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AutoZone, Inc (AZO)

March 13, 2013 8:50 am ET

Executives

Charlie Pleas - Principal Accounting Officer, Senior Vice President and Controller

Brian Campbell

Analysts

Michael Lasser - UBS Investment Bank, Research Division

Michael Lasser - UBS Investment Bank, Research Division

Good morning, everyone. My name is Michael Lasser. I'm the hardline retail analyst from UBS. Thank you very much for joining us today. We're very pleased to have AutoZone with us. With us from the company is Brian Campbell, who's the Vice President of Investor Relations; and Charlie Pleas, who's the Senior Vice President and the Controller.

When I think of AutoZone, I think of consistency. The company follows a very disciplined and rigorous model of generating stable comp growth, modest unit expansion, and then typically buys back about 10% of its shares per year. This formula has been quite lucrative, as it's been one of the best performing retail stocks over the last decade. And I hope this morning, we'll find out if that's going to continue to be the case.

So with that, I'm going to give it over to Charlie who's going to give a few opening remarks and then we'll have a broader discussion.

Charlie Pleas

Good morning. We have a few slides that you should read very closely. Everybody done with that? Forward-looking statements, our lawyers' pictures are very well placed on that.

So we're here to talk to you about AutoZone today. And this is our pledge, AutoZone, as always, "put customers first" and that's certainly a part of all the things our folks focus on every day. Whenever they're concerned or they don't know the -- whether they're doing the right thing, they always can harken back to our pledge of putting customers first. If the activity isn't involved in the customer, then we should change that. We know our parts and products, our parts knowledge. And the products that we sell is important to us and we emphasize that with our sales people on the floor and in the field. And certainly, we always are focused on having our stores be presentable and look great for our customers to have a great shopping experience. And we've got the best merchandise at the right price and we continue to -- you can see, work with our vendors to ensure that we've got the product that our customers are seeking and certainly have that priced competitively.

A company overview. Nation's leading distributor of automotive replacement parts and accessories, an extensive line of products for cars, sports utility vehicles, vans and light trucks. Light trucks and certainly those utility vehicles are certainly kind to us and unkind to the roads. So that really tears a lot of parts up. So we're focused on those vehicles in particular. Operates 4,700 stores or so in the 49 states. The District of Columbia, Puerto Rico, we've got 300 or so; 334 in Mexico; and 1 store in Brazil. Got the flags on it. And soon -- hopefully, we'll have another soon.

3,146 commercial programs. It's certainly one of our legs for growth and things that we've been focused on and especially a lot of the work that we've been putting in our hubs. 10 new remodels this past quarter, 77 so far, putting new merchandise in the market and expanding our lines to ensure that those stores are able to not only work for our retail customers but for our commercial customers. And then 2012 net sales of $8.6 billion, EBITDA of $1.8 billion. So you can see over the past 10, 5 years, we've had fairly steady mid-single-digit growth in our sales.

And that's kind of the real finance story of AutoZone. We can talk a little bit more about some of things that we focus on, registered vehicles, car park is certainly something we look to as well as miles driven. And as you can see, it has tailed off a little bit over the tail end of 2012. It's something that we focused on. And then the average age of vehicles has extended, offsetting that somewhat. And those particular vehicles, cars, trucks and all have grown over the past -- that age 7 -- 5 to 7 years is what we were focused on. It's somewhat extended to 10 years. So favorable for our industry.

Financial results, record EPS growth. Michael spoke of that. We continue to see great performance over time. 2012 was not an exception for us. 10-year CAGR of 20%; 5-year, just over. And then some of the financial results. EBIT a fairly consistent growth over not only the past 10 but 5 years. And that's one of the things that we are most proud of that we've been able to consistently grow our EBIT over time.

