AutoZone's Q1 sales rise 8.2%, but EPS drops 4.6% due to $98 million LIFO charge; outlook remains positive for fiscal 2026.

Good day everyone and welcome to AutoZone 2026 Q1 Earnings Release Conference call. At this time, all participants are placed on a listen only mode and we will open the floor for your questions and comments after the presentation. At this time the Company would like to provide its forward-looking statement. Before we begin, please note that today's call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform act of 1995. Forward looking statements are not guarantees of future performance. Please refer to this morning's press release in the Company's most recent Annual report on Form 10K and other filings with the securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward looking statements speak only as of the date made and the Company undertakes no obligation to update such statements. Today's call will also include certain non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures can be found in our press release. Good morning and thank you for joining us today for AutoZone 2026 first quarter conference call. With me today are Jamir Jackson, Chief Financial Officer and Brian Campbell, Vice President of Treasurer, Investor Relations and Tax. Regarding the first 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 130,000 AutoZoners across the company for their commitment to delivering on our pledge to always put customers first. Our decision making process starts with asking the question what is right for the customer. We strive to deliver on our commitment of providing wow customer service and it's our autozoners across our stores and supply chain who deliver on this commitment every day driving our results and our continued success. To start this morning, I'll address our sales results and talk about our new store openings for the quarter. I'll discuss both domestic and international results and break our sales results down between traffic and ticket growth comparisons to address what inflation has meant to both our ticket growth and our sales growth. I'll also address regional disparities where they exist and finally I'll address our outlook and how we expect the year to unfold. For the quarter our total sales grew 8.2% while earnings per share decreased 4.6%. Additionally, I want to point out that this year's gross margin, operating profit and earnings per share were negatively impacted by a non cash $98 million LIFO charge which had a material impact on our margins and eps. Excluding this LIFO charge, our EPS would have been up 8.9% versus last year's Q1. We also delivered a positive 4.7% total same store sales on a constant currency basis with domestic same store sales growth of 4.8%. Our domestic DIY same store sales growth grew 1.5% while our domestic commercial sales grew up 14.5% versus last year's Q1 and up sequentially from 12.5% on a 16-week basis in the fourth quarter of last year. Our focus is on improving execution, expanding parts availability and improving the speed of delivery. We are pleased with our results thus far. International same store sales were up 3.7% on a constant currency basis. Our unadjusted international comp was up 11.2%. This was the first quarter since Q3.24 where foreign exchange rates were favorable to our operating profit and EPS. Jamir will provide more color for you on our foreign currency impact on our financial results for both this past quarter and the upcoming second quarter later on this call. With over 7700 stores across three countries, our business is getting more global each day. We finished the quarter with 6,666 U.S. stores, 895 Mexico stores, and 147 Brazil stores. We opened 53 stores globally this past quarter versus 34 in last year's first quarter. This kind of first quarter growth is at near record for any first quarter store openings in our history and indicative of our commitment to accelerate our store growth. We are very excited about the pace of these openings and we know that this pace will drive future earnings growth globally. Next, let me address our sales results in a little more detail. Coming into the quarter we were optimistic that our improved execution would drive sales growth for both retail and commercial. More specifically, we felt the momentum we gained over the last three quarters with our domestic commercial sales would continue this quarter. We are very pleased that our domestic commercial sales accelerated again this quarter to 14.5%. This marked an acceleration from our commercial sales growth on a two year and a three year basis. Additionally, the domestic retail comp performed well, up 1.5% but slowed slightly from last quarter's 2.2%. Finally, our international constant currency comp was up 3.7% for the quarter and performed slightly better on a two year basis than last quarter's result. We are encouraged by our continued improved sales results and the way we finished the quarter gives us confidence in our sales outlook for the remainder of our fiscal year 2026. Next, I'll discuss the quarter sales cadence regarding our 4.8% quarterly domestic sales. Same store sales. The cadence was 5.5% in our first four weeks, positive 3.5 in our second four weeks and positive 5.5 over the last four week period in the quarter. We attribute the weakness in the middle four week segment to weather in the month of October that was not as favorable as last year in a select group of markets. Last year we experienced much colder