AutoZone, Inc.

Good morning, ladies and gentlemen, and welcome to AutoZone's 2022 Second Quarter Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. Before we begin, the company would like to read some forward-looking statements.

Before we begin, please note that today's call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning's press release and the company's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made. and the company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

Thank you. It is now my pleasure to turn the floor over to your host, Bill Rhodes, CEO of AutoZone. Sir, the floor is yours.

Thank you. Good morning, and thank you for joining us today for AutoZone's 2022 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'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, www.autozone.com, under the Investor Relations link. Please click on quarterly earnings conference calls to see them. As we begin, we want to continue to stress that our highest priority remains the safety and well-being of our customers and auto zoners. Everyone, everyone across the organization takes this responsibility very seriously, and I am extremely proud of how our team has continued to respond to COVID-19 and the recent Omicron variant. Since the start of the pandemic, we have consistently recognized our AutoZoners in our stores and distribution centers for giving exceptional service in the face of all the challenges COVID-19 has presented. This quarter, we will start the same way by saying thank you to our AutoZoners for their dedication to providing exceptional customer service and helping our customers with their automotive needs. This morning, we will review our overall same-store sales, DIY versus DIFM trends, our sales cadence over the 12 weeks of the quarter, merchandise categories that drove our performance, and any regional discrepancies. We'll also share how inflation is affecting our costs and retails, and how we think they will impact our business for the remainder of the fiscal year. Lastly, I'll touch on the subject of pricing in the industry. Our domestic same-store sales were an impressive 13.8% this quarter, on top of last year's very strong 15.2%. Our team has once again executed an exceptionally high level and delivered amazing results despite the ongoing, very challenging environment. In Q1 of this fiscal year, we reported 13.6% same-store sales, On top of 2021's Q1 same-store sales of 12.3. Impressively, very impressively, our team delivered accelerating two-year comps in our second quarter. Our growth rates for retail and commercial were both strong, with domestic commercial growth north of 32%. Commercial set a second-quarter record with $844 million in sales, an incredible accomplishment. We generated $200 million more in sales this quarter than in Q2 last year. On a trailing four-quarter basis, we generated $3.8 billion in annualized commercial sales versus $2.9 billion just a year ago of 30%. We also set a record in average weekly sales per store for any second quarter at $13,500 versus $10,000 $500 last year on a two-year basis our sales accelerated from last quarter exceeding 46% in commercial domestic commercial sales represented 25% of our total company sales another record for us compared to 21.9 percent last year our commercial sales growth continues to be driven by a host and I don't emphasize a host of key initiatives we've been working on the last several years we proved our satellite store inventory availability we've had massive improvements in hub and mega hub coverage we're leveraging the strength of the DuraLast brand we have better technology to make us easier to do business with we have significantly improved our delivery times we've enhanced our sales forces effectiveness and we're living consistent with our pledge by being quote priced right and for the value proposition that we deliver. We continue to execute very well in commercial, and we are extremely proud of our team and their performance. We're also very proud of our organization's performance in domestic DIY. We ran an 8.4% comp this quarter on top of last year's 15.7%. As our DIY two-year stack comp accelerated from the first quarter, it's remarkable to reflect on four consecutive quarters of more than 20% two-year comps in this more mature portion of our business. From the data we have available to us, we continue to not only retain the enormous three full points of share gains we built during the initial stages of the pandemic, but modestly continue to build on those gains. Our performance, considering the amount of time from the last stimulus and the ending of the enhanced unemployment benefits, has substantially exceeded our expectations and gives us more conviction on the sustainability of these sales levels. Now let's focus on sales cadence. Our same-store sales decreased sequentially from late November through January and then accelerated again in the few days of the quarter we had in February. The deceleration through January could be deceiving as last year's comps strengthened as the quarter progressed as a result of the federal stimulus distributed around the first of last calendar year. Given the dynamics of the past 20 months, We, like others who benefited from the pandemic, believe it has been more instructive to look at two-year stacked comps. On this basis, the monthly results were almost identical and were very stable. For Q2, our two-year comp was 29.1%. And the four-week periods of the quarter increased 29.6%, 28.9%, and 29.1% respectively. Regarding weather, until February, we experienced warmer than usual weather in the northeastern U.S., while the remainder of the country experienced pretty normal winter trends. Overall, we feel weather did not play a material role in our sales performance. As we look forward to the spring months, we believe we will see normal weather trends, and therefore weather is not planned to be a big story for this upcoming quarter or summer. As a reminder, historically extreme weather, either cold or hot, drives parts failures and accelerated maintenance. Regarding this quarter's traffic versus ticket growth, in retail our traffic was up slightly, while our ticket was up 7.8%. This slight transaction count growth continues to be a meaningful acceleration from pre-pandemic levels, although it decelerated versus last year as expected due to the elimination of stimulus and enhanced unemployment. In our commercial business, we saw most of the sales growth come from transaction growth from new and existing customers. It was encouraging for us to see sales trends remain strong, and we continue to be pleased with the momentum we are seeing in both domestic businesses heading into the spring months. During the quarter, there were some geographic regions that did better than others, as there always are. But this quarter, we saw a mere 15 basis points difference between the Northeast and Midwest compared to the balance of the country. As winter definitely came in late January in the Northeast and Midwest, we're expecting that gap will remain close. Also, the market share data suggests we continued to gain share in most of our markets. Now let's move into more specifics on performance for the quarter. Our same-store sales were up 13.8% versus last year's second quarter. Our net income was $472 million, and our EPS was $22.30 a share, increasing an impressive 49.4%. Regarding our merchandise categories in the retail business, our hard parts grew slightly faster than our sales floor categories, but not material, say, maybe less than 1%. As Americans get back to driving more, we've seen maintenance and failure-related categories perform well. We've been especially pleased with our growth rates in select failure-related businesses like batteries that have successfully lapped very strong performance last year. We believe our hard parts business will continue to strengthen as our customers drive more. Let me also address inflation and pricing. This quarter, we saw our sales increase by over 5% from inflation, while our cost of goods was up over 4% on a like-for-like basis. We believe both numbers will be slightly higher in the third quarter as cost increases in many key merchandise categories continue to work their way through the system. As rising raw material pricing, labor, and transportation costs are all impacting us and our suppliers, inflation has been prevalent in the aftermarket space. We have no way to say how long this will last, but our industry has been disciplined about pricing for decades, and we expect that to continue. It is also notable that following periods of higher inflation, we typically do not see corresponding deflation. While we continue to be encouraged with the current sales environment, it remains difficult to forecast near to mid-term sales. What I will say is that the past four quarter sales have all been consistent on a two-year stacked comp basis and a three-year basis, and that goes for both our DIY and our commercial businesses. While it's difficult to predict absolute sales levels going forward, We are excited about our growth initiatives, our team's exceptional execution, and the tremendous share gains we have achieved in both sectors. Currently, the macro environment, while uncertain, remains very favorable for our industry. And even if these near-term trends fade, we believe that we are in an industry that is positioned for solid growth over the long term. For FY22, we expect our sales performance to be led by the strength in our commercial business as we continue executing on our differentiating initiatives. As we progress through the year, we will, as always, be transparent about what we are seeing and provide color on our markets and outlooks as trends emerge. Before handing the call over to Jameer, I'd like to address the subject of pricing. And if AutoZone's pricing disciplines or philosophies have changed from past practices, the short answer is a resounding no. While we initiated a retail pricing adjustment last year in Q1 and further adjusted some commercial pricing in quarters two through four, these moves were done to be price competitive but with other channels, not with our direct competitors. Specifically, in the retail business, we reduced our premiums to mass, particularly on highly visible commodity products. Regarding the more significant change in commercial, our prices have always, always been meaningfully higher than our WD competitors, as our service level is superior. Our pricing changes over the last year or so have been too narrow. I emphasize narrow, but not eliminate that gap. We must make sure we receive a premium for our service advantage, but we narrowed that premium by roughly half. While this has created some consternation in the investment community, we think our results have shown that this was a prudent and productive decision. We continue to see our industry as very rational when it comes to pricing strategies. And I want to be clear, crystal clear. I don't want anyone to conclude that our growth in commercial is solely due to pricing. We launched a comprehensive new strategy about three years ago with improvements in assortments, local market availability with hubs and mega hubs. Our delivery times are dropping as we leverage new technologies that have been deployed. Our team's execution is enhanced. we've made ourselves easier to do business with and we've improved our pricing versus WDs we stated last year we didn't envision any additional pricing reductions beyond those deployed at the beginning of last year's q4 and that remains our stance now turn the call over to Jameer Jackson Jameer

