AutoZone, Inc.

Good morning and welcome to the AutoZone conference call. Your line has been placed on listen only until 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's fourth quarter earnings release. Bill Rhodes, the company's chairman, president, and CEO will be making a short presentation on 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 statement regarding 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 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, 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, cost of suppliers, disruption in our supply chain due to public health, epidemics or otherwise, impact of tariffs, anticipated impact of new accounting standards, and business interruptions. Certain of these risks and uncertainties are discussed in more detail in the risk factors section contained in item 1A under Part 1 of the Annual Report on Form 10-K 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 business decisions may differ from those contemplated by such forward-looking statements, and events described above and in the risk factors could materially and adversely 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.

And now I'd like to turn the call over to Mr. Bill Rhodes.

Good morning, and thank you for joining us today for AutoZone's 2020 fourth quarter conference call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer, Brian Campbell, Vice President, Treasurer, Investor Relations and Tax, and Jameer Jackson, our Executive Vice President, Chief Financial Officer-Elect. Jameer, who joined us just last week, will be observing only today, but we are so glad to have him here and part of our great team. Regarding the fourth 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 our slides complementing our comments today are available on our website, www.AutoZone.com under the investor relations link. Please click on quarterly earnings conference calls to see them. Since our last earnings release in late May, much of the world's attention has been on COVID-19, its current and short-term implications and trying to evaluate the long-term ramifications of this pandemic. During Q3's conference call, we shared the incredible volatility we experienced during the third quarter with three very distinct performance periods. Pre-COVID, where our same-store sales were up about 6% or so, then the midst of the stay-at-home orders, where our comps were down over 20%, And then the last four weeks where our performance was in the low teens following the stimulus checks and at the beginning of the enhanced unemployment benefits. We shared last quarter that our retail sales increased an incredible 50, 5-0% one week from a Monday to a Wednesday. This quarter's sales story was very different. It was quite consistent and consistently very, very strong. While last quarter was the most remarkable quarter I've ever experienced, this quarter marked another milestone. AutoZone enjoyed its largest quarterly same-store sales performance since going public in 1991, 22% same-store sales growth, and that introduced new unfamiliar challenges. With the significant increase in customer traffic in our retail and commercial sales, we had to intensely focus on ensuring the safety of our customers and auto zoners, and that took a tremendous amount of creativity on the part of our team. Our supply chain, specifically our distribution centers, our vendor partners, and their operations were and continue to be under immense pressure to keep up with the surge in demand we have experienced over the last five months. Our in-stock positions today aren't up to our usual high standards, and we are working diligently to get recovered, but our supply chain wasn't built for 25% excess capacity. I've mentioned often, that our sales are pretty predictable, staying in a very tight band. Well, that couldn't be further from the truth since stimulus money began to flow. That said, our sales in both retail and commercial were high but very consistent from the beginning of our quarter in early May through July. We were anxious to see what happened to our sales performance in August, after the enhanced unemployment benefits subsided. We are very happy to report that our domestic same-store sales in August, while down some from May through July, were still up a remarkable 16.5%. During the quarter, there were certainly some geographic regions that did better than others, as there always are, but all of our regions performed well. I'm sure many of you would like to know how we're thinking about sales for both the first quarter and fiscal 21. It remains very difficult for us to predict. Based on our performance post-enhanced unemployment, we feel our sales will remain elevated for some time. And typically, in recessionary environments, we perform well. But nothing, nothing about this global pandemic is typical. There are simply too many remaining unknowns. Will the federal government's $300 enhanced unemployment benefit be sufficient? How long will it last? Will there be an effective vaccine? And if so, when? What consumer behaviors have changed temporarily? Which ones have changed permanently? And many, many more questions. Beyond our primary objective to ensure the safety of our customers and auto zoners, our focus is on providing our auto zoners with the resources they need to provide our customers with an exceptional experience. As for the long term, to date, we don't see anything that substantially changes our bullish view on our industry, but we must continue to monitor consumer shifts and behavior. And if the economy enters a deep and protracted recessionary environment, We continue to believe our customers will focus more on maintaining their current vehicles, and it will benefit our business, retail in particular, as it has in the last three recessions. Last quarter, I reminded folks the strongest periods we've experienced of outside sales growth over the last three decades have been the early 90s, 01, 02, 09, 10, and 11, all coming out of recessionary periods. This is why we remain optimistic on the industry this upcoming year. Interestingly, after each of those outside sales growth periods, they have never been followed by equivalent declines in the years that follow. We believe consumer behaviors change during these recessionary periods, allowing us to showcase our skills and capabilities to new customers, and we retain many of those customers in the years that follow. We always begin these calls by thanking our AutoZoners. What our team continues to do has really been exceptional. I applaud our entire organization, each and every AutoZoner across the enterprise, from Hawaii to Sao Paulo, from AllData to our Data Zone facility in Mexico. Every AutoZoner has had to learn new ways to work, new ways to meet and exceed the wants, needs, and desires of our customers, and everyone has met embraced and delivered on that challenge. I couldn't be more proud of the phenomenal team I had the honor of working alongside. I especially want to call out and on behalf of every AutoZoner, recognize our store and distribution center AutoZoners. These extraordinary people have been thrown many, many curveballs in the last six months, and they have met every challenge with tremendous ingenuity, courage, innovation, and passion. Most importantly, they continue to deliver an exceptional service experience for our customers. Thank you, AutoZoners. You embody everything it means to be an AutoZoner, and you deliver on our cultural and service promises every single day. Now let's move into our performance for the quarter. Same-store sales were up 21.8% versus last year's fourth quarter. Our net income was $740 million, and our EPS was $30.93 a share, 36.9% above last year. Excluding the extra week in last year's fourth quarter, our EPS was up an amazing 47.6%. Regarding our sales performance, while the consistency from week to week was predictable, the volume of business was the outlier this quarter. Our sales were much higher than we could have forecast at the beginning of the fiscal year, and they sustained higher levels than we would have predicted on our last call in May. While our retail business was stronger than our commercial business, both businesses had week-to-week consistent sales performance. Our DIY same-store sales were up approximately 24%. Our share growth in retail... over the last four months on the detailed information we have available for our broadest set of competitors shows that we have been gaining much, much more share than at any time before in both units and dollars. Our commercial business total sales were up approximately 17% on a 16-week basis. In commercial, we averaged over $60 million in weekly sales, which was over $12,200 in sales per program per week. Both new records for us. Candidly, we are most proud to highlight