Automotive parts retailer AutoZone Inc. (AZO) is set to report first-quarter earnings for fiscal year 2026 on December 9, and there's plenty to unpack heading into the call. The company's last quarter told a mixed story—solid sales growth paired with margin pressure and declining profitability.

Last Quarter's Performance Raises Questions

AutoZone delivered 6.9% sales growth in Q4 2025, which sounds encouraging until you look at what happened further down the income statement. Operating profit tumbled 7.8% to $1.2 billion, while earnings per share dropped from $51.58 to $48.71—a 5.6% decline. The culprit? Rising operating expenses, which climbed to 33.6% of sales compared to 32.6% the previous year. That's the kind of margin compression that makes investors nervous.

The Buyback Machine Keeps Humming

Despite the profit squeeze, AutoZone hasn't slowed its aggressive capital return strategy. In October, the company authorized an additional $1.5 billion for stock repurchases, continuing a buyback program that has returned $40.7 billion to shareholders since 1998. During fiscal 2025 alone, the company repurchased 447 thousand shares at an average price of $3,425, investing the full $1.5 billion authorization.

Wall Street Still Likes What It Sees

Analyst sentiment remains upbeat. Baird analyst Justin Kleber upgraded the stock to an Outperform rating with a $4,500 price target, while Christopher Horvers maintained an Overweight rating and set an even more optimistic price forecast of $4,850. Horvers cited resilient demand and improving long-term earnings power as reasons for his bullish stance.

Tariffs Are Creating Headwinds

Here's where things get interesting. CEO Philip B. Daniele has been candid about tariffs affecting the business. Auto parts tariffs imposed by President Donald Trump are hitting DIY car mechanics in the wallet, causing them to postpone maintenance work. "Customers can defer that maintenance for some period of time, but ultimately they realize that they've got to fix it or it creates more damage," Daniele explained during the September earnings call. It's a temporary reprieve for consumers, but eventually those repairs can't wait.

Price Action: AZO was trading at $3,822.73 during pre-market trading.