Good day, ladies and gentlemen and welcome to AutoZone’s 2022 Third Quarter Earnings Release Conference Call. [Operator Instructions] 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 the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning’s press release and the company’s most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made and the company undertakes no obligation to update such statements. Today’s call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Thank you. It is now my pleasure to turn the floor over to your host, Bill Rhodes, Chairman, President and CEO of AutoZone. Sir, the floor is yours.

Good morning and thank you for joining us today for AutoZone’s 2022 third quarter conference call. With me today are Jamere Jackson, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third quarter, I hope you have had an opportunity to read our press release and learn about the quarter’s results. If not, the press release along with slides complementing our comments today, are available on our website, www.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them. As we begin, we want to continue to stress that our highest priority remains the safety and well-being of our customers and AutoZoners, Everyone, everyone across the organization continues to take this responsibility seriously and I am very proud of how our team continues to respond to COVID-19 and subsequent variants. While mass mandates have abated, we continue to make sure the environments our AutoZoners are working in and our customers are shopping in are as safe as possible for these times. Since the start of the pandemic, we have consistently recognized our AutoZoners in our stores and distribution centers, especially for giving exceptional service in the face of all the challenges COVID-19 has meant for all of us. This quarter, we will start the same, by again thanking our AutoZoners for their dedication to providing exceptional customer service, while helping our customers with their automotive needs. This morning, we will review our overall same-store sales, DIY versus DIFM trends, our sales cadence over the 12 weeks of the quarter, merchandise categories that drove our performance and any regional discrepancies. We will also share how inflation is affecting our costs and retails and how we think they will impact our business for the remainder of the…

Thanks, Bill. Good morning, everyone. As Bill mentioned, we had a strong third quarter, stacked on top of a remarkable third quarter last year, with 2.6% comp growth, a 2% decline in EBIT and a 9.6% increase in EPS. Our results for the first three quarters of the fiscal year have been incredibly strong as our growth initiatives continue to deliver great results and the efforts of our AutoZoners in our stores and distribution centers have continued to enable us to take advantage of robust market conditions. To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q3. For the quarter, total sales were just under $3.9 billion, up 5.9% and total auto parts sales, which includes our domestic Mexico and Brazil stores, were $3.8 billion, up 5.7%. Let me give a little more color on sales and our growth initiatives, starting with our commercial business for the third quarter. Our domestic DIFM sales increased 26% to over $1 billion and were up 70.4% on a 2-year stack basis. Sales to our DIFM customers represented 27% of our total company sales and 30% of our domestic auto parts sales. Our weekly sales per program were $16,600, up 23% as we averaged just over $87 million in total weekly commercial sales. Once again, growth at 26% exceeded our internal expectations and was broad-based as both national and local accounts performed very well for the quarter. Our results for the quarter represented the highest weekly sales volume for any quarter in the history of the chain. I want to reiterate that our execution on our commercial acceleration initiatives is delivering better than expected results as we grow share by winning new business and increasing our share of wallet with existing customers. We have…

Thank you, Jamere. We had very solid results so far in fiscal ‘22, and we remain focused on superior execution and customer service. Our culture was built on providing exceptional service, and this is what we will continue to define our success well into the future. And looking to the future, it is still very difficult to predict the next 6 to 12 months. But our perspective has meaningfully morphed over the last two quarters. On last quarter’s call, we discussed how most, if not all, of the growth in sales we experienced since the start of the pandemic was sustainable. We believed our competitive positioning was materially improved, as indicated by our significant retail share gains and rapidly accelerated commercial sales growth. We believe customer behavior may have permanently changed. We continue to believe all of this today. If this holds true, it will be the 4th time in the last 30 years that the economy and society have been through significant shocks, leading to material acceleration in our growth in sales and profits without a corresponding decline back to pre-recessionary or pre-pandemic levels. Our industry is unique and it has a very long track record of strong performance with high return and cash flow characteristics. As we have now lapped the second anniversary of the pandemic, some of the measurements we have all used recently to measure our performance will become skewed. Remember, at the beginning of the pandemic, our sales dropped radically. Our retail sales rebounded quickly with the April 2020 stimulus, but commercials rebound lagged and took several months. For Q4, in light of the amazing performance in the back half of 2020, the 2-year comparison for overall comps won’t be comparable. We would encourage you to migrate to studying 3-year comps to gauge our fourth…

[Operator Instructions] Your first question for today is coming from Bret Jordan with Jefferies. Bret, you line is live.

