AutoZone, Inc.

Greetings. Welcome to AutoZone's 2025 Q3 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. 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. The reconciliation of GAAP to non-GAAP financial measures can be found in our press release.

Thank you. Good morning. I will now turn the conference over to your host, Phil Danielle, CEO at AutoZone. You may begin.

Good morning, and thank you for joining us today for AutoZone's 2025 third quarter conference call. With me today are Jameer Jackson, Chief Financial Officer, and Brian Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the third quarter, I hope you had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with slides complementing our comments today, are available on our website, www.AutoZone.com, under the investor relations link. Please click on the quarterly earnings conference call to see them. I want to thank our more than 125,000 AutoZoners across the entire company for their commitment to delivering on our pledge to always put customers first. Their contributions allow us to deliver the consistent performance we have been able to enjoy. We can only succeed if we are all working towards the common goal of outstanding customer service. To get started this morning, let me address our sales results. Coming into the quarter we were optimistic that our improved execution would drive sales growth for both retail and commercial. More specifically, We felt the momentum we gained last quarter with our domestic commercial sales would continue this quarter. We are very pleased that our domestic commercial sales grew 10.7% for the quarter, marking our first double-digit quarter for commercial growth since the second quarter of FY23. We also cleared another milestone. For the first time on a rolling four-quarter basis, we eclipsed the $5 billion sales mark on commercial. Our domestic retail comp was just north of 3%, which is the best retail growth we have reported since the second quarter of FY22. Finally, our international constant currency comp remained solid, up 8.1% for the quarter. We are encouraged by our sales results and our momentum as we start our fourth quarter. Now, let me touch on a few highlights from the quarter, and then I will give you 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 5.4%, while earnings per share decreased 3.6%. We delivered a positive 5.4% total company same-store sales on a constant currency basis, with domestic same-store sales growth of 5%, our domestic DIY same-store sales growth of 3%, while our domestic commercial sales grew 10.7%. Our international same-store sales were 8.1% on a constant currency basis. While our international business continued to comp impressively, we faced over 17 points of currency headwind, which resulted in an unadjusted negative 9.2% international comp. As you know, the stronger US dollar has continued to have negative impact on our reported sales, operating profit, and EPS. We expect this trend to continue this quarter. Jameer will provide more color on our foreign currency impact on our financial results for both this past quarter and the fourth quarter. Specifically, related to our domestic commercial business, our focus is on improving execution, expanding parts availability, and improved speed of delivery. These initiatives include initiatives helped us significantly improve our year-over-year sales growth. Commercial sales were 10.7% year-over-year versus up 7.3% in the second quarter and up 3.2% in the first quarter. We believe the initiatives we have in place have a long runway and will drive strong results in future quarters. We are pleased with our efforts and our execution thus far. Next, we found the quarter's cadence to be somewhat predictable with the tax refund season's normal impact on sales. Our domestic same-store sales cadence was 6.7% in our first four weeks of the quarter, 5.1% in our second, and 3.1% over the last four weeks. The variation being driven by our domestic DIY business with cooler, wetter weather and and the Easter holiday shifting into our last four weeks versus last year, falling in the middle four-week segment. Our commercial comp, on the other hand, was more consistent over the 12 weeks of the quarter. This consistency was very encouraging as we build towards future commercial sales growth. Overall, we are encouraged to see the sales acceleration from this past quarter. Now, let me make a few comments on our U.S. DIY business. While the macro environment and the uncertainty around tariffs have forced customers to be cautious with their spending, the consistency of our failure and maintenance businesses continued this past quarter. We saw an improving trend in our maintenance and failure categories on a year-over-year basis. Discretionary categories, the smallest part of our business, have been under pressure for several quarters now. Historically, when our consumer is under pressure, our maintenance and failure categories begin to outperform discretionary categories. Our DIY comp was up 6.2% in the first four-week segment, 2% in the second, and up 1% during the last segment. This compares last year's Q3 DIY comps of negative 2.2 in the first four-week segment, positive 0.1 in the second, and negative 0.7% in the last segment. With regard to