Greetings, and welcome to AutoZone's Fourth Quarter 2023 Fiscal Earnings Release Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. We will now play our Safe Harbor statements.

Before we begin, please note that today's call includes forward-looking statements that are subject to 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 obligations 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.

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

Good morning. And thank you for joining us today for AutoZone's 2023 fourth quarter conference call. With me today are Phil Danielle, our CEO-Elect; Jamere Jackson, Chief Financial Officer and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the fourth quarter, 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 thank our AutoZoners for their incredible contributions during fiscal 2023 that resulted in our solid performance. As our pledge states they continued putting our customers first, which resulted in total sales growth of 7.4% for the fiscal year, while earnings per share increased 12.9%. It's important to remember that these results build on the phenomenal three year performance from the pandemic years of 2020 to 2022. Candidly, Phil, Jamere, Tom Newbern, and I felt at some point we would see our sales per store migrate closer to pre-pandemic levels. That hasn't happened. And at this stage, we do not expect it will. To put it in perspective, our domestic average weekly sales per store are 33% higher than in 2019, growing from $35,600 a week to $47,300 a week. This level of growth and sales also drove enormous growth in operating profit, where this year's $3.474 billion was 61% above 2019, when adjusted for the 2,019, 53 week. That is remarkable growth, especially for a 44-year old enterprise. We could not have achieved this success without exceptional efforts across the entire organization. We have several updates for you this morning. First, I'm sure you've noticed the new table in our press release.…

Thanks, Bill. And good morning, everyone. I'm honored to be participating in my first earnings release conference call. I will start by reviewing our Q4 overall same store sales, DIY versus DIFM trends, our sales cadence over the 16 weeks of the quarter, and merchandise categories that drove our performance as well as any regional disparities. We will also share how inflation is affecting our costs and retails and how we think inflation will impact our business in FY24. Our domestic same store sales were 1.7% this quarter, on top of last year's exceptionally strong 6.2% growth. I do want to reiterate what Bill said a moment ago, our execution improved materially over the quarter. And that execution, which is a hallmark of our success will ultimately deliver better results as we move forward. Our domestic commercial business grew 3.9%. Despite lower than anticipated, we believe we grew share and set another fourth quarter record with $1.5 billion in sales. For the full year, we generated nearly $4.6 billion up 8.7% from last year. Domestic commercial sales represented 30% of our domestic auto parts sales, which is identical to last year. Our commercial sales growth continues to be driven by the key initiatives we have been working on for the last several years, improved satellite store availability, material improvements and hub and mega hub coverage, in addition to aggressive growth in the number of those types of stores. We continue to strengthen the Duralast brand with an intense focus on high quality products. And we continue to deliver technological enhancements to make us easier to do business with. We are also operating more efficiently with improvements in delivery time and enhanced sales force effectiveness. In Q4, we opened 156 net new commercial programs, opening the majority of them late in…

Thanks, Phil. And good morning everyone. As both Bill and Phil had previously discussed we had a solid fourth quarter, stacked on top of an impressive fourth quarter last year. 6.4% total company sales growth, 1.7% domestic comp, a 14.9% international comp on a constant currency basis, a 10.8% increase in EBIT, and a 14.7% increase in EPS. In addition, our results for the entire fiscal year were very strong as total sales grew 7.4% and EPS grew 12.9%. We continue to deliver great results and the efforts of our AutoZoners in our stores and distribution centers have continued to enable us to grow our business and our earnings in a meaningful way. To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q4. For the quarter total sales were just under $5.7 billion, up 6.4%. For the year our total sales were $17.5 billion, up 7.4% versus last fiscal year. I continue to marvel at the strength of our business since FY19. Our sales are up an amazing 47% or nearly $5.6 billion since 2019. Let me give a little more color on sales and our growth initiatives starting with our domestic commercial business. For the fourth quarter our domestic DIFM sales increased 3.9% to $1.5 billion and up 25.9% on a two year stack basis. Sales to our domestic DIFM customers represented 26% of our total company sales and 30% of our domestic auto parts sales. Our average weekly sales per program were approximately $16,700, down 1.8%. Now it's important to point out that our sales per program productivity was impacted materially by the late in quarter openings of approximately 120 new programs. While these openings depressed the point in time productivity metric, we're encouraged by the growth prospects…

