P&L. And so, we would encourage you to look at it, excluding the LIFO charges, both as it's a penalty for us now and when it's a benefit for us whenever that happens.

Scot Ciccarelli:

So, I guess I have another question on kind of the same SKU inflation outlook. I mean while you guys are still seeing double-digit same SKU inflation, year-over-year comparisons do start to become much more difficult over the next few quarters. So, how should we think about the comp cadence as those comparisons start to become difficult?

Scot Ciccarelli:

And then just a quick follow-up here. Does the increase in interest rates and higher interest costs change your expectations at all for your debt-to-EBITDAR targets? Or maybe how aggressive you plan to be on your buyback program?

Operator:

Your next question is coming from Kate McShane of Goldman Sachs. Kate, please ask your question.

Bill Rhodes:

Yes. Terrific questions, Kate. I'll take the last one first. Duralast continues to perform exceptionally well in the DIFM sector. We've rolled it into more categories. In the last few years, we've rolled it into shocks and struts. We've rolled out a Duralast Gold type performance chassis program, and we've rolled out Duralast elite brake pads. Each of these have been well received in both the retail and the commercial market, where 10 years ago, everybody would say, we couldn't be successful in commercial because of the Duralast brand. I think, the exact opposite is true. It has become a real strength for us. Remind me the first part of your question, sorry.

Bill Rhodes:

Yes, sorry. I think they're very, very similar. Both are doing very well. There's not a discernible difference between the two right now.

Daniel Imbro:

Bill, you discussed your new supply chain investment, I think it's on the West Coast for direct importing. Obviously, direct importing is tough especially with fill rates are so important. There's been some changes on your merchandising management internally. So can you just walk through the pros and cons, I mean, growing the direct import business, maybe how you manage that risk in the supply chain backdrop?

Daniel Imbro:

And Jamere, I want to follow up on the SG&A side. I think Do-It-For-Me or commercial delivery costs are actually in that line. So can you talk about maybe on a store level basis, what the SG&A initiatives are that you're implementing, just impressed you're able to leverage that despite the growth in commercial? So trying to understand what's happening on the non-commercial delivery, kind of the core SG&A side of the business?

Operator:

Your next question is coming from Greg Melich of Evercore. Greg, please ask your question.

Jamere Jackson:

It's basket and mix that are driving the difference there.

Jamere Jackson:

That's right.

Jamere Jackson:

We have a strong program that are driving the AP to inventory numbers. The other thing I'll point to is that our turns are elevated relative to where we've been historically, 1.5x versus probably being somewhere in the 1.2x to 1.3x. And that's given us some goodness there in terms of the AP inventory ratio. It may move around a few points or so, but we're going to continue to be aggressive on the programs that we've put in place.

Bill Rhodes:

Yes, it's a great question, Greg. It's something that we have been studying really since probably May. We have seen it at times on the margin. But really -- I mean, we've really looked for it hard. We have not seen it in mass by any stretch of the imagination at this point in time.

Bill Rhodes:

Okay. Well, before we conclude the call, I just want to take a moment to reiterate that we believe our industry is in a strong position, and our business model we know is solid. We are excited about our growth prospects for the year, but we will take nothing for granted as we understand our customers have alternatives. We have exciting plans that should help us succeed for the future, but I want to stress again that it's a marathon and not a sprint. As we continue to focus on the basics and strive to optimize shareholder value for the future, we are confident AutoZone will continue to be very successful. Thank you for participating in today's call. Have a great day.

