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 customers. This quarterly report covers the three months ended March 31, 2016, compared with the same period in 2015. The company operated 4,623 stores in 44 states at quarter-end after opening 52 net new stores.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $2.096 billion | $1.902 billion | +10% |
| Comparable-store sales | +6.1% | +7.2% | Declined 1.1 percentage points |
| Gross profit | $1.098 billion | $987.0 million | +11% |
| Gross margin | 52.4% | 51.9% | +50 basis points |
| Operating income | $418.6 million | $350.4 million | +19% |
| Operating margin | 20.0% | 18.4% | +160 basis points |
| Net income | $255.4 million | $212.9 million | +20% |
| Diluted EPS | $2.59 | $2.06 | +26% |
| Cash flow from operations | $488.2 million | $406.0 million | +20% |
| Capital expenditures | $104.0 million | $91.1 million | +14% |
| Free cash flow | $384.2 million | $314.9 million | +22% |
All balance-sheet amounts below are as of March 31, 2016, unless otherwise stated. Cash and cash equivalents were $716.0 million, compared with $116.3 million at December 31, 2015. Inventory was $2.702 billion, and total current assets were $3.701 billion. Current liabilities were $3.316 billion.
Long-term debt increased to $1.886 billion from $1.390 billion, primarily because the company issued $500 million of 3.550% senior notes due 2026 in March 2016. The company had no borrowings under its $600 million unsecured revolving credit facility, although $38.9 million of letters of credit reduced availability. The company remained compliant with its debt covenants; the consolidated fixed-charge coverage ratio was 6.14x and the consolidated leverage ratio was 1.72x.
The company repurchased 1.231 million shares for $312.6 million during the quarter. Weighted-average diluted shares declined to 98.5 million from 103.3 million. The board increased the cumulative repurchase authorization by $750 million, and approximately $580.6 million remained available at March 31, 2016.
Material changes versus the prior comparable period
- Sales growth reflected comparable-store sales, store expansion, one additional day from Leap Day, and non-store sales. Management attributed comparable-store growth to higher average ticket values and transaction counts in both customer categories.
- Gross-margin expansion reflected supplier cost improvements and distribution-cost leverage, partially offset by a larger non-cash LIFO impact. LIFO costs written down to replacement cost were approximately $13 million in 2016 versus $8 million in 2015.
- SG&A increased 7% to $679.0 million, but declined to 32.4% of sales from 33.5% because of operating leverage.
- Cash provided by operations increased by $82.1 million. Inventory investment was a use of $70.7 million versus a source of $26.8 million in the prior-year quarter, while accounts payable increased by $174.4 million.
- Financing activities provided $213.6 million, compared with a $93.4 million use in the prior-year quarter, primarily because of the new $500 million debt issuance. This benefit was partly offset by increased share repurchases.
- Diluted EPS growth exceeded net-income growth because of the lower share count resulting from repurchases.
Guidance, outlook, risks and unusual items
- Management planned 210 net new store openings for 2016; 52 were opened during the first quarter. Management expected operating cash flow and revolver availability to fund anticipated short- and long-term liquidity needs, but cautioned that cash generation could decline if demand or customer buying patterns weaken.
- Management cited miles driven, vehicle population and age, employment, fuel costs, consumer spending, competition, weather and product demand as important industry drivers. U.S. miles driven increased 3.7% year to date through February 2016, according to management.
- The business is seasonal, with historically higher sales and profits in the second and third quarters. First-quarter results are not necessarily indicative of full-year performance.
- Forward-looking risks include economic conditions, competition, inflation, consumer debt, hiring and retention, increased debt levels, credit ratings, regulation, weather, acquisitions and geopolitical events.
- The company was responding to a California hazardous-waste subpoena and expected potential injunctive and monetary relief. Management stated that accrued amounts were probable and reasonably estimable and did not expect a material adverse effect, although the ultimate outcome could not be predicted.
- The company had reserved $18.7 million for the Meridian Creative Alliance contract dispute and was appealing a $12.5 million jury verdict.
- New accounting standards for revenue recognition, leases, derivatives and share-based compensation had future adoption dates. The filing states that the company was evaluating the potential effects; the derivatives update was not expected to have a material impact.
- Subsequent to quarter-end through May 9, 2016, the company repurchased 1.7 million additional shares for approximately $436.8 million.
Important facts for investors to verify
- Whether comparable-store sales and transaction trends remain positive after the benefit from Leap Day and in the context of seasonal second- and third-quarter strength.
- The effect of the additional $500 million debt issuance on interest expense, leverage, credit ratings and future repurchase capacity.
- Progress toward the 210-store 2016 expansion target and the associated capital-expenditure and working-capital requirements.
- Inventory growth, supplier funding, LIFO effects and the sustainability of gross-margin improvement.
- The pace and pricing of post-quarter-end share repurchases and the resulting diluted share count.
- Developments in the California hazardous-waste matter and the Meridian litigation reserve.
- The filing contains slightly different descriptions of cumulative repurchase authorization, stating both $6.3 billion and $6.25 billion; investors should verify the definitive authorization amount in the related board announcement or subsequent filing.