AutoZone ( AZO) is running out of gas. Unlike its competitors, which delivered turbo-charged results, AutoZone saw its business stall in the latest quarter. Same-store sales remained idle, and core retail sales actually slid into reverse. Total sales, fueled by 45 new stores, grew 3.4% to $1.16 billion, but still stopped short of the $1.2 billion Wall Street had expected. Even earnings that zoomed past analyst estimates failed to keep the stock from crashing on news of the slowdown. Shares of AutoZone skidded 5.7% to $83.40 early Wednesday morning. Analysts had warned the stock might tank if sales failed to accelerate. "We believe all focus will be on the top line, most notably on the retail comp and the quality of any EPS upside," predicted Citigroup Smith Barney analyst Bill Sims, who has a hold rating on the stock. "We believe this is especially true based on the weaker-than-anticipated sales results that have been reported in each of the last several quarters at AutoZone." Like most, Sims had expected the company's sales to rev up in the latest quarter. Instead, same-store sales remained flat against an easy comparison last year. Moreover, sales to the company's core retail market slid 1% instead of inching forward to meet modest growth expectations. Even the company's newer -- and lower-margin -- commercial business grew at about half the pace some analysts had projected. AutoZone did manage to beat earnings estimates by growing overall margins and aggressively repurchasing its shares. The company delivered total profits of $91.7 million, or $1.04 a share, that topped the consensus estimate by 4 cents. But investors steered right past that 32% jump in EPS and, as expected, parked their attention on the company's top line instead. "We think AutoZone is raising prices and cutting costs to protect earnings, which is hurting the top line," noted J.P. Morgan analyst Danielle Fox, who has an underweight rating on the stock. "Once again, sales trends decelerated on easing comparisons."
Fox found plenty to fret about. He pointed out that second-quarter cash flow, prior to share repurchases, slid from $55 million to $4 million. He also noted that total debt had jumped both sequentially and year over year. But he dwelled on the company's sales trends in particular. Over the past two years, he noted, the company's retail sales comps have slid into negative territory. Meanwhile, he added, the company's commercial comps are increasing at less than half their old rate. AutoZone's latest results looked particularly weak when compared to the surging growth recently posted by competitors. "Recall that O'Reilly ( ORLY) and Advance Auto Parts ( AAP) reported positive, high-single-digit comps for their most recent quarters," Fox reminded readers. "We believe that AutoZone's emphasis on margins is causing it to lose market share." Some analysts had banked on AutoZone riding the strong industry trend. But at least one hinted at a possible downgrade if AutoZone detoured from that path. Whitaker Securities analyst Cid Wilson said he'd be focusing on sales to retail "do-it-yourselfers" -- which fell short of expectations -- when evaluating the company's prospects. "If we see signs that AutoZone is participating in the upswing in DIY sales seen at other auto parts retailers, this could be a buying opportunity," wrote Wilson, who rated the stock outperform prior to Wednesday's report. "But if AutoZone and Advance see a divergence in sales, it could warrant a review in our rating and thesis." AutoZone weathered at least three downgrades after it last disappointed analysts three months ago.