AZO
#Thanks, Dave.
On the competitive environment, number one, we have fantastic competitors.
We have a lot of very strong competitors, and have for a number of years.
And that's both on the retail side and the commercial side.
There's more than normal going on in the competitive environment.
Obviously we have one competitor that's going through an integration effort, and they're converting and/or closing some stores.
We're obviously monitoring that very closely and seeing how we can optimize our performance.
But the biggest thing that we're focused on is us and our initiatives.
We've got to make sure we believe in the game plan that we have and we've got to execute that game plan.
So, I don't want to get too overly focused on what's happening short term in the competitive market.
An AutoAnything, that's obviously primarily focused on performance and accessories business.
But as you may have seen, we are beginning to expand in some replacement parts on AutoAnything.
That's still relatively new but we're continuing to expand the SKU count on the site to be more encompassing and to really take advantage of the name AutoAnything.
Clearly, our commercial performance, if you go back to Q4 of last year, has decelerated.
We talked about some of that deceleration, but not all of that deceleration has been due to the number of new stores that are going through the maturation process.
But there's still a gap and we are very focused on why that gap exists and what are we going to do about it.
We talked on the last call about really significantly increasing the engagement of our district managers and our store managers in the commercial business.
We said at the time that will take time.
That's proving to be you true, but I'm very excited about getting those great leaders more involved in the commercial business.
We're also looking at what else can we do to drive sales in this business over the long term.
We think inventory availability is having an impact and will continue to have an impact over the long term.
But we've got to get more acceleration in our commercial sales growth.
I think we're seeing pretty fairly significant share gains on both sides.
Clearly the market, we grew 6.5% on the commercial.
I don't think anybody thinks the commercial market grew 6.5%.
Now, that's not as wide a gap as we had before.
And then all the indicators that we have on the retail side of the business show that we continue to gain share.
Let's make sure I'm clear on one thing first, <UNK>.
When we talked about $1,000 to $1,500 per store, that's both our retail and commercial business.
And, frankly, more than half of that goes to the retail side of the business.
We do believe inventory availability and saying Yes, We've Got It more frequently will build to longer and stronger relationships with our customers over time.
But I don't think it is a flip the switch, and obviously that's playing out to be true.
You said, yes, weather was a material drag on commercial.
Also this maturation cycle is a significant drag.
But, frankly, there's some more sales that we haven't figured out why we're missing those and we're working on that.
And I have a high degree of confidence we'll figure it out and hopefully reaccelerate our commercial growth rate.
But it's not of lost on us.
We're marginally disappointed with our commercial sales performance and, frankly, disappointed with our sales performance overall for the quarter.
But we're not managing this business for one month or one quarter or, frankly, even one year.
Yes, absolutely.
We have territory sales managers on the ground in those markets.
And nobody's more excited about turning on a mega hub or getting increased frequency of delivery than a territory sales manager or a store manager, and they're preaching that from the rooftops.
I think it's probably a combination of both cost concessions and also sourcing.
We've put a lot more time, energy and effort around improving our capabilities around sourcing.
We've mentioned earlier that we had established an office overseas to help support that effort.
That's still relatively immature.
From our vantage point we're very pleased with the hard work the merchandising organization has done to improve our overall margin rates and we really think there's continued opportunity for us to continue on that track some time into the future.
Obviously I don't know exactly what that rate will be but we're really pleased with the health of the margin and our opportunity to continue to grow it.
Actually, I'd say our overall inventory level right now at $629,000 a store is pretty close to where we think it should be able to sustain itself, between $629,000 and, say, $640,000.
I think that the more frequent delivery has allowed us to optimize some of the inventory even though we're increasing the amount of inventory we have in the mega hubs.
So I think the organization's done a pretty good job of balancing out.
We've obviously increased it pretty significantly, if you go back a couple of years.
But we think that probably that $630,000, $640,000 is a pretty good range for us at the moment.
If you think about it in the simplest form, we've acquired businesses over the years, and many of those businesses have some of the same customers that we have in the AutoZone business.
So, think about ALLDATA and the customers that they overlap with our commercial customers, and think about IMC and some of the overlaps we have with those customers.
So, we're really trying to build what we call one view of the customer so that we have a holistic view of how we as an enterprise interact with that customer.
And it's going to take us some time.
We've been working on its for a while but it's very hard to get all those data sets the same.
I'm really pleased with the work our IT organization's doing but it's going to take us a while.
When we come out the other side of it we think we'll be in a much better position in the market to those customers, be they retail or commercial.
It's generally more on the traffic side, Matt.
You do see some compression.
For instance, if your battery business is off, then that's going to hurt your ticket because that's a high-price ticket.
But most of it is in the traffic count.
To answer your first part of your question, they were flat to slightly negative in the latter part of the quarter.
But, really, as I mentioned in the prepared remarks, <UNK>, sales were really volatile week to week, and it directly correlated with when those weather patterns were coming through.
To your question about should you straightline the two-year comp, our premise at this point in time ---+ as you know we don't give guidance ---+ but we think the weather was a pretty significant headwind in this quarter.
They're calling for a hot summer.
We haven't seen it yet.
It's starting to heat up around here a little bit, and hopefully it does in the Northeast.
But we think if that comes to fruition we could have a pretty strong fourth quarter.
No question about it.
I would think of it as more intentional.
We're very focused on improving customer service and so we've made some investments from a payroll perspective.
