AutoZone, Inc. (AZO) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

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.

Key Financial Performance

Total Sales $6.2 billion, up 0.6% versus the 17-week quarter last year. On a 16-week comparison of last year, sales grew 6.9%. The growth was attributed to improved store execution and momentum in domestic commercial same-store sales.

Domestic Same-Store Sales Grew 4.8% year-over-year. Growth was driven by improved execution, expanded parts availability, and improved speed of delivery to commercial customers.

International Same-Store Sales Grew 7.2% on a constant currency basis. However, faced over 5 points of currency headwind, resulting in a lower unadjusted international comp of 2.1%. The stronger U.S. dollar negatively impacted reported sales, operating profit, and earnings per share.

Earnings Per Share (EPS) Decreased 5.6% year-over-year. Adjusted for a comparable 16-week basis and excluding an $80 million LIFO charge, EPS grew 8.7%. The LIFO charge and foreign exchange rates were significant headwinds.

Gross Margin 51.5%, down 103 basis points year-over-year on a 16-week basis. The decline was primarily due to an $80 million LIFO charge, which accounted for 128 basis points of the unfavorable comparison. Excluding the LIFO charge, gross margin improved by 25 basis points due to solid merchandise margin improvement.

Domestic Commercial Sales Up 12.5% year-over-year on a 16-week basis. Growth was attributed to improved execution, expanded parts availability, and improved speed of delivery to professional customers.

DIY Same-Store Sales Grew 2.2% year-over-year. Growth was driven by higher average ticket growth of 3.9%, which outpaced SKU inflation of 2.8%, attributed to an improved product mix. However, DIY traffic count was down 1.9%.

Net Income $837 million, down 0.5% year-over-year on a 16-week basis. The decline was due to LIFO charges and foreign exchange headwinds.

Free Cash Flow $511 million for the quarter and $1.8 billion for FY '25. The company remains a strong cash flow generator.

Inventory Per Store Up 9.6% year-over-year. Total inventory increased 14.1%, driven by new stores, additional inventory investment to support growth initiatives, and inflation.

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Operating Highlights

Mega-Hub stores: Opened 14 new Mega-Hubs in Q4, totaling 133. Plan to open 25-30 more in FY '26. Mega-Hubs carry over 100,000 SKUs and significantly boost sales.

New store openings: Opened 304 net new stores globally in FY '25, including 195 in the U.S. and 109 internationally. Plan to open 325-350 stores in FY '26.

International expansion: Opened 51 new stores in Mexico and Brazil in Q4, totaling 1,030 international stores. International same-store sales grew 7.2% on a constant currency basis.

Domestic commercial sales: Sales grew 12.5% year-over-year in Q4, driven by improved inventory availability, speed of delivery, and customer service.

Gross margin: Gross margin was 51.5%, down 103 basis points due to an $80 million LIFO charge. Excluding this, gross margin improved by 25 basis points.

Supply chain investments: Opened 2 new distribution centers in FY '25 to enhance efficiency and reduce costs.

Capital investments: Invested $1.4 billion in CapEx in FY '25, focusing on store growth, supply chain, and technology. Plan to invest a similar amount in FY '26.

Market share growth: Focused on gaining market share in domestic commercial and international markets through improved execution and customer service.

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Risk or Challenges

Foreign Exchange Rates: The stronger U.S. dollar negatively impacted reported sales, operating profit, and earnings per share, particularly in international markets like Mexico and Brazil. This resulted in a $36 million headwind to sales, a $14 million headwind to EBIT, and a $0.57 per share drag on EPS for the quarter.

LIFO Charges: A noncash $80 million LIFO charge negatively impacted gross margins and earnings per share. This charge is expected to continue into the next quarter with an estimated $120 million impact.

DIY Traffic Decline: DIY traffic count decreased by 1.9% for the quarter, which could indicate challenges in maintaining customer engagement in this segment.

Inflation Impact: Inflation on like-for-like SKUs was approximately 2.7% for commercial and 2.8% for DIY, contributing to higher average ticket prices but also potentially impacting customer purchasing behavior.

