AutoZone (AZO) Q3 2026 Earnings Call Transcript

Motley Fool Transcribing, The Motley FoolTue, May 26, 2026 at 3:39 PM UTC

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Tuesday, May 26, 2026 at 10 a.m. ET

CALL PARTICIPANTS -

Chief Executive Officer — Philip Daniele

Chief Financial Officer — Jamere Jackson

Vice President, Treasurer, Investor Relations, and Tax — Brian L. Campbell

TAKEAWAYS -

Total Sales -- $4.8 billion, up 8.4%, marking the largest increase in over three years, driven by both retail and commercial segments.

Earnings Per Share (EPS) -- $38.07, up 7.7%; excluding a $20 million LIFO charge this year and a $16 million credit last year, adjusted EPS would have increased 12.5%.

Gross Margin -- 52.2%, down 57 basis points; excluding LIFO effects, gross margin was up 20 basis points due to improvements offsetting commercial mix headwinds.

Domestic Same Store Sales -- Increased 4.1%, with DIY sales up 2.2% and commercial sales up 10.4%, reflecting continued market share gains.

International Same Store Sales -- Up 1.6% on a constant currency basis and 16.6% unadjusted, with foreign exchange providing a $74 million sales tailwind.

Mega Hub Store Expansion -- 14 new mega hubs opened, totaling 156, with plans to open 15 more in the next quarter; target is 300 at full buildout.

New Store Openings -- 82 stores added globally, bringing totals to 6,770 U.S. stores, 933 in Mexico, and 157 in Brazil; on track for roughly 365 new stores for the year.

Commercial Program Penetration -- Commercial programs are active in 94% of domestic stores, with average weekly sales per program up 4.5% to $18,500.

Same SKU Inflation -- Over 7% for both DIY and commercial; DIY average ticket grew 5.6% while same store traffic declined by 3.6%.

Free Cash Flow -- Generated $455 million, up from $423 million; year-to-date free cash flow reached $1.1 billion.

Share Repurchase -- $586 million repurchased this quarter, with $800 million left under the current authorization.

Capital Expenditures -- Nearly $1.6 billion in CapEx deployed toward accelerated store and hub expansion, with similar spending planned for next year.

Operating Expenses (SG&A) -- Rose 7.6%, but SG&A as a percentage of sales leveraged 25 basis points; per store SG&A rose 3%.

LIFO Charges -- $20 million charge this quarter, $177 million year-to-date; projected $30 million LIFO charge expected next quarter.

Accounts Payable to Inventory Ratio -- Ended at 111.1%, down from 115.6% last year.

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RISKS -

Management reported a "slow down in sales" during the last two weeks of the quarter, attributing it to "unseasonably cool weather impacting our heat related categories," which affected both DIY and commercial segments.

International growth remains "soft" with same store sales "Driven by a continued soft macro environment." in Mexico and Brazil, and management cautioned that "consumers and our international markets remain under pressure." for the upcoming quarter.

"traffic count -3.6%." for domestic DIY business indicates persistent volume declines, with management noting this as "A similar decline to our second quarter."

Gross margin was negatively impacted by a $20 million LIFO charge, with an additional $30 million charge and 45 basis point impact expected in the next quarter.

Management emphasized that both domestic and international store expansions are progressing ahead of plan, with newly opened stores and mega hubs outperforming initial forecasts on both commercial and DIY performance. The commercial segment remains a major growth driver, with commercial sales representing 34% of domestic auto parts revenue and double-digit growth from national accounts and up-and-down-the-street customers. Executives reiterated that productivity and cost-control measures are offsetting expenses associated with accelerated store openings, supporting disciplined SG&A growth. Capital allocation remains balanced between continued investment and substantial shareholder returns through ongoing buybacks. The company expects to maintain comparable levels of capital expenditures in the coming year, with commercial expansion and new store maturation lifting future comp growth above historical averages.

Jamere Jackson stated, "Mega Hubs typically carry over 100 thousand SKUs, drive a tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores," highlighting the role of mega hubs in market share expansion.

Philip Daniele described "the cadence" of domestic same store sales as decelerating through the quarter, with the last two weeks at "comps of 1.3%," illustrating sensitivity to weather patterns late in the quarter.

"We continue to be very pleased with our sales productivity we are generating out of our new stores and their sales results are exceeding our pro forma expectations," management said, pointing to stronger-than-forecast contributions from new locations.

Foreign exchange contributed $0.83 per share to EPS this quarter, and management expects similar tailwinds if spot rates persist in the next quarter.

New store cohort comps contribute meaningfully to total growth, with management confirming that outsized runs from new locations and rapid commercialization underpin future comp acceleration.

INDUSTRY GLOSSARY -

DIY: Do-It-Yourself; refers to retail customers purchasing parts for self-installation rather than professional service.

DIFM: Do-It-For-Me; represents sales to professional installers and garages as opposed to individual retail customers.

Mega Hub: Large-format stores with expanded inventory (over 100,000 SKUs) serving as distribution points for rapid parts delivery to surrounding locations and customers.

Comps: Comparable store sales; same store sales growth measured against the prior period for locations open at least one year.

Full Conference Call Transcript

Philip Daniele: Good morning, and thank you for joining us today for AutoZone's 26 third quarter conference call. With me today are Jamere Jackson, Chief Financial Officer and Brian L. Campbell, Vice President, Treasurer, Investor Relations, and Tax. Regarding the third quarter, I hope you had an opportunity to read our press release and learn about the quarter's results. If not, the press release, along with slides complementing our comments today are available on our website at www.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them.

To start out this morning, I want to thank our more than 130 thousand incredible AutoZoners across the company for their commitment to delivering on the first line of our pledge, which is to always put customers first. Our results and performance begin with us asking, what does the customer need and how can we exceed those needs and do it more efficiently? And it is our AutoZoners across our stores and our supply chain who deliver on this commitment every day. This past quarter, their efforts allowed us to deliver sales growth of plus 8.4%. The largest we have reported since Q2 of FY 23. Simply put, we are growing.

