In December, AutoZone CEO Bill Rhodes cautioned investors about the “inherent volatility” that always comes with its fiscal second quarter, noting that the quarter usually marks AutoZone’s lowest sales of the year.
“It has a couple holidays that shift year to year, and different weather patterns make our week-to-week sales quite volatile,” Rhodes noted on Feb. 26, recalling what he said during the company’s fiscal first-quarter conference call.
With some help from the polar vortex, AutoZone posted second-quarter sales of $2.5 billion, up 1.6 percent compared to its fiscal second quarter of 2018. U.S. same-store sales – sales for stores open at least one year – increased 2.6 percent.
Investors cheered the company’s results, as shares of AutoZone stock hit a 52-week high after the announcement.
AutoZone’s fiscal second-quarter 2018 benefited from “a more normalized winter” than in previous years, Rhodes said during the Feb. 26 conference call. Its fiscal second-quarter 2019 saw more of the same, along with the volatility that the company had promised.
“Our sales were generally on plan for the first few weeks, then they were materially softer in the middle of the quarter, on both a one- and two-year basis,” Rhodes explained. “Then, when the polar vortex arrived, sales rebounded nicely to finish the quarter.”
Rhodes added: “We wish we didn’t have to focus so much on ‘the weather,’ but in the second quarter in particular, it really matters.”
AutoZone’s weekly sales during the second quarter had a variance of more than $40 million between the busiest and slowest weeks, according to Rhodes.
“While the cold temperatures didn’t come until the latter half of January, they came, and our business responded,” Rhodes added.
AutoZone’s commercial sales grew nearly 13 percent, marking the fourth consecutive quarter of growth in its commercial business. Commercial sales represented 21 percent of AutoZone’s total sales for the quarter, and the company now has a commercial program in 4,788 of its 5,651 U.S. stores, according to CFO Bill Giles.
Rhodes said the company is “excited about but not surprised by” the jump in its commercial sales.
“We have been steadily building a stronger foundation and our customers are continuing to notice, recognize and reward those improvements,” Rhodes said. “Over the last several years, we have substantially improved our inventory availability, we have worked diligently to enhance the quality of the parts and products we sell – many under the Duralast name – our sales force is becoming more tenured and effective, and most notably, recently we have been increasing the engagement of the local store teams, particularly the store manager and district manager.”
AutoZone opened two more hubs in the second quarter, giving the company 171 hub stores and 27 megahubs – for a total of 198 stores “with significantly expanded parts assortments,” according to Rhodes. Noting that the company’s commercial and DIY sales have expanded in markets where it has added hubs and megahubs, Rhodes said AutoZone plans to add as many as 16 hubs this year.
“Both our hubs and megahubs are focused on making available additional coverage to the local markets, meaning adding SKUs that would not have been available locally in our network before,” Rhodes explained. “Previously, we relied on shipping these hard-to-find or slower-turning SKUs into a market when the demand arose.”
During the quarter, AutoZone opened 20 new stores in the United States, one store in Mexico and two stores in Brazil – for a total count of 6,241 stores, as of Feb. 9.
Giles noted AutoZone has “aggressive plans” to open 17 additional stores in Brazil by the end of the company’s fiscal 2019. As of Feb. 9, AutoZone had 22 stores in Brazil.
“Our performance continues to improve and we remain optimistic about the long-term future of this market,” Giles said of Brazil. “If we can prove success, this market has the potential to be much larger than Mexico. So while challenging, the potential size of the market is significant.”
‘Peak Selling Period’
AutoZone generates the biggest chunk of its sales during spring and summer, according to Rhodes, and the company will be opening the majority of its new stores and commercial programs during the same time period. There’s a lot at stake, but Rhodes said AutoZone is “in much better shape as we enter our peak selling period.”
“If you recall this time last year, we had several major product-category conversions underway, and several of them did not go as planned,” Rhodes explained.
He also pointed to efforts to ramp up “our focus on enhancing the customer-service experience.”
“As part of that effort, we made meaningful pay adjustments to our most tenured hourly AutoZoners to ensure that they are compensated appropriately,” Rhodes said.
While Rhodes pointed to lower gas prices and other factors as continuing positives for the industry, tax refunds could be a wild card. Although AutoZone already is seeing customers spend their tax refunds in its stores, he noted “there is significant speculation” as to whether the size of this year’s tax refunds will be similar to last year’s.
“We are certainly monitoring the pace and amount of tax returns, as this could be either a significant benefit or a detractor based on the total refund dollars that are processed,” Rhodes said.
Regardless, he added, AutoZone is “ready to help our customers leverage those refunds to ensure their vehicles are performing well.”