Good morning, guys.

Good morning, Bret.

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

Well, frankly, Bret, they are supporting smaller and smaller radius of geography today than they did before because we were getting so many of them. When we first built them, it was not uncommon for them to be supporting stores that were 2, 3, maybe even 400 miles away. A lot of times, that would be on an overnight basis. The real crux of it is, how do we get the stores that are in, call it, 30 or 40 miles away from the mega hub, and how can we get them service 3x a day. That’s when we really performed well. But the biggest part of the mega hub performance is the mega hub itself. The four walls of the mega hubs are just continuing. Every time we look at them, and every time we open some and open more, they continue to outperform our expectations. And one of the remarkable things is they are not cannibalizing close-in stores like we thought they would. So as we talked on the last call, remember when we first launched the mega hubs, we said we would have 25 to 40. We’re now in the 60s, and we’re headed to 200. That just goes to show you the power of these mega hubs.

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

Sure. Yes. We’re hearing a lot of questions about what’s going on with the low-end consumer, are people trading down? Our hard parts business, I don’t want to overstate that. I mean, I think I said it was off about 1% during that. It is very difficult right now to get clarity on the comparisons. Let’s remember – some people are talking about weather. We’re saying we don’t think weather was a meaningful impact on our business. What was meaningful was, we went up against stimulus from March of last year that lasted for 4 to 6 weeks. That is really the story. And so it’s hard to say the low-end consumer, sure their purchases are down versus last year, of course they are. They had a massive amount of stimulus in their pocket. I think it will be interesting to see what happens over the fourth quarter. Are we watching what happens with the low-end consumer? Absolutely. But I also want to remind you the comment that I made at the end. If you think about the – over the last 30 years, there is been four significant shocks to the economy. In all four of those shocks, our performance and our industry’s performance has made a meaningful step up during those shocks, recessions and pandemics that our business has gone up, and it’s never stepped back down.

Great. Thank you.

Yes. Thank you, Bret.

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

Thank you. So a few questions on the gross margin front. As you look ahead, there’re some headwinds that seem to be emerging on the fuel side. How do you think about pricing and fuel cost pressures in terms of product pricing? And then your success in commercial obviously has some expense on gross margin rate. So given those two factors, would you think that gross margin continues to see the type of year-over-year headwinds that you saw in the current quarter and the past couple of quarters?

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

Understood. That’s great. And then my other question is somewhat technical. As you think about the fuel impact of the trucks and the cars going from the store to the shops and the mechanics, where does that show up in your P&L? Is that an SG&A item? And how do you think about your – the ability to maybe price that in or offset that impact? Because clearly, diesel and gas accelerated over the quarter, and that impact should be bigger as you look forward.

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

Yes. Just for clarity, there is pressure in both gross margin and SG&A. The majority of the diesel is in the warehouse and distribution costs, which is in gross profit. And then our – we have one of the largest light-duty fleets in our commercial and field management folks. And so there is a lot of pressure in SG&A as well.

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

That’s right.

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

Got it. Thanks very much. Best of luck.

Thanks, Chris.

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

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

I will say it crystal clear. No, we are not constraining our growth based upon the margin characteristics of the DIFM business. We set it for 1 million years. DIFM today operates at lower gross margins and lower operating margins. But it grows – it operates in operating margins the way we look at it on generally an incremental basis in the mid-teens. We will grow that business as fast as humanly possible. If we could add another $4 billion in sales and the corresponding operating income that comes with that tomorrow, with the limited amount of incremental capital that we have to deploy, we would do it tomorrow. We were very focused on operating profit dollars. And as we look forward, I would just encourage you all to look at our business from a gross margin point of view, how are we doing in DIY and how are we doing in commercial. Our goals will be to marginally increase those gross margins over time. If we do that and that puts – and the commercial business grows at 26% and it puts pressure on the overall gross margin, so be it.

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

Yes. I don’t know that I would say it can grow at a faster rate the industry itself. I clearly think that we can, and maybe some of our close-in competitors can grow faster in the commercial business because that is still so fragmented. But the bigger part of my point is this is the most remarkably resilient business I have ever seen. And I don’t understand why, when we have a recession, our business goes up and we come out of it and our business never goes down. It seems to flat line and then grow from there. It’s amazing to me.