We are opening more stores than we have in many, many years, and we continue to gain market share. Congratulations AutoZoners. Let's keep delivering Wow customer service. To start this morning, we will address our sales results and provide an update on our growth initiatives. We will also discuss our domestic and international results and break down our domestic sales results between traffic and ticket growth to address what inflation has meant to both our ticket and sales growth. We will also share regional performance and give an outlook on how we expect the last quarter of the year to play out as we enter our summer selling season.

For the third quarter, our total sales grew plus 8.4%. it is an acceleration from the first half of the year. While earnings per share increased plus 7.7%. Similar to our experience in the first half of the year, our gross margin, operating profit and EPS were negatively impacted by non-cash $20 million LIFO charge. As a reminder, during last year's Q3, we recognized a $16 million LIFO credit which favorably impacted operating profit and EPS. Excluding the LIFO charge of $20 million this quarter, and the $16 million credit last year, our EPS would have been up 12.5% versus last year's Q3. Now let me share a few key highlights from the quarter.

Total company same store sales grew plus 4.9% or I am sorry, 3.9% on a constant currency basis with domestic same store sales growth of 4.1%. Our domestic DIY sales grew plus 2.2% while our domestic commercial sales grew plus 10.4% versus last year's Q3. We are pleased to report double digit commercial sales growth and believe the strong performance will continue as we move forward even as we cycle tougher comparisons to Q4 of last year. International same store sales were up plus 1.6% on a constant currency basis. And our unadjusted international comp was plus 16.6% as exchange rates positively impacted our comps by 1.49 thousand basis points.

We opened 82 stores globally this past quarter to finish with 6.77 thousand US stores, 33 Mexico stores, and 157 Brazil stores. We are on track to open approximately 365 stores for the full year versus the 305 stores we opened globally last year. We continue to be very pleased with our sales productivity we are generating out of our new stores and their sales results are exceeding our pro forma expectations. Next, let me address our sales results in a little more detail. Coming into the quarter, we were optimistic that our domestic store execution would drive sales growth for both retail and commercial.

Regarding our plus 4.1%, quarterly domestic same store sales, the cadence was 5% in our first 4 weeks, 4.5% in our second 4 weeks and 2.9% over the last 4-week period of the quarter. Now let me address the last 2 weeks a little more specifically. Those 2 weeks were softer than the rest of the quarter with comps of 1.3%. This slow down in sales was caused by unseasonably cool weather impacting our heat related categories which normally begin to ramp this time of year as summer heat begins to take hold. This affected both DIY and commercial.

Our domestic comp was solid, up plus 2.2% versus last year, and an acceleration versus the plus 1.5% in Q2 as we continue to gain market share. I am very pleased with what we are seeing in terms of market share gains and we continue to exit well in this environment. Regarding our plus 2.2% DIY comp for the quarter, we experienced a positive 2.4% comp in the first 4-week segment a positive 3.4% comp in the second segment, and a 0.8% comp during the third segment. As noted, the last 4-week segment was our weakest performing segment which was driven by the very mild weather in certain markets. Those markets have historically been warmer at this time of year.

And the cooler temperatures led to a lower key volumes in key categories like air conditioning, starting, and charging. For the quarter, we felt we benefited marginally from higher than usual income tax refund season along with share gains and solid execution. Regionally, our results were solid overall. With the strongest results in the West, Midwest, and the Northeast. We expect to have solid DIY performance over the coming upcoming summer. With regards to inflations, impact on DIY sales, we saw like for like same SKU inflation just north of 7% for the quarter, which contributed to our DIY average ticket being up 5.6%. The difference between the like for like inflation and ticket growth was attributable to product mix.

We expect the average ticket for the fourth quarter to be in the mid-4% range as we begin to lap the inflation ramp from the beginning of fourth quarter of last year. For the last quarter, we also saw same store DIY traffic count -3.6%. A similar decline to our second quarter where we were down in the mid-3% range. Next, I will touch on our domestic commercial business. As I mentioned, our commercial sales were up plus 10.4% for the quarter. The first 4-week segment grew at 12.7%. The second 4-week segment was plus 9.1%, and the third 4-week segment grew at plus 9.6%. We feel very good about how we are performing as we head into Q4.

Our commercial sales results continue to be driven by our improved satellite store inventory availability, significant improvements in hub and mega hub coverage, the continued strength of our Duralast brand, and execution on our initiatives to improve speed to customer and delivery services. These initiatives are delivering share gains and give us confidence as we move into the summer months. Both the year over year inflation on a like for like same SKU basis for our commercial business and our average ticket growth were similar to DIY. North of 7% for SKU inflation and 6% for ticket average. Our average transaction growth was 2% for the quarter and similar to last quarter.

We believe that there are opportunities to grow market share and accelerate transaction growth with both with smaller up-and-down-the-street customers and national accounts. As we are significantly underpenetrated in commercial and we are gaining share. Adding a little more color, both up-and-down-the-street customers and national accounts grew double digits. Now let me take a moment to discuss our international business. Across Mexico and Brazil, we now have 1.09 thousand international stores. As I mentioned, our same store sales growth grew plus 1.6% on a constant currency basis. Driven by a continued soft macro environment. For Q4, we are expecting same store sales to be in a similar range as Q3.

While these economies have slowed, we are continuing to grow share. When these economies improve, we expect our sales to reaccelerate as we continue to invest in stores and distribution centers. Today, approximately 14% of our total store base is outside of The US, and we expect this number to grow as we continue our international store build out. We have confidence in our international markets as their returns on capital even with slower sales growth are strong. In summary, we have continued to invest capital in driving traffic and sales growth. While there will always be tailwinds and headwinds in any quarter's results, what has been consistent is our focus on driving sustainable, long term results.

We continue to focus on flawless execution, improving product assortments in stores and online, and driving efficiency in our supply chain. All of these efforts position us well for future growth. We are committed to investing both CapEx and operating expense to capitalize on these opportunities. This year, we are investing nearly $1.6 billion in CapEx to drive our strategic growth priorities and we expect to invest a similar amount next year. The majority of our investments are in accelerated store growth, including hubs and mega hubs, which place more inventory closer to our customers and are reducing time to serve for both DIY and commercial customers.

