O'Reilly Automotive, Inc. — 2014 Q3 Form 10-Q Summary
Business context and reporting period
O'Reilly Automotive is a U.S. specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional customers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
At September 30, 2014, the company operated 4,311 stores in 43 states, compared with 4,135 stores in 42 states a year earlier. It opened 57 stores and closed three during the quarter, and opened 150 and closed five during the nine-month period.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Sales | $1.877 billion | $1.728 billion | $5.452 billion | $5.028 billion |
| Sales growth | 9% | — | 8% | — |
| Comparable-store sales growth | 6.2% | 4.6% | 5.9% | 3.9% |
| Gross profit | $968.2 million | $879.2 million | $2.797 billion | $2.550 billion |
| Gross margin | 51.6% | 50.9% | 51.3% | 50.7% |
| Operating income | $343.8 million | $300.4 million | $967.4 million | $847.7 million |
| Operating margin | 18.3% | 17.4% | 17.7% | 16.9% |
| Net income | $217.0 million | $186.5 million | $596.5 million | $517.9 million |
| Net margin | 11.6% | 10.8% | 10.9% | 10.3% |
| Diluted EPS | $2.06 | $1.69 | $5.58 | $4.63 |
- Q3 diluted EPS increased 22%, while nine-month diluted EPS increased 21%, helped by higher earnings and lower weighted-average shares outstanding following substantial share repurchases.
- SG&A increased 8% in Q3 and 7% year to date, but declined as a percentage of sales to 33.3% from 33.5% in Q3 and to 33.6% from 33.8% year to date, reflecting occupancy leverage.
- Management attributed gross-margin expansion primarily to product acquisition-cost improvements, lower quarterly non-cash LIFO charges and increased capitalized warehouse costs. Inventory was written down to replacement cost by approximately $6 million in Q3 and $34 million year to date.
Cash flow, balance sheet, debt and liquidity
| Metric | September 30, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $298.3 million | $231.3 million |
| Inventory | $2.518 billion | $2.375 billion |
| Total assets | $6.475 billion | $6.067 billion |
| Total debt and capital leases | $1.397 billion | $1.396 billion |
| Shareholders' equity | $1.976 billion | $1.966 billion |
- Nine-month cash provided by operating activities was $983.0 million, compared with $719.8 million in 2013.
- Capital expenditures were $317.2 million, compared with $299.5 million; reported free cash flow was $665.8 million, compared with $420.3 million.
- Investing activities used $312.1 million. Financing activities used $603.9 million, primarily because of $687.2 million of share repurchases and the absence of the $300.0 million debt issuance recorded in the prior-year period.
- The company had no borrowings under its $600 million unsecured revolving credit facility; approximately $47.8 million of letters of credit reduced availability. The facility matures in July 2018.
- Unsecured senior notes had an aggregate principal amount of approximately $1.4 billion, with stated interest rates of 3.800% to 4.875% and maturities from 2021 through 2023.
- The company remained in compliance with its debt covenants. The consolidated fixed-charge coverage ratio was 5.24 times versus a 2.25-times minimum through December 31, 2014, and the leverage ratio was 1.77 times versus a 3.00-times maximum.
Material changes versus the prior comparable period
- Sales increased $149 million, or 9%, in Q3 and $424 million, or 8%, in the first nine months. Growth reflected comparable-store gains, store expansion, increased average ticket values and higher transaction counts among both DIY and professional customers.
- Gross margin expanded 70 basis points in Q3 and 60 basis points year to date.
- Operating income rose 14% in both comparison periods, while net income increased 16% in Q3 and 15% year to date.
- Operating cash flow increased $263.1 million year to date, and free cash flow increased $245.5 million.
- Share repurchases were $687.1 million year to date, approximately unchanged in dollars from 2013 despite fewer shares repurchased at a higher average price. The company had $458.6 million remaining under its authorization at September 30, 2014.
- Subsequent to quarter-end through November 7, 2014, the company repurchased 1.1 million additional shares for $172.3 million.
Guidance, outlook, risks and unusual items
- Management planned approximately 200 net new stores in 2014 and 205 net new stores in 2015. It stated that expected operating cash flow and available revolver capacity should fund foreseeable capital and liquidity needs, while cautioning that future cash generation is not assured.
- Management cited vehicle age, miles driven, registered vehicles, employment and consumer spending as important aftermarket-demand drivers. It also noted risks from competition, changing product demand, economic conditions, inflation, weather, regulation, employee retention, acquisitions and higher debt levels.
- The business is seasonal, with historically higher sales and profits in the second and third quarters. Results for the nine months are not necessarily indicative of full-year results.
- The company received an environmental subpoena from Alameda County and other California agencies concerning hazardous-waste handling, storage and disposal. The ultimate outcome was not determinable.
- A $12.1 million reserve remained for potential CSK-related indemnification obligations and legal fees. Management did not expect a material adverse effect after reserves and insurance, but acknowledged that a particular period could be materially affected.
- The company adopted no material new accounting standard during the period. It was evaluating the potential effect of revenue-recognition standard ASU 2014-09, scheduled for adoption beginning with the first quarter ending March 31, 2017.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-store sales momentum and planned store openings continued after September 30, 2014.
- The sustainability of gross-margin expansion, including vendor-cost improvements, LIFO effects and capitalized warehouse costs.
- Capital-expenditure requirements, inventory growth and the conversion of operating cash flow into free cash flow.
- The pace and valuation of ongoing share repurchases relative to leverage and store-growth investments.
- Compliance with fixed-charge and leverage covenants as debt, rent obligations and share repurchases change.
- Developments in the California environmental inquiry and the remaining CSK-related indemnification matter.
- The filing text does not provide a clear full-year earnings or revenue forecast beyond store-opening targets and management’s liquidity outlook.