Okay. Thanks. Good luck.

Yes. Thank you, Simeon.

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

Good morning. Thank you all for taking my question. The roads on the topic of recessionary environments and the impact that it has on the auto aftermarket is one of the drivers during those periods that people shift away from buying new cars and are more interested and need to maintain their existing cars? And so the dynamic this time around could be influenced by the fact that new cars that might used car sales have been depressed because of the supply constraints, so the industry might not see as much of a countercyclical boost as it’s seen in the past?

Yes. I think all of that makes perfect sense, Michael. I wish we had empirical evidence that could tell us that’s exactly what’s happened. I will tell you, if you asked me a year ago if we were going to retain the kind of sales gains that we had grown over the first 2 years of the pandemic, I would have said I doubt it. But there has also been other pressures that have happened. Clearly, the lack of new cars and the elevation of pricing, the radical elevation of pricing of used cars has our customers view on how long they are going to have that vehicle changing to much longer than it normally is. When that happens, they seem to take better care of their cars. I think we also didn’t envision the inflation impact that we are seeing. And clearly, that’s – I talked about some traffic declines, some significant traffic declines, 8.5% in the retail business. That was up against 16% traffic growth last year. I will take a 2-year comp of 7.5% traffic all day long, but inflation and the ability to pass that inflation on has helped us. That’s another key element of this industry is the inelasticity of demand in this sector of retail is probably unparalleled. And so as this inflation has come through, it’s helped us get through that period of time as well.

My follow-up question is, you have clearly gained market share. If we compare your results to a variety of indicators, that’s pretty obvious. And your messaging is that it’s as a result of many different factors, one of which does seem to be that you have made some price investments initially on the DIY side, more recently on the DIFM side. One of your competitors has been vocal about making similar price investments on – especially on the DIFM side. So, at this point, do you feel the need to make further price investments, either on the DIY side or on the commercial side, either – in an effort to either maintain or grow all the share that you have gained in the last couple of years? Thank you.

The short answer is absolutely no. The longer answer is, we made very marginal price investments on the retail business. We have far lapped those probably six months or so ago. They were very targeted to specific highly-visible commodity-related items, and we are focused on our comparisons versus mass. That’s in the past. About this time last year, in fact, we have now annualized it. We completed rolling out the pricing changes that we made in our commercial business. Again, I want to be crystal clear. The growth that we saw in commercial over the last couple of years is not a result of pricing investments alone. They are an element. There is many other elements, the mega-hubs and hubs, the Duralast brand. We have rolled out – we had the single largest technology investment in the company’s history focused on commercial and commercial deliveries. Our delivery times are dropping. So, we have done a lot of different things, and we lowered our pricings to make sure that we were focused on pricing versus a different competitive set. All that together has worked and has worked really, really well. At this point in time, we do not have any additional pricing actions being tested nor being considered. We believe we are very happy with our prices today in retail and commercial except that we need to pass inflation costs along as they come in. We will be very focused on trying to keep the same kinds of competitive positioning, but we need to pass on the inflation as it comes through us in costs.

Thank you very much and good luck.

Yes. Thank you, Mike.

Your next question for today is coming from Mike Baker with Davidson.

Okay. Thanks guys. I don’t know if you can answer this, but just curious, why do you think weather didn’t have an impact on your business? It had an impact on all your competitors’ businesses and many other seasonal businesses. Why would your business be different, particularly as you over-index to DIY, which I think is probably a little bit more weather-sensitive than the commercial business?

It’s a very fair question. The information we have was, it was, as I have said, slightly cooler and slightly wetter. The real question – or the real discussion for this quarter was not weather it was stimulus. And I don’t know how you fared out a 0.5 point or 1 point change in weather dynamics when you are talking about 2-year comps of 30% that were driven by stimulus. So, we are trying to focus on the major elements and make sure we communicate to you what we think are the real drivers, and frankly, the drivers that will help you understand our long-term trends. The weather was marginally different and I can’t ferret it out in a 30% 2-year comp.

Okay. That’s fair enough. And then one other follow-up. You did say hard parts are down, you said only 100 basis points. So, you don’t want to make too big of a deal of it, but you did say you thought it was because of gas prices. So, are you implying there – again, I don’t want to make a big deal, but did you – do you think people are just driving less on the higher gas prices? And then you said that should get better, does it get better only when gas prices come back down, or should we…?

