AutoZone's Q3 2025 Earnings: Can Margin Woes Be Overcome in a Growth-Fueled Race?

AutoZone (NYSE: AZO) has long been a bellwether for the auto parts industry, its stock soaring to historic highs as it capitalized on a post-pandemic DIY boom and a relentless expansion strategy. But its third-quarter 2025 earnings report revealed a stark trade-off: explosive growth in stores and commercial sales came at a cost. While revenue rose 5.4% to $4.5 billion, margin pressures and a disappointing EPS miss have left investors questioning whether AutoZone's ambitions are outpacing its ability to sustain profitability.

The company's struggles are no secret. Gross margins fell 77 basis points to 52.7%, and operating margins dropped a steep 185 basis points to 19.4%, driven by everything from higher inventory shrink to the startup costs of new distribution centers. Yet beneath the numbers lies a story of calculated risk—AutoZone is doubling down on its growth playbook, betting that its aggressive expansion in high-potential markets like Mexico and Brazil will eventually deliver outsized returns.

The Expansion Playbook: A Double-Edged Sword

AutoZone's third quarter saw 84 net new stores open—87% more than the same period in 2024—bringing its global footprint to 7,516 locations. While U.S. stores grew by 54, the real momentum lies abroad: 25 new stores in Mexico and 5 in Brazil underscore a deliberate push into emerging markets. CEO Phil Daniele has long argued that AutoZone's domestic dominance (6,537 stores) leaves room for “meaningful scale” in regions like Latin America, where auto ownership is rising.

But this strategy comes with trade-offs. International same-store sales fell 9.2% on an as-reported basis due to currency headwinds, though underlying demand grew 8.1% on a constant-currency basis. The challenge for AutoZone is whether it can weather these macroeconomic storms while scaling its infrastructure. A key metric to watch: the rollout of new distribution centers, which management claims will stabilize gross margins once fully operational.

Commercial Growth: The Engine That Won't Stall

While margins are under pressure, AutoZone's commercial business—its fastest-growing segment—is firing on all cylinders. Commercial sales surged 10.7% to $1.27 billion, with 92% of U.S. stores now offering programs that generated an average of $17,700 weekly. This segment, which caters to repair shops and fleet operators, has become a critical driver of recurring revenue.

The question is whether AutoZone can maintain this momentum without further squeezing margins. The commercial mix has contributed to gross margin declines, as these sales often carry lower margins than retail. Yet the volume and predictability of commercial contracts may justify short-term pain for long-term gain.

The Margin Recovery Hurdle: Can It Be Cleared?

The elephant in the room is AutoZone's path to margin recovery. Management has pointed to three levers: 1) improved merchandise margins as new distribution centers ramp up, 2) reduced LIFO impacts, and 3) better inventory management. Yet skeptics note that inventory levels rose 10.8% year-over-year to $6.82 billion—a sign of overcaution in a sector where just-in-time supply chains are the norm.

The company's share repurchases also deserve scrutiny. AutoZone spent $250 million on buybacks in Q3 alone, reducing diluted shares by 3.1% year-over-year. While this boosts EPS, it's a double-edged sword: if margins don't rebound, the stock's valuation—a forward P/E of ~38x—may prove unsustainable.

Why Investors Should Still Bet on AutoZone

Despite the hurdles, AutoZone's fundamentals remain formidable. Its U.S. same-store sales grew 5.0%, a testament to its dominance in a fragmented market. The commercial business's scalability and international markets' long-term growth potential suggest that margins could rebound as the company matures its global footprint.

Moreover, AutoZone's balance sheet remains a fortress. Debt dipped slightly to $8.85 billion, and its stock repurchase program—$1.1 billion year-to-date—signals confidence in its long-term prospects. The stock's dip post-earnings to $3,678.39 (a 3.87% drop) has created a buying opportunity for investors willing to look past short-term volatility.

The Bottom Line: A Trade of Growth for Profitability—But Is It Worth It?

AutoZone is playing a high-stakes game: sacrificing near-term margins to fuel global expansion and commercial dominance. For investors, the question is whether the payoff—dominating emerging markets and locking in recurring revenue—will outweigh the costs.

The data suggests it could. Analysts' buy ratings (9 out of 9) and a median price target of $3,850 reflect optimism that AutoZone's strategy will pay dividends. The summer selling season, which accounts for 40% of annual sales, is a critical test. If same-store sales rebound and margins stabilize, AutoZone's stock could reclaim its footing—and its place as the auto parts sector's unchallenged leader.

In an era where growth often comes with growing pains, AutoZone's bet on scale and diversification is audacious. But for investors with a long-term horizon, the payoff could be extraordinary. The question isn't whether AutoZone can recover its margins—it's whether it can do so before the market loses patience. The next few quarters will tell.