AutoZone, Inc.

Good day, everyone. Welcome to AutoZone's 2025 Q1's Earning Release Conference Call. At this time, all participants are on a listen-only mode. After management's prepared remarks, there will be a question and answer session. Before we begin, the client would like to read their forward-looking statement. Please go ahead.

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 discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as 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 GAAP to non-GAAP financial measures can be found in our press release.

I would now like to turn the floor over to Phil Daniel. The floor is yours.

Thank you. Good morning and thank you for joining us today for AutoZone's 2025 First Quarter Conference Call. With me today are Jameer Jackson, Chief Financial Officer, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the first quarter, I hope you had the 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, www.AutoZone.com, under the investor relations link. Please click on the quarterly earnings conference call to see them. As we begin, I want to thank our more than 125,000 AutoZoners across the globe for their commitment to the first line of our pledge, which states, AutoZoners always put customers first. their contributions continue to drive our performance. We knew this first quarter would be similar to last quarter as our expectations for domestic same-store sales were muted and our international sales would be up against a difficult FX rate comparison. As we mentioned on our previous conference call, we did not expect the macro environment to positively impact our results. We are, however, optimistic that our improved execution and customer service initiatives are on track. The environment will improve as we experience winter weather and the uncertainty of the election are now behind us. While the macro environment has led customers to be cautious with their spending, we remain confident that we will continue to gain share over time in both domestic, DIY, and commercial. For the quarter, With our continued focus on what we call WOW customer service, our total sales grew 2.1%, while earnings per share decreased 0.1%. We delivered positive 1.8% total company same-store sales, with domestic same-store sales growth of 0.3%, and our domestic commercial sales grew 3.2%, and up 9% on a two-year stack basis. International same-store sales up 13.7% on a constant currency basis. While our international business continued to comp impressively, up almost 14% in local currencies, we faced approximately 1,300 basis points of currency headwind, which resulted in an unadjusted 1% international comp. The stronger U.S. dollar had a negative impact on our reported sales, operating profit, and EPS. Jameer will provide more color concerning the foreign currency impact on our business and what we are thinking regarding the impact on our financial results for Q2 and the remainder of the year. While there will always be tailwinds and headwinds in any quarter's results, what has been consistent is our focus on driving sustainable long-term results. We continue to invest in improved customer service, product assortment initiatives, our supply chain, and believe we are well positioned for future upswings in consumer demand. Now let me dive into our sales results. First off, our domestic DIY results showed a slight improvement to last quarter as Q1's DIY comp sales were down 0.4%. Our discretionary merchandise categories continue to be a drag on our domestic DIY sales, similar to the last several quarters. For our first quarter, discretionary category sales were approximately 17% of our mix, and these categories continue to underperform our expectations. While better on a percentage basis than last quarter's results, we are now comping against last year's mid-single-digit declines in the discretionary categories. Our belief is that sales will continue to be pressured until the customer gets some economic relief and consumer competence improves. With regard to inflation's impact on DIY sales, we saw the average like-for-like skew inflation up approximately 1.6% for the quarter, while the average DIY ticket was up 1.3%. The difference between inflation and ticket growth was driven by the mix of goods sold. We were encouraged with the uptick in our average ticket and expect that trend to continue into Q2. We continue to expect inflation in our ticket to be approximately 3% over time, and we anticipate average ticket growth will return to historic industry growth rates as we move further away from the hyperinflation of the last couple of years. We also saw DIY transaction count down 1.8%. This, too, was better than the down 2% we experienced last quarter. While we do not have final share data for the last segment of the quarter, we were encouraged by the recent favorable trends. We believe we have a best-in-class product and service offering, and this gives us confidence that when customers return to their historic shopping habits, we will be beneficiaries. Secondly, I'll speak to our regional DIY performance. We saw noticeable underperformance in the Northeast, Mid-Atlantic, and the rest of what we call the Rust Belt. These markets were down negative 1.8%, versus negative 0.1% in the rest of the domestic markets. This doesn't surprise us as these markets have underperformed due to the milder than normal temperatures and lower than usual precipitation levels the last couple of years. Third, I will address weather and what we believe the impact was on our DIY business. This quarter was impacted by several markets having hurricanes. Although these storms are difficult for our customers and our auto zoners, they did not have a meaningful impact on our DIY business. Also, across much of the country, the weather pattern was similar to the previous year. We do not believe weather played a meaningful role on our DIY performance in Q1. Next, I will touch on our U.S. commercial business. Our commercial sales were up 3.2% for the quarter compared to last quarter's 4.5% total commercial growth. The first four weeks were the weakest as sales grew only 1.8%, primarily because of the hurricanes. More broadly across the U.S., and similar to what we saw with our DIY customers, we noticed underperformance in the Northeast, Mid-Atlantic, and Rust Belt markets. The spread between these markets and the rest of the country was approximately 400 basis points. We exited the quarter with stronger sales and believe we are continuing to gain share. While we have continued to see wide variations of performance across these more sensitive weather markets, we remain steadfast with our initiatives. We are encouraged with our improved satellite store inventory availability, significant improvements in hub and mega hub coverage, the continued strength of our Duralast brand, and good execution on our initiatives to improve speed of delivery and improved customer service, which gives us confidence as we move through the year. This quarter, On a like-for-like skew basis, our commercial business was down, which contributed a negative 0.7% to average ticket. The lack of inflation continued to pressure sales. Our sales growth will be driven by our continued ability to gain market share and an expectation that like-for-like retail skew inflation will accelerate by the end of FY25. For the quarter, we opened a total of 23 net domestic stores. We remain committed to more aggressively opening regular stores, hubs, and mega hub stores, and for the remainder of FY25, our openings will be continued to be skewed towards the back half of the year. Hubs and mega hubs lead to better comp results that are growing faster than the balance of the chain, and we are going to continually aggressively deploy these important assets. For the second quarter, we expect both DIY and commercial sales trends to modestly improve as our comparisons become slightly easier and we gain momentum from our sales growth initiatives. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends emerge. Before turning the call to Jamir, I'd like to take a moment and discuss our international business. In Mexico and Brazil, we opened a total of 11 stores in the quarter and now have 932 total international stores. As you can see from the press release, our same stores were just under 14% on a constant currency basis and accelerated from last quarter's 10%. Today, we have just under 13% of our total store base outside of the U.S. and expect this number to grow materially as we accelerate our international store openings. For the fiscal year, we expect to open around 100 international stores. As you'd expect, we continue to take our U.S. store learnings and introduce them into our international operations. We are very excited about the future in international stores. In summary, we have continued to invest in driving traffic and sales growth. This year, we expect to again invest more than $1 billion in CapEx in order to drive our strategic growth priorities. We are investing in accelerated store growth, specifically hubs and mega hubs, placing inventory closer to our customers, distribution centers that drive efficiency and reduce supply chain costs, and leveraging technology and our IT systems that improve our auto zoners' ability to serve our customers. We believe that this is exactly the right time to invest in these initiatives in order to be ready when industry demand ramps up. Now I will turn the call over to Jameer Jackson.

