AutoZone Stock

Good day, everyone, and welcome to AutoZone's 2026 Fourth Quarter Earnings Release Conference Call. [Operator Instructions] At this time, the company would like to provide its forward-looking statement.

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.

Good morning, and thank you for joining us today for AutoZone's 2026 fourth quarter conference call. With me today are Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer and Investor Relations.

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 at 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 company for continuing their relentless commitment to delivering on our pledge to always put customers first. The operating theme for FY 2026 was driving the future together, and we delivered on that theme this year as we grew our total store count, opening the most stores ever in a single year, improved on our assortment and in-stock positions and continue to invest in systems to deliver even better customer service. Our customer service levels and execution have improved this past year, and this quarter, we continued to gain market share in a challenging environment.

As an outline for this morning's call, first, we'll [Audio gap] domestic DIY and commercial sales results and provide color on the cadence of our sales over the 16-week quarter, including traffic, ticket and inflation trends. We will also provide an outlook and perspective on FY '27 sales. Second, we will discuss our international sales results and the progress we are making on our new store build out. Third, we will talk about our store openings, both domestically and internationally and provide perspective on store economics and the impact on return on invested capital over the next several years. Lastly, we'll conclude with an additional commentary on how we see FY '27 playing out.

So let me start by unpacking our Q4 results. We delivered total sales growth of plus 5.6%, while we grew slower than Q3's rate, we felt we gained momentum as the quarter moved along, and we like our sales growth potential heading into the new year. Our earnings per share increased 15.1%. Similar to prior quarters, our gross margin, operating profit and EPS were negatively impacted by a noncash LIFO charge of $15 million. As a reminder, during last year's Q4, we recognized an $80 million LIFO charge. In addition, we saw a $96 million or $4.43 share benefit from the refunds of IEEPA tariffs. Finally, we opened 175 new stores this quarter. For the year, we opened 374 new stores versus 304 stores last year. This year's total of 374 stores is the most ever in a fiscal year. We also hit some major milestones. We celebrated our 1,000th store in Mexico, and we opened our 8,000th store in August in our home state of Tennessee. We also held our grand opening for our relocated Monterrey, Mexico distribution center, which is almost 2x the size of the previous distribution center, and we broke ground on our new Leon Mexico DC, which will come online in late FY '28 to support our international expansion.

Let me touch on some same-store sales highlights for the quarter. Total company same-store sales grew plus 1.5% on a constant currency basis with domestic same-store sales growth of plus 1.6%. Our domestic DIY same-store sales declined 0.6%, while our domestic commercial sales grew plus 8.6% versus last year's Q4. We saw our sales bottom in June and then begin to improve as the quarter moved along. We exited the quarter with good momentum, and we are optimistic about our sales trajectory for the new fiscal year. International same-store sales were up 1.3% on a constant currency basis, and our unadjusted international comp was plus 10.7% as exchange rates positively impacted our comps by over 900 basis points.

Next, let me address our total domestic same-store sales results in a little more detail. Domestic same-store sales averaged around plus 1.4% over the first three months and then accelerated in August to plus 2.1%. Our domestic retail comps were negative 0.6% for the quarter and ran negative for the first three months before running essentially flat in August. We began the quarter with milder-than-usual temperatures across the Southeast and the South Central markets, along with lower foot traffic. The impact of higher inflation from higher oil and gas prices likely dampened our traffic and sales results for most of the quarter. At the tail end of the quarter, our results were buoyed by stronger results in our hot weather categories. We saw mid-single-digit like-for-like same SKU inflation for the quarter, which contributed to our DIY average ticket being up roughly 5%, which was offset by traffic declines. For the first quarter of FY '27, we expect same-store sales to be relatively flat, with average ticket to remain around plus 5% that we saw in Q4.

Next, I will touch on our domestic commercial business. As I mentioned, our commercial sales were up just under 9% for the quarter. The first three months of the quarter averaged just over 8%, while the last month was well over 9% growth. Commercial growth was impacted earlier in the quarter by below expectations performance in our hot weather categories that rebounded in the last month of the quarter as we experienced hotter summer temperatures. Similar to DIY, we saw ticket average growth of around 5%. We would expect this trend to continue into Q1. Our commercial business had a solid year finishing up nearly 11% versus FY '25.

So in summary, our domestic business was below our expectations, driven largely by the underperformance in DIY for most of the quarter. Milder temperatures earlier in the quarter certainly had an impact along with lower foot traffic. We are encouraged by the performance late in the quarter and look to maintain momentum in Q1. Our commercial sales results continue to be driven by our improved satellite store inventory availability, significant improvements in Hub and Mega Hub coverage, the continued strength of our Duralast brand and execution on our initiatives to improve speed of delivery and customer service for the professional. Our sales initiatives are driving growth in -- with the smaller up and down the street customers, where we have the majority of our sales, but also have a tremendous market share opportunity. We see our Mega Hub and inventory initiatives as ways to accelerate our growth with these underpenetrated up and down the street customers. Thus far, our initiatives are delivering market share gains and gives us confidence as we move into FY '27. As a reminder, in FY '26, we opened up 39 Mega Hubs and 11 net regular Hubs.

Now let me take a moment to discuss our international business. This past quarter, we celebrated the opening of our 1,000th store in Mexico and finished the quarter with 1,001 locations. In Brazil, we now have 167 stores, bringing our total international store count to 1,168. Our international same-store sales grew plus 1.3% on a constant currency basis as we faced continued softness in the macro environment, specifically in Mexico. Importantly, we saw an uptick in sales in the last four weeks of the quarter, which gives us confidence that sales may inflect upward in Q1. We are expecting same-store sales to be slightly stronger on a constant currency basis as we expect to report low single-digit growth in Q1. As the economy is starting to improve, we expect our international sales to reaccelerate as we continue to invest in customer service, inventory, new stores and our supply chain. Today, approximately 15% of our total store base is outside of the U.S. We expect this number to grow as we continue to -- our international store build-out. We have confidence in our international markets and the returns on invested capital are strong. We have a relatively young store base that we expect to drive strong sales and EBIT results as they continue to mature.

In summary, we have continued to invest capital in driving sales growth. We also continue to invest in refining product assortments in stores and driving efficiency in our supply chain, which we believe positions us well for future growth. We are committed to investing both CapEx and operating expense to capitalize on these opportunities. This year, we invested approximately $1.5 billion in CapEx to drive our strategic growth priorities and expect to invest a similar amount in FY '27. The majority of our investments are in accelerated store growth, including Hubs and Mega Hubs. These investments place more inventory closer to our customers, and we'll continue to reduce the time it takes us to serve both our DIY and professional customers. The early performance of our accelerated store investments are better than our original forecast, which will allow us to achieve our EBIT goals sooner. We are laser-focused on generating the returns that you expect from AutoZone.

To give additional color on our new store performance, we assume the first year sales for our average store format is roughly $1.7 million that ramps to roughly $2.7 million by year 6. Historically, on average, new store sales grew double-digit in the second year and roughly 5% for each of the next four years. With an average investment of around $2.9 million per store, we assume that return on invested capital is roughly zero in the first year. By the end of the fourth year, we expect to achieve approximately 15% ROIC. And by the end of the sixth year, we expect ROIC of over 20%, which should continue to improve well after that. Importantly, the growth in store productivity is heavily skewed to commercial sales, which typically more than doubles over that 6-year time horizon. The majority of this growth comes from up and down the street customers who demand availability and speedy delivery. While we plan to again invest spend around $1.65 billion in CapEx in FY '27, we are committed to managing our investment to achieve strong results and invested capital over time. While in the near term, our returns on capital have been pressured as we have accelerated our store growth. We will hold our ROIC in the mid-30s area and remain committed to driving higher ROIC over time as new stores continue to mature.

Now I will turn the call over to Jamere Jackson.

Thanks, Phil, and good morning, everyone. Our operating results remained strong for the quarter and were highlighted by solid top line revenue. Total sales were $6.6 billion and up 5.6% versus Q4 of last year. Our domestic same-store sales grew 1.6%, and our international comp was up 1.3% on a constant currency basis. Total company EBIT was up 10.1%, and our EPS was up 15.1%. Our results included a $96 million tariff refund and a $15 million LIFO charge this quarter. Excluding the $15 million LIFO charge in this year's quarter and the $80 million LIFO charge in last year's quarter, EBIT grew 4.4% and our EPS grew 8.5%.

Foreign exchange rates impacted our results for the quarter from Mexico, the peso strengthened almost 9% versus the U.S. dollar, resulting in a $70 million tailwind in sales, a $21 million tailwind to EBIT and an $0.87 a share benefit to EPS versus the prior year. For FY '26, total sales were $20.3 billion, up 7.4%, and EPS was $152.55, up 5.3%.

Next, let me take a few moments to elaborate on the specifics in our P&L for the quarter. First, I'll give a little more color on sales and our growth initiatives. Starting with our domestic commercial business for the quarter, our domestic DIFM sales were $1.9 billion, up just under 9%. For the quarter, our domestic commercial sales represented 34% of our domestic auto part sales and 29% of our total company sales. Our average weekly sales per program were $18,700, up 2.7% versus last year. This quarter, we opened 87 net new programs we finished with 6,443 total programs, and we have our commercial program in 94% of our domestic stores. For the year, we opened 345 domestic commercial programs. Mega Hub stores remain a key component of our current and future commercial growth. We opened 16 Mega Hubs in the quarter, 39% for the year and now have 172 Mega Hub stores. We expect to open over 40 mega hubs in FY '27. As a reminder, our Mega Hubs typically carry over 100,000 SKUs and drive a tremendous sales lift inside the store box and 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 larger stores give our customers access to thousands of additional parts across the market. While I mentioned a moment ago that our average commercial weekly sales per program grew 2.7%, the 172 Mega Hubs continue to drive growth at an even faster clip.

Let me provide one other piece of perspective on the importance of Mega Hubs. There are approximately 2,000 commercial programs that are linked to a Mega Hub network. These programs sell 16% more annually than the balance of the commercial programs in the chain. Given these dynamics, we continue to target having approximately 300 Mega Hubs over the next three years. Our customers are excited in our commercial offering as we deploy more stores in local markets closer to the customer while improving our service levels. On the domestic retail side of our business, our DIY comp was down 60 basis points for the quarter. From the third-party data available to us, our DIY share has remained ahead of industry growth rates, which is indicative of the overall market softness. The DIY market is experiencing a growing and aging car park and a challenging new and used car sales market, which typically provides a tailwind for our business. However, transactions are soft as the customer experiences high inflation in our industry and elsewhere. We see evidence of deferrals and trade down in DIY, particularly with the most financially challenged DIY customers. This is not a new phenomenon for our industry, and we expect it to recover over time.

Now I'll say a few words regarding our international business. During the quarter, we opened 68 new stores in Mexico to finish with 1,001 stores and 10 new stores in Brazil, ending with 167. Our same-store sales grew 1.3% on a constant currency basis and 10.7% on an unadjusted basis. While sales growth has slowed over the last few quarters in Mexico due to slower economic growth in the country, we have continued to manage our P&L appropriately in this environment. We're also continuing to grow share and are well positioned when the economy improves. We remain committed to investing in international expansion. And as we accelerate the store opening pace, we're pleased with our results versus our forecast in these markets. As we look ahead, we're bullish on international being in an attractive and meaningful contributor to AutoZone's future sales, operating profit and ROIC.

Now let me spend a few minutes on the rest of the P&L and gross margins for the quarter. Our gross margin was 53.3%, up 182 basis points versus last year. This quarter, we had a $15 million LIFO charge versus an $80 million LIFO charge for Q4 last year. Excluding the LIFO comparison, we were up 76 basis points versus last year as we benefited $96 million from tariff reimbursements we received this past quarter. Now given the lumpiness of gross margins this year, excluding LIFO, you should expect gross margins to be flat to up 25 basis points on a GAAP basis in FY '27. With respect to LIFO assumptions for Q1, we're anticipating a $40 million charge and expect approximately $15 million in charges for quarters 2, 3 and 4. In total, we're modeling $85 million to $90 million in LIFO charges for FY '27. As a reminder, we recognized $192 million in LIFO charges for all of fiscal 2026.

Moving on to operating expenses. Our expenses were up 8.9% versus Q4 last year as SG&A as a percentage of sales deleveraged 101 basis points. On a per store basis, our SG&A was up 4% compared to last quarter's 3% increase. The deleverage was driven primarily by our growth initiatives. We expect SG&A per store and total growth to be in a similar range in the first quarter of FY '27, which is up roughly 4% on a per store basis or 8.5% to 9% on a total growth basis. Similarly, we expect SG&A per store to grow roughly 3% for FY '27 or approximately 8% on a total growth basis. For Q1 FY '27, we expect to open approximately 65 stores globally versus 53 in Q1 last year. And for the full year, we expect to open approximately 400 stores versus the 374 new stores opened in FY '26.

Moving to the rest of the P&L. EBIT for the quarter was $1.3 billion, up 10.1% versus the prior year. Adjusting for LIFO charges in both years, our EBIT would have been up 4.4% versus the prior year. Interest expense for the quarter was $149 million, flat with a year ago as our debt outstanding at the end of the quarter was up approximately $280 million. We're planning interest of $114 million for the first quarter of FY '27 versus $106 million in Q1 last year. For the quarter, our tax rate was 20.3%, roughly flat versus a year ago. Excluding the benefit from stock option exercises, our ETR for the quarter was 20.8% versus 21.7% last year. This quarter, the rate benefited approximately $7 million from stock options exercised versus a $16 million benefit last year for Q4. For Q1, we suggest investors model us at approximately 22.7% all-in.

Now moving to net income and EPS. Net income for the quarter was $932 million, up 11.3% versus last year. Our diluted share count of $16.6 million was 3.3% lower than last year's fourth quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $56.05, up 15.1% versus last year's Q4. As a reminder, LIFO drove our EPS down $0.69 a share and tariff refunds added $4.43 a share.

Now let me talk about our free cash flow. For the fourth quarter, we generated $684 million in free cash flow versus $511 million in Q4 last year. For FY '26, we generated approximately $1.8 billion in free cash, roughly flat versus a year ago despite a $169 million increase in CapEx. We expect to continue being an incredibly strong cash flow generator in fiscal 2027 and are planning higher free cash flow that will fund growth and robust returns to the shareholders in the form of share buybacks. Regarding our balance sheet, our liquidity position remains very strong and our leverage ratio finished at 2.5x EBITDAR. Our inventory per store was up 5% versus Q4 last year, while total inventory increased 10% 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 $107,000 versus negative $131,000 last year and negative $107,000 last quarter. As a result, accounts payable as a percentage of inventory finished the quarter at 111.1% versus last year's Q4 of 114.2%.

Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $697 million of AutoZone stock in the quarter and $2 billion for the fiscal year. And at quarter end, we had $1.6 billion remaining under our share buyback authorization. Our strong earnings, balance sheet and powerful free cash generation allow us to return a significant amount of cash to our shareholders through our buyback program. We have bought back over 100% of the 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 our shareholders.

So to wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and cash and returning excess cash to our shareholders. Our strategies continue to work as we remain focused on gaining market share and improving our competitive positioning in a disciplined way. As we look forward to the beginning of our new fiscal year, we're bullish on our growth prospects behind a resilient DIY business, a solid 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.

Before turning 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, foreign currency resulted in a tailwind to revenue and EPS this quarter. If yesterday's spot rates held for Q1, then we expect an approximate $45 million benefit to revenue, a $14 million benefit to EBIT and a $0.60 share benefit to EPS. And as a reminder, in Q1, we expect LIFO to reduce EBIT by approximately $40 million, impact our gross margin rate negatively by approximately 80 basis points and our EPS by approximately $1.85 a share.

And now I'll turn it back to Phil.

Thank you, Jamere. We are excited to start off FY '27, and we have a lot to accomplish. We remain committed to outstanding customer service, flawless execution and appropriately spending our capital to drive growth and efficiency. We believe we are well positioned to grow both our domestic DIY and commercial sales. We also expect our international same-store sales on a constant currency basis will improve in fiscal year 2027. We believe our gross margins will be strong, and we expect our operating expense to grow in line with accelerated store opening assumptions. This time of year, we always enjoy reflecting on the past 12 months highlights. Our teams achieved several milestones this past year. Our sales totaled $20.3 billion, an all-time high and the first time we have exceeded the $20 billion mark. Domestic commercial sales were just under $5.8 billion and grew just under 11% for the year. Average weekly sales domestically of $50,000, equating to $2.6 million per store annually. We opened an amazing 374 stores this past year, the most ever. We have over 8,000 total stores and 1,000 stores in Mexico. Our operating cash flow was over $3.3 billion for the year, second only to [ FY '27 ] at the height of the pandemic and should increase again in FY '27.

We opened our new expanded Monterrey Mexico distribution center and broke ground on another planned DC in Mexico. This expanded Mexico supply chain will allow us to serve our customers better, reduce supply chain costs and better support our international store growth. I would also like to update you on our longer-term strategic growth initiatives where we are investing both CapEx and SG&A and expect to produce a faster growing and more profitable AutoZone over time, specifically our investments in our supply chain, accelerated, new store openings, execution and improved customer service and leveraging technology. Many of these initiatives are in various stages of maturity, but all of them are in the later stages of implementation are on track or ahead of our plan. Supply chain investments that started in earnest in 2020 are now in the final stages of completion. We have completed the vast majority of the technology upgrades needed to accommodate a much more dynamic and global supply chain. Our U.S. DC expansion is complete with two new U.S. distribution centers and two direct import facilities. Our new Brazil DC is complete and already reducing our supply chain costs in country. Our new Mexico DC in Monterrey is now more than 2x the size and fully operational.

In August, we broke ground on our third Mexico DC that will allow us to service our customers in stores more efficiently as we grow our store count in country. Let me talk about flawless execution and improved customer service investments that we've made over the last 18 months. We have been focused on our store-level execution, customer service and reducing delivery times to our professional customers. While we will always invest in customer service and execution, these investments will moderate. We are already beginning to see these investments pay off. Leveraging technology, again, a longer-term initiatives but we are in the final stages of these investments. We have made investments in scalable, resilient platforms that are now predominantly cloud-based and ready to be leveraged to improve what we call WOW customer service enable us to leverage new technologies and improve efficiency.

New store acceleration from roughly 200 stores annually to this year over 400. We are nearing the long-term goals as stated earlier, of around 430 stores annually. We are excited about the performance of our new stores. These stores are slightly ahead of our expected sales and EBIT performance. We are also more than halfway to our goal of around 300 Mega Hubs and more Hub locations. As mentioned earlier, these expanded assortments in these hubs are a key element needed to continue to accelerate growth in market share gains in both our DIY and more specifically with our professional customers. Although the growth in new stores will continue through FY '28, the year-over-year ramp will moderate as we near our long-term goals. As a reminder, our stores are our highest and best returning assets and we are happy with these accelerated openings.

Finally, I want to wrap up my comments by providing you with how we see sales playing out for FY '27. We expect our domestic same-store sales to be flat to up low single digits, driven by an expectation of approximately 4% ticket growth. We see our total domestic commercial sales growing high single to low double digits. As with retail, we expect ticket average to grow in the roughly 4% range, and we expect to continue to grow market share, fueled by our growth initiatives. In International, we expect low to mid-single-digit comps on a constant currency basis. We saw trends improving later in the latter half of Q4, and we expect continued improvement in FY '27. And as we are planning to open approximately 400 new stores in FY '27, we have decided to reduce the FY '28 target from roughly 500 stores to 430 as we do not expect to open as many international stores. Specifically, we will slow the pace of our Brazil expansion to concentrate on the U.S. and Mexico in the near term. The top focus for fiscal 2027 will remain growing market share in our domestic commercial business and reaccelerating our international growth. We have remained laser-focused on customer service, flawless execution and gaining market share in every market in which we operate. We believe we can continue to gain market share compared to the overall industry, and we are confident in our ability to achieve our goals. We have great leadership in place, and we feel we are executing at our highest level in many years. We are excited about what we can accomplish for this year. AutoZoners everywhere are prepared to deliver on our commitments of growing together. We believe AutoZone's best days are ahead of us.

Now we would like to open up the call for questions.

[Operator Instructions] Your first question is coming from Bret Jordan from Jefferies.

On the IEEPA contribution, is most of the refund in the fourth quarter, obviously, your direct import refunds come to you, but do you have suppliers who are going to be trickling out rebates to you as we get into '27?

Yes. Most of that refund was in the fourth quarter. As we talked about, we have a little over $100 million that were in IEEPA tariffs. We got most of that in the fourth quarter, and that is basically on the inventory that we have sold. We expect the remainder of that to sort of trickle out over FY '27.

Okay. And then a question on same SKU inflation. I think you called out 5% in Q1, but you called out a 4% ticket contribution for fiscal '27. Could you sort of talk about how you see the cadence of same SKU inflation as we sort of roll over that peak tariff impact in late calendar '25.

Yes. We think the first quarter will be in the similar ZIP code as the fourth quarter of this year, probably closer to 5%, and then we expect it to moderate over time, and we expect to average around 4%. What I will say is that it's a pretty volatile environment. In the near term, there's certainly pressure on categories like oil that are driving higher inflation. And as we move through, we expect to see sort of more normalized inflation across the business. And I think the most important point to that is that this industry is pretty disciplined and rational. And as we see the ticket inflation go up, we'll raise retails accordingly.

Your next question is coming from Simeon Gutman from Morgan Stanley.

So I guess, Phil, some of the math or, I think, Jamere, when you gave the guidance on, I think it was Phil's guidance, on retail and commercial. I guess if you just do the weighted some products, you'd get somewhere between a 2 at the low end of comp guide to something like a 4 or 5. And I know you're not guiding, but you're giving us a framework. Is that fair? And then looking at your market share gains, are you satisfied with them? Like how do you look at them for your prior fiscal year?

