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#Good morning, and thank you for joining us today for AutoZone\
Thanks, Bill, and good morning, everyone.
To start this morning, let me take a few moments to talk more specifically about our retail, commercial and international results for the quarter.
For the quarter, total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico and Brazil stores and our 26 IMC branches, increased 1.1%.
For the trailing 52 weeks ended, total sales for AutoZone store were $1,768,000.
For the quarter, total commercial sales increased 3.6%.
In the third quarter, commercial represented 19% of our total sales and grew $17 million over last year's third quarter.
This past quarter, we opened 56 net new programs versus 46 programs opened in our third quarter of last fiscal year.
We now have our commercial program in 4,493 stores or 83% of our domestic stores supported by 184 hub stores.
Approximately 900 of our programs are 3 years old or younger.
In 2017, we expect to open approximately 200 new programs.
While our trends slowed during the third quarter, our April and May sales are in line with our results from earlier this year, which while not meeting our aspirations is more encouraging than our trends in February and March.
We remain focused on having a great sales team supplemented with strong engagement of our store managers and district managers.
We remain confident we will continue to gain market share with our commercial customers, and we're encouraged by the initiatives that we have in place and feel we can further grow sales.
And as Bill previously mentioned, while we think our strategy has worked very well over the last 9 years, we want to take a fresh objective look over the next several months.
Will anything materially change.
We don't know, but we do know we will likely implement some tests to continue to learn how best to service our customers and further penetrate this large sector of our industry.
Our Mexico stores continued to perform well on a local-currency basis.
We opened 8 new stores during the third quarter.
At the end of the quarter, we had 499 stores in Mexico.
We expect to open approximately 40 new net stores this year and next.
As Bill said earlier, we were challenged by a difficult foreign exchange rate in regard to the peso.
While sales in base currency were above plan this quarter, the devaluation of the peso was much greater than we assumed at the start of the year.
This has created a headwind, and our EPS was significantly impacted.
We do believe the Mexico leadership team has done an exceptional job managing the peso-denominated business.
Regarding Brazil, we opened no new stores and are currently operating 9 stores.
Our plans are to grow to between 20 and 25 total stores over the next few years.
While sales growth has been very encouraging, we continue to refine our business model to make sure that it works for us financially.
Gross margin for the quarter was 52.6% of sales, down 21 basis points.
The decrease in gross margin was attributable to higher supply chain costs associated with the current-year inventory initiatives and higher inventory shrink results, partially offset by lower acquisition costs.
Compared to the prior year, we have incurred more costs related to our supply chain in support of inventory availability initiatives along with rising shrink expense after several years of declining expenses.
Our primary focus remains growing absolute gross profit dollars in our total auto parts segment.
SG&A for the quarter was 32.4% of sales, higher by 25 basis points from last year's third quarter.
Operating expenses as a percentage of sales were 32.4% up, deleveraging by 25 basis points.
As I mentioned, operating expenses as a percent of sales were higher than last year primarily from fixed cost deleverage due to our comparable store sales decline, higher sales insurance costs and increasing wage pressures, partially offset by favorability from last year's discrete legal charge and lower incentive compensation.
EBIT for the quarter was $530 million, down 1.3% over last year's third quarter.
And our EBIT margin was 20.2%.
Interest expense for the quarter was $35.7 million compared with $34.1 million in Q3 a year ago.
As we completed a $600 million 10-year bond deal this past quarter, we are planning interest at $51 million in the fourth quarter versus $45.8 million last year's fourth quarter.
Debt outstanding at the end of the quarter was $5,153,000,000 or approximately $200 million more than last year's balance of $4,954,000,000.
Our adjusted debt level metric finished the quarter at 2.6x EBITDAR.
While in any given quarter we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment-grade rating and our capital allocation strategy, and share repurchases are an important element of that strategy.
For the quarter, our tax rate was 32.8% versus last year's Q3 of 34.8%.
And I do want to take a moment and remind listeners of our first quarter adoption of a new accounting standard.
The new standard requires us to recognize the tax benefit received from the gains employees have on stock options as a credit to income tax expense on the P&<UNK>
This past quarter, it lowered our tax rate 231 basis points.
