Title

Presentation

AutoZone, Inc. misses on earnings expectations. Reported EPS is $28.29 EPS, expectations were $29.05.

Operator: Good day, everyone, and welcome to AutoZone’s 2025 Second Quarter Earnings Release Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Brian Campbell. Sir, the floor is yours.

Brian Campbell: 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 annual report on Form 10-K and other filings with the Securities and Exchange Commission for a 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 will also include non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our press release.

Philip Daniele: Good morning. Thank you for joining us today for AutoZone’s 2025 Second Quarter Conference Call. With me today are Jamere 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, www.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 2.4%, while earnings per share decreased 2.1%. We delivered positive 2.9% total company same-store sales, with Domestic same-store sales growth of 1.9%; and our Domestic Commercial sales grew 7.3% and were up 10% on a 2-year stack basis.

International same-store sales increased 9.5% 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 8.2% International comp. As you know, the U.S. 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 2 quarters of this fiscal year. Jamere 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 7.3% versus up 3.2% 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 4.3% in the first 4 weeks, plus 2.8% in our second 4 weeks and a [ negative 1.2% ] over our last 4 weeks. This compares to the previous year’s second quarter where domestic sales were a positive 1.4% in the first 4 weeks, a negative 4.9% in the second 4 weeks and a positive 4.4% in the last 4 weeks.

On a 2-year basis, GAAP comps were a positive 5.7% in the first 4 weeks, a negative 2.1% in the second 4 weeks and a positive 3.2% in the last 4-week segment. It is important to point out that the Arctic cold that came early this year came later in the last 4-week segment last year. That is why the last 4-week segment was such a difficult comparison for us. Thirdly, the Domestic variation over the 4-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 softened significantly, but returns once people are able to get back out to shop, 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 [indiscernible] business continued this past quarter. Weather in Q2 always has such a big impact on our results. With a winter that started earlier, we benefited this year from more related parts 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 comp were plus 0.1%. Our discretionary merchandise [indiscernible] continued to be the lowest 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 confidence improves. Our DIY comp was up 2.9% in the first 4-week segment, plus 2% in the second 4-week segment and down 4.3% during the third fourth-week segment. That compares to last year’s Q2 DIY comps of 0.7% in the first 4 weeks, negative 6.2% in the second 4 weeks and a positive 4.8% in the third fourth-week segment.

With regards to inflation impact on DIY safety, we saw both DIY average ticket and average like-for-like same SKU 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 [ 4 ] years. We also saw DIY transaction count down approximately 1%. This, too, was better than the down 1.8% 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 best-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. [indiscernible] markets were up 0.5% versus 1.1% 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 7.3% for the quarter versus last year, and this compares to 3.2% total Commercial growth in Q1. For Commercial, the first 4 weeks of our 12-week quarter grew 8.8% due to the impact from winter weather previously discussed. The second 4-week period grew 5.9% and the last 4-week period grew 7.1%. Commercial was also impacted 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 60 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 roll 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 confident 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 improve cost service, which gives us confidence as we move throughout the year.

This quarter, year-over-year inflation on a like-for-like same SKU basis and 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 year-over-year. Our sales growth will be driven by our continued ability to gain market share and an expectation that like-for-like same SKU 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. And Mega-Hub comps continue to grow faster than the balance of the chain, and we are going to continually, aggressively deploy these assets.

In FY ’25, our openings will continue to be skewed to the back half of the fiscal year. For the third quarter, we expect both the DIY and commercial sales trends to improve as our comparisons become slightly easier and we gained 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 9.5% 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 U.S. 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 opening over the remaining 2 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 2 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 $1 billion in CapEx in order to drive our strategic growth priorities. We are investing in accelerated store growth, specifically Hubs and Mega-Hubs, placing inventory closer to our customers; distribution centers that drive efficiency and reduce supply chain costs; and leveraging technology and our IT systems to improve customer service and our AutoZoners’ 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 Jamere Jackson.

Jamere Jackson: Thanks, Phil, and good morning, everyone. For the quarter, total sales were $4 billion and were up 2.4%. Our Domestic same-store sales grew 1.9% and our International comp was up 9.5% on a constant currency basis. Total company EBIT was down 4.9% and our EPS was down 2.1%. As Phil discussed earlier, we had a headwind from foreign exchange rates this quarter. From Mexico, FX rates weakened 19% versus the U.S. dollar for the quarter resulting in a $91 million headwind to sales, a $30 million headwind to EBIT and $1.22 a share drag on EPS versus the prior year. Excluding the FX headwind, we would have reported an EPS increase of 2.1% for the quarter. We continue to deliver solid results as the efforts of our AutoZoners in our stores and distribution centers have enabled us to continue to grow our business.

