AutoZone

AutoZone's fourth-quarter results featured a 5.6% net sales increase, with US same-store sales up 1.6%. Diluted EPS rose 15.1% to $56.05, bolstered by a $4.43 tariff refund benefit, while core gross margin fell 68 basis points to 50.8% as commercial sales mix and freight costs offset pricing gains.

Why it matters: AutoZone's growth investments are creating a near-term disconnect between expense growth and sales productivity. We think this represents the cost of building greater network density rather than weakening underlying store economics. Operating expenses rose 101 basis points to 33.4% of sales as new unit growth and related operating investments outpaced sales growth. We think this is largely timing-related, as new locations carry labor, occupancy, and opening costs before sales volumes fully ramp. We expect near-term pressures to persist as AutoZone plans 400 store openings and about 8% SG&A growth in fiscal 2027, ahead of its flat- to low-single-digit US same-store sales outlook, leaving near-term profit growth increasingly reliant on a recovery in do-it-yourself traffic.

The bottom line: We maintain our $3,700 fair value estimate for wide-moat AutoZone and view shares as undervalued. Shares rose 3% on the print, on improving sales momentum after concerns about do-it-yourself traffic left shares down 30% over the past year. In our view, the US vehicle fleet's record age of 12.8 years provides durable demand for nondiscretionary failure and maintenance parts (85% of sales), and we surmise investors underappreciate the pending sales and margin tailwinds stemming from expanding mega-hub coverage.

Long view: We expect profitability to improve as AutoZone moves beyond the heaviest phase of its supply chain investment and its expanding store base matures. We forecast operating margins to average 18.7% (from 18.3% in fiscal 2026) as logistics efficiencies offset lower-margin mix.

We maintain our $3,700 per-share fair value estimate for AutoZone following fiscal 2026 fourth-quarter results, as near-term margin pressure does not alter our long-term view of the business. Commercial mix, freight costs, and elevated spending on new stores and supply chain capacity weighed on profitability during the quarter, with core gross margin declining 68 basis points and operating expenses rising 101 basis points as a share of sales. However, we view much of this pressure as timing-related, as costs associated with network expansion are being incurred ahead of the sales productivity those investments should ultimately generate. As the store base matures and mega-hub density improves, we continue to expect greater fixed-cost leverage and logistics efficiencies. As such, we make no material changes to our long-term assumptions, maintaining our 10-year explicit forecast revenue CAGR of about 7% and our average operating margin expectation of 18.7%. Our valuation implies a fiscal 2027 enterprise value/adjusted EBITDA multiple of roughly 15 times.

Domestic operations remain the primary engine of AutoZone’s financial prospects; we forecast average US comparable store sales growth of 2.7% over the next decade. Growth is further underpinned by aggressive footprint expansion, adding about 200 new US stores per year, contributing 2.7% annually to domestic sales growth, driving total market share in the US automotive aftermarket to roughly 4.3% by the end of the decade, up from 3.9% in fiscal 2026. This domestic growth is augmented by international expansion in Mexico and Brazil, which we model to contribute another 100 new stores annually. Together, these initiatives are projected to expand AutoZone’s total store count to nearly 10,800 by the end of the decade.

The core profit driver and primary margin lever over our explicit forecast horizon is the ongoing evolution of AutoZone’s sales mix. We model commercial (DIFM) sales as a share of domestic revenue to gain about 90 basis points in the sales mix annually. Because commercial sales carry lower gross margins than the core DIY business, we expect cost of goods sold as a share of revenue to increase by 120 basis points from 47.7% in fiscal 2026. However, we forecast this gross margin pressure to be mostly offset by 180 basis points of selling, general, and administrative leverage, from 34%, which we expect to be achieved through efficiencies in the supply chain and greater fixed-cost leverage on higher volumes. Bringing these components together, we project consolidated operating margins to settle at 18.9% by the end of our forecast period.

We assign AutoZone a wide Morningstar Economic Moat Rating, underpinned by a cost advantage and robust intangible assets. AutoZone has carved out a dominant position in the automotive aftermarket, long ruling the do-it-yourself (DIY) segment while expanding its do-it-for-me (DIFM) presence. Over the past decade, the firm has generated an average return on invested capital (ROIC) of 33%, well in excess of our 7.6% weighted average cost of capital estimate. As the company continues to leverage its evolving supply chain and capitalizes on structural industry tailwinds, we forecast ROICs of 29% over the next decade and believe these returns can persist for the next two decades.

AutoZone’s cost advantage results from purchasing scale that supports favorable vendor financing. AutoZone and O’Reilly lead the highly fragmented US auto parts industry, representing about a third of the industry’s footprint. This dominant position leads to favorable pricing and terms through negotiating leverage that manifests in AutoZone’s working capital dynamics. The firm operates with negative net working capital, commanding an average accounts payable/inventory ratio of nearly 1.2 times over the last decade. Despite warehousing thousands of slow-moving components, AutoZone turns over its inventory in about nine months, faster than the roughly 11 months that it must pay its vendors. This stands in stark contrast to struggling peers like Advance Auto Parts’ 10-year average ratio of 0.8 times. This operational excellence allows AutoZone to command a massive margin premium, printing an 18% operating margin that dwarfs Advance Auto Parts’ 2.5%.

