Good day, ladies and gentlemen, and welcome to AutoZone’s 2022 Second Quarter Earnings Release Conference Call. At this time, all participants have been placed on listen-only mode. And we will open the floor for your question, comments after the presentation. Before we begin, the company would like to read some forward-looking statements.

Before we begin, please note that today’s call includes forward-looking statements that are subject 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. Operator: Thank you. It is now my pleasure to turn the floor over to your host, Bill Rhodes, CEO of AutoZone. Sir, the floor is yours.

Thank you. Good morning, and thank you for joining us today for AutoZone's 2022 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 second 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 continue to stress that our highest priority remains the safety and well-being of our customers and AutoZoners, Everyone, everyone across the organization takes this responsibility very seriously, and I am extremely proud of how our team has continued to respond to COVID-19 and the recent Omicron variant. Since the start of the pandemic, we have consistently recognized our AutoZoners in our stores and distribution centers for giving exceptional service in the face of all the challenges COVID-19 has presented. This quarter, we will start the same way by saying thank you to our AutoZoners for their dedication to providing exceptional customer service and 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'll 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. Lastly, I'll touch on the subject of pricing in the industry. Our domestic same-store sales were an impressive 13.8% this quarter, on top of last year's very strong 15.2%.…

Thanks, Bill, and good morning, everyone. As Bill mentioned, we had a strong second quarter with double-digit comp growth, a 30% growth in EBIT and a 49% growth in EPS. Our results for the first half of the fiscal year have been remarkably strong as our growth initiatives continue to deliver great results and the efforts of our AutoZoners in our stores and distribution centers have enabled us to take advantage of robust market conditions. 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 auto parts sales, which includes our domestic, Mexico and Brazil stores, were $3.3 billion, up 15.6%. Now let me give a little color on sales and our growth initiatives. Starting with our commercial business for the second quarter, our domestic DIFM sales increased 32.1% to $844 million and were up 46.8% on a two-year stacked basis. Sales to our DIFM customers represented 25% of our total company sales, and our weekly sales per program were $13,500, up 28.6% as we averaged just over $70 million in total weekly commercial sales. Once again, our growth was broad-based as national and local accounts both grew at approximately 32% for the quarter. While the second quarter is seasonally our lowest selling quarter, our results for the quarter are exceptional and represent the highest volume second quarter in the history of the chain. I want to continue to reiterate that our execution on our commercial acceleration initiatives is delivering better-than-expected results as we focus on building a faster-growing business. We are making tremendous progress in growing share in this highly fragmented portion of the market by winning new business and increasing our share of wallet with existing customers. We have our commercial program in approximately…

Thank you, Jamere. Fiscal 2022 is off to a very strong start, and we remain focused on superior customer service and flawless execution. Our culture is based on exceptional service and that will continue to define our success. I want to step back for a minute and talk about the big picture. Throughout the pandemic, each of us has had a very difficult time forecasting the future in light of all the uncertainties: the disease, the variants, consumer and government responses, competitive dynamics and on and on. But we are now nearly two years into this pandemic. What has happened to our business over those two years due to the tremendous contributions of our AutoZoners is nothing short of phenomenal. On a trailing 12-month basis versus pre-pandemic, our sales volumes have increased by over a remarkable 30%, and our profitability expressed as EBIT has increased nearly 50%. Six to nine months ago, if you would have asked us, our expectation was that some of those incremental sales and profits would go back closer to historic norms. While it is still very difficult to predict the next six to 12 months, our perspective has morphed, as we are nearly a year past the last stimulus and nearly six months from the suspension of enhanced unemployment, we believe most, if not all, of this growth is sustainable. We believe our competitive positioning is improved, as indicated by our significant share gains in both retail and commercial. And consumer behaviors may have permanently changed. 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 pre-pandemic levels. Our industry is unique,…

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] We do ask that all Q&A participants please limit to two questions per person. Your first question is coming from Bret Jordan from Jefferies. Your line is live.

Hey, good morning, guys.

Good morning, Bret.

Good morning, Bret.

Yes. On the Americas expansion, sort of thinking longer term, how do you see the potential size of Mexico and Brazil on a three to five or maybe even longer-term basis?

Sure. So we haven't given specific numbers, Bret, but what we have said repeatedly is, in both the United States and Mexico, we believe we can continue to grow at the current kinds of levels for the foreseeable future. So in the U.S., that's 150, 170 stores, Mexico, it's 40 to 50 stores. We believe we can do that for the foreseeable future. So it's going to be much, much larger than it is today. As far as Brazil is concerned, we're just getting started. You all know, we've been down there for over nine years now, and we were very methodical and very thoughtful and careful about making sure that this model worked for us. Just about a year ago, we presented to our Board that we felt like Brazil was now at the stage where we're comfortable, the model works. We knew it worked for the customers. We are now comfortable it works for us financially, and we will be stemming out and growing much faster in Brazil. I believe, over the long term, Brazil will end up being larger than Mexico for AutoZone. But with 50-some-odd stores, it's a long way to go.

