AUTOZONE INC Q2 FY2025 earnings call

• Emphasized focus on WOW! Customer Service, with total sales up 2.4% but earnings per share down 2.1%. • Domestic same-store sales grew 1.9%, with Domestic Commercial sales up 7.3% and up 10% on a 2-year stack basis. International same-store sales up 9.5% on constant currency but negative 8.2% unadjusted due to currency headwind. • Invested in improving Domestic Commercial business through initiatives like improving availability and speed of delivery, with Commercial sales growing 7.3% vs 3.2% in Q1. • Opened 28 net domestic stores in the quarter, with Mega-Hub stores growing faster. • Opened 2 new Domestic distribution centers (California and Virginia), with Virginia DC being the largest, deploying new technology and automation. • Intended to invest over $1 billion in CapEx for store growth, distribution centers, and technology to drive strategic growth priorities.

For the quarter, total sales were $4 billion, up 2.4%. Domestic same-store sales grew 1.9%. International same-store sales were up 9.5% on a constant currency basis but negative 8.2% on an unadjusted basis. Domestic Commercial sales were up 7.3% for the quarter, representing 31% of Domestic auto part sales and 27% of total company sales. International business opened 17 new stores during the quarter and now has 949 total International stores. The Domestic Commercial business's average weekly sales per program were $14,700, up 4.3% versus last year's second quarter.

• Expect third quarter DIY and Commercial sales trends to improve as comparisons become easier and growth initiatives gain momentum. • Intend to accelerate International store openings, planning to open around 100 International stores in FY '25, with acceleration in the remaining 2 quarters. • Expect foreign currency to continue impacting results for the remaining quarters of FY '25, with approximately $106 million drag on revenue, $34 million drag on EBIT, and $1.41 a share drag on EPS in Q3 if yesterday's spot rates held, and similar impacts expected for Q4 and full year FY '25.

• Foreign exchange rate headwinds negatively impacting reported sales, operating profit, and EPS. • Tariffs on Chinese-sourced goods posing potential impacts on costs, with outcomes including vendor absorption, diversifying sourcing, or pricing actions needed to maintain margin profile. • Volatility in retail business due to extreme weather, affecting customer traffic in the DIY segment, though pent-up demand typically follows.

Q: In the press release, you talked about operating expense deleverage 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 sort of the SG&A spend in the quarter?

A: Yes. I mean we've talked pretty extensively about investing in a disciplined way in IT, which 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. 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 the 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.

Q: As you look back over the past year at flattish to 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, maybe gas prices, tax refund? Or conversely, do you think headwinds from policy, immigration, et cetera, could drive more uncertainty there?

A: Yes.Iu I think that lower-income consumer has been pressured for quite some time. The massive play had over the last several years impacts that consumer the most. So I 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, 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.

Q: Thinking about the Domestic DIFM side of the business, came in much stronger than expected for the quarter. Aside from weather, is there anything to call out from a regional standpoint? Maybe are you seeing any market share gains in any particular markets where competitors are closing stores?

A: I would say -- from a customer perspective, the growth, as Jamere just mentioned, is very broad. It's geographic. It's in the categories. And we think there's going to be opportunities because of the said competitors, as you mentioned. But I think what -- this backfill is what we're doing and a 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 AutoZoners. 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 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 2 quarters this year being prepared for the summer selling season. And I believe 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 the 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.