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Analyzing Advance Auto Parts’ Profit Margin in Q2 2018

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Advance Auto Parts’ second-quarter earnings

In the previous part, we discussed Advance Auto Parts’ (AAP) second-quarter sales. In the second quarter, the company’s revenues and comp sales improved significantly. Now, we’ll discuss Advance Auto Parts’ margins in the second quarter.

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Second-quarter profit margin

In the second quarter, Advance Auto Parts’ gross profit rose 1.9% year-over-year to $1.01 billion. The company’s gross profit margin fell to 43.5% in the second quarter from 43.9% the previous year.

Higher supply chain costs due to higher transportation and fuel expenses impacted the company’s gross profit margin in the last quarter.

Advance Auto Parts’ operating profit was at $168 million with an operating profit margin of 7.2% in the second quarter. The operating profit margin was significantly better than 6.5% reported in the second quarter of 2017. Similarly, the adjusted net profit margin improved to 6.3% in the second quarter—compared to 5.2% in the second quarter of 2017.

What boosted the profit margin?

In 2017, Advance Auto Parts’ profit margin continued to witness 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 tailwinds to Advance Auto Parts’ profit margins last year.

In the first half of 2018, the company’s operating profit margin improved. Advance Auto Parts raised its 2018 operating margin guidance to 7.5% from 7.3%, which reflects optimism.

In general, auto parts retailers’ gross profit margins are much higher than legacy auto companies (XLY) like Ford (F), General Motors (GM), and Fiat Chrysler (FCAU). There are significantly higher fixed costs involved in the auto manufacturing business. Advance Auto Parts’ direct US peers,  O’Reilly Automotive (ORLY) and AutoZone (AZO) reported gross margins of 52.5% and 53.5%, respectively.

Next, we’ll discuss what analysts expect for Advance Auto Parts’ upcoming earnings.

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