Good morning, ladies and gentlemen, and welcome to AutoZone’s 2023 First Quarter Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. Before we begin, the Company would like to read forward-looking statements.

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 turn the floor over to Mr. Bill Rhodes, Chairman, President and CEO of AutoZone. Bill, the floor is yours.

Good morning and thank you for joining us today for AutoZone’s 2023 first quarter conference call. With me today are Jamere Jackson, Executive Vice President, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Text. Regarding the first quarter, I hope you have 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 is 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’d like to thank and congratulate our AutoZoners across the enterprise for their commitment to taking care of our customers, which led to the strong results they continue to deliver. It has been a busy first quarter of our new fiscal year, as every day we strive to get back to normal and exit ‘‘pandemic mode’’. This quarter, we opened our new direct import distribution center on the West Coast, continued to improve our in-stock position, and we had our first full national sales meeting since the pandemic began. In fact, we returned to having national sales meetings in every country where we operate and at ALLDATA. These meetings, they are critical to our success, where we celebrate our past accomplishments and lay the groundwork for our future success. Most importantly, they allow us to inspire each other and grow and nurture our unique and powerful culture. For the quarter, as our teams delivered exceptional service, their efforts led to our overall sales growing 8.6% on top of 16.3% last year. Our two-year growth rate marks some of the highest ever. We could not have achieved this success without phenomenal contributions from across the organization. Our AutoZoners’ efforts generated a positive and accelerating retail…

Thanks Bill. Good morning, everyone. As Bill mentioned, from a sales perspective, we had a strong first quarter stacked on top of an exceptionally strong first quarter last year with 5.6% domestic comp growth. We also had a 4.2% decrease in EBIT and a 6.9% increase in EPS. To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q1. For the quarter, total sales were just under $4 billion, up 8.6%, reflecting continued strength in our industry and solid execution of our growth initiatives. Let me give a little more color on some of our growth initiatives, starting with our commercial business. For the first quarter, our domestic DIFM sales increased nearly 15% to $1 billion and were up 44.3% on a two-year stack basis. Sales to our domestic DIFM customers represented 29% of our domestic auto parts sales. Our weekly sales per program were $16,000, up 11.1%. And our growth was broad based as both national and local accounts performed well for the quarter. Our results for the quarter set a record for the highest first quarter weekly sales volume in the history of the chain. I want to reiterate that our execution on our commercial acceleration initiatives continues to deliver exceptionally strong results as we grow share by winning new business and increasing our share of wallet with existing customers. We have a commercial program and approximately 88% 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 117 net new programs finishing with 5,459 total programs. As I have said previously, commercial growth will lead the way in FY23. And we continue to deliver on our goal of becoming a faster growing business. Our…

Thanks, Jamere. Fiscal 2023 is off to a solid start. But we must continue to be focused on superior customer service and flawless execution. Execution and our culture, a culture of always putting the customer first is what defines us. As Jamere said a moment ago, we continue to be bullish on our industry and in particular on our own opportunities for the New Year. Our team continues to work collaboratively with our suppliers. And together, we’ve done a good job improving our in-stock position. But we still are a couple of hundred basis points below our historical norms. We’re also being smart about adding new inventory coverage. We’re meeting the ever-growing needs of our customers, especially our commercial customers, by being able to say, yes, we’ve got it. It’s a requirement. For the remainder of fiscal ‘23, we are launching some very exciting initiatives. Not only will we be opening roughly 200 stores across the U.S., Mexico and Brazil, but we’ll be opening more mega hubs and hub stores. And we’re focused on initiatives in place to continue driving strong performance in both, our retail and commercial businesses. For the remainder of fiscal 2023, we are keenly focused on relentless execution. We will not accept shortcuts. Our vendors must return to providing us the right amount of merchandise at the right time. Every store has to be staffed right, every hour of every day, and our processes need to function correctly, always. We have to meet our store opening goals and timelines. Simply put, we have to focus on exceptional execution. It has made a difference for us for decades. We know that investors will ultimately measure us by what our future cash flows look like three to five years from now, and we very much welcome that challenge. I continue to be bullish on our industry and in particular on AutoZone. Now, we’d like to open up the call for questions.

