AutoZone, Inc.

Good day, everyone, and welcome to AutoZone's 2024 Fourth 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. It is now my pleasure to turn the floor over to your host, Phil Daniel, CEO of AutoZone. Sir, the floor is yours.

Thank you. Good morning, and thank you for joining us today for AutoZone's 2024 Fourth Quarter Conference Call. With me today are Jameer Jackson, Chief Financial Officer, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the fourth quarter, I hope you had an opportunity to read our press release and learn about our quarter's results. If not, the press release, along with slides complementing our comments today, are available on our website at www.autozone.com under the Investor Relations link. Please click on the quarterly earnings conference call to see them. As we begin this morning, I want to thank our more than 120,000 AutoZoners for their contributions during fiscal 2024 that resulted in our solid performance. As the first line of our pledge states, they continued putting our customers first, which resulted in total sales growth of 5.9% for the fiscal year, while earnings per share increased 13%. As a reminder, this fiscal year had an extra week of results, so excluding the 53rd week, our sales were up 3.8%, while our EPS was up 10.4%. In the fourth quarter, with our continued focus on what we call WOW customer service, our total sales were up 9% while EPS was up 11%. On a 16-week basis, our Q4 sales were up 2.6% while our EPS was up 3.5%. We also delivered 1.3% total company same-store sales, domestic same-store sales growth of 0.2%, and international same-store sales up 9.9%. Our domestic commercial sales accelerated sequentially, finishing up 4.5% versus last year's Q4 of 3.9%. This is on a 16-week versus 16-week basis. We were up 10.9% on a 17-week versus 16-week basis. While our international business continued to comp up approximately 10% in local currencies, we faced a nearly 500 points of currency headwind, and our reported growth rate is approximately 5%. As you know, the weaker US dollar has been a tailwind for our reported results since we began reporting international comps last year in our fourth quarter earnings report. The stronger dollar had a meaningful impact on our reported sales operating profit, and EPS this quarter. Jameer will update the potential impact of foreign currency on FY25 later in the call. While there will always be tailwinds and headwinds in a quarter's results, what has been consistent is that we could not have achieved both this quarter's and this year's success without exceptional efforts across the entire organization. So let me dive into our sales results. First off, I will say that our domestic DIY results were very similar to last quarter. Q4's DI comp sales were down about 1%. The impact from the headwind on our discretionary merchandise categories drove the bulk of this decline, similar to last quarter. For our fourth quarter, discretionary category sales were approximately 18% of our mix, and they were down roughly 5% year over year. Again, similar to our results in previous quarters this fiscal year. We have seen this trend for the entire fiscal year, and our belief is that these categories will continue to be pressured until the consumer gets some economic relief and consumer competence improves. With regards to our inflation impact on the DIY comp, we saw both average ticket and life-for-life skew inflation up approximately 1% for the quarter. While still low versus historical norms, the growth is a good trend for us, as we would expect inflation in our ticket average to be approximately 3% over time. We anticipate average ticket growth will return to historical industry growth rates as we move farther away from the hyperinflation of the last couple of years. We also saw DIY transactions count down 2%. While our industry overall sales growth rate for DIY appears to be down over the last quarter, it was very encouraging to see our market share growth in DIY. We believe we have a best in class offering and this gives us confidence that when our consumers return to their historical shopping habits, we will be the beneficiaries of that upswing. Secondly, I'll speak to our regional DIY performance. Simply put, it was consistent across the country as each of our 10 reporting census regions delivered approximately a 1% negative comp. Third, I will address weather and what we believe the impact was on our DIY business. We clearly saw hot weather across the U.S. this past summer, and in those markets where the weather was hot, our sales increased accordingly. However, across the majority of the country, the weather pattern was similar to the previous year and therefore did not have a meaningful impact on our performance. Next, I will touch on our U.S. commercial business. While we reported this morning that our commercial sales were up 10.9% for the quarter, on a 16-week comparable basis to last year, our sales were up 4.5%. We were encouraged to see our U.S. commercial sales growth. This past quarter marked another quarter of sequential increases to year-over-year DIFM sales. We saw very little variation in the commercial sales across regions as the entire country was basically running at the overall sales growth rate of 4.5% on a 16-week basis. While we are encouraged by the progress we are making, we still have significant opportunities in front of us to grow market share with improved satellite store inventory availability, significant improvements in hub and mega hub coverage, the strength of our Duralast brand, and good execution on our initiatives to improve speed of delivery and improve customer service. We are confident about our future. This quarter, inflation on a like-for-like skew basis was essentially flat, which drove flat pricing and average ticket for commercial. We have seen pricing remain relatively flat as inflation has cooled for goods in our industry. We expect to see slightly more inflation next year, and our assumption is like-for-like skew retail inflation will be in the low single digits in FY25. For the year, we opened eight hubs and 11 mega hubs, which is roughly half of what we did in FY23. We are excited about the ability to resume aggressively opening these important assets in FY25, although openings will be somewhat second half loaded. Hubs and mega hubs lead to comp results that grow faster than the balance of the chain and we are going to continue to aggressively deploy these assets. For our first quarter of FY25, we expect both DIY and commercial sales trends to modestly improve. We expect better sales performance in Q2 and the Q3 timeframes. