O’Reilly Automotive, Inc. 2022 Q3 Form 10-Q Summary
Business context and reporting period
O’Reilly is an automotive aftermarket specialty retailer serving do-it-yourself customers and professional service providers in the United States and Mexico. The unaudited report covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. At quarter-end, the company operated 5,910 U.S. stores and 28 Mexico stores.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Sales | $3.799 billion | $3.480 billion | $10.765 billion | $10.036 billion |
| Gross profit | $1.935 billion | $1.818 billion | $5.528 billion | $5.285 billion |
| Gross margin | 50.9% | 52.3% | 51.3% | 52.7% |
| Operating income | $804.2 million | $754.6 million | $2.272 billion | $2.241 billion |
| Operating margin | 21.2% | 21.7% | 21.1% | 22.3% |
| Net income | $585.4 million | $558.7 million | $1.644 billion | $1.646 billion |
| Net margin | 15.4% | 16.1% | 15.3% | 16.4% |
| Diluted EPS | $9.17 | $8.07 | $25.08 | $23.45 |
| Operating cash flow | Not separately provided | Not separately provided | $2.353 billion | $2.565 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.945 billion | $2.194 billion |
Q3 sales increased 9%, operating income increased 7%, and net income increased 5%. Nine-month sales increased 7%, while operating income increased 1% and net income declined slightly. Diluted EPS increased primarily because share repurchases reduced diluted weighted-average shares to approximately 65.6 million for the nine months from 70.2 million in the prior-year period.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $67.1 million at September 30, 2022, down from $362.1 million at December 31, 2021.
- Inventory was $4.138 billion, up from $3.686 billion at year-end 2021; accounts payable increased to $5.574 billion from $4.695 billion.
- Long-term debt was $4.371 billion, compared with $3.827 billion at year-end 2021. Total principal debt was $4.400 billion.
- The company issued $850 million of 4.700% senior notes due 2032 and repaid $300 million of 3.800% notes that matured on September 1, 2022.
- The $1.8 billion unsecured revolving credit facility had no borrowings outstanding at quarter-end, with $5.1 million of letters of credit reducing availability. Additional letters of credit totaled $96.6 million.
- The company remained compliant with debt covenants. The fixed-charge coverage ratio was 6.83 times versus a 2.50-times minimum, and the leverage ratio was 1.74 times versus a 3.50-times maximum.
- Shareholders’ deficit increased to $1.205 billion, principally reflecting $2.862 billion of year-to-date share repurchases.
Material changes versus the prior comparable period
- Comparable-store sales increased 7.6% in Q3 and 5.6% for the first nine months, versus 6.7% and 12.9%, respectively, in the prior-year periods.
- Professional service provider sales grew faster than DIY sales. Q3 professional sales increased to $1.631 billion from $1.409 billion, while DIY sales increased to $2.086 billion from $1.993 billion.
- Gross margin declined 140 basis points in Q3 and 140 basis points for the nine months. Management attributed the decline primarily to the professional pricing initiative, a higher professional-sales mix, and the absence of a prior-year benefit from lower-cost inventory.
- SG&A increased 6% in Q3 and 7% year to date, but declined modestly as a percentage of sales to 29.8% and 30.2%, respectively, due to fixed-cost leverage and lower accrued incentive compensation, partly offset by wage, benefit, and fuel inflation.
- Operating cash flow declined by $212.3 million year to date, while capital expenditures increased to $388.8 million from $340.7 million because of store and distribution expansion.
- The company repurchased 4.425 million shares for $2.862 billion during the first nine months, compared with 3.801 million shares for $2.007 billion in the prior-year period. Approximately $644 million remained under the authorization at September 30.
Guidance, outlook, risks, and unusual items
- Management anticipated approximately 180 net new stores in 2022 and 180 to 190 net new stores in 2023.
- Management stated that long-term demand benefits from miles driven, an expanding and aging vehicle fleet, and constrained new-vehicle availability. It also noted pressure from inflation, fuel costs, interest rates, consumer debt, and weaker DIY transaction counts.
- Management expects to mitigate merchandise inflation through supplier incentives, purchasing scale, selective forward buying, and price increases, but stated that future inflation and demand effects are uncertain.
- Q3 and year-to-date interest expense increased because of higher average borrowings; the company also recorded declines in the value of trading securities of $2.0 million in Q3 and $11.2 million year to date.
- The company had $25.0 million invested in five unconsolidated renewable-energy tax-credit funds and commitments of approximately $122 million upon achievement of project milestones. Subsequent to quarter-end, it entered into an additional commitment of approximately $60 million.
- Legal proceedings are described as ordinary-course matters; management does not currently expect them, in the aggregate, to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether professional pricing investments and mix effects continue to pressure gross margin.
- Whether DIY transaction weakness and inflation reduce comparable-store sales or operating leverage.
- The pace and funding of planned store growth and distribution expansion.
- Debt refinancing requirements, interest-rate exposure, covenant headroom, and the company’s low reported cash balance.
- The sustainability of large share repurchases given the shareholders’ deficit and increased debt.
- The timing and amount of renewable-energy tax-credit fund contributions and related tax benefits.
- Subsequent activity: through November 8, 2022, the company repurchased an additional 0.3 million shares for $184.5 million.