Unless otherwise indicated, "we," "us," "our" and similar terms, as well as references to the "Company" or "O'Reilly," refer to O'Reilly Automotive, Inc. 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
? our results of operations for the three months ended March 31, 2022 and 2021;
? 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.
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 December 31, 2021, and subsequent Securities and Exchange Commission filings, for additional factors that could materially affect 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.
We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States and Mexico. We are one of the largest U.S. automotive aftermarket specialty retailers, selling our products to 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 March 31, 2022, we operated 5,811 stores in 47 U.S. states and 27 stores in Mexico.
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 U.S. miles driven, number of U.S. registered vehicles, new light vehicle registrations and average vehicle age.
The number of total miles driven in the U.S. influences the demand for repair and maintenance products sold within the automotive aftermarket. In total, vehicles in the U.S. are driven approximately three trillion miles per year, 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 U.S. Department of Transportation, the number of total miles driven in the U.S. decreased 13.2% in 2020, as a result of responses to 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 Auto Care Association, the total 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 U.S. ("SAAR") was below the historical 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 U.S. 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.
Sales for the three months ended March 31, 2022, increased $205 million or 7% to $3.30 billion from $3.09 billion for the same period one year ago. Comparable store sales for stores open at least one year increased 4.8% and 24.8% for the three months ended March 31, 2022 and 2021, respectively. Comparable store sales are calculated based on the change in sales for U.S. stores open at least 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 U.S. stores open at least one year are included in the comparable store sales calculation.
The following table presents the components of the increase in sales for the three months ended March 31, 2022 (in millions):
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 Mexico store sales
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
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 March 31, 2022, we believe the strength of our distribution network and our strong 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 March 31, 2022, 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 U.S. stores and two new stores in Mexico during the three months ended March 31, 2022, compared to opening 66 net, new U.S. stores during the three months ended March 31, 2021. As of March 31, 2022, we operated 5,811 stores in 47 U.S. states and 27 stores in Mexico compared to 5,660 stores in 47 U.S. states and 22 stores in Mexico at March 31, 2021. We anticipate total new store growth to be 175 to 185 net, new store openings in 2022.
Gross profit for the three months ended March 31, 2022, increased 4% to $1.71 billion (or 51.8% of sales) from $1.64 billion (or 53.1% of sales) for the same period one year ago. The increase in gross profit dollars for the three months ended March 31, 2022, was primarily the result of new store sales and the increase in comparable store sales at existing stores. The decrease in gross profit as a percentage of
sales for the three months ended March 31, 2022, was primarily due to the impact 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 March 31, 2022, increased 9% to $1.04 billion (or 31.5% of sales) from $950 million (or 30.7% of sales) for the same period one year ago. The increase in total SG&A dollars for the three months ended March 31, 2022, was the result of 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 March 31, 2022, was primarily due to inflationary pressures on 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.
As a result of the impacts discussed above, operating income for the three months ended March 31, 2022, decreased 3% to $670 million (or 20.3% of sales) from $691 million (or 22.4% of sales) for the same period one year ago.
Total other expense for the three months ended March 31, 2022, increased 3% to $36 million (or 1.1% of sales) from $35 million (or 1.1% of sales) for the same period one year ago. The increase in total other expense for the three months ended March 31, 2022, was the result of a decrease in the value of our trading securities, partially offset by decreased interest expense on lower average outstanding borrowings.
Our provision for income taxes for the three months ended March 31, 2022, decreased 2% to $151 million (23.9% effective tax rate) from $154 million (23.5% effective tax rate) for the same period one year ago. The decrease in our provision for income taxes for the three months ended March 31, 2022, was the 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 March 31, 2022, was the result of lower excess tax benefits from share-based compensation.
As a result of the impacts discussed above, net income for the three months ended March 31, 2022, decreased 4% to $482 million (or 14.6% of sales) from $502 million (or 16.2% of sales) for the same period one year ago.
Our diluted earnings per common share for the three months ended March 31, 2022, increased 2% to $7.17 on 67 million shares from $7.06 on 71 million shares for the same period one year ago.
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 December 31, 2021.
19 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 $ (170,567) $ 145,240
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.
The decrease in net cash provided by operating activities during the three months ended March 31, 2022, compared to the same period in 2021, was primarily 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.
The increase in net cash used in investing activities during the three months ended March 31, 2022, compared to the same period in 2021, was the result of an 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.
The increase in net cash used in financing activities during the three months ended March 31, 2022, compared to the same period in 2021, was attributable to an increase in repurchases of our common stock.
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.
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 March 31, 2022, we 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.
We had a consolidated fixed charge coverage ratio of 6.93 times and 6.46 times as of March 31, 2022 and 2021, respectively, and a consolidated leverage ratio of 1.62 times and 1.77 times as of March 31, 2022 and 2021, respectively, 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 March 31, 2022 and 2021 (dollars in thousands):
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 March 31, 2022 $ 448,384 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 March 31, 2021 $ 426,126 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 21
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 United States generally accepted accounting 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.
See Note 8 "Share Repurchase Program" to the Consolidated Financial Statements for information on our share repurchase program.
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 December 31, 2021.
See Note 13 "Recent Accounting Pronouncements" to the Condensed Consolidated Financial Statements for information about recent accounting pronouncements.
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