O’Reilly Automotive, Inc. (NASDAQ:ORLY) Q1 2024 Earnings Call Transcript April 25, 2024
O’Reilly Automotive, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the O’Reilly Automotive, Inc. First Quarter 2024 Earnings Call. My name is Matthew, and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.
Jeremy Fletcher: Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today’s conference call, we will discuss our first quarter 2024 results and our outlook for the remainder of the year. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by and we claim the protection under the safe harbor provisions for forward-looking statements contained in 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.
The company’s actual results could differ materially from any forward-looking statements due to several important factors described in the company’s latest annual report on Form 10-K for the year ended December 31, 2023, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Brad Beckham.
Brad Beckham: Thanks Jeremy. Good morning, everyone, and welcome to the O’Reilly Auto Parts first quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer; Greg Henslee, our Executive Chairman; and David O’Reilly, our Executive Vice Chairman, are also present on the call. I’ll begin our call today by thanking our over 90,000 team members for their relentless dedication to providing the knowledge and expertise our customers have come to expect and rely on from the professional parts people at O’Reilly Auto Parts. We are truly in a people business where relationships and customer service are paramount, and Team O’Reilly continues to demonstrate their ability to outhustle, out service and, in turn, outperform our competition.
We finished the first quarter with a 3.4% comparable store sales growth on top of a 10.8% in the prior year. Our continued strong top line sales results are dependent on and driven by consistent daily execution across all of our 6,200-plus stores in the U.S., Mexico, Puerto Rico and now Canada. Driving continued growth in our store volumes does not get easier as our company gets bigger, especially as we build on the significant market share gains we have captured over the last few years. Our single greatest challenge as a company and the driving factor to our success is our ability to build and develop teams and leaders who will be the standard bearers of our culture far into the future. Our leaders across our stores, distribution centers and corporate offices are relentlessly dedicated to perpetuating our culture and investing in our people.
Thank you, Team O’Reilly for your commitment to our customers, our company and your fellow team members. Now I’d like to start our discussion of the first quarter by walking through the details of our sales performance. Starting with comparable store sales, our growth of 3.4% in the quarter was within our full year guidance range, but slightly below our expectations as we saw some volatility I will discuss in more detail in a moment. We drove solid performance and positive comps in both our DIY and professional businesses in the quarter with the mid-single-digit comps in professional being the larger driver of our results, consistent with our expectation and ongoing trends. Increases in average ticket values and ticket counts were both contributors to comp growth on both sides of our business with inflation at about 1%, in line with our full year expectations.
Next, I want to provide some color on the cadence of our sales results in the first quarter. As we have discussed in the past, our first quarter can be volatile as we see variability in our business from both the type and severity of winter weather and from the timing of the onset of spring. We were pleased to generate positive comparable store sales results in each month of the quarter. However, we did experience the choppiness that can be characteristic of first quarter, especially as we exited with a slow start to spring. As we reported on last quarter’s earnings call, we produced solid results in January, which benefited from harsh winter weather in many of our markets. Moving past the winter weather in January, our business was negatively impacted through much of February by the timing of individual income tax refunds.
Typically, we see a benefit starting early in February and ramping through the month that coincides with the distribution of tax refunds. However, there was a noticeable delay in the processing of refunds this year that pressured both sides of our business. These pressures moderated as the cumulative amount of refunds begin to catch up to the prior year, and we saw improved trends at the end of February in the first half of March. However, we also experienced unseasonably cool wet weather throughout March across many of our markets. As a result, March and the full quarter finished slightly below our expectations. The trends we saw as we exited the first quarter have continued into April as we still really haven’t seen the uptick in our business that typically accompanies sustained favorable spring weather.
The choppiness we saw in the first quarter more significantly impacted DIY business, which is in line with what we have seen historically. Our DIY customers are often working on their vehicles in their driveways. So weather conditions can impact their ability and willingness to perform repair, maintenance and tune up items that may have been on hold during the winter. While our DIFM business was also impacted by the delayed timing of tax refunds, our professional customers tend to be more insulated from weather pressures and the volatility on this side of our business was more muted during the quarter. We continue to be pleased with the performance of our professional business even as we face very challenging comparisons. As we outlined in our full year guidance on last quarter’s earnings call, we are seeing an expected moderation in professional comps as we calendar significant share gains that drove a professional comp performance that exceeded 20% in the first quarter of last year.
