O’Reilly Automotive, Inc. — Q2 2011 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. O’Reilly is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional customers. The company operated 3,657 stores in 39 states at quarter-end, opened 44 stores during the quarter and 99 year-to-date, and planned approximately 170 net new stores for 2011.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $1.479 billion | $1.381 billion | $2.862 billion | $2.661 billion |
| Gross profit / margin | $718.7 million / 48.6% | $672.6 million / 48.7% | $1.388 billion / 48.5% | $1.291 billion / 48.5% |
| Operating income / margin | $222.4 million / 15.0% | $181.2 million / 13.1% | $418.8 million / 14.6% | $349.6 million / 13.1% |
| Net income / margin | $133.8 million / 9.0% | $99.6 million / 7.2% | $236.2 million / 8.3% | $197.1 million / 7.4% |
| Diluted EPS | $0.96 | $0.71 | $1.67 | $1.40 |
- Comparable-store sales increased 4.4% in Q2 and 5.0% year-to-date. Sales growth reflected comparable-store gains, new stores and growth in commercial sales.
- SG&A increased 4% in Q2 to $496.3 million, but declined to 33.5% of sales from 34.5%; year-to-date SG&A was 33.9% of sales versus 34.8%.
- Six-month operating cash flow was $561.5 million versus $355.7 million. Capital expenditures were $150.6 million, producing operating cash flow less capital expenditures of approximately $410.8 million.
- Cash and cash equivalents were $268.8 million at June 30, 2011, versus $29.7 million at December 31, 2010. Working capital was $1.096 billion, the current ratio was 1.75:1 and the quick ratio was 0.36:1.
- Total debt was $498.6 million, including approximately $496.6 million of net carrying value for the 4.875% senior notes due 2021. The company had no borrowings under its $750 million unsecured revolving facility.
Material changes versus the prior comparable period
- Q2 sales increased 7%, operating income increased 23% and net income increased 34%. Six-month sales increased 8%, operating income increased 20% and net income increased 20%.
- Gross margin was broadly stable year-to-date and declined slightly in Q2 because of a higher mix of lower-margin commercial sales, promotional pricing, increased distribution costs and higher diesel costs. These pressures were partly offset by improved inventory shrinkage and product mix.
- The company refinanced in January 2011 by issuing $500 million of 4.875% senior notes due 2021, repaying and retiring its prior asset-based revolving credit facility, and terminating related interest-rate swaps. The refinancing increased debt by approximately $140 million from year-end but reduced near-term revolving borrowings.
- Six-month results included one-time charges of $21.6 million for the write-off of former credit-facility debt issuance costs and $4.2 million for terminating interest-rate swaps. Prior-year Q2 included a $15 million charge related to the legacy CSK Department of Justice investigation.
- The company repurchased 5.9 million shares for $337.9 million during the first six months, reducing shares outstanding and contributing approximately $0.03 to year-to-date diluted EPS. The original authorization had $162.1 million remaining at June 30.
Guidance, outlook, commentary and risks
- Management expected approximately 170 net new stores in 2011, funded primarily with operating cash flow and available credit capacity.
- Management cited vehicle aging, deferred maintenance and growth in professional sales as favorable demand drivers, while noting that declining miles driven, higher gasoline prices, unemployment and weaker consumer discretionary spending could reduce demand.
- At June 30, the company reported compliance with its debt covenants, including a 4.6 times fixed-charge coverage ratio and 1.6 times adjusted debt-to-EBITDAR ratio. The Revolver requires minimum fixed-charge coverage of 2.0 times through 2012 and maximum adjusted leverage of 3.0 times.
- The company maintained a $21.0 million reserve for the anticipated DOJ penalty and related costs concerning CSK’s legacy accounting matters, and a remaining $16.7 million reserve for CSK-related indemnification obligations. Final outcomes remain uncertain and could materially affect a particular period.
- Subsequent to quarter-end, the company repurchased 1.4 million additional shares for $80.6 million and increased the cumulative share-repurchase authorization to $1 billion.
- Other risks include competition, integration of acquired CSK operations, product demand, economic conditions, inflation, fuel prices, employee retention, weather and increased debt levels. The filing states that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether commercial-sales growth and distribution costs cause sustained gross-margin pressure.
- The pace and returns of the planned 2011 store expansion.
- Cash flow benefits from extended vendor payment terms and whether those benefits are sustainable.
- Progress toward finalizing the DOJ non-prosecution agreement and the ultimate cost of related litigation and indemnification matters.
- The effect of continued share repurchases and additional debt on leverage, liquidity and per-share earnings.
- Future miles driven, fuel prices, unemployment and consumer spending trends affecting aftermarket demand.