ORLY

Business Context and Reporting Period

Company: O'Reilly Automotive, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Overview: One of the largest specialty retailers of automotive aftermarket parts, tools, supplies, and accessories in the United States. The company serves both do-it-yourself (DIY) customers and professional installers through a network of 571 stores located in nine contiguous states (Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana, Nebraska, and Illinois). The company does not sell tires or perform repairs.

Key Financial Metrics (Year Ended Dec 31, 1999)

Material Changes vs. Prior Period

• Store Expansion: The company opened 80 net new stores in 1999, bringing the total to 571. This expansion, combined with a 9.6% increase in same-store sales, drove the 22.4% revenue growth.
• Margin Expansion: Gross profit margin improved to 43.1% from 41.8% in 1998, attributed to improved product acquisition programs and increased buying power.
• Debt Reduction: Total debt decreased significantly due to the use of $124.6 million in net proceeds from a secondary public offering in March 1999 to repay outstanding indebtedness. Interest expense dropped from $8.1 million in 1998 to $5.3 million in 1999.
• Acquisition Integration: The company continued to integrate the 182 stores acquired from Hi-Lo Automotive, Inc. in 1998. In 1999, the company also acquired a distribution center in Dallas, Texas, for $5.4 million.
• Stock Split: A two-for-one stock split was effected in November 1999. All per-share data in the filing has been restated to reflect this.

Guidance, Outlook, and Risks

Management Outlook

• Expansion Plans: The company plans to open approximately 100 stores in 2000 and 120 stores in 2001. Sites for the 2000 openings have been identified.
• Capital Needs: Management believes existing cash, operating cash flow, and available credit facilities ($62.2 million available under the revolving line) are sufficient to fund expansion and working capital needs.
• Seasonality: Sales and profits are historically higher in the second and third quarters (April through September) due to weather conditions.

Risks and Contingencies

• Legal Proceedings: The company is defending a class-action lawsuit filed against its acquired subsidiary, Hi-Lo, alleging the sale of "old" or "used" batteries as new. The class was certified by the Texas Court of Appeals, and the company has sought a mandamus from the Texas Supreme Court. Management believes the accusations are unfounded and does not expect a material adverse effect, though damages are unspecified.
• Competition: The automotive aftermarket is highly competitive, with rivals including national chains (AutoZone, Advance Auto Parts), mass merchandisers (Wal-Mart), and independent stores.
• Regional Sensitivity: Approximately 36% of stores are in Texas, making the business sensitive to regional economic and weather conditions.
• Key Personnel: Success depends heavily on key family members and management; loss of these individuals could materially affect operations.

Investor Verification Checklist

• Debt Covenants: Verify the terms of the $165 million syndicated credit facility and ensure compliance with covenants given the high level of capital expenditures.
• Legal Exposure: Monitor the status of the Hi-Lo battery class-action lawsuit for any updates from the Texas Supreme Court or settlement discussions.
• Same-Store Sales Sustainability: Assess whether the 9.6% same-store sales growth is sustainable given the competitive landscape and economic conditions in the Central/Southern US.
• Acquisition Integration: Review the performance of the former Hi-Lo stores to ensure they are meeting the projected sales mix (increasing professional installer sales) and margin targets.
• Capital Allocation: Confirm the execution of the planned 100 store openings for 2000 and the operational readiness of the new Dallas distribution center.