AutoZone, Inc. (AZO) Earnings Call Transcript & Summary

All right. Could not be any happier to have AutoZone here. For -- well, certainly for 18 straight years because that's all I know. But certainly, a ton of the 49 years we've had. Jamere Jackson, the company's CFO is here, as is Brian Campbell, the company's Director of Investor Relations. AutoZone has 154 million shares -- wait, I'm getting that wrong. That was the number of shares they had in 1998. AutoZone has bought back itself many times over. It's a 16.7 million shares trading around $3,700, $64 billion equity cap, $8.5 billion of net debt, just under $73 billion to enterprise value. Talk about cash flow and talk about the ability to generate shareholder returns, this company, maybe a couple of others have very few peers. So thrilled to have some Q&A with Jamere and to get in the zone.

So I think one of the things that we have talked about over the course of the last couple of days is the consumer and some strain. And I think as a largely DIY, driven retailer and distributor maybe you could help out more than anyone else. So what are you all seeing on front lines with the consumer in various cohorts of income?

Yes. And candidly, not a lot of change from where we were even a year ago. What I've seen with the consumer sort of in our DIY business is that the consumer is still looking at a situation from a macro standpoint where new car prices are high. The average new car price is over $50,000. The average monthly payment is over $700 a month. Used car prices are high. The average used car price on a monthly payment basis is over $500. So consumers are continuing to hunker down and take care of the vehicles that they're already in. A year ago, we were seeing probably more pressure in the discretionary categories. The last couple of quarters, we've actually seen a little bit of growth in those discretionary categories. So I would say that the situation with the consumer has not changed a lot in the last year. I will say there's a lot more volatility and uncertainty in the marketplace in that from time to time, does impact sort of consumer behavior. There's a lots to talk about what's happening with the low-end consumer. I think that narrative has been in the marketplace for a little over a year or so. We haven't seen the low-end consumer get any worse than they were a year ago. So I think for us and really for our industry, we've sort of powered our way through it and been able to deliver. The other thing I'll say about the consumer is that you've seen on a macro basis, numbers like the unemployment numbers ticking up a little bit. We're now up closer to 4.3%. That's still very good. And if you look at that in combination with where average wages are, the consumer is still hanging in there, if you will. But the volatility and uncertainty does from time to time cause consumers to pause. But the macro factors in our industry are very strong with a growing car park, an aging car park and a consumer that's been pretty resilient through it all.

As you're thinking about this and you have not seen the deterioration of the consumer yet, but clearly, there's enough in the way of tea leaves that you could be seeing it. Have you seen anything as it relates to mix some good, better, best choices changing? And how does that factor into your own inventory and sourcing planning?

Yes. We haven't seen a lot of trade downs, which typically when things get tight from a consumer standpoint, you'll see some trade down in terms of the good, better, best stack. We haven't experienced that as we moved into this fiscal year and even in the tail end in the last fiscal year. And what I'll also say is that because consumers are hanging on to their vehicles a little bit longer, the average age of a vehicle on the road now is, I think, 12.8 years. It's ticked up a little bit every single year for the last 5 or 6 years because consumers are anticipating having to hang on to those vehicles a little bit longer. We actually saw in some -- in certain categories, where consumers were actually trading up because they realize they're going to be in the vehicle a little bit longer. They're probably not going to buy a new vehicle or a used vehicle. And that obviously bodes well for us as a business.

Sure. We talked a lot about inflation over the course of the last 1.5 days. This has been an area where you have excelled over time. Your ability to not only deal with cost but pass that along to consumers in an appropriate manner. Talk about the decisions that take place at AutoZone regarding pricing and your ability to not only in an inflationary environment maintain gross profit dollars but also gross margin which is obviously accretive to EPS?