Against these challenging comparisons, we believe our professional results in the first quarter of this year reflect continued share gains. We are excited by our team’s ability to leverage the momentum we have created in our professional business and continue to grow our share of what remains a highly fragmented professional market across all of North America. Now I’d like to provide some comments as to how we are thinking about the sales outlook for the balance of the year. As I noted previously, the volatility we have seen so far in 2024 is not uncommon for our business in the first quarter. As many of you listening today have heard us say before, we are cautious not to overreact to choppiness at this point in the year. As we move forward, we expect any weather-driven variability will moderate and business will normalize into the summer selling season.
Given this outlook, we are maintaining our full year comparable store sales guidance of 3% to 5% and would also expect our quarterly comp results to fall within the same range. Inherent in our guidance expectations is our belief that demand for our industry is resilient and our end consumer continues to be reasonably healthy. In situations of heightened economic pressures, we believe consumers will continue to prioritize investing to maintain their vehicles, particularly given the significant cost and monthly payment burden of a new or replacement vehicle. We believe the composition of our sales results support this view of the consumer in the current environment. We are encouraged to see broad-based performance across our category mix with continued strength in categories such as oil and filters as consumers continue to prioritize recurring maintenance jobs.
Additionally, we are not seeing notable evidence of trade down within our categories rather we are seeing better and best level value spectrum products continue to perform well as consumers prioritize higher-quality products that carry extended warranties and in turn, provide long-term value to their investment in transportation. However, we still remain cautious of the potential deterioration in the broader macro environment that could push consumers to begin more carefully considering where and how they spend their money. Our experience gives us confidence that these demand headwinds are short term. And over time, the consumer will continue to prioritize their transportation needs given the value proposition that is present. All of this being said, we will not settle for industry average growth or allow our teams to accept macroeconomic pressures as an impediment to growth.
We know there is substantial opportunity to gain a bigger piece of the pie in our industry and the mission we have set before our team is to be the leader in all of our markets and on both sides of our business. Before I move on from our sales discussion, there are a few items I would like to call out as discrete impacts to our sales. First, the Easter holiday shifted into our first quarter this year which was built into our plan and met our expectations as a headwind of approximately 20 basis points to comparable store sales on the quarter. Next, we received the benefit of an additional selling day as a result of leap day in the first quarter of 2024. We exclude the impact of leap day from our comparable store sales calculation, but this benefit was included in our total sales guidance and came in as expected representing 125 basis points of our total sales increase of 7.2% on the quarter.
Last, we closed on the acquisition of Groupe Del Vasto on January 22, and their operating results from that point forward are included in our reported numbers. The first quarter total sales increase benefited by approximately 70 basis points from the inclusion of Vast-Auto sales results, which are also excluded from our comparable store sales like Mexico. Moving on to diluted earnings per share, we are increasing our full year EPS guidance to a range of $41.35 to $41.85. Our lift in EPS guidance is driven by the gross margin and SG&A results that Brent will cover next as well as a lower-than-planned tax rate and the impacts of shares repurchased through the date of our earnings release today. As Brent will share with you here in a moment, we have been pleased with our team’s ability to manage cost, while still making steady progress on the numerous initiatives and projects we have in motion to further enhance our competitive position.
As I wrap up my prepared comments, I would like to once again thank Team O’Reilly for their hard work and dedication to start 2024. Now I will turn the call over to Brent.
Brent Kirby: Thanks, Brad. I would also like to begin my comments this morning by thanking Team O’Reilly for their incredible hard work to ensure a solid start to 2024. We are proud to say that Team O’Reilly now extends across the United States, Mexico, Puerto Rico and Canada. Regardless of the market we operate in, we know that the absolute key to our success is a team of professional parts people dedicated to the O’Reilly culture of excellent customer service. Today, I will cover our first quarter gross margin and SG&A results and provide a quick update on our expansion and capital investments thus far in 2024. Starting with gross margin. Our first quarter gross margin of 51.2% was an 18 basis point increase from the first quarter of 2023 and slightly better than our expectations for the quarter.