Thanks, Phil. Good morning, everyone. For the quarter, total sales were $4.3 billion, up 2.1%. Our domestic same-store sales grew three-tenths of a percent, and our international comp was up 13.7% on a constant currency basis. Total company EBIT was down nine-tenths of a percent, and our EPS was down a tenth of a percent. As Phil discussed earlier, we had a headwind from foreign exchange rates this quarter. From Mexico, FX rates weakened 13% versus the U.S. dollar for the quarter, resulting in a $58 million headwind to sales, a $17 million headwind to EBIT, and a 68 cents a share drag on EPS versus the prior year. We continue to deliver solid results despite the challenging economic backdrop that Phil discussed earlier, as the efforts of our auto zoners and our stores and distribution centers have enabled us to continue to grow our business. Let me take a few moments to elaborate on the specifics in our P&L for Q1. I'll start with giving a little more color on sales and our growth initiatives, starting with our domestic commercial business. For the first quarter, our domestic DIFM sales increased 3.2% to $1.1 billion. For the quarter, our domestic commercial sales represented 30% of our domestic auto parts sales and 26% of our total company sales. Our average weekly sales per program were $15,900, flat to last year as we lapped several 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 continue to 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 37 net new programs, finishing with 5,935 total programs. Importantly, we continue to have lots of opportunities to expand sales per program and open new ones. We plan to aggressively pursue growth across our domestic commercial customers, which represents a tremendous sales opportunity for our company. To support our commercial growth, we now have 111 mega hub locations. While I mentioned a moment ago that our commercial weekly sales per program average was $15,900 per program, the 111 mega hubs average significantly higher sales and are growing much faster than the balance of the commercial business in Q1. As a reminder, our mega hubs typically carry over 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. 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 now set a new objective to have just under 300 mega hubs at full build out. Our customers are excited by our commercial offering as we deploy more parts in local markets closer to the customer while improving our service levels. On the domestic retail side of our business, our DIY comp was down 0.4% for the quarter. Importantly, we maintained share in DIY and were well positioned when the industry reaccelerates. As Phil mentioned, we saw traffic down 1.8% along with a positive 1.3% 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 share has remained strong 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 six new stores in Mexico to finish with 800 stores and five new stores in Brazil, ending with 132. Our same-store sales grew 13.7% on a constant currency basis and 1% on a reported basis. We remain committed to international, and given our success in these markets, we will accelerate the short opening pace going forward. We are bullish on international being an attractive and meaningful contributor to AutoZone's future sales and operating profit growth. Now let me spend a few minutes on the rest of the P&L on gross margins. For the quarter, our gross margin was 53% up 16 basis points. This quarter, while we did not book any LIFO adjustments, we did have a $2 million unfavorable LIFO comparison the last year. excluding LIFO from both years, we had a 21 basis point improvement in gross margin driven by continued improvement in merchandising margins. As a reminder, for Q2 last year, we had a $14 million credit, and we do not expect to have any credits this Q2 as freight cost increases are offsetting deflation and the remainder of our cost of goods. At quarter end, we still have $19 million in cumulative LIFO charges yet to be reversed through our P&L. And as I've said previously, 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 LIFO reserve. Moving to operating expenses, our expenses were up 4.5% versus last year as SG&A as a percentage of sales delevered 75 basis points. While we are managing our SG&A spend in a slower growth environment in a disciplined way, we will continue to invest at an accelerated pace in IT and CapEx to underpin our growth initiatives. We believe these investments will pay dividends in customer experience, speed, and productivity, and are important enablers for us to gain future market share. We will remain committed to being disciplined on SG&A growth as we move forward, and we will manage SG&A expenses in line with sales growth over time. Moving to the rest of the P&L, EBIT for the quarter was $841 million, down 0.9% versus the prior year. As I previously said, FX rates reduced our EBIT by approximately $17 million. On a constant currency basis, our EBIT would have been up approximately 1%. Interest expense for the quarter was $107.6 million, up 18% from Q1 a year ago, as our debt outstanding at the end of the quarter was $9 billion versus $8.6 billion a year ago. We're planning interest in the $108 million range for the second quarter of FY25 versus $102.6 million last year. higher debt levels and borrowing rates across the curve are continuing to drive interest expense increases. For the quarter, our tax rate was 23% and up from last year's first quarter of 21.6%. This quarter's rate benefited 72 basis points from stock options exercise, while last year it benefited 147 basis points. For the second quarter of FY25, we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises. We're assuming Q2 option exercises are less than Q2 last year, which had $23 million of credits. Moving to net income and EPS, net income for the quarter was $565 million, down 4.8% versus last year. Our diluted share count of 17.4 million was 4.7% lower than last year's first quarter. The combination of lower net income and lower share count drove earnings per share for the quarter to $32.52, down 0.1% for the quarter. As a reminder, the unfavorable FX comparison drove our EPS down approximately $0.68 a share. Now let me talk about our free cash flow. For the first quarter, we generated $565 million in free cash flow versus $595 million last year in Q1, driven by lower net income and higher capex. 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 5.4% versus Q1 last year, while total inventory increased 8.7% over the same period last year, driven by new store growth, and inventory placement to support new growth opportunities. Net inventory, defined as merchandise inventories less accounts payable on a per store basis, was negative $166,000 versus a negative $197,000 last year and negative $163,000 last quarter. As a result, accounts payable as a percent of gross inventory finished a quarter at 119.5% versus last year's Q1 of 124.4%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $505 million of AutoZone stock in the quarter, and at quarter end, we had $1.7 billion remaining under our share buyback authorization. Our ongoing strong earnings balance sheet and powerful free cash continues to allow us to return a significant amount of cash to our shareholders through our buyback program. 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 and improving our competitive positioning in a disciplined way. As we look forward to the balance of our fiscal year, 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 risks, so our results primarily 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 for Q2, then we expect approximately a $95 million drag on revenue, a $30 million drag on EBIT, and $1.30 a share drag on EPS. And if rates remained at the current spot rates for the full fiscal year of 2025, we would expect approximately a $355 million impact to revenues, $120 million impact to EBIT, and a $4.90 a share impact to full-year EPS. And now I'll turn it back to Phil.

