Autozone Inc (AZO) Q1 2021 Earnings Call Transcript

Autozone Inc (NYSE: AZO) Q1 2021 earnings call dated Dec. 08, 2020.

Corporate Participants:

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

William T. Giles — Chief Financial Officer and Executive Vice President – Finance and Information Technology, Customer

Jamere Jackson — Chief Financial Officer and Executive Vice President – Finance and Store Development-Elect, Customer

Analysts:

Bret David Jordan — Jefferies — Analyst

Simeon Ari Gutman — Morgan Stanley — Analyst

Christopher Michael Horvers — JPMorgan Chase & Co. — Analyst

Michael Lasser — UBS Investment Bank — Analyst

Matthew J. McClintock — Raymond James & Associates — Analyst

Presentation:

Operator

Good morning and welcome to the AutoZone Conference Call. [Operator Instructions]

This conference will discuss AutoZone’s first quarter earnings release. Bill Rhodes, the Company’s Chairman, President and CEO, will be making a short presentation on the highlights of the quarter. The conference call will end promptly at 10:00 AM Central Time and 11:00 AM Eastern Time.

Before Mr. Rhodes begins, the Company has requested that you listen to the following statement regarding forward-looking statements.

Certain statements contained in this presentation constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, position, strategy, seek, may, could and similar expressions. These are based on assumptions and assessments made by our management in light of experience and perception of historical trends, current conditions, expected future developments and other factors that we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including, without limitation, product demand; energy prices; weather; competition; credit market conditions; cash flows; access to available and feasible financing; future stock repurchases; the impact of recessionary conditions; consumer debt levels; changes in laws or regulations; war and the prospect of war, including terrorist activity; inflation; the ability to hire, train and retain qualified employees; construction delays; the compromising of confidentiality, availability or integrity of information, including cyberattacks; historic rate sustainability; downgrade of our credit ratings; damages to our reputation; challenges in international markets; failure or interruption of our information technology systems; origin and raw material costs of suppliers; disruption in our supply chain due to public health epidemics or otherwise; impact of tariffs; anticipated impact of new accounting standards; and business interruptions. Certain of these risks and uncertainties are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of the Annual Report on Form 10-K for the year ended August 31, 2020, and these Risk Factors should be read carefully. Forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ from those contemplated by such forward-looking statements, and events described above and in the Risk Factors could materially and adversely affect our business. Forward-looking statements speak only as of the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Good morning, and thank you for joining us today for AutoZone’s 2021 first quarter conference call.

With me today are Bill Giles, Executive Vice President and Chief Financial Officer; Jamere Jackson, Chief Financial Officer-Elect; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the first quarter, I hope you 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.

Since our last earnings release in late September, much of the world’s intention remains focused on COVID-19, including its current and future implications for communities, businesses and markets. These times remain extraordinary for all of us. From the start of the pandemic through this quarter, our team has had to deal with challenges unlike any we have seen in our Company’s history. While at the start of the pandemic our sales dipped, we performed quite well once economic stimulus was implemented in the US and Americans began to drive more.

By mid-April, our business began to strengthen and reached an apex last quarter when we reported 21.8% same-store sales, the best same-store sales performance in our Company’s rich history. For this quarter ending in late November, we are proud to report 12.3% same-store sales, another historically strong performance. While last quarter’s sales were more consistent, particularly across the first 12 weeks of the 16-week quarter, this quarter was a bit less so. Considering the meaningful volatility resulting from the pandemic and economic responses, we are sharing our same-store sales cadence for equal-week period of the quarter. We were up 16.5%, then up 11.4%, ending up 8.8% in the last four weeks. The deceleration appears to be related to a combination of normal seasonality and how far away we work from the benefits of economic stimulus. This quarter’s traffic was far more beneficial to same-store sales than ticket growth by quite a wide margin.

When we talked in September, we could not have effectively forecasted our growth for this quarter’s same-store sales, albeit we would have been much closer than we would have forecast in Q4 as of beginning of that quarter. We are continuing to learn as we go. In Q1, we felt we would see substantial above-normal growth, but we wouldn’t have thought double-digit same-store sales.

Our number one priority continues to be the health, safety and wellbeing of our customers and our AutoZoners. Throughout the pandemic, we have continued to follow the myriad of national, state and local mandates and ordinances and have always kept close tabs of the CDC guidelines. We require mask entering our facilities, perform questionnaires of our team and take many other safeguards like enhanced cleaning protocols, providing mask, hand sanitizers and other PPE to our AutoZoners to ensure safe shopping and work environments.

Last quarter, we talked about the pressure our supply chain was experiencing to make sure we were in stock and replenishing the stores on a timely basis. I’m very happy to say, today we feel we’ve made significant progress in this area. Our in-stocks are much improved and our supply chain in most of our vendor partners have done an exceptional job reacting to the unprecedented surge in volumes that have now lasted six-plus months. The progress has been significant, but at the end of the quarter, we had only closed about half of the gap from our depths to our normal levels of in-stock.

To provide a little more color on the drivers of our sales performance this quarter, I’ll remind you that we were anxious to see what would happen as we got further away from the enhanced unemployment benefits. While the initial stimulus package ended at the end of July, there were still funds being distributed on a state by state basis at lower levels this fall. As you recall, last quarter we reported finishing the quarter with comp sales running at 16.5%. And you can see we remain strong for this quarter. While our enhanced sales growth declined over the quarter to still historically high levels, we believe the noise around the election, the reemergence of COVID in many areas and the beginnings of seasonal weather patterns hurt foot traffic, particularly in the last four-week period. While it remains extremely hard to predict sales performance in the near term, we believe the fundamentals of our business remain quite strong.