Let me take a few moments to elaborate on this in our P&L for Q2. And first, I’ll give a little more color on sales initiatives. Starting with our Domestic Commercial business. For the first quarter, our Domestic DIFM sales increased 7.3% to $1.1 billion. For the quarter, our Domestic Commercial sales represented 31% of our Domestic auto part sales and 27% of our total company sales. Our average weekly sales per program were $14,700, up 4.3% versus last year’s second quarter. Our Commercial acquisition 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 2 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. 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, our Commercial weekly sales per program average was $14,700 per program, the 111 Mega-Hubs averaged 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 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 0.1% 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 across 2 periods and down 4.3% over the last 4 weeks, as we were up against a difficult comparison from an extremely cold period a year ago, along with very difficult DIY sales in 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 parc and a challenging new and used car sales market for our customers which continues to provide a tailwind to our business.

These dynamics: ticket growth, growth initiatives and macro carparc tailwinds, we believe will continue to drive a resilient DIY business environment for the balance of FY ’25. 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. Mexico finished with 813 stores, 4 new stores in Brazil, ending with 136. Our same-store sales grew 9.5% on a constant currency basis and a negative 8.2% 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 rental and gross margins. For the quarter, our gross margin was 53.9%, flat to last year. This quarter, we had a $14 million or a 30 basis points unfavorable LIFO comparison to last year. Excluding LIFO from last year’s results, we had a 36 basis point improvement in gross margin, driven by continued and 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 LIFO impacts. So at quarter end, we still had $19 million in cumulative LIFO 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 LIFO results.

So just to remind you, for Q3 last year, we had a $24 million credit. In Q3 this year, we’re not expecting to record any LIFO 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-forward results, including vendor absorption, diversifying sourcing, taking pricing actions or some combination of the 3. 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 6.4% versus last year as SG&A as a percentage of sales deleveraged 134 basis points.

On a per store basis, our SG&A was up 2.9% versus last year’s Q2. While we’re managing our SG&A spend on a slower growth environment in a disciplined way, we will continue to invest at an accelerated pay initiatives that we believe will help us continue to gain share. These investments will pay dividends and customer experience, either delivery and productivity. From our past experiences, we believe investing now at a reasonable pace is key for us to gain 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 4.9% 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 are planning interest in the [ $10 million ] range for the third quarter of FY ’25 versus $104 million last year. Higher debt levels and bond rates are continuing to drive interest expense increases. For the quarter, our tax rate was 18.4% and down from last year’s second quarter of 19.6%, driven by onetime discrete items. This quarter’s rate also benefited 239 basis from stock options exercised, while last year, it benefited 360 basis points. For the third quarter of FY ’25, we suggest investors model us at approximately 23.2% 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 5.3% versus last year. Our diluted share count of 17.2 million was 3.3% [indiscernible] in last year’s second quarter. The combination of lower net income and lower share count drove earnings per share for the quarter of [ $28.29 ] down 2.1% 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 of 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 2.5x EBITDAR. Our inventory per store was up 6.8% versus Q2 last year, while total inventory increased 10.4% over the same period last year, driven by additional inventory investments to support our growth initiatives. Net inventory, defined as merchandise inventories less accounts payable on a per store basis, was $161,000 versus negative $100,000 last year and negative $166,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 118.2% versus last year’s Q2 of 118.8%. Lastly, I’ll spend a moment on capital allocation in our 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 bought back over 100% of the then outstanding shares of our stock since our buyback conception in 1998 while investing in our existing assets and growing our business. We remain committed to this disciplined cap 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 and 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 the remainder of FY ’25, we’re bullish on our growth prospects behind a resilient DIY business, a fast-growing International business and a Domestic Commercial business that has gained 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 AutoZoners. 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 $1.41 a share drag on EPS. And for our fourth quarter of FY ’25, we would expect a $101 million drag on revenue, a $37 million drag on EBIT and $1.53 a share drag on EPS. 0And finally, if rates remained at the current spot rates for the balance of the fiscal year 2025, we would now expect a $356 million impact of revenues, an $18 million impact to EBIT and a $4.82 a share impact to full year EPS. And now I’ll turn it back to Phil.

