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What Factors Boosted Advance Auto Parts’ Profit Margins in Q1?

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Advance Auto Parts’ Q1 earnings

In the previous part of this series, we looked at Advance Auto Parts’ (AAP) first-quarter sales. In 2017, the company implemented an availability transformation program in 600 of its stores to improve parts availability and customers’ in-store experience. In its Q1 earnings conference call, AAP’s CEO Thomas Greco said the company is “applying learnings from availability transformation stores to assortment, inventory positioning and broader supply chain initiatives.”

Let’s take a look now at Advance Auto Parts’ margins in the first quarter.

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AAP’s Q1 2018 profit margins

In the first quarter, AAP’s gross profit remained nearly flat at $1.3 billion with a minor increase of 0.1% YoY (year-over-year). It improved to 44.3% in the first quarter from 44% a year ago and 42.9% in the fourth quarter.

Its adjusted operating profit was $224 million with an operating profit margin of 7.8% in the first quarter. It was significantly better than 7.1% in the first quarter of 2017 and 5.6% in the fourth quarter of 2017.

What boosted margins

In 2017, the company’s profit margins continued a negative trend due to higher supply chain costs and the non-cash impact of inventory optimization efforts. In contrast, improved material costs acted as a tailwind to its profit margins last year.

In the first quarter, a reduction in material costs and related items was the main reason the company expanded its profit margins.

In general, the gross profit margins of auto parts retailers are much higher than legacy automakers (XLY) such as Ford (F), General Motors (GM), and Fiat Chrysler (FCAU). That’s mainly due to significantly higher fixed costs in the auto manufacturing business.

In their most recent quarters, AAP’s peers AutoZone (AZO) and O’Reilly Automotive (ORLY) reported gross margins of 53.5% and 52.6%, respectively.

Next, let’s see what analysts are estimating for AAP’s upcoming earnings.

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