Lone Performer in Troubled Industry

Hemanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

AutoZone Inc. (NYSE: AZO) announced its earnings results last Tuesday on Dec. 4 where it reported $5.41 EPS and revenue of $2 billion for the quarter. During the same quarter in 2011, the company had posted $4.68 in EPS and its revenues are up by 3.5% compared to the same period.

There has been an increment of 4.9% in gross profit on sales compared to the same period an year ago. The year-over-year growth in margins was attributable to higher merchandise margins (53 basis points) due to reduction in acquisition costs and lowered expense.

 New Stores Opening

AutoZone opened 19 new stores in The U.S, 4 new stores in Mexico and established itself in Brazil with its first store. The company had about 4700 stores in 49 states, the District of Columbia and Puerto Rico in The U.S., 325 stores in Mexico and one store in Brazil. Recently the company had closed one of its stores in The U.S.

The company is holding inventory of $537 thousand per store compared to $524 thousand in the corresponding quarter of last year which has increased marginally by 2.5%. There has been a rise in the company’s inventory by 6.8% in the quarter due to new store openings.

Lower Demand of Cars: A Positive Sign

As the market of cars seems to decline these days it is presumed that the demand for auto parts and repairs will rise. The financial situation of Auto-Zone for the past year has been similarly positive.

Lack Lusture Competitors

Pep Boys (NYSE: PBY), another large scale auto parts dealer, again failed to fulfill its commitments to The U.S. retail world and the market seems to be in no forgiving mood for companies with failed business plans. Pep Boys however, does not seem to give up so easily. It has a leveragable competitive advantage in the auto parts or service markets despite a turnaround process that is going on 15 years now. Although improvement to just sub-optimal levels of performance would likely drive decent gains in the stock, it seems that Pep Boys is a stock for the most risk-tolerant turnaround investors.

However the retailer must look into some strategic issues to run its business. The company has too many stores in the wrong places and its stores are fundamentally very large for the business. Likewise, even if the company would get out of the service side of the business, I'm not sure it would really help all that much in terms of sales as it would just create more dead selling space.

O'Reilly Automotive (NASDAQ: ORLY) is one of the largest specialty retailers of automotive after-market parts, tools, supplies, equipment and accessories in The United States, serving both the do-it-yourself and professional service provider markets.  The Company operated around 3900 stores in 39 states.

From the numbers point of view of stores, AutoZone has been the primary industry player, though O'Reilly Automotive is quickly catching up. Also, the aggregate number of auto-repair stores is increasing. This makes sense, because fewer people are buying new cars and more people are repairing their old ones. Once people start buying new cars again the aggregate effect will be an excess of auto-repair shops. This will increase competition over time and cause industry margins to lower, possibly damaging the profitability of AutoZone depending on how it fares in this new competitive environment. The companies must plan strategically to be prepared for such a turnaround.

Overall View

AutoZone will need to train its employees and buy new equipment. The changing landscape of cars will inevitably provide opportunities for new entry. At the same time, its superior capital basis and market capitalization could give it the resources to adapt. When the company adopts the new automobile technology completely the results of AutoZone are likely to overshadow its competitors. As the company’s earnings represent a slight upward trend, long term investors may get convinced by this positive movement as compared to the previous quarter results.

hemanshumange has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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