The performance of our accelerated store investments are better than our original forecasts, which allow us to achieve our return goals sooner. We are laser focused on generating the returns you expect from AutoZone. Lastly, we will continue to invest in technology to improve our customer service model and our AutoZoners' ability to deliver on our promise of Wow customer service. This is a great time to invest in our business as we believe industry demand will continue to be strong, but we will continue to manage our investments with an expectation to achieve strong returns on invested capital. Now I will turn the call over to Jamere Jackson.

Jamere Jackson: Philip, and good morning, everyone. Our operating results remain strong for the quarter and were highlighted by solid top line revenue. Total sales were $4.8 billion and were up 8.4% versus Q3 of last year. This is the largest increase we have had in over 3 years and reflects our focus on accelerating growth. Our domestic same store sales grew 4.1% and our international comp was up 1.6% on a constant currency basis. Total company EBIT was up 6.6%, and our EBIT was up our EPS was up 7.7%.

Excluding our noncash $20 million LIFO charge in this year's quarter, and the $16 million LIFO credit in last year's quarter, EBIT would have grown 11% and our EPS would have grown 12 and a half percent. Foreign exchange rates positively impacted our results for the quarter, For Mexico, the peso strengthened almost 13% against the US dollar versus last year's Q3, resulting in a $74 million tailwind of sales a $20 million tailwind to EBIT, and an $0.83 a share benefit to EPS. We continue to be proud of our results as the efforts of the AutoZoners in our stores and distribution centers have enabled us to continue to grow our business.

Let me take a few moments to elaborate on the specifics in our P&L for Q3. First, I will give a little more color on sales and our growth initiatives. Starting with our domestic commercial business for the quarter. Our domestic DIFM sales were $1.4 billion up 10.4%. Our domestic commercial sales represented just under 34% of our domestic auto parts sales and 29% of our total company sales. Our average weekly sales per program were $18.5 thousand up 4.5% versus last year. This quarter, we opened 46 net new programs. We finished with 6.36 thousand total programs and we have our commercial program at 94% of our domestic stores.

Our commercial acceleration initiatives are continuing to deliver strong results as we grow share by winning new business increasing our share of wallet with existing customers. Mega Hub stores remain a key component of our current and future commercial growth, We opened 14 mega hubs in the quarter, we now have 156 mega hub stores. We expect to open approximately 15 Mega Hub locations in the fourth quarter which will bring our FY totals FY 2026 totals to 38. As a reminder, our Mega Hubs typically carry over 100 thousand SKUs, drive a tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores.

The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business as these larger stores give our customers access to thousands of additional parts across the market. I mentioned a moment ago that our average commercial weekly sales per program grew 4.5%, So 156 mega hubs continue to drive growth at an even faster clip. We continue to target having approximately 300 mega hubs at full build out and expect to open at least 40 in FY 2027. Our customers are excited by our commercial offering as we have deployed more parts in local markets closer to the customer while improving our service levels.

On the domestic retail side of our business, our DIY comp was up 2.2% for the quarter. Our DIY shares remained strong behind our growth initiatives, and we are well positioned for future growth. Importantly, the market is experiencing a growing and aging car park, and a challenging new and used car sales market for our customers which continues to provide a tailwind for our business. These dynamics ticket growth, growth initiatives, and macro car park tailwinds, we believe, will continue to drive a resilient DIY business environment for the remainder of FY 2026. I will say a few words regarding our international business. We can continue to be pleased with the progress we are making in our international markets.

During the quarter, we opened 20 new stores in Mexico to finish with 933 stores. And 5 new stores in Brazil ending with 157. Our same store sales grew 1.6% on a constant currency basis, and 16.6% on a nonadjusted basis. While sales growth has slowed over the last few quarters in Mexico due to the slower economic growth in the country, we have continued to manage our P&L appropriately in this environment. We are also continuing to grow share we are well positioned when the economy improves. We remain committed to investing in international expansion And as we accelerate the store opening pace, we are pleased with our results versus our forecast in these markets.

As we look ahead, we are bullish on international being an attractive and meaningful contributor to AutoZone's future sales operating profit, and return on invested capital. Now let me spend a minute on the rest of the P&L and gross margins For the quarter, our gross margin was 52.2%, down 57 basis points versus last year. This quarter, we had a $20 million LIFO charge or a 77-basis-point unfavorable LIFO comparison to last year. Excluding the LIFO comparison, gross margins were up 20 basis points versus last year as we offset a significant rate headwind from the mix shift to a faster growing commercial business.

As I mentioned, we had a $20 million noncash LIFO charge in Q3 and a year to date total of $177 million. We are planning a LIFO charge of approximately $30 million for the fourth quarter as we are continuing to experience higher costs that impact our LIFO layers. The $207 million in LIFO charges that we expect for fiscal 26 compares to $64 million last year. Moving on to operating expenses. Our expenses were up 7.6% versus Q3 last year as SG&A as a percentage of sales leverage 25 basis points driven by strong top line sales growth, solid expense management. On a per store basis, our SG&A was up 3% compared to last quarter's 4% increase.

We would expect the SG&A per store and total growth to be in a similar range in the fourth quarter. For Q4, we expect to open approximately 160 stores globally versus 141 last year. And for the full year, we expect to open approximately 365 stores versus 305 new stores opened in FY25. We remain committed to being disciplined on SG&A growth and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L. EBIT for the quarter was $924 million up 6.6% versus the prior year. As I previously mentioned, a noncash LIFO charge reduced our EBIT by $20 million.

Adjusting for the unfavorable LIFO comparison, EBIT would have been up 11% versus the prior year. Interest expense for the quarter was $110 million, flat with a year ago, as our debt outstanding at the end of the quarter was essentially flat versus a year ago. We are planning interest at $152 million for the fourth quarter of FY 26 versus $148 million last year. For the quarter, our tax rate was 21.1% up from last year's third quarter of 19.4%. Excluding the benefit from stock option exercises our tax rate for the quarter was 21.6% versus 22.4% last year. This quarter, the rate benefited approximately $4 million from stock options exercised versus a $23 million benefit last year.

