AutoZone Inc. (AZO) recorded a 20% increase in profit to $148.1 million in the second quarter of its fiscal 2011 from $123.3 million in the same quarter of the prior fiscal year. On earnings per share basis, profits of $3.34 increased from $2.46 in the year-ago quarter, beating the Zacks Consensus Estimate by 27 cents per share.
Net sales grew 10.3% to $1.66 billion, which was higher than the Zacks Consensus Estimate of $1.63 billion. Domestic same store sales, i.e., sales for stores open at least one year, rose 7.1% during the quarter compared with a meager 1.0% in the comparable quarter of 2009.
The improvement in results was attributable to the company’s higher sales volume backed by an aggressive store expansion strategy.
Total auto parts sales scaled up 10.3% to $1.62 billion, reflecting sales per average store of $349,000, an increase of $20,000 from the prior year level. Domestic commercial sales escalated 21.2% to $213.8 million while all other (ALLDATA and e-commerce) sales increased 11.2% to $37.0 million.
Gross margin went up marginally to 50.9% from 50.0% in the second quarter of last fiscal year. The increase in gross margin was attributable to increased penetration of the company’s Duralast product and lower product acquisition costs. Meanwhile, operating margin improved to 16.4% from 15.3% in the fiscal 2010-quarter.
Store Openings and Inventory
During the quarter, AutoZone opened 21 stores in the U.S. and 8 stores in Mexico. As of February 12, 2011, the company had 4,425 stores in 48 states, the District of Columbia and Puerto Rico in the U.S. and 249 stores in Mexico
The company’s inventory rose 7% to $2.42 million as of February 12, 2011, driven by new store openings and continued strategic investments in hard parts assortment. Inventory per store was $517,000 during the quarter compared with $504,000 as of February 13, 2010. Net inventory (merchandise inventories less accounts payable) deteriorated on a per store basis to minus $105,788 from plus $116,533 last year.
Under the current share repurchase program, AutoZone repurchased 1.5 million shares of its common stock for $394 million, at an average price of $257 per share during the quarter. At the end of the quarter, the company had $491 million remaining under its current share repurchase authorization.
Financial Position
AutoZone had cash and cash equivalents of $107.9 million as of February 12, 2011, up from $105.2 million in the corresponding period a year ago. Total debt amounted to $3.25 billion as of the above date compared with $2.77 billion as of February 13, 2010. The company had a stockholder deficit of $1.04 billion as of February 12, 2011, up significantly from the year ago level of $421.7 million.
In the first half of fiscal 2011, AutoZone had a net cash flow of $362.9 million before share repurchases and changes in debt. This was an improvement from $256.5 million in the prior fiscal-year period. Capital spending decreased to $108.4 million from $111.1 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, we appreciate the company’s aggressive share repurchase policy, supported by a strong cash flow.
However, AutoZone relies heavily on its private label brands, which could hinder its business should they falter. Vendor consolidation and appreciation in gas prices are other threats facing the company. Therefore, the company retains a Zacks #3 Rank, which translates to a short-term (1 to 3 months) recommendation of Hold and we have reiterated our long-term recommendation (more than 6 months) of Neutral.
Peer Performance
Both of AutoZone’s peers, O’Reilly Automotive Inc. (ORLY) and Advance Auto Parts Inc. (AAP) showed impressive performances during the recent quarter as well.
O’Reilly posted a 37% rise in profit to $98.5 million or 69 cents per share in the fourth quarter of 2010 from $71.9 million or 52 cents per share in the same quarter of 2009 (all excluding net gain on settlement of note receivable). With this, the auto parts retailer topped the Zacks Consensus Estimate by 5 cents per share and its own earnings per share guidance of 56 cents–60 cents per share.
On the other hand, Advance Auto reported a 40% rise in profit to $48.1 million or 57 cents per share for the fourth quarter fiscal 2010 ended January 1, 2011 from $34.5 million or 36 cents per share in the same period a year ago. The profit exceeded the Zacks Consensus Estimate by 2 cents per share.
ADVANCE AUTO PT (AAP): Free Stock Analysis Report
AUTOZONE INC (AZO): Free Stock Analysis Report
O REILLY AUTO (ORLY): Free Stock Analysis Report
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