Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member AutoZone, Inc. (AZO) reported net sales of $1.474 billion for its third quarter. Net income for the quarter increased 5.0% over the same period last year to $151.6 million, while diluted earnings per share increased 15.0% to $2.17 per share from $1.89 per share reported in the year-ago quarter.

The earnings compared favorably to analyst estimates, but the revenue was a bit lighter than consensus expectations. A key reason for the disparity appears to be fewer shares:

Under its share repurchase program, AutoZone repurchased 1.9 million shares of its common stock for $244.8 million during the third quarter, at an average price of $128 per share. For the fiscal year to date, the Company has repurchased 3.8 million shares of its common stock for $464.5 million, at an average price of $123 per share.

Inventory levels were slightly higher on a per-store basis, and on the last conference call management suggested the new merchandise assortment would be fully rolled out by this time.  Therefore I expect that topic (along with guidance) to be the dominant topics of discussion on today’s call.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Large Cap Watch List (Track at Marketocracy).

Though less than the Small Cap Watch List and Mid Cap Watch List (Track at Marketocracy), there was still relatively high turnover in this list. 14 of the original 33 names made the cut for the new list (which was trimmed to just 26 names.) Part of the reason for the turnover was to reduce overlap between the lists. One third of the Mid Cap Watch List (Track at Marketocracy) names appear on each of the Small Cap and Large Cap Watch List (Track at Marketocracy)s, but there is no longer any overlap between small and large.
So without further ado, the names on the chopping block from the previous list are:

3M (MMM); Continental (CTTAY.PK); Mitsui (MITSY); Anheuser-Busch (BUD); ConocoPhillips (COP); Helix Energy (HELX); IndyMac Bancorp (NDE - Annual Report); Barr Pharmaceutical (BRL - Annual Report); Quest Diagnostics (DGX); Public Storage (PSA); ITT Educational Services (ESI); Equifax (EFX); Rent-a-Center (RCII); Kroger (KR); Ricoh (RICOY); First Data Corp. (FDC); Expeditors International (EXPD); and Keyspan (KSE).

The new list is:

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Mid Cap Watch List (Track at Marketocracy).

As with the Small Cap Watch List (Track at Marketocracy), we were surprised at the amount of turnover in our screens. Only 7 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Part of the reason for the turnover was to reduce the overlap between the Small Cap and Mid Cap Watch List (Track at Marketocracy)s. Now there is only one-third overlapping names rather than two thirds. Furthermore, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.

So without further ado, the names on the chopping block from the previous list are:

Silgan Holdings (SLGN - Annual Report); Middleby (MIDD); Olin (OLN); Vector Group (VGR); Sanderson Farms (SAFM); Tesoro (TSO); Downey Financial (DSL); Waddell & Reed (WDR); Gamco (GBL); Apria Healthcare (AHG); Quest Diagnostics (DGX); ITT Educational Services (ESI); Equifax (EFX); Delhaize Group (DEG); Papa John’s (PZZA); Rent-a-Center (RCII); Cato Corp (CTR); Dassault Systemes (DASTY); Ingram Micro (IM); Energy East (EAS); South Jersey Industries (SJI - Annual Report); and American States Water (AWR).

The new list is:

Large Cap Watch List (Track at Marketocracy) member AutoZone, Inc. (AZO) reported earnings:

AutoZone, Inc. (NYSE:AZO) today reported net sales of $1.300 billion for its second quarter (12 weeks) ended February 10, 2007, up 3.7% from fiscal second quarter 2006. Same store sales, or sales for stores open at least one year, were down 0.3% for the quarter.Net income for the quarter increased 6.2% over the same period last year to $103.0 million, while diluted earnings per share increased 15.5% to $1.45 per share from $1.25 per share reported in the year-ago quarter.

The revenue was a bit shy of consensus estimates of $1.31 billion, and EPS was right on target - which is generally interpreted as a miss (especially when the market is trading like it did today.) And management did little to assuage fears of a slowing economy, noting on the conference call that:

The in-store sales, or sales per-store open more than one year, were down 0.3% for the quarter. At the start of the quarter, we were cautiously optimistic regarding sales, the price went down in gas, and we were down to around $2.25 a gallon.

And we believed our customers began to feel less pressure on their pocketbooks, but a sales improvement never really materialized when there were similar patterns across all regions of the country…

The company is, however, hopeful regarding a new merchandise mix that is being rolled out:

A second major focus for this year will be product assortment, more specifically, refining our hard-parts assortment to be more responsive to our customer’s needs in both retail and commercial. We have completed our major liner views and are currently rolling these improved steps to our stores. The majority of these new assortments began arriving in our stores in the second quarter and will be substantially complete in the third quarter.

We are always extremely mindful of our working capital levels so we attempt to balance the additions to inventory reductions where appropriate. And we’re proud to report an inventory per store number this quarter under $500,000. This is down approximately $6,000 from last quarter and was achieved at the same time the additional products were being added.

Reducing total inventory while bringing in new products is a noteworthy accomplishment that can have a huge payoff if management is correct in its assessment that the new merchandise will sell better. More efficient inventory management would allow the company to leverage its fixed costs over a larger revenue number, with the potential for significant gross margin improvements. And of course, the reverse applies if managements assessment is incorrect.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.

Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.

With the end of the second quarter a day away, this morning’s announced revisions to first-quarter GDP are old news. Yet they are interesting in light of the differences between the story they tell and today’s other news. As has been the case for some time, the strength in GDP was driven by the consumer. In fact, 3.53 of the 5.6 percentage points of GDP growth were due to increased personal consumption expenditures.

Against this backdrop, Advanced Auto Parts saw its shares plunge as much as 20% early Thursday as the No. 2 U.S. parts retailer slashed its second-quarter profit forecast, citing the impact of soaring gas prices and rising interest rates on customer spending.

“We believe that macroeconomic factors, including higher energy prices, ever-higher interest rates, and higher required credit-card payments are further reducing discretionary income for our lower- and middle-income customers and has unfavorably impacted customer traffic,” said Chairman and CEO Mike Coppola.

The weakness also affected other companies in the industry, including our Watch List component Autozone.

Consumers most likely to be buying their own auto parts tend to be those at the lower end of the income spectrum, where higher interest rates and gas prices hurt the most. Yet buyers of new cars are also stepping back, as the New York Times reports.  More »