Thanks, Bill, and good morning, everyone. As Bill mentioned, we had a strong second quarter with double-digit comp growth, a 30 percent growth in EBIT, and a 49 percent growth in EPS. Our results for the first half of the fiscal year have been remarkably strong as our growth initiatives continue to deliver great results, and the efforts of our autozoners in our stores and distribution centers have enabled us to take advantage of robust market conditions. To start this morning, let me take a few moments 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 $3.3 billion, up 15.6%. 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 32.1% to $844 million, and were up 46.8%, on a two-year stack basis. Sales to our DIFM customers represented 25% of our total company sales, and our weekly sales per program were $13,500, up 28.6%, as we averaged just over $70 million in total weekly commercial sales. Once again, our growth was broad-based, as national and local accounts both grew at approximately 32% for the quarter. While the second quarter is seasonally our lowest selling quarter, our results for the quarter are exceptional and represent the highest volume second quarter in the history of the chain. I want to continue to reiterate that our execution on our commercial acceleration initiatives is delivering better than expected results as we focus on building a faster growing business. We are making tremendous progress in growing share in this highly fragmented portion of the market by winning new business and increasing our share of wallet with existing customers. We have our commercial program in approximately 86% of our domestic stores, which leverages our DIY infrastructure, and we're building our business with national, regional, and local accounts. This quarter, we opened 22 net new programs, finishing with 5,233 total programs. As I said at the outset of the year, commercial growth will lead the way in FY22, and our results in the second quarter and the first half of the year reflects this dynamic. We remain confident in our strategies and execution and believe we will continue gaining share. Delivering quality parts, particularly with our Duralast brand, improved assortments, competitive pricing, and providing exceptional service has enabled us to drive double-digit sales growth for the past seven quarters. Our core initiatives are accelerating our growth and position us well in the marketplace. And notably, our mega hub strategy is driving strong performance and positioning us for an even brighter future in our commercial and retail businesses. Let me add a little more color on our progress. As I mentioned last quarter, our mega hub strategy is giving us tremendous momentum. We now have 64 mega hub locations, and we expect to open approximately 14 more over the remainder of the fiscal year. While I mentioned a moment ago the commercial weekly sales per program average was $13,500 per program, The 64 mega hubs average significantly higher sales and are growing much faster than the balance of the commercial footprint. As a result, our mega hubs typically carry roughly 100,000 SKUs and drive tremendous sales lift inside the store box, as well as serve as an expanded assortment source for other stores. The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business, and we're testing greater density of mega hubs to drive even stronger sales results. What we're learning is that not only are these assets performing well individually, but the fulfillment capability for the surrounding AutoZone stores gives our customers access to thousands of additional parts and lifts the entire network. By leveraging sophisticated predictive analytics and machine learning, we're expanding our market reach, driving closer proximity to our customers, and improving our product availability and delivery times. We're building a meaningful competitive advantage and we continue to have confidence in our ability to create a faster growing business. On the retail side of our business, same store sales for our domestic retail business was up 8.4% and up 24.1% on a two-year stack. The business has been remarkably resilient as we have gained and maintained nearly three points of market share since the start of the pandemic. As Bill mentioned, we saw traffic up slightly to go along with 7.8% ticket growth as we continue to raise prices in an inflationary environment. Our growth initiatives are also leading the share gains as we improve the customer shopping experience, expand assortment, and leverage our hub and mega hub network. These dynamics, along with favorable macro trends in miles driven, a growing and aging car park, and a challenging new and used car sales market for our customers, have continued to fuel sales momentum in DIY. Our in-stock positions, while still below where we were pre-pandemic, are continuing to improve as our supply chain and merchandising teams have made great progress in a challenging supply chain environment. We've been able to navigate supply and logistics constraints and have product available to meet our customers' needs. Our AutoZoners, who are taking care of our customers, give us a key competitive advantage that enables us to thrive in this market environment. Now there's no question that DIY comps get tougher in the back half of the year due to exceptionally strong back half performance in both FY20 and FY21. But we remain confident as the fundamentals of our business remain strong, macro conditions are favorable for us, and we have had great execution by our teams. Now I'll say a few words regarding our international business. We continue to be pleased with the progress we're making in Mexico and Brazil. During the quarter, we opened three new stores in Mexico to finish with 669 stores and two new stores in Brazil to finish with 55. And on a constant currency basis, we saw accelerated sales growth in both countries in line with the growth rates we saw overall. We remain committed to our store opening schedules in both markets and expect both countries to be significant contributors to sales and earnings growth in the future. With only just over 10% of our total store base now outside the U.S. and our