By: Zacks Equity Research

AutoZone Inc. (AZO) recorded a 24% rise in profit to $4.68 per share in the first quarter of its fiscal 2012 ended November 19, 2011 from $3.77 per share in the year-ago quarter. The result, reported Tuesday, beat the Zacks Consensus Estimate of $4.45 per share. In absolute terms, profit increased 11% to $191.1 million from $172.1 million a year ago.

The increase in profit was driven by a 7.4% rise in net sales to $1.92 billion, which surpassed the Zacks Consensus Estimate of $1.90 billion. Domestic same-store sales (for stores open at least one year), increased 4.6% during the quarter compared with 9.5% a year ago.

Gross margin was 51.1% versus 50.7% in the first quarter of fiscal 2011. The higher gross margin was attributable to lower distribution costs due to an increase in sales, lower shrink expense and modestly higher merchandise margins.

Operating margin increased to 17.7% compared with 17.1% in the prior-year quarter, driven by an improvement in operating expenses (as a percentage of sales) to 33.4% from 33.6% a year ago. The improvement was the result of lower incentive compensation, favorable legal expense and leverage from higher sales volumes, but it was partially offset by higher self insurance costs.

Store openings and inventory

During the quarter, AutoZone opened 17 stores in the U.S. and two stores in Mexico. As of November 19, 2011, the company had 4,551 stores in 48 states, the District of Columbia and Puerto Rico in the U.S. and 281 stores in Mexico, implying a total store count of 4,832.

The company’s inventory escalated 7.2% to $2.53 billion, driven by new stores and continued strategic investments in parts assortment. Inventory per store inched up 3% to $524,000 and from $508,000 last year.

Share repurchase

Under the current share buyback program, AutoZone repurchased 954,000 shares of its common stock for $310 million during the quarter, reflecting an average price of $325. At the end of the quarter, the company had $659 million worth of stock remaining under its existing share repurchase authorization.

Financial position

AutoZone had cash and cash equivalents of $96.7 million as of November 19, 2011, down from $98.0 million as of November 20, 2010. Total debt amounted to $3.35 billion as of November 19, 2011 compared with $2.88 billion as of November 20, 2010. The company had a stockholder deficit of $1.35 billion as of November 19, 2011, up from the year ago level of $817.2 million.

In the quarter, AutoZone had a net cash flow of $303.0 million before share repurchases and changes in debt, which was down from the year-ago level of $330.2 million.

Our take

AutoZone is focused on expansion of its Hub store, acceleration of store maintenance and strengthening of its commercial sales force. 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) are primary headwinds for the company.

However, depending on the improving near-term outlook, the company retains a Zacks #2 Rank on the stock, which translates into a Buy rating for the short-term (1 to 3 months).

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