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    O'Reilly Automotive Inc (ORLY)

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    O'Reilly Automotive, Inc. is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies, equipment, and accessories, operating in the United States, Puerto Rico, Mexico, and Canada . The company serves both do-it-yourself (DIY) customers and professional service providers through a dual market strategy, with a significant portion of its revenue coming from the DIY channel . O'Reilly's product offerings include new and remanufactured automotive hard parts, maintenance items, accessories, auto body paint, automotive tools, and professional service provider equipment, categorized by quality and price into "good," "better," and "best" . The company also provides enhanced services such as battery diagnostics, recycling programs, and custom hydraulic hoses .

    1. Automotive Hard Parts - Offers new and remanufactured parts essential for vehicle repair and maintenance, catering to both DIY customers and professional service providers.
    2. Maintenance Items - Supplies products necessary for routine vehicle upkeep, including filters, fluids, and wipers, ensuring vehicle longevity and performance.
    3. Accessories - Provides a range of automotive accessories, enhancing vehicle aesthetics and functionality, tailored to customer preferences.
    4. Auto Body Paint - Supplies paint products for vehicle bodywork, supporting both cosmetic and repair needs with a variety of color options.
    5. Automotive Tools - Offers a comprehensive selection of tools required for vehicle repair and maintenance, serving both amateur and professional mechanics.
    6. Professional Service Provider Equipment - Supplies specialized equipment for professional automotive service providers, enhancing service efficiency and capability.
    7. Enhanced Services - Includes battery diagnostics, recycling programs, and custom hydraulic hoses, offering additional value and convenience to customers.
    Initial Price$1050.07July 1, 2024
    Final Price$1161.99October 1, 2024
    Price Change$111.92
    % Change+10.66%

    What went well

    • 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.

    What went wrong

    • 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.

    Q&A Summary

    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.

    Guidance Changes

    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 )
    NamePositionStart DateShort Bio
    Brad BeckhamChief Executive OfficerJanuary 2024Brad Beckham has been with O'Reilly for 28 years, starting as a Parts Specialist. He has held various roles, including Store Manager and Executive Vice President. He became CEO in January 2024 .
    Brent G. KirbyPresidentJanuary 2024Brent G. Kirby joined O'Reilly in 2018 as Senior Vice President of Omnichannel. He has served as Executive Vice President of Supply Chain and became President in January 2024 .
    Jeremy FletcherExecutive Vice President and Chief Financial OfficerMay 9, 2022Jeremy Fletcher has been with O'Reilly for 18 years, starting as Financial Reporting and Budgeting Manager. He became CFO on May 9, 2022 .
    Scott R. RossExecutive Vice President and Chief Information OfficerOctober 2023Scott R. Ross joined O'Reilly in October 2023. He has over 30 years of IT experience, previously serving as President of Saks Cloud Services at Hudson's Bay Company .
    Doug BraggExecutive Vice President of Operations and Sales2022Doug Bragg has been with O'Reilly for 33 years, starting as a Distribution Center Team Member. He became Executive Vice President of Store Operations in 2022 .
    Tamara F. ConnSenior Vice President of Legal and General CounselJuly 2023Tamara F. Conn has been with O'Reilly for 15 years, starting as Legal Counsel. She became Senior Vice President of Legal and General Counsel in July 2023 .
    Robert DumasSenior Vice President of Eastern Store Operations and Sales2016Robert Dumas has been with O'Reilly for 32 years, starting as a Parts Specialist. He became Senior Vice President of Eastern Store Operations and Sales in 2016 .
    Larry GraySenior Vice President of Inventory ManagementJune 2023Larry Gray has been with O'Reilly for 32 years, starting as a Distribution Center Team Member. He became Senior Vice President of Inventory Management in June 2023 .
    Philip M. HopperSenior Vice President of Real Estate and Expansion2022Philip M. Hopper has been with O'Reilly for 12 years, starting as Real Estate Counsel. He became Senior Vice President of Real Estate and Expansion in 2022 .
    Jeffery T. LoafmanSenior Vice President of Distribution OperationsApril 2023Jeffery T. Loafman joined O'Reilly in April 2023. He previously worked at Walmart, Inc. for over 20 years in various roles, including Vice President of International Distribution Operations .
    Chris ManciniSenior Vice President of Central Store Operations and Sales2022Chris Mancini has been with O'Reilly for 20 years, starting as an Installer Service Specialist. He became Senior Vice President of Central Store Operations and Sales in 2022 .
    Mark J. MerzSenior Vice President of Finance2022Mark J. Merz has been with O'Reilly for 16 years, starting as a Senior Accountant. He became Senior Vice President of Finance in 2022 .
    Shari ReavesSenior Vice President of Human Resources and TrainingFebruary 2024Shari Reaves has been with O'Reilly for 30 years, starting as an Employment Coordinator. She became Senior Vice President of Human Resources and Training in February 2024 .
    Chuck RogersSenior Vice President of Professional Sales and Store Operations Support2022Chuck Rogers has been with O'Reilly for 33 years, starting as a Delivery Specialist. He became Senior Vice President of Professional Sales and Store Operations Support in 2022 .
    Jason TarrantSenior Vice President of Western Store Operations and Sales2018Jason Tarrant has been with O'Reilly for 23 years, starting as a Parts Specialist in 2001. He became Senior Vice President of Western Store Operations and Sales in 2018 .
    David WilbanksSenior Vice President of Merchandise2016David Wilbanks has been with O'Reilly for 11 years, starting as Vice President of Merchandise. He became Senior Vice President of Merchandise in 2016 .
    1. Given that your higher-margin DIY business, which accounts for slightly over 50% of your sales , is experiencing softness and facing increased competition from mass retailers and warehouse clubs becoming more competitive , how do you plan to regain momentum and protect your market share in the DIY segment?