Thank you, Jamere. As we start a new fiscal year, I'd like to take a moment to discuss our operating theme for the New Year, live the pledge. I know this sounds like a very consistent theme for AutoZone. In fact, it was the theme we used in my first full year as CEO in 2006. I'm asked frequently, what differentiates AutoZone from others. My answer goes back to the same point over and over, the culture. I, our Board and our leadership team believe we can never emphasize the culture enough. The culture is defined by helping solve our customers' challenges and optimizing the performance of their vehicles. It's based on a team-based approach recognizing everyone's contributions and performance and putting team goals ahead of personal goals. It sets the standard at exceptional performance, not mediocrity. It's about the AutoZone family. Calling yourself a family comes with great responsibility. And it is so much more. The pledge and our values summarize our operating strategies succinctly. As we've accelerated our top line since the onset of the pandemic, our competitive positioning has also materially improved. Our efforts for 2024 will be focused on execution. We have a lot of projects in flight, and we did get them completed. Supply chain improvements will remain a key focus in FY24. We will continue with our additions of mega hub and hub stores, new distribution centers and international store growth. As you noticed our international teams posted same store sales comps on a constant currency basis of 14.9%, much higher than our domestic comp. International has been strong for a few years now. This morning, I'm excited to share after an extensive strategic review of the ultimate number of locations we can have in the U.S., Mexico and Brazil. We are announcing our…

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions]. Thank you. Our first question is coming from Bret Jordan with Jefferies. Your line is live.

Hey, good morning, guys.

Good morning, Bret.

Hey, Bret.

You called out market share gain in the commercial space in the fourth quarter. Then you said, not in line with your aspirations. But then also said that pricing is rational. What do you think is happening in the space? Are there peers that are showing relatively better in-stocks? Or really was it just your regional footprint and exposure to some of those softer markets that made the difference?

It's a terrific question, Bret. And there's a lot of different elements as you would expect. Again, we are not satisfied with our commercial growth at this level. And we're going to change that, and we're encouraged about the direction that we're heading. I think part of it Bret is a comparison versus last year. You mentioned in-stocks. Last year, 18 months ago, we got very aggressive with some key categories and a lot of merchandise, when frankly a lot of our less sophisticated competitors were not in great in-stock positions. As we're beginning to lap that significant outsized growth last year, that's certainly a challenge for us. And we're beginning to get past that point in time. We also mentioned that we've had some challenges in the Midwest and Northeast, particularly with under cart categories, and particularly in commercial where we just didn't have that winner that we so desperately want and need. And we've suffered in those under cart categories.

Okay, great. And a big picture question, I guess on the international. When you look at the, obviously different vehicle demographic and economy, but how do you see the underlying growth rates in the DIY and the DIFM segments in Brazil and Mexico, sort of on a longer term basis?

That's a great question. We've been in Mexico for nearly 25 years now. There's just not great data there, Bret. And so you don't have the terrific kind of information that we get from the Auto Care Association. So we don't have great data down there. We're working to try to see if we can get some better data. But what we know is we've been in Mexico now, as I said, almost 25 years and we continue to grow significantly and think that we have a lot of growth left in front of us, not just in new stores but on same store sales. There are still categories where we are massively under penetrated, there are still categories we don't participate in at all. And as we learn more about that business, we're continuing to grow. Same things happened in Brazil. We're just much earlier in Brazil.

But fair to think an older car base that drives a better underlying growth than U.S.

