AutoZone, Inc. Q3 FY2025 earnings call

Phil Daniele began by thanking employees for their commitment to customer service. He addressed sales results, highlighting the growth in domestic commercial sales, domestic retail comp, and international constant currency comp. Key highlights included the focus on WOW! Customer Service, the strong growth in domestic commercial sales, the performance of domestic retail DIY, various initiatives in the commercial business such as improved assortment, the strength of the Duralast brand, and speed of delivery. Additionally, the international business opened 30 new stores, bringing the total number of international stores to 979, and there was an expectation to open around 100 international stores in the fiscal year. Phil also mentioned that 54 net domestic stores were opened in the quarter, with a commitment to opening satellite, Hub, and MegaHub stores more aggressively.

In the third quarter, AutoZone's total sales grew 5.4%. Domestic retail same-store sales were just over 3%, the best retail growth since the second quarter of FY '22. Domestic commercial sales surged 10.7%, marking the first double-digit commercial growth quarter since the second quarter of FY '23 and surpassing the $5 billion sales mark on a rolling 4-quarter basis. International constant currency same-store sales rose 8.1%, but unadjusted international comp was negative 9.2% due to the stronger U.S. dollar. Domestic DIY same-store sales grew 3%, with traffic up approximately 1.4%, and average ticket and like-for-like SKU inflation was around 1% for the quarter, with an expectation of inflation trending towards 3% over time. For the commercial business, year-over-year like-for-like SKU inflation was basically flat, and traffic was up nearly 9.8% on a same-store basis.

For the fourth quarter, DIY and commercial trends are expected to remain solid as comparisons become easier and momentum from growth initiatives continues. If yesterday's spot rates held for Q4, it was expected to result in approximately a $50 million drag on revenue, a $20 million drag on EBIT, and an approximate $0.80 per share drag on EPS. The company is expected to effectively manage gross margins and ensure operating expenses are appropriate for future growth.

The stronger U.S. dollar continues to have a negative impact on reported sales, operating profit, and EPS. There are risks associated with tariffs, including potential cost impacts that may require strategies like vendor absorption, diversification of sourcing, and pricing actions to mitigate.

Q: 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 this one.

A: Yes, the primary net importer is China. We've reduced our reliance on China over the past few years. We source from many Far East countries, some from Europe, and some from Mexico. Regarding direct import vs third-party, we don't specify the exact mix but have strategies to mitigate tariff costs through vendor negotiations, etc.

Q: 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 turn business? Or is there more of an effort here to perhaps have the cost be absorbed into the supply chain?

A: Yes, most inventory turns relatively slowly, so tariff cost hasn't been fully felt yet. There will be an impact of tariffs on costs, but we have multiple strategies to mitigate and maintain our margin structure.

Q: This is Lauren Ng on for Simeon. Our first one is on the 5% domestic comp, which is the strongest we've seen over the past 2 years. So well done on that. Could you just comment on what kind of comp lift you're seeing from maybe your own initiatives and market share gains versus the underlying market demand?

A: Yes, we're seeing share gains across all markets. The majority of our growth is from our own initiatives like improved execution, deployment of Hub and MegaHub stores, and improved assortments.

Q: 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 mid-single-digit and leverage that 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?

A: Yes, there has been core inflation in payroll. While inflation is moderating, we're in an investment period with initiatives in the early stages that will help us gain share and drive faster growth eventually.

Q: Nice quarter. So a question I have and I guess it's a bit repetitive, but clearly, we do look at the results and hear your commentary. The sales growth improved meaningfully here in the quarter. You talked about the initiatives, your initiatives have been in place for a while. So is there anything that really shifted here in the fiscal third quarter from the prior quarter, so to say, underpinning this better sales growth?

A: Yes, some initiatives are now fully rolled out, like commercial delivery initiatives, and we accelerated store growth opportunities, which contributed to the better sales growth.

Q: You talked about Hubs and MegaHubs continuing to 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 could see it from the outside. And then secondly, were there any outsized impacts on the commercial segment from new national account wins this quarter? Because I understand there's been some relationship changes on the national account side.

A: We haven't quantified the comp difference between Hubs/MegaHubs and other stores, but they are robust. On the national account side, we're growing share across all segments, mostly due to our own initiatives.

Q: Now that you have your California and Virginia DCs up and running for past quarter, can you comment on what kind of sales lift you've seen in these regions? And any competitive response you've seen?

A: The DCs are new, and stores are being transitioned to them. Competitors are not likely to change their distribution strategy based on this. We've seen start-up costs, but over time, supply chain costs will decrease.

Q: Could you remind us what a typical ramp-up is for MegaHub and the number of satellite stores at MegaHub tends to service. And with the 8 new MegaHubs in the quarter, another 10 in Q4, is there any regional color or thoughts on magnitude or density that you're adding there?

A: Satellite stores typically mature in about 5 years. MegaHubs ramp up quickly, use a big box format with 100,000 SKUs, and support the network, but specific regional density details aren't provided.

Q: 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 comparison, 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-SKU inflation?

A: The outlook for the fourth quarter is positive with similar momentum as the third quarter. Initiatives are working, and margin expectations are better than in the third quarter. Commercial growth has room for further share gain.

Q: So 2 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 6 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?

A: We've grown share in markets with competitive store closures and others. The West Coast commercial markets weren't the strongest due to weather, but our initiatives drive our success.

Q: 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?

A: We haven't seen much trade down as there's limited choice in most categories. Discretionary businesses are the smallest part and remain relatively constant until consumers have more cash.