[Operator Instructions] And the first question this morning is coming from Brian Nagel from Oppenheimer. Brian, your line is live. Please go ahead.

Hi. Good morning. Nice quarter. So, the first question I have, just with respect to freight costs, and Jamere you talked about this in your comments, and you mentioned the LIFO issues. But I guess the question I have is as we think about your freight costs now and what you’re seeing, where are you now tracking say, versus pre-pandemic? And then, even maybe putting some of the accounting noise aside, at what point could this become a tailwind to gross margins, as it really starts to work through the P&L?

Yes. Thanks, Brian. International freight rates are back at pre-pandemic levels. And one of the things that we discussed on last quarter’s call was this notion that during the height of the pandemic to secure capacity, we entered into some longer-term contracts. We’re now in a position where as the spot rates have come down, we’ve renegotiated some of those contracts. We have a pretty bullish outlook on where international freight rates are going to be for the balance of the year. Domestically, rates are still a little bit high. And as we work our way through the year, we expect those to start to abate a little bit. But domestically, the rates are still a little bit higher than what we would have anticipated. As it relates to LIFO, as you saw in the second quarter, we have lowered our outlook to be about a $40 million charge. And you could see in the back half of the year that abating completely. I won’t be date certain about when we’ll see this flip to gains rolling back through the P&L. But as we said last quarter, it could take the equivalent of three or four quarters before it all rolls through. And we see the gains come back through the P&L that offset the charges that we’ve taken. So, our outlook is positive, and we’re managing the business accordingly.

Can I jump in and add a little color on one other element, not on LIFO, but on our normal product cost? Many of those freight costs are being capitalized as part of the inventory cost. So, we’re going to have elevated product cost outside of LIFO for -- in a business that’s turning 1.5 times a year for nine months or a year, whatever the case may be, once those freight costs abate. So, we’ll continue to have pressure on product cost for foreseeable -- for an extended period of time.

That’s very helpful. I appreciate the color there. And then as a quick follow-up, with respect to traffic, and also going back to the comments you made, so it’s -- I think what you said was that the traffic in the stores, while still down in Q1, had improved from Q4, any comments on maybe the trajectory through the quarter? And then how are you thinking about traffic as we move into -- continue to progress through ‘23 here?

Yes, Brian. So, when we’re talking about traffic, we’re predominantly talking about -- we are talking about our DIY business. I will be first to tell you that our DIY strength in Q1 was stronger than we expected, considerably stronger than we expected. And yes, our traffic counts are down 4%, but that was meaningfully better than -- I believe it was 8% in Q4. Remember -- and you’ve been following this industry for a long time, there is a natural drag on DIY traffic counts that have been happening for 25-years. As you know, technology has gotten better and better on the products that we sell, and so they last longer. But there’s also inherent inflation in those product costs as technologies are added to the products. So, a 4% traffic decline in the DIY business is not abnormal in normal times. And to see it down 4% after the growth that we’ve seen over the last three years was very encouraging to us.

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

Good morning, everyone, and Bill, congratulations on the anniversary. My question is actually a follow-up to what you just mentioned, Bill. The traffic or I guess we will look at -- we try to call it units, I don’t know if you would say that they’re synonymous. It did look like it improved sequentially on a single-year basis. We don’t see what the stacks have looked like, I think, on traffic or units. And curious if underlying stacks are also improving such that this is the rebasing and we are in the all clear in terms of units probably done reverting and the negative numbers are normalizing back to that negative 4% that you mentioned.

Well, that’s a strong statement, Simeon, in the all clear. I think we still have a level of anxiety on what the next year or so is going to look like coming off of unprecedented growth over the last three years. If we were on this call last year, we had expectations that our sales -- our same-store sales would decline, and they didn’t. They were up considerably, and they were positive in DIY. Here we are again, comping off a positive DIY number with another positive DIY number. So, I think the farther we get away from the pandemic and the more resiliency we see in the DIY business, the more confidence we have that the gains that we picked up during the pandemic are sustainable. That said, I wouldn’t characterize it as “all clear”.

