Yahoo Finance AutoZone, Inc. (NYSE:AZO) Q2 2024 Earnings Call Transcript
AutoZone, Inc. (NYSE:AZO) Q2 2024 Earnings Call Transcript February 27, 2024
AutoZone, Inc. beats earnings expectations. Reported EPS is $32.55, expectations were $26.08. AutoZone, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to AutoZone’s 2024 Q2 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this conference is being recorded. Before we begin, the Company would like to announce the following forward-looking statements.
Unidentified Company Representative: 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 obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our press release.
Phil Daniele: Good morning, and thank you for joining us today for AutoZone's 2024 second quarter conference call. With me today are Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the second quarter, I hope you had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with the slides complementing our comments today, are available on our website at www.autozone.com under the Investor Relations link. Please click on the quarterly earnings conference call to see them. As we begin this morning, I'd like to say how honored I am to talk with you on behalf of our more than 120,000 AutoZoners. As today marks my first conference call as AutoZone’s, President and Chief Executive Officer.
At AutoZone, our first priority is to provide what we call WOW! Customer Service. This quarter, the efforts of our AutoZoners increased our total sales by 4.6% and total company same-store sales by 1.5% on a constant currency basis. Both our operating profit and earnings per share grew by a very impressive double-digit rates We continue to build on the phenomenal performance we had over the last several years. Congratulations to our AutoZoners everywhere, who helped us achieve this amazing growth. Before I begin my comments regarding our second quarter sales, as a reminder, this is always our most volatile quarter to predict as the timing and severity of winter weather is both meaningful and variable. It is also our lowest sales volume quarter.
This year, the Christmas and New Year's Day holidays fell on a Monday compared to Sunday last year. For commercial sales, this really mattered. Sunday is a very low sales day while Monday is one of the best. While weather across the US was very mild for the first 8 weeks of the quarter, we experienced a polar vortex and snow in the last four weeks. This extreme weather helped to propel us to stronger results in DIY, but muted our sales in commercial as snow in much of the Eastern United States, stayed on the ground for an extended period of time. Again, weather extremes either hot or cold, drive hard part failures and accelerate maintenance over time. For the second quarter, our total company same-store sales were 1.5% on a constant currency basis.
As international has become a more important part of our growth story in an area where we are increasingly deploying capital, we will continue reporting on our international performance. We encourage you to focus on the same-store sales, constant currency number where International, again, had a strong quarter, up 10.6%. We are very excited about the short and long-term growth prospects internationally, and we plan to accelerate new store openings over the next several years. Our domestic same-store sales were up 0.3% this quarter compared to 1.2% last quarter and 5.3% in Q2 of last year. Breaking our 12 weeks of sales into the first eight weeks and then the last four weeks, you can see the impact of the holiday shift and the weather volatility.
Domestically, we ran a negative 1.8% comp across the first eight weeks and a positive 4.4% comp in the last four weeks. This was even more pronounced when splitting these time frames up between commercial and DIY. Our commercial business grew 2.7% against very strong sales last year of 13.1%. Although our commercial business finished stronger than we started, our results were below our expectations. Across the 12-week quarter, we were up 4.1% for the first four weeks, then down 0.7% over the second four-week segment and up 4.4% over the last four weeks. Although better in the last four weeks segment, of the quarter, our sales were depressed due to the winter storms shutting down many commercial customers, particularly in the mid-south. The holiday shift combined with weather negatively impacted our sales by roughly 2% for the quarter.
Despite all this volatility in commercial sales, we are encouraged that we finished the quarter stronger. Commercial sales growth continues to be driven by the key initiatives we have been working on over time. Improved satellite and store inventory availability, material improvements in hub and mega hub coverage, the strength of the Duralast brand with an intense focus on high-quality products, and technology enhancements to make us easier to do business with. We recently launched initiatives focused on improving customer service with faster delivery times in commercial, while very early, we are encouraged by the initial results. In commercial, we continue to see higher growth rates for traffic relative to ticket. In Q2, we opened 20 net new commercial programs.
