Assessing AutoZone's LIFO-Adjusted Earnings Power Amid Strong Commercial Growth

Institutional investors have long viewed AutoZone (AZO) as a resilient player in the auto parts retail sector, but recent financial results have sparked renewed debate about its valuation. While the company's Q4 2025 earnings per share (EPS) fell short of expectations due to a non-cash LIFO charge, a deeper analysis reveals that its commercial segment growth and disciplined pricing strategies are offsetting these short-term headwinds. For investors with a long-term horizon, the combination of strategic expansion, margin resilience, and robust commercial momentum suggests that AZO remains a compelling opportunity despite temporary EPS compression.

LIFO-Adjusted Earnings: A Closer Look

AutoZone's Q4 2025 results were marred by a $80 million LIFO charge, which reduced gross profit by 98 basis points and dragged EPS down by $3.57. For the full fiscal year, the LIFO impact totaled $64 million, contributing to a 55 basis point decline in gross margin compared to 2024. However, these non-cash charges mask the company's underlying earnings power. Adjusting for the LIFO impact, AutoZone's FY2025 net income would have been $2.564 billion (vs. reported $2.5 billion), translating to an adjusted EPS of approximately $148.70-up from the reported $144.87-when divided by the 17.245 million weighted average diluted shares outstanding according to investor filings. This adjustment underscores that the company's core operations remain strong, even as inventory accounting practices distort headline metrics.

Commercial Segment: The Engine of Growth

The commercial segment has emerged as a critical driver of AutoZone's long-term value creation. In Q4 2025, domestic commercial same-store sales surged 12.5% year-over-year, fueled by the expansion of Direct-Install (DIFM) services and commercial credit programs. These initiatives, which provide repair shops and businesses with prompt delivery and tailored financing, have allowed AutoZone to capture a larger share of the professional market. By the end of Q4, 92% of domestic stores offered commercial programs, reflecting the company's strategic focus on cross-selling and customer retention.

Moreover, the commercial segment's growth is not isolated to domestic markets. AutoZone's international expansion-particularly in Mexico and Brazil-has accelerated, with 141 net new stores opened globally in Q4 2025. This geographic diversification not only mitigates regional economic risks but also taps into underpenetrated markets where demand for automotive services is rising.

Pricing Discipline and Margin Resilience

Despite inflationary pressures and tariff-related costs, AutoZone has maintained pricing discipline without sacrificing customer loyalty. The company's ability to pass on cost increases to consumers, supported by its premium brand positioning and limited competition in the DIFM space, has preserved gross margins. While the LIFO charge temporarily pressured profitability, management emphasized that these costs are largely non-recurring and do not reflect operational inefficiencies. Furthermore, AutoZone's aggressive share repurchase program- reducing diluted shares by 3.1% in FY2025-has amplified EPS growth, providing a tailwind for long-term investors.

Why Institutional Investors Should Revisit AZO

The short-term EPS drag from LIFO accounting and SG&A investments may deter value-focused investors, but these challenges are outweighed by the company's strategic momentum. AutoZone's commercial segment is not just a growth engine; it is a moat. By expanding its DIFM offerings and deepening relationships with professional customers, the company is locking in recurring revenue streams that are less sensitive to retail demand cycles. Meanwhile, its disciplined capital allocation-prioritizing store expansion in high-growth regions and share buybacks-ensures that returns are being reinvested where they matter most.

For institutional investors, the key takeaway is clear: AutoZone's earnings power, when adjusted for non-cash accounting effects, remains robust. The commercial segment's 6.7% year-over-year growth in FY2025 and the company's $120 million LIFO charge guidance for Q1 2026 suggest that the worst of the margin pressures may be behind it. As the market recalibrates to focus on long-term fundamentals rather than quarterly noise, AZO's strategic execution and pricing resilience position it as a standout in the auto parts sector.