Yes. So you're in the right ZIP code on the comps when you sort of do the math on the some of the parts, if you will. I think the important thing for us is we're calling what we see today based on that ticket inflation being elevated and some of the trends that we're seeing in our business. On the DIY side, clearly, the transactions have been a little bit softer. But as we roll over some of that elevated inflation, we would expect those transaction trends to improve a little bit. And we've got a tremendous amount of momentum in commercial that we expect to continue as we move forward.

Yes. I would kind of think about market share, you asked, are we satisfied? Well, the answer is no. We're never satisfied with the market share growth. But we do -- we believe in this environment on both the DIY side, we are continuing to gain market share that lower-end consumer is definitely pressured and probably will continue to be pressured for some time. And on the commercial side, we've said for a while, we think we should be able to -- it won't always be smooth, but grow essentially 2x the market growth. And we think we're doing that. And we think that the things that we've spent time investing on and working on, all give us the opportunity to continue to gain share in both DIY and commercial domestically and gain share in the international markets as well. So we feel good about our prospects of gaining share.

And a quick follow-up is that we've had a couple of years of, I don't know, if it's a noisy P&L, but some of the pieces were more volatile than what we're typically used to. And you've gone through an investment phase and Phil, you went out of your way just now to talk about some pieces getting passed, whether it's supply chain investments, some technology investments. Does this year -- does this fiscal year, are we settling into something more normal, and I'm not sure we'll ever be normal given the backdrop of fuel, et cetera. But does it feel like those investments fade and you can get back into that -- some of the prior rhythm of comp growth, steady EBIT growth and then steady EPS growth.

Yes. I'll talk a little bit about some of the investments and initiatives. We said even this next year, our CapEx will be slightly higher than this year in '26 versus '27. But most of that will be driven by new stores. Some of the other investments that have elevated CapEx over the last couple of years, like I talked about with distribution centers in the U.S., Mexico, IT investments. A lot of those will begin to wane. As I said, most of them are well over halfway through those types of investments. Many of them are in the implementation and optimization stage. So those will start to moderate. We still will continue to open slightly more stores year-over-year. But again, we're in the latter innings of virtually all of those investments, if that makes sense. They won't be the continuing part of the investment. It will be more new store acceleration as we continue to get closer to that $430 per store globally.

Yes. And I would just add, from a P&L standpoint, it indeed has been a bit noisy when you think about the things that have impacted us tariffs were one, and then we had tariff refunds. We've had significant hyperinflation that drove LIFO. So one of the things we wanted to do, and you heard Phil do it earlier in a little bit in some of my comments is give a little bit of an outlook on what we see on kind of a normalized basis so that you've got a base set of assumptions from which to model and plan the business. And we'll continue to operate the business with excellence as we move forward, and we expect this to be less noisy as we move forward.

Your next question is coming from Christopher Horvers from JP Morgan.

I just want to follow up on the first quarter guidance to make sure we get this right. So flat DIY, and it seems like you're implying a 6-handle do-it-for-me on a comp basis? I know you talked about this [ 8 ] and change expected to continue, but that's a total growth number. So that puts to right around 2%. Is that right? And then, I guess, how much conservatism are you baking in weather happens, weather was a headwind earlier, but it's helped in later in August and into September. So are you trying to -- like if you think about the past month, are you trending better than that and that 2% doesn't sort of bake in the continuance of weather benefits.

Yes. I think two things. One is what Phil laid out was sort of our guidance for the year, and what our expectations are. I think the thing that we also talked about is sort of the way we exited the quarter, which was a rebound and a little bit of a snapback from where we started the quarter. So we like the momentum that we have going into the first quarter on DIY and certainly, commercial exit and well north of 9% is something that we would expect to continue. We're executing very, very well in that regard. So those are kind of the two big pieces on the domestic comp side. And then I think on the international side, we did see some rebound in the back half of the quarter in Mexico. And the team has continued to execute well through a very difficult macro environment, and we expect to start to climb out from the environment that we've seen over the last few years or so. So those are kind of the key elements of how we're thinking about the quarter, but more importantly, what Phil talked about as we look at the business and look at all the things that are happening. And most of this is predicated on inflation, we feel pretty good about the ranges and the outlook that we gave.

Yes. I would just add the weather in the last -- latter part of the quarter certainly got to a more normal summer temperatures. And it looks like we're going to have a normal if not good winter. And those -- the extremes and weather drive our business, both hot and cold are good for us. And we don't -- we can't predict that weather in the winter time, but by all indications, it's going to be a normal to tougher winter, and we expect to be able to operate well in both of those environments.

And then following up on the model. As you look out even beyond '27, it's about 5.5% unit growth. As you think about the SG&A leverage point, is the model that you're building predicated on 4% comps to drive SG&A leverage, understanding that you have these upfront investments, supply chain and technology and people and process. But at the same time, you're going to have sort of these more immature stores that are burdened by labor and rent and so forth. So is the model being built as you look forward on a 4% leverage point on the domestic comp side?

Yes. I wouldn't say that it's built on a 4% leverage point. I mean, clearly, the way that we think about it is that we have the ability to grow SG&A in line with sales in an environment where those sales are are a little bit lower than we have the ability to go into the P&L and manage the SG&A downward. And we had that muscle. We've done it over time. In years where the sales have been accelerated, we've seen pretty good leverage on the SG&A line. And in some cases, it gave us the ability to go invest. So I think about it the same way that we have historically, which is we have the ability to grow SG&A in line with sales and manage the leverage and deleverage based on what we're seeing in the near term.

Your next question is coming from Steven Zaccone from Citi.

I wanted to follow up on the DIY side. I was curious if you could just give a little bit more of an assessment of what you're seeing. You talked about software transactions. I think there are so many moving pieces with the consumer at the moment. Have you seen some of that activity, whether it's trade down or deferral kind of get worse? How should we think about DIY from a quarterly cadence over the course of FY '27, that also would be helpful.

Yes. We tried to give as much color as we could around what we saw from the transactions and sales perspective over the 4-month time frame that comprises our fourth quarter again, the beginning of the quarter was slower, particularly in the hotter weather categories. But the exit rate in the latter half of Q4 and particularly in August, got better, and we expect those trends to kind of continue. What we've historically seen over long periods of time is after you have about higher traffic declines, they rebound over time, which is what we believe we're seeing today. The 5% decline were north of that in transactions is not typical in this industry, and we would expect those to moderate back into a more normal traffic rate. So we saw that improving coming out of the quarter. We like the exit rate on DIY, and we think that momentum will kind of continue.

Yes. The only thing I'll add is that the DIY customer certainly is facing some pretty significant inflation, particularly around fuel prices. If you just look at our ticket over a 2-year basis, it's up about 9%. So that consumer has felt a lot of inflation over the last two years. And we think the transaction environment, to Phil's point, will improve when this inflation moderates to something more normal and consumer sentiment gets bigger, it gets better. And the last thing that I'll say is that the tailwinds driving the industry are there. I mean you've got higher rates, you've got more expensive new and used vehicles that continue to drive the average age of vehicles higher. And that simply is going to mean that customers are going to keep their older cars longer and the repair frequency will likely increase in 2027, and that's the basis for our outlook there.

The other -- the one last thing that I think is important for the tailwinds is, even though gas prices and oil prices have been higher, we haven't necessarily seen a tail off in the miles driven yet, which I think is ultimately an additional good tailwind for us in this space.

Okay. That's very helpful. The follow-up I had is just understanding the impact of higher freight, right? Is this an expectation that seems to inflation, just trend higher, I heard your commentary to the prior question. But is the view of higher freight rippling through the supply chain, just just gets passed on in terms of higher same-SKU inflation to the end customer?

Yes. obviously, higher gas prices are going to flow through freight and transportation logistics, both domestically and internationally. We expect that, that will continue. I don't think it will be anywhere near like it was in the back half of the pandemic where we had the supply chain crisis. I don't think it'll be anywhere near that number. But our supply chain teams and our merchants do a great job of negotiating our transportation costs, and we expect to be able to manage that well. But there's no doubt that it will continue to be inflationary, not just in our space, but I think it will be inflationary everywhere.

Your next question is coming from Michael Lasser from UBS.

How would you quantify the return on the investments that you have seen over the last couple of years. Those have come in the form of accelerated CapEx, accelerated SG&A, as outsiders, what we see is the comps are moderating, you've got a player in the industry that's driving same-store sales growth well ahead of AutoZone. So it's hard for us to dimension the return that you're generating on these investments that you've been making.

Thank you for the question. I appreciate that. Part of the reason I tried to give a little more commentary on the kind of the investments that we have made with supply chain, operations, new stores, et cetera. And we're happy with those investments. Well, I would agree with you that our comps have maybe not been as high as we would have liked. We do feel that we're operating in -- as well as we have. We like the performance of our new stores. We ultimately had to do some work in our supply chain to make sure we were able to service our base stores that we had and do that well and efficiently, and we needed to expand our supply chain to make sure that we could accommodate what we believe is the right strategy in new store growth. Again, that's why we tried to give you some metrics on what -- how we see those new stores performing. It definitely puts some return on invested capital pressure on us in the short term as those stores begin to mature. But we like how they're maturing and they're slightly ahead of the plan we originally forecasted. So we think all of that, over time, works into a better, faster growing business that's going to produce higher returns over the long term.

Understood. My follow-up question is on the visibility that you have into your comps over the next few quarters. You're basically calling for an acceleration in your same-store sales growth as the year progresses, it sounds like there will be less like-for-like inflation that's going to moderate slightly. And the heart of the assumption is that transactions improve from here. So; a, is that right? And b, if your comps do not fall into, let's call it, a 3% to 4% range, is there enough flexibility for you to manage the P&L to still arrive at the number that you're implicitly guiding for, for fiscal '27?

Yes. I think that's right, Michael. Like we said, we still believe we're going to see an accelerated inflation on same SKU inflation as well as ticket. What we believe is the 5-plus percent decline in transactions, particularly on DIY, will kind of start to moderate back to a normal trend of historically over long periods of time, it's been down 1% or 1% to 3% in transactions, and you've gotten average ticket growth that's been higher than that. We expect that to continue, and it's similar to what we saw in the latter half of Q4, and we think that inflation rate for the year is going to be roughly 4%, maybe slightly higher on both DIY and commercial, which kind of gets you to those slightly improved comps from where we were in Q4.

Our next question comes from Steve Forbes from Guggenheim.

I wanted to maybe dive into the ROI profile that you spoke to in terms of the store maturation curve. So specifically, you mentioned commercial sales double over the 6-year period. Curious how much variability there is in the commercial growth profile between the years, right, year 2 versus year 6, I guess is there a faster growth in the outer years? And then can you speak to what the implicit growth rate is in the up and down, the Street part of the business versus the national account part of the business within that guide?

Yes. So two pieces. One is, we do see our commercial growth, having a big bump of acceleration in the first 1 to 2 years of the program, and that drives a lot of the returns on invested capital goodness that we see as we move through years 2 through 6. The majority of that is -- comes from the up and down the street customer. And we continue to see fairly significant share gains in that portion of the business. I want to be clear. I mean we like the up and down the street customer. We spend a lot of time growing that portion of the business, but we have share opportunities with both national accounts and up and down the street customers. I mean the metric that I like to continue to trot out in front of folks is that we're a 5% to 6% share in what's approaching $100 billion business, if you will. So there are share opportunities for us in both segments of the business. And we've clearly been driving our UDS business, but we think there's share opportunities for us to move up the call list and have a bigger play with both sets of customers.

The other thing that I think helps with that, we've talked about it. We've got 172 Mega Hubs and hundreds of Hubs around the country. We continue to build that out. And you asked about variability per store. When we drop a Mega Hub in a market that gets our proximity of those parts to a position where we can accelerate the speed of delivery to the shop or the DIY customer that drives sales, like we talked about. Jamere gave some specifics of what it looks like when a store is in the delivery areas for a Hub and a Mega Hub, and it does improve them. That's why we're so focused on driving the store counts in both those hubs and Mega Hub stores.

And then just a quick follow-up. Just a confirmation here for the gross margin outlook for fiscal 2027. The 0 to 25 basis points of FIFO gross margin expansion, that's I guess, that's inclusive of the baseline benefit that you've captured with tariff refunds, right? There's no expectation for recycling to drag on the FIFO gross margin profile.

That's right. So what we gave you when we talked about gross margins, as we gave you the LIFO assumptions for this year, we gave you the LIFO assumptions for for last year, obviously, we had $190-plus million last year. We've got $85 million to $90 million this year. So we're just looking at it on a GAAP basis, we should be flat to up 20. And then as it relates to tariffs specifically, while the tariff refunds may appear to be a windfall. The reality is that the refund environment was deflationary and the industry likely would have raised prices faster both retailers and suppliers hadn't received cost relief from those refunds. So we're expecting to lap those tariff benefits and not have that be a call out. Obviously, the way that they came in will make the margin profile a little lumpy, which is why we talked about where we are on an annualized basis. But we feel pretty good about all the work that we're doing both in our supply chain and in our merchandising organization to drive gross margin improvement in total.

Our next question is coming from Seth Sigman from Barclays.

A couple of things I wanted to follow up there on. One is on the economics of the Mega Hub. So it sounds like programs using the hubs have sales 16% higher than the base business. How has that trended over time? And just given that you do have a lot of newer Mega Hubs because you've accelerated growth over the last year. Is there a reason to believe that the lift in the contribution that you're getting from these should actually accelerate in terms of the impact it could have on comps over the next 12 to 18 months?

It's been fairly consistent over time as we look at Mega Hubs. And one of the reasons that we moved our targets from 75 to 110 and ultimately to 300, is that when we attach a Mega Hub to a satellite network, we see an acceleration, and it's a dynamic that we continue to see. When you jam more parts in the local market closer to the customer, then to Phil's point, it drives sales. As our commercial business continues to mature over time, and we continue to grow our market share and grow our presence as we expand that Mega Hub network and attach it to more stores, we expect that profile to be as good or better on a go-forward basis. So that drives a lot of our confidence about our business as we move closer to the 300 Mega Hubs totals, and it also drives a lot of the confidence in our business to continue to grow market share, particularly in commercial.

And we continue in those Hubs and Mega Hubs to figure out ways to get that -- those parts faster to our customers in our stores by leveraging technology. I mean, we know where our drivers are, we know where the parts are. We know how to fastest get those parts to those customers and the shops that are waiting to turn their bay. And ultimately help a DIY customer that may be broken down in our parking lot or broken down with their all. So we'll continue to iterate on our operations and make better and smarter decisions on how we deploy this inventory and how quickly we can get it to our customers. We're working on that continuously. So I suspect that will continue to improve.

Okay. Great. And then my follow-up is around inflation and the elasticity that we're thinking about here. When you look at the incremental inflation where it's coming from now and what you're thinking about for 2027, is there any reason to believe that the elasticity is going to be different, maybe more favorable than what you saw last year based on the categories that it's targeting?

Well, I think two things about inflation. One, we think it's going to be a little bit more favorable from an elasticity and transaction standpoint just because if you think about what's happening is our consumers had to deal with tariffs on top of sort of a normalized inflation, if you will, we get to lap over that beginning in the fourth quarter of this year. So as I mentioned a little bit earlier, if you just look at ticket averages for us, they're up 9% on a 2-year stack basis, we expect that to normalize as we move forward. And then I think very broadly speaking, as we think about inflation, again, I'll come back to this industry is very disciplined and very rational when it comes to dealing with inflation, and how we price our products to our customers. And we'll continue to expect that going forward, and that will mean that our business will be in pretty good shape as we move forward.

And I think as you talk about elasticities, too, large chunks of our business are really inelastic. It's failure related. And if a starter goes out or your battery goes out, you don't have a whole lot of choice, but you have to replace it. Some elements of our business are more discretionary and have more elasticities, particularly in the the categories like floor mats and seat covers. Those are not necessarily to drive your car. Maintenance, people will tend to push them a little bit as they get under pressure from an inflationary perspective. But over time, you have to replace those parts. You can't continue to defer the maintenance on the product on the car. If you do, you end up with a failure, tire [indiscernible], maybe wobbly. But if it fails, now you've got to replace ball joints in other parts of the car, which are a much more expensive failure repair. So customers generally understand that over time, and you've got to go do the maintenance on a vehicle, you're going to have a bigger problem. So discretionary can be pushed, which we've seen. But the other categories historically have always rebounded and been positive for us in inflationary environments.

Your next question is coming from Scot Ciccarelli from Truist.

How are you thinking about or modeling the higher comp contribution that you should get from the new store acceleration, which I guess started about a year ago. And are you building -- can we assume you're building like a growing lift as the year progresses as more stores roll into the comp base?

Yes. I mean as you might expect, the newer stores have higher comps in the near term. It does have some impact on our comps going forward. But you also remember that if you take domestically, for example, we added 236 stores on a base of 6,500 or 6,600 stores. So while it does have some impact, it doesn't move the needle as much as you might think, which the underlying view then is that we expect our mature stores and our mature store profile to continue to make progress as well. So while new stores are certainly a contributor here. We're expecting to make some progress across our entire business.

Got it. Understood. And then just to clarify something you guys mentioned earlier. Have you made any changes to your domestic store opening plans for '28, or was the whole change on Brazil?

Yes. Our -- we still think we'll get to roughly that 300 stores in the U.S. We'll be in that range of 120 or so in Mexico and roughly 20 or so in Brazil. We'll continue those -- to get to that roughly 430 net new stores on an annual basis. And again, like I said, we really think the opportunity is to continue to double down on our performance in Mexico and U.S. We'll continue to work on Brazil. We like the market, but there's things that we need to go do down there. And we think it's a great market for us, but we need to focus today on our domestic and Mexico business.

Okay. Thank you for those questions. But before we conclude the call, I'd like to take a moment to reiterate that we have an incredible business in a strong and resilient industry. We are excited about our growth prospects for the new fiscal 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 remain focused on delivering flawless execution and striving to optimize shareholder value for the future, we are confident that AutoZone will be successful. Thank you for participating in today's call.

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Greetings. Welcome to the AutoZone's 2026 Q3 Earnings Release Conference Call. [Operator Instructions] Please note this conference is being recorded. Management would like to read their forward-looking statement.

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.

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

Good morning, and thank you for joining us today for AutoZone's 2026 Third Quarter Conference Call. With me today are Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the third 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 at www.autozone.com under the Investor Relations link. Please click on quarterly earnings conference calls to see them.

To start out this morning, I want to thank our more than 130,000 incredible AutoZoners across the company for their commitment to delivering on the first line of our pledge, which is to always put customers first. Our results and performance begin with us asking, what does the customer need, and how can we exceed those needs and do it more efficiently? And it is our AutoZoners across our stores and our supply chain who deliver on this commitment every day. This past quarter, their efforts allowed us to deliver sales growth of plus 8.4%, the largest we've reported since Q2 of FY '23. Simply put, we're growing. We're opening more stores than we have in many, many years, and we continue to gain market share. Congratulations to AutoZoners. Let's keep delivering WOW! Customer Service.

To start this morning, we will address our sales results and provide an update on our growth initiatives. We will also discuss our domestic and international results and break down our domestic sales results between traffic and ticket growth to address what inflation has meant to both our ticket and sales growth. We will also share regional performance and give an outlook on how we expect the last quarter of the year to play out as we enter our summer selling season.

For the third quarter, our total sales grew plus 8.4%, which is an acceleration from the first half of the year, while earnings per share increased plus 7.7%. Similar to our experience in the first half of the year, our gross margin, operating profit and EPS were negatively impacted by noncash $20 million LIFO charge. As a reminder, during last year's Q3, we recognized a $16 million LIFO credit, which favorably impacted operating profit and EPS. Excluding the LIFO charge of $20 million this quarter and the $16 million credit last year, our EPS would have been up plus 12.5% versus last year's Q3.

Now let me share a few key highlights from the quarter. Total company same-store sales grew plus 4.9 -- I'm sorry, 3.9% on a constant currency basis with domestic same-store sales growth of 4.1%. Our domestic DIY sales grew plus 2.2%, while our domestic commercial sales grew plus 10.4% versus last year's Q3. We are pleased to report double-digit commercial sales growth and believe the strong performance will continue as we move forward even as we cycle tougher comparisons to Q4 of last year.

International same-store sales were up plus 1.6% on a constant currency basis, and our unadjusted international comp was plus 16.6% as exchange rates positively impacted our comps by 1,490 basis points. We opened 82 stores globally this past quarter to finish with 6,766 U.S. stores, 933 Mexico stores and 157 Brazil stores. We are on track to open approximately 365 stores for the full year versus the 305 stores we opened globally last year. We continue to be very pleased with our sales productivity we're generating out of our new stores, and their sales results are exceeding our pro forma expectations.

Next, let me address our sales results in a little more detail. Coming into the quarter, we were optimistic that our domestic store execution would drive sales growth for both retail and commercial. Regarding our plus 4.1% quarterly domestic same-store sales, the cadence was plus 5% in our first 4 weeks, plus 4.5% in our second 4 weeks and plus 2.9% over the last 4-week period of the quarter.

Now let me address the last 2 weeks a little more specifically. Those 2 weeks were softer than the rest of the quarter with comps of plus 1.3%. This slowdown in sales was caused by unseasonably cool weather impacting our heat-related categories, which normally begin to ramp this time of year as summer heat begins to take hold. This affected both DIY and commercial. Our domestic comp was solid, up plus 2.2% versus last year, and an acceleration versus the plus 1.5% in Q2 as we continue to gain market share. I'm very pleased with what we are seeing in terms of market share gains, and we continue to execute well in this environment.

