AutoZone, Inc.

Good day everyone and welcome to AutoZone's 2025 Second Quarter Earnings Release Conference Call. At this time all participants have been placed on a listen only mode. If you have any questions or comments during the presentation you may press star 1 on your phone to enter the question queue at any time and we'll open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Brian Campbell. Sir, the floor is yours.

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 reformance. Please refer to this morning's press release and the company's most recent annual report on Form 10K 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 of the date made and the company takes no obligation to update such statements. Today's call also includes certain non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our press release.

Good morning and thank you for joining us today for AutoZone's 2025 Second Quarter Conference Call. With me today are Jameer Jackson, Chief Financial Officer, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the second quarter, I hope you had a chance to read our press release and learn about this quarter's results. If not, the press release along with slides complementing our comments today are available on our website .autozone.com under the Investor Relations link. Please click on the quarterly earnings conference calls to see them. As we begin today, we want to thank our more than 125,000 AutoZoners across the globe for their commitment to delivering on our pledge to always put customers first. Their contributions allow us to deliver the consistent performance we have enjoyed over many years. We can only succeed if we all work together to deliver our goals. First off this morning, I'll say the quarter played out the way we thought it might. We felt optimistic that our execution could drive sales increases. And we also believed we would experience winter weather earlier in the quarter than we did last year during our second quarter. Now let me highlight a few highlights from this quarter and give a little more color on our execution, the current environment, and our outlook. For the quarter, with our continued focus on what we call wow customer service, our total sales grew .4% while earnings per share decreased 2.1%. We delivered positive .9% total company same store sales with domestic same store sales growth of 1.9%. And our domestic commercial sales grew .3% and were up 10% on a two-year stack basis. International same store sales increased .5% on a constant currency basis. While our international business continued to comp impressively, we faced an approximate 1,900 basis points of currency headwind which resulted in an unadjusted negative .2% international comp. As you know, the US dollar has continued to have a negative impact on our reported sales, operating profit, and EPS. We expect this trend to continue for the remaining two quarters of this fiscal year. Jameer will provide more color on our foreign currency impact for the third and fourth quarters as well as the full fiscal year. In terms of execution, specifically related to our domestic commercial business, our focus on improving both availability and speed of delivery helped us significantly improve our year over year sales growth. We drove commercial sales up .3% versus up .2% in the first quarter. We believe the initiatives we have in place have a long runway and will drive further improvement. We are pleased with our efforts and execution thus far. Secondly, the environment did improve as we experienced winter weather earlier than we had the last couple of years. Due to a colder November and early December, our sales noticeably increased. Our domestic same store sales cadence was .3% in the first four weeks plus 2.8 in our second four weeks and a negative 1.2 over our last four weeks. This compares to the previous year's second quarter where domestic sales were a positive .4% in the first four weeks, a negative 4.9 in the second four weeks, and a positive 4.4 in the last four weeks. On a two-year basis, DAPCOMPS were a positive 5.7 in the first four weeks, a negative 2.1 in the second four weeks, and a positive 3.2 in the last four-week segment. It is important to point out that the Arctic cold that came early this year came later in the last four-week segment last year. That is why the last four-week segment was such a difficult comparison for us. Thirdly, the domestic comp variation over the four-week segment was driven by volatility in our retail business. In fact, for our domestic retail business, the last week of the quarter was by far the worst week with our DIY comp being down almost 7%. But it was understandable. That week, for much of the country, was very cold weather along with heavy snowfall and it hurt our customer traffic. That is what happens during the winter quarter which is always the most volatile. During the weeks where weather is extreme, our traffic softens significantly but returns once people are able to get back out to shop. We seem to capitalize on the pent-up demand. Our commercial comp, on the other hand, was much more consistent over the 12 weeks of the quarter. This consistency was very encouraging to us and informs us that we are on the right track to continue future commercial sales growth. While the macro environment has continued to force customers to be cautious with their spending, the consistency of our failure and maintenance business continued this past quarter. Weather in Q2 always had such a big impact on our results. With a winter that started earlier, we benefited this year from more failure-related part sales. Winter also causes discretionary categories to be a lower percentage of our sales mix. Now, let me make a few comments on our DIY business. Our domestic DIY results showed an improvement to last quarter as Q2's DIY comps were plus 0.1%. Our discretionary merchandise category continued to be the lowest performer across domestic DIY sales. For our second quarter, discretionary category sales were approximately 16% of our mix and they were down on a same-store sales basis. Our belief is that discretionary sales will continue to be pressured until the customer gets some economic relief and consumer competence improves. Our DIY comp was up .9% in the first four-week segment, plus 2% in the second four-week segment and down .3% during the third fourth-week segment. That compares to last year's Q2 DIY comps of .7% in the first four weeks, negative 6.2 in the second four weeks, and a positive 4.8 in the third fourth-week segment. With regards to inflation's impact on DIY sales, we saw both DIY average ticket and average -for-like same-skew inflation up slightly for the quarter. We continue to expect that inflation in our ticket will be up approximately 3% over time and 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 transaction count down approximately 1%. This too was better than the down .8% we experienced in our traffic trend for last quarter. While we do not have final share data for the last segment of the quarter, we were encouraged by the recent favorable share trends. We believe we have a -in-class product offering and service offering, and this gives us confidence that when customers return to their historical shopping habits, we will be the beneficiaries. Next, I'll speak to our regional DIY performance. We saw slightly weaker performance in the Northeast, Midwest, or Mid-Atlantic, sorry, and Rust Belt versus the rest of the country. These markets were up .5% versus .1% across the rest of the domestic markets as sales are heavily dependent on winter weather. Winter weather benefited these Northeastern and Rust Belt markets earlier in the quarter and our sales increased nicely during those times versus Q2 last year. However, the last week of the quarter was much weaker in the Northeastern and Rust Belt markets as they were down 10% versus the rest of the country being down roughly 1%. Again, weather created a lot of volatility during the second quarter of our fiscal year. We would expect our performance to improve as our customers are now able to get back out and shop. Next, I will touch on U.S. commercial business. Our commercial sales were up .3% for the quarter versus last year, and this compares to .2% total commercial growth in Q1 for commercial. The first four weeks of our 12-week quarter grew .8% due to the impact from winter weather previously discussed. The second four-week period grew .9% and the last four-week period grew 7.1%. Commercial was also impacted by the last week of the quarter due to the severe winter storm. More broadly, across the U.S., our commercial business grew at a slower pace in the Northeast and the Rust Belt versus the rest of the country. The spread was pronounced 600 basis points between the Northeast and Rust Belt versus the rest of the country as many of our customers closed their businesses while these storms rolled through these markets. We expect performance in the Northeast and the Rust Belt markets to improve over the remainder of the year as the colder winter weather has historically led to parts failures and increased maintenance as the summer goes along. While we have continued to see wide variations in performance across the more rather sensitive markets, we remain competent in our initiatives. We are very encouraged with our improved satellite store inventory availability, significant improvements in hub and mega hub stores' coverages, the 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 throughout the year. This quarter, -over-year inflation on a -for-like same-skew basis in our commercial business increased versus Q1, contributing to our average ticket growth of 0.5%. Lastly, while ticket growth was slightly positive, we were very pleased with the growth in our commercial transactions -over-year. Our sales growth will be driven by our continued ability to gain market share and an expectation that -for-like same-skew inflation will accelerate as the year moves along. For the quarter, we opened a total of 28 net domestic stores. We remain committed to more aggressively opening regular stores, hubs, and mega hub stores. Hubs and mega hubs, comps, continue to grow faster than the balance of the chain, and we are going to continually aggressively deploy these assets. In FY25, our openings will continue to be skewed to the back half of the fiscal year. For the third quarter, we expect both our DIY and commercial sales trends to improve as our comparisons become slightly easier and we gain momentum from our growth initiatives. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends emerge. Now, let me take a moment and discuss our international business. In Mexico and Brazil, we opened a total of 17 new stores in the quarter and now have 949 total international stores. As you can see from our press release, our same store sales were up .5% on a constant currency basis. While slightly below double-digit growth, we remain very positive on our growth opportunities in this market. Today, we have just under 13% of our total store base outside of the US and we expect this number to grow as we accelerate our international store openings. For the fiscal year, we expect to open around 100 international stores and we will accelerate our openings over the remaining two quarters of the fiscal 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 improving customer service, product assortment initiatives and our supply chain. We believe we are well positioned for future upswings in consumer demand. We are investing in both capex and operating expense at the right time for market share growth. I'd like to recognize all AutoZoners who helped to get our two new domestic distribution centers open this quarter. Both our California and Virginia DC will help us tremendously with the future parts needs of our customers. The Virginia distribution center will be AutoZone's largest DC and both DCs will deploy new technology and automation. We are very excited by the supply chain efficiencies these facilities will provide us. In summary, we have continued to invest in driving traffic and sales growth. This year, we expect again to invest more than one 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 customer service and our AutoZoner's ability to deliver on our promise of wow customer service. We believe this is exactly the right time to invest in these initiatives in order to grow market share now and be ready when industry demand ramps up. Now I will turn the call over to Jamir Jackson.

