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Advance Auto Parts Stock Accelerated on 3Q17 Earnings Beat

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Part 3
Advance Auto Parts Stock Accelerated on 3Q17 Earnings Beat PART 3 OF 7

Advance Auto Parts’ Profit Margins Fell in Fiscal 3Q17

Advance Auto Parts’ fiscal 3Q17 earnings

Previously, we looked at Advance Auto Parts’ (AAP) fiscal 3Q17 revenues. Earlier this year, the company implemented availability transformation program in 400 of its stores to improve parts availability on demand and improve the in-store experience for the customers.

In 2H17, AAP plans to expand this availability transformation program to another 600 stores in order to encourage positive sales growth. Now, let’s look at Advance Auto Parts’ margins in the third quarter.

Advance Auto Parts&#8217; Profit Margins Fell in Fiscal 3Q17

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AAP’s profit margins in fiscal 3Q17

In fiscal 3Q17, AAP’s gross profit stood at $948.0 million, about 4.1% lower than its gross profit of $988.0 million in fiscal 3Q16. With this, the company’s gross profit margin also shrank to 43.4% in fiscal 3Q17 from 43.9% in fiscal 3Q17.

Likewise, Advance Auto Parts’ operating profit stood at $157.0 million with an operating profit margin of 7.2% in fiscal 3Q17. This operating profit margin was significantly lower than 8.6% in fiscal 3Q16.

Weakness continued

In fiscal 3Q17, Advance Auto Parts’ profit margins witnessed a negative trend due to factors such as higher supply chain costs and non-cash impact of inventory optimization efforts. In contrast, improved material costs acted as a tailwind to AAP’s fiscal 3Q17 profitability.

During its fiscal 2Q17 earnings conference call, the company’s management suggested that its inventory reduction efforts could negatively affect its gross margins in the coming quarters. At the same time, these inventory reduction efforts could help the company boost its cash flows.

In general, the gross profit margins of auto part retailers including Advance Auto Parts are much higher than legacy auto companies (XLY) such as Ford (F), General Motors (GM), and Fiat Chrysler (FCAU). This is mainly due to significantly higher fixed costs involved in the auto manufacturing sector. In fiscal 3Q17, Ford, GM, and Fiat Chrysler reported adjusted gross profit margins of 10.7%, 12.6%, and 15.4%, respectively

Read on to the next part to learn what analysts are estimating for AAP’s upcoming earnings.

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