AutoZone, Inc. (NYSE:AZO) Q1 2024 Earnings Call Transcript

AutoZone, Inc. (NYSE:AZO) Q1 2024 Earnings Call Transcript December 5, 2023

AutoZone, Inc. beats earnings expectations. Reported EPS is $32.55, expectations were $31.04.

Operator: Good day, everyone, and welcome to AutoZone’s 2024 First Quarter Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. Before we begin, the Company would like to announce the following forward-looking statements.

Unidentified Company Representative: Certain statements contain herein 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, speak, 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 will be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including without limitation, product demand due to changes in fuel, prices, miles driven or otherwise, energy prices, weather, including extreme temperatures, natural disasters and general weather conditions, competition, credit market conditions, cash flows, access to available and feasible financing, unfavorable terms, future stock repurchases, the impact of recessionary conditions, consumer debt levels, changes in laws or regulations, risks associated with self insurance war and the prospect of war, including terrorist activity, the impact of public health issues, inflation, including wage inflation, the ability to hire, train, and retain qualified employees, including members of management and other key personnel, construction delays, failure or interruption of our information services technology systems, issues relating to the confidentiality, integrity, or availability of information, including due to cyber-attacks, historic growth rates, sustainability, downgrade of our credit ratings, damage to our reputation, challenges associated with doing business in and expanding into international markets, origin and raw material costs of suppliers, inventory availability, disruption in our supply chain, impact of tariffs, impact of new accounting standards, our ability to execute our growth initiatives, and other 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 our annual report on Form 10-K for the year ended August 26, 2023. 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. Events described above and in the Risk Factors could materially and adversely affect our business. However, it should be understood that it is not possible to identify or predict all such risks and other factors that could affect these forward-looking statements. Forward-looking statements speak only to 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.

Operator: Thank you. It is now my pleasure to turn the floor over to your host, Bill Rhodes, Chairman and CEO of AutoZone. Sir, the floor is yours.

Bill Rhodes: Good morning. And thank you for joining us today for AutoZone’s 2024 first quarter conference call. With me today are Phil Daniele, CEO-Elect; Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the first quarter, hope you had an opportunity to read our press release and learn about the quarter’s results. If not, the press release along with slides complementing our comments today are available on our website, www.autozone.com, under the Investor Relations link. Please click on Quarterly Earnings Conference Calls to see them. As we begin this morning, we want to thank our AutoZoners for their contributions during the quarter that resulted in our solid performance.

As our pledge states, we lead with putting customers first, which allowed us to grow our total sales by 5.1% while both are operating profit and earnings per share, grew by very impressive high-teens rates. As we have previously said, we have been able to continually build on the phenomenal performance from the pandemic years of 2020 to 2023. Our leadership team and I continue to be impressed with our post-pandemic sales performance. To put this in perspective, our FY 2019 sales were $11.6 billion and now our trailing four quarter sales are $17.7 billion, a 50% plus increase over a four-year time horizon. Congratulations AutoZoners everywhere who made that enormous success possible. For the first quarter, our total company same-store sales were 3.4% and 2.1% on a constant currency basis.

As international has become a more important part of our growth story and an area where we are increasingly deploying capital, last quarter we began disclosing our global sales comp. We encourage you to focus on the constant currency number where international again had a strong quarter of 10.9%. Both our Mexican and Brazilian same-store sales had double-digit growth. We are very excited about the short- and long-term growth prospects of international. Our expectations are we will continue to grow both mature store volumes both in DIY and DIFM and we plan to accelerate new store openings over the next several years, ultimately getting to a minimum of 200 international new stores by 2028. Next, our domestic same-store sales were up 1.2% this quarter compared to 1.7% last quarter and 5.6% in Q1 of last year.

Our performance in retail was slightly below our expectations, but still, still resilient in the current environment. Breaking our sales into three, four-week segments, our DIY same-store sales were roughly 1% for both the first and last four-week segments, but were negative 2% in the middle four weeks or October. Commercial sales on the other hand accelerated for the quarter, but we started stronger than we finished. As you know some of the comparisons over the last few years were distorted. And on a three-year basis, the performance of each of the businesses this quarter was remarkably similar. Our commercial business grew 5.7% against exceptionally strong comps last year. Importantly, we continue to be encouraged by the new initiatives we have in place to accelerate top-line growth in commercial, and those efforts are having a positive impact on our performance.