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends change. Before turning the call to Jamir, I would like to take a moment to discuss our international business. We were busy opening stores this quarter. Between Mexico and Brazil, we opened 49 new stores and now have 921 international stores. As you can see from our press release, our same store sales were just under 10%. We remain committed to growing the number of stores in both Mexico and Brazil. Today, we have 13% of our total store base outside of the U.S. and expect that number will continue to grow. We plan to accelerate our openings by 2028, and we are targeting around 200 international openings per year. We continue to take our U.S. store learnings and introduce them to the international store operations, and we are very excited about our future in international. In summary, we have continued to invest in making in-market inventory assortments better to drive future traffic growth and sales, enhancing our IT systems and our supply chain. In FY25, we'll continue to ramp up our store openings, specifically our hubs and mega hubs, and drive efficiencies from our new DCs, which are expected to come online in 2025. At AutoZone, we are investing in our future growth initiatives. In FY24, we invested more than $1 billion in CapEx and are focused on our strategic growth priorities. In FY25, you will see more of the same. We are investing in accelerated store growth, specifically hubs and mega hubs, placing inventory closer to our customers, distribution centers that will drive efficiency and reduce supply chain costs, IT systems that will improve customer service and improve our AutoZone's ability to help our customers. We believe that our industry is strong, and we have an opportunity to grow market share domestically and internationally. Now I will turn the call over to Jameer Jackson.

Thanks, Phil, and good morning, everyone. Before I unpack our results, I want to remind you that each year our fiscal year ends on the last Saturday in August. Based on the way the calendar fell this year, we had an extra week in our fiscal year, and the fourth quarter is based on 17 weeks versus 16. For comparison, our same-store sales comps are based on a 16-week basis, while our total sales, EBIT, and EPS results will be discussed on a 17-week basis. As Phil has previously discussed, we reported 9% total company sales growth. On a 16-week basis, total company sales were up 2.6%. Our domestic same-store sales grew 0.2%, and our international comp was up 9.9% on a constant currency basis. Total company EBIT grew 6.1%, and our EPS grew 11%. I also want to point out that we had a headwind from foreign exchange rates in this quarter. We had a 500 basis points drag on international sales that resulted in a $32 million headwind to sales, an $8 million headwind to EBIT, and a 32 cents a share drag on EPS versus the prior year. We continue to deliver solid results despite the economic backdrop and the efforts of our auto zoners and our stores and distribution centers have enabled us to grow our business and our earnings in a meaningful way. Let me take a few moments to elaborate on the specifics in our P&L for Q4. For the quarter, total sales were just over $6.2 billion, and as I just mentioned, was up 9%. For the year, our total sales were $18.5 billion, up 5.9% versus last fiscal year. Let me give a little color on our sales and our growth initiatives. Starting with our domestic commercial business, for the fourth quarter, our domestic DIFM sales increased 10.9% to $1.7 billion. On a 16-week basis, our domestic commercial business grew 4.5%. For FY24, our commercial sales were $4.9 billion, up 6.2% versus last year. In the quarter, sales to our domestic DIFM customers represented 31% of our domestic auto parts sales and 27% of our total company sales. Our average weekly sales per program were $16,700, flat to last year as we lapped new programs that we opened that are not at maturity. Our commercial acceleration initiatives are continuing to deliver good results as we grow share by winning new business and increasing our share of wallet with existing customers. We now have our commercial program in approximately 92% 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 55 net new programs, finishing with 5,898 total programs. Importantly, we have a lot of runway in front of us, and we will aggressively pursue growth in commercial which represents a tremendous growth opportunity for our company. To support our commercial growth, we now have 109 mega hub locations. While I mentioned a moment ago our commercial weekly sales per program average was $16,700 per program, the 109 mega hubs average significantly higher sales and are growing much faster than the balance of the commercial business in Q4. As a reminder, our mega hubs typically carry over 100,000 SKUs and drive tremendous lift inside the store box, as well as serve as an expanded fulfillment 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. These assets are performing well individually, and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to thousands of additional parts and lifting the entire network. We have an objective to have well north of 200 mega hubs at full build-out. Customers are excited by our commercial offering as we deploy more parts in the local markets, closer to the customer, while improving our service levels. On the domestic retail side of our business, our DIY comp was down 1.1% for the quarter. For all of FY24, our DIY comp was down six-tenths of a percent. Despite the industry softness, we continue to gain share in DIY, and we are well-positioned when the industry re-accelerates. As Phil mentioned, we saw traffic down 2% along with 1% ticket growth. As we move forward, we would expect to see slightly declining transaction counts offset by low to mid single-digit ticket growth in line with the long-term historical trends for the business driven by changes in technology and the durability of new parts. Our DIY business has continued to gain share behind our growth initiatives. Importantly, the market is experiencing a growing and aging car park and a challenging new and used car sales market for our customers which continues to provide a tailwind for our business. These dynamics, ticket