And then second quarter, many of you I'm sure listened in or read our conference call script. Net sales growth of 3%, same-store sales down this past quarter. We talked about a fairly flat growth in sales over the balance of the quarter. In the last 2 weeks, really, a significant drop-off, definitely impacted by us on the delay in taxes. Not something we've experienced before. But our retail customers and certainly our commercial customers are impacted by that delay. And our last 2 weeks were down 8%, which pulled our quarter down 1.8%. We were able to get some good leverage on our gross margin, 51 basis points there, and managed our expenses well, only having 6 basis points of deleverage, and growing our EPS again for the quarter at 15%.

So we'll take questions.

Question-and-Answer Session

Michael Lasser - UBS Investment Bank, Research Division

So we'll -- just a logistical point before we kick it off. Russ [ph] is in the back with note cards and pens. If anyone has a question, you can write it down and then we'll work that into the conversation. I want to start out with an industry question. Between 2009, 2010, 2011, indices saw great, great growth. It was well above the historic average. And then last year, was -- we definitely saw a deceleration across the sector. There's been a lot of debate about is it -- was it weather related, given the abnormally warm conditions from last winter? Is it -- was it some other factor? It also occurred at the same time that new car sales were rising. So could you provide a little perspective on your view of really what drove the industry-wide deceleration in the last few quarters?

Charlie Pleas

Certainly there was some regional experience [ph] for us, and we've got data that we're all -- at least the major players are involved in, and there was definitely an industry slowdown. A lot of the things that we saw that -- particularly in the Northeast region, up in this area, and Midwest, Rust Belt, last year, winter was extremely mild. And the result was -- if you think in terms of what happened last year this same time, we were selling products that usually are spring-related products, Wash & Wax. And that was, we talked about at the time, a pull forward, which we had and are challenged with for Q2 and Q3. Some pretty nice comps in the early in Q3, tail end of Q2 that we are up against. And I think the industry as a whole, particularly those of us who are in that Northeastern region, had that impact. If you looked at the rest of the country, West and Southeast, not as bad, and certainly wasn't as bad of an impact or slowdown as we had in that Northeast region. And there's a fairly large concentration of stores in that area. We think the customer was challenged. The consumer was challenged financially as well. That need for maintenance wasn't as strong. Failure was still there, but the maintenance side of the industry was not there.

Michael Lasser - UBS Investment Bank, Research Division

And so if it really was weather -- and what I think the basic assumption is, right now, given the geographic differences, especially how consistent those differences were across all the various participants from the industry, if it truly was weather, when do you expect to start to see that a resumption of what are more normal trends within the industry? Maybe you don't have that time. What might be the explanation?

Charlie Pleas

All right. We actually, at the beginning of Q2 and we talked about it a little bit, we were seeing some improvement in those areas of the country that were challenged last year. And certainly we've had a little bit better winter this year and one closer to normal.

Michael Lasser - UBS Investment Bank, Research Division

Remember you're in Boston. They've got a lot of snow, so be sensitive to that.

Charlie Pleas

Exactly. Closer to normal. And there was -- it came later in the season but it was there. So certainly, we hope to see some benefit from that as we move through the spring season. And that's typically when it starts.

Michael Lasser - UBS Investment Bank, Research Division

Yes. And the other piece of it was, with new car sales rising, the vehicle population potentially changing given the dip that we saw in 2007 and '08 in the new car sales. As those mature into the "sweet spot" of the industry, which is historically has been considered 7 to 10 years old, how do you think that plays out? Do you think that as those cohorts enter the vehicle population and there's actually a deceleration in the rate of growth of new cars entering your base, is that going to have an impact on the industry?

Charlie Pleas

Well to some degree, that's offset by the fact that you hadn't seen a significant change in your scrappage rate. So when we look at those factors, we're looking to see how many cars are going out of the population. And as -- so what we've seen is the lives have extended. And so I think you'll get some offset to that decrease in new car sales by the fact that those others, the used cars are staying out there so much longer and they certainly are important to us and help our industry grow.