For Q4, we suggest investors model us at approximately 22% all in. Moving to net income and EPS. Net income for the quarter was $641 million up 5.4% versus last year. Our diluted share count of 16.9 million was 2.1% lower than last year's third quarter. The combination of higher net income and lower share count drove our earnings per share for the quarter to $38.07 up 7.77.7% versus last year. As a reminder, LIFO drove our EPS down 91¢ a share. Now let me spend a moment on our free cash flow. For the third quarter, we generated $455 million in free cash flow versus $423 million in Q3 last year.

Year to date, we generated $1.1 billion in free cash flow. Going forward, we expect to continue being in an incredibly strong cash flow generator and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong and our leverage ratio finished at 2.5x EBITDAR. Our inventory per store was up 6% versus Q3 last year, while total inventory increased 10.8% over the same period last year driven by new stores additional inventory investment to support our growth initiatives, and inflation.

Net inventory, defined as merchandise inventory less accounts payable on a per store basis, was a negative $107 thousand versus a negative $142 thousand last year and negative $105 thousand last quarter. As a result, accounts payable as a percentage of inventory finished the quarter at 111.1% versus last year's Q3 of 115.6%. Lastly, I will spend a moment on capital allocation and our share repurchase program. We repurchased $586 million of AutoZone stock in the quarter. And at quarter end, we had $800 million remaining under our share buyback authorization. Our ongoing strong earnings balance sheet, and powerful free cash generation allow us to return a significant amount of cash to our shareholders through our buyback program.

We bought back over 100% of the then-outstanding shares of stock since our buyback inception in 2 thousand. While investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts of cash to shareholders. So to wrap up, we remain committed to driving long term shareholder value by investing in our growth initiatives driving robust earnings and cash, and returning excess cash to our shareholders. Our strategy continues to work as we remain focused on gaining market share improving our competitive positioning in a disciplined way.

And as we look forward to the remainder of FY 26, we are bullish on our growth prospects behind a domestic commercial business that is growing share in a meaningful way. We continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders. Before handing the call back to Philip, I wanna remind you that we review comps on a constant currency basis to reflect our operating performance We generally do not take on transactional risks, so our results primarily reflect the translation impact for reporting purposes. As mentioned earlier in the quarter, foreign currency resulted in a tailwind to revenue and EPS.

If yesterday's spot rates held for Q4, then we expect an approximate $62 million benefit to revenue a $19 million benefit to EBIT, and a $0.78 a share benefit to EPS. Lastly, in Q4, we expect LIFO to reduce EBIT by approximately $30 million, impact our gross margin rate negatively by 45 basis points, and our EPS by approximately $1.40 a share. And now I will turn it back to Philip.

Philip Daniele: Thank you, Jamere. To wrap up this morning, I want to stress that we are on track for delivering our objectives for fiscal 26. While we continue to invest in our business, we remain committed to flawless execution and appropriately spending our capital to drive growth and efficiency. We feel we are well positioned to grow both our domestic do it yourself business as well as our commercial sales. We also feel that our international same store sales on a constant currency basis will improve, but we remain cautious for this upcoming fourth quarter as the consumers and our international markets remain under pressure.

We also expect to manage our gross margins effectively while growing our operating expenses in line with accelerated store opening assumptions. Finally, I want to reiterate that we are putting our capital to work where we will have the biggest impact on sales and profitability. Our AutoZoners our stores, our supply chain, and we are investing in technology to build a superior customer service experience. We will make sure that the capital we deploy produces strong returns. The stores we have opened over the last 5 years continue to exceed the planned sales and earnings we modeled when these stores were originally approved. The top focus for our fiscal 26 remains growing share in our domestic commercial business.

We do understand that we cannot take things for granted. We must remain laser focused on customer service, execution, and gaining share in every market in which we operate. We are excited about what we can accomplish for the last quarter of the fiscal year. And our AutoZoners are committed to delivering on our goals. We believe AutoZone's best days are ahead of us. Now we would like to open the call for questions.

Operator: Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. We do ask to please limit yourself to 2 questions. If you have any additional questions, you may reenter the queue by pressing 1. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 1 moment, while we poll for questions. Your first question for today is from Bret Jordan with Jefferies. Hey, good morning, guys.

Good morning, Bret.

Jamere Jackson: Good morning, Bret.

Analyst (Bret Jordan): Could you refresh us on how you see same SKU inflation in the second half of 2026 and obviously some concerns around supply chain and lubricants Are there are there drivers that might push it up more than expected?

Philip Daniele: Yeah, it is a great question. As we mentioned a minute ago, we think the inflation rates and ticket average rates will probably be that probably 4% range. So we still think that inflation A little more muted than they were in Q3. on a same SKU basis will continue into Q4. You know, the issue around lubricants, I know there is a lot of noise out there. We are going to leave that up to the oil specialist to really say what that means. We think there is probably gonna be some constraints, but we do not think that it is going to be that material. Okay.

Jamere Jackson: And then I guess 1 of your peers seems to be cutting back on national account business a little bit. Is that something that you are seeing a lot of incremental opportunity in? And could you remind us maybe sort of the profit spread between national accounts and up and down the street? Yeah. We I mean, we are undershared in commercial in total. that is both in national accounts, what we call up-and-down-the-street, and many other segments that we compete in. National account business is growing pretty strong for us as well as the up-and-down-the-street consumer. We like both of those segments, and we think we have opportunities to grow share in both of them.

Know, yeah, there is a little bit of a spread between the 2, but both of those are great businesses. We think there is opportunity for us to gain share in both of them. Like I said, both of them last quarter grew double digits. Great. Thank you.

Operator: Your next question is from Steven Zaccone with Citi.

Analyst (Steven Zaccone): Question. I wanted to drill down on your expectations for fourth quarter same store sales. Obviously, there is some weather impact here at the end of the third quarter. So just help us understand have you seen an improvement now as you have gotten later into May? And then how do we think about your expectations for the fourth quarter specifically on the domestic side?

