Zachary Fadem

Zachary Fadem from Wells Fargo Securities sought clarification on O'Reilly Automotive's 3-5% comparable store sales guidance for 2026, specifically asking how factors like recent winter weather, mid-single-digit inflation, and an anticipated strong tax refund season are incorporated. He also inquired about the magnitude of various gross margin drivers and the duration of elevated health insurance costs in the 2026 outlook.

Answer

CEO Brad W. Beckham stated that O'Reilly's guidance balances opportunities with consumer cautiousness, focusing on controllable factors rather than predicting specific weather or tax season outcomes, despite favorable early winter weather. Regarding margins, he explained that individual gross margin drivers (supply chain, distribution, professional mix, Mexico) typically impact by 10-20 basis points, with acquisition cost improvements and distribution efficiencies being positive. He anticipates heightened SG&A pressure from self-insurance costs in the first half of 2026 due to comparison timing.

Zachary Fadem asked for clarification on O'Reilly's 2026 comparable store sales guidance of 3%-5%, specifically how factors like recent snow, mid-single-digit inflation, and anticipated larger tax refunds are incorporated. He also inquired about the margin dynamics for 2026, including the magnitude of supply chain and distribution tailwinds, the do-it-for-me (DIFM) mix drag, and the potential benefit from Mexico's business evolution on gross margin. Finally, he asked how long elevated health insurance and other costs are incorporated into 2026 SG&A expectations.

Answer

Brad W. Beckham, CEO, stated that the 2026 guidance balances opportunities with consumer cautiousness, acknowledging that while early January saw favorable winter weather, its long-term impact is uncertain. He explained that individual gross margin drivers are typically 10-20 basis points, with a decent headwind from professional business growth offset by acquisition cost improvements and distribution efficiencies. Mexico's business evolution provides a smaller 4-5 basis point benefit. For SG&A, elevated self-insurance costs are expected to be more pronounced in the first half of 2026 due to easier comparisons later in the year, with personnel growth pressure anticipated in Q1.

Zachary Fadem from Wells Fargo asked about the business mix between immediate-need and deferrable purchases and inquired about the market share opportunity presented by the new Virginia distribution center.

Answer

CFO Jeremy Fletcher explained that a high majority of sales are non-discretionary, with consumer pressure affecting deferrable maintenance rather than immediate failure-related repairs. President Brent Kirby and CEO Brad Beckham highlighted the Virginia DC as a key to unlocking significant growth in the Mid-Atlantic and Northeast, calling it a 'last frontier' for domestic expansion that will support a higher store count in a densely populated region.

Zachary Fadem from Wells Fargo inquired about the historical mix of immediate versus deferrable purchases and the typical consumer reaction to rising prices. He also asked about the opportunity for market share gains from the new Virginia distribution center.

Answer

EVP & CFO Jeremy Fletcher and CEO Brad Beckham explained that the vast majority of their sales are for non-discretionary repairs, which limits price sensitivity per job, though broad economic pressure can cause short-term deferrals. President Brent Kirby and CEO Brad Beckham added that the new Virginia DC is a major strategic investment that will unlock significant growth opportunities in the densely populated Mid-Atlantic and Northeast regions.

Zachary Fadem from Wells Fargo asked when the deferred maintenance trend began and what typically unlocks that demand, and also inquired about the drivers for the Q4 margin outlook.

Answer

CEO Brad Beckham clarified that core maintenance categories remain strong, with softness concentrated in discretionary and some wear-and-tear categories. President Brent Kirby added that demand historically bounces back after tough years. For Q4 margins, CFO Jeremy Fletcher pointed to easier year-over-year SG&A comparisons due to the timing of 2023 investments, not a change in current investment cadence.

Zachary Fadem asked about competitors shifting their menu mix towards chicken or less inflationary items, and whether Texas Roadhouse would consider a menu pivot at its core business or Bubba's if beef inflation were to become excessively high.

Answer

Jerry Morgan, CEO, firmly stated that Texas Roadhouse is fundamentally a steakhouse and they would not remove what customers crave. He acknowledged their existing diverse offerings, including chicken, pork, salmon, and country dinners, but emphasized their strong reputation for cooking and serving great steaks.

Zachary Fadem asked about the company's philosophical stance on potentially pivoting its menu to chicken or other less inflationary items if beef inflation were to become excessively high.

