O’Reilly Automotive, Inc. — Q1 2012 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 months ended March 31, 2012, compared with the three months ended March 31, 2011.
The company operated 3,809 stores in 39 states at quarter-end. It opened 73 stores and closed four, for 69 net additions during the quarter.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales | $1.529 billion | $1.383 billion | +11% |
| Gross profit | $761.7 million | $669.8 million | +14% |
| Gross margin | 49.8% | 48.4% | +140 basis points |
| Operating income | $247.5 million | $196.4 million | +26% |
| Operating margin | 16.2% | 14.2% | +200 basis points |
| Net income | $147.5 million | $102.5 million | +44% |
| Net margin | 9.6% | 7.4% | +220 basis points |
| Diluted EPS | $1.14 | $0.72 | +58% |
| Operating cash flow | $414.5 million | $294.1 million | +41% |
| Capital expenditures | $75.5 million | $94.4 million | -20% |
Comparable-store sales increased 7.4%, or 6.1% after adjusting for the additional Leap Day. Average ticket values increased, while customer transaction counts were broadly flat; professional customer transactions were strong, while DIY transactions remained pressured by fuel costs and unemployment.
Cash and cash equivalents were $575.2 million at March 31, 2012, compared with $361.6 million at December 31, 2011. Total debt and capital lease obligations were $797.5 million, consisting principally of $500 million of 4.875% senior notes and $300 million of 4.625% senior notes, both due in 2021. The company had no revolving-facility borrowings and $57.8 million of outstanding letters of credit against its $660 million unsecured revolving facility.
Material changes versus the prior comparable period
- Gross margin benefited from distribution-center efficiencies, improved vendor acquisition costs, a more focused advertised-price strategy, lower inventory shrinkage and the absence of CSK store inventory changeover activities incurred in 2011.
- SG&A increased 9% to $514.2 million but declined to 33.6% of sales from 34.2%, reflecting operating leverage, lower advertising and occupancy costs, partly offset by higher store payroll and expansion-related costs.
- Other expense fell to $7.7 million from $30.3 million. Q1 2011 included $21.6 million of debt issuance cost write-offs and $4.2 million of interest-rate-swap termination charges related to financing transactions.
- Cash from operations increased principally because of higher earnings, lower net inventory investment and higher income taxes payable. Accounts payable to inventory increased to 73.3% at March 31, 2012, from 48.8% a year earlier.
- Financing cash use increased to $127.0 million, primarily due to $154.0 million of share repurchases and the absence of the prior-year debt issuance proceeds.
- The company repurchased 1.8 million shares at an average price of $87.01 during the quarter, leaving approximately $369.7 million authorized. Shares outstanding declined to 125.99 million from 127.18 million at year-end 2011.
Guidance, outlook, risks and unusual items
Management planned approximately 180 net new-store openings for 2012 and stated that operating cash flow and available revolver capacity were expected to fund near-term and long-term liquidity needs. No specific revenue or earnings guidance was provided in the filing.
Management cited aging vehicles, maintenance demand and potential market-share gains as favorable industry factors. Risks include fuel prices, unemployment, consumer spending, miles driven, competition, product demand, weather, inflation, regulations, employee retention, higher debt levels, credit ratings and the performance and integration of acquired businesses, including CSK.
The company remained in compliance with its debt covenants. At March 31, 2012, the fixed-charge coverage ratio was 5.00 times versus a 2.0-times minimum, and adjusted debt to adjusted EBITDAR was 1.68 times versus a 3.0-times maximum.
O’Reilly maintained a $14.1 million reserve for legal fees and costs associated with indemnification obligations related to CSK’s pre-acquisition governmental investigations and litigation. The underlying litigation had concluded, but insurance coverage and the ultimate cost remained uncertain. Management did not currently expect a material adverse effect after reserves, although a particular period could be materially affected.
The business is seasonal, with historically higher sales and profits in the second and third quarters. Management stated that there were no material changes to previously disclosed risk factors, contractual obligations, critical accounting estimates or market risks.
Important facts for investors to verify
- Whether comparable-store sales momentum and higher average tickets continue after the Leap Day benefit is removed.
- Execution of the 180-net-store 2012 expansion plan and the capital required to support store growth.
- Sustainability of the 49.8% gross margin and benefits from vendor financing and distribution efficiencies.
- Cash conversion, inventory growth and the continued increase in accounts payable relative to inventory.
- Share-repurchase pace and its effect on cash, leverage and diluted EPS.
- Compliance with the revolving credit facility’s fixed-charge and leverage covenants as debt, rent and store count change.
- Potential additional costs or insurance recoveries related to the $14.1 million CSK indemnification reserve.
- Exposure to fuel prices, unemployment, miles driven, consumer trade-down behavior and seasonal weather patterns.