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Why Wall Street Expects AutoZone’s Margins to Stay Flat

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AutoZone’s profit margins

Previously, we looked at some key reasons why AutoZone’s (AZO) revenues could continue to witness positive growth in 2Q18. However, analysts’ estimates suggest the company’s second-quarter margins could remain flat. In fiscal 1Q18, AZO reported gross profit margins of 52.75%, nearly flat compared to its gross profit margin of 52.74% in fiscal 1Q17. Similarly, AutoZone’s adjusted EBIT (earnings before interest and tax) margin fell to 18.10% in fiscal 1Q18, compared to 18.60% in fiscal 1Q17.

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Estimates for fiscal 2Q18 margins

According to Wall Street analysts’ consensus estimates, AZO is expected to report gross profit margins of 52.81% in fiscal 2Q18, which would be marginally higher than its 52.66% gross profit margins reported a year ago.

Moreover, the company’s fiscal 2Q18 EBIT margins are estimated to shrink to 16.56%, down from 16.77% in fiscal 2Q17.

As we discussed in the previous part of this series, recent softness in AutoZone’s home market DIY segment sales could keep its profit margins mixed to negative in fiscal 2Q18.

Key factors to watch

In the most recent quarters, AutoZone’s profit margins continued to suffer due to higher supply chain costs. These supply chain costs have gone up gradually in the last few quarters due to new store openings and other recent initiatives.

At the same time, AZO’s management’s clear focus on keeping acquisition costs low could continue to provide a cushion for profit margins.

Gross margins for auto parts retail companies are typically much higher than automakers’. Higher fixed costs in machinery and plants badly hurt auto manufacturers’ (FXD) profits. This could be the key reason why AutoZone’s margins are much higher than auto giants’, including Ford (F), General Motors (GM), and Fiat Chrysler (FCAU).

Read on to the next part of this series, where we’ll take a look at AutoZone’s key ratios ahead of its fiscal 2Q18 earnings report.

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