Answer

Jerry Morgan, CEO, affirmed that Texas Roadhouse is fundamentally a steakhouse. While the menu includes other offerings like chicken, pork, and salmon, he emphasized that customers primarily crave their steaks, and the company has no intention of moving away from its core steak-centric identity.

Zachary Fadem of Wells Fargo asked about the negative impact on the food cost line from the entree mix shifting towards beef. He inquired if this was a cyclical or structural trend and what the expected basis point impact would be in the second half of the year.

Answer

Michael Bailen, Senior Director & Head of IR, confirmed the headwind was about 25 basis points in Q2, down from 30 bps in Q1. He expects it to hold around 20-25 bps in Q3 before stepping down in Q4 as they lap the shift. He views it as a positive sign that guests appreciate the value of steaks on their menu, which is good for long-term success despite the near-term COGS pressure.

Zachary Fadem asked for more details on the 2026 comparable store sales building blocks, specifically regarding the contribution from Allivet, commodity inflation, and tax refund stimulus, and whether a return to the company's comparable store sales algorithm is anticipated for 2026.

Answer

Kurt Barton, EVP, CFO and Treasurer, reiterated that 2026 is expected to be a year of P&L normalization, with operating margin inflection at a run rate consistent with the second half of 2025. He anticipates positive average unit retail (AURs) and continued transaction growth as core foundations for comparable store sales. Strategic initiatives, including Allivet, are expected to contribute to momentum but will not be the primary drivers of overall comparable store sales growth, with more detailed guidance to be provided in January.

Zachary Fadem asked for more details on the 2026 comp building blocks, specifically touching on Allivet, commodity inflation, and tax refund stimulus. He also questioned if a return to the company's comp algorithm is anticipated for 2026.

Answer

Kurt Barton (EVP, CFO and Treasurer) reiterated that 2026 is expected to be a more normalized year with potential for margin inflection. He confirmed positive average unit retail (AUR) and continued transaction growth as core foundations. While strategic initiatives like Allivet will contribute, they are not expected to be the primary drivers of comp sales growth. More detailed guidance for 2026 will be provided in the January call.

Zachary Fadem asked about the financial benefit from sale-leasebacks in Q1 and the expected annual cadence, as well as for color on new store productivity.

Answer

CFO Kurt Barton reported a $17 million sale-leaseback gain in Q1, which flowed through SG&A, and expects future quarters to have minimal year-over-year noise from this activity. He stated new store productivity remains strong at 62% on a rolling 12-month basis, near the historical target, and that the Allivet acquisition is contributing as planned.

Zachary Fadem inquired about the performance of Tractor Supply's Project Fusion and Garden Center initiatives, asking if the historical mid-single-digit sales lift is still holding and what the outlook is for these store programs in 2025.

Answer

CEO Hal Lawton confirmed that the sales lift from Fusion stores continues to outperform the broader chain, contributing significantly to market share gains. He highlighted reaching milestones of over 1,000 Fusion layouts and 500 Garden Centers, with plans to continue the remodel pace of 175-225 stores annually. Lawton emphasized these investments are a key reason for the company's outperformance relative to the negative farm and ranch channel.

Zachary Fadem asked about the performance of Tractor Supply's Project Fusion and garden center initiatives, questioning if the historical mid-single-digit sales lift is still holding and inquiring about the outlook for these programs in 2025.

Answer

CEO Hal Lawton confirmed that the performance lift from Project Fusion and garden centers remains strong and continues to outpace the broader chain, contributing significantly to market share gains. He stated that the company plans to continue its remodel pace of 175-225 stores annually and noted that these formats attract a higher mix of female and younger shoppers.

Zachary Fadem inquired about the drivers behind the July sales improvement, asking whether it was due to weather or an underlying trend change, and questioned the outlook for second-half comps and the potential catalysts from interest rate cuts and tax reform.

Answer

Chair, CEO & President Ted Decker attributed the Q2 strength to broader customer engagement in smaller projects and favorable weather in July, noting the full-year comp guide requires only a slight second-half uptick. EVP & CFO Richard Mcphail added that Q2 momentum has continued into Q3 and that a foreign exchange headwind will flip to a tailwind. Decker also stated that while lower interest rates would help, general economic uncertainty remains the primary reason customers defer large projects, and he views the recent tax package as a positive for consumer spending.

Zachary Fadem asked if Home Depot's strategy to hold pricing steady amidst potential tariffs would widen its price advantage over competitors. He also inquired about the accounting implications of the retail inventory method and how tariff-driven costs would flow through the P&L.

