AutoZone Q3 Conference Call Summary

AutoZone

held its third quarter earnings conference on Tuesday; shares of the company are down 3.82 percent or $20.65 to $520.25. Below are some key takeaways from the call: Bill Rhodes, the company's Chairman, President and CEO • To begin this morning, I want to thank all AutoZoners across our organization for delivering another solid quarter operationally and financially. This morning, we reported our 31st consecutive quarter of double-digit earnings per share growth. While past success is no guarantee for future performance, this consistency in earnings is something we strive to attain each and every quarter. • For the quarter, we reported a total sales increase of 6.2%, while same-store sales were up 4%. In retail, we experienced same-store growth in both traffic and ticket, although ticket growth continues to be subdued versus historical growth rates due to the lack of inflation. As expected, during the quarter, the deferrable maintenance categories that were challenged during the harsh winter rebounded nicely, while the failure-related categories that were so strong during the winter, continued to grow, but at slower rates than in the second quarter. • These category sales trends also existed in commercial as well, but weren't as pronounced as they were in retail. Overall, domestic commercial sales growth accelerated to 14% this quarter versus 12% last quarter. We continue to be pleased with our progress in commercial, and we see tremendous opportunities for additional growth through further penetration of existing customers, and acquisition of new customers. • For the quarter, we opened 137 new programs to finish with 76% of our domestic stores operating commercial. This brings our year-to-date openings to 311 programs. We expect to open approximately 400 programs this fiscal year. • We continue to believe our customers are financially strained. One recent additional pressure point has been the increase in gas prices. During the quarter, gas prices increased $0.29 and are currently $0.07 higher than the same time last year. Based on the dialog we see across retail, the low-end consumer seems to be particularly challenged. • Now I'd like to review our initiatives for the year. Our operating theme for this year is creating customers for life, and the key priorities for the year are great people providing great service; two, profitably growing our commercial business; three, leveraging the Internet; four, leveraging technology to improve the customer experience while optimizing efficiencies; and five, improving inventory availability. • On the retail front this past quarter, under the great people providing great service theme, we continued with our intense focus on improving execution. We continue to enhance our operating systems to make them as intuitive as possible. We also continue to invest more payroll in our stores. Last year, we managed expenses especially tight as our sales results were below our expectations. This year, as we expected sales to improve with all of our initiatives, we wanted to make sure we represented our brand well, so we added payroll. • Additionally, we expanded our total hub locations by one, finishing at 161, and we continued to expand or relocate hubs. We've now expanded or relocated 120 hubs. We expect to continue to open a modest number of new hubs, and our expansion/relocation efforts are also continuing. As we mentioned on last quarter's earnings call, we've introduced the idea of being more digitally integrated, and we made this one of our four strategic growth priorities along with retail, commercial, and international. • While in an early stage, we believe this can be an important and significant opportunity for us to deepen customer relationships and grow sales. At this point in the evolution of our online offering, we're focusing more on data compilation and building a knowledge portal than on current sales. Today, shoppers use our websites for educating themselves on what they need for their vehicles, and they continue to buy the vast majority of what they need from our stores. Our objectives is to satisfy our customer's needs, regardless of how they want to interact with us. • As we head into the final quarter of our fiscal year, we remain optimistic on our prospects. Although we have some concerns about the health of the consumer due to ongoing financial strains and increasing gas prices, we're pleased with our execution and excited about our ongoing strategies. We're encouraged by increasing traffic counts, and the increases we have experienced in the deferrable maintenance categories, which we expect to continue through the summer. Bill Giles, Executive Vice President and Chief Financial Officer • For the quarter, total auto parts sales, which includes our domestic retail and commercial businesses, our Mexico stores, and our four stores in Brazil, increased 6.1% over the 12 weeks. Regarding the macro trends during the quarter, nationally, unleaded gas prices started out at $3.38 a gallon, and finished the quarter at $3.67 a gallon. Last year, gas prices decreased $0.07 per gallon during the third quarter - starting at $3.61 and ending at $3.54 a gallon. • We continue to believe gas prices have a real impact on our customers' abilities to maintain their vehicles, and we will continue to monitor prices closely in the future. We also recognize that the impact of miles driven on cars over 10 years old, the current average, is much different than on newer cars in terms of wear and tear. Miles driven data, reported by the Department of Transportation, are available only through February. January was down 1.3%, while February was down 0.8%. The other statistic we highlight is the number of seven-year and older vehicles on the road, which continues to trend in our industry's favor. • For the trailing four quarters, total sales per auto parts store was $1.767 million. This statistic continues to set the pace for the rest of the industry. For the quarter, total domestic commercial sales increased 14%. Domestic commercial sales represented 17.3% of our total company sales, and grew $50 million over last year's Q3. Last year's commercial sales mix percent was 16.2%. • Year-to-date through Q3, we've opened 311 new programs versus 195 programs last fiscal year. We now have our commercial program in 3,732 stores, supported by 161 hub stores. With only 76% of our domestic stores having a commercial program, and our average revenue per program below several of our competitors, we believe there's further opportunity for additional program growth in addition to improved productivity opportunities in current programs. • For the quarter, our tax rate was approximately 35.6%, slightly lower than last year's third quarter of 35.8%. This quarter benefited from certain discrete tax items. Net income for the quarter of $285 million was up 7.4% versus the prior year's third quarter. Our diluted share count of 33.7 million was down 7.7% from last year's third quarter. The combination of these factors drove earnings per share for the quarter to $8.46, up 16.4% over the prior year's third quarter. • There are several aspects of this initiative, including improving the placement methodology of hard parts at the store level, which, through Q3, is largely completed. This activity contributed to an increase in inventory per store, which was up 8.6% at $594,000 per store, reflecting our continued investments in hard parts coverage.