AutoZone, Inc.

Good morning and welcome to the AutoZone Conference Call. Your lines have been placed on a listen-only mode into 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 will discuss AutoZone's first 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 and 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 and Legislation 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 on the prospect of war, including terrorist activity, inflation, the ability to hire, train, and retain qualified employees, construction delays, the compromise in 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 interruptions. 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 adversely affect our business. Forward-looking statements speak only as of the date made, except as required by applicable law. We undertake no obligation to update publicly any forward-looking statements, whether a result of new information, future events, or otherwise. Actual results may materially differ from anticipated results.

Good morning, and thank you for joining us today for AutoZone's 2021 first quarter conference call. With me today are Bill Giles, Executive Vice President, Chief Financial Officer, Jameer Jackson, Chief Financial Officer-Elect, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the first 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, are available on our website, .autozone.com, under the Investor Relations link. Please click on quarterly earnings conference calls to see them. Since our last earnings release in late September, much of the world's attention remains focused on COVID-19, including its current and future implications for communities, businesses, and markets. These times remain extraordinary for all of us. From the start of the pandemic through this quarter, our team has had to deal with challenges unlike any we have seen in our company's history. Well, at the start of the pandemic, our sales dipped. We performed quite well once economic stimulus was implemented in the US, and Americans began to drive more. By mid-April, our business began to strengthen and reached an apex last quarter when we reported .8% same store sales, the best same store sales performance in our company's rich history. For this quarter, ending in late November, we are proud to report .3% same store sales, another historically strong performance. While last quarter's sales were more consistent, particularly across the first 12 weeks of the 16-week quarter, this quarter was a bit less so. Considering the meaningful volatility resulting from the pandemic and economic responses, we are sharing our same store sales cadence for each four-week period of the quarter. We were up 16.5%, then up 11.4%, ending up .8% in the last four weeks. The deceleration appears to be related to a combination of normal seasonality and how far away we were from the benefits of economic stimulus. This quarter's traffic was far more beneficial to same store sales than ticket growth by quite a wide margin. When we talked in September, we could not have effectively forecasted our growth for this quarter's same store sales, albeit we would have been much closer than we would have forecasted Q4 at the beginning of that quarter. We are continuing to learn as we go. In Q1, we felt we would see substantial above-normal growth, but we wouldn't have thought double-digit same store sales. Our number one priority continues to be the health, safety, and wellbeing of our customers and our auto zoners. Throughout the pandemic, we have continued to follow the myriad of national, state, and local mandates and ordinances, and have always kept close tabs on the CDC guidelines. We require masks entering our facilities, perform questionnaires of our team, and take many other safeguards, like enhanced cleaning protocols, providing masks, hand sanitizers, and other PPE to our auto zoners to ensure safe shopping and work environments. Last quarter, we talked about the pressure our supply chain was experiencing to make sure we were in stock and replenishing the stores on a timely basis. I am very happy to say, today, we feel we've made significant progress in this area. Our in-stocks are much improved, and our supply chain and most of our vendor partners have done an exceptional job reacting to the unprecedented surge in volumes that have now lasted six-plus months. The progress has been significant, but at the end of the quarter, we had only closed about half of the gap from our deaths to our normal levels of in-stock. To provide a little more color on the drivers of our sales performance this quarter, I remind you that we were anxious to see what would happen as we got further away from the enhanced unemployment benefits. While the initial stimulus package ended at the end of July, there were still funds being distributed on a -by-state basis at lower levels this fall. As you recall, last quarter, we reported finishing the quarter with comp sales running up 16.5%. And you can see we remain strong for this quarter. While our enhanced sales growth declined over the quarter to still historically high levels, we believe the noise around the election, the re-emergence of COVID in many areas, and the beginnings of seasonal weather patterns hurt foot traffic, particularly in the last four-week period. While it remains extremely hard to predict sales performance in the near term, we believe the fundamentals of our business remain quite strong. 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. And I could not be more proud to say that based on the retail sales floor customer segment data we have, we continue to experience historically unprecedented share gains. Historically unprecedented share gains. The data shows the industry has been growing in the high single digits, and our sales have been growing at close to double that rate for these categories. While we are thrilled to have these share gains today, our charge is to determine how we maintain them. I'm sure many of you would like to know how we are thinking about sales for both the second quarter and the balance for fiscal 21. I'll remind you that typically in recessionary environments, our business is remarkably resilient. However, nothing about this global pandemic is typical. There simply are too many remaining unknowns, like will the federal government pass a second round of stimulus? And when will the vaccine be distributed? And how effective will it be? What consumer behaviors have changed temporarily? Which ones have changed permanently? All of this creates uncertainty, but our focus on execution remains the same. Beyond our primary objective to ensure the safety of our customers and autosoners, our focus is on providing our autosoners with the resources they need to provide our customers with an exceptional shopping experience. For the long term, we remain bullish on the health of our industry. 