Michael Lasser - UBS Investment Bank, Research Division

And then how does it -- how does parts proliferation and really the sophistication of parts play into it, where as new cars are coming off the line, they're more expensive to put parts together? And so, even if there is a change in the vehicle population, could that have an offsetting impact of it as well?

Charlie Pleas

It does. And certainly...

Michael Lasser - UBS Investment Bank, Research Division

Then maybe you can explain kind of the life cycle of parts and how -- and what you've seen in terms of inflation of parts over time.

Charlie Pleas

Right. Over time, certainly, we've seen parts proliferation as the industry has always also talked about the slowdown and traffic over time. And that's being offset by the improvement in ticket. And certainly, that's been driven by parts are more expensive. They may last longer but when they break, they cost the consumer more. We talked about an example of just your regular coil. In the early '80s, late '80s, all cars had one coil that had a plug wire that can go into your ignition, your firing system. Now typically, with cars, that was a $20 part. You've got an 8-cylinder car. Every cylinder has a coil. So you've got -- where you were buying a $20 part, you've got now a 6x or 8x $20 expense. And so it becomes exponential. And that's the same way with most of the other parts that you run into with a car. As they become more sophisticated, that part becomes more expensive. And that ticket is a bit of an offset to the slowdown in traffic.

Michael Lasser - UBS Investment Bank, Research Division

And so then, as there's been a deceleration in the last couple of quarters, you continue to see this dynamic where parts are more expensive, inflation is benefiting the core. What has it been, more specifically within the maintenance category, that's really gotten hit hard?

Charlie Pleas

Yes. I think when we were looking at it last year, there was a lot of conversation around -- more than you realize, and in particular in the Northeast, the snow and salt that's associated with eliminating that and the brine that they put on the roadways, it deteriorates and accelerates the deterioration of those parts that are -- and when you think of under car, a lot of people think that, "Well, that's not maintenance". Oil on brake pads are certainly one thing that we can all agree on is more of a routine kind of maintenance job. 30,000 miles is what you would expect, but when you get those outside elements impacting them, that deterioration gets accelerated and you have to replace them more frequently. The road conditions are also impacted negatively by that -- those elements, which causes other car parts that are -- that don't fail as fast to have more routine maintenance to those. So that did not happen, and to a great degree, we noticed those changes and trends in those particular areas. And so the expectation is, is that you would see more of that. And that really -- the conclusions were drawn truly based on that. Now there's no guarantee, there's certainly not, that the consumer's going to react to that maintenance now and do it right away. It could still be extended. I heard the story a few days ago of a check engine light being on in the car and they're using electric tape to cover it. You don't have to look at it, it doesn't matter.

Michael Lasser - UBS Investment Bank, Research Division

Right. [indiscernible] taking a look at. You shouldn't -- you would think you'd be one person that could actually get that fixed.

Charlie Pleas

You would think [indiscernible] gets brake pads on backwards.

Michael Lasser - UBS Investment Bank, Research Division

Right. So coming back to this idea that -- what you're suggesting is there's pent-up demand. And because eventually brake pads are going to be fixed and if they -- if there has been some softness in these regular replenishment categories, when do you typically see that? At what point is that really -- is that a couple of quarters down the road? Is it more immediate as the weather sets in?

Charlie Pleas

It tends to -- it really starts in the spring and then you see it throughout spring and summer. It -- as those urgencies become more and the sound is too loud to where the earphones don't drown it out anymore, you have to do something with it.

Michael Lasser - UBS Investment Bank, Research Division

One question we got from the audience along these lines is what percentage of your SKUs are tied to DIY oil changes?

Charlie Pleas

DIY oil changes [indiscernible].

Michael Lasser - UBS Investment Bank, Research Division

We want to get Brian [indiscernible].

Brian Campbell

Back to the question here [ph], just a handful maybe.

Charlie Pleas

Yes.

Brian Campbell

3 or 4 SKUs in it. Oil and oil filters, maybe some other additional, forgotten filters that we stock up. But not a big -- it's not a big mix.

Michael Lasser - UBS Investment Bank, Research Division

But they turn pretty rapidly?