Thanks, Phil, and good morning, everyone. For the quarter, total sales were $4 billion and we're up 2.4%. Our domestic same store sales grew .9% and our international comp was up .5% on a constant currency basis. Total company EBIT was down .9% and our EPS was down 2.1%. As Phil discussed earlier, we had a headwind from foreign exchange rates this quarter for Mexico, FX rates weakened 19% versus the US dollar for the quarter, resulting in a $91 million headwind to sales, a $30 million headwind to EBIT, and a $1.22 a share drag on EPS versus the prior year. Excluding the FX headwind, we would have reported an EPS increase of .1% for the quarter. We continue to deliver solid results 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 Q2. And first, I'll give 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% to $1.1 billion. For the quarter, our domestic commercial sales represented 31% of our domestic auto parts sales and 27% of our total company sales. Our average weekly sales per program were $14,700, up .3% versus last year's second quarter. 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 27 net new programs, finishing with 5,962 total programs. Importantly, we continue to have a tremendous opportunity to expand sales per program and open new programs. We plan to aggressively grow our share of wallet with existing customers and add new customers. Mega Hub stores are a key component of our current and future commercial growth. We finished the second quarter with 111 Mega Hub stores. And we expect to open at least 19 more locations over the next two quarters. As a reminder, our Mega Hubs typically carry over 100,000 SKUs and drive a tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores. 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. While I mentioned a moment ago our commercial weekly sales per program average was $14,700 per program, the 111 Mega Hubs average significantly higher sales and are growing much faster than the balance of the commercial business in Q2. We continue to target having just under 300 Mega Hubs at full build out. Our customers are excited by our commercial offering as we deploy more parts and local markets closer to the customer while improving our service levels. On the domestic retail side of our business, our DIY comp was up .1% for the quarter. As Phil mentioned, we saw traffic down approximately 1% along with a positive 1% ticket growth. Our DIY comps were up 2% each of the first two periods and down .3% over the last four weeks as we were up against a difficult comparison from an extremely cold period a year ago along with very difficult DIY same-store sales the last week of the quarter. As we move forward, we would expect to see slightly declining transaction counts offset by low 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 and we are well positioned when the industry reaccelerates its growth. 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 the balance of 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 13 new stores in Mexico to finish with 813 stores, four new stores in Brazil, ending with 136. Our same store sales grew .5% on a constant currency basis and negative .2% on an unadjusted basis. We remain committed to international and we're pleased with our results in these markets. We will accelerate the store opening pace going forward as we're 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 and gross margins. For the quarter, our gross margin was .9% flat to last year. This quarter we had a $14 million or 36 basis points unfavorable lifehold comparison to last year. Excluding lifehold from last year's results, we had a 36 basis point improvement in gross margin driven by continued improvement in merchandising margins. As a result for Q3 last year, we had a $24 million credit. And while this Q3, we're not expecting to record any lifehold impacts. So at Q2 quarter end, we still had 19 million in cumulative lifehold charges yet to be reversed through our P&L. And as I previously said, once we credit back the 19 million through the P&L, we will not take any more credits as we will begin to rebuild an unrecorded lifehold result. So just a reminder, for Q3 last year, we had a $24 million credit. And Q3 this year, we're not expecting to record any lifehold impacts. Now let me take a moment and discuss the impact tariffs could have on our results. Recently, 20% tariffs were instituted on all SKUs purchased from China. Now there are several outcomes that may impact our go for results, including vendor absorption, diversifying sourcing, taking pricing actions, or some combination of the three. To be clear, we intend to maintain our margin profile post tariffs and we expect the entire industry will behave in a rational way as our historical experience has shown. Moving on to operating expenses, our expenses were up .4% versus last year as SG&A as a percentage of sales fee leveraged 134 basis points. On a per store basis, our SG&A was up .9% versus last year's Q2. While we're managing our SG&A spend in a slower growth environment in a disciplined way, we will continue to invest at an accelerated pace in initiatives that we believe will help us continue to gain share. These investments will pay dividends in customer experience, speed of delivery, and productivity. From our past experiences, we believe investing now at a reasonable pace is key 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 expenses in line with sales growth over time. Moving to the rest of the P&L, EBIT for the quarter was $707 million down .9% versus the prior year. As I previously mentioned, FX rates reduced our EBIT by $30 million. On a constant currency basis, our EBIT would have been down 0.9%. Interest expense for the quarter was $108.8 million, up 6% from Q2 a year ago, as our debt outstanding at the end of the quarter was $9.1 billion versus $8.6 billion a year ago. We're planning interest in the $110 million range for the third quarter of FY25 versus $104 million last year. Higher debt levels and borrowing rates are continuing to drive interest expense increases. For the quarter, our tax rate was .4% and down from last year's second quarter of .6% driven by one-time discrete items. This quarter's rate also benefited 239 basis points from stock options exercise, while last year it benefited 360 basis points. For the third quarter of FY25, we suggest investors model us at approximately .2% before any assumption on credits due to stock option exercises. And once again, we suggest investors model Q3 option exercises to be significantly less than Q3 last year, which had 479 basis points of benefit. Moving to net income and EPS, net income for the quarter was $488 million down .3% versus last year. Our diluted share count of 17.2 million was .3% lower than last year's second quarter. The combination of lower net income and lower share count drove earnings per share for the quarter to $28.29, down .1% for the quarter. As a reminder, the unfavorable FX comparison drove our EPS down $1.22 a share. Now let me talk about our free cash flow. For the second quarter, we generated $291 million in free cash flow versus $179 million last year in Q2. 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 for store was up .8% versus Q2 last year, while total inventory increased .4% over the same period last year, driven by additional inventory investment to support our growth initiatives. Net inventory, defined as merchandise inventory, is less accounts of payable on a per store basis, was a negative 161,000 versus negative 164,000 last year and negative $166,000 last quarter. As a result, accounts payable as a percent of growth inventory finished the quarter at .2% versus last year's Q2 of 118.8%. Lastly, I'll spend a moment on capital allocation in our share repurchase program. We repurchased $330 million of AutoZone stock in the quarter, and at quarter end, we had $1.3 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've brought back over 100% of the then outstanding shares 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 that will enable us to invest in the business and return meaningful amounts of cash to shareholders. So 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 as we remain focused on gaining market share and improving our competitive positioning in a disciplined way. As we look forward to the remainder of 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 gaining momentum and growing share. We 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 mentioned earlier in the quarter, foreign currency resulted in a headwind on revenue and EPS. If yesterday's spot rates held for Q3, then we expect an approximately $106 million drag on revenue, a $34 million drag on EBIT, and a $1.41 a share drag on EPS. And for our fourth quarter of FY25, we would expect a $101 million drag on revenue, a $37 million drag on EBIT, and a $1.53 a share drag on EPS. And finally, if rates remained at the current spot rates for the balance of the fiscal year of 2025, we would now expect a $356 million impact to revenues, a $118 million impact to EBIT, and a $4.82 a share impact to full-year EPS. And now I'll turn it back to

