O'REILLY AUTOMOTIVE, INC Unless otherwise indicated, "we," "us," "our" and similar terms, as well as
references to the "Company" or "O'Reilly," refer to
In Management's Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including
? recent developments within our Company;
? an overview of the key drivers of the automotive aftermarket industry;
? our results of operations for the three months ended
? our liquidity and capital resources;
? any contractual obligations, to which we are committed;
? our critical accounting estimates;
? the inflation and seasonality of our business; and
? recent accounting pronouncements that may affect our Company.
The review of Management's Discussion and Analysis should be made in conjunction with our condensed consolidated financial statements, related notes and other financial information, forward-looking statements and other risk factors included elsewhere in this quarterly report.
FORWARD-LOOKING STATEMENTS
We claim the protection of the safe-harbor for forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. You can
identify these statements by forward-looking words such as "estimate," "may,"
"could," "will," "believe," "expect," "would," "consider," "should,"
"anticipate," "project," "plan," "intend" or similar words. In addition,
statements contained within this quarterly report that are not historical facts
are forward-looking statements, such as statements discussing, among other
things, expected growth, store development, integration and expansion strategy,
business strategies, future revenues and future performance. These
forward-looking statements are based on estimates, projections, beliefs and
assumptions and are not guarantees of future events and results. Such
statements are subject to risks, uncertainties and assumptions, including, but
not limited to, the COVID-19 pandemic or other public health crisis, the economy
in general, inflation, tariffs, product demand, the market for auto parts,
competition, weather, risks associated with the performance of acquired
businesses, our ability to hire and retain qualified employees, consumer debt
levels, our increased debt levels, credit ratings on public debt, governmental
regulations, information security and cyber-attacks, terrorist activities, war
and the threat of war. Actual results may materially differ from anticipated
results described or implied in these forward-looking statements. Please refer
to the "Risk Factors" section of our annual report on Form 10-K for the year
ended
RECENT DEVELOPMENTS
The COVID-19 pandemic has caused significant disruption to the economy, and placed pressure on our business beginning in mid-March of 2020, as self-quarantine or stay at home orders were put in place in most cities, counties and states. We have been deemed an essential service provider in the communities we serve and have taken many steps to promote the health and safety of our customers and team members, strengthen our liquidity and mitigate the impact on our operations and financial performance, as we have been able to keep our stores open and operating to meet our customers' critical needs during the COVID-19 crisis.
These actions include, but not limited to:
Implementing social distancing standards throughout the company, providing our
? team members with personal protective equipment, and modifying store procedures
including the implementation of curbside pickup for Buy Online, Pick Up
In-Store orders;
? Reduced store operating hours across the chain;
Put in place programs to relax attendance policies as well as advance sick time
? to assist Team Members who are sick or need time away to support family
members;
? Delaying certain capital investments and prudently managing our cost structure
in response to sales pressures;
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Successfully issued
? Senior Notes due 2030, and drawing an additional
revolving credit facility;
? Temporarily suspended our share repurchase program on
Utilize relief efforts as part of the Coronavirus Aid, Relief, and Economic
? Security Act (CARES Act) signed into law on
bonus depreciation on eligible property, deferral of employer portion of social
security taxes, and deferral of other tax payments.
While we continue to make adjustments as we navigate the current environment, we are unable to predict how long the current crisis will last or how severe the impact will be to our customers and our business.
OVERVIEW
We are a specialty retailer of automotive aftermarket parts, tools, supplies,
equipment and accessories in
Our extensive product line includes an assortment of products that are differentiated by quality and price for most of the product lines we offer. For many of our product offerings, this quality differentiation reflects "good," "better," and "best" alternatives. Our sales and total gross profit dollars are, generally, highest for the "best" quality category of products. Consumers' willingness to select products at a higher point on the value spectrum is a driver of sales and profitability in our industry. We have ongoing initiatives focused on marketing and training to educate customers on the advantages of ongoing vehicle maintenance, as well as "purchasing up" on the value spectrum.