During the quarter, there were certainly some geographic regions that did better than others as there always are. But all of our regions performed well. And I could not be more proud to say that based on the retail sales for customer segment data that we have, we continue to experience historically unprecedented share gains, historically unprecedented share gains. The data shows the industry has been growing in the high single digits and our sales have been growing at close to the — to double that rate for these categories. While we are thrilled to have these share gains today, our charge is to determine how we maintain them.

I’m sure many of you would like to know how we are thinking about sales for both the second quarter and the balance of fiscal ’21. I’ll remind you that typically in recessionary environments, our business is remarkably resilient. However, nothing about this global pandemic is typical. There’re simply too many remaining unknowns like will the federal government pass the second round of stimulus and when will the vaccine be distributed and how effective will it be, what consumer behaviors have changed temporarily, which ones have changed permanently. All of this creates uncertainty. But our focus on execution remains the same. Beyond our primary objective to ensure the safety of our customers and AutoZoners, our focus is on providing our AutoZoners with the resources they need to provide our customers with an exceptional shopping experience.

For the long term, we remain bullish on the health of our industry. And if the economy enters a deep and protracted recessionary environment, we continue to believe our customers will focus more on maintaining their current vehicles. These time periods have benefited our business in the past, retail in particular, as it has in the last three recessions. Last quarter, I reminded folks the strongest periods we experienced outsized sales growth over the last three decades have been the early ’90s, ’01-’02,’09, ’10 and ’11, all coming out of recessionary periods. Therefore, we remain optimistic on the industry this upcoming year. Interestingly, after each of these outsized growth periods, they have never been followed by equivalent declines in the years that followed. We believe consumer behaviors change during these recessionary periods, allowing us to showcase our skills and capabilities to new customers, and we’ve retained many of those customers in the years that followed.

I would be remiss if I did not thank our AutoZoners for their exceptional efforts. While I’ll praise our entire organization from our stores to our distribution centers, from the US to Mexico to Brazil and all data and our store support teams, I always owe our thanks to our customers who continue to believe in our capabilities to help them with their automotive needs. I couldn’t be prouder of our team. As usual, I want to especially recognize on behalf of every AutoZoner our store and distribution center AutoZoners. These extraordinary people have been challenged more than they ever could have expected, and they have met every single challenge. Thank you, AutoZoners. You embody everything it means to be an AutoZoner, and you deliver on our cultural and service promises every day.

Now let’s move into more specifics on performance for the quarter. Our same-store sales were up 12.3% versus last year’s first quarter. Our net income was $442 million, and our EPS was $18.61 a share, 30.1% above last year.

Sales were higher than we forecasted at the beginning of the quarter and certainly higher than historic norms. Both our retail and commercial businesses showed strength in the quarter with DIY same-store sales up approximately 13% and commercial total sales growth of approximately 12%. In commercial, we averaged over $58 million in weekly sales, which was over $11,500 in sales per program per week. While average weekly sales per program decelerated from last quarter, that is normal as we change seasons. Moving forward, we expect our commercial business to show continued strength as we execute on our growth initiatives and gain additional share in this space. I’ll remind you that this is a highly fragmented $75 billion market, and we believe our product and service offerings provide us tremendous opportunity to significantly grow sales and market share over time.

While there are some geographical differences this quarter, there continue to be interesting trends across our merchandise categories, particularly in the retail business. Our sales [Phonetic] for categories continue to be strong as we believe people have more time and many have more money. Many parts of the economy are still operating at fractions of their normal capacity: movie theaters, vacation resorts, entertainment venues, hotels and the like. Some Americans have the luxury to, quote, work from home, eliminating their commute, and unfortunately, while vastly improved from the early days of the pandemic, unemployment is still twice the pre-pandemic rate. This extra time and, for some, extra funds, have been repurposed for that project car or doing that enhancement job our customers have been perpetually putting off.

At the same time, while our sales have increased in merchandise categories like brakes, rotors and even motor oil, they aren’t growing as fast as the rest of the categories due to last year’s mild winter and lower current miles driven. We believe miles driven will continue to improve and maintenance parts will increase as miles driven go up. And we know from history that the muted brake and rotor growth is also still being impacted by last year’s very mild winter. As for this year’s winter, all indications we have call for a normal winter. Anything, anything normal in this environment will be welcome.

We expect that our sales growth from the pandemic-related surge will moderate over time. However, we will continue to invest in growth initiatives in both our retail and commercial that position us well for the future. In addition, we continue to believe our products and services will be in high demand during more difficult economic times, and this resiliency gives us significant confidence about our prospects. One thing we are certain of is our team continues to perform at an exceptional level. I’m so proud of them across the enterprise. We remain focused on providing everyone with the support, encouragement and resources they need to live up to our pledge of always putting customers first.

Now I’d like to again thank our AutoZoners for their extraordinary efforts during these unprecedented times. In particular, I would like to recognize the tremendous contributions of our store and distribution center AutoZoners and their leaders who have been there for our customers, external or internal, every day since the beginning of the pandemic. I ask each of you listening to this call to stop for a moment and imagine yourself in a public environment five-plus days a week for the last nine months, helping customers while at the same time trying to keep yourself, your teammates, your customers and ultimately your own family safe from the virus. Seriously, seriously stop and think about that. That is exactly what our team has done. Our stores haven’t closed. Our distribution centers are operating at breakneck speed. Thanks to these AutoZoners at our stores and distribution centers for all they’ve done.

In the spring, we implemented something innovative and new for all eligible full and part-time hourly AutoZoners and ultimately for our store managers and DC advisors. We offered them emergency time off or ETO as we call it. In essence, it amounted to two extra weeks of vacation to give them the flexibility to ensure their safety, deal with childcare issues, care for a sick family member or most importantly, stay home, stay home if they were showing any symptoms. It is worth and it’s worked exceptionally well. Many of them have used this benefit while a significant portion have saved it and will receive meaningful payouts should they choose next month, an $800 to $1,600 or more bonus for most of our hourly AutoZoners.