weather in a subset of markets and this year that did not repeat which resulted in fewer winter related parts sales than normal. While it got colder in the last four week segment, it was not until November when we began to get the usual cold winter weather. Also, in a subset of markets in the Southeast where hurricanes occurred last year, our sales were weaker than last year. Hurricanes drive sales after the storms and during the cleanup period and without those storms. This year our sales in some markets were lower. Let me make a few comments on our domestic DIY business regarding our plus 1.5% DIY comparison for the quarter. We experienced a positive 2.1% in the first four week segment, a flat DIY comp in the second segment and a plus 2.3 comp during the third segment. Our merchandise categories performed as we would have expected, but less favorable weather comparisons in certain regions definitely impacted our results. More specifically, sales in the northern half of the country outperformed our markets in the southern half of the United States. With regard to inflation's impact on DIY sales, we saw like for like same SKU inflation up approximately 4.8% for the quarter. The same with our DIY average ticket that was up 4.8%. Based on our inflation expectations, we continue to expect our average ticket to grow sequentially through the third fiscal quarter which ends in May. During the fourth quarter we will begin to lap the increases in inflation we saw in this past year's fourth quarter we also saw DIY traffic down 3.4% as traffic was roughly down roughly two times in the middle four week segment versus the first four weeks. In the last four weeks due to the weather comparisons and positive impacts from hurricanes in those same markets. We are encouraged by our most recent trends and we expect our DIY business to remain resilient in this environment. Next I will touch on our domestic commercial business. As I mentioned, our commercial sales were up 14.5% for the quarter, the first four weeks grew 15.2%, the second four week segment grew 13.8% and the third four week segment grew 14.6%. As with DIY, our commercial sales were impacted during the middle four week segment due to the weather comparisons to last year. Our commercial results have been boosted by our improved inventory, satellite store investments and availability, significant improvements in our hub and mega hub coverage, and continued strength of our Duralast brand and execution on our initiatives to improve speed of delivery and customer service. These initiatives are delivering share gains and give us confidence as we move further into FY26. Year over year inflation on a like for like same SKU basis for commercial business was up 6% and grew similarly to to our average ticket growth of 6.1%. Lastly, we are very pleased with the growth in our commercial transactions, with traffic up 5.9% on a same store basis. As we continue to grow market share, our future sales growth will be driven by share gains and an expectation that like for like retail SKU inflation will continue as we move forward. As I said earlier, we opened a total of 39 net domestic stores and 14 stores in our international markets and we remain committed to more aggressively opening satellite stores, hub and mega hub stores, Hubs and mega hubs Comps results continue to grow faster than the balance of the chain and we are going to continue to aggressively deploy these assets for FY26. We expect to continue to open stores at an accelerated pace and Jamir will share more on our new store development progress in a moment. Overall, we are encouraged with our sales performance this quarter. We believe we are positioned well for growth in FY26 and we expect both DIY and commercial sales trends to remain solid. We will as always be transparent about what we are seeing and provide color on our markets and outlook as trends emerge. Now let me take a moment to discuss our international business. Across Mexico and Brazil, we now have 1,044 international stores. As I mentioned, our same store sales grew 3.7% on a constant currency basis behind a softer macro environment in Mexico. While we are continuing to gain market share, the economy is experiencing slower growth. As the economy improves, we expect our sales to re accelerate as we continue to invest in our new stores and distribution centers. Today we have almost 14% of our total store base outside of the US and we expect this number to grow as we accelerate our international store openings. In summary, we have continued to invest capital in opening new stores 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 delivering sustainable long term results. We continue to invest in improving product assortments in stores and online and improving efficiency in our supply chain which positions us well for future growth. We are 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 will be in accelerated store growth, including hubs and mega hubs that place more inventory closer to our customers. We are also investing in two new distribution centers, one in Mexico and one in Brazil, all while continuing to invest in technology to improve customer service and our autozoner's ability to execute on our promise of WOW customer service and delivering trustworthy advice. This is the right time to invest in our business as we believe industry demand will continue to remain strong and we have the ability to grow market share Now I'll turn the call over to Jamir Jackson.