And as we further analyzed our DIY and DIFM results and specifically our second period sales slowdown, our retail business was clearly impacted on a regional basis as we saw a 70 basis-point performance gap between the Northeast and Midwestern markets versus the rest of the country. We continue to attribute this gap in performance to the lack of winter weather last year and lack of snowfall. But enough about what happened to us. While not satisfied with our sales performance, we are encouraged as we enjoyed both, dollar and unit share gains in our domestic and retail businesses — domestic retail and commercial businesses. We previously highlighted that we were not executing at peak levels, and we are encouraged to share that we are seeing steady progress.

Our in-stock levels are nearing pre-pandemic levels. Turnover, while still elevated is beginning to decline. Productivity levels in our distribution centers have improved. The technology we deployed to improve service levels to commercial customers is seeing much higher adoption rates, leading to decreased delivery times and we have opened a significant number of new commercial programs, reaching 92% domestic penetration for the first time in our history. Even more encouraging is the continued strength in sales we are seeing from those new program openings as many are only weeks old. Now, I’d like to turn the call over to Phil Daniele to give more in-depth color on the quarter. Phil?

Phil Daniele: Thank you, Bill. Good morning, everyone. Our domestic same store sales were 1.2% this quarter on top of last year’s 5.6% growth. While we were up against exceptionally strong same-store sales from a year ago, particularly in commercial, we believe we are making progress with more room for improvement. I want to reiterate what Bill said a moment ago that we’ve made many changes across the organization from reinstituting many of our long-term processes to placing share of voice in vitally important areas, ensuring we are hiring the right AutoZoners, and execution is improving meaningfully. Our domestic commercial business grew 5.7%. We still have work to do, but we were pleased with the improvements we saw in this business.

As the business began improving, we believe we grew share and set another record for the quarter with $1.1 billion in commercial sales. Domestic commercial sales represented 30% of our domestic auto parts sales for quarter one. Our commercial sales growth continues to be driven by the key initiatives we have been working on for the last several years: improved satellite store inventory availability, material improvements in hub and mega hub coverage, adding new hubs and mega hubs, the strength of the Duralast brand with an intense focus on high-quality products, and technological enhancements that make us easier to do business with. We are also operating more efficiently, with improvements in delivery times and enhanced sales force effectiveness.

In Q1, we opened 121 net new commercial programs, opening the majority of them in the back half of the quarter. 69 of those 121 programs opened in weeks 7 through 12 of the quarter. While programs that opened late in the quarter have minimal sales impact on the quarter, they do position us for sales growth for the remainder of FY24 and beyond. As Bill previously shared, I want to reiterate, we now have commercial in approximately 92% of our domestic stores. When I was SVP of Commercial, we didn’t have line of sight to reaching that level of penetration. It really is a great sign of the progress that we’ve made over the last five years or so. We believe our commercial business will get stronger and growth rate should improve as we move through the year as comps get easier and our execution will continue to improve.

Regarding domestic DIY, we had flat comps this quarter on top of last year’s comp of 2.6%. While the data we have available to us indicates we continue to gain share in both dollars and units, our comp is below our expectations, but in line with what we are seeing across the industry. Regarding weather, it was quite mild this quarter. It is this time of year when our sales will fade as the summer sales slow down into winter. This year, October was warmer than last year, and sales in weather sensitive hard part categories in the Midwest and the Northeast underperformed the remainder of the country. While our retail comp was flat for the quarter, we saw the first four weeks comp up 1%, the second four weeks comp down 2%, and the last four weeks comp up 0.7%.

While our performance clearly improved over the last four weeks of the quarter, we fell short of our own expectations for retail for the full quarter. As a reminder, historically, extreme weather, either hot or cold, drives part failures and accelerated maintenance. Regarding this quarter’s traffic versus ticket growth, in retail, our traffic was down 1.6%, while our ticket was up similarly. We expect our ticket growth will return to more normalized levels in the 3% to 4% range as we get further removed from the large increases from last year due to significant inflation, particularly due to freight costs. Regarding our commercial trends, we continue to see higher growth rates for traffic relative to ticket. During the quarter, there were some geographic regions that did better than others as there always are.