Yes. I mean we continue to benefit from the fact that we're largely a break-fix business. I mean 85% of our mix, if you will, is in sort of failure and maintenance categories where if you're going to keep a vehicle in operation and be on the road, you're going to have to maintain that vehicle and fix those things that ultimately fail. So if you're operating sort of in that environment, you have an opportunity to be very disciplined from a pricing standpoint. And we've done that. And certainly, our entire industry has done that over time. So what we've seen is that those categories in the failure and maintenance categories basically are relatively inelastic, if you will, and we see some movement typically is around the discretionary categories. And most of that is sort of basket related as opposed to the consumer saying, I'm not going to go get certain things. So we benefit from being in a business and having a business [Technical Difficulty] model and selling a set of products that are relatively [Technical Difficulty] may maintain our gross margins as we move through. We do that with discipline. And we want to make sure that we're taking care of the consumer, but at the end of the day, given this model and the relative inelasticity, I've said at different points in time that inflation tends to be our friend -- some retail inflation that gives us an opportunity to raise retails, maintain our margins and overall create more gross profit dollars inside the business.

You're unique in so many different ways, but one of it is just your reach. Can you talk maybe regionally about what you've seen, any differences geographically from a top line perspective?

Yes, there are always nuances within the regions. Obviously, in places like the Rust Belt, we want to make sure that we get the kind of weather that is going to generate failures for us so that ultimately, we can keep that portion of the business humming right along. And so what I'll say is that regionally, there are always nuances, whether it's weather or regional dynamics in terms of economies, et cetera. But what I'll say overall is that, when we look across the country, particularly in the U.S., things are performing about as we would have expected.

And just to remind us, you mentioned, weather, that ends up kind of over time evening out. You're comping against an easy winter a year ago, I would imagine.

Yes. I mean, a year ago, we did have some weather in the kind of October time frame that makes the comps a little bit easier for us. But overall, I would say last year's winter when we look at it in totality, was about average, and we're anticipating to have a sort of a good winter this year. And I just remind people that we like really bad winters. We like cold and ice and I like when my friends in Texas call me and say that it's freezing here, and my pipes are breaking and my car won't start and all of those kinds of things. So we like really cold, nasty winners, and we like really hot summers because those things generate failures. And we get an opportunity to sell a lot of parts in that environment.

Yes. You guys do. My kids stay home too much when that happens. So if we are kind of thinking about your organization and some of your strategic initiatives. Maybe talk about a couple of the areas that you're wanting to either grow or to embed yourself even further with your customers?

Yes. Well, clearly, we've been focused on accelerating the growth in the commercial portion of our business. And we've done a pretty good job of that. In fact, this last quarter, it was about 1/3 of our mix on the U.S. side. 5 years ago, that number was closer to 19% or 20%. And we've continued to invest in a disciplined way and making sure that we jam more parts in the local market closer to the customer and grow our market share. Right now, we're probably a 5 share in a market on the commercial side of the business that's approaching $100 billion or so. There's a tremendous opportunity for us. We started our business as DIY and DIY only. We made our foray in the commercial. Candidly, we had some fits and starts, probably 20 years or so ago, but we've committed to that business. It's over a $5 billion run rate and grown very nicely the last couple of quarters. So we've invested in a meaningful way in adding more inventory. We're building Hubs and Mega-Hubs. Our Mega-Hubs in particular, have been a real boost to our business. Those Mega-Hubs carry close to 100,000 SKUs where a typical satellite store is closer to 30,000. That incremental inventory in a local market enables us to see [Technical Difficulty] slower turn in parts, if you will. That's been a big piece of our strategy. We've invested in our Duralast brand. We're using our Hubs and Mega-Hubs to do more direct deliveries as opposed to just having them fulfill the satellite stores. So our service levels are improving. And then the last thing I'll say is that we've spent a lot of time making sure that we put a professional sales force in the field to go drive sales, and that's been a meaningful lift to our business. So commercial has been our -- one of our top growth priorities inside the company. And the teams are executing very, very well, and we're really excited about the opportunities that we have going forward.

After a relatively small [incubator] [Technical Difficulty] for some time, you've really expanded quite a bit in Mexico. Can you talk about that initiative, the market there and kind of how that's progressing relative to expectations?

