O’Reilly Automotive, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
O’Reilly is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service-provider customers in the United States and Mexico. The filing covers the three and six months ended June 30, 2022; financial statements are unaudited. At quarter-end, the company operated 5,873 U.S. stores and 27 Mexico stores.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $3.671 billion | $3.466 billion | $6.967 billion | $6.557 billion |
| Gross profit / margin | $1.885 billion / 51.3% | $1.826 billion / 52.7% | $3.593 billion / 51.6% | $3.467 billion / 52.9% |
| Operating income / margin | $799 million / 21.8% | $796 million / 23.0% | $1.468 billion / 21.1% | $1.487 billion / 22.7% |
| Net income / margin | $577 million / 15.7% | $585 million / 16.9% | $1.059 billion / 15.2% | $1.087 billion / 16.6% |
| Diluted EPS | $8.78 | $8.33 | $15.94 | $15.39 |
| Operating cash flow | Not separately presented | Not separately presented | $1.392 billion | $1.713 billion |
| Free cash flow | Not separately presented | Not separately presented | $1.153 billion | $1.472 billion |
- Q2 comparable-store sales increased 4.3%; six-month comparable-store sales increased 4.5%.
- Professional service-provider sales increased 13.5% in Q2 and 13.2% year to date, while do-it-yourself sales increased 0.6% in Q2 and 1.3% year to date.
- Cash and cash equivalents were $253.9 million at June 30, 2022, compared with $362.1 million at December 31, 2021.
- Inventory increased to $4.005 billion from $3.686 billion at year-end 2021, reflecting initiatives to increase store-level inventory.
- Capital expenditures were $228.9 million for the six months, compared with $222.6 million in the prior-year period.
- Long-term debt was $4.670 billion, including $4.700 billion of principal senior notes, net of discount and issuance costs. The company had no revolving-credit borrowings and $1.8 billion of committed revolving capacity, reduced by $48.0 million of letters of credit.
- Shareholders’ deficit was $1.107 billion at June 30, 2022, compared with a deficit of $66.4 million at December 31, 2021, primarily reflecting $2.151 billion of share repurchases during the first six months.
Material changes versus the prior comparable period
- Q2 sales rose 6%, but gross margin declined 140 basis points to 51.3%. Management attributed the margin pressure primarily to the professional pricing initiative and the higher mix of lower-margin professional sales.
- Q2 operating income increased less than 1%, while operating margin declined 120 basis points. Six-month operating income decreased 1% and operating margin declined 160 basis points.
- Q2 net income declined 1% and six-month net income declined 3%, although diluted EPS increased 5% and 4%, respectively, because the weighted-average diluted share count fell to approximately 66 million from 70 million.
- SG&A increased 5% in Q2 and 7% year to date. Year-to-date pressure reflected higher payroll, benefits and fuel costs; Q2 SG&A as a percentage of sales was slightly lower due partly to lower accrued incentive compensation.
- Operating cash flow declined $321 million year to date, primarily because of greater inventory investment and changes in accrued payroll and benefits. Free cash flow declined $319 million.
- On June 15, 2022, the company issued $850 million of 4.700% senior notes due 2032. Total principal debt increased from $3.850 billion at year-end 2021 to $4.700 billion.
- The company repurchased 3.386 million shares for $2.151 billion during the first six months, compared with 2.218 million shares for $1.064 billion in the prior-year period. Approximately $1.4 billion remained authorized at June 30.
Guidance, outlook, commentary and risks
- Management expects 175 to 185 net new store openings in 2022. The company opened 114 net new U.S. stores and two Mexico stores during the first six months.
- Management cited favorable long-term demand factors, including an aging vehicle fleet, higher vehicle complexity, improving miles driven and continued vehicle scarcity. It also stated that strong supplier relationships and distribution capabilities supported inventory availability despite industry supply-chain disruption.
- Inflation, wage and fuel costs, interest rates, consumer purchasing power, supply-chain disruptions, product availability, labor conditions, competition, weather, tariffs, public-health events, cybersecurity, geopolitical events and increased debt levels could adversely affect results.
- DIY transaction counts declined, partly because of difficult comparisons with stimulus-supported 2021 demand and inflationary pressure. Professional transaction counts were positive.
- The company was in compliance with its debt covenants. The fixed-charge coverage ratio was 6.89 times against a 2.50-times minimum, and the consolidated leverage ratio was 1.84 times against a 3.50-times maximum.
- Litigation is ordinary-course in nature; management does not currently expect aggregate matters, after insurance and accruals, to materially affect financial position, results or cash flows. No material changes to previously disclosed risk factors were reported.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Most important facts for investors to verify
- Whether professional pricing investments and mix changes continue to pressure gross margin.
- Whether inventory growth converts into sustained sales and operating-cash-flow improvement.
- The effect of higher debt and interest rates, including the company’s ability to refinance the $300 million notes due in 2022 and $300 million notes due in 2023.
- The pace and economics of the planned 175–185 store openings and continued Mexico expansion.
- The sustainability of comparable-store sales growth as DIY transactions remain pressured.
- The balance between substantial share repurchases, liquidity needs, capital expenditures and debt reduction.
- Subsequent share repurchases: the company repurchased an additional 0.5 million shares for $311.8 million through August 8, 2022.