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Autozone Inc
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Good morning, and welcome to the AutoZone Conference Call. Your lines have been placed on listen-only until the question-and-answer session of the conference. Please be advised today's call is being recorded. If you have any objections, you may disconnect at this time.
This conference call will discuss AutoZone's second 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 or 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 are forward-looking statements. Forward-looking statements typically use words such as believe, anticipate, should, intend, plan, will, expect, estimate, project, positioned, strategy 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, access to available and feasible financing, 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 and retain qualified employees, construction delays, the compromising of the confidentiality, availability or integrity of information, including cyber security attacks and raw material costs of our suppliers.
Certain of these risks 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 26, 2017, 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.
Good morning, and thank you for joining us today for AutoZone's 2018 second 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 second 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 is available on our website, www.autozoneinc.com.
To begin this morning, I want to thank all AutoZoners across the company for their efforts that led us to deliver solid top and bottom line results for this quarter. For the last couple of years, we've discussed that the moderate winters have negatively impacted our business. As this winter was more severe, our performance certainly improved. And it's important to, again, highlight that there are multiple implications from the cold and wet winter we experienced.
In the short term, extreme cold results in immediate sales in categories like batteries, antifreeze, blower motors and the like, and ice and snow results in immediate sales of wipers, deicers, scrapers, et cetera. Additionally, we believe these conditions and the efforts to remedy them should have a lasting benefit in under-car categories like brakes, chassis and similar categories. We're optimistic that conditions could continue to be more favorable for the balance of our fiscal year.
In this morning's press release, we introduced adjustments to our GAAP numbers that are very unusual for us. But due to their significance, we thought they warranted increased visibility for investors. These include adjustments to the tax reform, impact from stock-option accounting and impairment charges related to two business units. I will give more details on these and provide some context regarding ongoing impacts of some of these adjustments.
Let's begin with the impairments. These charges were taken on both our AutoAnything and IMC businesses. As we stated in the press release, we determined these businesses were not core to our strategic priorities going forward and proceeded to begin a sale process. This process, along with our normal testing we do, led us to the conclusion it was appropriate to take a net of tax impairment charge of $147 million.
Now, I'd like to provide a little background on our strategic rationale for exiting these two businesses. AutoAnything, an online-only retailer that sells performance and accessory products, was acquired in the winter of 2012. We acquired AutoAnything to better understand the internet-only environment and to leverage those learnings on AutoZone.com. AutoAnything has always been run separate and distinct from AutoZone and AutoZone.com. Both the AutoAnything and AutoZone.com teams have learned from each other, but over time, as omni-channel has emerged and increased in importance, we've decided that our focus and efforts would be better spent focusing on AutoZone.com and driving our core business. This morning, we announced an agreement with Kingswood Capital who has purchased this business.
IMC, our import parts wholesale distributor business, was acquired in the fall of 2014, and our objective was to enhance our understanding of the WD model, while leveraging their focus on the import market. Our intention was to substantially expand their footprint, and we grew their branch count from 17 to 26. As we have grown this business, it has been increasingly challenging to grow quickly on a profitable basis. As our strategic perspective on the commercial marketplace has progressed, we have determined that our time, attention, focus and investments would be substantially more valuable centered on growing our core commercial business rather than focusing on a more narrow high-end import market. This morning, we announced an agreement with the Parts Authority for them to acquire this business.
Before leaving this subject, I'd like to thank all of the employees of AutoAnything and IMC. They have been terrific AutoZoners and have always put the customer first in everything they do. We believe both of these enterprises will be better suited to a different ownership structure, where they will get the time, attention and investments necessary to optimize their business model.
Next, we adopted the new stock option accounting standard in the beginning of fiscal 2017. This new standard can cause significant fluctuations in tax expense and diluted share count based on stock option exercise patterns. As this is inherently difficult to model and virtually impossible to forecast, we have elected to show the difference over the last year as an adjustment to GAAP earnings. This quarter, adjusting both years for the stock option accounting, the new standard increased our second quarter EPS by $0.72 a share.
Now, let's turn to Tax Reform. The implementation of the new tax laws requires us to recognize some one-time benefits and charges and to adjust our ongoing tax rate. There were two one-time events that generated a net tax benefit in Q2 of approximately $112 million: the revaluation of deferred tax liabilities which were reduced due to the change in the corporate tax rate and a one-time charge related to the repatriation tax on the accumulated earnings of foreign subsidiaries.
Our ongoing federal tax rate was lowered to approximately 26%, reflecting a blend of the old federal rate of 35% and the new federal rate of 21%. This blended rate reduced our tax expense by $59 million in the second quarter. For the balance of the year, we expect our global effective tax rate to be approximately 29% for both Q3 and Q4. Beginning in August 2018, the start of our fiscal 2019, we expect our ongoing global tax rate to be around 24.5%. We expect this lower rate in fiscal 2019 will benefit net income by over $200 million on an annual basis.
As we consider this enhancement in the profitability of the enterprise, we are exploring opportunities to proactively invest some of these proceeds in an effort to improve our business for the long-term. Importantly, we have not yet finalized our plans, but our primary focus has been on ensuring our wages and benefits are market competitive. And as we've mentioned for the last several quarters, we have been experiencing increasing wage pressure and we are exploring expediting our investments in technology to improve our service levels in DIY and commercial, both with an enhanced omni-channel emphasis.