Answer

EVP of Merchandising William Bastek declined to speculate on competitors but reiterated confidence in Home Depot's position due to its diversified supply chain and robust elasticity models. EVP and CFO Richard McPhail confirmed the company uses the retail inventory method and that while there can be some variability, nothing significant is expected quarter-to-quarter, as retail price changes are reflected in the ordinary course of business.

Zachary Fadem inquired if Home Depot's price spreads versus competitors might widen if it holds prices amid tariffs and asked about the accounting implications of the retail inventory method under these conditions.

Answer

EVP of Merchandising William Bastek declined to speculate on competitors but expressed confidence in Home Depot's own pricing position due to its sourcing diversification and elasticity models. CFO Richard McPhail confirmed the use of the retail inventory method and stated that while some variability can occur, no significant changes are expected as retail prices move in the ordinary course of business.

Zachary Fadem inquired about the Q3 hurricane impact, including category details and the Pro versus DIY sales mix. He also asked for a breakdown of the Q4 comp guide between hurricane effects and the underlying business, and for an update on trends in needs-based versus discretionary spending.

Answer

Executive Vice President of Merchandising, Billy Bastek, confirmed hurricane sales were typical prep-and-cleanup items and largely consumer-driven. Richard McPhail, EVP and CFO, noted the full-year guidance reflects Q3's outperformance from both hurricanes and favorable weather. CEO Ted Decker added that the trend of deferring large, discretionary projects while completing needs-based ones has remained consistent throughout the year.

Zachary Fadem of Wells Fargo & Company asked for an update on the sales mix across 'good, better, and best' tiers and inquired about the performance of opening price point products, especially given competitor focus in that area. He also asked about pricing flexibility across these tiers.

Answer

CEO Tom Taylor confirmed that 'better and best' products continue to outperform the 'good' tier, a consistent trend for the last three years. He stated that while competitors are leaning into opening price points, Floor & Decor remains competitive due to superior features and benefits. President Bradley Paulsen added that while price gaps are naturally wider on 'better and best' items, the company's surgical pricing approach allows for adjustments across all tiers based on market dynamics.

Zachary Fadem of Wells Fargo inquired about the 2025 pricing strategy in light of new tariffs and supply chain costs, and how price gaps with competitors have trended. He also asked about new store productivity expectations and the quarterly cadence of the new distribution center costs.

Answer

CEO Tom Taylor outlined a three-pronged tariff strategy: vendor negotiations, sourcing diversification away from China (now 16% of sales), and price increases as a final step, all while maintaining competitive price gaps. CFO Bryan Langley stated that new store productivity is expected to be similar to recent years, which is below historical targets. He clarified the DC cost impact will begin at approximately 30 basis points in Q1 and increase throughout the year.

Zachary Fadem of Wells Fargo & Company questioned how much the current operating margin is being constrained by new stores and what the potential for a margin 'snap back' is in a recovery. He followed up by asking at what point the company would consider pushing 2025 store openings into 2026 if comps remain negative.

Answer

CFO Bryan Langley acknowledged that new stores are a heavy pressure on margins, but also noted that mature stores are deleveraging for the first time in over a decade due to negative sales. He stated that while a margin recovery won't be immediate, the company has significant earnings power in a growth environment. CEO Tom Taylor added that if the top line worsens, the company would certainly consider delaying store openings, leveraging the flexibility of its back-half weighted 2025 plan.

Zachary Fadem of Morgan Stanley, on for Simeon Gutman, asked for the key assumptions driving the negative low-double-digit retail comp guidance for the second half of the year. He also requested more color on customer sensitivity to the base membership price increase, particularly the normalization of churn.

Answer

CFO Jedidiah Gold explained the guidance extrapolates the Q2 retail trend and factors in a tough comparison in October. He noted some softness among lower-income consumers and underperformance at interior clean sites. On pricing, Gold stated the rollout went as planned, with a slight, temporary uptick in churn for 4-6 weeks before returning to historical levels, consistent with test results.

Zachary Fadem asked for clarity on expectations for non-GAAP adjustments for the remainder of the year. He also inquired about the consensus view from vendors on like-for-like inflation and sought an update on opportunities to improve margins by renegotiating supplier financing terms.