inflation's impact on DIY sales, we saw both DIY average ticket and average like-for-like skew inflation up approximately 1% for the quarter. We continue to expect inflation in our ticket to 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 traffic up approximately 1.4%, which significantly improved versus the down 1% we experienced in our traffic trend last quarter. We continue to see data that confirms we are gaining share, and we are encouraged by our most recent trends. We believe we have a best in class product and service offering, and this gives us confidence we will continue to win in the marketplace. Next, I will speak to our regional DIY performance. We saw weaker performance in the South Central and Western United States. While still showing positive trends, these markets were not quite as strong as the other markets. It was a nice sign for us to see the Northeast and the Rust Belt outperforming for the first time in a while. In fact, outperforming by 250 basis points from the rest of the country. We believe this is a sign of the colder winter and favorable spring weather benefiting us with pent-up demand now leading to better sales for the spring and the summer. Next, I will touch on our U.S. commercial business. Our commercial sales were up 10.7 for the quarter, and this compares to Q2's plus 7.3% total commercial growth and Q1's 3.2% growth. For commercial, the first four weeks of our 12-week quarter grew 9.3%. The second four-week segment grew 13.6%, and the last segment grew 9.3%. Again, the Easter shift allowed us to outperform in the middle of the quarter. More broadly, across the U.S., our commercial business grew at a slower pace in the Northeast and the Rust Belt markets versus the rest of the country. The spread was over 200 basis points between the Northeast and the Rust Belt versus the rest of the country. This underperformance in those regions doesn't surprise us, as the colder winter weather doesn't show up with jobs to be done at the commercial accounts until later in the summer. There is normally a lag with commercial sales versus what we see in our DIY business. We continue to 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 as the summer goes along. While we have continued to see variation in performance across these more weather-sensitive markets, we remain competent in our initiatives. We are very encouraged with our improved satellite store inventory availability, significant improvement in hub and mega hub store coverage, the continued strength of our Duralast brand, and improved execution on our initiatives to improve speed of delivery and customer service. All of these initiatives give us competence as we move through the year. Year-over-year inflation, on a like-for-like skew basis for commercial business was basically flat and did not contribute significantly to our average ticket growth of approximately 1%. Lastly, we are very pleased with our growth in the commercial transactions year over year, with traffic up almost 9.8% on a same-store basis. 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 as we move forward. For the quarter, we opened a total of 54 net domestic stores. We remain committed to more aggressively opening satellite stores, hub stores, and mega hubs. Hubs and mega hubs comp results continue to grow faster than the balance of the rest of the chain, and we are going to continue to aggressively deploy these assets. For the remainder of the year, we expect our store openings to continue to ramp. For our fourth quarter, we expect both DIY and commercial trends to remain solid 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 we see trends emerge. Now let me take a moment to discuss our international business. In Mexico and Brazil, we opened a total of 30 new stores in the quarter and now have 979 international stores. As you can see from our press release, our same stores grew at 8.1% on a constant currency basis. We remain competent in our growth opportunities in these markets. Today, we have 13% of our total store base outside of the US and expect this number to grow as we accelerate our international store openings. With 58 international stores opened year to date, we continue to expect to open around 100 international stores this fiscal year. In summary, we have continued to invest to drive traffic and sales growth. 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, which all position us well for future growth. We are investing both capex and operating expense to capitalize on these opportunities. This year, we expect to again invest approximately $1.3 billion in CapEx in order to drive our strategic growth priorities. As a large part of our CapEx budget for this year, we are investing in accelerated store growth, specifically hubs and mega hubs, placing inventory closer to our customers. We have also opened two new distribution centers this year while utilizing our existing distribution centers to drive efficiency and reduce supply chain costs. and we are investing heavily in technology to improve customer service and our auto zoners' ability to deliver on our promise of wow customer service. This is the right time to invest in these initiatives as we believe industry demand will continue to ramp. Now I will turn the call over to Jameer Jackson.

