O’Reilly Automotive, Inc. — FY2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, including fourth-quarter results. O’Reilly 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. At year-end, the Company operated 4,829 stores in 47 states, supported by 27 distribution centers and 312 Hub stores. Approximately 58% of sales came from DIY customers and 42% from professional service providers.
Financial performance and key metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Sales | $8.593 billion | $7.967 billion | +8% |
| Gross profit | $4.509 billion | $4.163 billion | +8% |
| Gross margin | 52.5% | 52.3% | +20 bps |
| Operating income | $1.699 billion | $1.514 billion | +12% |
| Operating margin | 19.8% | 19.0% | +80 bps |
| Net income | $1.038 billion | $931.2 million | +11% |
| Net margin | 12.1% | 11.7% | +40 bps |
| Diluted EPS | $10.73 | $9.17 | +17% |
| Cash flow from operations | $1.454 billion | $1.281 billion | +13% |
| Capital expenditures | $476.3 million | $414.0 million | +15% |
| Free cash flow | $977.8 million | $867.5 million | +13% |
Comparable-store sales increased 4.8%, versus 7.5% in 2015. Fourth-quarter 2016 sales were $2.099 billion, gross profit was $1.114 billion, operating income was $407.7 million, net income was $246.0 million and diluted EPS was $2.59.
At December 31, 2016, cash and cash equivalents were $146.6 million, inventory was $2.779 billion and total assets were $7.204 billion. Current liabilities exceeded current assets, producing negative working capital of $142.7 million. Total debt was $1.887 billion, compared with $1.390 billion in 2015, while shareholders’ equity declined to $1.627 billion from $1.961 billion, primarily because of share repurchases.
Material changes versus the prior comparable period
- Sales growth reflected 4.8% comparable-store sales growth, 210 net new stores, the acquisition of 48 Bond Auto Parts stores, one additional Leap Day, and continued customer transaction and average-ticket increases.
- The store base increased from 4,571 to 4,829 locations, and geographic coverage expanded from 44 to 47 states.
- Gross margin improved primarily from supplier acquisition-cost improvements, partly offset by a larger non-cash LIFO adjustment. LIFO inventory costs were written down by approximately $49 million in 2016 versus $28 million in 2015.
- SG&A increased 6% in dollars but declined to 32.7% of sales from 33.2%, benefiting from occupancy-cost leverage and the absence of the $19 million litigation loss charge recorded in 2015.
- The Company issued $500 million of 3.550% unsecured senior notes due 2026, increasing total debt and interest expense.
- The Company repurchased 5.7 million shares for approximately $1.5 billion in 2016, reducing weighted-average diluted shares to 96.7 million from 101.5 million.
Guidance, outlook, risks and unusual items
- Management planned approximately 190 net new store openings in 2017, below 2016 levels because of resources required to convert the acquired Bond stores. Estimated new-store investment was approximately $1.5 million to $1.8 million per store, although leased locations may require less capital.
- Management expected operating cash flow and availability under the revolving credit facility to fund foreseeable liquidity needs. The $600 million unsecured revolver matured in July 2018; no borrowings were outstanding at year-end, although $38.7 million of letters of credit reduced availability.
- Debt covenants were satisfied. The fixed-charge coverage ratio was 6.15 times against a 2.50-times minimum, and the consolidated leverage ratio was 1.63 times against a 3.00-times maximum.
- Key risks include intense competition, economic and weather sensitivity, execution of store expansion and acquisitions, supplier disruption, distribution-center or information-technology interruptions, employee retention, data security, increased debt, interest-rate exposure, regulatory compliance and environmental, employment and healthcare costs.
- The Company had $2.257 billion of future minimum operating-lease payments, $2.391 billion of long-term debt principal and interest payments, $79.6 million of construction commitments and $138.7 million of undiscounted self-insurance reserves at year-end.
- A California hazardous-waste matter was resolved in November 2016 through a stipulated judgment and permanent injunction, with monetary and injunctive relief within previously established accruals. A Missouri contract dispute remained on appeal; the Company had reserved $18.6 million against a $12.5 million jury verdict.
- Management and Ernst & Young concluded that internal control over financial reporting was effective, and the independent auditor issued unqualified opinions on the financial statements and internal controls.
- The Company expected future accounting changes, particularly the lease standard, to materially increase reported assets and liabilities. The filing did not provide a quantified adoption impact.
Important facts for investors to verify
- Whether comparable-store sales and transaction growth can be sustained as the store base matures and vehicle repair frequency is affected by increasingly durable vehicles.
- The return on capital from the 2016 Bond acquisition, 2017 store conversions and planned new-store investments.
- The effect of supplier financing and elevated accounts payable, including the sustainability of the 105.7% accounts-payable-to-inventory ratio.
- Debt-service capacity, refinancing needs beginning in 2021, credit ratings and compliance with leverage and fixed-charge covenants.
- The impact of continued share repurchases on leverage, liquidity, equity and diluted EPS.
- Potential outcomes and additional costs related to litigation, environmental matters, self-insurance reserves and uncertain tax positions.
- The eventual balance-sheet impact of the lease-accounting standard and other pending accounting pronouncements.