Regarding our plus 2.2% DIY comp for the quarter, we experienced a positive 2.4% comp in the first 4-week segment, a positive 3.4% comp in the second segment and a plus 0.8% comp during the third segment. As noted, the last 4-week segment was our weakest performing segment, which was driven by the very mild weather in certain markets. Those markets have historically been warmer at this time of year, and the cooler temperatures led to a lower key volumes in key categories like air conditioning, starting and charging. For the quarter, we felt we benefited marginally from higher-than-usual income tax refund season, along with share gains and solid execution. Regionally, our results were solid overall, with the strongest results in the West, Midwest and the Northeast. We expect to have solid DIY performance over the upcoming summer.

With regards to inflation impact on DIY sales, we saw like-for-like same-SKU inflation just north of plus 7% for the quarter, which contributed to our DIY average ticket being up plus 5.6%. The difference between the like-for-like inflation and ticket growth was attributable to product mix. We expect the average ticket for the fourth quarter to be in the mid-4% range as we begin to lap the inflation ramp from the beginning of fourth quarter of last year. For the last quarter, we also saw same-store DIY traffic count negative 3.6%, a similar decline to our second quarter, where we were down in the mid-3% range.

Next, I will touch on our domestic commercial business. As I mentioned, our commercial sales were up plus 10.4% for the quarter. The first 4-week segment grew at 12.7%. The second 4-week segment was plus 9.1%, and the third 4-week segment grew at plus 9.6%. We feel very good about how we are performing as we head into Q4. Our commercial sales results continue to be driven by our improved satellite store inventory availability, significant improvements in Hub and Mega-Hub coverage, the continued strength of our Duralast brand, and execution on our initiatives to improve speed to customer and delivery services. These initiatives are delivering share gains and give us confidence as we move into the summer months.

Both the year-over-year inflation on a like-for-like same-SKU basis for our commercial business and our average ticket growth were similar to DIY, north of 7% for SKU inflation and 6% for ticket average. Our average transaction growth was 2% for the quarter and similar to last quarter. We believe that there are opportunities to grow market share and accelerate transaction growth with both smaller up-and-down the street customers and national accounts as we are significantly underpenetrated in commercial, and we are gaining share. Adding a little more color, both up-and-down-the-street-customers and national accounts grew double digits.

Now let me take a moment to discuss our international business. Across Mexico and Brazil, we now have 1,090 international stores. As I mentioned, our same-store sales growth grew plus 1.6% on a constant currency basis, driven by a continued soft macro environment. For Q4, we are expecting same-store sales to be in a similar range as Q3. While these economies have slowed, we are continuing to grow share. When these economies improve, we expect our sales to reaccelerate as we continue to invest in stores and distribution centers.

Today, approximately 14% of our total store base is outside of the U.S., and we expect this number to grow as we continue our international store build-out. We have confidence in our international markets as their returns on capital even with slower sales growth are strong.

In summary, we have continued to invest capital 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 focus on flawless execution, improving product assortment in stores and online and driving efficiency in our supply chain. All of these efforts position us well for future growth. We are committed to investing both CapEx and operating expense to capitalize on these opportunities.

This year, we are investing nearly $1.6 billion in CapEx to drive our strategic growth priorities, and we expect to invest a similar amount next year. The majority of our investments are in accelerated store growth, including Hubs and Mega-Hubs, which place more inventory closer to our customers and are reducing time to serve for both DIY and commercial customers. The performance of our accelerated store investments are better than our original forecast, which allow us to achieve our return goals sooner. We are laser-focused on generating the returns you expect from AutoZone.

Lastly, we will continue to invest in technology to improve our customer service model and our AutoZoners ability to deliver on our promise of WOW! Customer Service. This is a great time to invest in our business as we believe industry demand will continue to be strong, but we will continue to manage our investments with an expectation to achieve strong returns on invested capital.

Now I will turn the call over to Jamere Jackson.

Thanks, Phil, and good morning, everyone. Our operating results remained strong for the quarter and were highlighted by solid top line revenue. Total sales were $4.8 billion and were up 8.4% versus Q3 of last year. This is the largest increase we've had in over 3 years and reflects our focus on accelerating growth. Our domestic same-store sales grew 4.1%, and our international comp was up 1.6% on a constant currency basis. Total company EBIT was up 6.6%, and our EBIT was up -- our EPS was up 7.7%. Excluding our noncash $20 million LIFO charge in this year's quarter and a $16 million LIFO credit in last year's quarter, EBIT would have grown 11% and our EPS would have grown 12.5%.

Foreign exchange rates positively impacted our results for the quarter. For Mexico, the peso strengthened almost 13% against the U.S. dollar versus last year's Q3, resulting in a $74 million tailwind of sales, a $20 million tailwind in EBIT and an $0.83 a share benefit to EPS. We continue to be proud of our results as the efforts of the 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 Q3. And first, I'll give a little more color on sales and our growth initiatives, starting with our domestic commercial business for the quarter. Our domestic DIFM sales were $1.4 billion, up 10.4%. Our domestic commercial sales represented just under 34% of our domestic auto part sales and 29% of our total company sales. Our average weekly sales per program were $18,500, up 4.5% versus last year. This quarter, we opened 46 net new programs. We finished with 6,356 total programs and we have our commercial program in 94% of our domestic stores. Our commercial acceleration initiatives are continuing to deliver strong results as we grow share by winning new business and increasing our share of wallet with existing customers.

Mega-Hub stores remain a key component of our current and future commercial growth. We opened 14 Mega-Hubs in the quarter, and we now have 156 Mega-Hub stores. We expect to open approximately 15 Mega-Hub locations in the fourth quarter which will bring our FY '26 totals to 38. 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 as these larger stores give our customers access to thousands of additional parts across the market.

While I mentioned a moment ago that our average commercial weekly sales per program grew 4.5%, the 156 Mega-Hubs continue to drive growth at an even faster clip. We continue to target having approximately 300 Mega-Hubs at full build-out and expect to open at least 40 in FY '27. 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, our DIY shares remain strong behind our growth initiatives, and we're 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 the remainder of FY '26.

And 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 20 new stores in Mexico to finish with 933 stores and 5 new stores in Brazil, ending with 157. Our same-store sales grew 1.6% on a constant currency basis and 16.6% on an unadjusted basis. While sales growth has slowed over the last few quarters in Mexico due to the slower economic growth in the country, we have continued to manage our P&L appropriately in this environment. We're also continuing to grow share and we're well positioned when the economy improves. We remain committed to investing in international expansion. And as we accelerate the store opening pace, we're pleased with our results versus our forecast in these markets. As we look ahead, we're bullish on international being an attractive and meaningful contributor to AutoZone's future sales, operating profit and return on invested capital.

Now let me spend a minute on the rest of the P&L and gross margins. For the quarter, our gross margin was 52.2%, down 57 basis points versus last year. This quarter, we had a $20 million LIFO charge or a 77 basis point unfavorable LIFO comparison to last year. Excluding the LIFO comparison, gross margins were up 20 basis points versus last year as we offset a significant rate headwind from the mix shift to a faster-growing commercial business. As I mentioned, we had a $20 million noncash LIFO charge in Q3 and a year-to-date total of $177 million. We're planning a LIFO charge of approximately $30 million for the fourth quarter as we're continuing to experience higher costs that impact our LIFO layers. The $207 million in LIFO charges that we expect for fiscal 2026 compared to $64 million last year.

Moving on to operating expenses. Our expenses are up 7.6% versus Q3 last year as SG&A as a percentage of sales leveraged 25 basis points, driven by strong top line sales growth and solid expense management. On a per store basis, our SG&A was up 3% compared to last quarter's 4% increase. We would expect the SG&A per store and total growth to be in a similar range in the fourth quarter. For Q4, we expect to open approximately 160 stores globally versus 141 last year. And for the full year, we expect to open approximately 365 stores versus 305 new stores opened in FY '25.

We remain committed to being disciplined on SG&A growth, and we'll manage expenses in line with sales growth over time.

Moving to the rest of the P&L. EBIT for the quarter was $924 million, up 6.6% versus the prior year. As I previously mentioned, a noncash LIFO charge reduced our EBIT by $20 million. Adjusting for the unfavorable LIFO comparison, our EBIT would have been up 11% versus the prior year. Interest expense for the quarter was $110 million, flat with a year ago as our debt outstanding at the end of the quarter was essentially flat versus a year ago. We're planning interest at $152 million for the fourth quarter of FY '26 versus $148 million last year.

For the quarter, our tax rate was 21.1%, up from last year's third quarter of 19.4%. Excluding the benefit from stock option exercises, our tax rate for the quarter was 21.6% versus 22.4% last year. This quarter, the rate benefited approximately $4 million from stock options exercised versus a $23 million benefit last year. For Q4, we suggest investors model us at approximately 22% all in.

Moving to net income and EPS. Net income for the quarter was $641 million, up 5.4% versus last year. Our diluted share count of 16.9 million was 2.1% lower than last year's third quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $38.07 up 7.7% versus last year. As a reminder, LIFO drove our EPS down $0.91 a share.

Now let me spend a moment on our free cash flow. For the third quarter, we generated $455 million in free cash flow versus $423 million in Q3 last year. Year-to-date, we've generated $1.1 billion in free cash flow. Going forward, we expect to continue being in an incredibly strong cash flow generator, 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 EBITDAR. Our inventory per store was up 6% versus Q3 last year, while total inventory increased 10.8% 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 inventory less accounts payable on a per store basis was a negative $107,000 versus a negative $142,000 last year and negative $105,000 last quarter. As a result, accounts payable as a percentage of inventory finished the quarter at 111.1% versus last year's Q3 of 115.6%.

Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $586 million of AutoZone stock in the quarter. And at quarter end, we had $800 million remaining under our share buyback authorization. Our ongoing strong earnings, balance sheet and powerful free cash generation allow us to return a significant amount of cash to our shareholders through our buyback program. We bought back over 100% of the 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 and 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. And as we look forward to the remainder of FY '26, we're bullish on our growth prospects behind the 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.

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 tailwind to revenue and EPS. If yesterday's spot rates held for Q4, and we expect an approximate $62 million benefit to revenue, a $19 million benefit to EBIT and a $0.78 a share benefit to EPS.

Lastly, in Q4, we expect LIFO to reduce EBIT by approximately $30 million, impact our gross margin rate negatively by 45 basis points and our EPS by approximately $1.40 a share.

And now I'll turn it back to Phil.

Thank you, Jamere. To wrap up this morning, I want to stress that we are on track for delivering our objectives for fiscal 2026. While we continue to invest in our business, we remain committed to flawless execution and appropriately spending our capital to drive growth and efficiency. We feel we are well positioned to grow both our domestic do-it-yourself business as well as our commercial sales.

We also feel that our international same-store sales on a constant currency basis will improve, but we remain cautious for this upcoming fourth quarter as the consumers in our international markets remain under pressure. We also expect to manage our gross margins effectively while growing our operating expenses in line with accelerated store opening assumptions.

Finally, I want to reiterate that we are putting our capital to work where we'll have the biggest impact on sales and profitability. Our AutoZoners, our stores, our supply chain, and we are investing in technology to build a superior customer service experience. We will make sure that the capital we deploy produces strong returns.

The stores we have opened over the last 5 years continue to exceed the planned sales and earnings we modeled when these stores were originally approved. The top focus for our fiscal 2026 remains growing share in our domestic commercial business. We do understand that we cannot take things for granted. We must remain laser-focused on customer service, execution and gaining share in every market in which we operate. We are excited about what we can accomplish for the last quarter of the fiscal year, and our AutoZoners are committed to delivering on our goals. We believe AutoZone's best days are ahead of us.

Now we would like to open the call for questions.

[Operator Instructions] Your first question for today is from Bret Jordan with Jefferies.

Could you refresh us on how you see same-SKU inflation in the second half of '26 and obviously, some concerns around supply chain and lubricants. Are there drivers that might push it up more than expected?

Yes. It's a great question. As we mentioned a minute ago, we think the inflation rates and ticket average rates will probably be a little more muted than they were in Q3 in that probably 4% range. So we still think that inflation on a same-SKU basis will continue into Q4. The issue around lubricants, I know there's a lot of noise out there. We're going to leave that up to the oil specialists to really say what that means. We think there's probably going to be some constraints, but we don't think that it's going to be that material.

Okay. And then I guess one of your peers seems to be cutting back on national account business a little bit. Is that something that you're seeing a lot of incremental opportunity in? And could you remind us maybe sort of the profit spread between national accounts and up and down the street?

Yes. We -- I mean, we're under shared in commercial in total. That's both in national accounts, what we call up and down the street and many other segments that we compete in. The national account business is growing pretty strong for us as well as the up and down the street consumer. We like both of those segments, and we think we have opportunities to grow share in both of them. Yes, there's a little bit of a spread between the 2, but both of those are great businesses, and we think there's opportunity for us to gain share in both of them. Like I said, both of them last quarter grew double digits.

Your next question is from Steven Zaccone with Citi.

I wanted to drill down on your expectations for fourth quarter same-store sales. Obviously, there was some weather impact here at the end of the third quarter. So just help us understand, have you seen an improvement now as we've gotten later into May? And then how do we think about your expectations for the fourth quarter, specifically on the domestic side?

Yes. We -- I mean there's not a whole lot of change from what we just talked about. We generally release our numbers so soon as our quarter ended. I would say that May has been a little bit cooler, but I think we're expecting a normal, if not hotter than normal summer based on the prognostication of all the weather geniuses out there. I don't think that's what we are. But we're expecting a normal summer, and I'll go back to what we've talked about. We think our initiatives are strong, and they're the right initiatives for us. We think our execution is great and improving day in and day out.

We opened up a lot of new stores. And this past quarter, we opened up 14 additional Mega-Hubs, which helped us out significantly, both on the commercial side and on the DIY side. And we're going to open another 14 or so Mega-Hubs this next quarter. So I think we're expecting to have a pretty normal increase in our summer months to volume, and that should bode well for us.

Okay. The follow-up I had is just on the gross margin side. Obviously, continue to be strong on the core gross margin line. How should we expect that to perform in the fourth quarter?

Yes. I mean we continue to perform very well from a gross margin standpoint. In this quarter, we had probably 42 basis points of gross margin improvements that offset a commercial mix drag of about 22 basis points. And we saw positive merchandise margins. Our shrink is improving. Our supply chain productivity is improving. So we're expecting to have a pretty solid fourth quarter as well with similar kinds of dynamics. I will say that the growth rates that we're expecting from commercial relative to DIY will put a little bit more of a mix drag on. So we're working very hard to offset as much of that as we can with other margin improvements.

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

So as you step back, you had stimulus, you had what was one of probably the best winter since 2014 appreciative that -- and you had these big inflation numbers. Is there anything that you look at underneath the covers to say like there's an impact from energy prices, and that's being more of the issue than the near-term weather dynamics. And as you think about the back half of the calendar year, it looks like you're sitting at around a 4% leverage point. What can you do to control the expenses to the extent that there is something more weakness going on the DIY side of the business, especially as you lose those inflation tailwinds?

I would say, I think you're right to call out that we had a pretty normal or good winter. As we mentioned, our results across the company were stronger out west and in the Midwest and the Northeast, which that's kind of an indication. And we see it in the categories. That's an indication that we got the winter that we would have liked, and that has historically been good for us through the summer months in those categories, undercar categories, brakes, et cetera. We're expecting a normal, if not hotter than normal summer, and those all bode pretty well for us.

Again, I'll go back to what we think we're doing, which is we're opening up really productive new stores. Our stores that have been in place with the support of Mega-Hubs and Hubs and our improved performance across both DIY and commercial customer service are helping us across the board. We're gaining share on both sides of our business. And we think that, that's going to continue.

Yes. And I'd just say on the cost front, I mean, we're continuing to manage the business with discipline. So in addition to growing very strong on the top line, we're focused on expense management in the middle. We continue to invest in our new stores and maintaining high levels of customer service, but we're also continuing to drive productivity initiatives inside the company. And we expect those dynamics to continue into the fourth quarter and into the back half. So as the comps move associated with what we see in the market dynamics, we're anticipating that we'll manage our SG&A accordingly.

And then jumping back to the inflation side, you do import more than some of your peers, especially with the private label penetration that you have. One of your peers talked about some of their vendors talking about increases related to energy prices in resin. You also have the steel tariffs. So are you seeing those price pressures now? Why wouldn't the inflation outlook be better in the back half of the calendar year versus maybe what you thought 3 and 6 months ago?

Yes. I think -- I mean there could be additional costs that are coming in on various fronts. But at the end of the day, those tariffs that are on steel and automotive parts have been in place for quite some time. the inflation ramp that we saw started last year and what would be our Q4, which is the timeframe that we're entering. So yes, I think some of the costs from tariffs, et cetera, are still coming in as we cycle through that inventory. So there will be some improvement or increase in inflation, but it will be slightly muted because we're now lapping some of the higher inflation rates from last year.

Yes. I would characterize it as this is a pretty fluid situation as it relates to energy and oil, in particular, it's going to impact suppliers and retailers differently. What I'll say about us is that we're managing the situation with our suppliers and with our customers. And we expect the environment to continue to be inflationary, the extent to which we'll learn as we move forward, and we'll manage the business accordingly in terms of what we do with pricing, and we'll be very transparent about what we're seeing in our tickets.

Your next question is from Brian Nagel with Oppenheimer.

So the first question I want to ask, as we look at the ongoing rollout of your Mega-Hubs, I guess -- so maybe a couple of questions within this. I mean, one, can we talk about the latest Mega-Hubs you're opening, the incremental performance of those? I mean how are those performing versus some of the maybe legacy Mega-Hubs? And then you have other -- you have competitors out there now talking about a similar strategy. They may have been using similar terms. I guess I want to -- as you're rolling out and continuing to expand your Mega-Hub effort, are you seeing any type of competitive headwind there as others are, so to say, emulating the strategy?

Yes. I would say that we've got a very robust pipeline for Mega-Hubs. I mean we have over 100 Mega-Hubs currently in the pipeline today. We've talked openly about our plan to get to nearly 300 Mega-Hubs near-term. And quite frankly, as our commercial business continues to grow, there is a very distinct possibility that we'd even exceed that number. They're continuing to outperform our expectations. The combination of the demand for parts in the marketplace, the customers' desire for us to have those parts closer to the customer so that we can provide a better service level is really what's fueling our strategy.

So while the competitive dynamics are such that others are sort of mirroring that strategy, we think that our strategy is being executed appropriately, and it has not been muted or impacted at all by what others are doing in the marketplace.

Frankly, those Hubs and Mega-Hubs continue to perform year-over-year. We really like the productivity of those boxes and that inventory and the assets we can put around there to help energize that inventory in those Hubs and Mega-Hubs continues to be more productive as we find more and innovative ways to get that product to the customer, both DIY and commercial faster and faster.

That's very helpful. I appreciate all the color. My follow-up question, maybe not a totally fair one. But just looking at the sales performance through the quarter, which you called out the slower trend later in the fiscal quarter, look, it makes all the sense, a lot of sense that the weather impacted that. As you look at the data, I mean, what gives you confidence that it was indeed cooler weather versus some type of like tailing off, if you will, on the tax refund benefit?

Yes. It's pretty clear when you look at the categories, you can see it. We -- like I said, air conditioning is a great example. It's just been cool in May, significantly cooler than last year, and it's been relatively wet. That will change, and we will expect those categories to respond accordingly. So if you look at where it's been cool and where it's been wet, you can see a direct correlation to the category comps year-over-year and the trend changes. And again, that -- we believe that is going to change pretty rapidly here as we move into the summer months. And all of -- everything that you look at from the weather prognosticators are going to say that this is going to be a pretty hot summer, and that should bode very well for us. And I'd say we're well prepared for it, too. We're in great shape.

Your next question for today is from Seth Sigman with Barclays.

I wanted to ask about expenses, which have come in a little bit lower over the last 2 quarters versus the elevated plan that you had laid out last -- I think it was Q4. So the question is, are you investing at a slower pace? Or are there just more offsets than you anticipated? I'm just trying to think about whether SG&A will have to reaccelerate at some point or are we really past the worst?

Yes. We don't anticipate a reacceleration in SG&A. Again, the big driver in the early part of the year was lapping the load-in of new stores that we had in the back half of last year, which did put a couple of points of pressure on our SG&A growth rates. As we move through the year, we've got a more normalized year-over-year comparison. And now you're seeing us have SG&A and SG&A per store in line with what we've done historically.

And the other dynamic I'll say is that we're continuing to work productivity very hard inside the company like we always have. It's a muscle that even as we've been growing our business, we've continued to focus on opportunities to drive productivity and efficiencies really across all of our functional areas. The teams are doing a really good job. We've got a pretty robust playbook of cost and expense initiatives, and that's helping us manage SG&A in a meaningful way and have good cost management as we move forward.

Okay. Perfect. And then my follow-up question is on inflation and the expectation that it will moderate in Q4 and into next year. I guess it was asked a couple of different ways, but I'm just trying to think about some of the offsets, whether it's transactions or maybe mix accelerating. Like how do you think about these drivers? Has mix been a meaningful negative over the last 12 months? Like how do you see that improving maybe to help offset less inflation?

We haven't seen -- I mean, our mix has been relatively stable. We kind of look at our mix between what we call discretionary maintenance and failure. And the maintenance and failure businesses over quite a while have been relatively stable as a percent of sales. They'll move around a little bit, but relatively stable. It's kind of the beauty of this industry is it's pretty inelastic. Most of its break fix and you've got maintenance that has to be done. Consumers can defer it for some period of time. But if they do that, then they have a larger failure, which costs more money. So that number has been -- those numbers have been pretty flat, not a lot of shifts between them, and we think that's probably going to continue.

Your next question is from Michael Lasser with UBS.

Now when we look at the performance of AutoZone versus some of the other competitors in the marketplace, we obviously need to take into account that the calendars line up differently, the mix of the businesses line up differently. But simply speaking, when we compare your performance versus some of the others, we had been accustomed to AutoZone significantly outperforming the others. And now that spread is a bit more narrow. Is that a signal that some of the low-hanging fruit or the bulk of some of the market share gains that had happened in the wake of expanding parts availability and service are now behind AutoZone? Or is there an opportunity to accelerate some of those share gains from here? And what would drive an acceleration in the share gain?

