AutoZone Beats, Profits Up 20% - Analyst Blog

AutoZone Inc. (AZO) recorded a 20.1% increase in profit to $172.1 million in the first quarter of its fiscal 2011 from $143.3 million in the same quarter of the prior fiscal year. On earnings per share basis, profits of $3.77 were higher than $2.82 in the year-ago quarter and the Zacks Consensus Estimate of $3.43.

Net sales rose 12.7% to $1.79 billion. Domestic same store sales, i.e., sales for stores open at least one year, increased 9.5% during the quarter compared with 5.6% a year ago. The improvement in results can be attributed to the company's aggressive store expansion strategy and a recovery in the macroeconomic environment.

Gross margin went up marginally to 50.7% from 50.3% in the first 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.

Operating profit rose 17.5% to $306.1 million from $260.4 million in the prior year. This translated into an operating margin of 17.1% versus 16.4% last year.

Store Openings and Inventory

During the quarter, AutoZone opened 15 stores and replaced 4 stores in the U.S., and opened 3 stores in Mexico. As of November 20, 2010, the company had 4,404 stores in 48 states, the District of Columbia and Puerto Rico in the U.S. and 241 stores in Mexico.

The company's inventory inched up 4.4% to $2.36 million, driven by new store openings. Inventory per store was flat at $508,000 during the quarter. Net inventory (merchandise inventories less accounts payable) deteriorated on a per store basis to minus $158,431 from plus $75,476 last year.

Share Repurchase

Under the current share repurchase program, AutoZone repurchased 1.3 million shares of its common stock for $300 million, at an average price of $231 per share during the quarter. At the end of the quarter, the company had $386 million remaining under its current share repurchase authorization.

Financial Position

AutoZone had cash and cash equivalents of $98 million as of November 20, 2010, up from $79.6 million in the same period a year ago. Total debt amounted to $2.88 billion as of the above date compared with $2.74 billion as of November 21, 2009. The company had a stockholder deficit of $817.2 million as of November 20, 2010, up significantly from the year ago level of $484 million.

In the quarter, AutoZone had a net cash flow of $328.7 million before share repurchases and changes in debt. This was an improvement from the year-ago level of $178.7 million.

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. Therefore, the company retains its Zacks #2 Rank, which translates to a short-term (1–3 months) recommendation of ‘Buy'.