O REILLY AUTOMOTIVE INC Q3 FY2024 earnings call

• Thanked team members for their commitment during challenging conditions, including weather events like Hurricanes Helene and Milton. • Noted third quarter comparable store sales of 1.5%, with sales softness due to industry demand backdrop and weather. • Highlighted gross margin of 51.6% in Q3, up 18 basis points from Q3 2023, with dilution from Canadian business and mix of DIY/professional. • SG&A per store grew 4.2% in Q3, with updated full year guidance for SG&A per store growth 3.5% to 4% and operating margin 19.4% to 19.9%. • Inventory per store finished at $781,000, up 3% from last year, with 47 stores opened in Q3, year-to-date 111, on track for 190-200 in 2024 and 200-210 in 2025. • Capital expenditures $733 million in first nine months of 2024, maintaining guidance of $900 million to $1 billion.

The company's comparable store sales increased 1.5% in the third quarter. The Professional business drove mid-single-digit comps, while DIY comparable store sales were down approximately 1% due to negative ticket count comps. Average ticket values were positive on both sides of the business, with a 1% benefit from same SKU inflation.

• Full year comparable store sales guidance updated to 2% to 3%. • Operating margin guidance revised to 19.4% to 19.9% due to Q3 sales performance. • EPS guidance updated to $40.60 to $41.10. • Free cash flow guidance unchanged at $1.8 billion to $2.1 billion. • 2024 store openings on track for 190-200, 2025 target 200-210 net new stores.

• Macro-economic conditions and consumer caution impacting sales. • Weather events can impact operations and sales. • Potential tariffs on goods from China and other countries, uncertain impact on costs and pricing. • Dependence on supply chain and ability to pass along cost increases.

Q: Good day, guys. A question on supply chain with the Virginia DC opening and obviously you've got one in Devens, Mass. Do those two allow you to touch into that metro sort of mid-Atlantic Northeast New York market, or is there some additional supply chain expansion needed before you get to that white space in the Northeast?

A: Yes. Hi, Brett. Thanks. This is Brent. I'll start and these guys can join in. Thanks for the question. Yes. We're super excited about that Mid Atlantic DC. As you know, that opens up a corridor there of the Mid Atlantic that we've just have a lot of opportunities to continue to store up. And so, we feel like it's going to really pave the way for us to open up that corridor. To your point, when we think about the distance between Stafford and Devon's, they'll likely probably will at some point be another one that would be a fill in there, but super excited to get started on having that capability in that location.

Q: Good morning, everyone. Thanks for the question. Good morning, sir. Hey, Brad, anyone else. Good morning. I want to ask, you made the comment about headwinds should be short lived, and I think that makes sense. If you look at the industry, the industry got weak almost maybe a year, 3 quarters before your business got a little softer. So why does it flip soon? What about what confidence do you have? Is there anything about like a micro basis on failure rates? Or are there any markets that you have where you've had some softening and then a re-strengthening that you can point to like, help us think about timing. I know there's no crystal ball, but it's a tricky setup.

A: Yes. Great question, Simeon. I'll try to do the best, I can here. I think generally when you look back at, we don't want to live in pandemic times and we obviously saw a lot of success there. We've built our base, definitely several step changes there and on both sides of the business, obviously, more predominantly on the professional side. But when we think about a year like this, and again, we've said this a lot, you've heard us say it a lot, but in my 28 years in the industry and with O'Reilly, we've just lived this so many times that, while we're not happy with our 1.5% comp and really our year-to-date comp. The reason that I called out short-lived earlier is just because when we've lived this in an election year in times of higher inflation and all the things that have been on the consumer this year, which is the uncertainty. Once we get past the election and you think about how the inflation is moderated and a lot of things are piling up to the fact that, we feel even though we're not guiding to '25 obviously yet, we do feel confident that history repeats itself in our industry, and we continue to feel good that, we're going to get past this here soon and get back to kind of normal industry growth.

