AutoZone Inc. (NYSE: AZO) Q3 2020 Earnings Call Transcript

AutoZone Inc. (AZO) Q3 2020 earnings call dated May 26, 2020

Corporate Participants:

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

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

Analysts:

Seth Sigman — Credit Suisse — Analyst

Michael Lasser — UBS — Analyst

Simeon Gutman — Morgan Stanley — Analyst

Mike Baker — Nomura — Analyst

Matthew McClintock — Raymond James — Analyst

Chris Horvers — JP Morgan — Analyst

Brian Nagel — Oppenheimer — Analyst

Bret Jordan — Jefferies — Analyst

Presentation:

Operator

Good morning and welcome to the AutoZone Conference Call. [Operator Instructions] This conference call will discuss AutoZone’s Third 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 a.m. Central Time, 11:00 a.m. Eastern Time.

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

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, interruption of our information technology systems; origin and raw material cost 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, 2019, 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.

Operator

And now I’d like to turn the call over to Mr. Bill Rhodes.

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

Good morning, and thank you for joining us today for AutoZone’s 2020 third quarter conference call. With me today are Bill Giles, Executive Vice President and Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the third quarter, I hope you’ve had an opportunity to read our press release and learn about the quarter’s results. If not, the press release, along with slides complementing our comments today, are available on our website, www.autozone.com, under the Investor Relations link. Please click on Quarterly Earnings Conference Calls to see them.

Since our last earnings release, the world has changed significantly, and so has our business. During our last call, on March 3, we were focused on COVID-19 but more from a supply chain disruption perspective. Quickly thereafter, the unprecedented ramifications of the pandemic and it’s disruption on lives across the globe became a reality. As we have navigated these remarkable times, our first priority has been and will continue to be the health, safety and well-being of our customers and AutoZoners.

This quarter was the most remarkable quarter I have ever experienced. In light of that, this will be a different, more detailed update on our business. Our business is typically pretty predictable. As I’ve said many times, our sales fluctuate in a very tight band. But currently, that has not been true. We aren’t sure what lies ahead, so we’re going to share a lower level of granularity this quarter so you have a deeper understanding of the fluctuations and drivers or potential drivers.

I know, as we move into the Q&A, you will want us to help you quote model our sales performance for Q4. Frankly, we are having a very difficult time forecasting our business week to week, much less for the next quarter. And who knows what is in front of us this summer. Will the cases decline and subside? Will they escalate as we begin to reopen the economy? Will the government provide additional stimulus? Will enhanced unemployment benefits help our business? Will all of our commercial customer survive? We have too many unknowns.

And our focus is on making sure in the short term we provide our AutoZoners with the resources they need to provide our customers with an exceptional experience. As for the long term, to date, we don’t see anything that substantially changes our bullish view on our industry, but we must continue to monitor consumer shifts and behavior. And if the economy enters a deep and protracted recessionary environment, we believe our customers will focus more on maintaining their current vehicles and it will benefit our business, retail in particular as it has in the last three recessions. As a reminder, our strongest periods of outside sales growth over the last three decades have been the early ’90s, ’01, ’02, ’09, ’10 and ’11, all coming out of recessionary periods.

While we always begin these calls by thanking our AutoZoners, what our team has done as an essential retailer and remaining open throughout the crisis to serve the motoring public has been nothing short of phenomenal. I applaud our entire team, many who have had to quickly pivot to new ways of working, but I especially want to call out, recognize and show deep appreciation for our store AutoZoners and our distribution center AutoZoners. These remarkable people have done a tremendous job throughout this time and have made several large changes in how we operate and have done it quickly with tremendous passion and, of course, with excellence. I simply can’t thank them enough for what they have done for our customers and our Company.

Now let’s move into our performance for the quarter. Our same-store sales were down 1% versus last year’s third quarter. Our net income was $343 million. And our EPS was $14.39 a share, 10% below last year.

Regarding our sales performance, the quarter can best be described in three time periods, each basically four weeks long. Recall that we had a very mild winter and a disappointing sales performance in our fiscal second quarter. We shared that we were optimistic about the balance of the year and in particular, the third quarter, as we felt there was pent-up demand. And unlike other mild winters, many of the maintenance categories had not been pulled forward and tax refunds were beginning on time and at normal levels. The first four weeks, our sales, as expected, were quite strong with same-store sales up over 6%. Both retail and commercial were performing quite well with commercial sales growth returning comfortably to double digits.

And then, for the second four weeks, the world changed radically, literally overnight. Our sales performance immediately declined materially, dropping to a one-week low of comps down more than 25%. We began asking ourselves questions we never fathomed before. Do we have the liquidity necessary to weather the storm? Will we have issues with our debt covenants? Will we need to furlough AutoZoners and reduce compensation? How quickly and significantly can we stop capital expenditures and expenses?

We immediately acted to shore up any liquidity concerns. We temporarily suspended our share repurchase program. Then we issued $1.25 billion of bonds on Wednesday, March 30. We also closed on an additional 364-day $750 million line of credit. This additional line of credit was on top of the unutilized $2 billion line of credit already in place. We were running very pessimistic scenarios and preparing for what we thought could be the worst. Our team did a tremendous job enhancing our financial position in a chaotic environment in very short order, a testament to the team, and also to the strong financial position and long-term performance of the Company.

