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    AZO
    Earnings call· Feb 2025(Q2 FY25)

    AUTOZONE INC AZO

    Mar 4, 2025 Source

    Executive summary

    AutoZone Q2 FY25 — Strong Commercial Growth and Early Winter Benefit Drive Sales

    AutoZone delivered solid Q2 FY25 results, driven by strong Commercial growth and an earlier start to winter weather. Despite significant foreign currency headwinds impacting reported EPS and EBIT, the company's strategic investments in Mega-Hubs, supply chain, and technology are gaining traction, positioning it for continued market share gains. Management expects sales trends to improve in Q3 FY25 as comparisons ease and growth initiatives gain momentum.

    Highlights

    5

    • Total sales grew 2.4% to $4 billion.

    • Total company same-store sales grew 2.9%.

    • Domestic Commercial sales grew 7.3% and were up 10% on a 2-year stack basis.

    • International same-store sales increased 9.5% on a constant currency basis.

    • Free cash flow generated $291 million, up from $179 million last year.

    Concerns

    4

    • EPS decreased 2.1% to $28.29, with a $1.22 per share drag from unfavorable FX.

    • EBIT was down 4.9%, with a $30 million drag from unfavorable FX.

    • SG&A as a percentage of sales deleveraged 134 basis points, up 6.4% versus last year.

    • Discretionary merchandise categories were down on a same-store sales basis and represented approximately 16% of the mix.

    Guidance & targets

    18
    CategoryTargetConfidence
    Interest expense
    $110 million range
    medium materiality
    High
    FX Impact on Revenue
    $106 million drag
    medium materiality
    High
    FX Impact on EBIT
    $34 million drag
    medium materiality
    High
    FX Impact on EPS
    $1.41 a share drag
    high materiality
    High
    Tax Rate
    approximately 23.2%
    medium materiality
    High
    Tax Benefit from Stock Option Exercises
    significantly less than Q3 last year
    medium materiality
    High
    FX Impact on Revenue
    $101 million drag
    medium materiality
    High
    FX Impact on EBIT
    $37 million drag
    medium materiality
    High
    FX Impact on EPS
    $1.53 a share drag
    high materiality
    High
    FX Impact on Revenue
    $356 million impact
    high materiality
    High
    FX Impact on EBIT
    $118 million impact
    high materiality
    High
    FX Impact on EPS
    $4.82 a share impact
    high materiality
    High
    International Store Openings
    around 100
    medium materiality
    High
    Mega-Hub Openings
    at least 19 more locations
    medium materiality
    High
    Mega-Hubs at Full Build-out
    just under 300
    medium materiality
    High
    DIY Average Ticket Growth
    approximately 3%
    low materiality
    Medium
    SG&A Growth
    in line with sales growth
    medium materiality
    High
    Capital Expenditure
    more than $1 billion
    high materiality
    High