This quarter, we saw a 230 basis-point worse performance between the Northeast and the Midwest compared to the balance of the country. As the Northeast and the Midwest experienced a very mild winter last year with below average snowfall, we sold less weather-sensitive hard parts in this part of the country. Heading into the second quarter, we are planning for a more normal weather pattern. But as a reminder, the Q2 is always our most volatile quarter as weather fluctuations can be extreme, meaningfully impacting our short-term sales performance, either positively or negatively. Regarding our merchandise categories in the retail business, our sales floor categories underperformed hard parts as we saw more discretionary pullback from customers.

We do feel the low-end consumer started pulling back on discretionary purchases. Let me also address inflation and pricing. This quarter, we saw low-single-digit inflation and as a result our ticket was up roughly 1.5%. We believe inflation for the second quarter will be similar as the industry is migrating back to pre-pandemic inflation levels, lapping very high inflation from a year ago. I want to reiterate that our industry has been very-disciplined about pricing for decades, and we expect that to continue. Historically, as costs have increased, the industry has increased pricing commensurately to maintain margins. It is also notable that following periods of higher inflation, our industry has historically not reduced pricing to reflect lower cost, and we believe we have entered into one of those periods.

For the second quarter, we expect our DIY sales to remain more difficult and our commercial sales trends to improve. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends emerge. Before handing the call to Jamere, I’d like to highlight and give some color on a few of our other key business priorities for the new fiscal year. First, we continue to focus on our supply chain with two initiatives that are in flight to drive improved availability: one is our expanded hub and mega hub rollouts, and secondly, we are making good progress on transforming our distribution network. Along with having two domestic distribution centers currently under construction, our strategy is focused on leveraging the entire network to carry more inventory closer to the customer to drive growth with speed and expanded availability and efficiency.

Additionally, we plan to continue to grow internationally. At 840 store — 849 stores opened internationally, or 12% of our total store base, these businesses had impressive performance last quarter and should continue to grow at a robust pace for the remainder of fiscal 2024. We are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil. Now, I’d like to turn the call over to Jamere Jackson.

Jamere Jackson: Thanks, Phil, and good morning, everyone. As both Bill and Phil have previously discussed, we had a solid first quarter stacked on top of an impressive first quarter last year with 5.1% total company sales growth, 1.2% domestic comp growth, 10.9% international comp on a constant currency basis, a 17.4% increase in EBIT, and an 18.6% increase in EPS. We continue to deliver solid results, and the efforts of our AutoZoners in our storage and distribution centers have continued to enable us to drive earnings growth in a meaningful way. To start this morning, let me take a few moments to elaborate on the specifics in our P&L for Q1. For the quarter, total sales were $4.2 billion, up 5.1%, and let me give a little more color on sales and our growth initiatives.

Starting with our domestic commercial business, our domestic DIFM sales increased 5.7% to $1.1 billion and were up 20.6% on a two-year stack basis. Sales to our domestic DIFM customers represented 26% of our total company sales and 30% of our domestic auto part sales. Our average weekly sales per program were $15,900, down 0.6%. It’s important to point out that our sales per program productivity was again impacted by a large number of immature programs that have opened over the last five quarters. While these openings depress the point in time productivity metric, we’re encouraged by the growth prospects of these programs and their early contribution to our commercial business. We have intentionally opened more stores with commercial programs in response to the tremendous opportunity we see to grow our market share.

We now have a commercial program in approximately 92% of our domestic stores, which leverages our DIY infrastructure and we’re building our business with national, regional, and local accounts. This quarter, we opened 121 net new programs, finishing with 5,803 total programs. Our commercial acceleration initiatives continue to make progress as we grow share by winning new business and increasing our share of wallet with existing customers. Importantly, we continue to have a lot of runway in front of us and we will continue to aggressively pursue growth opportunities in commercial, which we believe is our single largest growth opportunity. To support our commercial growth, we now have 100 mega hub locations with 2 new mega hubs open in Q1.

The 100 mega hubs averaged significantly higher sales than the balance of commercial programs and grew more than 2 times the rate of our overall commercial business in Q1. As a reminder, our mega hubs typically carry roughly 100,000 SKUs and drive tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores. The expansion of coverage and parts availability continued to deliver a meaningful sales lift to both our commercial and DIY business. These assets are performing well individually and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to thousands of additional parts and lifting the entire network. We will continue to aggressively open mega hubs for the foreseeable future, and we expect to have north of 200 mega hubs at full build out.