Philip Daniele: Yes. We I mean, there is not a whole lot of change from what we just talked about. We are We generally release our numbers so soon as our quarter ended. You know, I would say that May has been a little bit cooler, but I think we are expecting a normal, if not hotter than normal, summer based on the prognostication of all the weather geniuses out there. Do not think that is what we are. But we are expecting a normal summer And, you know, I will go back to what we have talked about. We think our initiatives are strong and they are the right initiatives for us. We think our execution is great.

And improving day in and day out. We opened up a lot of new stores and, you know, this past quarter, we opened up 14 additional mega hubs. Which helped us out significantly both on the commercial side and on the DIY side. We are gonna open another, you know, 14 or so mega hubs this next quarter. So we are expecting to have a pretty normal increase in our summer months to volume, and that should bode well for us. Okay. Thanks for that detail.

Jamere Jackson: The follow-up I had is just on the gross margin side. Obviously, continue to be strong on the core gross margin line. Should we expect that to perform in the fourth quarter? Yes. I mean, we continue to perform very well from a gross margin standpoint. In this quarter, we had probably 42 basis points of gross margin improvements that offset a commercial mix drag of about 22 basis points. And we saw positive, you know, merchandise margins Our shrink's improving. Our supply chain productivity is improving. So you know, we are expecting to have a pretty solid fourth quarter as well. With similar kinds of dynamics.

I will say that the growth rates that we are expecting from commercial relative to DIY will put a little bit more of a mixed drag on. So we are working very hard to offset as much as that as we can with other margin improvements. Okay. Thanks for the detail. Hopefully, the weather prognosticators are right about summer.

Operator: Your next question for today is from Christopher Horvers with JPMorgan.

Analyst (Christopher Horvers): Thanks. Good morning, guys. So Good morning. You know, as you as you as you step back, you had stimulus. You had what was 1 of the probably the best winter since 2014? Appreciative that and you had this big inflation numbers. As is there anything that you look at underneath the covers to say, like, there is an impact from energy prices, that is being more of the issue than the near term weather dynamics.

And as you think about the back half of the calendar year, it looks like you are sitting at around a 4% leverage point What can you do, to control the expenses to the extent that there is something you know, more weakness going on the DIY side of the business especially as you lose those inflation tailwinds.

Philip Daniele: I would say, I think you are right to call out that we had a pretty normal or good winter You know, as we mentioned, our results across the company were stronger out west and in the Midwest and the Northeast. Which that is kind of an indication. And we see it in the categories. that is an indication that we got the winner that we would have liked and that has historically been good for us through the summer months in those categories, undercar categories, brakes, etcetera. We are expecting a normal, if not hotter than normal, summer And those all bode pretty well for us.

Again, I will go back to what we think we are doing, which is we are opening up really productive new stores. Our stores that have been in place with the support of mega hubs and hubs. And our improved performance across both DIY and commercial customer service are helping us across the board We are gaining share on both sides of our business. And I think that is going to continue.

Jamere Jackson: And I just say on the cost front, I mean, we are continuing to manage the business with, discipline. So in addition to growing very strong on the top line, we are focused on expense management in the middle. We continue to invest in our new stores and maintaining high levels of customer service. But we are also continuing to drive productivity initiatives inside the company. And we expect those dynamics to continue in the fourth quarter and into the back half. So as the, you know, the comps, move associated with what we see in the market dynamics, we are anticipating that we will manage our SG&A accordingly.

Analyst (Christopher Horvers): And then jumping back to the inflation side, you do import more than some of your peers, especially with the private label penetration. That you have. 1 of your peers talked about you know, some of their vendors talking about increases related to energy prices in resin. You also have the steel tariffs. So are you seeing those price pressures now? Why would not the inflation outlook be better in the back half of the calendar year versus maybe what you thought 3 and 6 months ago?

Philip Daniele: Yeah. I think the I mean, there could be additional costs that are con that are that are coming in on various fronts. But at the end of the day, those tariffs that are on steel and automotive parts have been in place for quite some time. The inflation ramp that we saw started last year in what would be our Q4, which is the time frame that we are entering. So yes, I think some of the cost from tariffs, etcetera, are still coming in. As we cycle through that inventory.

So there will be some improve or increase in inflation, but it will be slightly muted as we are now lapping some of the higher inflation rates from last year. Yeah.

Jamere Jackson: I would characterize it as, you know, this is a pretty fluid situation as it relates to energy and oil, in particular. it is gonna impact suppliers and retailers differently. What I will say about us is that we are managing the situation with our suppliers and with our customers, and you know, we expect the environment to continue to be inflationary. The extent to which we will learn as we move forward. And we will manage the business accordingly in terms of what we do with pricing. And we will be very transparent about what we are seeing in our tickets. Understood. Have a great summer. Thank you.

Operator: Your next question is from Brian Nagel with Oppenheimer.

Analyst (Brian Nagel): Good morning, Brian. But first question I want to ask, as we look at the ongoing rollout of your mega hubs, You know, so maybe a couple questions within this. Mean, 1, you know, we talk about the latest mega hubs you are opening, the performance of those. I mean, how are those performing versus, you know, some of the maybe latest event big hubs? And then, you know, you have other you have competitors out there now talking about a similar strategy. You know, they now they may be even using similar terms.

I guess, I want to as you are as you are rolling out and continue to expand your mega hub, effort, are you seeing any type of competitive headwind there as others are, some say, emulating the strategy?

Jamere Jackson: Yeah. I would say that we have got a very robust pipeline for mega hubs. I mean, we have over 100 mega hubs currently in the pipeline today. We talked openly about our plan to get to nearly 300 mega hubs near term. And quite frankly, as our commercial business continues to grow, you know, there is a very distinct possibility that we would even exceed that number. They are continuing to outperform our expectations. You know, the combination of the demand for parts in the marketplace the customer's desire for us to have those parts closer to the customer so that we can provide a better service level is really what is fueling our strategy.

So while, the competitive dynamics are such that others are sort of mirroring that strategy, You know, we think that our strategy is being executed appropriately. And it has not been muted or impacted at all by what others are doing in the marketplace. Frankly, those hub the hubs and mega hubs continue to perform year over year. We really like the productivity of both those boxes and that inventory and the asset we can put around there to help energize that inventory in those hubs and mega hubs continues to be more productive as we find more innovative ways to get that product to the customer, both DIY and commercial, faster and faster. that is very helpful.