Okay, great. And then I guess, you called out share gains, obviously, and it's quantified your DIY at 3 points. Could you give us any more color on the commercial side of the business? And within the share gains, have you seen any either any meaningful contribution, national versus independent recently?

Yes, Bret, I wish I could. We just don't have -- in the DIY business, we have very specific data. We have POS data for all front-of-store items. So it's crystal clear and we are comfortable sharing that with you. And that's where we said, during the height of the pandemic, we gained over 3%, which was 10% growth in share. Never seen that before personally. And we suspect that we would give some of that back up as the economy reopened. We have not. In fact, we continued to grow marginal amounts of share on top of that, which we've been very, very pleased with. On the commercial side of the business, we don't have a tool that gives us the direct insight. But when we look at it at the rates that we're growing, I think 46% on a two-year basis, we are quite comfortable that we're growing share exponentially many times what the industry is growing, but we don't have specifics, and so we can't tell you this is how we're doing against this sector or that sector.

Do you have a feeling whether it's -- is national account, or up and down the street business stronger than the other, or are they both sort of comparable growth rates?

They're very comparable growth rates right now. That changes over times during the depths of the pandemic. The nationals weren't growing as fast as the up and down the street. I think that's changed now. They're both growing at really high rates. I think Jamere even mentioned like 32% for both sectors during the quarter. So, we're really, really pleased. We've really developed some very nice relationships with our national account partners. And we have a specific program for our up and down the street that we call Pro Vantage, and both of those sectors are really, really doing well.

Okay, great. Thank you.

Yes, thank you, Bret. Have a good day.

Thank you. Your next question is coming from Zach Fadem from Wells Fargo. Your line is live.

Hey, good morning. So, for your Do-It-For-Me customers, can you talk a bit about your historical price gap versus your peers as well as WDs and how that's been trending over the last couple of years? And as you think about the drivers of sales for national, regional, and local accounts, where do you think the biggest drivers of share is today across price, availability or simply the fact that you're now able to serve certain customers that you historically weren't able to serve?

Yes, I'll start. I think that there's a misnomer by many that our pricing strategies are at the core of our growth. They are an element, not the element of our growth. What we did about four years ago is we embarked on a new strategy in commercial. And we looked at all elements of our offering. We changed the assortment methodology in every store in the United States. Every store has a different product assortment that leans further into the commercial business today than it did four years ago. We also said how are we going to get significant increase in local market availability? And we came up with this concept called a Mega-Hub store. We've now had over 60 Mega-Hubs. We've said publicly, we're going to go to at least 110. I think Jamere and I both feel like it's going to be closer to 200 than it will be 100, and maybe even more than that as we're testing -- one of the things about the Mega-Hubs, every time we measure them, they do better than our projections. Every single time. So, we've done these Mega-Hub improvements. We've taken our sales force, which was relatively immature and, frankly, brand new a decade ago. And as they mature and develop tenure, they're getting more professional, better at doing their sales techniques. We've deployed those single largest technology endeavor of the company's history in the commercial business. We've enhanced how we interact with our customers digitally. We've also rolled out handheld devices to all stores and all drivers so that when they're picking the products, we make sure we've got the right products. When we deliver the products, we can understand delivery times. We're driving our delivery times down about 15% so far and that's nowhere near our goal.…

No, no. So that was great. I just wanted to follow-up on just your expectations for industry growth as a whole in 2022. How are you thinking about DIY versus Do-It-For-Me in terms of volume versus price inflation? And I presume you still see room to build on the three points of market share that you've taken since the pandemic.

So I would say a few things. One, if you look at our results specifically, there are really four dynamics. The first is, to a certain extent, inflation has been our friend. It's helped us drive higher pricing and the volumes are actually holding. If you look at where we've seen pricing grow, I mean, we're up mid-single digits in retails for the first half. And quite frankly, if we see that same level of inflation in the back half, which is reasonable, then you could expect us to take pricing up in a similar dynamic. The share gains we've talked about are driving our business. We're up nearly three points versus the pre-pandemic. We've hung on to those share gains and the growth initiatives that Bill talked about, both in DIY and commercial, are giving us a lot of confidence that we'll maintain those shares as we go forward. And then the last dynamic for us that we've talked at length about is this macro strength that we're seeing. It's -- you have an aging and growing car park. You have used car prices that are up, 60% versus pre pandemic. And you're seeing many new cars that are actually selling higher than the sticker prices. And if you look at the used car price dynamic just in general, I mean, those higher residual values are actually encouraging our customers to invest in maintaining their vehicles because they're comfortable that the value is actually holding. So when you mix all of those things together, it suggests that the industry as a whole is not going back to pre-pandemic sales levels. And while we won't be date certain about when you'll see comps move one direction or the other, what we'll say is that the fundamentals are strong. We don't expect to return to the levels that we saw prior to coming into the pandemic. So our growth dynamics and the industry backdrop gives us a lot of confidence about the future.