This accounting change also increases the diluted share count calculation.
Net income for the quarter was $331 million, up 1.3% over last year.
Our diluted share count of 29 million was down 4.6% from last year's third quarter.
The combination of these factors drove earnings per share for the quarter to $11.44, up 6.2% over the prior year's third quarter.
Excluding the impact of the previously mentioned change in accounting for stock option exercises, our EPS would have increased by 3.2% for the quarter.
Relating to the cash flow statement, for the third fiscal quarter, we generated $445 million of operating cash flow.
Net fixed assets were up 7.9% versus last year.
Capital expenditures for the quarter totaled $142 million and reflected the additional expenditures required to open 45 new locations this quarter.
Capital expenditures on existing stores, hub and Mega Hub store remodels or openings, work on development of new stores for upcoming quarters and initial investments in our new domestic DCs and information technology investments.
With the new stores opened, we finished this past quarter with 5,381 stores in 50 states, the District of Columbia and Puerto Rico; 499 stores in Mexico and 9 in Brazil, for a total AutoZone store count of 5,889.
We also had 26 IMC branches opened at fiscal year-end, taking our total locations to 5,915.
Depreciation totaled $75,300,000 for the quarter versus last year's third quarter expense of $68,500,000.
This is generally in line with recent quarter growth rates.
We repurchased $284 million of AutoZone stock in the third quarter, and at quarter-end, we had $1 billion remaining under our share buyback authorization.
And our leverage metric was 2.6x at quarter-end.
Again, I want to stress we managed to appropriate credit ratings and not any one metric.
The metric we report is meant as a guide only as each rating firm has its own criteria.
We continue to view our share repurchase program as an attractive capital deployment strategy.
Next, I'd like to update you on our inventory levels in total and on a per-store basis.
The company's inventory increased 7% over the same period last year, driven primarily by new store openings, our ongoing inventory initiatives during the fiscal year and lower sales performance than planned.
Inventory per location was $653,000 versus $629,000 last year and $665,000 this past quarter.
Net inventory, defined as merchandise inventories less accounts payable, on a per location basis was a negative $47,000 versus negative $69,000 last year and a negative $36,000 last quarter.
As a result, accounts payable as a percent of gross inventory finished the quarter at 107.2%.
Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing 4 quarters of 30.5%.
We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital.
Now I'll turn it back to Bill <UNK>.
Thanks, Bill.
This quarter, we reported our second consecutive quarter of challenged sales and profitability performance following 41 quarters of double-digit growth in EPS.
Clearly, some of our recent challenges have been macro like timing of IRS refunds, rising wages and interest rates and peso weakness, but macro challenges and benefits come and go.
We also have some areas where we need to improve our performance, and that is where our attention is focused: Determining the right frequency of delivery to our stores from a cost benefit perspective; figuring out why our shrink results deteriorated and correcting those efforts; reaccelerating our sales in both retail and in particular, in commercial; finding new ways to leverage our most important asset, our AutoZoners in an accelerating wage environment, where personal touch and Trustworthy Advice really matter and differentiate us.
While we are disappointed at our recent performance as a company and as a team, we've been through both periods of difficulty and periods of tremendous success.
Over any extended period, our company successes have been remarkable.
While we need to challenge ourselves, our decisions, processes and strategies, we also need to remember our tremendous record of success and reinforce some of our guiding principles: evolution over revolution and superior execution with consistent strategy is a winning formula.
Simultaneously, as we are faced with more difficult circumstances, we must step back and take a more objective view of what is working and what may not be.
As we are in that stage, we see so many things that are ---+ continues to do exceptionally well.
But we also see some areas of opportunity or areas for accelerated experimentation.
After so many of ---+ years of unprecedented performance, I'm proud of our team for their steadfast commitment to our culture, strategy and approach and for their dissatisfaction with our current performance.
We have an exceptional team that executes extremely well.
Our focus remains on being successful over the long run.
That success will be attributable to our approach to leveraging our unique and powerful culture and focusing on the needs of our customers.
