AutoZone, Inc.

Good morning and welcome to the AutoZone conference call. Your lines have 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 second quarter earnings release. Bill Rhodes, the company's chairman, president, and CEO, will be making a short presentation of 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.

Ben, are you going to play the forward-looking statement? Good morning, everyone. Obviously, we have a little curveball, so I will read the forward-looking statement. 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 the company and Companies' management in light of experience and perception of historical trends, current conditions, expected future developments, and other factors that the company believes 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. risk associated with self-insurance, war and the prospect of war, including terrorist activity, the impact of public health issues, such as the ongoing global pandemic of a novel strain of the coronavirus, 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 growth rates, sustainability, downgrade of the company's credit ratings, damage to the company's reputation, challenges in international markets, failure or interruption of the company's information technology systems, origin and raw material cost of suppliers, disruption in the company's 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 described in more detail in the risk factor section contained in our In Item 1A under Part 1 of the company's annual report on Form 10-K for the fiscal year ended August 29, 2020, 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 the company's business. However, it should be understood that it is not possible to identify or predict all such risk and other factors that could affect these forward-looking statements. Forward-looking statements speak only as to the date made, except as required by applicable law, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Okay, well, good morning, and thank you for joining us today for AutoZone's 2021 second quarter conference call. With me today are Jameer Jackson, Executive Vice President, Chief Financial Officer, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the second quarter, I hope you 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, www.autozone.com, under the Investor Relations link. please click on quarterly earnings conference calls to see them. To start off this morning, I'll spend some time talking about our sales results, trends over the 12 weeks, merchandise categories that drove our performance, and any regional discrepancies. As I said in our press release this morning, we could not deliver the kind of results we had without the heroic efforts of our store and supply chain auto owners. While classified as essential workers, essential, seems insufficient to describe their remarkable contributions to our company, our customers, and our results. Our auto zoners have really stepped up during the pandemic and been nothing short of exceptional. And our top priority remains being committed to providing all of our auto zoners with a safe work environment so they can help our customers. While Jameer will talk more about this when he discusses the investments we've been making, I will say the additional emergency time off, or ETO, we offered is something we just knew was the right thing to do for our AutoZoners. Thank you, AutoZoners, again. Okay, let's turn to our sales results. Our overall comp sales were up 15.2% this quarter. Our growth rates for retail and commercial were both strong this quarter, with retail comps being slightly stronger than commercial. Commercial came on strong at the end of the quarter and comps similarly to retail for the last four weeks. Let's review our sales cadence. We told you on our last call we ran an 8.8% comp for the last four weeks of Q1. In the first four weeks of this quarter, our sales accelerated to a 10.7% comp. As the holidays arrived, we saw further acceleration, which was sustained for the balance of the quarter. We ran a 17.5% comp pretty consistently this over the last eight weeks of the quarter. This quarter's traffic versus ticket growth was pretty close to split down the middle, although ticket was slightly stronger. It was encouraging for us to see sales inflect upward starting in January with both ticket and traffic moving higher. Our ticket growth was stronger this quarter due to hard part sales mixing higher than what we experienced in the first quarter. Our number one priority continues to be the health, safety, and well-being of our customers and our auto zoners. Throughout the pandemic, we continue to follow all the national, state, and local mandates and ordinances and have always kept close tabs on the CDC guidelines. We continue to require masks entering our facilities, perform questionnaires of our team members, and take many other safeguards like enhanced cleaning protocols, providing masks, hand sanitizers, and other PPE to our AutoZoners to ensure safe shopping and work environments. And just last week, we announced that we would provide every AutoZoner with a $100 reward once they completed their vaccination for COVID-19. That's every AutoZoner, including part-timers. This is just the next logical step in our efforts to provide a safe working and shopping environment. I continue to be inspired by our board and our management team's commitment to doing what is right, putting safety first. You see, our values and our culture have been in full force and effect over the last year in this pandemic. Addressing our supply chain, we've done a solid job with handling the extra demand, and our in-stock levels have continued to improve. To provide a little more color on industry drivers of our sales performance this quarter, I remind you that we were anxious to see what would happen as we got further and further away from the enhanced unemployment benefits that ended last July. In the first week of January, over $100 billion of stimulus was distributed to Americans. The majority of these funds were was for the one-time checks as part of the $600 billion stimulus package passed in late December. While smaller in size than the April disbursements, we did see our business pick up