Investors had high expectations for AutoZone (NYSE:AZO) heading into its fiscal second-quarter report. After all, the auto parts retailer had booked double-digit percentage earnings gains in every quarter over the last 10 years.

On Tuesday, that streak came to an end as AutoZone's sales growth slowed to almost a halt.

Here's how the big-picture results stacked up against the prior year:


Q2 2017

Q2 2016

Change (YOY)


$2.29 billion

$2.26 billion


Net income

$237 million

$229 million






Data source: AutoZone's financial filings.

What happened this quarter?

Sales growth at existing locations was flat following the third quarter's minor increase, and profitability declined slightly as, the company noted, customer spending was pinched by the implementation of a new IRS regulation that is delaying a large fraction of this year's income tax refunds for early filers.

A man shopping in an auto parts store.

Image source: Getty Images.

Highlights of the quarter included:

  • Comparable-store sales didn't budge, compared to a 2% uptick in the prior quarter. A growing store base ensured that overall revenue rose slightly, though.
  • Gross profit margin held steady at 53% of sales.
  • Net income rose by 4%, a marked slowdown from the prior quarter's 8% boost. AutoZone's declining share count, a product of its aggressive stock repurchase spending, allowed earnings per share to rise by just under 9%. It was the first time in 42 quarters that the company grew EPS by less than 10%.
  • Inventory levels jumped 9% due to the combination of a larger store base and efforts to better stock existing locations.
  • Return on invested capital held steady at 31% of sales.
  • AutoZone opened 33 new locations in the U.S., three in Mexico, and one in Brazil, bringing its global store count to 5,872.

What management had to say

"I would like to thank all AutoZoners across the organization for their tremendous efforts during what ultimately turned out to be a challenging quarter," CEO Bill Rhodes said in a press release. "Our sales performance in the last three weeks of our quarter was significantly challenged by well-publicized timing delays in IRS tax refunds, which negatively impacted our profitability," he continued.

While admitting that the results weren't up to management's expectations, Rhodes said the company's growth strategy is intact. "Our objective remains to continue to provide great service to our customers and deliver strong, consistent performance for our shareholders as we remain committed to our approach of increasing operating earnings and utilizing our capital effectively."

Looking forward

The company's focus is firmly on improving the customer experience through investments in stores, employee training, and in-stock levels.

Beyond that, AutoZone's major growth priorities include boosting its consumer retailing division by aggressively adding to its square footage, and with 33 new locations opened in the quarter, the company is right on track in that initiative. Its commercial program, meanwhile, is expanding at a healthy pace as commercial locations rose to 4,400 from 4,200 a year ago. The retailer aims to increase its domestic commercial market share significantly from the current 3% level. Finally, AutoZone sees international markets as a solid growth opportunity, so investors should expect to see continued, steady additions to its store base outside the domestic market.

The company's most immediate goal will be returning its U.S. stores to comps growth, though. Over the last six months, that segment has improved by less than 1% while over the same period last year, its growth was nearly 4%.