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AutoZone's (AZO) 3Q25 earnings report continues a recent trend of falling short of EPS expectations as significant foreign exchange (FX) headwinds continue to negatively impact the company's results. Additionally, a 77-bps yr/yr decline in gross margin further pressured profitability, driven by a mix toward lower-margin commercial sales and rising supply chain costs. The disappointing performance contrasts with Advance Auto Parts’ (AAP) vastly improved Q1 report from last week, which showcased better-than-expected EPS, revenue, and comps, signaling that AAP is narrowing the competitive gap with AZO and O’Reilly Automotive (ORLY) in the aftermarket auto parts industry.

• AZO's Q3 comps rose 3.2% overall, or 5.4% in constant currency, reflecting solid underlying demand despite currency challenges. Domestic comps grew a robust 5.0%, driven by strong performance in commercial sales, which increased 7.3% yr/yr, particularly in hard parts like batteries, brakes, and engine components, fueled by an aging vehicle fleet and steady repair demand. However, international comps fell 9.1% due to significant FX headwinds, primarily from currency depreciation in Mexico and Brazil, though they achieved an impressive 8.1% growth in constant currency, indicating strong market penetration in these regions.
  • Weakness in discretionary categories, such as accessories and appearance products, persists as inflation-conscious consumers prioritize essential repairs over non-essential purchases, a trend also noted in AZO’s domestic retail segment, which saw softer growth compared to commercial channels.
• The 77-bps decline in gross margin to 52.7% was primarily driven by a shift in sales mix toward lower-margin commercial business, which grew faster than the higher-margin retail segment, alongside increased supply chain costs due to investments in distribution and mega-hub networks. Furthermore, AZO experienced a negative 21-bps ($8 mln net) non-cash LIFO impact in Q3, contributing to a decrease in gross margin.
• Operating expenses rose to 33.3% of sales from 32.2% a year ago, reflecting deleverage from higher self-insurance expenses, driven by increased claims costs, and ongoing investments in growth initiatives, including technology upgrades and store expansions. These cost pressures highlight the trade-off between short-term profitability and long-term strategic positioning, as AZO prioritizes market share gains and operational enhancements.
• AZO’s growth initiatives, particularly its aggressive store expansion in Mexico and Brazil, are pivotal to its long-term strategy. In Q3, the company added 30 new international stores (25 in Mexico and 5 in Brazil), bringing its international store count to 979, with plans to open 100 more in fiscal 2025. These expansions are enhancing AZO’s presence in high-growth markets, where rising vehicle ownership and less mature aftermarket competition offer significant opportunities.

AZO’s Q3 EPS miss, driven by FX headwinds and gross margin compression, continues a concerning trend of underperformance relative to expectations, compounded by rising operating expenses. Nevertheless, the company’s strong domestic commercial growth, international expansion in Mexico and Brazil, and favorable trends in the auto repair market, driven by an aging vehicle fleet, position it for potential recovery and sustained long-term growth.