AutoZone Needs an Oil Change

I remember buying my first car and hardly ever changing the oil; every few months I would pull into the gas station and have the attendant check the oil. That was in the 1980s, when my automobile IQ was lower than it is now. Now I know to change my oil every three months, or 3,000 miles, and my cars seem to like me better.

Do-it-yourself retail stores have filled a need in consumers to either save money on repairs or pile up cuts and bruises in places that they barely knew existed. Whether you're walking through the likes of Home Depot (NYSE: HD  ) or auto parts store AutoZone (NYSE: AZO  ) , the expectation is always the same: Hard work will bring rewarding results.

Hard work is also what it takes to get ahead in the auto parts retailing industry. With a list of companies that includes AutoZone, Pep Boys (NYSE: PBY  ) , Genuine Parts (NYSE: GPC  ) , Advance Auto Parts (NYSE: AAP  ) , and many other retailers that sell related products, it's becoming harder to retain market share.

This crowded market landscape and tightening economic conditions (including higher gas prices) affected AutoZone's fourth-quarter results, which were a few cents short of the analysts' consensus estimate at $2.53 per share (versus $2.27 per share last year). The company's sales of $1.8 billion also came in a bit below the $1.9 billion expected (but less than 1% higher than last year), and same-store sales declined 3%.

The fact that AutoZone exceeded expectations for several quarters before this might be signaling a negative trend. However, a positive reinforcing sign is that the company's return on invested capital for the trailing four quarters rose to 25.1%, from last year's 23.4%. The company is also buying back shares like a bargain hunter, with 3.9 million shares alone repurchased in the fourth quarter. The share buyback also aided earnings-per-share growth (decreasing the number of shares outstanding) of 11.5%, which was significantly higher than the 1% gain on net income.

The shares are trading at only 10 times the company's fiscal 2005 earnings estimate of $7.43 per share, which is a decent discount to its expected 13% growth rate. While there is plenty of competition in the auto parts industry, AutoZone might merely need a quick oil change to get back on the road again. Nonetheless, it might be worth watching consumer and economic activity, because the company could feel the negative impact of some belt-tightening as people stretch their auto repair and maintenance.

Give your investment portfolio a tune-up by reading these additional takes:

• CSK's Success Not Automatic
• The Auto Parts Wars
• Is AutoZone Stalling Out?

Fool contributor Phil Wohl spent more than 12 years on Wall Street. He has no stake in any firm mentioned above.