When we rolled this new benefit out, as you would expect, we shared that it was a one-time extraordinary benefit. Who knew then that the pandemic would still be racing at the turn of the calendar year. So two weeks ago, we announced our team that we would allow them to carry over any unused ETO or be paid out in January at their election, that every single AutoZoner who has unused normal vacation would be allowed to carry it over six months past the normal deadline, and most importantly, that we would be extending all eligible full and part-time hourly AutoZoners, store managers and DC advisors in the US with another week of ETO at the beginning of the new calendar year.

This is an expense that will be recognized in our second quarter of approximately $50 million. And as I’ve told our AutoZoners on the Wednesday before Thanksgiving when I made the announcement, it’s a large expense, but is more importantly a tremendous investment in them and their safety. I’m exceptionally proud to work with a team of leaders and a Board of Directors who ensure we live consistent with our stated values.

Now it is my pleasure to turn the call over to Bill Giles. Bill?

William T. Giles — Chief Financial Officer and Executive Vice President – Finance and Information Technology, Customer

Thanks, Bill, and good morning, everyone.

To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q1. For the quarter, total auto parts sales, which includes our domestic, Mexico and Brazil stores, increased 13.1%. For the trailing four quarters ended, total sales for AutoZone store were $1,960,000. This compares to $1,865,000 in Q1 last year.

Now let me give a little more color on sales and our growth initiatives. For the first quarter, our domestic do-it-for-me or DIFM sales increased 11.9% to $695 million, another strong quarter for us. In the quarter, sales to our DIFM customers represented 22% of our total sales and increased approximately $75 million from last year’s Q1. Our weekly sales per program were $11,500, up 9.2% on a per-program basis versus $10,600 per week last year. Not only was $11,500 per week the second highest average ever for us, but we were able to average $58 million in total weekly commercial sales, another near record and a tremendous accomplishment for our teams. As you know, commercial sales is an important growth initiative for us, and we are investing in a disciplined way to create a faster growing business. We now have our commercial program in 85% of our domestic stores. This year, we have opened 36 net new programs, finishing with 5,043 total programs as our sales efficiency per store remains at near-record levels.

Let me give a little more color on our success in commercial and the growth playbook as we move forward. This past year, we believe we grew share and remain focused on repeating this for FY ’21. Fundamentally, we believe that our share gains are underpinned by the investments we made in improving the quality of our parts offering, many in the Duralast brand, improvements in our parts coverage by model year and a commitment to providing exceptional service. These core focus areas have enabled us to drive double-digit sales growth for the past two quarters and position us well in the marketplace.

As we move forward, we are focused on several initiatives that we believe will accelerate growth. First, we continue to expand our inventory availability initiatives by adding MegaHub locations. We opened three new MegaHubs this quarter, bringing our total to 47. These stores substantially increase local market availability, and we see a meaningful lift in sales in the markets where they opened. With over 80,000 SKUs or more, we deliver same day and often multiple times per day to stores in MegaHub markets. This means a store can say, yes, we have it significantly more than when they are sourced from a hub that carries 40,000 to 50,000 SKUs.

Second, we are improving our service continually by upgrading service levels with our parts professionals and drivers. We are delivering faster, and we are supporting our customers with overall needs better than before. We recently implemented chainwide in the US technology that will significantly improve our delivery times and the accuracy of the commitments that we make to our customers.

Third, using our one team approach, we have further integrated our commercial business at our stores where we offer programs. This means that store management and the entire team is focused on driving sales and improving service to our commercial customers. And fourth, we continue to invest in disciplined way in initiatives that make us more competitive in the marketplace and much easier to do business with. We like our growth prospects in commercial and believe our growth initiatives will help us create a faster growing AutoZone.

Now, Bill, gave a lot of color on our DIY business, which I won’t repeat, but I would like to spend a moment on our integrated retail efforts. As COVID’s effect on customers’ ability to get out and shop grew, we’ve ramped up our strategy to enhance the customer shopping experience by meeting customers when, where and how they wanted to shop. This past quarter, we continued to see very strong growth in our buy online, pickup in store shopping channel. While our other two options, next day delivery and ship to home were also up nicely, our buy online, pickup at store offering continued its rapid growth. Pickup at store grew faster than our ship to home option as customers continue to value interaction with our experienced in-store advisors. While our online sales remain less than 5% of our DIY business, the traffic to the website is a tremendous marketing tool for our in-store business. We remain committed to improving the shopping experience online in order to help customers identify what they need and allow them a quicker in and out experience once they come to our stores for pickup.

Our Mexico stores continue to be impacted by the pandemic. In addition to impacting sales, the weakness in the foreign currency exchange rate put additional pressure on our results. the exchange rate finished the quarter at MXN20.6 to the dollar and was roughly 6% higher than last year’s first quarter rate. As a result of the devaluation, our total US dollar sales were negatively impacted. During the quarter, we did not open any new stores and finished with 621 stores. While the macro environment has been challenging, we believe we are seeing signs of a turnaround with the Mexican economy. We remain committed to our store opening schedule in Mexico for the foreseeable future.

Regarding Brazil, we finished with 45 stores. We opened two new stores in the quarter. Like the US and Mexico, Brazil faced challenges with COVID-19, stay at home mandates and foreign exchange headwinds. The Brazilian real devalued roughly 30% for Q1 year-over-year. We view the COVID impact to be short term in nature for our Brazil stores as well. Our commitment to grow in Brazil — the Brazilian business has not wavered.

Now I’ll pass it off to our CFO-Elect and the new member of our team, Jamere Jackson, to take us through additional P&L items and our cash flow and balance sheet highlights. But before I do, I would like to personally welcome Jamere to our team. We are also excited to have him here. He has been a very quick and we all look forward to his valuable contributions for many years to come. Jamere?

