Updated from 7:31 a.m. EST

AutoZone's ( AZO) fiscal second-quarter earnings rose just 3% from last year, but higher sales and wider margins show that recent store investments may be starting to pay off for the company, part of Ed Lampert's portfolio.

AutoZone earned $97 million, or $1.25 a share, in the quarter ended Feb. 11, compared with $94.1 million, or $1.16 a share, a year ago. Excluding stock-option expenses, earnings were $1.29 a share in the latest quarter. Sales rose 4.1% from a year ago to $1.25 billion, while same-store sales rose 0.4%.

Analysts surveyed by Thomson First Call had forecast earnings of $1.28 a share and sales of $1.25 billion.

The average number of diluted shares outstanding fell to 77.5 million in the latest quarter from 80.9 million a year ago, reflecting a continuation of the company's aggressive share-buyback campaign.

AutoZone's commitment to the Lampert doctrine of preferring profitability over undirected sales growth was evident in several metrics. Operating margin for the quarter expanded by 187 basis points to 14.2%, while operating profit was up 19.9% from a year ago. Gross profit was 49.1% in the latest quarter, up from 48.4% a year ago.

Those results came even as operating expenses rose 192 basis points over last year, as the retailer continued to spend money on training employees and sprucing up its stores. On a conference call with analysts, AutoZone President and CEO William Rhodes said most of the store improvements are complete.

"The past six months have been about positioning ourselves for the long run," Rhodes said. "We feel we are well prepared for the spring and summer selling seasons, and cost control will be a major focus for us for the remainder of the year."

In a research note, Credit Suisse First Boston analyst Gary Balter noted that some investors may be disappointed with AutoZone's 0.4% comp-sales growth, but the company's same-store sales have been consistently negative in the past, and he said the number reflects a significant improvement.

"The compares turn significantly easier this quarter and the costs of resetting all the stores is now behind them. With gross margins solid, despite some concerns to the contrary and comparisons turning easier, we believe that the turnaround story is very much on track and we view AutoZone as an interesting story for 2006," Balter said."

Rhodes said he would like to see the company's sales performance accelerate, noting that margin expansion would not continue at its recent pace.

"We can't continue to generate these profit-margin improvements for the remainder of the year," he said.

AutoZone opened 41 new stores during the quarter. Rhodes said he sees opportunities for AutoZone to open thousands of new stores in the U.S.

Shares of AutoZone recently were up $2.01, or 2%, to $98.69.

More from Stocks

Spotlight On Space Exploration as Jeff Bezos' Blue Origin Sets Ticket Sale Date

Spotlight On Space Exploration as Jeff Bezos' Blue Origin Sets Ticket Sale Date

This Will Be the Ultimate Buy (or Sell) Signal for Stocks

This Will Be the Ultimate Buy (or Sell) Signal for Stocks

3 Fierce Chinese Tech Stocks to Gamble on Right Now

3 Fierce Chinese Tech Stocks to Gamble on Right Now

Stocks Slammed on Latest Trump Tariff Fears

Stocks Slammed on Latest Trump Tariff Fears

How Small-Cap Stocks Can Protect Your Portfolio From a Trade War

How Small-Cap Stocks Can Protect Your Portfolio From a Trade War