O'Reilly Automotive Inc (ORLY)

• O'Reilly is gaining market share in the professional (DIFM) segment and expects continued growth, with the segment remaining resilient and offering significant opportunities. -
• Expansion into new markets, particularly in the densely populated Northeast, through new distribution centers like the Mid-Atlantic DC, is positioning O'Reilly for substantial growth in underpenetrated areas. -
• Robust and flexible supply chain strategies, including reduced dependency on China and the ability to manage tariffs and cost pressures, are safeguarding margins and demonstrating operational resilience. -

• Softness in the DIY segment, which represents slightly over 50% of O'Reilly's business, is impacting sales growth and remains uncertain. -
• Increased competition from mass retailers and warehouse clubs has led to loss of market share in certain product lines, affecting overall traffic and pricing. -
• O'Reilly has misgauged demand and reduced guidance, admitting uncertainty in future performance and potential challenges in sustaining margin expansion. -

1. 2025 Outlook and Comp Sales
   Q: If trends don't improve, will you maintain normal comp guidance for 2025?
   A: Management acknowledged that while 2024 has been uncharacteristic, they will evaluate their best read when establishing guidance for 2025. They believe they are well-positioned to take share gains and provide strong returns, remaining confident in their ability to grow faster than the market. -

2. Business Recovery Expectations
   Q: Why do you think headwinds are short-lived, and when will business flip?
   A: They expect conditions to improve post-election and with moderating inflation. Historical patterns suggest a return to normal industry growth. Though not seeing specific indicators yet, they are confident based on past experiences that the headwinds are temporary. -

3. Deferred Maintenance and Demand Recovery
   Q: When did deferred maintenance impact start, and what unlocks pent-up demand?
   A: Deferred maintenance trends have persisted throughout the year, impacting sales more over time. Management expects customers to return, citing historical bounce-backs after tough years. Factors like lower gas prices or normalized weather could unlock pent-up demand. -

4. Tariff Impact and China Exposure
   Q: How disruptive would new tariffs be, and can you pass on costs?
   A: They have reduced dependency on China by over 500 basis points, decreasing exposure to around 25%. - They feel confident in passing through increased costs, as they did with previous tariffs of 20–25%. - - However, tariffs as high as 60% would be unprecedented, and the broader consumer impact is uncertain. - -

5. Market Share and Growth Expectations
   Q: Do you factor market share gains into next year's comp expectations?
   A: Yes, they believe it's their entitlement to grow faster than the market due to their advantages and momentum. They expect to continue taking share gains, and this will be reflected in their 2025 expectations. -

6. Operating Margin and Expenses
   Q: What's driving Q4 margin easing and SG&A expenses?
   A: Easier comparisons from last year and the benefit of one extra Sunday (approximately 30–40 basis points to comp sales) are aiding margins. - Gross margin remains solid and in line with guidance. SG&A expenses are stabilizing as they lap prior investments, with no change in investment cadence. -

7. New Store Economics and Expansion
   Q: How are higher construction costs affecting new store economics?
   A: Despite higher construction costs, with owned store costs approaching $3 million, productivity and returns remain strong. - This supports their plan to open 200–210 new stores in 2025, feeling confident about returns even with higher costs. -

8. Competition from Mass Retailers
   Q: Has competition from mass retailers impacted DIY business?
   A: While mass retailers sell some commodities, management believes their service model and customer loyalty keep customers sticky. They don't see any significant changes in 2024 and are confident in overcoming competition with their professional service and availability. -

9. DIFM vs. DIY Recovery
   Q: How will recovery differ between DIFM and DIY segments?
   A: They expect the DIFM segment to remain more resilient and continue gaining share. While DIY has been more impacted, they anticipate a meaningful comeback as consumers return, possibly with catch-up demand. -

10. Hurricane Impact on Sales
    Q: Are hurricanes net positive or negative for sales volumes?
    A: Hurricanes like Helene caused some disruption, impacting comps by 10–15 basis points in the quarter. - Overall, weather is considered net neutral, and the total impact in Q4 remains to be seen. -

11. Supply Chain Expansion
    Q: Does the new Virginia DC cover the Northeast market?
    A: The new Mid-Atlantic distribution center opens opportunities in that corridor. However, there may be a need for another DC between Stafford and Devens in the future. They are excited to expand in key markets like Northern Virginia, D.C. Metro, Baltimore, and Philly. -

Annual guidance for FY 2024:

• Total Revenues: $16.6 billion to $16.8 billion - (lowered from $16.6 billion to $16.9 billion - )
• Effective Tax Rate: 21.8% - (lowered from 22.4% - )
• Diluted EPS: $40.60 to $41.10 - (lowered from $40.75 to $41.25 - )
• Free Cash Flow: $1.8 billion to $2.1 billion - (no change from prior guidance - )
• Accounts Payable as a Percentage of Inventory: 127% - (no change from prior guidance - )
• Operating Margin: 19.4% to 19.9% - (lowered from 19.6% to 20.1% - )
• Gross Margin: 51% to 51.5% - (no change from prior guidance - )
• SG&A per Store Growth: 3.5% to 4% - (no change from prior guidance - )
• Comparable Store Sales: 2% to 3% - (lowered from 2% to 4% - )
• Capital Expenditures: $900 million to $1 billion - (no prior guidance)
• New Store Openings: 190 to 200 new stores - (no change from prior guidance - )