    2. With the prospect of tariffs ranging from 30% to 60% on goods from China and other countries , what specific strategies are you implementing to mitigate the potential impact on your cost of goods sold and overall margins?

    3. Your SG&A expenses grew 4.2% in the third quarter, reaching the high end of your expectations due to factors like self-insurance costs from events such as Hurricane Helene and deferred compensation ; how do you intend to control these expenses without compromising your commitment to excellent customer service?

    4. You've reduced your operating margin guidance to a range of 19.4% to 19.9%, driven by third-quarter sales performance and updated full-year comparable store sales expectations ; what concrete steps are you taking to improve sales and margins in the face of current macroeconomic pressures?

    5. The delays in new store openings due to construction and permitting issues have put you slightly behind your growth plan ; how are you addressing these obstacles to ensure timely expansion and maximize the returns on your capital investments?

    Program DetailsProgram 1Program 2
    Approval DateMay 23, 2023 November 16, 2023
    End Date/Duration3 years from approval 3 years from approval
    Total additional amount$2.0 billion $2.0 billion
    Remaining authorization amount$0 $967.7 million
    DetailsProgram to return excess capital to shareholders Program to return excess capital to shareholders

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Total Revenues: $16.6 billion to $16.8 billion .
      2. Effective Tax Rate: 21.8% .
      3. Diluted EPS: $40.60 to $41.10 .
      4. Free Cash Flow: $1.8 billion to $2.1 billion .
      5. Accounts Payable as a Percentage of Inventory: Approximately 127% .
      6. Operating Margin: 19.4% to 19.9% .
      7. Gross Margin: 51% to 51.5% .
      8. SG&A per Store Growth: 3.5% to 4% .
      9. Comparable Store Sales: 2% to 3% .
      10. Capital Expenditures: $900 million to $1 billion .
      11. New Store Openings: 190 to 200 new stores .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Comparable Store Sales Growth: 2% to 4% .
      2. SG&A Per Store Growth: 3.5% to 4% .
      3. Operating Margin: 19.6% to 20.1% .
      4. Gross Margin: 51% to 51.5% .
      5. Earnings Per Share (EPS): $40.75 to $41.25 .
      6. Total Revenues: $16.6 billion to $16.9 billion .
      7. Effective Tax Rate: 22.4% .
      8. Free Cash Flow: $1.8 billion to $2.1 billion .
      9. AP to Inventory Ratio: Approximately 127% .
      10. Store Openings: 190 to 200 new stores .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Total Revenues: $16.8 billion to $17.1 billion .
      2. Operating Margin: 19.7% to 20.2% .
      3. Effective Tax Rate: 22.4% .
      4. Free Cash Flow: $1.8 billion to $2.1 billion .
      5. Comparable Store Sales Growth: 3% to 5% .
      6. Diluted EPS: $41.35 to $41.85 .
      7. Gross Margin: 51% to 51.5% .
      8. SG&A Growth: 4.5% to 5% .
      9. Capital Expenditures: $900 million to $1 billion .
      10. Net New Store Openings: 190 to 200 .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Earnings Per Share (EPS): $41.05 to $41.55 .
      2. Total Revenues: $16.8 billion to $17.1 billion .
      3. Comparable Store Sales Growth: 3% to 5% .
      4. Gross Margin: 51% to 51.5% .
      5. Operating Profit Margin: 19.7% to 20.2% .
      6. Effective Tax Rate: 22.6% .
      7. Free Cash Flow: $1.8 billion to $2.1 billion .
      8. Capital Expenditures: $900 million to $1 billion .
      9. Inventory Growth: 4% per store, plus 1% from Vast-Auto .
      10. SG&A Growth: 4.5% to 5% .