Autozone Inc (AZO) — Q4 2019 Earnings Call Transcript

Certain statements contained in this presentation constitute forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, seek, may, could, and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties including, without limitation, product demand, energy prices, weather, competition, credit market conditions, cash flows, access to available and feasible financing, future stock repurchases, the impact of recessionary conditions, consumer debt levels, changes in laws or regulations, war and the prospect of war, including terrorist activity, inflation, the ability to hire, train, and retain qualified employees, construction delays, the compromising of confidentiality, availability or integrity of information, including cyber attacks, historical growth rates, sustainability, downgrade of our credit ratings, damages to our reputation, challenges in international markets, failure or interruption of our information technology systems, origin and raw material cost of suppliers, impact of tariffs, anticipated impact of new accounting standards, and business interruptions. Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of this Annual Report on Form 10-K for the year ended August 25, 2018 and these risk factors should be read carefully. Forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements and events described above and in the risk factors section could materially and adversely affect our business. Forward-looking statements speak only as of the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results.

Good morning and thank you for joining us today for AutoZone's fourth quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the fourth quarter, I hope you have had a chance to read our press release and learn about the results. If you haven't, the press release along with slides complementing our discussion is available on our website under the Investor Relations section. To start this morning, I want to thank all AutoZoners for their incredible efforts to fulfill our commitment. Unlike many organizations, we don't have a vision or mission statement; instead, we have a pledge to ourselves and our customers to deliver exceptional service. This commitment has allowed us to achieve the impressive results we reported this morning, and the credit goes to our dedicated AutoZoners. Overall, we were pleased with our Q4 performance. We will review key themes for the quarter, including our success with the commercial business, monthly sales trends, regional performance, the impact of tariffs on retail and margins, and our successes in customer focus, commercial acceleration, omnichannel, leveraging technology, and inventory initiatives. Our commercial sales grew 21.1% year-over-year and 14.1% on a 16-week basis, which was challenging due to a tougher comparison from last year. It's encouraging to see our two-year commercial comparisons improve each quarter this year, with a growth of 15.7% and 13.4% on a comparable 52-week basis—accounting for approximately $350 million more in sales compared to last year. Our team's commitment to growing this business throughout 2019 has been commendable. While we are still smaller than many peers in absolute sales volume, our growth rate is significantly higher, exceeding three times the industry rate. This growth is a result of multiple initiatives that have been developed over the years, including inventory improvements, hub and mega hub expansions, the strong reputation of our Duralast brand, technology enhancements, increased engagement from our store teams, and the efforts of our entire sales organization to effectively convey our value proposition. We also increased sales per store more than in the past, averaging our highest weekly sales productivity at $10,700 per program. Our growth with mature customers improved significantly this year, indicating that our offerings, products, and service quality have been recognized by our customers. Our up-and-down-the-street business also grew faster than the overall commercial growth, showing that improvements are being appreciated across different customer types. With more hub stores, better salesmanship, and improved product assortment, we have a solid foundation to build upon. Congratulations again to our organization for the great commercial performance in 2019. Their intense focus on growth is working. Regarding our domestic DIY business, while we achieved positive same-store sales for the quarter, our performance was affected by a slower May and a weaker first half of the quarter, followed by an uptick in the second half. Retail remains a steady revenue stream and cash flow generator, although we experienced weaknesses, particularly in the West and Southwest regions. We also had fewer heat-related sales this quarter. Certain Hispanic markets demonstrated some weakness, which has occurred in the past when immigration issues have been prominent. Our DIY share remained flat for the quarter while commercial saw robust growth. We gained market share for the fiscal year. Although our retail business is more mature, we are pleased with Q4 results and remain optimistic about the upcoming year, thanks to our inventory and staffing strategies. We believe our focus