Thanks Phil and good morning everyone. Our operating results remained strong for the quarter and were highlighted by solid top line revenue. Total sales were $4.6 billion and up 8.2% versus Q1 of last year. Our domestic same store sales grew 4.8% and our international comp was up 3.7%. On a constant currency basis. Total company ebit was down 6.8% and our EPS was down 4.6%. As Phil stated earlier, excluding our non cash $98 million LIFO charge, EBIT would have grown 4.9% and EPS would have been up 8.9%. Foreign exchange rates positively impacted our results for the quarter. For Mexico, the Peso strengthened just over 6% versus the US dollar for the quarter, resulting in a $37 million tailwind to sales, an $11 million tailwind to EBIT and a 44 cents a share benefit to EPS versus the prior year. We continue to be proud of our results as the efforts of our autozoners and 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 of and our P and L for Q1. First, I'll provide a little more color on sales and our growth initiatives, starting with our domestic commercial business for the quarter. Our domestic DIFM sales were $1.3 billion, up 14.5% for the quarter. Our domestic commercial sales represented 32% of our domestic auto parts sales and 28% of our total company Sales Our average weekly sales per program were $17,500, up 10% versus last year. Our commercial acceleration initiatives are continuing to deliver strong results as we grow share by winning new business and increasing our share of wallet with existing customers. We have a commercial program in approximately 93% of our domestic stores which leverages our DIY infrastructure and we're building our business with national, regional and local accounts. This quarter we opened 84 net new programs, finishing with 6,182 total programs. We plan to aggressively pursue growing our share of wallet with existing customers and adding new customers. Megahub stores remain a key component of our current and future commercial growth. We opened four megahubs and finished a quarter with 137 megahub stores. We expect to open at least 30 megahub locations over the fiscal year and our pipeline is exceptionally strong. As a reminder, our megahubs typically carry over 100,000 SKUs and 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. These larger stores give our customers access to thousands of additional parts across the market. While I mentioned a moment ago that our average commercial weekly sales per program grew 10%, the 137 megahubs continue to drive growth at an even faster clip. We continue to Target having approximately 300 mega hubs at full buildout. Our customers are excited by our commercial offering as we deploy more parts in local markets closer to the customers while improving our service levels. On the domestic retail side of our business, our DIY comp was up 1.5% for the quarter. Our DIY share has remained strong behind our growth initiatives and we're 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 FY26. Now I'll say a few words regarding our international business. We continue to be pleased with the progress we're making in our international markets. During the quarter, we opened 12 new stores in Mexico to. Finish with 895 stores and two new stores in Brazil, ending with 149 stores. Our same store sales grew 3.7% on a constant currency basis and a positive 11.2% on an unadjusted basis. While sales growth has slowed over the last few quarters in Mexico due to slower economic growth in the country, we've continue to grow our share and we're well positioned when the economy improves. We remain committed to investing in international expansion and we're pleased with our results in these markets as we accelerate the store opening pace. As we look ahead, we're bullish on international being an attractive and meaningful contributor to AutoZone's future sales and operating profit growth. Now let me spend a few moments on the rest of the P and L and gross margins. For the quarter our Gross margin was 51% down 203 basis points versus last year. This quarter we had a $98 million Last-In, First-Out (LIFO) charge or 212 basis point unfavorable Last-In, First-Out (LIFO) comparison to last year. Excluding the Last-In, First-Out (LIFO) comparison, we had a 9 basis point improvement to gross margin driven by margin actions which offset a significant rate headwind from the shift to a faster growing commercial business. We anticipate continued benefits from merchandise margins next quarter that should help offset the rate headwind from accelerated commercial growth. As I mentioned, we had a $98 million Last-In, First-Out (LIFO) charge in Q1. We're planning a Last-In, First-Out (LIFO) charge of approximately $60 million for each of the next three quarters as we're continuing to experience higher costs due to tariffs that impact our Last-In, First-Out (LIFO) layers. Moving on to operating expenses, our expenses were up 10.4% versus Q1 last year as SGA as a percentage of sales deleveraged 69 basis points driven by investments to support our growth initiatives. On a per store basis, our SGNA was up 5.8% compared to last quarter's 4.4% increase. The difference between per store growth and total SGA growth is the accelerated new store count that we have driven over the last 12 months. We expect to continue to increase our new store opening pace through the end of fiscal 2028 when we reach a total of 500 stores open annually. In the spirit of transparency and to give investors the opportunity to adjust expectations as we grow store count faster than we have in recent history, we will give more color on SGA growth and store counts. For Q2, we're assuming 65 to 70 store openings globally versus 45 last year, and for the full year we expect to open 350 to 360 stores versus 304 net new stores open in FY25. We've been purposefully investing in SGA in order to capitalize on opportunities to grow our business now and in the near future. These investments will also pay dividends in customer experience, speed of delivery, and productivity, all of which will help us grow market share for Q2. We expect SGA to grow similar to the first quarter, as the impact of new stores disproportionately impacts payroll, depreciation and occupancy costs. We remain committed to being disciplined with our SGA growth, and as the accelerated new stores mature, we will manage expenses in line with sales growth over time. Moving to the Rest of the P and L EBIT for the quarter was $784 million, down 6.8% versus the prior year. As I previously mentioned, a noncash Last-In, First-Out (LIFO) charge reduced our EBIT by $98 million. Adjusting for the unfavorable Last-In, First-Out (LIFO) comparison, our EBIT would have been up 4.9% versus the prior year. Interest expense for the quarter was $106 million, down 1.3% from a year ago. As our debt outstanding at the end of the quarter was $8.6 billion versus $9 billion a year ago. We're planning interest in the $114 million range for the second quarter of FY26 versus $109 million last year. For the quarter, our tax rate was 21.7%, down from last year's first quarter of 23%, driven primarily by higher stock option expense benefit. This quarter's tax rate benefited 186 basis points from stock options exercise, while last year it benefited 72 basis points for the second quarter of FY25. We suggest investors model us at approximately 22.5% moving to net income and EPS. Net income for the quarter was $531 million, down 6% versus last year. Our diluted share count of 17.1 million was 1.5% lower than last year's first quarter. The combination of lower net income and lower share count drove earnings per share for the quarter to $31.04, down 4.6% versus last year's Q1. As a reminder, Last-In, First-Out (LIFO) drove our EPS down $4.39 a share. Now let me talk about our free cash flow. For the quarter, we generated $630 million in free cash flow versus $565 million in Q1 last year. We expect to continue being an incredibly strong cash flow generator going forward, 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 and a half times EBITDAR. Our inventory per store was up 9.1% versus Q1 last year while total inventory increased 13.9% 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 inventories. Less accounts payable on a per store basis was a negative $145,000 versus negative $166,000 last year and negative $131,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 115.6% versus last year's Q1 of 119.5%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $431 million of Autozone stock in the quarter and at quarter end we had $1.7 billion remaining under our share buyback authorization. Our ongoing strong earnings balance sheet and powerful free cash generation allows us to return a significant amount of cash to our shareholders through our buyback program. We have bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998. 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 to wrap up. We remain committed to driving long term shareholder value by investing in our growth initiatives, driving robust earnings in cash and returning excess cash to our shareholders. Our strategy continues to work as we remain focused on gaining market share and improving our competitive positioning in a disciplined way as we look forward to the rest of FY26. We're bullish on our growth prospects behind a resilient domestic DIY business, a faster growing domestic commercial business and an international business that is continuing to grow 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 Phil, I want to remind you that we report revenue comps on a constant currency basis to reflect our operating performance. We generally don't 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 Q2, then we expect an approximate $57 million benefit to revenue, an $18 million benefit to EBIT and a 77 census share benefit to EPS. And lastly in Q2 we expect Last-In, First-Out (LIFO) to reduce EBIT by approximately $60 million, impact our gross margin rate by approximately 140 basis points and our EPS by approximately $2.70 a share. And now I'll turn it back to Phil.

