O’Reilly Automotive, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited interim financial statements. O’Reilly operated 4,135 stores in 42 states at quarter-end and focuses on automotive aftermarket products serving DIY and professional customers.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Sales | $1.728 billion | $1.602 billion | $5.028 billion | $4.694 billion |
| Gross profit | $879.2 million | $805.5 million | $2.550 billion | $2.347 billion |
| Gross margin | 50.9% | 50.3% | 50.7% | 50.0% |
| Operating income | $300.4 million | $263.3 million | $847.7 million | $754.4 million |
| Operating margin | 17.4% | 16.4% | 16.9% | 16.1% |
| Net income | $186.5 million | $159.3 million | $517.9 million | $452.9 million |
| Diluted EPS | $1.69 | $1.32 | $4.63 | $3.60 |
- Sales increased 8% in Q3 and 7% for the first nine months. Comparable-store sales increased 4.6% in Q3 and 3.9% year to date.
- Gross profit increased 9% in both periods, supported by acquisition-cost improvements, pricing management and distribution-center efficiencies.
- SG&A increased 7% in both periods, but declined slightly as a percentage of sales to 33.5% in Q3 and 33.8% year to date.
- Net income increased 17% in Q3 and 14% year to date. Diluted EPS increased 28% and 29%, respectively, aided by lower share count from repurchases.
- Effective tax rates declined to 35.3% in Q3 and 36.5% year to date, primarily due to employment tax credits and favorable tax-audit resolutions.
Cash flow, balance sheet and liquidity
- Cash provided by operating activities was $719.8 million for the first nine months, down from $1.033 billion in the prior-year period.
- Capital expenditures were $299.5 million, compared with $217.3 million, primarily for new distribution facilities and store growth.
- Cash used in financing activities was $310.5 million, including $687.2 million of share repurchases and proceeds from $300.0 million of new senior notes.
- Cash and cash equivalents increased to $363.0 million at September 30, 2013, from $248.1 million at December 31, 2012.
- Total debt and capital lease obligations were $1.396 billion, including $1.396 billion of long-term debt. The company had no borrowings under its $600 million unsecured revolving credit facility; $52.5 million of letters of credit reduced availability.
- The revolving facility matures in July 2018. The company remained in compliance with its covenants, including a 4.95 times fixed-charge coverage ratio versus a 2.25 times minimum and a 1.94 times leverage ratio versus a 3.00 times maximum.
- Total assets were $6.167 billion and shareholders’ equity was $2.036 billion at September 30, 2013.
Material changes versus the prior comparable period
- The company issued $300 million of 3.850% senior notes due 2023 in June 2013, increasing debt from $1.096 billion at December 31, 2012 to $1.396 billion at September 30, 2013.
- The revolving credit facility was amended in July 2013: maturity was extended to July 2018, while borrowing margins, facility fees and maximum borrowing capacity were reduced.
- The company opened 163 stores and closed four during the first nine months, resulting in 159 net new stores; management planned 190 net new stores for 2013 and 200 for 2014.
- Share repurchases totaled 6.548 million shares for $687.1 million during the first nine months, compared with 12.647 million shares for $1.134 billion in the prior-year period. The remaining authorization was $391.6 million at quarter-end.
- Inventory increased to $2.365 billion from $2.276 billion at year-end, while accounts payable increased to $2.076 billion from $1.929 billion.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow and revolver availability to fund short- and long-term capital needs, but cautioned that weaker demand or changes in customer buying patterns could reduce cash generation and affect covenant compliance.
- Growth strategy remained focused on store expansion, market penetration, the dual DIY/professional customer strategy, customer service and expense control.
- Key industry drivers include miles driven, vehicle registrations, vehicle age, unemployment, consumer spending, weather and general economic conditions. Management noted that commercial sales carry lower gross margins than DIY sales.
- Store-closure reserves were $6.2 million and administrative/distribution-facility closure reserves were $1.4 million at September 30, 2013. Related lease obligations extend through April 2023.
- The company maintained a $13.6 million reserve for potential CSK indemnification obligations related to legal fees and costs. Insurance coverage and the ultimate outcome remain uncertain, although management did not expect a material adverse effect after reserves and insurance.
- Management stated that ordinary-course litigation was not expected to have a material aggregate effect, and that CSK governmental investigations and related criminal and SEC proceedings had concluded.
- The company adopted ASU 2013-02 and planned to adopt ASU 2013-11 in the first quarter of 2014; management expected presentation-only effects with no material impact on financial condition, results or cash flows.
- Subsequent to quarter-end through November 8, 2013, the company repurchased 0.7 million additional shares for $83.4 million.
Facts investors should verify
- Whether comparable-store sales, professional sales mix and gross-margin gains were sustained after the quarter.
- The pace and return on investment of planned 2013 and 2014 store openings and distribution-facility spending.
- Operating cash-flow conversion, inventory growth and the sustainability of vendor-financing benefits.
- Debt leverage, fixed-charge coverage and remaining revolver availability as additional senior-note obligations mature.
- The size and timing of future share repurchases relative to capital expenditures, store expansion and debt reduction.
- Resolution and potential additional costs associated with the CSK indemnification matter and other litigation.