Philip Daniele: Thank you, Jamere. We are excited about where we are striving to accomplish for the remainder of FY ’25. We promised to continue to focus on improving our execution and delivering WOW! 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 spaces, 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 WOW! Customer Service will lead to sales growth and gains in market share. We are excited to ramp up our efforts 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 WOW! 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%, [indiscernible] several years of strong growth. Reaccelerate 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, reaccelerate 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.

Operator: [Operator Instructions] Your first question is coming from Bret Jordan from Jefferies.

Bret Jordan: 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?

Jamere Jackson: 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.

Bret Jordan: Okay. And then a question on Mexico, I mean, obviously, varied under the FX. But as you build the store base down there, is there sort of a tipping point where you start getting better leverage of 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?

Jamere Jackson: Yes. 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 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 SG&A standpoint. But as we’ve talked about on previous calls, we’re investing in distribution center capability that’s going to help 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.

Operator: Your next question is coming from Simeon Gutman from Morgan Stanley.

Unknown Analyst: This is Lauren on for Simeon. Our first one is we wanted to touch on the 1.9% domestic comp on a constant currency basis. This is the strongest comp in the business I’ve seen over the past several quarters. We were wondering if do you think this is driven more so by 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?

Philip Daniele: I think it’s a little bit of all of the above. The weather was clearly a better year than we’ve had historically over the last 2 or 3 years. But I also we’ve spent quite a bit of effort over the last year, really improving our execution at our level, both on DIY and the Commercial business. We’ve been investing in growth opportunities around Hubs, Mega-Hubs and assortment, and we also have 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 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.

Unknown Analyst: Great. And our follow-up is just on gross margins. Freight costs are picking up and there are some inflation concerns, I guess, how can we expect this to impact gross margins in ’25? Could this be offset by strength in merch margins? Just any color on the cadence of gross margins for ’25 would be helpful.

Philip Daniele: Go ahead. Go ahead.

Jamere Jackson: From a gross margin standpoint, a couple of dynamics are happening. One is we’re going to see some gross margin drag just because our Commercial business is accelerating. And 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 commercial mix 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 $24 million of benefit booked in the third quarter for LIFO, which we’re not expecting to repeat.

So that will be [indiscernible]. Overall, our underlying gross margins are healthy. The teams are doing a great job. I think there is potential for inflation to come back into the marketplace. And if that does happen, we’ll respond accordingly.

Operator: Your next question is coming from Christopher Horvers from JPMorgan.

Christian Carlino: It’s Christian Carlino on 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, how will they be impacted by if it start today, if at all?

Philip Daniele: Yes, that’s — it’s a great question. And 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 executions based on the categories, part types, depending on what the product was coming out of China. We have worked diligently since those original rounds of tariffs to do all of the activities you would expect us to do, try to source by category and multiple [indiscernible], moving — vendors have done a lot of work to move manufacturing to various places that could still be lower cost. And 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 and 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 — Jamere mentioned just a second ago, our merch team, if you take out the LIFO impact, did a pretty nice job of growing gross margin last quarter. We do have a bit of a headwind to compare against last year’s LIFO 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.

Christian Carlino: Got it. That’s really helpful. And to follow up on the operating expenses, could you talk about to what degree is this just wrapping up the DIFM reacceleration initiatives versus leaning into share or adding drivers and trucks given one of your competitor’s closing stores? And just how should we think about this going forward? Like is the step-up true? Or do you expect to lap these investments at going?

Jamere Jackson: 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 that’s meant making sure that we have assets and infrastructure, it is 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’re working on and focusing on for several years. And quite frankly, a lot of that investment is in our IT organization, and it’s paying dividends for us in terms of speed and productivity and better customer experience. We’re going to do that in a disciplined way and lean into the opportunities that are in the marketplace.

Operator: Your next question is coming from Zach Fadem from Wells Fargo.

Zachary Fadem: 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?

Philip Daniele: 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.

Zachary Fadem: 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 adds? And then, Jamere, in light of the progress, is it fair to call this high single-digit growth level, the right run rate for the business today?