We now have commercial programs in 92% of our domestic stores. Domestic commercial sales represented 30% of our domestic auto part sales for Q2. We believe our commercial business will get stronger and growth rates will improve as we move through the year. Sales growth comparisons get easier in the back half of the year and our execution, customer delivery times, in-stock levels, and parts availability continue to improve. Regarding domestic DIY, we had a negative 0.3% comp this quarter versus last year's comp of positive 2.7%. DIY ran 0.7% across the first four weeks of the quarter, a negative 6.2% across the second four-week segment and a positive 4.8% comp over the last four weeks. The last four-week time segment was accelerated due to the winter weather, as a reminder, last year, the polar vortex hit in the second four-week segment.
I'd like to add some color on our regional performance as well. The Northeast and the Midwest markets underperformed the remainder of the country by 500 basis points in the middle four-week segment, only to swing to a positive 1,250 basis points overperformance for the last four-week segment. For the quarter, we saw a 270 basis point favorable performance in the Northeast and the Midwest versus the remainder of the country. Although the Midwest had some extreme cold, we frankly would like to see more winter weather along the East Coast markets, where the winter has been persistently mild for more than two years now. Overall, for the quarter, the West performed least favorably. Headed into the third quarter, we are planning for a more normal weather pattern, meaning we feel weather will not play a big story, one way or the other.
Our Q3 performance is always contingent on a normalized tax refund season and we expect this year to be similar to last year. Regarding our merchandise categories and DIY business, our sales floor categories underperformed hard parts as we saw more discretionary pullback, particularly from the low-end consumer. Regarding this quarter's traffic versus ticket growth, our DIY traffic was down 2.2%, while our ticket average was up 1.7%. We expect our ticket growth will return to more normalized levels in the 2% to 4% range as we get further removed from higher inflation last year. We attribute our share gains to improve customer service levels in our store, and our in-stock nearing pre-pandemic levels driven by improved productivity in our distribution centers.
While we are up against exceptionally strong same-store sales from a year ago, particularly in commercial, we believe we are making progress. We've made many changes across the organization. From doubling down on many of our long-term execution processes, ensuring that we are hiring the best AutoZoners and reducing turnover, our execution is improving, and we're making steady progress. Before handing the call to Jamere, I'd like to highlight and give some color on our international business. At 859 stores opened internationally or 12% of our total store base, the business had impressive performance last quarter and should continue to grow at a robust pace for the remainder of fiscal 2024. We are leveraging many of the learnings we have in the US to refine our offerings in our international markets.
And finally, before Jamere discusses our financial results, I'd like to remind you of our overarching objectives for fiscal 2024. We are focused on growing our domestic commercial business and believe our improved service levels will lead to continued sales growth. We also continue to focus on our supply chain with two initiatives that are in flight and drive improved availability. First is our expanded hub and mega hub rollouts. And secondly, we're making good progress on transforming our distribution network. We have two domestic distribution centers currently under construction in the US, Chowchilla, California and New Kent, Virginia. We are also nearing the completion of our expanded Tepeji, Mexico distribution center. Additionally, we have broken ground on a larger facility that will house our relocated Monterrey distribution center.
Our strategy is focusing on leveraging the entire network to carry more inventory closer to the customer, driving sales growth with improved speed and expanded parts availability and improved efficiency. Now I'd like to turn the call over to Jamere Jackson.
Jamere Jackson: Thanks, Phil, and good morning, everyone. As Phil has previously discussed, we had a solid second quarter, marking our fifth sequential quarter of double-digit EPS growth. This quarter, we delivered 4.6% total company sales growth with a 0.3% domestic comp, a 10.6% international comp on a constant currency basis, a 10.9% increase in EBIT and a 17.2% increase in EPS. We continue to deliver solid results and the efforts of our AutoZoners in our stores and distribution centers continue to enable us to drive growth in a meaningful way. 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 sales were up -- were $3.9 billion, up 4.6% and let me give a little color on our sales and our growth initiatives, starting with our domestic commercial business.