Many of these investments are pull forwards of planned future investments. We currently estimate the investments to impact operating margin by 60 basis points to 90 basis points on an annualized basis once fully implemented. While some investments will begin in Q3, we expect these investments to really materialize over the next 18 to 24 months.
Now, for the business results and specifically sales. The Northeastern and Midwestern market results were much stronger than the remainder of our markets. As you would expect, our weather-sensitive markets improved materially as the harsh winter conditions began near the end of December. In those weather-sensitive markets, our comp store sales improved by more than 200 basis points as a result of the storms. As noted above, certain categories experienced substantially improved sales. However, other categories, like maintenance categories, were challenged and other markets like the West Coast also underperformed. Net-net, our same-store sales improved to 2.2%.
Our sales were strongest in the middle of the quarter when the first major winter storms arrived. As we get later in the winter, additional cold spells don't continue to benefit the business. As we have said for years, weather in this business matters over short periods of time. Over long periods of time, weather effects even themselves out. Aside from the weather, we should reiterate we continued to see positive growth in the industry for both retail and commercial and feel the underlying demographics of our customers' vehicle population and driving habits lead us to remain constructive for the future.
Regarding our internal initiatives, and specifically continuing improving inventory availability at the market level, we continue to see a nice pickup in sales from the markets with mega hub capabilities. Mega hub stores are our stores with approximately 100,000 unique SKUs and provide delivery to surrounding stores and other hubs. As our plan dictated this quarter, we did not open any additional mega hubs. However, we continue on track to have 26 locations opened by the end of the fiscal year.
Our supply chain team remained quite busy this past quarter as they were finishing construction on a new distribution center in Ocala, Florida, and a major expansion in Danville, Illinois. Ocala will begin shipping next month, and we're staging inventory in Danville's expansion now. Even while this activity was ongoing, our supply chain team was able to deliver leverage in our warehouse and delivery cost. This marked the second sequential quarter where we have leveraged our cost, and while we continue to be mindful of fuel cost increases year-over-year and labor shortages across several carrier lines, we remain encouraged with the direction of our business' cost are headed over the remainder of our fiscal 2018.
Additionally, we saw solid performance in our commercial business sales results in Q2. Total commercial sales increased 5.7% for the quarter. While this quarter's rate grew slower than Q1 at 6.7%, these results were encouraging considering both Christmas and New Year's fell on Mondays this year versus Sunday last year. Our commercial customers are typically closed on holidays, so we lost two selling days in the quarter. We estimate that it impacted commercial growth by more than 150 basis points.
We continue to grow our business faster than the overall industry by executing on our game plan. With fewer year-over-year program openings, more of our sales growth is coming from existing customers or new customers in older programs. We believe our inventory availability work is vital to these efforts and is enhancing our position in the market. I'll add a lot of credit here for our ongoing commercial performance goes to our store AutoZoners that are simply getting better at running our model. Commercial relationships take time to cultivate, and we are encouraged with their efforts.
Turning to our online efforts, we continue to invest in our strategy to enhance the customer shopping experience in an omni-channel world. We continue to see growth in website traffic, particularly mobile, while it drives in-store traffic, ship-to-home sales and buy online, pick up in store. Our website has become one of our key marketing tools, and our first omni-channel objective is to leverage the website to drive in-store business.
Buy online, pick up in store growth rates remain much, much faster than ship-to-home as our customers value the convenience of immediate availability and the trustworthy advice our AutoZoners provide them. This also further highlights the importance of inventory availability at the store level.
We're also working to further enhance our digital capabilities with our commercial customers, and they continue to increase their interaction with us electronically. We will continue to invest in our omni-channel strategy to ensure we can conduct business with our customers in the manner that best fits their needs and desires.
On the cost front, I've highlighted on the first – the last two quarters' conference calls the impacts we are experiencing from accelerated pressure on wages. Those pressures continue to exist and are much more than our historical norms. The regulatory changes are going to continue as evidenced by the areas that have passed legislation to increase their wages substantially over the next few years. And more importantly, the current market forces in retail as we all compete for talented employees in a very low unemployment environment.
We are constantly working diligently to find new innovations to better manage our cost structure, and those efforts will continue. But we believe this particular area will have continued pressure for some extended period of time.
Our management team remains committed to managing this business for the long-term to provide great service for our customers and great opportunities for our AutoZoners, ultimately delivering strong shareholder value. We operate in an industry driven by, in many cases, inelastic demand. If the parts break or wear out, our customers need to fix it now to get to work and get on with their lives. Because of this predictability based on miles driven and an aging car population, we remain committed to continually improving our ability to aid our customers in saying yes to their needs.
Now, let me provide a little more detail on the quarter. For the quarter, our sales increased 5.4% and our domestic same-store sales were up 2.2%. During the quarter, we opened 34 net new stores in the U.S. and our commercial business opened 23 programs. Year-to-date, we've opened 49 net new stores and 53 commercial programs in the U.S., eight new stores in Mexico and two in Brazil. We expect to open approximately 150 new domestic stores, 40 in Mexico and approximately 10 in Brazil, for a total of roughly 200 new locations, and we expect to open about 150 net new U.S. commercial programs. Currently, 84% of our domestic stores have a commercial program.