Great question, Michael. And I think the way we look at it is we have an opportunity to gain share, both on the DIY side of our business and on the commercial side of the business. Our execution has improved. Our assortments are improving. Our -- we're literally, as Jamere mentioned, we're only about halfway through our Hub and Mega-Hub expansion strategy. And those will help us both on the DIY side of the business and the commercial side of the business. And our execution continues to improve, and we have strategies that will help our execution improve even more.

We look at things on the -- from an execution perspective, our turnover in stores is back down to historic levels, historically low levels. Our supply chains are gaining efficiency. We're getting better service to our commercial customers out of our Hubs and our Mega-Hubs and our satellite stores. We continue to improve on our delivery times. All of those things point to better execution, and we think the opportunity to gain share, specifically on the commercial side, where we're still roughly 5% of the market share opportunity that's out there. So we think we have pretty good opportunities on both sides of the business.

And I think the thing that I'll really amplify from your comments, Michael, is the fact that if you look at a lot of our near-end competitors have a much higher mix on the commercial side of the business. Right now, our domestic commercial business is about 34% of our mix which is why we're so focused on growing the commercial business. It is growing faster. We've got a significant number of opportunities there. And so we've continued to double down on Hubs and Mega-Hubs. We've doubled down on assortment. We've doubled down on the quality of our Duralast brand, putting up professional sales force in the field. It is why it is our #1 growth priority.

So as you look at sort of that performance that you're seeing amongst the competitive set, that difference in the mix is why we're so focused on what we're focused on from a commercial standpoint. And that strategy is working. I mean, Phil mentioned the fact that we're growing double digits with both national accounts and up and down the street customers. That is a meaningful progress for us moving forward. And we're pretty excited about what it means for us as we move through the fourth quarter and next year.

Understood. My quick follow-up question is the message that you've been offering for some time now is you're deploying a lot of capital to make this a faster growing top line business which then in turn can drive equal to or better EPS growth over time. So in light of the last couple of quarters where there's been a weather disruption to the comp that's created a little bit of noise, are you still of the view that this can be a faster top line growth story over time? And if there is something that interrupts that, do you have the ability to flex your SG&A? I think there was a mention of that earlier in the conversation to sustain the EPS growth under a variety of scenarios for your same-store sales growth?

Yes. I think, Michael, to that point, our SG&A control has been a strength of this company for a very long period of time. Obviously, the SG&A that goes along with a new store opening or something of that nature is once you start the investment in the store, that's going to materialize. But we've always had the ability to manage our SG&A, payroll expenses related to store -- to sales growth and that sort of thing very, very well for a long period of time. And I think as we showed this past quarter, we continue to be able to do that.

And as we look at these investments that we're making, as we said in our prepared remarks, the performance that we placed on our stores when we originally approved them are fairly conservative, and we're outperforming those proformas. The stores are indexing higher than we initially said. Our commercial programs are continuing to perform slightly better than we would have thought. And we think all of that will help us produce those returns at a faster rate over time.

Your next question for today is from Simeon Gutman with Morgan Stanley.

This is Skylar Tennant on for Simeon Gutman. So is it reasonable for us to assume that with new stores and the maturation curve, a sustainable level of comp growth would be around that 4% plus level into the future?

Yes. I think if you look at where we've been historically and you look at what the new store load-in actually looks like, particularly as we get to 300 new stores domestically, you're going to get a much bigger comp waterfall from those new stores than we have historically. So in that 4% ZIP code is where we need to be or better to drive the kind of returns on invested capital. And one of the things that we've said and we've been very, very clear on is that the combination of the new stores plus the accelerating commercial business that we have is what has us bullish about a faster-growing business in the future. And that faster-growing business is obviously going to be a higher returning business as well for us.

Great. And then zooming in on fiscal year '27, given some of the inflationary trends and that maturation curve, can we assume comps get to a level closer to 5% by then?

Obviously, we don't guide in that manner. But I think qualitatively, what we'll say is that we're expecting continued progress in terms of growing our domestic commercial business. We've got a very resilient DIY business. And at some point, we will have a snapback or a rebound of our international business and you should see our business growing faster. And you combine that with, as you mentioned a little bit earlier, you combine that with the fact that we're continuing to drive new store growth that's above our historical average and the fact that they're performing better than they have historically, that sets us up very nicely for a very strong FY '27. And we'll talk a little bit more about that as we get to our fourth quarter call.

Your next question is from Kate McShane with Goldman Sachs.

We wanted to ask about some of the dynamic between the national account and up and down the street. Could you just remind us what the gross margin headwind there is as you pursue the national accounts versus up and down the street? And then second to that, within SG&A, can you talk about the SG&A investment needed to pursue national accounts versus the up and down the street customers? We just wondered how the return would compare.

So on the SG&A front, I mean, there's really no difference in terms of how we manage the SG&A for national accounts versus up and down the street customers. We have a very efficient sales force. We have a very efficient operations team that is sort of managing that business within the construct of where we are. So there's not a meaningful difference in terms of where we are on the SG&A front.

And then from a gross margin standpoint, what we've said is that the national account business is always very, very competitive. There are most sophisticated customer set out there. They have scale that you would expect them to want to negotiate things like pricing and service levels, and we've done that and still been able to earn very good returns on that business. So we do like the national account business, as Phil said. We like the margin profile associated with the national account business.

And the most important point to all of that is that we're underpenetrated. We're underpenetrated with national accounts. We're underpenetrated with up and down the street customers. And this is an opportunity for us to grow our business in a meaningful way.

Your next question for today is from Scot Ciccarelli with Truist.

I guess the question is if same-SKU inflation steps down by, call it, 250 to 300 basis points in your fiscal fourth quarter, why wouldn't your domestic comp growth slow down by a similar amount? Like I know you're going to gain share over time. But like at least in the near-term, is that the way people should be thinking about from a modeling perspective?

I think you got a couple of dynamics there. We are lapping the same-SKU inflation that was caused by tariffs in the fourth quarter of last year. So -- but you've also had other inflationary impacts that have impacted the business at the same time. So the big reason for the step down isn't that there's something dramatically happened in different end markets. It's just that you're lapping that big step-up that we had in the fourth quarter of last year.

I think when we look at the business overall, here are the things that we like. We like the fact that our commercial business is growing, and it's going to grow not just from ticket, but it's going to grow from transactions. We like the progress that we're making with our DIY shares. We've also seen traffic be down in the mid-3s over the last couple of quarters or so. And as we continue to gain share and as the uncertainty associated with the consumer in some instances has impacted things like discretionary categories, there's an opportunity to go transactions as well. So I wouldn't have a direct read-through that says that the lapping of the of the inflation sort of creators comps, there are lots of things that are driving our comp expectations as we move forward.

I agree with that. And I think to that point, again, we continue to gain share, and we have really low share on the commercial side of the business. And we think all that sets up well for us. And we're working very hard with our initiatives, both on the DIY side and the commercial side of the business to continue to gain share, and we think we can overcome that.

That's helpful. And then what is the comp waterfall contribution today, just so we can better understand how the go-forward contribution might be?

Yes. I mean we haven't shared it specifically. And obviously, it varies based on the mix of stores. But I mean, very simply, we get outsized comps associated with the new stores. And as we've accelerated that new stores going from, for example, in the domestic side of our business from 150 to 200 plus, and you're getting more of a contribution from those new stores than we have historically.

So I think as we think about our business going forward, the combination of those new stores and what you naturally get in terms of comp acceleration and the fact that we're growing market share is what gives us the confidence around comp acceleration as we move forward.

And to be clear, this is the real reason for the strategy that we had associated with accelerating the new stores. We saw a market share opportunity -- we saw an improvement in the unit economics because our commercial business is growing. That's going to ultimately result in faster-growing comps for us. And we've got a lot of confidence in that strategy, and we're executing on it. And we're about halfway through to where we said we'd be in FY '28 and the performance has been exceeding our expectations.

Your next question is from Michael Baker with D.A. Davidson.

Okay. A couple of follow-ups. I guess, you said that the new store performance is better than expected, and I think you said on the commercial side, but anything else driving that better performance in those stores? Talk about, please, the DIY side and also expenses, which I think, as Simeon alluded to, have been coming in better than expected.

Yes. I would say that -- and I'll let Jamere speak on the new stores, too, but they're performing better on commercial and DIY. When we approve a store, we kind of look at -- we set up a pro forma, we look at both the DIY performance and when we expect the commercial performance, and we index against both of those. And in total, these stores are performing better on both the DIY side and the commercial side than when those stores were originally approved. And that pro forma and index takes into account SG&A per store, et cetera.

So we like the performance. We're pretty conservative in those approvals. But all the initiatives that we have in place around, like Jamere just mentioned a minute ago, Hub performance, Mega-Hub performance, in-store productivity initiatives, sales initiatives, commercial initiatives, all help per box performance. And we like the initiatives that we have in place, and we think they will continue to make us a stronger business in the future.

Got it. Okay. Makes sense. And then again, just to follow up again, it's been asked a couple of times, but maybe I'll ask it another way. I think the easy perception here is that as you start to cycle the inflation from last year, comps will slow. But just to be sure we have the right message, you don't necessarily think comps slow, this is domestic comps I'm talking about. You don't necessarily think domestic comps slow as you lap that inflation because of the comp waterfall and share gains. Is that the right interpretation? Is that the right message?

Yes, I think that's right. Obviously, the inflation becomes a little more muted, but we think that the initiatives we have in place will help us overcome a lot of that as we move forward.

That's correct.

And I think we have time for just one more call.

Your next question is from Zach Fadem with Wells Fargo.

So first, could you talk about the performance of the 35, 40 new Mega-Hubs today and how this cohort of Mega-Hubs compares to historical openings in terms of per store sales returns, comp lift for nearby stores, et cetera?

Yes. I think 2 things are driving that performance. The first thing that's driving that performance is, again, we've got a much stronger commercial business than we have had historically. And as we put those Mega-Hubs in the marketplace, the strength of our commercial business allows those Mega-Hubs to come out of the gate much hotter than the ones that we put in historically. That's first and foremost.

I think the second thing is how we utilize those Mega-Hubs where we're using those Mega-Hubs to go more direct to our customers than we have in the past as opposed to having them be primarily focused on a fulfillment source for some of the other stores. So the utilization of the Mega-Hubs and the fact that we've got a stronger commercial business are the key drivers there.

And if you just look at the market dynamics that we see today, parts proliferation, aging vehicles, propensity for DIFM business, those are all demand drivers, if you will, for adding more parts in the local market. And if we can do that with the right assortments and we can get the parts to the customer faster, then that's a winning formula for us. And we've refilled and rebuilt the pipeline, and we're pretty excited about what it means for us in the future.

Yes. The only thing I'd add to that is we keep -- we've had these Hubs and Mega-Hubs in place for so long. We've had the ability to iterate on them several times, and we keep finding the biggest asset in there is obviously the inventory and how do we get that inventory faster to a customer, shortening time to serve for both the DIY customer and the commercial customer and also online with things like next-day delivery, et cetera. We continue to find ways to keep energizing that inventory, and we're not done with that process. We still think there's opportunities there.

Got it. And then you mentioned share gains and comp waterfall as future drivers. But if we take your DIY comp minus inflation, it looks like the volumes in that business started to decelerate as same-SKU inflation ramped up. So as you think about the current deferral cycle that we're in as a result of inflation, do you think it's fair to assume that DIY volumes could improve simply because we're lapping that initial deferral, which would start, I think, in Q4?

Yes. I mean that's certainly a piece of it. I mean -- and the way that we see it in terms of the results is that the transaction counts did come down more than they have historically. I mean we typically have seen sort of low single-digit declines in transaction counts. There have not been very many periods where we've seen those transaction account -- those transaction counts be down with a three handle in multiple quarters. So as we move forward, there's an opportunity for us to see some improvement in transactions and traffic, and that will certainly help us from a comp standpoint.

We have reached the end of the question-and-answer session, and I will now turn the call over to Phil Daniele for closing remarks.

Thank you. Before we conclude the call, I want to take a moment to reiterate that we have a great business in a strong industry. We are excited about our growth prospects over the summer months of our fourth quarter, but we will take nothing for granted as we understand 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 remain focused on delivering flawless execution and striving to optimize shareholder value for the future, we are confident that AutoZone will be successful. Thank you for participating in today's call.

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

Thank you.

Greetings, and welcome to AutoZone's Second Quarter 2026 Earnings Release Conference Call. [Operator Instructions] And please note, this conference is being recorded. At this time, we would like to play the company's safe harbor statement.

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.

Thank you. With that, I would like to turn the conference over to your host, Mr. Phil Daniele. Sir, the floor is yours.

Thank you. Good morning, and thank you for joining us today for AutoZone's 2026 Second Quarter Conference Call. With me today are Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax.

Regarding the second 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 quarterly earnings conference calls to see them. To start out this morning, I want to thank every AutoZoner across the company for their commitment to delivering on the first line of our pledge.

AutoZoners always put customers first. Our results would not be possible without us always asking what the customer needs and how we can meet those needs more efficiently day in and day out. It is our AutoZoners across the stores, supply chain and our store support centers, who deliver on this commitment every day. Their efforts allowed us to deliver sales growth of plus 8.1% this past quarter.

To start this morning, we will address both our sales results and provide an update on our growth initiatives. We will also discuss our domestic and international results and break our sales results down between traffic and ticket growth to address what inflation has meant to both our ticket growth and our sales growth. We will also share regional disparities where they exist. And finally, our outlook and how we expect the year to unfold as we enter our spring and summer selling season.

For the second quarter, our total sales grew plus 8.1% and similar to the first quarter sales growth, while earnings per share decreased 2.3%. Similarly, to our experience in the first quarter, our gross margin, operating profit and EPS were negatively impacted by a noncash $59 million LIFO charge, which had a material impact on our margins and EPS. Excluding this LIFO charge, our EPS would have been up 7.1% versus last year's Q2.

We also delivered a positive 3.3% total same-store sales on a constant currency basis, with domestic same-store sales growth of up 3.4%. Our domestic DIY same-store sales grew plus 1.5% and while our domestic commercial sales grew plus 9.8% versus last year's Q2.

I'll pause here to reiterate what we said during our last conference call. Q2 is always our most difficult to forecast due to the less predictable winter weather patterns, and this quarter was no exception. While our commercial sales increased was below our expectations, our results were negatively impacted due to the winter storms across much of the country during the last 4 weeks segment of the quarter.

To add a little more color around the impact the storms had on our domestic commercial sales, the 2 weeks, the storms really impacted us, weeks 10 and 11. Our commercial sales were up just over 1%, while the other 10 weeks of the quarter, our commercial sales were up over 12%.

International same-store sales were up 2.5% on a constant currency basis, and our unadjusted international comp was 17.1% as exchange rates positively impacted our comps by nearly 15 points. Jamere will provide more color for you on our foreign currency impact on our financial results for both this quarter and the upcoming third quarter later on this call.

We opened 64 stores globally this past quarter versus 45 in last year's second quarter to finish with 6,709 U.S. doors, 913 Mexico stores and 152 Brazil stores. We've now opened 342 new stores on a trailing 4-quarter basis versus 241 new stores on a trailing 4-quarter basis at the end of Q2 last fiscal year. We're now on track to open approximately 350 to 360 stores for the full year versus the 304 stores we opened globally last fiscal year.

We continue to be very pleased with the sales productivity we're generating out of our new stores as their sales results are exceeding our models. Next, let me address our sales results in a little more detail. Coming into the quarter, we are optimistic that our domestic store execution would drive sales growth for both retail and commercial. More specifically, we felt we had the momentum we have gained over the last several quarters with our domestic commercial sales would continue throughout the quarter. However, the severe weather experienced across the country significantly impacted our commercial customers, many of whom closed their businesses for several days.

Despite this, on a 2-year basis, our growth is right in line with last quarter's 2-year growth rate. While the winter weather was a short-term drag on sales, I want to stress that we are very excited about our growth initiatives, and they are delivering as we would expect. Historically, these types of winter weather patterns have had a positive impact on our summer selling season. As a reminder, extreme weather events drive failure and maintenance events for our customers.

Additionally, our domestic retail comp was solid at plus 1.5%, in line with last quarter's 1.5%. Again, the second quarter is always the most volatile quarter as the impacts of weather and the timing of tax refunds can have an impact on our short-term results. With that said, we are executing as well as we have in many years. I'm very excited with what we are seeing in terms of market share gains, and we expect to continue to gain share for the remainder of our fiscal year 2026.

Next, I'll discuss the quarter's sales cadence. Regarding the plus 3.4% domestic same-store sales, the cadence was plus 4.1% in our first 4 weeks plus 2.7% in the second 4 weeks and plus 3.5% over the last 4-week period in the quarter. Last year, we experienced much colder weather in the middle 4-week segment of the quarter while this year, the cold weather came in the last 4 weeks.

As a result, the DIY comparisons were tougher in the middle 4-week segment. Regarding our plus 1.5% DIY comp for the quarter, we experienced a positive 2.3% in the first 4-week segment, a negative 0.5% DIY comp in the second segment and a plus 2.8% comp during the third segment. Our merchandise categories performed as we would have expected, but the precipitation, especially the ice that large parts of the country experienced in late January and into early February, slowed our business trends. As a reminder, cold weather with ice and snow lead to higher failure rates that stretch into the summer months.

Regionally, we underperformed the company's overall DIY comp in the Mid-Atlantic and the South Atlantic areas. Also, the West Coast was a little weaker than we would have expected due to milder weather, but much less snow than the year before. With regard to inflation's impact on DIY sales, we saw like-for-like same SKU inflation up north of 6% for the quarter, which contributed to our DIY average ticket being up 5.2%. The difference between the like-for-like inflation and ticket growth is attributable to category mix.

Based on our inflation expectations, we continue to expect our average ticket to grow sequentially through the third fiscal quarter, which ends in May and then peak during the fourth quarter where we will begin to lap the increases in inflation we saw in this past year's fourth quarter. I'll remind you that we price our goods against our weighted average cost, and we continue to expect those weighted average costs to grow due to the impact from tariffs.

We also saw DIY traffic count down 3.6% as traffic in the middle 4-week segment was down more than the other 8 weeks. As a reminder, our traffic decline was similar in the last quarter's decline. Again, this quarter's difficulty in the middle 4-week segment was due to the difficult comparisons with cold weather we experienced last year.

I do want to stress here that we expect traffic to improve as ticket growth begins to slow by late summer. We also feel the cold winter and potentially the size of the tax refund season could create upside for us with traffic over the remainder of the fiscal year. Now I will touch on our domestic commercial business.

As I mentioned, our commercial sales were up 9.8% for the quarter. The first 4 weeks grew plus 10.1%. The second 4-week segment grew plus 12.5% and the third 4-week segment grew 7.3%. As with DIY, our commercial sales were impacted somewhat during the middle 4-week segment due to the weather comparisons we had last year, but we clearly underperformed our expectations the last 4 weeks of the quarter as the impact from ice and snow accumulation negatively impacted our commercial customers at the end of the quarter, as we have already discussed.

It was just more pronounced on the commercial side of the business. Our commercial sales results continue to be driven by our improved satellite store inventory availability, significant improvements in Hub and MegaHub coverage, the continued strength of our Duralast brand and high levels of execution on our initiatives to improve speed of delivery and customer service. We continue to see improvements in delivery times. These initiatives are delivering share gains and give us confidence as we move further into FY '26.

Both the year-over-year inflation on a like-for-like same SKU basis for the commercial business and our average commercial ticket growth were similar to DIY, north of 5% for same-SKU inflation and north of 5% per ticket. The weather in the last 4 weeks of the quarter slowed transaction trends to a slight negative growth over those last 4 weeks, and that is understandable to us.

We continue to be optimistic about reaccelerating transaction growth over the back half of our fiscal year as we remain focused on both growing our customer base and growing share of wallet and sales per customer. Our future sales growth will be driven by share gains and an expectation that like-for-like retail SKU inflation will remain in the mid single-digit range as we move forward.

Now let me take a moment to discuss our international business. Across Mexico and Brazil, we now have 1,065 international stores. As I mentioned, our same-store sales grew plus 2.5% on a constant currency basis behind a continued soft macro environment in Mexico. While we are continuing to gain market share, the economy continues to experience slower economic growth.

As Mexico's economy improves, we expect our sales to reaccelerate as we continue to invest in stores and distribution centers. Today, we have almost 14% of our total store base outside of the U.S., and we expect this number to grow as we continue our international store build-out.

In summary, we have continued to invest capital in driving traffic and sales growth. While there will always be tailwinds and headwinds in any quarter's results, what has been consistent is focus on driving sustainable long-term results. We continue to invest in improving product assortments in our stores and improving efficiency in our supply chain, which positions us well for the future. We are investing both CapEx and operating expense to capitalize on these opportunities. This year, we are investing nearly $1.6 billion in CapEx to drive our strategic growth priorities, and we expect to invest a similar amount next year.

The majority of these investments will be in accelerated store growth, including hubs and mega hubs placing more inventory closer to our customers. We will continue to invest in our supply chain. Our new Brazil distribution center opened and began servicing stores in Mexico or I'm sorry, in December. Our new and much larger DC in Monterrey, Mexico will be fully operational soon. We will also focus on optimizing our new distribution centers in the U.S. We are in the final stages of our Supply Chain 2030 project, which began in 2019, all while continuing to invest 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 our business, and we believe industry demand will continue to be strong, and we continue to manage our investments with an expectation to achieve strong returns on invested capital. And we will monitor returns carefully to make sure that we are achieving on or exceeding our expectations. Now I will turn the call over to Jamere Jackson.

