AutoZone (AZO) To Report Q3 Earnings: Will It Disappoint?

AutoZone, Inc. ( (NYSE:AZO) ) is slated to report third-quarter fiscal 2017 (ended May 6, 2017) results on May 23, before the market opens.

The company managed to see year-over-year growth last quarter, but its earnings missed expectations. AutoZone has delivered a negative average earnings surprise of 0.46% over the trailing four quarters.

Let’s see how things are shaping up prior to this announcement.

AutoZone, Inc. Price and EPS Surprise

AutoZone, Inc. Price and EPS Surprise | AutoZone, Inc. Quote

Factors Influencing This Quarter

AutoZone expects higher sales in third-quarter fiscal 2017 as tax refunds in the second quarter were lower year over year. Full-year refunds are expected to be consistent with that of last year. For fiscal 2017, it expects higher sales growth compared to fiscal 2016, driven by flourishing revenues, increasing store count and regular share buybacks.

The company uses its significant cash flow to open new stores every year and aggressively repurchase shares. AutoZone opened 158 stores in the U.S., 39 in Mexico and 2 in Brazil. The company plans to open 160 new domestic stores in fiscal 2017.

The company has ample liquidity to repurchase shares without compromising financial strength and therefore, its credit ratings. In Mar 2017, the company increased its share buyback program by $750 million. Including this new authorization, the company’s board has authorized a total of $18.7 billion for share buyback since 1998. In fiscal 2016, it repurchased 1.9 million shares for $1.45 billion, reflecting an average price of $763 per share.

However, AutoZone has been facing significant currency headwinds related to the Mexican peso and Brazilian real. Management expects this pressure to continue from the Mexican business.

Moreover, the company expects its capital and operating expenses to rise over the next three years, backed by its plans to open two to three new distribution centers over this time frame. AutoZone is increasing its delivery frequency to its stores to three or five times a week from just once a week. This will lead to gross margin headwinds of around 15–20 basis points every quarter until the completion of the rollout.

Earnings Whispers

Our proven model does not conclusively show that AutoZone is likely to beat on earnings this quarter or not. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below:

Zacks ESP: The Earnings ESP represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate. AutoZone’s Earnings ESP is -1.25%. This is because the Most Accurate estimate is pegged at $11.87 while the Zacks Consensus Estimate stands at $12.02. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: AutoZone carries a Zacks Rank #3 which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

Meanwhile, we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Price Performance

In the last three months, AutoZone shares have outperformed the Zacks categorized Automotive - Retail and Wholesale – Parts industry. The company shares have declined 9.12% while the industry saw a 9.66% decline. While the company is benefitting from expansion plans, currency headwinds and pressure on the gross margin related to elevated supply chain costs weigh on the company’s performance.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Lear Corporation (NYSE:LEA) has an Earnings ESP of +0.24% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Navistar International Corporation (NYSE:NAV) has an Earnings ESP of +12.05% and carries a Zacks Rank #3.

Meritor Inc. (NYSE:MTOR) has an Earnings ESP of +2.33% and a Zacks Rank #3.

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