AutoZone Inc. (AZO) reported net income of $227.4 million during the third quarter of fiscal 2011, up 12.1% year over year from $202.7 million. Earnings per share (EPS) of $5.29 comprehensively beat the year-ago quarter earnings of $4.12. Reported EPS also surpassed the Zacks Consensus Estimate by 32 cents.
Net sales improved 8.6% to $1.98 billion driven by higher sales volume coupled with an aggressive store expansion strategy. Net sales were slightly higher than the Zacks Consensus Estimate of $1.92 billion. Domestic same-store sales, i.e., sales for stores open for at least one year, deteriorated to 5.3% during the quarter from 7.1% in the comparable quarter of 2010.
Total auto parts sales climbed 8.4% to $1.94 billion, reflecting sales per average store of $412,000, an increase of $15,000 from the prior-year level. Domestic commercial sales escalated 22.8% to $267.5 million while all other (ALLDATA and e-commerce) sales increased 12.5% to $39.3 million.
Gross margin was 51.2% versus 50.7% in the prior-year quarter. The increase in gross margin was attributable to increased penetration of the company’s Duralast product and lower shrink expense.
Store Openings and Inventory
During the quarter, AutoZone opened 43 new stores, closed 1 and replaced 1 in the U.S. The company also opened 12 new stores in Mexico. As of May 07, 2011, the company had 4,467 stores in 48 states, including the District of Columbia and Puerto Rico in the U.S. and 261 stores in Mexico.
The company's inventory rose 8.9% to$2.49 billion as of May 07, 2011, driven by new store openings and continued strategic investments in hard parts assortment. Inventory per store was $527,000 during the quarter compared with $506,000 as of May 08, 2010. Net inventory (merchandise inventories less accounts payable) deteriorated on a per store basis to ($46,000) from $12,000 last year.
Share Repurchase
Under the current share repurchase program, AutoZone repurchased 1.3 million shares of its common stock for $339 million, at an average price of $267 per share during the quarter. At the end of the quarter, the company had $152 million remaining under its existing share repurchase authorization.
Financial Position
AutoZone had cash and cash equivalents of $100.4 million as of May 07, 2011, up from $95.8 million as of May 08, 2010.Total debt amounted to $3.22 billion as of the above date compared with $2.70 billion as of May 08, 2010.
AutoZone had a net cash flow of $361.9 million in the quarter, before share repurchases and changes in debt, compared with $333.2 million in the same quarter last year. Capital spending increased to $92.2 million from $68.9 million in the prior-year quarter.
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), both of which have delivered impressive results during their last reported quarters, are primary headwinds for the company.
Hence, the company retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating and we have reiterated our long-term Neutral recommendation on the shares of the company.
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AUTOZONE INC (AZO): Free Stock Analysis Report
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