O’Reilly Automotive(ORLY) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a 7.6% increase in comparable store sales, resulting in a two and three-year comp sales stack of 14.3% and 31.2% respectively [8] - Gross margin for the third quarter was 50.9%, a decrease of 132 basis points from the previous year, but in line with guidance expectations [27] - Diluted EPS for the third quarter increased to $9.17, a 14% increase year-over-year, and a 22% increase on a three-year compounded basis [28] - Full year 2022 EPS guidance was increased to $32.35 to $32.85, reflecting year-to-date results and fourth quarter expectations [29] - Free cash flow for the first nine months of 2022 was $1.9 billion, with an increase in expected full year free cash flow guidance to a range of $1.8 billion to $2.1 billion [79] Business Line Data and Key Metrics Changes - The professional business outperformed, producing double-digit comparable store sales growth driven by increases in ticket counts and average ticket size [15] - The DIY business showed positive results against difficult comparisons, with comparable store sales increases driven by growth in average ticket, despite traffic pressures [16][17] - Combined DIY and professional comparable store sales growth was driven by strength in average ticket, approximately 10% on both sides of the business [18] Market Data and Key Metrics Changes - Sales volumes accelerated throughout the quarter, with September being the strongest month [14] - Performance was consistent across market areas, with widespread outperformance versus expectations [21] - The company experienced broad-based support across its business categories, particularly benefiting from warm weather at the beginning of the quarter [21] Company Strategy and Development Direction - The company aims to continue consolidating the industry and growing its professional share, focusing on customer service and inventory availability [15] - The company plans to open 180 to 190 net new stores in 2023, expanding its footprint across the US and Mexico [53] - Investments are being made to enhance the distribution network and local inventory position to improve overall inventory availability [56] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the impact of inflation, consumer spending pressures, and weather dynamics on future performance [23][24] - The company remains confident in the health of the automotive aftermarket, supported by recovery in miles driven and favorable vehicle fleet dynamics [25] - Management noted that consumers are prioritizing maintenance of existing vehicles due to high inflation and economic uncertainty [26] Other Important Information - The company opened 37 net new stores in the third quarter, bringing the year-to-date total to 154 net new store openings [52] - The average inventory per store was $697,000, up 10% from the previous year [55] - The company retired $300 million of maturing senior notes, resulting in an adjusted debt-to-EBITDA ratio of 1.84 times [80] Q&A Session Summary Question: Current trends into the quarter - Management indicated that trends are measured against expectations and comparisons, with a focus on two-year and three-year performance [85][86] Question: Inflation and average ticket size between Pro and DIY - Management noted similar inflation benefits across both segments, with the professional side benefiting from the Pro pricing initiative [88][89] Question: Trade down observations - Management has not seen any material trade down, with movements being more related to supplier performance and inventory availability [91] Question: Cadence and performance expectations for the fourth quarter - Management expressed caution due to unknowns and volatility, particularly regarding consumer behavior and inflation during the holiday season [96][97] Question: Gross margin expectations and LIFO impacts - Management expects some headwinds to ease but remains cautious about significant improvements in gross margin due to ongoing cost pressures [99][100] Question: Pricing and inflation outlook - Management anticipates that pricing will remain rational and resilient, with no dramatic rollbacks expected in inflation [120][121] Question: Growth potential in 2023 - Management has not guided for 2023 yet but expects to continue passing through modest inflation to customers [131]