O REILLY AUTOMOTIVE INC annual report, FY2023

O’Reilly Automotive, Inc. 2023 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2023, with unaudited fourth-quarter information also provided. O’Reilly is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies, equipment, and accessories serving do-it-yourself and professional service-provider customers through a single reportable segment.

Store base at year-end: 6,095 domestic stores and 62 Mexico stores, or 6,157 total.
2023 net new stores: 166 domestic and 20 in Mexico.
Customer mix: approximately 53% DIY sales and 47% professional service-provider sales.
Employees: 90,302 as of January 31, 2024.
Groupe Del Vasto acquisition: completed in January 2024; results will be included from the acquisition date and were not material enough to require pro forma presentation.

Financial performance and key metrics

Metric	2023	2022	Change
Sales	$15.812 billion	$14.410 billion	+10%
Comparable-store sales	+7.9%	+6.4%	+1.5 percentage points
Gross profit	$8.105 billion	$7.382 billion	+10%
Gross margin	51.3%	51.2%	+0.1 percentage points
Operating income	$3.186 billion	$2.954 billion	+8%
Operating margin	20.2%	20.5%	-0.3 percentage points
Net income	$2.347 billion	$2.173 billion	+8%
Net margin	14.8%	15.1%	-0.3 percentage points
Diluted EPS	$38.47	$33.44	+15%
Operating cash flow	$3.034 billion	$3.148 billion	-4%
Capital expenditures	$1.006 billion	$563 million	+79%
Free cash flow	$1.988 billion	$2.371 billion	-16%

Fourth-quarter 2023 sales were $3.832 billion, gross profit was $1.967 billion, operating income was $719 million, net income was $553 million, and diluted EPS was $9.26. The filing does not provide a clear fourth-quarter comparable-store sales percentage in the supplied text.

DIY sales increased to $8.248 billion from $7.903 billion; professional sales increased to $7.246 billion from $6.170 billion.
Sales growth reflected 7.9% domestic comparable-store growth and $293 million of incremental sales from recent noncomparable stores.
Comparable sales benefited from higher average ticket values and positive professional-customer transaction counts, partly offset by declining DIY transaction counts.
SG&A increased 11% to $4.918 billion, or 31.1% of sales, from 30.7%. Drivers included higher staffing, wage rates, benefits, fleet depreciation, store refresh initiatives, self-insurance costs, deferred-compensation expense, and the resumed leadership conference.
Interest expense increased to $202 million from $158 million because of higher average borrowings.
The effective tax rate declined to 21.9% from 22.4%, primarily because of higher excess tax benefits from share-based compensation.

Balance sheet, debt, liquidity, and capital allocation

Cash and cash equivalents were $279 million at December 31, 2023, compared with $109 million at year-end 2022.
Total assets were $13.873 billion; inventory was $4.658 billion.
Total debt was $5.570 billion, up from $4.372 billion. Debt consisted primarily of $4.9 billion of senior notes and $751 million of commercial paper.
The $1.8 billion revolving credit facility had no borrowings outstanding, with $5.4 million of letters of credit reducing availability. The facility matures in June 2026.
Debt principal maturities include $751 million in 2024, $1.250 billion in 2026, $750 million in 2027, and $500 million in 2028.
Debt covenants were satisfied at year-end. Fixed-charge coverage was 6.42 times versus a 2.50-times minimum; leverage was 1.93 times versus a 3.50-times maximum.
Accounts payable included $4.4 billion of supplier-finance obligations, compared with $4.2 billion in 2022.
Shareholders’ deficit increased to $1.739 billion from $1.061 billion, largely reflecting continued share repurchases.
The company repurchased 3.568 million shares for $3.151 billion during 2023. Approximately $2.6 billion remained authorized at year-end; an additional $184 million of repurchases occurred through February 28, 2024.
No cash dividends have been declared since the company became public, and no dividends are expected in the foreseeable future.

Material changes versus the prior comparable period

Revenue and comparable-store growth accelerated, but operating and net margins declined modestly as operating expenses grew faster than sales.
Professional sales increased approximately 17%, materially outpacing DIY sales growth of approximately 4%, increasing the mix of lower-margin professional business.
Operating cash flow declined despite higher earnings, primarily because of greater inventory investment and less favorable working-capital effects.
Capital spending increased substantially to support new stores, distribution enhancements, store renovations, and vehicle-fleet upgrades, reducing free cash flow.
Debt increased by approximately $1.2 billion, including the issuance of $750 million of 5.750% senior notes due 2026 and the initiation of a commercial-paper program.
The company opened 186 net new stores, broadly consistent with 187 in 2022, while increasing its year-end store count by 186.

Guidance, outlook, commentary, and risks

Management planned 190 to 200 net new store openings in 2024. Estimated average investment for an owned new store was approximately $3.0 million to $3.3 million, with higher costs for Hub stores.
Management expects continued growth through new stores, comparable-store sales, professional-customer expansion, distribution investments, omnichannel initiatives, and selective acquisitions.
Planned 2024 distribution projects include relocating the Springfield and Atlanta distribution centers to larger facilities.
Management stated that inflation had not had a material adverse effect because of supplier programs, purchasing scale, selective forward buying, and pricing actions.
Key risks include economic weakness, inflation, interest rates, consumer debt, competition and pricing pressure, weather and natural disasters, supply-chain disruption, tariffs, labor availability and wage costs, cybersecurity incidents, technology failures, international operations, acquisition integration, regulatory and environmental obligations, and elevated debt.
The company reported no cybersecurity incident known to have materially affected, or reasonably likely to materially affect, its business, results, financial condition, or cash flows.
Legal proceedings are considered ordinary-course matters; management does not currently expect them, after insurance and accruals, to have a material adverse effect.
Self-insurance reserves were $214 million on a discounted basis. A 10% change in underlying assumptions would have affected pretax income by approximately $21 million.
The company recognized $336.5 million of renewable-energy tax credits in 2023 and had a $266 million liability for purchased transferable federal renewable-energy tax credits at year-end.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective internal control.

Important facts for investors to verify

Whether 2024 store openings remain on track for the stated 190-to-200 range and whether new-store returns justify the increased capital program.
The effect of professional-sales mix, pricing actions, inflation, and DIY transaction trends on gross margin and future comparable-store sales.
Inventory growth, supplier-finance obligations, and working-capital requirements as drivers of operating cash flow.
Refinancing and liquidity plans for the $751 million commercial-paper balance due in 2024 and the $1.25 billion of debt maturities in 2026.
Integration performance and financial impact of the Groupe Del Vasto acquisition, including expansion into Canada.
Debt-funded share repurchases and the effect of ongoing repurchases on leverage, shareholders’ deficit, and diluted EPS.
Exposure to self-insurance claims, tax-credit obligations, related-party leases, litigation, and potential changes in tax, labor, environmental, and data-privacy regulation.