Auto parts retailer AutoZone, Inc (AZO) reported stronger-than-expected results for its 2012 fourth quarter Wednesday morning. Sales increased 4.6% year-over-year to $2.8 billion, roughly in-line with consensus expectations. Earnings surged 18% to $8.46 per share, a few cents better than the consensus estimate. For our fair value estimate, please click here to view our 16-page reports on AutoZone and its peers.
Other metrics were also positive, with gross margins increasing 60 basis points year-over-year to 51.8%, thanks primarily to superior merchandise margins. SG&A (as a percentage of revenue), however, increased 20 basis points to 31.6%, mainly due to new employee expenses.
We trust that the company won't let expenses balloon, so we aren't too worried about this small increase. Same-store sales also advanced 2.7% compared to the same period last year, and the firm opened 72 new stores in the US and 24 stores in Mexico.
Same-store sales, though positive, were lighter than the firm anticipated, and with the recent strength in new car sales, we expect aftermarket parts retailers to continue to experience weaker growth rates in coming periods.
Nevertheless, the firm still generated nearly $950 million in free cash flow during the fiscal year. Management has used this cash flow to aggressively repurchase shares-reducing the shares outstanding by 38% during the past five years.
AutoZone's share price has followed suit, with shares more than tripling during that same period, making it one of the few very successful buyback programs, in our view. Though the firm has just $356 million left under its existing repurchase program, we wouldn't be surprised to see management increase that figure as the company generates more cash balance.
In spite of excellent capital allocation, a strong business, and robust cash-flow generating capabilities, we think shares are fairly valued at this time. Stronger economic conditions could help propel new auto sales, hurting the firm's parts sales in the near-term.
Even if the SAAR continues to run at 14 million auto units, we do not think the industry, which includes Advance Auto Parts, Inc. (AAP) and O'Reilly Automotive, Inc. (ORLY), will be as strong as it was during the depths of the recession. New cars tend to come with warranties and service packages, cannibalizing the "do-it-yourself" business.
Shares of the retailer only score a 3 on the Valuentum Buying Index (our stock-selection methodology), so we aren't interested in adding shares to our Best Ideas portfolio at this time.