Yes. We're really excited about the growth opportunities in Mexico. We have a little under 900 stores there. We actually think we can probably double the size of that chain within the next decade or so. Competitively, if you look at our outlet share versus the next 4 or 5 competitors and we have more outlets than the next 4 or 5 competitors combined, the product offering that we have and the service offering that we have is far superior to what we see from our nearing competitors there. So the combination of the size and the scale and the offerings that we have really given us a great business there. We like that business. It's a vehicle population that's quite a bit older than the population in the U.S., which is clearly a nice tailwind for us. If you look at the P&L dynamics, we get very good gross margins there. The productivity per store is on par with what we see in the U.S. And we also have -- the cost of labor there, obviously, is a lot cheaper. So we like the earnings capabilities and the returns that we're generating in that market. If there's one thing, Brian and I talk about this a lot, there's one thing that we wish we had done a lot sooner, which was, we wish we had built out stores in Mexico a lot sooner and a lot faster than we did in the past, but we're certainly accelerating that as we move forward.

Staying with Mexico on different wavelength trade and your sourcing. Maybe talk about initiatives over the course of the last year that you've had to undertake just because of various dynamics as it relates to [Technical Difficulty]

Having the discussions that we've all had over the last year around tariffs, we've been really focused on diversifying our sourcing capabilities outside of Asia. And particularly outside of China, we've had volume that we've moved to places like Turkey and we've moved into places like India and all of those things were to diversify our sourcing base, if you will, still the overwhelming majority inside the industry does come out of China. But we've done a nice job. If I look at our direct import business, where we were direct importing closer to 85% or 90% out of China a few years ago, that number is down closer to 60% today, and it's going to have a 5 handle on it based on the plans that we have in place. So that's been important. But that being the case, I mean, you can't necessarily run from what's going on in the macro, particularly as it relates to tariffs. So we've had a strategy that said, one, where are there opportunities for us to diversify. The second piece of that has been to make sure that we're working with our suppliers and where there are opportunities to have deflation offset some of the tariff impacts. We pushed really hard, and that's about being disciplined for the consumer. And then obviously, to the extent that those tariffs create an inflationary environment for us, then we're going to raise retails accordingly. And net-net, at the end of the day, maintain our margin structures. And this is not our first rodeo. We dealt with this in the 2017-ish kind of time frame and navigated that environment very well, and the teams are doing a great job now.

Thinking smaller [indiscernible] big enough of it, as the retailer with the highest DIY concentration, online penetration in the aftermarket would impact you the most. What have you seen, if anything, that's measurable from online competition and interfering with your business? And/or how have you grown your own online structure to better compete there?

Yes. I mean overall, it's still a relatively nascent portion of the business from a DIY standpoint. Although what I will tell you is that consumer behaviors are changing. And what we're seeing more so than anything else is about a lot of our customers, even the ones that come into the store to do a DIY purchase are starting that journey online. So they're looking up parts online, and they're figuring out the kinds of things that they need, they may be price shopping or comparing. But the one element that is a competitive advantage for us relative to the pure-play players is that those customers still want to come in and get trustworthy advice inside a store. So they come into an AutoZone, maybe they've started their journey online, but they want to come in and get advice from an AutoZoner about the part, do I have the right part? Is it the right fitment? Can you go grab it out of the back and can I compare it? And in many instances, depending on what the job is, I mean we actually do installations at a store where we'll go out on a courtesy basis. And go out to the customer's car and do the installation. And that's just something that you can't replicate online. What we've done over time though as we've continued to add assortment online. And we have assortment that in our stores, but we also have some that is only available online, and we think that's going to continue as we move forward. So we've navigated the environment very well. We continue to build assortment and build our online presence. We recognize the changes in sort of consumer behavior, and we're still benefiting from the fact that we provide trustworthy advice and that customers still like to come into the store and get that trustworthy advice from an AutoZoner as they're working to complete job.

Going to -- go ahead, Michael.

