AutoZone (AZO) Grows On Store Openings & Share Buybacks

On Jun 3, 2016, we issued an updated research report on AutoZone, Inc. (NYSE:AZO) . The company currently carries a Zacks Rank #3 (Hold).

AutoZone reported a 12.6% rise in earnings per share to $10.77 for the third quarter of fiscal 2016 (ended May 7, 2016) from $9.57 recorded in the year-ago quarter. Earnings, however, missed the Zacks Consensus Estimate of $10.96 by a wide margin.

Quarterly revenues improved 4% year over year to $2.59 billion in the reported quarter. However, the figure lagged the Zacks Consensus Estimate of $2.65 billion.

The third quarter of fiscal 2016 marked the 39th consecutive quarter in which AutoZone’s earnings per share have grown in double digits. Earnings are expected to rise further, driven by flourishing revenues, increasing store count and regular share buybacks.

AutoZone uses its significant cash flow to open new stores every year. It maintains a low single-digit square foot growth rate. The company opened 85 stores in the U.S., 17 stores in Mexico and 1 store in Brazil, along with 5 Interamerican Motor Corporation (“IMC”) branches during the first nine months of fiscal 2016. Also, it relocated 4 stores in the U.S.

The strong cash flows also help AutoZone to aggressively repurchase shares. In the third quarter, it repurchased 687,000 shares for $533 million.

However, cost headwinds related to opening new distribution centers and increasing the frequency of deliveries to stores are concerns for AutoZone. Currency headwinds also pose a challenge.

Foreign currency headwinds reduced the earnings before interest and taxes (EBIT) growth rate by over 1 percentage point in the first quarter, 2 percentage points in the second quarter and 1 percentage point in the third quarter of fiscal 2016. The company expects the currency-related pressure from the Mexican business to continue as long as the peso stays at elevated levels.

Some better-ranked automobile stocks include Autoliv, Inc. (NYSE:ALV) , Oshkosh Corporation (NYSE:OSK) and Superior Industries International, Inc. (NYSE:SUP) . All the three stocks sport a Zacks Rank #1 (Strong Buy).