Yes. The only thing I’d add to that is when we look at our business in our bread and butter failure and maintenance categories, our volume trends have been strong, as Bill mentioned in his prepared comments. The relative inelasticity of demand there gives us a lot of confidence about that business. But in our discretionary categories, we were down 2.5%. And if you think about where consumers are feeling the most pressure today and where that pressure actually manifests itself, it manifests itself in discretionary purchases. And so, the fact that our discretionary business trends actually improved quarter-over-quarter, give us a lot of confidence about the future. That being said, there’s still a lot of volatility and uncertainty, as Bill mentioned. We’ll continue to manage our business accordingly.

And then my follow-up is on used car prices. The empirical evidence tied to the industry’s growth isn’t great, statistically speaking. But it certainly has been a benefit. And it still feels like the industry is benefiting from the surge that we’ve seen. Are you finding there’s sensitivity now on the way down? Do you feel like we’re still benefiting from the surge? And then, if so, when does that tail off? And I don’t know if it becomes a headwind or not in your minds?

Yes. I look at the macro in a pretty broad way. You’ve got a couple of dynamics going. One, you have an ageing and growing car part. And used car prices, while they’ve started to abate, they’re still up almost 30% over the last two years. New car prices are up closer to 20%. And you’re in an environment where you have rising interest rates that have made financing more challenging. So we do believe that it is still a little bit of a tailwind for our business. And more importantly, we’ve been managing our business to take advantage of all of the robust market opportunities that we have, and this is just one portion of that. I think as we’ve talked about our business and the growth that we’re seeing, it’s not just that macro strength, but inflation has been our friend to some extent, driving higher prices, volumes held up under those dynamics. And our growth initiatives have helped us create a faster-growing business in both DIY and DIFM. So, when you take the combination of what you’re seeing from inflation, from our growth initiatives, from the work that we’ve done with hubs and mega-hubs and this macro strength, those are all the things that are in the soup, if you will, in terms of how our business is growing.

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

You had mentioned at the beginning of the call about your improving in-stock position. I wondered if you could talk a little bit more about that and where you see yourself by the end of ‘23 from an in-stock position? And then, I’ll follow up with my second question. Thank you.

Sure, Kate. Yes. Our in-stock position today is meaningfully better than it was at this time last year -- well, 18 months ago. It’s up a little bit from this time last year. It’s up a little bit from Q4, but we’re still about 200 basis points below our historical expectations and experiences. When will it resolve? It still -- frankly, Kate, I would have thought it had been resolved by now. But there are certain product categories that are still a challenge, and we’re looking to continue to find new sources in some of those categories and new geographies in some of those categories to help us get past it. But we feel pretty good about where we are. We feel very good about where we are competitively.

And is there an expectation that you’ll want to do better than the 200 basis points where you are below those expectations? And in terms of how much your sourcing has changed, has it been meaningful since where you used to source pre-pandemic?

Yes. Our sourcing has not changed a significant amount at this point in time. We do have some objectives to diversify the geographies with which we source in basically every category. As far as having higher expectations for in-stock, right before the pandemic, we’d reached an all-time high, which was 100 basis points ahead of where we were historically. So, our supply chain team -- need to remind them that we need to break our old high, which was 100 basis points higher. So, that would be about 300 basis points ahead of where we are right now. And I think they’ll get there. It may take a little more time.

Your next question is coming from Chris Horvers from JP Morgan.

So, my first question is just to check the math, on the LIFO the headwinds being halved in the second quarter. So I guess, directionally, should we think about your gross margin headwind in the second quarter being roughly half of what you experienced in the first quarter?

Yes. I mean, we expect LIFO charge in the second quarter to be somewhere in the $40 millionish range, if you will. And so that will be significantly less pressure from a gross margin standpoint.