To execute at a high level, we have to consistently adhere to living the pledge.
We cannot and will not take our eye off of execution.
We must stay committed to executing day in and day out on our game plan.
Success will be achieved with an attention to detail and exceptional execution.
Our customers have choices.
We must exceed their expectations in whatever way they choose to shop with us.
We are fortunate to operate in one of the strongest retail segments, and we continue to be excited about our industry's growth prospects for 2017 and beyond.
As customers continue to look to save money while taking care of their cars, we are committed to providing the Trustworthy Advice that they expect.
It truly is the value-add that differentiates us from any other faceless transactions.
Customers have come to expect that advice from us.
It is with this focus we will implement more enhancements on both our website and in-store experience to provide even more knowledgeable service.
We don't ever expect an online experience to replace the advice our customers want, but today's customers do expect more information on repairing their vehicles.
This aspect of service has always been our most important cultural cornerstone, and it will be long into the future.
Our charge remains to optimize our performance regardless of market conditions and continue to ensure we are investing in the key initiatives that will drive our long-term performance.
In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves.
This formula has been extremely successful over the last 38 years, and we continue to be excited about our future.
Now I'd like to open up the call for questions.
Okay.
Regarding separating the comps between the weather and the tax refunds, it's really difficult to do that, <UNK>.
I wish I can give you more clarity.
I'd like to go in a little more detail on the tax refunds.
As we mentioned on our last call, we fully expected that those refunds had been shifted later in the cycle, and we would actually see a benefit from those in Q3.
For whatever reason that we don't quite understand, those refund dollars never seemed to show up.
I don't know if they went to savings, you hear some of that.
Did they go to remittances to Mexico, did they show up in other sectors of retail or other sectors of the economy.
We don't know, but it does not appear that they came into our sector in any meaningful way.
Now we ---+ and we watched it very closely, and we have monthly reporting on market share from 2 different sources, and both of those sources continue to show that our market share gains were very similar throughout this period of time.
We just had an 8-week period, 3 weeks in last quarter and 5 weeks in this quarter, where we were just significantly impacted.
It was kind of like when the calendar churned in April, things went back to normal like they were in the fall and early winter.
Regarding the Mega Hubs, we continue to see that it provides a benefit when a store gets turned on to it, a fairly significant benefit.
Think of it in the 1% to 1.5% range when they get fully turned on for the full service out of the Mega Hubs.
Yes, I think there's several things in that question, <UNK>.
First of all, as we increase this investment profile, not only did sales get weaker, but several other things that had been industry tailwinds in our financials or macro tailwinds in our financials kind of turned against us.
So that's a little bit of a double whammy.
As we look at it going forward, yes, we're going to change our cost structure where we can.
The biggest place where we're focused on right now is we think there are some opportunities to decrease the multiple frequency of deliveries that we've rolled out over the last couple of years.
Unfortunately, we have not been able to quantifiably see that, that we are getting a sufficient benefit out of that.
So we're going to continue to test and maybe take some of these stores down to 2x a week instead of 3x a week and hopefully, make the ---+ a final decision in the next 6 months or so on where we will be long term.
We will pull back some of those costs.
What we won't do is pull back costs to the point that we're not providing great service to our store ---+ to our customers.
We're in this for the long term, and sometimes we're going to have periods of a little bit of weakness, and sometimes you're going to have great periods of strength.
We've got to manage this business for the long term.
Great question, <UNK>.
When we talk about May, we were talking about the May that was still in part of our quarter.
As we think about the sales environment, what we noticed was there was a very distinct 8-week period of time, where it acted very differently.
Go back to the fall, September through mid-January, it was pretty consistent.
Now we have fluctuations week-to-week, and you asked about it in April did we see fluctuations.
Of course we did, because the weather patterns in April are so different.
But the expectations week-to-week based upon the weather that we were experiencing was more consistent with our expectations.
That was not the case in that February to March period of time.
Yes, that's a great question.
So as I think about the industry's sales environment, and I'll think about AutoZone's sales performance over the last year as compared to other years, we have come off 2 very, very mild winters.
I mentioned that in the prepared remarks.