Simultaneously, I’m extremely proud to say that we acted swiftly in support of all of our field AutoZoners. Immediately we instituted reduced store hours of operation across the US store base. This allowed our stores to enhance our cleaning protocols and allowed our AutoZoners time off in the evening to de-compress after a very stressful day.

As an essential business, we were determined to be ready to safely service our customers, the motoring public each day. This meant taking care of our AutoZoners as well. Very early in the crisis, we announced that all eligible hourly full and part-time AutoZoners across the US would receive emergency time off benefits and it would be available immediately.

We didn’t wait to see what others were doing or wait on any mandates by governments. We felt it was imperative to act swiftly in support of our AutoZoners on the front lines. We provided them with two additional weeks of time off, including for the first time in our history providing part-timers with paid time off up to 40 hours. This additional time off can be used as the AutoZoner desires. And if they don’t use it between now and the calendar year end, we will pay them for those hours in January.

We did this to provide our AutoZoners with choices. Some are in the more vulnerable populations and weren’t comfortable coming to work, others had child care issues, others were just anxious, while the vast majority were comfortable coming to work and providing great service to our customers. This decision, which was made in a couple of days, was aligned with our values. And I was honored that our team and our Board of Directors lived up to the powerful culture we often espouse during this crisis. And you know a crisis is when real leaders lead. This alone was an incremental expense in the third quarter of $65 million. And combined with other directly-related COVID-19 expenses, our SG&A was negatively impacted by about $75 million in the quarter.

In addition to this past quarter’s investments in our AutoZoners, we plan to provide certain other AutoZoners that were not eligible for the first emergency time off benefit with similar benefits during the fourth quarter. We are honored to recognize those AutoZoners helping our customers every day on the front lines and to say thank you for their efforts. Based on what we know today, we expect to incur approximately $25 million in additional COVID-19-related expenses in the fourth quarter, including this recognition.

Our business, retail in particular, was beginning to rebound at the end of the second four weeks. Then, at the beginning of the third four-week period, federal stimulus checks began to arrive and flow through the US economy. We experienced a significant change in trend, moving from negative double-digit comps to a significantly positive comps almost immediately.

To put this in perspective, in two days, from a Monday to a Wednesday, our retail sales increased by roughly 50%. 50% in two days. And we continue to experience extremely robust sales performance through the end of the quarter. Throughout this crisis, our DIY business has been substantially stronger than DIFM. Retail began rebounding sooner and reacted stronger than commercial when the stimulus money arrived. At the end of the quarter, our commercial business turned positive again, but had not yet returned to double-digit growth like before the crisis.

Specifically, for the quarter, our overall same-store sales for each of the four weeks periods were up over 6%, then down more than 20%, then up in the low-teens, ending the quarter down 1%. Given the extreme volatility in the quarter, as I just outlined and as I said in the opening, it is impossible to know what our future sales trends will be. Unfortunately, we are forced to manage the business literally from week to week and our field organization has done an outstanding job measuring or managing these extremes.

We expect that our sales growth will moderate as the stimulus money works its way through the economy, but at the same time the nation is reopening. What will that do to our business? We simply aren’t sure. What we are sure about is our team has been incredibly nimble. They have reacted quickly to every single change. We are no longer, assuming there are no other significant shocks to the system, asking ourselves some of those very difficult questions. Instead, we are focused on providing our team with the resources and support they need to live up to our pledge, and our AutoZoners have definitely been and continue to put our customers first.

Regarding geographies, our performance was much worse in some of the most affected areas. Specifically the Northeast, Mid-Atlantic and also some of our stores in Puerto Rico in Brazil were down considerably as we were forced to close and/or operate under extreme restrictions. Certain markets rebounded pretty quickly like the Pacific Northwest. While others like New York, as you would expect, has been slower to recover. Our best performing areas have generally been in the middle of the country.

There have been very interesting trends in some of our merchandise categories, specifically in the retail business. Certain categories have been quite challenged like wipers and lighting as people have stayed home more and have not been as active at night, or during periods of inclement weather. Other categories have been strong, particularly post-stimulus. After a very mild winter, our battery sales have been strong, especially as people parked their cars for extended periods, after which the batteries fail or are discharged.

We’ve also seen some surprisingly strong categories that I’ll call project categories. These are categories for hobbyist or people who want to upgrade something. People have more time on their hands, so they’re working on their project car doing that enhancement job they’ve been constantly putting off before.

Now before moving beyond our sales trends, there has been some significant dialog regarding short-term impact of miles driven on our business. We have touted miles driven as a key macro factor that impacts our industry’s performance for decades. However, there have been times when the correlation with miles driven in our industry sales performance do not have a strong correlation, like during the Great Recession. We believe that during select generally shorter periods of time other factors, like new car sales, unemployment and the like, are more important and miles driven is less important.

Now, let’s turn our focus to the balance of the P&L. For the quarter, our gross margin was up 2 basis points. Along with past storylines around tariffs, supply chain and mix between DIY and DIFM sales, we’ve been a very steady performer in regard to gross margin.

