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What Expanded AutoZone’s Q3 Profit Margins

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AutoZone’s fiscal Q3 earnings

In the previous two parts, we looked at how AutoZone’s (AZO) key business segments fared in the third fiscal quarter. The company’s focus on improving parts availability and customers’ in-store experience has continued to drive commercial growth. Let’s find out how these factors affected AutoZone’s profitability.

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Profit margins

In the third fiscal quarter, AutoZone’s gross profit rose 3.2% YoY (year-over-year) to $1.42 billion from $1.38 billion, and its gross margin expanded to 53.5% from 52.6% YoY and 52.9% sequentially. AutoZone’s adjusted EBIT (earnings before interest and tax) rose to $546 million, and its EBIT margin expanded to 20.5% from 20.2% YoY and 16.7% sequentially. The company’s adjusted net profit margins also expanded in the third fiscal quarter, to 13.8% from 12.7% YoY and 9.8% sequentially.

Key drivers

In the third quarter, AZO’s gross margins improved slightly, primarily due to wider merchandise margins and the sale of two business units. In the last three years, AutoZone has focused on growing its in-store auto part inventories. In the third fiscal quarter, the company’s inventory per store increased by 3.7% YoY to $658,000. However, while replenishment measures improved store inventories, they also raised supply chain costs.

Auto part retailers’ gross profit margins are much wider than those of mainstream automakers (XLY) such as General Motors (GM), Ford (F), and Fiat Chrysler (FCAU), primarily due to fixed and operational costs being higher in the auto manufacturing business. In their most recently reported quarter, peers Advance Auto Parts (AAP) and O’Reilly Automotive (ORLY) reported gross margins of 44.3% and 52.6%, respectively. Continue to the next part to learn about analysts’ expectations for AutoZone’s future earnings.

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