Now, I'd like to provide an update on our inventory availability initiatives. As a reminder, multiple frequency of delivery is solely focused on improving the in-stock levels for the SKUs that are stocked in our stores, while the mega hubs are focused on adding additional coverage to the local markets, meaning adding SKUs that would not have been available locally in our network before.
We have completed our testing related to multiple frequency of delivery. We've determined that at certain volumes more frequent deliveries make economic sense, and at lower volumes, they don't. We will be implementing the new frequencies over the next several months. Once completed, approximately 25% of our stores, representing 40% of our sales volume and nearly 50% of our commercial sales, will receive distribution center deliveries three or more times per week. Implementing these changes will not have a meaningful impact on our current distribution cost structure.
I want to congratulate and thank the team that did all of this important work. They left no stone unturned in determining the optimal delivery frequency and ultimately devised a solid strategy that we will now implement.
Now, let's focus on our mega hubs. As a reminder, these super-sized AutoZone stores carry 80,000 to 100,000 unique SKUs, approximately twice what a hub store carries today. They provide coverage to both surrounding stores and other hub stores multiple times a day or on an overnight basis.
Our sales results thus far in our open mega hubs continue to exceed our expectations both for retail and commercial. Currently, we have over 4,000 stores with access to mega hub inventory. A majority or about two-thirds of these 4,000 stores receive their service on an overnight basis today, but as we expand our mega hubs, more of them will receive this service same-day and many will receive it multiple times per day.
We continue to expect to ultimately operate up to 40 mega hubs. The constraint on the speed with which we can open these is availability and location of real estate. While an average AutoZone location is just under 7,000 square feet, a mega hub is 20,000 square feet to 30,000 square feet or more. Identifying and developing these locations in prime retail areas is challenging and it takes time. While there are incremental cost to these rollouts, we continue to feel these investments will provide a better customer experience and increase market share.
Along with improving our local parts availability and assortment, we continue to manage this organization to provide exceptional service for our customers, provide our AutoZoners with a great place to work, with opportunities for advancement and ensure we do it on a long-term profitable basis to provide strong returns for our shareholders. We will continue to stress the importance of going the extra mile to fulfill our customers' needs regardless of how difficult the request. With our commitments to service intact, we continued to be share gainers over the quarter according to the data we have available to us and in fact our share gains have accelerated over the last several months.
Now, let me review our highlights regarding execution of our ongoing operating theme from 2017 that we carried over into 2018. Yes, we've got it. The key priorities for the year are great people providing great service, profitably growing our commercial business, leveraging the Internet, yes, we've got it and leveraging IT. On the retail front this past quarter under the great people providing great service theme, we were committed to supporting our store AutoZoners, we're focusing on enhanced training to store-level AutoZoners and increasing the share of voice regarding availability with the yes, we've got it theme.
We remain aggressive with our technology investments and believe these initiatives will help differentiate us on a go-forward basis. We realize as customers have become much more tech and mobile savvy, we have to have a sales proposition that touches all the ways they desire to interact with us. Our current and future technology investments will lead to sales growth across all of our businesses.
We should also highlight another strong performance in return on invested capital, as we were able to finish our second quarter at 30.2%. We continue to be pleased with this metric, as it is one of the best in all of hardlines retailing. However, our primary focus has been and continues to be that we ensure every incremental dollar of capital that we deploy in this business provides an acceptable return, well in excess of our cost to capital. It is important to reinforce that we always maintain our diligence regarding capital stewardship as the capital we invest is our investors' capital.
Before I pass the discussion over to Bill Giles to talk about financial results, I'd like to thank our AutoZoners for their efforts to continue to meet and exceed our customers' wants, needs and desires. We are bullish on the remainder of 2018 sales potential because we have a great business operated by an exceptional team.
Now, I'll turn it over to Bill.
Good morning, everyone, and thanks, Bill. To start this morning, let me take a few moments to talk more specifically about our retail, commercial and international results. For the quarter, total auto parts sales which includes our domestic retail and commercial businesses, our Mexico and Brazil stores and our 26 IMC branches increased 5.7%. For the trailing 52 weeks ended, total sales per domestic AutoZone store were $1,780,000. Total commercial sales also increased 5.7% in the quarter, and commercial represented 19% of our total sales and grew $25 million over last year's Q2.
We opened 23 net new programs versus 12 programs opened in our second quarter last year. We now have our commercial program in 4,645 stores or 84% of our domestic stores, supported by 188 hub stores. Over 700 of our programs are 3 years old or younger. For all of fiscal 2018, we expect to open approximately 150 new programs. While we continue to implement new tests in commercial, we are continuing with our existing strategies to grow commercial sales and profit. We are encouraged by the initiatives we have in place and feel we can further grow sales and market share.
Our Mexico stores continued to perform well. We opened three new stores during the second quarter, and year-to-date opened eight. We ended the quarter with 532 stores, and we expect to open approximately 40 new stores in fiscal 2018. Mexico's business was challenged throughout 2016 and 2017 by a weakening peso foreign exchange rate relative to the U.S. dollar. While 2018's exchange rates have come down versus last year and will potentially be favorable, the currency volatility is significant. Moves of greater than 5% from one quarter to the next mean we have to be extremely watchful of what the volatility means to the U.S. dollar earnings.