Thanks, Phil. Good morning, everyone. Let me start by saying we had a strong sales quarter. Total sales were $4.5 billion and were up 5.4%. Our domestic same-store sales grew 5%, and our international comp was up 8.1% on a constant currency basis. Total EBIT was down 3.8%, and our EPS was down 3.6%. As Phil discussed earlier, we had a headwind from foreign exchange rates this quarter. For Mexico, FX rates weakened nearly 20% versus the U.S. dollar for the quarter, resulting in an $89 million headwind to sales, a $27 million headwind to EBIT, and $1.10 a share drag on EPS versus the prior year. excluding the FX headwind, we would have reported an EPS decrease of 0.6% for the quarter. We continue to be proud of our results as the efforts of our autozoners 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 Q3. And first, I'll start with a little more color on our sales and growth initiatives. Starting with our domestic commercial business, our domestic DIFM sales increased 10.7% to $1.3 billion. For the quarter, our domestic commercial sales represented 32% of our domestic auto parts sales and 28% of our total company sales. Our average weekly sales per program were $17,700, up 8% versus last year. 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 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 49 net new programs, finishing with 6,011 total programs. Importantly, we continue to have a tremendous opportunity to both expand sales per program and open new programs. We plan to aggressively pursue growing our share of wallet with existing customers and adding new customers. Megahub stores are a key component of our current and future commercial growth. We opened eight Megahubs and finished the third quarter with 119 Megahub stores. We expect to open at least 10 more locations over the next quarter. As a reminder, our Megahubs 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. 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. While I mentioned a moment ago that our commercial weekly sales per program grew 8%, the 119 mega hubs are growing much faster than the balance of the commercial business in Q3. 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 in local markets closer to the customer while improving our service levels. On the domestic retail side of our business, our DIY comp was up 3% for the quarter. As Phil mentioned, we saw traffic up 1.4% along with a positive 1.5% ticket growth. Over time, we expect to see slightly declining traffic 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, and we're well positioned for future 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, We'll continue to drive a resilient DIY business environment for the balance of 2025. 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 25 new stores in Mexico to finish with 838 stores and five new stores in Brazil, ending with 141. Our same store sales grew 8.1% on a constant currency basis and negative 9.2% 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 moments on the rest of the P&L and gross margins. For the quarter, our gross margin was 52.7%, down 77 basis points versus last year. This quarter, we had an $8 million net or 21 basis point unfavorable LIFO comparison the last year. Excluding the LIFO comparison, we had a 56 basis point headwind to gross margins. The results were impacted by similar basis point headwinds from higher commercial mix, both domestically and internationally, domestic shrink, and new U.S. distribution center ramp-up costs, which more than offset solid merchandise margin improvement. We anticipate that the headwinds from shrink in the U.S. distribution centers will largely abate in Q4, and merchandise margin improvement will mute the commercial mixed drag. This quarter, we took a $16 million LIFO credit to the P&L as freight costs have continued to trend lower from their peak. At Q3 quarter end, we still had $3 million in cumulative LIFO charges yet to be reversed through our P&L. And as I've said previously, once we credit back the $3 million through the P&L, we will not take any more credits as we will begin to rebuild an unrecorded LIFO reserve. As a reminder, for Q4 last year, we had no LIFO credits, and we expect no credits in Q4 of this year. I would like to take a moment and discuss the impact of tariffs on our results. For this past quarter, we saw minimal impact from the implementation of tariffs. Going forward, there are several outcomes that may impact our results from tariffs, including vendor absorption, diversifying sourcing, taking pricing actions, or some combination of the three. Currently, we expect these actions to offset any Q4 tariff costs, and not have a material impact on our gross margins. To be clear, we intend to main 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 8.9% versus last year, as SG&A as a percentage of sales deleveraged 108 basis points, driven by investments to support our growth initiatives and an increase in our self-insurance expense. On a per store basis, our SG&A was up 5.1% versus last year's Q3. We have been investing in SG&A in order to capitalize on opportunities to grow our business now and in the future. 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. We will remain committed to being disciplined on SG&A growth, and we'll manage expenses in line with sales growth over time. Moving to the rest of the P&L, EBIT for the quarter was $866 million, down 3.8% versus the prior year. As I previously mentioned, FX rates reduced our EBIT by $27 million, while unfavorable LIFO comparisons reduced EBIT growth by another $8 million. Adjusting for the unfavorable LIFO comparison and reporting on a constant currency basis, our EBIT would have been up a tenth of a percent versus the prior year, which is below our normal performance, driven by the gross margin and SCNA drivers I mentioned earlier. Interest expense for the quarter was $111 million, up 6.6% from a year ago, as our debt outstanding at the end of the quarter was $8.9 billion versus $9 billion a year ago. We were planning interest in the $146 to $149 million range for the fourth quarter of FY25 versus $144 million last year on a 16-week basis. Higher borrowing rates are continuing to drive interest expense increases. For the quarter, our tax rate was 19.4 percent, and up from last year's third quarter of 18.1 percent, driven primarily by higher stock option expense benefit last year. This quarter's tax rate benefited 301 basis points from stock options exercise, while last year it benefited 479 basis points. For the fourth quarter of FY25, we suggest investors model us at approximately 23.2 percent before any assumption on credits due to stock option exercises. Moving to net income and EPS, net income for the quarter was $608 million, down 6.6% versus last year. Our diluted share count of 17.2 million was 3.1% lower than last year's third quarter. The combination of lower net income and lower share count drove earnings per share for the quarter to $35.36, down 3.6% for the quarter. As a reminder, the unfavorable FX comparison drove our EPS down $1.10 a share. Now let me talk about our free cash flow. For the third quarter, we generated $423 million in free cash flow versus $434 million last year in Q3. 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 6.7% versus Q3 last year, while total inventory increased 10.8% over the same period last year, driven by new stores and additional inventory investment to support our growth initiatives. Net inventory, defined as merchandise inventories less accounts payable on a per store basis, was a negative $142,000 versus negative $168,000 last year and negative $161,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 115.6% versus last year's Q3 of 119.7%. Lastly, I'll spend a moment on capital allocation in our share repurchase program. We repurchased $250 million of AutoZone stock in the quarter, and at quarter end, we have $1.1 billion remaining under our share buyback authorization. Our ongoing strong earnings balance sheet and powerful free cash continues to allow us to deliver 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. 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 handling the callback to fill, 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 Q4, then we expect an approximate $50 million drag on revenue, a $20 million drag on EBIT, and an approximate 80 cents a share drag on EPS. And now I'll turn the call back to Phil.