Phil. Thank you, Jameer. We are excited about what we are striving to accomplish for the remainder of FY25. We promise to continue to focus on improving our execution and delivering wild customer service. We are pleased with the progress we have made on our initiatives and feel our investments to grow sales are on track for the back half of the year. We are well positioned to grow sales across our domestic and our international store bases, with both our retail and our commercial customers. Our gross margins remain solid, and our operating expense is appropriately scaled for future growth. We continue to put our capital to work, where we'll have the biggest impact on sales and profits, and that is 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 continuing our momentum in our international markets. We believe we have a solid plan in place for the remainder of the fiscal year. We know our focus on parts availability and what we call wild customer service will lead to sales growth and gains in market share. We are excited to ramp up our efforts in calendar 2025. We are going to have a very busy remainder of our fiscal year, and we have to remain the execution machine we have always been. Fiscal 2025's top priorities are based on improving execution and wild customer service. We will continue to invest in the following strategic projects. Ramp up our domestic and international store growth. As discussed, our international teams posted same store sales comps on a constant currency basis of just under 10%, continuing several years of strong growth. Re-accelerate our new hub and mega hub openings, as we are planning 19 more mega hubs to open in the back half of the fiscal year. These stores do take time, but we are incredibly excited about their continued performance. And most importantly, re-accelerate our domestic commercial sales growth, which we are doing in a meaningful way. We are excited about what we can accomplish, and our AutoZoners are committed to delivering on our commitments in 2025. We believe AutoZone's best days are ahead of us. Now we would like to open the call for questions.

Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star one 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 participants please ask one question and one follow-up, then re-enter the queue. Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Brett Jordan from Jeffreys. Your line is live.

Hey, good morning, guys. Good morning, Brett. In the press release, you talked about operating expense deleveraged with investment to support growth. Was there anything beyond the accelerating store growth or hub openings that was investing? Is it technology, or could you talk about the SG&A spend in the quarter?

Yeah, we've talked pretty extensively about investing in a disciplined way in IT, which quite frankly is enabling growth in both DIY and commercial. Nearly every one of our growth initiatives is underpinned by some investments that we're making in technology. And that is a dynamic that's happened for the last few years or so. And we're pretty excited about that. It's helping us with speed. It's helping us with productivity. It's helping us with the customer experience. So a combination of investments that we're making in our commercial business to accelerate sales growth and all the things that we're investing in from an IT standpoint are the things that we think will give us a competitive advantage and enable us to grow sales in the future.

OK. And then a question on Mexico. I mean, obviously, varied under the FX. But as you build the store base down, there is sort of a tipping point where you start getting better leverage off the distribution expense and the investment being in the market where profitability accelerates. Is there sort of a number that you get to where you get an incremental benefit?

Yeah, I think there are a couple of things about our investments in Mexico. One is we're very pleased with the growth that we're seeing, both in terms of new store growth, but also with the same store sales that we're seeing from our existing stores. And so we're also investing there in a very disciplined way, not just in what we're seeing from an SDNA standpoint, but as we've talked about on previous calls, we're investing in distribution center capability that's going to help us in the future. One, get parts to the market faster and support the growing store base that we have there. So we're pleased with the profitability there. We're pleased with the growth prospects there. And the team there is executing in an exceptional way.

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

Hi, this is Lauren Ingham for Simeon. Thanks for taking our question. Our first one is we wanted to touch on the 1.9 domestic comp on a constant currency basis. You know, this is the strongest comp that the business has seen over the past several quarters. We were wondering if do you think this is driven more so by, you know, strategic initiatives within DIY and commercial weather, or are we seeing signs of improvement within the industry? Just how should we think about the 1.9 in context for the rest of the year? I

think it's a little bit of all of the above. You know, the weather was clearly a better year than we have had historically over the last two or three years. But I also we've spent quite a bit of effort over the last year really improving our execution at the store level, both on DIY and the commercial business. You know, we've been investing in growth opportunities around hubs, mega hubs and assortment. And we also have some some pretty significant fulfillment strategies specifically on the commercial side of the business that we're seeing nice progress on. And we think we have, you know, continued momentum for the long haul with some of those strategies being executed more frequently and expanding those opportunities. So it's showing up across both businesses. And we frankly feel like we have pretty good momentum going into the second half of the year.