These are difficult to find boxes in the right locations, but we are keenly focused on rapid expansion and have 45 currently in the pipeline and growing. On the domestic retail side of our business, our comp was essentially flat for the quarter. As mentioned, we saw traffic down 1.6%, offset by 1.5% ticket growth. As we move forward, we would expect to see slightly declining transaction counts offset by low to mid single digit ticket growth, in line with the long-term historical trends for the business, driven by changes in technology and the durability of new parts. While DIY discretionary purchases were challenged in Q1, we continue to see a growing and aging car park, a challenging new and used car sales market and a consumer that is likely to continue to invest in their existing vehicles.

As such, we believe our DIY business will remain resilient for the balance of FY24. I’ll now say a few words regarding our international business. We continue to be pleased with the progress we’re making internationally. Our same-store sales grew 25.1% on an actual basis and 10.9% on a constant currency basis. During the quarter, we opened 5 stores in Mexico to finish with 745 stores and 4 stores in Brazil ending with 104. We remain committed to international and given our success, we’re bullish on international being an attractive and meaningful contributor to AutoZone’s future growth. Now, let me spend a few minutes on the rest of the P&L and gross margins. For the quarter, our gross margin was 52.8%, up 279 basis points, driven primarily by a noncash $81 million LIFO charge in last year’s quarter versus a $2 million LIFO credit this year.

Excluding LIFO from both years, we had a very strong 70 basis-point improvement in gross margin, which increased from last quarter’s 37 basis-point improvement. We’ve had exceptional gross margin improvement and in fact, we’re at the highest gross margin rate we’ve had since FY 2021. I will point out that we now have $57 million in cumulative LIFO charges yet to be reversed through our P&L, and we expect this credit balance to reverse over time. We’re currently modeling $5 million in LIFO credits for Q2 based on the deflation experienced in Q1. And as I’ve said previously, once we credit back the $57 million through the P&L, we will not take any more credits and we will begin to rebuild an unrecorded LIFO reserve. Moving to operating expenses, our expenses were up 7.4% versus last year’s Q1 as SG&A as a percentage of sales deleveraged 68 basis points.

The increase in SG&A has been purposeful as we continue to invest in store payroll and IT to underpin our growth initiatives. These investments are paying dividends in customer experience, speed and productivity. We’re committed to being disciplined on SG&A growth as we move forward and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L. EBIT for the quarter was $849 million, up 17.4% versus the prior year, driven by our positive same-store sales growth and gross margin improvements including the LIFO year-over-year favorable comparison. Interest expense for the quarter was $91.4 million, up 58% from Q1 a year ago as our debt outstanding at the end of the quarter was $8.6 billion versus $6.3 billion at Q1 end last year.

We’re planning interest expense in the $98 million range for the second quarter of FY24 versus $65.6 million last year. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 21.6% and up from last year’s first quarter of 18.9%. This quarter’s rate benefited 147 basis points from stock options exercised, while last year it benefited 446 basis points. For the second quarter of FY24, we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises. Moving to net income and EPS. Net income for the quarter was $593 million, up 10% versus last year. Our diluted share count of 18.2 million was 7.2% lower than last year’s first quarter.

The combination of higher net income and lower share count drove earnings per share for the quarter to $32.55, up 18.6% for the quarter. Now let me talk about our free cash flow for Q1. For the first quarter, we generated $600 million in free cash flow. We expect to continue being an incredibly strong cash flow generator going forward, and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong and our leverage ratio finished Q1 at 2.5 times EBITDAR, returning to our long-term target. Our inventory per store was up 0.3% versus last year while total inventory increased 3%, driven by new store growth. Net inventory, defined as merchandise inventory less accounts payable on a per store basis, was a negative $197,000 versus negative $249,000 last year, and negative $201,000 last quarter.

As a result, accounts payable as a percent of inventory finished the quarter at 124.4% versus last year’s 131%. Lastly, I’ll spend a moment on capital allocation and our share repurchase program. We repurchased $1.5 billion of AutoZone stock in the quarter, and at quarter end we had just over $300 million remaining under our share buyback authorization. The strong earnings, balance sheet and powerful free cash we generated this year has allowed us to buy back 3% of the shares outstanding in the quarter. We have bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders.

To wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash, and returning excess cash to our shareholders. We’re growing our market share, expanding our margins, and improving our competitive positioning in a disciplined way. And as we look forward to the remainder of FY24, we’re bullish on our growth prospects behind a resilient DIY business, a fast growing international business, and a domestic commercial business that is reaccelerating. I continue to have tremendous confidence in our strategy and our ability to drive significant and ongoing value for our shareholders. And now I’ll turn it back to Phil.