Philip Daniele: Yes, I’ll talk specifically about our kind of our segmentation of Commercial business. I’d say, largely, we’re growing both in the — what we call the up and down the street market, 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 the segmentation of customers that are associated with new and used cars. That business is still pretty tough. But I think it makes sense. Interest rates are high. The consumer that bought a used car 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 the standard shop or new car — or I’m sorry, national account, up and down the street, regional customers, those types of businesses are growing nicely for us.

Jamere Jackson: Yes. And what I’ll say is, to Phil’s point, our growth was broad-based across our business in total and it was pretty broad cross category. So real underlying strength there in Commercial. We’ve 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 we’re roughly a [indiscernible] in what’s approaching $110 million to $115 billion 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 had good momentum coming out of the second quarter, and we’re expecting a very strong second half of the year.

Operator: Your next question is coming from Seth Basham from Wedbush.

Seth Basham: Just want to follow up on the tariff question. Jamere, I think you made a comment that you expect the maintain margin rate even with tariffs. What’s the break point? In other words, if we do see 20% tariffs incrementally on Chinese-sourced goods and 25% of Mexican-sourced goods, do you still think you can maintain margin rate? And what incremental on top of that would be the breakpoint where you couldn’t?

Jamere Jackson: Yes. As we mentioned, I mean, there are several outcomes that may impact our go-forward 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 3. But to be clear, 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 breakpoint. I think we have a number of tools that are at our disposal, lots of things that we’ll 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-forward position.

Seth Basham: Got it. And then my follow-up question is on SG&A. As you [indiscernible] investments here, what’s the time frame that will normalize to growing SG&A in line with sales?

Jamere Jackson: We expect to invest at a pretty accelerated pace for the next few quarters or so. The opportunities that we see in the marketplace, both on the DIY 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 in the event that comps don’t materialize, then we have this 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.

Operator: Your next question is coming from Kate McShane from Goldman Sachs.

Mark Jordan: This is Mark Jordan on for Kate. 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?

Philip Daniele: 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.

Mark Jordan: Okay. Perfect. And then just thinking about Mega-Hubs, 19 expected for the back half of the year. Can you talk about the time open location and how long it might take? And what we should think of as a good cadence for openings in the coming years?

Jamere Jackson: It takes way too long, as Phil continues to remind me every single day, when we’re dealing with these. And these are typically 30,000 square foot boxes that are difficult to find, and it typically will take us a couple of years to find it and get it open. But we’re pretty pleased with where we are. 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 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 a 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.

Philip Daniele: We have continued to hear 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 those help with all the [indiscernible], 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. We feel great about the second half of the year and the pipeline of those Hubs and Mega-Hubs is really strong, in much better shape than it’s been over the last several years.

Operator: Your next question is coming from Steve Forbes from Guggenheim.

Steven Forbes: Maybe just a follow-up 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 right about some of the initiatives, whether it be delivery time, deeper assortment, et cetera. 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 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 as we see those commercial programs maturing? Like sort of what could help provide all of us with greater conviction around sort of what that longer-term opportunity is as you see these investments maturing?

Philip Daniele: I think the biggest opportunity, the way we think about it, there’s wide variation in store performance from the low to the high, significant variances. The way we think about it is we have 5% share in an enormous market and lots of room to grow. Add up all of the public competitors of us [indiscernible] Napa, you just barely get over 20% of the available market share. That means there’s 75% to 80% that’s available for all of us to go take share of wallet and share of customers. That’s the way to think about it. The opportunities are so enormous. We just need to figure out how to efficiently get better each and every day and gain market share with those customers. And 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.

Steven Forbes: And then maybe just a follow-up on that. As we think about delivery times, because I think you guys were sort of leaning into some initiatives to improve delivery time specifically. Any way to help frame sort of some learnings or success stories that you guys have seen? And is that a result of increasing number of delivery windows, right, at that level? Or where are we just sort of in how the market response is to the improved delivery window promise that AutoZone is going to market with?

Philip Daniele: So essentially what we’ve done with our fulfillment and things of that nature is we have changed the strategy. We’ve used a lot of technology to help us improve our delivery time, specifically on the harder 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 the parts to the customer. Again, leveraging technology. And we think we are much better than we were we still frankly think there’s an opportunity to get better. So these projects are relatively new, and we believe they have a long maturity curve. We believe we will continue to optimize them.