Great, thank you. And our follow up is just on gross margins. You know, freight costs are picking up and there's some inflation concerns. I guess how can we expect this to impact gross margins in twenty five? Could this be offset by strength in merch margins? Just any color on the cadence of gross margins for twenty five would be helpful. Thank you.

All right, go ahead. Now, from a gross margin standpoint, you know, a couple of dynamics are happening. One is, you know, we're going to see some gross margin drag just because our commercial business is accelerating. And, you know, we like the fact that we're investing in commercial and we like the fact that we're accelerating that growth. So there's going to be a little bit of drag there from a gross margin standpoint. But one of the things that we've been really pleased with is that the actions that our merchants are taking to drive merch margin improvement is more than offset that that commercial mixed drag, if you will. So you'll have those dynamics happening. And then the only other comment that I'll make is I'll just to remind you again that we had twenty four million dollars of benefit booked in the third quarter. For life, which we're not expecting to repeat. So that will be a drag. But overall, the underlying gross margins are healthy. The teams are doing a great, great job. I think, you know, there there is some potential for inflation to come back into the market marketplace. And if that does happen, we'll respond accordingly.

Great. Thank you.

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

Hi, good morning. It's Christian Carley and I want for Chris, how should we think about the potential impact of tariffs this time, given the China tariffs had a long list of exclusions last time and as well, how should we think about your Mexico sourcing exposure and any comments on whether the suppliers with facilities in the free trade zones being held, they'll be impacted by tariffs that start today, if at all.

Yeah, that's it's a it's a great question. And I'll, you know, to be quite frank, I think some of this is still an unknown, specifically when it comes to your topic around exclusions. You're right. In 2016 and 17, there were several exclusions based on the categories, part types, depending on what the what the product was coming out of China. You know, we we have we have worked diligently since those original rounds of tariffs to do all of the activities you would expect us to do, try to multi source by category in multiple countries, moving. Vendors have done a lot of work to move manufacturing to various places that could still be lower cost. And we've we've negotiated with vendors to understand exactly what the free trade zone impacts would be. That's really challenging for us to understand. But we will continue to negotiate with vendors to try to improve our cost of acquisition of parts. And those conversations will continue. It's very fast moving, as you know, and to try to stay on top of it is difficult. But our merchants are doing a great job. I want to mention, you know, Jameer mentioned it just a second ago, our merch team, if you take out the life of impact, it's a pretty nice job of growing Mars gross margin last quarter. You know, we do have a bit of a headwind from a compare against last year's life of impact, but our merchant teams are doing a great job of working with the vendors to try to make sure that we keep our margin structure intact. And we believe we'll be able to do that because the industry has been rational with pricing for a very long period of time.

God, it's really helpful. And to follow up on the operating expenses, could you could you talk about to what degree is this just wrapping up the .F.M. reacceleration initiatives versus leaning into share, adding drivers and trucks, given one of your competitors closing stores and just how should we think about this going forward? Like is the step up structural or do you expect to lap these investments at some point?

Well, the step up is clearly intentional. We see opportunities to grow market share both in DIY and commercial, and we're investing in a disciplined way to be able to take advantage of that. And so, you know, that's meant making sure that we have assets and infrastructure in the market to take advantage of market opportunities as they present themselves. And then, as I mentioned before, on an ongoing basis, we have several growth initiatives that we've been working on and focusing on for several years. And quite frankly, a lot of that investment is in our organization and it's paying dividends for us in terms of speed and productivity and better customer experience. And so we're going to do that in a disciplined way and lean into the opportunities that are in the marketplace.

Got it. Thank you very much. Best of luck.

Thank you.

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

Hey, good morning. As you look back over the past year at flattish to negative DIY performance, curious to what extent you'd call out weakness at the lower income consumer as a driver. And as you look out over the next couple of quarters, is there any reason to believe that the lower income consumer could improve, you know, maybe gas prices, tax refunds? Or conversely, do you think headwinds from policy, immigration, etc. could drive more uncertainty there?

Yeah, I think I think that lowering consumer has been pressured for quite some time. You know, the massive inflation that we had over the last several years, you know, impacts that consumer the most. I also think they still have some inflation pressure coming at them. I mean, you probably we've all read the news and car inflation is still up significantly higher. So I think that the lower end consumer is under pressure and will continue to be under pressure. The one thing that I do think is positive is we believe that because of our improved execution, our assortment improvements, you know, our mega hub deployment, all of those things we've been working on over the last couple of years, we believe we will still gain share in this tougher market with consumer confidence. But eventually that will turn and we think we are well positioned to capitalize on it in the current market and as consumer confidence improves.

Got it. And then on the commercial business acceleration, could you talk through the performance of your national accounts versus independents and any differences in the relative performance there or maybe new business ads? And then, Jamir, in light of the progress, is it fair to call this high single digit growth level the right run rate for the business today?