I think in Mexico, clearly the car basis is older, and there's a lot of U.S. cars, there's also a lot of Mexico manufactured vehicles. Brazil is very different in that the size of the vehicles and in particularly, the engine sizes in Brazil are massively smaller. I mean, if you have a two liter engine in Brazil, that's a big car. Many of them are 1.4 liters and the like. So we still got a lot to learn in Brazil. But we're excited about where we are. We believe we see a path to great success, but we're still losing money there. We got to fix that over the next couple of years.

Great. Thank you.

Thank you.

Thank you. Our next question is coming from Simeon Gutman with Morgan Stanley. Your line is live.

Good morning, everyone, and congratulations to the retirees and promotees. My first question is, I may have missed, is double digits still the goal for commercial? And if so what's the -- how should we think about the timeframe to getting there?

Absolutely is still the goal. Keep in mind, we still have pretty low share in that, 4.5% range or so. So we're under share. And we think there's still tremendous opportunity for us to gain share. Like we said, we're not happy with our performance in the Q4 timeframe. We do feel like we're exiting the quarter at a higher rate, and we believe will continue to improve from this point forward. But we're not back to where we want to be. But we do see line of sight to getting back to that double digit growth over time.

And then maybe the follow up, the way you've built the business in commercial, it's been methodical, and you've had some periods of faster growth. But it's been cumulative. And my question is now that you're focused on it, again, how do we get comfortable with timing that, prescriptively, your business really accelerates, call it in the next few quarters versus why not take the year to get some of the traction from the things that you're working on?

Well, like I said, we talked, in Q3 or Q4 that our execution in the commercial arena wasn't where we expected it to be. And we've been working on that. We saw that performance and the execution levels improve as we worked through Q4. We're not finished yet. We'll frankly, never be finished. Execution is a long term strategy. But we continue to get better. And we think we continue to improve our business model. Like we said, we've opened up more hubs, more mega hubs. We continue to strengthen our store side assortments. And we're also continuing to leverage the technology enhancements that we've made over the last couple of years. And those will continue to mature. And we're not standing still. That technology enhancements will continue as we move through this next year.

Thank you. Good luck.

Thank you. Our next question is coming from Seth Sigman with Barclays. Your line is live.

Hey, good morning, everyone. And I'll add my congrats as well on all the new roles. Hey, want to follow up on the commercial business. And that last point, if you could maybe just elaborate on the execution shortfalls that you've seen. What are we talking about here, is that availability? Is it something more sales-related? Just any more context on that and how you're fixing that and the response so far? And then I'll add a follow up. Thank you.

Now on the execution -- thanks for the question. On the execution, I think if you go back to the pandemic, and some of the challenges of the pandemic, we obviously struggled with in-stock. We struggled with staffing, as everybody did. And we struggled with store level execution. Our primary objectives were keep our AutoZoners safe, take care of the customers, keep our stores in-stock. Nothing, there wasn't any -- this big one area that got broken. It was a lot of little things. And at AutoZone, we expect to operate executionally solid every single day. We didn't achieve that. We're continuing to work on that. And we're taking off the execution marks to get back to flawless execution day in and day out. That frankly, takes time and it will continue to improve. We liked the improvements we saw in Q4. I wouldn't say we're done. We think there's still opportunities to improve and we'll continue down that path. It's just part of our culture. Execute flawlessly.

Got it. Okay, that's helpful. And then I wanted to follow-up on another point made earlier about traffic and volume improving through the quarter, and I think that coincides with inflation moderating. Can you just give us a little bit more perspective on what you've seen historically, as it relates to elasticity? And then just in general, how are you thinking about inflation for this coming fiscal year? Thanks.

Yeah. So the first point I'll make on inflation is that, we've been comping hyperinflation relative to our store industry trends for quite some time now. And so as inflation has sort of moderated and faded to sort of the normal rates, those are the dynamics that we've been experiencing. As it relates to our business moving forward, we expect inflation to be in the low-to-mid single digit range that will impact our tickets. On the DIY side, as we've said, we've historically seen transaction counts decline kind of low single digits, if you will. And so we expect to be operating our business closer to historic norms moving forward. In terms of the macro environment, and how that's played out from an inflation standpoint. We haven't seen to this point, sort of a wobble from the consumer. We think it's been a two-speed world for a while where the low end consumer has been under some pressure, but consumers that have higher incomes have been doing well. And the net result of that is our business on the DIY side has been very, very resilient.