Brian Campbell:

Before we begin, please note that today’s call includes forward-looking statements that are subject the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning’s press release and the company’s most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made and the company undertakes no obligation to update such statements. Today’s call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Bill Rhodes:

Good morning and thank you for joining us today for AutoZone’s 2022 third quarter conference call. With me today are Jamere Jackson, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third quarter, I hope you have had an opportunity to read our press release and learn about the quarter’s results. If not, the press release along with slides complementing our comments today, are available on our website, www.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them. As we begin, we want to continue to stress that our highest priority remains the safety and well-being of our customers and AutoZoners, Everyone, everyone across the organization continues to take this responsibility seriously and I am very proud of how our team continues to respond to COVID-19 and subsequent variants. While mass mandates have abated, we continue to make sure the environments our AutoZoners are working in and our customers are shopping in are as safe as possible for these times. Since the start of the pandemic, we have consistently recognized our AutoZoners in our stores and distribution centers, especially for giving exceptional service in the face of all the challenges COVID-19 has meant for all of us. This quarter, we will start the same, by again thanking our AutoZoners for their dedication to providing exceptional customer service, while helping our customers with their automotive needs. This morning, we will review our overall same-store sales, DIY versus DIFM trends, our sales cadence over the 12 weeks of the quarter, merchandise categories that drove our performance and any regional discrepancies. We will also share how inflation is affecting our costs and retails and how we think they will impact our business for the remainder of the fiscal year. Our domestic same-store sales were a solid 2.6% this quarter, on top of last year’s very strong 28.9%. On both a 2-year and 3-year stack comp sales basis, our trends accelerated. Our team, once again, executed at an exceptionally high level and delivered amazing results despite the difficult comparisons. Our growth rates for retail and commercial were both strong, with domestic commercial growth north of 26%. Commercial set a third quarter record with $1.044 billion in sales, an incredible accomplishment. We generated $216 million more in sales this quarter than in Q3 of just last year. On a trailing four-quarter basis, our commercial sales are just under $4 billion versus $3.1 billion a year ago, up 27%. We also set a record in average weekly sales per store for any quarter at $16,600 versus $13,500 last year. On a 2-year basis, our sales accelerated from last quarter. Domestic commercial sales represented 30% of our domestic auto parts sales, another record for us compared to just 24.8% last year. Our commercial sales growth continues to be driven by a host of key initiatives. We have been working on for the last several years, improved satellite store availability, massive improvements in hub and mega hub coverage, the strength of the Duralast brand, better technology to make us easier to do business with, improve delivery times, enhancing our sales force effectiveness and living consistent with our pledge by being priced right for the value proposition we deliver. We continue to execute very well in commercial and we are extremely proud of our team and their performance. We are also very proud of our organization’s performance in domestic DIY. As a reminder, it was last year’s Q3 that had the massive stimulus payments that were distributed to consumers in the U.S. We ran a negative 4.5% comp this quarter on top of last year’s record positive comps of 24.8%. While our DIY 2-year comp decelerated slightly from Q2’s 2-year DIY comp, perhaps the more relevant comp is the DIY 3-year comp, which did accelerate. We were very proud of our DIY results considering we had such a tough comparison to last year. From the data we have available to us, we continue to not only retain the enormous share gains in dollars and units we built during the initial stages of the pandemic, but modestly build on those gains. Our performance, considering the amount of time from the last stimulus and the ending of the enhanced unemployment benefits, has substantially exceeded our expectations and gives us continued conviction about the sustainability of the massive elevated sales levels we have experienced since the beginning of the pandemic. Now, let’s focus on the sales cadence. Our quarter spans at 12-week period. Our same-store sales increased materially over the first 4 weeks, up 11.8%. Then they were down over the middle 4 weeks by 5.2%. But remember, we were comping against the stimulus payments made during this time last year and our same-store sales then accelerated over the last 4 weeks, up 3%. All of these year-over-year comparisons are really difficult to interpret us so much is going on last year and even the year before. For Q3, our 2-year comp was 31.5% and the 4-week periods for the quarter increased 23.4%, 65.4% and 17% respectively. But our 3-year comp was 30.5% and the 4-week periods for the quarter increased 29.7%, 44.7% and 29.8% respectively. What I want to stress is that our 2-year and 3-year comp accelerated for the quarter from Q2’s 2 and 3-year comparison. We are encouraged by the sustainability of these enormous sales gains. Regarding weather, in February and March, we experienced normal weather trends across the country. April, however, was a little cooler and a little wetter than normal. Overall, we feel weather did not play a material role in our sales performance. As we look