O REILLY AUTOMOTIVE INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as
references to the “Company” or “O’Reilly,” refer to
and its subsidiaries.
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
? an overview of the key drivers and other influences on the automotive
aftermarket industry;
? our results of operations for the three months ended
? our liquidity and capital resources;
? our critical accounting estimates; 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 and supply
chain disruptions; 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
Exchange Commission
our financial performance. Forward-looking statements speak only as of the date
they were made, and we undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by applicable law.
OVERVIEW
We are a specialty retailer of automotive aftermarket parts, tools, supplies,
equipment and accessories in
largest
both DIY customers and professional 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 enhanced 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
states and 27 stores in
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We are influenced by a number of general macroeconomic factors that impact both
our industry and consumers, including, but not limited to, inflation, including
rising consumer staples, fuel and energy costs, unemployment trends, interest
rates and other economic factors. Future changes, such as continued broad-based
inflation and further rapid increases in fuel costs that exceed wage growth, may
negatively impact our consumers’ level of disposable income, and we cannot
predict the degree these changes, or other future changes, may have on our
business or industry.
We believe the key drivers of current and future long-term demand for the
products sold within the automotive aftermarket include the number of
driven, number of
average vehicle age.
Number of Miles Driven
The number of total miles driven in the
and maintenance products sold within the automotive aftermarket. In total,
vehicles in the
resulting in ongoing wear and tear and a corresponding continued demand for the
repair and maintenance products necessary to keep these vehicles in operation.
According to the
driven in the
COIVD-19 pandemic, including work from home arrangements and reduced travel.
However for 2021, miles driven improved and increased 11.2%, and through
February of 2022, year-to-date miles driven have continued to improve and
increased 7.2%. Total miles driven can also be impacted by macroeconomic
factors, including rapid increases in fuel cost, but we are unable to predict
the degree of impact these factors may have on miles driven in the future.
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
number of registered vehicles increased 12.7% from 2010 to 2020, bringing the
number of light vehicles on the road to 281 million by the end of 2020. In
2021, the rate of new vehicle sales was pressured due to supply chain
constraints experienced by manufacturers, and the seasonally adjusted annual
rate of light vehicle sales in the
average at approximately 12.4 million. The impact of supply chain constraints
is expected to continue to limit new vehicle production capacity in 2022, making
it difficult to determine the ultimate forecast of new vehicle sales. However,
the current 2022 outlook for the SAAR is estimated to be approximately 13.3
million, which again remains below the historical average. From 2010 to 2020,
vehicle scrappage rates have remained relatively stable, ranging from 4.1% to
5.7% annually. As a result, over the past decade, the average age of the
vehicle population has increased, growing 12.3%, from 10.6 years in 2010 to
11.9 years in 2020. While the annual changes to the vehicle population
resulting from new vehicle sales and the fluctuation in vehicle scrappage rates
in any given year represent a small percentage of the total light vehicle
population and have a muted impact on the total number and average age of
vehicles on the road over the short term, we believe our business benefits from
the current environment of a new vehicle scarcity and higher than typical used
vehicle prices, as consumers are more willing to continue to invest in their
current vehicle.
We believe the increase in average vehicle age over the long-term 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.
Inflationary cost pressures impact our business; however, historically 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 increase due to base
commodity price increases or other input cost increases affecting the entire
industry, we have typically been able to pass along these cost increases through
higher selling 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.
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.
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RESULTS OF OPERATIONS
Sales:
Sales for the three months ended
store sales for stores open at least one year increased 4.8% and 24.8% for the
three months ended
sales are calculated based on the change in sales for
one year and exclude sales of specialty machinery, sales to independent parts
stores and sales to Team Members. Online sales for ship-to-home orders and
pickup in-store orders for
the comparable store sales calculation.