Thank you, Jamir. We are excited to start the calendar of 2026. We have a lot to accomplish this fiscal year. We are committed to flawless execution and wisely spending our capital to drive growth and efficiency. We feel we are well positioned to grow sales across our domestic and our international store base. With both our retail and our DIY customers. We expect to manage our gross margins effectively and grow our operating expense in line with an accelerated store opening assumption. We continue to put our capital to work where it will have the biggest impact on our sales and long term profitability. That's our stores, our distribution centers and investing in technology to build a superior customer experience. The top focus areas for 2026 will be growing share in our domestic commercial business and continuing our momentum in international. We are excited about what we can accomplish in the second quarter, but we understand that we cannot take things for granted. We must remain laser focused on customer service, flawless execution and gaining share in every market in which we operate. Fiscal 2026 Top operating priorities will continue to be based on improving execution and delivering WoW customer service. We will continue to invest in the following strategic projects remaining focused on driving DIY or Do it yourself and commercial sales growth, which we are doing in a meaningful way. Ramping up our domestic and international store growth, drive our new and mega hub openings and focus on optimizing our new distribution centers and our supply chain capabilities. We are excited about what we can accomplish in this new year and our autozoners are well prepared to deliver on our commitments. We believe AutoZone's best days are ahead of us. Now we'd like to open up the call for questions.