on enhancing customer service is making a difference, and the wage adjustments made last October will help us attract and retain high-quality talent for exceptional service. It’s essential to recognize the importance of our knowledgeable AutoZoners in assisting customers. Regarding tariffs, we previously discussed the minimal SKU-to-SKU inflation we've experienced historically due to the introduction of products at low scale, leading to lower per unit costs as they scale. We noted some inflation from earlier tariffs, and as new tariffs have been introduced, we have started passing those costs to customers. These increases may be significant, up to 25% on some products, and we are implementing retail price adjustments in waves to ease the burden on our customers. While SKU-to-SKU inflation has increased compared to the last quarter, it remains manageable, and we haven’t seen substantial changes in gross margins due to tariffs, although our prices will continue to rise. Turning to our omnichannel efforts, we are investing in strategies to enhance the customer shopping experience and ensure we reach them when and how they prefer. We are improving our in-store systems and our websites, and we continue to see growth in website traffic and shipping options. Although our ship-to-home and buy online options represent a small percentage of our business, we are pleased with customer adoption. Our next-day delivery program allows customers in over 85% of U.S. markets to order late and receive their products the next day, with plans for further expansion. We are also enhancing our digital offerings for commercial customers to deepen engagement and improve service. We recognize that customers often research online before visiting stores for in-person advice and services that are not easily replicated online. Regarding our focus for 2019, identified as "Drive for Excellence," we are striving for exceptional customer service, fast deliveries, and high-quality products. We are challenging our store leadership to reduce non-customer-facing tasks to improve service levels, and we have much work to do moving forward. In terms of inventory initiatives, our "Yes, We've Got It" effort involves expanding our hub store network. We currently have 35 mega hubs and 170 hub stores, with plans to open between 70 and 90 mega hubs nationwide. This will take several years to achieve, but it will significantly enhance local coverage and availability of inventory for customers. We are focused on meeting customer needs and providing a great workplace for our AutoZoners while ensuring profitability for our shareholders. We aim to exceed customer expectations consistently, regardless of the challenges involved. In our 2019 initiatives, we invested in technology to enhance our catalog and point-of-sale systems, ensuring seamless transactions for customers. We aim to improve our competitive position and equip our AutoZoners with the knowledge and efficiency needed for sales growth. Although these investments add to our expenses, we remain committed to enhancing customer experiences with continued investments into the future. We've spent substantially more on development this year and are focused on ongoing improvements in 2020. For commercial acceleration, we've invested in systems to facilitate efficiency for AutoZoners and ease of business for customers. Our emphasis on engaging the store team and focusing on existing customers is yielding positive results. In summary, we are satisfied with our performance and optimistic about industry strength in both DIY and DIFM, as well as our prospects for the coming fiscal year. We believe macro factors like low gas prices and increased driving miles are favorable for our business, and we will continue to grow our market share in both DIY and commercial sectors. Now let me provide more specifics on the quarter. Total auto parts sales increased by 11.9%, with a 5.2% increase when excluding the additional week of sales. Domestic same-store sales were up 3%. Regionally, our Northeastern, Midwestern, and Mid-Atlantic markets, representing about 28% of our store base, outperformed other regions. For the fiscal year, we opened 209 new stores, including 55 internationally and 152 net new domestic commercial programs, with no store closures. During the quarter, we opened 86 new stores in the U.S. and 62 net new commercial programs, with 85% of our domestic stores having a commercial program. We also continued our expansion in Mexico, opening 28 new stores and surpassing the 600 store mark, which is an incredible achievement. In Brazil, we opened 10 new stores, ending the quarter with 35. Our return on invested capital remained strong at 35.7% for the fourth quarter, one of the best in the hard lines retail sector, and we are committed to ensuring that every dollar of capital deployed yields a strong return above our cost of capital. It's crucial to maintain our diligence regarding capital stewardship, given that these investments are made with our investors' capital. Before turning the call over to Bill Giles for financial results, I would like to express our gratitude for our AutoZoners' contributions to achieving solid results for fiscal 2019. Now I will hand it over to Bill Giles. Bill.