nicely, and our sales remained elevated throughout the remainder of the quarter. While we continue to be encouraged with the current selling environment, we feel any additional stimulus should lead to a strong sales environment. During the quarter, there were certainly some geographic regions that did better than others, as there always are. Across both our retail and commercial customer bases, we saw the majority of the country perform well, with the Midwest and Northeastern markets underperforming the others pretty consistently. Again, these markets, which represent just over 25% of our store base, were solid, but not as strong as the remaining markets. For example, the spread in comp sales between these markets and the others was approximately 300 basis points for the quarter. We believe the separation was due to lingering effects of a mild winter last year and colder weather happening later this winter. But winter did come this year. Boy, did it. And the performance gap closed. So we are encouraged about the summertime and believe we won't have to discuss why mild winter affected comp sales during our upcoming fourth quarter. And I could not be more proud to say that based on the retail sales data we have for our industry, we continue to experience historically unprecedented share gains. The data shows the industry has been growing in the mid-single-digit range range with our sales closer to three times the industry's growth rate. While we are thrilled to have these share gains now, our charge remains to maintain them heading into the spring and summer months. I'm sure many of you would like to know how we're thinking about sales for both the third and fourth quarters of fiscal 21. I'll remind you that typically in recessionary environments, our business is remarkably resilient. However, nothing about this global pandemic is typical. Beyond our primary objective to ensure the safety of our customers and auto owners, our focus is on providing our auto owners with the resources they need to provide our customers with an exceptional shopping experience. We are optimistic about the sales environment heading into the third fiscal quarter, but we will obviously have a much more difficult comparison in the fourth fiscal quarter, as last year's fourth quarter benefited from the April 2020 stimulus package. For now, it remains difficult for us to predict sales for the remainder of the year. This is especially true for the fourth quarter of this year when we are up against the fourth quarter of previous year's 21.8% comp store sales growth. While we continue to expect our sales growth will moderate over time, we believe our products and services will be in high demand during these more difficult economic times. Over the long term, 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, we reminded you the strongest periods we've experienced of outside sales growth over the last three decades have been the early 90s, 01 and 02, and 09, 10, and 11, all coming out of recessionary environments. Therefore, we remain optimistic on the industry this upcoming year. Interestingly, after each of those 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 retained many of those customers in the years that followed. Now let's move into more specifics on our performance for the quarter. Our same-store sales were up 15.2% versus last year's second quarter. Our net income was $346 million, and our EPS was $14.93 a share, 20.5% 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 16% and commercial total sales growth of approximately 15%. For commercial, we averaged over $53 million in weekly sales, which was over $10,500 in sales per program per week. While average weekly sales per program decelerated from last quarter, that is normal as the winter months are lower selling months for us. Moving forward, we remain very encouraged with what we are doing within our commercial business. The initiatives we have in place are helping our sales. I'll remind you that this is a highly fragmented $75 billion market, and we believe our product and service offerings provide us a tremendous opportunity to significantly grow sales and market share over time. While there were 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. with categories like tools, antifreeze, small repair, and floor mats showing strength. But our hard parts business definitely picked up. In fact, our hard parts business comped in line with our sales floor for the quarter. This was the first quarter since the pandemic began where we saw our hard parts grow in line with sales floor. While business improved in many merchandise categories, such as batteries, categories like brakes and rotors are not comping as high as the overall business. We believe this performance gap with certain categories will close as miles driven continue to improve. As for this year's winter, it was late arriving, but it did arrive. Overall, we view the winter as not having a material impact on our upcoming spring and summer business one way or the other. 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 sectors. 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. On last quarter's call, we announced we would be expensing additional payroll during this second quarter. The additional expense was to provide our AutoZoners with more emergency time off. While this is the second time in our history we've offered ETO benefits, we believe it is the least we could do to support our AutoZoners in the field. This extra time off award has been enthusiastically embraced by our team. Our AutoZoners have the right to use the benefits to address medical emergencies, take time off to get the vaccine, take additional paid vacation time off, or wait until the end of the calendar year and get paid what remains in their incremental vacation bank. In January, we paid out $31 million, $31 million to AutoZoners who didn't utilize the ETO we offered them back in March of 2020. I have to tell you, it was an honor to provide these AutoZoners with sizable checks in recognition of their heroic efforts. We feel this is a very important investment in our AutoZoners and in 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 to turn the call over to Jameer Jackson. Jameer?