On operating expenses, our team, particularly our store operations and commercial teams, did a remarkable job of managing our expenses during the massive volatility I noted earlier. Imagine trying to manage payroll in line with sales when you have a 50% change in sales in two days, yes, on the surface we had material deleverage, but the majority of that deleverage was associated with our decision to provide enhanced benefits for our hourly AutoZoners in the form of emergency time off, costing us approximately $65 million in the quarter.

While a very significant and expensive decision as I’ve visited stores and talked to our team, this decision strengthen our already unique and powerful culture, and showed that this organization walks the walk. I believe there will be long lasting benefits from this decision. Additionally, we had other directly-related COVID expenses of approximately $10 million. Excluding these unique charges, our overall operating expenses were below the prior year’s quarter.

Regarding our balance sheet, our debt came down a bit and our cash was up. Both were purposeful as we were mindful of cash conservation. We also felt we managed our inventory well, as our inventory per store growth declined 0.5% versus Q3 last year. We feel we have strong liquidity heading into our summer season and can handle many of the future unknowns.

As I mentioned previously, we temporarily paused our stock buyback program. It was certainly the right decision at the time as there was too much uncertainty in the business and in the world. Our share repurchase program has been a very important part of our capital allocation strategy and it will continue to be. We haven’t restarted repurchases yet. But as we gain better visibility to our business trajectory, we intend to continue to leverage our free cash flow after robust investments in our business to reduce share count. Our current thinking is to continue to operate at reasonably similar credit metrics to the past while excluding the extraordinary unique COVID-19 expenses we discussed above.

On last quarter’s conference call, we discussed impacts from the supply chain and goods we received from China in particular. Today, we are in good shape and have no significant disruptions to report. While we created contingency plans for each merchandise category sourced from China, we ultimately did not have to implement them. Unfortunately, the COVID story shifted to become more of a US-centric story and away from the supply chain disruptions. That said, that portion of this pandemic and the tariffs have made us think differently about supplier diversity. We need to also consider country diversity as well going forward.

There will be certain of our plans that are disrupted as a result of the crisis, some known today while others will emerge over time. For instance, we paused our store development activities for about a month as we try to get a better understanding on where this was headed. We did this in the United States, Mexico and Brazil. We’ve subsequently restarted development work in the municipalities that allow us to do so. As a result, we will not meet our new store opening goals for the year. We are pushing in an orderly fashion to get back to opening new stores as quickly as possible. But in this environment, arbitrary goals and dates are not terribly important. So look for us to open less than 200 stores globally this fiscal year.

I’ll spend a quick moment on our omni-channel efforts as COVID-19’s effects on customers’ ability to get out and shop grew, we ramped up our strategy to enhance the customers shopping experience by meeting customers when, where and how they wanted to shop. We initiated a curbside pickup option in an amazingly short period of time. Additionally, we saw very strong growth in our online shopping channels Buy Online Pick-Up In-Store, next day delivery and ship-to-home. In particular, our Buy Online Pick-Up In-Store offering grew rapidly and over double the growth rate of our ship-to-home options. I do want to remind listeners that omni-channel for AutoZone still represents a very small percentage of the DIY business, substantially below 5%.

Before I pass the discussion over to Bill Giles to talk about our financial results, I’d like to again thank our AutoZoners for their extraordinary efforts during these unprecedented times. I cannot thank you enough nor can the rest of the management team, and I’m confident that I can speak on behalf of our shareholders too and say, thank you AutoZoners; you truly are essential and you are exceptional.

Now I’ll turn the call over to Bill Giles.

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

Thanks, Bill, and good morning, everyone. To start this morning, let me take a few moments to talk more specifically about our domestic retail, commercial and international results.

For the quarter, total auto part sales, which includes our domestic Mexico and Brazil stores, increased 0.3%. For the trailing four quarters, total sales per AutoZone store were $1,856,000. Now, this compares to an average of $1,814,000 at Q3 ending last year.

Total DIFM sales increased 6.7 — decreased 6.7%. In the quarter, sales to our DIFM customers represented 21% of our total sales and decreased approximately $40 million from last year’s Q3. Our weekly sales per program were $9,700 and they were down 9% on a per program basis versus $10,700 per week last year. As Bill mentioned earlier, our DIFM business was materially impacted from the COVID impact, more so than our DIY sales.

While certainly one of our most challenged sales performances in many quarters, we would ask listeners to see through this quarter and ask us, if we believe we are in good shape for future market share increases. And the answer to that question is, yes. We feel there may be a real opportunity for us to grow our business in the future. With so many smaller, single proprietary shops still operating across America and having to be closed for an extended period of time creates unforeseen challenges for these shops. We continue to believe we can gain market share into the future.

We now have our commercial program in 4,950 stores or 85% of domestic stores. While we did not roll out as many programs this past quarter, it was due to our inability to market to customers. We felt it appropriate to maintain distancing from customer shops. While this past quarter is certainly unique, we remain encouraged by the initiatives we have in place and feel we can further grow sales and market share.

