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What Factors Affected AutoZone’s Profitability in Fiscal 3Q16?

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AutoZone’s profitability

Previously, we looked at how AutoZone’s (AZO) revenues increased in 3Q16. The company’s focus on improving parts availability and lower overall gas prices helped it post higher revenues. In this part of the series, we’ll take a look at what factors affected AutoZone’s profitability in fiscal 3Q16. First, let’s take a look at the company’s margins.

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AutoZone’s margins

In fiscal 3Q16, AutoZone reported a solid gross margin of 52.8%, slightly higher than 52.3% in the corresponding quarter of the previous year. The company’s margins witnessed positive growth due to higher merchandise margins during the quarter.

AZO’s EBITDA (earnings before interest, tax, depreciation, and amortization) margin stood at 23.3% in fiscal 3Q16, higher than 23.1% in fiscal 3Q15.

However, there were several factors that restricted positive growth in AutoZone’s margins. Let’s take a look at those factors.

Higher supply chain costs

In the last couple of years, AutoZone has been focusing on higher inventories of auto parts at its stores. These replenishment measures have certainly improved the availability of inventory but have also increased related supply chain costs for the company. These higher supply chain costs have negatively affected AutoZone’s profitability in the last several quarters.

Note that the profitability of auto parts sellers, including AutoZone, is much higher than mainstream automakers (IYK) such as General Motors (GM), Ford (F), and Fiat Chrysler (FCAU). This is primarily due to significantly higher fixed costs involved in the auto manufacturing business.

Currency headwinds

In fiscal 3Q16, AutoZone’s profitability was negatively affected by the recent devaluation of the Mexican peso and the Brazilian real against the US dollar. Note that the Mexican peso and the Brazilian real against the US dollar have devalued ~18% and ~17%, respectively, in the last year. So the company’s profitability from these two important markets has contracted during that period.

During AutoZone’s fiscal 3Q16 earnings conference call, the company’s chief financial officer, William T. Giles, said, “While we cannot control movements in functional currency versus planned assumptions, the Mexico leadership team continues to do an exceptional job managing the peso-denominated business. If the peso stays at these elevated levels, it will continue to pressure our US dollar earnings into the fall.”

Read on to the next part to see what analysts are recommending for AutoZone after its fiscal 3Q16 results.

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