Thank you, Jameer. We are proud of our AutoZoners across the globe and the results our team delivered this past quarter. We promise to continue to focus on improving our execution and driving WOW customer service. While our sales increases don't reflect it quite yet, we believe we've made meaningful progress on our initiatives and are well positioned to grow sales across our domestic and international store bases with both our retail and our commercial customers. Our gross margins are solid and our operating expense is appropriate for future growth. we continue to put our capital at work where it will have the biggest impact on sales. Our stores, distribution centers, and leveraging technology to build a superior customer experience where we are able to say yes to our customers' needs. The top focus areas for fiscal 2025 will remain growing share in our domestic commercial business and in continuing our momentum in international. We believe we have a solid plan in place for the balance of the fiscal year. We know our focus on parts availability and our WOW customer service culture will lead to sales growth and gains in market share. We're excited to start calendar 2025. In September, we hosted our field leadership teams here in Memphis for AutoZone's 2025 National Sales Meeting. The energy and excitement about our plans and what we can accomplish was fantastic. Our operating theme for this new year, Great People, Great Service, was on full display over those four days. I could not be more proud of the effort being exhibited across our organization. This year, we will focus on our auto zoners like never before. We are determined to improve upon an already outstanding culture of customer service. In this difficult macro environment, we cannot rest on our laurels. We have to make sure every store is staffed right every hour of the day. Our processes need to function correctly, always. We must meet our store opening goals and timelines. Simply put, we have to remain the execution machine that we have always been. Fiscal 2025 top priorities are based on improving execution and WOW customer service. We will continue to invest in the following strategic projects. Re-accelerating our new hub and mega hub openings. As we said recently, we now plan to have more than 285 domestic hubs or mega hubs. These stores do take time, but we are incredibly excited about their continued performance. Effectively and efficiently opening our new distribution centers and optimizing our direct import facility. Ramping up our domestic and international store growth. As discussed, our international teams posted same store sales comps on a constant currency base of nearly 13.3%. or 14%, continuing several years of strong growth. And most importantly, re-accelerate our domestic commercial sales growth. As the macro environment has remained challenging, AutoZone has been focused on improving execution and leveraging our culture of outstanding customer service. The automotive aftermarket is always going to go through change, and we look to take advantage of that change and focus on gaining additional market share. We are excited about what we can accomplish, and our AutoZoners are committed to delivering better results in 2025. We believe AutoZone's best days are ahead of us. Now we'd like to open up the call for questions.