that we continue to live up to our stated values when it came to taking care of our AutoZoners. During our third quarter, we announced that all eligible hourly, full, and part-time AutoZoners across the U.S. would receive emergency time off benefits. and it would be available immediately. Remember back to that time. At that time, we didn't wait to see what others were doing or wait on any mandates by government. We felt it was imperative to act swiftly in support of our auto zoners on the front lines. We provided them with two additional weeks of time off, including for the first time in our history, providing eligible part-timers with paid time off up to 40 hours. This additional time off can be used as the auto's owner desires, and if they don't use it between now and the calendar year end, we will pay them for those hours in January. We did this to provide our auto's owners with choices. Some are in the more vulnerable populations and weren't comfortable coming to work. Others had childcare issues. Others were simply anxious, while the vast majority were comfortable continuing to come to work and providing great service to our customers in their time of need. This decision, which was made in a couple of days, was aligned with our values. In the fourth quarter, we extended these emergency time off benefits to our store managers and distribution center advisors, each of whom have been on the front line supporting and leading their teams through this extraordinary season. We were honored to be able to make these investments in our AutoZoners in recognition of what they have done and continue to do for our customers and our organization. Overall, this quarter's sales were a record for us, but it is simply impossible and would be irresponsible to extrapolate these results going forward. With so many variables heading into the fall, we continue to manage the business literally from week to week, and our field organization continues to do an outstanding job managing the business. As we said on last quarter's call, we expect that our sales growth will moderate over time, but we continue to believe our products and services will be in high demand during these more difficult economic times. One thing that we are sure about, Our team has shown their resiliency and they remain nimble. They're ready to react quickly to every single change. We remain focused on providing our team with the resources and support they need to live up to our pledge. And our AutoZone owners have definitely and continue to put our customers first. While geographic differences weren't a significant story this quarter, there continue to be interesting trends across our merchandise categories, specifically in the retail business. We continue to see some surprisingly strong categories that I will call project categories. These are categories for hobbyists or people who want to upgrade something. We believe that with people having more time on their hands and many opportunities, having more discretionary money due to enhanced unemployment benefits, often making more than they were making before, or a lack of spending on entertainment-type categories, customers are working on their, quote, project car or doing that enhancement job they've been constantly putting off. At the same time, we noted that certain product lines grew at a slower rate compared to the chain average. Merchandise categories like brakes, rotors, or even motor oil while up from pre-COVID levels aren't growing at the same rate as the overall store. We believe these categories may be impacted by the decrease in miles driven and in the break categories, specifically the lack of severe winter weather last year. Now let's turn our focus to the balance of the P&L. For the quarter, our gross margin was down 33 basis points. Included in our cost of goods this quarter is with a shift of mix and non-basis points of headwind due to civil unrest expenses. In addition, we've also identified select categories that are more commodity-based, which are less dependent upon service, that we have lowered prices in order to be more effectively compete with our non-traditional competitors to increase volumes. On operating expenses, our team, particularly our store operations and commercial teams, continue to manage our expenses during these times well. As our sales accelerated drastically in a very short period of time, we didn't have the available labor to achieve our desired staffing labels until later in the quarter. So we wish we could have spent more on labor to provide an even better customer experience. While expenses were up 9.2% versus last year's Q4, excluding the extra week, due to our very strong sales results, we were able to leverage operating expenses 315 basis points. Included in this quarter's expenses were approximately $11 million related to emergency time off and other COVID-related expenses. While the last two quarters' expenses related to COVID have been significant, as we visit stores and distribution centers and talk to our team, this decision strengthened our already unique and powerful culture and showed that this organization walks the talk. We believe there will be long-lasting benefits from this decision. Regarding our balance sheet, our debt was up a bit and our cash and cash equivalents were up dramatically. We now have over $1.7 billion in cash on the balance sheet, of which $1.6 billion is excess cash. Increasing our debt levels, adding a new 364-day line of credit, and increasing excess cash were purposeful as we wanted to maximize our liquidity position due to the significant uncertainty. We also felt we managed our inventory well as our inventory per store growth increased 1.3% versus Q4 last year. We feel our strong liquidity position heading into the fall months allows us immense flexibility when it comes to thoughtfully reinstituting our share repurchase program. As I mentioned previously, we temporarily paused our stock buyback program in March. It was certainly the right decision at the time, as there was too much uncertainty in the business and in the world. Our share repurchase program has been a very important part of our capital allocation strategy, and it will continue to be so. We expect to gradually restart our buyback program during the first quarter. We intend to utilize our ongoing free cash flow to buy back stock and, based on our view of the future, begin methodically utilizing some of the excess cash we currently have on our balance sheet. As we did in March, if we have concerns about the near term, we can and will temporarily suspend repurchases again. which is one of the significant benefits of a share repurchase program versus a dividend approach of returning capital to shareholders. We expect to maintain an elevated level of cash and cash equivalents throughout most of this new fiscal year. In regard to our capex spend during the quarter, we spent less this year than last year. We paused our development on many stores during the depths of the stay-at-home orders, which slowed our ability to complete construction and open new stores. As a result, we finished this year with 113 new U.S. stores versus 154 last year, and we opened only 25 stores across all of Mexico and Brazil for the year. For 2021, we would expect to get back to our usual cadence of approximately 150 domestic new stores and roughly 50 international stores. I'll spend a moment on our integrated retail efforts. As COVID's effect on consumers' ability to get out and shop grew, we ramped up our strategy to enhance the customer shopping experience by meeting customers when, where, and how they wanted to shop. This past quarter, we continued to see very strong growth in our online shopping channels, buy online, pick up in store, next day delivery, and ship to home. In particular, our buy online, pick up in store offering grew rapidly, at four times the growth rate of the ship-to-home options. I do want to remind listeners that our online sales still represent a very, very small percentage of the DIY business, substantially below 5%. While online purchasing is a smaller business for us, the traffic to the website is a tremendous marketing tool for our in-store business. We remain committed to improving the shopping experience online in order to help customers identify what they need and allow them a quicker in-and-out experience once they come to our stores for pickup. Before I pass the discussion over to Bill Giles to talk about our financial results, I'd like to again thank our AutoZoners for their extraordinary efforts during these unprecedented times. I cannot thank you enough. And I'm confident that I speak on behalf of our shareholders, too, and say thank you. AutoZoners, you truly delivered on AutoZone's promise to provide exceptional customer service. Now I'll turn it over to Bill Giles. Bill?