Supply Chain Costs: Investments in new distribution centers and supply chain improvements are increasing operating expenses, which could pressure margins if sales growth does not keep pace.

Interest Expense: Higher borrowing rates have increased interest expenses, with $148 million reported for the quarter and an expected $112 million for the next quarter.

Currency Headwinds: International same-store sales faced over 5 points of currency headwind, reducing unadjusted international comp to 2.1% despite strong constant currency growth of 7.2%.

Store Expansion Costs: Aggressive store expansion plans, including 325-350 new stores in FY '26, will require significant capital investment, potentially straining resources if returns are not realized as expected.

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Guidance & Outlook

Sales Growth: The company expects both DIY and commercial sales trends to remain solid in FY '26, driven by growth initiatives and market share gains.

Store Expansion: AutoZone plans to open 325 to 350 stores in the Americas in FY '26, with a focus on domestic and international markets. This includes an accelerated pace of international store openings.

Capital Expenditures: The company plans to invest approximately $1.5 billion in FY '26, primarily in new store development, hubs, Mega-Hubs, and technology to enhance customer service.

Commercial Business Growth: The company anticipates continued growth in its domestic commercial business, supported by improved inventory availability, faster delivery, and expanded Mega-Hub locations. 25 to 30 new Mega-Hubs are planned for FY '26.

International Business Growth: AutoZone remains bullish on international markets, with plans to accelerate store openings and expand its presence in Mexico and Brazil.

Gross Margin Management: The company expects to manage gross margins effectively, with benefits from merchandise margins offsetting headwinds from a faster-growing commercial business.

Inflation Impact: The company expects ticket inflation to be up at least 3% for the remainder of the calendar year, contributing to revenue growth.

Technology Investments: Investments in technology will continue to improve customer service and operational efficiency.

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Shareholder Return Plan

Share Repurchase Program: We repurchased $447 million of AutoZone stock in the quarter. At quarter end, we had $632 million remaining under our share buyback authorization. Our ongoing strong earnings, balance sheet, and powerful free cash allow us to return a significant amount of cash to our shareholders through our buyback program. We have bought back over 100% of 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.

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Key Q&A

Q:You were calling out inflation, I think, at least 3% in the fiscal first quarter. Is that your supply chain allowing you to sort of get to market at a lower cost and use price as a share gain? Or are you really expecting more than 3% tied to same SKU tariff tailwinds?

A:We suspect it will probably go up from here. We’ve talked about the industry being disciplined and rational in pricing, and we’ll use the pricing lever as needed to cover costs and stay competitive.

Q:You commented the discretionary is up for the first time in a bit. Is there anything either internally that you're doing to drive that? Or are you seeing green shoots as far as that consumer base?

A:Discretionary categories spiked post-pandemic and declined over the last two years. Growth over the last couple of months is the best since 2023. It may have bottomed out and started gaining traction, but it’s early to say. The lower-end consumer is still under pressure, mostly on the DIY sales floor side.

Q:Can you provide a sense of how the arc of the LIFO charges will look from here? Is it reasonable to annualize $120 million for the first quarter to around $520 million for the full year? Or would you expect that to peak and then fade off?

A:For Q1, we expect $120 million in LIFO charges. For Q2-Q4, modeling suggests $80-$85 million per quarter. Over time, as product cost deflation occurs, gains may roll back through the P&L, but timing is uncertain. LIFO is a bellwether for inflation, and we expect at least 3% inflation.

Q:Your SG&A growth was elevated this quarter. Is this a reflection of an arms race within the industry or just more expensive to run an auto parts business these days?

A:It’s not an arms race. We’re investing heavily in new stores, with 325-350 planned in the Americas, including the U.S. and Mexico. New stores mature in 4-5 years, initially dragging SG&A. We expect mid-single-digit SG&A growth as we execute growth initiatives for a faster-growing business.

