It has been about a month since the last earnings report for AutoZone, Inc. AZO. Shares have lost about 2.9% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

AutoZone Q3 Earnings Miss, Same-Store Sales Down Y/Y

AutoZone reported 6.2% year-over-year growth in earnings per share to $11.44 for the third quarter of fiscal 2017 (ended May 6, 2017) from $10.77 recorded in the year-ago quarter. However, earnings missed the Zacks Consensus Estimate of $12.00. Net income climbed 1.3% to $331.7 million from $327.5 million a year ago. 

Quarterly revenues improved 1.2% year over year to $2.62 billion in the reported quarter. However, the figure missed the Zacks Consensus Estimate of $2.70 billion. Domestic same-store sales (sales for stores open at least for one year) were down 8.2% year over year in the quarter.

Gross profit rose to $1.38 billion (or 52.6% of sales) from $1.37 billion (52.9%) in the prior-year quarter. The decrease in gross margin was due to higher supply chain costs associated with current year inventory initiatives and higher inventory shrink results, partly offset by lower acquisition costs.

Operating profit declined to $529.6 million from $536.4 million recorded in the third quarter of fiscal 2016. Operating expenses, as a percentage of sales, rose to 32.4% from 32.2% a year ago. Operating expenses margin rose due to fixed cost deleverage, higher self-insurance cost and increasing wage pressures, partly offset by last year’s discrete legal charge and lower incentive compensation.

Store Opening & Inventory

AutoZone opened 35 stores in the U.S. and eight stores in Mexico. As of May 6, the company had 5,381 stores across 50 states, the District of Columbia and Puerto Rico in the U.S., 499 stores in Mexico, nine stores in Brazil and 26 Interamerican Motor Corp. (IMC) branches. The total store count was 5,889 as of that date.

AutoZone’s inventory grew 7.3% year over year in the quarter, driven by store openings and increased product placement. Inventory per store increased to $653,000 from the year-ago level of $629,000.

Share Repurchases

In the third quarter of fiscal 2017, AutoZone repurchased 396,000 shares for $284 million, reflecting an average price of $716 per share. The company had shares worth $1.051 billion remaining for repurchase at the end of the quarter.

Financial Details

AutoZone had cash and cash equivalents of $227.1 million as of May 6, 2017, up from $213.4 million as of May 7, 2016. Total debt amounted to $5.15 billion as of May 6, 2017 compared with $5 billion as of May 7, 2016. The company had a stockholders’ deficit of $1.71 billion as of May 6, 2017, down from $1.86 billion as of May 7, 2016.

During the first nine months of fiscal 2017, AutoZone generated net cash flow of $650.9 million before share repurchases and changes in debt compared with $789.9 billion in the first nine months of fiscal 2016. Capital spending increased to $357.9 million from $299.9 million a year ago.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been ten revisions lower for the current quarter.

AutoZone, Inc. Price and Consensus

AutoZone, Inc. Price and Consensus | AutoZone, Inc. Quote

VGM Scores

At this time, the stock has a nice Growth Score of 'B', though it is lagging a lot on the momentum front with a 'D'. However, the stock was allocated a grade of 'B' on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.

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