commitment to continue expansion in a disciplined way, international growth will be an attractive and meaningful contributor to AutoZone's future growth. Now let me spend a few minutes on the P&L and gross margins. For the quarter, our gross margin was down 59 basis points, driven primarily by the accelerated growth in our commercial business, where the shift in mix coupled with the investments in our initiatives drove margin pressure, but increased our total gross profit dollars 14.5%. I mentioned on last quarter's call that we expected to have our gross margin down in a similar range this quarter as we saw in the first quarter, where we were down 65 basis points versus the previous year. Our merchandising team has been focused on driving margin improvements, primarily through pricing actions that offset inflation, resulting in slightly better performance than our initial expectations. As Bill mentioned earlier in the call, we're continuing to see cost inflation in certain product categories, along with rising transportation and distribution center costs. We're continuing to take pricing actions to offset inflation, and consistent with prior inflationary cycles, the industry's pricing remains rational. We would expect our margins in the third quarter to be down in the 50 bps range versus Q3 last year, driven primarily by mixed headwinds from our fast-growing commercial business. Moving to operating expenses, our expenses were up 7.5% versus last year's Q2, as SG&A as a percent of sales leveraged 264 basis points. The leverage was driven primarily by our strong results and approximately $40 million, or 137 basis points, and prior year pandemic-related expenses. While our SG&A dollar growth rate has been higher than historical averages, we've been focused on maintaining high levels of customer service during a period of accelerated growth. We also continue to invest at an accelerated pace in IT to underpin our growth initiatives, and these investments will pay dividends in user experience, speed, and productivity. We will continue to be disciplined on SG&A growth as we move forward and manage expenses in line with sales growth over time. Moving to the rest of the P&L, EBIT for the quarter was $627 million, up 30.1% versus the prior year's quarter, driven by strong top-line growth. Interest expense for the quarter was $42.5 million, down 7.7% from Q2 a year ago, as our debt outstanding at the end of the quarter was $5.8 billion versus just over $5.5 billion at Q2 end last year. We're planning interest in the $45 million range for the third quarter of fiscal 2022, roughly flat with Q3 last year. For the quarter, our tax rate was 19.3% versus 20.6% in last year's second quarter. This quarter's rate benefited 401 basis points from stock options exercised last year, while last year it benefited 265 basis points. For the third quarter of fiscal 2022, we suggest investors model us at approximately 23.6 percent before any assumption on credits due to stock option exercises. Moving to net income and EPS, net income for the quarter was $472 million. up 36.4% versus last year's second quarter. Our diluted share count of 21.2 million was 9% lower than last year's second quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $22.30, up 49.4% over the prior year's second quarter. Now let me talk about our free cash flow for Q2. For the second quarter, we generated $362 million of operating cash flow, and spent $106 million in capital expenditures, allowing us to generate $270 million in free cash flow, up 3.1% versus the prior year. Year to date, we have generated $960 million in free cash, up 12.4% versus the prior year. You should expect us to continue being an incredibly strong cash flow generator going forward, and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, through our share repurchase program and the prepayment of a bond due in April, we have exhausted our excess cash balance on the balance sheet. But rest assured, our liquidity position remains very strong, and our leverage ratios remain below our historic norms. We're also managing our inventory well, as our inventory per store was up 3.3% versus Q2 last year. Total inventory increased 6.2% over the same period last year, driven mainly by new stores and inflation. Net inventory, defined as merchandise inventories less accounts payable on a per store basis, was a negative $198,000 versus negative $93,000 last year and negative $207,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 126.8% versus last year's Q2 of 113%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. we repurchased nearly $1.6 billion of AutoZone stock in the quarter. As of the end of the fiscal quarter, we dropped below 20 million shares outstanding. As a point of emphasis, when we started our share repurchase program in 1998, we had 154 million shares outstanding. Now we have less than 20 million. At quarter end, we had just under $958 million remaining under our share buyback authorization. The powerful free cash we generated this year has allowed us to buy back over 6% of the shares outstanding since the beginning of the fiscal year. We have bought back over 90% of the shares outstanding of our stock since our buyback inception in 1998 while investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach where we expect to return to our long-term leverage target in the two and a half times area and generate powerful free cash flows that will enable us to invest in the business and return meaningful amounts of cash to shareholders. To wrap up, we had another very strong quarter, highlighted by strong comp sales, which drove a 36.4% increase in net income and a 49.4% increase in EPS. We are driving long-term shareholder value by investing in our growth initiatives driving robust earnings in cash and returning excess cash to our shareholders. Our strategy continues to work. We're growing our DIY and DIFM businesses at a significantly faster rate than the overall market, and we are committed to capturing our fair share while improving our competitive positioning in a disciplined way. I continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders. And now I'll turn it back to Bill.