Certainly. At this time, we will be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We do ask to please limit yourself to two questions. If you have any additional questions, you may re-enter the queue by pressing star one. Please hold just a moment while we pull for any questions. Your first question is coming from Brett Jordan with Jefferies. Please pose your question. Your line is live.

Hey, good morning, guys. Morning, Brett.

Good morning, Brett.

Hey, could you talk a little bit about what you're seeing on the West Coast as one of your peers is shutting stores and exiting that region? I guess in the short term, how you see inventory liquidation and maybe any price disruption, I think in the longer term, you know, how you see that market share filtering out. Obviously, you know, there will be some share gain potential.

Yeah, I'd say, you know, this is early innings in what they're doing. Obviously, you know, as they're closing their stores, they've ramped up their discounting and things of that nature. Um, it's, it's very early, uh, as you, as you could imagine. Um, and it's, it's hard to tell what that looks like over time. I think, you know, that'll be a benefit for us out there as we'll see, you know, shared gains as they exit those markets. Um, they are discounting that could, you know, potentially be a slight headwind in the short term. Um, as you know, there's discounted prices in what's a pretty inelastic business. Um, And it's kind of wait and see at this point, but long term, I think those will be great opportunities for us to gain some market share out there.

Okay. And then could you talk about the cadence of the first quarter, I guess, into the second quarter? I think you called out that the first four weeks were the weakest in commercial, but could you talk about what we've seen as winter has begun to show up?

Yeah, that's correct. The first, you know, if you think about the DIY business, you know, we've talked a lot about the underperformance in kind of those rust belt markets. That's kind of continued, but pretty consistent. And there wasn't a whole lot of weather impact in the quarter on the DIY side of the business. The commercial business, those first four weeks is where those hurricanes came across, you know, a lot of the southeast markets. And it has a more material impact initially on the commercial side of the business as those shops get disrupted. And, you know, that's what we saw in the first four weeks of the quarter. And then it kind of returned to more normal volumes in the back half of the quarter on the commercial side of the business.

Okay. Have you seen the later part of the quarter and the beginning of the second quarter improve with cold weather, or is it really not meaningful enough yet?

Again, you know, our quarter just ended. It's so early in the quarter. We like the initial part of the winter, but we've got a long way to go in winter to see that materialize. And, again, I think what matters the most over time is does the, you know, those rust belt markets and the cold and snow markets, do they get precipitation and cold weather throughout the winter, which really hasn't happened over the last couple of years. Great.

Thank you.

Thanks.

Your next question is coming from Simeon Gutman with Morgan Stanley. Please pose your question. Your line is live.

Good morning, everyone. My question, it's on operating income growth. And you mentioned X, the FX, it would have been up slightly. My question is, if this backdrop of sluggish macro doesn't change and comps more or less stay in this area, is that a good way to think about EBIT? I know you don't guide, but the question is, can you strengthen comps with keeping EBIT in this slightly up range or are you debating to invest more for some period of time and take it a little bit lower?

Yeah, I think a couple of dynamics stand out to us. One is we do expect the comps to improve as we move through the year. And we're positioning ourselves both in terms of inventory and infrastructure to take advantage of some of those opportunities. I think the second dynamic is that we expect gross margins to remain strong. as we move through. We're taking good actions on the merchandising margin side of the business, and the teams are doing a fantastic job of executing there. And then the third is, you know, we're able to manage our SG&A in a very disciplined way. Now, we are going to invest in infrastructure and opportunities to take advantage of sort of the competitive environment and the opportunities for us to grow share, but, you know, we believe that we can do that without it having a a negative impact on operating income. So in a lower comp environment, you would expect us to be disciplined in the middle of the P&L, but we are going to invest in a disciplined way to take advantage of those growth opportunities.

Okay, that's helpful, Jameer. My second question, the follow-up, it's on pricing and CPI and then tariffs. So the CPI is picking up. Curious if there's any bearing to the real world with it. They're getting into 3% to 4% range year over year. And then when Biden put back the section three Oh one tariffs earlier in the year, some prices went up, but just curious how that example could play into potential future tariffs. Meaning did the suppliers take them? Did they take price? Are you taking price? Like how, how is that working?

Yeah. Um, tariffs are an interesting question. I'll, I'll start off by saying at this point, we really don't know, um, what's going to happen. You know, our merchant teams have been dealing with tariffs now for the better part of a decade. And I think if you go back historically and look, early on when those tariffs happened, the vast majority of our supply chain was pretty dedicated to certain countries of origin. Since that timeframe, we've done a lot of work to make sure that our country of origins have been diversified. We have more than one category in the vast majority, more than one provider in the category than we had back then, and we've become pretty nimble in our supply chain. We'll continue to exercise against that playbook. And long term, I think this industry has been very disciplined in the pricing strategies, and I suspect that that will continue. But it's very early in this cycle to see what ultimately is going to happen with tariffs.