Thanks, Bill, and good morning everyone. I would like to discuss our domestic retail, commercial, and international results. For the quarter, total auto parts sales, which include our domestic retail and commercial businesses as well as our stores in Mexico and Brazil, increased by 11.9%. Excluding the extra week of sales, total auto parts sales were up 5.2%. For the trailing 52 weeks that ended, total sales for AutoZone stores reached $1,809,000, an increase from last year's average of $1,778,000 at the end of Q4. Total commercial sales increased by 21.1%, with a 14.1% growth on a 16 week basis. In this quarter, commercial sales accounted for 22% of our total sales, growing approximately $103 million compared to last year's Q4 on a 16 week basis. We are excited to announce that our domestic commercial sales averaged $10,700 in weekly sales per program, marking the highest quarterly average in our history, a notable increase of 10.6% from last year’s $9,700 during Q4. Our sales for the quarter were $2.5 billion, a strong result. Our commercial program is now available in 4,893 stores, which is 85% of our domestic locations. As Bill mentioned earlier, we are committed to gaining market share with our commercial customers and are encouraged by our current initiatives aimed at boosting sales and market share. Our stores in Mexico have been performing well, having opened 28 new locations during the fourth quarter, bringing our total there to 604 stores. I am always impressed by our talented team in Mexico and their execution of our model, as well as their embrace of our culture during my visits. In Brazil, we now operate 35 stores, with our team opening 15 new locations in fiscal 2019 from a base of only 20 at the start of the year. This achievement required significant efforts in hiring, training, and developing our new employees. Our performance continues to improve, and we are optimistic about the long-term potential of this market, which we believe could be much larger than Mexico. Although we are currently facing an annual operating loss in this market, its potential size is considerable. The gross margin for the quarter was 53.4% of sales, down 20 basis points from last year's fourth quarter, primarily due to the lower margin of goods sold as a result of a higher mix of commercial business. While our rapid growth in the commercial segment is affecting our overall gross margin rate, we recognize opportunities to reduce costs through direct sourcing. While we are looking at ways to improve our gross margin rate, we encourage continued buying trends due to the shift towards commercial. I want to emphasize our commitment to reducing costs where appropriate and feel we can enhance our efforts from this point. Our primary focus has always been on increasing absolute gross profit dollars in our total auto parts segment, and we have been pleased with our growth driven by the acceleration in commercial sales. SG&A for the quarter was 33.8% of sales, down 316 basis points from last year’s fourth quarter. Last year, we had a significant expense related to the termination of our pension plan. Excluding the $130 million charge from last year's numbers, our operating expenses this year were higher than the previous year but in line with our expectations at the beginning of the quarter. Operating expenses for the quarter rose by 7.6% on an adjusted basis. The cost increases this quarter were chiefly driven by our intentional investments in domestic store payroll and ongoing IT investments. We want to remind financial analysts that SG&A dollars will also increase proportionately in line with growth from this past quarter, as wage rate investments began in the latter part of Q1 last year. EBIT for the quarter was $780 million, with an EBIT margin of 19.6%. Interest expense for the quarter was $61.2 million, an increase from last year's Q4, mainly due to the extra week. We plan for interest in the $44 million range for the first quarter of fiscal 2020, up from $39 million in last year’s Q1. Our higher forecasts last year also included costs from the bond issuance we had in April. Debt outstanding at the end of the quarter stood at $5.2 billion, roughly $200 million higher than last year’s Q4 ending balance of $5 billion. Our adjusted debt level metric concluded the quarter at 2.5 times EBITDAR, and while our leverage metric may fluctuate based on management's assessment of market conditions, we remain committed to maintaining our investment grade rating and capital allocation strategy, with share repurchases being a key component. For the quarter, our tax rate was 21.45%, benefiting approximately 105 basis points from stock options exercised during the quarter. Excluding this benefit, our rate was 22.5%. For the first quarter of fiscal year 2020, we are modeling at 23.5% before incorporating any credits for stock option exercises. As we cannot effectively forecast this activity, we emphasize our commitment to transparently report the implications of stock option benefits on the cumulative tax rate. Net income for the quarter rose to $565.2 million, a 41.2% increase from last year. Our diluted share count of 25 million was down 6.1% compared to last year's fourth quarter. These factors drove our earnings per share for the quarter to $22.59, an increase of 50.4% from the previous year’s Q4. Adjusting for the extra week this year and the pension expense from last year’s Q4, earnings per share increased by 13%. In terms of our cash flow statement for the fourth quarter, we generated $842 million in operating cash flow. Our net fixed assets grew by 4.3% compared to last year. Capital expenditures for the quarter amounted to $182 million, reflecting the additional costs associated with opening 124 net new stores this quarter, along with investments in existing stores, hubs, mega hubs, and technology. With the new stores, we concluded the quarter with a total of 5,772 stores across 50 states, including Colombia, Puerto Rico, and St. Thomas, as well as 604 stores in Mexico and 35 in Brazil, totaling 6,411 AutoZone stores. Depreciation expense for the quarter reached $118.8 million, compared to $108 million in the fourth quarter last year, which aligns with recent growth rates. In the fourth quarter, we purchased $692 million of AutoZone stock compared to $665 million during the same quarter last year. At the end of the quarter, we had $477 million remaining under our share buyback authorization, and our leverage metric stood at 2.5 times. It is important to note that we manage to maintain appropriate credit ratings rather than fixate on any single metric. The metrics we provide serve merely as a guideline since each trading firm has its own evaluation criteria. We view our share repurchase program as an appealing strategy for capital deployment. Now, I would like to update you on our inventory levels overall and on a per-store basis. The company's inventory grew by 9.5% year-over-year, driven by new stores and increased product placement. Inventory per location was $674,000 compared to $636,000 last year and $688,000 last quarter. The net inventory, defined as merchandise inventory minus accounts payable on a per location basis, was a negative $85,000 compared to negative $75,000 last year and negative $58,000 last quarter. Consequently, accounts payable as a percentage of gross inventory ended the quarter at 112.6%. Lastly, as Bill previously indicated, our disciplined approach to capital management has yielded a return on invested capital of 35.7% for the trailing four quarters. We will continue to make investments that we believe will significantly exceed our cost of capital. Now, I will turn it back to Bill Rhodes.

