O’Reilly Automotive, Inc. — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
O’Reilly Automotive operates automotive aftermarket parts, tools, supplies, equipment and accessories stores serving do-it-yourself and professional customers. This unaudited report covers the three months ended March 31, 2011, compared primarily with the three months ended March 31, 2010. The company operated 3,613 stores in 39 states at quarter-end, after opening 55 stores and closing 12.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sales | $1.383 billion | $1.280 billion | +8% |
| Gross profit | $669.8 million | $618.3 million | +8% |
| Gross margin | 48.4% | 48.3% | +10 bps |
| Operating income | $196.4 million | $168.4 million | +17% |
| Net income | $102.5 million | $97.5 million | +5% |
| Diluted EPS | $0.72 | $0.70 | +3% |
| Operating cash flow | $294.1 million | $170.6 million | +72% |
| Capital expenditures | $94.4 million | $90.7 million | +4% |
- SG&A increased 5% to $473.3 million, but declined to 34.2% of sales from 35.1%, reflecting labor efficiencies, health-benefit results and operating leverage.
- Operating margin improved to approximately 14.2% from 13.2%. GAAP net margin was 7.4% versus 7.6%.
- Comparable-store sales increased 5.7%, versus 6.9% in Q1 2010. Sales growth was driven by higher transactions and average ticket values, particularly in hard-part categories.
- Cash and cash equivalents were $230.0 million at March 31, 2011, compared with $29.7 million at December 31, 2010.
- Working capital was $1.149 billion; the current ratio was 1.87:1 and the quick ratio was 0.35:1.
- Total debt was $498.8 million at March 31, 2011, compared with $358.7 million at December 31, 2010. Debt-to-equity was 0.16:1.
- The company had no borrowings under its new $750 million unsecured revolving credit facility at quarter-end.
Material Changes Versus Prior Comparable Period
- Sales increased $102.7 million, consisting primarily of $71 million from comparable-store sales and $29 million from stores opened during 2010.
- Gross margin improved modestly due to product mix, lower inventory shrinkage at converted CSK stores and stronger hard-part sales, partly offset by increased commercial sales, which carry lower margins.
- Operating income grew faster than sales as SG&A leverage improved.
- GAAP earnings were reduced by approximately $25.9 million of pre-tax, largely nonrecurring financing charges: $21.6 million for writing off ABL debt issuance costs and $4.2 million for terminating interest-rate swaps.
- Excluding these financing charges, management reported adjusted net income of $118.4 million, or $0.83 adjusted diluted EPS, versus $97.5 million and $0.70 in the prior-year quarter. These are non-GAAP measures.
- Operating cash flow benefited from higher earnings, lower net inventory investment and increased vendor payables, including extended vendor payment terms.
- The company repurchased 2.6 million shares for $145.0 million during the quarter under a new $500 million authorization. Approximately $355.0 million remained available at March 31.
Debt, Liquidity and Financing
On January 14, 2011, O’Reilly issued $500 million of 4.875% senior notes due January 14, 2021, using proceeds to repay and retire its $356 million asset-based revolving credit facility and related swaps. The company recorded the associated write-off and swap termination charges in Q1. The new notes were carried at $496.6 million net of discount and had an estimated fair value of $493.5 million at March 31.
The replacement unsecured revolver matures in January 2016, includes a $200 million letter-of-credit sublimit and a $75 million swing-line sublimit, and may be increased to $950 million subject to conditions. O’Reilly remained in compliance with its debt covenants, reporting a 4.4-times fixed-charge coverage ratio and 1.7-times adjusted debt-to-EBITDAR ratio.
Guidance, Outlook, Commentary and Risks
- Management planned approximately 170 net new stores in 2011, with expansion expected to be funded through operating cash flow and available credit.
- Management cited an aging U.S. vehicle fleet, increased miles driven, deferred maintenance and growth in commercial business as demand supports.
- Risks include higher gasoline prices, severe weather, unemployment, consumer spending weakness, competition, product demand, inflation, integration of CSK, increased debt and credit ratings.
- Gasoline prices were reported as approximately 24% higher through April 2011 than in the comparable 2010 period, creating potential pressure on miles driven and demand.
- The business is seasonal, with historically higher sales and profits in the second and third quarters.
- The company had a $21.3 million reserve related to the DOJ investigation of CSK’s legacy accounting practices, including a contemplated $20.9 million one-time penalty. Final documentation for the proposed non-prosecution agreement remained incomplete.
- O’Reilly also had a $16.8 million reserve for CSK-related indemnification obligations. Management stated that the ultimate outcome of the governmental and indemnification matters could materially affect a particular period, although it did not currently expect a material adverse effect after reserves and potential insurance.
- Employee separation restructuring activities related to CSK were expected to conclude in Q2 2011. Closed-store and facility reserves totaled approximately $18.3 million at March 31, 2011.
- From April 1 through May 9, the company repurchased an additional 1.1 million shares for approximately $62.9 million.
Important Facts for Investors to Verify
- Reconcile GAAP net income and diluted EPS with management’s adjusted figures and assess the recurring impact of the new debt structure.
- Review whether comparable-store sales, commercial sales growth and hard-part mix support continued margin expansion.
- Monitor cash conversion, inventory levels, vendor-payment programs and capital spending as store expansion continues.
- Assess leverage and covenant compliance after considering lease-adjusted debt, letters of credit and the $500 million senior notes.
- Track resolution of the DOJ investigation, SEC-related matters and CSK indemnification claims against recorded reserves.
- Evaluate the pace and returns of the planned 170 net new stores and the ongoing integration benefits from CSK.