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 crises; the economy
in general; inflation; consumer debt levels; product demand; the market for auto
parts; competition; weather; tariffs; availability of key products; business
interruptions, including terrorist activities, war and the threat of war;
failure to protect our brand and reputation; challenges in international
markets; volatility of the market price of our common stock; our increased debt
levels; credit ratings on public debt; historical growth rate sustainability;
our ability to hire and retain qualified employees; risks associated with the
performance of acquired businesses; information security and cyber-attacks; and
governmental regulations. 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
We continue to prioritize the safety and wellness of our Team Members and our customers as we navigate the ongoing challenges resulting from the COVID-19 pandemic in the current environment. Vaccine availability, effectiveness and distribution, gradual reopening processes across many of our markets, government stimulus payments and enhanced unemployment benefits have positively impacted demand for the products we sell. We continue to keep our stores open and operating to meet our customers' critical needs, while also ensuring the safety of our Team Members and customers through strict adherence to our safety protocols; however, we cannot predict how long the current crisis will last or the extent of its impact on our customers, our Team Members and overall industry demand.
For additional risks related to the COVID-19 pandemic, please refer to the "Risk
Factors" section of our Annual Report on Form 10-K for the year ended
OVERVIEW
We are a specialty retailer of automotive aftermarket parts, tools, supplies,
equipment and accessories in
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service providers - our "dual market strategy." Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items, accessories, a complete line of auto body paint and related materials, automotive tools and professional service provider service equipment.
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
Further government measures or consumer and business behavior could continue to have a negative impact on miles driven, but we are unable to predict the duration and severity of the impact to our business.
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
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.
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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
Comparable store sales for stores open at least one year increased 24.8% and
decreased 1.9% for the three months ended
Comparable store sales are calculated based on the change in sales for stores
open at least one year and exclude sales of specialty machinery, sales to
independent parts stores and sales to Team Members, as well as sales from Leap
Day in 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, 2021
Compared to the Same Period in 2020
Store sales:
Comparable store sales $ 589
Non-comparable store sales:
Sales for stores opened throughout 2020,
excluding stores open at least one year that
are included in comparable store sales, and
Mayasa store sales 40
Sales for stores opened throughout 2021 12
Sales from Leap Day in 2020 (34)
Decline in sales for stores that have closed (3)
Non-store sales:
Includes sales of machinery and sales to
independent parts stores and Team Members 10
Total increase in sales $ 614
We believe the increased sales are the result of store growth, 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. The government stimulus payments, enhanced unemployment benefits, lifting of stay at home orders and associated market reopening and recovery plans when combined with favorable industry dynamics, such as consumers investing in existing vehicles, led to strong demand for our products in the first quarter.
Our comparable store sales increase for the three months ended
In addition, 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, more technically advanced vehicles require less frequent repairs, as the component parts are more durable and last for longer periods of time. This decrease in repair frequency creates pressure on customer transaction counts; however, when repairs are needed, the cost of replacement parts is, on average, greater, which is a benefit to average ticket values.
Improvement in transaction counts during the three months ended
We opened 66 net, new
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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
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. We believe that cash expected to be provided by operating activities and availability under our unsecured revolving credit facility will be sufficient to fund both our short-term and long-term capital and liquidity needs for the foreseeable future. However, there can be no assurance that we will continue to generate cash flows at or above recent levels, and we are unable to predict the impact of the uncertainty and disruption caused by the COVID-19 pandemic on our ability to generate funds or maintain liquidity.
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The following table identifies cash provided by/(used in) our operating,
investing and financing activities for the three months ended March 31, 2021 and
2020 (in thousands):
For the Three Months Ended
March 31,
Liquidity: 2021 2020
Total cash provided by/(used in):
Operating activities $ 890,672 $ 459,093
Investing activities (93,757) (226,642)
Financing activities (651,304) 15,300
Effect of exchange rate changes on cash (371) (1,090)
Net increase in cash and cash equivalents
Capital expenditures$ 94,879 $ 133,284 Free cash flow (1) 789,780 227,170
(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 decrease in net cash used in investing activities during the three months
ended
Financing activities:
The net cash used in financing activities during the three months ended
Unsecured revolving credit facility:
On
As of
Senior Notes:
As of
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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 6.46 times and 5.08 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,
2021 2020
GAAP net income $ 1,953,473 $ 1,370,328
Add: Interest expense 159,246 145,070
Rent expense (1) 358,653 342,908
Provision for income taxes 589,099 385,509
Depreciation expense 311,037 279,103
Amortization expense 9,392 1,771
Non-cash share-based compensation 23,164 22,372
Non-GAAP EBITDAR $ 3,404,064 $ 2,547,061
Interest expense $ 159,246 $ 145,070
Capitalized interest 9,324 13,197
Rent expense (1) 358,653 342,908
Total fixed charges $ 527,223 $ 501,175
Consolidated fixed charge coverage ratio 6.46 5.08
GAAP debt $ 4,124,168 $ 4,471,248
Add: Stand-by letters of credit 84,045 39,083
Discount on senior notes 4,892 3,510
Debt issuance costs 20,940 19,242
Five-times rent expense 1,793,265 1,714,540
Non-GAAP adjusted debt $ 6,027,310 $ 6,247,623
Consolidated leverage ratio 1.77 2.45
(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") the most directly comparable GAAP financial measure, for the
twelve months ended March 31, 2021 and 2020 (in thousands):
Total lease cost, per ASC 842, for the twelve months ended
Variable non-contract operating lease components, related
to property taxes and insurance, for the twelve months
ended March 31, 2021 67,473
Rent expense for the twelve months ended March 31, 2021 $ 358,653 Total lease cost, per ASC 842, for the twelve months ended
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
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, 2021 and
2020 (in thousands):
For the Three Months Ended
March 31,
2021 2020
Cash provided by operating activities $ 890,672 $ 459,093
Less: Capital expenditures 94,879 133,284
Excess tax benefit from share-based compensation
payments 6,007 3,380
Investment in tax credit equity investments 6 95,259
Free cash flow $ 789,780 $ 227,170 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
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Credit Agreement. We include these items in judging our performance and believe this non-GAAP information is useful to investors as well. Material limitations of these non-GAAP measures are that such measures do not reflect actual GAAP amounts. We compensate for such limitations by presenting, in the tables above, a reconciliation to the most directly comparable GAAP measures.
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, 2021 and 2020 (in thousands, except per share data): For the Three Months Ended March 31, 2021 2020 Shares repurchased 1,475 1,484 Average price per share$ 450.65 $ 386.71 Total investment$ 664,533 $ 574,037
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.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 13 "Recent Accounting Pronouncements" to the Condensed Consolidated Financial Statements for information about recent accounting pronouncements.
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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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