Good morning. AutoZone buffers its mufflers against tariff pressure.
Despite tariff fickleness prompting customers to spend more cautiously, the auto parts retailer has seen year-over-year improvement in its failure and maintenance segments.
“Historically, when our consumers are under pressure, our maintenance and failure categories tend to outperform discretionary categories,” said Phil Daniele, CEO of the Fortune 500 company, on Tuesday’s earnings call.
There is a 25% tariff on imported cars and parts, leading to estimated price increases of $2,000 to $15,000, depending on the vehicle; as a result, more consumers are expected to repair their current cars instead of buying new ones, according to analysts.
AutoZone reported that for the quarter ending May 10, net sales rose 5.4% to about $4.5 billion, topping estimates of around $4.36 billion. It’s the company’s first revenue beat in more than a year. Commercial sales grew 11%, with a 3% increase in commercial programs and an 8% uptick in weekly sales per program.
The vast majority of growth is coming from strategic initiatives, such as improved execution, expanding hub and mega hub stores into AutoZone’s markets, and continually enhancing product assortments in both the U.S. and international markets, according to the company.
“For this past quarter, we saw minimal impact from the implementation of tariffs,” AutoZone’s CFO Jamere Jackson said on Tuesday’s earnings call. AutoZone expects to offset any tariff costs in its fourth quarter through actions like working with vendors, diversifying sourcing, and adjusting pricing. These measures should prevent tariffs from having a material impact on gross margins, Jackson said.
The biggest net importer of AutoZone products is China, Daniele noted on the call. However, the company has significantly reduced its reliance on imports from China since the first round of tariffs in 2016 and now sources some products from Eastern Europe and Mexico as well. The company also procures products from domestic suppliers, both free on board (FOB) or direct import, and makes domestic purchases, Daniele said.
“We don’t expect the threat of tariffs to materially affect AutoZone,” Morningstar equity analyst Noah Rohr wrote in a Tuesday note. Most of the parts the retailer sells are essential for vehicle maintenance and repair—products that customers need regardless of price increases, Rohr explained.
FX headwinds
Although AutoZone had a sales beat, it was offset by lower-than-expected margins and a 6.6% drop in quarterly profit. Contributing factors included rising operating expenses and foreign exchange headwinds. For Mexico, FX rates weakened nearly 20% versus the U.S. dollar for the quarter, resulting in an $89 million headwind to sales, a $27 million headwind to EBIT, and a $1.10 per share drag on EPS versus the prior year, Jackson explained. “Excluding the FX headwind, we would have reported an EPS decrease of 0.6% for the quarter,” he said.
AutoZone’s stock price closed at a record $3,880.15 on May 20. It was down about 3.4% at market close on Tuesday. “Margins contracted, but management’s continued investments in its stores and distribution network look cogent and should translate to further share gains in the future,” Rohr said in the report.
Amid times of uncertainty, AutoZone is still moving full-speed ahead with its long-term strategy. “This year, we expect to again invest approximately $1.3 billion in capex in order to drive our strategic growth priorities,” Daniele said on the call.
Sheryl Estrada
sheryl.estrada@fortune.com
Leaderboard
Tom Cowhey was appointed CFO of athenahealth, a provider of network-enabled software and services, effective June 9. Cowhey brings more than two decades of experience. He most recently served as EVP and CFO at CVS Health, where he was also a member of the investment committee for CVS Health Ventures. Before that, Cowhey was the CFO at Surgery Partners and also held various positions at Aetna, including as CFO of Aetna’s U.S. health plan business.
Sandra Beaver has resigned from her CFO position at Evolus, Inc. (Nasdaq: EOLS), a performance beauty company, effective June 13, to accept the same position at a private mental health and wellness technology company. Evolus has initiated a search to identify her successor.
Big Deal
As economic conditions fluctuate across industries, the U.S. job market is becoming increasingly fragmented. The latest Job Seeker Nation report from Employ finds that competition and application volume are surging in desk-based sectors, while employers in frontline roles still face persistent talent shortages.
“We’re seeing two very different job markets emerge—one overwhelmed with applications, and another starved for talent,” Stephanie Manzelli, chief human resources officer at Employ said in a statement.
Although overall employment remains robust, these diverging trends reveal deeper changes in the labor market—and signal that both job seekers and employers will need to adapt to keep up, according to the report.
Going deeper
“Salesforce just dropped $8 billion on Informatica. Here’s why it’s key to Marc Benioff’s ambitious bet on AI agents” is a new Fortune report by Greg McKenna.
From the report: “Salesforce’s dramatic pivot to AI agents seems to have stalled in its early days. The software giant is betting its $8 billion purchase of data-management firm Informatica, however, can help turbocharge the Silicon Valley stalwart’s transformation.
“When reports of a potential deal first surfaced last April, Informatica shares traded at nearly $40. Now, Salesforce will pay stockholders $25 per share, according to a joint press release. ‘Informatica is a gold mine of data,’ Dan Ives, a managing director and senior equity research analyst at Wedbush Securities, told Fortune.”
Overheard
“The global competitiveness of the United States has always depended on its universities—on their openness to talent and their commitment to research.”
—Vivek Wadhwa, an academic, entrepreneur, and author, writes in a new Fortune opinion piece. His book From Incremental to Exponential explains how large companies can see the future and rethink innovation.