What is O'Reilly's competitive positioning in the automotive aftermarket?

O'Reilly serves both do-it-yourself customers and Professional Installers, with roughly equal sales from each. Its strategy relies on technically proficient staff, same-day or overnight access to over 105,000 SKUs through three distribution centers, and a Right Part, Right Price, Right Now pricing guarantee. The company faces competition from AutoZone, which entered Professional Installer markets in 1996, as well as NAPA, Carquest and Parts Plus.

How is the company funding its rapid store expansion?

Expansion is funded primarily through operating cash flow and short-term bank borrowings. The company raised $47.7 million in a November 1995 public offering. Operating cash flow was only $4.9 million in 1996, so the company depended on bank lines and its prior equity raise to support inventory growth and $34.5 million of capital spending.

What are the main risks to margins going forward?

Management expects continued price competition among national and regional auto parts retailers to influence gross margins in 1997 and beyond. Gross margin fell slightly in 1996 to 41.8% from 42.0%. Expansion into more densely populated markets, where competition is more aggressive, is an additional risk to margin and same-store growth.

Does the company pay dividends, and how has the stock performed?

O'Reilly has not declared cash dividends since 1992 and does not anticipate paying any in the foreseeable future. The Nasdaq-traded stock ranged from a low of $28.75 to a high of $40.75 in 1996, compared with a 1995 range of $23.00 to $33.63. Approximately 5,500 stockholders are estimated to hold shares.

How concentrated are the company's suppliers and are there legal or regulatory concerns?

The company purchases from about 350 vendors, with the three largest accounting for roughly 15% of purchases and none exceeding 10%. It has no long-term supply contracts but reports good supplier relationships and no difficulty sourcing alternatives. Management reports no material pending legal proceedings beyond routine claims and no material adverse effect from environmental or other regulation.

ORLY 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 31, 1997. Cited figures are marked; the original filing is the authoritative source.

O'Reilly Automotive, Inc. (ORLY), a Springfield, Missouri-based specialty retailer of automotive aftermarket parts, reported strong fiscal 1996 results.

Product sales rose 28.7% to $259.2 million^a from $201.5 million, driven by 31 new stores and a 14.4% increase in same-store sales. Net income grew 34.6% to $19.0 million, or $1.82 per share, versus $1.58 in 1995. The company operated 219 stores at year end across Missouri, Arkansas, Kansas and Oklahoma, and is targeting 40 new stores in 1997 and 50 in 1998, including entry into Iowa and Nebraska.

Margin trends were mixed. Gross margin slipped to 41.8%^b from 42.0% as price competition intensified, and management expects that pressure to continue into 1997 and beyond. Operating margin improved to 11.1% from 10.9% because OSG&A leverage (30.7% of sales versus 31.1%) more than offset the gross margin decline.

Growth is capital intensive: capital expenditures reached $34.5 million^c in 1996, and operating cash flow fell to just $4.9 million, so the company relied on inventory build-out, short-term bank lines and its 1995 equity offering. Inventory rose to $83.9 million, and the company had $3.0 million in notes payable at year end. For investors, the key considerations are the company's dual DIY and Professional Installer strategy, its distribution-center-supported model, and its reliance on continued new store openings.

Risks include AutoZone's 1996 entry into Professional Installer markets, the need to renew credit facilities that expire in mid-1997, and weak free cash flow during expansion. The company pays no cash dividends and its stock traded between $28.75^d and $40.75 in 1996.

02—Key points

Key Highlights

Product sales grew 28.7% to $259.2 million in 1996, with same-store sales up 14.4%, driven by 31 new store openings.
Net income rose 34.6% to $19.0 million ($1.82 per share) from $14.1 million ($1.58 per share) in 1995.
Gross margin declined modestly to 41.8% from 42.0% due to continued price competition, while operating margin improved to 11.1% from 10.9% on OSG&A leverage.
The company operated 219 stores at year end 1996 across four states and plans 40 new stores in 1997 and 50 in 1998, including entry into Iowa and Nebraska.
Operating cash flow weakened to $4.9 million in 1996 as inventory rose to $83.9 million, while capital expenditures reached $34.5 million.
Stockholders' equity increased to $155.8 million, and total assets reached $183.6 million, with minimal long-term debt of $0.2 million.
Two key unsecured credit facilities totaling $32 million expire in mid-1997, and management expects to extend them but no assurances were given.

03—Questions

Frequently Asked Questions

What is O'Reilly's competitive positioning in the automotive aftermarket?
O'Reilly serves both do-it-yourself customers and Professional Installers, with roughly equal sales from each. Its strategy relies on technically proficient staff, same-day or overnight access to over 105,000 SKUs through three distribution centers, and a Right Part, Right Price, Right Now pricing guarantee. The company faces competition from AutoZone, which entered Professional Installer markets in 1996, as well as NAPA, Carquest and Parts Plus.
How is the company funding its rapid store expansion?
Expansion is funded primarily through operating cash flow and short-term bank borrowings. The company raised $47.7 million in a November 1995 public offering. Operating cash flow was only $4.9 million in 1996, so the company depended on bank lines and its prior equity raise to support inventory growth and $34.5 million of capital spending.
What are the main risks to margins going forward?
Management expects continued price competition among national and regional auto parts retailers to influence gross margins in 1997 and beyond. Gross margin fell slightly in 1996 to 41.8% from 42.0%. Expansion into more densely populated markets, where competition is more aggressive, is an additional risk to margin and same-store growth.
Does the company pay dividends, and how has the stock performed?
O'Reilly has not declared cash dividends since 1992 and does not anticipate paying any in the foreseeable future. The Nasdaq-traded stock ranged from a low of $28.75 to a high of $40.75 in 1996, compared with a 1995 range of $23.00 to $33.63. Approximately 5,500 stockholders are estimated to hold shares.
How concentrated are the company's suppliers and are there legal or regulatory concerns?
The company purchases from about 350 vendors, with the three largest accounting for roughly 15% of purchases and none exceeding 10%. It has no long-term supply contracts but reports good supplier relationships and no difficulty sourcing alternatives. Management reports no material pending legal proceedings beyond routine claims and no material adverse effect from environmental or other regulation.

04—Continue

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