AutoZone Inc. ( AZO - Analyst Report ) posted an 18.7% rise in earnings per share to $6.28 in the third quarter of fiscal 2012 ended May 5, 2012 from $5.29 in the third quarter of fiscal 2011. With this, it exceeded the Zacks Consensus Estimate by a penny. In absolute terms, profits were $248.6 million in the reported quarter, up 9.3% compared with $227.4 million in the year-ago quarter.

The company’s revenues for the quarter came in at $2.1 billion, up 6.7% compared with $2 billion in the year-ago quarter. However, it was in line with the Zacks Consensus Estimate. Domestic same-store sales (sales for stores open at least one year) increased 3.9% during the quarter.

AutoZone reported a 51.6% gross margin compared with 51.2% in the last year’s quarter. The improvement in margins was driven by lower shrinkage expenses and leveraging distribution costs (25 basis points) due to increase in sales.

Operating expenses as a percentage of sales is 31.4. Operating expenses as a percentage of sales were positively affected by decrease in incentive compensation (31 basis points), which was partially offset by a rise in self insurance cost (23 basis points).

Store Opening and Inventory

AutoZone opened 33 new stores in the U.S. and 10 new stores in Mexico with relocation of 3 stores in the U.S. As of May 5, 2012, the company had 4,613 stores in 48 states, the District of Columbia and Puerto Rico in the U.S. and 297 stores in Mexico.

AutoZone’s inventory went up 5.5% in the quarter. The increase is attributable to rise in store count and continuous investment in hard parts assortment. Inventory per store increased marginally by 1.6% to $536 thousand from $527 thousand in the corresponding quarter of prior year.

Share Repurchase

AutoZone repurchased 1.1 million shares of common stock under its existing share repurchase program. With an average price of $380, the company invested $400 million during the quarter for share repurchases. At the end of the quarter, the company had $836 million remaining under the current share repurchase authorization.

Financial Position

The company had cash and cash equivalents of $103.1 million as of May 5, 2012, up from $100.4 million as of May 7, 2011. Total debt amounted to $3.6 billion as of May 5, 2012 compared with $3.2 billion as of May 7, 2011. The company had a stockholder deficit of $1.4 billion as of May 5, 2012, up from $1.1 billion recorded as of May 7, 2011.

In the first nine months of fiscal 2012, the company had net cash flow of $631.6 million before share repurchases and changes in debt compared with $727.1 million in the same period last year. Capital spending increased to $228.3 million from $200.6 million in the year-ago period.

Our Take

AutoZone is a leading retailer and distributor of automotive replacement parts & accessories with stores in the U.S. and Mexico. The company is focused on aggressive share repurchase program along with expansion of hub stores.

It also possesses growth opportunities from rising demand for autoparts led by higher average age of vehicles on road. However, rising gas prices and stiff competition from O’Reilly Automotive Inc. ( ORLY - Analyst Report ) and Advance Auto Parts Inc. ( AAP - Analyst Report ) is a threat to the company. As a result, it retains a Zacks #3 Rank on its shares, which translates into a short-term Hold rating.