AZO Q4 Deep Dive: Margin Pressures Persist as Store Expansion Accelerates

Auto parts and accessories retailer AutoZone (NYSE:AZO) met Wall Streets revenue expectations in Q4 CY2025, with sales up 8.2% year on year to $4.63 billion. Its non-GAAP profit of $31.04 per share was 5.1% below analysts’ consensus estimates.

Is now the time to buy AZO? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

AutoZone’s fourth quarter results were met with a negative market reaction as the company’s non-GAAP earnings per share fell short of Wall Street’s consensus despite revenue growth that aligned with expectations. Management highlighted that a significant non-cash LIFO charge negatively affected margins and earnings, while an uptick in operating expenses was attributed to accelerated investments in new stores and supply chain initiatives. CEO Philip Daniele noted that weather-related disruptions and a lack of last year’s hurricane boost also played a role in dampening some retail sales trends, particularly in the middle portion of the quarter.

Looking forward, management outlined a strategy centered on continued investment in new store openings, commercial business expansion, and supply chain enhancements. The company expects ongoing inflation and tariff-related pressures to impact average ticket prices, while emphasizing that the maturation of recently opened stores should help offset near-term expense headwinds. CFO Jamere Jackson stated, "We like the earnings and cash profile on the backside of this," referencing the anticipated returns from current investments as stores reach maturity over the next several years.

Key Insights from Management’s Remarks

AutoZone’s management attributed recent performance to improvements in commercial sales, a robust store opening pace, and targeted cost management, even as margin pressures mounted.

• Commercial sales momentum: Management credited domestic commercial sales growth to improved parts availability, expanded hub and mega hub stores, and enhanced delivery speed, which contributed to market share gains across customer segments.
• Store expansion pace: The quarter saw an accelerated pace of store openings, including internationally, which management believes will be a significant driver of future earnings but also led to higher near-term SG&A (selling, general, and administrative) expenses.
• Supply chain investments: The company continued to invest in new and expanded distribution centers, particularly in Mexico and Brazil, aiming to improve efficiency and support both domestic and international growth.
• Margin headwinds: Gross margin and operating profit were pressured by a $98 million LIFO charge and a growing sales mix toward commercial (lower margin) business, partially offset by successful merchandising actions and cost mitigation strategies.
• Inflation and tariff mitigation: Management pointed to ongoing efforts to diversify suppliers and negotiate costs in response to tariffs and input inflation, which, combined with partial tariff rollbacks, helped moderate expected cost increases in the quarter.

Drivers of Future Performance

Management expects future performance to be shaped by store maturation, ongoing inflation, and a continued shift toward commercial sales.

• Accelerated store rollout: Continued global store growth, including more mega hub locations and international expansion, is expected to support both top-line and long-term profit growth, with new stores maturing over a four- to five-year period.
• Inflation and tariff dynamics: Management anticipates ongoing inflation and tariff-related cost pressures through the next two quarters, impacting average ticket size, but expects these headwinds to gradually moderate as tariff rollbacks and cost negotiations take effect.
• Margin recovery over time: SG&A growth will outpace sales in the near term due to investment in new stores and programs, but management expects operating margins to recover as stores mature and cost efficiencies are realized, with merchandise margin improvements targeted to offset the lower-margin mix from commercial sales.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will be watching (1) the pace at which new stores and mega hub locations ramp up and begin contributing to profitability, (2) whether inflation and tariff pressures on costs and ticket sizes begin to moderate as expected, and (3) the sustained strength of commercial sales and potential improvement in the international segment. Progress on supply chain efficiencies and margin stabilization will also be closely tracked.

AutoZone currently trades at $3,491, down from $3,767 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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