O’Reilly Automotive, Inc. 2018 Form 10-K Summary
Business context and reporting period
O’Reilly Automotive is a U.S. specialty retailer and supplier of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service provider customers. This Form 10-K covers the fiscal year ended December 31, 2018; fourth-quarter results are included but the filing is an annual report.
- Operated 5,219 stores in 47 states at year-end, up from 5,019 stores in 2017.
- Opened 200 net new stores during 2018; DIY sales represented approximately 57% of sales and professional service provider sales approximately 43%.
- Operated 27 regional distribution centers and 342 Hub stores.
Financial results and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Sales | $9.536 billion | $8.978 billion | Up 6% |
| Gross profit | $5.040 billion | $4.721 billion | Up 7% |
| Gross margin | 52.8% | 52.6% | Up 20 basis points |
| Operating income | $1.815 billion | $1.725 billion | Up 5% |
| Operating margin | 19.0% | 19.2% | Down 20 basis points |
| Net income | $1.324 billion | $1.134 billion | Up 17% |
| Net margin | 13.9% | 12.6% | Up 130 basis points |
| Diluted EPS | $16.10 | $12.67 | Up 27% |
| Cash from operating activities | $1.728 billion | $1.404 billion | Up 23% |
| Capital expenditures | $504.3 million | $465.9 million | Up 8% |
| Free cash flow | $1.189 billion | $889.1 million | Up 34% |
Fourth-quarter 2018 sales were $2.315 billion, gross profit was $1.234 billion, operating income was $428.0 million, net income was $300.4 million and diluted EPS was $3.72. Fourth-quarter comparable store sales increased 3.3%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $31.3 million at December 31, 2018, compared with $46.3 million in 2017.
- Working capital was negative $350.9 million, compared with negative $249.7 million in 2017.
- Total debt was $3.417 billion, up from $2.978 billion. Debt-to-equity increased to 9.66 times from 4.56 times, reflecting debt issuance and substantial share repurchases.
- The Company issued $500 million of 4.350% senior notes due 2028 and had $287 million outstanding under its $1.20 billion unsecured revolving credit facility at year-end.
- The fixed-charge coverage ratio was 5.38 times and the consolidated leverage ratio was 2.10 times, within credit agreement requirements of at least 2.50 times and no more than 3.50 times, respectively.
- O’Reilly repurchased 6.1 million shares for $1.714 billion during 2018. Approximately $1.0 billion remained authorized at year-end; an additional $268.9 million of repurchases occurred through February 27, 2019.
- No cash dividends have been declared since the Company became public, and no dividends were anticipated in the foreseeable future.
Material changes versus the prior comparable period
- Sales growth reflected a 3.8% comparable store sales increase, 200 net new stores and other sales growth. Comparable store sales improved from 1.4% in 2017.
- Gross margin improved primarily because 2017 included an approximately $22 million non-cash LIFO charge; this benefit was partly offset by higher distribution costs, wage pressure and transportation costs.
- SG&A rose 8% and increased to 33.8% of sales from 33.4%, driven by store growth, additional personnel and facilities, tax-savings allocation initiatives and an unfavorable comparison with a 2017 legal accrual benefit.
- Interest expense increased to $122.1 million from $91.3 million because of higher average borrowings.
- The effective tax rate declined to 21.8% from 30.8%, principally because of the lower federal corporate tax rate under the Tax Cuts and Jobs Act. The 2017 results also included a one-time $53.2 million deferred-tax revaluation benefit.
- Share count declined materially as a result of repurchases: weighted-average diluted shares fell to 82.3 million from 89.5 million.
- Shareholders’ equity declined to $353.7 million from $653.0 million, primarily because of repurchases.
Guidance, outlook, risks and unusual items
- Management planned approximately 200 to 210 net new store openings in 2019. New-store costs were estimated at approximately $1.6 million to $1.8 million per store, subject to the owned-versus-leased mix.
- The Company expected its Twinsburg, Ohio distribution center to open in 2019, adding approximately 275 stores of distribution capacity. A Nashville-Knoxville distribution center consolidation into Lebanon, Tennessee was planned for 2020.
- After year-end, O’Reilly acquired substantially all non-real-estate assets of Bennett Auto Supply, including 33 stores and a southern Florida warehouse. The stores were not included in 2018 results; 13 were expected to be merged into existing locations during 2019.
- The Company adopted the new revenue standard, Topic 606, in 2018 without a material effect. It expected the lease standard, Topic 842, to add approximately $1.9 billion of right-of-use assets and $2.0 billion of lease liabilities as of January 1, 2019, without a material impact on earnings, cash flows, liquidity or debt covenant compliance.
- A $11.4 million long-lived asset charge was recorded, primarily related to disposal of a software project. No goodwill impairment was recorded.
- Key risks include intense competition and pricing pressure, adverse economic or weather conditions, supplier disruption and tariffs, execution of new-store growth and acquisitions, distribution-center interruptions, cybersecurity and systems failures, labor and regulatory costs, increased debt, interest-rate exposure, credit-rating downgrades, litigation and environmental liabilities.
- Contractual obligations totaled approximately $7.038 billion, including $4.274 billion of debt principal and interest, $2.429 billion of operating lease payments, $157.5 million of self-insurance reserves and $177.7 million of construction commitments.
- Management and Ernst & Young issued effective and unqualified assessments of internal control over financial reporting and the consolidated financial statements.
Important facts for investors to verify
- Whether comparable-store sales and transaction trends support continued growth, particularly given negative DIY transaction counts and reliance on higher average ticket values.
- The effect of higher wages, transportation costs, tariffs, inflation and distribution investments on gross and operating margins.
- Debt maturities, variable-rate exposure, covenant headroom and the effect of continued share repurchases on leverage and equity.
- The actual financial contribution and integration costs of the Bennett acquisition and planned 2019 store openings.
- The balance-sheet effects of Topic 842 lease adoption and whether reported leverage metrics remain comparable after implementation.
- Execution of the Twinsburg distribution center and the planned Tennessee distribution-center consolidation.
- Potential changes in tax law, uncertain tax positions, litigation, self-insurance reserves and other contingencies.