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Under The Hood At Autozone

Posted: Sep 24, 2008 11:52 AM by Glenn Curtis

Tickers in this Article: AZO, PBY, AAP

The economy is on the ropes, but on the bright side at least people haven't stopped spending money on their cars. As evidence, I turn to Autozone's (NYSE:AZO) fourth quarter results. The autopart specialist kept margins solid in its latest quarter which is no easy task, it also improved earnings.

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Let's check under the hood, shall we?

Margins Remain Firm
In the period ended August 30, Autozone's gross margin came in at 50.3%. That's a slight bump from the 50.1% it saw in the comparable period a year ago. Meanwhile, its operating profit as a percentage of sales ticked down slightly in Q4 from Q4 last year (to 18.86% from 18.89%) by my math.

This suggests to me that the company isn't getting killed by markdowns. Also its strong margins lead me to believe that the company should likely deliver decent numbers in the current quarter.

Beating the Competition
Another thing that piqued my interest about its margins is how they compared with those of long time auto supply store Pep Boys (NYSE:PBY). In its most recent second quarter Pep Boy's gross margin came in at 26.1%, which was down from 26.9% in the comparable period last year. Meanwhile operating profit as a percentage of sales came in at 2.4% versus about 3.1% in the comparable period last year.

Advance Auto (NYSE:AAP) another well-known player recently turned in its second quarter results. Advance Auto posted solid margin improvements, although its percentages were less overall than those of Autozone in its most recent quarter. In the period ended July 12, Advance Auto's gross margin came in at 48.6% versus 48.1% in the comparable period last year. Meanwhile it's operating income as a percentage of sales came in at 10.4%, which was an increase from the 10.1% it witnessed in the comparable period last year.

Earnings Improve, but Miss Estimate
In the quarter Autozone earned roughly $243.7 million or $3.88 per share. That was a pretty sweet jump from the $217.2 million, or $3.23 per share, it earned in the comparable period last year. The problem is that analysts had been expecting the company to earn $3.90 per share.

Missing an estimate is never great news. This could temper some enthusiasm and cause some fence sitting investors to remain there. I think it could also cause analysts to be a little conservative on their estimates going forward. It also makes me wonder if this is a harbinger that more problems are on the way. (For more on analyst expectations, read Analyst Forecasts Spell Disaster For Some Stocks.)

Bottom Line
All things considered, I think it was a pretty decent quarter for Autozone. The stock certainly has long term potential; good companies always show reveal themselves during tough times. However, again that earnings miss makes me a little cautious.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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