Thanks, Bill, and good morning, everyone. To start this morning, let me take a few moments to talk more specifically about both our domestic and international results. For the quarter, total auto parts sales, which includes our domestic, Mexico, and Brazil stores, increased 14.2%. For the trailing four quarters ended, total sales per AutoZone store were $1,914,000. This compares to an average of $1,847,000 at Q4 ending last year. Total DIFM sales increased on a 16-week basis, 16.8% to $976 million. An amazing number as this quarter reached several records for us. In the quarter, sales to our DIFM customers represented 21.5% of our total sales and increased approximately $89 million from last year's Q4. Last year did have the extra week, and excluding that week, our sales were up $140.4 million. Our weekly sales program were $12,250. and they were up 14.2% on a per program basis versus $10,700 per week last year. As we opened fewer programs this year at 114, finishing with 5,007 total programs, our sales efficiency per store has never been higher. Not only was $12,250 a week a record for us, but we were able to average $60 million in total weekly commercial sales, an amazing accomplishment. While we know many of the industry participants remain comfortably ahead of us currently, we know we are on the right path. This past year, we again believe our sales increases were materially better than the overall industry and will remain focused on repeating this in FY21. I should take a moment to discuss four major things that are making a real difference for us when it comes to commercial. First, we continue to expand our inventory availability initiative. One major example of this is adding to the number of mega hub locations. These stores, having opened five this quarter and now numbering 44 in total, substantially increase local market availability. Mega hubs lift our sales noticeably in the markets where they open. With over 80,000 SKUs or more available same day and even multiple times per day from these mega hub markets, we are able to say yes materially more than when compared to carrying 40,000 to 50,000 SKUs from a hub. Second, we are improving our service. We are delivering faster and we are supporting our customers with their overall needs better than before. We recently began rolling out new technology that will significantly improve our delivery times and the accuracy of the commitments that we make to our customers. Third, we've gotten our store managers to buy into our commercial sales initiatives. They are not only involved with the commercial effort, but they are fully on board with driving sales calls and improving our service to our commercial customers. They now own the commercial business in their store. And fourth, We continue to roll out initiatives that make us much easier to do business with. We now have our commercial program in 5,007 stores or 85% of our domestic stores. Our Mexico stores continue to be impacted by the pandemic this past quarter. In addition to impacting sales, the weakness in the foreign currency exchange rate put additional pressure on our results. The exchange rate finished the quarter at 21.91 to the dollar and was roughly 15% higher than last year's fourth quarter. As a result of the devaluation, our total U.S. dollar sales were down for the quarter versus last year. During the quarter, we opened 11 new stores and finished with 621 stores. While the quarter was challenging, we believe the negative impacts are short-term in nature. We remain committed to our store opening schedules in Mexico for the foreseeable future. Regarding Brazil, we finished with 43 stores. We opened five new stores in the quarter. Similar to the U.S., Brazil faced immense challenges with COVID-19 and stay-at-home mandates. In fact, many of our stores in Brazil were forced to be closed for weeks, like our stores in Puerto Rico. In both markets, our auto owners were very creative and quickly implemented drive-through, no-contact service. You should have seen the lines of cars. Currently, we view the COVID impact to be short-term in nature for our Brazil stores as well. Our commitment to growing our Brazilian business is not wavered. Gross margin for the quarter was 53.1% of sales, down 31 basis points versus last year's fourth quarter on a 16-week basis. This past quarter's gross margin included approximately $4 million in charges related to damage from civil unrest. The decrease in gross margin was attributable to lower merchandise margins driven primarily by a shift in mix. Our primary focus will continue to be growing absolute gross profit dollars in total auto parts segments. SG&A for the quarter was 30.7% of sales. leveraging 338 basis points to last year's fourth quarter on a 16-week basis. Our SG&A grew 9.2% over last year's fourth quarter. As we discussed in our press release this morning, we incurred a net $10.7 million in charges related to offering emergency time off and additional direct COVID expenses. SG&A will remain something we manage in accordance with sales volumes. If sales pick up, we would expect the spend rate to increase. And as previously mentioned, at times, we haven't been able to adequately staff to the increase in volume. As our staffing levels have increased, so will our labor cost. EBIT for the quarter was $1,018,000,000. Our EBIT margin was 22.4%. Interest expense for the quarter was $65.6 million, up 14%. from Q4 a year ago. The higher expenses related to the $1.25 billion bond issuance and the $750 million 364-day credit facility both completed in the third quarter. We are planning interest at $48 million for the first quarter of fiscal 21 versus $43.7 million in last year's quarter. Our higher forecast than last year is driven, again, by the cause associated with the new bond issuance and the 364-day credit facility. Debt outstanding at the end of the quarter was $5,513,000,000 or $307,000,000 above last year's Q4 ending balance of $5,206,000,000. Our adjusted debt level metric finished the quarter at 1.9 times EBITDA. Our lower than normal credit metric reflects the temporary suspension of share repurchase program. While in any given quarter we may increase or decrease our leverage metric based on management's opinion regarding debt and equity conditions, we remain committed to both our investment grade rating and our capital allocation strategy. And long-term, our share repurchases are an important element of that strategy. For the quarter, our tax rate was 22.3% versus 21.5% in last year's fourth quarter. This quarter's rate benefited 35 basis points from stock options exercised, while last year it benefited 107 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 first quarter of FY21, we suggest investors model us at approximately 23.5% before any assumptions on credits due to 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 of the quarter was $740 million, up 41.2% versus last year's fourth quarter when excluding the 17th week. our diluted share count of $23.9 million was lower by 4.3% from last year's fourth quarter. The combination of these factors drove earnings per share for the quarter to $30.93, up 47.6% over the prior year's fourth quarter, excluding the extra week. Relating to the cash flow statement for the fourth quarter, we generated $1,417,000,000 of operating cash flow. This was up approximately $600 million over last year's Q4 with an extra week. Net fixed assets were up 2.5% versus last year. Capital expenditures for the quarter totaled $183. million and reflected the additional expenditures required to open 65 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 open, we finished this past quarter with 5,885 stores in the U.S., 621 stores in Mexico, and 43 in Brazil for a total store count of 6,549. Depreciation totaled $125.4 million for the quarter versus last year's expense of $118.5 million. This is generally in line with recent growth rates. We did not repurchase any AutoZone stock in the quarter versus $692 million last year. At quarter end, we had $796 million remaining under our share buyback authorization, and our leverage metric was 1.9 times. As Bill mentioned earlier, we had suspended our share repurchase program as we continued to evaluate cash flow generation and the economy as a whole. At this stage, based on current conditions and the strength of our business, we expect to be utilizing our free cash flow generated each quarter in order to opportunistically start buying back our program back up. It remains and will remain a core tool to our model as we believe it is a terrific, flexible way to return excess cash flow after appropriately investing in our business to our shareholders. Next, I'd like to update you on our inventory levels in total. The company's inventory increased 3.6% over the same period last year, driven by new stores and increased product placement. Inventory per location was $683,000 versus $674,000 last year and $685,000 last quarter. Net inventory, defined as merchandise inventory is less accounts payable, on a per location basis was a negative 104,000 versus a negative 85,000 last year and a negative 56,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 115.3% versus last year's Q4 of 112.6%. Finally, Our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 38.1%. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital. Now, I'll turn it back to Bill Rudds.

