Good morning, ladies and gentlemen, and welcome to AutoZone's 2022 Fourth Quarter Earnings Release Call. At this time, all participants have been placed on listen-only mode and floor will be opened for questions and comments after the presentation. Before we begin, the Company would like to read some forward-looking statements. Apologies, just two seconds.

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 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 undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release.

It is now my pleasure to hand the floor over to Mr. Bill Rhodes, Chairman, President and CEO of AutoZone. Bill, over to you.

Good morning and thank you for joining us today for AutoZone's 2022 fourth quarter conference call. With me today are Jamere Jackson, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the fourth quarter, I hope you've 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 quarterly earnings conference calls to see them. As we begin, we want to recognize our AutoZoners for their tremendous success this past year. They far exceeded our expectations from the beginning of the year and in a very challenging environment as our pledge states put our customers first, resulting in additional share gains and terrific sales performance on top of fantastic results in FY '21. We grew our overall sales of 11.1% on top of 15.8% growth last year, resulting in a two-year growth that is among the highest we've ever experienced. We could not have achieved this success without phenomenal contributions from across the organization. This year began with the resurgence of the pandemic, ongoing supply chain challenges, a very difficult staffing environment and finished with rising interest rates and inflation at its highest levels in decades, all as major storylines. Throughout the year, our team's incredible supply chain efforts to improve our in-stock position, likely at industry-leading levels, helped our sales growth. These efforts resulted in a positive retail comp and an exceptionally strong commercial comp for both the quarter and the year. Any way you evaluate our FY '22 performance, we had a terrific year. Congratulations AutoZoners, and thanks for always putting our customers first, which led to this success. This…

Thanks, Bill, and good morning, everyone. As Bill mentioned, we had a strong fourth quarter, stacked on top of a remarkable fourth quarter last year with 6.2% domestic comp growth, a 5.7% increase in EBIT and a 13.4% increase in EPS. Our results for the entire fiscal year were incredibly strong as our growth initiatives continue to deliver great results and the efforts of our AutoZoners in our stores and distribution centers have continued to enable us to take advantage of robust market conditions. To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q4. For the quarter, total sales were just over $5.3 billion, up 8.9%. For the year, our total sales were $16.3 billion, up 11.1% versus last fiscal year. I continue to marvel at the strength of our business since FY '19. Our sales are up an amazing 37% or nearly $4.4 billion since 2019. Let me give a little more color on sales and our growth initiatives, starting with our commercial business. For the fourth quarter, our domestic DIFM sales increased 22% to $1.4 billion and were up 43.2% on a two-year stack basis. Sales to our domestic DIFM customers represented 27% of our total company sales and 30% of our domestic auto part sales. Our weekly sales per program were $17,000, up 18.1% as we exceeded our internal expectations. Our growth was broad-based as both national and local accounts performed very well for the quarter. Our results for the quarter set another record for the highest weekly sales volume for any quarter in the history of the chain. I want to reiterate that our execution on our commercial acceleration initiatives is delivering better-than-expected results as we grow share by winning new business and increasing our share…

Thank you, Jamere. As we start a new fiscal year, I'd like to take a moment to discuss our operating theme for the new year. Last night, we kicked off our National Sales meeting with our amazing President's Club winners, our very best store managers. This week, we will embrace our theme for the year, Accelerate Together. We are very excited to have our field leadership team in Memphis for the next four days and I cannot wait to congratulate everyone on their year and thank them for their phenomenal results. They delivered exceptional results in fiscal '22, and we remain focused on superior execution and customer service heading into fiscal '23. Our culture was built on providing exceptional service and this is what will continue to define our success well into the future. As we've accelerated our top line, our competitive positioning has materially improved and customer behavior may have permanently changed post-pandemic. If this holds true, it will be the fourth time in the last 30 years that the economy and society have had significant shocks leading to material acceleration in our growth in sales and profits without a corresponding decline back to pre-recessionary or pandemic levels. Our industry is unique, and it is a very long track record of strong performance with high returns and consistent cash flows. We would also encourage you to migrate to studying our performance on a one-year comp to gauge our performance as we believe the business is steady enough to talk about year-over-year comps going forward. This time of year, I always enjoy reflecting on the past. This year, in particular, is a rewarding experience. Our team delivered some really impressive milestones, $16.3 billion in sales racing past the $15 billion milestone. DIY comps of 2.9%, most impressively, 21.6% on a…

Thank you, Bill. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from Bret Jordan of Jefferies. Bret, please ask your question.

