O’Reilly Automotive, Inc. — Form 10-Q Summary
Business context and reporting period
O’Reilly Automotive is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service provider customers in the United States and Mexico. The unaudited filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. At quarter-end, the company operated 5,740 U.S. stores in 47 states and 22 stores in Mexico.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $3.480 billion | $3.208 billion | $10.036 billion | $8.776 billion |
| Gross profit | $1.818 billion | $1.680 billion | $5.285 billion | $4.614 billion |
| Gross margin | 52.3% | 52.4% | 52.7% | 52.6% |
| Operating income | $754.6 million | $725.0 million | $2.241 billion | $1.885 billion |
| Operating margin | 21.7% | 22.6% | 22.3% | 21.5% |
| Net income | $558.7 million | $527.3 million | $1.646 billion | $1.359 billion |
| Net margin | 16.1% | 16.4% | 16.4% | 15.5% |
| Diluted EPS | $8.07 | $7.07 | $23.45 | $18.12 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $2.565 billion | $2.349 billion |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $340.7 million | $363.4 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | $2.194 billion | $1.876 billion |
- Comparable-store sales increased 6.7% in Q3 and 12.9% for the first nine months. Total sales increased 8% in Q3 and 14% year to date.
- DIY sales increased to $1.993 billion in Q3 and $5.773 billion year to date; professional service provider sales increased to $1.409 billion and $4.032 billion, respectively.
- Cash and cash equivalents were $449.3 million at September 30, 2021, versus $465.6 million at December 31, 2020.
- Long-term debt was $3.826 billion, consisting of $3.850 billion of principal less $23.9 million of unamortized discount and issuance costs. The company had no revolving-credit borrowings and $84.0 million of outstanding letters of credit.
- The company’s $1.8 billion unsecured revolving facility matures in June 2026; approximately $1.716 billion was available after letters of credit.
- The balance sheet reported a shareholders’ deficit of $140.9 million, primarily reflecting substantial share repurchases.
Material changes versus the prior comparable period
- Q3 sales increased 8%, operating income increased 4%, net income increased 6% and diluted EPS increased 14%. For the first nine months, sales increased 14%, operating income 19%, net income 21% and diluted EPS 29%.
- EPS growth benefited from both higher earnings and a lower diluted share count: 69.2 million shares in Q3 2021 versus 74.6 million in Q3 2020.
- Q3 gross margin declined slightly because of higher distribution-system costs, labor-market challenges, supply-chain pressures and a greater professional-customer sales mix. Nine-month gross margin increased modestly, aided by selling inventory purchased before recent acquisition-cost increases.
- Q3 SG&A increased to 30.6% of sales from 29.8%; management attributed the increase to added personnel, facilities and vehicles and unusually low prior-year expenses. Nine-month SG&A improved to 30.3% of sales from 31.1%.
- Operating cash flow increased $216.2 million year over year, while free cash flow increased $318.3 million. Investing cash use declined primarily because of lower renewable-energy tax-credit investments and capital expenditures.
- The company repurchased 3.801 million shares for $2.007 billion during the first nine months, compared with 2.634 million shares for $1.094 billion in the prior-year period. The remaining authorization was $974.4 million at September 30.
- On June 15, 2021, the company redeemed $300 million of 4.625% senior notes due 2021 and entered into the new $1.8 billion revolving credit facility.
Guidance, outlook, commentary and risks
- Management anticipated 165 to 175 net new store openings in 2021 and 175 to 185 in 2022.
- Management cited increased vaccinations, market reopenings, government stimulus, enhanced unemployment benefits, favorable weather, increased miles driven and vehicle scarcity as contributors to demand during the first nine months.
- Management stated that the benefit from selling older, lower-cost inventory is expected to diminish as the company sells through that inventory. Recent inflation in acquisition costs caused the LIFO reserve to return to a more typical credit balance.
- Management expects operating cash flow and availability under the revolving facility to fund foreseeable short- and long-term needs, but cautioned that COVID-19-related disruption could affect demand, supply chains, cash generation and liquidity.
- Primary disclosed risks include COVID-19 and other public-health events, inflation, supply-chain and product availability issues, labor constraints, economic conditions, competition, weather, tariffs, interest rates, elevated debt, credit ratings, cybersecurity, regulatory matters and the sustainability of historical growth.
- The company reported compliance with its debt covenants. The fixed-charge coverage ratio was 6.68x against a 2.50x minimum, and the consolidated leverage ratio was 1.65x against a 3.50x maximum.
- The company had approximately $20.0 million invested in unconsolidated renewable-energy tax-credit funds and could be required to make approximately $170.0 million of additional contributions upon achievement of project milestones.
- Through November 8, 2021, the company repurchased an additional 0.4 million shares for $246.9 million. Ordinary-course litigation was not expected to have a material adverse effect, and management reported no material changes to previously disclosed risk factors or internal controls.
Important facts for investors to verify
- Whether comparable-store sales, transaction counts and average ticket values remain sustainable as stimulus effects fade and comparisons become more difficult.
- The impact of inflation, labor costs, freight and supply-chain pressures on gross margin and inventory valuation after the older-cost inventory benefit diminishes.
- The pace and returns of planned store expansion, including the targeted 2021 and 2022 openings.
- Future capital allocation between share repurchases, store growth, capital expenditures, renewable-energy tax-credit investments and debt reduction.
- Refinancing or repayment plans for the $300 million of senior notes due in 2022 and ongoing compliance with debt covenants.
- The timing and cash-flow impact of the potential $170.0 million renewable-energy fund contributions.
- Any renewed effects from COVID-19, vehicle-mile trends, new-vehicle shortages, consumer behavior or broader economic conditions.