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AutoZone (AZO) is sharply lower after reporting its Q2 (Feb) results this morning. Notably, the company returned to EPS upside after six consecutive misses, while revenue was roughly in-line, increasing 8.2% yr/yr to $4.27 bln. However, yr/yr profit still declined, and continued margin declines, softer international trends, and moderating comp growth appear to be outweighing the EPS beat.

• EPS declined 2.3% yr/yr to $27.63, as a $59 mln non-cash LIFO charge drove a 138 bp headwind to gross margin. Gross margin fell 137 bps yr/yr to 52.5%.
• Operating profit fell 1.2% to $698.5 mln, as the decline in gross margin and slight opex deleverage more than offset sales growth. Operating expenses rose to 36.1% of sales, reflecting continued investment behind its growth initiatives.
• Total comp sales increased 3.3% in CC, decelerating from 4.7% in Q1, while domestic comps increased +3.4% (+4.8% in Q1) and international comps increased +2.5% in CC (+3.7% in Q4).
• International comps were below AZO's expectations, reflecting a still-soft macro backdrop in Mexico, though AZO believes it is taking share and outperforming peers in both Mexico and Brazil.
• Domestic commercial sales remained a bright spot, rising 9.8% yr/yr to $1.15 bln, though growth slowed from 14.5% in Q1. Domestic DIY comps increased 1.5% (flat with Q1), holding steady despite the winter storms.
• AZO also continues to expand at a healthy pace, opening 43 stores in the U.S., 18 in Mexico, and 3 in Brazil during the quarter. That keeps it on track with its plan to open roughly 350-360 stores in FY26.
• It also continues to see encouraging trends from its growth initiatives, with better parts availability, improving delivery times, and solid productivity from new stores.

Briefing.com Analyst Insight

The headline results were encouraging for AZO, with a return to EPS upside and continued high-single-digit revenue growth. While management noted that EPS would have increased yr/yr excluding the non-cash LIFO charge, that still muddies the overall profit picture as AZO navigates higher costs and continues investment behind its growth initiatives. The weakness in shares appears to reflect the profit declines, along with a steeper moderation in domestic and international comp growth, as well as slower commercial sales growth, all of which had been important areas of strength. That said, AZO said Q2 remains a difficult quarter due to winter weather disruptions, which weighed particularly on commercial trends late in the quarter. AZO still sounded constructive on market share gains, store expansion, and the broader benefits from its growth initiatives, but with the stock having made a strong run into the report, investors likely used a quarter that was a bit softer on comps as an opportunity to take some profits.