O’Reilly Automotive, Inc. — Form 10-Q Summary
Business context and reporting period
O’Reilly Automotive is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service provider customers in the United States and Mexico. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021. At March 31, 2022, the company operated 5,811 U.S. stores and 27 Mexico stores.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $3.296 billion | $3.091 billion | +7% |
| Gross profit | $1.708 billion | $1.641 billion | +4% |
| Gross margin | 51.8% | 53.1% | Down 130 bps |
| Operating income | $669.5 million | $691.1 million | -3% |
| Operating margin | 20.3% | 22.4% | Down 210 bps |
| Net income | $481.9 million | $501.6 million | -4% |
| Net margin | 14.6% | 16.2% | Down 160 bps |
| Diluted EPS | $7.17 | $7.06 | +2% |
| Cash flow from operations | $689.9 million | $890.7 million | Down $200.8 million |
| Free cash flow | $579.4 million | $789.8 million | Down $210.4 million |
| Capital expenditures | $104.0 million | $94.9 million | +10% |
Sales to do-it-yourself customers increased to $1.816 billion from $1.781 billion, while professional service provider sales increased to $1.399 billion from $1.239 billion. Comparable-store sales increased 4.8%, following a 24.8% increase in the prior-year quarter.
SG&A increased 9% to $1.039 billion, or 31.5% of sales, from 30.7% of sales. Management attributed the increase primarily to additional personnel, facilities and vehicles, as well as wage, benefit and fuel inflation.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $191.5 million at March 31, 2022, compared with $362.1 million at December 31, 2021.
- Long-term debt was $3.828 billion, representing $3.850 billion of senior-note principal less unamortized discount and issuance costs. Senior notes mature from 2022 through 2031 and carry stated interest rates from 1.750% to 4.350%.
- The company had no borrowings under its $1.8 billion unsecured revolving credit facility, which matures in June 2026. Outstanding letters of credit under the facility totaled $78.7 million, leaving approximately $1.721 billion of stated availability before other considerations.
- The company also had $60.9 million of letters of credit outside the revolving facility.
- The company remained in compliance with its debt covenants. The consolidated fixed-charge coverage ratio was 6.93x versus a 2.50x minimum, and the consolidated leverage ratio was 1.62x versus a 3.50x maximum.
- Total operating lease liabilities were approximately $2.034 billion, including current and long-term portions.
- Shareholders’ deficit was $328.3 million at March 31, 2022, compared with $66.4 million at December 31, 2021, primarily reflecting share repurchases.
Material changes versus the prior comparable period
- Revenue grew 7%, supported by store expansion, a 4.8% comparable-store sales increase and higher average ticket values.
- Transaction counts declined, particularly among DIY customers, due in part to difficult comparisons with stimulus-supported demand in Q1 2021 and unfavorable weather. Professional customer transactions were positive.
- Gross margin contracted 130 basis points, primarily due to the professional pricing initiative and a higher mix of lower-margin professional sales.
- Operating margin declined 210 basis points as gross-margin pressure and higher SG&A more than offset sales growth.
- Diluted EPS increased despite lower net income because weighted-average diluted shares declined to 67.2 million from 71.0 million.
- Operating cash flow and free cash flow declined materially, driven by increased inventory investment, changes in payroll and benefits accruals, and lower net income.
- The company repurchased 1.167 million shares for $775.2 million at an average price of $664.15, compared with 1.475 million shares for $664.5 million in Q1 2021.
- The company opened 52 net new U.S. stores and two Mexico stores during the quarter, compared with 66 net new U.S. stores in the prior-year period.
Guidance, outlook, risks and unusual items
- Management anticipated 175 to 185 net new store openings during 2022.
- Management remained confident in gaining market share through its dual-market strategy, customer service, inventory availability and store expansion.
- Management stated that inflation had not materially adversely affected operations historically, citing supplier incentives, purchasing scale, selective forward buying and price increases; however, wage, benefit and fuel inflation increased SG&A during the quarter.
- Supply-chain disruptions continued to affect product availability and new-vehicle production. Management said its distribution network and supplier relationships supported relatively strong in-stock positions.
- Key disclosed risks include inflation, fuel costs, economic conditions, consumer debt, product demand, competition, weather, tariffs, supply-chain disruptions, public-health events, labor availability, cybersecurity, regulatory developments, increased debt and the sustainability of historical growth rates.
- The company reported ordinary-course litigation and stated that, after considering insurance and accruals, it did not expect the matters to have a material adverse effect in aggregate.
- Four renewable-energy tax-credit fund investments were treated as unconsolidated variable-interest entities. The company’s net investment and generally maximum exposure to loss was $24.1 million at March 31, 2022.
- Subsequent to quarter-end through May 9, 2022, the company repurchased an additional 0.5 million shares for $295.6 million. Approximately $1.2 billion remained under the repurchase authorization at March 31, 2022.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether gross-margin pressure from professional pricing and mix persists or reverses.
- Whether wage, benefit, fuel and other inflationary costs continue to outpace sales growth.
- Inventory growth, supplier availability and the effect of supply-chain conditions on working capital and cash generation.
- The pace and returns of planned 2022 store openings and continued comparable-store sales performance.
- The scale and timing of share repurchases relative to free cash flow, cash balances and debt maturities.
- Refinancing plans for the $300 million of senior notes due in 2022 and the company’s ongoing covenant headroom.
- The impact of weaker transaction counts, weather, fuel prices, vehicle miles driven and broader consumer conditions on demand.
- Future foreign-exchange effects from the Mexico business and the company’s stated approximately $15.1 million sensitivity to a 10% change in exchange rates on net Mexican subsidiary assets.