O’Reilly Automotive, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
O’Reilly Automotive is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service-provider customers. The filing covers the fiscal year ended December 31, 2019, with fourth-quarter information included. At year-end, the company operated 5,439 U.S. stores in 47 states and 21 stores in Mexico.
- Sales mix: approximately 56% DIY and 44% professional service-provider customers.
- Completed the Mayasa acquisition on November 29, 2019, adding 21 Mexican stores and six distribution centers; Mayasa contributed less than 1% of 2019 revenue and net income.
- Opened 200 net new domestic stores and began operating 33 acquired Bennett stores during 2019; 13 Bennett stores were merged into existing locations and 20 were rebranded.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $10.150 billion | $9.536 billion | 6% |
| Gross profit | $5.395 billion | $5.040 billion | 7% |
| Gross margin | 53.1% | 52.8% | +30 bps |
| Operating income | $1.921 billion | $1.815 billion | 6% |
| Operating margin | 18.9% | 19.0% | -10 bps |
| Net income | $1.391 billion | $1.324 billion | 5% |
| Net margin | 13.7% | 13.9% | -20 bps |
| Diluted EPS | $17.88 | $16.10 | 11% |
| Comparable-store sales | 4.0% | 3.8% | +20 bps |
| Cash flow from operations | $1.708 billion | $1.728 billion | -1% |
| Capital expenditures | $628.1 million | $504.3 million | 25% |
| Free cash flow | $1.021 billion | $1.189 billion | -14% |
Gross-margin expansion reflected sales of inventory purchased before recent acquisition-cost increases and related price increases. SG&A increased to 34.2% of sales from 33.8%, primarily because of wage pressure, health and insurance costs, and increased omnichannel and technology investment. Interest expense increased to $140.0 million from $122.1 million.
Fourth-quarter 2019 sales were $2.483 billion, gross profit was $1.325 billion, operating income was $441.5 million, net income was $324.9 million and diluted EPS was $4.25. Fourth-quarter comparable-store sales increased 4.4%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $40.4 million at December 31, 2019, compared with $31.3 million in 2018.
- Working capital was negative $635.8 million, compared with negative $350.9 million, primarily reflecting higher accounts payable and the recognition of current operating-lease liabilities.
- Total debt was $3.891 billion, up from $3.417 billion. The increase included a $500 million issuance of 3.900% senior notes due 2029 and $261 million outstanding under the revolving credit facility.
- The company had a $1.2 billion unsecured revolving credit facility maturing in April 2022, with $39 million of letters of credit outstanding. Reported availability was reduced by borrowings and letters of credit.
- Senior-note principal maturities include $800 million in 2021, $561 million in 2022, $300 million in 2023 and $2.25 billion thereafter.
- Debt covenants were satisfied at year-end. The fixed-charge coverage ratio was 5.21x versus a 2.50x minimum, and the consolidated leverage ratio was 2.20x versus a 3.50x maximum.
- The company repurchased 3.877 million shares for $1.433 billion during 2019. Approximately $568.7 million remained authorized at year-end. No cash dividends have been declared since the company became public.
Material changes versus the prior comparable period
- Revenue growth was supported by 4.0% comparable-store sales, 200 net new domestic stores, Bennett operations and the late-year Mayasa acquisition.
- Comparable sales were driven by higher average ticket values, while transaction counts were flat overall: professional transactions increased, but DIY transactions declined.
- Wetter and cooler weather in the first half of 2019 and inflationary pressures negatively affected DIY transaction counts.
- Gross margin improved modestly, but operating and net margins declined because SG&A grew faster than sales.
- Operating cash flow was broadly stable, but free cash flow declined because capital expenditures increased for distribution expansion, new stores, property acquisitions and technology.
- ASC 842 lease accounting was adopted in 2019, resulting in approximately $1.9 billion of right-of-use assets and approximately $2.0 billion of lease liabilities. The adoption did not materially affect earnings, cash flow, liquidity or covenant compliance.
- Goodwill increased to $936.8 million, including $128.1 million of provisional goodwill and intangible assets related to Mayasa. No goodwill impairment was recorded.
Guidance, outlook, risks and unusual items
- Management planned approximately 180 net new domestic stores in 2020. Estimated average investment per new store was approximately $1.5 million to $1.8 million, with lower costs possible for leased sites.
- Planned 2020 distribution projects included consolidating the Nashville and Knoxville facilities into a larger Lebanon, Tennessee, distribution center, converting the existing Knoxville facility into a Hub, and opening a new distribution center in Horn Lake, Mississippi.
- Management expects operating cash flow and available revolver capacity to fund foreseeable capital and liquidity needs, but cautions that demand declines could reduce cash generation and affect covenant capacity.
- Key risks include intense competition and pricing pressure, weather and regional economic conditions, wage inflation, supplier disruption and tariffs, acquisition integration, distribution-center or systems interruptions, cybersecurity, debt and credit-rating risk, regulatory and environmental liabilities, litigation, employment costs and foreign-currency exposure.
- Contractual obligations totaled approximately $7.580 billion, including $4.779 billion of debt principal and interest, $2.437 billion of operating lease payments, $100.1 million of construction commitments and $95.0 million of planned tax-credit equity contributions.
- Legal proceedings were described as ordinary-course matters that management does not currently expect to have a material adverse effect, after considering insurance and accruals.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The Mayasa operations were excluded from management’s internal-control assessment because of the acquisition’s timing.
Most important facts for investors to verify
- Whether comparable-store sales and average ticket growth can offset declining DIY transaction counts and ongoing inflationary pressure.
- The pace and returns of planned store openings and distribution-center investments.
- Debt maturities beginning in 2021, revolver availability, covenant headroom and sensitivity to interest-rate increases.
- Whether free cash flow recovers after the 2019 increase in capital expenditures and acquisition-related investment.
- The final purchase-price allocation and integration performance of Mayasa, including any changes to provisional goodwill and intangible assets.
- Future effects of labor costs, tariffs, supplier pricing, weather, cybersecurity events and foreign-currency movements.
- The sustainability of share repurchases given the company’s high debt balance, negative working capital and substantial lease obligations.