O’Reilly Automotive, Inc. 2015 Form 10-K Summary
Business context and reporting period
O’Reilly Automotive is a U.S. 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, 2015, with quarterly data for the fourth quarter ended December 31, 2015. At year-end, the Company operated 4,571 stores in 44 states, compared with 4,366 stores in 43 states in 2014.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Sales | $7.967 billion | $7.216 billion | +10% |
| Comparable store sales | +7.5% | +6.0% | +1.5 percentage points |
| Gross profit | $4.163 billion | $3.709 billion | +12% |
| Gross margin | 52.3% | 51.4% | +0.9 percentage points |
| Operating income | $1.514 billion | $1.270 billion | +19% |
| Operating margin | 19.0% | 17.6% | +1.4 percentage points |
| Net income | $931.2 million | $778.2 million | +20% |
| Net margin | 11.7% | 10.8% | +0.9 percentage points |
| Diluted EPS | $9.17 | $7.34 | +25% |
| Cash flow from operations | $1.281 billion | $1.190 billion | +8% |
| Capital expenditures | $414.0 million | $430.0 million | -4% |
| Free cash flow | $867.5 million | $760.4 million | +14% |
Fourth-quarter 2015 sales were $1.949 billion, gross profit was $1.028 billion, operating income was $362.6 million, net income was $218.6 million and diluted EPS was $2.19. Fourth-quarter comparable store sales increased 7.7%.
At December 31, 2015, cash and cash equivalents were $116.3 million, current assets were $3.010 billion and current liabilities were $3.046 billion, resulting in negative working capital of $36.4 million. Long-term debt was $1.390 billion, consisting primarily of $1.4 billion of unsecured senior notes. The Company had no borrowings under its $600 million unsecured revolving credit facility, although $37.5 million of letters of credit reduced availability. Debt-to-equity was 0.71:1.
Material changes versus the prior comparable period
- Sales growth reflected a 7.5% comparable-store increase, 205 net new stores and continued growth in both DIY and professional service provider transactions.
- Gross margin expanded primarily because of product acquisition cost improvements, a smaller negative LIFO impact and distribution efficiencies. LIFO costs were written down by approximately $28 million in 2015 versus $41 million in 2014.
- SG&A increased 9% to $2.649 billion but declined to 33.2% of sales from 33.8%, reflecting operating leverage. SG&A included a $19 million litigation loss charge related to an adverse contract-dispute verdict.
- Share repurchases increased to 4.9 million shares for $1.136 billion in 2015, compared with 5.7 million shares for $866.4 million in 2014. Weighted-average diluted shares declined to 101.5 million from 106.0 million.
- Current liabilities increased primarily because of higher accounts payable and inventory growth supporting new stores. Accounts payable to inventory increased to 99.1% from 94.6%, aided by expanded supplier financing and extended payment terms.
- Total cash declined by $134.3 million, primarily because operating and investing cash flows were more than offset by share repurchases and other financing uses.
Guidance, outlook, commentary and risks
Management planned approximately 210 net new store openings in 2016, compared with 205 in 2015, and expected to open a new distribution center in Selma, Texas, with capacity for approximately 250 stores. New-store costs were estimated at approximately $1.5 million to $1.8 million per store, although leasing could reduce the cost.
Management expressed confidence in continued market-share gains, comparable-store sales growth and expansion of the dual-market strategy. The outlook depends on customer service, product availability, professional sales growth, store expansion and favorable industry drivers such as increasing miles driven, a growing vehicle population and an aging vehicle fleet.
- Key risks include intense competition, regional economic and weather conditions, fuel prices, unemployment, customer demand and the ability to open profitable stores.
- Supplier disruptions, unfavorable purchasing terms, distribution-center interruptions and inventory availability could affect sales and margins.
- Increased debt levels, interest-rate exposure, credit-rating downgrades and compliance with financing covenants could constrain liquidity. The Company was in compliance with its covenants at year-end; fixed-charge coverage was 5.99 times versus a 2.50-times minimum, and leverage was 1.52 times versus a 3.00-times maximum.
- The Company had approximately $2.133 billion of future minimum operating lease payments and $62.6 million of construction commitments at year-end.
- The Company was responding to a California environmental subpoena concerning hazardous-waste handling and disposal. Management stated that accrued amounts believed probable and estimable and did not expect a material adverse effect, although the ultimate outcome was not determinable.
- A $12.5 million adverse jury verdict in a contract dispute was under appeal; the Company had reserved $18.8 million at December 31, 2015.
- The Company identified risks involving cybersecurity, employment and healthcare regulation, environmental compliance, litigation, acquisitions and retention of qualified personnel.
The Company did not pay cash dividends and did not anticipate paying dividends in the foreseeable future. Management and Ernst & Young reported effective internal control over financial reporting, and Ernst & Young issued unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile annual and fourth-quarter results to the audited financial statements, including the effect of the litigation charge and LIFO inventory adjustments.
- Review the quality and sustainability of comparable-store sales growth, transaction trends, average ticket growth and professional service provider sales.
- Assess negative working capital, supplier-financing dependence, inventory growth and accounts payable-to-inventory trends.
- Evaluate the effect of $1.4 billion of senior notes, substantial operating lease obligations and planned capital expenditures on future free cash flow.
- Confirm remaining share-repurchase authorization and the impact of repurchases on per-share results and leverage.
- Monitor the California environmental matter, the contract-dispute appeal and other litigation or regulatory contingencies.
- Review the execution and returns of the planned 2016 store openings and Selma, Texas distribution center.
- Consider the future accounting effects of the announced revenue-recognition and lease-accounting standards.