Jamere, Brian, it's Michael Lasser, good to see you. On the topic of inflation and tariffs, there's a debate within the industry about the degree to which and the timing of which this is going to peak. What is your view on that? And the degree to which this peaks as a sales driver for the industry, what's on the other side of it? Does the industry go back to historic growth rates? Does it trough for a period of time? How does that look in the mind of AutoZone?

Yes, great question, Michael. What we're seeing today is that we're still in sort of the early innings from an inflation standpoint. The first round of tariff announcements, quite frankly, as I talked a little bit earlier, there were lots of things that we and others were doing to basically mitigate tariffs, including the fact that we've all been working with suppliers to say, how do we offset this? How much of this our suppliers and our vendors are going to eat before we get to the next leg, which is how much do we need to absorb in terms of cost and pricing. So when we first talked about tariffs on -- in our public earnings calls, the first quarter that we talked about it, it was pretty minimal and immaterial. Next quarter, we saw a little bit more. We're going to continue to see that number tick up for the next a few quarters or so. I think what's been confusing for some folks is that this didn't all -- the inflation didn't all come as a big bang sort of the way we saw it during the pandemic where freight hit us and all of a sudden we're taken 8%, 9%, 10%, ticket average is going up right away. What we're seeing here is it's coming in as we're bringing the inventory in as that inventory is turning we're seeing it come a little bit slower than what we saw when we saw hyperinflation with freight and other things during the pandemic. But to be clear, it is coming, and it is going to accelerate this quarter and probably for the next couple of quarters. I think on the back side of that, what we've experienced in this industry is typically when we see hyperinflation and then you see sort of some deflation that comes behind that, we don't take retails down. So there's an opportunity for us to actually expand margins when we start to see deflation. And then in terms of what happens to retails from that point forward, depending on what we see in terms of cost and cost increases, we would expect things that go back to kind of the normal industry averages, if you will, from an inflation standpoint. And that's sort of the way that we're planning it, but it is clear that more inflation is coming and it's going to come in the next couple of quarters or so. I can tell you on the ground that as we're in the market and we're operating both on the DIY and the commercial side, we're seeing retail prices go up and in many instances, they're going up pretty fast and furious. And it's not just sort of the large public competitors, but the warehouse distributors are doing it as well. I mean, we're all seeing the same sort of cost pressures, if you will, in total and we're all having to raise retails accordingly.

So Jamere, yes, when you think about this -- Jamere, it's Bret back here. But when you think about the industry this year, and obviously, you're getting a lot of price contribution that maybe wasn't expected prior to April. If you -- as you close out to '25, what do you think the annual industry growth rate would have been? And what would have been the unit contribution? Are we really sort of pushing units into '26 as a result of what we're doing in pricing in '25?

Yes. I think a couple of dynamics are happening. One is, obviously, from an inflation standpoint, the comps are moving higher, and that's driven by ticket average. What we're all watching is to see whether or not there are any wobbles from units or an elasticity standpoint or foot traffic standpoint. What I'll say is that, at least in the near term here, again, this is more of the characteristics of the industry than anything else is that for the lion's share of the business that's break fix related, we're not seeing a drop-off in units. You wouldn't expect that given the nature of the products that we sell. And we're not totally immune to those dynamics that you see in the macro when consumers see a lot of inflation coming at them. But what we saw during the pandemic and what we've seen historically is that, when a consumer looks at their wallet and they're thinking about mobility being a priority to get to work, to get the school, to move around, that other discretionary portions of retail tend to take a bigger hit than we do in our industry. So we're watching it. So far, we haven't seen a drop off there. And when we do see drop-offs, it's usually things like people are trading down the good, better, best stack or if they have an opportunity to defer, they will. What I'll say about deferrals is that we just came out of a deferral cycle, if you will. And where we saw that most pronounced, particularly was in the tire verticals where our friends and our customers in the tire vertical had a really tough time because all of big ticket was under pressure. And if a set of tires can cost you north of $1,000, and that was considered a big ticket. So if a consumer could push that to the right, they would or if they get 2 tires instead of 4, they did. And if you don't take the tires often, you don't get to the claptrap that we sell, breaks and rotors and calibers and that sort of stuff. So we're not seeing that here in the early innings, but it is something that we're watching.

