O’Reilly Automotive, Inc. — Q3 2011 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, 2011, with comparisons to the corresponding 2010 periods.
The company operated 3,707 stores in 39 states at September 30, 2011. It opened 50 stores in the third quarter and 149 stores during the first nine months, and planned 170 net new stores for full-year 2011.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Sales | $1.535 billion | $1.426 billion | $4.398 billion | $4.087 billion |
| Gross profit | $754.2 million | $693.4 million | $2.143 billion | $1.984 billion |
| Gross margin | 49.1% | 48.6% | 48.7% | 48.6% |
| Operating income | $241.1 million | $199.0 million | $659.9 million | $548.6 million |
| Operating margin | 15.7% | 14.0% | 15.0% | 13.4% |
| Net income | $148.4 million | $116.5 million | $384.7 million | $313.6 million |
| Diluted EPS | $1.10 | $0.82 | $2.76 | $2.23 |
Q3 sales increased 8%, driven by 4.8% comparable-store sales growth, new stores and higher non-store sales. Nine-month comparable-store sales increased 4.9%. Comparable sales benefited from higher average ticket values and growth in higher-priced hard-part categories, partly offset by lower customer transaction counts, particularly among DIY customers.
SG&A increased 5% in both the quarter and year-to-date period, but declined as a percentage of sales to 33.4% from 34.3% in Q3 and to 33.7% from 34.6% for the first nine months. Management attributed the improvement to occupancy and headquarters leverage and improved store payroll efficiency, partly offset by higher delivery-vehicle fuel costs.
Net cash provided by operating activities was $840.1 million for the first nine months, compared with $592.6 million in 2010. Capital expenditures were $243.3 million, resulting in net cash used in investing activities of $238.0 million. Financing activities used $355.2 million, including $840.3 million of share repurchases. Cash increased to $276.7 million from $29.7 million at December 31, 2010.
Balance sheet, debt and liquidity
- Total assets were $5.397 billion at September 30, 2011, compared with $5.048 billion at December 31, 2010.
- Total debt was $797.8 million, up from $358.7 million, primarily because of the issuance of $500 million of 4.875% senior notes and $300 million of 4.625% senior notes, partly offset by repayment of the former ABL facility.
- Cash and cash equivalents were $276.7 million. Current assets were $2.537 billion and current liabilities were $1.506 billion, producing working capital of $1.030 billion and a current ratio of 1.68 to 1.
- The company had no borrowings under its $660 million unsecured revolving credit facility, although $68.1 million of letters of credit reduced availability. The facility matures in September 2016.
- The company reported compliance with all debt covenants, including a fixed-charge coverage ratio of 4.79 times and adjusted debt to adjusted EBITDAR of 1.80 times for the twelve months ended September 30, 2011.
Material changes versus the prior comparable period
- Sales, operating income and net income increased 8%, 21% and 27%, respectively, in Q3; diluted EPS increased 34%, aided by lower share count from repurchases.
- For the first nine months, sales increased 8%, operating income 20%, net income 23% and diluted EPS 24%.
- Gross margin improved modestly because of favorable product mix and lower inventory shrinkage, while increasing commercial sales created some margin pressure.
- The company replaced its ABL facility with senior notes and an unsecured revolver. The financing change generated approximately $21.6 million of non-cash debt-issuance-cost write-offs and $4.2 million of interest-rate-swap termination charges in the nine-month period.
- The company repurchased 14.1 million shares for approximately $840.0 million during the first nine months and had $160.0 million remaining under the authorized program at September 30.
- The prior-year periods included $5.9 million and $20.9 million of charges related to the legacy CSK Department of Justice investigation for Q3 and nine months, respectively. The DOJ matter was resolved through a Non-Prosecution Agreement in August 2011, and the company paid the $20.9 million penalty during Q3.
Guidance, outlook, commentary and risks
Management expected 170 net new store openings in 2011 and anticipated funding expansion primarily through operating cash flow. Management cited the aging U.S. vehicle fleet, increased vehicle miles over time and deferred maintenance as long-term aftermarket demand drivers.
Near-term demand remained exposed to high unemployment, reduced disposable income, elevated gasoline prices, lower miles driven and continued economic uncertainty. The company noted that Q3 DIY transaction counts declined, while professional commercial sales grew faster but generally carried lower gross margins.
The business is seasonal, with historically stronger sales and profits in the second and third quarters. Management also noted risks from competition, product demand, inflation, weather, fuel prices, consumer debt, employee retention, integration and performance of the acquired CSK business, increased debt and credit ratings.
Ongoing CSK-related indemnification obligations and litigation remained uncertain. A reserve of approximately $15.7 million was recorded for expected legal fees and related costs at September 30, 2011. Management did not currently expect pending matters, after reserves and potentially available insurance, to have a material adverse effect, but acknowledged that ultimate outcomes could materially affect a particular period.
Goodwill impairment was not recorded during the quarter or year to date. The company stated that its adoption of recently issued accounting standards concerning fair-value disclosures, comprehensive-income presentation and goodwill testing was not expected to materially affect financial condition, results of operations or cash flows.
Important facts for investors to verify
- Whether comparable-store sales and transaction counts sustain momentum amid gasoline-price, unemployment and consumer-spending pressures.
- The effect of increased debt and the senior-note structure on interest expense, leverage, ratings and covenant headroom.
- Remaining authorization and future pace of share repurchases, including the impact on diluted EPS and liquidity.
- Execution of the 2011 store-opening plan and the profitability and capital needs of new stores and commercial operations.
- Final costs and resolution of remaining CSK-related indemnification, SEC, criminal and civil matters.
- Future gross-margin trends as commercial sales expand and product mix, shrinkage, vendor terms and commodity costs change.