O’Reilly Automotive, Inc. — Q2 2013 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, 2013, compared with the corresponding 2012 periods. The company operated 4,087 stores in 42 states at quarter-end and planned 190 net new store openings for 2013.
Financial performance and key metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Sales | $1.715 billion | $1.563 billion | $3.300 billion | $3.092 billion |
| Gross profit | $871.9 million | $779.9 million | $1.671 billion | $1.542 billion |
| Gross margin | 50.8% | 49.9% | 50.6% | 49.9% |
| Operating income | $296.3 million | $243.6 million | $547.3 million | $491.1 million |
| Operating margin | 17.3% | 15.6% | 16.6% | 15.9% |
| Net income | $177.1 million | $146.1 million | $331.5 million | $293.6 million |
| Diluted EPS | $1.58 | $1.15 | $2.94 | $2.29 |
- Second-quarter sales increased 10%, operating income increased 22%, net income increased 21% and diluted EPS increased 37% year over year.
- Six-month sales increased 7%, operating income increased 11%, net income increased 13% and diluted EPS increased 28%.
- Comparable-store sales increased 6.5% in the second quarter and 3.6% for the first six months.
- SG&A increased 7% in both the quarter and year-to-date period. SG&A was 33.6% of sales in the quarter versus 34.3% in the prior year and 34.0% for both six-month periods.
- The effective tax rate was 38.1% for the quarter and 37.1% year to date, compared with 37.8% and 38.2%, respectively, in 2012.
- Management attributed margin improvement primarily to vendor acquisition-cost improvements, pricing management and lower inventory shrinkage, partly offset by a higher mix of lower-margin commercial sales.
Cash flow, balance sheet, debt and liquidity
- Six-month cash flow from operations was $439.4 million, compared with $691.5 million in 2012. The decline primarily reflected working-capital timing and a smaller benefit from accounts payable growth, partially offset by higher net income.
- Capital expenditures were $176.6 million, primarily related to new distribution facilities, versus $151.3 million in the prior-year period.
- Cash and cash equivalents increased to $365.9 million at June 30, 2013, from $248.1 million at December 31, 2012.
- Total debt and capital lease obligations were $1.396 billion, up from $1.096 billion at year-end 2012, following the issuance of $300 million of 3.850% senior notes due 2023.
- The company had no borrowings under its revolving credit facility and approximately $51.8 million of outstanding letters of credit. The facility had a stated capacity of $660 million at quarter-end.
- Debt covenants remained in compliance. The fixed-charge coverage ratio was 4.93 times against a 2.25-times minimum through 2014, and the consolidated leverage ratio was 1.98 times against a 3.00-times maximum.
- On July 2, 2013, the revolving facility was amended to reduce maximum capacity to $600 million, extend maturity to July 2018 and reduce borrowing margins and facility fees.
Material changes versus the prior comparable period
- Sales growth reflected comparable-store gains, stores opened during 2012 and 2013, and the acquired VIP stores. The store base increased from 3,859 stores at June 30, 2012, to 4,087 stores.
- Gross margin expanded 90 basis points in the quarter and 70 basis points year to date.
- Share count declined materially because of repurchases: diluted weighted-average shares fell to 112.1 million in the quarter and 112.7 million year to date, from 127.2 million and 128.3 million, respectively.
- The company repurchased 5.0 million shares for $501.8 million during the first six months, compared with 6.3 million shares for $594.4 million in 2012. The board increased cumulative repurchase authorization to $3.5 billion, with $576.8 million remaining at June 30.
- Interest expense increased to $22.9 million year to date from $18.3 million, primarily due to higher average borrowings and debt issuance-cost amortization.
Guidance, outlook, risks, contingencies and unusual items
- Management planned 190 net new store openings in 2013 and expected store growth to be funded by operating cash flow and available revolver capacity.
- Management cited vehicle age, miles driven, unemployment, consumer spending, product demand, competition and economic conditions as important demand drivers. The filing does not provide formal full-year revenue or earnings guidance.
- Management noted that DIY transaction counts remained pressured by elevated unemployment and macroeconomic uncertainty, while professional sales benefited from acquired markets.
- The company reported $13.7 million of remaining reserves related to potential indemnification obligations associated with legacy CSK litigation and governmental investigations. Management did not expect the matter, after reserves and insurance, to have a material adverse effect, but stated that particular periods could be materially affected.
- Closed-store and facility reserves totaled $8.2 million at June 30, 2013, and lease obligations for closed properties extend through April 2023.
- There were no goodwill impairment charges, no material changes to disclosed risk factors, and no material changes in critical accounting estimates.
- The company adopted ASU 2013-02 regarding accumulated other comprehensive income presentation; it had no effect on financial condition, results or cash flows. ASU 2013-11 was expected to affect presentation only beginning in the first quarter of 2014.
- Subsequent to quarter-end through August 8, 2013, the company repurchased approximately 0.5 million additional shares for $56.3 million.
Most important facts for investors to verify
- Verify the sustainability of comparable-store sales growth and the 50%+ gross-margin performance as commercial sales become a larger mix.
- Assess whether operating cash flow can support planned store expansion, distribution-center investment and continued share repurchases.
- Monitor the increase in debt and the effect of the 2013 senior-note issuance on interest expense and leverage.
- Review available revolver capacity after letters of credit and confirm compliance with fixed-charge and leverage covenants.
- Evaluate the potential cash impact and insurance coverage of the remaining CSK-related indemnification reserve.
- Track DIY demand, unemployment, miles driven, vehicle age and consumer spending because these factors materially influence aftermarket demand.