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Why O’Reilly Automotive’s Profit Margins Contracted in 3Q17

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Dec. 4 2020, Updated 10:53 a.m. ET

O’Reilly Automotive’s 3Q17 earnings

Previously, we looked at O’Reilly Automotive’s (ORLY) 3Q17 revenues. The company managed to report a ~5% increase in its revenues, but its 3Q17 same-store sales growth rate fell as compared to 3Q16. ORLY plans to expand this reach by opening 200 new stores in fiscal 2018, which should help the company to grow its sales. Now, let’s move on by looking at O’Reilly Automotive’s profit margins in the third quarter.

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ORLY’s 3Q17 profit margins

In 3Q17, ORLY’s gross profit stood at $1.23 billion, about 5.1% higher than the $1.17 billion in the third quarter of 2016. With this, the company’s gross profit margin remained flat with a minor negative change to 52.6% in 3Q17 from 52.7% a year ago.

O’Reilly Automotive’s operating profit stood at $462 million with an operating profit margin of 19.7% in 3Q17. This operating profit margin was significantly lower than 20.2% in 3Q last year. Similarly, the company’s 3Q17 net profit for the quarter rose 1.9% to $284 million in the third quarter with a net profit margin of 12.1%, which reflected a weakness from ORLY’s net profit margin of 12.5% in 3Q16.

Could margins improve going forward?

According to Wall Street analysts’ consensus estimates, O’Reilly’s gross profit margin could remain flat on a YoY (year-over-year) basis in the upcoming quarters. Analysts estimate the company’s 4Q17 gross profit margins to be at 53.2% as compared to 53.1% in 4Q16. Likewise, estimates suggested that its 1Q18 gross profit margins could be at 52.6% as compared to 52.5% in the first quarter of 2017.

Interestingly, the gross profit margins of auto part retailers including O’Reilly Automotive are much higher than legacy auto companies (IYK) like General Motors (GM), Ford (F), and Fiat Chrysler (FCAU). Higher fixed costs involved in the vehicle manufacturing business are one of the key factors that could hurt automakers’ profitability.

Continue to the next part to learn how ORLY’s valuation multiples look going into 4Q17.

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