O’Reilly Automotive(ORLY) - 2021 Q4 - Annual Report

Part I Business O'Reilly Automotive, Inc. is a leading specialty retailer of automotive aftermarket parts, tools, and accessories in the U.S. and Mexico, serving both DIY and professional customers - O'Reilly is one of the largest specialty retailers of automotive aftermarket parts in the U.S., serving both do-it-yourself (DIY) and professional service provider customers[22] Store Count as of December 31, 2021 | Region | Store Count | | :--- | :--- | | United States | 5,759 | | Mexico | 25 | - In 2021, sales were derived approximately 59% from DIY customers and 41% from professional service provider customers[27] - The company's growth strategy includes opening 175 to 185 net new stores in 2022, increasing penetration in existing markets and expanding into new ones[32] Competitive Advantages and Growth Strategy The company's competitive strengths include its dual market strategy, superior customer service, strategic distribution network, and experienced management team, driving growth through new store openings and omnichannel enhancements - Key competitive advantages are identified as: proven dual market strategy, superior customer service, technically proficient personnel, strategic distribution network, and an experienced management team[25] - The strategic distribution network consists of 28 regional Distribution Centers (DCs) providing access to an average of 158,000 SKUs, and 375 Hub stores providing same-day access to an average of 45,000 SKUs[30] - The company's omnichannel strategy focuses on enhancing the customer's research and buying experience through digital platforms like www.OReillyAuto.com and www.FirstCallOnline.com, complementing its physical stores[39] Team Members and Human Capital Management O'Reilly emphasizes a "promote from within" philosophy, fostering an experienced management team and providing extensive training to its 83,636 Team Members, with a commitment to diversity and inclusion Team Member Composition (as of Jan 31, 2022) | Category | Count | | :--- | :--- | | Total Team Members | 83,636 | | Full-time | 68,679 (82%) | | Part-time | 14,957 (18%) | - The management team is highly experienced, with senior managers averaging 20 years of service, corporate managers 16 years, and district managers 14 years as of December 31, 2021[42] Store and Distribution Network As of December 31, 2021, O'Reilly operated 5,784 stores supported by 28 domestic DCs and 375 Hub stores, providing industry-leading parts availability and growth capacity for 300 to 450 additional stores Store and Distribution Metrics (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Total Domestic Stores | 5,759 | | Total Mexico Stores | 25 | | Domestic Distribution Centers | 28 | | Total Hub Stores | 375 | | Average SKUs in a DC | 158,000 | | Average SKUs in a Hub | 45,000 | - The distribution network has a growth capacity of 300 to 450 stores, supported by recent facility enhancements in Tennessee and Mississippi[61] Industry Environment and Competition The U.S. automotive aftermarket is estimated at $325 billion, with O'Reilly's addressable market at $130-140 billion, facing intense competition from national chains, wholesalers, and mass merchandisers, and experiencing some seasonality - O'Reilly's addressable market is estimated to be approximately $130 billion to $140 billion within the total automotive aftermarket[72] - Key competitors include national chains (AutoZone, Advance Auto Parts, NAPA), regional chains, wholesalers, auto dealers, and mass merchandisers (Walmart, Amazon)[74] - The business experiences some seasonality, with sales and profits historically higher in the second and third quarters (April-September)[78] Risk Factors The company faces material risks including ongoing COVID-19 impacts, economic downturns, intense competition, supply chain disruptions, cybersecurity threats, international operational challenges, and debt levels - The COVID-19 pandemic continues to pose risks related to economic disruption, supply chain volatility, and unpredictable consumer demand[108] - The automotive aftermarket is highly competitive, and the company may need to risk capital to maintain its position against larger competitors, smaller regional players, and online retailers[114] - Risks related to indebtedness include potential difficulties in satisfying financial obligations, vulnerability to adverse economic conditions, and limitations on flexibility due to covenants[127] - A breach of customer, supplier, or company information could damage the company's reputation and result in substantial costs or litigation[132] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[139] Properties As of December 31, 2021, O'Reilly operated 5,784 stores and 28 domestic regional distribution centers, with significant owned properties and capacity for future store growth Property Ownership (as of Dec 31, 2021) | Property Type | Owned | Leased | | :--- | :--- | :--- | | Stores | 2,395 | 3,389 | | Distribution Centers | 21 | 7 | - The existing 28 U.S. Distribution Centers have the capacity to service approximately 6,075 stores, providing a growth capacity of 300 to 450 U.S. stores[145] Legal Proceedings The company is involved in ordinary course litigation, which management does not expect to have a material adverse effect on its financial position or results - The company accrues for litigation losses where an adverse outcome is probable and the amount can be reasonably estimated, not expecting a material adverse effect on its financial condition[147] Mine Safety Disclosures This item is not applicable to the company - Not applicable[148] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities O'Reilly's common stock trades on Nasdaq under "ORLY," with no cash dividends declared since 1993, and the company actively repurchases shares, including $469 million in Q4 2021 - The company's common stock trades on Nasdaq under the symbol 'ORLY', with no cash dividends declared since 1993, and none anticipated in the foreseeable future[151] Q4 2021 Share Repurchases | Period | Shares Purchased (thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2021 | 322 | $617.35 | | Nov 2021 | 194 | $635.96 | | Dec 2021 | 220 | $667.08 | | Total Q4 | 736 | $637.15 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, sales increased 15% to $13.33 billion, driven by strong comparable