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, 2022
Compared to the Same
Period in 2021
Store sales:
Comparable store sales $ 144
Non-comparable store sales:
Sales for stores opened throughout 2021, excluding
stores open at least one year that are included in
comparable store sales, and
43 Sales for stores opened throughout 2022 8 Sales for stores that have closed, including temporarily closed stores -
Non-store sales:
Includes sales of machinery and sales to independent
parts stores and Team Members
10 Total increase in sales $ 205
We believe our 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 from our regional distribution centers and hub store
network, 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. In
addition, despite the global supply chain disruptions that created inventory
availability challenges for our industry, during the three months ended
31, 2022
supplier relationships allowed us to maintain better in-stock inventory
positions than the broader market and contributed to our sales growth.
Our comparable store sales increase for the three months ended
was driven by increases in average ticket values for both professional service
provider and DIY customers, partially offset by negative transaction counts.
Average ticket values benefited from increases in average selling prices, on a
same-SKU basis, as compared to the same period in 2021, driven by increases in
acquisition costs of inventory, which were passed on in selling prices. Average
ticket values also continue to be positively impacted by 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. The resulting 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. The
decrease in transaction counts was driven by a challenging comparison to the
strong DIY customer transaction counts in the prior year, aided by government
stimulus, and unfavorable weather conditions in some of our markets during the
quarter, including the late start to spring, partially offset by positive
transaction counts from professional service provider customers.
We opened 52 net, new
months ended
the three months ended
stores in 47 U.S. states and 27 stores in
store growth to be 175 to 185 net, new store openings in 2022.
Gross profit:
Gross profit for the three months ended
billion
period one year ago. The increase in gross profit dollars for the three months
ended
increase in comparable store sales at existing stores. The decrease in gross
profit as a percentage of
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sales for the three months ended
from the rollout of our professional pricing initiative, which was a strategic
investment aimed at ensuring we are more competitively priced on the
professional side of our business, and a greater percentage of our total sales
mix generated from professional service provider customers, which carry a lower
gross margin than DIY sales.
Selling, general and administrative expenses:
Selling, general and administrative expenses (“SG&A”) for the three months ended
million
total SG&A dollars for the three months ended
additional Team Members, facilities and vehicles to support our increased sales
and store count. The increase in SG&A as a percentage of sales for the three
months ended
wages, benefits and fuel costs and increased payroll, as compared to the same
period one year ago, when store payroll hours were constrained due to expense
control measures in response to the pandemic and the difficult labor
environment.
Operating income:
As a result of the impacts discussed above, operating income for the
three months ended
sales) from
Other income and expense:
Total other expense for the three months ended
period one year ago. The increase in total other expense for the three months
ended
securities, partially offset by decreased interest expense on lower average
outstanding borrowings.
Income taxes:
Our provision for income taxes for the three months ended
decreased 2% to
effective tax rate) for the same period one year ago. The decrease in our
provision for income taxes for the three months ended
result of lower taxable income, partially offset by lower excess tax benefits
from share-based compensation. The increase in our effective tax rate for the
three months ended
from share-based compensation.
Net income:
As a result of the impacts discussed above, net income for the three months
ended
million
Earnings per share:
Our diluted earnings per common share for the three months ended
increased 2% to
the same period one year ago.
LIQUIDITY AND CAPITAL RESOURCES
Our long-term business strategy requires capital to open new stores, fund
strategic acquisitions, expand distribution infrastructure, operate and maintain
our existing stores and may include the opportunistic repurchase of shares of
our common stock through our Board-approved share repurchase program. Our
material cash requirements necessary to maintain the current operations of our
long-term business strategy include, but are not limited to, inventory
purchases, human capital obligations, including payroll and benefits,
contractual obligations, including debt and interest obligations, capital
expenditures, payment of income taxes and other operational priorities. We
expect to fund our short- and long-term cash and capital requirements with our
primary sources of liquidity, which include funds generated from the normal
course of our business operations and borrowings under our unsecured revolving
credit facility. However, there can be no assurance that we will continue to
generate cash flows or maintain liquidity at or above recent levels, as we are
unable to predict decreased demand for our products, changes in customer buying
patterns or the impact of the uncertainty and disruption caused by the COVID-19
pandemic. Additionally, these factors could also 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.
