O’Reilly Automotive(ORLY) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - The company revised its full-year EPS guidance to a range of $40.75 to $41.25, reflecting a forecasted 7% increase in full-year EPS at the midpoint [5] - Comparable store sales increased by 2.3% in Q2 2024, driven by a $70 million non-comp contribution from stores opened in 2023 and 2024 [17] - Free cash flow for the first six months of 2024 was $1.2 billion, in line with the first half of 2023, with expected full-year free cash flow guidance unchanged at $1.8 billion to $2.1 billion [18] - Gross margin for Q2 2024 was 50.7%, down 53 basis points from Q2 2023, with 35 basis points of the decrease driven by the acquisition of the Canadian business [97] Business Line Performance - Strong performance in hot weather-related categories such as batteries and HVAC, as well as solid performance in maintenance categories like brakes, oil changes, and spark plugs [8] - Professional business delivered mid-single-digit comps, with robust growth in ticket counts, partially offset by headwinds in DIY comparable store sales, which were down just shy of 1% [88][89] - Discretionary appearance and accessory categories experienced more pronounced softness, contributing to the sales shortfall in Q2 [90] Market Performance - The company outperformed the industry despite a sales performance that fell short of expectations, driven by strong customer service and inventory availability [4][7] - Improved trends in June were driven by strong performance in hot weather-related categories, with July sales trends remaining solid but moderating compared to last year [6][26] Company Strategy and Industry Competition - The company remains bullish on its prospects to compound share growth in the highly fragmented professional market [7] - The company is committed to maintaining a high standard of customer service and will not make dramatic adjustments to SG&A spend that would negatively impact service levels [108] - The company continues to invest in distribution infrastructure to support store growth, with three active DC projects underway [53] Management Commentary on Operating Environment and Future Outlook - Management acknowledged potential demand impact in the back half of the year due to economic uncertainty, particularly during an election year [9] - The company lowered its full-year comparable store sales guidance to 2% to 4%, reflecting Q2 results and updated expectations for Q3 and Q4 [93] - Management remains confident in the long-term fundamental drivers of demand for the automotive aftermarket, citing the size and growth of the car park in North America and the rising average vehicle age [94][95] Other Important Information - The company opened 27 stores in Q2 2024 and remains on track to open 190 to 200 new stores in 2024, including 15 to 20 stores in Mexico [104] - The company repurchased 784,000 shares in Q2 2024 at an average price of $1,012, totaling $794 million [115] - Mark Merz, Head of Investor Relations, will transition to a new role in the Mexican operation, with Leslie Skorick taking over Investor Relations duties [19][20] Q&A Session Summary Question: Discretionary Goods Softness and Gross Margin Impact - Discretionary categories, though a smaller portion of the business, were down significantly, contributing to the overall comp pressure [24] - The Canadian business is expected to be slightly more dilutive to gross margins than originally anticipated, but the full-year gross margin guidance remains unchanged [23][120] Question: July Sales Trends - July sales trends remained solid but moderated compared to June, with weather benefits seen in June easing in July [26][27] Question: Undercar Parts Performance - The company observed some deferral of high-ticket undercar repairs but no significant trade-down in product categories [124][125] Question: Catalyst for Industry Growth - The company believes its ability to execute and maintain high service levels will be key to driving continued share gains, even in a challenging environment [131][132] Question: Store Openings and Distribution Investments - The company remains on track with its store opening plans, including growth in Mexico, and continues to invest in distribution infrastructure [52][53] Question: Employee Mix and Cost Structure - The company has increased its full-time employee mix, which has improved productivity and service levels, providing flexibility in managing costs during periods of moderate growth [55][137] Question: Weather Impact on Industry Growth - Weather had a mixed impact on Q2 performance, with June benefiting from hot weather but July moderating due to comparisons with last year's favorable weather [142][143] Question: Product Acquisition Costs - The company expects product acquisition costs to normalize in the back half of the year, contributing to gross margin stability [145][146] Question: July DIY Performance - DIY performance in July remained consistent with trends seen earlier in the year, with solid performance in hot weather-related categories [150]