Yes, we're getting some pressure from some of the regulatory environment in terms of wage rates, et cetera, but I would say that's much to a lesser extent currently.
Today, I would say that it's more intentional from ensuring that we've got great customer service in the stores.
Nothing much more dramatic than that, <UNK>.
We've already added tractors and trailers to support more frequent deliveries.
There will be a little bit more of that as we open up new distribution centers.
But for the most part I would think of it as those three distribution centers over the next couple of years.
Exactly right.
I would say, first of all, the premise behind the acquisition of IMC was it's a good business and we think it can be a great business and can be substantially larger than it is today.
After we bought them, we quickly started increasing the branch count.
We were at 17 branches less than two years ago when we acquired them.
We're now at 25.
That's over 50% growth, or right at 50% growth.
And, frankly, we've probably got a little bit out in front of our skis.
We were moving too fast for an organization that had not opened a lot of branches over time.
And we were also doing a lot of integration with AutoZone.
So, we've slowed down a little bit and intend to slow down our branch growth and really work on the fundamentals of the business in the 25 branches that we have and then restart the branch expansion later.
We are using, as I mentioned in the prepared remarks, we have about 700 stores that are using and selling IMC parts.
That is just to supplement our commercial offerings.
It's not going to be a radical change in the sales trajectory of our commercial business.
But it's a nice way to say Yes, We've Got It to a commercial customer who has a unique need.
As far as a separate sales organization, we have separate and distinct sales organizations for AutoZone, commercial, ALLDATA and IMC.
Now, we are doing some work around them on lead generation between the three different businesses, but each one of those is really a standalone organization.
As far as on the AutoZone side regarding mega hubs and increased frequency of delivery, at the current point we don't believe we need a significant expansion of our sales force.
We've got a very talented sales force that we've built over the last seven or eight years and think they're performing well.
We've just got to keep telling our story.
I don't think we addressed it.
Frankly, we just missed our estimate.
It's been a while since we built a distribution center.
These are in different geographies which have different site preparation costs.
It was just a function of we got deeper into the due diligence and found out they were going to be more expensive than we thought.
It's the same general operating model that we've opened in the last couple of distribution centers we've opened.
I'm trying to remember back.
I think we quantified it and said we thought it might be 1 point, 1.5 points, something like that.
As we're thinking about gas prices currently, and, yes, they're elevated but they're still at historically low levels for the last decade or so.
So, when we're thinking about it, yes, it may have muted that benefit, maybe slightly a headwind, but we don't think it's a significant major driver.
It will be interesting to watch what happens to miles driven as we get those data sets that show when gas prices started to increase.
So far, all the miles driven data we've seen has been incredibly positive.
No.
What we've really seen is in gas prices the real shocks that we've seen have been when gas prices got to $4.
And there seemed to be almost a magic switch there, that it changed customer behavior.
People started changing where they lived or where they worked or using public transportation.
There was a meaningful change in miles driven at those levels.
Below those levels it's really hard to ferret out.
No.
I think you can contribute some of it to the maturation cycle change.
You can contribute some of it to the weather.
And I think there's still a gap there that we haven't identified yet.
No, I think cannibalization by definition is less today than it was three or four years ago when we were opening 400 programs.
We're just not opening as many on top of the other programs.
I don't think they were ever in decline.
I think that they were not growing as rapidly as we would have expected because that cannibalization was coming in.
Now, a specific store, if we open a store two miles down the road, yes, it might go in decline for six months.
But as a general rule, most of them were continuing to grow.
No, I think we're absolutely on par, if not ahead, with our initiatives, particularly the mega hubs.
We see the performance every week.
We know that they're outperforming where we thought we would be.
We see the inventory, the frequency of deliveries, they continue to perform in line with our expectations, if not even a little bit ahead there.
So, we're seeing that performance.
There's just other things that are going on in the business, too, that are giving us a little bit of headwind and that happens over time.
We're clearly seeing that we're selling some products to them but it's not going to be a meaningful change in the overall performance of the commercial program.
I'd say that we're focusing it more on an online strategy and we're basing it based on the level of value proposition that the online retailer has.
So, obviously returns are a little bit more difficult, you don't have the trustworthy advice that you have at a brick-and-mortar store.
So, we're pricing it appropriately based on that and based on the level of service that we provide.
Yes, it will be a different product, different brand, et cetera.
It's a great question, <UNK>, but we don't focus on it that way.
We run simulations so we can understand what they wouldn't have sold.
And those stores are all over the country, so some of these weather patterns that we're seeing would distort those views in certain areas versus other areas.
I think we're just going to stick with what we've said all along, that we expect, when a store gets each of these two initiatives, then their sales will grow between $1,000, $1,500 per week.
And we're seeing that's being confirmed in our test results ---+ excuse me, our roll outs.
I think we're seeing both.
Clearly we're constantly out there trying to hunt for new accounts and build better relationships.
We also are out there building deeper relationships with the customers that we have.
I would say it's on both sides.
That is correct.
That's exactly right, <UNK>.
It sounds like Scot ---+ I think he already asked a question.
We'll just go into the closing.
Before we conclude the call I want to wish everyone a nice Memorial Day weekend, and look forward to updating you on our initiatives in September.
While we're excited about our growth prospects for the remainder of the year, we will not take anything for granted as we understand our customers have alternatives.
We have a solid plan to succeed this quarter 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.
