AutoZone, Inc. (NYSE:AZO) Q3 2019 Earnings Conference Call Transcript

May 21, 2019 • 10:00 am ET

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AutoZone, Inc. (NYSE:AZO) Q3 2019 Earnings Conference Call Transcript

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Q & A
Operator
Operator

Thank you. And we have our first question is from Christopher Horvers of JPMorgan. Chris, your line is open.

Analyst
Christopher Horvers

Thanks, good morning, everybody.

Executive
William C. Rhodes

Good morning.

Analyst
Christopher Horvers

Can you talk about the mega hub expansion? You're roughly doubling the target. So couple of questions there. Is the lift that you're seeing better than what you saw prior and any quantification? And then just structurally, is this a market expansion, i.e. you were targeting 40 markets, now you are going to 80, or you're actually building in density that cuts drive time to replenish the satellite stores and directly fulfill more customer orders?

Executive
William C. Rhodes

Yes. Terrific question, Chris. It's both, frankly. We will be adding mega hubs in smaller markets than we envisioned originally and we'll also be adding to density in some of the largest markets. As we said all along since we've introduced these mega hubs, they continually have outperformed our expectations. So frankly, the analysis that we did four, five years ago when we started them said we can only do 25 to 40. As they -- their performance has improved, they've allowed us to go to these other markets.

Analyst
Christopher Horvers

Understood. And then in terms of the commercial business, Bill, you mentioned that you are quite pleased with the momentum heading into the fourth quarter. Sorry to parse this out, but is that a comment on April on the strong finish to 3Q? Or is that a comment on May because arguably April was I think the -- one of the easiest comparison to the year and May flips up to be one of the hardest?

Executive
William C. Rhodes

Yeah, and I don't really want to get into too much on week-to-week comparisons. As you know in this business, weather matters, especially on a weekly or geographic area -- certain geographies. So I don't want to spend too much time on it. We feel confident that we're continuing to build momentum in the commercial business. Now, when you talk about comps, we are up against tougher commercial growth in the fourth quarter of last year. That's not lost on us, but this isn't about a quarter or two. This is about a long-term growth model.

Analyst
Christopher Horvers

Understood. And one quick last one. On the gross margin, was there a benefit from lower product acquisition costs that offset some of the mix headwinds? The past two quarters, I think it was about 40 basis points of lower product acquisition costs.

Executive
William T. Giles

A little bit, but we still had some inflation as Bill mentioned overall. I think probably the one thing that impacted gross margin, as we highlighted, was just the increased penetration of the commercial business overall. But we continue to believe there are opportunities within gross margin to lower acquisition costs as we continue to increase our direct importing activity.

Analyst
Christopher Horvers

Understood. Best of luck guys.

Executive
William C. Rhodes

Thanks, Chris.

Executive
William T. Giles

Thank you, Chris.

Operator
Operator

Thank you. Our next question is from Simeon Gutman of Morgan Stanley. Simeon, your line is open.

Analyst
Simeon Gutman

Thank you. Good morning. One follow-up to the prior question,