Our stores also offer enhanced services and programs to our customers,
including used oil, oil filter and battery recycling; battery, wiper and bulb
replacement; battery diagnostic testing; electrical and module testing; check
engine light code extraction; loaner tool program; drum and rotor resurfacing;
custom hydraulic hoses; professional paint shop mixing and related materials;
and machine shops. As of
We are influenced by a number of general macroeconomic factors that impact both
our industry and our consumers, including, but not limited to, fuel costs,
unemployment trends, interest rates, and other economic factors. Due to the
nature of these macroeconomic factors, we are unable to determine how long
current conditions will persist and the degree of impact future changes may have
on our business. Macroeconomic factors, such as increases in the
We believe the key drivers of current and future long-term demand for the
products sold within the automotive aftermarket include the number of
Number of Miles Driven
The number of total miles driven in the
According to the
Size and Age of the Vehicle Fleet
The total number of vehicles on the road and the average age of the vehicle
population heavily influence the demand for products sold within the automotive
aftermarket industry. As reported by The
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Estimates of the SAAR for 2020, have been revised significantly downward, as a result of the sharp decline in new vehicle sales coinciding with the onset of COVID-19, and the outlook for SAAR is highly uncertain, as the severity and duration of the COVID-19 crisis is indeterminable. However, the rate of new vehicle sales in any given year represents a small percentage of the total light vehicle population and has a muted impact on the total number of vehicles on the road and average age of vehicles in the short term.
We believe the increase in average age can be attributed to better engineered and manufactured vehicles, which can be reliably driven at higher mileages due to better quality power trains, interiors and exteriors, and the consumer's willingness to invest in maintaining these higher-mileage, better built vehicles. As the average age of vehicles on the road increases, a larger percentage of miles are being driven by vehicles that are outside of a manufacturer warranty. These out-of-warranty, older vehicles generate strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent mechanical failures and generally require more maintenance than newer vehicles. We believe consumers will continue to invest in these reliable, higher-quality, higher-mileage vehicles and these investments, along with an increasing total light vehicle fleet, will support continued demand for automotive aftermarket products.
We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O'Reilly values of hard work and excellent customer service.
RESULTS OF OPERATIONS Sales:
Sales for the three months ended
The following table presents the components of the increase in sales for the
three months ended
Increase in Sales for the Three Months Ended
March 31, 2020
Compared to the Same Period in 2019
Store sales:
Comparable store sales $ (44)
Non-comparable store sales:
Sales for stores opened throughout 2019,
excluding stores open at least one year that
are included in comparable store sales and
sales from the acquired Mayasa stores 44
Sales for stores opened throughout 2020 8
Sales from Leap Day 34
Decline in sales for stores that have closed (2)
Non-store sales:
Includes sales of machinery and sales to
independent parts stores and Team Members 26
Total increase in sales $ 66
We believe the increased sales are the result of store growth, the acquisition of Mayasa, sales from one additional day due to Leap Day, the high levels of customer service provided by our well-trained and technically proficient Team Members, superior inventory availability, including same day and over-night access to inventory in our regional distribution centers, enhanced services and programs offered in our stores, a broader selection of product offerings in most stores with a dynamic catalog system to identify and source parts, a targeted promotional and advertising effort through a variety of media and localized promotional events, continued improvement in the merchandising and store layouts of our stores, compensation programs for all store Team Members that provide incentives for performance and our continued focus on serving both DIY and professional service provider customers. These benefits were offset, in part, by significant sales headwinds beginning in the middle of March as a result of COVID-19.
Our comparable store sales decrease for the three months ended
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provider customers, partially offset by negative transaction counts, comprised of negative transaction counts for DIY customers, partially offset by positive transaction counts for professional service provider customers. The improvement in average ticket values was the result of the increasing complexity and cost of replacement parts necessary to maintain the current population of better-engineered and more technically advanced vehicles. These better-engineered and more technically advanced vehicles require less frequent repairs, as the component parts are more durable and last for longer periods of time, creating pressure on customer transaction counts. However, when repairs are needed, the cost of replacement parts is, on average, greater, which benefits average ticket values. Average ticket values also benefited from increased selling prices on a SKU-by-SKU basis, as compared to the prior year, driven by increases in acquisition cost of inventory, which were passed on in market prices. Transaction counts prior to the stay at home orders taking effect were also negatively impacted by unseasonably mild winter weather in many of our markets, which did not stress vehicle components, resulting in a lower level of automobile parts breakage.
