Why did reported EPS and operating profit grow faster than gross margin implied?

Operating expenses grew more slowly than sales, improving to 33.1% of sales from 33.3%. Together with 8.4% sales growth, this lifted operating profit 6.6%, despite a 57 bp gross margin decline driven largely by a non-cash LIFO charge. Lower share count (diluted shares down about 2% year over year) also boosted EPS growth to 7.7%.

How much of the headline international growth is real?

Very little of it. Reported international same store sales rose 16.6%, but constant-currency growth was only 1.6%, reflecting a favorable currency translation effect. Constant-currency growth also slowed sharply from 8.1% a year earlier, and management said performance in Mexico and Brazil is below plan.

Is the 10.8% inventory increase a concern?

It warrants monitoring. Management attributed the increase to new-store growth and inflation, and inventory grew faster than sales. Inventory turns fell to 1.3x from 1.4x, although accounts payable still funds 111% of inventory, so net inventory remains negative at $(107) thousand per store.

What are the capital return and leverage implications?

AutoZone repurchased $586.3 million of stock in the quarter and has $0.8 billion of authorization left. Adjusted debt to EBITDAR was stable at 2.5x, consistent with the company's goal of maintaining investment-grade ratings while continuing buybacks.

AZO 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed May 26, 2026. Cited figures are marked; the original filing is the authoritative source.

AutoZone reported fiscal Q3 2026 (12 weeks ended May 9, 2026) with net sales of $4.84 billion^a, up 8.4% year over year, and total company same store sales up 3.9% in constant currency (5.5% as reported).

Domestic same store sales rose 4.1%, driven by growth in both DIY and commercial sales. Diluted EPS was $38.07^b versus $35.36 a year ago, and operating profit rose 6.6% to $923.8 million. Management said the operating margin returned to above 19% for the quarter, although the reported gross margin fell 57 basis points to 52.2%, largely because of a 77 basis point non-cash LIFO charge.

The main concern is international performance. Constant-currency international same store sales grew only 1.6%^c in the quarter (versus 8.1% a year earlier), and management acknowledged that results in Mexico and Brazil have been below plan. Reported international growth of 16.6% was largely a currency effect.

Inventory rose 10.8%^d year over year, which management attributed to growth initiatives and inflation. Inventory turns slipped to 1.3x from 1.4x, a modest signal to watch. Capital allocation and balance sheet metrics stayed consistent.

AutoZone repurchased $586.3 million of stock in the quarter at an average price of about $3,582, leaving $0.8 billion of authorization. Adjusted debt to EBITDAR was steady at 2.5x, and the stockholders' deficit narrowed to $(2.78) billion from $(3.97) billion a year earlier. The company opened 82 stores globally and reaffirmed its plan for 355-365 openings in fiscal 2026.

02—Key points

Key Highlights

Net sales of $4.84 billion, up 8.4% year over year; total company same store sales up 3.9% in constant currency and domestic same store sales up 4.1%.
Diluted EPS of $38.07 versus $35.36 a year ago, with net income of $641.5 million versus $608.4 million; operating profit rose 6.6% to $923.8 million.
Gross margin fell 57 bps to 52.2%, mainly from a 77 bp non-cash LIFO impact; operating expenses leveraged to 33.1% of sales from 33.3%.
International constant-currency same store sales slowed sharply to 1.6% from 8.1% a year earlier; management said Mexico and Brazil are below plan.
Merchandise inventory rose 10.8% year over year to $7.56 billion, and inventory turns fell to 1.3x from 1.4x.
Repurchased $586.3 million of stock (164 thousand shares at an average of about $3,582); $0.8 billion of authorization remains.
Opened 82 stores in the quarter, bringing the total to 7,856; full-year guidance is 355-365 new stores. Adjusted debt to EBITDAR held at 2.5x.

03—Questions

Frequently Asked Questions

Why did reported EPS and operating profit grow faster than gross margin implied?
Operating expenses grew more slowly than sales, improving to 33.1% of sales from 33.3%. Together with 8.4% sales growth, this lifted operating profit 6.6%, despite a 57 bp gross margin decline driven largely by a non-cash LIFO charge. Lower share count (diluted shares down about 2% year over year) also boosted EPS growth to 7.7%.
How much of the headline international growth is real?
Very little of it. Reported international same store sales rose 16.6%, but constant-currency growth was only 1.6%, reflecting a favorable currency translation effect. Constant-currency growth also slowed sharply from 8.1% a year earlier, and management said performance in Mexico and Brazil is below plan.
Is the 10.8% inventory increase a concern?
It warrants monitoring. Management attributed the increase to new-store growth and inflation, and inventory grew faster than sales. Inventory turns fell to 1.3x from 1.4x, although accounts payable still funds 111% of inventory, so net inventory remains negative at $(107) thousand per store.
What are the capital return and leverage implications?
AutoZone repurchased $586.3 million of stock in the quarter and has $0.8 billion of authorization left. Adjusted debt to EBITDAR was stable at 2.5x, consistent with the company's goal of maintaining investment-grade ratings while continuing buybacks.

04—Continue

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