Autozone Inc

NYSE:AZO

Q4-2025 Earnings Call

[Operator]

Greetings. Welcome to AutoZone's 2025 Q4 Earnings Release Conference Call. [Operator Instructions] Please note, this conference is being recorded. Before we begin, the client would like to read their forward-looking statement. Please go ahead.

[Unknown Executive]

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 and the company's most recent annual report on Form 10-K 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.

[Operator]

I would now like to turn the call over to your host, Phil Daniele, President and CEO of AutoZone. You may begin.

[Philip Daniele, executive]

Thank you. Good morning, and thank you for joining us today for AutoZone's 2025 Fourth Quarter Conference Call. With me today are Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the fourth 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, www.autozone.com under the Investor Relations link. Please click on the quarterly earnings conference call to see them.

To start out this morning, I want to thank our more than 130,000 AutoZoners across the entire company for their commitment to delivering on the first line of our pledge. AutoZoners always put customers first. Our operating theme for FY '25 was great people, great service, and we have lived up to that theme. Their contributions continue to allow us to deliver solid results. We will continue to succeed as long as we are all working towards the common goal of delivering what AutoZoners call WOW! Customer service.

To get started this morning, let me address our sales results. Coming into the quarter, we were optimistic that our focus on improved store execution would drive sales growth for both our retail and commercial channels. More specifically, we felt the momentum we gained over the last 2 quarters with our domestic commercial same-store sales would continue this quarter. We are very pleased that our domestic commercial sales accelerated again this quarter to 12.5% on a 16-week basis.

Additionally, our domestic retail comp performed well at 2.2%. Finally, our international constant currency comp remained solid, up 7.2% for the quarter and relatively consistent on a 2-year basis with last quarter's results. We are encouraged by our continued sales results and we are excited about the outlook for the 2026 fiscal year.

Next, let me touch on a few highlights for the quarter, and then I'll give you a little more color on our execution, the current environment and our outlook. For the quarter, as we continue to focus on what we call WOW customer service, our total sales grew plus 0.6%, while earnings per share decreased 5.6%. I will remind you that last year, we had an extra week in the quarter. If we adjust last year to include only 16 weeks, our total sales grew 6.9% while our earnings per share grew plus 1.3%.

Additionally, I want to point out that this year's gross margin, operating profit and EPS were negatively impacted by a noncash $80 million LIFO charge. This charge had an impact on margins and EPS. Excluding this LIFO charge, our EPS would have been plus 8.7% versus last year on a 16-week basis. We also delivered a positive 5.1% total company same-store sales on a constant currency basis with domestic same-store sales growth of 4.8%, our domestic DIY same-store sales grew 2.2%, while our domestic commercial sales grew up 12.5% versus last year on a 16-week basis.

International same-store sales were up 7.2% on a constant currency basis. While our international business continues to comp impressively, we faced over 5 points of currency headwind, which resulted in a lower unadjusted international comp of 2.1%. As you know, the stronger U.S. dollar had a negative impact on our reported sales, operating profit and earnings per share.

Jamere will provide more color for you on the foreign currency impact on our financial results for both this past quarter and the upcoming first quarter later on this call. Specifically related to our domestic commercial business, our focus is on improving execution, expanding parts availability and improved speed of delivery to our commercial professional customers.

These initiatives helped us significantly improve our sales results versus last year. Commercial sales were up 12.5% year-over-year on a 16-week basis versus a very strong plus 10.7% in the third quarter and 7.3% in the second quarter. We believe the initiatives we have in place have a long runway and will drive strong results into the future quarters. We are pleased with our efforts and our execution thus far.

Next, I'll discuss the quarter's sales cadence. Regarding our positive 4.8% quarterly domestic same-store sales, the cadence was plus 4.4% in the first 4 weeks, plus 2.4% in the second 4 weeks, plus 6% in the third 4-week segment and plus 6.4% over the last 4 weeks of the quarter.

Because this quarter's second 4-week segment had the July 4 holiday, while last year, the holiday fell in the third 4-week segment, we feel it's appropriate to combine the middle 8 weeks of results. Our comp was plus 4.2% over this segment. Therefore, the ramp being plus 4.4%, plus 4.2% and plus 6.4%. We're encouraged by those numbers. We attribute this ramp to both growing market share and the warmer more summer-like weather arriving in mid-July, while last year's warmer weather came earlier in the quarter. This positively impacted both our DIY and commercial sales.

Overall, we are encouraged with our sales acceleration this quarter, and we are excited to start the new year. Now let me focus for a few more minutes on our domestic DIY business. Our merchandise category segments, failure, maintenance and discretionary were all positive for the quarter. It is very encouraging for us to see the discretionary categories grow at a pace not seen since FY 2023.

Regarding our plus 2.2% DIY comp for the quarter, we experienced a positive 2.1% in the first 4-week segment, a plus 0.9% in the second segment, plus 1.7% across the third segment and up 4.1% during the last segment.

With regard to inflation impact on DIY sales, we saw higher average DIY ticket growth at 3.9% versus like-for-like same SKU inflation up approximately 2.8% for the quarter. We attribute the higher average ticket versus SKU inflation growth to an improved product mix this quarter. We continue to expect ticket inflation to be up at least 3% for the remainder of the calendar year.