Regarding Brazil, we opened two new stores and now have 16 total stores open. Our plans are to add eight more locations over the remainder of the fiscal year. While still running with an operating loss, our performance continues to improve and gives us optimism about the long-term future of this market. With more economies of scales, this market has the potential to be much larger than Mexico. So, while challenging, it is worth our patience.
Gross margin for the quarter was 52.9% of sales, up 26 basis points from last year's second quarter. The increase in gross margin was attributable to lower distribution cost and higher merchandise margins. While we continue to be optimistic on gross margin rate for the remainder of fiscal 2018, our primary focus remains growing absolute gross profit dollars in our business.
SG&A for the quarter was 44.4% of sales. Now, excluding the impairment charge, SG&A deleveraged by about 53 basis points. Operating expenses before impairment charges as a percentage of sales were higher than last year, primarily due to higher incentive compensation, higher advertising and deleverage on occupancy costs.
EBIT for the quarter was $205 million in the second quarter. Excluding the impairment charges, EBIT was up 3.7%. Interest expense for the quarter was $39 million compared with $34 million in Q2 a year ago. We are planning interest expense of approximately $40 million in the third quarter of fiscal 2018 versus $35.7 million last year. The higher expense is due to the tenure and size of the bonds completed last April of $600 million at 3.75% coupon.
Debt outstanding at the end of the quarter was approximately $5 billion. Our adjusted debt level metric finished the quarter at 2.5 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 provision was a benefit due to the one-time Tax Reform items versus last year's Q2 tax rate of 32.2%. As Bill has already mentioned this morning, our taxes were impacted by four main components in Q2. The first one has been in effect for about a year now. The new standard on handling stock option expensing requires us to recognize the tax benefit received from the gains employees have on stock options as a credit to income tax expense in the P&L.
This past quarter, it lowered our tax expense by $32 million. This compares to last year's Q1 benefit of $13 million. This accounting change also increases the diluted share count calculation. Because it is impossible for us to predict when individuals exercise options, we encourage folks to model us on a rate assuming no stock option impact and we will report both rates.
Secondly, our rate was impacted by the tax benefit on the impairment charge taken. This was a benefit of $47 million in the quarter. We also had a benefit from the revaluation of our deferred tax liability and from the new, lower go-forward federal tax rate. Lastly, we incurred a one-time tax expense in Q2 for the repatriation tax on the accumulated earnings of foreign subsidiaries. To try and parse through all of these pushes and pulls, I will simply say we expect our global tax rate to approximate 29% for Q3 and Q4, and we expect our fiscal 2019 global tax rate to be approximately 24.5% going forward.
On a GAAP basis, net income for the quarter was $290 million, up 22% versus Q2 last year. Our diluted share count of 27.9 million was down 5% from last year's second quarter. The combination of these factors drove earnings per share for the quarter to $10.38, up 28% over the prior year's second quarter. Now, excluding the impact of the previously-mentioned adjustments, including impairment charges, Tax Reform and stock-option accounting to both this year and last year's numbers, our EPS would've increased at 9.3% for the quarter.
Relating to the cash flow statement for the second quarter, we generated $187 million of operating cash flow. Net fixed assets were up 7.3% versus last year. Capital expenditures for the quarter totaled $104 million and reflected the additional expenditures required to open stores this quarter. Capital expenditures on existing stores, hub and mega hug store remodels or openings, work on the development of new stores for upcoming quarters, investments in our new domestic DCs and information technology investments. With the new stores opened, we finished this past quarter with 5,514 stores in 50 states, the District of Columbia, and Puerto Rico, 532 stores in Mexico and 16 in Brazil for a total AutoZone store count of 6,062. We also had 26 IMC branches open at the end of Q2.
Depreciation totaled $79.3 million for the quarter versus last year's second quarter expense of $72.8 million. This is generally in line with recent quarter growth rates. We repurchased $175 million of AutoZone stock in the second quarter. At quarter-end, we had $296 million remaining under our share buyback authorization and our leverage metric was 2.5 times at quarter-end. Again, I want to stress, we manage through appropriate credit ratings and not any one metric. The metric we report is meant as a guide only as each rating firm has its own criteria. We continue to view our share repurchase program as an attractive capital deployment strategy.
Next, I'd like to update you on our inventory levels in total and on a per store basis. The company's inventory increased 4.7% over the same period last year. Inventory per location was $671,000 versus $665,000 last year and $663,000 last quarter. Net inventory, defined as merchandised inventories less accounts payable, on a per location basis was a negative $46,000 versus a negative $36,000 last year and a negative $52,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 106.9%.
Finally, as Bill previously mentioned, our continued, disciplined capital management approach resulted in return on invested capital for the trailing four quarters of 30.2%. 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.
Thank you, Bill. While we are encouraged for the remainder of the year by the favorable macro environment and the traction we are gaining with our internal sales initiatives, we understand we must continue to execute on our game plan. We are optimistic looking at the back half of the fiscal year. Last year, we were impacted negatively by the delay in income tax refunds and the impact of a second consecutive mild winter. Timing of this year's income tax refund season is expected to be similar to last year, and therefore, we do not expect a material impact on the third quarter.