forward to the summer months, we anticipate normal weather patterns. As a reminder, historically, extreme weather, hot or cold, drives parts failure and accelerated maintenance. Regarding the quarter’s traffic versus ticket growth in retail, our traffic was down roughly 8.5%, while our ticket was up 4%. Our transaction count decline was correlated to last year’s Q3 meaningful 16% traffic count increase. While we had expected a decline in transactions this quarter, we were pleased to exceed our beginning of the quarter assumptions on transaction count declines. We are also quite pleased with the ongoing growth in unit share we are seeing in our market share data. We are very encouraged by the sales trends we continue to experience in commercial. Most of the sales growth is coming from transaction growth from new and existing customers. I have visited our stores and commercial customers extensively this quarter and find it very encouraging to hear the positive comments from our customers and AutoZoners on our comprehensive offerings. The tone of our sales calls has changed meaningfully over the last few years as we continue to implement and execute our commercial acceleration strategy. As we start our final quarter of the fiscal year, we continue to be pleased with the momentum we are seeing in both domestic businesses heading into the summer months. During the quarter, there were some geographic regions that did better than others as there always are. This quarter, we saw a 54 basis points difference between the Northeast and Midwest compared to the balance of the country, with the Northeast and Midwest performing lower. As the Northeast and Midwest were cooler and wetter in April, their sales were below last year’s results. We do not believe there will be lasting effects on sales performance in the Northeast and Midwest due to the slightly cooler April weather. Heading into the fourth quarter, we continue to believe weather will have a minimal effect on summer sales. Now, let’s move into more specifics on our performance for the quarter. Our same-store sales were up 2.6% versus last year’s third quarter. Our net income was $593 million and our EPS was $29.03 a share, increasing 9.6%. Regarding our merchandise categories in the retail business, our hard parts outperformed our sales floor categories, but there was less than a 1% difference between them. As gas prices jumped recently, our sales results in certain hard parts categories performed below our plan. This is unlike the sales floor categories, which were on plan. We have been especially pleased with our growth rates in many of our categories like batteries that have successfully left very strong performance last year and easily exceeded our planned assumptions for the quarter. We believe our hard parts business will strengthen as our customers return to driving more. Let me also address inflation and pricing. This quarter, we saw our sales increase by 7.8% from inflation, in line with the cost of goods inflation, which was up similarly at 7.2% on a like-for-like basis. We believe both numbers for the fourth quarter could be slightly higher than this past quarter’s increases. As rising raw material pricing, labor and transportation costs are all impacting us and our suppliers, inflation has been prevalent in the aftermarket space. We have no way to say how long this will last, but our industry has been disciplined about pricing for decades and we expect that to continue. It is also notable that following periods of higher inflation, our industry has historically not reduced pricing to reflect lower ultimate cost. While we continue to be encouraged with the current sales environment, it remains difficult for us to forecast near to mid-term sales. What I have previously said is that the past five quarter sales have all been consistent on both a 2-year stacked comp basis and a 3-year stacked comp basis. While it’s difficult to predict absolute sales levels going forward, we are excited about our growth initiatives, our team’s exceptional execution and the tremendous share gains we have achieved in both sectors. Currently, the macro environment, while uncertain, remains favorable for our industry. And even if these near-term trends fade, we believe that we are in an industry that is positioned for solid growth over the long-term. For our fourth quarter, we expect our sales performance to be led by the continued strength in our commercial business as we continue executing on our differentiating initiatives. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends emerge. Before handing the call over to Jamere, I’d like to make sure the listeners know what our key business priorities are for the remainder of the fiscal year and give some color on those. First, we are focusing on our supply chain. We have two initiatives in place to drive improved availability. One is our expanded hub and mega hub rollouts. We believe intelligently placing more inventory in local markets will lead to our ability to continue to say yes to our customers more frequently and in turn continued to drive our sales performance. Secondly, we are expanding our distribution center footprint. We announced opening two new domestic DCs and one additional DC in Mexico. These DCs will allow us to not only reduced drive times to stores and markets serviced by the new DCs, but they, being larger than the previous DCs, will allow us to carry inventory that is slower turning yet in demand across the country. We previously relied on our vendor community to carry these SKUs and shipped them once ordered by our stores. Our DC strategy is focused on carrying more product in our supply chain that was not available previously. These SKUs will smartly expand our stocked inventory across all 50 states. And lastly, we plan on continuing to grow our Mexico business, while accelerating growth in Brazil and we are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil. Now, I will turn the call over to Jamere Jackson. Jamere?

