AutoZone Posts Solid Quarter

The Lampert blueprint is followed as earnings rise and sales fall.
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AutoZone's

(AZO) - Get Report

third-quarter earnings surged past estimates on declining same-store sales, a performance that generally conforms to the profit-obsessed blueprint of major holder Ed Lampert.

The parts retailer earned $147.8 million, or $1.86 a share, in the quarter, compared with $143.4 million, or $1.68 a share, a year ago. Sales fell 1.6% from a year ago to $1.34 billion. Analysts were forecasting earnings of $1.80 a share on sales of $1.37 billion.

Some of the EPS upside looked attributable to a stock buyback. AutoZone said it repurchased 3.2 million common shares at an average price of $87 a share in the quarter, helping to lower average shares outstanding by about 6 million to 79.5 million.

Based on a Thomson First Call earnings estimate of $7.44 for the year ending in August, the shares were bought back at a price-to-earnings multiple of about 11.7. The multiple falls to 10.6 using next year's consensus of $8.23, an estimate that implies 10% year-over-year profit growth.

AutoZone's third-quarter same-store sales fell 5% from a year ago, while operating margin rose by 91 basis points to about 20.3%. Operating profit rose 3.2% from a year ago.

The performance is similar to what usually happens at Lampert's crown jewel,

Sears Holdings

(SHLD)

. There, the hedge fund manager has repeatedly preferred earnings growth to sales, producing a famously rich return for shareholders.

The company, nevertheless, laments its third-quarter top line.

"Sales were considerably weaker this quarter than expected," AutoZone says. "This shortfall has challenged us to take a fresh look at our opportunities for driving profitable sales."

"Our financial model continues to be strong. We will maintain our disciplined approach to growing operating earnings and utilizing our capital effectively, while looking to leverage our industry-leading financial metrics," AutoZone says.