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VOL. 128 | NO. 39 | Tuesday, February 26, 2013

AutoZone Blames Slower Sales on Tax Refund Delay, Winter Weather

By Andy Meek

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No company is completely immune to the effects of political squabbling in Washington, the stakes of which have intensified lately for the average taxpayer.

That includes even a company as seemingly unrelated to the political world as Memphis-based AutoZone Inc., the leading car parts retailer in the U.S.

AutoZone CEO Bill Rhodes told analysts Tuesday, Feb. 26, the retailer was disappointed with its 1.8 percent drop in U.S. same-store sales for the second quarter, referencing a key metric in the retail sector. The same-store sales metric sets aside the opening and closing of new stores and looks at activity from stores open at least a year, which gives a better growth picture for a company.

AutoZone executives discussed the quarter’s results before the stock market opened Tuesday. There was plenty to like in the results, including the company’s 26th straight quarter of double-digit earnings per share growth.

AutoZone reported a 15.1 percent climb in earnings per share, to $4.78 from $4.15 in the year-ago period. Profit was up $9.3 million to $176.2 million. And the company saw a 2.8 percent increase in net sales, hitting $1.9 billion for the second quarter.

Rhodes, meanwhile, attributed the drop in same-store sales in part to delayed tax refunds. That drop also was a big deal to Dan Wewer, an analyst covering AutoZone for Raymond James & Associates Inc.

“While the softer sales environment was somewhat anticipated given the lingering impact of warm weather a year ago, the company experienced a significant slowdown in the last two weeks of the quarter due to the delay in federal tax refunds,” Wewer said.

Taxpayers will get refunds later than usual this year partly as a result of national lawmakers who’ve lurched from crisis to crisis as the two major political parties argue over spending and fiscal priorities, including earlier this year when they reached a last-minute deal to avoid another debt ceiling debacle. Unfortunately, that keeps the IRS guessing too long on what the rules of the road will be for tax purposes.

That political wrangling meant the IRS couldn’t start processing any returns filed before Jan. 30.

Along those same lines, but separate from the quarterly results presentation, AutoZone recently has pointed out to investors other ways the company believes decisions made in Washington could potentially impact the company negatively. In the company’s latest annual report, released in late 2012, a summary of risk factors that could affect the company’s business makes a reference to the Affordable Care Act.

“While the significant costs of the recent healthcare legislation enacted will occur after 2013 due to provisions of the legislation being phased in over time, changes to our healthcare cost structure could have a significant negative impact on our business,” the report reads.

The indirect political impact, meanwhile, wasn’t the only thing that made a dent in AutoZone’s same-store sales for the just-ended quarter. The warmer-than-usual winter also didn’t help, because it contributed to less wear on cars and thus kept consumers from visiting AutoZone stores as much to buy new parts.

Rhodes tried to reassure analysts of a couple of positive indicators: one, that except for the last two weeks of the quarter, sales were generally consistent with where the company thought they would be. And two, that next quarter should see sales get back to their historic trend.

“Historically, we have seen our sales increase significantly during the final two weeks of our second quarter,” Rhodes said. “However, this year our total domestic auto parts same store sales for the last two weeks declined by eight percent. Our belief is the approximately two-week delay in processing of income tax returns this year was the key contributor to this decline in sales. Our expectation is sales in the upcoming quarter should recover to more normalized sales volumes.”

Also during the second quarter, AutoZone bought back 513,000 shares of its common stock for $185 million. At quarter’s end, the company had $603 million remaining under its current share repurchase authorization.

The company also opened 32 new stores in the U.S. during the quarter, as well as nine new stores in Mexico. As of Feb. 9, the company had 4,735 stores in the U.S., 334 stores in Mexico, and one store in Brazil for a total store count of 5,070.

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