AutoZone, Inc.

Good morning and welcome to the AutoZone Conference Call. Your lines have been placed in listen only and to the question and answer session of the conference. Please be advised today's call is being recorded. If you have any objections, please disconnect at this time. This conference call will discuss AutoZone second quarter earnings release. Bill Rhodes, the company's chairman, president, and CEO, will be making a short presentation and the highlights of the quarter. The conference call will end promptly at 10 a.m. Central Time, 11 a.m. Eastern Time. Before Mr. Rhodes begins, the company has requested that you listen to the following statements regarding your forward-looking statements.

Certain statements contained in this presentation constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities and Livigation 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 and regulations, war and the prospect of war, including terrorist activity, inflation, the ability to hire, train, retain qualified employees, construction delays, the compromising confidentiality, availability, or integrity of information, including cyber attacks, historic rate sustainability, downgrade of our credit ratings, damages to our reputation, challenges in international markets, failure, interruption of our information technology systems, origin, and raw material costs of suppliers, disruption in our supply chain due to public health epidemics or otherwise, impact of tariffs, anticipate impact of new accounting standards, and business eruptions. Certain of these risks and uncertainties are discussed in more detail in the risk factors section contained in item 1A under part one of the annual report on form 10K for the year ended August 31, 2019, and these risk factors should be read carefully. Forward-looking statements are not guarantees of future performance and actual results. Developments and businesses may differ from those contemplated by such forward-looking statements, and events described above and in the risk factors could materially and universally affect our business. Forward-looking statements speak only as the date made, except as required by applicable law. We undertake no obligation to update publicly any forward-looking statements whether a result of new information, future events, or otherwise. Actual results may materially differ from anticipated results.

Now I'd like to turn the call over to Mr. Billy Rhodes to leave the go-ahead.