What we have experienced over a 2-year period of time in the Northeast, Midwest and Mid-Atlantic is alarming, and I don't think that has anything to do with what's going on in those markets.
I think it has to do with what's going on with the weather pattern.
We can see it in specific categories that are very related to snow, ice, salt and potholes, mainly under car items.
So I think very strongly that, that has impacted our industry's performance.
And then this whole tax refund thing this year, it was just a tremendous anomaly.
I can't explain it.
I don't know where those dollars went, but that has been such a big driver of our industry's sales over the last 5 or 6 years, and it just went away this year.
It was nonexistent.
Then the other thing on AutoZone's front is our commercial sales have decelerated.
They've decelerated because we were doing a lot of things on opening new programs, and our sales were benefiting from that.
As we've gotten further down that maturation, we haven't had the same benefit from those, but we continue to gain market share in both retail and commercial, and we believe the sales environment's going to continue to be pretty strong.
That's a good point, <UNK>, and we feel really good about the Mega Hubs and the results that we have had.
And you are spot on that there are some real estate constraints relative to our ability to open up more and more Mega Hubs.
You will see us continue to open up Mega Hubs, and the speed of which that we open them up will be somewhat contingent upon finding the right available real estate in order to do that.
From a more frequent deliveries standpoint, look, we're an analytically driven company.
And if we do not see the benefits from the investments that we are making, we're going to make adjustments to that.
So from that perspective, yes, we believe that we will be basically reduce expenses from that perspective in the future as we make adjustments to that.
Yes, there's a host of those things, but frankly, you've hit on the right ones: sales are going to be big driver, distance, number of stores on a route, et cetera.
So there'll be number of factors there, but sales is going to be heavily weighted because, again, we've got to be able to get an adequate return on the investment dollars that we are putting forth, and right now, we don't believe that we are, and we're going to make adjustments to it.
Yes, Matt.
It's not as much an ROI calculation because the capital that we are deploying to do this is not that significant.
We're opening these 2 distribution centers, not because of multiple frequency of delivery but because we needed incremental distribution capacity.
So this is more about how do we get a better than a breakeven on the sales environment for the operating expense increases that we've experienced.
So the vast majority of the difference will be seen in gross margins.
There'll be a little bit of it in the SG&A, but most of it will be in gross margins.
Yes, it's predominantly supply chain.
It's truck runs, but it's also extra tours to the distribution centers, so labor and the DCs.
I think there has been some very minor improvements in sales, which would go away, but it's not material, unfortunately.
If it was, we'd continue to do it, and I want to be careful here.
We have not made final decisions.
This is a very complicated analysis to do.
So we're still doing some work over the next several months just to figure out what the right frequency for us is.
One of the things we're realizing is that many years ago in our hub stores, we started doing kind of feed or replenishment out of those stores to the outlying stores that they service, and so that's one of the reasons we're not getting the same kind of benefit out of the multiple frequency of delivery.
We were already topping them off with highest probability of SKUs that would sell so that benefit didn't exist for us.
Well, I agree with your read of the numbers versus last quarter.
But you remember, last quarter got killed at the end, particularly DIY.
So I think most of ---+ both businesses have been impacted during that 8-week period of time pretty significantly, and our commercial business has decelerated more than we would have expected.
By the way, that's why we're going back and taking another strategic look at commercial.
I'm really excited about what we're going to be doing.
It's going to take us some time, but we're going to take a fresh look at what are we doing in commercial and what are our long-term strategies there.
Yes, I would say the core-based business continues to do well.
If you just look at it on a local-currency basis, the business continues to perform strong.
We're very pleased with what the team has done down there, et cetera.
From a foreign currency exchange impact on our EPS growth rate, it was probably a little less than 1% of an impact from a growth rate perspective.
So it continues to be a bit of a headwind.
So for us, it's really about the exchange rates.
There's not a lot of strategies that we're necessarily going to change.
We feel pretty good about the position of Mexico.
We're excited about the 500th store opening, as Bill mentioned earlier.
So that business continues to go well, but we'll just ---+ hopefully, the pace will turn around a little bit in the future.
