AutoZone (NYSE:AZO) holds a leading market share of the U.S. auto parts market and continued to build market share during its fiscal first quarter. The shares have performed admirably so far this year, and while this has increased the earnings multiple, the company fundamentals suggest there is further room for the stock to run.

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First Quarter Review
Net sales increased 12.7% to $1.8 billion. Same-store sales grew a solid 9.5% and the company opened 11 net new locations as it opened 15 new ones and closed four stores. It also opened three new locations in Mexico, where just over 5% of its total store base of 4,645 is located. The rest operate in 48 U.S. states and Puerto Rico.

Gross margins improved a slight 40 basis points to 50.7% of sales as product costs decreased and the company sold more of Duralast branded products that count as an in-house brand and carry higher margins, much like private-label brands at other retail stores. Management also held operating expenses in check and was able to reduce them by 30 basis points to 33.6% of sales. This allowed for sales leverage and sent operating income up by 17.5% to $306.1 million.

Modest interest expense and income tax costs allowed net income to improve just over 20% to $172.1 million, or $3.77 per diluted share. This came in ahead of analyst projections.

AutoZone doesn't provide forward guidance but analysts currently project full-year sales growth of just under 6% to $7.8 billion. They also expect earnings of $17.50 per share, which would be year-over-year growth of about 15%.

The Bottom Line
In the earnings press release, management boasted that the first quarter represented its "eighth consecutive quarter of 20% plus growth in earnings per share and our 17th consecutive quarter of double digit growth." This is indeed impressive, as is the fact that the company generates excess capital that it used to buy back its own stock. It repurchased $300 million shares during the first quarter and has about $386 million left on its current authorization program.

The stock has steadily increased this year and is now more than 75% above its 52-week lows back in January. Much of this performance has been due to multiple expansion and the forward P/E is now nearly 15. This is much higher than that the low double-digit multiple the shares have traded at since 2005, but it isn't unreasonable.

It is also still lower than the forward multiples of peers, including O'Reilly Automotive (Nasdaq:ORLY) (more than 20-times forward earnings), Pep Boys (NYSE:PBY) (more than 24-times), Advance Auto Parts (NYSE:AAP) (more than 17-times), and Genuine Parts Company (NYSE:GPC) (more than 17-times), which runs NAPA auto parts stores but also distributes auto parts to commercial retailers. AutoZone is criticized for its low exposure to the commercial market, but this does represent a growth avenue. (To learn more, check out Analyzing Auto Stocks.)

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Tickers in this Article: AZO, ORLY, PBY, GPC, AAP

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