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Why Did AutoZone’s Margins Fall in 3Q17?

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AutoZone’s fiscal 3Q17 earnings

AutoZone’s (AZO) focus on improving part availability and in-store experience remains intact. But its retail business traffic count dropped in fiscal 3Q17. In fiscal 3Q17, AutoZone’s gross margin remained weak on a YoY (year-over-year) basis at 52.6%, which represents a fall of about 21 basis points from 52.8% in fiscal 3Q16.

AZO’s EBIT (earnings before interest and tax) in fiscal 3Q17 stood at $530 million, with an EBIT margin of 20.2%, which is lower than its 20.7% in fiscal 3Q16.

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AZO’s higher supply chain costs

In the third quarter, the company’s margins witnessed a fall primarily due to higher supply chain costs during the quarter. In the past two years, AutoZone has shifted its focus toward higher inventories of auto parts at its stores. These measures have improved the availability of inventory in its stores but have also increased its related supply chain costs, and higher supply chain costs have negatively affected AutoZone’s profitability for the past several quarters.

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

Now let’s examine a few key highlights from AutoZone’s fiscal 3Q17 earnings call.

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