Brian Campbell

They do. Oil is one of the highest-turning SKUs in our store and it's what we promote, advertise, offer a special every month.

Charlie Pleas

And you can -- you tend to have a decent-sized basket with oil sales because it brings opportunities for other additives into that mix of sales. So the oil certainly, with all of us, is what gets our customers in the stores. It's the most regular routine.

Michael Lasser - UBS Investment Bank, Research Division

And if we make the assumption that it wasn't weather, for whatever reason, it's new car sales coming, the vehicle population is changing, last summer there started to be some chatter that one of the players was promoting a little more aggressively and using oil as a vehicle to draw in traffic, do you expect that the industry could start to become more promotional as the pie is not growing as fast and perhaps everyone's fighting for a piece of it?

Charlie Pleas

What we've experienced, certainly in the recent months and probably, I'd say, the past couple of years, has been a fairly rational approach to pricing in the space. In particular, with oil pricing was one of the items that because it's a lead, we saw a lot of lower-end pricing there. But over the past year to 16 months, you've seen certainly fairly consistent behavior. Everybody is going to have a high-end deal and a low-end deal, and it just varies month-to-month as to what brand you're using. But I think that -- I would hope that it certainly would continue. I hadn't seen indication that it won't.

Michael Lasser - UBS Investment Bank, Research Division

Okay. Let's switch gears and talk a little bit about the commercial side of the business. You've in the last few years seen very good growth on the commercial side, in part by rolling out new programs at your store base. Can you give us an indication of how far you are along that penetration curve, where you think you can ultimately go, and will the -- there's been some recent debate on whether or not the incremental programs can be as productive as the existing programs?

Charlie Pleas

Sure. The -- we've certainly -- when you look at last year's comparison to this year as to how many programs we opened, there was a definite, a deliberate effort to slow down the openings in Q2. And that was mainly driven by the timing. Last year, we were really scheduled to open 300 programs. We opened 400, probably more of an opportunistic approach to it than not. But the consistency is still going to be there this year. The intent is to open 300 programs as well, 100 so far, and look to do the rest in the coming quarters. We don't think ultimately that there is any delta in thinking of opening the most productive programs first versus not. It more often is these programs are opened across the country and it's a regional approach. So a Regional Manager may come with 3 programs this year versus someone on the other side of the country coming with 3. They're doing it where they have the skill set. So if I've got the talent in the field and those folks are ready to go, I've already deployed a salesman there, I'm going to add stores where I've got the sales force. And we're doing that methodically across the country. We have a list ongoing of programs and where they're going to be across the country. And as they come to the top of the list from the standpoint that we've got the resources there, the trucks have been deployed, the systems have been installed, they go. It's not a "you're the better one, you go first." It's generally more making sure you're matching the resources with the effort. So I think it's going to be ongoing. It's -- we're not -- and certainly not through our chain. That's not to say that we're going to be 90-plus percent. But we're not at a position where we think we've opened all we can. And in addition to that, probably more than we've ever in the past, we're opening stores with commercial already installed. And so that approach, in conjunction with going back and hitting those stores that have been opened for a while, we'll keep that going.

Michael Lasser - UBS Investment Bank, Research Division

So do you think that -- so right now, you're in 60% range penetration?

Charlie Pleas

Right.

Michael Lasser - UBS Investment Bank, Research Division

You suggested that maybe 90% would be too high, or maybe not?

Brian Campbell

We don't know yet.

Charlie Pleas

We don't know how high is high. And so every store is being considered for it. What typically stops you is if you've got a program within 5 miles of another. That would be -- California is an example. Where your stores are heavily clustered, you're going to have a less concentration of programs.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And as you look at the map right now, do you have any big greenfield areas in the country that you're really underpenetrated relative to others within your commercial program base?

