O'Reilly Automotive, Inc. (ORLY) Earnings

Management highlights

- Overall Financial Performance * Q2 2026 diluted earnings per share grew 10% year-over-year, following 11% growth in Q2 2025; first half 2026 diluted EPS grew 13% * Gross margin for Q2 2026 came in at 51.4%, flat year-over-year, in line with seasonal expectations; year-to-date 2026 gross margin is 51.5%, up 11 basis points year-over-year * SG&A per store grew 4.8% year-over-year in Q2 2026, with incremental spend to support elevated sales volumes and modest pressure from higher fuel prices, within management expectations; first half 2026 operating margin expanded 21 basis points, driving 10% operating profit dollar growth * First half 2026 free cash flow was $1.5 billion, up from $904 million in the first half of 2025, driven by higher operating income and favorable timing of renewable energy credit payments * 110 net new stores opened year-to-date 2026 across 31 U.S. states, Puerto Rico, Mexico, and Canada; O'Reilly currently operates 6,695 total stores across North America with over 95,000 team members * Inventory per store at the end of Q2 2026 was $892,000, up 7% year-over-year and 2% from end-2025, slightly below original first half projections due to seasonal timing differences * Q2 2026 share repurchases totaled 17 million shares for $1.5 billion at an average price of $90.40; year-to-date 2026 repurchases through the earnings release date totaled 34 million shares for $3.1 billion * Adjusted debt-to-EBITDA at end-Q2 was 2.17x, up from 2.03x at end-2025, as the company incrementally approaches its 2.5x optimal leverage target - Capital Allocation Strategy * Top capital priority is reinvestment in existing stores, distribution networks, and organic new store growth to consolidate the highly fragmented auto parts market, where O'Reilly holds only ~10% of total addressable market * Targeted opportunistic smaller tuck-in acquisitions are a secondary priority, with strict discipline around strategic fit and integration; management stated there is no expectation or intention to pursue a large, transformative acquisition in the foreseeable future * Excess capital after business investments is returned to shareholders via share repurchases, which management views as an effective use of capital that is supported by the company's discounted future cash flows - Supply Chain and Operations * The new 690,000 square foot Atlanta distribution center (relocated at end-2024) provides incremental capacity to support expansion in the U.S. Southeast and enhanced import processing capabilities, aligned with the company's focus on improving inventory availability * The merchandise and supply chain teams continue to proactively manage supply chain disruptions and diversify sourcing to reduce cost pressures * The accounts payable to inventory ratio finished Q2 at 124%, flat with end-2025, and is expected to moderate to ~122% by end-2026 in line with planned inventory investments

Guidance

- Full-year 2026 comparable store sales guidance was revised upward to 4% to 6%, from the prior range of 3% to 5%. The update reflects first half 2026 outperformance, while expectations for back half 2026 comparable sales growth remain unchanged. - Full-year 2026 diluted EPS guidance was increased to $3.20 to $3.30, driven by first half operational performance and completed share repurchases. - Full-year gross margin guidance is maintained at 51.5% to 52%, representing 16 basis points of expansion at the midpoint versus 2025. - Full-year SG&A per store growth guidance was tightened to 3.5% to 4% (from the prior wider range), reflecting first half results and an expected moderation of per-store expense growth in the back half as year-over-year comparisons ease; full-year operating profit guidance is maintained at 19.3% to 19.8%. - Full-year net new store opening guidance is maintained at 225 to 235 net new stores for 2026; full-year capital expenditure guidance remains unchanged. - Full-year 2026 total revenue guidance is set to a range of $18.9 billion to $19.2 billion. - Full-year 2026 free cash flow guidance is maintained at $1.8 billion to $2.1 billion; the full-year effective tax rate is expected to be 22.5%. - Management expects inflation benefit from 2025 tariff-driven price increases to moderate to 1% to 2% for the back half of 2026, ranging from 2% in Q3 to 1% in Q4. Inventory per store is targeted to grow 5% year-over-year by end-2026.