Yeah, I'll talk specifically about our kind of our segmentation of commercial business. I'd say largely, you know, we're growing both in the what we call the up and down the street customer, you know, that's not the national accounts and all the branded national accounts. All those businesses are very good. The one business that we've talked about over the last couple of quarters that has been tougher for us would be, you know, the segment of segmentation of customers that are associated with, you know, new and used cars. That business is still pretty tough, but I think it makes sense. You know, interest rates are high. The consumer that bought a used car, you know, during the height of the pandemic, when used car prices had accelerated so much, they're probably still underwater. And if you're going to go out and get a new loan today, your loan value is probably higher today than it would have been back then. So those segments are pretty tough. But again, we feel really good about, you know, the standard shop use or new car or I'm sorry, national account up and down the streets, regional customers, those types of businesses are growing nicely for us.

Yeah. And what I'll say is that, you know, to Phil's point, our growth was broad based across, you know, our business in total. And it was pretty broad based across categories. So real underlying strength there in commercial. You know, we've talked historically on the second part of your question on where our growth rate will be for commercial. And what I'll say is that we've been investing in a very disciplined way to grow our share. And while our growth rates tapered off somewhat over the last several quarters or so, we still believe we've been growing share in that environment. I'll just remind you that, you know, we're roughly a five share and, you know, what's approaching one hundred and ten to one hundred fifteen billion dollar market and all the investments that we've made that Phil talked about the quality of our parts, the expanded assortments with our mega hubs, improving delivery times, leveraging technology, the things that we've done for pricing. All of those things give us a tremendous amount of confidence about our business moving forward. We have good momentum coming out of the second quarter. We're expecting a very strong second half of the year.

Thanks for the time.

Thank you.

Thank you. Your next question is coming from Seth Busham from Wed Bush. Your line is live.

Thanks a lot and good morning. Just want to follow up on the tariffs question. Jamir, I think you made a comment that you expect to maintain gross margin rate even with tariffs. What's the break point? In other words, if we do see 20 percent tariffs incrementally on Chinese sourced goods and 25 percent on Mexican sourced goods, you still think you can maintain margin rate? And what incremental on top of that would be the break point where you couldn't?

Yeah, as we mentioned, I mean, there are several outcomes that may impact our go for results, including vendor absorption of the higher costs, diversifying our sourcing, which we've done in the past, taking pricing actions or some combination of the three. But to be clear, we intend we intend to maintain our margin profile post tariffs, and we expect the entire industry will behave in a rational way, just as our historical experience has shown. So I don't know that there's necessarily a break point. I think we have a number of tools at our disposal, not lots of things that will negotiate and lots of past practices that, quite frankly, has resulted in us being able to maintain margins. And we're very confident in that as our go for position.

Got it. And my follow up question is just on SG&A. As you accelerate the investments here, what's the time frame that will normalize the growing SG&A in line with sales?

You know, we expect to invest at a pretty accelerated pace for the next few quarters or The opportunities that we see in the marketplace, both on the DIY side of the business and the commercial side of the business, suggest that we should be leaning in and investing at an accelerated pace. And we're going to do that over the next couple of quarters. And you should expect to see some acceleration in our comps as a result of that. We've been very disciplined about SG&A growth over time, and we've been able to manage the SG&A line in line with sales. And to the extent that, you know, comps don't materialize, then we know all the playbook that we need to run to manage that SG&A number down. But right now we see an opportunity and we're going to invest and we're going to do it in a disciplined way like we always have.

Thank you, guys.

Thank

you. Thank you. Your next question is coming from Kate McShane from Goldman Sachs. Your line is live.

Good morning. This is Mark Jordan on for Kate. You know, thinking about the domestic DIFM side of the business came in much stronger than expected for the quarter. You know, aside from weather, is there anything to call out from a regional standpoint? You know, maybe are you seeing any market share gains in any particular markets where competitors are closing stores?

I would say, you know, from a commercial perspective, the growth, as Jamir just mentioned, is very broad based. It's geographic. It's in the categories. And we think, yeah, there's going to be opportunities because of the said competitors, as you mentioned. But I think what is most impactful is what we're doing and how we're going to market today. Our execution is significantly improved on the commercial side of the house. We've done a great job with our outside sales team. We spent the appropriate time and effort training our folks, our autos owners. We've invested in assortment strategies. We've invested in our hubs and our mega hubs and we've spent considerable time over the last year working on strategic efforts to improve our delivery of parts to those customers, specifically hard to find parts. And I feel like we're in a really good spot. We've spent a lot of time and effort over the first two quarters this year being prepared for this summer selling season. And I believe we're we are where we need to be. If you think about how execution, what we talked about, for example, our in stock levels are bumping up against all time highs. Numbers we haven't frankly seen since the early 2020. We feel really good about where we are and we believe we have momentum going into the second half of the year.

Okay, perfect. And then just thinking about mega hubs, you know, 19 expected for the back half of the year. Can you talk about the timeline to open a location, you know, how long it might take and what we should think of as a good cadence for openings in the coming years?