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I appreciate all the color.

Analyst (Brian Nagel): My follow-up question, maybe not a totally fair 1, but just looking at the sales performance through the quarter, which you called out this, the slower trend later in the fiscal quarter. It makes a lot of sense that the weather impact of that. As you look at the data, I mean, what gives you confidence that it was indeed cooler weather versus some type of, like, tailing off, if you will, on the tax refund benefit?

Philip Daniele: Yeah. it is it is pretty clear when you look at the categories, you can see it. We you know, like I said, you know, air conditioning is a great example. it is just been cool in May. Significantly cooler than last year, and it is been relatively wet. That will change and we will expect those categories to respond accordingly. So if you look at where it where it is been cool and where it is been wet, you can direct you can see a direct correlation to the category comp year over year and the trend changes.

And, again, that we believe that is going to continue, going to change pretty rapidly here as we move into the summer months. And, you know, all of everything that you look at from the weather prognosticators is gonna say this is going to be a pretty hot summer. And that should bode very well for us. And I would say we are well prepared for it too. We are in great shape. Much appreciated. Thank you.

Operator: Your next question for today is from Seth Sigman with Barclays.

Analyst (Seth Sigman): Guys. Good morning. Thanks for taking the question. I wanted to ask about expenses, have come in a little bit lower over the last 2 quarters. Versus the elevated plan that you had laid out last I think it was Q4. The question is, are you investing at a slower pace? Or are there just more offsets than you anticipated? I am just trying to think about whether SG&A will have to reaccelerate at some point or we have really passed the worst. Thank you.

Jamere Jackson: Yeah. We do not, anticipate a reacceleration in SG&A. Again, the big driver in the early part of the year was lapping the load in of new stores that we had in the back half of last year, which did put a couple points of pressure on our SG&A growth rates. As we move through the year, we have got a more normalized year over year comparison And now you are seeing us, you know, have SG&A and SG&A per store in line with what we have done historically.

And the other dynamic I will say is that, you know, we are continuing to work productivity very hard inside the company like we always have. it is a muscle that you know, even as we have been growing our business, we have continued to focus on opportunities to drive productivity and efficiencies really across all of our functional areas. The teams are doing a really good job. We have got a pretty robust playbook of cost and expense initiatives. And that is helping us manage SG&A in a meaningful way and have good cost management as we move forward. Okay. Perfect.

Analyst (Seth Sigman): Thank you. And then my follow-up question is on inflation and the expectation that it will moderate in Q4 and into next year. I guess it was asked a couple of different ways, but I am just trying to think about some of the offsets, whether it is transactions or maybe mix accelerating. Like how do you think about these drivers? Has mix been a meaningful negative over the last 12 months? And how do you see that improving maybe to help offset less inflation? Thank you.

Philip Daniele: Yeah. We have not seen I mean, our mix has been relatively stable. You know, we kind of look at our mix between what we call discretionary maintenance and failure. And the maintenance and failure businesses over quite a while have been have been relatively stable as a percent of sales. They will move around a little bit, but relatively stable. it is kind of the beauty of this industry is it is pretty inelastic. Most of it is break fix, and you have got maintenance that has to be done. Consumers can defer it for some period of time, but if they do that, then they have a larger failure which costs more money.

So that number has been those numbers have been pretty flat. Not a lot of shifts between them. And we think that is probably going to continue. Okay. Thanks, guys.

Operator: Your next question is from Michael Lasser with UBS.

Analyst (Michael Lasser): Good morning. Thank you so much for taking my question. Now when we look at your good morning, Philip. When we look at the performance of AutoZone versus some of the other competitors, in the marketplace. We obviously need to take into account that the calendars line up differently, the mix of the businesses line up differently. But simply speaking, when we compare your performance versus some of the others, we had been accustomed to AutoZone significantly outperforming the others. And now that spread is a bit more narrow.

Is that a signal that some of the low hanging fruit or the bulk of some of the market share gains that had happened in the wake of expanding parts availability and service are now behind AutoZone, or is there an opportunity to accelerate some of those share gains from here, and what would drive an acceleration in the share gain?

Philip Daniele: We great question. Michael. And I think the way we look at it is we have an opportunity to gain share both on the DIY side of our business and on the commercial side of the business. Our execution has improved. Our assortments are improving. You know, we are we are literally, as Jamere mentioned, we are only about halfway through our hub and mega hub expansion strategy. And those will help us both on the DIY side of the business and the commercial side of the business. And our execution continues to improve, and we have strategies that will help our execution improve even more.

We look at things from an execution perspective, our turnover in stores is back down to historic levels, historically low levels Our supply chains are gaining efficiency. We are getting better service to our commercial customers out of our hubs. And our mega hubs and our satellite stores. We continue to improve on our delivery times. All those things point to better execution, and we think the opportunity to gain share specifically on the commercial side where we are still you know, roughly 5% of the market share opportunity that is out there. So we think we have pretty good opportunities on both sides of the business.

Jamere Jackson: And I think the thing that, I really amplified from your comments Michael, is the fact that you know, if you look at a lot of our near end competitors, have a much higher mix on the commercial side of the business. You know, right now, our domestic commercial business is about 34% of our mix which is why we are so focused on growing the commercial business. It is growing faster. We have got a significant number of opportunities there. And so we have continued to double down on hubs and mega hubs We have doubled down on assortment. We have doubled down on the quality of our Duralast brand, putting up professional sales force in the field.

It is why it is our number 1 growth priority. So as you look at, you know, sort of that performance that you are seeing, you know, amongst the competitive set, that difference in the mix is why we are so focused on what we are focused on from a from a commercial standpoint. And that strategy is working. I mean, Philip mentioned the fact that we are growing double digits with both national accounts and up and down the street customers. That is, meaningful progress for us. Moving forward. And pretty excited about what it means for us as we move through the fourth quarter of next year. Understood. Thank you very much.