We also saw DIY traffic count down 1.9%, which was relatively consistent across the quarter, although the best period for DIY transaction performance was our last segment at negative 0.6%, which is exciting as it was also our best average ticket growth in the quarter. This correlated with warmer weather temperatures versus the previous periods. We continue to see data that confirms we are gaining share, and we are encouraged by our most recent trends. We believe we have best-in-class product offerings and customer service. This gives us confidence that we will continue to win in the marketplace.

Finally, all of our census regions were positive, led by the Northeast in the Rust Belt markets, which were driven by share gains and favorable weather after having a more normal winter and spring weather season. Next, I will touch on our domestic commercial business. As I mentioned, our commercial sales were up 12.5% for the quarter on a 16-week basis. The first 4-week segment grew 11.4%, the second 4-week segment grew 7.3%, the third 4-week segment grew 17.9%, and the last 4-week segment grew 13.4%, including this year's -- excluding this year's additional week.

As previously mentioned, the second 4-week segment this year had the July 4th holiday in it, while last year, the July 4th holiday fell in the third 4-week segment. When combining the sales of both second and third segments, sales grew plus 12.5% over those 8 weeks. Overall, we saw a steady increase in the performance throughout the quarter.

We are very encouraged with our improved satellite store inventory availability, significant improvements in our hub and MegaHub store coverage, the continued strength of our Duralast brand and improved execution in our initiatives to improve speed of delivery and customer service for the professional customers. These initiatives are delivering share gains and give us confidence as we move into FY '26.

Year-over-year inflation on a like-for-like SKU basis for commercial business was roughly 2.7% and contributed to our average ticket growth of approximately 3.7%.

Lastly, we were very pleased with the growth in our commercial transactions year-over-year, with traffic up 6.2% on a same-store basis. Our sales growth will be driven by our continued availability to gain market share and an expectation that like-for-like retail SKU inflation will accelerate as we move forward. For the quarter, we opened a total of 90 net domestic stores and 51 stores in our international markets.

For the year, we opened 304 net new stores, the most since 1996. We remain committed to more aggressively opening satellite stores, hub stores and Mega-Hub stores. Hub and Mega-Hub comps results continue to grow faster than the balance of the chain and we're going to continue to aggressively deploy these assets for FY '26. For FY '26, we expect to continue to open stores at an accelerated pace, and Jamere will share more on our new store development progress.

As we move into FY '26, we expect both DIY and commercial sales trends to remain solid as we gain momentum and grow market share behind our growth initiatives. 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. In Mexico and Brazil, we opened a total of 51 new stores in the quarter and now have 1,030 International stores. As I mentioned, our same-store sales grew 7.2% on a constant currency basis. We remain very positive on our growth opportunities in these markets. Today, we have over 13% of our total store base outside the U.S., and we expect this number to grow as we accelerate our international store openings. We opened 109 international stores for the year, and we expect to open slightly more in FY '26.

In summary, we have continued to invest in 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 driving sustainable long-term results. We continue to invest in improving customer service, product assortment initiatives and our supply chain, which all position us well for future growth.

We are investing both CapEx and operating expense to capitalize on these opportunities. This year, we invested approximately $1.4 billion in CapEx in order to drive our strategic growth priorities, and we expect to invest a similar amount this next year. The majority of our investments will be in accelerated store growth, specifically hubs and mega hubs that place more inventory closer to our customers. This past year, we also opened 2 new distribution centers, while utilizing our existing distribution centers to drive efficiency and reduce supply chain costs and we will continue investing in technology to improve customer service and our AutoZoners ability to deliver on our promise of WOW customer service. This is the right time to invest in these initiatives as we believe the industry demand will continue to remain strong, and we have the ability to grow our market share.

Now I will turn the call over to Jamere Jackson.

[Jamere Jackson, executive]

Thanks, Phil, and good morning, everyone. Our underlying operating results for the quarter were strong, highlighted by strong top line results. Total sales were $6.2 billion and up 0.6% versus the 17-week quarter last year. On a 16-week comparison of last year, our sales grew 6.9%. Our domestic same-store sales grew 4.8% and our international comp was up 7.2% on a constant currency basis.

Total company EBIT was down 1.1%, and our EPS was up 1.3% on a 16-week basis. I do want to point out that excluding our noncash $80 million LIFO charge and reporting on a comparable 16-week basis, EBIT would have grown 5.5% and EPS would have been up 8.7%. As Phil discussed earlier, we also had a headwind from foreign exchange rates this quarter. For Mexico, FX rates weakened just over 5% versus the U.S. dollar for the quarter resulting in a $36 million headwind to sales, a $14 million headwind to EBIT and a $0.57 a share drag on EPS versus the prior year.

For the full year, our total sales were $18.9 billion, up 4.5% versus last fiscal year on a 52-week basis. We continue to be proud of our results as the efforts of our AutoZoners in 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 in our P&L for Q4. And first, I'll give a little more color on our sales and our growth initiatives. Starting with our domestic commercial business for the fourth quarter, our domestic DIFM sales were $1.8 billion, up 12.5% on a 16-week basis. For the quarter, our domestic commercial sales represented 33% of our domestic auto part sales and 28% of our total company sales. Our average weekly sales per program were approximately $18,200, up 9% versus last year.

