O'Reilly Automotive Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 13 speakers on the call.

Operator

Welcome to the O'Reilly Automotive, Inc. 2nd Quarter 2021 Earnings Conference Call. My name is Victor, and I'll be your operator today's call. At this time, all participants are in a listen only mode. Later, we will conduct a 30 minute question and answer during the question and answer session.

Operator

I will now turn the call over to Tom McFall. Mr. McFall, you may begin.

Speaker 1

Thank you, Victor. Good morning, everyone, and thank you for joining us. Today's conference call, we'll discuss our Q2 2021 results and our updated outlook for the full year of 2021. For questions. After our prepared comments, we'll host a question and answer period.

Speaker 1

Before we begin this morning, I'd like to remind everyone that our comments today contain forward looking statements, And we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act for 2019. You can identify these statements by forward looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward looking statements this call due to several important factors described in the company's latest annual report on Form 10 ks for the year ended December 31, 2020, another recent SEC filings. The company assumes no obligation to update any forward looking statements made during this call. At this time, I'd like to introduce Greg Johnson.

Speaker 2

For today's call. Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts 2nd quarter conference call. Participating on the call with me this morning are Jeff Shaw, our Chief Operating Officer and Co President and Tom McFall, our Chief Financial Officer. For Greg Hensley, our Executive Chairman and David O'Reilly, our Executive Vice Chairman are also present on the call.

Speaker 2

For today's call. I would also like to welcome Brad Beckham, our Executive Vice President of Store Operations and Sales, who is joining us for his first call. For I'd like to begin our call today by expressing my gratitude to team O'Reilly for the hard work you put into delivering yet another outstanding performance this quarter. For questions. We don't take for granted the exceptional results you generated in the Q2 nor the high level of execution required every day to produce these results.

Speaker 2

For So thank you, team O'Reilly for continuing to demonstrate why you are the best in the business. Our 2nd quarter results were headlined by a robust a 9.9% increase in comparable store sales and a 17% increase in diluted earnings per share. Today's call. These results are especially impressive as they were achieved on top of a 16.2% comparable store sales growth and 57% increase in diluted earnings for the Q2 of last year. Over the past 5 quarters since the onset for the Q4 of the pandemic.

Speaker 2

We have grown earnings per share an average of 44% per quarter and this is truly remarkable performance. For And this truly remarkable performance was achieved through our team's selfless dedication and focus on safety, Congratulations, team O'Reilly on another exceptional quarter. For Before we dive into our results, I'd like to take a moment to extend my congratulations to Jeff Shaw, our Chief Operating Officer and Co President on his upcoming retirement. For today's press release, Jeff has decided to retire in early 2022 after more than 33 years of dedicated service to the company and his fellow team members. Jeff is an incredible leader and mentor and passionate about providing consistent excellent customer service.

Speaker 2

For his career track is a prime example of our company's promote from within philosophy. Having begun his O'Reilly tenure as a part specialist on the counter, He has grown his career by being a key contributor to our company's tremendous growth. Throughout his career progression to Chief Operating Officer and Co President, he He has consistently championed our promote for them philosophy and has served as a mentor to many of O'Reilly's current senior leadership team. For Jeff has earned the gratitude of all of team O'Reilly for his incredible contributions to our company's success, and we wish him a very happy and well deserved retirement. Thanks to Jeff's keen focus on succession planning, we're very pleased to announce Brad Beckham, for O'Reilly's Executive Vice President of Store Operations and Sales will step into the Executive Vice President and Chief Operating Officer role for the Q1 of 2019.

Speaker 2

Brad has been an O'Reilly team member for over 24 years and his career progression mirrors much of Jeff's having also started his O'Reilly career as a parts specialist. Brad is an exceptional leader who shares Jeff's passion for providing excellent customer service for investing in our team members and I'm confident he will continue to lead our company to success well into the future. For. Now I'd like to address the quarter's results and start by providing some color on our exceptional sales performance. Our 2nd quarter comparable store sales growth of 9.9% and our 2nd quarter 2 year comparable store sales stack of 26.1% for greatly surpassed our expectations for the quarter as we continue to maximize the benefits from the robust broad based industry trends we've experienced over the last several quarters coupled with a favorable weather environment and the benefit of government stimulus.

Speaker 2

For. As noted on our Q1 call, the last round of government stimulus payments started to be distributed in mid March, for at which point the sales volumes accelerated meaningfully. This growth continued in April before moderating at the end of April for the Q1 of fiscal year 2019. We expect to continue to be

Speaker 3

a strong year over year increase in the year. We expect to continue to be a strong

Speaker 2

year over year increase in the year. For. These volumes translated into positive comps every month of the quarter, which was impressive in light of the extremely strong compares we faced in May May June of 2020. These better than expected sales volumes have continued thus far in July, and we have been pleased with the durable nature of strong sales volumes we have been able to achieve. The robust comparable store sales results we generated have been underpinned by significant contributions from both the DIY and Professional business.

Speaker 2

We posted positive comps for DIY and Professional in the quarter comprised of both ticket count comp and average ticket comp growth. The Professional business was the larger contributor to the comparable store sales increase for the quarter, having faced softer comparisons on this side of the business resulting from a more gradual recovery last year from the initial pandemic impact. We faced tougher comparisons on the DIY side, for We're very pleased with the performance in our DIY business as we calendar the exceptional sales volumes from last year. For While both sides of our business exceeded our expectations for the quarter, our DIY business was responsible for producing the greater outperformance as compared for questions. Same SKU inflation increased to slightly over 2% for the quarter, for up from the 1.5% we experienced last quarter.

