O’Reilly Automotive, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. O’Reilly is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service provider customers in the United States and Mexico. At year-end, the Company operated 5,594 U.S. stores in 47 states and 22 stores in Mexico.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Sales | $11.604 billion | $10.150 billion | +14% |
| Comparable store sales | +10.9% | +4.0% | Improved |
| Gross profit | $6.086 billion | $5.395 billion | +13% |
| Gross margin | 52.4% | 53.1% | -70 bps |
| Operating income | $2.419 billion | $1.921 billion | +26% |
| Operating margin | 20.8% | 18.9% | +190 bps |
| Net income | $1.752 billion | $1.391 billion | +26% |
| Net margin | 15.1% | 13.7% | +140 bps |
| Diluted EPS | $23.53 | $17.88 | +32% |
| Cash flow from operations | $2.837 billion | $1.708 billion | +66% |
| Capital expenditures | $466 million | $628 million | -26% |
| Free cash flow | $2.190 billion | $1.021 billion | +115% |
Fourth-quarter 2020 sales were $2.829 billion, operating income was $534.3 million and net income was $392.9 million. Fourth-quarter diluted EPS was $5.40.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $465.6 million at December 31, 2020, compared with $40.4 million at December 31, 2019.
- Total debt was $4.123 billion, compared with $3.891 billion in 2019. The Company had no outstanding revolving credit facility borrowings at year-end.
- The Company had a $1.2 billion unsecured revolving credit facility maturing in April 2022, with $66.4 million of letters of credit outstanding.
- During 2020, O’Reilly issued $500 million of 4.200% senior notes due 2030 and $500 million of 1.750% senior notes due 2031, and redeemed $500 million of 4.875% senior notes due 2021.
- Debt covenants were satisfied. The consolidated fixed-charge coverage ratio was 5.93x and the consolidated leverage ratio was 1.92x, versus covenant limits of 2.50x and 3.50x, respectively.
- The Company repurchased 4.8 million shares for $2.087 billion during 2020. The program was suspended from March 16 through May 28, 2020, and resumed on May 29. Approximately $481.5 million remained authorized at year-end.
- O’Reilly pays no cash dividend and does not anticipate paying one in the foreseeable future.
Material changes versus the prior comparable period
- COVID-19 caused significant sales pressure from mid-March through mid-April 2020. Sales subsequently benefited from government stimulus payments, enhanced unemployment benefits, market reopenings and consumer investment in existing vehicles.
- DIY sales increased to $6.684 billion from $5.612 billion, while professional service provider sales increased to $4.647 billion from $4.370 billion.
- Gross margin declined because 2019 benefited from selling inventory purchased before tariff-related cost increases and because Mayasa generated lower-margin sales to independent jobbers. The decline was partially offset by a higher mix of DIY sales and lower acquisition costs.
- SG&A increased 6% in dollars but declined to 31.6% of sales from 34.2%, reflecting strong comparable-store-sales leverage and expense controls.
- The Company opened 155 net new U.S. stores and one store in Mexico, compared with 200 net new U.S. stores in 2019. The year-end store count increased from 5,460 to 5,616.
- Capital spending declined while operating cash flow and free cash flow increased substantially. Financing cash use increased primarily because of share repurchases and debt redemption.
- Total equity declined to $140.3 million from $397.3 million, principally because share repurchases exceeded retained earnings additions.
Guidance, outlook, commentary and risks
- Management planned 165 to 175 net new store openings in 2021. Estimated average investment per new store was approximately $1.5 million to $1.8 million, subject to lower costs for leased locations.
- Management remained confident in gaining market share through its dual-market strategy, customer service, inventory availability, distribution network and expense control.
- Planned 2021 distribution initiatives included completing the Knoxville-to-Lebanon, Tennessee, distribution-center integration and opening the Horn Lake, Mississippi, distribution center, while converting the North Little Rock facility into a Hub.
- Management could not predict the duration or future severity of COVID-19 effects, including impacts on demand, miles driven, staffing, operating restrictions, supply availability and consumer confidence.
- Principal risks include economic deterioration, competition and pricing pressure, weather and natural disasters, supplier or distribution disruptions, cyberattacks, labor availability and costs, international operations, acquisitions, debt and credit-rating risk, litigation, environmental regulation and changes in vehicle technology.
- Self-insurance reserves were $202.5 million on a discounted basis and were identified as the audit’s critical audit matter. A 10% change in estimated reserves would have affected pretax income by approximately $20 million.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that internal controls were effective.
Most important facts for investors to verify
- Whether post-stimulus demand, transaction counts and comparable-store sales remain durable as mobility patterns and government support normalize.
- The sustainability of the 2020 margin improvement, particularly the 52.4% gross margin and 20.8% operating margin.
- Execution of the 165–175-store 2021 expansion plan and related capital requirements.
- Debt maturities beginning with $300 million of senior notes due in 2021, the April 2022 revolving-facility maturity and ongoing refinancing capacity.
- The effect of continued share repurchases on leverage, equity, diluted EPS and liquidity.
- Exposure to supply-chain disruptions, supplier costs, tariffs, labor costs, cyber risks and changing vehicle technologies.
- The assumptions supporting self-insurance reserves, tax-credit investments and other significant management estimates.