On the supply chain comment, could you maybe give us an update where we are as far as fill rates go and the cadence of improvement? It does seem to some commercial customers finding parts is still a bit of a challenge.

Thank you, Bret. It's still quite challenging. And it's moved. I've talked about it over time. It moves from one category to another one. Most of our hard part categories, we're in pretty good shape on. We have some challenges in areas like filtration. But generally, we're in pretty good shape, but we are still a couple of points behind our overall in-stock rate that we had before the pandemic. It's been very stubborn, frankly. We're looking to push through it. But every time we think we've got it solved in other category rears its ugly head.

And then in the prepared remarks, you mentioned price right and obviously, a big topic this year. Are you seeing anything in the market pricing, whether it be in the DIY against the non-traditionals? Is anything changing in pricing cadence?

No, we're not seeing anything changed in terms of pricing cadence. We've been very disciplined about the pricing that we put in the marketplace. Again, we've been pricing to recover inflation and been doing that pretty consistently. And as I've said before, our industry has been very disciplined over time as it relates to this, and we're not seeing anything that throws us out of whack there.

Thank you very much. Your next question is coming from Steven Zaccone of Citi. Steven, please ask your question.

So our question was on the DIY side of the business. You cited resilient expectations for this year and thinking about the business on a one-year basis. Do you see the potential to comp positive again in fiscal '23? And within that context, you cited some weakness on the discretionary side. How do you expect that to perform over the balance of the year now that gas prices have come down a bit?

Sure. Well, first, on the latter part of the question, we addressed it a little bit in our prepared remarks that when gas prices were $5.50 a gallon on average across the country, we saw an immediate reduction in our discretionary products. As those gas prices have come back down, we've seen discretionary products improve. You have to be careful because it's such a small part of our business, but we've certainly seen it improve. As for whether or not we can see positive comps in DIY for FY '23, as you know, we don't give guidance. There's a lot of uncertainty in the marketplace with inflation, with rising interest rates and the like. But I will tell you -- I'll answer it this way. This latter part of the fourth quarter was much stronger than we were expecting it to be in June and July. And so that gives us some confidence that at least for now, the DIY business is really quite strong. And frankly, as strong if not stronger than we thought it would be back in the early months of the summer.

The follow-up I had was just thinking about the commercial business from a higher level. You said you've grown past the $4 billion sales target that you had. How should we think about the multiyear path for that business? And I guess, what are the strategies you're focused on for the next chapter of growth?

I think the strategies that we're focused on for the next chapter of growth are the same ones that we've been working on for about five years. We're going to continue to make sure that we've got the best coverage in the marketplace. That considers being in the best situation in the local store. It also means expansion of hubs and mega-hubs. We've talked about growing our mega-hubs from today's 78 to 200. So, we're just over -- just under 40% of the way there, and we're moving pretty quickly. Same kind of trajectory on the hub stores, we're around 200. We want to get to 300 of those. So we have lots of growth still in front of us on hubs and mega-hubs, and we're continuing to test new philosophies and new coverage even in those. We're going to continue to focus on the Duralast brand. We're leveraging technology to make our people more efficient and to reduce our delivery times. We're always making sure that we're priced strike. We've got a lot of different strategies, and that's the thing to me that's most encouraging is it's not one single thing that's making this happen. It's a holistic substantial improvement in our competitive positioning in the marketplace. At the end of the day, we got around 4% share in commercial. I said on the call today, the first time we've ever said it. We want to win and be the largest in both sectors. And it's going to take us a while, but that's our goal. And I'm very pleased with the progress that we've had with 20% growth over six consecutive quarters, that's pretty phenomenal regardless of how the industry is growing.

Your next question is coming from Simeon Gutman of Morgan Stanley. Simeon, please ask your question.

I'll be the LIFO person for the call. So the LIFO charges because of freight, non-cash. If you look out 12 to 18 months, do you get back all the charges to earnings either freight subsides or you take credits? Or you actually just raise price when over time to recoup this?