As Brad previously noted, this was the first quarter to include the operating results from the acquisition of the Vast-Auto business. And the incremental dilution to our first quarter gross margin was in line with the full year 25 basis points we guided to at the beginning of the year. We have continued to see a stable supplier and supply chain environment and experienced the anticipated mix of acquisition cost puts and takes in the first quarter. On a net basis, improved acquisition costs benefited gross margins driven by incremental buying improvements as well as market-driven reductions in freight cost. To the extent that we have seen modest inflation pressure in certain categories, we have been successful in passing those cost increases along in a continued rational pricing environment.
Given our solid performance in the first quarter, we continue to expect our quarterly gross margin performance to land within our full year gross margin range of 51% to 51.5%. Turning to SG&A. We are pleased with our SG&A management in the first quarter results in line with expectations as a percentage of sales. Our first quarter average SG&A per store growth of 5.7% included an anticipated 100 basis point increase from the additional business day as a result of leap day. Additionally, the SG&A per store growth includes a 15 basis point increment on the quarter from the inclusion of Canada’s operating results, which was in line with our expectations based on the portion of the quarter since we have owned that business. Our spend in the first quarter keeps us on pace for our full year plan of growing average SG&A per store by 4.5% to 5%.
As we noted on our last call, the cadence of growth in average SG&A per store will moderate as we move throughout the year. As a result of beginning to compare against the impact of 2023 investments that we made in the business. While we continue to move forward as planned on our growth initiatives, some of the investments we have been making in technology capabilities as well as enhancements to our vehicle fleet and the image and appearance of our store will begin to layer into our SG&A comparisons as we incurred ramping incremental expenses throughout 2023 in these areas. The impact of these comparison headwinds in our first quarter SG&A spend drove the planned deleverage of SG&A, which we also anticipate to moderate throughout the balance of this year.
Given the top line choppiness we experienced during the first quarter, we believe our teams effectively balanced the incremental investments we are deploying in our business with prudent expense control. The decisions we make concerning the staffing levels within our stores remain the most significant driver of our SG&A spend in total. Our team is focused on judiciously managing our expenses as appropriate for the current conditions in our business, while also ensuring that we are delivering excellent customer service that develops and maintains long-term customer relationships. We feel that our consistency in delivering excellent customer service in all market conditions has been critical to our long-term success and reflects the high level of professionalism demonstrated by our team.
We are confident that the investments we have made and are continuing to make position Team O’Reilly to provide industry-leading customer service at high levels of productivity. With the solid gross margin and SG&A performance we saw in the first quarter, our operating margin outlook is unchanged, and we continue to expect the full year to come in within the range of 19.7% to 20.2%, which includes the anticipated dilution of 15 basis points from the inclusion of Vast-Auto’s results. Inventory per store finished the quarter at $773,000, which was up 2.5% from this time last year and 2.2% from the end of 2023. The addition of Vast-Auto’s inventory and store count provided the 1% incremental increase we had anticipated, and we continue to target a range of 4% growth within our existing chain by the end of 2024.
Inventory turnover has remained at 1.7x, and we are pleased to see strong inventory productivity as we have continually enhanced and refined the inventory deployment in each of our stores while also expanding hub and DC level inventories. Our store in-stock position remains strong, and our teams are working hard to ensure O’Reilly Auto Parts offers the best inventory availability in all of our markets. Turning to our progress on store growth and capital investments. We opened a total of 37 stores across the U.S. and Mexico during the first quarter. Additionally, we were pleased to officially bring the 23 Canadian stores into the fold. Our annual net new store opening guidance of 190 to 200 excludes the addition of the 23 Canadian stores. Capital expenditures for the quarter were $249 million, and we are on track for our annual goal of $900 million to $1 billion.