We're excited to intensify our focus on our core businesses because we see these core businesses as tremendously attractive and in strong markets. We will continue our domestic and international expansion efforts, growing roughly 200 locations annually. We will continue to focus on growing our commercial business at an accelerated rate to the market growth. We will accelerate our omni-channel efforts, and we will leverage ALLDATA as the premier tool our shops use in the automotive aftermarket.
To execute at a high level, we have to consistently adhere to living the pledge. We cannot and will not take our eye off execution. We must stay committed to executing day in and day out on our game plan. Success will be achieved with an attention to detail and exceptional execution.
Our customers have choices and we must exceed their expectations in whatever way they choose to shop with us. We are fortunate to operate in one of the strongest retail segment and we continue to be excited about our industry's growth prospects for 2018 and beyond.
As consumers continually look to save money while taking care of their vehicles, we are committed to providing the trustworthy advice they expect. It is truly the value-add that differentiates us from any other faceless transaction. Customers have come to expect that advice from us. It is with this focus we will implement more enhancements on both our DIY and commercial websites and in-store experience to provide even more knowledgeable service.
We don't ever expect an online experience to replace the advice our customers want, but today's customers do expect more information on repairing their vehicles. This aspect of service has always been our most important cultural cornerstone and it will be long into the future. Our charge remains to optimize our performance regardless of market conditions and ensure we are investing in the key initiatives that will drive our long-term performance.
In the end, delivering strong EPS growth and ROIC each and every quarter is how we measure ourselves. This formula has been extremely successful over the last 38 years and we continue to be excited about our future.
Now, we'd like to open up the call for questions.
Thank you. We will now begin a question-and-answer session. Our first question is coming from Alan Rifkin of BTIG. Your line is now open.
Good morning, Alan.
Hello?
Hey, Alan. Hello?
One moment please.
Then, can we move to the – I'm sorry.
Operator, can we take the next call, please?
Thank you. Once again, Alan Rifkin, your line is now open.
Thank you. Can you hear me?
Yeah, we can. Sorry about that, Alan. I'm not sure what happened.
I'm very sorry about that also. Bill, a couple of questions for you, Bill Rhodes. So the disposition of IMC and AutoAnything is the first time that I can recall you disposing of an asset. Is that a sign that you're now taking a more targeted approach to growing your business? And why do you think you couldn't make AutoAnything work, yet you remain confident in the AutoZone.com business? And then I do have a follow-up, please.
That's a great question, Alan. First of all, it's the second time we divested of a business. We did sell the TruckPro business, if you recall, back in 2001 or 2002. In each of these cases, the first thing I'll tell you is as we get into these other businesses that are maybe half a step away from our core business, the profitability dynamics are just very, very different than what we experience in our core business, and it really makes us further appreciate the strength of this core business on a long-term basis.
Specifically on AutoAnything, we bought them to learn. Online-only retail at that time, this is 2012, was really emerging and we felt like it was important that we understood that business and understood it to see if we could grow it, but also to understand it and what its implications would be to the long-term of our business. As you can see from both of those businesses, they're not terribly profitable. In fact, we were operating both of them at a net loss.
And the more we've learned about both the online-only area and AutoZone.com, we have become more confident that we need to leverage the strengths of our business, particularly the knowledgeable people that we have in our stores. And so our decision has been let's go and double down on the core business, both AutoZone.com and our retail operations, as well as commercial. And we feel really good about those decisions. We do want to say thanks again to the people with AutoAnything and IMC, great AutoZoners and did a wonderful job for us, just tougher markets.
Okay. Thank you, Bill. And a follow-up, if I may. What proportion of the Tax Reform savings do you expect to be reinvested into the business? And what areas, in particular, will be earmarked? And what would be a reasonable time to expect a return from these investments? Thank you so much.
Thank you, Alan. Great questions, again. I've said this in our prepared remarks, and I want to emphasize it again. We have not made final decisions on that. And frankly, we haven't had a board meeting since the Tax Reform was passed. You know us to be very methodical in what we do. We're not going to go out and make quick decisions. We're going to evaluate what we think the right decisions are for the long term.
I mentioned in our prepared remarks that we're looking at wages. We've been talking about the increased pressure on wages over the last year or so. And one implication of Tax Reform is that those pressures on wages are intensifying. You've heard other retailers and other businesses talk about raising their minimum wages and the like. So we are very focused on making sure that we are market competitive with our wages. Our people are our most important asset, and it is imperative that we have the best people and it's imperative that we pay them appropriately. So I think that will be a big part of what we focus on.
As for when do those investments pay off, it's going to depend on when they come in. I've said in the prepared remarks, you know what, don't look for these all come in this quarter. They'll be feathered in overtime as we're prepared to execute them.
Okay. Thank you. And sorry for the mix-up on my end with the Q&A.
I'm not sure what happened, Alan.
I too.
Thank you.
Thank you. Thank you, gentlemen.
Thank you, Alan. And our next question is coming from Matt Fassler of Goldman Sachs. Your line is now open.
Thanks so much. Thanks so much, guys, and good morning to you. Can you hear me?
Yeah. Thanks, Matt.
