AZO — Annual 2026 Financial Report Analysis

Headline

AutoZone's fiscal 2026 (the 52 weeks from August 31, 2025 to August 29, 2026) delivered sales of $20.34 billion, up 7.4%, but operating profit grew only 3.1% and net income 3.0% because costs for new stores and distribution hubs rose faster than sales. Diluted earnings per share (EPS — profit divided by the number of shares) rose a faster 5.3% to $152.55, largely because the company kept shrinking its share count through buybacks. The 16-week fourth quarter (May 10 to August 29, 2026) looked much stronger — EPS up 15% to $56.05 — but a large part of that came from refunds of tariffs the company had previously paid, which will not repeat.

Full-year figures

Gross margin is the share of sales left after paying for the parts sold; operating margin is the share left after also paying to run the stores and head office, before interest and tax. Same-store sales compare only stores open at least a year, so they strip out growth that comes purely from opening new locations.

Fourth quarter: a strong print flattered by two items

The quarter's 182-basis-point gross-margin gain (100 basis points = 1 percentage point) came from two items the company itemized: 145 basis points from tariff refunds and 105 basis points from a non-cash LIFO effect (LIFO is an inventory accounting method under which changes in product costs flow through profit; it produces book gains or charges without any cash moving). Those two items together add up to roughly 250 basis points — more than the whole improvement — which means that, stripping them out, gross margin would have been roughly 70 basis points lower than last year. The company attributes the underlying pressure to "higher commercial mix": sales to repair shops, which carry lower margins than sales to do-it-yourself shoppers, are a growing share of the business. By our arithmetic, 145 basis points of Q4 sales is roughly $95 million of pre-tax benefit from tariff refunds.

Operating expenses rose to 33.4% of sales from 32.4%, which the company says was "primarily driven by growth initiatives" — new stores, Mega Hubs (large stores stocking a much wider parts range that also resupply nearby stores) and faster delivery.

Demand weakened during the quarter and then recovered. Domestic same-store sales rose just 1.6%, against a tough 4.8% gain a year earlier, and CEO Phil Daniele described "a difficult selling environment the first eight weeks of our quarter," with results strengthening over the last eight weeks.

Where the growth is coming from

• Commercial (sales to repair shops) is the engine. Domestic commercial sales rose 10.6% for the year to $5.76 billion, versus 3.3% domestic same-store growth overall. Average weekly sales per commercial program rose 6.0% for the year to $17.7 thousand. 6,443 U.S. stores now run commercial programs, up from 6,098.
• International growth is mostly currency. International same-store sales rose 13.5% for the year as reported, but only 2.2% in constant currency (that is, converting both years at the same exchange rates). The gap is a currency effect — Mexican peso and Brazilian real revenue translating into more dollars — not extra customer demand. In Q4 the gap was 10.7% reported versus 1.3% constant currency.
• Store growth accelerated. AutoZone opened 374 net stores in the year (236 in the U.S., 118 in Mexico, 20 in Brazil), up from 304 the year before, ending with 8,031 stores — 6,863 in the U.S., 1,001 in Mexico and 167 in Brazil.

Cash, buybacks and balance sheet

• Operating cash flow was $3.30 billion (up from $3.16 billion); capital spending rose to $1.50 billion from $1.37 billion. That leaves free cash flow — cash from operations minus investment in stores and equipment — of about $1.81 billion, roughly flat on last year.
• The company spent $2.0 billion buying back 579 thousand shares at an average $3,496. That is more than free cash flow, with the gap funded partly by borrowing: total debt rose to $9.08 billion from $8.80 billion. Diluted share count fell 2.2%, which is why EPS grew faster than net income. $1.6 billion of buyback authorization remains.
• Adjusted debt to EBITDAR (debt including lease obligations, divided by earnings before interest, tax, depreciation, amortization, rent and share-based pay — a gauge of how heavily indebted the company is) held at 2.5x.
• Adjusted after-tax return on invested capital (ROIC — profit generated per dollar of money tied up in the business) fell to 35.8% from 41.3%, as the investment base grew faster than profit.
• Inventory rose 10.1% to $7.74 billion, ahead of 7.4% sales growth, which the company attributes to growth initiatives. Suppliers are still funding more than all of it — accounts payable equal 111.1% of inventory (down from 114.2%), so net inventory per store is negative $107 thousand.

Takeaway: Fiscal 2026 was a year of heavy investment that has not yet paid back: sales grew 7.4% and commercial grew 10.6%, but operating margin slipped from 19.1% to 18.3% and return on invested capital dropped more than five points. The strong Q4 headline leaned on tariff refunds and a LIFO benefit — without them, the underlying gross margin moved down, not up.

Outlook

AutoZone does not give numerical guidance. Management said it expects "sales in each of the three countries in which we operate to accelerate in the new fiscal year," and pointed to strengthening sales over the final eight weeks of Q4.

Our read: the investment case for fiscal 2027 rests on whether the new stores, Mega Hubs and delivery spending start to lift sales faster than costs. Watch three things: (1) whether domestic same-store growth reaccelerates from Q4's 1.6%; (2) whether operating expenses stop outgrowing sales — the year's 0.4-point rise in the expense ratio is what turned 7.4% sales growth into 3.1% profit growth; and (3) the underlying gross margin once tariff refunds disappear, since the growing commercial mix is a structural drag. Buybacks will keep EPS growth a few points ahead of net income growth, but they are running ahead of free cash flow, so debt is doing part of the work.