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On May 29, we maintained our Neutral recommendation on AutoZone Inc. (AZO - Analyst Report), based on its improved third quarter fiscal 2013 performance combined with the company’s focus on share repurchase program and store expansion. However, we are concerned about the rising gas prices and AutoZone’s heavy reliance on its private-label brands.

Why the Reiteration?

On May 21, AutoZone reported a 15.8% rise in earnings per share to $7.27 for the third quarter of fiscal 2013 (ended May 4, 2013) from $6.28 in the year-ago quarter. Earnings surpassed the Zacks Consensus Estimate by 6 cents. Quarterly revenues increased 4.4% to $2.2 billion. Domestic same-store sales (sales for stores open at least one year) decreased 0.1% in the quarter.

Following the release of the third quarter results, the Zacks Consensus Estimate for fiscal 2013 increased marginally by 0.4% to $27.63 per share. The Zacks Consensus Estimate for fiscal 2014 went up 0.8% to $31.23 per share. Currently, AutoZone retains a Zacks Rank #3 (Hold).

AutoZone actively focuses on its store-opening strategy. In the first nine months of fiscal 2013, the company has opened 84 stores in the U.S. and 20 stores in Mexico. As of May 4, 2013, the company had 4,767 stores in 49 states, the District of Columbia and Puerto Rico in the U.S., 341 stores in Mexico and one store in Brazil.

Advance Auto Parts Inc. (AAP - Analyst Report), another leading retailer and distributor of automotive replacement parts and accessories, also pursues an aggressive store expansion strategy. During the first quarter of fiscal year ended Apr 20, 2013, it acquired 124 BWP stores and opened 56 stores, including 7 Autopart International stores, and closed 5 stores.

CarMax Inc. (KMX - Analyst Report), one of the largest used vehicles retailers, opened two stores, penetrating the Denver, Colorado, and Jacksonville, Florida, markets in the fourth quarter of fiscal 2013. In fiscal 2013, the company has opened ten stores, bringing its used car superstore count to 118 as of Feb 28, 2013. The company intends to open between 10 and 15 superstores in each of the following two fiscal years.

Increasing vehicles on roads and the subsequent growth in demand for auto parts is benefiting AutoZone. Revenues from Mexico benefited from the abundance of old cars and a shortage of quality parts. In this situation, AutoZone plans to gain market share by category-management efforts and supply-chain initiatives in the retail segment.

However, we are concerned about rising gas prices, which has an adverse impact on miles driven and lead to deferment of maintenance by the customers. In addition, AutoZone has a high degree of reliance on its private-label brands, which could hinder its commercial business.

Other Stocks to Look For

Currently, O’Reilly Automotive Inc. (ORLY - Analyst Report), with Zacks Rank #2 (Buy), is performing well in the auto parts industry.

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