O’Reilly Automotive, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013; it is an annual Form 10-K rather than a standalone fourth-quarter filing. O’Reilly is a U.S. specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service-provider customers. At year-end, the company operated 4,166 stores in 42 states, supported by 24 distribution centers and 266 Hub stores.
Approximately 58% of 2013 sales came from DIY customers and 42% from professional service providers. The company opened 190 net new stores during 2013 and reported a single operating segment.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Sales | $6.649 billion | $6.182 billion | +8% |
| Gross profit | $3.369 billion | $3.097 billion | +9% |
| Gross margin | 50.7% | 50.1% | +60 bps |
| Operating income | $1.103 billion | $977 million | +13% |
| Operating margin | 16.6% | 15.8% | +80 bps |
| Net income | $670 million | $586 million | +14% |
| Net margin | 10.1% | 9.5% | +60 bps |
| Diluted EPS | $6.03 | $4.75 | +27% |
| Comparable-store sales | +4.3% | +3.8% | +50 bps |
| Cash from operating activities | $908 million | $1.252 billion | Down $344 million |
| Capital expenditures | $396 million | $301 million | +32% |
| Free cash flow | $512 million | $951 million | Down $439 million |
Fourth-quarter 2013 sales were $1.621 billion, gross profit was $819 million, operating income was $256 million, net income was $152 million and diluted EPS was $1.40. Fourth-quarter comparable-store sales increased 5.4%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $231 million at December 31, 2013, compared with $248 million at the prior year-end.
- Working capital was $412 million, down from $460 million.
- Total debt was approximately $1.396 billion, up 27% primarily because of the issuance of $300 million of 3.850% senior notes due 2023.
- Debt-to-equity increased to 0.71:1 from 0.52:1; shareholders’ equity declined to $1.966 billion from $2.108 billion, principally reflecting share repurchases.
- The company had no borrowings under its $600 million unsecured revolving credit facility; $51.7 million of letters of credit reduced availability.
- Fixed-charge coverage was 4.98 times and consolidated leverage was 1.90 times, compared with covenant thresholds of 2.25 times and 3.00 times, respectively. The company reported compliance with all debt covenants.
- Contractual cash obligations totaled approximately $4.057 billion, including $1.905 billion of debt principal and interest, $1.941 billion of operating and capital lease payments, $126.7 million of self-insurance reserves and $80.8 million of construction commitments.
Material changes versus the prior comparable period
- Sales growth reflected 4.3% comparable-store sales growth, 190 net new stores and sales from stores opened or acquired. Store count increased from 3,976 to 4,166.
- Gross margin improved due to acquisition-cost reductions, better inventory shrinkage and distribution efficiencies, partially offset by product-mix pressure from faster-growing commercial sales and the depletion of the LIFO reserve.
- The company recorded a $21.6 million reduction of LIFO cost to replacement cost in 2013 and indicated that additional gross-margin pressure from acquisition-cost reductions could occur in early 2014.
- SG&A increased 7% but declined as a percentage of sales to 34.1% from 34.3%, reflecting leverage in store payroll and occupancy costs.
- Operating cash flow and free cash flow declined because of working-capital timing and higher investment in distribution facilities, despite higher net income.
- The company repurchased 8.5 million shares for $933 million in 2013, compared with 16.2 million shares for $1.445 billion in 2012. Weighted-average diluted shares declined to 111.1 million from 123.3 million.
- The company issued $300 million of 3.850% senior notes due 2023 and amended its revolving credit facility, reducing commitments to $600 million while extending maturity to July 2018.
Guidance, outlook, risks and unusual items
- Management planned approximately 200 net new stores in 2014. New-store costs were estimated at approximately $1.3 million to $1.5 million per store, with lower costs possible for leased locations.
- Distribution capacity was expected to expand materially through the Lakeland, Florida facility, a planned Chicago facility and relocation of the Lewiston, Maine facility. Management expected more than 750 stores of total distribution growth capacity by the end of 2014.
- Management expressed confidence in continued market-share gains, profitable growth and expansion of the professional-service-provider business, but did not provide explicit full-year revenue, earnings or margin guidance in the supplied filing text.
- Key risks include intense competition, adverse economic or weather conditions, slower vehicle miles driven, changing consumer spending, vendor disruptions, acquisition integration, distribution-center interruptions, technology or data-security failures, labor and healthcare costs, increased debt and possible credit-rating downgrades.
- The company had a $13.4 million reserve related to legal fees and costs associated with legacy CSK indemnification obligations. Management did not expect the matter to materially affect consolidated results, although the timing and ultimate outcome remained uncertain.
- The company had $58.6 million of reserves for unrecognized tax benefits, including interest and penalties, and expected approximately $4.3 million of reductions during the following year from settlements or statute expirations.
- No goodwill or material long-lived-asset impairment was recorded in 2013. The company paid no cash dividends and did not anticipate paying dividends in the foreseeable future.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded that controls were effective.
Most important facts for investors to verify
- Whether planned 2014 store openings and distribution-center expansions were completed on schedule and within budget.
- Comparable-store sales, professional-service-provider sales mix and the effect of commercial growth on gross margin.
- Free cash flow conversion, inventory growth, vendor-financing dependence and accounts-payable-to-inventory levels.
- Debt repayment capacity, covenant headroom, interest expense and the effect of the $300 million 2023 note issuance.
- The pace and valuation of share repurchases relative to operating cash generation and leverage.
- Resolution and cash impact of the legacy CSK indemnification matter and uncertain tax positions.
- Exposure to competition, weather, vehicle-repair trends, labor costs, cybersecurity incidents and supply-chain disruptions.