Thanks, Phil. Good morning, everyone. Our operating results remained strong for the quarter and were highlighted by solid top line revenues. Total sales were $4.3 billion and were up 8.1% versus Q2 of last year. Our domestic same-store sales grew 3.4% and our international comp was up 2.5% on a constant currency basis.

Total company EBIT was down 1.2%, and our EPS was down 2.3%. As Phil stated earlier, excluding our noncash $59 million LIFO charge, EBIT would have grown 7.2% and EPS would have been up 7.1%. Foreign exchange rates positively impacted our results for the quarter. For Mexico, the peso strengthened versus last year's Q2, just over 12% versus the U.S. dollar, resulting in a $74 million tailwind in sales, a $23 million tailwind to EBIT and and $0.95 a share benefit to EPS versus the prior year.

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 Q2. First, I'll start with a little more color on sales and our growth initiatives, starting with our domestic commercial business for the quarter. Our domestic DIFM sales were $1.2 billion, up 9.8%. Our domestic commercial sales represented just over 32% of our domestic auto part sales and 27% of our total company sales.

Our average weekly sales per program were $15,400, up 4.8% versus last year. This quarter, we opened 128 net new programs, including nearly 80 programs in existing stores, which dampened our sales per program growth but will accelerate our total growth moving forward. We finished with 6,310 total programs, and we now have our commercial program in 94% of our domestic stores. Our commercial acceleration initiatives continue to deliver strong results as we grow share by winning new business and increasing our share of wallet with existing customers.

We're building our business with national, regional and local accounts, and we plan to aggressively pursue growing our share of wallet with existing customers while also adding new customers. Mega Hub stores remain a key component of our current and future commercial growth. We opened 5 mega hubs and finished the quarter with 142 Mega-Hub stores. We continue to expect to open approximately 30 Mega-Hub locations over the fiscal year as our pipeline is exceptionally strong.

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 larger stores give our customers access to thousands of additional parts across the market.

While I mentioned a moment ago that our average commercial weekly sales per program grew 4.8%, the 142 Mega-Hubs continue to drive growth at an even faster clip. We continue to target having approximately 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 1.5% for the quarter. Our DIY share has remained strong behind our growth initiatives, and we're 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 the remainder of 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 18 new stores in Mexico to finish with 913 stores and 3 new stores in Brazil, ending with 152. Our same-store sales grew 2.5% on a constant currency basis and 17.1% on an unadjusted basis. While sales growth has slowed over the last few quarters in Mexico due to slower economic growth in the country, we have continued to grow share, and we're well positioned when the economy improves. We remain committed to investing in international expansion, and we're pleased with our results in these markets as we accelerate the store opening pace.

As we look ahead, 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 52.5%, down 137 basis points versus last year. This quarter, we had a $59 million LIFO charge or 138 basis points unfavorable LIFO comparison to the last year. Excluding the LIFO comparison, we were slightly positive year-over-year on a gross margin basis, which met our expectations as we offset a significant rate headwind from the mix shift to a faster-growing commercial business.

We continue to anticipate benefits from merchandise margins next quarter as well that should help offset the rate headwind from accelerated commercial growth. As I mentioned, we had a $59 million noncash LIFO charge in Q2 and a year-to-date total of $157 million. We're planning a LIFO charge of approximately $60 million for each of the remaining 2 quarters of fiscal 2026 as we're continuing to experience higher costs due to tariffs that are impacting our LIFO layers.

The $277 million in LIFO charges that we expect this year compared to $64 million last year. Moving on to operating expenses. Our expenses were up 8.7% versus Q2 last year as SG&A as a percentage of sales deleveraged 18 basis points, driven by investments to support our growth initiatives.

On a per store basis, our SG&A was up 3.9% compared to last quarter's 5.8% increase as we managed our SG&A per store lower as sales softened in the middle of the quarter. We expect to continue to increase our new store opening pace through the end of fiscal 2028 when we reach a total of 500 stores open annually. For Q3, we expect to open 90 to 95 stores globally versus 84 last year. And for the full year, we expect to open 350 to 360 stores versus 304 net new stores opened in FY '25.

We've been purposefully investing in SG&A in order to capitalize on opportunities to grow our business now and in the near future. These investments will also pay dividends and customer experience, speed of delivery and productivity all of which will help us grow market share. We remain committed to being disciplined with our SG&A growth. And as the accelerated new stores mature, we will manage expenses in line with sales growth over time.

Moving to the rest of the P&L. EBIT for the quarter was $698 million, down 1.2% versus the prior year. As I previously mentioned, a noncash LIFO charge reduced our EBIT by $59 million. Adjusting for the unfavorable LIFO comparison, our EBIT would have been up 7.2% versus the prior year. Interest expense for the quarter was $107 million, down 1.5% from a year ago as our debt outstanding at the end of the quarter was approximately $8.9 billion versus $9.1 billion a year ago.

We're planning interest in the $112 million range for the third quarter of FY '26 versus $111 million last year. For the quarter, our tax rate was 20.7%, up from last year's second quarter of 18.4%. This quarter's tax rate benefited 213 basis points from stock options exercised, while last year, it benefited 239 basis points. For the third quarter of FY '26, we suggest investors model us at approximately 22.9%.

Moving to net income and EPS. Net income for the quarter was $469 million, down 3.9% versus last year. Our diluted share count of 17 million was 1.6% lower than last year's second quarter. The combination of lower net income and lower share count drove earnings per share for the quarter to $27.63 down 2.3% versus last year's Q2. As a reminder, LIFO drove our EPS down $2.66 a share.

Now let me talk about our free cash flow. For the second quarter, we generated $15 million in free cash flow versus $291 million in Q2 last year. Year-to-date, we've generated $645 million in free cash flow versus $856 million last year. The lower free cash generator is due to CapEx and payables timing.

Going forward, we expect to continue being in an incredibly strong cash flow generator, 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 just over 2.5x EBITDAR. Our inventory per store was up 8.1% versus Q2 last year, while total inventory increased 13.1% 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 a negative $105,000 versus the negative $161,000 last year and negative $145,000 last quarter. As a result, accounts payable as a percent of inventory finished the quarter at 110.9% versus last year's Q2 of 118.2%.

Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $311 million of AutoZone stock in the quarter. And at quarter end, we had $1.4 billion remaining under our share buyback authorization. Our ongoing strong earnings, balance sheet and powerful free cash generation allows us to return a significant amount of cash to our shareholders through our buyback program.

We've bought back over 100% of the 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 and 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 the back half of our FY '26, we're bullish on our growth prospects behind a resilient DIY business, a solid 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. 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 tailwind to revenue and EPS.

If current spot rates held for Q3 then we expect an approximate $75 million benefit to revenue, a $20 million benefit to EBIT and an $0.85 a share benefit to EPS. Lastly, in Q3, we expect LIFO to reduce EBIT by approximately $60 million, impact our gross margin rate by approximately 125 basis points and our EPS by approximately $2.75 a share. And now I'll turn it back to Phil.

Thank you, Jamere. To wrap up this morning, I want to stress that we are on track for delivering on our objectives for the remainder of fiscal 2026. While we have much more to accomplish this fiscal year, we remain committed to flawless execution and appropriately spending our capital to drive growth and efficiency. We feel we are well positioned to grow both our domestic DIY sales and domestic commercial sales. .

We also feel that our international same-store sales on a constant currency basis will improve, but we remain cautious as the Mexico consumer remains under pressure. We also expect to manage our gross margin effectively while growing our operating expenses in line with our accelerated store opening assumptions.

Finally, I want to reiterate that we are putting our capital to work where we'll have the biggest impact on sales, our stores, our distribution centers and investing in technology to build a differentiated and superior customer experience. We will make sure that the capital we deploy produces strong returns. The stores we have opened over the last 5 years have exceeded the planned sales and earnings we modeled when these sites were approved.

The focus areas for FY '26 will remain growing share in our domestic DIY and commercial business and accelerating international top line growth. We do understand that we cannot take things for granted. We must remain laser-focused on customer service, execution and gaining share in every market in which we operate. We are excited about what we can accomplish over the remainder of the year, and our AutoZoners are motivated to deliver on those commitments. We believe AutoZone's best days are ahead of us. Now we would like to open the call for questions.

[Operator Instructions] Our first question today is coming from Bret Jordan with Jefferies.

Could you talk a bit more about your same SKU inflation expectation? I think you said it would be with you mid-single digits going forward. So maybe the rest of the fiscal year. But when you think about the second half of the calendar year, do you anticipate continued same SKU price benefit?

Yes. We believe that it will continue to increase over the third quarter and through most of the fourth quarter. And then the fourth quarter is when we will start annualizing those higher rates from last year, but we still see same SKU inflation kind of similar to third and maybe slightly tailing off through the back half of what you said calendar year, which would be most of our fiscal year, which ends in late August, as you know.

A couple of drivers here, Bret, is there are lots of discussion about what's going to happen with tariffs. And obviously, the [ IEEPA ] tariffs have been stayed at this point. That was a relatively small portion of our tariff bill, if you will. Most of our tariffs are the 232 tariffs. So we're still expecting to see tariff impact as we move through the back half of the year. .

I think the other dynamic is that we've talked about this notion of having a multipronged strategy here where we would continue to negotiate with our vendors. We diversify our sources and then in some cases, we'll raise our retails. All of the costs that we've seen so far from tariffs have not made its way through the system, which is why, as Phil mentioned, we're expecting tickets to continue to be elevated through the third and the fourth quarter. So I just wanted to give a little bit of color on why that expectation is where it is.

Okay. Great. And I guess, early days here, but a lot of talk about expectations around tax refunds this year. You're seeing any signs of incremental traction and, I guess, sort of a similar theme the weather that we've seen here in the last 6 or 8 weeks. I guess what's your near-term outlook on demand creation from that would sort of seem like [ undercar ], some of the seasonal categories might see some benefit?

Yes. I think if you kind of look across the Midwest, the Mid-Atlantic and the Northeast, what we kind of affectionately call the Rust Belt markets for us. This type of weather that we've had in those markets for winter, all have always indicated a pretty strong category performance in those markets as you move through summer -- spring and summer selling season.

So exactly those categories you talk about. Undercar will probably have some improved sales in those markets, chassis, steering, suspension, anything that is open to the bottom of the car to get rust and salt on it, those are going to drive maintenance and failure events over the summertime. So we're pretty encouraged by that.

Tax refunds, I mean it is, as you said, early on, that tax season is just now beginning. And as has been stated in the news, we expect those to be slightly bigger based on no tax on tips and all that sort of stuff that's been talked about pretty widely in the news. So we think that also bodes pretty well for us through the the early part of spring and into early summer.

Our next question is coming from Chris Horvers with JPMorgan.

So I wanted to follow up a bit on Bret's question. So first, distilling through all the noise of the puts and takes of whether both good and bad, including that widespread hit in late January and early February. What do you think the right underlying run rate of your domestic businesses. And can you also talk about that on the commercial side? I think people are pretty attuned to the deceleration below 10% on a total DIFM basis.

Yes. And as I talked about in our prepared remarks, we were kind of running on the previous 10 weeks or so in the quarter. We were up in that 12% range. And in those last 2 weeks of the quarter were pretty substantially lower at a 1% comp. So the quarter was kind of running along at that better than double-digit number and then the last 2 weeks were pretty significantly impacted. And again, it was a pretty wide area that stores got impacted going all the way from Dallas, Little Rock, Oklahoma City, all the way across here in Memphis, Nashville, Louisville, all the way to D.C. had a pretty big impact initially during that time frame.

And as you went a little further south, you ended up with pretty significant ice. To give you an anecdotal example, most of the schools in Tennessee and Arkansas were shut down for 2 weeks. I mean people were pretty much locked in their house for a time frame. So that was a temporary impact. It was late in the quarter to recover it, but we see nothing that indicates that we're not going to have pretty strong sales growth on the commercial side of the business going forward.

Yes. I mean if you think about it, Bret, I mean,or think about it at the end of the first quarter results, we expected our second quarter to perform pretty similarly, excluding sort of the severe weather and the prolonged impacts on both our DIY and commercial business, we would have printed a number in the second quarter very similar to that. I think what's important to us is that our DIY business continues to remain resilient and our commercial business has sort of snapped back.

So the results that we saw in the first quarter, we see us performing somewhere in that ZIP code as we move forward.

And then Phil, to your previous comments about typical lag of a benefit to the business off a cold and snowy winter. As you think about that benefit, historically, does the business accelerate from that recent trend because of that? And as you think about sequential growth of inflation into the third quarter here, what would hold back the business from not accelerating from what sounds like something in the 4% baseline.

Yes. I don't -- again, I think the tailwinds that you get from the tougher winter weather in those markets that are impacted, we believe those would be a net positive in the go forward. Now as we move through summer, there's -- the other side of the weather equation that we got to have as a normal to hot summer, which we're expecting to have at least a normal summer at this point.

So I think all of those are benefits. And as we said, we expect a slightly larger tax refund season. It will be -- we'll have to wait and see how that ultimately pans out, but I think those are positive trends for us as we move forward.

It is coming from Steven Zaccone with Citi.

I wanted to ask a question on pricing on a different way. When we get to peak pricing, how do you think about elasticity of transactions on the other side? The industry doesn't typically see deflation, but just help us understand your expectations elasticity of transactions once pricing growth starts to moderate?

Yes. I think we kind of -- we think about the business in kind of 3 different discrete buckets of types of product. You've got discretionary product. That business has been pretty tough, although it's slightly better than it's been over -- since the pandemic, frankly, slightly better. But those are probably the more elastic or inelastic categories. Maintenance has a tendency to sometimes be in a higher elevated average ticket growth.

If you will get some delayed maintenance. But typically, the customer understands that if I delay maintenance, I end up with a failure going forward. And then if the part is a failure mode, ultimately, you have to replace it. So there's not a whole lot of -- it's break fix, and that hasn't really changed over a very, very long period of time. So discretionary gets impacted the most. We would expect as you get further out from inflationary items in the average ticket, that business probably recovers a little bit, but it's a relatively small percentage of our total overall volume. Most of our businesses break fix failure and maintenance business. And those will continue to be pretty strong for us, we believe.

Okay. My follow-up question on the topic of investments in general you've been on this journey to increase your hub count, grow SG&A spending. How would you assess where we are in the investment cycle? What inning are we in? And how do we think about the pace of some of these investments as we go through the next couple of quarters?

I would say we're in the middle innings. One of the things we highlighted was that we expect to -- by FY '28 to grow our domestic store count by 300 stores a year, and we're going to continue to ramp there. That means an incremental 40 to 50 stores next year and then the following fiscal year. So we're kind of in the middle innings of that ramp. What I'll say is that our pipeline is very strong and the stores are ahead of our pro forma in terms of our performance. So we like the progress that we've made. We like the sales growth that we're seeing. We like the market share gains that we're getting from that. It has put some pressure on our SG&A as we've been very transparent about, probably to the tune of 1.5 to 2 points, but we're managing the rest of the SG&A in a very disciplined way. So as we move through, I expect this to result in a faster-growing top line business and a faster-growing EBIT business as a result of it.

Our next question is coming from Zach Fadem with Wells Fargo.

First to clarify, it sounds like weather was about a 1 to 1.5 point hit to comp in Q2. Just want to make sure that's right. And then second, when you look at DIY traffic or volumes down about 3.5%, similar in Q1 and Q2, how much of this would you categorize as deferred maintenance? And how should we think about the path and time frame towards getting those volumes back?

Yes. Great. So I think your estimation on what the impact was is kind of right on target of how it impacted the very end of our Q2. As far as deferred maintenance and that sort of thing, it's always a little bit hard to tell. But we feel like those will accelerate coming into the second -- or the second half of our year on the backs of, like we've already said, some of this tax time should -- generally speaking, when you get more tax money or money in the marketplace, the customer will reinvest in the car, and they'll tackle some of those bigger failure projects. And we believe that that's going to continue into the second half of the year.

Got it. And then, Jim, it sounds like the SG&A spend is peaking to some extent and should moderate a touch from here. And I think we do, at this point, all have a good sense of what that level of spend will be, both in terms of investing in SG&A and new stores. But perhaps you could spend some time talking about the size of the prize in terms of expected returns and payback on these investments? And is it fair to say we would see outsized top line and EBIT growth as soon as '27?

Yes. That's certainly our expectation that you'll start to see these stores mature and that you'll see our top line growth accelerate in FY '27 and FY '28. So in terms of size of the price, in addition to seeing a faster-growing business, you're also going to see a business that has very healthy returns on invested capital. We modeled these stores in a very disciplined way, even though we're very conservative. They get to sort of the targeted returns on invested capital in a very, very short period of time. I mean most of these stores will mature in the 4- to 5-year kind of time frame.

What I'll suggest is that Mega-Hubs have been improving their performance over time and are actually doing better -- significantly better than what we had modeled. So we feel pretty good about it. And again, we're very disciplined on making sure that we're driving the returns on invested capital associated with this strategy. And so you'll have a faster-growing business that has faster growing EBIT growth as a result of that with very good return on invested capital.

Our next question is coming from Simeon Gutman with Morgan Stanley.

There was a comment made in the prepared remarks, growing market share in a disciplined manner. There's been talk about growing EBIT faster. Can you phrase it in terms of margins? Can the margins of the business reexpand? Or should we think about it in terms of [ EBITDAR ] growth?

Yes. Good question. I'll say we kind of think about how we manage margin rate on the 2 sides of the business. What I would say is I think we can incrementally grow both of them. If you start at the highest level of margin, gross margin rate, both on DIY, we have slight margin improvement, and we think we can improve gross margin in the commercial side of the business over time as well.

Now you we still believe that we're going to grow commercial faster than DIY. So you'll end up with some margin mix pressure, but we're okay with that because at the end of the day, that commercial business throws off a pretty good amount of operating profit and EBIT. So there'll be a little bit of top line margin pressure because of mix. But overall, to Jamere point, we'll have a faster growing EBIT business as these stores mature and as we move forward. We believe we're growing share on both DIY, commercial and in our international markets. So all of those are, we believe, very, very healthy for us.

Yes. I mean if you think about the way that we've sort of manage the business historically. I mean in that 18% to 19% sort of operating margin range, we will operate the business in that ZIP code as we move forward. Again, nothing has changed about the way that we think about the operating margin profile of the business. We will have the mix pressure, but one of the things that we've done pretty consistently and you've seen in the last couple of quarters as we continue to manage gross margins with intensity.

And for example, this past quarter, we had about 27 basis points of rate pressure purely from our commercial mix and our merchants and our supply chain has done a really good job of sort of offsetting that and keeping gross margins flat year-over-year. So that's the kind of operating discipline we have in the company. And as you think about the business in the future, similar operating margin rates with a faster top line growth.

And I guess to zoom in on the mechanics of that, I realize you don't give a lot of guidance points, but the comp rate of this business that was prevailing that you should grow faster from. Is it fair that 3 to 4 is the baseline that you're hoping to grow faster. And I know you haven't endorsed a specific number. I don't know if that's a fair baseline to think you're going to grow faster. And then it does sound like it's the SG&A tapering that will enable EBIT to grow faster given what Phil said around the margin pressure of mix coming from commercial?

Well, I think you got 2 dynamics, Simeon. One is the -- we're clearly adding more stores at a faster clip. As those stores mature, you're going to see that have some lift to the comp rate overall. So that is part of the calculus there. And then from an SG&A standpoint, I mean, we'll be back to managing SG&A where we have historically. So that's what gives us the confidence that even with a -- even with a faster-growing commercial business, which is part of that equation for a faster comp rate, we can keep the operating margins close to where they've been historically.

Our next question is coming from Michael Lasser with UBS.

Given the slowdown in the commercial business attributed to the weather, don't these jobs still get done? And wouldn't that imply the commercial business should have accelerated as meaningfully as the weather improved. And if not, just anything about where AutoZone sits on the call list, in these times where volumes are more constrained, these commercial customers focus their supplier relationships on the top call and that can contribute to outsized volatility in the commercial business for AutoZone?

No. Mike, I don't think so. I think the impact of the slowing at the end of our quarter was just literally that at the very end of our quarter. Those shops were closed for the most part and didn't open. And it was, again, right at the very end of the quarter. We've seen a pretty nice [ snap ] back. We're very early in our quarter of Q3.

But I think what's been true over time as we continue to gain share on the commercial side of the business on the backs of our strategies, putting more assortment closer to the customer through a Mega-Hubs and hubs continually improving our same -- our satellite store assortments and working on strategies that make us easier to do business with and getting those hard-to-find parts faster to those customer shops, we think we're executing very well at that. And we think we have a strategy that will continue to only get better, which is as we drop these hubs and Mega-Hubs, we continue to gain market share and they also help the satellite stores perform better on commercial.

And by the way, we don't talk much about it, but those same Mega-Hubs and hubs put that same product closer to the DIY customer as well. So we think we gain over that. Again, I think the impact in the last 4 weeks was just that. And you'll see that -- we've seen that business recover already as those shops opened up. We think over time we continue to move up the call list. Again, we're gaining with both new customers and share of wallet in what we call up and down the street and in traditional and national accounts. So we're gaining in all of those segments, and we like how healthy that commercial business is.

My follow-up question is was there anything unique about the operating expense performance in second quarter, meaning maybe you anticipated this slowdown in sales, so you pulled back on some operating expenses such that it's going to significantly accelerate from here. And as part of that, if you do see this potential improvement in comps over the next couple of quarters, given all the factors that have been discussed today, would you lean in and accelerate some of your investments such that operating expense growth will revert back to this high double-digit rate that was experienced last quarter.