Our commercial acceleration initiatives are continuing to deliver good results as we grow share by winning new business and increasing our share of wallet with existing customers. We have our commercial program at 92% 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 87 net new programs finishing with 6,098 total programs. Importantly, we continue to have a tremendous opportunity to both expand sales per program and open new programs. We plan to aggressively pursue growing share of wallet with existing customers and adding new customers.

Mega-Hub stores remain a key component of our current and future commercial growth. We opened 14 Mega-Hubs and finished the fourth quarter with 133 Mega-Hubs stores. We expect to open 25 to 30 Mega-Hub locations over the next fiscal year. As a reminder, our Mega-Hubs 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 assets are performing well individually, and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to thousands of additional parts and lifting the entire network. While I mentioned a moment ago that our average commercial weekly sales per program grew 9%, the 133 Mega-Hubs are growing much faster than the balance of the commercial business in Q4.

We continue to target having almost 300 Mega-Hubs at full build-out. Our customers are excited by our commercial offering as we deploy more parts in local markets closer to the customer while improving our service levels. On the domestic retail side of our business, our DIY comp was up 2.2% for the quarter. As Phil mentioned, we saw traffic down 1.9%, along with a positive 3.9% ticket growth. Over time, we expect to see slightly declining transaction counts, offset by low to mid-single-digit ticket growth in line with the long-term historical trends for the business driven by changes in technology and the durability of new parts.

Our DIY shares remained strong behind our growth initiatives, and we are 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 FY '26.

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 45 new stores in Mexico to finish with 883 stores and 6 new stores in Brazil, ending with 147. Our same-store sales grew 7.2% on a constant currency basis and positive 2.1% on an unadjusted basis. We remain committed to international, and we're pleased with our results in these markets. We will accelerate the store opening pace going forward as 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 minutes on the rest of the P&L and gross margins. For the quarter, our gross margin was 51.5%, down 103 basis points versus last year on a 16-week basis. This quarter, we had an $80 million LIFO charge or 128 basis point unfavorable LIFO comparison to last year. Excluding the LIFO comparison in last year's additional week, we had a 25 basis point improvement to gross margin driven by solid merchandise margin improvement.

Next quarter, we anticipate continued benefits from merchandise margins that should offset the rate headwind from the mix shift to a faster-growing commercial business. As I mentioned, we had an $80 million LIFO charge in Q4, we're planning a LIFO charge of approximately $120 million for next quarter as we're continuing to experience higher costs due to tariffs that impact our LIFO layers.

Moving on to operating expenses. Our expenses were up 8.7% versus last year on a 16-week basis as SG&A as a percentage of sales delivered -- deleveraged 53 basis points, driven by investments to support our growth initiatives. On a per store basis, our SG&A was up 4.4% on a 16-week basis compared to last quarter's 5.1% increase. We have been investing in an SG&A in order to capitalize on opportunities to grow our business now and in the near future. These investments will help us grow market share, improve the customer experience, speed up delivery times and drive productivity. We remain committed to being disciplined on SG&A growth, and we will manage expenses in line with sales growth over time.

Moving to the rest of the P&L. EBIT for the quarter was $1.2 billion, down 1.1% versus the prior year on a 16-week basis. As I previously mentioned, a combination of LIFO charges and FX rates reduced our EBIT by $94 million. Adjusting for the unfavorable LIFO comparison and reporting on a constant currency and 16-week basis, our EBIT would have been up 6.6% versus the prior year. Interest expense for the quarter was $148 million, up 2.7% from a year ago on a 16-week basis as our debt outstanding at the end of the quarter was $8.8 billion versus $9 billion a year ago.

We're planning interest in the $112 million range for the first quarter of FY '26 versus $108 million last year, higher borrowing rates have driven interest expense increases. For the quarter, our tax rate was 20.1%, down from last year's fourth quarter of 21%, driven primarily by higher stock option expense benefit. This quarter's tax rate benefited 152 basis points from stock options exercised, while last year, it benefited 80 basis points. For the first quarter of FY '25, we suggest investors model us at approximately 23.2% before any assumption on credits due to stock option exercises. For the full year, EBIT was $3.6 billion, down 4.7% driven by the extra week and $104 million in net LIFO impacts. Excluding the LIFO and currency headwinds, EBIT would have grown 2.7% on a 52-week basis.

Moving to net income and EPS. Net income for the quarter was $837 million, down 0.5% versus last year on a 16-week basis. Our diluted share count of 17.2 million was 1.8% lower than last year's fourth quarter. The combination of lower net income and lower share count drove earnings per share for the quarter to $48.71, up 1.3% on a 16-week basis.

As a reminder, the combination of LIFO and unfavorable FX comparison drove our EPS down $4.14 a share. For FY '25, net income was $2.5 billion, down 6.2% and earnings per share was $144.87, down 3.1%. LIFO and FX drove our EPS down $6.42 a share in FY '25.

