10-QPeriod: Q2 FY2010

O REILLY AUTOMOTIVE INC Quarterly Report for Q2 Ended Jun 30, 2010

Filed August 5, 2010For Securities:ORLY

Summary

O'Reilly Automotive, Inc. (ORLY) reported a solid second quarter and first half of 2010, demonstrating strong sales growth and improved profitability. Sales increased by 10% for both the quarter and the year-to-date period, driven by comparable store sales growth and new store openings. This top-line performance translated into a significant increase in operating income and net income, with a 21% and 33% rise in operating income for the quarter and year-to-date respectively. The company also saw an improvement in its gross profit margin, benefiting from reduced inventory shrinkage at converted CSK stores, better product mix, and lower acquisition costs. While SG&A expenses increased, they grew at a slower pace than sales, leading to improved operating leverage. A notable event was the $15 million charge taken in the second quarter to increase the accrual for the legacy CSK DOJ investigation, which impacted reported net income. However, adjusted figures excluding this charge indicate even stronger underlying operational performance.

Financial Highlights

46 data points
Beta

Revenue

$1.38B

48.7% Gross Margin

Net Income

$99.59M

7.2% Net Margin

EPS (Diluted)

$0.05

Total Assets

$4.92B

Cash & Equivalents

$31.61M

Free Cash Flow

$93.55M

Financial Statements
Beta
Revenue$1.38B
Cost of Revenue$708.61M
Gross Profit$672.63M
SG&A Expenses$476.47M
Operating Income$181.16M
Interest Expense$11.15M
Net Income$99.59M
EPS (Basic)$0.05
EPS (Diluted)$0.05
Shares Outstanding (Basic)2.07B
Shares Outstanding (Diluted)2.12B

Key Highlights

  • 1Sales increased by 10% to $1.38 billion for the second quarter and by 10% to $2.66 billion for the first six months of 2010 compared to the prior year.
  • 2Operating income saw substantial growth, increasing by 21% to $181 million for the quarter and by 33% to $350 million for the first six months.
  • 3Gross profit margin improved to 48.7% for the quarter and 48.5% for the first six months, up from 48.2% and 47.5% respectively, due to factors like reduced inventory shrinkage and better product mix.
  • 4The company took a $15 million charge in the second quarter related to the legacy CSK DOJ investigation, impacting reported net income.
  • 5Net income increased by 16% to $100 million for the second quarter and by 33% to $197 million for the first six months.
  • 6Diluted earnings per share (EPS) increased by 15% to $0.71 for the quarter and by 30% to $1.40 for the first six months.
  • 7Net cash provided by operating activities significantly increased from $153 million to $356 million for the first six months, driven by higher net income and a reduction in inventory investment.

Frequently Asked Questions

O'Reilly's sales growth is primarily driven by a combination of comparable store sales increases (which rose 7.9% for the quarter) and the addition of new stores. The company's strategy of expanding its store count and improving sales at existing locations, fueled by factors like superior inventory availability and a broader product selection, are key contributors.

The $15 million charge is an accrual for the estimated costs to resolve the legacy Department of Justice (DOJ) investigation into CSK's historical accounting practices prior to O'Reilly's acquisition. This charge negatively impacts reported net income and EPS, but management believes excluding it provides a clearer view of the core operational performance. The company has also recorded a reserve for related indemnification obligations.

O'Reilly has a $1.2 billion asset-based revolving credit facility and has been actively managing its borrowings. For the first six months of 2010, net cash provided by operating activities increased significantly, allowing the company to reduce outstanding borrowings on its credit facility. The company expects to use cash generated from operations to further reduce debt. At June 30, 2010, the company had $477 million in outstanding borrowings and $647 million in aggregate availability for additional borrowings.

O'Reilly plans to open approximately 150 new stores in 2010. While this is below historical averages, it is attributed to the resources being directed towards the integration of CSK. New store openings are expected to be funded by cash generated from operations.