O’Reilly Automotive, Inc. — Fiscal 2011 Form 10-K 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 service-provider customers. The filing covers the fiscal year ended December 31, 2011, including the fourth quarter. At year-end, the Company operated 3,740 stores in 39 states, 23 distribution centers and 192 hub stores. Approximately 59% of 2011 sales came from DIY customers and 41% from professional service providers.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $5.789 billion | $5.398 billion | 7.2% increase |
| Comparable-store sales | 4.6% | 8.8% | Decelerated |
| Gross profit | $2.837 billion; 49.0% margin | $2.621 billion; 48.6% margin | Margin increased 40 basis points |
| Operating income | $866.8 million; 15.0% margin | $712.8 million; 13.2% margin | 22% increase |
| Net income | $507.7 million; 8.8% margin | $419.4 million; 7.8% margin | 21% increase |
| Diluted EPS | $3.71 | $2.95 | 26% increase |
| Cash flow from operations | $1.119 billion | $703.7 million | 59% increase |
| Capital expenditures | $328.3 million | $365.4 million | Decrease |
| Cash and cash equivalents | $361.6 million | $29.7 million | Increase |
| Total debt | $797.6 million | $358.7 million | 122% increase |
Fourth-quarter 2011 sales were $1.391 billion, gross profit was $694.7 million, operating income was $206.9 million and net income was $123.0 million. Fourth-quarter comparable-store sales increased 3.3%, compared with 9.2% in the prior-year quarter. Fourth-quarter results included a $2.8 million operating-income benefit from a former CSK officer clawback.
Material changes versus the prior comparable period
- Sales growth reflected $241 million of comparable-store sales growth, $82 million from stores opened in 2011 and $70 million from stores opened during 2010, partly offset by $13 million from closed stores.
- The Company opened 170 net new stores in 2011, compared with 149 in 2010, increasing the year-end store count from 3,570 to 3,740.
- Gross margin improved primarily because of favorable product mix, improved acquisition costs, lower inventory shrinkage and distribution-center efficiencies. Increased professional sales, which generally carry lower margins, partially offset these benefits.
- SG&A increased 5% in dollars but declined to 34.1% of sales from 35.0%, reflecting operating leverage and payroll efficiencies.
- The Company completed a financing transition: it retired the $356 million ABL facility, issued $500 million of 4.875% senior notes due 2021 and issued $300 million of 4.625% senior notes due 2021. It also established and later amended an unsecured revolving credit facility, reduced to $660 million and extended to September 2016.
- Share repurchases totaled 15.9 million shares for $976.6 million during 2011, reducing year-end shares outstanding to 127.2 million from 141.0 million and contributing approximately $0.19 to diluted EPS.
Liquidity, debt and capital resources
- Working capital was $1.028 billion, compared with $1.072 billion in 2010. The current ratio declined to 1.65 from 1.87, while the quick ratio improved to 0.39 from 0.23.
- The Company had no borrowings outstanding under its $660 million unsecured revolving credit facility at year-end, although $59.9 million of letters of credit reduced availability.
- Debt consisted primarily of the two senior-note issues, with principal maturities concentrated after 2016 and substantially thereafter in 2021.
- The Company remained in compliance with its debt covenants. Fixed-charge coverage was 4.86 times and adjusted debt to adjusted EBITDAR was 1.75 times, versus covenant thresholds of 2.0 times and 3.0 times, respectively.
- Management stated that operating cash flow and revolving-credit availability should be sufficient for foreseeable liquidity needs, while noting that future cash generation is not assured.
Guidance, outlook, commentary and risks
- Management planned approximately 180 net new stores in 2012. Estimated average investment per new store was approximately $1.3 million to $1.5 million, subject to lower costs when sites are leased.
- Management expects continued growth from the dual-market strategy, professional-service-provider sales in former CSK markets, new stores, same-store sales and distribution efficiencies.
- Key risks include economic weakness, unemployment, fuel prices, vehicle miles driven, competition, adverse weather, regional concentration in Texas and California, vendor availability, distribution-center or technology disruptions, cybersecurity, employee retention, environmental compliance and increased debt.
- The Company remains exposed to execution risk in integrating and improving former CSK stores, particularly retaining DIY customers, expanding commercial relationships and achieving core O’Reilly profitability levels.
- Legacy CSK legal matters remain partially unresolved. The Company held a $14.1 million reserve for indemnification obligations and related legal costs at December 31, 2011. Management did not expect a material adverse consolidated outcome after reserves, but acknowledged that a resolution could materially affect a particular period.
- Unusual 2011 items included a $2.8 million former-CSK-officer clawback benefit, a $21.6 million write-off of ABL debt issuance costs and a $4.2 million charge for terminated interest-rate swaps. Adjusted diluted EPS was $3.81 versus reported GAAP diluted EPS of $3.71.
- No cash dividends were declared, and the Company did not anticipate paying dividends in the foreseeable future.
Important facts for investors to verify
- Reconcile reported GAAP results with management’s non-GAAP adjustments, particularly financing charges and the CSK clawback.
- Assess whether comparable-store sales can stabilize after declining from 8.8% in 2010 to 4.6% in 2011 and 3.3% in the fourth quarter.
- Monitor professional-service-provider sales growth and its effect on gross margins.
- Evaluate leverage, 2021 senior-note maturities, revolver availability and covenant headroom after substantial share repurchases.
- Review the remaining CSK litigation and the adequacy of the $14.1 million reserve.
- Verify execution of the 2012 plan for approximately 180 new stores and the related capital requirements.
- Consider the impact of fuel prices, unemployment, weather and vehicle miles driven on demand and transaction counts.
- Confirm the Company’s stated effective internal controls and Ernst & Young’s unqualified audit opinions.