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AutoZone Beats, Profits Up 12%

Zacks Equity Research

AutoZone Inc. (NYSE: AZO - News) posted a 12.1% increase in profit to $301.5 million in the fourth quarter of its fiscal year ended August 27, 2011 from $268.9 million in the year-ago quarter. On a per-share basis, profits rose 26.9% to $7.18 from $5.66 in the year-ago quarter, surpassing the Zacks Consensus Estimate of $6.98.

Net sales grew 8.1% to $2.64 billion, exceeding the Zacks Consensus Estimate of $2.61 billion. Domestic same store sales, i.e., sales for stores open at least one year, rose 4.5% during the quarter.

Gross margin was 51.2% compared with 50.5% in the fourth quarter last year. The increase in gross margin was attributable to lower shrink expense and higher merchandise margins. The increase in merchandise margins was driven by retail price increases on commodity-based products, which were partially offset by increased penetration of commercial sales.

Operating profit rose 11% to $524.0 million from $472.7 million in the prior year. This translated into an operating margin of 19.8% versus 19.3% in the fourth quarter of fiscal 2010.

Operating expenses, as a percentage of sales, increased to 31.4% from 31.2% last year due to higher self-insurance costs and higher fuel costs, partially offset by leverage due to higher sales volumes.

Annual Results

In the fiscal year ended August 27, 2011, AutoZone’s profit rose 15% to $849.0 million from $738.3 million in the prior fiscal year. On per share basis, profits increased 30% to $19.47 from $14.97 in the previous fiscal year, beating the Zacks Consensus Estimate of $19.22.

Net sales escalated 9.6% to $8.07 billion, up from the Zacks Consensus Estimate of $8.04 billion. Domestic same store sales went up 6.3% during the fiscal year. Operating profit increased 13.3% to $1.49 billion from $1.32 billion a year ago. Consequently, operating margin was 18.5% versus 17.9% last year.

Store Openings and Inventory

During the quarter, AutoZone opened 68 new stores, replaced five stores, and closed one store in the U.S. and opened 18 new stores in Mexico. As of August 27, 2011, the company had 4,534 stores in 48 states, the District of Columbia and Puerto Rico in the U.S. and 279 stores in Mexico.

AutoZone’s inventory went up 7% to $2.47 billion as of August 27, 2011 from $2.30 billion as of August 28, 2010, driven primarily by new store openings. Inventory per store was $512,000 as of August 27, 2011 compared with $498,000 as of August 28, 2010. Net inventory (merchandise inventories less accounts payable) improved on a per store basis to a minus $60,000 from minus $28,000 last year.

Share Repurchase

Under the current share repurchase program, AutoZone repurchased 1.5 million shares of its common stock for $433 million during the quarter under study, reflecting an average price of $289.

For fiscal 2011, the company has repurchased 5.6 million shares of its common stock for $1.5 billion, implying an average price of $262. At the end of the fiscal year, the company had $219 million remaining under its current share repurchase authorization.

Financial Position

AutoZone had cash and cash equivalents of $97.6 million as of August 27, 2011 compared with $98.3 million as of August 28, 2010. Total debt amounted to $3.35 billion as of August 27, 2011 compared with $2.91 billion as of August 28, 2010. The company had a stockholder deficit of $1.25 billion as of August 27, 2011, up from $738.8 million at the end of fiscal 2010.

In fiscal 2011, AutoZone had a net cash flow of $1.02 billion before share repurchases and changes in debt, which is an improvement upon the year-ago level of $947.6 million.

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 repurchases policy supported by strong cash flows 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. (NasdaqGS: ORLY - News) and Advance Auto Parts Inc. (NYSE: AAP - News), both of which have posted impressive rises in profits during their last reported quarters, are primary headwinds for the company.

Hence, the company retains a Zacks #3 Rank, which translates into a “Hold” rating for the short-term (1 to 3 months) and we reiterate our “Neutral” recommendation on the shares of the company for the long-term (more than 6 months).

AUTOZONE INC (AZO): Read the Full Research ReportO'REILLY AUTOMOTIVE INC (ORLY): Read the Full Research ReportADVANCE AUTO PARTS INC (AAP): Read the Full Research ReportZacks Investment Research