Bill Rhodes:

Thank you, Jamere. We had very solid results so far in fiscal ‘22, and we remain focused on superior execution and customer service. Our culture was built on providing exceptional service, and this is what we will continue to define our success well into the future. And looking to the future, it is still very difficult to predict the next 6 to 12 months. But our perspective has meaningfully morphed over the last two quarters. On last quarter’s call, we discussed how most, if not all, of the growth in sales we experienced since the start of the pandemic was sustainable. We believed our competitive positioning was materially improved, as indicated by our significant retail share gains and rapidly accelerated commercial sales growth. We believe customer behavior may have permanently changed. We continue to believe all of this today. If this holds true, it will be the 4th time in the last 30 years that the economy and society have been through significant shocks, leading to material acceleration in our growth in sales and profits without a corresponding decline back to pre-recessionary or pre-pandemic levels. Our industry is unique and it has a very long track record of strong performance with high return and cash flow characteristics. As we have now lapped the second anniversary of the pandemic, some of the measurements we have all used recently to measure our performance will become skewed. Remember, at the beginning of the pandemic, our sales dropped radically. Our retail sales rebounded quickly with the April 2020 stimulus, but commercials rebound lagged and took several months. For Q4, in light of the amazing performance in the back half of 2020, the 2-year comparison for overall comps won’t be comparable. We would encourage you to migrate to studying 3-year comps to gauge our fourth quarter performance. That said, soon, we look forward to returning to focusing solely on 1 year comparisons. We continue to be bullish on our industry and, in particular, on our own opportunities for 2022. We believe the macro backdrop is in our favor for near and long-term. Our customers across the Americas, they want to get out and drive, and we are here when they need helpful advice. Our team has worked diligently and collaboratively with our suppliers. And together, they have done a very good job dealing with the enormous supply chain challenges that exist for everyone. We continue to believe we are better in stock than most retailers, and I think our results obviously support that belief. I’d like to share a few other points with you. It has been a rather noisy earnings season for retailers, and I want to be clear, crystal clear about our business and the environment. First, I believe AutoZone can manage effectively through this inflationary environment. Historically, our industry has been disciplined and rational about passing along cost increases with higher retails and that is true today. Second, we feel our store staffing levels are appropriate, and we can, and we will manage expenses appropriately for either stronger or weaker sales environment. Our business and our industry has been remarkably resilient and, frankly, robust. For the remainder of fiscal ‘22, we are focused on further growing share, but as always, doing so on a very profitable basis. Last quarter, we announced we would begin construction on three new distribution centers to fuel continued growth, two in the U.S. and one in Mexico. Expected to open in fiscal ‘24, these new distribution centers represent a meaningful acceleration in our historic investments in DCs as during the pandemic, we’ve learned we need to have more excess capacity. Secondly, we are targeting to open 11 more new domestic mega hub in the U.S. in this quarter, Q4. These mega hubs will enhance our availability and support growth in both our retail and commercial businesses. As we have mentioned many times before, our mega hub strategy is at the core of materially improving our inventory availability, and our results show that they are working. For the fiscal year, we continue to expect to open more than 200 new stores throughout the Americas with notable acceleration in our Brazil business. Our fourth quarter will be a busy one from a store development standpoint. These capacity expansion investments reflect our bullishness on our industry and our own growth prospects. We are being disciplined, yet we are being aggressive. Lastly, I want to reiterate how proud I am of our AutoZoners across the stores and distribution centers, in particular, for their commitment to servicing our customers and doing so in a very safe manner. First and foremost, our focus will be on keeping our AutoZoners and customers safe while providing our customers with their automotive needs. And secondly, we must continuously challenge ourselves during these extraordinary times to position our company for even greater future success. We know that investors will ultimately measure us by what our future cash flows look like 3 to 5 years from now, and we very much welcome that challenge. I continue to be bullish on our industry and, in particular, on AutoZone. Now we’d like to open up the call for questions.