Got it. And then, is -- as a follow-up to that and then a question on the SG&A side, I mean, is there -- other than the mix headwinds of Do-It-For-Me in gross margin, is there anything else to consider? And then on the SG&A side, SG&A dollar growth year-over-year has been running in this 8% to 10% range over the past four quarters. How much of that is wage and benefit cost inflation versus investing during the good times? And then going forward, how are you thinking about inflation and wages and SG&A in the context of your overall leverage point?

Yes. So, from an SG&A standpoint, I mean, we’re going to continue to grow SG&A in a disciplined way as we create a faster-growing business. As I said, we were flat as a percentage of sales this past quarter. But we’ve been investing, and we’ve been investing to maintain high levels of customer service. And we’ve been investing because many of our growth initiatives, both on the retail and the commercial side of our business, are underpinned by investments in IT. So IT investments, in particular, are an enabler to what we’re doing from a growth standpoint. As you know, wage pressure is a macro labor market issue, and we certainly haven’t been immune to those dynamics. Historically, our wages have run in the, call it, the 2% ZIP code. It’s been running closer to 5%. And so that’s put some pressure on us. But what I’ll say about SG&A over time is that we will continue to manage it in line with the top line. We’ve been opportunistic as our business has grown to invest at an accelerated pace in some areas to support the growth in our business and to maintain great levels of customer service, and we’ll continue to be very-disciplined about it going forward. And I’m sorry, what was the first part of your question again?

Other than the mix of commercial versus DIY, is there any other variables that are different here in the second quarter in the context of that LIFO headwind being halved?

No. We’ve said that our faster-growing commercial business is likely going to put 35 basis points to 45 basis points of pressure on our gross margins. You saw that in this quarter. And we continue to expect our commercial business to grow significantly faster than our DIY business. And those are the kinds of headwinds that you’ll see from a margin standpoint as we move forward.

Your next question is coming from Michael Lasser from UBS.

Bill, your tax in the commercial business remains quite consistent, but it did slow on a one-year basis. Do you think that’s more related to something happening out of AutoZone where the log diminishing returns are taking over such that you’re still generating similar amount of incremental sales, but it’s just on a larger base, or is there something happening in the underlying trend of the commercial segment itself?

It’s a great question, Michael and one that, frankly, I’m not sure that I can factually answer. I will start with 15% growth in our commercial business, we are all excited about that, especially coming off of the growth that we’ve had in the last couple of years. So, we are pleased with the performance in our commercial business. It’s widespread. The slowdown, the slight slowdown that we’ve experienced is across the board. It’s not national accounts. It’s not up and down the street. It’s not our ProVantage customers. We’ve seen a general slowdown across different customer bases and across geographies. So, I don’t think that it’s anything that we’ve done at AutoZone. I think it’s -- we’ve grown very fast, and we grew 15% on top of it, and we’re pleased with that.

And is this now a more realistic run rate? It will still grow double digits? Is it hard to maintain that 20% that you have been achieving? And my follow-up is one of your competitors recently announced that they’re going to make some price investments. This comes on the heels of another competitor emulating what you had done and make price investments. At what point should we call this a trend, and increased price transparency is just leading to a little bit more price competition within the commercial segment of the auto part retail sector?

Yes, I’ll leave it to you guys to define the trends that you want to do. What I can tell you is our pricing investments that we made about 18 months ago we had nothing to do with our close in competitors. They were focused on looking at our value proposition versus the 80% of the market that’s outside of our close in competitors, and trying to make sure that we were priced right for the value proposition that we were delivering. We’ve been very pleased with that and pleased with we’re believing that our outside growth over the last couple of years has been driven not by taking share from our close in competitors by taking share from the broader market. And so I’m not seeing anything by any indications based upon either of our close in competitors pricing that we see anything very different.

Your next question is coming from Daniel Imbro from Stephens.

I wanted to start on the commercial side. Bill, in your prepared remarks, you talked more about some tech investments you’re making to make it easier -- I think you said easier to do business with you guys. Could you provide more detail on what those initiatives are? And then where are we -- what inning are we in, in terms of the rollout of these different tech programs on the commercial side?