Thank you, Bill. We are pleased to report a solid fourth quarter and fiscal year. At 3% same-store sales our fiscal 2019 was our best comping year since 2015. For the New Year we must continue to focus on executing at a high level which we believe can and has been a competitive advantage. To execute at a high level we have to consistently adhere to living the pledge. We cannot and will not take our eye off execution. While we study the external environment and react where appropriate we must stay committed to executing day in and day out on our game plan. Success will be achieved with an attention to detail and exceptional execution. For 2020 we have a lot of deliverables from our IT initiatives and we will remain focused on simplifying our store AutoZoners workloads, to reduce clutter and unnecessary tasks that get in the way of making the customer experience better for both the Do It Yourself customer and the professional customer. We believe our industry's fundamentals will remain strong as miles driven are expected to increase over the remainder of the year and while there's been many forecasts otherwise the vehicle part has continued to age and the internal combustion engine remains the dominant vehicle of choice. Before I conclude the call I want to take this opportunity to reflect on fiscal 2019. We were able to build on past accomplishments and deliver some impressive results. In recognition of the dedication, passion, and commitment of our AutoZoners I want to highlight what they as one very strong team delivered in 2019. Both retail and commercial experienced positive same store sales in every quarter. Our total sales grew by 5.7% on a 52 week basis and set an all time sales record at 11.9 billion. Our commercial sales aggressively accelerated from 7.3% growth last year to 13.4% this year on a 52 week basis with growth in mature customer sales and productivity per program, the highest in our history. We made significant and meaningful investments in our tenured store hourly AutoZoners and it has improved our performance. Research confirms impressively that more technicians choose Duralast parts and we continue to leverage the power of the Duralast brand expanding into new categories or product types. On the back of a stellar performance of our mega hubs, we expanded our vision of the future more than doubling the ultimate plans to 70 to 90 mega hubs. We opened our 600th store in Mexico and we opened 15 new locations in Brazil off of a base at the beginning of the year of only 20. We continued to accelerate our investments in technology, leveraging technological enhancements in every facet of our business. Leveraging our very strong and predictable cash flow we repurchased a record $2 billion in AutoZone stock in fiscal 2019. Since inception in 1998 we have now repurchased a cumulative $21.4 billion and we have reduced our share count from 152.1 million to 24 million. Most importantly, our team has continued to live our pledge and leverage our unique and powerful culture to deliver exceptional service to our customers who rewarded us with incremental business. I'd like to take this opportunity to again recognize and thank our team of talented, dedicated, passionate AutoZoners for what they do each and every day for our customers which expands opportunities for AutoZoners, allows us to support the communities we serve, and ultimately rewards our shareholders. We're excited about our balanced model for growth around domestic retail and commercial, international, online, and pick up in-store. We believe our hubs and mega hubs, Mexico, Brazil, ALLDATA and digital can all grow their top line this upcoming year. To execute at a high level we must adhere to living the pledge, we cannot and we will not take our eye off of execution. Success will be achieved with an attention to detail and thoughtful execution. Service has always been our most important cultural cornerstone and it will be long into the future. Now we would like to open up the call for questions.

Hey guys, good morning. Thanks for taking the question and congrats on the progress this quarter and for the year. I wanted to just follow-up on the point on the cadence in the quarter. You talked about some challenges earlier in the quarter, and then obviously an improvement later in the quarter. Can you just clarify was that specific to DIY or did you also see that trend in commercial? And then as we think about that trend in the second half of the quarter, is that more representative of the run rate of the business and how we should be thinking about the first quarter here, thanks?