Appreciate that. Thanks for the time.

Thank you.

Thank you. Your next question is coming from Brian Nagel from Oppenheimer. Your line is live.

Hi, good morning. Nice quarter. Congratulations.

Thank you.

Thanks, Brian.

I guess I have two questions. I'll kind of merge them together. I mean, so first off, Bill, in your opening comments, you talked about just the strength in the business. Is there anything -- as you look at the acceleration in sales from fiscal Q1 into fiscal Q2, is there anything specific to point to? I mean, is inflation, your ability to pass along those inflationary prices, so to say, a factor there? And then my second question is just on the gas price front. I mean, I know you're not -- AutoZone does not provide guidance, but what we are seeing here is gas prices are again climbing due to, I guess, issues in the United States and now probably more importantly, geopolitical issues. Do these higher gas prices concern you at all in terms of sales and the health of your consumer?

Yeah. So two great points, Brian. First of all, what changed versus Q1 and Q2, there's a lot of different things that changed. I think our -- we're going to hang our head a lot on our execution and our team's execution. But clearly, this inflation has a lagging effect and we had more inflation in our sales growth in Q2 than we did in Q1, not material but maybe a point or so. So that is an element of our acceleration, and we didn't accelerate that much. I think we accelerated two or three points on a two-year basis. Then as far as gas prices, as you know, you've followed this industry for a long, long time. Gas prices fluctuate and they fluctuated very significantly during my tenure here. What we've said historically is that there's not a ton of correlation between gas prices and our business until it hits a magic point. And historically, and I don't know what that magic point will be now because it's been a long time since we hit it, but historically, when it hit $4 a gallon, it seemed to impact miles driven. And you could almost see a direct correlation once it hit that $4 a gallon in miles driven. We don't know if that will hold true if it gets to $4 a gallon again. But for us, it goes up and it goes down. There's nothing we change in our business as a result of gas prices. So sometimes we're going to have industry tailwinds like we've had. Sometimes, we're going to have industry headwinds. We need to just manage this business through both environments and make sure that we optimize our performance based upon the macro environment.

That's very helpful. Congratulations again. Thanks.

Thank you.

Thank you. Your next question is coming from Christopher Horvers from JPMorgan. Your line is live.

Hi, good morning. It's Christian Carlino on for Chris. Could you just help us lay out some of the drivers of the inflation, whether that be product or supply chain costs and how you're thinking about that going ahead this year? I'm understanding you're not giving guidance. And do you expect it to be a potential lift to sales in the second half of calendar 2022?

Yes. As we mentioned before, I mean, we are seeing cost inflation in certain categories. We're also seeing higher transportation costs. We're seeing higher labor costs across the board. But I think the important point is that the industry pricing has remained rational, and we are pricing like our competitors to recover inflationary impacts, just as we've done in the past. And if you look at the history of this industry, it's been very disciplined about passing along inflation. And typically, what we see is that the demand doesn't fall off, just given the essential nature of the goods that we're providing. We've raised retail prices in line with inflation. As we mentioned, it's been mid-single digits. We expect that you could see similar dynamics in the back half of the year, and we'll be disciplined to raise prices accordingly. The other dynamics as it relates to this is that we're seeing broad-based inflation. It isn't just in our industry. But if you look at transportation, you look at labor, you look at wage rates, there's another side of the coin, which is our customers, are benefiting from higher wage rates and particularly that lower-end customer is benefiting from higher wage rates. And that, quite frankly, has provided a little bit of a safety net, probably more so than in the past. And we're filling that inflation even in our own business. If I think about what we're seeing in terms of wage inflation, it's probably -- on a percentage basis, it goes up maybe low single digits every year. We're probably seeing inflation 2x that, as we look to take care of our AutoZoners in an inflationary environment, our customers are seeing that. So those dynamics have made the lower-end consumer a little bit more resilient than probably they would have been in the past in an inflationary environment. So we're not seeing any wobbles at this point, but it is something that we're keeping our eye on.

Got it. That's really helpful color. I appreciate that. And then, I guess, you're clearly doing a lot to leverage technology to improve fulfillment on the commercial side of the business. Could you speak to the opportunity to build out technology on the pricing front? Maybe sift through all data, are you able to -- do you have better pricing visibility across the commercial market than, say, some of your peers? How should we think about that opportunity?

