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AutoZone EPS Tops, But Stock Drops 4%

AutoZone's earnings engine continued to run smoothly, with the auto-parts retailer on Tuesday reporting its 31st straight quarter of double-digit growth. But shares fell amid high expectations and concerns about high inventories.

The company's fiscal third-quarter earnings rose 16% to $8.46 a share, beating estimates by a penny. Sales rose 6% to $2.34 billion, edging views for $2.3 billion.

Auto-parts and repair shops have done well as Americans kept their aging vehicles on the road. Even with new-car sales rising, the average age of cars and trucks is 11.4 years, according to research firm Polk.

AutoZone (AZO) shares initially rose modestly but reversed to close off 4% to 520.25. The stock hit a record 561.62 on Feb. 12.

"Some investors may have gotten used to them beating expectations," said Liang Feng, an analyst at Morningstar. "(They may) also be a bit concerned that sales trends became volatile even though sales were pretty strong.

Keeping Shelves Stocked AutoZone's 12% increase in inventory during its third quarter also raised some doubts. The company hopes improving store inventory will win over customers, but some analysts wonder if the strategy might bring diminishing returns.

Wedbush Securities analyst Seth Basham says he is "not too concerned," because parts inventory is financed by vendors. But over time, he notes, there will be an impact if more obscure auto parts don't move off shelves quickly.

"You want to try to cover everything so long as it's worthwhile to do so," he said.

In response to analyst concerns, AutoZone CEO Bill Rhodes said in a post-earnings conference call that while inventory was indeed "significantly less productive . . . When we run our models, we're very confident that even though it's less productive, it can be a productive investment for us.

The chain's Q3 same-store sales climbed 4%. It opened 30 stores in the U.S. and seven in Mexico, lifting its store tally to 5,279.

A Winter Win For Industry The tough winter season contributed to higher industrywide sales of replacement parts . Advance Auto Parts (AAP)and O'Reilly Automotive (ORLY) also beat Wall Street projections in their latest quarterly reports. Advance Auto's EPS jumped 36% and O'Reilly's rose 18%.

Rhodes said AutoZone's Q3 sales surpassed the company's expectations. "As expected, during the quarter the deferrable maintenance categories that were challenged during the harsh winter rebounded nicely, while the failure-related categories that were so strong during the winter continued to grow but at slower rates than in the second quarter," he said.

JPMorgan analyst Christopher Horvers said in a research note that AutoZone's earnings report Tuesday " reinforces the view that the category remains strong as the lag effect of the winter on pent-up maintenance drives demand.

Advance Auto Parts fell 1.5% and O'Reilly closed down 1%.