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Why AutoZone’s Profit Margins Could Remain Weak in Fiscal 1Q18

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AutoZone’s profitability

Previously, we looked at some key reasons why AutoZone’s (AZO) revenues could witness positive growth in fiscal 1Q18. However, analysts’ estimates suggest that the company’s fiscal 4Q17 margins could remain weak.

In fiscal 4Q17, AZO reported a gross profit margin of 52.8%, about 2 basis points lower than its gross profit margin in fiscal 4Q16. Similarly, AutoZone’s EBIT (earnings before interest and tax) margin fell to 20.1% in fiscal 4Q17 compared to 20.7% in fiscal 4Q16.

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Fiscal 1Q18 profit margin estimates

According to Wall Street analysts’ consensus estimates, AZO is expected to report a gross profit margin of 52.5% in fiscal 1Q18. This would be marginally lower than its 52.7% gross profit margins reported in fiscal 1Q17.

Similarly, the company’s fiscal 1Q17 EBIT margins are estimated to shrink to 18.2% compared to 18.6% in fiscal 1Q16.

As we discussed in the previous part, recent softness in AutoZone’s Domestic DIY segment’s sales could keep its profit margins mixed to negative in fiscal 1Q18.

Other key factors to watch

In fiscal 4Q17, AZO’s profit margins suffered due to higher supply chain costs. These supply chain costs have risen gradually in the last few quarters due to new store openings and other recent initiatives taken by the company.

The company’s management’s clear focus on maintaining low acquisition costs could provide a cushion for the company’s profitability.

Gross margins of auto parts retail companies are typically much higher than those posted by auto manufacturers. Higher fixed costs in machinery and plants cut into auto manufacturers’ (IYK) profitability. This is the key reason why AutoZone’s margins are much higher than those of auto giants Ford (F), General Motors (GM), and Fiat Chrysler (FCAU).

Continue to the next part for a look at some of AutoZone’s key ratios ahead of its fiscal 1Q18 earnings report.

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