Okay. Thank you.

Thank you. Our next question is coming from Elizabeth Suzuki with Bank of America. Your line is live.

Great, thank you. I just, a question on expansion and store growth. I mean, just given that the cost of construction and the cost of capital has gone up quite a bit in the last couple of years, how are you thinking about capital allocation? Just it seems like store growth is a pretty big part of your long term plans. But just thinking about where that capital can be best deployed, in which areas, maybe rural areas, or international, where you think you're going to get the best return?

Yeah, thank you, Liz. We think we're going t o get a great return basically, in all three countries, whether that be urban environments or rural environments. And I go back to when you're running a ROIC of 50%, that shows that we can get really good returns. Yes, we're making this announcement when construction costs are higher, interest rates are higher and on and on. We're making decisions that are 40-year decisions. And we believe we've got a long runway for opening significant amounts of new stores. And once we finished that strategic review back in June, we made the decision that we're going to accelerate and get back to 500 stores a year. Now remember, that'll be between 3% and 3.5% organic store growth. So it's not like we're talking about going to 10% growth. We think having something that's growing in that range makes a lot of sense for the long term.

Now the only thing I'll add, Liz, is that, to your point around capital allocation, this doesn't change our long term capital allocation framework. Managing our leverage target at 2.5 times EBITDAR gives us a tremendous amount of financial firepower, to invest in our existing assets, to invest in this growth profile that Bill's talking about, but also to give meaningful amounts of cash back to shareholders. So doesn't change our long term capital allocation framework as we move forward.

Great, thank you. And then, you talked about Mexico and Brazil. Now in Brazil, you're still losing some money there. What does the profit profile look like in Mexico or just for the international operations in total? And how should we think about the impact on the total company margin profile as those stores grow as a percentage of AutoZone's total?

Well, it's certainly a tale of two countries. We are losing money in Brazil. We haven't disclosed specifics in Mexico, but I'll just say that we are very pleased with the profitability profile, and particularly the return profile in Mexico.

Great, thank you.

Thank you.

Thank you. Our next question is coming from Chris Horvers with JPMorgan. Your line is live.

Thanks. Good morning. Also wanted to follow up on the commercial side. You talked about 7% in the last four weeks. So to clarify was that comped, and as we look forward, clearly August was hot, and you got a weather bump there. So you talked about improving from what you've seen. I guess, what's the right trend line to think about of the 7% versus the 2.5% that you actually did for the quarter?

Yeah, the 7%, just to be clear, was a total growth in those last four weeks of the quarter. So it improved over the quarter timeframe. I'd like to forecast that we're going to improve from there. It could be bumpy. Nothing's a straight line. I'll tell you, if you think about the weather performance over the quarter, like we said, the beginning parts of the quarter, the first month of May and June, were particularly cool and wet. And although that had probably a more material impact on the DIY side of the business, it impacts commercial as well. And as it got hot, you see those bigger ticket categories, like per se, air conditioning, for example. Those are big categories and big jobs. And as you get those failures due to heat, it helps the comps and the total growth. So we think that weather story will help us a little bit. The hot summer will help us as we move through the beginning of Q4. And then we'll move into a normal weather pattern as we as we go through Q2 and the rest of the year.

Got it? And then -- okay, got it. So the 7% was total. So the comp side of it [ph] for me was more like a 5%, I guess. Is that right? And then as you think about '24, any other high level comments? I know you don't guide. Jamere, you talked about some LIFO tailwinds that, persist early, and then probably turn to some year-over-year headwinds. Anything else to think about in the P&L in terms of SG&A per store, or other comments on gross margin and so forth? Thank you.