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
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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, 2022 and
2021 (in thousands):
For the Three Months Ended
March 31,
Liquidity: 2022 2021
Total cash provided by/(used in):
Operating activities $ 689,886 $ 890,672
Investing activities (104,981) (93,757)
Financing activities (755,619) (651,304)
Effect of exchange rate changes on cash 147 (371)
Net (decrease) increase in cash and cash equivalents
Capital expenditures$ 103,990 $ 94,879 Free cash flow (1) 579,350 789,780
(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 decrease in net cash provided by operating activities during the three
months ended
due to a larger decrease in accrued payroll and benefits, a smaller decrease in
net inventory investment and a decrease in net income. The larger decrease in
accrued payroll and benefits was primarily attributable to payroll payments and
higher accrued incentive compensation payments in 2022 versus the same period in
2021. The smaller decrease in net inventory investment was driven by our
initiatives to increase store level inventory in 2022.
Investing activities:
The increase in net cash used in investing activities during the three months
ended
increase in capital expenditures. The increase in capital expenditures was
primarily due to the timing of store and distribution expansion projects in the
current period, as compared to the same period in the prior year.
Financing activities:
The increase in net cash used in financing activities during the three months
ended
an increase in repurchases of our common stock.
Debt instruments:
See Note 5 “Financing” to the Condensed Consolidated Financial Statements for
information concerning the Company’s credit agreement, unsecured revolving
credit facility, outstanding letters of credit and unsecured senior notes.
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
were in compliance with the covenants applicable to our senior notes.
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.
20
We had a consolidated fixed charge coverage ratio of 6.93 times and 6.46 times
as of
of 1.62 times and 1.77 times as of
remaining in compliance with all covenants related to the borrowing
arrangements.
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,
2022 2021
GAAP net income $ 2,144,956 $ 1,953,473
Add: Interest expense 142,103 159,246
Rent expense (1) 375,942 358,653
Provision for income taxes 614,392 589,099
Depreciation expense 323,539 311,037
Amortization expense 7,844 9,392
Non-cash share-based compensation 24,897 23,164
Non-GAAP EBITDAR $ 3,633,673 $ 3,404,064
Interest expense $ 142,103 $ 159,246
Capitalized interest 6,425 9,324
Rent expense (1) 375,942 358,653
Total fixed charges $ 524,470 $ 527,223
Consolidated fixed charge coverage ratio 6.93 6.46
GAAP debt $ 3,827,891 $ 4,124,168
Add: Stand-by letters of credit 139,569 84,045
Discount on senior notes 4,188 4,892
Debt issuance costs 17,921 20,940
Five-times rent expense 1,879,710 1,793,265
Non-GAAP adjusted debt $ 5,869,279 $ 6,027,310
Consolidated leverage ratio 1.62 1.77
(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, 2022 and 2021 (in thousands):
Total lease cost, per ASC 842, for the twelve months ended
Less:
Variable non-contract operating lease components, related
to property taxes and insurance, for the twelve months
ended March 31, 2022 72,442
Rent expense for the twelve months ended March 31, 2022 $ 375,942
Total lease cost, per ASC 842, for the twelve months ended
Less:
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
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, 2022 and
2021 (in thousands):
For the Three Months Ended
March 31,
2022 2021
Cash provided by operating activities $ 689,886 $ 890,672
Less: Capital expenditures 103,990 94,879
Excess tax benefit from share-based compensation
payments 2,466 6,007
Investment in tax credit equity investments 4,080 6
Free cash flow $ 579,350 $ 789,780
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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
principles (“GAAP”). We do not, nor do we suggest investors should, consider
such non-GAAP financial measures in isolation from, or as a substitute for, GAAP
financial information. We believe that the presentation of our free cash flow,
consolidated fixed charge coverage ratio and consolidated leverage ratio
provides meaningful supplemental information to both management and investors
and reflects the required covenants under the 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:
See Note 8 “Share Repurchase Program” to the Consolidated Financial Statements
for information on our share repurchase program.
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
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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