Thank you, Jameer. We are on track for the remainder of FY25 to accomplish our goals. We are committed to continually focus on improving our execution and driving WOW customer service. We feel we are well-positioned to grow sales across our domestic and and our international store bases with both our retail and our commercial customers. We expect to manage our gross margins effectively, and our operating expense is appropriate for future growth. We continue to put our capital to work where it will have the biggest impact on our sales, our stores, specifically our hubs and mega hubs, our distribution centers, and investing in technology to build a superior customer experience where we are able to say yes to our customers' needs. The top focus areas for this last quarter of fiscal 25 remain growing share in our domestic commercial business and continuing our momentum in our international markets. We are excited to get started on our fourth quarter. We understand we cannot take things for granted. We must remain laser focused on customer service, execution, and gaining share in every market in which we operate. Fiscal 2025's top operating priorities are based on improving execution and wow customer service. We will continue to invest in the following strategic projects, accelerating our domestic and our international store growth, re-accelerating our new hub and mega hub openings. These stores do take time, but we are incredibly excited about their continued performance. And most importantly, remain diligent, driving 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 for FY25. We believe AutoZone's best days are ahead of us. Now we would like to open up the call for questions.

Certainly. At this time, we will be conducting a 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 two 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.

One moment, please, while we poll for questions.

Your first question for today is from Brett Jordan with Jefferies.

Hey, good morning, guys. Good morning, Brett. Good morning, Brett. Could you just give us a quick refresher as it relates to the tariffs, source of origin for your primary import countries, and how much is direct import versus via a third-party supplier? And then a quick follow-up to that.

Yeah, sure. I mean, the biggest net importer where most of our product comes from is China. I will say that we've taken that number down pretty significantly over the last couple of years, specifically since the first round of tariffs back in 2016. But we get product out of many Far East countries. We get a little bit of product out of Europe, mostly Eastern Europe, and then we get some out of Mexico. That would be where the vast majority of those come from.

Okay. And I guess as far as direct import versus buying from a doorman or somebody who might be making the initial Chinese imports,

Yeah, I mean, we obviously have, we do a lot of that from, we take product from domestic suppliers, both FOB or direct import, and we buy domestically. I've never really said exactly what our mix is, but, you know, the question, I think, your real question is how do we think we're going to manage tariffs? And we feel like we have our arms around it, even though it's changing every day. It's not nearly as impactful as it appeared it was going to be several months ago. And, you know, as Jameer mentioned a minute ago, There's lots of strategies to try to mitigate the cost of tariffs through vendor negotiations, diversification of country of origin, diversification of suppliers, pricing actions, and a combination of all of those.

I think as a follow-up, you talked about the 1% inflation sort of trending towards a 3%. Is that 3% assuming pricing pass-through, or would tariffs be incremental to that expectation of a higher low single-digit inflation rate?

Yeah, I think if you think about what's happened with our average ticket over the last, you know, 12 to 18 months, it's been relatively flat coming off of several years of what I would consider hyperinflation. You know, if tariff costs ultimately do materialize, I would think we would probably get back closer to that 3% average ticket growth. And that would be more of a long-term average ticket growth based on technology enhancements and, frankly, quality of parts.

Great. Thank you. Appreciate it.

Your next question is from Christopher Horvers with JP Morgan.

Thanks, guys. Good morning. Sort of a follow up there first on the tariff. Is it that the inflation is not here yet because people pause shipments coming out of China and it's just a slow inventory turned business? Or is there more of an effort here to perhaps have the cost be absorbed into the supply chain?

I think one of the reasons that you haven't seen a lot of the tariff cost in our side of the business is, as you mentioned, most of our inventory turns relatively slow compared to many other industries, hard parts in particular. And that product just hasn't shown up here in the country. And as you know, this stuff has changed pretty significantly over the last 90 days or 120 days. I mean, there will be an impact to tariffs on the cost of goods. But again, as we've mentioned, we think there's lots of ways to mitigate that cost. And and maintain our margin structure over time.

Understood. And then, you know, on the margin front, Jameer, can you talk about the persistence of some of these costs, like the shrink and the self-insurance costs? Like how do you think about what gross margins look like as we move forward and then similarly on the SG&A per store side? And sorry, one additional one, which is can you break out the monthlies? X to East are shipped, and then just for that, so we have a clearer view of the cadence over the quarter.