Beautiful. First of all, I want to talk a bit about the rate of sales growth. You gave us some color about the cadence during the quarter, the strength in the middle. Obviously we're coming off two years where you kind of had a perfect storm against you. You seem rather optimistic about the rest of this year based on all those – many of those factors reversing.
Is your sense that the run rate of this business kind of in a neutral state where things like car park and weather are one way or the other similar to where it's been in years past? Is the run rate you think lower than it's been in years past? Just thinking about the 2% comp in a quarter where it seems like you had more good guys than bad guys, how should we think about the run rate, not just here in the third fiscal quarter, but on a bigger picture go-forward basis? Any new insights would be great there.
Sure. And I would say this is probably not new, Matt, but if you go back to our conference call in September, if you remember last year this time there was a lot of anxiety that the market, the industry fundamentals had been disrupted and were going to be changed over a long period of time.
Back in September, I made a very intentional point to say that our five-year average growth in same-store sales was 1.9%. So this quarter, we ended at 2.2%. I don't think the industry fundamentals have changed significantly this year, last year, or over the last five years. I'm pretty pleased with the 2.2% comp that we had in the quarter. If you recall, we knew we were going to be up against a tough beginning of the quarter because the only weather we got last year was kind of between Thanksgiving and Christmas. So we were a little challenged in that period of time. When the first cold weather hit, our sales absolutely performed and did wonderfully.
As we got later in the quarter, our sales softened. That to us was not a big surprise. It was cold and rainy, and as it gets – you get the sales pop when you get the first cold snap. You don't get continued failure of batteries and the like when you get continued cold spells.
What we are optimistic about for the balance of the year, and one thing we talked about for the last two years is our maintenance businesses in Q3 and Q4 have been challenged. The road conditions, salt, potholes and the like, help brakes and chassis and shocks and struts, and so we anticipate as we go into the back half of the year that our conditions should be pretty favorable.
One other thing that I want to make sure and reinforce is when you look at the two-year comp for Q2, I think some people were concerned about that, don't forget, last year, we lost the tax money in Q2. We did not pick that back up this year. So that was a fundamental shift in the business.
Got you. And then one quick follow-up. If you could – you guys talked about a $5 million operating loss essentially associated with the two businesses that you're divesting. What does that look like on an annual basis? And can you share or do you plan to publish with your filings the parameters of that so that as we model out the upcoming quarters and years, we can do so accurately without AutoAnything in the mix?
Yeah, and that's a good point, Matt. And to be honest with you, we just want to be transparent and show you guys that they're not profitable, but they're very, very small businesses overall. But they're probably on an annualized basis combined single-digit, low-double digit EBIT loss, so, but we'll break that out as we go forward and you guys can model it in.
And then finally, how much money did you get in these transactions? Is it meaningful at all?
No, it's an undisclosed number. But look, we feel pretty good about what we did with these two units. We're glad to move on and put them under different ownership and focus back on our core, because we're pretty excited about our core.
Thank you, guys.
Thanks, Matt.
Thank you. And our next question is coming from Christopher Horvers of JPMorgan. Your line is now open.
Thanks. Good morning. Following up on Matt's thread there, you have had more good guys than bad guys, and I know you talked about a 2% average over the past five years. But with more good guys in hand, do we tick-up a little bit from the 2%? And how would you – and then, as you think about the third quarter, compared to look easier here, so is there something unique why we shouldn't see some modest acceleration in light of those two factors, more good guys than bad guys, and then a real dip here in the third quarter last year?
Great question, Chris. On the third quarter, I do want you to remember also last year we didn't get the tax money that we thought we'd get in the third quarter of last year, so that was part of the challenge. What happens with that tax money this year, we really don't know. For the most part, it didn't start arriving until last Friday. That was the first time a significant amount of tax money arrived in the marketplace, so we'll see over time.
As far as the forecast in the future, as you know, we don't give guidance. And we're talking about five years of 1.9% and this quarter at 2.2%. Those are very similar numbers. What happens on a go-forward basis? I think we've been pretty clear, we're optimistic about the second half, but I don't want to put a number on it.
Yeah. And then, within the quarter, last year, you provided some helpful context around, I think, December was down 6% and January, before the last three weeks, was – sorry, up 6% and then January before the last three weeks of the quarter, I think, was down 4%. So could you provide some incremental color in terms of sort of how we compare it against those?
Yeah. I would think of it almost as a bell curve on the quarter to some extent. You're right. When we anniversaried some of that strong performance at the early part of the quarter given the weather that hit last year, business was a little bit more challenging. When we hit the heart of the quarter, business was really strong and a lot of that was weather related.
As Bill mentioned in the prepared remarks, as we hit the tail end of the quarter, we had a lot of wet, chilly type of weather throughout the country, and that was a little bit softer, but we think we're pretty well positioned as we head into Q3. And as Bill said, the tax money is now arriving. We don't know what the impact of that will be, but we feel pretty good as we start to head into Q3.
Great. Thanks, guys. Best of luck.
Thank you.
Thank you. And our next question is coming from Simeon Gutman of Morgan Stanley. Your line is now open.
