O’Reilly Automotive, Inc. — 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 report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The company operated 4,041 stores in 42 states at quarter-end and opened 66 stores while closing one, for 65 net new stores.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $1.585 billion | $1.529 billion | +4% |
| Gross profit | $798.7 million | $761.7 million | +5% |
| Gross margin | 50.4% | 49.8% | +60 basis points |
| Operating income | $251.1 million | $247.5 million | +1% |
| Operating margin | 15.8% | 16.2% | -40 basis points |
| Net income | $154.3 million | $147.5 million | +5% |
| Diluted EPS | $1.36 | $1.14 | +19% |
| Cash flow from operations | $226.3 million | $414.5 million | Down $188.2 million |
| Capital expenditures | $73.5 million | $75.5 million | Down $2.0 million |
| Share repurchases | $227.9 million | $154.0 million | Higher by $73.9 million |
Comparable-store sales increased 0.6%, or 1.9% after adjusting for the prior-year Leap Day. Management identified the timing of Easter and the extra day in Q1 2012 as an approximately 150-basis-point headwind to Q1 2013 comparable sales. The sales increase was driven by new-store growth and higher average ticket values, partly offset by lower DIY transaction counts.
Gross-margin expansion reflected improved inventory shrinkage and distribution-center efficiencies, partly offset by a greater mix of lower-margin commercial sales. SG&A increased to $547.6 million, or 34.5% of sales, from $514.2 million, or 33.6%, primarily due to additional personnel, facilities and vehicles supporting store growth.
The effective tax rate declined to 35.9% from 38.5%, primarily due to employment tax credits and adjustments to tax reserves following favorable income-tax audit resolutions. Net income margin was 9.7%, compared with 9.6% in the prior-year quarter.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | March 31, 2013 | December 31, 2012 |
|---|---|---|
| Cash and cash equivalents | $205.4 million | $248.1 million |
| Inventory | $2.296 billion | $2.276 billion |
| Total assets | $5.790 billion | $5.749 billion |
| Total debt and capital leases | $1.096 billion | $1.096 billion |
| Shareholders’ equity | $2.073 billion | $2.108 billion |
Operating cash flow was $226.3 million. Investing cash outflow was $72.1 million, primarily for property and equipment. Financing cash outflow was $197.0 million, primarily because of share repurchases. Cash consequently declined by $42.7 million to $205.4 million.
The company had no borrowings under its $660 million unsecured revolving credit facility, although $56.5 million of letters of credit reduced availability. The facility matures in September 2016. Outstanding senior notes consisted of $500 million at 4.875% due 2021, $300 million at 4.625% due 2021 and $300 million at 3.800% due 2022. The company remained in compliance with its debt covenants, reporting a 4.86 times fixed-charge coverage ratio and a 1.84 times consolidated leverage ratio versus covenant limits of 2.25 times and 3.00 times, respectively.
Material Changes Versus the Prior Comparable Period
- Sales rose 4%, but comparable-store sales growth slowed to 0.6% from 7.4%.
- Gross margin improved 60 basis points, while operating margin declined 40 basis points because SG&A grew faster than sales.
- Net income increased 5%, aided by the lower effective tax rate.
- Diluted EPS increased 19%, benefiting from substantially lower average diluted shares outstanding, 113.4 million versus 129.3 million.
- Operating cash flow fell significantly, primarily because accounts payable increased less than in the prior year and working-capital investment was less favorable.
- Share repurchases increased to 2.468 million shares for $227.9 million. Approximately $350.7 million remained authorized at March 31, 2013.
- The company expanded to 4,041 stores from 3,809 stores at March 31, 2012, and increased its store footprint from 39 to 42 states.
Guidance, Outlook, Risks and Unusual Items
Management planned approximately 190 net new store openings in 2013 and expected store growth to be funded by operating cash flow and available revolver capacity. Management stated that cash from operations and revolver availability were expected to fund short- and long-term liquidity needs for the foreseeable future, while cautioning that lower demand or changed customer buying patterns could reduce cash generation and affect covenant compliance.
Management cited vehicle miles driven, the number and age of vehicles, new vehicle registrations, unemployment, consumer spending and competition as important demand drivers. The company continued to face macroeconomic pressure on DIY transaction counts and noted that newer vehicles require fewer repairs, although repairs can be more expensive when needed.
The business is seasonal, with historically higher sales and profits in the second and third quarters. Relevant risks include competition, product demand, economic conditions, inflation, consumer debt, regulation, elevated debt levels, credit ratings, employee retention, acquisition performance, weather and other general operating uncertainties.
The company maintained a $13.7 million reserve related to potential CSK indemnification obligations arising from legacy litigation and governmental investigations. The investigations and related criminal and SEC proceedings had concluded, but insurance coverage and the ultimate resolution of related legal fees remained uncertain. Management did not expect the matter, after reserves and insurance, to have a material adverse effect, although a particular period could be materially affected.
Subsequent to quarter-end through May 9, 2013, the company repurchased approximately 0.7 million additional shares for $75.7 million at an average price of $101.07. The company adopted ASU 2013-02 regarding accumulated other comprehensive income disclosures; the adoption affected presentation only.
Important Facts for Investors to Verify
- Whether comparable-store sales improve from the 0.6% reported for Q1 and whether DIY transaction weakness persists.
- The pace, cost and returns of the planned 190 net new stores in 2013.
- Operating cash-flow conversion and working-capital trends, particularly inventory and vendor-financing effects.
- The sustainability of gross-margin gains and the impact of increasing commercial-sales mix.
- Share-repurchase spending, remaining authorization and its effect on leverage and per-share results.
- Compliance with fixed-charge and leverage covenants as debt, rent and operating conditions change.
- The ultimate cost, insurance recovery and timing of the CSK-related indemnification matter.
- Exposure to economic conditions, unemployment, vehicle usage, weather and competition.