Jamere Jackson: And a big enablement to that is what we’ve done with our Hubs and our Mega-Hubs. Two things that are really clear about what we’ve done in the commercial business is we’ve made a commitment and have a good effort to jam more parts in the local market closer to customer. 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 need to grow your market share and that’s where we’re focused.

Operator: Your next question is coming from David Bellinger from Mizuho.

David Bellinger: Maybe just a clarification on an earlier one. But are you seeing anything in terms of the immigration policy? Are there certain markets that have ticked down similar to what occurred back in mid-2017, is it getting worse in recent weeks? And anything you can share on quarter-to-date trends being impacted would be helpful?

Philip Daniele: Yes. Great question. To date — and this is still early. But to date, I don’t think we can show anything empirically that says that “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 we have, of course, in and around the border on both sides of the border and nothing at this point would indicate that there’s something like that going on.

David Bellinger: Okay. I appreciate that. And then just switching topics on the new distribution centers, including some automation in those facilities. Can you help us with 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?

Philip Daniele: That’s a great question. And one of the questions that I’m asking our supply chain teams all the time, is how do we can evergreen the new technology that’s going into our newer distribution centers. Two of the things that happen in both of these facilities that are opening as we’ve talked about them at various times, is the direct import facility, the Virginia DC will have an additional direct import facility for the eastern half of the United States, and the Chowchilla, 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 2 DCs. We are still — retrofitting is the wrong word.

But we’re still ramping up automation in our Redland 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.

Operator: Your next question is coming from Scott Ciccarelli from Truist.

Unknown Analyst: This is Josh Young on for Scott. So with the potential for new cars a lot higher given tariffs, how much of an impact do you guys think that could have on your business in calendar ’25, as consumers potentially focus more on repairing their existing vehicle as opposed to buying something new?

Jamere Jackson: Still early to tell what the calendar ’25 benefit would be, if any. But what we know over time is that when our 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 the other side of a tougher economic situation, we’ve seen that historically in the business, we would expect that to be the case. Still early innings in terms of what it’s going to mean for pricing and what it’s going to mean for consumer [indiscernible]. But generally speaking, higher prices in new and used ultimately ends up being a tailwind for our business.

Philip Daniele: Yes. I think 2 of the other key elements in KPIs that are impactful for the aftermarket auto parts are how long the cars 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 2 appear to be tailwinds that don’t appear to be slowing down. We like the age of the vehicle and miles driven and need to both increase which are healthy for the industry.

Brian Campbell: I think we’ve got time for one more call.

Operator: Our last question is coming from Brian Nagel from Oppenheimer.

Brian Nagel: Nice quarter. Congratulations.

Jamere Jackson: Thank you.

Philip Daniele: Thanks, Brian.

Brian Nagel: So the first question I have, I want to bounce back to tariffs, I know it’s been addressed a bit already. Look, as you mentioned, as we’ve seen, AutoZone in your sector have been very good over time of managing higher input costs. But the question I want to ask, just as we look at this late news, which could be substantial. Is your, sort of say, testing as you’re constantly evaluating our business, would — has anything changed here from your standpoint to suggest maybe a different elasticity of demand, particularly with the consumer overall, by other indications, maybe more inflation wary than they have been in the past?

Jamere Jackson: Yes. I mean, from our vantage point, again, when you think about our business, the lion’s share of our business is relatively inelastic. And so to the extent that the consumer feels additional pressures that related 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. Obviously, more discretionary parts of retail, including in our own business, come under pressure when there are hyperinflation scenarios, but we would expect that the lion’s share of our business will perform just fine.

Philip Daniele: 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, 10% on a $30 item, $3, it’s not like it’s $60,000, $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 Jamere’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 2 years ago because of interest rates. I think those, at the end of the day, are industry tailwinds that are positive for us.

Brian Nagel: That’s helpful. Very helpful. The second question I have with respect to weather. So we had erratic weather. It seems as though looking at your results here that you capitalize on that, you benefited from that. But I guess the question I have is, what was the nature of that demand? Is it — was it was 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 — what I’m asking is you contextualize the weather dynamic here and how that’s affected sales.

Philip Daniele: Yes. 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 in the southern markets in the summer, air conditioning spikes. So those 2 are true. The other thing that happens with cold weather, specifically harsh cold weather in the Northeast, 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 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. 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.

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