Yeah, fantastic question, thank you. A couple of things; one, weather effects are always more exaggerated in the retail business at least for us at this stage in our development than they are in the commercial business. So commercial will see weather implications, but not nearly to the same extent that retail will see them. So, the ones that we were talking about specifically were more retail oriented. Part of what happened was we had a very late spring, and so May was particularly soft and then June was soft too not on a comp store basis because we had a really strong June the year before. We think July and August were much more normalized, and we hope that they are indicative of what we're going to experience in the first quarter. But we don't know what's going to happen with weather or other effects, but we feel very good about our performance in Q4.

Of course, okay. And then you did mention that prices have started to increase, can you guys give us a sense of the impact it may have had on comps this quarter. And in general, how is the consumer responding in your view? I know you talked about raising prices in waves, but if you could talk about how you're seeing the consumer respond initially, that would be helpful? Thank you.

Yes, so far, I would say that we're seeing a good response from the consumers, and I think that the merchandising organization is doing a great job of kind of measuring these increases in as they roll through our weighted average cost. And so, it's still early days, and so I would say that we haven't seen a significant impact from a sales perspective or from a margin perspective necessarily from the tariffs, but we'll continue to monitor and continue to manage it that way going forward.

Okay, great. Thanks guys.

Thank you.

Thanks, good morning. So, I wanted to ask first on gross margin. I have two related questions. So, Bill Giles, I think you mentioned that our gross margins should be similar going forward I think to recent trends, and I think you also said you want to make improvement. So, can you reconcile those two and then in terms of the time frame that we should extrapolate that, is that for Q1 or is that for the whole year? And then as tariffs roll in, does it make it harder to show improvement in that trend line or it all depends on the elasticity?

That's a good question. Let me explain. We believe there are opportunities to improve our gross margin, and we are constantly looking for ways to enhance our sourcing to reduce costs. As previously mentioned, the Duralast brand is very strong, and we see further opportunities to expand it into other categories as we develop the brand. Additionally, I am focusing on the short term rather than trying to forecast for the entire year. As we increase our commercial business at a double-digit rate, that will create some pressure on gross margin. This quarter, the impact was around 20 basis points. Our main priorities are growing the business, increasing gross margin dollars, and achieving EBIT growth. We will actively manage our margins and continue to seek cost reduction opportunities, but the growth of our commercial business will continue to exert some pressure on our overall gross margin rate.

Got it, okay, that's helpful. My follow-up is on SG&A and I guess trading profit for growth maybe. So you stepped up a lot in fiscal 2019 and you seem to be getting a pretty good return. And you've invested on a steady pace over time. Are you debating whether it makes sense to spend even at a higher rate and trade a little more profit for growth?

I would say that the investments that we've made have been very specific and very targeted. So, our investments to this point have been on wage adjustments that we believe were appropriate and we believe we're getting benefit from those wage adjustments. As we move forward, we recognize that we will continue to have some wage pressure mostly from regulatory activity that is taking place across the country. So, we recognize that wages will continue to be a little bit of a pressure point, maybe not as high as it was when we proactively invested in wages. And then technology and that's a smaller component, but it's still an investment. And so, those are the specific areas and we will continue to invest in technology, and as Bill mentioned in our prepared remarks, last year was probably one of the highest years we've spent on technology, and we expect to continue to invest even more in technology as we move forward. So those are the two areas, and yes, you're right, we will play in the environment that we are in and sales have been strong and we've been able to manage our way through that and continue to generate earnings results.

Okay, thank you.

Hey, good morning. First one on the commercial growth, curious if you could speak a little more about the makeup of the growth in the quarter, what would you attribute to new commercial programs and then on the comp component to what extent would you categorize the growth as independent mom and pop versus national or regional accounts and maybe could speak to some of the puts and takes here around the various customer categories?

Yeah, terrific question. First of all, we were very excited about the growth that we had in the commercial business across all different customer segments. I did say in our prepared remarks that the up-and-down-the-street customer which are those small mom and pops grew at a faster rate than the rest of the commercial business. And we want to make that point clear to make sure you know that this is a widespread growth. Our growth in mature customer sales I also said was at an all-time high level. So we were very excited about how it came across different markets, different customer segments just across the board which tells us that all the different things that we're working on from getting our store managers and district managers more engaged to the hub initiatives that we've had to the inventory initiatives that they're all working in tandem which is exactly what we were hopeful of.