Yes, Simeon. So what we're modeling right now, as we said, is up to $100 million in the first quarter due primarily to higher freight. We are starting to see freight moderate some in the spot markets. However, what I'll remind you is that when we were in this environment of trying to make sure that we had capacity, we were incurring higher freight charges just so that we could secure capacity. So as those short-term contracted capacity dynamics happen from freight start to roll off, we'll start to see the benefits of what we're starting to see in the marketplace, which is a moderating freight market. You could see this in the back half get better, barring any disruptions. But right now, from a forecast standpoint, we're modeling somewhere in the neighborhood of close to $100 million in the first quarter and something similar in the second quarter. From a pricing standpoint, what we've said is that when there's hyperinflation on things like freight, where, for example, container costs went up 7x what we normally pay and then spike back down over time, you typically don't price to recover those kinds of spikes. What you do is you wait for the market to sort of moderate and your price accordingly to what you see the long-term impacts are going to be. So, we're continuing to price in a disciplined way. We're monitoring what's happening in the freight markets. It will come back. It's already starting to come back. And what you'll see is that we'll get credits coming back through the P&L to offset the charges that I've talked about for the first and the second quarter. And then as we get back to our normal market conditions, you'll see us rebuild that reserve balance over time.

I'll ask something different for the follow-up. If you look at the units in DIY, they're probably negative. So, can you talk about the stacks there whether it's stabilizing and thinking about reversion or even elasticity, does the DIY units, do they stay negative or they work back to flat through fiscal '23?

Simeon, you followed us for a lot of years, and you've heard me say many times that the dirty little secret of our industry is that there's downward pressure on units and have been for decades. So oftentimes, we'll be down 3% or 4% in units and customer count. A lot of that is driven by improvements in automobile technology. So easy example is spark bugs. He used to buy spark bugs and they were copper spark bugs and they would last for 30,000 miles. Now you buy Iridium spark bugs and they last 100,000 miles. Now the old copper spark bugs used to cost $0.59. Now Iridium's are oftentimes over $10. So, there's an upward pressure on cost or peaks -- price per piece and a downward pressure on units. I think our downward pressure in the fourth quarter was more exaggerated than it typically is, mainly because of the incredible performance that we've seen over the last three years. I think there's been some moderation. There was also a little bit of moderation as we said, because of the discretionary items, accessories and the like. Is that helpful?

Yes. That's helpful.

Your next question is coming from Michael Lasser of UBS. Michael, please ask your question.

Understanding that you don't provide guidance, but in light of the $100 million LIFO charge this quarter and next quarter, coupled with rising interest expense and what looks to be a slightly higher tax rate year-over-year, is it best that we assume this is going to be a sub algorithm year even if you comp in the traditional 3% to 4% range and buy back a similar amount of stock that you have been buying back?

From an operating standpoint, we will be spot on the algorithm that we've typically had. You do have some dynamics associated with LIFO this year where if you model in a couple of quarters of LIFO charges in the $100 million range, it will have a non-operating impact on our gross margins. So if you're thinking about modeling it that way, then certainly, that's potentially the case. But we'll come back to you. We'll be very transparent about what we're seeing. As we said, we're starting to see some moderation in the dynamics that are causing us to take a LIFO charge. As we get through the first and the second quarter, we could see some moderation there and that could change how you ultimately end up for the fiscal year. But what I want to make sure that people understand is that this certainly is an operational deficiency. It's simply non-cash LIFO accounting. And we're continuing to run the business in a very disciplined way, which means that as we've seen pricing impacts on our product costs, we're continuing to take pricing. We'll continue to drive our growth initiatives. We're going to be a very strong cash flow generator. And the most important part of the operating model in our mind is that cash is going to mean that we're going to invest in our business, and we're going to return a meaningful amount of that to shareholders this year.

Jamere, let me jump in and amplify a couple of points, too. First of all, I've been involved with this company since before we went public in 1991. This is the first time we've ever had a LIFO charge period. These are uncertain times or unique dynamics, especially with the level of inflation that we've seen in cargo freight going from $1,800 to over $20,000 per container. Those numbers have moderated significantly now, but we do have some long term -- or some midterm contracts, call them 6 to 12 months where we had to secure capacity. It is our full expectation -- and I don't know if it will happen this year or not. It's going to depend on freight costs. It is our full anticipation whatever charges we take in Q1 and Q2 ultimately will be reversed, and we will go back to zero and then we'll start building a LIFO reserve that we don't record. So, we think this $100 million to $200 million charge will be temporary, and it will reverse and it could be -- the back half of this year, could be next year, but that is fully our expectation.