Jamere Jackson — Chief Financial Officer and Executive Vice President – Finance and Store Development-Elect, Customer

Thanks, Bill.

And let me first say how delighted I am to join AutoZone at this point in my career and the Company’s rich history. It’s been a pleasure working with you, and I’m so grateful for the opportunity to lead the world-class Finance & Store Development teams that you’ve built over the years. I’m also fortunate that you’re running through the tape, to use a sports analogy which has enabled me to spend valuable time in our stores and distribution centers and learn the business from the ground up. Your track record of building shareholder value as CFO of this company has been impressive. Certainly, not many CFOs boast the kind of numbers that you put on the board during your tenure. I wish you and Jill all the best as you write the next chapter.

Let me begin on the P&L on gross margins. For the quarter, our gross margin was down approximately 62 basis points. I would categorize the drivers in three buckets. About a third of the pressure is the result of one-time markdowns on COVID-related goods such as hand sanitizer where we saw a significant slowdown in sales velocity as we moved through the quarter. Another third of the pressure is the result of higher loyalty transactions. As our transaction counts have been up materially the last two quarters, we simply have issued more $20 credits to customers. This has translated into higher sales and profits, but slightly lower margins. Given the share gains we have seen as evidenced by the high-single-digit transaction growth that Bill Rhodes mentioned earlier, we are planning for this headwind on gross margins to remain in future quarters.

Now, this is a good outcome for our business as we’re driving new customers and retention. The remainder of the deleverage was driven primarily by mix and some pricing investments we’re making in select merchandise categories to improve our competitive positioning. Our industry remains extremely rational when it comes to pricing. All of the investments we are making suggest that we are growing our DIY and DIFM businesses at roughly double the rate of the overall market or better, and we’re committed to capturing our fair share and improving our competitive positioning in a disciplined way. Our primary focus will continue to be growing absolute gross profit dollars in our total auto parts segment.

Regarding operating expenses, our team, particularly our store operations and commercial teams, continue to manage our expenses well during these times. Our expenses were up 6% versus last year’s Q1 due to our very strong sales results, and we’re able to leverage operating expenses 222 basis points. Included in this quarter’s expenses were approximately $5.2 million related to emergency time off and other COVID-related expenses. We believe there will be long-lasting benefits from our decision to provide emergency time off for the heroic efforts undertaken by our AutoZoners during the pandemic. This is perhaps one of the most important investments we have made, maybe ever. We will continue to manage SG&A in line with sales volumes.

Moving to EBIT. EBIT for the quarter was $615 million, up 23% versus the prior year. Our EBIT margin was 19.5%, up 160 basis points versus the prior year quarter.

Interest expense for the quarter was just over $46 million, up 5.6% from Q1 a year ago. The higher expenses related to the $1.25 billion bond issuance and the $750 million 364 day credit facility, both completed in last year’s third quarter. We are planning interest in the same $47 million range for the second quarter of fiscal 2021 versus $44.3 million in last year’s second quarter. The increase in Q2 is driven by the same reasons noted for Q1.

Debt outstanding at the end of the quarter was just over $5.5 billion or approximately $228 million above last year’s Q1 ending balance of just under $5.3 million. Our adjusted debt level metric finished the quarter at 1.9 times EBITDAR. While in any given quarter we may increase or decrease our leverage metric based on debt and equity market conditions, we remain committed to both our investment grade rating and our capital allocation strategy, and long-term share repurchases are an important element of that strategy.

For the quarter, our tax rate was 22.2% versus 23.2% in last year’s first quarter. This quarter’s rate benefited 134 basis points from stock options exercised while last year it benefited 33 basis points. Stock option exercises are unpredictable and as such they will affect our tax rate and ultimately our net income and EPS. For the second quarter of fiscal year 2021, we suggest investors model us at approximately 23.5% before any assumption on credits due to stock option exercises. Because we cannot effectively predict this activity, we remain committed to reporting the stock option impact on the tax rate.

Moving to net income and EPS. Net income for the quarter was $442 million, up 26.3% versus last year’s first quarter. Our diluted share count of 23.8 million shares was lower by 2.9% from last year’s quarter. The combination of these factors drove earnings per share for the quarter to $18.61, up 30.1% over the prior year’s first quarter.

Now I’ll move to cash flow. For the first quarter, we generated $683 million of operating cash flow. This was up approximately $236 million over last year’s Q1. Our operating cash flow results were driven by the exceptionally strong earnings that Bill mentioned earlier and working capital. Net fixed assets were up 3% versus last year. Capital expenditures for the quarter totaled $113 million and reflected the spending to open 41 net new stores this quarter, investments in existing stores, hubs and MegaHubs and information technology investments. With the new stores opened, we finished this past quarter with 5,924 stores in the US, 621 stores in Mexico and 45 in Brazil for a total store count of 6,590. For fiscal year 2021, we expect to get back to our usual cadence of approximately 150 domestic stores and roughly 50 international stores.

Depreciation totaled $89.6 million in the quarter versus last year’s expense of $89.7 million.

We repurchased $678 million of AutoZone stock in the quarter versus $450 million last year. At quarter-end, we had $117.6 million remaining under our share buyback authorization.

Regarding our balance sheet, our debt was flat to last quarter, and our cash and cash equivalents remain significantly higher than historical levels. We now have over $1.7 billion in cash on the balance sheet, of which $1.5 billion is excess cash. Our liquidity position remains strong as we have both a multiyear and a 364 day credit facility totaling $2.75 billion that remains intact. We’re also managing our inventory well as our inventory per store growth was up 1.2% versus Q1 last year. Inventory per store was $702,000 versus $694,000 last year and $683,000 last quarter. Total inventory increased 3.7% over the same period last year, driven by new stores and improved product assortment. Net inventory, defined as merchandise inventories less accounts payable, on a per location basis, was negative $99,000 versus negative $71,000 last year and negative $104,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 114.1% versus last quarter’s Q1 of 110.3%.