Yes, I would say, actually, we feel really good about what the merchandising organization has done relative to continuing to find opportunities to lower acquisition costs.
We mentioned a couple of quarters ago about our activity around direct importing, and we continue to increase that.
So the team has done a nice job there, we're continuing to increase that.
So I feel really good about the health of the gross margin rate today and going forward.
It may be a little bit less, but it's still very healthy, and it is very well positioned.
And so we have a couple of very identifiable expense items that are putting some headwind on gross margin, both of which we believe are just near-term headwinds, and we'll be able to work our way through those, but the lowering acquisition costs is something that we think is there for a while.
Yes, I don't want to get into what's going to happen as we go into individual quarter comparisons, but I will go into what your original question is.
What has changed with the macro look, outlook for sales in this industry over the long term.
I would answer that absolutely nothing.
We had an 8-week period of time, which we believe we can very easily attribute to the tax refund delays and the 2 mild winters, but I don't see anything else in this industry that has changed really at all.
Again, I don't want to get into giving guidance.
What I will tell you is I think the industry performance over the long term has not changed by any significant level, and the one challenge that we have in our sales performance compared to what it's been over the last 5 years is that our commercial business is not growing at the same rate that it was growing before as we opened all those new programs.
We have to take that on, and we have to find ways to accelerate the market share gains that we're already getting in commercial, and that'll be a critical element of our story over time.
I've been in this business for 22 years.
I could ---+ I can't add up 5 times where I've seen lower prices lead to higher sales.
My first question is just on your long-term growth algorithm, Bill.
You've previously spoken to mid-single-digit EBIT growth and double-digit EPS growth.
Is that still how you feel about the business.
Yes.
I think over the long term, we would ---+ that would be ---+ continue to be our goal.
I did highlight in here that in the short term, we have a disproportionate amount of things, some of which are decisions we've made or things we've done to ourselves, and some of them are kind of a disproportionate amount of macro things that have turned in our headwinds for us.
So I think in the intermediate term, we have more challenges to get to those numbers.
Over the long term, particularly if we were able to reaccelerate our commercial business, that will continue to be our goals and aspirations.
Got it, and then secondly, my follow-up question is on inventory per store.
We've seen a rise in that metric over the last couple of quarters.
Are you comfortable with the levels you're at.
Do you expect to see some declines going forward.
How should we be thinking about that.
And the potential impact on the road on margins and sales.
Yes.
I think that as we move forward, we expect that number to kind of hang where it is a little bit, maybe come down a little.
You saw that it came down consecutively from last quarter on a per-store basis.
So inventory levels are a little bit higher than we would have desired.
Some of that was sales related.
Some of that also is some of the activity that we have relative to opening up Mega Hubs, direct import activity, et cetera.
So some of that is for good reasons, but we expect it to moderate going forward.
Okay.
Regarding those macro trends that you talked about regarding unemployment and increased gas prices, the only time we've really seen unemployment be a key driver of our performance is when it has been significant increases like during the Great Recession.
And for whatever reason, that seemed to be a driver of our business rather than a detractor of our business.
On gas prices, clearly, we want them to be as low as possible, but the only time we've really seen or called them out as material contributors to our success or headwinds for us have been when they've really gotten around $4 a gallon.
So I don't think we believe a move from $2 to $2.50 is going to make any significant difference on our performance.
Regarding traffic, clearly our traffic was down this quarter, particularly on the retail side of the business.
It was one of the softer quarters that we've had, but it has not performed any different than it has over the long term during this April period of time nor did it perform any differently in the fall.
We do have an industry as an industry, a long-term challenge with the traffic going down but, at the same time, cost of products going up as the quality improves on the products that we sell.
We've been dealing with that for 20 years.
All right.
Thank you.
Before we conclude the call, I'd just like to wish everyone a nice Memorial Day weekend.
And thank everyone that has served in our Armed Forces.
Look, we're excited about our growth prospects for the year.
We will not take anything for granted as we understand our customers have alternatives.
We have a solid plan to succeed this fiscal year, but I want to stress that this is a marathon and not a sprint.
As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be very successful.
Thank you for participating in today's call.