Thank you, Jameer. Fiscal 2022 is off to a very strong start and we remain focused on superior customer service and flawless execution. Our culture is based on exceptional service and that will continue to define our success. I want to step back for a minute and talk about the big picture. Throughout the pandemic, each of us has had a very difficult time forecasting the future in light of all the uncertainties, the disease, the variants, consumer and government responses, competitive dynamics, and on and on. But we are now nearly two years into this pandemic. What has happened to our business over those two years due to the tremendous contributions of our autozoners is nothing short of phenomenal. On a trailing 12-month basis versus pre-pandemic, our sales volumes have increased by over a remarkable 30%. And our profitability, expressed as EBIT, has increased nearly 50%. Six to nine months ago, if you would have asked us, our expectation was that some of those incremental sales and profits would go back closer to historic norms. While it is still very difficult to predict the next six to 12 months, our perspective has morphed. As we are nearly a year past the last stimulus and nearly six months from the suspension of enhanced unemployment, we believe most if not all of this growth is sustainable. We believe our competitive positioning is improved, as indicated by our significant share gains in both retail and commercial. And consumer behaviors may have permanently changed. If this holds true, it will be the fourth time in the last 30 years that the economy and society have had significant shocks leading to material acceleration in our growth in sales and profits without a corresponding decline back to pre-recessionary or pre-pandemic levels. Our industry is unique, but it has a very long track record of strong performance with high return and cash flow characteristics. As we begin to lap the second anniversary of the pandemic, some of the measurements we've all used recently to measure our performance will become skewed. Remember, at the beginning of the pandemic, our sales dropped radically. Our retail sales rebounded quickly with the April 2020 stimulus, but commercials rebound lagged and it took several months to recover. For Q3, the two-year stacked comp measurement holds reasonably well as we delivered basically flat overall comps in Q3 of 2020. However, that measure for our commercial business won't be as meaningful. And then in Q4, in light of the amazing performance in 2020, The two-year comparison for overall comps won't be comparable. We would encourage you to migrate to three-year comps. We continue to be bullish on our industry, and in particular on our opportunities for 2022. We believe the macro backdrop is in our favor for the near and long term. Our customers across the Americas want to get out and get out and drive. And we'll be there when they need helpful advice. Our team has worked diligently and collaboratively with our suppliers. And together, they have done a very good job dealing with the enormous supply chain challenges that exist for everyone. While our in-stock levels are improving, and we expect that to continue, we also believe we are better in stock than most retailers. And our results, they support that belief. For the remainder of fiscal 2022, we are launching some very exciting initiatives. We're focused on further growing share, but as always, doing so on a very profitable basis. In fiscal 2024, we plan to open a new distribution center in California to fuel continued growth of our domestic business. We just recently announced a new distribution center in Virginia, and we're now planning an additional distribution center in Mexico to allow us to service a growing store base in that country. This is a meaningful acceleration in our historic investments in distribution centers, as during the pandemic, we have learned we need to have a bit more excess capacity in our supply chain. We're also targeting to open 14 more new domestic mega hubs in the US that will enhance our availability and support growth in our retail and commercial businesses. As we've mentioned many times before, our mega hub strategy is at the core of materially improving our inventory availability. This strategy is expected to help us drive both commercial and retail sales for many, many years to come. We also will be leveraging our hub and mega hub strategy further in Mexico. For the fiscal year, we expect to open more than 200 new stores throughout the Americas with notable acceleration in Brazil. These capacity expansion investments reflect our bullishness on our industry, and in particular, our own growth prospects. We're being disciplined, yet we're being aggressive. I also want to reiterate how proud I am of our AutoZoners across the stores and distribution centers in particular for their commitment to servicing our customers and doing so in a very safe manner. First and foremost, our focus will be on keeping our auto's owners and customers safe while providing our customers with their automotive needs. And secondly, we must continuously challenge ourselves during these extraordinary times to position our company for even greater future success. We know that investors will ultimately measure us by what our future cash flows look like three to five years from now. And we very much, very much welcome that challenge. I continue to be bullish on our industry, and in particular, on AutoZone and AutoZoners. Now we'd like to open up the call for questions.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. We do ask that all Q&A participants please limit to two questions per person. Your first question is coming from Brett Jordan from Jefferies. Your line is live.