Certainly everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press Star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. We do ask that participants please ask one question and one follow up, then re enter the queue. Once again, if you have any questions or comments, please press Star one on your phone. Your first question is coming from Brett Jeffries. Excuse me, Brett Jordan. From Jeffrey. Your line is live.

Hey, good morning guys.

Good morning.

Could you talk about the maturation schedule of the new stores now that it's. Become a very, you know, I guess. A more significant item, you know, as far as the ramp and then incremental investment that's required. I think you're talking about a couple of DCs internationally. But as far as domestic store growth, are there more DCs or accelerated hub expansion as you build this new store base? I mean, you're sort of trying to. Think about it's an SG and a. Expense at the front, but when do. We start getting the return?

Yeah, thanks for your question, Brett. So typically our new stores mature on about a four to five year time frame, if you will. And we've seen this historically over time and it's fairly predictable. Our teams do a great job of getting those assets into the market and then building our business around them. Regarding sga, we had about two points of the growth in our SG&A that was related to new stores and the acceleration of our commercial programs. And you'll see this ramp continue as we peak at the 500 stores globally that we're expecting in FY28. What has us excited is in addition to the new satellite stores that we're building, we're also building out our mega hub footprint, which as we mentioned is going to grow to 300 mega hubs. We've got about 100 of those in the pipeline today and we feel very good about our execution there. So as we look at the way our operating margins will progress between now and then, you'll see this roughly 2 points of incremental SG&A associated with this ramp, if you will. And then you'll see that sort of lop off and we'll return to the kind of operating margins that we have in the past as it relates to investments. Obviously we've been investing in distribution centers. We had a couple of new distribution centers that we put in over the last couple years or so. Those have come online and we're getting the productivity out of them. We're also investing in distribution centers in Mexico and Brazil. And all of this will underpin the growth. So that two points of SGNA that I talked about includes all the investments that we need to make across the business.

Maybe I'll add a little bit to that. We talked a lot about this project we've had in place for several years now, which is Supply Chain 2030, which is really looking at what did our supply chain need to look like to get us to these faster growing store numbers. Most of those investments in the US have already been in place and stood up those two new distribution centers we opened up last year. There's also some new efficiency strategies built in those distribution centers as well as some direct import facilities in Mexico, as we talked about, we opened up a new DC and expanded one and we're in the process of expanding our Monterey distribution center to almost double the size and that will be open fully operational probably in March. And then we're bringing our distribution from third party to our own supply chain down in Brazil, which should help us for quite some time. So most of the US expansion is done. It will be about improving efficiencies. Mexico will be done effectively in March or April. And that will take us for quite some time for the next couple years from the supply chain perspective.

Okay, great. Thank you. A quick question on the commercial growth on a 2, 3 year basis. Could you sort of parse out what. Might be national account versus domestic? I mean obviously not a lot of.

New national accounts entering the market. Is this skewed more to local business? Yeah, we're growing on the commercial side of the business in all of the different segments that we break out. Obviously to your point, there's not a lot of new national accounts that you would consider branded national accounts, but we're growing share of wallet in all of those segments. National accounts, what we call local customers, which are generally the local mom and pop shop as well as what we call verticals and associations, we're growing across all of the four segments. Pretty helpful. Thank you. Appreciate it.

Thank you. Your next question is coming from Chris Horvors from JP Morgan. Your line is live.

Hi guys, it's Bharat Rao on for Chris. Thanks for taking the question. So on diy, given the sequential slowdown, you said weather was a headwind in the middle four weeks, but can you help us parse out how much of that was additionally attributable to any government shutdown noise or like any sort of observable deterioration in the underlying trend or demand?

Yeah, I wouldn't say that the demand has necessarily deteriorated. As we mentioned kind of that weather segment in the middle of the, you know, we broke the quarter down into the 12 week quarter down into four week segments, the middle section of that segment. Year over year you had some changes in weather in more of the northern markets and you had the impact from the hurricane that benefited us last year that did not reoccur this year. So it was really a wobble in the middle four week segments. Not related to the customer per se, more related to the impacts from last year. Both a positive weather event due to hurricanes and a cold snap that happened last year as opposed to something that really deteriorated in this year and that Middle four week segment as we mentioned was down significantly compared to the first four week segment and the third four week segment. Hope that's a little clearer.

Got it. That's helpful. Yep. And then a quick one on sga. So previously we talked about mid single digit SG and a store growth for the year and came in at the higher end in 1Q despite softer sales. So now that you're accelerating store growth and you said 2Q SGA will be similarly up to 1Q. Can you help us understand how does the curve of that SG and A per store growth look throughout the year and does that pretty much moderate into next year? Thank you.

Yeah, as I mentioned we had about two points of growth that was related to new stores and really the opening of new programs in our commercial area of the business domestically. And we expect that to continue. And then if you look at our store opening ramp, you know, we're going to continue to open new stores. It's going to be back half weighted. As I mentioned, we'll open 350 to 360 stores globally in total and a good chunk of that will be weighted in the back half. So you'll see some acceleration as we move through. And again, this is all, you know, predicated on the growth that we're seeing. We're continuing to invest in a disciplined way in those growth initiatives. And you know, quite frankly, we like the earnings and the cash story that this is going to generate for us as we come out of this.

Got it. Thank you guys. Happy holidays.

Happy holidays.

Thank you. Your next question is coming from Simeon Gutman from Morgan Stanley. Your line is live.

Hi, this is Skyler Tennant. On behalf of Simeon, thank you for taking our question. On our first question we wanted to ask whether the consumer is showing any signs of elasticity to higher prices or whether you're seeing any signs of trade down.