I think you had two elements that happened. You had two elements that happened to miles driven. We are still rebounding from the pandemic decrease of miles driven. Now you have got the gas prices implications. What we have seen historically in the past, Mike, is when gas prices hit $4 a gallon, you can see a direct correlation with those prices and a decline in miles driven. What we said historically as we have seen people when it gets to those elevated levels, they change their behavior. They change where they live, they change where they work. Obviously, with remote work and those kind of things, there could be different nuances this time. A lot of people are saying, yes, but $4 a gallon back then would be the equivalent to $5 whatever today, that may be true. I don’t know if that’s the case or not. This has happened in pretty short order. And I think we need to watch what happens to miles driven over time. As we think about it, it will be a short-term phenomenon, just like it has been in the past. Our focus isn’t about next quarter or even the quarter after that. And our focus, as I have said, is how do we think about driving this business to drive long-term cash flow at really high return rates and think out 3 years to 5 years. Gas prices will come and go, and it doesn’t really impact how we manage the business day-to-day.

Fair enough. I appreciate the color. Thank you.

Yes. Thank you.

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

Good morning guys. So, you have mentioned, obviously, the mega-hubs quite a few times and the positive impact that you see on your sales. Is there a way to potentially quantify the sales lift that you experienced in a market when you open a mega-hub?

Yes. A couple of things stand out to us. As we said, as we have tested greater density, we are seeing two dynamics. One is the business plan that we build usually justifies the mega-hub based on what happens inside the four walls. And so we are seeing those sales be largely incremental, as Bill mentioned. We are not seeing the cannibalization. What we have tested is as we put more mega-hubs into the market and jam more parts in the market, those satellite stores are benefiting tremendously because they are leveraging the inventory and the availability from those mega-hubs, and they are seeing an overall lift as well. We haven’t talked specifically about what the quantification is. But I can tell you that it’s significant, and it is what’s given us confidence to take our target from 110 to 200. And quite honestly, we will likely go beyond that as we continue to test and learn more in the future.

And Jim, as the mega-hubs kind of mature, do they follow a new store maturity type curve?

They do. But one of the things that we are experiencing right now, particularly with the growth in our commercial business, is that the ramp for the mega-hubs has been faster than what we have seen in the past. And that is because as we have put those additional parts into the marketplace, while we are doing all the work that Bill mentioned on our commercial acceleration initiatives, those mega-hubs are ramping up faster than we ever anticipated.

Very helpful. Thank you.

Your next question for today is coming from Daniel Imbro with Stephens.

Hey. Good morning guys and congrats on the quarter. Bill, I wanted to ask a higher-level question on the Do-It-For-Me side. So, obviously, you have been gaining share. But when you are not winning the business, from an operational standpoint, is there a consistent area of feedback you hear from customers where you need to improve, or any consistent learnings that you are seeing where you can still improve to gain more share when you are not winning that business?

Yes. It’s a really great question. I mentioned it in the call, and I have been out in the field a whole lot in the last three months. And the tone of the conversations with our commercial customers, be that national accounts at the senior leader level or in our commercial shops, has just – the tenor of the conversations have changed. It’s a question of how can I give you more business versus the, age old things of, it was about availability, it was about the Duralast brand. The Duralast brand conversation has turned from a significant negative to a positive. And now, with our availability, it has meaningfully changed. So, I am not really hearing that we always can get better on delivery times. And if anybody wants to tell you why they are not giving you business, that’s a very easy one. Well, now we have actual data that says, you are right, we are delivering to you too slow. Your average deliveries are 31 minutes and 37 seconds, and we apologize for that. We are going to work to get that better. And so we have got new tools at our disposal. We have got much better inventory assortments. The Duralast brand is amazing. And so the tenor of those conversations is really radically different than they were just 3 years or 4 years ago.

Got it. That’s helpful. And then Jamere, maybe more financial question, I know you just talked about the maturity curve of the new mega-hubs and DCs. But with three DCs coming online and 11 mega hubs, I guess in the near-term, what kind of SG&A pressure should we expect? I would assume there is inherent deleverage just from preopening costs and then as they ramp. So, kind of what kind of headwinds should we anticipate that puts on the SG&A line over the coming quarters?