growth, growth initiatives, and macro car park tailwinds, we believe, will continue to drive a resilient DIY business environment for FY25. Now I'll say a few words regarding our international business. We continue to be pleased with the progress we're making in our international markets. During the quarter, we opened 31 new stores in Mexico to finish with 794 stores and 18 new stores in Brazil, ending with 127. Our same-store sales grew 9.9% on a constant currency basis and 4.9% when taking into account foreign exchange rates. We remain committed to international, and given our success in these markets, we will accelerate the store opening pace going forward. We're bullish on international being an attractive and meaningful contributor to AutoZone's future sales and operating profit growth. Let me spend a few minutes on the rest of the P&L and gross margins. For the quarter, our gross margin was 52.5%, down 21 basis points. driven primarily by an unfavorable LIFO comparison of last year. Excluding LIFO from both years, we had a 32 basis point improvement in gross margin driven by continued improvement in merchandising margins. For Q4 last year, we had a $30 million LIFO credit, while this year we did not have any credits. We previously said that we thought we would have approximately $10 million of LIFO credits in the quarter, which would have equated to 16 bps of higher gross margins or 45 cents a share. At year end, we had $19 million in cumulative LIFO charges yet to be reversed through our P&L. At the moment, we're not anticipating any charges or credits through our P&L for Q1 of FY25, as inflation has not materially impacted our LIFO inventory accounting results. I will remind you that in last year's first quarter, we booked $2 million LIFO credit. And as a reminder, once we credit back the $19 million through the P&L, We will not take any more credits and we will begin to rebuild an unrecorded life or reserve. Moving to operating expenses, our expenses were up 10.4% versus last year's Q4 as SG&A as a percentage of sales deleveraged 37 basis points. On a 16-week basis, our SG&A was up 4.6%. The growth in SG&A has been purposeful as we continue to invest at an accelerated pace in IT and payroll to underpin our growth initiatives. These investments will pay dividends in customer experience, speed, and productivity. We're committed to being disciplined on SG&A growth as we move forward, and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L, EBIT for the quarter was $1.3 billion, up 6.1% versus the prior year. EBIT for FY24 was just under $3.8 billion, up 9.1% versus the prior year, driven by top-line growth and gross margin improvements. Interest expense for the quarter was $153.2 million, up 41% from Q4 a year ago, as our debt outstanding at the end of the quarter was $9 billion versus $7.7 billion at Q4 and last year. We're planning interest in the $108 million range for the first quarter of FY25 versus $91.4 million in this past year's first quarter. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 21.1% and down from last year's fourth quarter of 22.4%. This quarter's rate benefited 80 basis points from stock options exercise, while last year it benefited 22 basis points. For the first quarter of FY25, we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises. Moving to net income and EPS, net income for the quarter was $902 million, up 4.3% versus last year. Our diluted share count of $17.5 million was 6% lower than last year's fourth quarter. The combination of higher net income and lower share count drove earnings for share for the quarter to $51.58, up 11% for the quarter. For FY24, net income was $2.7 billion, up 5.3%. and earnings per share was $149.55, up 13%. Now let me talk about our free cash flow. For the fourth quarter, we generated $723 million in free cash flow, and for the year, we generated $1.9 billion in free cash. We expect 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, our liquidity position remains very strong and our leverage ratio finished at 2.5 times EBITDA. Our inventory per store was up 3.7% versus Q4 last year, while total inventory increased 6.8% over the same period last year, driven by new store growth. Net inventory, defined as merchandise inventories less accounts payable on a per store basis, was a negative $163,000 versus negative $201,000 last year, and negative $168,000 last quarter. As a result, accounts payable as a percent of gross inventory finished a quarter at 119.5% versus last year's Q4 of 124.9%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $711 million of AutoZone stock in the quarter, and at quarter end, we had just under $2.2 billion remaining under our share buyback authorization. The strong earnings balance sheet and powerful free cash we generated this year has allowed us to buy back 6% of the shares outstanding since the beginning of the fiscal year. We have bought back over 100% of the then outstanding shares of 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 that will enable us to invest in the business and return meaningful amounts of cash to shareholders. To wrap up, we remain committed to 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 market share domestically and internationally and improving our competitive positioning in a disciplined way. As we look forward to FY25, we're bullish on our growth prospects behind a resilient DIY business, a fast-growing international business, and a domestic commercial business that is continuing to grow share. I continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders behind a strong industry, a winning strategy, and an exceptional team of auto zoners. Before handing the call back to Phil, I want to remind you that we report revenue comps on a constant currency basis to reflect our operating performance. We generally don't take on transactional risk, so our results reflect the translation impact for reporting purposes. As I mentioned earlier in the quarter, foreign currency resulted in a headwind on revenue and EPS. If yesterday's spot rates held constant for Q1 FY25, then we expect an approximate $55 million drag on revenue, a $16 million drag on EBIT, and a $0.63 a share drag on EPS. And if rates remained at the current spot rates for the full fiscal year 2025, we would expect an approximate $265 million impact to revenues, a $90 million impact to EBIT, and a $3.64 a share impact to full-year EPS. And now I'll turn it back to Phil.