Thank you, Bill. These continue to be unique and unprecedented times. And they have required us to look at many things differently to manage our business day to day. I'm extraordinarily proud of our team across the board for their commitment to servicing our customers, the motoring public, but doing so in a very safe manner. While we are learning how to operate effectively in these times, we remain wary of the volatility that can exist. Volatility in both the U.S. and our international markets. We don't know what lies ahead of us, for this new fiscal year, but we feel we are much more prepared today for uncertainty than we were at the start of this pandemic. We'll be ready for a wide variety of economic environments, and we have extraordinary people who are committed to servicing our customers and helping them get to work, go see their families, drive to a close vacation spot, or get back into the school year. I wish we could provide you with more clarity on our expectations on business trends for our upcoming first quarter and the new fiscal year. But as I stated before, that isn't practical for us with all the unknowns. But I want to be crystal clear. We plan conservatively in order to manage our cost structure appropriately. While our domestic retail business was a tremendous surprise for us this past quarter, we understand trends will ultimately slow. While we appreciate these things, we feel we are well positioned for continued future share gain opportunities in both the domestic retail and commercial segments. We had an outstanding quarter, but we have work to do as we start a new fiscal year. Frankly, our focus isn't on what happens this new quarter. It's are we keeping our auto zoners and customers safe today while providing our customers with their automotive needs? And more importantly, What can we do during these extraordinary times to position our company for even greater future success? What really matters is how are we doing a year or two from now? And I continue to be bullish on our industry, and in particular, bullish on our company. Before we proceed to questions, we made some exciting organization announcements a few weeks ago. We announced that Bill Giles and Bill Hagney Two tremendous long-term talented leaders plan to retire at the end of the calendar year. It is impossible to state the tremendous impact each of them have had on our business, our culture, and our teams. They will be sorely missed. But in their typical fashion, they always put the company's interest ahead of their own. And they have been sharing with us for a long time that this day would inevitably come. As such, their teams are prepared, and we simultaneously announced the addition of two new fabulous leaders to our team. Our new EVP CFO, Jameer Jackson, is with us today, and Song Ong will be joining us soon as our new Senior Vice President of Merchandising. We are so excited to add these two seasoned, highly accomplished leaders to our teams. It will be terrific to inject their ideas, thoughts, and perspectives into our future strategies and tactics. We welcome Jameer and Song, and we look forward to celebrating the enormous contributions of Bill and Bill. Now we'd like to open up the call for questions.

