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AutoZone Beats, Opens 35 Stores

Zacks Equity Research

AutoZone Inc. (AZO) recorded a 24% increase in profit to $4.15 per share in the second quarter of fiscal year ended February 11, 2012 from $3.34 per share in the year-ago quarter. The profit exceeded the Zacks Consensus Estimate by 11 cents per share.

In absolute terms, profits went up 13% to $166.9 million during the quarter from $148.1 million in the second quarter of prior fiscal year.

Sales in the quarter rose 9% to $1.8 billion, which was in line with the Zacks Consensus Estimate. Domestic same store sales (sales for stores open at least one year) increased 5.9% during the quarter.

Gross margin increased to 51.3% from 50.9% in the last year’s quarter led by lower shrink expense (35 basis points). Operating expenses, as a percentage of sales, were 34.7% versus 34.6% in the prior fiscal year due to higher self insurance costs (59 basis points), partially offset by leverage of other operating expenses due to higher sales volumes.

Store Openings and Inventory

During the quarter, AutoZone opened 29 new stores in the U.S. and opened 6 new stores in Mexico. As of February 11, 2012, the company had 4,580 stores in 48 states, the District of Columbia and Puerto Rico in the U.S. and 287 stores in Mexico for a total store count of 4,867.

AutoZone’s inventory rose 6.6% from the last year, driven by an increase in store count and continued strategic investments in hard parts assortment. Inventory per store increased 2.3% to $530 thousand from $517 thousand in the second quarter of fiscal 2011.

Share Repurchase

Under the current share repurchase program, AutoZone repurchased 501 thousand shares of its common stock for $173 million during the quarter, reflecting an average price of $345. At the end of the quarter, the company had $486 million worth of shares remaining under its current share repurchase authorization.

Financial Position

AutoZone had cash and cash equivalents of $103.2 million as of February 11, 2012, up from $107.9 million February 12, 2011. Total debt amounted to $3.5 billion as of February 11, 2012 compared with $3.2 billion as of February 12, 2011. The company had a stockholder deficit of $1.3 billion as of February 11, 2012; up significantly from the year ago level of $1.0 billion.

In the first half of fiscal 2012, AutoZone had net cash flow of $374.2 million before share repurchases and changes in debt versus $362.9 million in the same period of 2011. Meanwhile, capital spending increased to $132.4 million from $108.4 million a year ago.

Our Take

AutoZone is focused on expansion of its Hub store, acceleration of store maintenance and strengthening of its commercial sales force. Besides, its aggressive share repurchase policy, supported by a strong cash flow, is also worth mentioning.

However, AutoZone relies heavily on its private label brands, which could hinder its business should they falter. Vendor consolidation and appreciation in gas prices coupled with fierce competition from O’Reilly Automotive Inc. (ORLY) and Advance Auto Parts Inc. (AAP) are primary headwinds for the company.

However, depending on the improving near-term outlook, the company retains a Zacks #2 Rank on its stock, which translates into a Buy” rating for the short-term (1 to 3 months).

Peer Performance

Both of AutoZone’s peers, O’Reilly and Advance Auto Partsshowed impressive performance during the recent quarter.O’Reilly posted a 35% jump in profit to 93 cents per share in the fourth quarter of 2011 from 69 cents per share in the prior-year quarter, surpassing the Zacks Consensus Estimate by 7 cents per share. Adjusted net profit was $121 million compared with $98 million in the fourth quarter of 2010.

On the other hand, Advance Auto reported a 58% rise in profit to 90 cents per share in the fourth quarter fiscal 2011 ended December 31, 2011 from 57 cents in the comparable quarter ended January 1, 2011. The profit exceeded the Zacks Consensus Estimate by a considerable margin of 16 cents per share. The increase in profit was driven by the company’s aggressive store expansion strategy, enabling better availability of parts to its customers.

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