Yes, we kind of figured this question was probably coming at the end of the day. I would kind of characterize it as the lower end consumer has been under pressure for frankly quite some time. You know, I'd say more than two years. And what I would say is they've been relatively stable. So there hasn't been, you know, a significant wobble in that lower end consumer. The higher end consumer we think is still doing okay and we think that's been relatively stable over the last couple of quarters. We don't have a lot of categories where you would see trade down. We have some good, better best opportunities in batteries and brakes and wiper blades. Things of that nature. But the vast majority of our inventory is generally one part that fits a particular vehicle. And there's not a whole lot of upsell opportunities based on good, better, best opportunities. So we don't see a lot of trade down. There's a little bit, but it's really not been that meaningful.

Okay, thank you. And as a follow up, how are you thinking about inflation? Has it impacted the entire product catalog? And for items not impacted, are you seeing any signs of demand elasticity there?

Yeah, the inflation, we think the inflation is going to continue to increase through what would be our third quarter on a year over year basis. And then some of the impacts from tariff and cost increases started in Q4 of last year. So we'll start to lap some of that. I suspect that there'll still be some increases, but they'll probably be a little bit less muted in the latter part of what would be our Q4. More like the summertime. But as far as separating out what has tariff impact and not have had tariff impact, most of the product that we sell is essentially break fix or it's required maintenance. And there hasn't been a lot of volatility in those product categories. In purely discretionary categories, which is a relatively small part of our business, more like 16 to 17% of our total market. Those categories were impacted over the last two years and had some pretty significant downfalls. But over the last year or so they've actually been relatively stable and seen some minor improvement in sales over the last year.

Great. Thank you. Good luck and happy holidays.

Thank you. Happy holidays to you too.

Thank you. Your next question is coming from Michael Lasser from ubs. Your line is live.

Hi, this is Zaim Gracom from Michael. Astrid, thank you very much for taking our question. The first question is on the comps. We're wondering how likely is it that the same store sales momentum would be sustainable domestically as comparisons become more challenging in the third quarter as well as fourth quarter and you lap a greater inflation number in Q4? Q?

Yes, I would characterize that we think those numbers are going to be relatively stable. Again, our comp in the latter part of Q3 and Q4 there was an increase from if you think about a two year stack and it might moderate a little bit, but we're confident behind our initiatives that we have in place that we will continue to grow market share on both the DIY and the commercial business. So they may flatten out a little bit. But at the end of the day I think we're going to continue on this Growth trajectory for both DIY and on the commercial side of the business.

Got you. That's helpful. And as far as my second question goes, I'm going to try to approach the SGA topic a little differently. Since the beginning of fiscal year 2024, SGA growth has outpaced sales growth in each quarter and by about 2 to 3 percentage points on average. So how should we expect that gap between sales and SGA growth to unfold going forward, especially as you accelerate unit growth? And as part of that, would it.

Be fair to think the model is more reliant on recouping some of the gross margin headwinds you faced in the past couple of years to return to operating margins of 19% plus? Yeah. So, you know, the first thing that I'll say, and we've reiterated this point, is that, you know, we're growing SG&A in a disciplined way as we create a faster growing business. And so what you've seen is that, you know, the investments in SGNA have been purposeful. We've had accelerated growth in SGNA related to new stores and the acceleration of our commercial business. And two things. Number one, you're starting to see the growth shoots associated with that. And we like the earnings profile of the new stores, first of all, as they're coming out of the chutes. But more importantly, when those stores mature in the next four to five years, what I'll say about the gap between sales growth and SG&A growth over time is that SG and A will slightly outpace the sales growth. As we move through. But as we get to the point where these stores mature, then we'll manage SGA growth in line with sales. But I think the key takeaway is that it's been purposeful and this is underpinning the growth that we've talked about. And we like the earnings and cash profile on the backside of this. Gotcha. Thank you very much. And the model reliance on gross margin to get back to 19% margin profile? Well, I think the reality is if you look at the model today and you're talking about operating profits, if you will, you got two points associated with this accelerated growth that we're talking about. You got about 140 basis points associated with LIFO. So between those two, you add back, call it three and a half points to a business that's going to do 17 and some change on a GAAP basis and you're back at your 20% operating model. If you do that on top of a much larger store base, again, that's what has Us excited about the model as we move forward.

Super helpful. Thank you very much.

Thank you. Your next question is coming from Scott Ciccarelli from Truist. Your line is live.

Hi there. This is Sherman on for Scott. Thanks for taking my question. LIFO charges were less than expected this quarter, and now you've lowered your expectation of the headwind for the next three quarters by 25%. Just want to know if this is from just greater tariff reductions or maybe more focused mitigation efforts. And then could that taper the upper end of your same skew expectations for inflation throughout the year? Thanks.