Yeah, so just on the gross margin, as we said, it was driven by Frank. Our DCs are ramping up, and we obviously have higher costs as those DCs ramp up and we get to the ongoing productivity rates. And then the positive there, although it's a negative from a mix standpoint, is that our global commercial mix is growing, and that's driven by the work that we're doing to grow our commercial business. What I'll say is that the DC ramp-up and the shrink pressure will abate, and merge margins should largely offset our commercial mix pressure. So from a gross margin standpoint, we would expect those gross margins to be down slightly in Q4, given all of those dynamics, as opposed to being down 56 basis points, ex-LIFO, as we saw this quarter. On the SG&A front, I just want to reiterate that we're growing SG&A in a disciplined way to create a faster-growing business. We deleveraged this past quarter. About half of that deleverage was driven by self-insurance. As our commercial business grows, we put more delivery vehicles on the road to support that commercial growth. Obviously, you're going to have more incidents. And then we also settled some outstanding claims that were longer in nature where we saw a spike in incidence and severity primarily in the 21 to 22 kind of timeframe. But what I'll say about SG&A is that, you know, we're continuing to invest in a disciplined way on all the things that are going to drive growth for us. And those things are paying off in a higher top line. And as you've seen our business in the past, you know, to the extent that the top line doesn't show up, we obviously know how to go to the middle of the P&L range. to drive the margins that we need to make sure that we're driving the earnings that we have. So I feel good about where we are. I think, you know, the execution is great. We're being intentional about the investments that we're making. And I feel great about the growth prospects that we see in the future behind all of those investments that we've made this far.

Great. And then the, can you give us the four week cadence X Easter shift? So we can understand that better.

Yeah, we typically don't break that out. What I'll say to you is that if we think about our business in total, from a commercial standpoint, you heard Phil kind of walk through the quarter. Commercial was pretty steady growth across each of the four-week segments with a little bit of a pop in the middle because of the Easter shift. And then on the DIY side of the business, more so than the Easter shift, the story really is about the share that we're regaining there. And while we did see a little bit of an Easter shift in the middle of the quarter, what we're encouraged by is the opportunity to win share and the execution that we're seeing by our folks in the stores.

Great.

Thanks so much.

Your next question is from Simeon Gutman with Morgan Stanley.

Hi, this is Lauren Eng on Versimian. Thanks for taking our question. Our first one is on the 5% domestic comp, you know, which is the strongest we've seen over the past two years, so well done on that. Could you just comment on what kind of comp list you're seeing from maybe your own initiatives and market share gains versus the underlying market demand?

Yeah, thank you for the question. I think, you know, we're seeing share gains, you know, across the board, all across the country in both DIY and commercial. And I would say, yeah, there's obviously some macro that's going on, but we feel like the vast majority of our growth is coming from the initiatives we have in place. Improved execution, driving hub and mega hubs into our markets, continually improving our assortments, both in the U.S. and in our international markets. And we think those are helping us improve on all elements of our operations and causing us to gain share, both on the DIY side and internationally. faster share on the commercial side.

Great. And then our next follow-up is on the improvement in the commercial comps. It seems like you guys are continuing to take market share nicely there. Could you comment maybe what you want to continue focusing on in the upcoming quarters? Yeah, thank you.

Okay. You know, as we've said, the strategy is not a whole lot different than we've talked about over the last couple of quarters. We continue to improve our assortments at our local store We continue to deploy our hubs and mega hubs and refining those assortments, both for DIY customers and the commercial customers. And we've also been working on some strategies to improve delivery time and speed of delivery, what we call time to shop for our commercial deliveries, changing some of our fulfillment methodologies from our hubs and mega hubs to get to the customer faster. We think all of those are creating a better customer experience. and causing us to grow both new customers and share of wallet with those commercial customers.

Great. Thank you.

Your next question is from Michael Lasser with UBS.

Good morning. Thank you so much for taking my question. So do you think the cost of doing business within the aftermarket has gone up such that in the past AutoZone might have been able to grow its

Overall top line is single digit and leverage back to double digit EPS growth. And now that is just more difficult to do, such that the market can recalibrate its expectations around earnings growth.

Michael, we broke up just a tad. Good morning, by the way. Yeah, I think there has been some core inflation in our payroll, both in the supply chain and in the stores. So, yeah, there's probably a little bit more of an inflationary environment, you know, since the pandemic. I think they're moderating somewhat. But I think at the end of the day, we've proven that we've been able to maintain our sales and our SG&A in line with, you know, investing in our growth initiatives that we think will help us gain market share. You know, as Jamir said, we've been pretty good at this over time and managing our expenses in line with our top-line growth. I will say at the moment, though, we have quite a few initiatives that are all in place, both from improved execution on our stores, growing our commercial business faster by using some new initiatives that are still in the early innings, as well as ramping up two new distribution centers. So we are running through an investment period that we think, we believe, will ultimately help us have a faster-growing business and can allow us to continue to gain share at a faster clip.

And Phil, what does the arc of that investment cycle look like? Can you help frame the market's expectations on how long this is going to weigh on the profitability of AutoZone such that eventually it can get back to the double-digit EPS growth that it's historically been able to achieve? Thank you.