This structural cost leadership is furthered by AutoZone’s private-label program, featuring brands like Duralast, Valucraft, and ProElite. Private-label penetration currently sits near 50%, which outpaces the less than a third share at big-box retail peers such as Walmart and Costco. We estimate AutoZone-owned brands boast up to a 600- to 800-basis-point gross margin premium compared with their national brand equivalents. Because failure and maintenance-related categories represent 85% of AutoZone’s sales mix, which has held steady since 2011 (83%), AutoZone enjoys a predictable product mix that maximizes its unit-cost leverage. By fulfilling this nondiscretionary demand with its private labels, AutoZone maintains gross margins consistently above 50%. This aligns with our view that while financially constrained consumers may defer discretionary purchases, they cannot indefinitely defer a failing alternator or a dead battery if they rely on their vehicle for daily transportation.

Beyond cost leadership, AutoZone’s competitive advantage is supported by robust intangible assets, primarily localized inventory density. To fulfill DIY requests (about two-thirds of revenue) and urgent DIFM orders, while countering the threat of e-commerce, AutoZone transitioned to a multiechelon hub-and-spoke supply chain about a decade ago. While traditional retail stores max out at roughly 25,000 stock-keeping units (SKUs), AutoZone continued to build on its traditional hub stores (which carried about 50,000 SKUs) by expanding the inventory density of its network through megahubs (hybrid retail/distribution centers capable of housing over 110,000 SKUs). With its DIFM program now active in roughly 94% of domestic stores and 133 megahubs at the end of fiscal 2025 (targeting a full buildout to 200 to 300 locations), AutoZone’s localized inventory density ensures that an independent garage can receive a specialized part within hours, countering digital competitors that lack hyperlocal, decentralized inventory. This dual-market dominance translates into the firm generating $384 in sales per square foot and $70 in operating profit per square foot, similar to O’Reilly ($362 and $70, respectively) and well above Advance Auto Parts ($237 and $6).

AutoZone further bolsters its intangible assets through proprietary data and software integration. Acquired in 1996 by Autozone, Alldata is the industry’s leading original equipment manufacturer repair and diagnostic database serving over 400,000 technicians across 115,000 shops worldwide, holding a massive, centralized repository for technical service bulletins and diagnostic trouble codes. AutoZone integrates its parts catalog into the software, creating a frictionless ordering process when a diagnostic code is pulled. By coupling this with its localized megahub logistics footprint, AutoZone’s efforts to win over professional mechanics continue to bear fruit. We estimate the firm captured 5.4% of the domestic DIFM market as of fiscal 2025, compared with 3.6% share in 2011. During this same period, Genuine Parts (NAPA) saw its leading position collapse from 14.8% to 7.9%, while Advance Auto Parts experienced a similar decline, falling from 7.6% to 4.4%. Even when compared with the current industry leader, O’Reilly, which grew its share from 7.9% to 8.8%, AutoZone’s pace of capture has been superior. In our view, this momentum suggests that the DIFM market is bifurcating in favor of high-velocity, tech-enabled operators.

Although electric vehicle proliferation is a long-term risk, it does not impair our moat assessment. The US auto fleet requires 20 to 25 years to turn over, creating a massive buffer against rapid technology displacement. Because battery electric vehicles (BEV) comprised merely 8% of new vehicle registrations in 2025 and carry an average age of just 3.7 years, the majority of these units remain covered under OEM warranties and outside the aftermarket window. Even if BEVs account for 20% of new vehicle sales in 2030, the existing fleet implies that roughly 90% of vehicles on the road will still rely on traditional internal combustion engines (ICE). This aligns closely with Morningstar’s forecast that ICE and hybrid vehicles will constitute roughly 94% of the US fleet by the end of the decade, ensuring AutoZone’s replacement parts sales remain structurally secure.

Accelerated commercial (DIFM) market share gains, fueled by megahub expansion, could narrow the gap with commercial-heavy peers faster than anticipated, driving outsize sales growth.

Continued growth in private-label parts penetration (beyond 50%) could expand gross margins beyond our base case, while reinforcing AutoZone’s value proposition to budget-conscious consumers.

Mexico and Brazil could outpace our estimate of sales and profit contribution if AutoZone replicates US density economics in these underpenetrated, fragmented aftermarket regions more effectively.

Scaled digital marketplaces could erode DIY margins, as consumers can easily price-shop and wait for delivery on non-emergency, planned purchases like accessories or routine maintenance.

Rapid adoption of battery electric vehicles (BEVs) above our projected 6% share of the US fleet by 2030 could materially compress aftermarket demand, as these vehicles require fewer traditional maintenance parts.

Automakers using proprietary software locks and closed-loop telematics to monopolize vehicle repairs could freeze out the independent garages AutoZone relies on for commercial growth.