O’Reilly Automotive, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
O’Reilly Automotive 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, 2021, with comparable periods in 2020. As of June 30, 2021, the Company operated 5,710 U.S. stores and 22 stores in Mexico.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $3.466 billion | $3.092 billion | $6.557 billion | $5.568 billion |
| Gross profit | $1.826 billion | $1.637 billion | $3.467 billion | $2.933 billion |
| Gross margin | 52.7% | 53.0% | 52.9% | 52.7% |
| Operating income | $796 million | $736 million | $1.487 billion | $1.160 billion |
| Operating margin | 23.0% | 23.8% | 22.7% | 20.8% |
| Net income | $585 million | $532 million | $1.087 billion | $832 million |
| Diluted EPS | $8.33 | $7.10 | $15.39 | $11.06 |
| Net cash from operations | Not separately provided | Not separately provided | $1.713 billion | $1.559 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.472 billion | $1.213 billion |
Q2 comparable-store sales increased 9.9%; six-month comparable-store sales increased 16.5%. Sales growth reflected higher average ticket values and transaction counts, store expansion, favorable weather, market reopening, government stimulus and enhanced unemployment benefits.
At June 30, 2021, cash and cash equivalents were $631.6 million, inventory was $3.647 billion, total assets were $11.949 billion and shareholders’ equity was $217.7 million. Long-term debt was $3.825 billion, consisting of $3.850 billion of principal less unamortized discount and issuance costs. The Company had no borrowings under its revolving credit facility, although outstanding letters of credit totaled $84.0 million.
Material changes versus the prior comparable period
- Q2 sales increased 12%, operating income increased 8%, net income increased 10% and diluted EPS increased 17% year over year.
- For the first six months, sales increased 18%, operating income increased 28%, net income increased 31% and diluted EPS increased 39%.
- Q2 gross margin declined 30 basis points because of a higher professional-customer sales mix and increased distribution costs, including labor and supply-chain pressures. Six-month gross margin increased 20 basis points because of a higher DIY sales mix.
- Q2 SG&A increased 14% and rose to 29.7% of sales from 29.1%, reflecting additional personnel, facilities and vehicles and unusually low prior-year expenses. Six-month SG&A fell to 30.2% of sales from 31.8%.
- Operating cash flow increased $154 million to $1.713 billion for the six months. Capital expenditures declined to $222.6 million from $244.5 million.
- The Company redeemed $300 million of 4.625% senior notes due 2021 and entered into a new five-year, $1.8 billion unsecured revolving credit facility maturing in June 2026.
- Share repurchases increased to $1.064 billion for the six months from $651 million in the prior-year period, reducing shares outstanding to 69.1 million at June 30, 2021, from 71.1 million at December 31, 2020.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative full-year revenue, earnings or comparable-store-sales guidance. Management expects operating cash flow and revolving-credit availability to fund short- and long-term liquidity needs, while noting that future cash generation and liquidity could be affected by the COVID-19 pandemic and economic disruption.
- Management cited continued market reopening, vaccinations, stimulus payments, enhanced unemployment benefits, favorable weather, increasing vehicle age and growth in miles driven as positive demand factors.
- Key risks include COVID-19 and other public-health events, inflation, labor and supply-chain constraints, product availability, competition, consumer demand, weather, tariffs, cybersecurity, employee retention, international operations and elevated debt levels.
- The new credit agreement requires a minimum consolidated fixed-charge coverage ratio of 2.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00. Actual ratios at June 30, 2021 were 6.58:1.00 and 1.66:1.00, respectively, and the Company was in compliance with its covenants.
- The Company agreed to make approximately $160 million of additional capital contributions to a renewable-energy tax-credit fund upon achievement of project milestones; timing is variable and outside the Company’s control. Its maximum exposure to losses from unconsolidated tax-credit VIEs was $20.3 million at June 30, 2021.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect, taking into account insurance and accruals. No material changes to previously disclosed risk factors or contractual obligations were reported.
- Subsequent to quarter-end through August 6, 2021, the Company repurchased 0.3 million shares for $169.0 million at an average price of $596.11.
Most important facts for investors to verify
- Whether strong comparable-store sales and transaction growth persist after the expiration of stimulus benefits and further normalization of customer behavior.
- The effect of labor shortages, distribution costs, inflation and global supply-chain constraints on gross margins and inventory availability.
- The pace and return on new-store openings and continued market-share gains across DIY and professional customers.
- Future share repurchases relative to cash generation, debt maturities and the Company’s low reported shareholders’ equity.
- Timing and cash requirements associated with the approximately $160 million renewable-energy tax-credit commitment.
- Compliance with debt covenants and refinancing requirements for senior notes due from 2022 through 2031.