Good morning, and thank you for joining us today for AutoZone's 2020 Second Quarter Conference Goal. With me today are Bill Giles, Executive Vice President and Chief Financial Officer, and Brian Campbell, Vice President, Treasurer, Industrial Relations, and Tax. Regarding the Second Quarter, I 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, is available on our website, .autozone.com, under the investor relations link. Please click on quarterly earnings conference calls to see them. Starting this morning, I want to thank all AutoZoners across the entire organization for their hard work and dedication to delivering great customer service in light of a challenging sales environment this past quarter. As I mentioned on our last conference call, weather during our second quarter each year can be volatile and can significantly impact our performance. Coming off of a strong fall selling season, having delivered .4% same-store sales in Q1, we were confident in our ability to execute but remained cautious heading into our second quarter. And, as it has been widely reported, the winter weather was much milder in our second quarter than last year. While our sales were certainly meaningfully below plan and our expectations to deliver both net income and EPS at the level we were was commendable. We have an amazingly simple business, yet it has to be executed every day at a very high level across more than 6,400 locations in multiple countries and geographies in order to make everything work. This is where our culture continues to guide and differentiate us. This past quarter we continued to focus on our many initiatives, not the least of which included incremental inventory replacements, mega hub rollouts, ongoing enhancements to how we digitally interact with our commercial customers, and the rollout of our updated retail POS system. We feel both our store presentation and customer service is second to none in our space. But I can also tell you with full certainty, we are happy to put this quarter behind us and focus on delivering materially better sales performance for the remainder of the year. In providing a little more color this morning, I'll talk about the monthly sales cadence, regional sales performance differences, retail versus commercial, and lastly merchandise categories impacted by the quarter's results. In regard to cadence for the quarter, as we completed the first two-thirds of our quarter, our same store sales were positive, but certainly below our plan and expectations. As you will recall, in the prior year, the winter weather was also mild until the last two weeks of our quarter when the polar vortex arrived. As we were comparing against a mild winter with another one, our same store sales were positive, but our two-year growth was considerably softer than it was in our first quarter. At the end of this quarter, as we compared against the severe winter weather last year, our performance compared to last year was very poor, with combined same store sales down 6% for the last two weeks. However, on a two-year comp store basis, the last four weeks of the quarter were substantially stronger than the first two-thirds of the quarter. Unfortunately, as we have stated many, many times, the timing of our second quarter can result in quite volatile sales performance, both good and bad, and the timing this year couldn't have been much worse. In the end, weather impacts normalize over time, and our focus is on our long-term performance. Our performance was particularly soft in the Midwestern and Northeastern markets, where our same store sales ended 580 basis points lower in these northern markets than in our remaining markets. And an even larger 1,700 basis points lower than the remaining markets over the last two weeks of our quarter. Our sales falloff was more pronounced for our DIY business than commercial, but we certainly saw the trajectory of our business slow during this time frame for both businesses. With over 25% of our sales coming from our Midwestern and Northeastern markets, we could not make up for the sales shortfall from these areas from sales in other markets. Regarding merchandise mix during the quarter, our cold weather businesses, think batteries, antifreeze, and seasonal fluids, were down materially in total across retail and commercial combined. These categories are significant businesses for us, particularly in the winter, and they were our worst performing categories and combined were down more than 9% on a same store basis across the country for the quarter. And we're both down north of 20% the last two weeks for the quarter. The testament to our team is how resilient our model is during changes in performance during certain periods. With a very challenged sales environment, our team delivered 2% growth in EBIT and grew earnings per share .8% for the quarter. This clearly didn't meet our expectations or aspirations, but was impressive nonetheless. Our financial model allows us to grow cash flow and EPS steadily. I'm very proud of how diligent our organization is in all business climates. During the quarter, our market share, based on the data available to us, was slightly positive through the end of January. While our sales performance for Q2 was comfortably below our plan and expectations, we haven't seen any material changes in the market or industry drivers beyond weather. We are excited to enter our third quarter, where we begin to enter our robust selling season, which is starting in earnest right now as federal tax refunds begin to reach our customers. We have had mild winters in the past, but each cycle is different. This year we expect, initially we are seeing a now normalized tax refund season. We believe both our retail and commercial businesses will improve from this quarter's results. We're also doing some great things that we feel will benefit sales over time. As you know, our mega-hub store rollout continues along with key investments in technology. We believe these areas of investment allow us to further differentiate our offerings from our competitors or to close competitive gaps that may exist, allowing us to accelerate further in our industry. We opened two more mega-hubs this quarter and now have 39 locations. Our mega-hubs provide deep, very deep, local market coverage for -to-find parts. This is critical to both of our sectors, but particularly important to our commercial business. And our store and commercial systems have and will continue to receive enhancements this year, making it easier for our customers to do business with, while simultaneously making it more efficient for our auto-zoners. As we enter our all-important sales season, our stores look great, and our auto-zoners are doing an excellent job focusing on customer service. We believe we are ready for the remainder of the year. To provide specifics on the quarter, our total sales grew .6% this quarter. This compares to last quarter growing at 5.7%. Our DIY sales comp were down versus last year, while BIFM sales were up .2% in total. Both of these numbers were negatively affected by the calendar shift, causing a 63 basis point headwind for the quarter. Regarding our domestic commercial business, we were up against .9% growth in the second quarter last year, and a harder comparison to last quarter, but we expected we could reach positive double-digit growth. While we did not achieve our targeted double-digit goal for the quarter, we feel our team across the organization, from our sales team to our operators, merchants, technologists, marketers, credit team, to all data, and on and on, have really bought into providing a compelling, differentiated, comprehensive experience for our customers. With that approach, we will continue to be rewarded with incremental business in the marketplace by our customers. While we remain smaller than many of our peers in absolute sales volume, our growth rate has been very robust, growing significantly more than the industry growth rate. This growth has come from a combination of many initiatives that have been in development for years, including inventory assortment improvements, hub and mega-hub store expansions, the ever-strengthening reputation of the Duralast brand across our professional customer base, technology enhancements, increased engagement of our very strong store operating teams, and tremendous efforts on the part of our entire sales organization to effectively convey our value proposition. We also grew our commercial sales per store at -single-digit rate versus last year's second quarter. Although we are averaging fewer annual program openings, as approximately 85% of our stores already have a program, the programs we have opened continue to produce for us. We averaged $9,400 in weekly commercial sales per program this past quarter, up 5% over last year. We have grown our sales with mature customers and mature programs at substantially improved growth rate the last two years versus previous years, indicating our offerings, products, coverage, customer service, and ability to enhance the customer's overall shopping experience are improved and have been recognized and rewarded by our customers. Finally, our -the-street business, otherwise known as independent repair shops, grew faster than our overall commercial business, indicating that the improvements we are making are broad-based across different geographies and customer types. Our AutoZoner's confidence regarding the commercial business continues to increase, and this will continue to have a very positive impact on the business. We believe there remains considerable growth opportunities for us in commercial, as our customers are appreciating our new and enhanced offerings. Regarding our domestic DIY business, recently we did better out west, with the Northeast and Midwest performing quite poorly versus last year. As we reminded folks on last quarter's call, the second quarter is always our most volatile quarter from a sales perspective, both positively and negatively. But over time, weather effects normalize, as does our sales performance. In regard to modeling for the upcoming quarters, we feel there are enough tailwinds within the business that we are planning for sales growth from here for the remainder of the year. We also expect that as our initiatives roll out across the chain for both DIY and DIFM, they will add to improved sales performance. In regard to our technology investments, we have invested a great deal in both operating and capital expense to benefit our DIY and DIFM businesses. Recently, we rolled out our internally developed new POS system to our stores. This new system leverages new architecture and technologies that will expedite retail sales transactions by making the workflow more succinct and logical with touch screen capabilities and allowing us to make future changes much quicker as we replace some very old legacy code. We've also done some important work behind the scenes that should help increase our agility by updating our store operating system and implementing a new human capital management system. We are also investing a great deal in our commercial systems, and as we continue to test these new technologies, we remain confident that allowing our customers easier means of doing business with us will help commercial continue to grow at an accelerated pace for the future. On last quarter's call, we highlighted that we were seeing tariffs. We noted that as a result of tariffs, we expected to have a higher amount of inflation in our cost of goods on a skew by skew basis than we had in the past. In past years, it was common for us to have deflation at the cost level, but due to tariffs, we began to see cost rise. As the tariffs were introduced, we began to pass those costs on to our customers through higher retail prices. We were also successful in negotiating with certain vendors to share the costs from tariffs. However, we did have to incur some price increases. As certain tariffs are considerable in particular product lines, we intentionally pass those costs along in higher retails in tranches as we absorb those costs through our weighted average cost accounting method. At this point, we are not planning for any further tariffs on goods imported from China, and in fact, we are trying to get tariffs reduced by applying for relief through the U.S. Customs Office. To date, tariffs and their impact on our costs in retails have been manageable. As we begin to lapse the tariff cost and commiserate retail increases we implemented last year, we've been asked about the impact this will have on same store sales. While we do not expect to incur the same -for-like skew inflation as in the past year, we don't believe that tariffs were a material net benefit over the last year, nor do we think there will be a significant headwind for the next 12 months. At this point, I'd like to talk about any disruption we may be seeing from the ongoing coronavirus epidemic. While we have not incurred disruption thus far, we must and are being diligent. We have created a contingency plan for each merchandise category sourced from China. Our teams have done a wonderful job planning for potential scenarios. At this point, we have nothing substantial to report, but the longer this outbreak lasts, the more it will impact ourselves and both our and the overall retail industry. It is currently a very fluid situation, as many of the factories have just begun to reopen after an extended Chinese Lunar New Year holiday. Some are coming back online quickly, while others quite slowly, and certain of them haven't come back online yet. The next few weeks will be critical. Turning to our Omnichannel efforts, we continue to invest in our strategy to enhance the customer shopping experience by meeting customers when, where, and how they want to shop. We have initiatives in place to improve our in-store systems and websites, AutoZone.com, AutoZone Pro, Mobile App, DuraLabs Parts, and All Data. We continue to see growth in website traffic and rapid growth in shipped home, next day delivery, and buy online, pick up in-store sales. We continue to see growth in our online sales, but Omnichannel still represents a very small percentage of our business, substantially below 5%. We continue to see buy online and pick up in stores as our largest Omnichannel business, with its mix of Omnichannel total sales at over 40% and higher than last year. Our BOFUS model continues to grow faster than our shipped home business, highlighting the importance of our high-touch operating model, where customers place a high value on the trustworthy advice our AutoZoners deliver to them. Regarding our annual operating theme for 2020, 40 years of WoW customer service, we continue to push for a relentless focus on what matters to our customers, exceptional service, fast deliveries, high-quality parts and products, trustworthy advice, and flawless execution across the enterprise. We continue to identify and remove all redundant or -customer-facing activities for our store AutoZoners. By removing or streamlining these tasks, we know we can improve our service levels of customer service. This will continue to be a major focus for us for the balance of the year. Along with improving local parts availability and assortment, we continue to manage this organization to provide exceptional service for our customers, provide our AutoZoners with a great place to work, with substantial opportunities for advancement, and work to ensure we provide strong returns for our shareholders. In summary, while we were not pleased with our top-line performance, we were pleased with our operating performance and remained encouraged with our industry's strength in both DIY and DIFM and our prospects for the remainder of the fiscal year. We believe macro factors such as relatively low gas prices and increasing miles driven remain largely in our favor. We remain committed to growing our market share in both DIY and commercial. Now let me provide more detail on what we accomplished during the quarter. For the quarter, we opened 25 new stores in the United States, and our commercial business opened 25 net new programs. Currently, 85% of our domestic stores have a commercial program, and the vast majority of our international stores have a commercial program. During the quarter, we continued to expand our international footprint, opening two new stores in Mexico and one in Brazil. We should once again highlight another strong performance in return on invested capital, as we were able to finish our second quarter at 35.3%. We continue to be pleased with this metric as it is one of the best in all of Hardline's retailers. However, our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return, well in excess of our cost of capital. It's important to reinforce that we will always maintain our diligence regarding capital stewardship, as the capital we invest is our investors' capital. Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to again thank our auto zoners for their efforts to deliver great service to our customers and solid financial results for the second fiscal quarter of 2020. Now I'll turn it over to Bill Giles. Bill?