Hey, good morning, guys. Morning, Brett. Morning, Brett. On the Americas expansion, sort of thinking longer term, how do you see the potential size of Mexico and Brazil on a three to five or maybe even longer term basis? Sure.

So we haven't given specific numbers, Brett, but what we have said repeatedly is in both the United States and Mexico, we believe we can continue to grow at the current kinds of levels for the foreseeable future. So in the U S that's 150, 170 stores, Mexico, it's 40 to 50 stores. We believe we can do that for the foreseeable future. So it's going to be much, much larger than it is today. As far as Brazil is concerned, we're just getting started. You all know we've been down there for over nine years now and we were very methodical and very thoughtful and careful about making sure that this model worked for us. Uh, just about a year ago, We presented to our board that we felt like Brazil was now at the stage where we're comfortable, the model works. We knew it worked for the customers. We are now comfortable it works for us financially, and we will be stamping out and growing much faster in Brazil. I believe over the long term, Brazil will end up being larger than Mexico for AutoZone. But with 50-some-odd stores, it's a long way to go.

Okay, great. And then I guess... You called out share gains, obviously, and quantified your DIY at three points. Could you give us any more color on the commercial side of the business? And within the share gains, have you seen any meaningful contribution, national versus independent, recently?

Yeah, Brett, I wish I could. We just don't have, in the DIY business, we have very specific data. We have POS data for all front of store items. So it's crystal clear, and we are comfortable sharing that with you. And that's where we said during the height of the pandemic, we gained over three points, 3%, which was 10% growth in share. Never seen that before personally. And we suspected we would give some of that back up as the economy reopened. We have not. In fact, we continue to grow marginal amounts of share on top of that. which we've been very, very pleased with. On the commercial side of the business, we don't have a tool that gives us the direct insights. But when we look at it, at the rates that we're growing, I think 46% on a two-year basis, we're quite comfortable that we're growing share exponentially many times what the industry is growing, but we don't have specifics. And so we can't tell you this is how we're doing against this sector or that sector.