Our DC relocation projects in Springfield, Missouri and Atlanta, Georgia are making great progress, and we are excited to bring those new, larger and more efficient facilities online later this year to further enhance service levels within those markets. We are also excited about the progress made so far on our Mid-Atlantic, D.C. in Stafford, Virginia, that is slated to be operational in the middle of 2025. As I finish my comments, I would like to thank Team O’Reilly for their commitment to delivering excellent customer service one customer at a time. I look forward to the opportunities we have ahead and taking on that challenge as a team. Now, I will turn the call over to Jeremy.
Jeremy Fletcher: Thanks, Brent. I would also like to congratulate Team O’Reilly on a solid start to the year. Now, we will fill in some additional details on our first quarter results and outlook for the remainder of 2024. For the quarter, sales increased $268 million, driven by a 3.4% increase in comparable store sales and a $73 million non-comp contribution from stores opened in 2023 and 2024 that have not yet entered the comp base. For 2024, we expect our total revenues to be between $16.8 billion and $17.1 billion. Our first quarter effective tax rate was 21.9% of pre-tax income, comprised of a base rate of 24.2%, reduced by a 2.3% benefit for share-based compensation. This compares to the first quarter of 2023 rate of 23.7% of pre-tax income, which was comprised of a base tax rate of 24.3% reduced by a 0.6% benefit for share-based compensation.
Our first quarter effective tax rate was below our expectations as a result of the timing and amount of benefit we realized from share-based compensation. For the full year of 2024, we now expect an effective tax rate of 22.4% comprised of a base rate of 23.1% reduced by a benefit of 0.7% for share-based compensation. We expect the fourth quarter rate to be lower than the other three quarters due to the tolling of certain tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate as we saw in the first quarter. Now, we will move on to free cash flow and the components that drove our results. Free cash flow for the first quarter of 2024 was $439 million versus $486 million in 2023.
The decrease of $47 million was the result of a larger increase in net inventory in 2024, partially offset by an increase in earnings. For 2024, our expected free cash flow guidance remains unchanged at a range of $1.8 billion to $2.1 billion. Our accounts payable as a percentage of inventory finished the first quarter at 127%, down from 131% at the end of 2023. This moderation was in line with expectations, including the impact from our Canadian acquisition and we would anticipate finishing the year in line with these levels. Moving on to debt, we finished the first quarter with an adjusted debt-to-EBITDA ratio of 1.95 times as compared to our end of 2023 ratio of 2.03 times with the decrease driven by a reduction in borrowings under our commercial paper program.
We continue to be below our leverage target of 2.5 times and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. And during the first quarter, we repurchased 262,000 shares at an average share price of $1,029 for a total investment of $270 million. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance, Brent outlined earlier, includes the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I open up our call to your questions, I would like to thank the entire O’Reilly team for their dedication to our company and our customers.
Your hard work and commitment to excellent customer service continues to drive our outstanding performance. This concludes our prepared comments. At this time, I’d like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions.
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Q&A Session
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Operator: Thank you. We’ll now begin the 30-minute question-and-answer session. [Operator Instructions] first question comes from Chris Horvers from JPMorgan. Your line is live.
Chris Horvers: Thanks, guys, and good morning. Can you talk about, since the beginning of February, can you talk about the geographic performance that you’ve seen? And how correlated has that been to the arrival of spring. So markets where you have seen spring arrive, what is the performance of the comps look like versus markets that haven’t?
Brad Beckham: Hey, good morning, Chris. Thanks for the question. Well, there was a lot of moving pieces in the quarter really directly to your question there. And really, what we saw just kind of walking through the quarter again is January, we were really pleased with January. And in a lot of the markets, you’re really true winter markets where harsh weather really drives that demand, we felt like that really exactly played out that way in January. As we got into February, it definitely kind of more normalized from a kind of a weather standpoint or early on in the month. And then not too long after that, we felt like there was some a little bit of volatility more from lack of seeing some of the tax money roll in, Chris. And then kind of what we saw as things started to kind of stay cool and get a little bit more wet in the markets you don’t necessarily want to see it, that kind of matched up with what we saw geographically in certain regions, in certain divisions, and it really kind of made sense to us kind of what was happening with some unfavorable weather, especially on the DIY business for people to get out and work on stuff.