Now let me spend a few minutes on capital allocation and our share repurchase program. This past quarter, we restarted our share repurchase program. As we mentioned on our last quarter’s call, we expected to gradually program during the first quarter. We said that we intended to utilize our ongoing free cash flow to buy back stock and, based on our view of the future, begin methodically utilizing some of the excess cash we currently have on our balance sheet. As we said last quarter, if we have concerns about the near term, we will simply temporarily suspend repurchases again, but we feel comfortable with our ongoing strategy. This past quarter, we spent $678 million on stock repurchases, representing 584,000 shares. We remain confident in our near-term plans and as such expect to systematically reduce the level of cash and cash equivalents on hand through the remainder of this fiscal year and return meaningful and historically unprecedented amounts of cash to shareholders as part of our disciplined capital allocation strategy.

To wrap up, we had a very strong quarter, highlighted by exceptionally strong comp sales which drove a double-digit increase in net income and EPS. We remain confident in our ability to drive long-term shareholder value by, first, investing in our growth initiatives, driving robust earnings and cash and returning excess cash to our shareholders. I’ll remind you that our business remains remarkably resilient through the cycles, and the investments we are making today in our products and services position us well in the near and long term.

Let me give you just a few initial impressions of my short time here in the CFO chair. This is a tremendous business with an incredibly bright future. We have a world-class leadership team with deep domain expertise and a passion for winning in the marketplace. I have experienced first-hand the dedication and heroic actions of our AutoZoners in the stores and distribution centers, and as a long-time customer, I know that they are the reason why we are delivering exceptional results. And finally, our execution on our growth initiatives give me great confidence in our ability to grow our business and build tremendous value for our shareholders.

Now I will turn it back to Bill Rhodes.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Thank you, Jamere, and welcome.

These continue to be unique and abnormal times, and they require us to look at many things differently to manage our business day-to-day. I’m extraordinarily proud of our team across the board for their commitment to servicing our customers, the motoring public, but doing so in a very safe manner. While we are learning how to operate effectively in these times, we remain wary of the volatility that can exist, volatility in both the US and our international markets. We are fortunate to have extraordinary people who are committed to servicing our customers and helping them get to work, go see their families or simply get back and forth to school.

Our operating theme this year is AutoZone is strong, and I’m honored to say we have come together this year to live this theme like never before. While it’s impossible for us to know what the cadence of the new year sales will be, I want to be crystal clear. We plan conservatively in order to manage our cost structure appropriately. While our domestic retail business continues to do very well, we understand trends will slow in the future. But we believe we have a tremendous ongoing opportunity within our domestic commercial business. While we understand these things, we also feel we are well positioned for continued future share gain opportunities across all the business segments we operate.

Our business continues to do very well, but as always we have work to do as we start calendar 2021. First and foremost, our focus will be on keeping our AutoZoners and customers safe, while providing our customers with their automotive needs. Secondly, we must continuously challenge ourselves during these extraordinary times to position our Company for even greater future success. We will ultimately be measured by what our future cash flows will look like three to five years from now.

Lastly, I continue to be bullish on our industry, and in particular, bullish on AutoZone.

Before we proceed to Q&A, I want to take the liberty to publicly thank two exceptional leaders. Over 37 years ago, Bill Hackney followed in his father’s footsteps and joined this extraordinary enterprise. And over those 37 plus years, Bill leveraged his knowledge of virtually every part of this business and his deep understanding of our customers to our and our customers’ benefit. He will be missed.

And almost 15 years ago, Bill Giles traded home goods for auto parts, and boy, weren’t we fortunate. I’ve had the honor to partner with Bill ever since he joined the Company. How many CEOs have the privilege to host 59 consecutive earnings release calls with the same world-class CFO. Bill has been a great team member and advisor for our entire organization, and we thank you, Bill. While we will miss both of them, as our Founder’s father [Indecipherable] often said, quote, no individual builds a business. They build an organization, and the organization builds the business. Both of these AutoZoners for life have embraced that mentality and built tremendous teams. We wish you and your families the best of luck in your next chapter and thank you for all you’ve done for each of us.

Now I’d like to open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Bret Jordan with Jefferies, you may go ahead, sir.

Bret David Jordan — Jefferies — Analyst

Hey, good morning, guys.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Good morning, Bret.

Bret David Jordan — Jefferies — Analyst

I guess a little more follow-up on the market share gain. It seems like the second quarter, you guys have been picking share up. Could you maybe give us some color, both on the commercial and DIY side, where you’re seeing the share donors? And I guess the follow-up question would really be on sustainability. If you’re picking up share from WDs, given your higher in-stocks, do you see that share sustaining in the sense that the — those customers stay with you as the WDs bring inventory back up? I guess is your position higher on the call list relatively defensible? Thank you.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Yeah. Thank you for the question, Bret. On the commercial side of the business, you’ve seen the publicly available numbers. And I think, first of all, we’re — we’re at the top of the heap in both the retail and commercial businesses with our public peers. I think we’re doing very well there. Regarding your specific question with WDs, clearly, during the worst of times back in Q3, we were in a very different position than some of our smaller competitors. They really shut things down. Many of them closed or worked reduced hours, had less inventory and the like, and I think that that gave us a real opportunity to introduce ourselves and be there for certain customers that maybe we didn’t have the same relationship before. As we’ve said many, many times, the commercial part of this business certainly is a relationship business. And when you’re there for customers you build up some credibility that you can leverage for a long time. So I think that that’s the bigger issue rather than them getting back to where their normal operating procedures are that we were there in people’s times of need and I think that people have long memories about that.

