AZO Q2 Earnings Call: Sales Growth Driven by Commercial Segment, Margin Pressure from Investments and FX

Auto parts and accessories retailer AutoZone (NYSE:AZO) fell short of the market’s revenue expectations in Q2 CY2025, but sales rose 5.4% year on year to $4.46 billion. 

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

StockStory’s Take

AutoZone’s second quarter results were shaped by notable strength in its commercial segment and steady execution in core retail operations. Management attributed the company’s 5.4% sales growth to improved commercial sales execution, expansion of hub and MegaHub store formats, and ongoing share gains in both retail (DIY) and commercial markets. CEO Phil Daniele emphasized that initiatives around parts availability, delivery speed, and product assortment have begun to yield market share gains, particularly in domestic commercial sales, which grew at a double-digit rate. CFO Jamere Jackson provided additional context, noting that commercial program expansion and investments in supply chain infrastructure underpinned the quarter’s top-line performance, despite ongoing pressure in discretionary categories and negative foreign currency impacts.

Looking ahead, AutoZone’s leadership anticipates continued top-line momentum as commercial initiatives mature and international expansion accelerates. Management stated that investments in new distribution centers, hub and MegaHub store growth, and technology should bolster inventory availability and customer service, positioning the company for further share gains. However, CFO Jamere Jackson cautioned that margin pressures may persist in the near term, citing higher supply chain costs, self-insurance expenses, and potential tariff impacts. CEO Phil Daniele reinforced the company’s commitment to disciplined expense management and strategic investment, saying, “We are in the early innings of our growth initiatives, and while expenses are elevated, these investments are expected to drive faster top-line and earnings growth over time.”

Key Insights from Management’s Remarks

Management identified commercial segment expansion, regional performance shifts, and increased investment in supply chain and technology as key drivers of the quarter’s results and near-term outlook.

• Commercial segment momentum: The domestic commercial business delivered over 10% sales growth, driven by expanded product assortment, improved delivery speed, and the rollout of new hub and MegaHub stores. Management highlighted these initiatives as the primary contributors to recent share gains and consistent transaction growth in commercial accounts.
• Retail (DIY) traffic improvement: DIY segment traffic increased 1.4% after previous declines, signaling stabilization and market share gains, especially in maintenance and failure categories. Management noted that discretionary categories remain soft due to cautious consumer spending, but core maintenance demand is compensating for this weakness.
• Regional performance shifts: The Northeast and Rust Belt regions outperformed other markets for the first time in several quarters, benefiting from colder winter and favorable spring weather. Meanwhile, South Central and Western regions experienced comparatively slower growth, with management attributing the differences to weather patterns and pent-up seasonal demand.
• International expansion and FX headwinds: AutoZone opened 30 new stores internationally, maintaining strong same-store sales growth on a constant currency basis. However, significant foreign exchange headwinds, particularly in Mexico, negatively impacted reported sales, operating profit, and EPS. Management expects these currency pressures to persist in the near term.
• Elevated investment in growth initiatives: The company continued accelerated investment in supply chain, store expansion, and technology, leading to higher SG&A costs. CFO Jamere Jackson explained that these investments are essential for long-term growth, but currently weigh on operating margins as the benefits are realized over several quarters.

Drivers of Future Performance

AutoZone expects its commercial initiatives, international growth, and investment in supply chain infrastructure to drive future revenue, while margin headwinds from expenses, FX, and tariffs remain a focus.

• Commercial and international expansion: Management believes that continued rollout of hub and MegaHub locations, combined with aggressive store openings in both domestic and international markets, will sustain above-market sales growth and expand the company’s reach. CEO Phil Daniele highlighted opportunities to gain share in underpenetrated commercial and international regions.
• Margin management amid higher expenses: CFO Jamere Jackson cautioned that operating margin will remain pressured in the short term due to ongoing investment in distribution centers, higher self-insurance costs, and an unfavorable sales mix as commercial growth outpaces retail. Management expects some cost headwinds to abate over time but stressed the need for disciplined SG&A growth as expansion continues.
• Tariff and inflation uncertainty: Management is monitoring evolving tariff policies and inflation trends, noting that while recent tariff impacts have been modest, future cost increases could require a combination of vendor negotiations, sourcing shifts, and selective price adjustments to protect margins. The company expects to offset tariff-related costs but acknowledged that supply chain inflation could affect pricing and profitability.

Catalysts in Upcoming Quarters

Looking forward, the StockStory team will be monitoring (1) the pace and profitability of new hub and MegaHub store openings, (2) stabilization of operating expenses as distribution center and technology investments mature, and (3) the company’s ability to offset FX and tariff-related headwinds through pricing and sourcing strategies. Execution on commercial and international expansion, as well as sustained share gains in both retail and commercial channels, will be key signposts for progress.

AutoZone currently trades at a forward P/E ratio of 22.3×. At this valuation, is it a buy or sell post earnings? See for yourself in our full research report (it’s free).

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