Now let me talk about our free cash flow. For the quarter, we generated $511 million in free cash flow and $1.8 billion for FY '25. 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 2.5x EBITDA. Our inventory per store was up 9.6% versus Q4 last year, while total inventory increased 14.1% 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 negative $131,000 versus negative $163,000 last year and negative $142,000 last quarter.

As a result, accounts payable as a percent of gross inventory finished the quarter at 114.2% versus last year's Q4 of 119.5%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $447 million of AutoZone stock in the quarter. And at quarter end, we had $632 million remaining under our share buyback authorization. Our ongoing strong earnings, balance sheet and powerful free cash allows us to return a significant amount of cash to our shareholders through our buyback program. We have bought back over 100% of 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. So 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 FY '26, we're bullish on our growth prospects behind a Brazilian DIY business, a fast-growing international business and a domestic commercial business that is growing share in a meaningful way.

We continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders behind a strong industry, a winning strategy and an exceptional team of AutoZoners. 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 headwind on revenue and EPS. If yesterday's spot rates held for Q1 then we expect an approximate $32 million benefit to revenue, a $9 million benefit to EBIT and a $0.38 a share benefit to EPS.

Additionally, as you build your FY '26 models, note that we are aggressively building stores, both domestically and in Mexico and expect to build 325 to 350 stores in the Americas in FY '26. The build-out will be skewed to the back half of the year and will make up the majority of our planned CapEx of approximately $1.5 billion.

And now I'll turn it back to Phil.

[Philip Daniele, executive]

Thank you, Jamere. We are excited to start FY '26, we have a lot to accomplish in this new fiscal year. We are committed to improving our execution and driving WOW customer service. We feel we are well positioned to grow sales across our domestic and our international store businesses with both our retail and our commercial customers. We expect to manage our gross margins effectively and operating expense is appropriate for future growth.

We continue to put our capital to work where it will have the biggest impact on sales. Our stores, our distribution centers, and investing in technology to build a superior customer service experience. The top focus areas for FY '26 will be growing share in our domestic commercial business and continuing our momentum in international. We are excited to get started on our first quarter. But we understand we cannot take things for granted. We must remain laser-focused on customer service, flawless execution and gaining market share in every market in which we operate. This time of year, we also enjoy reflecting on the past 12 months highlights.

Our teams achieved several impressive milestones this past year. First, $18.9 billion in sales, and we hope to celebrate the $20 billion milestone soon. Domestic commercial sales of an amazing $5.2 billion. Average weekly sales domestically of just over $48,000 a store, equating to just over $2.5 million per store annually. We opened an amazing 195 new stores domestically. This is the most stores we opened annually in the U.S. since fiscal year 2004 over 20 years ago, and we opened a record 109 stores internationally. Globally, we opened a record 304 net new stores, over 43% more stores than the year before.

In a week or so, we will be hosting our national sales meeting here in Memphis and we'll discuss with our field leadership, our operating theme for the new year, driving the future together. While improving on our customer service levels will forever be a key theme, this year we want to celebrate collaboration as a theme to take us even further for the new year.

Our store assortment and in-stock position are better than they have ever been. So we want to challenge our teams to educate our customers on our product offerings and services. This will only happen if AutoZoners amplify their product availability across our retail and commercial customer bases. Fiscal 2026 top priority -- operating priority will continue to be based on improving execution and WOW customer service.

We will continue to invest in the following strategic projects, remain focused on driving our do-it-yourself and commercial sales growth, which we are doing in a meaningful way, continuing to ramp our domestic and international new store growth, drive new hub and Mega-Hub openings, where we are incredibly excited about their continued performance, focusing on improving our new distribution centers and the new supply chain capabilities we have and leveraging our IT capabilities to drive improved customer service and sales. We are excited about what we can accomplish in the new year, and our AutoZoners everywhere are 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.

[Operator]

[Operator Instructions]

Your first question for today is from Bret Jordan with Jefferies.

[Bret Jordan, analyst]

You were calling out inflation, I think, at least 3% in the fiscal first quarter. It's sounding from some of the WDs like you're seeing a fair amount more price than that. Is that your supply chain allowing you to sort of get to market at a lower cost and use price as a share gain? Or are you really expecting more than 3 sort of tied to same SKU tariff tailwinds?

[Philip Daniele, executive]

I think, Bret, we suspect it will probably, we said kind of at least 3%, probably goes up from here. I mean at the end of the day, we've talked for years about this industry being pretty disciplined and rational in pricing. And we're going to use the pricing lever as we need to, to cover the cost of goods and make sure we stay competitive in the marketplace.

[Bret Jordan, analyst]

Okay. And then interestingly, you commented the discretionary is up for the first time in a bit. Is there anything either internally that you're doing to drive that? Or are you seeing sort of green shoots as far as that consumer base?

[Philip Daniele, executive]

Yes. Well, I think it's kind of 2 points. At some point, it really spiked up, and I'm going back several years. Coming out of the pandemic, the discretionary categories really spiked up and then they've really declined over the last 2 years. As we said, it's the best growth we've had over the last couple of months, it is since '23.

So I'd say it's probably bottomed out and slowly started to gain some traction. Maybe there's a little bit of green shoots, but I would say it's a little early to say. And I still think that the lower end consumer is still under quite a bit of pressure. And this is mostly on the DIY sales floor side of the business.