Our domestic DIFM sales increased 2.7% to $980 million and were up 15.8% on a two-year stack basis. Sales to our domestic DIFM customers represented 25% of our total company sales and 30% of our domestic auto part sales. Our average weekly sales per program were $14,051, down 2.8% versus last year. Once again, the weekly sales averages were impacted by the addition of a significant number of immature programs over the last couple of quarters. I'll also remind you that Q1 and Q2 are our toughest comparisons this fiscal year and we expect our year-over-year comparisons to be somewhat easier in the back half of our fiscal year. We now have our commercial program in approximately 92% of our domestic stores, which leverages our DIY infrastructure and we're building our business with national, regional and local accounts.
This quarter, we opened 20 net new programs finishing with 5,823 total programs. Our commercial acceleration initiatives continue to make progress as we seek to grow share by winning new business and increasing our share of wallet with existing customers. Importantly, we have a lot of runway in front of us and we will continue to aggressively pursue growth opportunities in commercial, which we believe is our single largest growth opportunity. To support our commercial growth, we now have 101 Mega Hub locations. Our Mega Hubs continue to average significantly higher sales than the balance of the commercial programs and grew more than three times the rate of our overall commercial business in Q2. Our Mega Hubs typically carry roughly 100,000 SKUs drive tremendous sales lift inside the store box and serve as an expanded fulfillment source for other stores.
These assets are performing well individually, and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to tens of thousands of additional parts and lifting the entire network. We will continue to aggressively open Mega Hubs for the foreseeable future, and we expect to have north of 200 Mega Hubs at full buildout. On the domestic retail side of our business, our comp was negative 0.3% for the quarter, as Phil mentioned, we saw traffic down 2.2%, offset by 1.7% ticket growth. As we move forward, we would expect to see slightly declining transaction counts, offset by low to mid-single-digit ticket growth in line with the long-term historical trends for the business, driven by changes in technology and the durability of new parts.
While DIY discretionary purchases were challenged in Q2, we continue to see a growing and aging car park, a challenging new and used car sales market and a consumer that is likely to continue to invest in their existing vehicles. In addition, miles driven are back to pre-pandemic levels. As such, we believe our DIY business will remain resilient for the remainder of FY 2024. Now I'll say a few words regarding our international business. We continue to be pleased with the progress we're making internationally, our same-store sales grew an impressive 23.9% on an actual basis and 10.6% on a constant currency basis. During the quarter, we opened six stores in Mexico to finish with 751 stores and four stores in Brazil, ending with 108. We remain committed to international and given our success, we're bullish on international being an attractive and meaningful contributor to AutoZone's future growth.
Now let me spend a few minutes on the rest of the P&L and gross margins. For the quarter, our gross margin was 53.9%, up 160 basis points, driven primarily by a significant improvement in our core business gross margins and 63 basis points from a non-cash $10 million LIFO charge in last year's quarter versus a $14 million LIFO credit this year. Excluding LIFO from both years, we had a very strong 97 basis points improvement in gross margin, which increased from last quarter's 70 basis point improvement. We've had exceptional gross margin improvement. And in fact, Q2's gross margin was at the highest gross margin rate we've had since Q2 of FY 2021. I'll point out that we now have $43 million in cumulative LIFO charges yet to be reversed through our P&L, and we expect this credit balance to reverse over time.
We're currently modeling $15 million of LIFO credits for Q3 based on the deflation experienced in Q1 and Q2. This compares to the $17 million LIFO credit we had in Q3 last year, which means we'll have a $2 million net LIFO headwind in gross profit in Q3. As I've said previously, once we credit back to $43 million through the P&L, we will not take any more credits, and we will begin to rebuild an unrecorded LIFO reserve. Moving to operating expenses. Our expenses were up 6.1% versus last year's Q2 as SG&A as a percentage of sales deleveraged 49 basis points. The accelerated growth in SG&A has been purposeful as we continue to invest in store payroll and IT to underpin our growth initiatives. These investments are paying dividends and customer experience, speed, and productivity.