Yeah. So as we think about FY24, I think there are a handful of dynamics that you need to sort of wrap your mind around as you build your models. Number one, we're forecasting a very consistent and resilient DIY business. And Phil and Bill talked about some of those dynamics as part of their prepared comments. The second dynamic that we're focused on, as Phil alluded to, is an improving growth profile in our commercial business, again, we were very pleased with where we exited the fourth quarter. I believe we got the momentum going into the first quarter and next year. I think the third dynamic that you mentioned is around LIFO. We've got $59 million of LIFO that we expect to largely get back through the P&L. So as you're working your way through your modeling, you can expect most, if not all of that, to come back to us this year. And then from an expense profile standpoint we said longer term SG&A will grow in line with sales. We are an investment mode, particularly in IT in some of the areas that are underpinning some of the growth initiatives that we're talking about. So that's how I focus. And then the last one I just mentioned is just on -- from an international standpoint. You've seen us post our international numbers. This morning, we've got two years, quite frankly, where the business has been on fire. And we're very excited about the growth profile in our international business. So as you think about where we are, we feel good about the growth prospects going forward. We think, from a margin standpoint, we've made tremendous strides in gross margin excluding LIFO. And we've got a consistent, resilient domestic DIY business, which still is the lion's share of our businesses as we move forward.

Thank you.

Thank you. Our next question is coming from Michael Lasser with UBS. Your line is live.

Hi, this is Henry Carr on behalf of Michael Lasser. Good morning, and thanks for taking our question. We've been hearing about elevated levels of deferred maintenance and weak car counts in the industry. When thinking about returning to a sustainable high single digit or low double digit growth in commercial, how are you factoring in this occurrence, is it a reaffirmed goal? And is there any way to quantify it?

Yeah, we don't have terrific data on that. Obviously, we're in our commercial customer shops all the time. And we're hearing the same things. Frankly, we've been hearing it since about February that car counts are down, particularly for people that are in the tire business. And as you know, when a technician takes off a tire, it provides a whole another opportunity for sales. You get a chance to see what's going on with the braking systems and chassis systems and the like. So we don't have a great history on what are the exact members, but we think it is -- has been a softer environment. I think some of that has to do with the economic challenges that we're seeing. We haven't operated in the commercial business at this level for a long period of time. So we don't know the cycles like we do in the DIY business. But I think our belief is when economic pressures happen we get trade down from DIY to DIFM or sorry, from DIFM to DIY in certain cases. And I suspect that's what we're experiencing now. How long will that last? You tell me what the economic cycle is going to look like. And again, we have a lot of discussions about short term sales performance. Our focus is not on the short term sales performance. Our focus is on what are we doing in our business to make our business better competitively? And how are we going to grow sales and share profitably over the long term?

Thank you. And just as a quick follow up, I believe the mega hubs came in at 13 in fourth quarter, and if I'm not mistaken that might be a little bit short of where you were targeting for '22 to '25 for full year, fiscal year '23. Are most of these openings just going to roll into 2023? Is there another way we should think about it? Thank you.

You want me to do Jamere's performance review in public?

I was just going to say, did he pay you to ask that question? So obviously, store development falls under my purview. We are short of where we need to be and when Phil and Bill talked about things that we need to execute better on, certainly what we're doing from a store development standpoint, fits squarely in that category. As I said, last quarter, we got 20 open this past fiscal year. We would have liked that number to be closer to 25. But what I'll tell you is that our pipeline is very strong as we move into FY24. And we're committed to get to the 200 number. So you'll see us start to accelerate that mega hub target. And it's important for our business. It's important not just for the commercial business, but also for the DIY business, because of the outsized growth that we see in our mega hubs. So we're working our way through it, and we'll get better as we move forward.

Thank you.

Thank you. Our next question is coming from Seth Basham with Wedbush Securities. Your line is live.

Thanks a lot, and good morning. My question is also on the commercial business, just in terms of where you're not getting as much share, as you expected. Is it in more in the national accounts versus [indiscernible] security accounts? Are there any specific regions that are underperforming your expectations?