[Operator]

Your next question for today is from Michael Lasser with UBS.

[Michael Lasser, analyst]

Can you provide a sense of how the arc of the LIFO charges will look from here, you indicated to expect $120 million in the first quarter, is it reasonable for us to simply annualize that number, getting to around $520 million or so for the full year? Or would you expect that to peak and then fade off? And how will your margins look as that cycle fades, meaning do you get all of the margin headwind back on the other side of this cycle?

[Jamere Jackson, executive]

Yes. Thanks, Michael, for the question. So for the first quarter, we're expecting the number to be in the $120 million ZIP code, if you will. And we expect pressure, quite frankly, for the subsequent quarters, Q2, Q3, Q4. I would say over those 3 quarters right now, our modeling is probably in $80 million to $85 million-ish a quarter range. It's a pretty dynamic environment, obviously, because it's associated with tariffs.

But based on the visibility that we see right now, it could be in the $80 million to $85 million a quarter going out Q2, Q3 and Q4. As always, we'll be pretty transparent about what we see there and share the next quarter's outlook. What I'll say in total about that is, as you've seen in the past, as we have booked these LIFO charges and as we sort of anniversary those and they become part of the base as we see product cost deflation over time, which we have then we would expect to see these gains potentially rolling back through the P&L. And over time, we'll get back to these reversion out and being gained through the P&L. The timing of which right now is a little bit uncertain. But that's what you can expect in the future.

And then the last thing I'll say about LIFO is it is a little bit of a bellwether, if you will, for what we expect to see coming on inflation. And as Phil talked about a little bit earlier, I mean we see at least 3% inflation. But what I'll tell you is that based on what we're seeing from tariffs and the costs associated with tariffs, the playbook that we have, which is negotiating with our vendors to absorb a portion of the costs to raise retails where necessary and make sure and doing all of this that we're taking care of the customer. I mean, that playbook is still active. And we're going to be pretty disciplined about what we do. But our goal over time is to maintain our gross margins and our gross margin rate.

[Michael Lasser, analyst]

Got you. Very helpful. My follow-up question is on SG&A. Your SG&A growth was elevated this quarter. It sounds like it might remain elevated for at least in near term, others are having a similar dynamic. Is this a reflection of an arms race within the industry where there's just an opportunity to put more operating expense in the ground and that will translate to better share and eventually, that will subside? Or is it just more expensive to run an auto parts business these days?

[Jamere Jackson, executive]

I wouldn't characterize it as an arms race. What I'll say very specifically is that we're investing heavily, primarily in new stores this year. And that new store growth will be, as I mentioned, 325 to 350 stores in the Americas, which is going to include an acceleration for both the U.S. and Mexico. And I'll remind you that new stores typically mature in 4 to 5 years. And so their SG&A drags as -- in the early years. And then as those stores mature, we actually start to leverage SG&A. What I'll say is that -- we expect this SG&A growth to be in the mid-single-digit ZIP code as we move forward and execute on this plan and coming out on the other side of that, we're creating a faster-growing business. And you can see the growth shoots in our current quarter's comp, and we expect to continue that momentum as we move forward.

So the cost to operate in this industry, we've always managed that with discipline. I think what you're seeing here is us very purposefully investing in growth initiatives that are going to pay real dividends for us in terms of a faster growing business going forward.

[Operator]

Your next question is from Greg Melich with Evercore.

[Gregory Melich, analyst]

Maybe I love to follow up on the last question and then my follow-up would be on price elasticity. On SG&A growth, particularly, what sort of comp now do you expect given the growth plans to be necessary to leverage SG&A if we think about the next couple of years?

[Jamere Jackson, executive]

I mean one of the things that we've said is that we will manage the SG&A line in line with sales growth. So if we're expecting to invest this kind of SG&A going forward, particularly with new stores. And we obviously would expect an acceleration in the comp. I won't be date certain or very specific about what that comp looks like, but what you can anticipate for us is if we're expecting to grow SG&A in the ZIP code, then you can see us to have a little bit faster growth on the comp line.

And again, we'll be transparent about what we see in the market going forward. But we like the growth prospects that we have. We're growing share both in DIY and in commercial. Our Mexico business is doing very, very well against a tougher macro backdrop. But we have a lot of confidence in this growth plan. Hence, we're going to continue to accelerate store growth in the future.

[Gregory Melich, analyst]

Got it. And I guess the fun part of the question is really on price elasticity. It seems like as the first wave of inflation has come through, I know there's usually some or maybe some items out of the basket or maybe a little bit of deferral, but it sounds like you guys have seen no price -- no elasticity to unit demand as this is a...

[Philip Daniele, executive]

Yes. We've talked about this for a long time. If you think about the way we kind of characterize our big segments of categories, failure, maintenance and discretionary, the first two, they are break fix or customers learn over time that if I don't do the maintenance on the car, I'll ultimately end up with a bigger failure project that cost me a lot more money.

