Earnings call transcript: AutoZone Q3 2025 sees revenue rise but EPS miss

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Overview

The earnings call summary indicates positive aspects such as plans for strategic growth through significant CapEx investments, store openings, and improved sales trends. Despite foreign currency impacts, there is an emphasis on market share growth and competitive positioning. The Q&A section highlights management's confidence in share gains and merchandise margin improvements, although some responses lacked clarity. Overall, the strategic initiatives and optimistic outlook on sales trends and market share contribute to a positive sentiment, suggesting a likely stock price increase.

Key Financial Performance

Total Sales $4,500,000,000, up 5.4% year-over-year.

Domestic Commercial Sales $1,300,000,000, up 10.7% year-over-year.

Domestic Same Store Sales 5% growth year-over-year.

International Same Store Sales 8.1% growth on a constant currency basis.

Earnings Per Share (EPS) $35.36, down 3.6% year-over-year.

Total EBIT $866,000,000, down 3.8% year-over-year.

Interest Expense $111,000,000, up 6.6% year-over-year.

Net Income $608,000,000, down 6.6% year-over-year.

Free Cash Flow $423,000,000, down from $434,000,000 year-over-year.

Gross Margin 52.7%, down 77 basis points year-over-year.

SG&A Expenses Up 8.9% year-over-year.

Inventory per Store Up 6.7% year-over-year.

Total Inventory Increased 10.8% year-over-year.

Share Repurchase $250,000,000 in the quarter.

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Operating Highlights

International Store Openings: Opened 30 new stores in Mexico and Brazil, totaling 979 international stores.

Domestic Store Openings: Opened 54 net domestic stores, with plans to continue aggressive openings of satellite stores, hub stores, and mega hubs.

Commercial Sales Growth: Domestic commercial sales grew 10.7% for the quarter, marking the first double-digit growth since Q2 FY 2023.

International Same Store Sales: International same store sales grew 8.1% on a constant currency basis.

Sales Growth: Total sales grew 5.4% for the quarter, with domestic same store sales growth of 5%.

Earnings Per Share (EPS): EPS decreased by 3.6% due to foreign exchange headwinds.

Inventory Management: Total inventory increased by 10.8% year-over-year, driven by new stores and additional inventory investment.

Capital Expenditure (CapEx): Investing approximately $1.3 billion in CapEx to drive strategic growth priorities, including store growth and technology improvements.

Focus on Customer Service: Continued investment in improving customer service and product assortment initiatives.

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Risk or Challenges

Foreign Exchange Impact: The stronger U.S. Dollar has negatively impacted reported sales, operating profit, and EPS, with an expected $50 million drag on revenue and $20 million on EBIT for Q4.

Tariff Risks: Uncertainty around tariffs has forced customers to be cautious with spending, and future tariff costs may impact gross margins, although strategies are in place to mitigate these effects.

Supply Chain Challenges: New distribution centers have startup costs that may affect margins initially, but these costs are expected to abate over time as operations stabilize.

Inflationary Pressures: Inflation on average ticket and SKU prices is anticipated to rise, with expectations of 3% inflation over time, which could impact pricing strategies.

Competitive Pressures: The company faces competitive pressures from market share dynamics, particularly in regions where competitors have closed stores, but believes its initiatives are driving share gains.

Operational Costs: Operating expenses increased by 8.9% due to investments in growth initiatives and higher self-insurance expenses, which may affect profitability.

Shrinkage Issues: Shrinkage has been a concern, but the company believes it has a handle on the causes and does not expect it to be a significant issue moving forward.

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Guidance & Outlook

CapEx Investment: AutoZone expects to invest approximately $1,300,000,000 in CapEx for FY 2025 to drive strategic growth priorities, including accelerated store growth, specifically hubs and mega hubs, and technology improvements.

Store Openings: The company plans to open around 100 international stores this fiscal year, with 58 international stores opened year to date.

Commercial Sales Growth Initiatives: AutoZone is focused on improving execution, expanding parts availability, and enhancing delivery speed to drive commercial sales growth.

Customer Service Initiatives: The company is committed to improving customer service through various initiatives, including technology investments and better inventory management.

Fourth Quarter Outlook: For Q4, AutoZone expects solid trends in both DIY and commercial segments as comparisons become easier and momentum from growth initiatives continues.

Revenue Expectations: If current foreign exchange rates hold, AutoZone anticipates a $50,000,000 drag on revenue, a $20,000,000 drag on EBIT, and an approximate $0.80 per share drag on EPS.

Gross Margin Expectations: Gross margins are expected to be down slightly in Q4, but not to the same extent as in Q3 due to abating pressures.

Market Share Growth: AutoZone aims to continue gaining market share in both DIY and commercial segments, with a focus on improving service and delivery.

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Shareholder Return Plan

Share Repurchase Program: AutoZone repurchased $250,000,000 of its stock in the quarter, with $1,100,000,000 remaining under its share buyback authorization.

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Key Q&A

Q:Could you just give us a quick refresher as it relates to the tariffs, source of origin for your primary import countries and how much is direct import versus, via a third party supplier?

A:The biggest net importer where most of our product comes from is China. I will say that we’ve taken that number down pretty significantly over the last couple of years, specifically since the first round of tariffs back in 2016. But we get product out of many Far East countries. We get a little bit of product out of Europe, mostly Eastern Europe, and then we get some out of Mexico.

Q:And I guess as far as direct import versus buying from a doorman or somebody who might be making the initial Chinese import?

A:Yeah. We obviously do a lot of that from we take product from domestic suppliers, both FOB or direct import and we buy domestically. Never really said exactly what our mix is, but, the question, I think your real question is how would we think we’re going to manage tariffs? And feel like we have our arms around it. Even though it’s changing every day, it’s not nearly as impactful as it appeared it was going to be several months ago.