So there was a lot of moving pieces there. When we looked at our regional performance versus our plan by region and you looked at the kind of the compares from this time last year, everything was really fairly consistent, and it pretty much made sense based upon what the weather was doing.
Chris Horvers: So does the – I guess, in markets that where you’ve seen spring break, have the comps been consistent with the 3% to 5% outlook for the quarters in the year?
Jeremy Fletcher: Yes. I think one of the challenges – this is Chris – or this Jeremy, Chris. Good talk to you. I think one of the challenges we’ve had is we just haven’t really seen consistency in how our business would perform on a sustained normalized spring business. I think, as Brad described it on the call, the choppiness that we’ve seen has been exactly that. We’ll see pockets of improved performance as we move through. But there’s not anything that’s been consistent and sustained. And for sure, the areas that have been more volatile are the ones where we can see the impact of that. But at this stage, with a few of the different factors that we saw impact us during the quarter, especially as we move through that period of time when tax refund money shifted around, it’s been harder to get a more consistent rate just week to week on the underlying businesses. There’s just been a lot of the choppiness that’s characterized the quarter.
Chris Horvers: Understood. And I know you mentioned that you’re seeing – as a follow-up question, I know that you’re – you mentioned that you’re seeing consumers trade up, haven’t seen trade down. And I also understand that you have a low mix exposure to national accounts. And even within that, you’re not selling to the A and B SKUs like brake pads or something like that. But in that channel or any other parts of the business, are you seeing any evidence of deferral of some bigger ticket type repairs, or even oil change – or even oil changes or anything else?
Brad Beckham: Yes. No, great follow-up question, Chris. The answer is no. When we look at kind of our book of business and you look at the general independent garage versus strategic accounts, whether it be a regional account or whether it be a national account. As you know, we have a smaller portion of our business that is the national account business and some of our competitors. And – but when we look at the mix of business, when you look at the category of customer and then you really break it down to the last part of your question, we’re just – we’re not seeing that. Especially when you look at look at our non-discretionary categories, the needs-based categories when Brent and I, when we look at our failure categories, when we look at our maintenance categories, we’re extremely pleased with how those categories are performing.
And kind of like we said earlier, that when we look at good, better, best, our better and best of the value spectrum has been very encouraging. The only area that I would say that we have seen some softness, Chris, would be more with our discretionary categories. When you think about things like truck and towing accessories, maybe performance or something like that. That’s where we want to just be a little bit cautious that we have seen some pressure in Q1, and we’re going to watch that closely. The thing that I would balance that with is some of those categories only perform really well when people can get out and do those things in their driveway. So it’s a little bit of a challenging answer that we are seeing some pressure discretionary.
Some of that may have to do with some of the weather. But really, when you think about our failure and maintenance categories, non-discretionary needs based, we’re extremely encouraged.
Chris Horvers: Have a great finish this spring.
Brad Beckham: Thank you, Chris.
Jeremy Fletcher: Thanks, Chris.
Operator: Thank you. Your next question is coming from Seth Basham from Wedbush Securities. Your line is live.
Seth Basham: Thanks a lot and good morning. My first question is just on SG&A per store growth. You anticipate some moderation through the year here, and that’s despite the fact that you expect comps to likely accelerate a little bit from here. Is that simply due to the investment comparisons or anything else?
Brent Kirby: Yes. Chris, this is Brent – I’m sorry, Seth, this is Brent. I’ll start and then Jeremy can jump in. I’m sure on some of that on the back end of it. But yes, as I talked about in the script, biggest driver of our SG&A per store really is our store payroll. And our teams have been very focused on balancing that with the demand and the opportunity that they see in their markets, and they manage through a period in Q1 where we did have some of that choppiness that we’ve talked about. But really proud of the job overall that the teams did there, and we’re obviously approaching any kind of choppiness with an eye to expense control, but we do have some of that investment depreciation pressure that I mentioned in my script that we’re going to see as we move through the year. That’s why our plan was not a peanut butter spread on SG&A for this year. And Jeremy, you may have a couple of other thoughts on that.
