The operator welcomes participants to the AutoZone's 2024 Q3 earnings release conference call and reminds them that the call is being recorded. The company's CEO, Phil Daniele, introduces himself and other speakers and notes that forward-looking statements will be made. He also mentions that the call will include non-GAAP measures and directs listeners to the company's website for more information.

The speaker thanks the AutoZoners for delivering solid earnings results despite a difficult macro environment. They achieved a 3.5% increase in total sales and a 1.9% increase in same store sales. Operating profit and earnings per share also grew. The speaker mentions the impact of tax refund season on customer shopping patterns and notes that this year's refund dollars were slightly lower than the previous year. The weather in the Northeast and Midwest also affected sales.

Despite the negative impacts of extreme weather and a delayed tax refund season, the company saw successes in gaining market share and implementing supply chain initiatives. They remain cautious about their outlook for the rest of the year, but expect sales to improve over time. International markets have become a significant part of their growth strategy, with a strong quarter and plans for expansion and operational improvements in the future.

The company's domestic same store sales were flat this quarter due to delayed tax refunds and mild weather. The commercial business grew 3.3%, but underperformed in the last four weeks. The Northeast and Midwest regions had lower sales compared to the rest of the country. The company opened 20 new commercial programs and now has commercial in 92% of its domestic stores. Despite the choppiness in sales, the company is expecting stronger growth in Q4 due to continued execution of growth initiatives and easier comparisons. The growth in commercial sales is attributed to improved inventory availability, expanded coverage, strong brand presence, and technology enhancements.

The company is optimistic about their recent initiatives to improve customer service and faster delivery times, which they believe will lead to increased growth and market share. DIY sales were down 1% compared to last year, with the Northeast and Midwestern regions underperforming. The company expects weather to be less volatile in the fourth quarter and plans to focus on sales floor and discretionary categories. DIY traffic was down 2% but average ticket growth is expected to return to normal levels. The company attributes their DIY share gains to improved customer service and in-stock levels, thanks to their vendor partners returning to pre-pandemic operations. They will continue to focus on customer service to drive sales growth in their domestic business.

The international business of the company has shown impressive performance in the last quarter and is expected to continue growing in the future. The company is leveraging its learnings from the US to improve offerings in international markets. The key objectives for fiscal year 2024 include focusing on domestic commercial business, improving customer service levels, and expanding the supply chain. The company is close to completing two distribution centers in the US and one in Mexico, which will support future growth. The call is then handed over to Jamere Jackson, who discusses the company's solid third quarter results, including sales growth, comp growth, and increases in EBIT and EPS.

In the third quarter, the company saw a 3.5% increase in total sales, with domestic commercial sales increasing by 3.3%. The average weekly sales per program were slightly lower due to the addition of new programs, but these new programs are maturing quickly. The company has 92% of its stores participating in the commercial program and has opened 20 new programs in the quarter. The company is focused on growing its share in the highly fragmented commercial market and has 103 mega hub locations to support this growth. These mega hubs have significantly higher sales and are growing at a faster rate than the overall commercial business.

AutoZone's mega hub locations, which carry a large number of SKUs and serve as fulfillment centers, are driving sales and are a key part of the company's growth plans. In the domestic retail business, comp was down 1% due to a decline in traffic, but ticket growth partially offset this. The company expects to see declining transaction counts but mid-single digit ticket growth in the long term. Despite challenges in discretionary purchases, the DIY business is expected to remain resilient due to a growing and aging car market. The international business saw strong growth in same-store sales and the company is committed to its international expansion.

The company's gross margin for the quarter increased by 102 basis points, driven by improvements in core business and a noncash LIFO credit. The merchandising and supply chain teams have been successful in driving gross margin improvement. However, there is still a $19 million LIFO charge to be reversed in the next few quarters. Operating expenses increased by 6%, with SG&A growing by 3.3% on a same store basis. EBIT for the quarter was $900 million, up 4.9% from the previous year. Interest expense also increased due to higher debt outstanding. The company is expecting interest expenses to be around $148 million in the fourth quarter.

The company's higher debt levels and borrowing rates are contributing to an increase in revenue, along with an extra week in the fourth quarter. The tax rate for the quarter was 18.1%, up from the previous year. Net income for the quarter was $652 million, a 0.6% increase from last year, and earnings per share were $36.69, a 7.5% increase. The company generated $434 million in free cash flow and expects to spend $1.1 billion in CapEx this fiscal year. Their liquidity position remains strong and their leverage ratio is 2.5 times EBITDAR. Inventory is up 7.9%, driven by a combination of inventory per store growth, improvements in in-stock levels, and new store growth. Net inventory per store was $168,000 negative, an improvement from last year and last quarter.

In the third quarter, AutoZone saw a decrease in accounts payable as a percentage of inventory, and they also repurchased a significant amount of stock. They are committed to a disciplined approach to capital allocation and believe they can continue to drive long-term shareholder value. The company remains focused on their growth initiatives and improving their competitive positioning. They are confident in their strategy and ability to deliver strong results in the future.

AutoZone's top priority for fiscal year 2024 is enhanced execution, and they are making good progress. They have various strategic projects in progress, including opening new hubs and distribution centers and ramping up store growth. However, their biggest opportunity for growth is in their domestic commercial business. The business has been experiencing choppiness and the last four weeks have been difficult due to unfavorable weather conditions.