Thanks, Bill. Good morning, everyone. To start this morning, let me take a few minutes to talk more specifically about our domestic retail, commercial and international results. For the quarter, total auto parts sales, which includes our domestic, Mexico and Brazil stores, increased 2.6%. For the trailing four quarters ended, total sales per auto zone store were ,867,000, which is up from an average of ,800,000 at Q2 ending last year. Total commercial sales increased 8.2%. In the quarter, commercial represented 23% of our total sales and grew approximately $42 million over last year's Q2. Our average weekly sales per program were $9,400, up 5% on a per program basis, versus $9,000 per week last year. As Bill mentioned earlier, we expect our sales per program growth to do better in Q3 than this past quarter as we begin our summer selling season. We now have our commercial program in 4,942 stores, or 85% of our domestic stores. We remain committed to gaining market share with our commercial customers, and we are encouraged by the initiatives we have in place and feel we can further grow sales and market share. Our Mexico stores continue to perform well. In Brazil, we opened two new stores during the second quarter ending the quarter with 608 stores. We remain committed to open stores for many years to come. Regarding Brazil, we now operate 38 stores. Our performance continues to improve, and we remain optimistic about the long-term future of this market. This market has the potential to be much larger than Mexico, so while challenging and currently a drag on earnings, the potential size of the market is significant. Gross margin for the quarter was .3% of sales, up 28 basis points versus last year's second quarter. The increase in gross margin was primarily driven by supply chain leverage. While our accelerated pace of commercial growth has weighed on our overall gross margin, we continue to see opportunities to lower our costs through sourcing. I do want to stress we remain committed to taking costs out of our business where appropriate. Our primary focus has always been growing absolute gross profit dollars in our total auto parts segment, and we have been pleased with our growth driven by the acceleration we have experienced in commercial. SG&A for the quarter was .1% of sales, deleveraging 37 basis points to last year's second quarter. This was lower than our first quarter's deleverage of 65 basis points. In fact, our SG&A grew .6% over last year's second quarter. As we lapped salary increases initiated in last year's first quarter and as our sales were challenged, our team aggressively managed costs and we returned to a more historically run rate. SG&A will remain something we manage in accordance with sales volumes. If sales pick up, we would expect the spend rate to increase. The deleverage for this quarter was primarily driven by our planned and ongoing domestic store payroll investments, which negatively impacted operating expenses. EBIT for the quarter was $407.9 million. Our EBIT margin was 16.2%. Interest expense for the quarter was $44.3 million, up .2% from Q2 a year ago, but in line with our expectations. We are planning interest at $44.7 million for the third quarter of fiscal 2020 versus $43.2 million last year. Our higher forecast than last year is driven mainly by the association with the bond issuance we had in April of 2019. Debt outstanding at the end of the quarter was ,000,000 or ,000,000 above last year's Q2 ending balance of ,000,000. Our adjusted debt level metric finished the quarter at 2.6 times EBITDA. While in any given quarter we may increase or decrease our leverage metric based on management's opinion regarding debt and equity market conditions, we remain committed to both our investment grade rating and our capital allocation strategy. And share repurchases are an important element of that strategy. For the quarter, our tax rate was .7% versus .8% in last year's second quarter. This quarter's rate benefited 412 basis points from stock options exercise while last year it benefited 389 basis points. Stock option exercises aren't predictable and as such they will affect our tax rate and ultimately our net income and EPS. For the third quarter of FY 2020 we suggest investors model us at approximately 23% before any assumption on credit student stock option exercises. Because we cannot effectively predict this activity, we remain committed to reporting the stock option impact on the tax rate. Net income for the quarter was $299.2 million, up .6% versus last year's second quarter. Our diluted share account of $24.2 million was down .8% from last year's second quarter. The combination of these factors drove earnings per share for the quarter to $12.39, up .8% over the prior year's second quarter. Relating to the cash flow statement for the second quarter, we generated $205 million of operating cash flow. Net fixed assets were up .8% versus last year. Capital expenditures for the quarter totaled $89.2 million and reflected the additional expenditures required to open 28 net new stores this quarter. Capital expenditures on existing stores, hub and mega hub remodels or openings, work on development of new stores for upcoming quarters and information technology investments. With the new stores opened, we finished this past quarter with 5,814 stores in the US, 608 stores in Mexico, and 38 in Brazil for a total store count of 6,461. The appreciation totaled $90.7 million for the quarter versus last year's second quarter expense of $83.8 million. This is generally in line with our recent quarter growth rates. We repurchased $350 million of AutoZone stock in the quarter versus $350 million last year. At quarter end, we had $962 million remaining under our share buyback authorization, and our leverage metric was 2.6 times. Again, I want to stress we managed to appropriate credit ratings and not any one metric. The metric we report is meant as a guide only as each rating agency has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy. Next, I'd like to update you on our inventory levels in total. The company's inventory increased 7% over the same period last year, driven by new stores and increased product placement. The net inventory per location was $713,000 versus $690,000 last year and $694,000 last quarter. Net inventory, defined as merchandise inventories less accounts payable on a per location basis, was a negative $41,000 versus a negative $58,000 last year and a negative $71,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at .7% versus last year's Q2 of 108.5%. Finally, as Bill previously mentioned, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 35.3%. We have and will continue to make investments that we believe will generate returns to significantly exceed our cost of capital. Now, I'll turn it back to Bill Rhodes.

