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AutoZone (AZO -3%) drove right through Q3 (May) earnings estimates, a frequent occurrence for the aftermarket auto parts retailer. However, by delivering revenue growth short of the consensus, a rarity for AZO, its shares are under modest selling pressure today.

• AZO seldom misses bottom-line estimates, registering decent-sized upside for over five years. However, AZO's beat in Q3 was its slimmest since its pandemic quarter. Similarly, AZO missed revenue estimates just once over that same timeframe, making its sales shortfall in Q3, recording growth of 3.6% yr/yr to $4.24 bln, somewhat surprising.
• Underpinning the lighter-than-anticipated revenue growth was a deceleration in domestic same-store sales growth from +0.3% in Q2 (Feb) to flat in Q3. With AZO exiting the previous quarter with upward momentum, as its domestic business enjoyed a +4.4% comp during the last four weeks of Q2, its flat comps in Q3 are deflating.
• Driving the domestic weakness were tax refund delays and cooler-than-usual weather across many parts of the country. These trends resembled what rival O'Reilly Automotive (ORLY) discussed last month, noting that while the tax refund delays moderated toward the beginning of March, unseasonably cool weather posed another headwind. ORLY stated that as of its Q1 (Mar) earnings call on April 25, the unfavorable weather-related trends had stuck around, keeping it from enjoying a usual uptick in demand to start the spring season.
  • However, given ORLY's warnings, the market likely expected similar developments to negatively affect AZO in Q3, particularly on the DIY side, as gloomy weather prevents customers from working on their cars in the driveway or garage.
• On a more positive note, AZO's international business, which saw explosive +18.1% comp growth in Q3, helped pull total company comps firmly in positive territory at +1.9%, a decent acceleration from the +1.5% posted last quarter. AZO has not let off the gas surrounding its expansion in Mexico and Brazil, opening 13 new stores across both regions in Q3 to bring its total to 763 in Mexico and 109 in Brazil.
  • ORLY is also penetrating the Mexican market, commanding around 60 stores south of the border. ORLY mentioned how fragmented the market is in Mexico and how lucrative the opportunities are, citing the average age of vehicles in the region at over 16 years compared to around 12 in the U.S. However, given AZO's considerable lead over ORLY, it commands a much firmer position to capitalize on the opportunities presented in Mexico.
• Looking ahead, AZO does not tend to issue formal guidance. Instead, management provided some commentary, expressing excitement over the start of the summer selling season and healthy inventory availability.

Facing similar headwinds as ORLY, AZO's Q3 results were uninspiring, sparking modest selling activity today. Still, with much of the challenges encountered during the quarter attributed to tax refunds and weather, instead of structural demand weakness, AZO remains poised to break free from consolidation.