And I think on the inflation front, while we are starting to see some movement in CPI, I mean, a little bit closer to home, We've seen freight start to spike up. We expect that to make its way in the cost of goods and ultimately in the pricing and tickets over time. And I think the labor markets have thawed a little bit, so we're not seeing what we saw when we saw hyperinflation there. But to the extent that there is some inflation, as Phil mentioned in his prepared comments, we expect the normal inflation that we see inside the industry to return And that should have a positive impact on what we see in like-for-like inflation on an SKU basis. And as you know, this industry has been very disciplined about taking pricing when we see that kind of inflation. So I think net-net, it'll potentially be a tailwind, but it's going to work its way through over a relatively slow period of time, we believe. Agreed.

Okay, thanks.

Your next question is coming from Kate McShane with Goldman Sachs. Please pose your question. Your line is live.

Good morning. This is Mark Jordan on for Kate McShane. Just thinking about share repurchases, it came in a little bit lower than we're expecting for the quarter. How should we think about capital allocation going forward here? How do you feel about current debt levels? And are you planning on still rolling over the notes that are coming due in April this year?

Yeah, so no change in our capital allocation policy. As I mentioned, we're going to be a significant free cash flow generator. We're going to hold our leverage target in the two-and-a-half times area. That gives us a tremendous amount of financial firepower to invest in our existing assets, to grow our business, and to give a significant amount of cash back to shareholders. And we're going to continue to run that play over time. And you can expect us, as it relates to our debt stack, to continue to manage to a two and a half times leverage target, and that will impact what we do on any debt that's due.

Okay, perfect. And just as a follow-up, kind of piggybacking on the tariff comments that were made earlier, do you have the option, and do you plan on maybe accelerating some purchases ahead of any tariffs that might come across?

Yeah, I mean, our merchant's are looking at that today. Um, keep in mind the vast majority of the categories that we operate in are pretty low turning. Um, so we'll take opportunities where that makes sense to do that. Um, and you know, the merchants are pretty studious and adept in this type of, uh, of, of environment and we'll act accordingly. What's in the best, um, you know, thoughts for us and obviously for our customer.

Thank you.

Your next question is coming from Michael Lasser with UBS. Please pose your question. Your line is live.

Good morning. Thank you so much for taking my question. Given the extra week you had last year in your calendar, how did the shift in how you measure your same-store sales impact your comp this quarter, and how would you expect that to play out over the next few quarters?

That's a good question, Michael. We didn't talk about it specifically, but it did impact our comps about a point in the quarter, negatively impacted our comps about a point in the quarter. And we would expect, just given the shifts in the calendar, that we'd potentially pick up an extra bump later in the spring that could impact our comps. But it was worth about a point, and it'll play out over the next couple of quarters or so, particularly as we get into the spring months.

So, Jameer, it'll continue to be a drag in the next quarter, and then it'll reverse in the third and fourth quarter of the year. Is that right? That's the right way to think about it. Okay. And my follow-up question is, if you look at the stores that are being serviced by the hubs, what is the average commercial sales per week in those locations versus stores that are not currently being serviced by a hub? And is it a good rule of thumb for us to think about that the less productive commercial programs could reach the more productive commercial programs as you accelerate the rollout of these hubs over the next several quarters, especially given the consolidation that's happening in the market with all these foreclosures? Thank you.

Yeah, Michael, great question. And we don't break out all those numbers and share them publicly, but you can suffice it to say that when a hub or a mega hub gets put into a market, those stores overperform a satellite store, as you would probably imagine. They have deeper inventory. And they also lift the market, frankly, on both sides, on DIY and the commercial side of the business. But delineating those is... In many cases, hubs may have been serviced, you know, stores may have been serviced by a mega hub that was, say, you know, 100 or 200 miles away. As you can imagine, if you put inventory closer to the customer, it lifts all of those boats in that market, if you will. So it's better for us. Again, today we have, you know, if you think about our store placement where we have these deeper inventories in both hubs and mega hubs, we're just under 7%. of our stores having these deeper assortments closer to them. Over time, we'll take up those mega hubs pretty significantly, and that will lift both DIY and commercial sales in those markets. The closer you get the inventory to the customer, the bigger advantage you have.

Hopefully that answers your question.

Your next question is coming from Christopher Horvitz with JP Morgan. Please pose your question. Your line is live.

Thanks. Good morning, guys. So my first question is on the gross margin. You talked about the LIFO headwind. Presumably there was some DIY mix headwind. If you back that, it looks like you're generating 40 basis points of expansion from lower product costs. So can you talk about what's going on there? That level seems pretty consistent with where you've been the past couple quarters. So how far are you into that initiative and how... How much longer do you think we can continue to benefit that level of improvement?

Yeah, I mean, we have a few moving pieces in the gross margin line, but I'll say a couple things. Number one, from a merchandising margin standpoint, we are doing extremely well, both in terms of how we're merchandising, the work that we're doing with our supply base, the mix of products that we have in the marketplace. I feel pretty good with where we are. There are a couple dynamics that are happening. We're not raising prices as fast as we were when we saw sort of more inflation in the marketplace and more like-for-like inflation. So we're offsetting that to some extent with the tremendous actions that we have from a merchandising margin standpoint. LIFO wasn't that big of a deal this quarter. We only had a couple million dollars of credits last quarter. We didn't book anything this quarter. And just given where freight is and some of the inflationary impacts that we've talked about, it's not likely that we're booking any LIFO credits next quarter. In fact, we could actually see some headwinds just depending on where we are. And then I'll say the third dynamic that we have is we've got a couple of new DCs that are coming online, and those DCs are clearly not at maturity, and that's a little bit of a drag in the gross margin line. So Net-net, when you put it all together, I'm very pleased that we're up, you know, 21 basis points on our next LIFO basis. I think we're running the gross margin play like we always do with intensity. And, you know, we should be managing gross margins to be positive as we move through the back half of the year.