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. These time periods have benefited our business in the past, retail in particular, as it has in the last three recessions. Last quarter, I reminded folks, the strongest periods we experienced of outside sales growth over the last three decades have been the early 90s, 0102, 9, 10, and 11, all coming out of recessionary periods. Therefore, we remain optimistic on the industry this upcoming year. Interestingly, after each of these outsized 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. I would be remiss if I did not thank our autosoners for their exceptional efforts. I owe praise to our entire organization, from our stores to our distribution centers, from the US to Mexico to Brazil, at AllData and our store support teams. I always owe thanks to our customers who continue to believe in our capabilities to help them with their automotive needs. I couldn't be prouder of our team. As usual, I want to especially recognize, on behalf of every autosoner, our store and distribution center autosoners, these extraordinary people have been challenged more than they ever could have expected, and they have met every single challenge. Thank you, autosoners. You embody everything it means to be an autosoner, and you deliver on our cultural and service promises every day. Now let's move into more specifics on performance for the quarter. Our same store sales were up .3% versus last year's first quarter. Our net income was $442 million, and our APS was $18.61 a share, .1% above last year. Sales were higher than we forecasted at the beginning of the quarter, and certainly higher than historic norms. Both our retail and commercial businesses showed strength in the quarter, with DIY same store sales up approximately 13%, and commercial total sales growth of approximately 12%. In commercial, we averaged over $58 million in weekly sales, which was over $11,500 in sales per program per week. While average weekly sales per program decelerated from last quarter, that is normal as we change seasons. Moving forward, we expect our commercial business to show continued strength as we execute on our growth initiatives and gain additional share in this space. I'll remind you that this is a highly fragmented $75 billion market, and we believe our product and service offerings provide us tremendous opportunity to significantly grow sales and market share over time. While there are some geographical differences this quarter, there continue to be interesting trends across our merchandise categories, particularly in the retail business. Our sales floor categories continue to be strong, as we believe people have more time, and many have more money. Many parts of the economy are still operating at fractions of their normal capacity, movie theaters, vacation resorts, entertainment venues, hotels, and the like. Some Americans have the luxury to, quote, work from home, eliminating their commute, and unfortunately, while vastly improved in the early days of the pandemic, unemployment is still twice the pre-pandemic rate. This extra time, and for some extra funds, have been repurposed to that project car, are doing that enhancement job our customers have been perpetually putting off. At the same time, while our sales have increased in merchandise categories like brakes, rotors, and even motor oil, they aren't growing as fast as the rest of the categories due to last year's mild winter and lower current miles driven. We believe miles driven will continue to improve, and maintenance parts will increase as miles driven go up. And we know from history that the muted brake and rotor growth is also still being impacted by last year's very mild winter. As for this year's winter, all indications we have call for a normal winter. Anything, anything normal in this environment would be welcome. We expect that our sales growth from the pandemic-related surge will moderate over time. However, we will continue to invest in growth initiatives in both our retail and commercial that position us well for the future. In addition, we continue to believe our products and services will be in high demand during more difficult economic times, and this resiliency gives us significant confidence about our prospects. One thing we are certain of is our team continues to perform at an exceptional level. I am so proud of them across the enterprise. We remain focused on providing everyone with the support, encouragement, and resources they need to live up to our pledge of always putting customers first. Now I'd like to again thank our AutoZoners for their extraordinary efforts during these unprecedented times. In particular, I would like to recognize the tremendous contributions of our store and distribution center AutoZoners and their leaders who have been there for our customers, external or internal, every day since the beginning of the pandemic. I ask each of you listening to this call to stop for a moment and imagine yourself in a public environment five plus days a week for the last nine months helping customers while at the same time trying to keep yourself, your teammates, your customers, and ultimately your own family safe from the virus. Seriously, seriously stop and think about that. That is exactly what our team has done. Our stores haven't closed. Our distribution centers are operating at breakneck speed thanks to these AutoZoners in our stores and distribution centers for all they've done. In the spring we implemented something innovative and new for all eligible full and part-time hourly AutoZoners and ultimately for our store managers and DC advisors. We offered them emergency time off or ETO as we call it. In essence, it amounted to two extra weeks of vacation to give them the flexibility to ensure their safety, deal with childcare issues, care for a sick family member, or most importantly, stay home. Stay home if they were showing any symptoms. It has worked and it's worked exceptionally well. Many of them have used this benefit while a significant portion have saved it and will receive meaningful payouts should they choose next month. And 800 to $1,600 are more bonus for most of our hourly AutoZoners. When we rolled this new benefit out, as you would expect, we shared that it was a one-time extraordinary benefit. Who knew then that the pandemic would still be raging at the turn of the calendar year? So two weeks ago, we announced our team that we would allow them to carry over any unused ETO or be paid out in January at their election. That every single AutoZoner who has unused normal vacation would be allowed to carry it over six months past the normal deadline. And most importantly, that we would be extending all eligible full and part-time hourly AutoZoners, store managers, and DC advisors in the US with another week of ETO at the beginning of the new calendar year. This is an expense that will be recognized in our second quarter of approximately $50 million. And as I told our AutoZoners on the Wednesday before Thanksgiving, when I made the announcement, it's a large expense, but it's more importantly, a tremendous investment in them and their safety. I'm exceptionally proud to work with a team of leaders and a board of directors who ensure we live consistent with our stated values. Now it is my pleasure