So just to clarify, your point being, yes, for maybe this year on a GAAP basis, your EPS algorithm might be a little bit lower than it's been historically, but that's just a GAAP reporting number, the cash flow characteristics of the business aren't changing. And so, if that's the correct interpretation, is it fair to assume that eventually the gross margin can get back to 52% or better over time as this accounting situation reverses and perhaps you start to see the benefits of deflation in your product cost while you keep your retails flat or growing?

Yes. I don't want to specifically say 52% gross margins is what the future is going to look like. As you've seen, there are pressures on gross margin as we continue to grow this commercial business at such an accelerated rate. That pressure is likely going to continue. But just like you said, the GAAP charge, let's just say, it was $200 million for the first half of the year. A year from now or 18 months from now, you're also going to have to think about when that $200 million comes back through the P&L. And so, we would encourage you to look at it, excluding the LIFO charges, both as it's a penalty for us now and when it's a benefit for us whenever that happens.

Your next question is coming from Scott Catarelli from Truist Securities. Scott, please ask your question.

So, I guess I have another question on kind of the same SKU inflation outlook. I mean while you guys are still seeing double-digit same SKU inflation, year-over-year comparisons do start to become much more difficult over the next few quarters. So, how should we think about the comp cadence as those comparisons start to become difficult?

Well, from a comp cadence standpoint, a couple of things I'll point you to is, remember, the first two quarters of last year, we have well over 13% domestic comps. And those are toughest two quarters from a comp standpoint and then you start to see that comp sort of moderate in the back half of the year. And we encourage you for the full year to look at our comps on a year-over-year basis. And the things that we've talked about is, again, we have a resilient DIY business, albeit in a marketplace that has some volatility and some uncertainty associated with it. We've been very disciplined and our growth initiatives are delivered. And then probably the most important part of our story is the commercial story where we're continuing to see accelerated growth in commercial, driven by all the initiatives that Bill talked about and the fact that we're a four or five share in a large and growing market. So, that's how you should think about our comps. And again, the first half comps obviously are going to be a little bit tougher just given the fact that we printed over 13% in the first two quarters of last year.

And then just a quick follow-up here. Does the increase in interest rates and higher interest costs change your expectations at all for your debt-to-EBITDAR targets? Or maybe how aggressive you plan to be on your buyback program?

They don't. A couple of things I'll point you to. One is we've been at roughly a 2.1x metric. So, we have a lot of dry powder to get back to our 2.5x metric. We continue to stress that as we move through this period where our business has grown on an accelerated basis, and we have confidence in our growth prospects going forward. And we're going to move back closer to or at that 2.5x target. So that gives us a lot of financial firepower to, first of all, invest in our existing assets and grow our business, but also to give meaningful amounts back to our shareholders. So you'll see us continue to drive free cash flow and get our leverage metrics back to the 2.5x. And that means that we'll be able to do some exciting things for shareholders in the future.

Your next question is coming from Kate McShane of Goldman Sachs. Kate, please ask your question.

We wondered within DIFM, if you're seeing similar demand trends from national accounts and independents? And also in DIFM, how is private label playing a role in this expanded business? Is it becoming a higher percentage of your mix?

Yes. Terrific questions, Kate. I'll take the last one first. Duralast continues to perform exceptionally well in the DIFM sector. We've rolled it into more categories. In the last few years, we've rolled it into shocks and struts. We've rolled out a Duralast Gold type performance chassis program, and we've rolled out Duralast elite brake pads. Each of these have been well received in both the retail and the commercial market, where 10 years ago, everybody would say, we couldn't be successful in commercial because of the Duralast brand. I think, the exact opposite is true. It has become a real strength for us. Remind me the first part of your question, sorry.

Just demand trends from national accounts and independents.

Yes, sorry. I think they're very, very similar. Both are doing very well. There's not a discernible difference between the two right now.