Charlie Pleas

I think it's probably if you looked at it 5, 10 years ago and saw where our store count was, where we had some greater opportunity with that, probably similar. Where we have greenfields for stores, that's probably where we are with commercial as well.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And have you -- the recent programs, it sounds like, from the last quarter call, have been a little bit softer than some of the legacy programs that you've rolled out. Do you have a hypothesis on what may have been causing that?

Charlie Pleas

I think if you compared -- when you looked at similar stories for retail, you had a similar story for commercial. So those programs that were in those areas that weren't as challenged were performing just as well as had been. So we didn't see any slowdown there other than what we've seen across the industry. And there were some slowdown in commercial and retail for the industry over that month of January. So I don't see anything that gives us structurally a different point of view about commercial. We think it's still our vehicle, one of our stronger vehicles for growth, and we are continuing to invest in it and there's no change in those plans.

Michael Lasser - UBS Investment Bank, Research Division

Yes, as a tangent to the discussion of the commercial business, what's critical in this industry is being able to get the right part at the right place in the right time. AutoZone follows a hub-and-spoke distribution model. Some of your competitors have a distribution -- larger, more densely populated distribution centers across the country. Can you talk about the pluses and minuses of each approach, and why you think the hub-and-spoke model is the most effective avenue moving forward?

Charlie Pleas

Well, when you think about hubs as a concept, I think AutoZone was the primary genesis of that, the hub being in market, closest to the stores, with a storefront. And if you'll note, our competitors like that model. They have more hubs than we do. And so...

Michael Lasser - UBS Investment Bank, Research Division

Imitation is the biggest form of flattery.

Brian Campbell

Exactly. So I think when you're starting to say what's the pros and the cons, our distribution centers, we try to centrally locate those and with the effort to making multiple deliveries to hubs on a weekly basis. And we think and haven't gone away from the concept that, that's the right way of going about it. Now we, over the past couple of years, have made efforts to go back and look at all of our hubs wherever they are in the country and determine whether the size is appropriate. Because, as I said, it is most important to have those parts in the market to where you can get them to those stores and to the customers when necessary. So I think more than anything, we're looking at the width of the SKU count in those hubs, and the depth as well, to ensure that we can have local market parts to deliver to our satellite stores in a timely fashion. Now with traction from that, I think the majority of our investment going forward will be to continue to make sure the locations are the right place and the size is there.

Michael Lasser - UBS Investment Bank, Research Division

Can you give us some sense of the distribution of your sales by SKU in the DIY side versus the commercial side? So are 80% of your DIY sales coming from 20% of your SKUs, whereas in the commercial side, 70% are coming for [ph] 50%? Give us some order of magnitude to help size the supply chain relevance within each sector. You don't have to give us now...

Brian Campbell

No, no, no, it's fine. What we're talking about is how do you get the SKU to the local level the fastest and how do you offer this access. All the SKUs that have been added, I'd argue, across our industry have been ever-slower-turning SKUs. So the trade-off here is, "Hey, if I add these really slow turning items, I'll pick up a bigger basket over time. Other items will be added." What you see is these SKUs are actually slowing inventory turns of the overall chain down. So we used to average about 2 turns a year, and now we're at 1.6x a year. So the formula, unfortunately, what turns the fastest, the As, the B movers, how we define it, it's the old 80/20 rule. These top SKU buckets are what moves. But just because you have that, certain customers they think they can't find Ds, Cs and Es, then they don't want to call. In the past, the right model, you had a very clever, the cyber model, would be go straight from the vendor, just-in-time inventory, don't stock anything. Well, that's not possible. The vendors can't get it there in 5 minutes. So then you stock at a warehouse and deliver overnight. Well, that might not be fast enough. So then we've gone to the hub in the local markets, so not every store has things. But I think what we're talking about here is the industry, with all these makes and models, will only continue to add SKUs. I expect this will be a continuing discussion point and a question every year: how big can it get, and then how much you want to invest in it, and how efficient do you want to be with your capital.