Do you have a feeling whether it's – is national account or up and down the street business stronger than the other, or are they both sort of comparable growth rates?

They're very comparable growth rates right now. That changes over time during the depths of the pandemic. The nationals weren't growing as fast as the up and down the street. I think that's changed now. They're both growing at really high rates. I think Jameer even mentioned like 32% for both sectors during the quarter. So we're really, really pleased. We've really – develop some very nice relationships with our national account partners. And we have a specific program for our up and down the street that we call ProVantage, and both of those sectors are really, really doing well.

Okay, great.

Thank you. Yep, thank you, Brett. Have a good day. You too.

Thank you. Your next question is coming from Zach Fadum from Wells Fargo. Your line is live.

Hey, good morning. So for your do it for me customers, can you talk a bit about your historical price gap versus your peers as well as WDs and how that's been trending over the last couple of years? And as you think about the drivers of sales for national, regional and local accounts, where do you think the biggest drivers of share is today across price availability or simply the fact that you're now able to serve certain customers that you historically weren't able to serve?

Yeah, I'll start. I think that there's a misnomer by many that our pricing strategies are at the core of our growth. They are an element, not the element of our growth. What we did about four years ago is we embarked on a new strategy in commercial, and we looked at all elements of our offering. We changed the assortment methodology in every store in the United States. Every store has a different product assortment that leans further into the commercial business today than it did four years ago. We also said, how are we going to get significant increase in local market availability? And we came up with this concept called a mega hub store. We've now had over 60 mega hubs. We've said publicly we're going to go to at least 110. I think Jameer and I both feel like it's going to be closer to 200 than it will be 100. and maybe even more than that as we're testing. One of the things about the mega hubs, every time we measure them, they do better than our projections, period, every single time. So we've done these mega hub improvements. We've taken our sales force, which was relatively immature and frankly brand new a decade ago, and as they mature and develop tenure, they're getting more professional, better at doing their sales techniques. We've deployed the single largest technology endeavor of the company's history in the commercial business. We've enhanced how we interact with our customers digitally. We've also rolled out handheld devices to all stores and all drivers so that when they're picking the products, we make sure we've got the right products. When we deliver the products, we can understand delivery times. We're driving our delivery times down about 15% so far, and that's nowhere near our goal. So we're improving our service on that front. The Duralast brand continues to become stronger and stronger across the board and really excited about that. And then we've lowered our price gaps. We don't have the same level of transparency in the commercial business that we have in retail. Everybody can see everybody's retail prices every day. In the commercial business, we're going to have different pricing philosophies with certain of our national account customers, and then up and down the street customers that penetrate this category are going to be priced different from somebody else. So you don't have the level of transparency. We talked about it at length about a year ago that we were focused on making sure that our total value proposition, including price, was accurate. a strong value proposition versus a different set of competitors called the warehouse distributors. And we cut, as I said in the prepared remarks, our gap versus them. We've always been premium priced to them because our service offering is premium priced. Then we cut the gap after about a year of testing, so we knew it worked. We cut the gap by about a half, so call it 15% to 8-ish, 8.5-ish kind of percent. And we've been extraordinarily pleased with how that has worked over time. Zach, did I answer all your questions? You had a few of them embedded in there.

No, so that was great. I just wanted to follow up on just your expectations for industry growth as a whole in 2022. How are you thinking about DIY versus do it for me in terms of volume versus price and inflation? And I presume you still see room to build on the three points of market share that you've taken since the pandemic.

Yeah, I would say a few things. One, if you look at our results specifically, there are really four dynamics. The first is, to a certain extent, inflation has been our friend. It's helped us drive higher pricing, and the volumes are actually holding. And if you look at where we've seen pricing grow, I mean, we're up mid-single digits in retails for the first half. And, you know, quite frankly, if we see that same level of inflation in the back half, which is reasonable, then you could expect us to take pricing up in a similar dynamic. You know, the share gains we've talked about are driving our business. You know, we're up nearly three points versus the pre-pandemic. We've hung on to those share gains. And the growth initiatives that Bill talked about both in DIY and commercial are giving us a lot of confidence that we'll maintain those shares as we go forward. And then the last dynamic for us that we've talked at length about is this macro strength that we're seeing. You have an aging and growing car park. You have used car prices that are up 60% versus pre-pandemic. And you're seeing many new cars that are actually selling higher than the sticker prices. And if you look at the used car price dynamic just in general, those higher residual values are actually encouraging our customers to invest in maintaining their vehicles because they're comfortable that the value is actually holding. So when you mix all of those things together, it suggests that the industry as a whole is not going back to pre-pandemic sales levels. And while we won't be date certain about when you'll see comps move one direction or the other, what we'll say is that the fundamentals are strong. We don't expect to return to the levels that we saw prior to coming in the pandemic. So Our growth dynamics in the industry backdrop gives us a lot of confidence about the future.