Yeah. So two things on lifo. Number one, we have not seen as much cost impact as we had originally anticipated. I think, you know, we've talked very openly about the fact that we're running, you know, a tried and true playbook. One is, to the extent that there's an opportunity to negotiate lower costs with vendors and protect the customer, we've been doing that. If there's an opportunity for us to diversify sources and maintain the sales, we're doing that. And then the third leg of the stool, obviously, has been to raise retails. So we haven't, you know, in running that playbook, we haven't seen as much inflation as we would have anticipated. I think the second dynamic is you saw the announcements where the IA tariffs on China moved from 20% down to 10%. And so that does lower our expectation going forward. But what we're seeing, and you heard Phil talk about this a little bit earlier, is we're still expecting to see higher costs associated with tariffs as we move through. And that is going to have some impact on ticket average and have some impact on comps going forward. It's just that what we had anticipated originally, we're seeing better performance from a cost standpoint and lower IA tariffs from the rollback that was announced in November. Yeah. I would continue to add that our merchants have been working at this tariff mitigation, country of origin diversification and multiple supplier diversification. Frankly, since the original tariffs went in back in 2016 and 17, and they've become pretty good at it. You know, having multiple sources for country of origin as well as multiple suppliers to supply a particular category has been a strategy we've had for quite some time. We've had a strategy for diversifying our sourcing out of China into other countries for years, and they've become very adept at it. To Jamir's point, we're running that same playbook, and our folks have gotten pretty good at doing that. As well as continuing to improve our supply chain efficiencies which are helping our gross margins. But. They'Ve just done an exceptional job which you saw in our gross margin overcoming the vast majority of the mix shift to a lower margin business that grew faster on the commercial side of the business. So we think that's a really good story for us.

That was really helpful. Thanks so much guys. Thank you.

Thank you. Your next question is coming from Steven Segon from Citi. Your line is live.

Hi, this is Arianna on Proceed. Thank you for taking our questions. My first question is can you give any color on the merch margin performance in the quarter and like any color on the outlook for this fiscal year?

Yeah, we had a very strong quarter from a merged margin standpoint. And you know what you see in our underlying gross margins is we were up 9 basis points excluding LIFO. We had about a 34 basis points drag just from the mix shift associated with a faster growing commercial business. So all of the merchant actions that were taken inside the company are working really hard to offset that drag from the drag that's associated with the commercial rate. And that's a playbook that we're continuing to run with intensity and the teams are doing a pretty good job there.

Thank you. And then my follow up kind of piggybacks off a previous question. So like where do you kind of expect Team SKU to peak in 3Q as it like accelerate sequentially?

Yeah, I mean I won't be date certain about when it will peak but what we can tell you is that, you know, we're going to continue to see inflation. Coming through. You know, our cost of goods sold. We're seeing it, you know, both in terms of what we're seeing from vendors but also from tariffs. And as that rolls through, you know, it is potential to see another point or two over the next couple of quarters impacted on same SKU and resulting in higher average tickets.

Got it. Thank you so much and happy holidays.

Thank you.

Thank you. Your next question is coming from Kate McShane from Goldman Sachs. Your line is live.

Hey, good morning, this is Mark Jordan. On for Kate McCheyne.

The first question I think might be a quick one but it's just what drove the difference between same SKU inflation in the retail business and the commercial business? Is that just the mix of the parts that are being sold? Yes, it's a mix and combination of products and parts that get sold between the two. The commercial side generally you have a higher hard part mix and you have generally newer, less Let me say this the right way. Newer SKUs in their life cycle, which generally are a little more expensive because they have more technology associated with them, essentially.

Okay, perfect. Thank you very much. And then in terms of product categories, just wondering if there's anything to read through there. In terms of the healthier core customer, which categories were stronger and which were. Weaker during the quarter and are you. Still seeing improvement on the discretionary side?

Yeah, I would say. I mean, our failure categories and our maintenance categories continue to be the best performers, which I think is indicative of the health of the automotive industry. In total, our weaker performers have been over the last couple of years. Frankly, the more purely discretionary items over the last year or so, those items have kind of flattened out from a negative comp perspective and continued to and started to slightly grow year over year, which we think is a pretty good sign that that segment of product has kind of bottomed out and will probably continue to grow from this point forward.

And just thinking about the comp there, is that mostly being same SKU inflation driven on that side or is units up as well.

On the purely discretionary product? It's a little bit of both.

Perfect, thank you very much.

Thank you.

Thank you. Your next question is coming from Michael Montani from Evercore. Your line is live.

Yes, hi, good morning. It's Mike Montani on for Greg Melick. Thanks for taking our question. I just wanted to ask a little bit about the underlying performance in merch margin if I could. So that was strong in the quarter Jamir, and wondering how to think about that into next quarter. And then also if you look at private label supply chain optimization, price optimization, like, can you help us just understand a little bit more the drivers that are offsetting that 30 to 40 bp mix headwind that you referenced?