Q:What sort of comp do you expect given the growth plans to be necessary to leverage SG&A over the next couple of years?

A:We will manage SG&A in line with sales growth. With new store investments, we expect an acceleration in comp. While not specific, faster growth on the comp line is anticipated, and we’ll remain transparent about market conditions.

Q:On price elasticity, have you seen any impact on unit demand as inflation has come through?

A:There’s little elasticity in failure and maintenance categories, as customers must address issues to avoid bigger costs. Discretionary categories are smaller and less elastic. The industry has been disciplined in passing costs to consumers, and we expect this to continue.

Q:Can you talk about the growth opportunity in Mexico? How big is your market share, and do you think you could double your store base from here?

A:We see long-term growth opportunities in Mexico. The competitive set is different, with many category-specific competitors. We have a strong market share, larger than the next 7-8 chains combined. The car park is older than in the U.S., and we plan to accelerate store growth, particularly in dense markets like Mexico City.

Q:Is the LIFO number predicated on the assumed 3% inflation for the balance of the year?

A:Yes, we expect inflation to creep up, potentially adding mid-single-digit increments. LIFO charges are dynamic, but our merchandising teams have mitigated costs effectively. The playbook remains the same as we move forward.

Q:On SG&A per store growth in '26, do you expect it to be weighted to the back half of the year?

A:We expect mid-single-digit SG&A growth for the fiscal year, with some acceleration in the back half due to increased store openings. By 2028, we aim for 500 stores annually, with 300 in the U.S. and 200 internationally.

Q:As same SKU inflation steps up, do you have concerns about price elasticity in the category?

A:We expect more same SKU inflation as tariffs impact costs, but the categories we play in are essential (e.g., failure and maintenance). Incremental price increases are manageable for consumers, and the industry remains rational in pricing. We’ll monitor demand signals closely.

Q:Can you elaborate on what’s driving strong merchandise margins and if it can continue through fiscal '26?

A:Merchandising teams have driven gross margin improvement through cost opportunities, innovation, and mix optimization (e.g., Duralast brand). This strategy helps offset commercial business margin pressure, supporting future margin expansion.

Q:How should we think about the impact of tariffs on fiscal Q4 results?

A:Tariffs have driven ticket growth in both DIY and commercial segments. Same SKU inflation has increased, and retail prices have risen across the industry. The impact of tariffs is evident in accelerated ticket growth.

Q:How do you view the improving trend in sales growth through fiscal Q4?

A:Sales growth was driven by better weather, same SKU inflation, and internal initiatives like new stores, improved assortments, and better in-stocks. These factors combined to create a positive outlook for the next quarters.

Q:With inflation on top of inflation, are you concerned about another deferral cycle in 2026?

A:We’re not overly concerned about a massive deferral cycle unless inflation significantly increases. Maintenance deferrals have likely run their course, and discretionary categories are stabilizing. We’ll monitor demand signals closely.

Q:Should we see the Mega-Hub model roll out to Mexico, and how will it impact store capabilities?

A:We’re light on the Hub and Mega-Hub strategy in Mexico but see opportunities to strengthen assortments and support commercial customers. This may require hubs and Mega-Hubs to enhance service.

Q:Can you break down the 200 planned international stores by country, and how does the expense rate differ between U.S. and international stores?

A:Most international stores will be in Mexico, with fewer in Brazil. The cost profile is similar to the U.S., with stores maturing in 4-5 years. International stores have a slightly different absolute cost but follow a similar expense trajectory.

Q:Does the mid-single-digit SG&A growth comment apply to 2026, given the ramp in new stores?

A:Yes, mid-single-digit SG&A growth is expected, driven by new stores. Sales growth from new and existing stores is critical to offset SG&A drags. If sales don’t meet expectations, expenses will be adjusted to maintain profitability.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the expected comp growth necessary to leverage SG&A, stating only that faster growth is anticipated. They also did not provide a clear timeline for when LIFO charges might revert to gains in the P&L, citing uncertainty in timing.

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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 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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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.

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