Thanks, Bill, and good morning, everyone. As Bill mentioned, we had another outstanding quarter. Our growth initiatives are delivering, and the heroic efforts of our auto zoners in our stores and distribution centers are driving exceptional results. To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q2. For the quarter, total auto parts sales, which includes our domestic, Mexico, and Brazil stores, were $2.9 billion, up 16%. For the trailing four quarters ended, total sales per AutoZone store were just over $2 million. This compares to just under $1.9 million in Q2 last year. Now, let me give a little color on sales and our growth initiatives. Starting with our commercial business, for the second quarter, our domestic DIFM sales increased 14.7% to $639 million. Sequentially, commercial growth was nearly three points higher than Q1. In the quarter, sales to our commercial customers represented 22% of our total sales, and our weekly sales per program were $10,500, up 11.7%. We averaged $53 million in total weekly commercial sales. Internally, we have been executing against our commercial acceleration program, where we are focused on building a faster-growing business with disciplined investments in pricing, service, technology, and assortment. We have a tremendous market opportunity as we are significantly underpenetrated in this highly fragmented portion of the market. We now have our commercial program in 85% of our domestic stores, and we're focused on building our business with national, regional, and local accounts. This quarter, we opened 45 net new programs, finishing with 5,088 total programs. And our sales efficiency per store remained at near record levels as we leverage our DIY infrastructure and increase our share of wallet with existing customers. Let me be clear. Our strategy is working. We believe we grew share, and we remain focused on repeating this for the balance of fiscal 2021. Fundamentally, we believe that our share gains are underpinned by the investments we made in improving the quality of our parts, improvements in our assortment and parts coverage by model year, more competitive pricing, and a commitment to providing exceptional service. These core focus areas have enabled us to drive double digit sales growth for the past three quarters and position us well in the marketplace. And as we move forward, we are focused on our core initiatives that we believe will accelerate our growth even further. First, our mega hub strategy is improving our parts availability. We opened one more mega hub this quarter, bringing our total to 48 locations, and we expect to open between seven and 10 more mega hubs by the end of the fiscal year. Given the success of our mega hubs and increasing parts availability and driving meaningful sales lift, we're now raising our target from 75 to 90 mega hubs at build out to 100 to 110. These stores help us expand coverage and say, yes, we have it more frequently. Second, we are leveraging technology to improve delivery times and service levels. The technology investments we're making in electronic ordering and tracking will significantly improve our delivery times and the accuracy of the commitments that we make to our customers. We're making it simpler to do business with AutoZone, and we're driving efficiency for our sales professionals and drivers. Third, we are committed to being price competitive. We have a laser focus on the key categories where investment and pricing lead to accelerated sales growth and higher EBIT dollars. We're using data science and market intelligence to live up to our pledge to have the best merchandise at the right price. We like the competitive hand that we have in our commercial business and believe we are in the early innings of a transformational growth story. Now, Bill gave a lot of color on our DIY business, which I won't repeat, but I would like to spend a moment on our retail acceleration initiatives. We're excited about the gains we're seeing in our DIY share growth. Like the commercial initiatives I mentioned earlier, we're running an intense playbook in DIY that is driving solid results for our business. First, the assortment work and mega hub strategy that I mentioned earlier drive tremendous benefits to our DIY business. Our investments are improving coverage and availability, leading to a meaningful impact on trial and repeat purchase activity. Second, we continue to focus on improving the customer shopping experience with the work we have done on the digital front. Our efforts in buy online, pick up in store, next day delivery, and ship to home have helped us meet customers when, where, and how they want to