I mean it will clearly be some pressure on SG&A, but what I will say is that we have been very disciplined about managing our SG&A expenses. And quite frankly, when we have to make these kind of investments, number one, they have great payoffs associated – paybacks associated with them. But number two, we look for bill payers elsewhere in the P&L to be able to go do that. But what we have done over time, and what we will continue to do is, we invest in a very disciplined way in growth, and we are not afraid to de-lever SG&A if we need to, to support that growth, because in the long-term, it’s the right thing for our business. So, we have a plan over time to manage SG&A in line with our sales growth. But in the short-term, you may see us spike it up from time-to-time to support the investments in growth. And we have done that not only with the capacity investments that you talked about, we have done it with our IT expenses over time, and we will continue to do that going forward.

Got it. Thanks so much. Best of luck guys.

Thank you.

Your next question is coming from Liz Suzuki with Bank of America.

Great. Thank you for taking my question. Regarding the comment you made about gross margin and just a hyper focus on mix and how that impacts your overall gross margin. How can we think about tracking improvements in margin in each of your categories? Like where will we see that show up in metrics?

Yes. I think two things you will see. Number one, we will continue to have mix pressure associated with our commercial business going forward. And we will be very transparent about what we see there. But all the playbook that we have historically run on managing gross margin, taking pricing actions in categories, driving down costs in certain categories, all those tactics will still be a play. And you will see us over time make positive improvements in gross margin. It’s just that we are starting off in an environment where our commercial business is growing significantly faster than DIY, and that’s going to be a margin pressure that we welcome because of the nature of the business and the fact that it’s growing our overall gross profit dollars. So, we will be very transparent about it as we move forward, and it’s a trade-off that we welcome.

Yes. That makes sense. And I mean is there a rule of thumb that we should think about as the differential in gross margin between commercial and retail in general?

Well, it will depend on how fast the commercial business actually grows. If you look at the differential this quarter, it was significant, which actually drove gross margin deleverage this quarter. What I would say that if you were on an apples-to-apples basis in terms of growth rate, we would have actually seen gross margin be positive this quarter. But you have got the mix headwind there. It’s a welcome trade-off and we are delivering.

Got it. Thank you.

Thank you.

Your next question for today is coming from Zach Fadem with Wells Fargo.

Hey, good morning. With the elevated used vehicle pricing and lack of new cars available, just curious how you think that’s impacted your addressable market? And to what extent scrap rates have declined out there with your customers? And as we inevitably go back to an environment where new cars come back on, or used vehicle prices start to come back down, to what extent do you think that would be a headwind for the industry?

Well, I think you have got a dynamic here where, clearly, the macro environment associated with used cars is – has a significant impact on what you are seeing in the car park. The dynamic associated with new cars is similar. I mean our – if you look at the data on used cars, they are up 23% year-over-year, up 50% pre-pandemic. If you look at what’s happening with dealer lots right now, they are probably carrying about a third of the inventory that they were pre-pandemic. So, it is a significant driver. What you are seeing though is that the car park is actually aging. People are hanging on to the vehicles longer. In fact the data that came out this morning shows that it’s now ticked up to 12.2 years is the average age of a vehicle on the road. And those things are all producing a tailwind for us. I think what we are focused on as a business is, one, managing our business associated with the vehicles that are in operations, making sure that we have the assortment to go deal with that. And as there are changes in the car park, there are changes in technology, there are changes in consumer behavior, we just manage our business accordingly, and we have done that historically over time, and it’s been a good outcome for us.

And then with the step-up in mega-hub density, is it fair to assume that double-digit commercial growth remains the norm for your business through fiscal ‘23? And do you view the opportunity ahead more about getting denser with existing customers or expanding your reach to newer customers that maybe you haven’t been able to serve at this point?

We will continue to see our commercial business have very strong growth. And the initiatives that we have talked about, whether it’s the things that we are doing with assortment, the things that we have done with technology, the things that we have done with pricing, all of those things are driving significant growth in our commercial business, and we expect that trend to continue for us.

Thanks for the time.

Great. Thank you. 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, but we will take nothing for granted as we understand our customers have alternatives. We have exciting plans that should help us succeed for the future, but I want to stress that this is a marathon and not a sprint. As we continue to focus on the basics and strive to optimize shareholder value for the remainder of FY ‘22, we are confident AutoZone can continue to be successful. Lastly, as we celebrate Memorial Day next Monday, we should remember all of our country’s heroes, both past and present. We owe these Americans, a tremendous debt of gratitude. Thank you for participating in today’s call. Have a great day.

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.