Answer

EVP and CFO Ryan Grimsland noted that of the $150 million in cash expenses for the year, $90 million is complete. CEO Shane O'Kelly stated there are many scenarios for how inflation plays out with vendors and reiterated the company's rational approach. Grimsland added that guidance contemplates various scenarios, with low single-digit inflation being a likely outcome. On vendor financing, Grimsland reported no material changes, with the company continuing to use its supply chain finance program as a tool while always evaluating terms.

Zachary Fadem of Wells Fargo questioned how much of the 2025 and 2027 margin targets depend on achieving higher comparable sales. He also asked about the deployment strategy for the ~$1 billion in remaining cash from the Worldpac sale, particularly the decision not to pay down debt immediately.

Answer

CFO Ryan Grimsland and CEO Shane O'Kelly clarified that the margin expansion plan is predicated on controllable cost and efficiency actions, not significant top-line growth, which they view as future upside. Regarding the cash, Ryan Grimsland explained they are maintaining balance sheet flexibility during the early stages of the restructuring but reiterated their commitment to paying down debt at or before maturity to achieve their long-term leverage target of 2.5x.

Zachary Fadem of Wells Fargo & Company asked about the typical ramp-up period for a Mega Hub, the number of stores they service, Q4 inflation expectations, and the potential P&L implications of LIFO accounting if tariffs are implemented.

Answer

CFO Jamere Jackson explained that Mega Hubs ramp faster than typical satellite stores because they become magnets for traffic. On inflation, he expects it to be in a similar 'zip code' in Q4, excluding tariffs. He clarified that if significant tariffs are implemented, it would be inflationary and could lead to a LIFO expense in Q4, but the base assumption is for no LIFO impact.

Zachary Fadem of Wells Fargo & Company asked about the typical ramp-up for a Mega Hub, the number of stores they service, the regional focus of new openings, and the outlook for same-SKU inflation and LIFO in Q4.

Answer

CFO Jamere Jackson explained that Mega Hubs ramp faster than the typical five-year maturity for satellite stores because their extensive inventory makes them 'magnets for traffic.' He projected Q4 same-SKU inflation would be similar to Q3, excluding tariffs. However, he noted that significant tariffs could be inflationary and potentially trigger a LIFO expense in Q4, though the base case is for no LIFO impact.

Zachary Fadem from Wells Fargo & Company asked about the impact of the lower-income consumer on DIY performance and the outlook for that segment. He also inquired about the relative performance of national versus independent accounts in the Commercial business.

Answer

Executive Philip Daniele acknowledged that the lower-income consumer remains pressured but believes AutoZone will gain share through superior execution and assortment. He noted broad-based growth in Commercial across independent and national accounts, with only the segment tied to used car dealers remaining challenged. CFO Jamere Jackson added that they expect a strong second half for Commercial.

Zachary Fadem from Wells Fargo & Company questioned whether the pandemic-era lag in new car sales could create a future headwind or 'air pocket' for the industry, and asked about the rationale for the current level of SG&A growth per store.

Answer

CEO Philip Daniele and CFO Jamere Jackson dismissed the 'air pocket' theory, explaining that cars are lasting longer (average age 12.6 years) and not being scrapped as quickly, which results in a consistently growing car park. Jackson added that SG&A is managed with a balanced approach, funding key growth initiatives while remaining disciplined in a softer sales environment.

Zachary Fadem from Wells Fargo & Company asked for a breakdown of the sales cadence within the first quarter for America's Best. He also sought color on performance across different income demographics and how industry growth rates for their new target segments compare to their core value offering.

Answer

Executive L. Fahs detailed the quarterly sales cadence, noting a strong January and March that bookended a peculiar two-week slowdown in February. He explained that the company saw a positive shift with higher-income customers offsetting a decline from lower-income consumers. Fahs emphasized that the company is underdeveloped in its three target segments (managed care, progressives, outside Rx) relative to the broader market, presenting a significant growth opportunity.

Zachary Fadem from Wells Fargo asked for details on the sales cadence during the first quarter, trends in customer income demographics, and a comparison of industry growth rates for their new target segments versus their core value offering.

Answer

Executive L. Fahs detailed the quarter's performance, noting a strong January and March that bookended a peculiar two-week slowdown in February. He observed a trend of higher-income customers trading into their stores, which offset a decline from lower-income consumers. Fahs emphasized that their target segments—managed care, progressive, and outside Rx—represent areas where National Vision is underdeveloped relative to the market, presenting a significant growth opportunity.

