AutoZone's Q4 2025 Earnings Call: Contradictions Emerge on Inflation, Mexico Expansion, Commercial Growth, Tariffs, and Discretionary Sales

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 23, 2025

Financials Results

• Revenue: $6.2B, up 0.6% vs 17-week prior year; up 6.9% on a comparable 16-week basis
• EPS: $48.71 per diluted share, down 5.6% vs reported 17-week prior; up 1.3% on a comparable 16-week basis; +8.7% YOY ex-$80M LIFO
• Gross Margin: 51.5%, down 103 bps YOY on a 16-week basis; ex-LIFO comparison, up ~25 bps
• Operating Margin: Approximately 19.4% (EBIT $1.2B on $6.2B sales); EBIT down 1.1% YOY on a 16-week basis; ex-LIFO/FX, EBIT up 6.6%

Guidance:

• Q1 LIFO charge ~$120M; Q2–Q4 ~$80–85M per quarter.
• Q1 interest expense ~$112M (vs $108M last year).
• Model Q1 tax rate ~23.2% before stock option benefits.
• If current FX holds for Q1: +$32M revenue, +$9M EBIT, +$0.38 EPS.
• Merchandise margin gains expected to offset commercial mix pressure on gross margin.
• FY26: open 325–350 stores in the Americas; 25–30 Mega-Hubs; CapEx ~$1.5B; openings skewed to back half.
• SG&A growth planned in mid-single digits, weighted to back half.
• Expect ≥3% inflation, potentially higher; pricing and vendor negotiations to protect margins.

Business Commentary:

* Sales and Market Share Growth: - AutoZone reported total sales grew 0.6% for Q4, with international same-store sales up 7.2% on a constant currency basis. - The growth was driven by increased domestic commercial sales, which rose 12.5% year-over-year, and improved execution and inventory availability in the commercial segment.

• Gross Margin and LIFO Impact:
• The gross margin for the quarter was 51.5%, down 103 basis points from the previous year primarily due to an $80 million LIFO charge.

• The LIFO charge was attributed to higher costs due to tariffs, impacting LIFO layers and margins.

• Segment Performance and Market Dynamics:

• The domestic DIY segment witnessed a positive 2.2% comp for the quarter, with discretionary categories growing at their highest pace since FY 2023.

• Growth was driven by improved product mix, higher average DIY ticket growth, and favorable weather conditions in key regions.

• International Expansion and Market Opportunities:

• AutoZone opened 51 new stores internationally, with same-store sales in Mexico and Brazil up 7.2% on a constant currency basis.
• The expansion was driven by the growing car park and market opportunities in Mexico, with a focus on leveraging the existing store base and improving service levels.

Sentiment Analysis:

• Management highlighted accelerating domestic commercial comps (+12.5%), domestic comps +4.8%, and international comps +7.2% (constant currency). Excluding an $80M LIFO charge, EPS would have risen 8.7% YOY (16-week). They plan to open 325–350 stores in FY26 and 25–30 Mega-Hubs, citing strong execution, record in-stocks, and share gains. While LIFO and FX were headwinds, they expressed confidence in FY26 growth and margin management.

Q&A:

• Question from Bret Jordan (Jefferies): With at least 3% inflation expected in Q1, are you using lower costs to price for share, or should we expect more than 3% same-SKU inflation tied to tariffs?
  Response: Inflation likely exceeds 3%; pricing remains rational and will be used to cover costs while staying competitive.

• Question from Bret Jordan (Jefferies): Discretionary category improved—are you doing something internally, or are there consumer green shoots?
  Response: Discretionary appears to have bottomed and is recovering modestly; lower-income DIY consumer still pressured.

• Question from Michael Lasser (UBS): How should we model LIFO from here and do margins recover as the cycle fades?
  Response: Q1 LIFO ≈$120M; Q2–Q4 ~$80–85M each; over time LIFO could reverse if costs deflate; aim to maintain gross margins via vendor negotiations and pricing.

• Question from Michael Lasser (UBS): SG&A is elevated—is this an industry arms race or structural cost increase?
  Response: Not an arms race; investing in accelerated new store growth; SG&A mid-single digits with early-year drag that leverages as stores mature.

• Question from Gregory Melich (Evercore ISI): What comp is needed to leverage SG&A given growth plans?
  Response: SG&A will be managed in line with sales; expect faster comps to support investment; confidence from share gains in DIY/commercial and Mexico.

• Question from Gregory Melich (Evercore ISI): Any price elasticity as inflation rises?
  Response: Minimal elasticity; break-fix/maintenance dominate, with rational industry pricing and only modest deferral.

• Question from Christopher Horvers (JPMorgan): What’s the growth runway in Mexico and can the store base double?
  Response: Long runway; fragmented competition; underpenetrated dense cities; older car park; strong share position supports expansion.

• Question from Christopher Horvers (JPMorgan): Are LIFO estimates tied to inflation assumptions, and how is SG&A per store paced?
  Response: Yes—higher inflation implies similar LIFO run-rate; SG&A per store mid-single-digit growth, accelerating in back half with store openings.

• Question from Steven Zaccone (Citi): Could rising same-SKU inflation trigger elasticity and affect comps?
  Response: Demand should hold given necessity purchases and small ticket sizes; will avoid pricing that destroys demand.

• Question from Steven Zaccone (Citi): What’s driving merchandise margin strength and can it persist?
  Response: Cost actions, mix optimization, and Duralast penetration; expected to offset commercial mix pressure and support margins.

• Question from Brian Nagel (Oppenheimer): How did tariffs impact Q4 sales and margins?
  Response: Tariffs lifted product costs and tickets, driving higher same-SKU inflation; industry raised retails accordingly.

• Question from Brian Nagel (Oppenheimer): What drove the sales acceleration through the quarter—tariffs, weather, or demand?
  Response: All three: better weather, some inflation uplift, and stronger execution with improved assortments, hubs/Mega-Hubs, and record in-stocks.

• Question from David Bellinger (Mizuho): Risk of another deferral cycle in 2026 given inflation?
  Response: Not expecting a major deferral unless inflation spikes; maintenance can’t be deferred indefinitely; discretionary appears to be normalizing.

• Question from David Bellinger (Mizuho): Will Mexico adopt Hub/Mega-Hub model to support commercial?
  Response: Yes; currently lighter on hubs; building assortments and will add hubs/Mega-Hubs to better serve commercial demand.

• Question from Steven Forbes (Guggenheim): Path to 500 stores by 2028—international split and expense dynamics?
  Response: Most international growth will be in Mexico; new-store cost drag similar to U.S., with 4–5 year maturity to profitability.

• Question from Steven Forbes (Guggenheim): Does matching expense growth to sales apply in 2026 despite a store ramp?
  Response: Yes; SG&A mid-single digits driven by new stores; top-line growth must support it; will pull costs if sales underperform.