store sales, improved gross profit margin, and 21% operating income growth, while maintaining strong liquidity and debt compliance Key Financial Results (2021 vs 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Sales | $13,327.6M | $11,604.5M | 15% | | Comparable Store Sales | 13.3% | 10.9% | +2.4 p.p. | | Gross Profit | $7,019.9M | $6,085.7M | 15% | | Operating Income | $2,917.2M | $2,419.3M | 21% | | Net Income | $2,164.7M | $1,752.3M | 24% | | Diluted EPS | $31.10 | $23.53 | 32% | - Key long-term demand drivers for the automotive aftermarket include U.S. miles driven (increased 11.2% in 2021), the number of registered vehicles (281 million in 2020), and the average vehicle age (11.9 years in 2020)[163][164][165] Results of Operations For fiscal year 2021, sales rose 15% to $13.33 billion due to strong comparable store sales, with gross profit margin expanding to 52.7% and operating income increasing 21% to $2.92 billion Components of Sales Increase (2021 vs 2020) | Component | Increase (in millions) | | :--- | :--- | | Comparable store sales | $1,496 | | Non-comparable store sales | $221 | | Sales from Leap Day (2020) | ($34) | | Non-store sales & other | $40 | | Total Increase in Sales | $1,723 | - The increase in gross profit as a percentage of sales was mainly due to a benefit from selling through inventory purchased prior to recent acquisition cost increases[183] - SG&A as a percentage of sales decreased from 31.6% to 30.8% due to strong leverage of fixed store operating costs on robust comparable store sales growth[186] Liquidity and Capital Resources The company's primary liquidity sources are cash from operations ($3.2 billion in 2021) and its $1.8 billion revolving credit facility, supporting capital expenditures, debt repayment, and share repurchases while maintaining strong covenant compliance Cash Flow Summary (in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $3,207.3 | $2,836.6 | | Net cash used in investing activities | ($615.6) | ($614.9) | | Net cash used in financing activities | ($2,694.9) | ($1,796.6) | - The company plans to open 175 to 185 net new stores in 2022, with an estimated cost of $1.5 million to $1.8 million per new store[205] Debt Covenant Ratios | Ratio | As of Dec 31, 2021 | Covenant Requirement | | :--- | :--- | :--- | | Consolidated fixed charge coverage ratio | 6.97 | Minimum 2.50 | | Consolidated leverage ratio | 1.59 | Maximum 3.50 | Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate risk from its variable-rate credit facility (no outstanding borrowings in 2021) and foreign currency risk from Mexican operations, with a 10% peso change potentially impacting net assets by $13.9 million - The company had no outstanding borrowings under its variable-rate Revolving Credit Facility as of December 31, 2021, mitigating short-term interest rate risk[230] - The company faces foreign currency risk from its Mexican operations; a 10% adverse change in the Mexican peso to U.S. dollar exchange rate would result in a potential loss of approximately $13.9 million on the value of net assets in Mexican subsidiaries[234] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2021, including the balance sheets, income statements, cash flow statements, and related notes, with an unqualified audit opinion - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[244][252] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $4,504,262 | $4,499,787 | | Net Property and Equipment | $4,213,515 | $4,094,918 | | Total Assets | $11,718,707 | $11,596,642 | | Total Current Liabilities | $5,874,615 | $5,262,417 | | Long-Term Debt | $3,826,978 | $4,123,217 | | Total Shareholders' (Deficit) Equity | ($66,423) | $140,258 | Consolidated Statement of Income Highlights (in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Sales | $13,327,563 | $11,604,493 | | Gross Profit | $7,019,949 | $6,085,692 | | Operating Income | $2,917,168 | $2,419,336 | | Net Income | $2,164,685 | $1,752,302 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[390] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes during Q4 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[391] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, the company's internal controls[392] Other Information This item is not applicable - Not Applicable[399] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not Applicable[400] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the audit committee and financial expert, is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the company's definitive Proxy Statement to be filed within 120 days of fiscal year-end[403] - The Board of Directors has determined that Audit Committee Chairperson, Thomas T. Hendrickson, qualifies as an audit committee financial expert[408] Executive Compensation Information regarding executive officer and director compensation is incorporated by reference from the company's 2022 Proxy Statement - Information required by Item 402 of Regulation S-K will be included in the Proxy Statement under "Compensation of Executive Officers" and "Compensation of Directors" and is incorporated by reference[409] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management, along with equity compensation plans, is incorporated by reference from the 2022 Proxy Statement - Information required by Item 403 of Regulation S-K will be included in the Proxy Statement under "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Management" and is incorporated by reference[412] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2022 Proxy Statement - Information required by Item 404 of Regulation S-K will be included in the Proxy Statement under "Certain Relationships and Related Transactions" and is incorporated by reference[413] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement - Information required by Item 9(e) of Schedule 14A will be included in the Proxy Statement under "Fees Paid to Independent Registered Public Accounting Firm" and is incorporated by reference[414] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including consolidated financial statements and required certifications - This section lists all documents filed with the Form 10-K, including financial statements, schedules, and exhibits such as articles of incorporation, debt indentures, and management compensation plans[417][418] Form 10-K Summary This item is not applicable - Not applicable[425]