Thank you, Bill. Clearly, our sales performance in Q2 was disappointing. We didn't achieve our plans nor our aspirations. We always know Q2, our shortest, lowest sales season, will be volatile and this year, due to a very mild winter, our performance suffered and suffered mightily in specific weather sensitive categories and in particular markets. As we analyze our performance in great detail, we are confident that the key driver this quarter was weather. As we cannot influence the weather and as we know weather impacts normalize over time, our goal is to ensure we understand the drivers of our business and then move on and focus on what we can control. Most of our senior team has been in this business and with this company for decades. And we have seen this in the past and are focused on delivering optimal performance in the short term in light of the sales environment. But our real focus isn't on any single quarters but building our business for the long term. We all have seen enough cycles to know them when we see them. As we have recited internally, we weren't brilliant in the first quarter and lost our touch in the second. This, too, shall pass. With half fiscal 2020 behind us, we believe we continue to be very well positioned to grow sales and earnings for the remainder of the year. Many are now looking at previous mild winters and trying to extrapolate them to the balance of the year, as are we. But there are always other key factors that impact our industry's performance. What is the timing of tax refunds? What's going to happen with summer weather patterns? Where are we with the aging of the car park and sweet spots and on and on and on? In the end, we believe our sales will strengthen from here and our focus remains on managing this business to the optimum profitability based on the current industry sales environment, which will run through normal marginal cycles from time to time. Our team did just that in the second quarter. As we look to the balance of the year, we commit that we will manage this business well and we will manage it for the long term. Our business model is amazingly consistent. We generate a healthy amount of cash flow each and every year, and this year will be no different. Each year, we target to generate as much or more operating cash flow as the year before, and this year, we have the same target. Let me reiterate, we believe we are in good shape for the back half of the year. For the new year, we must continue to execute consistently at a high level. We understand we must adhere to living the pledge and doing what is right for our customers. We cannot take our eye off of execution. Success will be achieved with an attention to detail and exceptional execution. For the remainder of the year, we have a lot of deliverables from our IT initiatives, and we will remain focused on simplifying our store auto zoners' workloads to reduce clutter and unnecessary tasks that give in the way of making the customer experience better for both the DIYer and the professional customer. We remain focused on growing our DIY business and continuing to grow our commercial business well in excess of industry growth rates. We promise to remain committed to both executing our strategies and getting better every single day. I'd like to take this opportunity to again recognize and thank our team of talented, dedicated, passionate auto zoners for what they do each and every day for our customers, which expands opportunities for auto zoners, allows us to support the communities we serve, and ultimately rewards our shareholders. Now we'd like to open up the call for questions.

