O’Reilly Automotive, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
O’Reilly Automotive is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service provider customers. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company operated 5,512 U.S. stores and 21 Mexico stores at quarter-end.
COVID-19 began materially affecting demand in mid-March. O’Reilly was deemed an essential service provider and generally kept stores open, while reducing hours, implementing health precautions and using curbside pickup.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $2.476 billion | $2.411 billion | +3% |
| Gross profit | $1.296 billion | $1.279 billion | +1% |
| Gross margin | 52.3% | 53.1% | -80 basis points |
| SG&A | $872.3 million | $834.5 million | +5% |
| Operating income | $423.6 million | $444.8 million | -5% |
| Operating margin | 17.1% | 18.5% | -140 basis points |
| Net income | $300.4 million | $321.2 million | -6% |
| Diluted EPS | $3.97 | $4.05 | -2% |
| Operating cash flow | $459.1 million | $440.6 million | +4% |
| Capital expenditures | $133.3 million | $152.9 million | -13% |
| Free cash flow | $227.2 million | $279.2 million | -19% |
Comparable-store sales decreased 1.9%, versus a 3.2% increase in the prior-year quarter. Sales benefited from new stores, the Mayasa acquisition, Leap Day and non-store sales, but these benefits were partly offset by COVID-19-related declines beginning in mid-March. Comparable sales declined 13% during the four-week period beginning in mid-March and extending into April.
DIY sales were $1.345 billion and professional service provider sales were $1.070 billion. The effective tax rate decreased to 20.9% from 22.5%, partly because of renewable energy investment tax credits.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $287.1 million at March 31, 2020, compared with $40.4 million at December 31, 2019.
- Long-term debt was $4.471 billion, up from $3.891 billion at year-end 2019. Principal debt consisted of $344.0 million drawn on the revolving credit facility and $4.150 billion of senior notes.
- On March 25, 2020, the company issued $500 million of 4.200% unsecured senior notes due 2030.
- The $1.2 billion unsecured revolving credit facility had $344.0 million outstanding and $39.1 million of letters of credit at quarter-end. The facility matures in April 2022.
- The company reported compliance with all debt covenants. The fixed-charge coverage ratio was 5.08x versus a 2.50x minimum, and the consolidated leverage ratio was 2.45x versus a 3.50x maximum.
- The company borrowed additional funds and held approximately $250 million of additional cash to strengthen liquidity during the pandemic.
- Share repurchases totaled $574.0 million for 1.484 million shares, compared with $321.9 million for 927,000 shares in Q1 2019. Repurchases were suspended on March 16, 2020; approximately $994.6 million remained authorized at quarter-end.
Material changes versus the prior comparable period
- Revenue increased despite a 1.9% comparable-store sales decline, primarily because of store growth, Mayasa, Leap Day and other sales.
- Gross margin, operating margin and net margin contracted because of product mix, lower comparable-store sales and deleveraging of fixed distribution and operating costs.
- Interest expense increased to $39.4 million from $34.3 million because of higher borrowings, while marketable-security losses produced $5.2 million of other expense versus $2.8 million of gains in the prior-year quarter.
- Operating cash flow increased, but free cash flow declined because of a $95.3 million investment in tax-credit equity investments and other cash uses.
- Inventory increased to $3.557 billion from $3.454 billion at year-end 2019, while accounts payable increased to $3.758 billion from $3.605 billion.
- Shareholders’ equity declined to $108.8 million from $397.3 million, primarily due to $574.1 million of share repurchases, partially offset by quarterly net income.
- The company adopted the current expected credit loss standard in Q1 2020; management stated that adoption had no material impact.
Outlook, commentary, risks and unusual items
- Management did not provide a quantitative full-year outlook in the filing. It stated that the duration and severity of COVID-19 and its effects on demand, miles driven, customer behavior and liquidity could not be predicted.
- Key responses included reduced store hours, delayed capital investments, cost controls, health and safety measures, curbside pickup, increased borrowing and suspension of share repurchases.
- COVID-19 risks include lower store traffic and professional-customer demand, reduced vehicle miles driven, potential store closures, supply-chain disruptions, inventory-delivery delays and broader economic and capital-market deterioration.
- The company’s business remains seasonally stronger in the second and third quarters and is affected by weather and macroeconomic conditions.
- The Mayasa acquisition purchase-price allocation remained provisional. Preliminary goodwill and intangible assets recognized were $128.1 million, and additional valuation work was ongoing.
- Foreign-currency translation generated a $30.6 million other comprehensive loss. The Mexican peso declined approximately 20% against the U.S. dollar from December 31, 2019.
- Ordinary-course litigation was disclosed; management did not believe aggregate matters would materially affect financial position, results or cash flows.
Most important facts for an investor to verify
- Whether the COVID-19-related 13% comparable-sales decline persisted, worsened or reversed after the filing date.
- Current liquidity, revolving-credit borrowings, debt maturities and compliance with the 3.50x leverage covenant.
- The timing and amount of any resumption of share repurchases and the effect on cash balances and leverage.
- Subsequent trends in gross margin and SG&A leverage after the Q1 demand disruption.
- Final purchase-price accounting for Mayasa, including any additional intangible assets or goodwill adjustments.
- Inventory levels, supplier receivables and supply-chain conditions as demand and operating restrictions changed.
- Any later quantitative guidance, store-opening revisions or changes to capital-expenditure plans.