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On Mar 10, we maintained our Neutral recommendation on AutoZone Inc. (AZO - Analyst Report), despite rising gas prices and the company’s heavy reliance on its private label brands as we are mainly encouraged with the company’s aggressive share repurchase program, expansion of hub stores as well as better performance in the second quarter of fiscal 2013.

Why Maintained?

AutoZone’s earnings increased 15.2% to $4.78 per share in the second quarter of fiscal 2013 ended on Feb 9, 2013 from $4.15 in the year-ago quarter. Earnings per share surpassed the Zacks Consensus Estimate by 4 cents. AutoZone’s revenues for the quarter increased 2.8% to $1.86 billion, marginally missing the Zacks Consensus Estimate of $1.88 billion.

Following the release of the second quarter results, the Zacks Consensus Estimate for fiscal 2013 decreased marginally by 0.1% to $27.54 per share. The Zacks Consensus Estimate for fiscal 2014 also went down 0.2% to $30.96 per share. Currently, AutoZone retains a Zacks Rank #3 (Hold).

AutoZone aggressively focuses on store opening strategy every year. In fiscal 2012, the company opened 72 new stores in the U.S and 24 new stores in Mexico. In the last quarter, AutoZone opened 32 new stores in the U.S, and 9 new stores in Mexico. As of Feb 9, 2013, the company had 4,735 stores in 49 states, the District of Columbia and Puerto Rico in the U.S., 334 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 fourth quarter of 2012, it opened 67 stores, including 8 Autopart International stores. The company opened 137 stores in 2012, including 21 Autopart International stores.

AutoZone benefits from the rising demand for auto parts with the growing age of vehicles on road. Revenues from Mexico benefited from the abundance of old cars and a shortage of quality parts. With 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 have an adverse impact on miles driven and lead to deferment of purchases 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

Few stocks that are also performing well in the industry where AutoZone operates are O’Reilly Automotive Inc. (ORLY - Analyst Report) and CarMax Inc. (KMX - Analyst Report). O'Reilly is a Zacks Rank #1 (Strong Buy) stock while CarMax is a Zacks Rank #2 (Buy) stock.

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