Bret Jordan:

Good morning, guys.

Bret Jordan:

On the mega hubs, could you talk maybe about the geographic reach? You noted that the DIFM is accelerating in their markets. I mean how far can they support smaller stores geographically?

Bret Jordan:

Great. And then one quick follow-up. You noted some impact on hard parts maybe correlated to higher fuel prices year-to-date. Are you seeing any trade down, whether it be in the Do-It-For-Me or the DIY space, given what’s going on in inflationary to the consumer?

Bret Jordan:

Great. Thank you.

Operator:

Your next question for today is coming from Christopher Hoover with JPMorgan. Christopher, your line is live.

Jamere Jackson:

Yes. On the first part of your question, I mean, there is no question, we’re seeing cost inflation in certain categories. We’re also seeing higher transportation costs. We’re seeing higher fuel costs. However, as we reiterated on the call, the industry pricing is rational, and we’re actually pricing to recover all of those inflationary impacts, just as we’ve done in the past. So you’ve seen us move retail prices up. As inflation has moved up mid-single digits, our pricing has moved. I think our entire industry has done that. And as I’ve said before, inflation has been a little bit of our friend in terms of what we see in terms of retail pricing. Now as it relates to our commercial business, we want to be crystal clear. Our goal is to create a faster growing business with higher margin dollars. This is a much more sustainable way for us to grow our cash and, ultimately, shareholder value. Our domestic commercial business grew 26%. It’s a mix headwind. We expect our domestic commercial business to continue to outgrow our DIY business, and that’s a trade-off that we welcome. We will continue to run a very disciplined playbook on margin expansion opportunities across all of our business, which includes things that we’re doing from a cost standpoint, raising our prices and managing our expenses accordingly. But we like the fact that we’ve got a commercial business with very strong operating margins that is accretive to the overall business.

Jamere Jackson:

Yes. If you look at diesel in particular, it’s up probably 50% versus a year ago. That does show up in our SG&A expenses. So as we’re running the cost playbook and we’re running our pricing playbook, we have to take all of those things into account. And as I said before, when we look at our business in total, and look at all of the inflationary impacts, we’re pricing our retails accordingly to make sure that we maintain our margin structure going forward.

Christopher Hoover:

Right. And then the idea is you’re going to manage pricing to help offset that the light-duty expense pressure in SG&A?

Bill Rhodes:

Both of them, both the light-duty and the heavy-duty.

Bill Rhodes:

Thanks, Chris.

Simeon Gutman:

Good morning everyone. My first question is on some of the margin and growth comments Jamere just made. Given the success you have in DIFM, are you making trade-offs between how much quicker you can grow and the margin dilution? And then meaning can you grow even quicker and maybe a bigger detriment to margin or are you seeing less detriment to margin as this expansion is happening in commercial?

Simeon Gutman:

Fair enough. And Bill, I was intrigued by some of the comments you made about some permanent changes to the industry. Were you underscoring how resilient the business is, or are you also thinking that maybe the business or the industry can grow at a faster rate than it has historically?

Simeon Gutman:

Okay. Thanks. Good luck.