Sure, Daniel. Thank you. One of the things that we’ve rolled out over the last couple of years is handheld devices for everybody that’s in the store picking the products and everybody that’s delivering to a commercial customer. And that helps us ensure that we have the exact right product, and it helps us manage delivery times, which we have brought our delivery times down about 20% since we deployed that technology. The other big part of it -- and there’s a lot of different technology things that we’re doing along the way. But the other big one that we’ve done is really how we interact digitally with our commercial customers and -- from providing them access to invoices to making us more seamless to operate together, just trying to take the pressure points out and make a frictionless transaction with us. The handheld pieces have been deployed. We’re continuing to refine the technology. And I suspect that those refinements will probably take up to another year or so. I think the digital integration is less far along. We have more newer ideas that we have yet to embark on, on the digital integration with our customers. And so, that’s got to probably have two or three years of legs to it.

And then I want to follow up on Chris’ question earlier on LIFO. So, Jamere, you provided a helpful color on 2Q. But I think in your prepared remarks, you said you expected to recognize some LIFO benefits in the back half of this year that would offset it. So if we just think about the $40 million you’re now guiding for 2Q and a LIFO headwind, should we assume there’s about $120 million of a LIFO benefit that’s going to flow through the gross margin line in the back half of the year? And then, what would the cadence be that you’d expect to recognize that $120 million benefit?

Yes. Well, there are lots of things that will impact when we actually see the reversal of the charges that we take. The biggest one, as we mentioned, is the pace with which freight comes down and we get out of some of the contracts that we’re in. And as I said before, we won’t be date certain about when that actually happens, but we do anticipate that happens. So, it’s moving in the right direction for us. And given that our inventory turns at, call it, 1.5 times, you should expect it to take two or three quarters potentially for us to have all of those costs worked their way through and us to see it turn the other way. So, we’ll give a more fulsome update on our next quarter call. And as I said before, we’ll be very transparent about what we’re seeing.

Your next question is coming from David Bellinger from MKM Partners.

The first one on commercial. It seems like the transaction counts maybe have been a bit slower this quarter. So, is there anything to read into that? And what type of consumer or customer activity are you seeing? Is there some type of deferral coming into play? Just any other details around the commercial counts would be helpful?

Yes. We’re doing a lot of studying on both our retail and commercial customers because if you think about it, this is a pretty unprecedented environment. I know I’ve never seen inflation rates in the upper single digits and lower double digits. So, we’re paying particular attention to what customer behaviors are happening. As a reminder -- and we certainly have more experience in the DIY business than we do in the commercial business, in the last economic shocks, the last four economic shocks in the U.S., our business has significantly outperformed normal periods of time. So, we’re monitoring that to make sure we understand, particularly what’s going on with the low-end consumer. And then, I think the expectation -- and we don’t have near the evidence here at this point in time, but I believe that there’s an expectation that some commercial customers or some jobs that a commercial customer would normally be done DIFM, can trade down into the DIY sector. And so, we’re watching those kind of trends, but we don’t see anything yet that is alarming to us. We continue to monitor it. And again, we’re pretty darn pleased with the 15% growth in our commercial business.

Got it. And then, just on the commercial program growth, that seemed to step up a little in Q1. It was about 5% year-over-year. Can you give us an update on how those programs are maturing? Is it still something like three to five years for those units to gain some material traction, or are you now seeing an accelerated pace in ramp-up, just given all the progress in the commercial business and the mega hub strategy?

Sure. Well, we certainly stepped up openings in the first quarter. But remember, we’re at about 88% of our stores have the commercial program today. There’s no vision that we’re going to be 100% or anywhere close to that. As you would imagine, the per store and per program economics of our commercial business over the last couple of years have changed pretty meaningfully. So, there are programs that now make sense to be open that two years ago, we might want to service them from another program. So, that’s what you’re seeing. We may open another 100 or so, but I wouldn’t expect for massive growth rates in commercial openings. And you’re exactly right. It typically takes four or five years for those programs to mature. I think as we’ve gotten stronger, they come out of the box higher than they did before. And we’ll see what -- if the maturity lasts as long as it used to. The one place that is very different, they mature -- we don’t know how long it takes for them to mature, but they come out of the gates much higher our mega hubs. It’s amazing to see the volumes that we do almost day one coming out of a mega hub.

