01—Abstract
Summary
Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.
O'Reilly Automotive (ORLY) reported a strong fiscal 1999, with product sales rising 22.4% to $754.1 milliona from $616.3 million, driven by 80 net new stores and a 9.6% increase in same-store sales.
Net income grew 48.3% to $45.6 millionb, or $0.92 diluted EPS (split-adjusted), and net margin expanded to 6.1% from 5.0%. Gross margin improved to 43.1% from 41.8%, reflecting better purchasing programs and buying power, while operating, selling, general and administrative expenses rose to 32.9% of sales from 32.6%, pressured by medical and workers' compensation costs and Hi/LO integration. The balance sheet strengthened considerably.
Shareholders' equity more than doubled to $403.0 millionc, aided by a March 1999 secondary offering that raised $124.6 million net, and long-term debt fell to $90.7 million from $170.2 million. Operating cash flow improved to $29.7 million, but capital expenditures of $86.0 million kept free cash flow negative, so the company continues to rely on its credit facility and offering proceeds to fund expansion. Inventory of $293.9 million is the largest asset and grows with store count.
The key risks for investors are geographic concentration (roughly 36%d of stores in Texas, all in the Central and Southern U.S.), dependence on the founding O'Reilly family, which controls about 25% of shares, and an unresolved class action tied to the former Hi/LO battery sales. The company plans to open about 100 stores in 2000 and 120 in 2001, a growth pace that makes execution and same-store performance the central investment questions.
02—Key points
Key Highlights
- Product sales grew 22.4% to $754.1 million in 1999, with 80 net new stores and a 9.6% same-store sales increase
- Net income rose 48.3% to $45.6 million; diluted EPS was $0.92 versus $0.71 in 1998 (split-adjusted)
- Gross margin expanded to 43.1% from 41.8%, while SG&A rose to 32.9% of sales from 32.6%
- Store network reached 571 stores across nine states, with Texas the largest at 208 stores
- Shareholders' equity rose to $403.0 million from $218.4 million after a March 1999 secondary offering netting $124.6 million
- Long-term debt fell to $90.7 million from $170.2 million, while capital expenditures reached $86.0 million
- Plans call for roughly 100 new stores in 2000 and 120 in 2001, with a Dallas distribution center planned for late 2000
03—Questions
Frequently Asked Questions
How fast is O'Reilly growing, and is growth coming from new stores or existing stores?
Growth comes from both. Product sales rose 22.4% in 1999, of which about 9.6 points came from same-store sales growth of $56.4 million, and the rest came from 80 net new stores. The company has posted 24 consecutive quarters of year-over-year record sales and earnings growth, though 1998 growth was inflated by the Hi/LO acquisition.
Is the company's profitability improving?
Yes. Net margin increased to 6.1% from 5.0%, and gross margin rose to 43.1% from 41.8%, mainly from better vendor programs and purchasing power. Operating margin improved to 10.2% from 9.2%, although SG&A costs rose due to medical, workers' compensation, and Hi/LO integration expenses.
How is the company financed, and is its balance sheet healthy?
The balance sheet improved substantially. Equity more than doubled to $403.0 million on the strength of the secondary offering, and long-term debt dropped to $90.7 million. Available credit was $62.2 million at year-end under a $165 million facility maturing in January 2003. Operating cash flow of $29.7 million did not cover $86.0 million in capital expenditures, so expansion still depends on borrowing and equity proceeds.
What are the main risks to owning ORLY stock?
The main risks are geographic concentration, with about 36% of stores in Texas and all operations in the Central and Southern U.S., and sensitivity to weather and regional economic conditions. The O'Reilly family holds about 25% of shares and can exert significant control over mergers and board elections. Growth depends on opening new stores at an accelerated pace, and a class action over former Hi/LO battery sales remains unresolved.
What is the company's expansion outlook?
Management plans to open about 100 stores in 2000 and about 120 in 2001, with sites for most of the 2000 openings already identified. It is also acquiring Gateway Auto Supply's assets, 14 Texas stores, for about $5 million, expected to close in April 2000. Capital spending is expected to remain significant to support this pace, and there are $29.7 million in construction commitments at year-end 1999.
04—Continue