We're committed to being disciplined on SG&A growth as we move forward, and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L. EBIT for the quarter was $743 million, up 10.9% versus the prior year, driven by our positive same-store sales growth and gross margin improvements. Interest expense for the quarter was $102.6 million, up 56% from Q2 a year ago as our debt outstanding at the end of the quarter was $8.6 billion versus $7 billion at Q2 end last year. We're planning interest in the $105 million range for the third quarter of FY 2024 versus $74.3 million last year. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 19.6% and down from last year's second quarter of 21.2%, this quarter's rate benefited 360 basis points from stock options exercised, while last year, it benefited 222 basis points.
For the second quarter of FY 2024, we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises. Moving to net income and EPS. Net income for the quarter was $515 million, up 8.1% versus last year. Our diluted share count of 17.8 million was 7.8% lower than last year's second quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $28.89, up 17.2% for the quarter. Now, let me talk about our free cash flow for Q2. For the second quarter, we generated $179 million in free cash flow. We had higher CapEx spending this quarter versus a year ago and we expect to spend close to $1.1 billion in CapEx this fiscal year as we complete the addition of our distribution center capacity expansion ahead of schedule.
I'll also remind you that we generate a majority of our free cash flow in the back half of our fiscal year. We expect to continue to be an incredibly strong cash flow generator going forward and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong and our leverage ratio finished Q2 at 2.4 times EBITDA. Our inventory per store was up 1.6% versus last year, while total inventory increased 4.2% driven by new store growth. Net inventory, defined as merchandise inventories less accounts payable on a per store basis was a negative $164,000 versus negative $227,000 last year and negative $197,000 last quarter. As a result, accounts payable as a percentage of inventory finished the quarter at 119.8% versus last year's 127.7%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $224 million of AutoZone stock in the quarter. And at quarter end, we had just over $2.1 billion remaining under our share buyback authorization. We've bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to a leverage target in the 2.5 times area and a disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. So to wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash and returning excess cash to our shareholders.
We're growing our market share, expanding our margins and improving our competitive positioning in a disciplined way. And as we look forward to the remainder of FY 2024, we remain bullish on our initiatives to grow sales behind a resilient DIY business, a fast growing international business and a domestic commercial business that remains underpenetrated and should accelerate in the back half of the fiscal year. I continue to have tremendous confidence in our strategy and our ability to drive significant and ongoing value for our shareholders. And now I'll turn it back to Phil.
Phil Daniele: Thank you, Jamere. I want to stress how proud I am to represent the company as only the fifth CEO over the almost 45 years we have been in business. As you've heard, we have a lot of initiatives in flight and we have a great team of AutoZoners in place to take us to the next level. We truly believe we will continue to improve from here. We are well-positioned to grow sales across our domestic and international store bases with both our retail and commercial customers. Our gross margin margins are solid, and our operating expense structure is appropriate for future growth. We are putting our capital expenditures where it matters most. Our stores, our distribution centers and leveraging technology to build a superior customer experience where we are able to say yes to our customers' needs.
Fiscal 2024's top priority is enhanced execution. Additionally, we have many strategic projects in various stages of completion. We will continue opening new mega hub and hubs, completing construction on the new distribution centers and optimizing our new direct import facility. We are also in the early stages of ramping up our domestic and international store growth. As you noticed, our international teams posted same-store sales comps on a constant currency basis of 10.6%, much higher than our domestic comps. International has been strong for several years now. While I mentioned all these investments in FY 2024, AutoZone's biggest opportunity remains growing share in our domestic commercial business. While Q2 was below our expectations, we believe we have a solid plan in place for growth over the remainder of the year.
We know our focus on parts availability and wow customer service will lead to additional sales growth. We are excited about what we can accomplish and our AutoZoners are committed to delivering results. Now I'd like to open up the call for questions.
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