    Segment performance

    9
    SegmentRevenueYoYQoQMargin
    Total Company
    Total sales and EBIT performance for the quarter, with overall same-store sales growth.
    Total company same-store sales: 2.9%
    		$4 billion2.4%—EBIT down 4.9%
    Domestic
    Domestic same-store sales performance, including weekly cadence and 2-year GAAP comps, showing volatility due to weather.
    Domestic same-store sales cadence (first 4 weeks): 4.3%Domestic same-store sales cadence (second 4 weeks): 2.8%Domestic same-store sales cadence (last 4 weeks): -1.2%Domestic same-store sales 2-year GAAP comps (first 4 weeks): 5.7%Domestic same-store sales 2-year GAAP comps (second 4 weeks): -2.1%Domestic same-store sales 2-year GAAP comps (last 4 weeks): 3.2%
    		—1.9% same-store sales——
    Domestic Commercial
    Strong growth in Domestic Commercial business, driven by strategic initiatives and improved execution. Mega-Hubs are a key component of growth.
    2-year stack growth: 10%Percentage of Domestic auto part sales: 31%Percentage of total company sales: 27%Average weekly sales per program: $14,700Average weekly sales per program growth: 4.3% YoYNet new programs opened: 27Total programs: 5,962Mega-Hubs: 111Commercial same-SKU inflation: increased vs Q1Commercial average ticket growth: 0.5%Commercial transactions: growth YoYCommercial sales growth (first 4 weeks): 8.8%Commercial sales growth (second 4 weeks): 5.9%Commercial sales growth (last 4 weeks): 7.1%
    		$1.1 billion7.3%——
    Domestic DIY
    DIY business showed improvement in comps and traffic trends, but discretionary categories remained pressured. Performance was volatile due to weather.
    Traffic trend: down approximately 1%Traffic trend (last quarter): down 1.8%Ticket growth: positive 1%Discretionary merchandise mix: approximately 16%Discretionary merchandise same-store sales: downDIY same-SKU inflation: up slightlyDIY average ticket inflation: up slightlyDIY comp (first 4-week segment): 2.9%DIY comp (second 4-week segment): 2%DIY comp (third 4-week segment): -4.3%Last year's Q2 DIY comp (first 4 weeks): 0.7%Last year's Q2 DIY comp (second 4 weeks): -6.2%Last year's Q2 DIY comp (third 4-week segment): 4.8%
    		—0.1% comp——
    International
    Strong constant currency growth, but significant FX headwinds impacted reported results. Company plans to accelerate store openings.
    Unadjusted same-store sales: -8.2%FX headwind: 1,900 basis pointsPercentage of total store base: just under 13%
    		—9.5% constant currency same-store sales——
    Mexico
    Continued store expansion and significant FX weakening against the USD.
    New stores opened: 13Total stores: 813FX rates weakened: 19% vs USD
    		————
    Brazil
    Continued store expansion in Brazil.
    New stores opened: 4Total stores: 136
    		————
    Northeast, Mid-Atlantic, Rust Belt (Domestic DIY)
    Weaker DIY performance in these regions compared to the rest of the country, especially in the last week of the quarter due to severe weather.
    Performance vs rest of country: 0.5% vs 1.1%Last week of quarter performance: down 10% vs rest of country down roughly 1%
    		————
    Northeast, Rust Belt (Domestic Commercial)
    Commercial business grew at a slower pace in these regions due to customers closing businesses during storms, with a 600 basis point spread.
    Growth pace vs rest of country: slowerSpread vs rest of country: 600 basis points
    		————

    Operational metrics

    19
    EPS (Adjusted for FX)
    2.1% increasevs prior year
    Q2 FY25

    EPS would have increased 2.1% excluding the $1.22 per share FX headwind.

    EBIT (Adjusted for FX)
    down 0.9%vs prior year
    Q2 FY25

    EBIT would have been down 0.9% on a constant currency basis, excluding the $30 million FX headwind.

    LIFO Impact
    $14 millionunfavorable vs last year
    Q2 FY25

    Unfavorable LIFO comparison to last year's Q2 results.

    Gross Margin Improvement (Ex-LIFO)
    36 basis point improvement
    Q2 FY25

    Improvement in gross margin excluding LIFO, driven by merchandising margins.

    Cumulative LIFO
    $19 million
    Q2 FY25 end

    Cumulative LIFO yet to be reversed through the P&L at quarter end.

    Interest Expense
    $108.8 millionup 6% from Q2 a year ago
    Q2 FY25

    Increased interest expense due to higher debt levels and bond rates.

    Debt Outstanding
    $9.1 billionvs $8.6 billion a year ago
    Q2 FY25 end

    Total debt outstanding at the end of the quarter.

    Tax Rate
    18.4%down from 19.6% last year
    Q2 FY25

    Tax rate for the quarter, driven by one-time discrete items.

    Tax Benefit from Stock Options
    239 basis pointsvs 360 bps last year
    Q2 FY25

    Benefit to the tax rate from stock options exercised.

    Net Income
    $488 milliondown 5.3% versus last year
    Q2 FY25

    Net income for the quarter.

