O’Reilly Automotive, Inc. — Q3 2023 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, Puerto Rico, and Mexico. The filing covers the unaudited quarter and nine months ended September 30, 2023. At quarter-end, the company operated 6,063 stores in 48 U.S. states and Puerto Rico and 48 stores in Mexico.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Sales | $4.20 billion | $3.80 billion | $11.98 billion | $10.77 billion |
| Gross profit | $2.16 billion | $1.93 billion | $6.14 billion | $5.53 billion |
| Gross margin | 51.4% | 50.9% | 51.2% | 51.3% |
| Operating income | $897.2 million | $804.2 million | $2.47 billion | $2.27 billion |
| Operating margin | 21.3% | 21.2% | 20.6% | 21.1% |
| Net income | $649.8 million | $585.4 million | $1.79 billion | $1.64 billion |
| Diluted EPS | $10.72 | $9.17 | $29.20 | $25.08 |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $2.52 billion | $2.35 billion |
| Free cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1.73 billion | $1.94 billion |
Q3 sales increased 11%, operating income increased 12%, net income increased 11%, and diluted EPS increased 17%. Nine-month sales increased 11%, operating income increased 9%, net income increased 9%, and diluted EPS increased 16%. The EPS growth benefited from a lower diluted share count of 61 million for the nine months versus 66 million in the prior-year period.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $82.7 million at September 30, 2023, compared with $108.6 million at December 31, 2022.
- Long-term debt was $5.10 billion, including $1.03 billion of commercial paper and approximately $4.1 billion of senior notes. The commercial paper carried a weighted-average variable interest rate of 5.578%.
- The company had no borrowings under its $1.8 billion unsecured revolving credit facility; $4.9 million of letters of credit reduced availability. The facility matures in June 2026 and serves as a liquidity backstop for the commercial paper program.
- Operating cash flow increased to $2.52 billion, while capital expenditures increased to $754.0 million from $388.8 million, primarily for store and distribution projects and vehicle fleet upgrades.
- The company repurchased 2.96 million shares for $2.59 billion during the first nine months and had $1.1 billion remaining under its authorization at September 30. It repurchased an additional 0.5 million shares for $444.4 million through November 8, 2023.
- Shareholders’ deficit increased to $1.76 billion from $1.06 billion at year-end, primarily reflecting share repurchases exceeding retained earnings and other equity changes.
- Supplier finance obligations of approximately $4.4 billion were included in accounts payable at September 30, 2023.
Material changes versus the prior comparable period
- Comparable-store sales increased 8.7% in Q3 and 9.4% for the first nine months. Management attributed the increases to higher average ticket values, positive professional-customer transaction counts, service and inventory execution, competitive pricing, and hot weather in many markets during the quarter.
- Professional service provider sales grew faster than do-it-yourself sales, increasing the professional mix and creating some gross-margin pressure.
- Q3 gross margin expanded 50 basis points, primarily due to improved acquisition costs. Nine-month gross margin declined 10 basis points because of the professional pricing initiative, greater professional sales mix, and a prior-year benefit from lower-cost inventory.
- SG&A increased to 30.1% of sales in Q3 and 30.6% for the nine months, versus 29.8% and 30.2%, respectively. Drivers included staffing, facilities, vehicles, store refresh initiatives, enhanced benefits, deferred compensation expense, and the annual leadership conference.
- Interest expense increased to $145.5 million for the first nine months from $115.4 million, reflecting higher average borrowings and interest rates.
- Capital expenditures nearly doubled year over year, while free cash flow declined by $213 million despite higher operating cash flow.
- The company opened 40 net new stores in Q3 and 140 in the first nine months, compared with 38 and 154, respectively, in the prior-year periods.
Guidance, outlook, commentary, and risks
- Management expects 180 to 190 net new store openings in 2023 and 190 to 200 in 2024.
- Management remains confident in gaining market share through its dual-market strategy, customer service, inventory availability, store expansion, distribution capabilities, merchandising, and omnichannel initiatives.
- Long-term demand is supported by miles driven, the size and age of the vehicle fleet, and continued maintenance of older, out-of-warranty vehicles. Management reported U.S. miles driven increased 2.4% year to date through August 2023.
- Key risks include inflation, interest rates, consumer debt and disposable income, product demand, competition, weather, tariffs, supply-chain disruptions, labor availability, acquisitions, information technology failures and cyberattacks, international operations, regulation, higher debt levels, and the sustainability of historical growth rates.
- The company committed to purchase approximately $300 million of federal renewable energy tax credits, with the transfer anticipated by September 2024.
- The company was in compliance with its debt covenants. The twelve-month consolidated fixed-charge coverage ratio was 6.56 times versus a 2.50-times minimum, and the consolidated leverage ratio was 1.83 times versus a 3.50-times maximum.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect, and that there were no material changes to previously disclosed risk factors or critical accounting estimates.
Important facts for investors to verify
- Assess whether comparable-store sales growth remains sustainable after separating price increases, ticket growth, transaction trends, weather effects, and new-store contributions.
- Monitor gross-margin trends as professional sales mix, competitive pricing, acquisition costs, and inventory-cost inflation change.
- Evaluate the effect of higher interest rates and $1.03 billion of commercial paper on earnings, liquidity, and refinancing risk.
- Track the pace and return on elevated capital expenditures and planned store openings.
- Review the economic substance and liquidity implications of approximately $4.4 billion in supplier finance obligations included in accounts payable.
- Consider the impact of continued large share repurchases on leverage, shareholders’ deficit, and per-share results.
- Verify the timing and financial impact of the planned $300 million renewable energy tax-credit purchase and related tax-payment timing.