Much like the impact COVID had on sales in the US, our stores in Mexico were also impacted. In addition to impacting sales, the weakness in the foreign currency exchange rate put additional pressure on the business. At the start of the quarter, the exchange was below MXN20 to $1 but weakened throughout, finishing 26% weaker at MXN24 to $1. During the quarter, we opened two new stores and finished with 610 stores. While the quarter was challenging, we believe the negative impacts, much like with the US, are short term in nature. We remain committed to our store opening schedules in Mexico for the foreseeable future.

Regarding Brazil, we finished with 38 stores. We opened no new stores in the quarter. Similar to the US, Brazil faced the same challenges with COVID sickness and stay-at-home mandates. Much like Mexico, we view the COVID impact short term in nature for our Brazil stores as well. Our commitment to growing our Brazilian business is not wavered.

Gross margin for the quarter was 53.6% of sales, up 2 basis points versus last year’s third quarter. Our primary focus will continue to be growing absolute gross profit dollars in our total auto parts segment.

SG&A for the quarter was 35.9% of sales, deleveraging 201 basis points to last year’s third quarter. Our SG&A grew 5.8% over last year’s third quarter. As we discussed in our press release this morning, we incurred approximately $65 million in charges related to offering emergency time off to eligible full and part-timer AutoZoners, and another $10 million in additional direct COVID expenses. Excluding these extraordinary charges, operating expenses were below last year. As we have demonstrated over time, our organization is very good at adapting to the environment we are operating in. SG&A will remain something we manage in accordance with sales volumes. As sales pick up, we would expect the spend rate to increase.

EBIT for the quarter was $491,700,000. Our EBIT margin was 17.7%. Interest expense for the quarter was $47.5 million, up 9.7% from Q3 a year ago and higher than our plan. The higher expenses related to the $1.25 billion bond issuance and the $750 million 364-day credit facility both completed this past quarter. We are planning interest at $68 million for the fourth quarter of fiscal 2020 versus $61.2 million last year. Our higher forecast than last year is driven again by the cost associated with the new bond issuance and the 364-day credit facility.

Debt outstanding at the end of the quarter was $5.418 billion or $266 million above last year’s Q3 ending balance of $5.152 billion. Our adjusted debt level metric finished the quarter at 2.6 times EBITDAR, while in any given quarter we may increase or decrease our leverage metric based on management’s opinion regarding debt and equity market conditions.

We remain committed to both our investment grade rating and our capital allocation strategy, and share repurchases are an important element of that strategy. For the quarter, our tax rate was 22.8% versus 19.5% in last year’s third quarter. This quarter’s rate benefited 26 basis points from stock options exercised while last year it benefited 259 basis points. Stock option exercises aren’t predictable and as such, they will affect our tax rate and ultimately, our net income and EPS. For the fourth quarter of FY 2020, we suggest investors model us at approximately 23.7% before any assumptions 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.

Net income for the fourth quarter was $343 million, down 15.5% versus last year’s third quarter. Our diluted share count of 23.8 million was lower by 6.2% from last year’s third quarter. The combination of these factors drove earnings per share for the quarter to $14.39, down 10% over the prior year’s third quarter.

Relating to the cash flow statement, for the third quarter, we generated $651 million of operating cash flow. Net fixed assets were up 1.4% versus last year. Capital expenditures for the quarter totaled $83.3 million and reflected the additional expenditures required to open 23 net new stores this quarter. Capital expenditures on existing stores, hub and megahub remodels or openings, work on development of new stores for upcoming quarters and information technology investments. With the new stores opened, we finished this past quarter with 5,836 stores in the US, 610 stores in Mexico and 38 in Brazil for a total store count of 6,484.

Depreciation totaled $91.7 million for the quarter versus last year’s third quarter expense of $84.9 million. This is generally in line with recent quarter growth rates. We repurchased $166 million of AutoZone stock in the quarter versus $466 million last year. At quarter end, we had $796 million remaining under our share buyback authorization. And again, our leverage metric was 2.6 times.

Again, I want to stress, we manage to appropriate credit ratings and not any one metric. The metric we report is meant as a guide only as each rating agency has its own criteria. And as Bill mentioned earlier, we have temporarily suspended our share repurchase program as we continue to study future cash flow generation. Over time, however, we continue to view our share repurchase program as an integral to our capital allocation strategy remains and will remain a core tool to our earnings per share model.

Next, I’d like to update you on our inventory levels in total. The Company’s inventory increased 2.7% over the same period last year, driven by the new stores and increased product placement. Inventory per location was $685,000 versus $688,000 last year and $713,000 last quarter. Net inventory defined as merchandise inventories less accounts payable on a per location basis was a negative $56,000 versus negative $58,000 last year and a negative $41,000 last quarter.

As a result, accounts payable as a percent of gross inventory finished the quarter at 108.2% versus last year’s Q3 of 108.7%. Finally, our continued disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 34%. We have and will continue to make investments that we believe will generate returns that significantly exceed our cost of capital.

Now, I’ll turn it back to Bill Rhodes.

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

Thank you, Bill. These certainly are unique and unprecedented times and they require a very different cadence of data gathering, evaluation and decision-making. I am 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 making so many significant decision so quickly, we know we won’t get them all right. And that’s okay, but as long as we are making the best decisions with the right motivations and adjusting as we go, we will continue to persevere.

