O’Reilly Automotive, Inc. — Q2 2020 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 customers. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. At quarter-end, the company operated 5,562 stores in 47 U.S. states and 21 stores in Mexico.
Management reported significant COVID-19-related pressure from mid-March through mid-April, followed by strong demand as stimulus payments, enhanced unemployment benefits, store reopenings and consumers’ investment in existing vehicles supported sales during May and June.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $3.092 billion | $2.590 billion | $5.568 billion | $5.000 billion |
| Comparable-store sales growth | 16.2% | 3.4% | 7.5% | 3.3% |
| Gross profit | $1.637 billion | $1.368 billion | $2.933 billion | $2.648 billion |
| Gross margin | 53.0% | 52.8% | 52.7% | 52.9% |
| Operating income | $736.5 million | $498.1 million | $1.160 billion | $942.9 million |
| Operating margin | 23.8% | 19.2% | 20.8% | 18.9% |
| Net income | $531.7 million | $353.7 million | $832.1 million | $674.8 million |
| Net margin | 17.2% | 13.7% | 14.9% | 13.5% |
| Diluted EPS | $7.10 | $4.51 | $11.06 | $8.56 |
- Q2 sales increased 19%, operating income increased 48% and net income increased 50% year over year. Six-month sales increased 11%, while operating income and net income increased 23%.
- SG&A increased 4% in both periods, but declined as a percentage of sales to 29.1% from 33.6% in Q2 and to 31.8% from 34.1% year to date, reflecting sales leverage and expense controls.
- DIY sales were $1.853 billion in Q2, up from $1.434 billion; professional sales were $1.175 billion, up from $1.113 billion. Comparable-store performance benefited from higher average tickets and positive DIY transactions, partly offset by negative professional transaction counts.
- Six-month operating cash flow was $1.559 billion versus $847.0 million. Capital expenditures were $244.5 million versus $295.6 million.
- Management-defined free cash flow was $1.213 billion versus $539.0 million. This non-GAAP measure excludes capital expenditures, excess tax benefits and tax-credit equity investments from operating cash flow.
- Cash and cash equivalents were $872.4 million at June 30, 2020, compared with $40.4 million at December 31, 2019. Inventory was $3.529 billion, and total assets were $11.729 billion.
Debt, liquidity and capital allocation
- Long-term debt was $4.127 billion at June 30, 2020, including $4.150 billion of principal senior notes and no revolving-credit borrowings. The company issued $500 million of 4.200% senior notes due 2030 in March 2020.
- The $1.2 billion unsecured revolving credit facility matures in April 2022. Availability was reduced by $51.6 million of outstanding letters of credit; the filing states that the company was in compliance with all debt covenants.
- The twelve-month consolidated fixed-charge coverage ratio was 5.49x versus a 2.50x minimum, and the consolidated leverage ratio was 2.12x versus a 3.50x maximum.
- Share repurchases totaled $651.0 million for the first six months, compared with $920.7 million in the prior-year period. Repurchases were suspended on March 16 because of COVID-19 and resumed on May 29. Remaining authorization at June 30 was $917.7 million.
- Shareholders’ equity increased to $589.1 million from $397.3 million at December 31, 2019, despite the ongoing share repurchase program.
Material changes, outlook and risks
- Sales and profitability benefited from government stimulus, enhanced unemployment benefits, market reopenings, favorable aftermarket demand and increased consumer spending on vehicle maintenance. The company also opened 123 net new U.S. stores during the first six months.
- Gross margin improved in Q2 because of a greater DIY sales mix, acquisition-cost reductions and distribution-cost leverage, but declined slightly for the six-month period because of prior-year tariff-related inventory benefits and lower-margin Mayasa sales.
- The Mayasa acquisition, completed November 29, 2019, added operations in Mexico. The purchase-price allocation remained preliminary; updated allocations included $36.0 million of indefinite-lived trade names and trademarks, $22.3 million of finite-lived intangible assets and $75.6 million of residual goodwill.
- The filing provides no specific numerical earnings, sales or margin guidance. Management states that it cannot predict the duration or severity of COVID-19, future reopening conditions or the effect of possible renewed restrictions.
- Key risks include renewed COVID-19 restrictions, lower vehicle miles driven, reduced consumer or professional-customer demand, supply-chain disruptions, economic deterioration, increased debt levels, covenant compliance, competition, tariffs, employee availability, cybersecurity and foreign-currency exposure.
- Mexican-peso translation produced a $27.0 million year-to-date other comprehensive loss. A 10% currency-rate change at June 30 was estimated to affect Mexican net assets by approximately $11.4 million.
- Litigation is described as ordinary-course litigation; management does not currently expect aggregate matters, after insurance and accruals, to have a material adverse effect. Internal controls and disclosure controls were reported effective, with no material changes during the quarter.
Important facts for investors to verify
- Whether Q2 demand was sustained after stimulus benefits and store reopenings faded, particularly for DIY versus professional customers.
- The company’s exposure to renewed COVID-19 restrictions, declining miles driven and potential supply-chain interruptions.
- Debt maturities from 2021 through 2030, interest expense, refinancing requirements and continued compliance with leverage and fixed-charge covenants.
- The sustainability of unusually strong operating cash flow and free cash flow, including the effects of deferred taxes and payroll taxes under the CARES Act.
- The final purchase-price allocation and operating performance of Mayasa, including goodwill and intangible-asset impairment risk.
- The pace and valuation of resumed share repurchases relative to liquidity needs, capital expenditures and debt reduction.