O’Reilly Automotive, Inc. — 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 service-provider customers. This quarterly report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
At June 30, 2019, the company operated 5,344 stores in 47 states. It opened 43 net new stores during the quarter and 105 during the first six months. The company also acquired 33 Bennett Auto Supply stores at the beginning of 2019, merged 13 into existing locations and rebranded the remaining 20.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Sales | $2.590 billion | $2.456 billion | $5.000 billion | $4.739 billion |
| Gross profit | $1.368 billion | $1.289 billion | $2.648 billion | $2.490 billion |
| Gross margin | 52.8% | 52.5% | 52.9% | 52.5% |
| Operating income | $498.1 million | $479.2 million | $942.9 million | $902.0 million |
| Operating margin | 19.2% | 19.5% | 18.9% | 19.0% |
| Net income | $353.7 million | $353.1 million | $674.8 million | $658.0 million |
| Diluted EPS | $4.51 | $4.28 | $8.56 | $7.89 |
Second-quarter comparable-store sales increased 3.4%; first-half comparable-store sales increased 3.3%. Sales growth was supported by store expansion, the Bennett acquisition and higher average ticket values. Transaction counts were approximately flat overall, with weaker DIY transactions partly offset by professional customer growth.
For the six months, operating cash flow was $847.0 million, capital expenditures were $295.6 million and management-defined free cash flow was $540.7 million, compared with $631.5 million in the prior-year period. Cash and cash equivalents were $55.8 million at June 30, 2019, versus $31.3 million at December 31, 2018.
Debt, liquidity and capital allocation
- Long-term debt was $3.784 billion at June 30, 2019, compared with $3.417 billion at December 31, 2018.
- The company issued $500 million of 3.900% unsecured senior notes due 2029 on May 20, 2019. Total senior notes had aggregate principal of approximately $3.7 billion and maturities from 2021 through 2029.
- Revolving credit facility borrowings were $156.0 million at a weighted-average variable rate of 4.229%. The facility provides $1.2 billion of commitments, subject to permitted increases up to $1.8 billion, and matures in April 2022. Letters of credit of $39.1 million reduced availability.
- The company reported compliance with its debt covenants. The consolidated fixed-charge coverage ratio was 5.24x versus a 2.50x minimum; the consolidated leverage ratio was 2.22x versus a 3.50x maximum.
- The company repurchased 2.56 million shares for $920.7 million during the first six months and had approximately $1.1 billion remaining under its authorization at June 30, 2019. It repurchased an additional 0.5 million shares for approximately $174.6 million through August 8, 2019.
- Operating lease right-of-use assets and lease liabilities of approximately $1.9 billion each were recognized following adoption of ASC 842.
Material changes versus the prior comparable period
- Quarterly sales increased 5%, while first-half sales increased 6%.
- Quarterly net income was essentially unchanged, increasing less than 1%; first-half net income increased 3%.
- Diluted EPS increased 5% for the quarter and 8% for the first half, primarily reflecting the substantially lower share count from repurchases.
- Gross margin improved by approximately 30 basis points in both periods, benefiting from product mix and sales of inventory purchased before recent cost increases.
- SG&A increased 8% in the quarter and 7% in the first half, with SG&A as a percentage of sales rising to 33.6% and 34.1%, respectively, from 33.0% and 33.5%.
- Interest expense increased because of higher average borrowings, while cash flow from operations declined 3% and capital expenditures increased 32% year over year.
- The company adopted the new lease standard, adding approximately $1.9 billion of lease assets and liabilities without a material effect on earnings, cash flows, liquidity or covenant compliance.
Guidance, outlook, commentary and risks
Management expects to open 200 to 210 net new stores in 2019 and to add a net 20 stores from the Bennett acquisition. Management believes operating cash flow and available revolving-credit capacity will fund expected capital and liquidity needs for the foreseeable future, although it cautions that future cash generation is not assured.
Management cited healthy employment, an aging vehicle fleet, increasing registered vehicles and modestly higher miles driven as supportive industry factors. It also reported headwinds from above-average precipitation and cooler temperatures, which reduced DIY transaction counts and weather-related repairs.
Recent tariffs and supplier input-cost increases raised inventory acquisition costs. The company generally passed these increases through in higher prices, but continued wage pressure and other inflationary costs increased SG&A. Other risks include economic conditions, fuel costs, competition, product demand, weather, tariffs, employee retention, increased debt, credit ratings, information security and cyberattacks, and the performance of acquired businesses.
Litigation is described as ordinary-course litigation and is not currently expected to have a material adverse effect. The filing states that there were no material changes to previously disclosed risk factors or contractual obligations.
Important facts for investors to verify
- Whether comparable-store sales and transaction trends remain positive after weather-related disruptions and as average ticket growth moderates.
- Whether SG&A inflation, wage pressure and lease costs continue to compress operating margins.
- The pace and returns of planned store openings, distribution expansion and Bennett integration.
- Debt repayment capacity, interest-rate sensitivity and continued compliance with the revolving-credit covenants.
- The sustainability of large share repurchases relative to free cash flow and the company’s elevated debt and lease obligations.
- The effect of tariffs, supplier costs and pricing actions on demand, inventory margins and customer behavior.
- The filing’s non-GAAP free cash flow and covenant metrics, including their reconciliations to GAAP measures.