O’Reilly Automotive, Inc. 2014 Form 10-K Summary
Business context and reporting period
O’Reilly Automotive is a U.S. specialty retailer and supplier of automotive aftermarket parts, tools, supplies, equipment and accessories serving do-it-yourself and professional service-provider customers. The filing covers the fiscal year ended December 31, 2014, and includes fourth-quarter results. At year-end, the company operated 4,366 stores in 43 states, compared with 4,166 stores in 42 states in 2013.
| Metric | 2014 | 2013 |
|---|
| Sales | $7.216 billion | $6.649 billion |
| Net income | $778.2 million | $670.3 million |
| Diluted EPS | $7.34 | $6.03 |
| Stores | 4,366 | 4,166 |
Financial performance and key metrics
- Annual sales increased 9% year over year. Comparable-store sales increased 6.0%, versus 4.3% in 2013.
- Gross profit increased 10% to $3.709 billion; gross margin expanded to 51.4% from 50.7%.
- Operating income increased 15% to $1.270 billion; operating margin improved to 17.6% from 16.6%.
- Net income increased 16% to $778.2 million; net margin increased to 10.8% from 10.1%.
- The effective income-tax rate was 36.3%, compared with 36.7% in 2013, primarily reflecting greater employment tax credits.
- Cash provided by operating activities was $1.190 billion, compared with $908.0 million in 2013. Capital expenditures were $430.0 million, producing reported free cash flow of $760.4 million.
- Cash and cash equivalents were $250.6 million at year-end. Working capital declined to $236.4 million from $412.2 million, largely because accounts payable increased faster than current assets as the store base expanded.
- Total debt was approximately $1.397 billion, consisting principally of $1.4 billion of unsecured senior notes due from 2021 through 2023. There were no borrowings under the $600 million revolving credit facility, although $47.9 million of letters of credit reduced availability.
- Debt-to-equity was 0.69:1. The company remained in compliance with debt covenants, with a 5.36x fixed-charge coverage ratio and a 1.72x consolidated leverage ratio.
- Inventory was $2.555 billion, and accounts payable represented 94.6% of inventory, compared with 86.6% in 2013. The company attributed the increase to supplier financing and extended payment terms.
- The company repurchased 5.743 million shares for $866.4 million during 2014. Approximately $279.3 million remained authorized at December 31, 2014; the authorization was later increased, and approximately $751.5 million remained as of February 27, 2015.
Fourth-quarter 2014 results
| Metric | Q4 2014 | Q4 2013 |
|---|
| Comparable-store sales growth | 6.3% | 5.4% |
| Sales | $1.764 billion | $1.621 billion |
| Gross profit | $912.1 million | $819.3 million |
| Operating income | $303.0 million | $255.8 million |
| Net income | $181.7 million | $152.3 million |
| Diluted EPS | $1.76 | $1.40 |
Material changes versus the prior comparable period
- Growth reflected 200 net new stores, stronger comparable-store sales, higher average ticket values and positive transaction counts for both customer categories.
- Professional-service-provider sales continued to grow faster than DIY sales. Professional customers represented approximately 42% of 2014 sales, while DIY customers represented approximately 58%.
- Gross margin benefited from product acquisition-cost improvements, partly offset by a $41 million non-cash LIFO-related write-down to replacement cost.
- SG&A increased 8% in dollars but declined to 33.8% of sales from 34.1%, reflecting operating leverage on store occupancy costs.
- Interest expense increased to $53.3 million from $49.1 million because of higher average borrowings, although total debt was broadly unchanged at year-end.
- Operating cash flow improved substantially, supported by higher earnings and increased supplier financing. Capital expenditures rose by approximately $34 million to support new stores and facilities.
- Weighted-average diluted shares declined to 106.0 million from 111.1 million, principally due to share repurchases, contributing to diluted EPS growth of 22%.
Guidance, outlook, risks and unusual items
- Management planned approximately 205 net new store openings in 2015. Estimated average new-store investment was approximately $1.3 million to $1.5 million, although leasing can reduce the cost.
- Management expected operating cash flow and available revolver capacity to fund foreseeable liquidity and capital needs, but cautioned that weaker demand could reduce cash generation and affect covenant compliance.
- Key operating risks include intense competition, regional economic and weather conditions, slower miles driven, supplier disruptions, labor costs, employee retention, acquisition integration, distribution-center interruptions, system failures or data breaches, environmental and employment regulation, and higher debt or lower credit ratings.
- The company is subject to a California environmental subpoena concerning hazardous-waste handling, storage and disposal. The outcome could not be predicted from the filing.
- A reserve of approximately $11.6 million remained for legal fees and costs associated with CSK legacy indemnification obligations. Management did not expect the matter to have a material adverse effect after reserves, but a particular period could be affected.
- The company had approximately $2.02 billion of future operating-lease payments, $1.4 billion of senior-note principal, $65.9 million of construction commitments and $132.9 million of undiscounted self-insurance reserves at year-end.
- No goodwill or material long-lived-asset impairment was recorded in 2014. The company paid no cash dividends and did not anticipate paying dividends in the foreseeable future.
- Standard & Poor’s upgraded the company’s ratings on January 26, 2015, reducing applicable revolver pricing. The company planned to adopt the new revenue-recognition standard beginning in the first quarter of 2017 and the going-concern disclosure standard for the year ending December 31, 2016.
- Management and Ernst & Young reported effective internal control over financial reporting, and the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether comparable-store sales and professional-service-provider growth remain strong as the store base expands.
- Whether gross-margin improvement persists despite product-cost deflation, LIFO accounting effects and the lower-margin professional sales mix.
- The sustainability of cash flow and supplier-financing benefits, particularly as inventory and accounts payable grow.
- Debt covenant headroom, fixed-rate senior-note obligations, lease commitments and the effect of any future credit-rating changes.
- The pace and returns of the planned 205 store openings, including required capital expenditures and distribution capacity.
- The ultimate outcome and potential cost of the California environmental inquiry and CSK legacy indemnification matter.
- The effect of continued share repurchases on leverage, liquidity, outstanding shares and EPS.