Great question. I think we're kind of in the midst of early innings of most of these initiatives. You know, some of them like our commercial delivery strategies, that's all been executed. Today it's more about continuing to refine the execution and get better at it with business practices. And so I'd say we're kind of, all these things are in flight and in launch phase. At the moment we're more about trying to optimize these and get better at them as we're in the early phases of these, what we believe have long life cycle and benefit. But most of them are in flight and on track at the moment.

I think the one thing I'll add is that we've talked about this notion of managing our expenses in line with sales growth. And to be clear, our disciplines around investment will all have a payback associated with them. And most notably, you'll see it in the top line and you'll eventually see it in the bottom line. I think the thing that gives us a lot of confidence and is really encouraging is the things that we've been investing on for the last several quarters are now starting to show some growth shoots. I mean, you see that in the commercial numbers in the last couple of quarters. Our outlook as we look at the fourth quarter and in the next year remains very positive. We've got a lot of good momentum there. And we're also seeing it on the international side as well. So as we you know, accelerate the number of stores that we put in place. We accelerate, you know, the initiatives that we have in place to grow our commercial business. We're very excited about creating a faster-growing business, and ultimately that's going to result in more earnings growth for the company.

Understood. Thank you very much, and good luck.

Thanks. Thank you.

Your next question is from Brian Nagel with Oppenheimer.

Hi. Good morning. Nice quarter. Good morning. So the question I have, and I guess it's a bit repetitive, but clearly, looking at the results and hearing your commentary, the sales growth improved meaningfully here in the quarter. You talk about the initiatives. Your initiatives have been in place for a while. Is there anything that really shifted here in the fiscal third quarter from the prior quarters to, so to say, underpin this better sales growth?

Yeah, you're right. Some of these initiatives have been in place. Keep in mind, although we've been talking about them for approximately a year, they do take time to roll out. And we're continuing to, you know, we've got, you know, if you think about commercial delivery initiatives, things of that nature, those are now essentially rolled out. And we will only be added as we add hubs and mega hubs and get those stores open. And also in the quarter, we also accelerated quite a few store growth opportunities that And those also have expenses associated with them as we get those stores opened up. That part of the initiative is going to continue as we ultimately ramp up to roughly 300 stores domestically and 500 stores internationally. It'll still take us a couple years to get to those growth numbers, but those do have expenses on the front end. But the rest of the service initiatives that are already in place are essentially out, and it's more about optimizing them and continuing to get better execution at the store level.

So is it fair to say that here in the third quarter, we did see somewhat of a culmination of these initiatives that helped to drive the better sales and also what may be an improving sector backdrop?

Yeah, I think that's correct. I think that's well said.

The follow-up question I have, and you may have just answered this, but as you're looking at sales tracking better and getting back to what I would consider a normalized algo for our for AutoZone. Was there then a conscious decision to sort of say invest some of that sales upside into other areas of the P&L and that's maybe why we didn't see the flow through?

Yeah, I think we've been intentional about that and we've been very clear about the notion that we see an opportunity today and some of it is a unique opportunity to invest into the growth opportunities that we're seeing. So we're intentional, particularly in the SG&A about making sure that we have the assets in place, the infrastructure in place to be able to go after that opportunity. So we've been very purposeful and very intentional about investing into that. But to be very, very clear, I mean, our disciplines around managing the P&L to ultimately drive earnings growth and cash inside the company are still in place. But this is a unique opportunity for us to go invest in a disciplined way. to drive the kind of growth that we're seeing. And again, we saw some growth shoots on the top line here that we're very encouraged about, and that momentum is going to continue. So that strategy is working for us.

All right, guys. I appreciate it. Thanks.

Thank you.

Your next question for today is from Scott Ciccarelli with Truist.

Good morning, guys. So you guys talked about Hi, you talked about the hubs and mega hubs continue and grow much faster than the rest of the commercial base. Can you quantify for us the comp contribution from those stores? Like, is it something that's big enough that we can see it from the outside? And then secondly, were there any outsized impacts on the commercial segment from new national account wins this quarter? I understand there's been some relationship changes out on the national account side. Thanks.

We've never quantified how much comp difference there is between our hubs and a mega hub versus the satellite stores, but we'll say that they're pretty robust. To your second question, on the national account side, I would say we believe we're growing share on the national account side with regional accounts and with the up and down the street customers or the local shops, as we call it. We're very happy about the sales growth we're getting across all of the ways that we segment our business on the commercial side. And, again, we believe most of that growth is, frankly, because of the initiatives that we have in place, improving assortment, the strength of our Duralast brand, service metrics around speed of delivery to the shop, and ultimately a sales force that continues to mature.

So, Phillip, it wasn't cited as a factor, but was there any – merchandise margin impact from some of the no-account ones?