On the retail side of the business, again, I think we’re performing at the highest level of any of our public peers. But I also think that there are other parts of the channel — other channels in the retail sector, mass and online, that we did particularly well against during this period of time and continue to do so. Again, I think is this sustainable or not, that’s the biggest charge that we have as a management team. We have this opportunity to introduce ourselves to new customers, and as we said in our prepared remarks, much of our business growth in the retail business is coming from existing customers who are doing more business with us. And I think it’s very encouraging that we’re — they’re participating with us in different categories than they normally do. And so we feel very good about that.

Bret David Jordan — Jefferies — Analyst

Yeah. On the DIFM, the commercial side, I guess the WDs historically had strong relationships, but might not have had inventory at a point in time. And I guess as their inventory balances come back up, I guess my real question is, do you see any shift in the cadence of your share gains? Are the WDs becoming more effective competitors or are you really holding all of the share that you picked up in the downturn?

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

I wish I had better information to answer that question, Bret. We have very specific information on the sales [Indecipherable] categories in our retail business. We don’t have that level of information on the commercial business. So we have to, like everybody else, look pretty much at the top line numbers and try to extrapolate from there. But we feel like we’re doing well. I can’t tell you how the WDs are doing as a whole.

Bret David Jordan — Jefferies — Analyst

Okay. Great. Thank you.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Yeah. Thank you.

Operator

And our next question comes from Simeon Gutman with Morgan Stanley. You may go ahead.

Simeon Ari Gutman — Morgan Stanley — Analyst

Hey, good morning, everyone. And I wish Bill Giles a good send-off again. I think we did it last quarter, but it was a nice message from Bill Rhodes. My first question is on price. I think we’ve talked about investing in price a little more prominently in the last couple of quarters. Can we talk about the rationale? Any specific areas you are trying to address? Is the price [Indecipherable] DIY, DIFM? And then, can you talk big picture around the elasticity of demand? I’m assuming it’s not for short-term gains because a lot of the demand is failure based, but how do you think about that?

Jamere Jackson — Chief Financial Officer and Executive Vice President – Finance and Store Development-Elect, Customer

Yeah, this is Jamere. I want to say a couple of things. First of all, we control our own destiny here, and the results as it relates to our gross margins are not a result of cost pressures on pricing spirals within — within the industry. What we’re doing is, we’re investing in a disciplined way to improve our competitive position. We’re improving our overall profitability. And in many ways, the productivity we’re achieving in operating expenses serves as a bill payer for some of the investments that we’re making. What I’ll say about pricing is that we’re making decisions on pricing, merchandising and investments based on data and discipline, and these are decisions that are resulting in both share gains and higher overall earnings. So I’d like the playbook that we have as it relates to pricing.

Simeon Ari Gutman — Morgan Stanley — Analyst

Okay. Thanks for that. Let me ask maybe a follow-up on the stock buyback. I think you mentioned you may exceed I guess historic levels, and I think the last amount that you purchased was something in the $2 billion category or $2 billion level on a peak basis. So, I mean, is there any way — are you planning to eclipse that target? And then, would you take up your leverage short-term? Would it have any impact vis-a-vis the rating agencies? Can you take your leverage up to buy back an outsized amount?

Jamere Jackson — Chief Financial Officer and Executive Vice President – Finance and Store Development-Elect, Customer

Yeah, so let me — let me say this. I mean, this is perhaps one of the most powerful free cash flow stories really in all of industry. And the business model that we have enables us to invest in a disciplined way in growth and return meaningful amounts of cash to shareholders in a very consistent and efficient way. And so what we — what we recognize is that this model is powerful enough from a cash flow standpoint for us to do that investment in the growth of our business and continue along the journey that we’ve been returning meaningful amounts of cash and — with the free cash flow that we generate. So we don’t see a need today to do anything different in terms of leverage, and we also don’t see a need today to do anything different in terms of moving off the center line that we have for this disciplined capital allocation strategy.

Simeon Ari Gutman — Morgan Stanley — Analyst

Okay. Thanks.

Operator

Thank you. Our next question comes from Chris Horvers with JPMorgan. You may go ahead.

Christopher Michael Horvers — JPMorgan Chase & Co. — Analyst

Thanks. Good morning, guys. I think, Bill, the trade from home furnishings to AutoZone is definitely the trade of the century coming to this organization from Linens N Things. So congratulations again. So my question — two questions. So first on the do-it-for-me side of the business. Your annual run rate is now $600,000 per program per year. A couple of years ago, you were sub $500,000. And so you look at your peers, they’re in this $800,000 plus type range. I guess how do you think about getting to that level? Do you think that the service changes, the parts availability changes, the MegaHub strategy and the delivery strategy are sufficient to sort of keep step functioning up to that — to that level of productivity?

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Yeah, Chris, thank you for the question. A lot of attention gets focused on our close-in competitors and rightfully so and they both outperform us on a sales per program basis and have for a long time. I’m really pleased with what our team has been able to do to begin closing that gap. But we really don’t want to get too focused on our close-in competitors. We want to think about the industry as a whole. As I mentioned in the prepared remarks, it’s a $75 billion market. It is incredibly fragmented, much more so fragmented than the retail side of the business. So I want to make sure that we’re focused on the entire market, not our close-in competitors.

If you look back over the history of time, what our team has been able to do is really helped us, as you’ve noted, accelerate our growth in a significant way. We’ve vastly improved our inventory assortments in every individual store, particularly as it relates to commercial-oriented vehicles. We had this up in MegaHub strategy, which we are rolling out and continues to outperform, particularly the MegaHubs. Every time we talk about the MegaHubs, we talk about that they have outperformed our expectations. We now have built this fabulous brand called the Duralast brand which five to seven years ago people thought was an inhibitor to our success. Now everybody else sees that as a real key part and a leverage point for us in the commercial business.

