O’Reilly Automotive, Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing also provides unaudited fourth-quarter results. O’Reilly operates a single reportable segment focused on automotive aftermarket parts, tools, supplies, equipment and accessories for do-it-yourself and professional service provider customers in the United States and Mexico.
Business Context
- Operated 5,929 U.S. stores in 47 states and 42 stores in Mexico at year-end, for 5,971 total stores.
- Opened 170 net new U.S. stores and 17 net new Mexico stores during 2022.
- Approximately 56% of sales came from DIY customers and 44% from professional service provider customers.
- Operated 28 U.S. distribution centers and 383 Hub stores; employed 87,377 Team Members at year-end.
Key Financial Metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Sales | $14.410 billion | $13.328 billion | +8% |
| Gross profit | $7.382 billion | $7.020 billion | +5% |
| Gross margin | 51.2% | 52.7% | Down 150 basis points |
| Operating income | $2.954 billion | $2.917 billion | +1% |
| Operating margin | 20.5% | 21.9% | Down 140 basis points |
| Net income | $2.173 billion | $2.165 billion | Flat to slightly higher |
| Diluted EPS | $33.44 | $31.10 | +8% |
| Comparable store sales | +6.4% | +13.3% | Slower growth |
| Cash from operating activities | $3.148 billion | $3.207 billion | Down 2% |
| Capital expenditures | $563 million | $443 million | Up 27% |
| Free cash flow | $2.371 billion | $2.549 billion | Down 7% |
Sales growth reflected comparable-store gains, new-store contributions and higher average ticket values, including price increases passed through in response to higher inventory acquisition costs. Professional customer transactions were positive, while DIY transactions declined against a strong 2021 comparison and inflationary pressure.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $108.6 million at December 31, 2022, compared with $362.1 million a year earlier.
- Total debt was $4.372 billion, consisting primarily of $4.400 billion principal amount of unsecured senior notes, net of discounts and issuance costs.
- The Company issued $850 million of 4.700% senior notes due 2032 and repaid $300 million of notes maturing in September 2022.
- No borrowings were outstanding under the $1.8 billion unsecured revolving credit facility; outstanding letters of credit reduced availability.
- Debt maturities include $300 million in 2023, $500 million in 2026, $750 million in 2027 and $2.85 billion thereafter.
- The Company remained in compliance with debt covenants. The consolidated fixed-charge coverage ratio was 6.71x and the consolidated leverage ratio was 1.73x, compared with covenant limits of at least 2.50x and no more than 3.50x, respectively.
- Shareholders’ equity was negative $1.061 billion, primarily reflecting substantial cumulative share repurchases.
- The Company repurchased 4.961 million shares for approximately $3.282 billion during 2022. Approximately $1.7 billion remained authorized at year-end.
- No cash dividends have been declared since the Company became public, and none are anticipated in the foreseeable future.
Material Changes Versus FY2021
- Revenue increased $1.082 billion, or 8%, while comparable-store sales growth decelerated from 13.3% to 6.4%.
- Gross margin declined due to the professional pricing initiative, a greater professional-sales mix, and reduced benefit from selling lower-cost inventory acquired before inflationary cost increases.
- SG&A increased 8% to $4.427 billion, reflecting store growth, additional personnel and facilities, wage, benefit and fuel inflation, and a non-cash charge related to an enhanced paid-time-off program.
- Operating margin declined from 21.9% to 20.5%, while net income was broadly unchanged because higher sales were offset by margin pressure and increased interest expense.
- Inventory increased to $4.359 billion from $3.686 billion, while accounts payable increased to $5.881 billion from $4.695 billion.
- Capital expenditures increased primarily because of store and distribution-center expansion and enhancement projects.
- Weighted-average diluted shares declined from approximately 69.6 million to 65.0 million, supporting diluted EPS growth despite minimal net-income growth.
Outlook, Commentary and Risks
- Management planned 180 to 190 net new stores in 2023, along with a new distribution center in Puerto Rico and a large distribution center in Guadalajara, Mexico.
- Estimated 2023 costs for owned new stores were approximately $2.8 million to $3.0 million per store, although leasing could materially reduce costs.
- Management stated that inflation had not had a material adverse effect because of supplier programs, purchasing scale, selective forward buying and the ability to pass through cost increases; however, wage, fuel and consumer inflation remained pressures.
- Key demand drivers include miles driven, vehicle fleet size and age, vehicle technology, repair frequency and consumer willingness to maintain older vehicles.
- Material risks include economic deterioration, inflation, consumer debt and credit conditions, competition and online price comparison, weather and natural disasters, supply-chain disruption, supplier concentration, tariffs, labor availability and wage pressure, cybersecurity and information-technology failures, international operations, acquisitions, litigation, environmental and tax regulation, and the Company’s increased debt levels.
- The Company had no material unresolved SEC staff comments and stated that ordinary-course litigation was not expected to have a material adverse effect, after considering insurance and accruals.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter was valuation of self-insurance reserves, which totaled approximately $233 million on a discounted basis.
Investor Verification Items
- Verify the sustainability of comparable-store sales growth after the 2021 stimulus-driven comparison and amid weaker DIY transactions.
- Assess whether professional pricing investments, mix shift and inflation will continue to pressure gross margin.
- Review inventory growth, supplier-finance arrangements, accounts payable and working-capital requirements.
- Confirm refinancing plans and liquidity for the $300 million 2023 debt maturity and longer-term maturities.
- Evaluate the capital intensity and execution risk of the planned store and distribution-center expansion.
- Monitor share repurchases, leverage, negative shareholders’ equity and the effect of debt-funded capital allocation.
- Review assumptions underlying self-insurance reserves, warranty liabilities, tax-credit investments and other contingencies.
- Track competitive, technological and regulatory developments affecting traditional internal-combustion vehicle repairs and access to vehicle data.