All of those customer segments have slightly different margin rates, but at the end of the day, that was not a material impact on our commercial business.

Got it. Thanks, guys.

Your next question is from Robbie Ohms with Bank of America.

Thank you for taking our questions. My first question is, now that you have your California and Virginia DCs up and running for past quarter, can you comment on what kind of sales that you've seen in these regions and any competitive response you've seen?

Yeah. The DCs have just opened up, and we're still in the process of rolling stores off of some of the other DCs to these distribution centers where the stores are ultimately closer. I wouldn't suspect that a competitor is going to change their distribution strategy based on us opening stores, so I don't think that'll be a material change. What we have seen is as we've opened up these new distribution centers, there are some costs on getting startup, and that those incremental costs will abate over time as we get all of our distribution of stores to the appropriate DCs, where ultimately that reduces supply chain costs over our entire network.

That's helpful. For my follow-up, it looks like your inventory per store and in-stock levels are pretty high. Do you plan to keep investing in your assortments, improving assortments, or do you think this is a comfortable level to be at going forward?

Yeah, so we did grow inventory 10% in total and a little less than 7% on a same-store basis, if you will, per store. Those investments have been where we believe we have had opportunities to continue to refine our assortment for the commercial side of the business. Obviously, hubs, mega hubs, have a bigger assortment that gets deployed in a market, which helps lift the entire market. And we've also seen opportunities in our international markets, to go after commercial business and improve those assortments to go attack the opportunities we have with commercial customers in those international markets. A similar strategy that we have in the U.S., those hubs and mega hubs are very important to us, and continually improving our assortment to satisfy the commercial customers is a high priority for us.

Thank you.

Your next question is from Zach Fathom with Wells Fargo.

Good morning. Could you remind us what a typical ramp-up is for a mega hub and the number of satellite stores a mega hub tends to service? And with the eight new mega hubs in the quarter, another 10 in Q4, is there any regional color or thoughts on magnitude or density that you're adding there?

Yeah, so, you know, typically we'll see satellite stores get to maturity roughly in the you know sort of year five time frame what we've been seeing with mega hubs and why we're so excited about deploying those assets is that those mega hubs are ramping faster you know to the extent that we can put a hundred thousand SKUs in a big box format in a local market jamming more parts closer to the customer those boxes become magnets for traffic and we're doing well inside the four walls The additional impact is the fact that we use those mega hubs, as you know, to support the entire network. And so it varies in terms of the number of satellite stores that a mega hub will support. But having that additional inventory is a lift for the entire market.

Got it. And, Jameer, you mentioned about 1% same-skew inflation right now, but expectations for acceleration. Any thoughts on Q4 inflation? same skew inflation? And, you know, as you do start to see that ramp up, could you walk us through the mechanics of LIFO and any P&L implications we should keep in mind?

Yeah, I mean, excluding tariffs, we would expect the same skew inflation to be in the same zip code. You know, there has not been a lot of costs that have come into the market, primarily because, you know, one of the big drivers for the cost increases was freight. And we've seen freight come down off its peak, which has driven, you know, sort of lower same-skew inflation, but also has been a positive to the LIFO balance. What I'll say about LIFO for the fourth quarter is, you know, our base assumption is that, you know, we wouldn't see any impact. However, if we do see significant tariffs, that will indeed have an inflationary impact, and you could see us book some LIFO expense in the fourth quarter. Again, there are lots of variables associated with that, as we talked about a little bit earlier. We'll be transparent about what we see in the fourth quarter, but to the extent that tariffs are inflationary, that could have an expense impact from a LIFO standpoint in the fourth quarter.

Gotcha. Thanks for the time.

Thank you.

Your next question for today is from Stephen Saccone with Citi.

Great. Good morning. Thanks very much for taking my question. I was hoping you could talk a little bit more about your outlook for the fourth quarter. You cited the expectations for solid trends against easing compares on both DIFM and DIY. On the DIFM side, it's been a while since we talked about growing double digits on a comp basis. Could we get back to that double-digit growth rate as initiatives gain more traction and you see some higher same-skew inflation?

Yeah, what I'll say is that, you know, our outlook for the fourth quarter, particularly from a top line standpoint, is that we'll have, you know, similar kind of momentum that we had in the third quarter. I think the initiatives that Phil talked about are working for us. And you've seen us sequentially improve in commercial. And we're carrying that momentum into the fourth quarter. So we feel pretty good about it from a top line standpoint. I think the second piece to that is that we're going to continue to invest in a disciplined way for what we see as a near-term opportunity and also a long-term opportunity. And then from a margin standpoint, as I mentioned on gross margins, we expect the gross margins to be down slightly, certainly not to the same order of magnitude that we saw in the third quarter, because some of those pressures that we saw in the third quarter will obviously abate. Overall, I think the outlook is pretty positive for us, and we feel good about the momentum, particularly on the top line that we have going into the fourth quarter.