shop. We are investing in technology to continue to improve the customer experience and make it easier to shop our broad array of products. Third, and similar to our commercial approach, we have a laser-like focus on being competitively priced in the marketplace. We're using discipline and sophisticated data analytics to drive pricing decisions in certain categories, categories where we typically compete with nontraditional competitors like mass and online-only sellers in commodities and very slow-moving parts and products. We have tested our approach in key categories and markets, and this effort is yielding increased top line and gross profit dollar growth, albeit at slightly lower gross margins. This is a data-rich environment, and our tools and capabilities give us a meaningful competitive advantage. Again, we're living up to our pledge of having the best merchandise at the right price, and we believe it is helping us create a faster-growing business. Fourth, we simply have a relentless focus on execution. As Bill mentioned, our auto zoners and our stores and distribution centers have delivered exceptional results in a tough environment. As I said last quarter, perhaps the best investment we have made in our company is the investment in additional emergency time off. In return, we continue to see our supply chain process record volume and our store autozoners handle record store traffic while still delighting our customers. This focus on execution is a meaningful competitive advantage for us, and we're winning in the marketplace. Let me spend just a few minutes on international. First, we continue to be pleased with the progress we're making in Mexico. During the quarter, we opened seven new stores to finish with 628 stores, and our store sales accelerated sequentially. Like last quarter, the exchange rate again played a role in the U.S. dollar equivalent reported sales. The exchange rate finished a quarter at roughly 77% higher than last year's second quarter rate. That's 7% higher than last quarter's second rate. And as a result of the devaluation, our total U.S. dollar sales were negatively impacted. While the macro environment has been challenging, we believe we're seeing signs of a turnaround in the Mexican economy. We remain committed to our store opening schedules in Mexico for the foreseeable future. Regarding Brazil, we opened one new store to finish with 46 stores this quarter. The Brazilian REI continues to face headwinds and devalued roughly 25% for Q2 over last year. Long-term, Brazil will be an important market for AutoZone, and we will invest in a disciplined way. Now, let me spend a few minutes on the P&L and gross margins. For the quarter, our gross margin was down approximately 77 basis points. Thirty-seven basis points of margin headwind is due to higher supply chain costs, including a one-time benefit last year that did not repeat this year. The remaining 40 basis points came from our pricing initiatives, loyalty program, and mix shift. As I discussed above, we're focused on competitive pricing that will drive top line and gross profit dollar gains. To be clear, though, the industry's pricing remains rational, and overall, we still have pricing power. We have tested certain categories and taken action when we have the ability to drive both top line and gross profit dollar gains. This is a dynamic market, and we remain disciplined in our approach. The strategy is working. We see our work translating into higher sales and profits, as evidenced by the transaction and share growth that Bill mentioned earlier. As we continue to refine our strategy over the next several quarters, we're planning for higher sales and gross profit dollars that outpace the drag from gross margin rate. This is a good outcome for our business as we're driving new customers and retention. All of the investments we're making suggest that we're growing our DIY and DIFM businesses at roughly double the rate of the overall market or better, and we're committed to capturing our fair share and improving our competitive position in a disciplined way. Again, our primary focus will continue to be growing absolute gross profit dollars at a faster than historic rate in our total auto parts operating segments. Regarding operating expenses, our teams, particularly our store operations and commercial teams, continue to manage our expenses well in this environment. Our expenses are up 12.5% versus last year's Q2, but included in this quarter's expenses were approximately $40 million related to emergency time off and other COVID-related expenses, which represented 4.2% of the overall SG&A growth. We believe our decision to