We don’t know what lies ahead of us for the next few months or even the next couple of years. But what I know is we have a very resilient business that has performed exceptionally well in a wide variety of economic environments, and we have extraordinary people who are committed to servicing our customers and helping them get to work, go see their family, drive to a close vacation spot or other personal priorities.

I wish we could provide you with more clarity on our expectations on business trends for the fourth quarter. But as I stated before, there are too many unknowns. But I want to be crystal clear, our expectations do not include sales remaining as robust as we experienced in the last few weeks of the third quarter. Our expectation is the stimulus money will work its way through the economy rather quickly. Our best guide is annual tax refunds and typically those funds positively impact our business for about three weeks.

Frankly, our focus isn’t on what happens this quarter. It’s are we keeping our AutoZoners and customers safe today while providing our customers with their automotive needs and more importantly, what can we do during this very difficult time to position our Company for even greater future success. What really matters is how are we doing a year or two from now? And I continue to be quite bullish on our industry and in particular, on our Company.

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

Questions and Answers:

 

Operator

[Operator Instructions] First question is from Seth Sigman from Credit Suisse. Your line is now open.

Seth Sigman — Credit Suisse — Analyst

Hey, guys. Good morning. Thanks for taking the question and a nice job managing through the environment. I was hoping you could elaborate a little bit more on the commercial trends that you observed over that last four-week period. It sounds like you got back to positive. Just wondering, would you categorize it as sort of a gradual improvement over that four-week period tied in with miles driven improving. I mean, I guess, how are you thinking about that? And if you could give us a sense on maybe how positive it got over that time period, that would be helpful.

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

Sure. It’s very interesting on the commercial business. It took a pretty deep dive. It’s down roughly 30% and it stayed there for three or four weeks, then it began to rebound. If you look at those last four weeks, it was negative the first two, and then it turned positive the second two, ending at, call it, mid-single digits positive.

It was also interesting — I can’t say whether or not it was tied to miles driven. It certainly began rebounding as the retail business took off when we got the stimulus money in the economy. But also a lot of customers — we saw a significant amount of customers that just stop purchasing from us altogether for some period of time. Our assumption and we tried to reach many of them is they closed at the beginning of this. And as we got towards the latter part of the quarter, we saw that those non-purchasing customers had decreased substantially, if not completely. So it looks like some of them just closed their shops and went did whatever they needed to do, stayed at home, and then began reopening and our business picked up.

Seth Sigman — Credit Suisse — Analyst

Okay. That’s helpful. And then past the external factors, if you just think about how AutoZone is managing the commercial business, with all the disruption and the volatility through the period, do you feel like the strategy has been set back in any way? Are there any limitations to sort of getting back that commercial momentum, that double-digit growth that we’ve seen in prior periods?

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

I don’t think that our strategy has impacted one bit by what’s happened in retail or commercial in any significant way at this point in time. Now, we’re going to have to understand and watch what happens with consumer behavior. I don’t think anybody really knows as the economies in the cities start reopening, who knows what consumer behavior is going to look like. So far what we’re seeing is it looks a whole lot like it did before the pandemic, but I’m sure consumers are going to adjust parts of their behavior and we’ll have to adapt accordingly to that. But on the commercial side of the business, the only thing that’s still holding us back is we’re not doing a lot of face-to-face sales or calls yet. We’ll be doing that probably before long, but we’re not out there [Indecipherable] able to tell our story like we were before.

Seth Sigman — Credit Suisse — Analyst

Understood. Okay. Thanks. Best of luck.

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

Yes. Thank you.

Operator

Next question is from Michael Lasser with UBS. Your line is now open.

Michael Lasser — UBS — Analyst

Good morning. Thanks a lot for taking my question. So I know you’ve been resistant give us too much help with modeling, the current quarter. But in light of your comments around the stimulus dollars potentially lasting around three weeks or so, should we take that to assume that your current quarter-to-date trends are meaningfully slower than what we experienced in that last four weeks of the third quarter?

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

Man, you’re baiting me, Michael.

Michael Lasser — UBS — Analyst

Yes, I’m trying.

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

I not completely understand, okay. We have a long history of not talking about what’s going on intra-quarter, because we release earnings within 2.5 weeks of our quarter-end. So I just don’t want to be giving 2.5-week information and people trying to extrapolate that. I wouldn’t make the interpretation that our business has gone way down since that point in time, but that’s really all I want to say.

Michael Lasser — UBS — Analyst

Okay. And on your comment around the business development piece of the commercial growth, should — and that may be coming back more slowly than just the underlying growth. Should we assume that more than half of the, call it, double-digit, call it, 10% growth, that the commercial business has been growing over the last several quarters, has been coming from new customer additions? As a result, we can factor that piece to be slower to come back and that’s how we should frame the outlook for the commercial program — for commercial segment from here?

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

I wouldn’t think it would be coming to all from new customers. You have to believe that we’re building our business with our existing customers too. And as Seth mentioned in the previous one about our initiatives on commercial, we feel really good about the initiatives that we have in place and a lot of it has to do with being easier to do business with our commercial customers, getting more inventory closer to our commercial customers and proving the time in which we can deliver that product. And that will continue on and that’s going to benefit both new customers and existing customers. So our ability to be able to grow with out existing customers remains very strong.

