WS Investor
26 May 2026, 14:43
AutoZone Drops 10% as LIFO Charges and International Weakness Disappoint Despite Solid Domestic Results
AutoZone fell sharply today despite reporting a third quarter that showed solid domestic execution, with investors focused on gross margin compression, weak international performance in constant currency and earnings that appear to have come in below elevated market expectations.
Net sales for the 12-week quarter ended May 9, 2026 grew 8.4% to $4.8 billion, driven by domestic same store sales growth of 4.1% and international same store sales growth of 16.6% on a reported basis. The international headline, however, is deeply misleading — in constant currency, international comparable sales grew just 1.6%, as both Mexico and Brazil continued to underperform plan. Total company comparable sales of 3.9% in constant currency represent a solid but unremarkable result for a company trading at a premium multiple.
The gross margin story was the primary source of disappointment. Gross profit as a percentage of sales fell 57 basis points to 52.2%, with management attributing the compression primarily to a 77 basis point non-cash LIFO inventory charge — a real cost that reflects the impact of goods price inflation flowing through inventory accounting. The partial offset from other gross margin improvements was not sufficient to prevent the decline, and in an environment where investors have been watching cost pressures closely across retail, any margin contraction draws scrutiny.
Operating profit grew 6.6% to $923.8 million and operating margin returned above 19%, which CEO Phil Daniele specifically highlighted as a positive milestone. Net income grew to $641.5 million and diluted EPS rose 7.7% to $38.07 from $35.36 a year ago. The company repurchased $586.3 million of stock during the quarter at an average price of $3,582 per share, with $0.8 billion remaining under the current authorization.
On the store count front, AutoZone opened 82 new locations globally in the quarter — 57 in the US, 20 in Mexico and five in Brazil — bringing the total to 7,856 stores worldwide. The company remains on track to open approximately 355 to 365 stores for the full fiscal year.
The 10% decline is steep for a business that delivered positive comparable sales, margin above 19% and continued earnings growth. It likely reflects a combination of the LIFO-driven gross margin miss, the persistent international underperformance in constant currency and an EPS figure that, while growing, may have fallen short of what a richly valued stock required to justify its price. For a company where investors pay a significant premium for consistency, any stumble on margins or international execution carries an outsized punishment.
AutoZone fell sharply today despite reporting a third quarter that showed solid domestic execution, with investors focused on gross margin compression, weak international performance in constant currency and earnings that appear to have come in below elevated market expectations.
Net sales for the 12-week quarter ended May 9, 2026 grew 8.4% to $4.8 billion, driven by domestic same store sales growth of 4.1% and international same store sales growth of 16.6% on a reported basis. The international headline, however, is deeply misleading — in constant currency, international comparable sales grew just 1.6%, as both Mexico and Brazil continued to underperform plan. Total company comparable sales of 3.9% in constant currency represent a solid but unremarkable result for a company trading at a premium multiple.
The gross margin story was the primary source of disappointment. Gross profit as a percentage of sales fell 57 basis points to 52.2%, with management attributing the compression primarily to a 77 basis point non-cash LIFO inventory charge — a real cost that reflects the impact of goods price inflation flowing through inventory accounting. The partial offset from other gross margin improvements was not sufficient to prevent the decline, and in an environment where investors have been watching cost pressures closely across retail, any margin contraction draws scrutiny.
Operating profit grew 6.6% to $923.8 million and operating margin returned above 19%, which CEO Phil Daniele specifically highlighted as a positive milestone. Net income grew to $641.5 million and diluted EPS rose 7.7% to $38.07 from $35.36 a year ago. The company repurchased $586.3 million of stock during the quarter at an average price of $3,582 per share, with $0.8 billion remaining under the current authorization.
On the store count front, AutoZone opened 82 new locations globally in the quarter — 57 in the US, 20 in Mexico and five in Brazil — bringing the total to 7,856 stores worldwide. The company remains on track to open approximately 355 to 365 stores for the full fiscal year.
The 10% decline is steep for a business that delivered positive comparable sales, margin above 19% and continued earnings growth. It likely reflects a combination of the LIFO-driven gross margin miss, the persistent international underperformance in constant currency and an EPS figure that, while growing, may have fallen short of what a richly valued stock required to justify its price. For a company where investors pay a significant premium for consistency, any stumble on margins or international execution carries an outsized punishment.
