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Will AutoZone’s Margins Expand in 1Q17?

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AutoZone’s margins

Previously, we looked at some reasons why AutoZone’s (AZO) 1Q17 revenues could witness positive growth. On a similar note, analysts’ estimates suggest that the company’s margins could also expand in its first quarter, which ended November 19, 2016. According to these estimates, AutoZone’s first quarter gross margins will be at 52.7%, up 20 basis points from its gross margin in 1Q16.

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Expansion in net profit margins

Likewise, AZO’s 1Q17 EBITDA (earnings before interest, tax, depreciation, and amortization) margins are expected to be at 21.3%, up by 20 basis points YoY (year-over-year). The company’s 1Q net profit margins for this year are also likely to be stronger at 11.0% from 10.8% a year ago.

As discussed in the previous part, continued strength in retail and DIY (do-it-yourself) operations could help the company expand its margins in 1Q17.

Other key factors to watch

In the last few quarters, AutoZone’s margins have benefited from lower acquisition costs. At the same time, the company’s supply chain costs have increased due to new store openings and other initiatives. Moreover, AutoZone management’s clear focus on maintaining acquisition costs on the lower side could continue to provide a cushion to higher supply chain costs.

Note that in the auto parts retail business, profit margins typically tend to be higher than the auto manufacturing business. Higher fixed costs in plant and machinery significantly affect automakers’ (IYK) margins. This is the reason why AutoZone’s and Advanced Auto Parts’ (AAP) margins are much higher than of automakers such as General Motors (GM), Ford (F), and Fiat Chrysler (FCAU).

In the next part, we’ll take a look at some of AutoZone’s key ratios ahead of its 1Q17 earnings report.

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