No, it takes way too long as Phil continues to remind me every single day when we're dealing with these. And these are, you know, typically 30,000 square foot boxes that are difficult to find and it typically will take us a couple years to find it and get it open. But we're pretty pleased with where we are. You know, right now we have 91 mega hubs in the pipeline today and we're adding to that pipeline every day. Our teams and store development are doing a fantastic job of identifying these opportunities, working with our operations teams in the local markets. And we're pretty excited about the future prospects there. And as I mentioned a little bit earlier, we expect at full build out to have close to 300 mega hubs and that will serve as a tremendous lift for both our DIY and our commercial business.

Yeah, we continue to give Jamir a hard time. He's responsible for our store development team. And we did have a little bit of a lull coming into this year, but the pipeline is really healthy. And like you said, we hope to get 19 open between now and the end of the calendar year. And, you know, those help with all those strategies I mentioned just a minute ago. Assortment specifically on harder to find parts that are more impactful on the commercial consumer. They help DIY too, but it's a big impact on the commercial side of the house. And it also helps with speed of delivery and this fulfillment process that we've improved on. So we feel great about the second half of the year and the pipeline of those hubs and mega hubs is really strong and much better shaped than it's been over the last several years.

Great. Thank you very much. Thank you. Your next question is coming from Steve Forbes from Guggenheim. Your line is live. Good morning.

Maybe just a follow up on on the DIFM performance and it might be a difficult question to answer, but it's really nice to see the growth with an average weekly sales per commercial program. And you guys sound really excited about some of the initiatives, whether it be delivery time, deeper assortment, etc. So I don't know if you can maybe help us reframe like how we should be thinking about the evolution of that core KPI or metric on a go forward basis. Maybe, you know, like, what is the range right of between the lowest productive program versus the highest productive program or is there sort of like a longer term target to think about, you know, as we see those commercial programs maturing, like, you know, sort of what what could help you provide all of us with greater conviction around sort of what that longer term opportunity is as you see these investments maturing.

Yeah, I think the biggest opportunity, the way we think about it. There's there's wide variation in store performance from the low to the high. I mean, significant variances. The way we think about it is We have 5% share in an enormous market and lots of room to grow. You know, add us add up all the public competitors, us, Advance, O'Reilly, Napa, you just barely get over 20% of the available market share. That means there's, you know, 75 to 80% that's available for all of us to go take share of wallet and share of customers. That's the way we think about it. The opportunities are so enormous. We just need to figure out how to how to efficiently get better each and every day and gain market share with those customers. And it's, it's a wide variation. Those customers all have different needs as well. And we go to market very specifically on each one of those types of customers. But again, 5% share is our current opportunity. And that's the way we think about it.

Maybe just a follow up on that. You know, as we think about delivery times, because I think you guys were sort of leaning into some initiatives to improve delivery time specifically. And it would help frame sort of, you know, some learnings or success stories that you guys have seen and it is that result Increasing number of delivery windows right, you know, at the local level or where we just sort of in, you know, how the market response is to the improved delivery window promise that AutoZone is going to market with

The so essentially what we've done with our, you know, fulfillment and things of that nature is We have changed the strategy we've used. I used a lot of Technology to help us improve our delivery time specifically on the harder to find parts. The challenge in this industry is and probably always will be Where is the part how quick does that part move and how soon does that shop need to part and we think we've spent a lot of time over the last 18 months. Improving that algorithm and improving the way we go to market and how we deliver those parts to the customer again leveraging technology and We think we're much better than we were. We still frankly think there's an opportunity to get better. So these these projects are relatively new and we believe they have a long maturity curve and we believe we will continue to optimize them.

And a big enablement to that is what we've done with our hubs and our mega hubs. You know, two things that are really clear about, you know, what we've done in the commercial businesses. We've made a Commitment and have a concerted effort to jam more parts in the local markets closer to customers. And by doing that and leveraging the technology as Phil has mentioned that's enabled us to improve our value prop to all of the customers that we're serving and the ones that we're going to serve in the future. And so deploying those assets leveraging technology is a winning formula. And we know that in the commercial side of the business. If you have parts availability and you can get them there fast, you have an opportunity to grow your market share. And that's where we're focused.

Great.

Thank you.

Thank you. Your next question is coming from David Bellinger from the zoo. Your line is live.

Hey guys. Good morning. Thanks for the question. Maybe just a clarification on an earlier one. But are you seeing anything in terms of the immigration policy or there are certain markets that have ticked down similar to what occurred back in mid 2017 Is it getting worse in recent weeks and anything can share on quarter to date trends being impacted would be helpful.

Yeah, great. Great question. To date, and this is still early, but to date, I don't think we can show anything empirically that says that, you know, quote unquote that high the Hispanic hibernation that happened back in 2016 and 17 is happening and materialized. We don't see anything empirically that would say that But, you know, we have lots of stores in and around the border on both sides of the border and nothing at this point would would indicate that there's something like that going on.

Okay, appreciate that. And then just switching topics on the new distribution centers, including some automation in those facilities. Can you help us with any details on the benefits you expect to see how should those layer in as volumes ramp up and do you now have an opportunity to go back and retrofit some of the older buildings with automation.