Yes. We don't expect to go back to the double-digit rates over the back half of the year. Again, the big driver there is we're starting to annualize the accelerated store growth that we had in the back half of last year. So we naturally would have expected the year-over-year growth from an SG&A standpoint to moderate some in the back half. And in terms of the past quarter, there was nothing that we did that was different from the way that we've always operated the business. We've always sort of monitor the way that we manage our payroll with what we see in terms of transactions. And obviously, with the severe weather, we had some store closures for several days, and we had reduced hours in some instances and fewer transactions.

So we just managed the payroll with discipline, but we didn't do anything that was outside of the way that we normally operate the business. And then as our comps continue to accelerate, we make sure that we've got the right level of payroll in and we continue to manage the business so that we're providing Wow! Customer Service. So we didn't toggle anything in terms of investments, and we're not going to toggle any of the investment cadence in the back half of the year.

Most of these investments that we're talking about, particularly store growth and DCs, I would say for most of the distribution and supply chain investments, we're over the majority of those -- the DC openings and that sort of stuff. But the stores, it's hard to accelerate a store they're going to open when they're going to open. We put the staff in, get those folks trained before those stores opening. It's hard to move them forward by 60 days or 90 days just because of the construction schedule.

So we'll continue to monitor that. But I think what was notable about Q2 is as we had some changes in our individual week-on-week comps, our operators are really good at being able to manage that business based on the flow of customers. That discipline, we are very good at it. We've been good at it for a long time, and we continue to be good at it. We don't expect that to change.

Our next question is coming from Scot Ciccarelli with Truist.

First, still a little bit confused on the cadence differences between DIY and commercial. Like why was DIY's low point in the middle 4 weeks, if I wrote that down right and commercial's low point was the last 4 weeks. And then secondly, as you guys continue to expand Mega-Hubs -- your Mega-Hub strategy and get more experience there, can you help quantify the sales lift you're seeing in stores in a market where you open a Mega-Hub.

Yes, sure. We'll talk a little bit about -- let me answer the first question on the cadence of DIY versus commercial, the middle part of -- the middle segment of Q2 last year, you had a pretty significant cold weather event in that middle segment. So it created a tougher comp for those 4 weeks. .

Last year, you had some pretty extreme cold, which drove a lot of battery sales and cold weather product last year. So that created a bit of a comp differential this year that cold weather didn't happen in the middle 4-week segment. It happened in the last 4-week segment. Now the mix of those 2 -- so even though the commercial business was a little bit stronger in that second 4-week segment, and we capitalized on that, DIY was soft, commercial was better. The last 4-week segment we got the cold weather event, which helped DIY, but it hurt the commercial business because we had shops that were closed for so long.

So I would say, we performed kind of as you would expect from a 2-year comp basis, but that specific cold weather comp in the Midwest and the Northeast last year created a comp challenge for us, which was slightly negative on DIY.

Got it. And then the question on the Mega-Hub. Just kind of what kind of halo effect are you guys seeing when you guys open a Mega-Hub? And has that changed as you guys continue to expand that strategy?

Well, yes, we've never really quantified how much we think those things lift in total. Well, I'll tell you this, we've been opening and working on our strategies for hubs and Mega-Hubs for quite some time now. And going back several years, I could go back and tell you, we thought we knew how high was high back 8 to 10 years ago with our strategies. We continue to perform different strategies and execution of tactics around how we deploy inventory to those stores, how we energize the inventory in a given market.

You've heard us talk about doing density tests with more Mega-Hubs in metro areas. And we continue to optimize and figure out more ways to make those stores more productive for us, specifically for commercial, but also on DIY. And we have yet to say we've reached peak performance in our hubs and Mega-Hubs. So we like how they perform. They help us, again, on the commercial side with those hard-to-find parts, they help us our per store 4-wall performance, which is how we look at those hubs and Mega-Hubs continues to improve, and they continue to give a halo for the entire satellite network around them that they service.

So we like the Mega-Hubs and Hubs, which is why you hear us keep taking those numbers up from several years ago from 40 to 100 stores to 150 to 200. And now we believe we'll have more than 300 at full build-out. Those are great performing assets for us. Thank you for the question.

Our next question is coming from Steve Forbes with Guggenheim. .

Maybe just a follow-up question on the domestic comp average ticket trends or I guess, same SKU inflation trends versus the DIY. What explains the difference in the quarter with DIY being 6 and DIFM being sub-5, I guess, specifically, just trying to figure out if there's any pockets of competitive pricing pressure or if it's sort of mix oriented as it pertains to national versus up and down the street business.

Yes. It's almost all category mix. The winter ends and things of that nature drives battery sales, starters, alternators, et cetera. It's the difference in category mix between the 2 channels and even the category mix that you get in terms of timing of year if that makes sense. So that's really what drives that. .

That's good to hear. And then just a follow-up on DIFM comp transactions. I don't know if you could specifically state what it was during the second quarter. It looks around 2%, maybe slightly over 2%. And more specifically, like what was the difference between the first 8 weeks from a DIFM comp transaction base versus those last 4 weeks?

Yes. The last 4 weeks, and it was literally the last 2 weeks that drove the vast majority of the change was the closings of stores and closing of commercial accounts, many of them were closed for more than 2 weeks. And we kind of had a rolling 400 stores, if you will, from starting in kind of West as that storm moved across from Texas all the way to D.C., was kind of a rolling 200 to 400 stores depending on the day that were closed.

And then those commercial accounts stayed closed much longer than that. So that was really what drove that change. Again, 10 weeks of the quarter in commercial were plus 12% or better. Those last 2 weeks were a 1. And I would tell you that later in -- even the last couple of days that started to recover in the quarter and it's been back to normal as we would have expected in the very early going of what is our Q3.

So I guess just to clarify that, if we look at the last sort of the last 12 months before this quarter, domestic traffic comps were sort of 6% or so, 6%, 7% Is that's the right way to think about the business on a go-forward basis. There's nothing that sort of changes the view on the building blocks on comp to get to that sort of 4-plus percent domestic comp profile?

Yes, I think you're thinking about that right. Yes. .

Okay. Before we conclude the call, I want to take a moment to reiterate that we believe that our industry remains strong and our strategies for growth are working. We are excited about our growth prospects for the back half of the 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. We remain focused on delivering flawless execution and striving to optimize shareholder value for the future. We are confident AutoZone will be successful. Thank you for participating in today's call.

Thank you. Ladies and gentlemen, this does conclude today's call. may disconnect your lines at this time, and we thank you for your participation.

Good morning, everyone, and thank you for joining us today for AutoZone's 2025 Annual Meeting of Stockholders. I am Phil Daniele, President and CEO of Customer Satisfaction, and I will be presiding at this meeting. Of course, it would not be an official AutoZone meeting if we didn't start our meeting with a cheer and a pledge. Damon Payne, will you please lead us in the cheer and the pledge.

[Presentation]

Thank you, Damon. Does anyone have an Extra Miler story to share with us?

I have one. Steven Thomas, Senior Category Manager Friction and Hardware, Customer Satisfaction, 12-year AutoZoner. This comes to us from Store 2387 out of Kansas City. On Monday, November 10, 2025, Curtis Porter went out of his way to assist a commercial customer for my store, 2374, that was broken down on the highway in Grandview Missouri. He was able to get all the parts to the customer needed and then take them to the customer on the side of the road. He then stayed with the customer to help him and get back on the road safely. The customer even called me the next day, saying how thankful he was to have AutoZone to rely on when in need.

Now I will turn the meeting over to Jenna Bedsole, our Senior Vice President, General Counsel and Secretary.

Thank you, Phil. Ms. Cassandra Shedd from Computershare is serving as our independent inspector of elections. A complete list of the holders of record of the company's common stock on October 20, 2025, which holders are entitled to vote at this meeting is available here for inspection. Also, I have received an affidavit of mailing from Computershare stating that notice of the meeting was duly given to stockholders of record as of the close of business on October 20, 2025. .

Finally, a tabulation of the proxies received from the stockholders indicates that more than a majority of the outstanding shares entitled to vote are represented at this meeting, and a quorum is present.

Thanks, Jenna. I hereby call this order to meet. As a reminder, it is not necessary for stockholders to vote at this meeting if they have already voted. If you have not voted or would like to change your vote, please raise your hand and a ballot will be provided to you.

Before we proceed to the first order of business, I'd like to recognize our senior management team, the AutoZone Executive Committee who are with us today. Thank you for your leadership in delivering another great year for our customers, AutoZoners, communities and our stockholders. Also with us today are my fellow director nominees, whom I will introduce shortly and Mike Walsh from Ernst & Young LLP, our independent auditor.

With that, let's proceed to the items of business. Our first order of business is the election of directors to serve until the next Annual Meeting of Stockholders in 2026. The following directors have been nominated for reelection to the Board. The following are at this meeting and present with us today. Myself, Phil Daniel, Mike George, Linda Goodspeed, Butch Graves, Brian Hannasch; Gale King, Claire McDonough, George Mrkonic, Bill Rhodes, Jill Soltau and serving with us virtually today is Constantino Spas Montesinos.

The second order of business is the ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for fiscal year 2026.

The third order of business is a nonbinding advisory vote to approve the compensation of our named executive officers. The Board of Directors unanimously recommends that stockholders vote for each of the director nominees, for Ernst & Young and for the advisory vote on executive compensation.

Since there are no other matters to properly come before this meeting, we will now proceed with the vote. For those stockholders voting at the meeting, please complete your vote now, and we will collect your ballots.

[Voting]

I now declare the polls for the 2025 Annual Meeting of Stockholders are closed. Jenna has the inspector of elections presented the results.

Yes. The inspector of elections has presented her preliminary report. They are present at this meeting in person or by proxy 14,846,704 shares of the company's common stock, representing 89% of the approximate 16.6 million shares outstanding as of October 2025. Based upon this report, all 11 directors have been reelected. The appointment of Ernst & Young LLP for fiscal year '26 has been ratified and the nonbinding advisory vote on executive compensation has been approved. The final vote results will be filed on a current report on Form 8-K.

Since there is no further business, the official business of this meeting is hereby adjourned.

At this time, we will open the floor for any questions. As there are none, I'm seeing no questions, I'd like to thank...

[indiscernible] I want to know what's the LIFO effect due to the tariffs. And are there any changes in the supply chain, the way we are sourcing the parts?

Yes. Well, the LIFO effect is caused predominantly by incoming cost that's higher than our current inventory. Those charges for the LIFO effect for Q1 was just under $100 million. For Q2, we're thinking it will be somewhere around $60 million. And that will continue as we see higher tariffs coming into our cost of goods. I assume that's your question.

[indiscernible]

Yes, we've been working on changing our supply chain strategies going back since some of the first tariffs came in, in 2016 and '17 and our strategy has been to diversify our sourcing in a number of countries that we source from as well as in virtually every category. So we have multiple suppliers for every category so that we reduce the risk and ultimately can control the cost as much as possible on those categories. Ultimately, we'd like to source from countries that have the quality that we need and require to take care of our customers as well as mitigating the tariff impact and making sure that we have a supply chain that's sustainable, so we have product for our customers.

One more question. Like what's the strategy as far as the international expansion in Mexico, especially?

So with -- as we've talked about plenty of times, our strategy, we like our Mexico and our Brazil strategy. Both of them are great businesses for us. As we've said, last year, we opened 89 stores in Mexico. We opened, trying to remember the number, 7 or 8 in Brazil. We'll continue that type of strategy. Ultimately, longer term, domestically, we'd like to open around 300 stores by 2028, and then we'll open another 200 stores internationally to get us to a total number of around 500 stores globally by 2028.

Those numbers will continue to ratchet up as we get to 2028. So there'll be incrementally more this year in '26 than they were in '25, more in '27, and then we'll get to a steady run rate of somewhere around 500 stores globally.

Thank you. Okay. Any other questions? Great. I'd like to thank our shareholders for your continued confidence in our mission, and I'd like to thank all AutoZoners across the globe for their commitment to living the pledge. Now let's deliver a great 2026 by focusing on continuing to providing wow customer service. Damon, could you come back up and close us out? And thank you.

Good day, everyone, and welcome to AutoZone's 2026 Q1 Earnings Release Conference Call. [Operator Instructions] At this time, the company would like to provide its forward-looking statement.

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.

Good morning, and thank you for joining us today for AutoZone's 2026 First Quarter Conference Call. With me today are Jamere Jackson, Chief Financial Officer; and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the first 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 at www.autozone.com under the Investor Relations link. Please click on Quarterly Earnings Conference Calls to see them.

To start out this morning, I want to thank our more than 130,000 AutoZoners across the company for their commitment to delivering on our pledge to always put customers first. Our decision-making process starts with asking the question, what is right for the customer? We strive to deliver on our commitment of providing WOW! Customer Service, and it's our AutoZoners across our stores and supply chain who deliver on this commitment every day, driving our results and our continued success. To start this morning, I'll address our sales results and talk about our new store openings for the quarter. I'll discuss both domestic and international results and break our sales results down between traffic and ticket growth comparisons to address what inflation has meant to both our ticket growth and our sales growth.

I'll also address regional disparities where they exist. And finally, I'll address our outlook and how we expect the year to unfold. For the quarter, our total sales grew 8.2%, while earnings per share decreased 4.6%. Additionally, I want to point out that this year's gross margin, operating profit and earnings per share were negatively impacted by a noncash $98 million LIFO charge, which had a material impact on our margins and EPS. Excluding this LIFO charge, our EPS would have been up 8.9% versus last year's Q1. We also delivered a positive 4.7% total same-store sales on a constant currency basis with domestic same-store sales growth of 4.8%. Our domestic DIY same-store sales growth grew 1.5%, while our domestic commercial sales grew up 14.5% versus last year's Q1 and up sequentially from 12.5% on a 16-week basis in the fourth quarter of last year.

Our focus is on improving execution, expanding parts availability and improving the speed of delivery. We are pleased with our results thus far. International same-store sales were up 3.7% on a constant currency basis. Our unadjusted international comp was up 11.2%. This was the first quarter since Q3 '24, where FX rates were favorable to our operating profit and EPS. Jamere will provide more color for you on our foreign currency impact on our financial results for both this past quarter and the upcoming second quarter later on this call. With over 7,700 stores across 3 countries, our business is getting more global each day. We finished the quarter with 6,666 U.S. stores, 895 Mexico stores and 147 Brazil stores.

We opened 53 stores globally this past quarter versus 34 in last year's first quarter. This kind of first quarter growth is at near record for any first quarter store openings in our history and indicative of our commitment to accelerate our store growth. We are very excited about the pace of these openings, and we know that this pace will drive future earnings growth globally. Next, let me address our sales results in a little more detail. Coming into the quarter, we were optimistic that our improved execution would drive sales growth for both retail and commercial. More specifically, we felt the momentum we gained over the last 3 quarters with our domestic commercial sales would continue this quarter.

We are very pleased that our domestic commercial sales accelerated again this quarter to 14.5%. This marked an acceleration from our commercial sales growth on a 2-year and a 3-year basis. Additionally, the domestic retail comp performed well, up 1.5%, but slowed slightly from last quarter's 2.2%. Finally, our international constant currency comp was up 3.7% for the quarter and performed slightly better on a 2-year basis than last quarter's result. We are encouraged by our continued improved sales results and the way we finished the quarter gives us confidence in our sales outlook for the remainder of our fiscal year 2026.

Next, I'll discuss the quarter's sales cadence. Regarding our 4.8% quarterly domestic sales -- same-store sales, the cadence was 5.5% in our first 4 weeks, positive 3.5% in our second 4 weeks and positive 5.5% over the last 4-week period in the quarter. We attribute the weakness in the middle 4-week segment to weather in the month of October that was not as favorable as last year in a select group of markets. Last year, we experienced much colder weather in a subset of markets. And this year, that did not repeat, which resulted in fewer winter-related parts sales than normal. While it got colder in the last 4-week segment, it was not until November when we began to get the usual cold winter weather.

Also, in a subset of markets in the Southeast where hurricanes occurred last year, our sales were weaker than last year. Hurricanes drive sales after the storms and during the cleanup period. And without those storms, this year, our sales in some markets were lower. Let me make a few comments on our domestic DIY business. Regarding our plus 1.5% DIY comp for the quarter, we experienced a positive 2.1% in the first 4-week segment, a flat DIY comp in the second segment and a plus 2.3% comp during the third segment. Our merchandise categories performed as we would have expected, but less favorable weather comparisons in certain regions definitely impacted our results. More specifically, sales in the northern half of the country outperformed our markets in the southern half of the United States.

With regard to inflation's impact on DIY sales, we saw like-for-like same SKU inflation up approximately 4.8% for the quarter, the same with our DIY average ticket that was up 4.8%. Based on our inflation expectations, we continue to expect our average ticket to grow sequentially through the third fiscal quarter, which ends in May. During the fourth quarter, we will begin to lap the increases in inflation we saw in this past year's fourth quarter. We also saw DIY traffic down 3.4% as traffic was roughly -- down roughly 2x in the middle 4-week segment versus the first 4 weeks and the last 4 weeks due to the weather comparisons and positive impacts from hurricanes in those same markets.

We are encouraged by our most recent trends, and we expect our DIY business to remain resilient in this environment. Next, I will touch on our domestic commercial business. As I mentioned, our commercial sales were up 14.5% for the quarter. The first 4 weeks grew 15.2%. The second 4-week segment grew 13.8% and the third 4-week segment grew 14.6%. As with DIY, our commercial sales were impacted during the middle 4-week segment due to the weather comparisons to last year. Our commercial results have been boosted by our improved inventory, satellite store investments and availability, significant improvements in our Hub and Mega-Hub coverage and continued strength of our Duralast brand and execution on our initiatives to improve speed of delivery and customer service. These initiatives are delivering share gains and give us confidence as we move further into FY '26.

Year-over-year inflation on a like-for-like same SKU basis for our commercial business was up 6% and grew similarly to our average ticket growth of 6.1% Lastly, we are very pleased with the growth in our commercial transactions with traffic up 5.9% on a same-store basis as we continue to grow market share. Our future sales growth will be driven by share gains and an expectation that like-for-like retail SKU inflation will continue as we move forward. As I said earlier, we opened a total of 39 net domestic stores and 14 stores in our international markets, and we remain committed to more aggressively opening satellite stores, Hub and Mega-Hub stores. Hubs and Mega-Hubs comps results continue to grow faster than the balance of the chain, and we are going to continue to aggressively deploy these assets.

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 in a moment. Overall, we are encouraged with our sales performance this quarter. We believe we are positioned well for growth in FY '26, and we expect both DIY and commercial sales trends to remain solid. 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. Across Mexico and Brazil, we now have 1,044 international stores. As I mentioned, our same-store sales grew 3.7% on a constant currency basis behind a softer macro environment in Mexico. While we are continuing to gain market share, the economy is experiencing slower growth.

As the economy improves, we expect our sales to reaccelerate as we continue to invest in our new stores and distribution centers. Today, we have almost 14% of our total store base outside of the U.S., and we expect this number to grow as we accelerate our international store openings. In summary, we have continued to invest capital in opening new stores, 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 delivering sustainable long-term results. We continue to invest in improving product assortments in stores and online and improving efficiency in our supply chain, which positions us well for future growth. We are investing both CapEx and operating expense to capitalize on these opportunities.

This year, we are investing nearly $1.6 billion in CapEx to drive our strategic growth priorities, and we expect to invest a similar amount next year. The majority of our investments will be in accelerated store growth, including Hubs and Mega-Hubs that place more inventory closer to our customers. We are also investing in 2 new distribution centers, one in Mexico and one in Brazil, all while continuing to invest in technology to improve customer service and our AutoZoner's ability to execute on our promise of WOW! Customer Service and delivering trustworthy advice. This is the right time to invest in our business as we believe industry demand will continue to remain strong, and we have the ability to grow market share. Now I'll turn the call over to Jamere Jackson.

Thanks, Phil, and good morning, everyone. Our operating results remained strong for the quarter and were highlighted by solid top line revenue. Total sales were $4.6 billion and up 8.2% versus Q1 of last year. Our domestic same-store sales grew 4.8%, and our international comp was up 3.7% on a constant currency basis. Total company EBIT was down 6.8%, and our EPS was down 4.6%. As Phil stated earlier, excluding our noncash $98 million LIFO charge, EBIT would have grown 4.9% and EPS would have been up 8.9%. Foreign exchange rates positively impacted our results for the quarter. For Mexico, the peso strengthened just over 6% versus the U.S. dollar for the quarter, resulting in a $37 million tailwind to sales, an $11 million tailwind to EBIT and a $0.44 a share benefit to EPS versus the prior year.

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 Q1. First, I'll provide a little more color on sales and our growth initiatives, starting with our domestic commercial business for the quarter. Our domestic DIFM sales were $1.3 billion, up 14.5%. For the quarter, our domestic commercial sales represented 32% of our domestic auto parts sales and 28% of our total company sales. Our average weekly sales per program were $17,500, up 10% versus last year. Our commercial acceleration initiatives are continuing to deliver strong results as we grow share by winning new business and increasing our share of wallet with existing customers.

We have a commercial program in approximately 93% 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 84 net new programs, finishing with 6,182 total programs. We plan to aggressively pursue growing our 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 4 Mega-Hubs and finished the quarter with 137 Mega-Hub stores. We expect to open at least 30 Mega-Hub locations over the fiscal year, and our pipeline is exceptionally strong.

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 larger stores give our customers access to thousands of additional parts across the market. While I mentioned a moment ago that our average commercial weekly sales per program grew 10%, the 137 Mega-Hubs continue to drive growth at an even faster clip. We continue to target having approximately 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 customers while improving our service levels. On the domestic retail side of our business, our DIY comp was up 1.5% for the quarter.

Our DIY share has remained strong behind our growth initiatives, and we're 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 the remainder of 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 12 new stores in Mexico to finish with 895 stores and 2 new stores in Brazil, ending with 149 stores. Our same-store sales grew 3.7% on a constant currency basis and a positive 11.2% on an unadjusted basis.