provide emergency time off for the heroic efforts undertaken by our honors voters during the pandemic was absolutely the right thing to do. As I said last quarter, this is perhaps one of the most important investments we have made, maybe ever. We will continue to manage SG&A in lines with sales budgets. Moving to the rest of the P&L, EBIT for the quarter was $482 million, up 18.1% versus the prior year's quarter. Our EBIT margin was 16.6%, up 32 basis points versus the prior year's quarter. Interest expense for the quarter was just over $46 million, up 4% from Q2 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 last fiscal year's third quarter. We're planning interest in the same $46 to $47 million range for the third quarter of fiscal 2021, versus $47.5 million in last year's third quarter. Debt outstanding at the end of the quarter was just over $5.5 billion versus last year's Q2 ending balance of just under $5.5 billion. Our adjusted debt level metric finished the quarter at two times EBITDA. While in any given quarter we may increase or decrease our leverage metric based on debt and equity market 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. Moving to tax, our tax rate was 20.6 percent versus 17.7 percent in last year's second quarter. This quarter's rate benefited 265 basis points from stock options exercise, while last year it benefited 412 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 fiscal 2021, we suggest investors model us at approximately 23.5% before any assumption 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. Moving to net income and EPS, net income for the quarter was $346 million, up 15.6% versus last year's second quarter, Our diluted share count of $23.2 million was lowered by 4.1% from last year's second quarter. The combination of these factors drove earnings per share for the quarter to $14.93, up 20.5% over the prior year's second quarter. Let me talk a few minutes about our cash flow. For the second quarter, we generated $356 million of operating cash flow. This was up approximately $150 million over last year's Q2. Our operating cash flow results benefited from the strong sales and earnings previously discussed. We repurchased $900 million of AutoZone stock in the quarter versus $315 million last year. At quarter end, we had approximately $718 million remaining under our share buyback authorization, and our leverage metric was two times. Regarding our balance sheet, our debt was flat with last quarter, and our cash and cash equivalents remained significantly higher than historical levels. We now have a billion dollars in cash on the balance sheet, of which approximately $830 million is excess cash. Our liquidity position remains strong. We're also managing our inventory well as our inventory for store growth was flat versus Q2 last year. Inventory for store was $715,000 versus $713,000 last year and $702,000 last quarter. Total inventory increased 2.8% over the same period last year, driven by new stores and improved product assortment. Net inventory, defined as merchandise inventories less account payable on a per location basis, was a negative $93,000 versus negative $41,000 last year and negative $99,000 last quarter. As a result, accounts payable as a percent of gross inventory finished a quarter at 113% versus last year's Q2 of 105.7%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. As you will recall, we restarted our buyback program during the first quarter. We said that we intended 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 said last quarter, if we have concerns about the near term, we will simply temporarily suspend repurchases again. But we feel comfortable with our strategy and our execution. As I mentioned, we spent $900 million on stock repurchases representing 752,000 shares. We remain confident in our near-term plans and, as such, expect to continue reducing the level of cash and cash equivalents on hand through the remainder of this fiscal year. This will enable us to grow our business and return meaningful amounts of cash to shareholders as part of our disciplined capital allocation strategy. So, to wrap up, we had a very strong quarter, highlighted by exceptionally strong comp sales, which drove a double-digit increase in net income and EPS. We remain confident in our ability to drive long-term shareholder value by investing in our growth initiatives, driving robust earnings in cash, and returning excess cash to our shareholders. Our growth initiatives are delivering, and this gives me tremendous confidence in our ability to drive significant and ongoing value for our shareholders. And now I'll turn it back to Bill.