01—Abstract
Summary
Summary of the 10-K filed March 31, 1998. Cited figures are marked; the original filing is the authoritative source.
O'Reilly Automotive (ORLY) closed 1997 with record results: product sales rose 22.1% to $316.4 milliona from $259.2 million, driven by 40 net new stores and a 6.8% increase in same-store sales.
Gross margin expanded to 42.5% from 41.8%, mainly from volume purchasing discounts, and operating income grew 28.5% to $37.1 millionb. Net income reached $23.1 million, or $1.09 diluted EPS, up 21.6% from $19.0 million, or $0.90 in 1996. Operating cash flow improved to $17.9 million, while the company invested $37.2 million in capital expenditures for store growth and distribution.
The most important development for investors is the January 30, 1998 acquisition of Hi-Lo Automotive, a Houston-based retailer with 189 stores in Texas, Louisiana and California and a 375,000 square foot distribution center. The equity purchase price was about $47.8 millionc ($4.35 per share), and about $43.2 million of debt was assumed, for a total of roughly $91 million. The deal was funded with a new $175 million unsecured syndicated credit facility, comprising a $125 million five-year revolver and a $50 million five-year term loan.
Long-term debt rose from $0.2 million at year-end 1996 to $22.6 milliond at year-end 1997, and the Hi-Lo acquisition will add substantially more leverage in 1998. Looking ahead, management plans to open 50 new stores in 1998 and 80 in 1999, expanding into Texas, Iowa and Nebraska, and to convert the Hi/LO operations to O'Reilly systems during 1998.
Management expects gross margins to face continued price competition from national and regional rivals, and it views the Year 2000 remediation cost as immaterial. The company pays no cash dividends and its stock rose from a $15.50 low to a $28.00 high during 1997.
02—Key points
Key Highlights
- Product sales grew 22.1% to $316.4 million in 1997, supported by 40 net new stores and a 6.8% same-store sales increase.
- Gross margin improved to 42.5% from 41.8%, reflecting volume purchasing discounts and economies of scale despite ongoing price competition.
- Net income rose 21.6% to $23.1 million, and diluted EPS increased to $1.09 from $0.90, with operating margin reaching 11.7%.
- The January 1998 Hi-Lo Automotive acquisition (189 stores in TX, LA, CA) for about $91 million total consideration, including assumed debt, significantly expands the company's footprint.
- A new $175 million unsecured credit facility replaced prior lines to fund the acquisition, with long-term debt rising to $22.6 million at year-end 1997.
- The company plans aggressive expansion, with 50 new stores in 1998 and 80 in 1999, and ended 1997 with 259 stores in six Midwestern states.
- Operating cash flow increased to $17.9 million, while capital expenditures of $37.2 million funded store growth and distribution infrastructure, and the company pays no dividends.
03—Questions
Frequently Asked Questions
How did O'Reilly's core business perform in 1997?
Product sales rose 22.1% to $316.4 million, with 40 net new stores and a 6.8% same-store sales gain. Gross profit grew 24.1% to $134.6 million, and operating income increased 28.5% to $37.1 million. Net income reached $23.1 million, or $1.09 per diluted share.
What was the Hi-Lo Automotive acquisition and how was it financed?
O'Reilly acquired 100% of Hi-Lo Automotive on January 30, 1998 for an equity price of about $47.8 million ($4.35 per share), plus about $43.2 million of assumed debt, for a total of roughly $91 million. It added 189 stores in Texas, Louisiana and California, plus a Houston distribution center. The deal was funded through a new $175 million unsecured credit facility, which includes a $125 million five-year revolver and a $50 million five-year term loan.
How much debt does O'Reilly carry and what are the implications?
Long-term debt, less the current portion, was $22.6 million at December 31, 1997, up from $0.2 million a year earlier. Following the Hi-Lo acquisition and the new credit facility, leverage will increase materially in 1998. Management believes operating cash flow and existing credit facilities will be sufficient to fund short- and long-term needs.
What are the main risks and competitive pressures facing the company?
Management expects continued price competition among national and regional auto parts retailers to influence gross margins in 1998 and beyond. The company competes with AutoZone, which entered its professional installer markets in 1997, along with Pep Boys, NAPA and Carquest. Some competitors are larger and have greater financial resources. Integrating Hi-Lo's operations into O'Reilly's systems during 1998 also presents execution risk.
Does O'Reilly pay dividends and how has the stock performed?
No cash dividends have been declared since 1992, and the company does not anticipate paying dividends in the foreseeable future. Shares traded on Nasdaq and rose during 1997 from a low of $15.50 to a high of $28.00. At February 27, 1998, there were 21.1 million shares outstanding, and non-affiliate market value was about $419 million.
04—Continue