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

Yes, let me just add on to that too. I mean, one of the bigger changes that we saw as our business started growing significantly almost two years ago now, one of the biggest KPIs that improved for us was mature customer growth in mature programs, which says to us that we’re becoming more and more important to our most important customers.

Michael Lasser — UBS — Analyst

Thank you very much and good luck.

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

Yes. Thank you.

Operator

Next question is from Simeon Gutman with Morgan Stanley. Your line is now open.

Simeon Gutman — Morgan Stanley — Analyst

Hey, guys. Good morning. First, just a two-parter on what we were seeing in the prior quarter. Any state — in states or geographies that were less impacted by COVID are more rural, did you experience a similar roller-coaster? And then, if you look at the product mix that you’re selling and Bill Rhodes, you gave some color on this, are there any products that where you would either — if I’m washing or waxing my car, I’m pulling forward margin or sales that we may not see that as strong in future periods?

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

Yes. Terrific question. So as I mentioned in the prepared remarks, the middle part of the country, Simeon, whether it was urban, suburban or rural, all had the same roller-coaster, maybe not — didn’t go down quite as far, but certainly went down significantly. They just rebounded faster and they’ve increased more during this period of time.

As far as the product categories, yes, there’s been a lot of changes, some really interesting trends in the product categories. For instance, right now, we’re seeing more work in paint and body than we’ve seen in a long time, and it’s across the board; it’s Bondo, it’s sandpaper, it’s paints. People just have time on their hands and they’re doing some of those projects that they haven’t done before.

So excellent question about is that mean we’re pulling some businesses forward or that we’re going to have a headwind or tailwind because of gross margin. I don’t think any of that’s true. I think, we’re probably pulling some work that was never going to happen before and it’s happening now.

Simeon Gutman — Morgan Stanley — Analyst

Okay. Thanks for that. And then my follow-up, I know you mentioned it’s really hard to predict the environment. I don’t know if there is a working hypothesis at AutoZone regarding miles driven unless just taking week-to-week and month-to-month. But if there is, if you can share it? And then any different posture from the business as far as looking to acquire share vis-a-vis smaller businesses, which I know you haven’t done a lot of that in the past, but wonder if this is some change that we can expect.

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

Yes, you want to take the latter part of that?

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

Yes. I think that from a share perspective, we’re going to continue to do what we’ve been doing in terms of organically growing and taking market share. We believe that there is significant opportunity. Now, given the current environment, I suspect that some players in the industry will continue to be challenged and so that may create opportunities or not, but we’re going to continue to stick with our strategy and a lot of that is organic growth.

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

On the first part of your question, Simeon, on miles driven, we were very intentional in our prepared remarks to talk about miles driven. I think, AutoZone was actually the one that came out with that notion 25 years ago or so that there was an important factor underlying the trajectory of the industry. And we’ve held to that and believed that. However, and we learned during the Great Recession that during certain periods of time, it is not correlated very well at all with the industry same store sales. We saw that in ’09, ’10 and ’11 that there are just other factors and our thought is when people have a high degree of unemployment, people aren’t buying new cars and the like that miles driven aren’t as important as they were.

Simeon Gutman — Morgan Stanley — Analyst

Okay. Thank you.

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

Yes. Thank you.

Operator

Next question is from Mike Baker from Nomura. Your line is now open.

Mike Baker — Nomura — Analyst

Hi. Thanks, guys. So a couple of longer-term questions. I know you said you’re not really at this point changing your strategy, which makes sense. But longer term, do you think there’s going to be any change to consumer behavior with respect to DIY versus DIFM with some — a lot of jobs now people getting used to working from home and if not going to the office, maybe not every day, but certainly working from home a couple of days a week. Does that dictate longer term that the whole industry might move more towards DIY and away from commercial, which I think would be a reverse of trends that we saw pre-COVID?

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

Yes. Terrific questions, many of which we’re thinking through and we certainly don’t have definitive conclusions at this point in time. I think, on the shift between DIY and DIFM, there has been a long pattern of both sectors of the industry growing pretty well. DIY has been — or DIFM has been growing slightly faster than DIY, but DIY has continued to grow almost every single year. A lot of people are starting to talk about work-from-home. I think that they’re also not thinking about who our customer is.

For the most and particularly on the DIY side of the business, our customer is generally a financially fragile customer. They are not going to have the opportunity to work from home, they’re working blue collar jobs in a lot of cases. And so, their shift in work, even during the crisis, wasn’t to go work at home, they had to be out doing their jobs.

As we’ve seen — we’ve rolled out curbside pickup, which was really great. Our team did it in a remarkably short period of time. And we’ve seen all of our digital sales grow through Buy Online Pick-Up In-Store, which includes curbside. We’ve seen our next day delivery grow. And we’ve seen our ship-to-home grow. The biggest growth that we’ve seen is in our buy online and pick-up in-store. And as I’ve been out in stores, I have yet to see a customer do a curbside order.

