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AutoZone Inc. (NYSE:AZO) announced that it would release its results for the fourth quarter and the full fiscal 2011 that ended on August 27, 2011 before the market opens on September 20, 2011. Memphis, Tennessee-based AutoZone earned a profit of $5.29 in the third quarter of fiscal 2011, beating the Zacks Consensus Estimates of $4.97 per share. In the upcoming quarter, the Zacks Consensus Estimate for AutoZone is pegged at $6.97 per share, reflecting an annualized growth of 23%.

On the other hand, Zacks Consensus Estimate for fiscal 2011 is projected at $19.21, reflecting an annualized growth of 28%. The estimate upsides, essentially a proxy for future earnings surprises, are 0.57% and 0.16%, respectively for the quarter and the full year.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 6.98%, implying that the company has beaten the Zacks Consensus Estimate in the last four quarters. Only two of the concerned quarters exceeded the estimates while the remaining two exactly matched the Zacks estimates.

Third Quarter Recap

Net sales improved 8.6% to $1.98 billion driven by higher sales volume coupled with an aggressive store expansion strategy. Net sales were slightly higher than the Zacks Consensus Estimate of $1.92 billion. Domestic same-store sales, i.e., sales for stores open for at least one year, deteriorated to 5.3% during the quarter from 7.1% in the comparable quarter of 2010.

Total auto parts sales climbed 8.4% to $1.94 billion, reflecting sales per average store of $412,000, an increase of $15,000 from the prior-year level. Domestic commercial sales escalated 22.8% to $267.5 million while all other (ALLDATA and e-commerce) sales increased 12.5% to $39.3 million.

Gross margin was 51.2% versus 50.7% in the prior-year quarter. The increase in gross margin was attributable to increased penetration of the company’s Duralast product and lower shrink expense.

During the quarter, AutoZone opened 43 new stores, closed 1 and replaced 1 in the U.S. The company also opened 12 new stores in Mexico. As of May 07, 2011, the company had 4,467 stores in 48 states, including the District of Columbia and Puerto Rico in the U.S. and 261 stores in Mexico.

AutoZone had cash and cash equivalents of $100.4 million as of May 07, 2011, up from $95.8 million as of May 08, 2010. Total debt amounted to $3.22 billion as of the above date compared with $2.70 billion as of May 08, 2010.

Estimate Revisions Trend

Earnings estimates for the fourth quarter and the fiscal 2011 are currently pegged at a profit of $6.97 and $19.21 per share. The improving auto industry and the strong performance by the company in the last reported quarter have made the analysts hopeful about its future financial results.

Agreement of Estimate Revisions

Out of the 19 analysts covering the stock for the fourth quarter of fiscal 2011, only three analysts upgraded the stock in the past 30 days, out of which one made a change in the last 7 days. However, none downgraded the stock in the last 30 days.

Again for the full fiscal, 21 analysts are covering the stock, out of which only two have upgraded the stock in the past 30 days while only one downgraded it during the same period.

Magnitude of Estimate Revisions

Following the third quarter earnings release in June, fourth quarter earnings per share were projected at a profit of $6.93. However, over the last 60 days, the estimate rose to a profit of $6.94 per share. The estimate again went up by a penny to $6.95 in the last 7 days. However, currently the estimate is maintained at $6.97 per share.

For the full year, estimate was $19.16 per share in the past 90 days, which rose to $19.21 per share in the last 60 days. However, in the last 7 days estimates took a dip to $19.18 per share. But currently the estimate is at $19.21 per share.

Our Take

AutoZone is focused on expanding its Hub store, accelerating store maintenance and strengthening of its commercial sales force. Besides, 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. (NASDAQ:ORLY) and Advance Auto Parts Inc. (NYSE:AAP), both of which have delivered impressive results during their last reported quarters, are primary headwinds for the company.

Hence, the company retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating. We have reiterated our long-term Neutral recommendation on the shares of the company.