Thank you. We will now begin a question and answer session for today's conference. To all participants, if you would like to ask a question, please press star followed by the number one on your phone. Unmute your phone and record your name when prompted. Your name is required to introduce your question. To cancel your request, press star followed by the number two. Our first question is from Michael Lasser from UBS. Your line is now open.

Good morning. This is Atul Mysoreyan from Michael Lasser. Thanks a lot for taking our questions. Good morning. Good morning. I know you are expecting sales to accelerate over the remainder of the year, but can you provide some color on quarter to day trends, how much of sales improved compared to the minus 6% that you witnessed in the final two weeks of the quarter, and what's really driven the improvement? Yes,

sure. I appreciate the question. We have a long-standing practice. We release our earnings usually within two weeks and a couple of days at the end of the quarter, and we have a long-standing practice to not talk about such a short period of time. As we evidenced with the last two weeks of the quarter, our business can be incredibly volatile over a short period of time, and we don't want anybody to try to extrapolate that good or bad for a 12-week quarter. So we have a long-standing practice to not talk about it. What we do say is the second quarter is certainly more volatile than the third quarter. As we are entering the third quarter, we anticipate tax refunds coming. As I'm sure most of you have noticed, there was a significant amount of tax refunds, $67 billion, that were issued last Wednesday. That appears to be generally on track with where we were last year, and we're excited to enter this very important selling season for us.

