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AutoZone Reports Strongest Commercial Sales Growth Since 2015

AutoZone Inc.’s net income rose 25.1 percent to $351.41 million for the fiscal first quarter ended Nov. 17, 2018, benefitting from a decline in its tax rate, which slid from 34.6 percent to 21.7 percent on a year-over-year basis (or 24.2 percent excluding the exercise of stock options).

Gross profit increased 3.8 percent to $1.42 billion. As a percentage of sales, gross profit grew from 52.8 percent a year ago to 53.7 percent for the 12 weeks ended Nov. 17, 2018. Management attributed the improvement in gross margin to the sale of two businesses and higher merchandise margins.

Net sales increased 2.0 percent to $2.64 billion. Domestic same-store sales rose 2.7 percent on top of a 2.3-percent gain a year ago for a two-year stack of +5.0 percent.

Chairman, President and CEO Bill Rhodes told analysts on the company’s Dec. 4 quarterly report conference call that results were generally consistent throughout the quarter, except for the weeks and markets where AutoZone lapped hurricane events from last year, as well as the last week of the quarter, which was particularly strong as much of the country experienced the first major cold weather, which accelerated sales. “Over time, weather effects normalize,” Rhodes pointed out, “but, in certain weeks, it can have a meaningful impact on our sales.”

On a regional basis, strength was noted in the Northeast, Mid-Atlantic and Midwest markets, while results were improving — but still a bit subdued — in the West, according to Rhodes’ commentary.

Domestic commercial sales increased 11.3 percent to $546.91 million for the strongest growth quarter for commercial since fiscal 2015.

Analysts with Jefferies LLC wrote in a Dec. 4 Company Note that “improved inventory availability and focus on customer engagement appear to be driving share gains from independents, while DIFM growth in general appears robust.”

AutoZone opened 25 net new commercial programs during the fiscal first quarter, and management expects to open roughly 150 net new commercial programs this fiscal year. Currently, approximately 85 percent of the company’s domestic stores have a commercial program.

During the quarter, AutoZone opened 13 new stores and relocated one store in the United States. As of Nov. 17, 2018, the company had 5,631 stores in the United States, including Puerto Rico.

The company also opened three stores in Mexico, ending the quarter with 567 stores in-country. The goal is to open 40 new stores this fiscal year in Mexico.

It’s worth pointing out that this month marks the 20th anniversary of AutoZone’s first store in Mexico.

No new stores were opened in Brazil during the fiscal first quarter; however, management plans to expand its 20-store base by 15 to 20 additional locations by the end of the fiscal year.

During the quarter, AutoZone opened two mega hub locations, giving the company a total of 26 in operation. Combined with the 170 hub stores, the company now has 196 stores with expanded parts assortments. Management plans to open 10 new hub locations this fiscal year, the majority of which will be mega hubs.

AutoZone’s inventory increased 2.0 percent to $4.09 billion in the quarter; however, inventory per location declined from $663,000 to $658,000 on a year-over-year basis. And, for the trailing five quarters, inventory turns are unchanged at 1.3x.

“On our last call, we highlighted that, over the last six months, we had executed a significant amount of changes, including product category changeovers that we felt were disruptive to our company and negatively impacted sales during that time,” Rhodes said. “We are happy to report that the majority of those challenges have been addressed and rectified, and those issues are predominantly behind us. As importantly, we have studied our opportunities for improvement in the future and have improved our planning and processes accordingly.”

He also told analysts: “Overall, our business strengthened in Q1, and we are encouraged as we head into our second fiscal quarter.”         — Marc Vincent

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