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 filing covers the unaudited quarter ended March 31, 2019, compared with the quarter ended March 31, 2018.
The company operated 5,306 stores in 47 states at quarter-end. It opened 64 stores, merged eight acquired Bennett stores into existing locations and closed two stores during the quarter. The Bennett asset acquisition, completed after December 31, 2018, added 33 stores and a warehouse in Florida.
Financial Performance and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $2.411 billion | $2.283 billion | +6% |
| Comparable-store sales | +3.2% | +3.4% | Declined 0.2 percentage points |
| Gross profit | $1.279 billion | $1.201 billion | +6% |
| Gross margin | 53.1% | 52.6% | +50 basis points |
| SG&A | $834.5 million | $778.4 million | +7% |
| Operating income | $444.8 million | $422.8 million | +5% |
| Operating margin | 18.5% | 18.5% | Flat |
| Net income | $321.2 million | $304.9 million | +5% |
| Diluted EPS | $4.05 | $3.61 | +12% |
| Diluted weighted-average shares | 79.3 million | 84.5 million | −6% |
| Effective tax rate | 22.5% | 22.9% | Down 40 basis points |
Sales growth reflected a $72 million contribution from comparable-store sales, $41 million from stores opened during 2018, $19 million from 2019 openings and Bennett stores, and a $3 million reduction from closed stores. DIY sales were $1.337 billion and professional service provider sales were $1.039 billion.
Gross-margin expansion primarily reflected product mix and the sale of inventory purchased before recent acquisition-cost increases at higher market selling prices. SG&A increased as a percentage of sales to 34.6% from 34.1%, mainly because of wage pressure and other variable costs in a low-unemployment, inflationary environment.
Operating cash flow was $440.6 million versus $432.3 million in the prior-year quarter. Capital expenditures were $152.9 million versus $114.8 million, and reported free cash flow was $279.2 million versus $311.1 million. Financing activities used $263.8 million, including $321.9 million for share repurchases. Cash and cash equivalents ended at $56.7 million.
Balance Sheet, Debt and Liquidity
- Total assets were $10.062 billion, including $3.229 billion of inventory and $1.886 billion of operating lease right-of-use assets.
- Long-term debt was $3.461 billion, including $330.0 million outstanding under the revolving credit facility and approximately $3.13 billion of senior notes.
- The company had a $1.2 billion unsecured revolving credit facility maturing in April 2022. Outstanding letters of credit totaled $39.2 million, reducing availability.
- The facility carried a weighted-average variable interest rate of 3.740% at March 31, 2019. A 25-basis-point rate increase would have increased annual pretax expense and cash outflow by approximately $0.8 million at that borrowing level.
- The company reported a fixed-charge coverage ratio of 5.29x versus a 2.50x minimum and a consolidated leverage ratio of 2.11x versus a 3.50x maximum. It remained in compliance with its debt covenants.
- The company had $679.6 million remaining under its share-repurchase authorization at March 31, 2019. It repurchased 927,000 shares for $321.8 million during the quarter and an additional 0.1 million shares for $52.1 million through May 6, 2019.
Material Changes Versus the Prior Comparable Period
- Sales increased 6%, while comparable-store sales increased 3.2%, slightly below the 3.4% prior-year increase.
- Diluted EPS grew faster than net income because of substantial share repurchases; diluted shares declined from 84.5 million to 79.3 million.
- Gross margin improved by 50 basis points, but SG&A grew faster than sales and held operating margin flat.
- Capital expenditures increased approximately 33% to support store growth, property acquisitions, technology and distribution expansion.
- Interest expense increased to $34.3 million from $28.2 million because of higher average borrowings.
- The company adopted ASC 842, recognizing approximately $1.9 billion each of operating lease assets and liabilities and recording a $1.4 million after-tax reduction to opening retained deficit. Management stated that adoption did not materially affect earnings, cash flow, liquidity or covenant compliance.
- The company early adopted the simplified goodwill impairment standard; management reported no material impact.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management planned 200 to 210 net new stores in 2019. It expected to merge five additional Bennett stores during the second quarter, resulting in a net addition of 20 acquired Bennett stores.
- Management expected store growth to be funded by operating cash flow and available revolving-credit borrowings.
- Management cited vehicle miles driven, the size and age of the U.S. vehicle fleet, employment, product availability, customer service and the dual-market strategy as key demand drivers.
- Comparable-store sales benefited from higher average ticket values but were constrained by slightly negative transactions, lower income-tax refunds and unfavorable precipitation in several markets, which particularly affected DIY demand.
- Tariffs on products imported from China and higher supplier costs for wages and interest increased inventory acquisition costs. The company generally passed these increases through to retail and wholesale prices.
- Reported other income included a $2.8 million increase in the fair value of trading securities, compared with a $0.1 million decrease in the prior-year quarter.
- Principal disclosed risks include economic conditions, inflation, tariffs, product demand, competition, weather, employee retention, consumer spending and debt levels, credit ratings, regulation, cybersecurity, terrorism and war. The filing states that there were no material changes to previously disclosed risk factors.
- Ordinary-course litigation is pending, but management does not currently expect aggregate litigation exposure, net of insurance and accruals, to materially affect financial position, results or cash flows.
Important Facts for Investors to Verify
- Confirm the pace and economics of the planned 200–210 net new stores and the integration and merger of the remaining Bennett locations.
- Monitor comparable-store sales, transaction counts and average ticket trends, particularly the differing performance of DIY and professional customers.
- Assess whether wage inflation, tariffs and supplier-cost increases continue to pressure SG&A and gross margin.
- Reconcile free cash flow after the higher capital-expenditure program with continued share repurchases and additional borrowing.
- Track debt balances, variable-rate exposure, covenant ratios and the April 2022 revolving-facility maturity.
- Consider the effect of the ASC 842 lease liabilities on leverage analysis, noting that the company’s covenant leverage calculation includes five times rent expense.
- Verify subsequent share repurchases and the remaining authorization, as well as the company’s ability to sustain repurchases while funding store expansion.
- Review the complete Form 10-K risk factors and subsequent SEC filings for developments not included in this interim report.