The phone lines are now open for questions. If you would like to ask a question over the phone, please press star 1 and record your name. Also, please limit yourself to one follow-up question. If you'd like to withdraw your question, Press star two. First question in the queue is from Michael Lasser with UBS. Your line is now open.

Good morning. Thanks a lot for taking my question. Congratulations to everyone on their new role, and good luck on your retirement. Thank you. Thank you. Recognizing that you don't necessarily want to opine on how to think about AutoZone sales trends moving forward, But as you think about the period of extraordinary growth that the industry is experiencing right now from those, what you categorize as project-related items, as that stays, are you operating under the assumption that the industry sales can return to pre-COVID levels even if vehicle miles driven are structurally lower moving forward?

Yeah, I think that is one of those other questions that are really hard to say right now, Michael. And I'll go back to on our last call, if you would have told me that our sales would continue for four months, additional four months at those elevated levels, I wouldn't have thought that to be true. But they did. And the biggest news to me was the fact that August still had 16.5% same-store sales growth post-economic stimulus and enhanced unemployment benefits. What happens with miles driven will be an element of it, but a lot of the miles that are being driven, they're not all the same. Our customer, our core customer, their habits haven't changed. They're still going to work every day. When you think about the miles driven that have declined, it's generally higher socioeconomic groups that are working from home. Our core customers, they haven't worked at home, just like our store auto zoners and DC auto zoners. They haven't worked at home a day. So I don't think all miles driven are the same. What happens in the next 12 months, frankly, is very, very difficult for us to predict. The piece that I hang on to and we hang on to is generally when economic times are tough, people... prioritize their vehicle at a different level because they're not going to get a new vehicle in any short-term period. And therefore, they change their maintenance and upgrade their vehicles. So as I said earlier, over the last three decades, the best periods of performance for us have all been coming out of recessionary environments. Will this recessionary environment be the same as those other periods? I don't know. But that's the best analogy that we have at this point.

That's helpful. My follow-up question is on your gross margin. How much did lowering prices on commodity items impact the gross margin in the quarter? Did that have any effect on your ability to gain shares seemingly within the commercial side of the business? And do you expect to push this strategy further over the next couple of quarters, such that it'll continue to have a lingering impact on the gross margin?