Yeah, I mean, we continue to run the merge margin playbook, as I've historically said, with intensity. Our teams are doing a fantastic job looking for alternate sources, looking for new brands to introduce, and quite frankly, when there are opportunities to move more to our house brands to help us drive margin opportunities. And that's a playbook that we've run over time. And the teams continue to execute very well on that, we're going to continue to have a fairly significant headwind from a faster growing commercial business. And we're really pushing hard on merge margins to mute that or offset that completely. And that's what we'll do as we move forward.

Thank you.

Thank you. Your next question is coming from Robbie Ohms from Bank of America.

Your line is live Good morning, this is Vicki Liu. I'm for Robbie Omes. Thank you for taking our question. Can you talk about your expectation for early calendar 2026 as we'll likely have the combined impacts of a hot summer, cold winter and maybe some tax refund tailwind from the one big beautiful Bill. Thank you.

Great question. If you think cyclically about how our business performs in Q2 and what that means for Q3 and Q4. Q2 is always our most volatile quarter due to primarily these big weather events that move across the country. What we would like to see, and it looks like we might get this year, is we like to see cold weather followed by precipitation in the form of snow and ice. Those have a tendency to put a lot of strain on the under car parts of the vehicle. So think suspension. Brakes, chassis parts, things of that nature. And cold weather puts a lot of pressure on batteries, which are a pretty big part of our business. So what we'd like to see is a nice cold weather winter and that'll help sales coming into the summer and spring and summertimes, which is kind of what we saw this last year. If you remember the comment that we made, our northern stores performed a little bit better than our southern stores. Some of that was due to some weather comparisons. But it's also the knock on effect of a better winter last year that carries on through the spring and the summertime, which is what we saw in those categories. So that's kind of what we think will happen. You know, it's hard to predict the weather. I don't think Tamir and I are very good at that. But it looks like the beginning it's going to be cold next couple of weeks colder than last year. That's generally good for us. And they're saying it looks like in the later part of the winter we're going to get more snowfall in the Northwest and the Midwest than we did or Northeast and the Midwest than we did last year. So those should set up pretty good. For us in the summer. Yeah, I mean one thing that we always talk about is remember that because of all the weather cycles, I mean Q2, you know, our Q2 in the early part of the year can be pretty volatile. And you know, we always say that we're a couple of storms away from greatness or a couple of storms away from it being not as good as we anticipated. So you know, there's typically some volatility in the quarter. We're focused on execution though. I agree with that. To answer your question on taxes, I don't think we really know the answer to that and how that's going to lay. I will say that generally our Q2 ends right about the time of tax refund. So there can be some volatility on whether that ends up in how much of it ends up in the end of our Q2 and the beginning of our Q3. So there can be some volatility around that time frame.

Thank you. Happy holiday.

Hard for us to predict.

Thank you. And our last question is coming from Justin Klaber from Baird. Your line is live.

Hey, thanks. Good morning everyone. Wanted to ask the SG and a question just one more time. I apologize. I understand the impact from store growth and how that builds from here, but just wanted to clarify that growth on a per store basis, are you telling us we should expect that 5.9% pace in 1Q to effectively continue or are there certain offsetting levers to bend that growth curve on a per store basis as you start to annualize some of. These investments to improve service and delivery speed?

Yeah, I mean, you're going to be somewhere in that same zip code on a per store basis. And the other point that I'll make is, remember the back half of the year, we're going to continue to accelerate the store growth. So if you're in that zip code, you're in the right area. There are always things that we're working on from an SDA standpoint. But if you're modeling going forward and you're in that zip code, you're in the right place.

Okay, thanks for that. And then if I could just follow up on the international outlook. You mentioned softer trends in Mexico, but the two year stack did improve sequentially. So was that just driven by Brazil? And then would you expect that two. Year stack to remain relatively stable internationally. Just as we think out over the next few quarters? Thanks so much, guys.

Yeah, I think you'll see it be fairly consistent, we believe, over the next couple of quarters. And just speaking in our international business as a whole, we really like the accelerated growth we have there. We think we have opportunities to gain market share in all of our international markets, both with a growing DIY business as well as a rapidly growing commercial business. And as those consumers get a little healthier, as the economics continue to hopefully improve, we expect our sales to accelerate in those markets as well. So the international markets are fantastic for us.

Thank you for the. Thank you both.

Thanks. Okay, before we conclude the call, I'd like to take a moment to reiterate that we believe our industry remains in a strong position and our business model is very solid. We are excited about our growth prospects for the new year, but we will take nothing for granted as we understand that 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. Finally, we'd like to wish everyone a happy and healthy holiday season and thank you for participating on today's call.

Thank you everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.