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UPDATE 3-Delayed tax refunds weigh on AutoZone sales

* Second-quarter earnings $4.78/share vs est $4.76

* Revenue $1.86 billion vs est $1.88 billion

* Sees faster growth in second half of fiscal 2013

* Shares fall 1.5 percent

By Sagarika Jaisinghani

Feb 26 (Reuters) - AutoZone Inc, the largest U.S. auto parts retailer, reported a 1.8 percent drop in domestic same-store sales as delayed tax refunds and the lingering effects of a mild winter last year reduced demand.

Auto parts retailers have been hurt over the last year as a warmer-than-normal winter resulted in less wear and tear on cars, reducing the need to replace parts.

The company said sales usually increase significantly during the final two weeks of the second quarter. But this year total domestic same-store sales fell 8 percent in that two-week period.

"Our belief is the approximate two-week delay in processing of income tax returns this year was the key contributor to this decline in sales," Chief Executive Bill Rhodes said.

The U.S. Internal Revenue Service delayed the start of tax filing in 2013 following political wrangling in Washington over the "fiscal cliff". Last-minute and retroactive tax law changes meant it was unable to process any returns filed before Jan. 30, delaying some refunds.

"We continue to see slower growth ahead (for AutoZone) despite historically strong execution," Morgan Stanley analyst David Gober wrote in a note to clients.

Gober added that near-term headwinds for lower-income households would likely limit growth in the company's do-it-yourself business, which accounts for about 85 percent of the its revenue.

The tax refunds of some lower-income Americans are arriving later than expected due in part to a closer scrutiny of claims by the IRS.

However, AutoZone, which sells to both home mechanics and commercial repair shops, said it would grow faster in the second half of the fiscal year as it expects the severe winter to drive up auto repairs.

The company said there was some improvement in its northeast and midwest markets in the second quarter ended Feb. 9, but they were still "negative" and about 500 basis points worse than the western and southern markets.

The market is expecting demand for auto parts in the region to rise as the U.S. Northeast has been hammered by a slew of snowstorms since November.

AutoZone said gross margins rose to 51.9 percent in the quarter from 51.3 percent in the year-ago quarter, as it spent less on parts it bought.

Net income rose to $176.2 million, or $4.78 per share, in the second quarter, from $166.9 million, or $4.15 per share, a year earlier.

Revenue rose 3 percent to $1.86 billion.

Analysts on average expected earnings of $4.76 per share on revenue of $1.88 billion, according to Thomson Reuters I/B/E/S.

AutoZone's shares were down 1.5 percent at $372.55 on Tuesday on the New York Stock Exchange.

"It will take the visibility of improving (same-store sales) comparisons to move the stock higher," Stephens Inc analyst John Lawrence said, adding that the comparisons are likely to get better in the second half of 2013.