Segment performance

O'Reilly Automotive operates two core customer segments: DIY (Do-It-Yourself) and professional (DIFM, Do-It-For-Me). For Q2 2026, overall comparable store sales grew 6% year-over-year, exceeding management expectations. The professional segment, which is the larger contributor to total comparable sales, delivered 10% comparable store growth, marking the fourth consecutive quarter of double-digit gains. Professional growth was split evenly between average ticket increases (in line with expectations) and mid-single digit ticket count growth (outpacing forecasts). The DIY segment delivered low single-digit comparable store growth, with average ticket strength as the primary driver, partially offset by low single-digit transaction count declines (slightly below expectations) driven by cooler than normal June weather reducing demand for hot weather-related categories. Year-to-date 2026 overall comparable store sales grew 7%, with total sales growing over 9%.

Risks & headwinds

- Unseasonably cool weather at the end of Q2 2026 reduced demand for hot weather-related product categories, negatively impacting DIY transaction counts in the quarter. - Short-term monthly and quarterly demand volatility from weather patterns can create uneven sales trends that are difficult to forecast. - Persistently rising crude oil and fuel prices create incremental cost pressure for SG&A (domestic transportation) and can push input costs higher for imported products. - Broad economic pressure and inflation can impact consumer discretionary spending, leading to potential choppiness in DIY customer demand. - Tariff policy uncertainty creates supply chain and input cost volatility, requiring ongoing negotiations with supplier partners.

Analyst Q&A

• Q: There is market speculation O'Reilly may acquire a large competitor, implying a structural change in how O'Reilly views competitive positioning. Is this the case? /

  A: O'Reilly does not comment on market rumors or speculation. The company reaffirmed its longstanding strategy: O'Reilly holds just 10% of the fragmented North American auto parts market, and will continue to consolidate share organically by focusing on its proven store-centric, customer-focused culture and operating playbook. There are no structural changes to O'Reilly's approach to M&A or market share gains, and management remains highly convicted in its existing organic strategy.

• Q: What drove the sequential DIY slowdown from Q1 to Q2 2026, and what are the downside risks from rising gas prices and consumer pressure in the back half? /

  A: Q1 DIY strength was partially driven by favorable spring weather and one-time support from tax refund flows, which naturally moderated in Q2. Lower-than-expected June heat also suppressed demand for hot weather DIY categories, a gap that has already rebounded in early July as hot weather took hold across most markets. While management is cognizant of potential consumer volatility from broader economic pressures, they note the auto parts industry has resilient underlying fundamentals: aging vehicle fleets, increasing total miles driven, and consumers prioritize maintaining existing vehicles in high new/used car price environments, and O'Reilly is focused on outperforming broader market trends. O'Reilly has already seen DIY share gains in 2026.

• Q: Is the current projected SG&A per store growth in the back half the new normalized run rate, and can we expect a return to consistent operating margin expansion? /

  A: Management prioritizes profitable share gain and growing operating profit dollars over hitting specific short-term margin targets, and will not cut necessary long-term growth investments to hit margin targets. Back half SG&A growth is moderating as the company laps elevated 2025 costs from self-insurance and legal line items, which were expected. O'Reilly will continue to balance investments in customer service and growth with operational efficiency, but will not forgo share gain opportunities to hit a specific near-term leverage target. Management remains focused on taking aggressive share over the long term given the company's small current market share.

• Q: How is O'Reilly handling potential tariff rebates, and could these benefits offset rising energy-driven cost pressures to support gross margin? /

  A: O'Reilly's supply chain model relies on suppliers acting as the importer of record for most goods, so O'Reilly does not receive large direct tariff rebates like some other retailers. However, the company works closely with suppliers to ensure it shares in any tariff-related cost benefits through negotiated product pricing, and has successfully diversified sourcing across countries of origin to reduce cost pressures. All cost components, including energy-driven shipping and input costs, are incorporated into ongoing supplier negotiations, and management remains confident it can maintain gross margin within guidance while offsetting incremental operating cost pressure.