Yeah, it's a good question, Michael. I would start by first saying most of the gross margin impact was product mix shift. So we had some categories like lighting and breaks that typically have higher margins than our average, and those underperformed the quarter. Batteries, as an example, outperformed during the quarter, and they typically have slightly lower margins than the average. So that's what drove it a little bit. But, yes, we did find opportunities for us to lower – select categories of commodities where we're really not adding a lot of service, and it's an opportunity for us to be more competitive. And we did gain market share in many of those categories during the quarter, so we think it was the right decision, and long-term it will help drive sales and ultimately help drive gross profit. But to dimensionalize it, it was probably a single-digit basis point impact.

That's helpful, and best of luck. Thank you.

Next question is from Simeon Gutman with Morgan Stanley. Your line is now open.

Thanks. Good morning, everyone. I have a question on sales and then a question on margin. My first question on sales, Bill Rhodes, you mentioned the 16.5 through August a couple times. And I think towards the end of your prepared remarks, you said, you know, sales will ultimately revert back. Is there anything more you can talk about on September? Sorry to be so short term. And if we get CARES 2, do you think we'll see a bigger impact in DIY or commercial?

Okay. So you know this. Our long history is we report earnings so quickly after the end of our quarter, usually twice. three quarters of the year within two and a half weeks. At the end of the year, because of year end, we go three and a half weeks. I just don't want to talk about trends in September because I just don't want people focusing that much attention on such a short period of time. That's why we were so crystal clear about what happened in August that we did see a 16.5% comp in August. I want to leave it at that, Simeon. I understand your desire to hear more, but I don't want us extrapolating two or three weeks.

Fair enough. And then I guess I'll throw the follow-up, and then I don't know if you have a thought on if CARES 2 will help commercial or DIY more. But the follow-up is also on gross margin. And in the past, I don't know if you've provided a rule of thumb or the market has that gross margin for AutoZone could be up on average from 10-ish basis points or so a year. Is that still a fair framework, the idea maybe, or is there a lower threshold given, you know, you reserve the right to invest back in price? And then if it was, you know, down a little in 2020, does that mean it could be up a little bit more than sort of typical algorithm in 2021?

All right, let me answer your first follow-up question on the CARES Act, and then Bill, take the gross margin one. As far as the CARES Act, if there was a CARES, I think it's now four, and we provided additional enhanced unemployment benefits, I think you see more of the benefit on the DIY side of the business because that's where the most financially fragile customers are. You look back to what happens every year when tax refunds come out. And it's the DIY business. They both pick up, but the DIY business picks up even more. So I think it would be beneficial on both sides, more beneficial on the DIY side.

You know, on the gross side, I would just say that, look, we grew gross profit dollars by 20%. Our focus is, again, on driving gross profit dollars. And so where we can find opportunities to invest back in the business, we're going to do that. And over time, retail and commercial prices will go up and down significantly. based on market conditions. So, again, our standpoint is, look, our margin is in a really healthy place right now, and we've got great opportunities for us to lower costs through lower acquisition opportunities. And so, you know, on a category-by-category basis, we feel really good about where our margin is. There's always going to be some shift in product-sale mix that's going to impact the margin.

Got it. Okay. Thanks, Bill, and congratulations. Thank you.

Next question is from Seth Sigmund with Credit Suisse. Your line is now open.

Great. Hey, guys. Good morning. Congrats on the quarter. And Bill Giles, congrats on your announced retirement as well. I wanted to focus a little bit more on that 16.5% exit rate. Obviously, it's a very strong trend. Can you just discuss the DIY and commercial trends that you saw as you moved through the quarter? And then the second part of it is if you can talk about the types of projects that you see getting done and whether – Do you have any concerns that sales are being pulled forward, or do you believe that what you've seen is largely projects that had been delayed from earlier in the year? How are you thinking about that?

Yeah, some terrific questions in there. As far as the last question of did we pull projects forward, I think the project work is kind of, I call it the never doing now category. These are projects that people thought that they would do sometime, but they never had the time to do them. And therefore, when they had the time and they had some incremental disposable income, they tackled those jobs. Our battery business, as Bill said, has been very, very strong. A lot of the reasons we believe it's been strong is because a lot of people parked their vehicle for some extended period of time. Once they restarted it, the battery had been discharged some. So are those some failures that might have happened this coming winter when it got cold? That's the only piece that I wonder if that might have a bit of a pull forward. But we'll see when we get into next year. What was the first part of your question?

Just the DIY versus commercial trends as you move through the quarter.

Yeah, thanks for that. You know, DIY started, I mentioned it went up 50% in two days back in April, and so it ramped really quickly. The commercial business lagged it, but it continued to build very methodically over the course of the quarter. As we got into August, both businesses took a little bit of a step down when that enhanced unemployment benefit went away.

Okay, that makes sense. And then just to follow up on commercial, I do think the most important trend in the quarter was the strength you saw in commercial, obviously reflects a lot of the things that you've been doing over the last couple of years. Can you just update us on the hub strategy, frame for us how markets perform when you add a hub to the network? And then, you know, how are you thinking about growth of hub locations at this point, particularly given all the disruption in retail and the real estate opportunities that may come up? Thanks.