Max Rakhlenko. So excluding price, you guys have seen a really nice inflection in DIFM transactions the past couple of quarters. I think that's sort of coincided with a reacceleration in Mega-Hub openings. So maybe just talk about sort of your Mega-Hub strategy in the next couple of years? Seems like '26 is going to have more than '25 So what's the pace of openings and then just opportunities to better optimize the Mega-Hubs just to push more inventory and make all the markets stronger.

Yes, I'd say very broadly speaking, we're winning share. We're winning share with national accounts and also the smaller up and down the street players. A big key to that is having more [Technical Difficulty] we have a plan that we've laid out that says we'll get close to 300 Mega-Hubs at full build-out. And candidly, it's likely to go higher than that just based on the success that we're having with the strategy, what we're seeing in terms of cannibalization. And more importantly, what it means to have those parts in the local market lifting the entire network. So we're excited about that piece of the strategy. It's important for us to make sure that we've got that inventory and that inventory is efficient. And I get the questions a lot about why the big box formats and the very simple answer is that we've seen a lot of parts proliferation in this industry. And so the trick has been what are you forward place in a satellite versus a Hub versus a Mega-Hub versus at a distribution center. And increasingly, we're getting a lot of products that are shipped direct from the vendor either to the store or direct to the customer. So having that algorithm right, and making sure that you've got the right parts in a local market, close to the customer is really, really important in terms of winning in the marketplace. And we're doing a good job of that, and we've got a lot of potential in front of us as well.

Greg?

Gregory Melich with Evercore. I guess I had 2 questions. One, just remind us tax refunds. What that's done historically and if you'd expect to see that next year with the Big Beautiful Act refunds, if there would be any reason you wouldn't see that normal propensity to fix your car with those checks? And then second is immigration. Do you think the lack of flow this year has had any impact on demand or the increased deportations?

Yes. So the first one on tax refunds. Obviously, our spring selling season sort of coincides with tax refunds, and we call that our Super Bowl or Christmas, if you will, inside the business. And we see a meaningful lift in our business during that time frame. Based on what we're hearing, at least in the early innings, there's a potential for the refund checks to be a little bit larger. And so we would expect that to have some impact on our business. But what I also say is that as we get closer to that time frame, we have a much better view. Tax refund season can be a little bit nuanced for retailers and our business is no different in that regard and that if the weather is nice and it's warm, people get out, they spend money, particularly discretionary money, then we see a nice lift associated with that. If the weather is not great during that time frame, you miss -- sometimes you miss those purchase occasions altogether. The one thing that always does -- that we can always count on that sort of underpins our selling season is one, is that to start spring break and when people are traveling a little bit more. And it also coincides with when people go and buy a lot of used cars. And so those used cars are being refurbished during that time. Those used car dealers are buying a lot of parts from us. And then the customers sometimes after -- [Technical Difficulty] those cars, it's the reason other things that we sell as well. So those are kind of the dynamics during that time frame. We want to make sure that the flows happen, and we also want to make sure that the weather is good and the consumer is feeling good about taking that check and spin it. But it's been pretty consistent and steady with the exception of sometimes the weather doesn't always cooperate during that time frame. And then on immigration and deportations. What I'll say is we haven't seen anything material when we look broadly across the U.S. But there are pockets, clearly, where to the extent that there are national guard troops on the ground or a big media cycle around deportations. You do see a little bit of a hibernation. And then once that cools off, people come back out and it's sort of business as usual. So what I'll say is that it's been a little bit more temporary and transient than it has been sort of a long-lasting impact, if you will.

Jamere and Brian, unfortunately, we're running out of time. Thank you very much, again, for taking time out of a very busy week to come here, and the Q&A was great. Really appreciate it.

Always good to be here. See you guys.

So we've got about 15 minutes to get lunch and get situated before Melinda, I would love to have it as quiet as possible for when she begins. So please do what you can, and we'll see you in 15 minutes. Thank you.