So customers can defer that maintenance for some period of time, but ultimately, they realize that they've got to fix it or it creates more damage. Again, the discretionary segment of our business, specifically on the DIY side is pretty small relative to the other 2. So there's just not a lot of elasticity variability in the categories that we play in. Some deferral back and forth, weather is dependent on a couple of them. I think you saw we talked a little bit about our performance in the Midwest and the Northeast was a little better because we got a more normal winter, which drives more brake sales and undercar sales because it just drives failure on those types of part types.

So we feel good about that. And the industry has been able to pass on these costs to the consumer. And we saw it in the pandemic. We've seen it over 15-, 20-, 30-year time horizons. It's all been pretty disciplined and rational, and we suspect that that's going to continue.

[Operator]

Your next question for today is from Christopher Horvers with JPMorgan.

[Christopher Horvers, analyst]

So I want to make a longer-term question here. Can you talk about the growth opportunity in Mexico about 900-ish stores. How big is your market share? How big is the market? There's about 37,000 auto parts stores in the United States. Is that a comparable number? And do you think over time that you could perhaps double your store base from here?

[Philip Daniele, executive]

Yes, I think we see some pretty long shoots for store growth and share growth in all of our international markets and obviously also in Mexico. I will say the competitive set in Mexico is a lot different than it is in the U.S. although there are some pretty good competitors down there that have higher store counts, but there's also a large part of the marketplace that is maybe category specific, maybe they're focused specifically on undercar or starters and alternators or brakes or something of that nature as opposed to somebody like us where we have kind of all categories and great service.

So we've got a pretty big store count advantage over the rest of the marketplace, but we still see lots of opportunities to continue to expand our store count footprint specifically in the southern half of the country in some of the more dense markets, take Mexico City, for example, we just don't have a lot of stores there, and it's one of the biggest cities in the world, lots of opportunity for us to continue to grow.

[Jamere Jackson, executive]

I think to put it in a little perspective, I mean you've got a car park there that is older than the car park in the U.S. by roughly 3 years or so and you've got a number of outlets there that are very fragmented, if you will. So if you look at the size of our chain today, we're probably larger than the next 7 or 8 change combined.

So our market share position there is very strong. And as Phil said, we've got a tremendous opportunity to go forward. Hence, we've talked about accelerating store growth in Mexico. So we're pretty bullish on it going forward. You got to grow in an aging car park and you've got a competitive set there that what we bring to the market is differentiated. And we're pretty excited about the opportunity to grow market share.

[Christopher Horvers, analyst]

Got it. And then 2 quick margin follow-up questions. First on LIFO, is the LIFO numbers that you put out Jamere predicated on that assumed 3% inflation in the balance of the year. And then on SG&A per store growth in '26 given the timing of openings, do you expect that to be weighted to the back half of the year?

[Jamere Jackson, executive]

Yes. I mean we expect from an inflation standpoint for that inflation number to continue to creep up as we talked about. And what we anticipate going forward is that you could see another couple of mid-single-digit increments of inflation as we work our way through tariffs and build our inventory accordingly.

So with that, if that is the case, then you could see the LIFO in the ZIP code. Again, it's a pretty dynamic environment. What I'll tell you is that our merchandising teams have done a really good job along with our suppliers in finding a way to go mitigate costs. We haven't experienced as much cost as we would have anticipated, given all the announcements that are out there. So as the environment unfolds, then we've reacted accordingly. And again, the playbook is the same as we move forward.

[Christopher Horvers, analyst]

And then on SG&A per store?

[Jamere Jackson, executive]

Yes. From an SG&A per store standpoint in the back half, I mean, we think we're going to be somewhere in this mid-single-digit growth for the entire fiscal year, probably accelerates a little bit in the back half because our store count will accelerate in the back half of the year will be a little bit more level loaded than it was in this past year, but still a little bit more skewed to the back half of the year.

So as you're sort of building your models, call it, mid-single digits for the year and maybe have a little bit of acceleration in the back half and you should be in the right ZIP Code.

[Philip Daniele, executive]

Just -- that we ultimately -- the store count growth year-over-year we've kind of said we plan to be somewhere around that 500 stores a year in 2028. So we are -- as Jamere said, we're going to continue to ramp up our store counts, both domestically and internationally to get somewhere close to that -- roughly 300 in the U.S. and 200 internationally over time.

[Operator]

Your next question is from Steven Zaccone with Citi.

[Steven Zaccone, analyst]

I wanted to follow up on the pricing elasticity question. It sounds like things have gone well thus far. But as you think about same SKU inflation stepping up over the next couple of quarters, do you have concerns that there could be similar price elasticity in the category? How does that factor into your same-store sales outlook?

[Philip Daniele, executive]

I mean, yes, I think there probably will be more same SKU inflation as we move throughout the year as the full impact of tariffs come in, and prices continue to migrate up to cover those incremental costs. But again, the categories that we play in, if the starter breaks, your car is not going to start and you have to ultimately do 1 of 2 things, either bum a ride or get your car fixed or take an Uber.

And none of those are probably that -- the customer is probably not that excited about that. I'd like to remind everybody, too, most of the categories and the ticket averages that we're talking about here are somewhere in the mid $35 to $40 on DIY and they're $60 to $90 on the commercial side, depending on the category and the job that's being done so that an incremental 1%, 2%, 3% or 5% is not a significant dollar amount. It's not like we're buying cars that are -- where the price went up $5,000 to $8,000 or a couch where it went up 20% or 30%, it's just not that big a dollar amount.

