O’Reilly Automotive, Inc. — FY2021 Form 10-K 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. The filing covers the fiscal year ended December 31, 2021, with quarterly information for the fourth quarter included. At year-end, the Company operated 5,759 U.S. stores in 47 states and 25 stores in Mexico, supported by 28 domestic distribution centers and 375 Hub stores.
Approximately 59% of 2021 sales came from DIY customers and 41% from professional service provider customers. The Company operates as one reportable segment.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Sales | $13.33 billion | $11.60 billion | +15% |
| Comparable store sales | +13.3% | +10.9% | +2.4 percentage points |
| Gross profit | $7.02 billion | $6.09 billion | +15% |
| Gross margin | 52.7% | 52.4% | +0.3 percentage points |
| Operating income | $2.92 billion | $2.42 billion | +21% |
| Operating margin | 21.9% | 20.8% | +1.1 percentage points |
| Net income | $2.16 billion | $1.75 billion | +24% |
| Net margin | 16.2% | 15.1% | +1.1 percentage points |
| Diluted EPS | $31.10 | $23.53 | +32% |
| Cash flow from operations | $3.21 billion | $2.84 billion | +13% |
| Capital expenditures | $442.9 million | $465.6 million | Down |
| Free cash flow | $2.55 billion | $2.19 billion | +16% |
| Total debt | $3.83 billion | $4.12 billion | Down $296.2 million |
| Cash and equivalents | $362.1 million | $465.6 million | Down $103.5 million |
Fourth-quarter 2021 sales were $3.29 billion, operating income was $675.9 million, net income was $519.0 million and diluted EPS was $7.64. Fourth-quarter 2020 sales were $2.83 billion, operating income was $534.3 million, net income was $392.9 million and diluted EPS was $5.40.
Material changes versus the prior comparable period
- Sales increased by $1.72 billion, driven primarily by a $1.50 billion increase in comparable store sales, new-store growth and higher non-store sales.
- Comparable sales benefited from higher average ticket values and transaction counts across both customer groups, favorable weather, market reopening, government stimulus and increased miles driven.
- Gross margin expanded modestly because the Company sold inventory purchased before recent acquisition-cost increases; this benefit was partly offset by higher distribution costs. Management expects the benefit from older, lower-cost inventory to diminish.
- SG&A increased 12% in dollars but declined to 30.8% of sales from 31.6%, reflecting fixed-cost leverage on higher sales, partly offset by higher staffing, facilities, vehicles and incentive compensation.
- Interest expense declined because of lower average borrowings and borrowing costs. The Company redeemed $300 million of 4.625% senior notes due 2021 and had no borrowings under its revolving credit facility at year-end.
- The Company opened 165 net new U.S. stores and three stores in Mexico, compared with 155 and one, respectively, in 2020.
- Share repurchases totaled $2.48 billion for 4.54 million shares in 2021. The share count declined to 67.0 million at year-end from 71.1 million.
- Shareholders’ equity declined from $140.3 million to a deficit of $66.4 million, primarily reflecting share repurchases exceeding net income and other equity activity.
Liquidity, debt and capital allocation
- The Company generated $3.21 billion of operating cash flow and used $615.6 million in investing activities and $2.69 billion in financing activities.
- Capital expenditures were $442.9 million. Management estimates the cost of opening a new store at approximately $1.5 million to $1.8 million, although costs may be lower for leased sites.
- Long-term debt consisted of $3.85 billion of senior-note principal, net of discounts and issuance costs to $3.83 billion. Principal maturities include $300 million in 2022, $300 million in 2023 and $500 million in 2026.
- The Company maintained a $1.8 billion unsecured revolving credit facility maturing in June 2026. No borrowings were outstanding at December 31, 2021, although $84.0 million of letters of credit reduced availability.
- The Company was in compliance with debt covenants. The fixed-charge coverage ratio was 6.97 times versus a 2.50-times minimum, and the consolidated leverage ratio was 1.59 times versus a 3.50-times maximum.
- The Board-authorized repurchase program had approximately $2.01 billion of remaining capacity at December 31, 2021 and approximately $1.6 billion at February 28, 2022, after additional repurchases.
- No cash dividends have been declared since the Company became public, and management does not anticipate paying dividends in the foreseeable future.
Guidance, outlook, risks and unusual items
- Management planned 175 to 185 net new stores in 2022 and reported distribution capacity to support approximately 300 to 450 additional stores.
- Management remained confident in gaining market share through the dual-market strategy, customer service, inventory availability, store expansion, omnichannel capabilities and expense control.
- COVID-19 remained a significant uncertainty, with potential effects on customer demand, miles driven, labor availability, supply chains, regulations, operating costs and cash flows.
- Other principal risks include competition and pricing pressure, inflation, supplier and transportation disruptions, adverse weather, distribution-center or information-system interruptions, cybersecurity, international operations, labor costs, acquisitions, litigation and increased debt levels.
- Global supply-chain pressures and challenging labor markets increased distribution costs. The Company stated that strong supplier relationships and its distribution network helped maintain comparatively favorable inventory availability.
- The Company recognized $177.1 million of renewable-energy investment tax credits in 2021, reducing cash taxes. It also invested $180.3 million in tax-credit equity investments and had approximately $5.7 million of additional contribution commitments subject to project milestones.
- Self-insurance reserves totaled $222.3 million on a discounted basis. A 10% change in the estimated reserve would have affected pretax income by approximately $22 million.
- The Company recorded a $12.6 million long-lived-asset charge, primarily related to hardware and software projects disposed of or no longer expected to provide a long-term benefit.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter was valuation of self-insurance reserves.
Investor verification points
- Verify whether comparable-sales momentum and elevated average ticket values persist after the normalization of pandemic-related demand and stimulus effects.
- Monitor gross-margin performance as the benefit from lower-cost inventory fades and inflationary, freight and labor costs continue.
- Review execution of the 175-to-185-store opening plan, required capital investment and distribution-center capacity.
- Assess debt maturities, refinancing plans for the $300 million of senior notes due in 2022, interest-rate exposure and covenant headroom.
- Evaluate the sustainability of large share repurchases relative to cash generation, leverage and the negative shareholders’ equity balance.
- Track supply-chain availability, labor costs, supplier concentration and the effect of potential tariffs or transportation disruptions.
- Review the assumptions supporting self-insurance reserves, tax-credit investments, impairment testing and uncertain tax positions.