Got it, and on the investments you called out for 2020 curious if you could speak a little more about what you're doing differently versus the investments in 2019? And Bill on your SG&A comment I just want to confirm that we should think about SG&A growth up in the seven and halfish range similar to what we saw this quarter on a 52 week basis. And if there's any extra commentary that you would add on cadence or duration of that spending in 2020?

Yeah, I would say that the 7.5% is the right number to think about and give you more update as we move along through the year. But certainly for the next quarter that's the way I would be thinking about it. Relative to what we did last year and how we're thinking about it moving forward and as I said I think we'll continue to invest in wages much of it will be in response to regulatory pressures. And then we will continue to escalate some of our technology investments and they will occur both on the commercial side of the business and the retail side of the business. We have made some good investments on commercial in order to be able to be an easier place to do business with through our commercial customers and provide better service there. And we recognize that there are opportunities on the retail side as well to improve customer service through technology. And then obviously like any mature company we're also changing our legacy systems as we move along and we've had a big effort on that over the last couple of years.

Got it, makes sense. Appreciate the time guys.

Alright, thank you.

Good morning, thanks a lot for taking my questions. Bill Rhodes historically AutoZone has been mid-single-digit operating income grower and buying back enough stock to get double-digit. Now your operating margin has been down, it sounds like between faster commercial growth and domestic investments we should have guarded expectations around the operating margin, were these the near-term. So is this still reasonable to expect that AutoZone can achieve this type of growth algorithm…?

Thank you for the question, Michael. If we look back, we had an impressive period of 41 consecutive quarters with double-digit EPS growth. A lot has changed since then, but some things remain the same. We still aim to grow our EBIT in the low to mid-single digits, and through our share repurchase program, we hope to push our growth to around or above 10%. However, I don't anticipate we will replicate that 41-quarter streak. As our commercial side grows, we will inevitably experience pressure on our gross and EBIT margins. Our focus is not on the overall operating margin for the company, but rather on growing operating profit dollars at a reasonable rate and achieving solid returns on the capital we invest to support that growth.

Just to clarify, you mentioned there has been a change. Are you referring to the fact that the business is now being influenced by commercial transparency, potentially increasing your gross margin? What specifically were you indicating about this change?

I would say that the changes are really the acceleration of our commercial business and so as we've seen that grow from a mid-single-digit to high single digits to low double-digit that's a significant component of the change certainly that we've seen in the past and that's what we expect in the future. So, from that perspective and back to your margin question is that that continues to put a little bit of pressure on margin but we're all about taking market share and growing the business and growing dollars. And so that's really where our primary focus is and so far we've executed on that on both fronts but particularly in commercial.

Yeah, it is hard to tell a little bit on the inflation part of it. I mean there's absolutely a component of inflation that’s baked into our comp store sales improvement whether or not that inflation resulted any pressure points from a demand perspective, it's hard to tell. So it's kind of two-dimensional there. But look I would say that there is definitely a component of the same store sales that is somewhat driven by inflation but overall it was healthy growth. And keep in mind also that our inventory return is a 1.3 so the costs are coming through at a relatively slow rate. And so we're increasing our retails as we're seeing that cost go through. So, it is a double-edged sword. We wish inventory return was faster but in this particular case it's been a little bit of a benefit for us. So we've been able to kind of measurably improve our retail prices in order to offset those costs as we move along and we will continue to do that going forward. So it won't be as lumpy as increasing our retail prices all at once.

Thank you and good luck.

Thank you.

Thanks, good morning everyone. I have a couple of follow-up questions regarding the commercial business and the performance you experienced in July and August. Would you consider this summer to be typical, indicating there are no significant challenges or advantages to consider for the upcoming fall season? Additionally, regarding the weather in the fall, if we have a warmer September and October, would that affect the business in any way, or could it potentially hinder performance?

I will start with the second part of it. The weather effects in our business are generally very muted in the fall. There's not a lot of rainfall that happens in the fall generally. The temperatures are maybe warmer than last year but they're not extreme temperatures that would put excess stress on our vehicle parts. So I don't think if we called out weather as a major initiative outside of hurricanes in the past. So if we get a hurricane like we did in Houston or in South Florida then that can be a bigger issue. And what was the first part of your question Chris.

How would you classify the weather this past summer, July-August, June, July?