Thanks. Good morning. Guys, I realize that you don't give line item guidance. And my question is on operating income, which was fine this quarter. It grew nicely. I wanted to ask if the mid-single digits is the right run rate, and I heard a lot of commentary from Bill Rhodes about investment and potential reinvestment. And so I want to understand if the philosophy around that number has changed, meaning if comps do eclipse 3% in the next couple quarters, are you reinvesting faster or are you letting that flow through?
I think to a large extent it'll be timing. When we talked about making some of the reinvestments, as we mentioned, some of those may take 18 to 24 months as we go through and evaluate where the best places are and what the dollar amounts will be, et cetera. But I think that our philosophy relative to our operating model remains intact with the exception that as we have this benefit from the Tax Reform Act that ultimately will put more pressure on wages in the marketplace in general. But we'll respond to that. We want to get out in front of that, and so we'll take an opportunity to take a portion of those Tax Reform dollars and be able to invest them back in the business to continue to drive EPS overall. But I don't think anything's changed in our operating model excluding that.
Okay. And then with regard to the current environment, are you seeing anything yet with regard to under-car repairs sort of bigger jobs or bigger part sales that relate to larger damage? And then, connected to it, anything yet as far as six to seven-year-old vehicles where this whole car part argument is starting to come through?
Yeah. I'll start with the first one on are we seeing the maintenance items, the under-car items come up. Not yet, we aren't. But the weather has not been conducive to it and usually we see it at the time when the weather finally breaks and gets into the 50-degree, 60-degree range, when people can get outside and work on their vehicles and that really hasn't happened. So we're not surprised by any stretch of imagination that we haven't seen it materialize yet, and we're quite optimistic that it will materialize over time. On the six to seven-year-old car part, if you've listened to us, we haven't made that big of a deal out of it over time. Yeah, it was a minor headwind, but I don't think it was a – it was never one that we called out as a significant driver of our performance. So I don't think it'll be a significant driver this year either.
Okay. Thanks, Bill. Good luck.
Yeah. Thank you, Simeon.
Thank you. And our next question is coming from Scot Ciccarelli of RBC Capital Markets. Your line is now open.
It's Scot Ciccarelli. Two questions. First, can you tell us the size of your AutoZone.com business today? Number one. Number two, looking for a clarification on the comments on the disposed businesses. Bill, when you said high-single-digit or low-double-digit loss, was that an annualized number in millions for the two businesses in aggregate?
Yeah. It was an annualized number from an EBIT perspective. And, like I said, we'll disclose that as we move forward so that you guys will be able to see it. We don't really disclose the volume on AutoZone.com because what's really important to us is the eyeballs that we get to the site. So we get a significant amount of traffic on a weekly basis, much of which we believe transfers itself into sales inside of our store. Certainly our buy online, pickup in store business, which is not significant but clearly the fastest growing channel of growth that we have continues to do really well. So that's where we really fall back to this concept that we really believe with the assets that we have that investing in the omni-channel is really our core strategy, and that's how we're going to move forward.
So maybe phrasing the question slightly differently, of your AutoZone.com orders, how much has picked up in the store versus sent to people's homes?
I would say probably 50% of what comes through online is picked up in the store.
Got it. All right. Thanks, guys.
Sure.
Thank you, Scot.
Thank you. And our next question is coming from Brian Nagel of Oppenheimer. Your line is now open.
Hi. Good morning.
Good morning.
Good morning.
First off, I guess a bigger picture question just with respect to the sales backdrop. We talked a lot about weather so far. With some of the shifts in taxes, particularly on the personal side, are you seeing evidence yet that the overall health or buying power of your core consumer has been improving?
We haven't seen that yet. This is a very volatile time of year for us. Every single year, the second quarter, the beginning of the third quarter is clearly the most volatile period of time. So to be able to pick up on those nuances would be pretty challenging. We've also done some work and are continuing to do some work on what does it actually mean to our customers? And if you look at it, it can be a meaningful dollar amount. Tax Reform can be a meaningful dollar amount over the year, but the change in their check on an every two-week basis is pretty small. And so we're kind of wondering how are we going to see that? It's really easy to see it when you get a tax refund. We can absolutely see that in our business. But if you're picking up $30 to $70 every two weeks in your check, I don't know how we're going to be able to ferret that out.
That's helpful. And then the second question I have with respect to potential reinvestments of the corporate tax savings, so AutoZone's been aggressively buying its stock back for some time. I guess that's been a key source of investment. As you think about this, for lack of a better term, windfall of money coming in and how to allocate that, is the buyback still prioritized similarly, or...
Yes.
Okay.
Absolutely, the buyback is still a very important part of our structure. But our capital structure all along has been, number one, invest in the assets that we have today to make them perform at an optimum level. Secondly, invest in new assets. So think new stores in the United States, Mexico, Brazil, new commercial programs, and on and on. Thirdly, we repurchase shares with the balance of that excess cash flow. That will not change, has not changed. We are looking at are there some areas that we should invest at an accelerated rate, and that's what we called out this morning. But again I want to reiterate we have not made final decisions on any of that at this point in time.
Thank you very much.
All right. Thank you, Brian.
Thank you, Brian. And our next question is coming from Kate McShane of Citi Research. Your line is now open.
Hello. Good morning. Thanks for taking my question.
Good morning.