Yeah, I mean, there's -- the national account versus what we call the UDS account or the general repair shop down the street, the business growth between the two has been pretty consistent. Frankly, I will say within some of those national accounts, I think it's been more around two segments that have not performed as well for us recently. One is the used car market, kind of the buy-here, pay-here, growth has not been as good and the used car markets that are sold within new car dealerships, those markets haven't been as good for us. And like Bill mentioned earlier, the groups that deal with tires have been softer. We didn't have a great winter. Those tire changes, going from a summer tire to a winter tire and vice versa, didn't happen like you would normally expect. And as Bill mentioned, when you pull that tire off, and you get to see that the brakes are rusted and the calipers frozen and the suspension parts aren't working as well as they should be, or maybe something's broken, that opportunity to get the wheel off, just generates a bigger repair. Now the other thing is, as people push maintenance off, there becomes more failures in the repair cycle. So longer term, pushing that deferred maintenance off is good for us. But those have been the pressure points over the last couple of months.

Understand those being the pressure points, but would you assess those are also the areas where you're not getting as much share as you expected?

Yeah, I don't know that we're not gaining share in those categories. I think, over the last couple of years, we know we've grown a significant share in some of those categories. I believe everybody would be down pretty commensurately. And some of those categories aren't going to return to a more normal cycle until you go through another winter cycle of snow. So I think they will be depressed. We'll see those categories, be under a little bit of pressure until we get through another normal winter cycle.

So I'll add that I do think, like we said earlier, we have -- we grew share exponentially over a couple of years. And part of that was because our in-stock position was massively better, certainly than our WD competitors. I think we've ceded some of that share back to them as they've gotten back in-stock.

Yeah, that's exactly my follow up is going to be Bill, just thinking about that in-stock position, when we start to cycle that improvement by your competitors, is that here into the fiscal first quarter, or is it going to take another couple of quarters?

I think we're beginning to cycle it now. But as you said, it's going to take some time not every category was the same, not everyone competitor was the same. So we'll probably be dealing with it for six more months but we probably past the height of it.

Great. Thanks, guys.

Thank you.

Thank you. Our final question today will be coming from Scot Ciccarelli with Truist. Your line is live.

Good morning, everyone. Thank you for the time. So I guess I'm still confused, outside of whether what has the main execution challenge has been on the commercial segment? Part one. And then part two, kind of related to that is, what specific changes are you making to the business to help accelerate growth as we kind of roll here into -- further into '24? Thank you.

Thanks, Scot. I think the answer is there's not one single thing. I think we tried to make that clear. We -- as we've said, for the last two quarters, we were operating differently during the pandemic. Everybody had to operate differently. Because we were having to make decisions on the fly every day. As we've come out of the pandemic, we've lost a few of our disciplines. These are things like writing the right schedule. We've experienced exceptionally high turnover. We don't have the same level of, of experience in our stores that we had then. And we've just got to get back to making sure that we're dotting the I's and crossing the t's. And we're delivering parts on time, that we've got the right hand stock levels, and on and on and on. There is not one major thing. These are thousand paper cuts. That has been the hallmark of this organization. I put our execution up against anybody. And we weren't as sharp as we needed to be, and we're making those improvements today.

And then specific changes you're making. Is it just better blocking and tackling for lack of a better term Bill?

I think that that is the biggest change that we're making. But that's not the sole thing that we're doing. Phil mentioned that we got a lot of technology that we've deployed in the commercial business. Over the last six months we've really refined that technology. And we're excited about what it means. We have two or three major technological enhancements that are coming in the first quarter or two this year, specifically in the commercial business that are all focused on how do we execute better? How do we decrease delivery times? How do we make sure that we're delivering the right parts at the right time? And we're excited about that.

Got it. Thank you.

All right. Thank you. All right. 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're 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 future, we are confident AutoZone will continue to be very successful. Thank you for participating in today's call. Have a great day.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time and we thank you for your participation.