Thank you. That's helpful. And then just a quick one on the calendar shift drag. When should we really expect this drag to reverse and become a benefit? Is that going to be in the third or the fourth quarter of this year?

Yes. Again, one of those things is very hard to tell. As we talked about what happened with the end of the quarter, Q2 could have been a net positive or a net negative. In the end, it was a net negative because of the way the weather hit at the very end of the season. We anticipate we will get what's happened in the first half of the year back in the second, but it's going to depend somewhat on what happens around the beginning of the quarter and the ending of the quarters.

Our next question is from Sienian Gutman from Morgan Stanley. Your line is now open.

Good morning. Hi, everyone. I wanted to ask you, Bill, first on the timing of bounce back. I know you don't comment until your last answer. I guess the question is, do we have to wait for weather? Do we have to wait for weather to normalize or no? It's not about weather at this point. It's about tax refunds and just the timing of the calendar to see the business normalize.

Yes, I think you're right. I mean, I think it's the latter. As we begin to move into the spring season, what dominates our performance is no longer extreme weather patterns. In the wintertime, and a lot of people will look at what's happening with average temperatures, which is an indicator, but what really matters to us in the wintertime is when we get extreme cold for an extended period of time, three, four, five days. That puts a lot of pressure on failure parts. The other part that really matters to us is what's happening with road conditions. If we get a lot of snow and ice and freezing temperatures, that puts the road conditions in pretty bad shape, which puts more pressure on undercar and brake systems. One of the things, as we enter this period of time, it's more about the maintenance categories. And I mentioned in my prepared remarks that a lot of times everybody wants to compare to what's happened in the last three or four mild winters. And that's absolutely right. And we're doing the same thing. But there are other things that are happening in the environment. One of the things that's happened in some of the previous mild winters is we had a significant amount of our maintenance businesses that were pulled forward into Q2. You found not only was it not extreme cold temperatures, but you had some very nice weekend weather, and people did DIY jobs. We did not see that in Q2. So we're anticipating, as these tax refunds flow, as the weather improves, that we should have more robust maintenance performance.

Great. My follow-up is on the commercial strategy. You've had great momentum. Can you talk about the inning that the Mega Hub strategy is in and then any incremental inventory investments you plan to make this year?

Great questions. So we've now opened 39 Mega Hubs. We've stated externally that we want to get to 70 to 90. We are very aggressively pursuing those at this point in time. Very pleased with the continued performance of our Mega Hubs and think that they are a key contributor to commercial. They're also a contributor to retail, but very pleased with that progress.

Yeah, and I would say we're probably in the fourth or fifth inning, I would say, on the Mega Hubs, and we'll continue to roll out on the Hub strategies as well. And to Bill's point, we've been very pleased with the performance of both the Mega Hubs and the Hubs, but in particular the Mega Hubs, both on DIY and on the commercial side of the business. Now, at the same time, that does create a little bit more inventory in the system as we get more inventory out closer to the customer. But we believe one term, that's a winning strategy.

Okay, thanks. Good luck the rest of the year.

All right, thank you. Our next question is from Seth Stigman from Credit Suisse. Your line is now open.

Hey guys, good morning. Just wanted to follow up on a couple of those points. First, just on the commercial side of the business, so it sounds like the slowdown is really weather related and you're planning for trends to reaccelerate. Is there anything that you see that would suggest that you can't get back to double-digit growth in the commercial business in the next quarter or so?

I would say no. I think that if we look back over the quarter and see our performance, some of that impacted by weather, certainly geographically as we talked about on the DIY business, was similar on the commercial side of the business as well. So some of those more cold weather geographies underperformed considerably during the quarter. So we believe fairly confidently that we will get back to a more normalized double-digit growth rate as we head into Q3. So fundamentally, we don't believe that we see anything different in the business.

I

think

adding a little bit to that too, we also, as we talked about in our prepared works, our up and down the street business continues to perform very, very well. We did see more challenges with our more national account businesses, many of which are concentrated in the Northeast and Midwest. So we're encouraged by that as well.

Okay, thanks for that. And then obviously in the quarter, the margin trends were quite healthy despite the sales shortfall. Your prior commentary had suggested an acceleration in operating profit growth as you move through this year. I guess getting back to at least low single-digit EBIT growth, is that still a fair way to think about it? Any more parameters around that would be helpful. Thank you.

Yeah, I think, and first of all, I think your organization did a great job of managing the way through a difficult quarter, being able to control SG&A, leverage a gross margin, and be able to drive EBIT growth of around 2%. And I believe last quarter we said that we would expect to grow EBIT on a positive basis. And yes, we do expect to get to that low single-digit, mid single-digit kind of growth rate on a long-term basis. Okay, thank you.