Michael Lasser - UBS Investment Bank, Research Division

Yes. And I guess this is a natural time to lead into new channels of distribution, particularly the Internet. Historically, this is -- the auto parts sector, given the SKU intensity, given the relationship between you and your customer both on the DIY and the DIFM side, this is thought to be an industry that's more insulated than others from Internet competition and yet you went out and made a nice purchase of an online-only player. Can you talk about how the customer for AutoAnything compares to who you're serving through your store base? And how do you expect to see that evolve over time?

Charlie Pleas

Brian's going to love this one.

Michael Lasser - UBS Investment Bank, Research Division

I'm sure this is the first time you've heard it.

Brian Campbell

Yes. Yes, the Internet -- Michael is right. The fact is not a lot of products are sold today on the Internet. We don't see it as being a large venue today for hard part purchasers or even much from an accessory standpoint. However, it is growing. The company that we purchased, AutoAnything, we believe, industry leader on accessory sales on the Internet. They're a California-based company. They have a lot of impressive growth year after year. They're a profitable company. But they sell a little bit higher ticket to a higher-income consumer. We do share vendors but the category of their products aren't stocked in our stores necessarily. The overlap is minor. So it's -- we feel there's some negotiation opportunity with product costing, shipping costs, IT infrastructure on both sides, autozone.com learning from AutoAnything and vice versa. But a little bit different customer. So we're trying to figure out how does that fit with us. It's, to your point, not a lot of hard parts right now being sold on the Web. But we want to get out in front of it. In case it gets bigger, we want to be the industry leader in that space. So don't look for Duralast and the brand to be sold on AutoAnything's website. The integrity of the websites remain consistent.

Charlie Pleas

A couple of things that are important for AutoAnything. Their culture was really a lot like ours. So they're really aligned very well with us. They really focus on the customer, they're focused on ensuring that they've got the right information. And I think when you talk about what we find is most useful for our customers on the Web, it's information. They're going there, whether it's pricing or just knowledge about how to do a job or watching YouTube videos that are pop-outs from our website, information is what they're seeking.

Michael Lasser - UBS Investment Bank, Research Division

And from what -- the response, it sounds like it's more discretionary products, it's more aficionados. So it's more of a want-based purchase than a need-based purchase that you're more typically skewing towards in your store. Is that a fair assessment?

Charlie Pleas

Performance, accessories, et cetera.

Brian Campbell

"Wait a couple of day", kind of delivery.

Michael Lasser - UBS Investment Bank, Research Division

Yes. Moving on to the financial piece, given we've got the brain trust here. You've gotten a lot of -- I was talking about the audience. You've gotten a lot of credit for your capital allocation, so for your overt credit for your capital allocation strategy, which has been really prototypical within retail over the last few years. I think there's less awareness of how well you manage the expenses within the business. And that's -- that may become more obvious to the market as -- if the industry remains in a more slower growth phase for an extended period of time, how long can you maintain this operating margin expansion or operating margin growth in a flat-type comp scenario for an extended period of time?

Charlie Pleas

So there's always been and continues to be focus from our merchants on finding the best prices for product. And they continue to work with vendors to not only help them build stronger relationships, whether it's through import or through improvements in their factories. And just looking at things where it's how do we make our pick lines more efficient or how do we make product more presentable, all of those things are a part of the focus. But we continue to expect improvements in gross margin, not dramatic changes but enough to show that we're continuing to grow it there. And even when you think in terms of gross margin in the past, I guess, over the past year, you saw a lot of improvements in shrink. But that's just one of the ways that we've gone through to try and take cost out of the business, and we'll continue to focus on those. As well as when you look at the expense lines, our fields have done an outstanding job over the past quarter, and we'll continue to make sure that we've got customer-facing labor there and then taking task out where necessary.

Michael Lasser - UBS Investment Bank, Research Division

I'm just -- I'm going to push you a little harder because I think it's an important point. Is it -- you've got another year left, another 2 years, another 3 years, if -- even if you comp in this flattish growth, your algorithm is to generate mid-teens-type EPS growth. I think that's very alluring to shareholders and potential shareholders. I think the fear is that the industry, if it wasn't weather, what's the risk/reward profile in that scenario? My sense is it's pretty good. Is that -- for an extended period of time, is that fair?