As the COVID-19 stay at home orders and recommendations took effect in our
markets in the middle of
We opened 73 net, new
Gross profit:
Gross profit for the three months ended
Selling, general and administrative expenses:
Selling, general and administrative expenses ("SG&A") for the three months ended
Operating income:
As a result of the impacts discussed above, operating income for the
three months ended
Other income and expense:
Total other expense for the three months ended
Income taxes:
Our provision for income taxes for the three months ended
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ended
Net income:
As a result of the impacts discussed above, net income for the three months
ended
Earnings per share:
Our diluted earnings per common share for the three months ended
LIQUIDITY AND CAPITAL RESOURCES
Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program. The primary sources of our liquidity are funds generated from operations and borrowed under our unsecured revolving credit facility. Decreased demand for our products or changes in customer buying patterns could negatively impact our ability to generate funds from operations. Additionally, decreased demand or changes in buying patterns could impact our ability to meet the debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility.
As we operate amid uncertainty and disruption caused by the COVID-19 pandemic,
we have taken prudent steps to support the continued stability and financial
flexibility of our Company. Our teams have taken action to reduce costs and
conserve cash, which includes delaying capital investments and the suspension of
our share repurchase program. At
The following table identifies cash provided by/(used in) our operating, investing and financing activities for the three months endedMarch 31, 2020 and 2019 (in thousands): For the Three Months Ended March 31, Liquidity: 2020 2019 Total cash provided by/(used in): Operating activities$ 459,093 $ 440,622 Investing activities (226,642) (151,398) Financing activities 15,300 (263,822) Effect of exchange rate changes on cash (1,090) -
Net increase in cash and cash equivalents
Capital expenditures$ 133,284 $ 152,914 Free cash flow (1) 227,170 279,195
(1) Calculated as net cash provided by operating activities, less capital
expenditures and excess tax benefit from share-based compensation payments,
and investment in tax credit equity investments for the period.
Operating activities:
The increase in net cash provided by operating activities during the three
months ended
Investing activities:
The increase in net cash used in investing activities during the three months
ended
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Financing activities:
The net cash provided by financing activities during the three months ended
Unsecured revolving credit facility:
On
As of
Senior Notes:
On
We have issued a cumulative
Debt covenants:
The indentures governing our senior notes contain covenants that limit our
ability and the ability of certain of our subsidiaries to, among other things,
create certain liens on assets to secure certain debt and enter into certain
sale and leaseback transactions, and limit our ability to merge or consolidate
with another company or transfer all or substantially all of our property, in
each case as set forth in the indentures. These covenants are, however, subject
to a number of important limitations and exceptions. As of
The Credit Agreement contains certain covenants, including limitations on indebtedness, a minimum consolidated fixed charge coverage ratio of 2.50:1.00 and a maximum consolidated leverage ratio of 3.50:1.00. The consolidated fixed charge coverage ratio includes a calculation of earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense to fixed charges. Fixed charges include interest expense, capitalized interest and rent expense. The consolidated leverage ratio includes a calculation of adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and non-cash share-based compensation expense. Adjusted debt includes outstanding debt, outstanding stand-by letters of credit and similar instruments, five-times rent expense and excludes any premium or discount recorded in conjunction with the issuance of long-term debt. In the event that we should default on any covenant contained within the Credit Agreement, certain actions may be taken, including, but not limited to, possible termination of commitments, immediate payment of outstanding principal amounts plus accrued interest and other amounts payable under the Credit Agreement and litigation from our lenders.