Q: Good morning. Thank you so much for taking my question. This has been a year where uncharacteristically O'Reilly has just misgauged the demand in the market and has had to die down a couple of times. Now, we're only going to be a few months away from how you're starting to think about 2025. If we go through the next few months, let's say, it's a normal season from a weather perspective and you don't see your trends improve, would you still be coming out at the outset of the year with a normal O'Reilly algorithm in the 3% to 5% comp range? And the second part of that question is, if the industry is going to have another sluggish year, next year, what does O'Reilly think the right level to comp is in order to generate sustained margin expansion on the expense side? Put another way, how low can comps be next year without having some deleverage? Will you see your SG&A per store still grow 2% to 3% or higher if indeed trends remain sluggish next year?

A: Yes, Michael. Thanks for the question. This is Jeremy. I think you're accurate in saying that the year like we're having this year is uncharacteristic, I think, for us for our history. Although, it's not completely unprecedented. We've had years like this, our industry has had years like this. I think for us, having a near-term focus to try to predict exactly the sequence and timing of exactly how the business performs and moves out of it is one that we've got some insight into. But frankly, we don't have the same -- we don't have that crystal ball that all of you don't have. We'll have to evaluate what our best read is, when we establish our guidance for 2025. It's a challenge to answer that from a hypothetical situation, because we do still have, I think, some pretty relevant time period between now and how we form kind of from a concrete perspective what those opinions are. I think that same answer applies to how we think about expense structure and what our REIT is on what overall cost levels are going to be next year and how we think the components of what our 2025 guide will be comprised, what benefit we might think we see in same SKU inflation in those things. I think maybe to step back from near term questions that try to pull forward our guidance setting process for next year and to just talk, I think, structurally on how we feel like we can operate our business and the profitability of our business. We still believe that we are positioned well to take share gains, to be productive in doing so and to provide strong returns for how we're investing in the business. And so I think as we put together those expectations for 2025, you'll see a similar conviction around the success of our business that we've had underlying our results for a long time.

Q: This has been asked a couple of different ways, but taking a different angle here. Just curious as you look back over the course of the year, if you can pinpoint when specifically the deferred maintenance dynamic started to materialize in your data. And as you look to Q4 and beyond, any thoughts on what the drivers historically tend to be that unlock or catch up pent-up demand, be it lower gas prices, which we're starting to see today or weather. Any thoughts there?

A: Yes. Thanks, Zach. This is Brad. I'll kick that off and then let the other guys kind of clean me up here. But first off, I think if you think back to the last couple of quarters, for a long time there, even though we were seeing some pressure in discretionary going back a quarter or 2 ago. You mentioned maintenance. We actually are very pleased with our maintenance categories. We look at it more from the biggest part of our business is nondiscretionary failure, repair type jobs. Some of that stuff can still be a little bit delayed. We're fairly pleased with our failure and kind of repair categories. Maintenance has been really good. I called that out in my prepared comments, things like oil changes, oil filters, oil, spark plugs, things like that, maintenance. We haven't seen a lot of deferral. Now there could be some deferral in there and other parts of it could be later model vehicles that are somewhat offsetting that. There's a lot of moving pieces. Really, what we continue to see, but what we saw more pronounced in Q3 than we have year-to-date would have been even more so discretionary and then we saw a little bit more trade down. You've heard us talk a lot about actual trade up from good to better and better to best. We did see some offset in that in Q3, while we still saw customers trading from better to best. We did see some that we're moving down to some extent there in Q3. So that's kind of what I'd say and may laid Brent.

Q: My follow-up question is how much work are you doing today to prepare for the prospect of tariffs in the next couple of months? And how disruptive would be 30% to 60% tariff on goods coming from China and some degree of tariff coming in on goods coming from all other countries.