While sales growth has slowed over the last few quarters in Mexico due to slower economic growth in the country, we have continued to grow our share, and we're well positioned when the economy improves. We remain committed to investing in international expansion, and we're pleased with our results in these markets as we accelerate the store opening pace. As we look ahead, 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 moments on the rest of the P&L and gross margins. For the quarter, our gross margin was 51%, down 203 basis points versus last year. This quarter, we had a $98 million LIFO charge or 212 basis point unfavorable LIFO comparison to last year. Excluding the LIFO comparison, we had a 9 basis point improvement to gross margin driven by margin actions, which offset a significant rate headwind from the shift to a faster-growing commercial business.

We anticipate continued benefits from merchandise margins next quarter that should help offset the rate headwind from accelerated commercial growth. As I mentioned, we had a $98 million LIFO charge in Q1. We're planning a LIFO charge of approximately $60 million for each of the next 3 quarters 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 10.4% versus Q1 last year as SG&A as a percentage of sales delevered 69 basis points, driven by investments to support our growth initiatives. On a per store basis, our SG&A was up 5.8% compared to last quarter's 4.4% increase. The difference between per store growth and total SG&A growth is the accelerated new store count that we have driven over the last 12 months. We expect to continue to increase our new store opening pace through the end of fiscal 2028 when we reach a total of 500 stores open annually.

In the spirit of transparency and to give investors the opportunity to ingest expectations as we grow store count faster than we have in recent history, we will give more color on SG&A growth and store counts. For Q2, we're assuming 65 to 70 store openings globally versus 45 last year. And for the full year, we expect to open 350 to 360 stores versus 304 net new stores opened in FY '25. We've been purposefully investing in SG&A in order to capitalize on opportunities to grow our business now and in the near future. These investments will also pay dividends in customer experience, speed of delivery and productivity, all of which will help us grow market share. For Q2, we expect SG&A to grow similar to the first quarter as the impact of new stores disproportionately impacts payroll, depreciation and occupancy costs

We remain committed to being disciplined with our SG&A growth. And as the accelerated new stores mature, we will manage expenses in line with sales growth over time. Moving to the rest of the P&L. EBIT for the quarter was $784 million, down 6.8% versus the prior year. As I previously mentioned, a noncash LIFO charge reduced our EBIT by $98 million. Adjusting for the unfavorable LIFO comparison, our EBIT would have been up 4.9% versus the prior year. Interest expense for the quarter was $106 million, down 1.3% from a year ago as our debt outstanding at the end of the quarter was $8.6 billion versus $9 billion a year ago.

We're planning interest in the $114 million range for the second quarter of FY '26 versus $109 million last year. For the quarter, our tax rate was 21.7%, down from last year's first quarter of 23%, driven primarily by higher stock option expense benefit. This quarter's tax rate benefited 186 basis points from stock options exercised, while last year, it benefited 72 basis points. For the second quarter of FY '25, we suggest investors model us at approximately 22.5%. Moving to net income and EPS. Net income for the quarter was $531 million, down 6% versus last year. Our diluted share count of 17.1 million was 1.5% lower than last year's first quarter. The combination of lower net income and lower share count drove earnings per share for the quarter to $31.04, down 4.6% versus last year's Q1.

As a reminder, LIFO drove our EPS down $4.39 a share. Now let me talk about our free cash flow. For the quarter, we generated $630 million in free cash flow versus $565 million in Q1 last year. 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 EBITDAR. Our inventory per store was up 9.1% versus Q1 last year, while total inventory increased 13.9% 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 a negative $145,000 versus negative $166,000 last year and negative $131,000 last quarter. As a result, accounts payable as a percent of gross inventory finished the quarter at 115.6% versus last year's Q1 of 119.5%. Lastly, I'll spend a moment on capital allocation and our share repurchase program. We repurchased $431 million of AutoZone stock in the quarter. And at quarter end, we had $1.7 billion remaining under our share buyback authorization. Our ongoing strong earnings, balance sheet and powerful free cash generation allows us to return a significant amount of cash to our shareholders through our buyback program. We have bought back over 100% of the 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. To wrap up, we remain committed to driving long-term shareholder value by investing in our growth initiatives, driving robust earnings and 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 the rest of FY '26, we're bullish on our growth prospects behind a resilient domestic DIY business, a faster-growing domestic commercial business and an international business that is continuing to grow share in a meaningful way.

We continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders. 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 risk, so our results primarily reflect the translation impact for reporting purposes. As mentioned earlier, in the quarter, foreign currency resulted in a tailwind to revenue and EPS. If yesterday's spot rates held for Q2, then we expect an approximate $57 million benefit to revenue, an $18 million benefit to EBIT and a $0.77 a share benefit to EPS. And lastly, in Q2, we expect LIFO to reduce EBIT by approximately $60 million, impact our gross margin rate by approximately 140 basis points and our EPS by approximately $2.70 a share. And now I'll turn it back to Phil.

Thank you, Jamere. We are excited to start the calendar of 2026. We have a lot to accomplish this fiscal year. We are committed to flawless execution and wisely spending our capital to drive growth and efficiency. We feel we are well positioned to grow sales across our domestic and our international store base with both our retail and our DIY customers. We expect to manage our gross margins effectively and grow our operating expense in line with an accelerated store opening assumption. We continue to put our capital to work where it will have the biggest impact on our sales and long-term profitability as our stores, our distribution centers and investing in technology to build a superior customer experience.

The top focus areas for 2026 will be growing share in our domestic commercial business and continuing our momentum in international. We are excited about what we can accomplish in the second quarter. but we understand that we cannot take things for granted. We must remain laser-focused on customer service, flawless execution and gaining share in every market in which we operate. Fiscal 2026 top operating priorities will continue to be based on improving execution and delivering WOW! Customer Service.

We will continue to invest in the following strategic projects: remaining focused on driving DIY or do-it-yourself and commercial sales growth, which we are doing in a meaningful way, ramping up our domestic and international store growth, drive our new and Mega-Hub openings and focus on optimizing our new distribution centers and our supply chain capabilities. We are excited about what we can accomplish in this new year, and our AutoZoners are well 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 Instructions] Your first question is coming from Bret Jordan from Jefferies.

Could you talk about the maturation schedule of the new stores now that it's become a very, I guess, a more significant item as far as the ramp and then incremental investment that's required, I think you're talking about a couple of DCs internationally. But as far as domestic store growth, are there more DCs or accelerated hub expansion as you build this new store base? I mean just sort of trying to think about an SG&A expense at the front, but when do we start getting the return?

Yes. Thanks for your question, Bret. So typically, our new stores mature on about a 4- to 5-year time frame, if you will. And we've seen this historically over time, and it's fairly predictable. Our teams do a great job of getting those assets into the market and then building our business around them. Regarding SG&A, we had about 2 points of the growth in our SG&A that was related to new stores and the acceleration of our commercial programs. And you'll see this ramp continue as we peak at the 500 stores globally that we're expecting in FY '28. What has us excited is in addition to the new satellite stores that we're building, we're also building out our Mega-Hub footprint, which, as we mentioned, is going to grow to 300 Mega-Hubs.

We've got about 100 of those in the pipeline today, and we feel very good about our execution there. So as we look at the way our operating margins will progress between now and then, you'll see this roughly 2 points of incremental SG&A associated with this ramp, if you will. And then you'll see that sort of lap off and we'll return to the kind of operating margins that we have in the past. As it relates to investments, obviously, we've been investing in distribution centers. We had a couple of new distribution centers that we put in over the last couple of years or so. Those have come online, and we're getting the productivity out of them. We're also investing in distribution centers in Mexico and Brazil, and all of this will underpin the growth. So that 2 points of SG&A that I talked about includes all the investments that we need to make across the business.

Maybe I'll add a little bit to that. We've talked a lot about this project we've had in place for several years now, which is Supply Chain 2030, which is really looking at what did our supply chain need to look like to get us to these faster-growing store numbers. Most of those investments in the U.S. have already been in place and stood up those 2 new DCs we opened up last year. There's also some new efficiency strategies built in those distribution centers as well as some direct import facilities.

In Mexico, as we've talked about, we opened up a new DC and expanded one, and we're in the process of expanding our Monterrey distribution center to almost double the size, and that will be open fully operational probably in March. And then we're bringing our distribution from third party to our own supply chain down in Brazil, which should help us for quite some time. So most of the U.S. expansion is done. It will be about improving efficiencies. Mexico will be done effectively in March or April. And that will take us for quite some time for the next couple of years from a supply chain perspective.

Okay. Great. A quick question on the commercial growth on a 2-, 3-year basis. Could you sort of parse out what might be national account versus domestic? I mean, obviously, not a lot of new national accounts entering the market. Is this skewed more to up and down the street business?

Yes. We're growing on the commercial side of the business in all of the different segments that we break out. Obviously, to your point, there's not a lot of new national accounts that you would consider branded national accounts, but we're growing share of wallet in all of those segments, national accounts, what we call up and down the street customers, which are generally the local mom-and-pop shop as well as what we call verticals and associations. We're growing across all of the 4 segments. Pretty helpful.

Your next question is coming from Chris Horvers from JPMorgan.

It's Bharat Rao, on for Chris. So on DIY, given the sequential slowdown, I know you said weather was a headwind in the middle 4 weeks. But can you help us parse out how much of that was additionally attributable to any government shutdown noise or any like sort of observable deterioration in the underlying trend or demand?

Yes. I wouldn't say that the demand has necessarily deteriorated. As we mentioned, kind of that weather segment in the middle of the -- we broke the quarter down into the 12-week quarter down into 4-week segments. The middle section of that segment, year-over-year, you had some changes in weather in more of the northern markets, and you had the impact from the hurricane that benefited us last year that did not reoccur this year. So it was really a wobble in the middle 4-week segment, not related to the customer per se, more related to the impact from last year, both positive weather event due to hurricanes and a cold snap that happened last year as opposed to something that really deteriorated in this year. And that middle 4-week segment, as we mentioned, was down significantly compared to the first 4-week segment and the third 4-week segment. I hope that's a little clearer.

Got it. That's helpful. And then a quick one on SG&A. So previously, you talked about mid-single-digit SG&A store growth for the year and came in at the higher end in 1Q despite softer sales. So now that you're accelerating store growth and you said 2Q SG&A will be similarly up to 1Q. Can you help us understand like how does the curve of that SG&A per store growth look throughout the year? And does that pretty much moderate into next year?

Yes. As I mentioned, we had about 2 points of growth that was related to new stores and really the opening of new programs in our commercial area of the business domestically, and we expect that to continue. And then if you look at our store opening ramp, we're going to continue to open new stores. It's going to be back half weighted. As I mentioned, we'll open 350 to 360 stores globally in total and a good chunk of that will be weighted in the back half. So you'll see some acceleration as we move through. And again, this is all predicated on the growth that we're seeing. We're continuing to invest in a disciplined way in those growth initiatives. And quite frankly, we like the earnings and the cash story that this is going to generate for us as we come out of this.

Your next question is coming from Simeon Gutman from Morgan Stanley.

This is Skylar Tennant on behalf of Simeon. On our first question, we wanted to ask whether the consumer is showing any signs of elasticity to higher prices or whether you're seeing any signs of trade down?

Yes. We kind of figured this question was probably coming. At the end of the day, I would kind of characterize it as the lower-end consumer has been under pressure for, frankly, quite some time, I'd say, more than 2 years. And what I would say is they've been relatively stable. So there hasn't been a significant wobble in that lower-end consumer. The higher-end consumer, we think, is still doing okay.

And we think that's been relatively stable over the last couple of quarters. We don't have a lot of categories where you would see trade down. We have some good, better, best opportunities in batteries and brakes and wiper blades, things of that nature. But the vast majority of our inventory is generally one part that fits a particular vehicle, and there's not a whole lot of upsell opportunities based on good, better, best opportunities. So we don't see a lot of trade down. There's a little bit, but it's really not been that meaningful.

Okay. And as a follow-up, how are you thinking about inflation? Has it impacted the entire product catalog? And for items not impacted, are you seeing any signs of demand elasticity there?

Yes. The inflation, we think the inflation is going to continue to increase through what would be our third quarter on a year-over-year basis. And then some of the impacts from tariff and cost increases started in Q4 of last year. So we'll start to lap some of that. I suspect that there'll still be some increases, but they'll probably be a little bit less muted in the latter part of what would be our Q4, more like the summertime. But as far as separating out what has tariff impact and have not had tariff impact, most of the product that we sell is essentially break fix or it's required maintenance, and there hasn't been a lot of volatility in those product categories in purely discretionary categories, which is a relatively small part of our business, more like 16% to 17% of our total market. Those categories were impacted over the last 2 years and had some pretty significant downfalls. But over the last year or so, they've actually been relatively stable and seen some minor improvement in sales over the last year.

Your next question is coming from Michael Lasser from UBS.

This is [indiscernible] for Michael Lasser. The first question is on the comps. We were wondering how likely is it that the same-store sales momentum would be sustainable domestically as comparisons become more challenging in the third quarter as well as fourth quarter and you lap a greater inflation number in 4Q?

Yes. I would characterize that we think those numbers are going to be relatively stable. Again, our comp in the latter part of Q3 and Q4, there was an increase from -- if you think about a 2-year stack, and it might moderate a little bit. But we're confident behind our initiatives that we have in place that we will continue to grow market share on both the DIY and the commercial business. So they may flatten out a little bit. But at the end of the day, I think we're going to continue on this growth trajectory for both DIY and on the commercial side of the business.

Got you. That's helpful. And as far as my second question goes, I'm going to try to approach the SG&A topic a little differently. Since the beginning of fiscal year 2024, SG&A growth has outpaced sales growth in each quarter and by about 2 to 3 percentage points on average. So how should we expect that gap between sales and SG&A growth to unfold going forward, especially as you accelerate unit growth? And as part of that, would it be fair to think the model is more reliant on recouping some of the gross margin headwinds you faced in the past couple of years to return to operating margins of 19% plus?

Yes. So the first thing that I'll say, and we've reiterated this point is that we're growing SG&A in a disciplined way as we create a faster-growing business. And so what you've seen is that the investments in SG&A have been purposeful. We've had accelerated growth in SG&A related to new stores and the acceleration of our commercial business. And 2 things. Number one, you're starting to see the growth shoots associated with that. And we like the earnings profile of the new stores, first of all, as they're coming out of the shoots, but more importantly, when those stores mature in the next 4 to 5 years.

What I'll say about the gap between sales growth and SG&A growth over time is that SG&A will slightly outpace the sales growth as we move through. But as we get to the point where these stores mature, then we'll manage SG&A growth in line with sales. But I think the key takeaway is that it's been purposeful, and this is underpinning the growth that we've talked about, and we like the earnings and cash profile on the back side of this.

Got you. And the model is reliance on gross margin to get back to 19% margin profile?

Well, I think the reality is if you look at the model today and you're talking about operating profits, if you will, you got 2 points associated with this accelerated growth that we're talking about. You got about 140 basis points associated with LIFO. So between those 2, you add back, call it, 3.5 points to a business that's going to do 17 and some change on a GAAP basis, and you're back at your 20% operating model. And if you do that on top of a much larger store base, again, that's what has us excited about the model as we move forward.

Your next question is coming from Scott Ciccarelli from Truist.

This is [indiscernible] on for Scott. LIFO charges were less than expected this quarter, and now you've lowered your expectation of the headwind for the next 3 quarters by around 25%. Just want to know if this is from just greater tariff reductions or maybe more focused mitigation efforts? And then like could that taper like the upper end of your same SKU expectations like for inflation throughout the year?

Yes. So 2 things on LIFO. Number one, we have not seen as much cost impact as we had originally anticipated. I think we've talked very openly about the fact that we're running a tried and true playbook. One is to the extent that there's an opportunity to negotiate lower cost with vendors and protect the customer, we've been doing that. If there's an opportunity for us to diversify sources and maintain the sales we're doing that. And then the third leg of the stool, obviously, has been to raise retails.

So we haven't -- in running that playbook, we haven't seen as much inflation as we would have anticipated. I think the second dynamic is you saw the announcements where the IEEPA tariffs on China moved from 20% down to 10%. And so that does lower our expectation going forward. But what we're seeing, and you heard Phil talk about this a little bit earlier, is we're still expecting to see higher costs associated with tariffs as we move through. And that is going to have some impact on ticket average and to have some impact on comps going forward. It's just that what we had anticipated originally, we're seeing better performance from a cost standpoint and lower IEEPA tariffs from the rollback that was announced in November.

Yes. I would continue to add that our merchants have been working at this tariff mitigation, country of origin diversification and multiple supplier diversification, frankly, since the original tariffs went in back in 2016 and '17, and they've become pretty good at it. Having multiple sources for country of origin as well as multiple suppliers to supply a particular category has been a strategy we've had for quite some time.

We've had a strategy for diversifying our sourcing out of China into other countries for years, and they've become very adept at it. To Jamere's point, we're running the same playbook and our folks have gotten pretty good at doing that as well as continuing to improve our supply chain efficiencies, which are helping our gross margins. But they've just done an exceptional job, which you saw in our gross margin, overcoming the vast majority of the mix shift to a lower-margin business that grew faster on the commercial side of the business. So we think that's a really good story for us.

Your next question is coming from Stephen Zaccone from Citi.

This is Ariana, on for Steve. My first question is, can you give any color on the merch margin performance in the quarter? And like any color on the outlook for this fiscal year?

Yes. We had a very strong quarter from a merch margin standpoint. And what you see in our underlying gross margins is we were up 9 basis points, excluding LIFO. We had about a 34 basis points drag just from the mix shift associated with a faster-growing commercial business. So all of the merchant actions that we're taking inside the company are working really hard to offset that drag from -- the drag that's associated with the commercial rate. So -- and that's a playbook that we're continuing to run with intensity, and the teams are doing a pretty good job there.

And then my follow-up kind of piggy back off the previous question. So like where do you kind of expect SKU to peak in 3Q as it accelerate sequentially?

Yes. I mean I won't be date certain about when it will peak, but what we can tell you is that we're going to continue to see inflation coming through our cost of goods sold. We're seeing it both in terms of what we're seeing from vendors, but also from tariffs. And as that rolls through, it is potential to see another point or 2 over the next couple of quarters impacted on same SKU and resulting in higher average tickets.

Your next question is coming from Kate McShane from Goldman Sachs.

This is Mark Jordan on for Kate McShane. The first question, I think, might be a quick one, but it's just what drove the difference between same SKU inflation in the retail business and the commercial business? Is that just the mix of the parts that are being sold?

Yes. It's a mix and combination of products and parts that get sold between the 2. The commercial side, generally, you have a higher hard part mix and you have generally newer less -- let me say this the right way, newer SKUs in their life cycle, which generally are a little more expensive because they have more technology associated with them essentially.

Okay. Perfect. And then in terms of product categories, just wondering if there's anything to read through there in terms of the health of your core customer. Which categories were stronger and which were weaker during the quarter? And are you still seeing improvement on the discretionary side?

Yes. I would say, I mean, our failure categories and our maintenance categories continue to be the best performers, which I think is indicative of the health of the automotive industry in total. Our weaker performers have been over the last couple of years, frankly, the more purely discretionary items. Over the last year or so, those items have kind of flattened out from a negative comp perspective and continue to -- and started to slightly grow year-over-year, which we think is a pretty good sign that, that segment of product has kind of bottomed out and will probably continue to grow from this point forward.

And just thinking about the comp there, is that mostly being same SKU inflation driven on that side? Or is units up as well?

On the purely discretionary product, it's a little bit of both.

Your next question is coming from Michael Montani from Evercore.

It's Mike Montani on for Greg Melich. I just wanted to ask a little bit about the underlying performance in merch margin, if I could. So that was strong in the quarter, Jamere, and wondering how to think about that into next quarter? And then also if you look at private label supply chain optimization, price optimization, like can you help us just understand a little bit more the drivers that are offsetting that 30 to 40 bps mix headwind that you referenced?

Yes. I mean we continue to run the merch margin playbook, as I've historically said, with intensity. Our teams are doing a fantastic job looking for alternate sources, looking for new brands to introduce and quite frankly, when there are opportunities to move more to our house brands to help us drive margin opportunities. And that's a playbook that we've run over time and the teams continue to execute very well on that. We're going to continue to have a fairly significant headwind from a faster-growing commercial business, and we're really pushing hard on merch margins to mute that or offset that completely. And that's what we'll do as we move forward.

Your next question is coming from Robby Ohmes from Bank of America.

This is Vicky Liu, on for Robby Ohmes. Can you talk about your expectation for early calendar 2026 as we'll likely have the combined impact of a hot summer, cold winter and maybe some tax refund tailwind from the One Big Beautiful Bill?

Yes. Great question. If you think cyclically about how our business performs in Q2 and what that means for Q3 and Q4, Q2 is always our most volatile quarter due to primarily these big weather events that move across the country. What we would like to see, and it looks like we might get this year is we like to see cold weather followed by precipitation in the form of snow and ice. Those have a tendency to put a lot of strain on the undercar parts of the vehicle. So think suspension, brakes, chassis parts, things of that nature and cold weather puts a lot of pressure on batteries, which are a pretty big part of our business. So what we'd like to see is a nice cold weather winter, and that will help sales coming into the summer and spring and summer times, which is kind of what we saw this last year.

If you remember the comment that we made, our northern stores performed a little bit better than our southern stores. Some of that was due to some weather comparisons, but it's also the knock-on effect of a better winter last year that carries on through the spring and the summertime, which is what we saw in those categories. So that's kind of what we think will happen. It's hard to predict the weather. I don't think Jamere and I are very good at that. But it looks like the beginning, it's going to be cold next couple of weeks, colder than last year. That's generally good for us. And they're saying it looks like in the later part of the winter, we're going to get more snowfall in the Northwest and the Midwest than we did -- or Northeast and the Midwest than we did last year. So those should set up pretty good for us. Also, in the summer.