That's a that's a great question. One of the questions that I'm asking our supply chain teams all the time is how do we continue to leverage some of the new technology that's going into our into our newer distribution centers. Two of the things that happen in both of these facilities that are opening is we've talked about them at various times is A direct import facility, the Virginia DC will have an additional direct import facility for the eastern half of the United States. And the child chilla California distribution center will institute some of this. What we call long tail distribution, the slower moving parts so that we're able to keep in stock and replenish those stores on this slower moving merchandise faster. Both of those technology elements are in those two DCs. We're still retro retrofitting is the wrong word, but we're still ramping up automation in our Redlands. Direct import facility. So all of these elements, we believe, will help us improve efficiencies in our supply chain and distribution nodes over time, which will help us leverage that supply chain expense and ultimately get parts faster to our stores. So lots of opportunity.

Great. Thanks very much.

Thank you.

Thank you. Your next question is coming from Scott. Chikarelli from truest. Your line is live.

Hey, good morning. This is Josh young on for Scott. So with the potential for new car prices to move a lot higher given tariffs. How much of an impact. You guys think that could have on your business and calendar 25 as consumers potentially focus more on repairing their existing vehicle as opposed to buying something new.

I still early to tell what the calendar 25 benefit would be, if any. But, you know, what we know over time is that when new car prices get expensive or used car prices get expensive. Consumers tend to hang on to their vehicles a little bit longer repair the vehicles that they have to ride to the other side of a tougher economic situation. We've seen that historically in the business, we would expect that to be the case. So, You know, still early innings in terms of what it's going to mean for pricing and what it's going to mean for consumer behavior. But generally speaking, higher prices in new and used. Ultimately ends up being a tailwind for our business.

Yeah, I think that two of the other key elements and KPIs that are impactful for the aftermarket auto parts are How long to car stay on the road and we're up at 12.6 years probably going to be over 14 I would suggest over the next couple of years and miles driven and those two appear to be tail winds that don't appear to be slowing down. We like the age of the vehicle and miles driven and they continue to both increase. Which are healthy for the industry. That's

helpful.

Yep. Thanks guys. I think we have time for one more call.

Absolutely. Our last question is coming from Brian Nagel from Oppenheimer. Your line is live.

Hi guys. Good morning. Nice quarter. Congratulations. Thank you. Thanks Brian. So the first question I have, I want to bounce back to tariffs and I know it's been addressed a bit already, but But the question I want to ask, this is we look at this new, you know, this latest tariff news, which could be substantial. Is your, so to say, testing, is your, you know, constantly evaluating a business. Is anything changed here from your standpoint to suggest maybe a different elasticity of demand, you know, particularly with the consumer overall, you know, by other indications, maybe more inflation wary than they have been in the past.

Yeah, I mean, you know, from our vantage point, again, when you think about our business, the lion's share of our business is relatively inelastic. And so, you know, to the extent that the consumer feels additional pressure as it relates to tariffs, then we would expect that the lion's share of our business will continue to perform in a way that it has historically. You know, obviously more discretionary parts of retail, including in our own business, come under pressure when there are, you know, hyperinflation scenarios, but we would expect that the lion's share of our business will perform just fine.

I think one other thing to think about is we're not importing vehicles. So 10%, our average ticket at the end of the day is relatively low, you know, 10% on a $30 item. Three bucks. It's not like it's a, you know, 60, $70,000 automobile or a large piece of furniture or something of that nature. The average ticket is relatively low. Yes, that bottom end consumer has been under pressure and this could potentially put more pressure on them. But to Jameer's point, it's break fix for the most part, or maintaining a vehicle that you believe you probably are going to have to keep longer than you would have thought two years ago because of interest rates. I think those at the end of the day are industry tailwinds that are positive for us.

That's helpful. Very helpful. The second question I have with respect to weather. So, you know, we have erratic weather. It seems as though looking at your results here that you capitalize on, you benefit from that. I guess the question I have is what was the nature of that demand? Was it weather related demand here in the period incremental? Did it potentially come at the expense of sales in future periods? And then conversely, as we've seen in the past when you have these harsh weather periods, it actually can lead to better sales down the road. So I guess maybe contextualize the weather dynamic here and how that's affected sales.

Yeah, great question. I think you're thinking of it right. Certain categories when you get these extreme cold events or hot events will accelerate. Think batteries in the cold as an example gets cold outside. Your car won't start. Conversely, heat when it's really hot and, you know, the southern markets in the summer air conditioning spikes. So those two are true. The other thing that happens with cold weather, specifically harsh cold weather in the Northeast, you know, mid Atlantic Midwest. When you get cold precipitation, salt on the road, you also have lingering effects that show up later in the spring and summer with people replace brakes, suspension parts have to take all the hard hits from potholes in the road. Those things all become true when you have these harsh winter months and that impacts some other categories later in the year, which the failures don't show up immediately. They show up over time or they become maintenance where somebody may replace the brakes because, you know, their suspension parts are rusty and not making noise or not stopping brakes as well as they did prior. So I think you're thinking about it correctly.

I appreciate it. Thank you.

Great. So in closing, before we conclude the call, I want to take a moment and reiterate that 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 will 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 and strive to optimize shareholder value for the future, we are confident AutoZone will be successful. Thank you for participating in today's call.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.