O'Reilly Automotive, Inc. — Form 10-Q 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 customers. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
At June 30, 2015, the company operated 4,465 stores in 43 states. It opened 101 stores and closed two during the first six months.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2015 | Year-over-Year Change | Six Months Ended June 30, 2015 | Year-over-Year Change |
|---|---|---|---|---|
| Sales | $2.036 billion | +10% | $3.937 billion | +10% |
| Gross profit | $1.059 billion; 52.0% margin | Margin up from 51.5% | $2.046 billion; 52.0% margin | Margin up from 51.1% |
| Operating income | $386 million; 19.0% margin | +15%; margin up from 18.2% | $736 million; 18.7% margin | +18%; margin up from 17.4% |
| Net income | $234 million; 11.5% margin | +14% | $446 million; 11.3% margin | +18% |
| Diluted EPS | $2.29 | +20% | $4.35 | +24% |
- Comparable-store sales increased 7.2% for both the quarter and the first six months.
- Six-month operating cash flow was $698.5 million, compared with $655.5 million in the prior-year period.
- Capital expenditures were $186.5 million, producing reported free cash flow of $511.9 million.
- Cash and cash equivalents were $260.0 million at June 30, 2015, compared with $250.6 million at December 31, 2014.
- Long-term debt was $1.397 billion, consisting primarily of unsecured senior notes due from 2021 through 2023. No borrowings were outstanding under the $600 million revolving credit facility; $50.5 million of letters of credit reduced availability.
- The company reported a fixed-charge coverage ratio of 5.65x and a consolidated leverage ratio of 1.63x, compared with covenant limits of 2.50x minimum and 3.00x maximum, respectively.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected a 7.2% comparable-store increase, store expansion and higher sales from stores opened in 2014 and 2015.
- Gross margin improved primarily because of product acquisition cost improvements. This benefit was partly offset in the quarter by a larger non-cash LIFO replacement-cost write-down, approximately $11 million versus $4 million in the prior-year quarter. For the six-month period, the write-down was approximately $19 million versus $28 million.
- SG&A increased to $673.0 million for the quarter and $1.310 billion for the six-month period, primarily because of additional personnel, facilities and vehicles supporting store growth and a $19 million litigation charge. SG&A as a percentage of sales nevertheless declined.
- Interest expense increased to $14.3 million for the quarter and $28.7 million for the six-month period, primarily reflecting lower capitalized interest.
- Share repurchases increased materially. The company repurchased 2.637 million shares for $574.9 million during the first six months, compared with 2.022 million shares for $299.6 million in the prior-year period. Weighted-average diluted shares declined to 102.7 million from 107.8 million.
- Cash increased only $9.5 million during the first six months, as operating cash flow and free cash flow were largely offset by share repurchases and capital expenditures.
Guidance, Outlook, Risks and Unusual Items
- Management planned approximately 205 net new store openings during 2015 and expected operating cash flow and revolving-facility availability to fund anticipated capital and liquidity needs.
- Management cited favorable demand drivers, including increasing miles driven, lower fuel prices, declining unemployment and an aging U.S. vehicle fleet. It also identified competition, economic conditions, consumer spending, weather, product demand, employee retention, acquisition performance, increased debt and regulatory matters as risks.
- The company accrued $19.0 million in the second quarter related to an unfavorable $12.5 million jury verdict in the Meridian Creative Alliance contract dispute, including estimated attorney fees, prejudgment interest and related costs. The company intends to challenge the verdict.
- The company remains subject to an environmental subpoena concerning the handling, storage and disposal of hazardous waste in California. Management stated that the ultimate outcome cannot currently be predicted.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect after considering insurance and existing reserves.
- The business is seasonal, with historically higher sales and profits in the second and third quarters. The filing states that interim results are not necessarily indicative of full-year results.
- The company remained in compliance with its debt covenants. Its revolving credit agreement was amended June 18, 2015, and matures in July 2018.
- New accounting standards concerning revenue recognition, extraordinary items and debt issuance cost presentation were scheduled for adoption in future periods; management did not expect material effects, except that the revenue standard remained under evaluation.
Most Important Facts to Verify
- Whether the 7.2% comparable-store sales growth and planned 205 net new stores support continued earnings growth.
- The sustainability of the 52.0% gross margin, including the effects of supplier costs and recurring LIFO replacement-cost adjustments.
- The cash-flow impact of continued share repurchases, with $704.4 million remaining under the authorization at June 30, 2015, plus $57.2 million of additional repurchases through August 7, 2015.
- The final outcome and total cost of the Meridian litigation and any developments regarding the California environmental investigation.
- Debt covenant headroom, refinancing requirements for the 2021–2023 senior notes and continued availability under the revolving credit facility.
- The eventual impact and implementation method of the revenue-recognition standard.