Our next question is from Brett Jordan from Jeffreys. Your line is now open.

Hey, good morning, guys.

Good morning.

In your prepared remarks, you talked about market share gains. Could you talk maybe DIY versus commercial? And I guess regionally, did you outperform in any particular market more than other?

Yeah, Brett, great question. I should

have clarified

that in the prepared remarks. We don't have good visibility to market share gains in commercial. So generally, we're growing commercial at 8%, the market's growing by 4%. We're pretty confident we're gaining share. My specific comments about growing shares slightly are from a few different indications that we have on the DIY side of the business.

Okay, great. And then I guess a question on inflation. I think Bill Giles was talking about, or maybe it was you, Bill, about not a material net benefit for the year. And I guess the supplier association, a lot of the peers have been talking about 2% to 3% inflation seen in the last 12 months. Is it just that you haven't elected to pass through the costs you've seen come out of China? Or I guess is there something different about your addressing inflation versus theirs?

Yeah, I can't speak for theirs. We have certainly seen skew over skew, year over year inflation. And the bigger change isn't that we've seen major inflation. It's generally that we've seen deflation. You know, as you think about it, our parts come into the life cycle, and they're very short runs until the costs are more expensive. As the part becomes, goes through the bell curve and becomes much more, much higher volumes, our costs go down. And therefore we have significant deflation as is shown in our LIFO, major LIFO reserve that we've had forever. In the last 18 months or so, we have seen some inflation. We have been very careful about managing that inflation. And as we said in our prepared remarks, if we had a 25% tariff, we didn't go out and raise our price 25%. We went out and worked that in in tranches so that we didn't shock the customer. Over time, we think we've done a pretty good job of rolling those price increases in. We've also worked with several of our partners on not pushing the full amount to the customer. There's been some changes in the RMB currency, and we've taken advantage of that. So we've been very, I think, judicious about it. We don't think we saw a big net benefit as costs go up. There is some tampering down of demand. We don't think we saw a major significant net benefit, and therefore we don't think we'll see a major significant net deficit. All right, great. Thank you. Thank you.

Our next question is from Seth Ascham from Wood Bush Securities. Your line is now open.

Thanks a lot and good morning. My first question is just around the calendar shift. We've seen two quarters of a negative impact from the calendar shift. When do you expect to get that back? Is that more of a third quarter or a fiscal fourth quarter event?

Yeah, as Bill said, we'll have to wait and see to see how the performance is at the end of each of those quarters. Our anticipation is, is this likely more back-end loaded in the second half of the year?

Fair enough. And then secondly, as it relates to your gross margins, you say supply chain leverage is your primary driver of improvement here. Does that include lower costs you're getting from sourcing, or are you specifically talking about savings within your supply chain and distribution?

That one was pretty much the savings within the supply chain and distribution on a -over-year basis. We are continuing to try to lower our acquisition costs and believe that overall our margin remains relatively healthy. But for this specific quarter, we were able to leverage down supply chain just by lowering some costs during the quarter.

And the follow-up there is we think about the impacts of tariff-driven inflation into your business over the last year and what it means for your inventory balances and your gross margins in the last quarters. Have you been getting a benefit from that, or would you expect a headwind going forward into the back half of the calendar year?

I think that some of the tariff costs are going to continue to work their way through the average cost of the inventory. As Bill said, I think the merchandising organization has done a nice job of being able to feather in the increases to commensurate with the cost increases that we are experiencing. And our expectation is that we will continue to do that. It may be some pressure going forward, but our expectation is that we'll be able to manage our way through that.

Great. Thank

you

very much. Our next question is from Michael Montani from Evercore ISI. Your lines may open. Michael Montani? There may be a mute.

Hello. Can you hear me?

Yes, we can.

Okay, great. Sorry about that. I just wanted to follow up on the inflation front for a minute if I could and see what kind of an impact did you see to same store sales from inflation in particular for this quarter? And then on a related note, what kind of success have you had at this point in getting rebate checks from tariff related exemptions?

Yeah, just to kind of go backwards first. We're in that process. I think Bill called it out in the prepared remarks that we've gone through and made applications for some rebates relative to tariffs. And we've had some success, but we have more things in the works. So we'll see how that is. We don't think it'll be material, by the way, but it will be certainly a help overall. Well, I think on the inflation side of it, we said we'll probably have inflation of 2 plus percent on a year over year basis from a skew to skew basis. But at the same time, it's very difficult to measure out what the demand impact is as some of the prices have raised a little bit. So I think that's where we would say that we haven't seen a material impact overall from the inflation relative to comp store sales because it is kind of a blended number with the demand as well.