And as I talked to AutoZoners, I asked them, are you getting a lot of curbside orders. And they say, no. Once the customers realize that were open, in fact, they’ll come to the door and say, can we come inside. They want to come in and interact with our most important asset, which is our AutoZoners. So as people start returning to this new normal, it seems like their behaviors are pretty consistent with the way they were in the past. And our Buy Online Pick-Up In-Store is basically double what it was pre-crisis right now. But that’s still a very, very small percentage of our business.

Mike Baker — Nomura — Analyst

Understood. Thanks. And if I could follow up on that, again, in terms of the long-term, you mentioned a couple of times, potential for commercial customers that were either closed or they might end up needing to close permanently. I guess, the question is, have you seen any of that yet? Or is that just what you think could happen or potentially might happen? Or again, are you starting to see just commercial customers, smaller ones just go out of business and is that an opportunity for share gains? Thanks.

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

We absolutely saw commercial customers close on a temporary basis. Probably as indicated by we had zero purchases from them for weeks, call it, 5% to 10% of our commercial customers. It’s very interesting as the stimulus money came in, as the commercial business began to pick up, one of the interesting things we’ve seen is we were worried about our commercial receivables. Well, we are seeing that our commercial customers are in fact catching up on the receivables that they got behind on in the crisis. So I don’t see any big wave of commercial customers that are closing. I’m sure that there are on the margin certain commercial customers that were nearing retirement or were teetering on the edge of not being solvent and they’re going to go away, but I don’t think that that business is going to go away. The customer might — that particular shop might go away, but then the work is just going to move to another shop. So I don’t see any significant shifts yet at this point in time.

Mike Baker — Nomura — Analyst

Okay. Thanks. I appreciate the color.

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

Absolutely. Thank you.

Operator

Next question is from Matthew McClintock from Raymond James. Your line is now open.

Matthew McClintock — Raymond James — Analyst

Yes. Good morning, everyone, and it’s great to hear your voices. I hope — glad everyone sounds good. The one question I have is just, you talked about supplier diversity, you talked about country diversity. And I just wanted you to dig a little bit more into those comments and maybe just discuss the overall fragility of your supplier base and how your way of thinking towards the supply chain is — not supply chain, but your suppliers is changing. Thank you.

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

Sure. For a long time, we’ve been working on making sure that we have diversity in particular categories vendor diversity. And as — just actually began thinking about this long before the crisis hit, but the crisis made it even more acute at this point in time. But as you think about what’s happened with China with the tariffs over the last year or so, it significantly increased our cost structure at a moment’s notice and we’re having all of certain categories, even if we had two or three or four vendors, all of those vendors were in China take routers and steel products, for example, all of those are coming out of China. When that happens and you get slapped with a 10% or 25% tariff, your cost went up 10% or 25% overnight. So we need to be thinking as we always have, about vendor diversity, we also need to think about country diversity. And this situation, COVID-19, only made that that much more important.

Matthew McClintock — Raymond James — Analyst

Thank you very much. I appreciate it.

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

You bet. Thank you.

Operator

Next question is from Chris Horvers from JP Morgan. Your line is now open.

Chris Horvers — JP Morgan — Analyst

Thank you and good morning. So wanted to ask about the early part of the quarter actually, up more than 6%. Now, granted you probably got some of the worst part of the winter behind you, given the timing of your quarter. But it does seem like you outperformed peers in that first four weeks. So you talked about the strength of the commercial business based on the day that you see where you’re outperforming, did you gain share in DIY and do that have anything to do with perhaps weather or delayed tax refunds a year ago?

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

Yes, I think, overall, I mean, look, we’re gaining market share during that time period and overall for sure. And so we feel pretty good about that. I think also we were in the heart of the tax season and so we were able to execute very well on that. There was also, to be fair, there was probably a little bit of the 53rd week shift in that time period as well that benefited us, but it was a strong period for us. We had mentioned at the end of Q2 that we felt pretty good about start in Q3 and all the things that we thought we had in the place, etc., from a supply chain perspective, from inventory initiatives. And so we were strong on both fronts. And so, we were pretty well positioned as we headed into Q3 and it showed up in our first four weeks of our numbers.

Chris Horvers — JP Morgan — Analyst

And then what was the shift — the past couple of quarters has hurt you. So was the shift benefit this quarter?

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

It was probably lessened 100 basis points for sure, probably closer to 40 basis points to 50 basis points [Phonetic] during that time period.

Chris Horvers — JP Morgan — Analyst

Got it. And then my follow-up on gross margins. So you did a negative comp, but you didn’t deleverage. It seems like the supply chain, was there some benefits that came in in terms of the DIY mix that was an offset and just typically you do give some commentary about how you think about gross margin on a go-forward basis. Do you still see the sourcing benefits coming through and should we expect some modest positive there?

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

Yes, I think that we’ll continue to see some modest positive is a very good way to say, Chris, in terms of our ability to be able to continue to expand our supply — our sourcing capabilities. When you think about the gross margin overall for this quarter, couple of interesting parts is that — one is that commercial business, it was actually had a decrease. So although that typically is a headwind for us, it was not so much of a headwind this quarter.