Think about the other national brands that a decade ago were so powerful. Many of them are gone. Those that are still around are less relevant today than they were back then. And now we’ve also built this really strong sales force which we didn’t have a decade ago. We’re now supplementing all of that with some technology tools that are some of the largest investments that we’ve made in technology to make our teams more efficient and improve our delivery and reliability. So we’re very bullish on what the future is, and frankly pretty proud of the progress that we’ve made to date.

Christopher Michael Horvers — JPMorgan Chase & Co. — Analyst

Got it. And then, in terms of the — the last four weeks of the quarter, you talked about roughly an 8.8% in the last four weeks. Some of your peers have talked about disruption in election week. I was just curious — you mentioned that — if we took out the election week, would it suggest that maybe the underlying trend rate is better than that 8.8%, and I’ll ask just because we should ask any commentary on what you’re seeing so far this quarter?

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Perfect, Chris. Thanks for getting that normal question out of the way. I’ll answer it the normal way. But can we release our earnings so quick in the quarter? So we’re two weeks and three days into this quarter. We don’t want to talk about what’s happening this quarter because we don’t want our owners to get focused on two and a half week period of time. So historically we have not talked about what’s happened intra-quarter, and we’re not going to do that today. We did — we were very specific in showing you what happened in each four week period during the quarter. We don’t look — generally give that level of clarity either. I want to remind us, coming into Q4, that we told you we were up 16.5% in the last four weeks of last quarter. I told you today that we are up 16.5% the first four week period. I think a lot of people thought our sales had gone down materially in September, and that wasn’t true.

Regarding the 8.8% that we had in the last four week period of time, we were very intentional in saying, yes, the election was going on. We also — in this period of time, sales are driven up and down based upon weather patterns. We get a cold snap, it can be very positive. We get very rainy weather, it can be very negative. So we’ve given you the cadence. It’s very hard for us to talk about and even understand what the next 12 weeks is going to be like. We don’t know. These are unprecedented levels. 12.3% same-store sales is the best performance in this Company since I joined the Company over 26 years ago. It will slow down over time. How fast that happens, I don’t know, but I do know we have an incredibly strong business that regardless will continue to outperform over the long term.

Christopher Michael Horvers — JPMorgan Chase & Co. — Analyst

Awesome. Thanks very much, and have a great holiday season.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Yeah, you too.

Operator

Thank you. And our next question comes from Michael Lasser with UBS. You may go ahead, sir.

Michael Lasser — UBS Investment Bank — Analyst

Good morning. Thanks a lot for taking my question. And Bill and Jamere, congratulations and best of luck to you both. Bill Rhodes, in your prepared remarks you pointed out that during the last 30 years or so, the best — the periods of strongest growth for the industry have been in — during times of recession. And subsequently, the year after the industry still didn’t comp negative. Do you think this time is different because what’s been driving the industry has been some of the discretionary categories rather than the strength in maintenance of failure like — like happened last time because there is a perception out there that the DIY business is going to give back a lot of what it’s gained this year when consumers get back out and do what they’ve been doing previously, and because of AutoZone’s mix of business, it will have — it will be the most sensitive to softness in the DIY segment whenever that happens.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Well, really a terrific question, Michael. Yes, this time is different. There is no question about it. I’ve said it — I’ve just said it. This is the second best quarter since I’ve been at the Company. The best quarter was last quarter. Will we be able to comp the 21.8% same-store sales in Q4, I highly doubt it. Will we give some of that back? Absolutely. The question is, will we give it all back. Are we introducing ourselves to new customers? Are we introducing existing customers to new categories for us? Are we can kind of standing in that gap for customers? I think we are, and I think we’re going to build loyalty with our customers over the long term. My real question for us is, if we hadn’t had this pandemic, what would our sales have been two years from now? I’m sorry there is a train outside the room. I think you can hear. If we hadn’t had the pandemic — and you move forward two years from now, and we have 2%, 3%, 4% increase in business that we would have had the pandemic not happen? I think that’s a distinct possibility. And if we do, I think we’d be very pleased with that.

Michael Lasser — UBS Investment Bank — Analyst

Got it. The train is a good — a good euphemism for suggesting that AutoZone’s going to keep chugging along. So that’s helpful. And the…

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Your [Speech Overlap] those kind of things, Michael. It is light and it’s not a train usually.

Michael Lasser — UBS Investment Bank — Analyst

Okay. The follow-up is on the gross margin. So it’s been down two quarters in a row. There is a perception that this might be the beginning of a longer-term trend particularly if AutoZone chooses to use some of the flexibility it has on the SG&A side to go and reinvest that into the price or other gross margin driving initiatives. So A is that, true, and, B, there is a lot of well-documented pressure on labor. So do you lose some of the flexibility or do you foresee losing the flexibility if wage rates and other factors that are driving your cost of labor up hurt that side of your P&L? Thank you very much.

William T. Giles — Chief Financial Officer and Executive Vice President – Finance and Information Technology, Customer

I would just jump in and say that, look, from a growth perspective, it’s down two quarters in a row, but frankly, a big chunk of this one was one-time. So, you’ve got a little bit of pressure, and some of the things Jamere pointed out, for example, on loyalty. It’s a great example of the fact that to follow on what Bill was talking about is that we’re seeing a tremendous amount of traffic. And therefore we’re seeing a tremendous amount of new and existing customers. Our existing customers are visiting us more, and they’re building up more loyalty points. That’s fantastic.

