O’Reilly Automotive, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
O’Reilly is an automotive aftermarket parts, tools, supplies, equipment and accessories retailer serving do-it-yourself and professional service-provider customers in the United States and Mexico. The filing covers the three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020. At quarter-end, the company operated 5,660 U.S. stores and 22 Mexico stores.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $3.091 billion | $2.476 billion | +25% |
| Comparable-store sales | +24.8% | -1.9% | Improved |
| Gross profit | $1.641 billion | $1.296 billion | +27% |
| Gross margin | 53.1% | 52.3% | +80 bps |
| Operating income | $691.1 million | $423.6 million | +63% |
| Operating margin | 22.4% | 17.1% | +530 bps |
| Net income | $501.6 million | $300.4 million | +67% |
| Net margin | 16.2% | 12.1% | +410 bps |
| Diluted EPS | $7.06 | $3.97 | +78% |
| Operating cash flow | $890.7 million | $459.1 million | +94% |
| Free cash flow | $789.8 million | $227.2 million | +248% |
| Capital expenditures | $94.9 million | $133.3 million | Down |
SG&A increased 9% to $949.7 million but declined to 30.7% of sales from 35.2%, reflecting operating leverage. The effective income tax rate increased to 23.5% from 20.9%, primarily because of lower renewable-energy tax-credit benefits.
At March 31, 2021, cash and cash equivalents were $610.9 million. Total debt was $4.124 billion, including $299.9 million classified as current for senior notes due in 2021. The company had no revolving-credit borrowings and had $84.0 million of outstanding letters of credit. Its $1.2 billion unsecured revolving facility was scheduled to mature in April 2022. Shareholders’ equity was a deficit of $7.0 million, largely reflecting cumulative share repurchases.
Material changes versus the prior comparable period
- Sales growth was driven by a 24.8% comparable-store increase, store expansion, higher average ticket values and increased transaction counts.
- DIY sales increased to $1.781 billion from $1.345 billion, while professional-service-provider sales increased to $1.239 billion from $1.070 billion.
- Gross-margin expansion reflected a greater mix of higher-margin DIY sales and leverage of fixed distribution costs.
- Operating and net margins expanded materially as sales growth exceeded SG&A growth.
- Operating cash flow nearly doubled, benefiting from higher earnings, stronger inventory turns and a larger increase in taxes payable.
- Financing cash flow shifted to a $651.3 million use from a $15.3 million source, primarily because of $664.5 million of share repurchases and the absence of prior-year debt issuance and revolving-facility borrowings.
- The company opened 66 net new U.S. stores in the quarter, compared with 73 in Q1 2020.
Outlook, commentary, risks and unusual items
Management did not provide specific quantitative full-year earnings or sales guidance in the filing. Management stated that government stimulus payments, enhanced unemployment benefits, market reopenings, favorable weather and consumers’ investment in existing vehicles positively affected first-quarter demand. It remains focused on its dual-market strategy, store growth, customer service, inventory availability and market-share gains.
Management expects operating cash flow and availability under the revolving facility to fund short- and long-term needs for the foreseeable future, but cautioned that COVID-19-related uncertainty could reduce demand, cash generation or covenant capacity. Other identified risks include miles driven, economic conditions, inflation, competition, product availability, tariffs, labor, cybersecurity, international operations, acquisition performance, debt levels and credit ratings.
The company increased its cumulative share-repurchase authorization by $1.0 billion to $15.8 billion. It repurchased 1.475 million shares for $664.5 million during the quarter and had $817.0 million of authorization remaining at March 31, 2021. Through May 7, 2021, it repurchased less than 0.1 million additional shares for $8.0 million.
The company classified $300 million of senior notes due in 2021 as current and stated that it expected to have sufficient cash to redeem them. It remained in compliance with its debt covenants, including a 6.46 times fixed-charge coverage ratio versus a 2.50 times minimum and a 1.77 times leverage ratio versus a 3.50 times maximum.
Legal proceedings were described as incidental to ordinary operations and not expected to have a material adverse effect in aggregate. Management reported no material changes to previously disclosed risk factors, contractual obligations or critical accounting estimates. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether first-quarter demand benefits from stimulus, reopenings and favorable weather persist after comparable-period effects normalize.
- The timing and funding of the $300 million senior-note maturity and the April 2022 revolving-facility maturity.
- The pace and valuation of continued share repurchases, especially given the near-zero shareholders’ equity balance.
- Whether gross-margin expansion and SG&A leverage are sustainable as sales mix and operating conditions change.
- Trends in miles driven, professional-customer demand, inventory availability, inflation and supplier costs.
- COVID-19 developments, labor availability, cybersecurity, competition and other risks identified in the filing.
- The filing’s free cash flow and covenant ratios are non-GAAP measures and should be evaluated together with the reconciled GAAP figures.