Got it. And then as it relates to the balance sheet, I know in a previous question you talk about you know, staying around two and a half times, you know, based on, I know you don't guide, but, you know, based on maintaining the current level of debt, assuming more of a gradual improvement in comps over the balance of the year, it would seem like, you know, it could really draw down on the amount of share repurchases you could make. In the past, we've seen you move up a little bit higher than two and a half, maybe into the, you know, two, six, two, eight range, you know, to what extent do you see flexibility in your ability to just take it up and keep that investment grade rating?

Yeah, I mean, we clearly have a tremendous amount of flexibility there, and you hear me often talk about it as the two-and-a-half times area. And so that two-and-a-half times area gives us the ability at different points in time to tick it up a little bit or even tick down a little bit, as you've seen us do in the past. But we like being in that two-and-a-half times area. As I said, it gives us a tremendous amount of flexibility there, to invest in the business, to grow with our growth initiatives, and to give a lot of cash back to shareholders. And we're going to continue to run that play over time.

Great. Thanks very much.

Your next question is coming from Stephen Forbes with Guggenheim Securities. Please pose your question. Your line is live.

Good morning. Phil, maybe just a follow-up on the mega hubs and hub strategy. I believe you raised the target for the end state to 300 from maybe 200 plus. So curious what drove that, you know, so maybe learnings that are driving that decision, and if there's been any change in the planned cadence of openings over the next years to come.

Yeah, so the change in strategy, if you go all the way back, ultimately we thought we'd have somewhere between 25 and 40 of these mega hubs. A long time ago. It's a long time ago. And then we updated the guidance several times. The benefit of these stores is we continue to see outsized performance from the hubs and specifically the mega hubs. And it's kind of interesting as you look back over time, we kind of thought we've reached the height of what these stores will be able to produce for us. And at the end of the day, they continue to grow and become more and more productive as we continue to optimize our inventory in those stores, continue to leverage the power of our brands. at incremental brands and incremental assortment. And they help on both. We talk specifically about the commercial side of the business, but they do help on both sides of the business. They kind of become epicenters for the surrounding stores, and they help drive both commercial and DIY sales results. So we like these assets. As I've said before, we wish we could open them faster. They do take time. Jameer's now got a pipeline full of about 80 of these stores that are essentially ready to go um but it does take us almost two years to get these stores open on average so it takes time but we're excited about them again just under seven percent of our stores today have stores with deeper assortments that's including hubs and mega hubs and as a reminder the mega hubs have roughly a hundred thousand skus in them and the hubs have somewhere between forty five and sixty thousand skews and uh again we like these assets We're going to go as fast as we can to keep opening them.

I think one of the things you've heard me mention over the last couple of years is that we were testing mega hub density in several markets. As we've wrapped up those tests, one of the things that we've learned is that we can jam mega hubs closer together and see very little in terms of cannibalization. To Phil's point, when we put those boxes in the marketplace, we're seeing a lift to both the DIY and the commercial business. as we've wrapped up that mega hub density test, that's given us a lot of confidence about the number that we can put in the marketplace, where we should put them, and as we said, we're rapidly building the pipeline moving forward.

Maybe as a follow-up, sticking with real estate, top focus area, ramping up store growth, you gave targets in the past for sort of out-year domestic and international stores per year. Any updates on how we should be reframing or rethinking the curve or the slope of new store openings?

So Phil's smiling at me when this happens. This is one of my big KPIs inside of the company. But we feel very good about the pace that we're ramping up stores. We're going to open significantly more stores domestically this year than we did last year. They will be back half-loaded. And then as Phil talked about in his prepared comments, I mean, we'll open roughly 100 stores internationally here. So the target of doing, you know, 300 domestic and 200 international, we're on the right glide path to do that towards the end of the decade. You know, we've rebuilt our store development pipelines here. We've got some attractive opportunities. We're going as fast as we can to get them open. And, you know, this will be a good – significant piece of our growth strategy as we move forward.

I think I would say we're much more confident in our ability to hit, you know, those timelines for this year and get towards that, you know, roughly 500 stores open in all markets, you know, domestically being roughly 300 and international 200 by that, you know, 28 timeframe that Jameer mentioned. So we feel good about where we're headed. Again, these stores take a long time. The trails on these stores are pretty long from the time you decide to open up a store to the day it actually rings up its first sale. It takes quite a bit of time, but we're excited about where we're headed and feel pretty confident that we'll be able to meet our goals.

Thank you.

Your next question is coming from Stephen Zicone with Citi. Please pose your question. Your line is live.

Great. Good morning. Thanks very much for taking my question. I wanted to focus on the DIFM business. Sequentially, it looks like the comps got a little bit weaker. Now, you called out some weakness in those first four weeks, but could you just talk through how transactions performed? Do you attribute the sequential step down largely those first four weeks? Is there anything you've seen in the industry that would suggest the overall industry backdrop for DIFM has gotten a little bit weaker?