Q:Is it that the inflation is not here yet because people pause shipments coming out of China and it’s just a slow inventory turn business? Or is there more of an effort here to perhaps have the cost be absorbed into the supply chain?

A:Yes. Think one of the reasons that you haven’t seen a lot of the tariff cost in our side of the business is, as you mentioned, most of our inventory turns relatively slow compared to many other industries, hard parts in particular. And that product just hasn’t shown up here in the country.

Q:Can you talk about the persistence of some of these costs like the shrink and the self insurance costs?

A:Yeah, so just on the gross margin, as we said, it was driven by Frank. Our DCs are ramping up and we obviously have higher costs as those DCs ramp up and we get to our going productivity rates.

Q:Can you break out the monthlies ex the Easter shift and adjust for that so we have a clearer view of the cadence over the quarter?

A:Yeah, we typically don’t, break that out.

Q:Could you just comment on what of comp lift you’re seeing from maybe your own initiatives and market share gains versus the underlying market demand?

A:Yeah, thank you for the question. I think we’re seeing share gains across the board, all across the country in both DIY and commercial.

Q:Could you comment maybe what you want to continue focusing on in the upcoming quarters?

A:Yes. Thank you.

Q:Do you think the cost of doing business within the aftermarket has gone up such that in the past, AutoZone might have been able to grow its overall top line mid single digit and leverage back to double digit EPS growth, and now that it’s just more difficult to do such that the market can recalibrate its expectations around earnings growth?

A:Yes, think there has been some core inflation in our payroll, both in the supply chain and in the stores.

Q:What is the arc of that investment cycle look like? Can you help frame the market’s expectations on how long this is gonna weigh on the profitability of AutoZone such that eventually, it can get back to the double digit EPS growth that it’s historically been able to achieve?

A:Right. Great question. I think we’re kind of in the midst of early innings of most of these initiatives.

Q:Can you quantify for us the comp contribution from those stores?

A:Yeah. We’ve never quantified how much comp difference there is between our hubs and a mega hub, and versus the satellite stores, but we’ll say that they’re pretty robust.

Q:Was there any merchandise margin impact from some of the new account wins?

A:All of those customer segments have slightly different margin rates, But at the end of the day, that was not a material impact on our commercial business.

Q:Can you comment on what kind of sales lift you’ve seen in these regions and any competitive response you’ve seen?

A:Yeah. The DCs have just opened up and we’re still in the process of rolling stores off of some of the other DCs to these distribution centers where the stores are ultimately closer.

Q:Do you plan to keep investing in your assortments, improving assortments? Or do you think this is a comfortable level to be at going forward?

A:Yes. So there’s we did grow inventory 10% in total and a little less than 7% on a same store basis, if you will.

Q:Could you remind us what a typical ramp up is for a Mega Hub and the number of satellite stores a Mega Hub tends to service?

A:Yes. So typically, we’ll see satellite stores get to maturity roughly in the sort of year five timeframe.

Q:Any thoughts on Q4 same SKU inflation?

A:Yeah, I mean, excluding tariffs, we would expect the same SKU inflation to be in the same zip code.

Q:Could you walk us through the mechanics of LIFO and any P and L implications we should keep in mind?

A:Yeah, I think a couple of things stand out to us.

Q:I was hoping you could talk a little bit more about your outlook for the fourth quarter. You cited the expectations for solid trends against easing comparison both DIFM and DIY. Could we get back to that double digit growth rate as initiatives gain more traction and you see some higher same SKU inflation?

A:Yeah, what I’ll say is that, our outlook for the fourth quarter, particularly from a top line standpoint, is that we’ll have similar kind of momentum that we had in the third quarter.

Q:Do you still see opportunity for merchandise margin improvement, I guess specifically as you try to grow the commercial side of the business?

A:Yes. Yes, I think we do.

Q:Could you talk about the momentum being broad based?

A:Yeah, great question. I think what we’ve seen is specifically on the DIY side, where we have more empirical data on share, as we’ve grown share in all of the markets.

Q:For shrink specifically, I’m just curious, any more perspective on what happened in the period, how you address that, why this is not going to be an ongoing issue?

A:Yeah, I think a couple of things stand out to us.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the exact mix of direct imports versus third-party suppliers, stating they never really disclosed that information. Additionally, they did not break out the monthly sales cadence excluding the Easter shift, indicating a lack of clarity on that aspect.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call reveals strong growth initiatives, with expansion in both domestic and international markets, supported by strategic investments in technology and new stores. Despite a slight decline in net income, free cash flow has improved, and the company maintains a stable outlook. The Q&A section highlights confidence in sustaining same-store sales and managing inflation impacts. While there are some concerns about SG&A growth and tax refund impacts, the overall sentiment is positive, driven by effective margin management and strategic growth plans.

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The earnings call summary presents a generally positive outlook, with strong domestic sales growth, significant expansion plans, and effective margin management despite challenges like FX impacts. The Q&A section highlights growth opportunities in Mexico, manageable inflation impacts, and merchandise margin improvements. While management was vague on some specifics, the overall sentiment is optimistic, supported by strategic expansions and favorable market conditions. The absence of a market cap makes it hard to predict exact stock movement, but the positive sentiment suggests a likely increase.

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The earnings call summary and Q&A reveal a mixed sentiment. Financial performance is impacted by foreign currency, with a negative EPS expectation. Product development and market strategy are positive due to store expansions and commercial growth. However, financial health is pressured by margin decline and increased costs. Shareholder returns remain uncertain. The Q&A highlights concerns about costs, margins, and inflation, but also shows confidence in initiatives and market share gains. The lack of clear guidance and quantification in some areas tempers overall optimism, resulting in a neutral outlook.

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