Charlie Pleas

We've got a pretty good track record of being able to manage in good and bad times. And our management team hasn't changed a lot over the years. And there is a reason why there's that consistency there in our performance.

Brian Campbell

Yes.

Michael Lasser - UBS Investment Bank, Research Division

And then on the gross margin side, have you tested elasticities within the sector? This comes back a little bit to the promotional aspect. But could you -- with AutoZone having a 20% operating margin that it's really that incremental dollar of sales because $0.20 of it going to fall to the bottom line. Perhaps you would be willing to sacrifice $0.01 of margin to be willing to drive that incremental dollar of sale. I know that it's complicated by the fact that these are largely inelastic goods. But is there some elasticity you can push on in order to drive the top line?

Charlie Pleas

It's all Brian's fault.

Brian Campbell

It is, yes. I don't think so. I think that you can be sharp on your sort of chemicals and accessory offerings, window signage, near-term promotional items, stuff that's -- like motor oil, we talked about earlier, was a question. But it's hard. It's not an industry built on that. It was mature -- half of our sales come from failure-related items. But there are things on availability we can do, back to that other discussion, that I think that are important. There's so many cars in the population that are getting worked on all the time. Our opportunities still remain great. So as much as I think, back to your point, we can operate in a low same-store sales environment, not only do we not want to be there, we don't expect to be there. We expect to be able to grow. And so we expect to be able to grow on the U.S. side as well as international. So commercial continues to be a great opportunity for us. So hopefully with all these things, while we can operate conservatively, yes, we can and we have for, I guess, for several years there in the early 2000s, at a lower volume, hopefully we're not having those discussions with you.

Michael Lasser - UBS Investment Bank, Research Division

And one really compelling aspect to the business -- one of many compelling aspects of the business has been the vendor financing program, where now your AP-to-inventory ratio stands well in excess of 100%, which is a remarkable feat. But where can it go? And how are you going to manage that in the future as far as balancing the margin with the terms you're getting from vendors?

Brian Campbell

And it's all part of the cost structure to a vendor. Everything is made of -- every vendor has a balance sheet and income statement as well. And so they look at days extended versus initial cost of goods. And it's -- everything is a negotiation, a put and a take. So when costs increase, it's passed through. Where can it go? We have indicated not a lot higher. We think we have some room with those things. What's benefited AutoZone is the ability to negotiate private label products, our brands. We've created this Duralast and Duralast Gold brand, as well as Valucraft with the opening price point, that continues to help us going forward. So I think that, that story remains a positive for us. That's a good thing.

Michael Lasser - UBS Investment Bank, Research Division

And private label penetration, I think it's north of 50%. Is that -- is there still room on the horizon to push that further? What are big categories that have yet to be touched by private label? I think in the last few years, it's been windshield wiper blades. Maybe you could identify a couple of others that are potential candidates.

Charlie Pleas

We've gone through a lot of the areas that we could. I mean, more often than not, if anything, now it's looking at the mix of products within categories, whether it's your good, better, best tiers. So you may pick out, you had -- you've got a good and better, you may add a best tier. But there's -- wipers were a great example. That was something we didn't have a lot of penetration in. And then, over the past several years, we've gotten there. We look at chemicals from time to time. But our biggest focus is really making sure that whatever we do with the Duralast brand, it's quality associated with it and nothing that we do deteriorates that brand because it's important to us.

Michael Lasser - UBS Investment Bank, Research Division

Okay. My final question is on capital allocation. You, as I mentioned, prototyped the very effective strategy of buying back about 10% of your shares per year, maintaining a consistent leverage ratio. And my 2 questions along those lines are: a, have you thought about the potential for increasing your leverage ratio from time to time? If trends do slow and you see some strain on the P&L, how would that influence your perspective on raising the leverage ratio, at least temporarily, to maintaining your posture? And then, what about a dividend?