Yeah, we did decelerate a little bit from our Q4 comp total comp, the first four weeks were definitely impacted, and mostly in those markets where we saw the impacts from those hurricanes. If you kind of think about what we've talked about with transactions and ticket average, the ticket average on the commercial side of the business has been more muted, although we are seeing some transaction growth, which we're pretty happy about. We exited the quarter with some improving comps versus the first four weeks, there are lingering effects to those hurricanes. And I'll also say, if you look inside of our commercial business, we don't share all this detail, but if you think about any of our customers that are new and used car related, those segments of business have been pretty poor over the last couple of quarters. I'm not so sure that segment of business responds quickly as you think about the New car sales, used car sales are down over the, you know, if you call the pandemic highs of over 40 million used cars sold in a year. And interest rates continue to be high. So I'm not sure those particular segments recover. We do like what we see in the other parts of our business. The UDS customers are pretty resoundingly in positive area, and we think that's a positive trend for us going forward.

Okay, that's helpful. And then just to shift gears, SG&A, you know, the dollar growth rate was one of the lowest in quite some time. Is there anything to call out there in terms of some of the fixed cost pressure in the business, maybe wage inflation? Is that moderating? And how do you think about that SG&A growth rate over the balance of the year?

Yeah, I mean, what we've said is that we're going to grow SG&A in a disciplined way as we, you know, continue to focus on growing our business as we move forward. We're continuing to invest at a very healthy clip in our growth initiatives that are really focused on speed and productivity and improving our customer service levels. We have seen wages cool off some, and so that has given us an opportunity to not see the same sort of growth rates that we saw when SG&A was significantly more elevated. The growth rate in SG&A was significantly more elevated. What I'll say overall is that we've run this play with intensity over time. We're investing in a disciplined way. And to the extent that there are market opportunities for us to grow share, we've got the inventory and infrastructure in place to take advantage of those opportunities.

Okay. Thanks for the detail.

Your next question is coming from Scott Ciccarelli with Truist. Please pose your question. Your line is live.

Good morning, guys. So looking for clarification. Hi. Looking for clarification or comments about expecting better DIY and commercial performance. Based on where we are with the macro, are you also expecting improvement in domestic stacked comp trends, or is the improvement you referenced just fully due to easier comparisons?

Well, I think you've got a couple things going. Clearly, we've got some easier comps in the back half of the year, and I'm specifically thinking about what we have on the commercial side of the business. But I think you layer on top of that the progress that we're making with our growth initiatives. And we've been on a steady diet of focusing on putting more inventory in the local markets, closer to customers. We've been really focused on driving speed and service. And those things, even in a commercial market that has not seen the same levels of growth that we've seen over the last couple of years, those are the kinds of things that give us a lot of confidence as we move forward. And then we think there are going to be some share opportunities available for us, both on the DIY and the commercial side as we move through the year. So those are the things that give us a bullish outlook on where we're going to finish up the year.

Yeah, I think all those things that Jameer said are true. We've talked pretty extensively over the last 18 months or so about improving our execution. Turnover at the store level has started to moderate significantly. We've spent money and effort towards training our auto owners at the store, both on the DIY side and the commercial side of the business. I think we feel like we've got a running start going into the next seasonal opportunities that are going to come. We believe we'll get a more normal weather pattern, which hopefully will help, specifically in those rust belt markets we've talked about that have been a little more depressed. We're pretty excited about where we're headed, and we feel like we're well-positioned with the strategies that we have in place, and to Jumeirah's point, where we've deployed inventory, put our effort towards focus on the customer, both on the DIY side and the commercial side. Our execution among our strategies on delivering better service to the commercial customer, specifically in speed of delivery, have all improved, and we like where we are, and we believe we are well prepared to take the share opportunities we have in the future.

I appreciate that. Just a quick follow-up, if I can. There is a very large retailer out there that's become increasingly price competitive across a lot of product categories, including auto parts, I think especially batteries. Have you seen any change in the competitive environment outside of your direct peers, which are typically very consistent in their pricing strategies?

Yeah. You know, if you think about mass, they're doing – they always are going to have changes. And we've competed against those, you know, mass players for, you know, four decades at this point in the automotive arena. Yeah. They don't play in the vast majority of our hard parts, if you think about it that way. They do play in batteries and oil and some of those other categories that are generally front of store. And we like the strategy we put in place several years ago on the DIY and specifically the sales floor part of our business, and we're continuing to maintain those strategies. We don't see any reason to change those at this point.

Excellent. Thanks, guys.

Thank you.

Your next question is coming from David Bellinger with Mizuho Securities. Please post your question. Your line is live.

Hey, good morning. Thanks for the questions. Another one on the mega hub target moving up closer to 300. I believe you already have more than 90% of domestic stores with access to mega hub inventory. So are you getting to a point now where it's more normal to have multiple mega hubs that are servicing a store location, maybe two or three? And can you talk about the returns associated with that kind of strategy?

