AutoZone Is Booming

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AZO AutoZone Inc.

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May 27, 2009

Two weeks ago, Wall Street was knocked on its ear by an awful retail sales report. The report said that retail sales for April had declined by 0.4% which was a big shock since the Street had been expecting no change. This report was particular disappointing because a consensus had been forming that the worst economic news was behind us. Now, we're not so sure.

The fact is that consumers still aren't in a happy mood, and that impacts their spending. And retailers are feeling it on their bottom lines. April sales at retailers like clothing shops and restaurants were down a whopping 10.1% from a year ago. Sales at electronics and appliance stores fell 2.8%.

As bad as it looks out there, not all retailers are suffering. In fact, there are a select few that actually thrive during rough times. The key is to focus on stores that help consumers make their dollar go further. A perfect example is the auto parts retailer, AutoZone (AZO).

AutoZone Will Fill the Void Left by Fewer Car Dealers

AutoZone is a true diamond in the rough. The company operates approximately 4,100 stores in the U.S. and Puerto Rico, and is clearly the #1 auto parts chain. As auto sales have plummeted dramatically, more people are relying on aging vehicles to get around. The result is a huge increase in demand for parts and maintenance -- and huge sales for AutoZone.

In its latest quarter, the company's earnings rose 21.6% to $115.9 million or $2.03 per share compared with $106.7 million or $1.67 per share in the same quarter in 2008. Growing year-over-year earnings in this dismal environment is a tremendous feat!

During the same period, AutoZone's sales rose 8.2% to $1.45 billion compared with $1.34 billion. Wall Street expected earnings of $1.85 per share and $1.38 billion in sales, so the company posted a 9.7% earnings surprise and a 5.1% sales surprise.

In the past three months, analysts have revised their consensus earnings estimate 5.4% higher, which is a good omen, since positive analyst revisions typically precede future earnings surprises.

What's more, the company is poised to pick up a huge chunk of market share as Chrysler and General Motors head down the drain. Since the dealer networks and parts businesses of these companies will likely suffer during the process, AZO will quickly fill the void.

I should urge you not to be afraid of AutoZone's high share price. Many investors are needlessly steering clear of stocks that go for $150 a share. There's really no need to. Even if you only buy a few shares, it's better to own high-quality stocks with a high price tag, than low-quality stocks going for under $10 a share. I also like the fact that the stock has pulled back about 10% from its recent high.

AutoZone reported outstanding earnings on Wednesday, May 27. The company earned $3.13 a share which is a huge jump over the $2.49 a share from last year. The consensus on Wall Street was expecting AZO to report $2.89 a share so this was a big earnings surprise. I was especially impressed that same-store sales rose by more than 7%.

Due to robust profit margin expansion, I expect AutoZone's earnings growth will continue to outpace its already impressive sale growth and create big profits for stockholders in 2009. AutoZone is an excellent buy.

Is this market rally for real? A lot of companies beat earnings expectations last quarter, but many of those gains were due to cost-cutting, not increased revenue. You still have to be selective in choosing stocks that have solid fundamental reasons for growth. Louis Navellier screens his picks against strict momentum growth criteria. Click here to get his new FREE special report, Top 5 Stocks to Own Now, absolutely FREE!