Okay, thanks. If I could just follow up on one housekeeping thing was the CAPEX and DNA outlook for this year, for the full year. And then secondly, any initiatives that you all may have in the pipeline on the productivity front that could help offset some of those wage increases, whether that be automation in the DCs or potential outsourcing, et cetera.

Yeah, from a CAPEX perspective, you know, I think our expectation is around $600 million of CAPEX for the year. And I believe depreciation is around that $350 million number. I would say overall from a CAPEX investment perspective, obviously, first and foremost, we're investing in our stores. We're investing in the maintenance of our stores to continue to ensure that they look great. We're investing in hubs and mega hubs along the way. We also have a good sizeable investment in technology as well. We continue to invest in technology both to enhance our existing systems as well as to add new functionality in order to improve our customer experience both on the DIY and the commercial side of the business as both. So those are the major projects that we kind of continue to work on.

Okay, thanks. And just the productivity side?

On the productivity, we're always working on different productivity initiatives. But if you're talking about are we changing the way we go to market in our supply chain by implementing a tremendous amount of new automation or those kind of things, at this point we're not. We're constantly looking at the calculations of where the IRRs make sense. As wage pressure goes up, it changes the economics and we'll continue to look at it. But we don't have anything to talk about significantly currently. Okay,

thank

you. Our next question is from Zach Fadum from Wells Fargo. Your line is now open.

Hey guys. First question on coronavirus. You touched on supply chain. Curious if you have any thoughts on the potential impact to miles driven and how that could impact your business.

It's a very interesting question. You know, as you would expect over the last month or so, we have been very focused on the supply chain aspects of coronavirus. And in the last week or two, more and more focused on what's happening here in the United States and ultimately Mexico and Brazil, we see no indications at this point in time of any demand and destruction as a result of coronavirus. But just like we said with the supply chain, it's an incredibly, incredibly fluid situation. I think the next couple of weeks to a month are going to be critical to see what actually happens. We don't have good insights into that.

Got it. And then just a bigger picture on the car park. Curious if you could speak to where you think we're at in terms of the sweet spot. How long do you believe the current tailwind can last and whether it's more of a benefit to your DIY or your commercial business? Thanks.

Well, a lot back to that question. You know, we haven't been big on talking about the ramification of the car park over the last 12 years. We all know that there was a significant divot in new car sales in 2009. And that as those cars came into the quote unquote sweet spot, there was a headwind for a while. And now it looks like it's turned into a tailwind. I think it's on the margin in both instances. What we like to see is steady state new vehicles coming on the road, 16, 17 million. The scrappage rate doesn't appear to change much at all. And therefore we just have a steady state of new cars. So I don't think there's anything in the next two or three or four years that's going to be radically different than what we've seen in the past. Got it. Appreciate the time, Bill. Yep.

Thank you. Have a good day.

Our next question is from Drew Wright with Daniel Embro from Stevens and Kiela. The line is now open.

Hey, guys. This is Andrew on for Daniel. I just got a quick question here. I was wondering, your commentary sounded pretty upbeat on the second half. What gives you this confidence and how could you weight that between company specific initiatives and improving demand outlook?

Yeah, terrific question. I think what gives us the confidence is that we've been here before. As I mentioned in our prepared remarks, most of our management team has been here for decades. We've seen times of strength. We've seen times of softness. We certainly saw softness in the second quarter. As we're looking at the second half of the year, we have concerns and we also have things that we're very positive about. On the concern side, I mentioned earlier that the roads, particularly in the Midwest and the Northeast, haven't had the kind of difficult conditions that put stress on brake systems and undercar systems. That's likely to be a bit of a headwind as we go through the second half of the year. That said, unlike some other previous winters, we didn't see this significant pull forward of demand in those exact categories, which are heavily maintenance categories. So we're looking at where we are. We absolutely are disappointed with the second quarter, but we don't see anything that changed as a result of the second quarter other than those road conditions, and therefore we've made zero changes in our plans for the second half of the year. Again, to us, we're disappointed. We hate a bad quarter, but we're not managing this business for quarter to quarter. We're managing this business for long terms, and that's the approach we're going to continue to take. And we're very optimistic that just like we've been very successful over the last decades, we're going to continue to be successful as we look forward.

That's very helpful. Thank you, guys.

All right. Thank you.

Sean, if there are any questions in queue, I'd like to turn the call over back to Mr. Bill Rhodes for final comments. You may proceed.

Great. Thank you. Before we conclude the call, I'd just like to take a moment to reiterate that we believe our business model continues to be solid. We are excited about our growth prospects for the year. We do not take anything for granted as we understand our customers have alternatives. We have an exciting plan that should help us succeed this fiscal year, but I want to stress that this is a marathon, not a sprint. As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be successful. Thank you for participating in today's call, and have a great day.

That concludes today's conference. Thank you all for your participation. You may now disconnect.