AutoZone's next quarterly report is shaping up to be more than just another earnings release. According to UBS Securities, the auto parts retailer could be at a turning point, with a quirky accounting drag finally easing and its higher-volume commercial business gaining momentum. Even though the bank expects a small earnings miss in the near term, it sees a clearer path to stronger profit growth in fiscal 2027.
What's behind the cautious near-term view?
UBS is leaning cautious on AutoZone's upcoming print. The bank forecasts domestic same-store sales to rise 2.5%, below the 3.6% consensus on Wall Street. The gap reflects a split in customer behavior: do-it-yourself (DIY) shoppers are holding back, while sales to professional repair shops are jumping about 8%.
That divergence matters because DIY sales are typically higher-margin, while commercial sales, though growing faster, come with thinner margins. Still, the overall picture isn't bleak. UBS sees gross margin edging up 0.15 percentage points to 51.7%, helped by a reduction in LIFO-related costs.
What is LIFO and why does it matter?
LIFO stands for "last in, first out," an inventory accounting method that assumes the most recently purchased items are sold first. When prices rise, LIFO can inflate the cost of goods sold, squeezing margins. For retailers like AutoZone, which hold large inventories, LIFO charges can be a significant drag during inflationary periods.
UBS believes that drag is now fading. As inflation cools and price increases slow, the LIFO hit should shrink, giving margins a natural boost. That's a key reason the bank sees profitability improving even as same-store sales growth remains modest.
Why commercial sales are the growth engine
AutoZone has been investing heavily in its commercial business—supplying parts to independent repair shops, fleets, and other professional customers. This segment is less sensitive to consumer discretionary spending and tends to be more recurring. UBS expects commercial sales to grow around 8%, outpacing the overall company.
That shift is important for the long-term story. While DIY sales can swing with consumer confidence and weather, commercial demand is steadier. As the commercial mix grows, it could provide a more predictable revenue base and support higher earnings growth over time.
What it means for investors
For everyday investors, the key takeaway is that AutoZone's next earnings report might not look great on the surface—a small miss is possible—but the underlying trends could be improving. If LIFO pressure continues to ease and commercial sales keep climbing, the company could be positioned for mid-teens earnings per share growth in fiscal 2027, according to UBS.
That kind of growth would be a welcome change for shareholders, who have seen the stock trade in a wide range as inflation and consumer caution weighed on results. The market often rewards companies that show a clear path to accelerating profits, even if the current quarter is soft.
Investors should watch the upcoming earnings call for updates on LIFO charges, commercial sales momentum, and any changes to full-year guidance. A confirmation that the drag is truly fading could be the catalyst the stock needs.
Broader context
AutoZone isn't alone in facing margin pressure from inventory accounting. Other retailers have dealt with similar issues, and the easing of LIFO costs could be a tailwind across the sector. At the same time, the broader economy remains uncertain, with inflation and interest rates still elevated. That's why UBS's cautious near-term stance makes sense—consumer spending on big-ticket items like car repairs can be deferred, but commercial demand is more resilient.
For context, Costco's latest outlook also highlighted how fuel costs can weigh on margins, a reminder that even strong sales don't always translate to profit growth. Similarly, RH's tariff refunds masked a deeper margin squeeze, showing that accounting quirks can obscure the real picture.
The bottom line
AutoZone's next earnings report is worth watching, not for the headline number, but for what it signals about the future. If LIFO pressure is truly fading and commercial sales keep growing, the company could be on the cusp of a more profitable era. UBS's mid-teens EPS growth forecast for fiscal 2027 is a bold call, but it's grounded in the mechanics of the business. For investors, the message is simple: don't judge this quarter in isolation—look at the trajectory.
