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Shares of Autozone (AZO) lost more than 6% over the past trading week. The retailer and distributor of automotive replacement parts and accessories reported its first quarter results last Tuesday before the market open.

First Quarter Results

Autozone reported first quarter revenues of $1.99 billion, up 3.5% on the year before. Growth was driven by new store openings, as same store sales rose merely 0.2% for the quarter. Revenues fell short of analysts forecasts of $2.02 billion.

Gross margins came in at 51.8%, up 70 basis points on the year before, predominately driven by higher merchandise margins. Net income rose 6.4% to $203.5 million. As a result of continued share repurchases, earnings per share rose 15.7% to $5.41 per diluted share. Earnings came in line with analysts forecasts of $5.39 per diluted share.

During the quarter, Autozone repurchased 855,000 shares for a total consideration of $317 million. The company had another $788 million authorized under its current repurchase program.

In total Autozone ended the quarter with 5,029 stores.

CEO and Chairman Bill Rhodes commented on the results, "I would like to thank our entire organization for the solid performance delivered this past quarter. We are pleased to report our twenty-fifth consecutive quarter of double digit earnings per share growth. While this past quarter's sales results were lower than planned, they were not surprising to us. Regional sales discrepancies continued to challenge our results, however we began to see improvements in our more challenged regions late in the quarter."

Acquisition of AutoAnything

Besides announcing first quarter earnings, Autozone furthermore informed the market about the agreement to acquire AutoAnything. The company is a leading online retailer of automotive products that is expected to generate annual sales of $125 million this year.

The transaction price is not yet announced, given that the deal is not closed at the moment. The definitive purchase price will be announced once the deal has been completed. Autozone expects earnings to be slightly dilutive to its fiscal 2013 earnings per share. The deal is expected to be accretive in 2014 and beyond.

Valuation

Autozone ended its third quarter with $99.9 million in cash and equivalents. The company operates with $3.80 billion in total debt, for a net debt position of $3.7 billion. For the full year of its fiscal 2012, Autozone generated annual revenues of $8.6 billion. The company net earned $930.4 million, or $23.48 per diluted share for the year.

The market currently values Autozone at $13.1 billion. This values the firm at 1.5 times annual revenues and 14 times annual earnings. Autozone does not pay a dividend at this moment, but favors share repurchases in its attempt to return cash to its shareholders.

Some Historical Perspective

Year to date, shares of Autozone have risen some 11%. Shares started the year around $320 in January and rose to highs of $400 in April of this year. Shares fell back to levels around $359 at the moment. Over the past five years shareholders have seen some great returns. Shares rose from lows of $100 in 2008 to highs of $400 earlier this year. In total, shareholders have seen the value of their holdings triple in this time period.

Between 2009 and 2012, revenues rose from $6.8 billion to $8.6 billion. Earnings grew from $657 million to $930 million. Earnings per share roughly doubled after the company retired roughly 30% of its shares outstanding over the time period.

Investment Thesis

Autozone experienced a soft quarter, with same store sales growth coming in at just 0.2%. Autozone recognizes in its earnings conference call that results are very inconsistent on a regional basis. Notably, the warm weather impacts the maintenance business of Autozone which makes up roughly 40% of total revenues. Warm weather resulted in less wear and tear to automobiles, and customers consequently buy less auto parts from Autozone.

Besides warm weather, low car sales in recent years are impacting sales as well. Lower car sales result in less demand for auto parts which need to be replaced. Autozone is confident that the continued increase of the average age of vehicles on the road will be able to offset soft new car sales.

To re-ignite growth, Autozone announced the acquisition of AutoAnything, which furthermore boosts the online presence of the business. At the same time, the company is increasing its customer services by expanding its hub system. The company operates 67 hubs which increases the inventory availability to customers. As such, Autozone sticks to its mission, "AutoZoners always put customers first."

Shares might have been a great opportunity to pick up during the crisis, but I see few compelling reasons to pick up shares at the moment. Shares are valued at 14 times annual earnings, while same store sales growth has essentially come to a standstill as a result of the warm weather.

The sizable share repurchase programs have boosted earnings per share in recent years, thereby propelling the share price higher. As a result of the sizable share repurchases in recent years, the net debt position of the company has grown to $3.7 billion. The increase in leverage makes it difficult to sustain the high pace of share repurchases into the future.

Problematic is that the company's net debt position has grown to $3.7 billion as a result of the share repurchases, leaving less room for future repurchases. I see few triggers for further gains in the short to medium future, and therefore remain on the sidelines.

Source: Autozone - Tough Market Conditions And Warm Weather Results In Growth Standstill