Business Context and Reporting Period
Company: O'Reilly Automotive, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: One of the largest specialty retailers of automotive aftermarket parts, tools, supplies, and accessories in the U.S., serving both do-it-yourself (DIY) customers and professional installers. As of June 30, 2009, the company operated 3,387 stores in 38 states. The reporting period is heavily influenced by the integration of the CSK Auto Corporation acquisition completed in July 2008.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|
| Sales | $1,251,377 | $2,415,126 | $1,350,650 |
| Gross Profit | $603,769 | $1,146,439 | $605,591 |
| Gross Margin % | 48.2% | 47.5% | 44.8% |
| Operating Income | $149,675 | $263,011 | $162,544 |
| Net Income | $85,515 | $148,350 | $102,119 |
| Diluted EPS | $0.62 | $1.08 | $0.88 |
| Operating Cash Flow (6mo) | $152,763 (2009) vs $215,468 (2008) | ||
| Total Debt (Long-term + Current) | $796,620 (as of June 30, 2009) | ||
| Cash and Equivalents | $41,024 (as of June 30, 2009) |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 78% ($547 million) for the quarter and 79% ($1.06 billion) for the six months compared to the prior year. This growth is primarily driven by the inclusion of CSK Auto Corporation stores acquired in July 2008.
- Comparable Store Sales: Consolidated comparable store sales increased 4.8% for the quarter and 5.2% for the six months. O'Reilly branded stores saw a 6.1% increase in the quarter, while legacy CSK systems saw a 2.1% increase.
- Profitability: Net income increased 53% for the quarter and 45% for the six months. However, net income as a percentage of sales decreased slightly (from 7.9% to 6.8% in the quarter) due to higher SG&A expenses associated with the CSK integration and amortization of acquired intangible assets.
- Expenses: Selling, general, and administrative (SG&A) expenses increased 98% for the quarter and 99% for the six months, rising from 32.5% to 36.3% of sales. This is attributed to the higher expense structure of acquired CSK stores and payroll for store conversions.
- Interest Expense: Interest expense increased significantly ($10 million for the quarter) due to borrowings under the new $1.2 billion asset-based credit facility used to fund the CSK acquisition.
Guidance, Outlook, and Risks
- Store Expansion: The company plans to open approximately 150 net new stores in 2009. During the second quarter, 50 new O'Reilly branded stores were opened, and 120 CSK stores were converted to the O'Reilly system.
- Outlook: Management expects the reduction in commodity prices to normalize over the remainder of the year. They anticipate continued growth driven by an aging vehicle population and unperformed maintenance, despite challenging macroeconomic conditions.
- Legal Contingencies: The company is involved in resolving governmental investigations (DOJ and SEC) regarding historical accounting practices of CSK. A $21.0 million reserve was recorded as part of the purchase price allocation. While the SEC investigation was settled without fines, the DOJ investigation remains ongoing. Management does not currently believe these matters will have a material adverse effect.
- Exit Activities: Significant reserves ($16.4 million for store closures, $8.2 million for office/distribution closures, and $3.3 million for employee separation) remain for planned CSK exit activities, including the closure of 51 CSK stores and consolidation of facilities.
- Liquidity: The company has a $1.2 billion credit facility with $445.8 million available for additional borrowings as of June 30, 2009. The company is in compliance with its leverage ratio covenants.
Investor Verification Checklist
- CSK Integration Progress: Verify the pace of converting CSK stores to O'Reilly systems and the associated costs versus the projected timeline.
- Comparable Store Sales Sustainability: Monitor whether the 4.8% - 5.2% comparable store sales growth can be sustained as the CSK acquisition impact fully integrates and the macroeconomic environment evolves.
- Legal Reserve Adequacy: Track the status of the ongoing DOJ investigation and the $21.0 million legal reserve to ensure no additional material liabilities arise.
- Debt Servicing: Review the impact of the increased interest expense ($23 million for six months) on future cash flows, particularly given the $676.3 million outstanding on variable-rate debt.
- Inventory Levels: Assess the $1.74 billion inventory balance and the company's ability to manage obsolescence and shrinkage as they integrate CSK inventory systems.