Now, at the same time from a retail perspective, although we were very strong in the retail side of the business, couple of categories that Bill mentioned before, lighting, wipers, that typically have higher margin were less so as people were certainly driving less at night. So those two categories probably were a little bit of a headwind. So that kind of mixed out and we wound up having kind of a flattish gross margins. So, frankly, we feel really good about the health of our gross margin rate and would continue to expect it to be strong and slightly positive as we move forward.

Chris Horvers — JP Morgan — Analyst

Understood. Best of luck. Thanks, guys.

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

Thank you.

Operator

Next question is from Brian Nagel with Oppenheimer. Your line is now open.

Brian Nagel — Oppenheimer — Analyst

Hi, good morning. Congrats on managing a tough environment really well.

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

Thank you.

Brian Nagel — Oppenheimer — Analyst

So the question I had, look, a number of retailers now had called out the benefits of the stimulus payments from their sales trajectory as you did. Is there — as you look at the data, is there a way to separate out what benefit you may have gotten from consumers actually putting to work those stimulus checks versus just an overall underlying improvement in consumer confidence as that was taking place in the economy?

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

Yes, that’s a fantastic question. I can’t do it with data. I can tell you when your business changes 50% in two days that there is a pretty strong correlation that consumer behavior changes take more time than that.

Brian Nagel — Oppenheimer — Analyst

Okay. That’s helpful. Then the second question I had also, I apologize for it, getting too much into the weeds here, but we watched your commercial business grow so nicely over the past now few years. We talked a lot about AutoZone really moving up that call list with your individual mechanic customers. Clearly, there is disruptions here with all that’s going on and you called it out — it is Bill Giles called it out in his prepared comments. But have you seen any indications that one reason or another that AutoZone has fallen down those list and falling in individual mechanics?

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

Absolutely not. I think, if anything, we’re moving up that list. There are certain players in the commercial side of the industry that don’t have the financial strength that we have. We’ve been there throughout the entire crisis taking care of our customers and getting better and better every day. So I think, if anything, we moved up that list in the crisis. And I don’t hear a lot of people talking about their commercial business being positive, like we said, ours was for the last two weeks of the quarter.

Brian Nagel — Oppenheimer — Analyst

Right. Very helpful. I appreciate it. Thank you.

Operator

Next question is from Bret Jordan with Jefferies. Your line is now open.

Bret Jordan — Jefferies — Analyst

Hey. Good morning, guys.

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

Good Morning.

Bret Jordan — Jefferies — Analyst

When you think about the diversifying your supply chain geographically, I guess, how long a process is that? And I guess, is there capacity — adequate capacity in other manufacturing markets that could really sort of fill the hole that China would leave? And with that, do you still be on the back of private label or do you have to start buying branded parts to get into other manufacturing markets?

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

I think it would definitely be on private label side more so than branded parts for sure, which is what we’ve been doing with the China products anyway. Certainly, Bret, it would take a considerable amount of time, but it’s one of those things if you don’t ever start it, then you’ll never get there. We’ve already begun some of that work. In fact, right before the crisis I can remember having a conversation about some of our folks going to Turkey and we’re like, are we comfortable with them going to Turkey, but those kind of markets, Vietnam, South Korea, we’ve been working those markets for some time, India. And Mexico is bigger than anybody outside of China. So we’re going to continue to cultivate those relationships and learn those new suppliers over time.

Bret Jordan — Jefferies — Analyst

Okay. And then a question on the market share consolidation. I mean, it does sound as if some of the smaller distributors have been pretty stressed in this recent environment. If you think about potential door closures, how much contraction you think we could actually get? If there is 36,000-odd auto parts stores out there, how many do you think we come out of this with?

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

In that the age-old question, I think it’s been 34,000 to 36,000 auto parts outlets for 20 years or so. I just — I don’t have a good insight into that, Bret. I wish I did, but obviously hard times are going to put more pressure on folks than good times are. So I would expect a higher percentage than we’ve seen over the last five years, but does it go up 10% or does it go up 25%, I don’t know.

Bret Jordan — Jefferies — Analyst

Okay. And if I could whip in a housekeeping question for Bill Giles. I guess, on the leverage ratio, do you need to be down to 2.5 times to start the buyback or can you start the buyback at 2.6 times as you ended the quarter?

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

Yes. No, I mean, we certainly — we ended the last quarter 2.6 times. So I think that anywhere in that neighborhood we would be comfortable. So those are the credit metrics that we’ve always had.

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

I think the other part of that too is when we think about our business, we’re going to pull out those COVID-related expenses. So if you pull them out, that also changes to leverage metric a little bit.

Bret Jordan — Jefferies — Analyst

Great. Thank you.

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

Thank you.

Operator

And now I’d like to turn the call back over to Mr. Bill Rhodes.

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

Okay. Before we conclude the call, I want to pivot and encourage us all to take all the precautions we can take to keep everyone safe and healthy. Yes, we’re taking precautions that inconvenience us, but during these times our personal actions matter. And as we celebrated Memorial Day yesterday, we should remember all the heroes of yesteryear, but also remember today’s heroes. They all matter. May God bless America during this challenging time. Thank you for being with us today.

Operator

[Operator Closing Remarks]