Appreciate that. Thanks for the time. Thank you.

Thank you. Your next question is coming from Brian Nagel from Oppenheimer. Your line is live.

Hi, good morning. Nice quarter again. Congratulations. Thank you. Thanks, Brian. But I guess I'll have two questions about kind of merging together. I mean, so first off, Bill, in your opening comments, you talked about just the strength in the business. Is there anything as you look at the acceleration in sales, you know, from fiscal Q1 into fiscal Q2? Is there anything specific to point to? I mean, is inflation and your ability to pass along those inflationary pressures, so to say, a factor there? And then my second question is just on the gas price front. I mean, I know you're not – AutoZone does not provide guidance, but what we are seeing here is gas prices are again climbing due to, I guess, the United States now, probably more importantly, geopolitical issues. Do these higher gas prices concern you at all in terms of sales and the kind of health of your consumer?

Yes. Two great points, Brian. First of all, what changed versus Q1 and Q2? There's a lot of different things that changed. I think we're going to hang our head a lot on our execution issues. and our team's execution, but clearly this inflation has a lagging effect, and we had more inflation in our sales growth in Q2 than we did in Q1. Not material, but maybe a point or so. So that is an element of our acceleration, and we didn't accelerate that much. I think we accelerated two or three points on a two-year basis. Then as far as gas prices, as you know, you've followed this industry for a long, long time. Gas prices fluctuate, and they fluctuated very significantly during my tenure here. What we've said historically is that there's not a ton of correlation between gas prices and our business until it hits a magic point. Historically, and I don't know what that magic point will be now because it's been a long time since we hit it, but historically when it hit $4 a gallon, it seemed to impact miles driven. And you could almost see a direct correlation once it hit that $4 a gallon in miles driven. We don't know if that will hold true if it gets to $4 a gallon again. But for us, it goes up and it goes down. There's nothing we change in our business as a result of gas prices. So sometimes we're going to have industry tailwinds like we've had. Sometimes we're going to have industry headwinds. We need to just manage this business through gas. both environments and make sure that we optimize our performance based upon the macro environment.

That's very helpful. Congratulations again. Thanks.

Thank you.

Thank you. Your next question is coming from Christopher Horvitz from JP Morgan. Your line is live.

Hi, good morning. It's Christian Carlino on for Chris. Can you just help us weigh out some of the drivers of inflation, whether that be product or supply chain costs, how you're thinking about that going ahead this year, understanding or not, giving guidance? And do you expect it to be a potential lift to sales in the second half of 2022?

As we mentioned before, I mean, we are seeing cost inflation in certain categories. We're also seeing higher transportation costs. We're seeing higher labor costs across the board. But I think the important point is that the industry pricing has remained rational. And we are pricing, like our competitors, to recover inflationary impacts, just as we've done in the past. And if you look at the history of this industry, it's been very disciplined about passing along inflation. And typically what we see is that the demand doesn't fall off, just given the essential nature of the goods that we're providing. We've raised retail prices in line with inflation. As we mentioned, it's been mid-single digits. We expect that you could see similar dynamics in the back half of the year, and we'll be disciplined to raise prices accordingly. The other dynamics that relates to this is that we're seeing broad-based inflation. It isn't just in our industry, but if you look at transportation, you look at labor, You look at wage rates. There's another side to the coin, which is our customers are benefiting from higher wage rates, and particularly that lower-end customer is benefiting from higher wage rates. And that, quite frankly, has provided a little bit of a safety net, probably more so than in the past. And we're feeling that inflation even in our own business. If I think about what we're seeing in terms of wage inflation, it's probably – On a percentage basis, it goes up maybe low single digits every year. We're probably seeing inflation 2x that. As we look to take care of our auto zoners in an inflationary environment, our customers are seeing that. Those dynamics have made the lower-end consumer a little bit more resilient than probably they would have been in the past in an inflationary environment. We're not seeing any wobbles at this point, but it is something that we're keeping our eye on.

Got it. That's really helpful color. Appreciate that. And then, um, I guess, you know, you're clearly doing a lot to leverage technology to improve, you know, fulfillment on the commercial side of the business. Um, could you speak to the opportunity to, you know, build out technology on the pricing front, you know, maybe through all data, are you able to, do you have better pricing visibility across the commercial market than say some of your peers, you know, just how should we think about that opportunity?