Phil Daniele: Thank you, Jamere. During the quarter, we launched our new fiscal year, and I’d like to take a moment to discuss the key takeaways from our national sales meeting in September. At the meeting, we launched our operating theme for the New Year, Live the Pledge. While we have used this theme previously, it continues to deeply resonate with our AutoZoners. Simply put, it differentiates us from everyone else. The energy at the event has never been higher. The pledge is the core of our culture, and I, our Board and our leadership team believe we can never overemphasize our culture. It is defined by helping solve our customers’ challenges and optimizing the performance of their vehicles. It is based on a team-based approach of recognizing everyone’s contributions and performance, putting team goals ahead of personal goals.

It sets the standard at exceptional performance, not mediocrity. And it’s about caring about people, both our customers and our AutoZoners. It’s about providing unparalleled career opportunities to a diverse population of AutoZoners. And it’s about the AutoZone family. Calling yourself a family comes with great responsibility, and it’s so much more. The pledge and our values summarize our operating strategy succinctly. Fiscal 2024’s top priority is enhanced execution. Additionally, we have many strategic projects in varying stages of completion. We will continue opening new mega hubs and hubs. Construction on our new distribution centers and the optimization of our new direct import facility are a focus, as we are also ramping up our domestic and international store growth to achieve 500 annual new store openings by 2028.

As you noticed, our international teams posted same-store sales comps on a constant currency basis of 10.9%, much higher than our domestic comp. International has been strong for a few years now. While I mentioned all of these investments in FY24, the number one focus for the remainder of the year will be on growing share in our domestic commercial business. We believe we have a solid plan in place for growth over the next 12 months. We know our focus on parts availability and better customer service will lead to additional sales growth. We are excited about what we can accomplish for the remainder of this year. Finally, I’d like to update you on our leadership transition plan. Next month, Bill will become Executive Chair and I will become President and CEO.

It will be one of the greatest honors of my life to move into that role. And while that role will come with new opportunities and challenges, I continue to be very bullish about the prospects because I know we have an extraordinary culture and a terrific industry and as you have seen, an ever-evolving but exceptional team. As Bill and I both continue to say, and it may sound a little bit cliché, and we both believe it. AutoZone’s best days lie ahead of us. I want to thank Bill for his wonderful nearly 19-year tenure leading this company and thank him for his leadership. I’m excited about the opportunity to continue to leverage him and his experiences in this new role as Executive Chair. I also want to thank three other long-term senior leaders for their amazing contributions to our success Grant McGee, Charlie Pleas and Al Saltiel with their respective 34, 27, and 10 years of service to AutoZone.

They have had an enormous contributions, and their legacies will be evident in the teams they have built and the contributions those teams will make over the coming decades. I congratulate each of them and wish Grant and Bonnie, Charlie and Doris, and Al and Sue well earned happiness in their next chapters. Now, we’d like to open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question is coming from Bret Jordan from Jefferies.

Bret Jordan: Can we talk a bit more about the international margins, since that’s going to be more impactful, how it compares to what you see in the U.S.? And I guess Brazil versus Mexico, is there much difference? And is there, I guess, an investment phase that is going to be required to ramp that?

Jamere Jackson: Yes. I mean from a margin standpoint, we’re very pleased with the progress that we’re making on margins, both gross margins and total operating margins. In our business in Mexico, which is much more mature than obviously what we have in Brazil, we’ve been very pleased with the actions we’ve been able to take on the merchandising side of the business, and that’s given us a very healthy gross margin in that business. And then, if you also think about the inherent advantages that you have from a cost structure standpoint, particularly with wage rates and labor, it’s a very attractive operating margin structure in Mexico. And we believe as our business in Brazil matures and scales over time that we’ll see similar advantages in Brazil. So net-net, what we’re doing on the international side, while it’s a fast-growing business, it’s also going to have a lot of margin calories that come along with it.

Bill Rhodes: Yes. I think I would also add, we continue to say that in Brazil, we’re still losing money there. So we’re in an investment phase. We’re ramping up our store count very aggressively. But with that comes some operating losses that are kind of consistent with what we’ve been seeing over the last five or six years.

Bret Jordan: I guess, what kind of scale do you need to tip Brazil into profitability? I mean the incremental margin would seem to be very high in that case.