Brian Campbell

I mean, these are all alternatives to the free cash. We're fortunate as a company to have a larger operating cash flow generation business than CapEx. I -- I'll tell you, the ability to incrementally flex leverage is not something that's embraced by rating agencies nor our fixed income investors. Many of you are out in this room. So unfortunately, in answer to flexing, it's very hard. We state a targeted metric of remaining in this status of sort of BBB, Baa2 range, we want to remain there. So whatever leverage is carried has to answer within that guideline. I'm trying to remember the last question. It was sort of if business gets weaker, for example, do you leverage up? That's actually the counterintuitive at that point. You have to watch your money at that point because it works both ways, so leverage and deleverage. The last question that you asked was...

Michael Lasser - UBS Investment Bank, Research Division

Dividend.

Brian Campbell

The dividend map is just a cash utilization. Do you apply the cash leaving on your balance sheet in a money market account or cash equivalent? Do you pay a dividend or do you buy back stock? It all has tax ramifications. Our opinion is, from an accretion standpoint, the math that we've run for 15 years, our belief is that the accretion growth rate, the cumulative growth rate from buyback will be greater than simply dividend. Now that doesn't make all investors excited, but we believe ultimately it will pay off to be more value add for investors than simply a dividend, especially as tax law changes have worked against, more recently, dividends. So at this point, we're not embracing it.

Michael Lasser - UBS Investment Bank, Research Division

So it's -- the sound of the tone suggests that sticking with the strategy, it's working, go with it.

Brian Campbell

It is. And one last thing is, if asked, "Is there a stock price where you would not buy your stock back?" The answer would be yes, there is. And we think about those things. And we would communicate that to investors. And what would be the alternative if we weren't buying back stock? We would offer a dividend.

Michael Lasser - UBS Investment Bank, Research Division

And maybe you could just give us a price range?

Brian Campbell

It's not [indiscernible] its value.

Michael Lasser - UBS Investment Bank, Research Division

It's higher than it is right now?

Brian Campbell

They're a great time and effort expense. We have lots of financial experts on our Board of Directors that keep us busy as well as our senior leadership, Charlie, that debate this issue about capital allocation, appropriate utilization of cash all the time. So we manage the business, hopefully, very efficiently, that's our goal every day.

Michael Lasser - UBS Investment Bank, Research Division

And I think we have 2 minutes left. So along the capital allocations line, we have seen some acquisition activity of -- accelerate by some of your peers at the end of last year. It sounds like there's still more opportunity within the market. How do you see AutoZone participating or not participating in some of that consolidation activity?

Charlie Pleas

We're always looking at it from a real estate perspective. We are looking for sites that meet our requirements from a visibility perspective. And then we're focused on it from a retail customer perspective, and that's a little bit different from some of the -- our competitors. So a lot of these sites are in light industrial areas. That's not going to be attractive for our retail consumers. And from a commercial perspective, as long as we're within that vicinity and we can get our products there in a timely fashion, that's fine. So we opportunistically look at it from just a real estate -- it's -- we're not really looking to acquire inventory or anything of that nature. It's more about where we want our locations to be.

Michael Lasser - UBS Investment Bank, Research Division

And you did mention that you've put a foothold in Brazil. What do you see as the capital needs for furthering your expansion into Latin America? Which does seem like a pretty attractive market for the future.

Brian Campbell

It is very much. Brazil is small in nature, so don't expect great growth from AutoZone as we're still learning. We're a greenfield operation there. So it's not a big capital outlay. AutoZone is always very careful about currency valuation, devaluation, making sure that you pay as you go strategy. So look for Brazil to be steady growth, maybe a handful of stores this year and next kind of thing.

Michael Lasser - UBS Investment Bank, Research Division

Okay. Thank you very much for joining us today.

Brian Campbell

Thank you.

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