A: Yes. Michael, this is Brent. Great question. I can start and these guys can add in. Most recent point of reference we have on any kind of scenario like that would be back in 2018 when we had the tariffs 2017, 2018 before. Honestly, we were able to pass those increased costs through in selling price. And really, that wasn't just us. That was the entire industry, so it was kind of a nonevent in terms of some of those components. What I will tell you, since then and since COVID and through COVID, our teams, our supply chain teams, sourcing teams, merchandise teams have done a fantastic job continuing to look at alternate supply sources, countries of origin, we continue to leverage the strength of our proprietary brand portfolio to source from multiple suppliers. So I would tell你 that we are less dependent on anything from China than we were, not to say that we still don't have some dependencies there we do and our industry does. But really proud of the work the team has done over the last several years to reduce that dependency. But where that does come into play, specifically with China,我 still feel confident in our ability to pass those costs along where they may become a part of cost of goods.

Q: A couple of follow-up questions. First on the one last Sunday. If I recall, it's a pretty modest benefit and less than what others have quoted because of the mix difference. So can你 talk about how much that is from a comp perspective? And does it roll into total sales or in comp? And then was there any benefit related to that in the third quarter?

A: Yes. So third quarter was pretty even up from that perspective. Fourth quarter, when we have a Sunday difference can be a little bit variable just because the timing of the holiday can impact that, too. And usually, we would say it's somewhere in the, call it, maybe 30, 40 basis point range, depending on how you measure it, but that's a benefit to comp and total sales.

Q: I wanted to focus on the potential recovery in the business. How do你 think that plays out, DIFM versus DIY? You've mentioned looking at history that you see a bounce back after some years of softness. How do你 think that plays out by the different segments?

A: Yes, great question. Steven, this is Brad. So even though we weren't necessarily pleased with our performance on either side of the business, I kind of to kind of kick off the question. I want to frame up that we're -- we feel really good about the way our teams continue to take share on the DIFM side. And so when你 think about the overall market getting back to norms over the short to midterm here and the way the complexity and all those things are going to weigh in on people being able to work on their own stuff. We continue to see an opportunity on both sides. It's obviously going to be out on the DIFM side. And so I think, generally speaking, the DIFM business, most likely is going to stay a little bit more resilient. That said, the -- I think it's balanced with the fact that the DIY business has been more impacted. And so when that consumer comes back, it could come back in a reasonably good way. And there could be some catch-up to do. There could be some things like that. And so generally speaking, I think DIFM is going to continue to stay a little bit more steady and resilient. But I also think that DIY, while it's a little bit more uncertain, I still feel like it has plenty of opportunity to get more healthier in the next 12, 18 months.

Q: Just a follow-up on the DIY side. I'm sure你've gotten the question in the past, but some of the mass channel and the warehouse clubs, we've heard about them getting more competitive. Have you seen that impact your business at all as you think about maybe pricing or just overall traffic?

A: Yes, sure. So those type competitors, they're -- they kind of dabble or pedal in some of our lines. A lot of that stuff is the more discretionary types of less hard parts and things like that, that would be tough overall for them to compete and have the SKU proliferation and things like that. But really, we saw a huge opportunity, as you know, during the pandemic, where some of those were closed and service was closed, and so less people were going through kind of their parts section, so to speak, at the mass retail. And there's no doubt that we saw some recovery from those folks. They do a good job on a lot of fronts. But nothing necessarily happening different in 2024, Steven. We saw some of that happen over the last couple of years. And so我们 have our head in the sand if we said we didn't maybe give a little bit of that back. But when we look at what we did during the pandemic versus mass retail, when we talk to our store team members and we look at our CSAT scores and we look at customer data and what customers are telling us, most of that, what我们 aim, we continue to see is very sticky. Customers continue to tell us that curbside has worked very well for them, buy online, pick up in store. Continuing to not have to go get stuck in a big parking lot going into a big box versus being able to get into our neighborhood store in and out, professional parks people trusted advice. So we continue to have a lot of confidence, but the majority of that was sticky. Those folks are always going to sell commodities. They're always going to be very sharply priced, but we continue to have confidence in our ability to overcome that with our service model in our smaller box.