Yes. One of the things I'm really excited about is, the investments that we're making in technology. And you typically don't hear CFOs say that, because typically, they're only thinking about the cost side of that. But the investments that we're making in technology are really underpinning the growth strategy. And the sophisticated nature with which we're able to figure out what we're doing on the store development side, how we're using AI and machine learning to help us think about pricing and get a lot more surgical from a pricing standpoint are all things that I'm really excited about to help us drive growth and improvements in our business. So indeed, we are using technology to do that. It's a little bit more difficult, sometimes on the commercial side of the business. But you combine that technology with the on-the-ground intelligence that we're receiving from our AutoZoners in the field, and I like our capabilities there. And it's given us a competitive advantage as we think about what we're doing from a pricing standpoint.

Got it. Thanks. Thank you very much and congrats on a great quarter.

Thank you.

Thank you.

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

Hi. This is Jackie Sussman on for Simeon. Congrats on a great quarter. My first question is just on product availability. Kind of how much of an advantage has been in the stock over the last two years, has been kind of in-stock and does it narrow as supply chains come back? Kind of what is your outlook there? Thanks.

Yes. It's a fantastic question, Jackie. And frankly, we don't have really, really good data on how our in-stock position compares to our direct competitors or with retail in general, except for walk-in stores, and which we've done a lot of over time. I'm really, really proud of the way that our supply chain team, our merchandising team and our suppliers, they've worked at unprecedented levels during this past couple of years. And we've gotten very creative. Our logistics team has done an amazing job with all the challenges getting merchandise from the Far East to the United States into our distribution centers. Our belief is, we've had an improved in-stock position versus others. But our in-stock position, even today is a couple of hundred basis points below where it is normally. And it's been a little bit of a game of whack-a-mole. We solve it in this category, then it moves into that category, then it moves into another category. Overall, we're getting better and better and better on a weekly basis, just about. But we still got a ways to go before we get back to that level. Trying to quantify how much of that has been embedded in our share gains and sales lift, it's just -- it's too much art for us to figure that out.

Got you. Understood. And you talked a bit about the Duralast brand. Have you disclosed kind of Duralast penetration by product category? Which products are kind of over-indexed and which are under?

Yes. We haven't done it by product category. We obviously said it's over half of our hard part sales and continues to grow. We continue to introduce it in different categories or line extensions. Not too long ago, we introduced the Duralast Elite brake pad program, which is doing really well. We've added Duralast Gold chassis, which has done extremely well. A couple of years ago, we added Duralast shocks and struts. It's interesting, we did some market research as part of our commercial strategy development about four years ago, and we went by in the commercial business. And we said, what are the top three brands by product category? And the Duralast brand was listed in two categories as the number two brand, and we had never sold one piece in that category. So it just shows you the overall power of the Duralast brand. And if you turn back the clock a decade, it was interesting. People would have said we couldn't have been successful in commercial because we had private label. We don't have private label. We've got the Duralast brand, and it's high-quality products that our customers continue to turn to and trust.

Great. Congrats on a great quarter.

Thank you, Jackie.

Thank you. Your next question is coming from Scot Ciccarelli from Truist. Your line is live.

Hi. This is Joe [ph] on for Scot. I just had a quick question. Given the success you guys have shown in the Mega-Hub strategy, do you think we could see an acceleration of these rollouts next year and going forward? And what does that look like for margins?

Well, Jamere is in charge of store development so I'll answer it for him. The answer is yes. Jamere, you want to add some color?

You're writing my development plan for this year and next year. Thanks. The key for us is making sure that we leverage these assets. As Bill mentioned, every time we've doubled down on our Mega-Hub strategy, it's paid dividends for us and the Mega-Hubs are outperforming our expectations. The ability to put these assets in the market, provide a lift to the overall network, benefit both our DIY and our DIFM business, there's a very strong business building proposition for us. And we're going to go further and faster. One of the things I mentioned we're testing is higher density of Mega-Hubs in a marketplace. You typically are worried about cannibalization if you get stores or assets too close from a proximity standpoint. But what we're finding is when we put more parts into those markets and we do that in a disciplined way based on the analysis that we're doing and the research that we've done and the actual results that we're seeing, it's exceeded our expectation. Cannibalization is lower. It's a lift to the overall marketplace, and that's why we're so bullish and that's why we're going to double down on it.

Appreciate it. Thanks.

Thank you, Joe. Before we conclude the call, I want to take a moment to reiterate. We believe our industry is in a strong position and our business model is solid. We are excited about our growth prospects for the year, and we will take nothing for granted as we understand our customers have alternatives to shopping with us as we continue to focus on the basics and strive to optimize shareholder value for the remainder of FY 2022, we are confident AutoZone can continue to be successful. Thank you very much for participating in today's call. Have a great day.