So it's a little easier for the consumer to swallow that price. But we do expect it's going to continue, and we expect the industry will remain rational and disciplined in its approach to pricing. The one thing we don't want to do, and we'll always watch is make sure we're not destroying demand. Because we think that's very important to keep the customer coming into our stores and the shop buying from us. Those are important.

[Christopher Horvers, analyst]

Okay. And then the follow-up I had was just on gross margin, merchandise margin has been strong the last couple of quarters. It sounds like that's going to continue in the first quarter. Can you just elaborate a little bit more what's driving that? And can it continue through the balance of fiscal '26?

[Jamere Jackson, executive]

Yes. I think our -- again, our teams in merchandising have done a fantastic job of finding opportunities for us to drive gross margin improvement. It's a playbook that we've run for a really long time. It's a combination of finding cost opportunities with our vendor community it's innovation in those categories that enable us to go do that, and it's an opportunity for us to sweeten the mix a little bit. And we've sweetened that mix in some instances, by moving more volume into our Duralast brand.

So teams have done a very good job of doing that over time. Again, it's a playbook that we've run. We run it with intensity inside of the company and we count on that to help us grow our business. And that's really important for us as we think about sort of margin expansion in the future. Obviously, our commercial business has a little bit lower gross margin, although we like the operating margins associated with that. We think the work that we've done on the merchandising side, particularly with merch margins, has the ability to basically mute that pressure that we see on gross margins.

So you get an opportunity to have a faster-growing business with commercial that doesn't create a dramatic drag on your gross margins as you move forward.

[Operator]

Your next question is from Brian Nagel with Oppenheimer.

[Brian Nagel, analyst]

So first question, I know it's going to be a bit of a follow-up. But just on the topic of tariffs and trade policy. And so as we look at these fiscal Q4 results, how should we think about what the impact tariffs have there? I mean, is there a way you can say it was -- were the incremental tariffs a driver of sales? Did you see some sort of, say, impacts on the margin here in the quarter?

[Jamere Jackson, executive]

Yes, I would say the best way to think about it is, you've seen our ticket growth basically accelerate in both DIY and commercial. And a portion of that ticket growth is very clearly driven by the cost increases that we're seeing associated with tariffs. Now while we've been running the playbook, as I mentioned before, of having very healthy negotiations with our vendors, by moving sources in some cases. The reality is that some of that inflation is finding its way in the product costs and finding its way into same SKU inflation and the entire industry has moved retail prices up accordingly.

So there's a very direct impact associated with tariffs and the fact that you're starting to see more pronounced same-SKU inflation. And as a result, retails across the industry are going up. As we move forward and we continue to see that and to have probably fewer opportunities to mitigate that. You'll continue to see same SKU inflation tick up and likely see retails moving up accordingly. And again, back to the previous question on it, this is largely a break-fix business where the lion's share of our business is in failure and maintenance-related categories. So we believe that we -- the industry will continue to be rational in terms of how we price, and we don't expect a notable drop off in terms of units.

[Philip Daniele, executive]

I think those long-term trends to have been in kind of that a little more than 3% same SKU inflation or ticket average inflation driven by some number of negative transaction counts. And those have been in place for -- I said this on several calls, 20 and 30 years -- you had a big bump through COVID, specifically because of the supply chain crisis.

It was muted coming out of that for the last couple of years and tariffs are now putting it back in somewhere in that 3% range. But I think over time, because of technology, parts consolidations and improvements in longevity of parts, you're going to see that natural incline in average unit retails and slightly decline in transaction counts.

[Brian Nagel, analyst]

No, that's very helpful. And then so as a follow-up to that, if you look at the cadence of sales through the fiscal fourth quarter? I mean, recognizing, as you pointed out, there's some noise with the timing of, I guess, the fourth July holiday. But both your DIY and your commercial sales growth strengthens. So -- how much -- is there a way to think about how much of that is this what we're talking about here, the tariffs rolling through? I know the weather improved for you. But then I guess the final piece would be actual better underlying demand. I mean, the question I'm asking is, how do we think about that improving trend in sales growth through the quarter with all this going on?

[Philip Daniele, executive]

Yes. Great to see you brought up a couple of great points. One is, if you think year-over-year, whether the early part of summer was very, very wet and slightly mild relative to the previous year and relative to history. About mid-July it started to crank up the heat, and we saw the heat categories really take off in that time frame. And brakes, undercar, those sorts of categories have been really strong up in the Northeast and the Midwest on the back of some better winter and spring weather, which we thought was going to be an advantage for us.

I would say all those things you mentioned are reasons that we're pretty optimistic. The marketplace is still pretty good. The weather has been pretty good for us, and specifically in the back half of the year, we are getting some same-SKU inflation. And I'll also say that I believe what we are doing -- our initiatives are also paying out. We have opened more new stores, but we've continued to improve our assortments at the store level. We've opened up hubs and Mega-Hubs and gotten that inventory closer to the stores.

Our in-stocks are at all-time high. We feel really good about our execution in our stores, both on the DIY side and the commercial side. So I think it's all of those kind of coming together tell a pretty good story for us, and it's why we're confident going into the next couple of quarters.