Yeah, one of the things I'm really excited about is the investments that we're making in technology. And you typically don't hear CFOs say that because typically they're only thinking about the cost side of that. But the investments that we're making in technology are really underpinning the growth strategy. And, you know, the sophisticated nature with which we're able to figure out what we're doing on the store development side, how we're using AI and machine learning, to help us think about pricing and get a lot more surgical from a pricing standpoint are all things that I'm really excited about to help us drive growth and improvements in our business. So indeed, we are using technology to do that. It's a little bit more difficult sometimes on the commercial side of the business. But, you know, you combine that technology with the on-the-ground intelligence that we receive from our auto zoners in the field. And I like our capabilities there. And it's given us a competitive advantage as we think about what we're doing from a pricing standpoint.

Got it. Thank you very much, and congrats on a great quarter. Thank you.

Thank you.

Thank you. Your next question is coming from Simeon Gutman from Morgan Stanley. Your line is live.

Hi, this is Jackie Sussman on for Simeon. Congrats on a great quarter. My first question is just on product availability. How much of an advantage has been in the stock over the last two years? Has it been in stock and does it narrow as supply chains come back? What is your outlook there? Thanks.

That's a fantastic question, Jackie. Frankly, we don't have really, really good data on how our in-stock position compares to our direct competitors or with retail in general, except for walking stores, which we've done a lot of over time. I'm really, really proud of the way that our supply chain team, our merchandising team, and our suppliers, they've worked at unprecedented levels during this past couple of years. And we've gotten very creative. Our logistics team has done an amazing job with all the challenges getting merchandise from the Far East to the United States and to our distribution centers. Our belief is we've had an improved in-stock position versus others. But our in-stock position, even today, is a couple hundred basis points below where it is normally. And it's been a little bit of a game of whack-a-mole. We solve it in this category, then it moves into that category, then it moves into another category. Overall, we're getting better and better and better on a weekly basis, just about. But we've still got a ways to go before we get back to that level. Trying to quantify how much of that has been embedded in our share gains and sales lift, it's just too much art for us to figure that out.

Gotcha, understood. And you talked a bit about the Duralast brand. Have you disclosed kind of Duralast penetration by product category? Which products are kind of over-indexed and which are under?

Yeah, we haven't done it by product category. We obviously said it's over half of our hard part sales and continues to grow. We continue to introduce it in different categories or line extensions, Not too long ago, we introduced the DuraLast Elite brake pad program, which is doing really well. We've added DuraLast Gold chassis, which has done extremely well. A couple of years ago, we added DuraLast to shocks and struts. It's interesting, we did some market research as part of our commercial strategy development about four years ago, and we went by in the commercial business, and we said, what are the top three brands by product category? And the Duralast brand was listed in two categories as the number two brand, and we had never sold one piece in that category. So it just shows you the overall power of the Duralast brand. If you turn back the clock a decade, it was interesting. People would have said we couldn't have been successful in commercial because we had private label. We don't have a private label. We've got the Duralast brand, and it's high-quality products that our customers continue to turn to and trust.

Great. Congrats on a great quarter.

Thank you, Jackie.

Thank you. Your next question is coming from Scott Ciccarelli from Truist. Your line is live.

Hi, this is Joe Ciavello on the line for Scott. I just had a quick question. Given the success you guys have shown in the mega-hug strategy, Do you think we could see an acceleration of these rollouts next year and going forward? And what does that look like for margins?

Well, Jameer's in charge of store development, so I'll answer it for him. The answer is yes. Jameer, you want to add some color?

You're writing my development plan for this year and next year. Thanks. You know, the key for us is making sure that we leverage these assets. As Bill mentioned, you know, every time we've doubled down on our mega hub strategy and It's paid dividends for us, and the mega hubs are outperforming our expectations. The ability to put these assets in the market, provide a lift to the overall network, benefit both our DIY and our DIF in business is a very strong business building proposition for us, and we're going to go further and faster. One of the things I mentioned we're testing is higher density of mega hubs. In a marketplace, you typically are worried about cannibalization if you get stores or assets too close from a proximity standpoint. But what we're finding is when we put more parts into those markets and we do that in a disciplined way based on the analysis that we're doing and the research that we've done and the actual results that we're seeing, it's exceeded our expectation. Cannibalization is lower. It's a lift to the overall marketplace, and that's why we're so bullish, and that's why we're going to double down on it.

Appreciate it. Thanks.

Thank you, Joe. Before we conclude the call, I want to take a moment to reiterate. We believe our industry is in a strong position, and our business model is solid. We're excited about our growth prospects for the year, and we will take nothing for granted as we understand our customers have alternatives to shopping with us. As we continue to focus on the basics – and strive to optimize shareholder value for the remainder of FY 2022, we are confident AutoZone can continue to be successful. Thank you very much for participating in today's call. Have a great day.