So, here's a thing that doesn't happen often: AutoZone Inc. (AZO) missed. The auto parts giant reported second-quarter results on Tuesday that came in just shy of what Wall Street was expecting on both the top and bottom lines. The market, which is not known for its patience with such things, promptly sent the stock tumbling.
Let's break down the numbers. AutoZone posted earnings of $27.63 per share. That's a lot of money per share, but it was a hair below the $27.76 analysts were looking for. Revenue came in at $4.27 billion, up 8.1% from a year ago, but again, just a bit light of the $4.31 billion estimate. It's the kind of miss that feels like you tripped on the last step of the stairs—not a disaster, but definitely a stumble.
The core business of selling parts to DIYers and professional mechanics actually seems fine. Same-store sales, a key retail metric, were up a solid 5.2% overall. In the U.S., they grew 3.4%, and internationally, they jumped 17.1%. That international number looks fantastic until you adjust for currency swings. On a constant-currency basis, which strips out the effect of a strong U.S. dollar, international same-store sales were up a more modest 2.5%.
Where things got tricky was on the profitability side. The gross margin—the percentage of revenue left after paying for the parts sold—was 52.5%. That's down 137 basis points (or 1.37 percentage points) from a year ago. The company pointed directly to a 138 basis point "non-cash LIFO headwind." That's accounting-speak for an inventory accounting method that, in an inflationary environment, can make your cost of goods sold look higher and your margins look lower, even if your actual buying and selling prices haven't changed that much. It's a paper loss, but it still hits the reported numbers.
With that margin pressure, operating profit slipped 1.2% to $698.5 million, and net income fell to $468.9 million from $487.9 million a year earlier. The company's inventory also ballooned by 13.1%, which it said was due to growth initiatives and inflation. More stuff on the shelves ties up cash.
Speaking of cash, AutoZone is still very much in the business of returning it to shareholders. The company bought back 85,000 of its own shares during the quarter at an average price of $3,666 apiece, for a total outlay of $310.8 million. There's still $1.4 billion left on its current buyback authorization. It also kept expanding its footprint, opening 43 new stores in the U.S., 18 in Mexico, and 3 in Brazil, for a total of 64 net new stores in the quarter.
On the financial health front, AutoZone ended the quarter with $285.5 million in cash. Its operating cash flow, however, was $342.5 million, down significantly from $583.8 million a year ago, reflecting some of that inventory build and the lower net income.
CEO Phil Daniele addressed the quarter's mixed signals. He said domestic DIY and commercial sales "performed well" despite some operational disruptions from winter storms in late January and early February. On the international front, he acknowledged that constant-currency sales "came in slightly below expectations," but he believes the company is still outperforming competitors and gaining market share in Mexico and Brazil.
"We remain focused on capturing additional market share in our fragmented industry," Daniele said, adding that the company is "committed to a disciplined approach to growing earnings and cash flow to enhance shareholder value."
Investors on Tuesday seemed more focused on the misses and the margin compression than the market share narrative. AutoZone shares were down 5.88% at $3,654.18 following the report.