As we talk about pricing and think about pricing, we’re going to be incredibly surgical about it. As Jamere said, it’s going to be very data driven. And at the end of the day, this is about driving gross profit dollars. Ultimately, that is what we are most focused on is driving dollars. And as you can see, we’re improving operating margin overall because we’re leveraging our fixed cost structure based on the sales that we’re generating from all of our activities, and pricing is just a small example of one of those activities. But I think overall, the way I think about it is, look, I think our gross margin is very healthy. I think it’s completely in our control. We have opportunities to improve and reduce our costs through importing, increasing our importing, lowering our acquisition costs. And as Jamere pointed out, we have an opportunity to be surgical about how we price, and so I think there’s a lot of pluses and minuses in gross margin, and right now they’re all working to drive sales and drive profits.

Jamere Jackson — Chief Financial Officer and Executive Vice President – Finance and Store Development-Elect, Customer

And the only thing I’d add is, you talked a little bit about operating expenses and wage pressure you saw this last quarter, and our teams did an outstanding job of really driving productivity. And we won the productivity play with intensity inside the Company, and we’ve been able to manage our labor costs sort of in line with volumes. There will be pockets of wage pressure as you mentioned in certain regions. But quite frankly, we’re committed to investing in our AutoZoners regardless of what happens in the regulatory environment. And quite frankly, that’s one of the reasons why we’re so good at driving productivity inside of the Company. So again, we control our own destiny as it relates to these things, and we’re going to invest in a disciplined way to move the needle on earnings as a whole.

Michael Lasser — UBS Investment Bank — Analyst

Understood. Thank you so much and good luck.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Thank you, Michael.

Operator

Thank you. Our next question comes from Matthew McClintock with Raymond James. You may go ahead, sir.

Matthew J. McClintock — Raymond James & Associates — Analyst

Hi, thanks, everyone. And honestly amazing results. So I don’t even know what to say. Good job, guys. The whole, team.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Thank you.

Matthew J. McClintock — Raymond James & Associates — Analyst

Jamere also, welcome. Really happy to have you. Can’t wait for you to talk more because honestly, this is a great Company. So you’ve made a good choice, to be honest with you. So, end of the day, I think this question here is — end of the day, I’m trying to think about your commercial growth was pretty outstanding this quarter, and vehicle miles driven is still negative and I’m trying to think through this. Because end of the day, are you trying to say that people now are coming back to work, the professionals that normally would go to mechanics are coming back to work and that’s why they’re starting to go to mechanics and that’s why the commercial business is good? Or with — the end of the day — exit — the exit rate of what your commercial business is doing right now should be pretty higher than what it is — what it is right now if vehicle miles driven increases. So that’s kind of — anything you can say toward that would be very helpful. How you think about the commercial business and the growth you did this quarter given that honestly it should get better from here.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Yeah. Another fantastic question. Thank you. As you look at the commercial business, you’re exactly right. The miles driven are down and they’ve been down for a period of time. I would also tell you that another thing that’s muting the commercial business is the lack of winter that we had last year. Tire sales are down, maintenance sales are down, brake, rotors, which I’ve talked about specifically in the prepared remarks. The other thing that’s happening in that sector is, the independent part of the sector is performing much better today than the national accounts, if you will. And I think those change — those things will change over time, as you see we get back into a normal weather pattern.

But again, we’re having this opportunity to introduce ourselves particularly to some of these up and down the street accounts at a different level than we have in the past. I don’t believe that people are, quote, returning to work, and we don’t see it yet in a significant miles driven improvement. It improved vastly in the summer time, but then it’s kind of been fairly steady over recent months we’ve seen. But I remind you that not all miles driven are the same. So people that are driving to work in some of these urban cores generally are our core customer. Our core customer has not had the luxury, just like our — our AutoZoners that are in the stores and the distribution centers, our core customer doesn’t have the luxury to work from home. They’re doing manual labor, they’re providing service economy kind of jobs. And so I don’t think that our core customer has really seen a significant change in their driving behaviors.

Matthew J. McClintock — Raymond James & Associates — Analyst

So, if I could follow up on that and just ask this question. Just because you’ve made so many investments in the commercial business, and I agree that you guys are very good in DIY, right. But because you’ve made so much investment in the commercial business over the years, isn’t that a sticky business? And doesn’t that kind of imply that next year, the comparisons aren’t that difficult because once somebody goes to you, they kind of don’t go back. Is that a fair way to think about this?

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

I think it’s a very fair way to think about it. I’ll just remind you, when we got serious about the commercial business, it was 2008, we were doing about $750 million annually at that point in time. In the last 12 years, we’ve more than tripled the business, getting close to quadruple in the business, and it’s been pretty darn sticky along the way. That’s certainly our hope. And as we’re launching many of these new initiatives, that are only going to amplify our service advantage as we’ve now shored up our inventory assortments, we’ve built this brand, and we’ve got somebody up telling our story and our sales force, we feel pretty good about the future. Will it be a straight line, no, it never is. But we’ve had a pretty strong trajectory over the last 12 years of growing that business much faster than the industry has grown.

Matthew J. McClintock — Raymond James & Associates — Analyst

Good luck. I really appreciate the color. Thank you very much.

William C. Rhodes — Chairman, President and Chief Executive Officer, Customer Satisfaction

Thank you. Appreciate it. All right, before we conclude the call, I want to take a moment to reiterate, we believe our industry is strong and our business model is solid. We will take nothing for granted as we understand our customers have alternatives to shopping with us. We’re excited about our growth prospects for the year. We do not take anything for granted. As we understand, our customers have alternatives. We have an exciting plan that should help us succeed this fiscal year, but I want to stress this is a marathon and not a sprint. As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be successful.

We thank you for participating in today’s call. And we’d like to wish our AutoZoners and everyone on the call a very happy and most important, a healthy, holiday season and a prosperous New Year. Thank you very much. Have a great day.

Operator

[Operator Closing Remarks]