I don't think it had a big effect on our commercial business. As we went into, and you were asking is there something coming headwind or tailwind, as we went into the fourth quarter the real question for us was how could we lap the accelerated growth that we had last year in Q4. That's really when our growth started to begin to grow or build and we will have the same impact in Q1, Q2, and Q3 where we will be up against stronger and stronger comps. But our momentum has been pretty consistent.

So that's my follow-up. So obviously May and June did have some moderating impact on your commercial comps, but yet you did accelerate the stack. So how are you thinking about modeling that business going forward and your ability to sustain comp stacks against those harder comparisons or even potentially accelerate them, continue to accelerate them?

I'll go back to one thing that I said earlier in the call, and that is that the effects of weather in the commercial business are very small in comparison to the retail business. So I don't want you to think that May and June were very soft because they weren't in the commercial business, they were softer in the retail business but the commercial business has been strong every period of 2019. And what's in front of us we don't know. We don't give guidance but we feel very good about the level of execution that we have, we feel very good about the initiatives that we have in place. So far they worked really well.

Understood, best of luck.

Alright, thank you.

Hey, good morning guys. I got a question on the tariff side as well but kind of a reversal. I guess we've seen some exclusions granted on one and two and do you have anything for sort of what that might be as far as alleviating some of the tariff pressures and how you might experience some rebating from suppliers who have taken price increases but we'll see those reversed?

You know Bret to give you an honest answer I don't know the answer to that as far as I don't think it's significant necessarily. It certainly hasn't been something that we've talked about a lot. We have spent a lot of time here so I don't think it's a material number to us.

Okay and then a question on your accounts payable. Obviously we're getting north of a 110% on inventory. What's the upper bound on that, how high can you take that as you build the inventory balances?

As we've discussed in recent quarters, we're aiming to keep our inventory levels stable. Our investments in inventory, which Bill mentioned regarding hubs and mega hubs, help improve our overall inventory balance while bringing inventory closer to customers, benefiting both our retail and commercial operations. This does place some pressure on inventory, and we've seen our inventory turnover decrease slightly over time from 1.5 to 1.4 to 1.3. Our goal is to maintain the balance between accounts payable and inventory at that level. We may have the potential to improve it slightly, but we want to keep it around that target.

Right, thank you.

Hey guys, Scot Ciccarelli. I know you have made a lot of changes to the commercial business over the last few years especially on the product availability side. I also know you got your store managers much more involved really over the last year in trying to cultivate some of those relationships. So operationally can you help us understand specifically how the store managers have become more involved on the commercial front and is that something that starts to slow now that you're kind of reaching the anniversary point of that or do you think you can maintain that double-digit growth rate in commercial because that's something that builds over time? Thanks.

Thank you, Scot. We believe our store managers and district managers are more engaged in the commercial business than ever. We began having our store managers make sales calls in the fourth quarter of last year, and they are actively reaching out. The key aspect is that they are learning from customers about what matters to them and how we are performing. When they return to their stores with their teams, they leverage their insights to enhance our customer service. Previously, without a direct connection to commercial customers, they were unaware of our service strengths and weaknesses. Now, they have clear visibility into this. We saw significant benefits from this last year and expect to continue enjoying these advantages in the coming years. Some have quickly adapted, while others are progressing at different paces in their understanding of and comfort with the commercial business.

So, there should be a pretty long tail to it sounds like. I appreciate it, thanks.

I would think so. It is the first time we've done it so we don't have empirical evidence that said that it has a three tail on it. But as I'm out in the stores and I'm talking to the commercial or to the store managers their level of knowledge is vastly different than it was 18 months ago. And that's what gets me excited.

Got it, thanks Bill.

Alright, thank you.

Before we conclude the call I want to take a moment and call out that we are hosting our National Sales Meeting here in Memphis this week. This week we will be recognizing our company's very best performers and announcing our new operating theme for the year. We will celebrate this past year's successes and focus on where we didn't meet our objectives. This week is for our field AutoZoners and we enthusiastically welcome them to our hometown of Memphis, Tennessee. As our business model continues to be solid and we're excited about the New Year we don't take anything for granted as we understand our customers have alternatives. We will continue to execute on our game plan but I want to stress that this is a marathon and not a sprint. As we continue to focus on the basics and focus on optimizing long-term shareholder value, we're confident AutoZone will continue to be successful. Thank you all very much for your interest in our company and for participating in today's call. Have a great day.