Analyst (Michael Lasser): My quick follow-up question is the message that you have been offering for some time now is you are deploying a lot of capital to make this a faster growing top line business, which then in turn can drive equal to or better EPS growth over time. So in light of the last couple of quarters where there is been a weather disruption to the comp that is created a little bit of noise, are you still of the view that this can be a faster top line growth story over time?

And if there is something that interrupts that, do you have the ability to flex your SG&A I think there was a mention of that earlier in the conversation. To, con to sustain the EPS growth under a variety of scenarios for your same store sales growth. Thank you.

Philip Daniele: Yeah. I think, Michael, to that to that point, our SG&A control has been a strength of this company for a very long period of time. Obviously, the SG&A that goes along with a new store opening or something of that nature is once you start the investment in the store, that is going to materialize. But we have always had the ability to manage our SG&A, payroll expenses related to store to sales growth, and that is where that sort of thing very, very well for a long period of time. And I think as we showed this past quarter, we continue to be able to do that.

And as we look at these investments that we are making as we said, in our prepared remarks, the performance that we placed on our stores when we originally approved them are fairly conservative and we are outperforming those performance. The stores are indexing higher than we initially said. Our commercial programs are continuing to perform slightly better than we would have thought. And we think all of that will help us return or produce those returns at a faster rate. Over time. Very helpful. Thank you so much and good luck. Thank you, Michael.

Operator: Your next question for today is from Simeon Gutman with Morgan Stanley.

Analyst: Hi, good morning. This is Skyler Tennant on for Gutman. Thank you for taking our question. So is it reasonable for us to assume that with new stores and the maturation curve, a sustainable level comp growth would be around that 4% plus level into the future?

Jamere Jackson: Yeah. I think if you look at where we have been historically, and you look at what the new store load in actually looks like, particularly as we get to 300 new stores domestically You are gonna get a much bigger, comp waterfall from those new stores than we have historically. So you know, in that in that 4% ZIP code is where we need to be or better to, drive the kind of returns on capital.

And, you know, 1 of the things that we have we have said and we have been very, very clear on is that the combination of the new stores plus the accelerating commercial business that we have is what has us, bullish about a faster growing business in the future. And faster growing business is actually gonna be a higher returning business as well for us. Great. Thank you. And then zooming in on fiscal year 2027, given some of the inflationary trends and that maturation curve, can we assume comps get to a level closer to 5%? By then? Thank you.

Obviously, we do not obviously, we do not guide in that in that manner, but I think qualitative qualitatively, what we will say is that you know, we are expecting continued progress in terms of growing our domestic commercial business. We have got a very resilient DIY business. And at some point, we will have a snapback or a rebound of our international business and, you should see our business growing faster.

And then you combine that with as you mentioned a little bit earlier, you combine that with you know, the fact that we are continuing to drive new store growth that is above our historical average and the fact that they are performing better than they have historically, you know, that sets us up very nicely for a very FY 2027, and we will talk a little bit more about that as we get to our fourth quarter call. Great. Thank you, and good luck.

Operator: Your next question is from Kate McShane with Goldman Sachs. Hi, good morning.

Analyst: Thanks for taking our questions. We wanted to ask about some of the dynamic between the national account and up and down the street. Could you just remind us what the gross margin headwind there is, as you pursue national accounts versus up and down the street? And then second to that, within SG&A, can you talk about the SG&A investment needed to pursue national accounts versus the up and down the street customers? We just wondered how the return would compare.

Jamere Jackson: So on the on the SG&A front, I mean, there is really no difference in terms of, you know, how we manage the SG&A for national accounts versus up and down the street customers. You know, we have a very efficient Salesforce. We have a very efficient operations team that is, you know, sort of managing that business within the construct of where we are. So there is not a meaningful difference in terms of where we are. On the SG&A front. And then, you know, from a gross margin standpoint, what we have said is that the national account business is always very, very competitive. They are our most sophisticated customer set out there.

They have scale that you would you know, expect them to, you know, want to negotiate things like pricing and service levels, and we have done that. And still been able to earn very good returns on that on that business. So we do like the national account business, as Philip said. We like the margin profile associated with the national account business. And the most important point to all of that is that we are underpenetrated. We are underpenetrated with national accounts. We are underpenetrated with up and down the street customers. And this is an opportunity for us to grow our business in a meaningful way. Thank you.

Operator: Your next question for today is from Scott Ciccarelli with Truist. Good morning, guys.

Analyst (Scott Ciccarelli): I Good morning. I guess the question is if same good morning. If same SKU inflation steps down by, call it, 250 or 300 basis points, in your fiscal fourth quarter. Why would not your domestic comp growth slow down by a similar amount? Know you are gonna gain share over time, but, like, at least in the near term, is that the way people should be thinking about from a modeling perspective?

Jamere Jackson: I think you got a couple dynamics there. We are lapping the same SKU inflation that was caused by tariffs. In the fourth quarter of last year. So you have also had other inflationary impacts that have impacted the business at the same time. So the big reason for the step down is not that know, there is something dramatically happening different in the market. it is just that you are lapping that big, step up that we had in the fourth quarter of last year. Think when we look at the business overall, here are the things that we like.

We like the fact that our commercial business is growing, and it is gonna grow just from ticket, but it is gonna grow from transactions. We like the progress that we are making with our DIY shares. We have also seen traffic be down in the in the mid threes over the last couple of quarters or so. And it and as we continue to gain share and as the uncertainty associated with the consumer in some instances, is impacted, things like discretionary categories, there is an opportunity to grow transactions as well.

So you know, I would not have a direct read through that says that the lapping of the of the inflation toward the craters comps, there are lots of things that are driving our comp expectations as we as we move forward. I agree with that.

Philip Daniele: And I think to that point of again, we continue to gain share and we have really low share on the commercial side of the business. And we think all that sets up well for us. And we have we are working very hard with our initiatives both on the DIY side and the commercial side of the business. To continue to gain share. And we think we can overcome that.

Analyst (Scott Ciccarelli): that is helpful. And then what is the comp waterfall contribution today just so we can better understand how the go forward contribution might be? Thanks.