Your next question is coming from Daniel Imbro of Stephens Inc. Daniel, please ask your question.

Bill, you discussed your new supply chain investment, I think it's on the West Coast for direct importing. Obviously, direct importing is tough especially with fill rates are so important. There's been some changes on your merchandising management internally. So can you just walk through the pros and cons, I mean, growing the direct import business, maybe how you manage that risk in the supply chain backdrop?

Yes. First of all, we've been -- thanks for the question. Terrific. We've been direct importing for years. We've got a strong team of people in China today and import from China and Taiwan and Vietnam and Turkey and India. We've got a very robust direct import program that will continue to grow, and it's been a very important part of us managing our product cost over long periods of time. What we're doing today is we're going to make it more efficient for us. So, we've opened in the beginning stages of opening a direct import facility in California. We also announced that we're going to be opening a new distribution center in New Kent, Virginia and attached to that new distribution center will also be a direct import facility. What this is going to allow us to do is continue to import, but instead of having to buy in quantities that are going to ship from China or Turkey or India by distribution center, we're going to flow them into this direct import facility and it allows us to do postponement on the allocation of the inventory by probably 45 days, which will make us be able to reduce our safety stock in a significant way and make us more efficient. I'm really excited about this new program.

And Jamere, I want to follow up on the SG&A side. I think Do-It-For-Me or commercial delivery costs are actually in that line. So can you talk about maybe on a store level basis, what the SG&A initiatives are that you're implementing, just impressed you're able to leverage that despite the growth in commercial? So trying to understand what's happening on the non-commercial delivery, kind of the core SG&A side of the business?

We've continued to run the playbook that we've always run inside the Company on SG&A, where we're very disciplined about cost. We tend to try to run our SG&A line to be somewhat close to what we're seeing from a sales standpoint. And so, there's a laundry list of tactics that we run every single year to make sure that we're delivering productivity from an SG&A standpoint. Every function is involved in that. So it isn't just the store functions that are a part of that. And those are the things that are, quite frankly, give us a lot of confidence that we're able to manage that line item in line with what we're seeing on the top line over time. Naturally, from a payroll standpoint, we continue to invest in the payroll line to deliver on the customer experience that our customers expect. And as the sales growth has been accelerated, we've tried to make sure that we put the hours in and the labor into our stores to be able to deliver on that promise and that experience, and it's been successful for us. And quite frankly, it's driving our top line growth.

Your next question is coming from Greg Melich of Evercore. Greg, please ask your question.

Congrats on a great year and quarter, guys. The inflation number of 11% for this company in DIY, you said ticket was up eight. Is it fair to say that the difference between the 11 and the eight is all just items in the basket at DIY? Or is there some -- there's inflation that's less in retail

It's basket and mix that are driving the difference there.

Okay. So I should assume inflation is the same in DIY?

That's right.

And then the second question is, and maybe it ties a little bit into the margins in LIFO. Any thoughts in terms of how far AP inventory can go? Any changes in terms there? If you did, would that help you get some more of these products in certain categories? How should we think about the AP inventory ratio?

We have a strong program that are driving the AP to inventory numbers. The other thing I'll point to is that our turns are elevated relative to where we've been historically, 1.5x versus probably being somewhere in the 1.2x to 1.3x. And that's given us some goodness there in terms of the AP inventory ratio. It may move around a few points or so, but we're going to continue to be aggressive on the programs that we've put in place.

And my last one would be trade down. Is there any sign of that? You talked a lot about the strength in commercial in Duralast Gold and Elite, but if you look across the box, including DIY, are we seeing consumers starting to shift anywhere?

Yes, it's a great question, Greg. It's something that we have been studying really since probably May. We have seen it at times on the margin. But really -- I mean, we've really looked for it hard. We have not seen it in mass by any stretch of the imagination at this point in time.

Okay. I'm going to hand back over to Bill now. We have finished the question-and-answer section. Bill, over to you.

Okay. Well, before we conclude the call, I just want to take a moment to reiterate that we believe our industry is in a strong position, and our business model we know 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 should help us succeed for the future, but I want to stress again that it's a marathon and not a sprint. As we continue to focus on the basics and strive to optimize shareholder value for the future, we are confident AutoZone will continue to be very successful. Thank you for participating in today's call. Have a great day.