O’Reilly Automotive, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended March 31, 2010, filed May 7, 2010. O’Reilly operated 3,469 automotive aftermarket stores in 38 states, serving do-it-yourself customers and professional installers. The store base increased from 3,421 at December 31, 2009, including 49 new stores and 358 conversions, primarily from the ongoing CSK integration.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Sales | $1.280 billion | $1.164 billion | +10% |
| Gross profit | $618.3 million | $542.7 million | +14% |
| Gross margin | 48.3% | 46.6% | +170 basis points |
| Operating income | $168.4 million | $113.3 million | +49% |
| Net income | $97.5 million | $62.8 million | +55% |
| Diluted EPS | $0.70 | $0.46 | +52% |
| Net cash from operating activities | $170.6 million | $86.6 million | +97% |
- Comparable-store sales increased 6.9%, driven primarily by higher transaction counts and, to a lesser extent, higher average ticket values.
- SG&A increased 5% to $449.9 million, but declined to 35.1% of sales from 36.9%, reflecting store expense leverage and reduced duplicative corporate overhead from CSK integration.
- Net income margin increased to 7.6% from 5.4%. The effective tax rate was 38.5% in both periods.
- Cash and cash equivalents were $29.9 million at March 31, 2010, compared with $26.9 million at December 31, 2009.
- Total debt and capital lease obligations were $702.5 million, down from $790.7 million at December 31, 2009. Current maturities were $105.8 million.
- The $1.2 billion asset-based revolving facility had $593.2 million outstanding, $72.2 million of standby letters of credit, and $531.2 million of additional borrowing availability. O’Reilly complied with its leverage covenant.
- Capital expenditures were $90.7 million, compared with $151.3 million in the prior-year quarter. Financing activities used $77.5 million, primarily because operating cash flow funded debt reduction.
Material changes versus the prior comparable period
- Sales growth reflected $78 million from comparable-store sales, $28 million from stores opened during 2009, $7 million from 2010 openings, and $3 million from other sales.
- Gross-margin expansion resulted primarily from lower product acquisition costs and improved vendor negotiating leverage following the CSK acquisition, partly offset by growth in lower-margin commercial sales.
- Interest expense declined to $10.9 million from $12.1 million because of lower average interest rates.
- Operating cash flow nearly doubled, while capital spending declined as CSK integration-related investments moderated.
- Debt declined by $88.2 million from year-end 2009, and the Company reported a net reduction in revolving-credit borrowings during the quarter.
Guidance, outlook, risks, contingencies, and unusual items
- Management planned approximately 150 new stores in 2010, including 49 opened in the first quarter and approximately 101 additional stores expected thereafter. Expansion was expected to be funded by operating cash flow and available credit capacity.
- Management expected 2010 gross-margin percentages to be more comparable with 2009, with potential pressure if commercial sales grew faster than DIY sales.
- The Company intended to redeem the $100 million CSK exchangeable senior notes in December 2010 using available credit-facility borrowings. The notes had a net carrying amount of $100.5 million and a stated maturity in 2025.
- Interest-rate swaps hedged $450 million of floating-rate debt. Management estimated that a 100-basis-point rate change would affect annualized interest expense and cash interest payments by approximately $1.4 million before tax, or $0.8 million after tax.
- Ongoing DOJ and SEC matters relating to CSK’s pre-acquisition accounting practices remained unresolved. The DOJ was considering potential criminal charges against CSK, but the probability and cost could not be estimated; therefore, no additional liability was accrued.
- The Company held a $20.7 million reserve for CSK-related governmental investigations and indemnification matters and paid approximately $1.8 million of related legal costs during the quarter.
- Management identified competition, product demand, economic conditions, consumer debt, weather, fuel costs, employee retention, and CSK integration as key risks. The filing stated that first-quarter results were not necessarily indicative of full-year results and that sales and profits are seasonally stronger in the second and third quarters.
Facts investors should verify
- Progress toward the planned 150-store expansion and the financial impact of continued CSK store conversions.
- Whether commercial-sales growth creates the anticipated pressure on gross margins.
- Execution and funding of the planned December 2010 redemption of the exchangeable senior notes.
- Debt paydown, borrowing-base availability, leverage-covenant compliance, and refinancing requirements through the July 2013 credit-facility maturity.
- Developments in the unresolved DOJ investigation and whether the $20.7 million reserve remains adequate.
- Comparable-store sales trends, miles driven, fuel costs, vehicle age, and consumer willingness to purchase higher-quality products.