Yes. I mean the one thing that we always talk about is remember that because of all the weather cycles, I mean, Q2 -- our Q2 in the early part of the year can be pretty volatile. And we always say that we're a couple of storms away from greatness or a couple of storms away from it being not as good as we anticipated. So there's typically some volatility in the quarter. We're focused on execution though.

I agree with that. To answer your question on taxes, I don't think we really know the answer to that and how that's going to lay. I will say that generally, our Q2 ends right about the time of tax refunds. So there can be some volatility on whether that ends up in -- how much of it ends up in the end of our Q2 and the beginning of our Q3. So there can be some volatility around that time frame.

And our last question is coming from Justin Kleber from Baird.

I wanted to ask the SG&A question just one more time. I apologize. I understand the impact from store growth and how that builds from here, but just wanted to clarify that growth on a per store basis, are you telling us we should expect that 5.9% pace in 1Q to effectively continue? Or are there certain offsetting levers to bend that growth curve on a per store basis as you start to annualize some of these investments to improve service and delivery speed?

Yes. I mean you're going to be somewhere in that same ZIP code on a per store basis. And the other point that I'll make is, remember, in the back half of the year, we're going to continue to accelerate the store growth. So if you're in that ZIP code, you're in the right area. There are always things that we're working on from an SG&A standpoint. But if you're modeling going forward and you're in that ZIP code, you're in the right place.

Okay. And then if I could just follow up on the international outlook. You mentioned softer trends in Mexico, but the 2-year stack did improve sequentially. So was that just driven by Brazil? And then would you expect that 2-year stack to remain relatively stable internationally, just as we think out over the next few quarters?

Yes. I think you'll see it be fairly consistent, we believe, over the next couple of quarters. And just speaking of our international business as a whole, we really like the accelerated growth we have there. We think we have opportunities to gain market share in all of our international markets, both with a growing DIY business as well as a rapidly growing commercial business. And as those consumers get a little healthier, as the economics continue to hopefully improve, we expect our sales to accelerate in those markets as well. So the international markets are fantastic for us.

Okay. Before we conclude the call, I'd like to take a moment to reiterate that we believe our industry remains in a strong position, and our business model is very 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 remain focused on delivering flawless execution and striving to optimize shareholder value for the future, we are confident that AutoZone will be successful. Finally, we'd like to wish everyone a happy and healthy holiday season, and thank you for participating on today's call.

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

All right. Could not be any happier to have AutoZone here. For -- well, certainly for 18 straight years because that's all I know. But certainly, a ton of the 49 years we've had. Jamere Jackson, the company's CFO is here, as is Brian Campbell, the company's Director of Investor Relations.

AutoZone has 154 million shares -- wait, I'm getting that wrong. That was the number of shares they had in 1998. AutoZone has bought back itself many times over. It's a 16.7 million shares trading around $3,700, $64 billion equity cap, $8.5 billion of net debt, just under $73 billion to enterprise value. Talk about cash flow and talk about the ability to generate shareholder returns, this company, maybe a couple of others have very few peers. So thrilled to have some Q&A with Jamere and to get in the zone.

So I think one of the things that we have talked about over the course of the last couple of days is the consumer and some strain. And I think as a largely DIY, driven retailer and distributor maybe you could help out more than anyone else. So what are you all seeing on front lines with the consumer in various cohorts of income?

Yes. And candidly, not a lot of change from where we were even a year ago. What I've seen with the consumer sort of in our DIY business is that the consumer is still looking at a situation from a macro standpoint where new car prices are high. The average new car price is over $50,000. The average monthly payment is over $700 a month. Used car prices are high. The average used car price on a monthly payment basis is over $500.

So consumers are continuing to hunker down and take care of the vehicles that they're already in. A year ago, we were seeing probably more pressure in the discretionary categories. The last couple of quarters, we've actually seen a little bit of growth in those discretionary categories. So I would say that the situation with the consumer has not changed a lot in the last year. I will say there's a lot more volatility and uncertainty in the marketplace in that from time to time, does impact sort of consumer behavior.

There's a lots to talk about what's happening with the low-end consumer. I think that narrative has been in the marketplace for a little over a year or so. We haven't seen the low-end consumer get any worse than they were a year ago. So I think for us and really for our industry, we've sort of powered our way through it and been able to deliver.

The other thing I'll say about the consumer is that you've seen on a macro basis, numbers like the unemployment numbers ticking up a little bit. We're now up closer to 4.3%. That's still very good. And if you look at that in combination with where average wages are, the consumer is still hanging in there, if you will. But the volatility and uncertainty does from time to time cause consumers to pause. But the macro factors in our industry are very strong with a growing car park, an aging car park and a consumer that's been pretty resilient through it all.

As you're thinking about this and you have not seen the deterioration of the consumer yet, but clearly, there's enough in the way of tea leaves that you could be seeing it. Have you seen anything as it relates to mix some good, better, best choices changing? And how does that factor into your own inventory and sourcing planning?

Yes. We haven't seen a lot of trade downs, which typically when things get tight from a consumer standpoint, you'll see some trade down in terms of the good, better, best stack. We haven't experienced that as we moved into this fiscal year and even in the tail end in the last fiscal year.

And what I'll also say is that because consumers are hanging on to their vehicles a little bit longer, the average age of a vehicle on the road now is, I think, 12.8 years. It's ticked up a little bit every single year for the last 5 or 6 years because consumers are anticipating having to hang on to those vehicles a little bit longer. We actually saw in some -- in certain categories, where consumers were actually trading up because they realize they're going to be in the vehicle a little bit longer. They're probably not going to buy a new vehicle or a used vehicle. And that obviously bodes well for us as a business.

Sure. We talked a lot about inflation over the course of the last 1.5 days. This has been an area where you have excelled over time. Your ability to not only deal with cost but pass that along to consumers in an appropriate manner.

Talk about the decisions that take place at AutoZone regarding pricing and your ability to not only in an inflationary environment maintain gross profit dollars but also gross margin which is obviously accretive to EPS?

Yes. I mean we continue to benefit from the fact that we're largely a break-fix business. I mean 85% of our mix, if you will, is in sort of failure and maintenance categories where if you're going to keep a vehicle in operation and be on the road, you're going to have to maintain that vehicle and fix those things that ultimately fail.

So if you're operating sort of in that environment, you have an opportunity to be very disciplined from a pricing standpoint. And we've done that. And certainly, our entire industry has done that over time. So what we've seen is that those categories in the failure and maintenance categories basically are relatively inelastic, if you will, and we see some movement typically is around the discretionary categories. And most of that is sort of basket related as opposed to the consumer saying, I'm not going to go get certain things.

So we benefit from being in a business and having a business [Technical Difficulty] model and selling a set of products that are relatively [Technical Difficulty] may maintain our gross margins as we move through. We do that with discipline. And we want to make sure that we're taking care of the consumer, but at the end of the day, given this model and the relative inelasticity, I've said at different points in time that inflation tends to be our friend -- some retail inflation that gives us an opportunity to raise retails, maintain our margins and overall create more gross profit dollars inside the business.

You're unique in so many different ways, but one of it is just your reach. Can you talk maybe regionally about what you've seen, any differences geographically from a top line perspective?

Yes, there are always nuances within the regions. Obviously, in places like the Rust Belt, we want to make sure that we get the kind of weather that is going to generate failures for us so that ultimately, we can keep that portion of the business humming right along. And so what I'll say is that regionally, there are always nuances, whether it's weather or regional dynamics in terms of economies, et cetera. But what I'll say overall is that, when we look across the country, particularly in the U.S., things are performing about as we would have expected.

And just to remind us, you mentioned, weather, that ends up kind of over time evening out. You're comping against an easy winter a year ago, I would imagine.

Yes. I mean, a year ago, we did have some weather in the kind of October time frame that makes the comps a little bit easier for us. But overall, I would say last year's winter when we look at it in totality, was about average, and we're anticipating to have a sort of a good winter this year. And I just remind people that we like really bad winters. We like cold and ice and I like when my friends in Texas call me and say that it's freezing here, and my pipes are breaking and my car won't start and all of those kinds of things.

So we like really cold, nasty winners, and we like really hot summers because those things generate failures. And we get an opportunity to sell a lot of parts in that environment.

Yes. You guys do. My kids stay home too much when that happens. So if we are kind of thinking about your organization and some of your strategic initiatives. Maybe talk about a couple of the areas that you're wanting to either grow or to embed yourself even further with your customers?

Yes. Well, clearly, we've been focused on accelerating the growth in the commercial portion of our business. And we've done a pretty good job of that. In fact, this last quarter, it was about 1/3 of our mix on the U.S. side. 5 years ago, that number was closer to 19% or 20%. And we've continued to invest in a disciplined way and making sure that we jam more parts in the local market closer to the customer and grow our market share.

Right now, we're probably a 5 share in a market on the commercial side of the business that's approaching $100 billion or so. There's a tremendous opportunity for us. We started our business as DIY and DIY only. We made our foray in the commercial. Candidly, we had some fits and starts, probably 20 years or so ago, but we've committed to that business. It's over a $5 billion run rate and grown very nicely the last couple of quarters.

So we've invested in a meaningful way in adding more inventory. We're building Hubs and Mega-Hubs. Our Mega-Hubs in particular, have been a real boost to our business. Those Mega-Hubs carry close to 100,000 SKUs where a typical satellite store is closer to 30,000. That incremental inventory in a local market enables us to see [Technical Difficulty] slower turn in parts, if you will. That's been a big piece of our strategy. We've invested in our Duralast brand. We're using our Hubs and Mega-Hubs to do more direct deliveries as opposed to just having them fulfill the satellite stores. So our service levels are improving.

And then the last thing I'll say is that we've spent a lot of time making sure that we put a professional sales force in the field to go drive sales, and that's been a meaningful lift to our business. So commercial has been our -- one of our top growth priorities inside the company. And the teams are executing very, very well, and we're really excited about the opportunities that we have going forward.

After a relatively small [incubator] [Technical Difficulty] for some time, you've really expanded quite a bit in Mexico. Can you talk about that initiative, the market there and kind of how that's progressing relative to expectations?

Yes. We're really excited about the growth opportunities in Mexico. We have a little under 900 stores there. We actually think we can probably double the size of that chain within the next decade or so. Competitively, if you look at our outlet share versus the next 4 or 5 competitors and we have more outlets than the next 4 or 5 competitors combined, the product offering that we have and the service offering that we have is far superior to what we see from our nearing competitors there. So the combination of the size and the scale and the offerings that we have really given us a great business there.

We like that business. It's a vehicle population that's quite a bit older than the population in the U.S., which is clearly a nice tailwind for us. If you look at the P&L dynamics, we get very good gross margins there. The productivity per store is on par with what we see in the U.S. And we also have -- the cost of labor there, obviously, is a lot cheaper. So we like the earnings capabilities and the returns that we're generating in that market.

If there's one thing, Brian and I talk about this a lot, there's one thing that we wish we had done a lot sooner, which was, we wish we had built out stores in Mexico a lot sooner and a lot faster than we did in the past, but we're certainly accelerating that as we move forward.

Staying with Mexico on different wavelength trade and your sourcing. Maybe talk about initiatives over the course of the last year that you've had to undertake just because of various dynamics as it relates to [Technical Difficulty]

Having the discussions that we've all had over the last year around tariffs, we've been really focused on diversifying our sourcing capabilities outside of Asia. And particularly outside of China, we've had volume that we've moved to places like Turkey and we've moved into places like India and all of those things were to diversify our sourcing base, if you will, still the overwhelming majority inside the industry does come out of China. But we've done a nice job.

If I look at our direct import business, where we were direct importing closer to 85% or 90% out of China a few years ago, that number is down closer to 60% today, and it's going to have a 5 handle on it based on the plans that we have in place. So that's been important. But that being the case, I mean, you can't necessarily run from what's going on in the macro, particularly as it relates to tariffs. So we've had a strategy that said, one, where are there opportunities for us to diversify.

The second piece of that has been to make sure that we're working with our suppliers and where there are opportunities to have deflation offset some of the tariff impacts. We pushed really hard, and that's about being disciplined for the consumer. And then obviously, to the extent that those tariffs create an inflationary environment for us, then we're going to raise retails accordingly. And net-net, at the end of the day, maintain our margin structures. And this is not our first rodeo. We dealt with this in the 2017-ish kind of time frame and navigated that environment very well, and the teams are doing a great job now.

Thinking smaller [indiscernible] big enough of it, as the retailer with the highest DIY concentration, online penetration in the aftermarket would impact you the most. What have you seen, if anything, that's measurable from online competition and interfering with your business? And/or how have you grown your own online structure to better compete there?

Yes. I mean overall, it's still a relatively nascent portion of the business from a DIY standpoint. Although what I will tell you is that consumer behaviors are changing. And what we're seeing more so than anything else is about a lot of our customers, even the ones that come into the store to do a DIY purchase are starting that journey online. So they're looking up parts online, and they're figuring out the kinds of things that they need, they may be price shopping or comparing. But the one element that is a competitive advantage for us relative to the pure-play players is that those customers still want to come in and get trustworthy advice inside a store.

So they come into an AutoZone, maybe they've started their journey online, but they want to come in and get advice from an AutoZoner about the part, do I have the right part? Is it the right fitment? Can you go grab it out of the back and can I compare it? And in many instances, depending on what the job is, I mean we actually do installations at a store where we'll go out on a courtesy basis. And go out to the customer's car and do the installation. And that's just something that you can't replicate online.

What we've done over time though as we've continued to add assortment online. And we have assortment that in our stores, but we also have some that is only available online, and we think that's going to continue as we move forward. So we've navigated the environment very well. We continue to build assortment and build our online presence. We recognize the changes in sort of consumer behavior, and we're still benefiting from the fact that we provide trustworthy advice and that customers still like to come into the store and get that trustworthy advice from an AutoZoner as they're working to complete job.

Going to -- go ahead, Michael.

Jamere, Brian, it's Michael Lasser, good to see you. On the topic of inflation and tariffs, there's a debate within the industry about the degree to which and the timing of which this is going to peak. What is your view on that? And the degree to which this peaks as a sales driver for the industry, what's on the other side of it? Does the industry go back to historic growth rates? Does it trough for a period of time? How does that look in the mind of AutoZone?

Yes, great question, Michael. What we're seeing today is that we're still in sort of the early innings from an inflation standpoint. The first round of tariff announcements, quite frankly, as I talked a little bit earlier, there were lots of things that we and others were doing to basically mitigate tariffs, including the fact that we've all been working with suppliers to say, how do we offset this? How much of this our suppliers and our vendors are going to eat before we get to the next leg, which is how much do we need to absorb in terms of cost and pricing.

So when we first talked about tariffs on -- in our public earnings calls, the first quarter that we talked about it, it was pretty minimal and immaterial. Next quarter, we saw a little bit more. We're going to continue to see that number tick up for the next a few quarters or so. I think what's been confusing for some folks is that this didn't all -- the inflation didn't all come as a big bang sort of the way we saw it during the pandemic where freight hit us and all of a sudden we're taken 8%, 9%, 10%, ticket average is going up right away.

What we're seeing here is it's coming in as we're bringing the inventory in as that inventory is turning we're seeing it come a little bit slower than what we saw when we saw hyperinflation with freight and other things during the pandemic. But to be clear, it is coming, and it is going to accelerate this quarter and probably for the next couple of quarters. I think on the back side of that, what we've experienced in this industry is typically when we see hyperinflation and then you see sort of some deflation that comes behind that, we don't take retails down. So there's an opportunity for us to actually expand margins when we start to see deflation.

And then in terms of what happens to retails from that point forward, depending on what we see in terms of cost and cost increases, we would expect things that go back to kind of the normal industry averages, if you will, from an inflation standpoint. And that's sort of the way that we're planning it, but it is clear that more inflation is coming and it's going to come in the next couple of quarters or so.

I can tell you on the ground that as we're in the market and we're operating both on the DIY and the commercial side, we're seeing retail prices go up and in many instances, they're going up pretty fast and furious. And it's not just sort of the large public competitors, but the warehouse distributors are doing it as well. I mean, we're all seeing the same sort of cost pressures, if you will, in total and we're all having to raise retails accordingly.

So Jamere, yes, when you think about this -- Jamere, it's Bret back here.

But when you think about the industry this year, and obviously, you're getting a lot of price contribution that maybe wasn't expected prior to April. If you -- as you close out to '25, what do you think the annual industry growth rate would have been? And what would have been the unit contribution? Are we really sort of pushing units into '26 as a result of what we're doing in pricing in '25?

Yes. I think a couple of dynamics are happening. One is, obviously, from an inflation standpoint, the comps are moving higher, and that's driven by ticket average. What we're all watching is to see whether or not there are any wobbles from units or an elasticity standpoint or foot traffic standpoint.

What I'll say is that, at least in the near term here, again, this is more of the characteristics of the industry than anything else is that for the lion's share of the business that's break fix related, we're not seeing a drop-off in units. You wouldn't expect that given the nature of the products that we sell. And we're not totally immune to those dynamics that you see in the macro when consumers see a lot of inflation coming at them.

But what we saw during the pandemic and what we've seen historically is that, when a consumer looks at their wallet and they're thinking about mobility being a priority to get to work, to get the school, to move around, that other discretionary portions of retail tend to take a bigger hit than we do in our industry. So we're watching it. So far, we haven't seen a drop off there. And when we do see drop-offs, it's usually things like people are trading down the good, better, best stack or if they have an opportunity to defer, they will.

What I'll say about deferrals is that we just came out of a deferral cycle, if you will. And where we saw that most pronounced, particularly was in the tire verticals where our friends and our customers in the tire vertical had a really tough time because all of big ticket was under pressure. And if a set of tires can cost you north of $1,000, and that was considered a big ticket. So if a consumer could push that to the right, they would or if they get 2 tires instead of 4, they did. And if you don't take the tires often, you don't get to the claptrap that we sell, breaks and rotors and calibers and that sort of stuff.

So we're not seeing that here in the early innings, but it is something that we're watching.

Max Rakhlenko. So excluding price, you guys have seen a really nice inflection in DIFM transactions the past couple of quarters. I think that's sort of coincided with a reacceleration in Mega-Hub openings. So maybe just talk about sort of your Mega-Hub strategy in the next couple of years? Seems like '26 is going to have more than '25 So what's the pace of openings and then just opportunities to better optimize the Mega-Hubs just to push more inventory and make all the markets stronger.

Yes, I'd say very broadly speaking, we're winning share. We're winning share with national accounts and also the smaller up and down the street players. A big key to that is having more [Technical Difficulty] we have a plan that we've laid out that says we'll get close to 300 Mega-Hubs at full build-out.

And candidly, it's likely to go higher than that just based on the success that we're having with the strategy, what we're seeing in terms of cannibalization. And more importantly, what it means to have those parts in the local market lifting the entire network.

So we're excited about that piece of the strategy. It's important for us to make sure that we've got that inventory and that inventory is efficient. And I get the questions a lot about why the big box formats and the very simple answer is that we've seen a lot of parts proliferation in this industry. And so the trick has been what are you forward place in a satellite versus a Hub versus a Mega-Hub versus at a distribution center.

And increasingly, we're getting a lot of products that are shipped direct from the vendor either to the store or direct to the customer. So having that algorithm right, and making sure that you've got the right parts in a local market, close to the customer is really, really important in terms of winning in the marketplace. And we're doing a good job of that, and we've got a lot of potential in front of us as well.

Greg?

Gregory Melich with Evercore. I guess I had 2 questions. One, just remind us tax refunds. What that's done historically and if you'd expect to see that next year with the Big Beautiful Act refunds, if there would be any reason you wouldn't see that normal propensity to fix your car with those checks? And then second is immigration. Do you think the lack of flow this year has had any impact on demand or the increased deportations?

Yes. So the first one on tax refunds. Obviously, our spring selling season sort of coincides with tax refunds, and we call that our Super Bowl or Christmas, if you will, inside the business. And we see a meaningful lift in our business during that time frame. Based on what we're hearing, at least in the early innings, there's a potential for the refund checks to be a little bit larger.

And so we would expect that to have some impact on our business. But what I also say is that as we get closer to that time frame, we have a much better view. Tax refund season can be a little bit nuanced for retailers and our business is no different in that regard and that if the weather is nice and it's warm, people get out, they spend money, particularly discretionary money, then we see a nice lift associated with that. If the weather is not great during that time frame, you miss -- sometimes you miss those purchase occasions altogether.

The one thing that always does -- that we can always count on that sort of underpins our selling season is one, is that to start spring break and when people are traveling a little bit more. And it also coincides with when people go and buy a lot of used cars. And so those used cars are being refurbished during that time. Those used car dealers are buying a lot of parts from us. And then the customers sometimes after -- [Technical Difficulty] those cars, it's the reason other things that we sell as well. So those are kind of the dynamics during that time frame. We want to make sure that the flows happen, and we also want to make sure that the weather is good and the consumer is feeling good about taking that check and spin it. But it's been pretty consistent and steady with the exception of sometimes the weather doesn't always cooperate during that time frame.

And then on immigration and deportations. What I'll say is we haven't seen anything material when we look broadly across the U.S. But there are pockets, clearly, where to the extent that there are national guard troops on the ground or a big media cycle around deportations. You do see a little bit of a hibernation. And then once that cools off, people come back out and it's sort of business as usual. So what I'll say is that it's been a little bit more temporary and transient than it has been sort of a long-lasting impact, if you will.

Jamere and Brian, unfortunately, we're running out of time. Thank you very much, again, for taking time out of a very busy week to come here, and the Q&A was great. Really appreciate it.

Always good to be here. See you guys.

So we've got about 15 minutes to get lunch and get situated before Melinda, I would love to have it as quiet as possible for when she begins. So please do what you can, and we'll see you in 15 minutes. Thank you.