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 unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
At September 30, 2015, the company operated 4,523 stores in 43 states. It opened 59 stores and closed one during the quarter, and opened 160 stores and closed three during the first nine months.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Sales | $2.080 billion | $1.877 billion | $6.018 billion | $5.452 billion |
| Gross profit | $1.089 billion | $968 million | $3.135 billion | $2.797 billion |
| Gross margin | 52.4% | 51.6% | 52.1% | 51.3% |
| Operating income | $415 million | $344 million | $1.151 billion | $967 million |
| Operating margin | 20.0% | 18.3% | 19.1% | 17.7% |
| Net income | $266 million | $217 million | $713 million | $597 million |
| Diluted EPS | $2.64 | $2.06 | $6.98 | $5.58 |
- Sales increased 11% in Q3 and 10% for the first nine months. Comparable-store sales rose 7.9% and 7.4%, respectively.
- Net income increased 23% in Q3 and 19% year to date. Diluted EPS increased 28% and 25%, aided by lower average shares outstanding from repurchases.
- Gross-margin expansion reflected supplier acquisition-cost improvements and a smaller negative LIFO impact. SG&A increased in dollars to support store growth but declined as a percentage of sales to 32.4% in Q3 and 33.0% year to date.
- Other expense was $14 million in Q3 and $41 million year to date, including higher interest expense and a decline in the value of marketable securities.
Cash flow, balance sheet, debt and liquidity
- Nine-month operating cash flow was $1.063 billion, compared with $983 million in 2014. Capital expenditures were $296 million, producing reported free cash flow of $766 million.
- Cash and cash equivalents were $277 million at September 30, 2015, versus $251 million at December 31, 2014.
- Total debt was approximately $1.397 billion, consisting primarily of unsecured senior notes due from 2021 through 2023. No borrowings were outstanding under the $600 million revolving credit facility; $45.9 million of letters of credit reduced availability.
- The revolving facility matures in July 2018. The company reported a 5.84 times fixed-charge coverage ratio and a 1.57 times consolidated leverage ratio, compared with covenant minimum and maximum thresholds of 2.50 times and 3.00 times, respectively. The company was in compliance with its debt covenants.
- The company repurchased 3.8 million shares for $849 million during the first nine months, leaving $430.2 million under the authorization at September 30. It repurchased an additional 0.1 million shares for $32.3 million through November 6, 2015.
Material changes versus the prior comparable period
- Revenue growth accelerated, with comparable-store sales increasing 7.9% in Q3 versus 6.2% in Q3 2014 and 7.4% year to date versus 5.9% in the prior-year period.
- Gross margin increased 80 basis points in Q3 and 80 basis points year to date.
- Operating margin increased 170 basis points in Q3 and 140 basis points year to date, reflecting gross-margin improvement and operating leverage.
- Operating cash flow increased, while capital expenditures declined because of the timing of property acquisitions, store closings and construction costs.
- Financing cash usage increased primarily because share repurchases rose to $849 million from $687 million in the prior-year nine-month period.
- The company recorded a $19 million litigation loss charge in the second quarter related to an adverse contract-dispute verdict.
Guidance, outlook, commentary, risks and unusual items
- Management planned 205 net new stores in 2015 and 210 net new stores in 2016. It expected store growth to be funded by operating cash flow and available revolving-credit capacity.
- Management cited lower fuel prices, declining unemployment, increased miles driven, favorable vehicle-age trends, customer-service initiatives and growth in professional-service-provider sales as demand drivers.
- Management stated that the business is seasonal, with sales and profits historically higher in the second and third quarters.
- Risks include macroeconomic conditions, vehicle miles driven, consumer spending, competition, weather, product demand, employee retention, acquisition and integration execution, increased debt, credit ratings and regulatory matters.
- The company is cooperating with California authorities investigating the handling, storage and disposal of hazardous waste; the ultimate outcome could not be predicted.
- In the Meridian Creative Alliance contract dispute, a $12.5 million jury verdict was returned against the company. O'Reilly reserved $18.8 million and planned to appeal.
- The company stated that ordinary-course litigation, after considering insurance and reserves, was not expected to have a material adverse effect, although outcomes cannot be assured.
- Management expected no material effect from adopting new accounting standards concerning revenue recognition, extraordinary items and debt-issuance-cost presentation; the revenue standard was scheduled for adoption beginning with the quarter ending March 31, 2018.
Most important facts for investors to verify
- Whether comparable-store sales, gross-margin expansion and operating leverage continued after the third quarter.
- The pace and economics of planned store openings, including the 2015 and 2016 targets.
- Cash generation relative to capital expenditures and the scale of share repurchases.
- Debt maturities, revolving-facility availability and continued compliance with fixed-charge and leverage covenants.
- The outcome and financial exposure related to the California hazardous-waste inquiry and the Meridian Creative Alliance appeal.
- Any change in consumer demand resulting from fuel prices, miles driven, unemployment, weather or broader economic conditions.