O’Reilly Automotive, Inc. — Q1 2015 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 Form 10-Q covers the three months ended March 31, 2015, compared primarily with the three months ended March 31, 2014.
The company opened 67 net new stores during the quarter and operated 4,433 stores in 43 states at March 31, 2015. Management planned 205 net new stores for 2015.
Financial Performance and Liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $1.902 billion | $1.728 billion | 10% |
| Comparable-store sales | 7.2% | 6.3% | Higher |
| Gross profit | $987.0 million | $877.7 million | 12% |
| Gross margin | 51.9% | 50.8% | Up 110 basis points |
| Operating income | $350.4 million | $287.1 million | 22% |
| Operating margin | 18.4% | 16.6% | Up 180 basis points |
| Net income | $212.9 million | $173.9 million | 22% |
| Diluted EPS | $2.06 | $1.61 | 28% |
| Cash flow from operations | $406.0 million | $345.5 million | 18% |
| Capital expenditures | $91.1 million | $83.1 million | 10% |
| Free cash flow | $314.9 million | $262.5 million | 20% |
SG&A increased 8% to $636.6 million but declined to 33.5% of sales from 34.2%, reflecting operating leverage. The effective tax rate was 37.0%, compared with 36.8% in the prior-year quarter. Gross-margin expansion reflected supplier acquisition-cost improvements and a smaller non-cash LIFO-related reduction: approximately $8 million in Q1 2015 versus $23 million in Q1 2014.
Cash and cash equivalents were $473.6 million at March 31, 2015, compared with $250.6 million at December 31, 2014. Total debt and capital lease obligations were approximately $1.397 billion, consisting primarily of unsecured senior notes due 2021 through 2023. The company had no borrowings under its $600 million revolving credit facility and approximately $50.5 million of outstanding letters of credit, leaving substantial unused capacity subject to covenants.
The company repurchased 650,000 shares for $134.8 million during the quarter at an average price of $207.50. The board increased cumulative repurchase authorization to $5.0 billion; approximately $644.5 million remained available at March 31, 2015.
Material Changes Versus the Prior Comparable Period
- Sales increased $174 million, supported by 7.2% comparable-store growth, store expansion and higher non-comparable sales.
- Gross margin improved 110 basis points, primarily from lower product acquisition costs and the smaller LIFO-related impact.
- Operating income and net income each increased 22%, while diluted EPS increased 28%, aided by lower weighted-average share count from repurchases.
- Operating cash flow increased $60.5 million, while financing cash flow shifted from a $16.9 million inflow to a $93.4 million outflow, mainly because of higher share repurchases.
- Store openings increased to 67 from 50 in the prior-year quarter.
- The consolidated fixed-charge coverage ratio improved to 5.53 times from 5.04 times, and the consolidated leverage ratio improved to 1.66 times from 1.86 times.
Guidance, Outlook, Risks and Unusual Items
Management expressed confidence in continued market-share gains and planned 205 net new store openings in 2015. Management cited lower gasoline prices, declining unemployment, higher miles driven, store growth, inventory availability and professional-service-provider demand as favorable factors.
Liquidity is expected to be funded by operating cash flow and available revolver capacity. The company was in compliance with its debt covenants, including a minimum fixed-charge coverage ratio of 2.50 times and maximum leverage ratio of 3.00 times. Management stated that current liquidity should fund foreseeable capital and operating needs, but noted that weaker product demand or changes in customer buying patterns could reduce cash generation and affect covenant compliance.
Key risks include macroeconomic conditions, fuel prices, consumer spending, competition, weather, employee retention, acquisition performance, increased debt, credit ratings and regulatory matters. The company received a California subpoena concerning hazardous-waste handling, storage and disposal; the ultimate outcome could not be determined. Management did not expect ordinary-course litigation, after considering insurance and reserves, to have a material adverse effect.
The business is seasonal, with historically higher sales and profits in the second and third quarters. The filing also notes that quarterly results are not necessarily indicative of full-year results. The company planned adoption of new revenue-recognition guidance in the first quarter of 2017 and new guidance regarding extraordinary items and debt issuance-cost presentation in 2016; no material impact was expected from the latter two standards.
Important Facts for Investors to Verify
- Whether the planned 205-store expansion and 7.2% comparable-store growth are sustained without weakening margins or liquidity.
- The effect of continued share repurchases, including the additional $133.9 million spent through May 8, 2015, on EPS, cash balances and leverage.
- Debt maturity, interest expense and compliance with fixed-charge and leverage covenants.
- Whether supplier cost benefits and reduced LIFO impacts remain repeatable, since these supported the quarter’s margin expansion.
- The outcome and potential financial exposure from the California hazardous-waste subpoena and other litigation.
- The future impact of seasonal demand, miles driven, fuel prices, unemployment and consumer maintenance behavior.