Here's Why You Should Retain AutoZone Stock in Your Portfolio Now

AutoZone, Inc. AZO, one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States, is poised to gain from strength in DIY and commercial business as well as omni-channel efforts. However, a stretched balance sheet and rising interest remain a concern

Let’s see why you should retain this Zacks Rank #3 (Hold) stock in your portfolio.

Rising Market Share, Robust Buyback Program Aid AZO

AutoZone has achieved record sales for 36 consecutive years. Its fiscal 2025 revenues of $18.9 billion rose 2.4% year over year. The company expects continued growth in fiscal 2026, driven by strong DIY and commercial business performance with expanded coverage and improved parts availability. The company continues to grow its market share through new customer wins and deeper engagement with existing clients. 

Focus on increasing its market penetration via the expansion of mega hubs is set to boost long-term prospects. Expanded hub and mega-hub rollouts, along with the expansion of the distribution center footprint, bode well. With 133 mega hub locations at the end of the fourth quarter of fiscal 2025, AutoZone is halfway through its objective of establishing more than 200 mega hubs. It aims to open 25-30 more locations over the next fiscal year. The company’s international operations are growing, and it is allocating a significant portion of expansion funds to these regions. With continued dedication to Mexico and Brazil, AZO is set to ramp up store openings in these markets, aiming for as many as 500 annually by 2028, which is poised to significantly boost AutoZone's future growth.

The company’s omni-channel efforts to improve customer shopping experience are reaping profits. The ramp-up of e-commerce efforts, including ship-to-home next day, buy online, pick-up in stores and commercial customer ordering, is driving traffic to the company’s online site, helping the company deliver sizzling growth. AutoZone's distribution network transformation, highlighted by the strategy to bring inventory closer to customers, will enhance efficiency and drive growth with increased availability and speed.

AutoZone’s robust buyback program also sparks confidence. In fiscal 2025, the firm repurchased shares worth $1.5 billion. At the end of fiscal 2025, AZO had over $632.3 million remaining under share repurchase authorization. Notably, it has bought back more than 100% of the then-outstanding shares since 1998. The company’s disciplined capital allocation approach to reinvest in the business and engage in meaningful investor-friendly moves is praiseworthy.

High Capex Requirement, Rising Interest Ail AutoZone

AutoZone’s technology investments to improve the electronic catalog might limit near-term cash inflows. In fiscal 2025, the company spent around $1.4 billion in capex, and it expects to spend around the same amount in fiscal 2026. The company also remains dedicated to investing in rapid store expansion, particularly in hubs and mega-hubs, bringing inventory closer to its customers.

AutoZone’s stretched balance sheet raises concerns. Its total debt-to-capital ratio stands at 1.81, which is significantly higher than the industry’s 0.92, indicating that the firm is highly leveraged.

In the fiscal fourth quarter of 2025, the company’s interest expense rose 2.7% year over year to $148 million. Amid the high debt levels, the company estimates fiscal first-quarter 2026 interest to be $112 million, up from $108 million in the fourth quarter of fiscal 2025.

In fiscal 2025, the company’s gross margin, operating profit and earnings per share took a hit because of a noncash $80 million LIFO accounting charge, including $80 million in the fourth quarter alone. Looking ahead, it expects another LIFO charge of about $120 million in the fiscal first quarter due to higher tariff-related costs. For the first, second and third quarters, these charges are projected to be around $80-$85 million each quarter.

Stocks to Consider

Some better-ranked stocks in the auto space are Dorman Products, Inc. DORM, China Yuchai International Limited CYD and PHINIA Inc. PHIN, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for DORM’s 2025 sales and earnings implies year-over-year growth of 7.9% and 22.7%, respectively. EPS estimates for 2025 and 2026 have improved 3 cents and 19 cents, respectively, in the past 30 days.

The Zacks Consensus Estimate for CYD’s 2025 sales and earnings implies year-over-year growth of 54.1% and 87.7%, respectively. EPS estimates for 2025 have improved 58 cents in the past 60 days.

The Zacks Consensus Estimate for PHIN’s 2025 earnings implies year-over-year growth of 18.1%. EPS estimates for 2025 and 2026 have improved by 22 cents and 15 cents, respectively, in the past 60 days.

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This article originally published on Zacks Investment Research (zacks.com).

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