Jamere Jackson: Yeah. I mean, we have not, shared it specifically. And, obviously, it varies based on the mix of stores. But mean, very simplest very simply, you know, we get outsized comps associated with the new stores. And as we have accelerated those, that new store is going from, you know, for example, in the in the domestic side of our business from 150 to 200-plus and you are getting more of a contribution from those new stores than we have historically.

So I think if as we think about our business going forward, the combination of those new stores and what you naturally get in terms of comp acceleration and the fact that we are growing market share is know, what gives us the confidence around comp acceleration as we move forward. And to be clear, this is you know, this is the real reason for the strategy that we had associated with accelerating the new stores. We saw a share a market share opportunity We saw an improvement in the unit economics because our commercial business is growing. that is gonna ultimately result in, you know, you know, faster growing comps for us.

We have got a lot of confidence in that strategy, and we are executing on it. And we are about halfway through to where we said we would be in FY 2028, and the performance has been exceeding our expectations. Great.

Operator: Thanks, guys. Thank you. Your next question is from Michael Lasser with UBS.

Analyst: Okay. Thanks. A couple of follow ups. I guess, you said that the new store performance is better than expected, and I think you said on the commercial side, but anything else driving that better performance in those stores? Talk about, please, the DIY side and also expenses, which I think, as someone alluded to, have been coming in better than expected.

Philip Daniele: Yeah. I would say that and I will let Jamere speak on the new stores too, but they are performing better on commercial and DIY. When we when we approve a store, we kind of look at we set up a pro forma. We look at both the DIY performance and the and what we expect the commercial performance, and we index against both of those. And in total, stores are performing better on both the DIY side and the commercial side than when those stores were originally approved. And, you know, that performance index takes into account SG&A per store, etcetera.

Jamere Jackson: So we like the performance. We are pretty conservative in those approvals. But, you know, all the initiatives that we have in place around you know, like Jamere just mentioned a minute ago, hub performance, mega hub performance, in store productivity initiatives, sales initiatives, commercial initiatives, all help per box performance. And we like the initiatives that we have in place, and we think they will continue to make us a stronger business in the future.

Analyst: Got it. Okay. Makes sense. And then again, you know, just to follow-up again, it is been asked a couple of times, but maybe I will ask it. Another way. I think the easy perception here is that as you start to cycle the inflation from last year, comps will slow. But just to be sure we have the right message, you do not necessarily think comps slow. This is domestic comps I am talking about. You do not necessarily think domestic comps slow. As you lap that inflation because of the comp waterfall and share gains Is that the right interpretation? Is that the right message? Thanks.

Philip Daniele: Yes. I think that is right. Obviously, the inflation becomes a little more muted, but we think that the initiatives we have in place will help us overcome a lot of that. As we move forward. that is correct. Thank you for clarifying.

Operator: Thank you. And I think we have time for just 1 more call. Your next question is from Zack Fadem with Wells Fargo.

Analyst (Zachary Fadem): Hey, good morning, and thanks for fitting me in. So first, could you talk about the performance of the 35-40 new Mega Hubs today and how this cohort of Mega Hubs compares to historical openings in terms of per store sales, returns, comp lift for nearby stores, etcetera?

Jamere Jackson: Yeah. I think 2 things are driving that performance. The first thing that is driving that performance is, again, we have got a much stronger commercial business than we have had historically. And, you know, as we put those mega hubs in the marketplace, you know, the strength of our commercial business allows those mega hubs to come out of the gate. Much hotter than the ones that we put in historically. that is that is first and foremost.

I think the second thing is how we utilize those mega hubs where, you know, we are using those Mega Hubs to go more direct to our customers than we have in the past as opposed to having them you know, you know, be primarily focused on a fulfillment source for of the other stores. So the utilization of the mega hubs the fact that we have got a stronger commercial business are the are the key drivers there. And if you just look at the market dynamics that we see today, parts proliferation, aging vehicles, propensity for DIFM business, you know, those are all demand drivers, if you will, for you know, adding more parts in the local market.

And if we can do that, with the right assortments, and we can, you know, get the parts of the customer faster, then that is a winning formula for us. And you know, we have we have refilled and rebuilt the pipeline and we are pretty excited about what it means for us in the future.

Philip Daniele: Yeah. The only thing I would add to that is we keep we have had these hubs and mega hubs in place for so long. We have had the ability to iterate on them several times and we keep finding you know, the biggest asset in there is obviously the inventory. And how do we get that inventory faster to a customer shortening time to serve for both the DIY customer and the commercial customer, and also, you know, online with things like next day delivery, etcetera. We continue to find ways keep energizing that inventory. And, we are we are not done with that process. We still think there is opportunities there. Got it.

Analyst (Zachary Fadem): And then you mentioned share gains and comp waterfall as future drivers. but if we take your DIY comp minus inflation it looks like the volumes in that business started to decelerate as our same SKU inflation ramped up. So as you think about the current deferral cycle that we are in as a result of inflation, do you think it is fair to assume that DIY volumes could improve simply because we are lapping that initial deferral, which would start, I think, in Q4.

Jamere Jackson: Yeah. I mean, that is certainly a piece of it. I mean, and the way that we see it in terms of the results is that the transaction counts did come down more than they have historically. I mean, we typically have seen sort of low single digit declines in transaction counts. there is not been very many periods where we have seen those transaction account those transaction accounts be down with a 3 handle in multiple quarters. So as we move forward, there is an opportunity for us to see some improvement in transactions and traffic, and that will certainly help us from a comp standpoint. Thanks for the time.

Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Philip Danielle for closing remarks.

Philip Daniele: Thank you. Before we conclude the call, I want to take a moment to reiterate that we have a great business and a strong industry. Are excited about our growth prospects over the summer months of our fourth quarter. But we will take nothing for granted as we understand our customers have alternatives. We have exciting plans that will help us succeed in the future. But I want to stress that this is a marathon and not a sprint. As we remain focused on delivering flawless execution and striving to optimize shareholder value for the future, we are confident that AutoZone will be successful. Thank you for participating in today's call.

Operator: This concludes today's conference, you may disconnect your lines at this time. Thank you for your participation. Thank you.

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