[Operator]

Your next question for today is from David Bellinger with Mizuho.

[David Bellinger, analyst]

Maybe for Phil, just with all the pricing going into the category, and this is inflation on top of inflation, even pre-tariff inflation, how concerned you that we could see another deferral cycle show up maybe sometime in 2026. Is that something you're watching for or just being a bit more mindful of only increasing prices about at 3% as opposed to something more?

[Philip Daniele, executive]

Yes. Like I said before a minute ago, we're going to -- we'll watch our demand signals that we get. We watch that like a hawk. But at the end of the day, I'm not that concerned about a massive deferral because I think the consumer at the bottom end has been under pressure for well over 2 years. Those maintenance deferral cycles, you probably run through them, if that's been your car where you didn't replace brakes at some point, you don't have a whole lot of choice, you've got to do it. The discretionary stuff could continue to be under some form of pressure, but it's also gotten to a point where I think it's got really low over the last 2 years and coming back into a more normal cycle, I would think.

So I'm not that worried about a massive deferral cycle unless inflation ticks up more than what we think it's going to be in that mid-single-digit range. If it went up significantly more, and there was an additional shock to the system, I think we would worry about that. But at this point, I think the consumer has been dealing with this inflation for since probably April or May, depending on the category, and it's showing up in our category today, but we think it's manageable, and we think customer demand stays intact.

[David Bellinger, analyst]

I appreciate that. And then just a follow-up question on Mexico and the comments on the long-term growth opportunity there. Should we see the Mega-Hub model at some point, roll out to Mexico and sort of replenish the stores more frequently. Does that -- how should we think about the build of that geography and what other features or capabilities these stores to get over time?

[Simeon Gutman, analyst]

Yes. We're light on the Hub and Mega-Hubs strategy down in Mexico and have been. It's been mostly kind of a satellite strategy down there. We spent the last couple of years really working on our assortment in Mexico to really capitalize on the commercial opportunity.

We say commercial is our biggest opportunity in the U.S. Well -- oh, by the way, it's the biggest opportunity in our international markets as well because the mix of volume roughly 40% DIY in the U.S., 60% in commercial in the U.S., it's more like 65%, 35%, 40%, it's the inverse of the U.S. So we like our opportunities down there. So we're strengthening those assortments and that says we probably need hubs and Mega-Hubs down there to make sure we're satisfying the commercial customer as well.

[Operator]

Your final question for today is from Steven Forbes with Guggenheim Securities.

[Steven Forbes, analyst]

For Phil or Jamere, just revisiting the path to 500 stores by 2028, I guess sort of a 2-part question. One, as we think about the 200 international stores, can you break that down by country, and then how does the year 1 expense rate differ between a new U.S. store versus international store? Like is there anything we should note as we dramatically increase the number of international stores to the mix.

[Jamere Jackson, executive]

Yes. So in terms of the split, obviously, we will have a significant more -- significantly more of those international stores will be in Mexico versus Brazil. One, because we see the market opportunity in Mexico. We have scale there today. And to Phil's point, there are opportunities for us to improve strategically there to really grow our business. And so to the extent that we're going to put those strategies in place in Mexico, we would expect most of that international mix to skew towards Mexico versus Brazil over time.

I think in terms of the cost profile, on a relative basis, it's very similar to what we see in the U.S., obviously, the absolute cost per is different in the international markets versus the U.S. But the cost drag in the early years is very similar to what we see in the U.S. The stores typically take somewhere between 4 and 5 years to mature. We see a drag in the early years. But as those stores mature and the same-store sales continues to grow, then those stores become very profitable for us as we move forward.

[Steven Forbes, analyst]

And then just a quick follow-up, right, as we think about marrying expense growth to sales growth, the comment that you made earlier in the call to another question. Does that apply for 2026, given the ramp in new stores and the comments around mid-single-digit expense per store growth because it's really setting up sort of a high single-digit-ish growth profile for expenses in almost like an indirect sort of framework for sales as well.

[Jamere Jackson, executive]

Yes. I think the way to think about it is that if SG&A is going to be in that ZIP code, and it's going to be driven by new stores, as we suggested, Remember, we jammed a lot of new stores into the back half of last year that are going to be SG&A drags for us as we enter this year. And then we're layering on top of that an accelerated sales growth plan this year.

So to make the math work for us. I mean, we essentially have to go drive the sales growth from those new stores and from our existing footprint to make the model work for us. And we're doing that, and you're seeing that on the top line. If -- as we said in the past and we continue to manage the business this way, if we don't see the kind of performance that we need to see from a sales standpoint, then we know how to reach into the middle of the P&L and pull the expenses out so that we deliver the kind of profitability that we need to. So it's accelerated, but that acceleration is predicated on us continuing to move in the right direction on the top line.

[Philip Daniele, executive]

Thank you. All right. Thank you for joining us on today's call. Before we conclude the call, I want to take a moment to reiterate that we believe that our industry remains in a very strong position, and our business model is 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 continue to focus on flawless execution and strive to optimize shareholder value for the future, we are confident that AutoZone will be successful. Thank you for participating on today's call.

[Operator]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.