Given the conclusion on the amount of deliveries to your stores, I'm not sure if I missed it, but can you walk us through how you reached the conclusion of what the ultimate level of deliveries for the lower volume stores should be? And should costs, therefore, be alleviating for some of those stores you're delivering less often to? And can you dimensionalize how that can impact your costs over time?
Yeah. I think the way to think about it is – and you're right on the track there. It's really an economic decision, so we're looking at the volume of those stores in determining what kind of lift that they can get in order to support the incremental cost, and that's how we bifurcated the overall chain and determined what stores would wind up getting that more frequent delivery. As we realign that versus what we are doing today, we actually think the costs will be relatively consistent with where it has been. So there'll be some pushes and pulls, but the cost would be relatively consistent.
Thank you.
Thank you.
Thank you. And our next question is coming from Greg Melich of MN Retail. Your line is now open.
Hi. Thanks, guys. I had two questions, one on the understanding numbers and reinvestments of the tax cuts and then second is on the imported parts strategy. So first on the tax cuts, I'm not sure I got this right; it's about $200 million of savings, but we should expect 60 bps to 90 bps of margin investment which would imply sort of a 35% to 50% reinvestment of that. Am I thinking about that the right way and then...
Yes.
...would CapEx be on top of that? Okay.
Yes, that's right, that's ballpark-ish, and the CapEx would still be its own separate strategy, and we'll continue with what we've done in the past. But think about that as $200 million-plus in Tax Reform money and the majority of that will go back to shareholders, per se, and less than the majority will be invested back in the business.
Got it. And that 60 basis points to 90 basis points, from everything you said, it sounds like it's basically SG&A?
Yes, to a large extent, it would be. I don't see us investing necessarily in the supply chain or margin – or gross margin, so it likely will show up in SG&A over time. But as Bill said, it will probably be over a longer period of time of 18 to 24 months, and it's worthy of stepping back for a second and just saying that we haven't made determinations as to exactly what that number is going to be or how it is going to be spent. We're just giving you an idea of what we're thinking about now.
Got it. And that starts in the third quarter of this fiscal year, but it should build to that range by next fiscal year. Would that be a fair way to think about it?
Yes.
Got it. And with the divestiture of IMC, how are you guys thinking about addressing that part of the market? That was a growing area, imported car parts. Is there a change in terms of vendors or SKU counts, or how are you thinking about that?
Terrific question, Greg. First of all, I think, if you recall, when first bought IMC, we talked about the incredibly small overlap of the customers that we had, and that hasn't changed. But over time, we have, in our core business, we have gotten deeper and deeper in import coverage, primarily through the Duralast brand, and we will continue to do that. So I don't see any major shift in how we go to market. I think all of us and we at AutoZone in particular have constantly been enhancing our coverage on import parts.
When you think about the mega hubs and hubs, there's a lot of that there, but there's a lot of it in just those core satellite stores as well. So I think we'll continue to focus on the import market, but not a major shift. What we won't be doing is selling to high-end import market, which is where IMC is really good at. So think about BMWs and Mercedes in particular. And that's just a part of the market that we're not focused on.
Got it. Thanks a lot. Good luck, guys.
All right. Thank you, Greg.
Thank you. And our next question is coming from Steve Forbes of Guggenheim Securities. Your line is now open.
Good morning.
Good morning.
Maybe a follow-up here on the multiple frequency of delivery initiatives. So can you expand on what percentage of those stores that you mentioned, right, the 25% of the store base that are going to be receiving three times a week delivery have that type of frequency in place today to just give us some perspective on the amount of change that has to transpire here? And then for the remaining 75% on a net-to-net basis is, do you plan on reducing the number of average deliveries per week for this cohort? And any color on kind of timing? I know you said you're still kind of working through it here, but any color on timing would be helpful.
We're still working through the timing. We made a decision last Monday, so this is fresh. It's going to take us a little bit of time as we rewrite delivery schedules to get in. But I'd say it will be in place over the next several months. So the net change is not going to be significant. We've been testing low volume stores at three times a week, high volume stores at one time a week and the like for the last year, year and a half in particular.
So the net change is not going to be significant. We're going to have lower volume stores that are getting three time a week delivery today that will go back to one time a week delivery. We're going to have high-volume stores that are getting once a week delivery to get three time a week delivery. We think it will have a marginal sales benefit and a neutral cost impact once it's implemented.
Thank you. And then just a quick, I guess, modeling question for a follow-up here regarding square footage growth within the quarter. If I'm doing this right, it looks like there was a step up in total footage, and it appears that it's really concentrated with international. Is that right? And then what would that be from?
Yes. It's probably more timing than anything else, Steve, and I would say that on an annualized basis we should be pretty consistent with prior year. So there's probably a little bit of juggling in between quarters. That's all I would think about.
Thank you.
Thank you.
Thank you. And we will now turn the call over back to Bill Rhodes.
Great, thank you. Before we conclude the call, I'd just like to take a moment to reiterate that our business model continues to be solid. We're excited about our growth prospects for the year. We will not take anything for granted as we understand our customers have alternatives. We continue to execute our game plans to succeed this fiscal year. But I want to stress that 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 very successful. We thank you for participating in today's call.
And that concludes today's conference. Thank you for your participation. You may now disconnect.