Bill Rhodes: I think that’s right, Bret. But frankly, we have a lot of — a whole lot of very new stores that are in very new markets as we’re expanding. I mean, we’ve opened 40 stores or so in the last 18 months. And those stores are very immature. So, we’ve got to see how those new stores and new markets mature. Right now, they’re causing a pretty good headwind but not unanticipated.

Bret Jordan: Okay. Quick follow-up. The U.S. Do-It-For-Me, any channel dispersion, national account, tire service chains versus independents performance?

Phil Daniele: Yes, there is. If you kind of looked at the business, and talking about the big traditional nationals and the up and down the street or the local shop, those folks have performed pretty well. The national accounts, particularly the ones that are focused on tires, have been where we’ve struggled the most. And this really goes back to a lot of the weather conversations we had from last year, those tire organizations just aren’t getting the tires off at the same rate. They take the tire off, they see the calipers frozen or lots of rust on those parts in there and they get the job. That’s just not happening at the same rate it has previously.

Operator: Your next question is coming from Michael Lasser from UBS.

Michael Lasser: Given the performance of the domestic commercial business this quarter, while there was an acceleration, it did fall short of that double-digit level that you had anticipated over the long run. Do you still think this is an achievable goal eventually? And is it more dependent on the performance of the industry to be stronger in order for AutoZone to achieve that goal?

Phil Daniele: Yes. Thanks. It’s great question. I think as we said, we’re slightly disappointed with our commercial growth for this particular quarter. We’re happy to accelerate it, but we frankly thought it would accelerate a little bit faster. We’re happy with the progress that we’re making. And to your question about double-digit long term, yes, we think we can get back to those types of growth numbers over time, particularly because we have such low share percent on the commercial side of the business in that 4% to 5% range. So over a long time, we believe we will be able to continue to expand our market share. And as we continue to have these newer stores that we’ve opened over the last five quarters continue to mature and we continue to improve our execution, we believe we will continue to grow our comps in the DIFM space.

Michael Lasser: My follow-up question is on the gross margin. It seems like there is a benefit right now from costs coming down, retail is remaining stable. How long is that sustainable? And is there a case where it might make sense to roll back some prices in certain areas in order to drive the retail business to grow a bit faster in the coming quarters? Thank you.

Jamere Jackson: Yes. We’re pleased with the progress that we’ve made on gross margins, and it’s really comprised of two pieces. Number one, from a merchandising margin standpoint, we’ve done a great job inside our merchandising organization of finding cost opportunities and pricing opportunities that have given us accretive gross margins, and we’re doing a tremendous job there. Second element of that, quite frankly, has been the work that we’ve done inside the supply chain. If you recall, our supply chain was under tremendous pressure over the last couple of years or so from a cost standpoint, and we’re now starting to see some benefits as some of those pressures have abated. But if you look at this business over the long term, I mean, we have historically been able to churn out positive gross margin improvements in a very-disciplined fashion over time.

And that has enabled us to grow our earnings very predictably as we move forward. And when we think about the pricing environment, as we’ve said and we continue to reiterate, pricing is a pretty dynamic environment. We don’t feel like we need to make any pricing investments at this point to be able to operate the business and grow share. But if we do have to make those moves, we’ll certainly do those, if it results in us improving units and ultimately growing EBIT. But at this point, we’re in pretty good shape in terms of where we are from a pricing standpoint and feel that we’re very competitive in the marketplace.

Operator: Your next question is coming from Max Rakhlenko from TD Cowen.

Max Rakhlenko: So first, can you speak to the competitive environment and if you’re seeing any changes there? And then how would you frame the level of competition today from the WDs compared to both a couple of quarters ago as well as pre-pandemic?

Phil Daniele: Yes. I’ll break that up into two parts. If you think about the DIY competition, we’ve had a very stable base of competitors there for a very long period of time. That business is pretty stable, and there’s not a whole lot of new or changing strategies that appears from the competition. On the DIFM side, if you kind of think about our — what we call our close-in competitors or the public folks, not a lot of changes there other than what O’Reilly did 1.5-year ago or so on their pricing strategy. On the WD side, I think you kind of have to look at pandemic time versus today, one of the things that we believe is they really struggled with some in-stock in some key categories over the pandemic. Over the last, say, a year or so, it appears that they have become more in-stock on those key categories, like everybody has, but they were probably more acutely impacted than a lot of the public players, and they’ve returned to more normal levels.