Yeah, so if you think about that inventory, again, it really is about how forward-placed that inventory is within a given market. If you think about some of these large metro markets, take New York, L.A., Chicago, Miami, just pick one. The mega hub may have been on one side of the city, and driving all the way to the other side of the city takes a long period of time. we believe the closer we can get this inventory to the customer, we will benefit. As Jamir talked about earlier, we've done some of these mega hub density tests, and they've proved that we can add multiple mega hubs in a given market, depending on the size and the amount of vehicles in those markets, and not have a lot of cannibalization. And ultimately, those stores perform incredibly well on their own, and then ultimately they begin to lift the surrounding store's on both the DIY side of the business and the commercial side of the business. Ultimately, it's proximity of hard-to-find parts close to the customer, either DIY or commercial, and they benefit us.

Got it. And then just one quick follow-up. I think before you mentioned something like 7% of stores have a deeper assortment closer to them. Could you talk about what the makeup of that inventory is? Does that lean more to commercial? And just by having these mega hubs in the market, what What did delivery times look like? Did those get sped up as well? Thank you.

So those 7% of stores are either, that's including both hubs and mega hubs. Again, hubs have roughly 50,000 SKUs in them. Mega hubs have over 100,000 SKUs. And delivery time, the assortment depth is, generally speaking, on the hard part side of the categories. So starters, alternators, fuel pumps, things of that nature. And as those parts get deployed closer to the commercial customer, instead of it taking, you know, three, four, six hours to get to that commercial customer, it may take, you know, 45 minutes or an hour to get there. So that lifts the market as you get those parts closer to the customer, and it also helps on DIY. They're great assets for us, and we like them.

Appreciate it. Thanks, Phil.

Thank you. Great question.

Your next question is coming from Greg Mellick with Evercore. Please pose your question. Your line is live.

Hi, thanks, guys. Two questions. Just wanted to dig a little deeper on the inflation deflation. I guess on commercial, we have the same skew, inflation and DIY. But why was do it for me deflationary? I think you said 70 or 80 bps in the quarter.

We've seen just continued pressure on the commercial side of the business. We try to watch our competitors there all the time, and it's a pretty small number, again, less than 1%, but we have seen a little bit more deflation on the ticket average on the commercial side of the business relative to the DIY. We do believe over time that those numbers will start to get back to more historic numbers, but it's not going to be a snapback. It's going to take multiple quarters. But I think the premise of your question, have we seen irrational behavior on the commercial side of the business, and the answer is no. We have seen some pretty significant inflation on, you know, like skew inflation on the commercial side of the business over the last several years, but ultimately that's moderated, and it's become slightly deflationary over the last quarter or two. We think that will return back to more normal historical trends over time.

Just to be clear, that do it for me number, that was an average ticket number. So that's really mix that's driving that rather than same skewed deflation on commercial.

That's correct. That's correct. Got it. It's a little bit of both, but you're correct.

Got it. So then my second question was, could you just level set us now on where your COGS come from, what percentage are imported, what come from China, what are indirect and indirect sales? as we figure out how this plays out into next year?

Yeah. I mean, we've never shared that externally. I can tell you we buy from all over the world. We sell, in a given year, roughly 500,000 individual SKUs, and product assortment comes from all over the world. Lots of it comes domestically, and tons of it comes from an international perspective. And our global sourcing team is very good at finding ways to reduce costs from those products products that come from overseas and, frankly, in the domestic arena as well. So it's a significant number, but I'll go back to what our merchants have done over the last decade is spent a lot of time diversifying both country of origin as well as having multiple suppliers in each category, and it allows us to be more nimble and reduce those risks of, you know, inflation and tariffs and all the other things that come with, you know, any sort of global sourcing activity.

Well, thanks and good luck, guys.

Thank you. Okay, I think that is our last call. We have one more? I'm sorry, we have one more.

Yes, you have one more. Your last question is coming from Scott Stemberg with Roth MKM. Please pose your question. Your line is live.

Great, and thanks for taking my question, guys. Thank you. I want to dig into the international side of the equation. I know everybody's focusing on the domestic piece, but can you maybe break out the sales growth or the performance by region, Mexico versus Brazil? And Mexico in particular, maybe just talk about what's driving that, what apparent meteoric growth that you're seeing there, and how do you expect that to play out for the rest of the year?

Our international markets, we don't break them out between the Brazil and the Mexico markets. We talk about them in total. But our international markets have been great for us. They're growing very quickly. Obviously, it's much more weighted towards Mexico than Brazil because of the store count. We have just over 100 stores in Brazil, and to Jameer's point earlier, we have over 800 in Mexico. But the reason we're seeing such great performance there is they're great markets, and we've exported a lot of the domestic strategies into those markets. We've also said the biggest opportunity for us to grow domestically is commercial, and it is the same on those international markets as well. And we like the strategies that we have in place, and we think they'll continue to accelerate both in store count and in productivity.

And then a follow-up. Have you ever disclosed what the DIFM versus do-it-yourself mix is in Mexico?

No, we have not.

Okay.

Got it.

All right, that's all I have. Thank you.

Okay, great. Thank you. All right, 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 are excited about our growth prospects for the year, but we will take nothing for granted as we understand our customers have alternatives. We have exciting plans that should help us succeed for the future, but I want to stress that this is a marathon and not a sprint. As we continue to focus on flawless execution, wow customer service, and strive to optimize shareholder value for the future, we are confident AutoZone will be successful. Finally, AutoZoners everywhere want to wish everyone a happy and healthy holiday season, and thank you for participating on today's call.

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.