Great question, Seth. Yeah, we think that there's continued opportunity. As we mentioned before, we're going to continue to expand our mega hubs. As we said, we have 44 open today. We've targeted 75 plus mega hubs in the future. We're well on our way to accomplishing that over the next couple of years. We've got about 200 hubs today. We think on a longer term basis, we could almost double that number. So we're excited about it. The markets do perform well when we introduce those hubs into the marketplace. And so we're certainly getting an adequate return and excited about the sales volume that is generated from that. And you are right that there are more and more boxes that are available in the marketplace. They just have to be in the right place. And that hopefully will be an opportunity for us as we move forward.

Next question is from Christopher Horvers with J.P. Morgan. Your line is now open.

Thanks. Good morning, guys. So a couple of follow-ups. On the hurricane in August, did hurricanes, to what degree that impacted the 16.5%? And perhaps as you peel that hurricane back, did Do It For Me actually moderate post-stimulus?

Okay, so the hurricane, this was not a massive hurricane except for the people that were directly impacted. So it was a pretty small area that was hit. Our sales were softer in that last week, not disproportionately softer, but they were softer. We did lose a store in Lake Charles, Louisiana. Fortunately, we know of no auto zoners that were significantly impacted as a result of that hurricane or the one that happened a week and a half ago. As far as commercial moderating, they both moderated in the August period of time. That's what we saw. They just stepped down a little bit, but we were, frankly, tickled to death with 16.5% comps in August.

Yeah, really, really strong. And then from a regionality perspective, as you saw some of the flare-ups of COVID over the summer, did you see any change in your business? any, you know, deceleration or acceleration? And as you think about some of the harder hits areas around COVID earlier this spring, for example, the Northeast, you know, how did that, those areas perform over the quarter?

Yeah, back in the spring, there was a clear delineation between the hardest hit areas in the rest of the country. This summer, there was very little differentiation and certainly little differentiation that you could attribute to COVID. You would see some weather patterns, as we always do, but I would say that the COVID impact in the summertime was unremarkable.

Then on the northeast?

I'm sorry?

Northeast.

The northeast, did that, you know, as miles driven, has it gotten less worse there? Has that has that part of the country seen a more marked improvement?

It has rebounded back to being more normal with the rest of the markets.

Understood. Thanks very much, and congratulations to all.

Thank you. Appreciate it, Chris.

Next question is from Zach Fadum with Wells Fargo. Your line is now open.

Hi, this is David Lance. I'm for Zach. Thanks for taking our questions. So as you continue to take share on the commercial side, I was just curious if you could comment on how this business has changed as a result of the pandemic and whether you would view the double-digit growth as sustainable going forward.

Well, I think one of the things that happened in the pandemic is is everybody that was operating a business started running down case scenarios, us included. I talked about it on the last call that we were asking ourselves questions that I never thought we would ask ourselves, questions like liquidity. But in the midst of the depths of the pandemic, we did two things. One, we invested in our auto zoners. Other people were saying, how do I cut my costs like crazy? We said, how do we stand in the gap for the most important thing we have, which is our auto zoners? We provided them with that emergency time off benefit. The other thing that we did was we didn't lay off or furlough one single person, not one, as a result of the pandemic. And we kept our operations as normal as possible. Yes, we cut back our store hours of operation, but that was about it. Other people, particularly the less sophisticated, less well-capitalized people, many of which were on the commercial side of the business, they reacted very swiftly and very strongly. And they let people go. They cut back their service level. And so it provided us an opportunity to over-serve our customers during that period of time, certainly from a competitive point of view. I think that that has a longstanding impact. Whether or not we can grow commercial 10% into the foreseeable future, that's anybody's guess. What I know is we're winning in the marketplace. If you look at our growth over most of the periods over the last 10 years, our growth versus the competitive landscape has been significantly better two or three times, many times, what the industry growth rate is. And we feel really good about where we are.

Great. And then just one more from us. How do you think miles driven plays out when you think through the moving parts around extended work from home, but also the higher demand from used cars and a population shift to the suburbs?

It feels as though the miles driven is getting better each month. I mean, obviously it was down maybe close to 10% back in July, but if you look at the current fuel sales, it would imply that miles driven is down in the mid to low single digits at this point. So our expectation is that that's a number that's going to continue to improve. And back to Bill's point earlier that relative to our customer, it's very likely that their miles driven is not necessarily negative. They're more likely than not essential workers needing to be able to get to work and able to operate their cars. So our expectation is that we'll continue to get better and that it is probably already a little bit better for our customer.

Can I jump in on that as well? And I just want to remind everybody to go back to the 08, 09 period of time. When Miles Driven dipped during that period of time, the correlation between Miles Driven and our sales performance and the industry sales performance was broken. We attribute that to the fact that our trends were more aligned with what was going on with employment. And so in these tough economic times, I think the correlation between miles driven breaks. It comes back together in more normal times, but it definitely is not a good contributor in short-term recessionary environments.

Great. Thanks so much.