We had a consolidated fixed charge coverage ratio of 5.08 times and 5.29 times
as of
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The table below outlines the calculations of the consolidated fixed charge
coverage ratio and consolidated leverage ratio covenants, as defined in the
Credit Agreement governing the Revolving Credit Facility, for the twelve months
ended
For the Twelve Months Ended
March 31,
2020 2019
GAAP net income $ 1,370,328 $ 1,340,733
Add: Interest expense 145,070 128,203
Rent expense (1) 342,908 322,881
Provision for income taxes 385,509 372,100
Depreciation expense 279,103 250,023
Amortization expense 1,771 2,958
Non-cash share-based compensation 22,372 20,424
Non-GAAP EBITDAR $ 2,547,061 $ 2,437,322
Interest expense $ 145,070 $ 128,203
Capitalized interest 13,197 9,716
Rent expense (1) 342,908 322,881
Total fixed charges $ 501,175 $ 460,800
Consolidated fixed charge coverage ratio 5.08 5.29
GAAP debt $ 4,471,248 $ 3,460,921
Add: Stand-by letters of credit 39,083 39,201
Discount on senior notes 3,510 4,090
Debt issuance costs 19,242 14,989
Five-times rent expense 1,714,540 1,614,405
Non-GAAP adjusted debt $ 6,247,623 $ 5,133,606
Consolidated leverage ratio 2.45 2.11
(1) The table below outlines the calculation of Rent expense and reconciles Rent
expense to Total lease cost, per Accounting Standard Codification 842 ("ASC
842"), adopted and effective January 1, 2019 , the most directly comparable
GAAP financial measure, for the twelve months ended March 31, 2020 and 2019
(in thousands):
Total lease cost, per ASC 842, for the twelve months ended
$ 404,138
Less: Variable non-contract operating lease components, related
to property taxes and insurance, for the twelve months
ended March 31, 2020 61,230
Rent expense for the twelve months ended March 31, 2020 $ 342,908 Total lease cost, per ASC 842, for the three months ended
to property taxes and insurance, for the three months ended
March 31, 2019 14,567
Rent expense for the three months ended March 31, 2019 83,726
Add: Rent expense for the nine months ended
as previously reported prior to the adoption of ASC 842 239,155
Rent expense for the twelve months ended March 31, 2019 $ 322,881
The table below outlines the calculation of Free cash flow and reconciles Free
cash flow to Net cash provided by operating activities, the most directly
comparable GAAP financial measure, for the three months ended March 31, 2020 and
2019 (in thousands):
For the Three Months Ended
March 31,
2020 2019
Cash provided by operating activities $ 459,093 $ 440,622
Less: Capital expenditures 133,284 152,914
Excess tax benefit from share-based compensation
payments 3,380 8,513
Investment in tax credit equity investments 95,259 -
Free cash flow $ 227,170 $ 279,195
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Free cash flow, the consolidated fixed charge coverage ratio and the
consolidated leverage ratio discussed and presented in the tables above are not
derived in accordance with
Share repurchase program:
In January of 2011, our Board of Directors approved a share repurchase program.
Under the program, we may, from time to time, repurchase shares of our common
stock, solely through open market purchases effected through a broker dealer at
prevailing market prices, based on a variety of factors such as price, corporate
trading policy requirements and overall market conditions. Our Board of
Directors may increase or otherwise modify, renew, suspend or terminate the
share repurchase program at any time, without prior notice. As announced on
The following table identifies shares of our common stock that have been repurchased as part of our publicly announced share repurchase program for the three months endedMarch 31, 2020 and 2019 (in thousands, except per share data): For the Three Months Ended March 31, 2020 2019 Shares repurchased 1,484 927 Average price per share$ 386.71 $ 347.09 Total investment$ 574,037 $ 321,846
As of
CONTRACTUAL OBLIGATIONS
There have been no material changes to the contractual obligations, to which we
are committed, since those discussed in our Annual Report on Form 10-K for
the year ended
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in accordance with GAAP requires the
application of certain estimates and judgments by management. Management bases
its assumptions, estimates, and adjustments on historical experience, current
trends and other factors believed to be relevant at the time the condensed
consolidated financial statements are prepared. There have been no material
changes in the critical accounting estimates since those discussed in our Annual
Report on Form 10-K for the year ended
INFLATION AND SEASONALITY
We have been successful, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our acquisition costs increased due to base commodity price increases industry-wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not believe inflation has had a material adverse effect on our operations.
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
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RECENT ACCOUNTING PRONOUNCEMENTS
See Note 14 "Recent Accounting Pronouncements" to the Condensed Consolidated Financial Statements for information about recent accounting pronouncements.
INTERNET ADDRESS AND ACCESS TO SEC FILINGS
Our Internet address is www.OReillyAuto.com. Interested readers can access, free
of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, through the
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