Thank, Bill. Enjoy the trip to Mexico.

All right. Thanks. I look forward to it.

The next question is coming from Mike Baker at D.A. Davidson.

Okay. Thanks, guys. A couple of questions. The spread between the ticket growth and inflation widened a little bit. It’s now -- I think it was 4 percentage points in retail versus 3 last quarter. Remind us, is that -- are you seeing -- is it fewer units per transaction? Is it a trade down to less expensive items? Just any color on what’s going on there?

Yes. It’s primarily basket mix that’s impacting that. One of the things we’ve been very disciplined about is moving retails, as we see cost and we’ve been very transparent about what we’re seeing there and been very disciplined about what we’re doing. This is the entire industry.

So, when you say basket mix, does that mean people trading down to lower more entry-level price points or private label? Just what exactly do you mean by basket mix?

It could actually mean the types of products that are being purchased relative to what we saw in the previous period.

Okay. And do you see that as any kind of sign of the consumer being strapped, or is it just sort of a random situation? What would cause that, I guess?

Again, as we talked about the consumer, if you think about it from a macro standpoint, I mean, clearly, the consumer is feeling the pinch of inflation on multiple fronts. And quite frankly, inflation is going to erode consumer spending overall. But in our business, where we see the primary pressures in our discretionary categories and our bread and butter failure and maintenance categories, the demand has been there. And the actions that we’ve taken from a pricing standpoint have not impacted volume in a meaningful way, so. The other thing I’ll say about just the consumer in general is it’s clearly a two-speed world. The middle and upper end consumers have stronger balance sheets, and they’re continuing to spend in a meaningful way and the lower end consumer is pitched. So, what we’re seeing from our business standpoint is quite frankly consumers, when they have an opportunity, as Bill mentioned, to potentially trade into DIY from DIFM for certain things, they will do that. And these are the kinds of things that we’d expect consumers to do over time. But I wouldn’t read anything into the fact that tickets are 1 point or 2 below what we’ve seen historically, most of that again is mix related.

Well, if I could ask one more, how about the opposite now? Gas prices, believe it or not, are now lower than they were prior to the Russia-Ukraine situation and essentially flat year-over-year. Historically, can you remind us how much relief does that provide to your customers? And can that help offset some of those pressures that you just talked about?

For sure, Mike. No question about it. If you recall -- you followed us for a year. So, one thing that we said that really does matter to our customer is gas prices, and particularly when they get over $4 a gallon. We’ve said that for the last 15 years, there just seems to be something special about that $4 a gallon. Obviously, we’re below that level now. But there’s a lot of puts and takes that are going on with the customer today. We’ve never seen this kind of combination. You got near double-digit inflation. You’ve got low-end wage inflation that’s up 5%, 6% across the marketplace. You’ve got gas prices that went up exponentially and then quickly came back down. So, we’re spending a lot of time looking at different stratus of our customer bases, particularly on the DIY side. And while we see some people trading down into -- on the good, better, best spectrum, we’re not seeing any significant moves at this point in time. But we’re obviously paying a lot of attention to it because these are kind of unprecedented underlying factors that are going into it.

And that is all the time we have for questions today. I would now like to turn the floor back to Mr. Bill Rhodes for closing remarks.

Great. Thank you. Before we conclude the call, I want to take a moment to reiterate, we believe our industry is strong, and our business model in particular is solid. We will take nothing for granted as we understand our customers have alternatives to shopping with us. We have exciting plans that should help us succeed for the future. But I want to stress again that this is 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. I want to wish everyone a happy and healthy holiday season. And thank you for participating in today’s call and for your interest in our company. Have a great day.

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.