Next question is from Michael Baker with DA Davidson. Your line is now open.

Hi, thanks. I wanted to ask a question on SG&A. It was up, we think, about 6% per foot when you adjust for the extra week. What I'm trying to understand is, so sales are probably going to slow, which means that maybe the SG&A growth would slow. But then again, that SG&A growth maybe was understated because you didn't have the labor you needed earlier in the quarter. So How do we think about that going forward? For instance, if you continue to comp in the mode of mid-teen level, does that SG&A per foot go up in the next quarter?

Yeah, good question, Michael. And as you know, our game plan is that we're going to play in the environment that we're in. So if sales continue to be strong, we're going to continue to invest back into that. As Bill mentioned before, we probably ended the quarter in reasonably good shape from the standpoint of labor and service, but certainly at the beginning of the quarter we were trying to catch up a little bit. So on an overall basis, I would expect us to continue to invest in labor as our sales continue to be strong, and we're going to find other opportunities for us to be able to make investments when our business is really strong because, again, it's all about the future and it's all about our long-term growth and ensuring that we're creating a great service environment for our customers, both on the retail side and the commercial side.

Okay, so that makes sense. So just to follow up on that, presumably if we were to be able to look at it on a month-by-month basis or something along those lines, the SG&A per foot in August towards the end of the quarter was up more than 6%, and that's maybe the trajectory we should think about going forward as long as we assume that sales are going to remain pretty strong. Is that fair?

I would just say on a relative basis it would have increased as the quarter progressed, yes.

Okay, understood. Thanks. Appreciate that. Thanks, Michael.

Next question is from Daniel Imbrow with Stevens Inc. Your line is now open.

Yep. Thanks for taking my questions. Good morning, guys. I'll add my congrats to Bill Giles. And, Jamir, welcome to the team. Thank you. Thank you. You started on gross margins. Bill, I think something you guys have talked about in the last 12 months has been a focus on direct sourcing and kind of growing that initiative. Can you update us on where that stands? And then, you know, your recent hire of Song Om, obviously experienced in the global sourcing department. Can you talk about how she adds to that capability going forward?

Yeah, great question. In fact, we've spent a lot of time and energy building our foreign sourcing office buying office over in China. And so we continue to find opportunities in a lot of different categories for us to be able to find areas where we can reduce our acquisition costs. One of the other things that the pandemic taught us was that we also want to ensure that we're not too dependent on any particular geographic area of the world. and so the team is going to be continuing to find other opportunities throughout the world in order for us to be able to source product. So that will actually, I think, reduce our risk on a long-term basis and should also find other opportunities for us to lower our acquisition cost. Song will come to us with a significant amount of experience in this area, and we're excited about her joining the organization and helping the great team that we've already built buying product every day. But Song will be able to add a lot of value in that area as well.

That's great. Thanks for the color. And then, Bill Rhodes, a follow-up on maybe a higher-level industry question. I mean, you just discussed some of the differences, why you're gaining so much share, and obviously it sounds like it's coming from the independent operators. As we think through the long-term impacts of that, you know, how long can the independents keep losing share before we start to see a you know, maybe a more rapid pace of independent store closures or, you know, how do you think that longer term, what are the impacts of that as you keep getting the share from that, from that base? Thanks.

Well, that's a terrific question. Um, you know, I've been in this industry for over 25 years and I've seen the consolidation happen and AutoZone was a significant participant of it in the late nineties, all the way through 2008 or so. On the commercial side, this consolidation is much more challenging. On the retail side of the business, everybody was looking for geographic expansion. And we could all take reasonably the same size boxes and over time turn them into our standard prototypes. On the wholesale side, it's not as easy. We don't need the wholesaler's inventory. We don't need their distribution. We don't need their locations. We need their customers, and is there more efficient ways for us to get their customers by winning in the marketplace is what we've learned over time. We did step our toe into the water with our acquisition of IMC, and that didn't work out very well for us. We believe our strategy and approach to approaching the market will win over time. If you look at what we've done and some of our close-in competitors, we've all substantially changed our inventory assortments over the last five to ten years. We've all built really strong sales forces, and we're continuing to chip away at some of the competitive differentiation that was in the marketplace. I think that that's what's happening with share over time. These companies, many of the independents, they're not working for a return on the capital, though. They're working for their salaries. And so what happens to them over time? I think they have longer staying power than other enterprises would. So I think it will take time, but I do think that there's a lot of pressure on independent operators in this commercial side of the business today, and that's not going to let up.

Great. Thanks so much to the caller and best of luck.

You bet. Thank you.

I would now like to turn the call back over to Mr. Bill Rhodes.

Okay. Before we conclude the call, I want to take a moment to reiterate that we believe our industry is very strong and our business model is solid. We'll take nothing for granted as we understand our customers have alternatives to shopping with us. We will continue to focus on the basics as we strive to optimize shareholder value in FY 2021. Thank you for your time, and thank you for your interest in our great company. Stay safe and be well.

This concludes today's call. Thank you for your participation. You may disconnect at this time.