Represented by Taylor Bernard, Zachary Fadem's questions focused on the expected drivers of 2025 comps (traffic vs. ticket), the implied cadence through the year, and how potential impacts from immigration policy are reflected in guidance.

Answer

President Alex Wilkes projected that 2025 comps would be driven by an equal mix of traffic and average ticket, noting strong ticket performance from Q4 initiatives. CEO L. Fahs added that immigration is viewed as one of many factors influencing overall consumer sentiment, which is incorporated into their cautious outlook.

Zachary Fadem questioned how much exam capacity has increased this year due to recent investments and how capacity utilization has trended. He also sought details on the characteristics of the stores slated for closure and the rationale for slowing new store openings in 2025.

Answer

CEO Reade Fahs stated that capacity has expanded and is providing incremental exams per day, but the company does not report on utilization rates. He noted that Q3 saw the lowest optometrist resignation rate since 2020. CFO Melissa Rasmussen explained that the store closures targeted less than 5% of the fleet and were based on individual store profitability and lease expirations, not specific vintages or regions.

Zachary Fadem inquired if the Uber Eats sales mix is still improving or has stabilized, and also asked about the performance of 'boost weeks' compared to the past and if there's an opportunity to increase their frequency.

Answer

Chief Financial Officer Sandeep Reddy stated they were 'very happy' with the Uber business in Q1 but will no longer provide mix details. Chief Executive Officer Russell Weiner added that they will not significantly increase boost weeks, as they want to preserve their special nature and not train customers to wait for deals.

Zachary Fadem asked if Q4 benefited from 'post-election exuberance' that has since faded, or if the early 2025 slowdown is purely weather-related. He also inquired about the potential impact of other policy dynamics, such as immigration.

Answer

CEO Marvin Ellison stated there was 'no real tangible data' to support an election-related sales boost, attributing the recent slowdown to a 'weather story,' as performance is strong where weather is normal. Regarding other policy issues, Ellison affirmed that the company is closely monitoring the environment and has the agility to manage through any political or policy changes that may arise.

Zachary Fadem of Wells Fargo & Company followed up on restaurant-level margins, asking if the high 30% to low 40% incremental margin is still the right long-term model. He also asked about the potential for new international partnerships and the status of the Alshaya relationship.

Answer

CFO Adam Rymer confirmed the 40% flow-through model is still intact, with the first half of the year being lower due to the portion investment before climbing back. CEO Scott Boatwright reported the Alshaya partnership is going 'really, really well' with aggressive expansion planned for 2025. He added that Chipotle believes its model works globally and is exploring other partnerships in regions like Southeast Asia or Latin America with large, experienced operators.

Zachary Fadem from Wells Fargo asked how current in-store wait times compare to Mobile Order & Pay (MOP) times, how MOP order abandonment is trending, and what the potential comparable sales opportunity would be if all transactions were under 4 minutes.

Answer

CEO Brian Niccol stated the comp opportunity would be positive ('it would go up'). He shared a key learning that MOP order abandonment increases significantly when promise times exceed 15 minutes. The goal of new initiatives, like time slots and better promise times, is to keep waits under that threshold, which frees up capacity to deliver a sub-4-minute experience for in-store customers, creating a harmonious and less overwhelming environment for both customers and partners.

Zachary Fadem followed up on the balance sheet, asking about the appetite to pay down debt to reduce interest expense, and questioned the impact of not renewing leases in Germany.

Answer

Chairman and CEO Gary Friedman reiterated his view that using debt for the 'currency swap' to buy back stock at $295 was a superior value-creation strategy than paying down debt. Regarding Germany, he explained that taking those leases was a strategic necessity to secure the premier Paris and London locations, accelerating the European launch by a decade. Not renewing the German leases will be accretive to operating margin and EBIT next year.

Zachary Fadem inquired about new CEO Joel Anderson's initial impressions, specifically the balance between investing in growth pillars like vet services and simplifying the business to remove costs. He also asked for clarity on the Q3 margin outlook, questioning the drivers between gross margin and SG&A.

Answer

CEO Joel Anderson emphasized that the immediate priority is improving profitability by strengthening retail fundamentals, including merchandise excellence, service execution, and operational efficiency, before pivoting to growth. CFO Brian LaRose clarified that the Q3 SG&A trend would be similar to Q1 and Q2, driven by planned store labor investments, and noted the focus remains on improving profitability and free cash flow in a dynamic environment.