    Diluted Share Count
    17.2 million3.3% lower than last year
    Q2 FY25

    Diluted share count for the quarter.

    Operating Expenses Growth
    6.4%versus last year
    Q2 FY25

    Growth in operating expenses for the quarter.

    SG&A per Store Growth
    2.9%versus last year's Q2
    Q2 FY25

    Growth in SG&A on a per store basis.

    Domestic Commercial Programs with Commercial Program
    approximately 92%
    Q2 FY25

    Percentage of domestic stores that have a commercial program.

    Mega-Hubs in Pipeline
    91
    current

    Number of Mega-Hubs currently in the development pipeline.

    Aftermarket Market Size
    $110 million to $115 billion
    current

    Estimated size of the aftermarket industry.

    Available Market Share
    75% to 80%
    current

    Percentage of market share available for capture, given public competitors hold just over 20%.

    Average Vehicle Age
    12.6 years
    current

    Current average age of vehicles on the road, expected to increase.

    Average Ticket (Overall)
    10% on a $30 item, $3
    current

    Illustrative example of a relatively low average ticket, contrasting with high-value items like automobiles.

    Industry KPIs

    10
    MetricValueDetails
    Sg a OPEX ratio6.4%%
    Comparable sales2.9%%
    Store count growth28net stores
    Gross margin drivers53.9%%
    Pro vs diy performanceCommercial sales up 7.3%%
    Net debt to adjusted EBITDA2.5xx
    Share buyback capital return$330 millionUSD
    Inventory position markdown riskup 6.8%%
    Same sku like for like inflationup slightlyN/A
    Distribution supply chain cost economicsnew technology and automationN/A

    Risks & headwinds

    5
    Foreign Currency HeadwindQ2 FY25, Q3 FY25, Q4 FY25, Full FY25

    Q2 FY25: $91 million sales headwind, $30 million EBIT headwind, $1.22 EPS drag. Q3 FY25: $106 million revenue drag, $34 million EBIT drag, $1.41 EPS drag (if spot rates hold). Q4 FY25: $101 million revenue drag, $37 million EBIT drag, $1.53 EPS drag (if spot rates hold). FY25: $356 million revenue impact, $118 million EBIT impact, $4.82 EPS impact (if spot rates hold).

    Mitigation: Company reports revenue comps on a constant currency basis to reflect operating performance, as they generally don't take on transactional risks.

    Lower-Income Consumer Spending PressureOngoing

    Discretionary merchandise categories (16% of mix) were down on a same-store sales basis. DIY transaction count down approximately 1%.

    Mitigation: Improved execution, assortment, Mega-Hub deployment to gain share; well-positioned for when consumer confidence improves.

    Tariff Impact on CostsNear-term to ongoing

    New 20% tariffs instituted on Chinese SKUs. Not yet quantified for future impact.

    Mitigation: Intends to maintain margin profile through vendor absorption, diversifying sourcing, and pricing actions; expects rational industry behavior.

    LIFO Comparison HeadwindQ2 FY25, Q3 FY25

    Q2 FY25: $14 million or 36 basis points unfavorable LIFO comparison. Q3 FY25: $24 million LIFO credit last year will not repeat.

    Mitigation: Merchandising margins are improving to offset this.

    Interest Expense IncreaseOngoing

    Q2 FY25 interest expense up 6% to $108.8 million. Q3 FY25 interest expense expected in $110 million range vs $104 million last year.

    Mitigation: Not explicitly stated, but strong cash flow generation.

    What to watch in Q3 FY25

    5

    Domestic DIY Sales Trends

    Q3 FY25
    CurrentQ2 DIY comp +0.1%, last 4 weeks down 4.3%.
    TargetImprovement in sales trends.

    Why it matters

    DIY performance is volatile and sensitive to consumer confidence; improvement would signal broader consumer health and effectiveness of initiatives.

