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CSFB Gets in the Zone

The firm upgrades AutoZone, predicting a pickup in the auto-parts retailer's sales growth.
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Shares of


(AZO) - Get AutoZone, Inc. Report

were bumped up to a four-month high Thursday after a Wall Street analyst upgraded the stock, predicting a pickup in sales growth.

Credit Suisse First Boston analyst Gary Balter raised his rating on the auto-parts retailing chain to outperform, citing his belief that recent investments in its stores, which have hurt profit margins, would soon pay off with higher sales growth.

Balter found a glimmer of hope in AutoZone's 1% same-store sales gain posted for its first quarter -- the company's first positive comps in six quarters. He noted in a report that his channel checks indicate the positive sales momentum is picking up in its current quarter.

"Some important changes at AutoZone are beginning to take hold," Balter said. "Stores are cleaner and less cluttered and service is improving."

AutoZone's operating model has long been influenced by major holder Ed Lampert, the elite hedge fund manager with ESL Investments who runs

Sears Holdings


. Lampert's focus on profitability, often at the expense of sales growth, powered Autozone's shares to a gain of 238% over the last five years.

More recently, though, the Memphis-based retailer's shares have been stuck, unable to break back over $100, where they were last summer. Disappointing sales and earnings results led many observers to conclude that Lampert's cost-cutting campaign had run its course in boosting profits, and the company's chief executive, Steve Odland, left last year to run

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-- another candidate for margin expansion.

Those left behind, along with AutoZone's new CEO Bill Rhodes, concluded it was time to start reinvesting some of AutoZone's cash flow in its stores to win back customers -- a process that produced some pain on margins.

In December, the retailer said its operating margin fell by about 1.5 percentage points to 15.3% in its first quarter, which ended in November, as operating expenses rose to 33.6% of sales, from 31.4% last year.

"Our operating margin reflects the actions we took to improve the in-store customer experience," the company said. "We increased training, placed additional focus on improving the appearance of our stores, and we intensified efforts to drive our unique and powerful culture. We will maintain our disciplined approach to growing operating earnings over the long term and utilizing our capital effectively, while striving to create the best shopping and working environment within the industry."

Balter, whose firm has an investment banking relationship with AutoZone, said the increased spending levels probably will peak in the current quarter at $16 million and margins should start to improve soon.

"By next year, we believe the company can return to sustainable peak margins," Balter said.

He estimates shares of AutoZone are trading at an industry-lagging multiple of 10.7 times earnings estimates through 2007. Based on his forecast, he raised his target price on the stock to $120 from $95, saying the company could trade at a valuation of 13.7 times estimates, still behind competitors like

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Shares of AutoZone were recently up $3.03, or 3.3%, to $96.36.