The company is experiencing challenges with inflation and supply chain issues, which have affected their gross margins. However, they expect inflation to return to normal levels and believe their relationship with vendors will improve in the future. The growth of their commercial business has also impacted their gross margins, but they are working to catch up on vendor rebates.

The speaker discusses how inflationary pressures have started to abate, allowing for negotiations for deflation. They mention that the tire segment is still under pressure, but the downward trend has flattened out. The buy here, pay here and used car centers have also been affected by slower sales and economic pressure. The speaker also mentions that there will be 200 mega hubs over time, but does not provide specific numbers for how many will be seen per year.

Jamere Jackson and Phil Daniele discuss the success of the company's mega hub stores and their plans to open more in the coming year. They have a strong pipeline for FY25 and expect to see acceleration in growth. The company also has smaller hubs that are performing well and helping with commercial and DIY sales. When asked about the outlook for FY25, the company did not provide guidance but suggested that the second half of the year may be stronger due to potential weather improvements and lapping big gross margin gains from the previous year.

Phil Daniele, the CEO, discusses some positive developments for the company, such as a potential boost in sales due to improved weather and commercial initiatives. He also mentions that the company is underpenetrated in the commercial business and has room for growth. The company is also facing challenges with inflation, which has had a negative impact on their top line growth. This is in contrast to last year when inflation had a positive impact on their top line.

The company expects inflation to return but currently it is running lower than it has historically. They have been disciplined about passing on inflation and raising prices. In the quarter, they saw zero ticket growth and inflation in some categories but not others. They are pricing dynamically and being disciplined. They have not seen trade down on the DIY side and average ticket has been affected by mix of category and fewer pieces in the basket.

The speaker believes that the slow sales trends are due to the environment and weather, which have affected the sales of big ticket items. They expect the sales to improve as the weather improves and more high-demand products become available. The speaker also mentions that they are focusing on improving customer service and execution, as well as investing in hard parts coverage and ways to better service customers on the commercial side. They are not planning on implementing another round of price investments.

The speaker discusses how their company's sales execution has been improved through disciplined pricing and growth initiatives. They mention that the demand for their products is relatively inelastic and the industry has been disciplined on pricing for decades. They also mention their commitment to doubling down on growth initiatives such as improving product quality, expanding assortments, and leveraging technology. The speaker clarifies that their pricing strategy is strong on both the DIY and professional sides of the business and that they do not anticipate any changes in industry pricing discipline. In response to a question, they mention potential store growth, both domestically and internationally, and acknowledge that the current demand weakness may be due to the high volume of their current store base.

AutoZone's CFO, Jamere Jackson, discusses the company's plans to accelerate store growth in the back half of the decade. They plan to expand domestically and internationally, with a focus on DIY and commercial growth. The company will also continue to optimize their store footprint and increase the number of mega hubs. However, building new stores takes time.

Seth Sigman from Barclays asks about the gap between the company's DIY and commercial businesses, which has been narrowing in the past couple of quarters. He wonders if this is due to a slowdown in the commercial end customer, possibly due to deferral or trading down. Phil Daniele responds that it is difficult to determine the exact reason for this, but certain segments such as tire and car dealerships have been more challenged, possibly due to decreased sales.

The company is discussing the potential migration of customers in the commercial market and how they plan to grow in this sector. They believe they have room for growth and are implementing initiatives to accelerate their commercial growth. They have seen some success in early markets where these changes have been implemented, but the rollout is still in its early stages.

The company is utilizing technology and local assets to improve delivery times and increase sales in the commercial market. The CEO believes that these efforts, combined with easier comparisons and a focus on service and delivery speeds, will lead to a stronger fourth quarter.

The speaker is optimistic about the company's future growth and mentions challenges in the big ticket retail industry. They believe their business is underpenetrated and have plans for growth. The interviewer asks about potential pressures on the lower income consumer and the speaker acknowledges that big ticket purchases have been challenging for all of retail. They also mention that discretionary categories have been under pressure for some time and that customers may prioritize maintenance items for their car to save money in the long run.

The speaker discusses the impact of weather on the aftermarket industry and compares this year's performance to that of 2017. They note that the industry has been affected by soft winter weather patterns in the past two years, with a lack of snow and cold temperatures in key markets. This has resulted in lower sales in undercar and brake categories. The speaker suggests that more cooperative weather may drive an acceleration in the industry, but acknowledges that other factors may also play a role.

The speaker is unsure of what will happen in the future due to changing weather patterns and inflation. They believe that the next four months will provide more clarity. The underlying gross margin trend has improved, but it may be difficult to offset the expected LIFO headwind. The company has been successful in improving margins through merchandising and supply chain efforts, but inflation and lack of ticket prices may impact future margins. This concludes the conference call.

The company has been working on a speed initiative for a year and a half and is currently in the middle of rolling it out to their stores. They believe this will improve customer service and attract new customers. The slower opening of mega hubs is due to challenges in finding suitable locations and executing the construction process, but they expect the pace to accelerate in the next few quarters.

The speaker, Phil Daniele, discusses their expansion plans for stores, emphasizing the importance of location and accessibility. He also mentions their confidence in the company's success and reminds listeners to honor veterans on Memorial Day. The call ends with a thank you and a reminder to disconnect.

This summary was generated with AI and may contain some inaccuracies.