    For the third quarter, we expect both the DIY and Commercial sales trends to improve as our comparisons become slightly easier and we gained momentum from our growth initiatives.

    Q&A highlights

    7

    Beyond store/Hub openings, what other investments are driving SG&A deleverage, particularly in technology?

    Investments in IT are enabling growth in both DIY and Commercial, improving speed, productivity, and customer experience. These technology investments are considered a competitive advantage and underpin nearly all growth initiatives.

    “Nearly every one of our growth initiatives is underpinned by some investments that we're making in technology. And that is a dynamic that's happened for the last few years or so. We're pretty excited about that. It's helping us with speed. It's helping us with productivity. It's helping us with the customer experience.”

    asked by Bret Jordan · answered by Jamere Jackson

    3 min read7 chapters

    Detailed Narrative

    01

    Impact of Winter Weather

    The quarter benefited from earlier winter weather, leading to increased sales of related parts. Domestic same-store sales cadence was 4.3% in the first 4 weeks and 2.8% in the second 4 weeks. However, extreme cold and heavy snowfall in the last week of the quarter significantly hurt customer traffic, especially in DIY sales, which were down almost 7% in that week. Commercial sales were more consistent despite weather volatility🌐, with growth rates of 8.8%, 5.9%, and 7.1% across the three 4-week periods.

    02

    DIY Business Performance

    Domestic DIY comps improved to +0.1% for the quarter, an improvement from the prior quarter. DIY transaction count was down approximately 1%, better than the -1.8% experienced last quarter. Discretionary merchandise, representing approximately 16% of the mix, continued to be pressured and was down on a same-store sales basis. Management expects slightly declining transaction counts to be offset by low single-digit ticket growth, aligning with historical trends.

    03

    Commercial Business Acceleration

    Domestic Commercial sales grew 7.3% to $1.1 billion, accelerating from 3.2% in Q1. This growth was attributed to improved satellite store inventory availability, enhanced Hub and Mega-Hub coverage, and better speed of delivery. The Commercial business showed broad-based growth across national accounts and 'up and down the street' markets. Segments tied to new/used car sales remained challenging due to high interest rates and car prices.

    04

    Strategic Investments & Infrastructure

    AutoZone continues to invest over $1 billion in CapEx for FY25, focusing on accelerated store growth, particularly Hubs and Mega-Hubs (111 currently, with 19 more planned). Two new Domestic distribution centers in California and Virginia (the latter being AutoZone's largest) were opened, deploying new technology and automation. These investments aim to improve customer service, speed of delivery, supply chain efficiencies, and ultimately gain market share.

    05

    Foreign Currency Headwinds

    Unfavorable FX rates, particularly from Mexico where the peso weakened 19% against the USD, resulted in a $91 million headwind to sales, $30 million to EBIT, and a $1.22 per share drag on EPS for Q2 FY25. Management provided guidance for continued FX headwinds🌐 in Q3 ($106M revenue, $34M EBIT, $1.41 EPS drag) and Q4 ($101M revenue, $37M EBIT, $1.53 EPS drag), projecting a full FY25 impact of $356 million on revenue, $118 million on EBIT, and $4.82 on EPS.

    06

    Tariff Impact & Mitigation

    The company addressed the potential impact of new 20% tariffs instituted on Chinese SKUs. Management stated its intention to maintain its margin profile post-tariffs through a combination of vendor absorption, diversifying sourcing, and pricing actions, expecting rational industry behavior. The impact on free trade zones in Mexico and the specifics of exclusions remain uncertain, but merchants are actively negotiating with vendors.

    07

    Market Share Opportunity and Industry Tailwinds

    AutoZone holds approximately 5% market share in the $110-$115 billion aftermarket. Combined public competitors barely exceed 20% market share, indicating a substantial 75-80% opportunity for growth. The industry benefits from an aging car park (average age 12.6 years, expected to exceed 14%) and increasing miles driven, which are considered healthy and persistent tailwinds for the business.

    AI-generated summary of the company’s earnings call. Not investment advice.