Maybe a little bit of comments on the commercial growth. Keep in mind, as we've said many times, we still are roughly a 5% share in the commercial arena. There's lots of opportunities for us to continue to grow share, both in terms of adding new customers, and growing share of wallet with each of those customers. And as we focus on our initiatives, which are assortment improvements in satellite stores, hubs, mega hubs, improving service, and improving speed of delivery to those customers with that enhanced assortment, we believe we have a lot of opportunity to continue to grow share for long term in the future.

Okay, I understand. The thought I have is on merchandise margin. You know, there's been focus here in the near term, but if you think on a multi-year basis, do you still see opportunity for merchandise margin improvement, I guess, specifically as you try to grow the commercial side of the business?

Yeah. Yeah, I think we do. I think the way we think about it is I think we would ultimately be able to grow share on DIY or grow margin on the DIY side and margin on the commercial side, both of them independently. What will happen is as we continue to grow share on, and our comps on the commercial side of the business, it will put pressure on our overall margin rate. But as we've said plenty of times, we'd like to take that opportunity to have that pressure on our margin rate because we're growing the commercial business faster because that creates more EBIT for us. We like that math problem.

Thanks for the detail. Best of luck.

Your next question is from Seth Sigmund with Barclays.

Great. Good morning, everyone. Thanks for taking the question. So two quick follow-ups. One is market share. You talked about the momentum being broad-based. You did have a competitor close a large number of stores over the last six months. I'm curious whether that had any impact on the quarter. It was interesting that the West Coast did not necessarily outperform. So I don't know if that implies more upside ahead. Curious how you guys think about that. And then I have a follow-up. Thanks.

Yeah. Great question. I think What we've seen is, specifically on the DIY side, where we have more empirical data on share, is we've grown share in all of the markets where those competitive closures happened and, frankly, where they did not happen. So we feel really good about our share growth. Again, we think the vast majority of our share growth is coming from what we're doing as opposed to some of the external factors. Obviously, closing down stores helps. So it's pretty broad-based share. And as, again, you mentioned and we mentioned that those West Coast markets on the commercial side weren't necessarily the strongest growing. We think weather was impactful. And, again, we think our initiatives are what's driving our success.

Okay, great. And then just to follow up on the gross margin, it sounds like you have decent visibility into the fourth quarter. For shrink specifically, I'm just curious, any more perspective on what happened in the period before how you address that, why this is not going to be an ongoing issue. Thank you.

Yeah, I think a couple things stand out to us. One is that we're growing our business. We have a lot of activity that is happening. We've got two new distribution centers that are fired up here. So the causes for shrink, we've got our arms around, and this is not something that we anticipate talking about in the fourth quarter. particularly as we move forward with all the things that we're working on from an execution standpoint. So, you know, this is a dynamic that, you know, we've been working our way through over the last several quarters. And, you know, we had a pretty tough comparison in Q3, Q4. Those pressures should largely abate.

Okay, great. Thank you both.

Your final question for today is from Greg Mellick with Evercore ISI.

Hi, thanks. My question is really on trade down and discretionary. I think you mentioned the consumer making some choices, spending on failure and maintenance. Wondering if they're taking those discretionary items out of the basket, or what sort of behavior you're seeing on trade down or trade out there?

Yeah, we haven't seen necessarily a lot of trade down, partly because in most categories, we don't have a lot of choice. We do in some categories like batteries and brakes and things of that nature. And we haven't seen necessarily a big move down out of premium, good, better, or best product. What we have seen is the discretionary businesses, they've been under pressure for quite some time now. The big negative comps we were seeing coming out of the back end of the pandemic have kind of largely slowed. So they're more constant in its volume. But It's the smallest piece of our business. It's roughly 16% of our total volume on the DIY side, and it's remained relatively at that point. I don't believe those discretionary categories will meaningfully improve until our consumer has more cash in their pocket.

Got it. And then my follow-up was on margin, just to understand how the international EBIT hit from FX yesterday. Jameer, presumably, does that show up more in SG&A than gross margin if we think about where it's allocated?

Yeah, if you think about it, it shows up in the top line, and then you'll see that top line flow through the gross margin, and then it's actually a little bit of a good guy on the SG&A line and net negative for EBIT.

So if we're thinking about deleverage... That would look worse because of the P&L internationally, or no, it's actually a little good guy?

Overall, it will be a bad guy.

A bad guy. Right, right. Got it. Thank you, and good luck.

All right.

Thank you. Before we conclude the call, I'd like to take a moment to reiterate that we believe our industry reigns in a strong position, and our business model is solid. We are excited about our growth prospects for the quarter, but we will take nothing for granted as we understand that our customers have alternatives. We have exciting plans that will help us succeed in 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 that AutoZone will be successful. Thank you for participating in today's call.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.