Speaker 2

We now anticipate we'll see additional larger increases in same SKU inflation for the year, but the ultimate extent of the impact will be determined by the duration of pressures to pricing levels for cost increases in wage rates, freight and raw materials. We anticipate the benefit to our top line sales results for questions. We partially offset as rising prices will likely cause some economically challenged customers to defer non critical maintenance for trade down on the product value spectrum. Finally, on a category basis, we saw broad based robust sales trends across all categories for the call with especially strong performance in undercar, hard car categories and weather related categories. As we disclosed in our earnings release yesterday, We are increasing our full year comparable store sales guidance to a range of 5% to 7% from our previous range of 1% to 3%.

Speaker 2

For included in this upward revision is our year to date performance as well as our continued strong performance to date in July. As we move into the back half of the year, we continue to pay strong compares to the prior year. And while we have a constructive view of the demand for I'm sorry, a constructive view of the demand backdrop for our industry, we remain cautious as significant uncertainty remains surrounding the continued progression of the pandemic recovery as well as the expected end of additional federal unemployment benefits in all states. Regardless of the uncertainties we face, we will continue to execute our proven business model and are extremely confident in our team's ability to drive further for share gains moving forward. The tremendous rapid growth in our business has given us the opportunity to earn many new O'Reilly customers for the Q2.

Speaker 2

And the outstanding customer service they've received will be the key to earning their repeat business. Turning to gross margin. For the Q2, our gross margin of 52.7% was a 26 basis point decrease from the 2nd quarter for 2020 gross margin. This was in line with our expectations as we anticipated headwinds from DIY versus professional total sales mix for the Q2 of last year. For the full year 2021, We are maintaining our gross margin guidance of 52.2% to 52.7%.

Speaker 2

While we are above the midpoint of our full year guidance through for the Q1. We expect to see pressure from certain transitory distribution costs in the back half of the year. Our distribution infrastructure is facing inefficiencies due to the massive sales spike over the last five quarters, the difficult labor environment the Q2 and global logistics challenges. We continue to view our distribution network as a key competitive advantage that supports our industry leading parts availability for today's call. To this end, we have adjusted our near term cost expectations us to match the deliberate steps we are taking to ensure the highest possible distribution service levels and further deliver on our strategic inventory initiatives.

Speaker 2

Simply put, our dedicated supplier partners and extraordinarily hardworking distribution center team members have done an amazing job to support the surge in our sales volume Before handing the call off to Jeff, I'd like to highlight our 2nd quarter earnings per share of 17% to $8.33 for With a year to date increase of 39 percent to $15.39 Our 2nd quarter earnings per share results represents a 36% 2 year compounded quarterly growth rate. And I'd once again like to congratulate and thank team O'Reilly for delivering another quarter of exceptional for performance. We are raising our full year earnings per share guidance to $26.80 to $27 for an increase of $2.05 which at the midpoint now represents an increase of over 14% compared to 2020 for a 2 year compounded annual growth rate of 23%. This increase in full year guidance driven by our strong year to date sales the Q1 results combined with excellent operating profit flow through which Jeff will provide more details on here shortly. For.

Speaker 2

As a reminder, our EPS guidance includes the impact of shares repurchased through the call, but does not include any additional share repurchases. For. To conclude my comments, I want to express my confidence in the long term strength of our industry as consumers continue to value investments in the care and maintenance of their vehicles and O'Reilly will be well positioned to meet those needs in the future. I also want to again extend my deepest thanks to our team for their commitment to our culture, fellow team members and our customers. For Tim O'Reilly.

Speaker 2

I'm proud of your continued outstanding performance, and I look forward to what we'll accomplish on the road ahead. I'll now turn the call over to Jeff Schall. Jeff?

Speaker 4

For Thanks, Greg, and good morning, everyone. I'd also like to extend my congratulations and express my sincere thanks team O'Reilly for their outstanding efforts and results this quarter. Our team's ability to grow comparable store sales and operating profit dollars on top for Q2 2020's record performance demonstrates just how deeply ingrained our culture is within team O'Reilly. I couldn't be more proud to work with the team who regardless of the past successes or challenges we faced will remain driven to win the business for rolling up their sleeves and out hustling and out servicing our competition every day. We've had plenty of opportunities over the last year to show new shareholders that we are in fact the friendliest parts store in town and I believe the continued strength in our results speaks volumes for Q and A.

Speaker 4

To begin my comments today, today. I'd like to provide some color on our SG and A expenses for the quarter and give some additional insight into the outstanding performance of our team. For Our 2nd quarter operating profit dollars increased by 8% as compared to last year, with our SG and A leverage at 29.7 percent of sales, for the Q1. Thank you, Victor. Thank you, Victor.

Speaker 4

Thank you, Victor. Thank you, Victor. Thank you, Victor. Thank you, Victor. Thank you, Victor.

Speaker 4

Thank you, Victor. Thank you, Victor. Thank you, Victor. Good morning, everyone. Good morning, everyone.

Speaker 4

Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 4

For. The strong sales trends continue to produce historically high levels of profitability. Greg has already mentioned the extremely tough comp for sales comparisons we were up against in the Q2, and we also faced our toughest SG and A leverage and operating margin comparison for the Q2 of last year. As a reminder, last year's Q2 results were driven in part by cost adjustments we made to our business for the Q1 of 2019.

Speaker 3

I'll now turn the call over to Mr. Lipton, who will be

Speaker 4

the first one in response to the initial impact of the pandemic, which generated a level of profitability that was unique to those specific circumstances for the Q1 of 2019. While this unusually difficult comparison created pressure

Speaker 3

for fiscal 2020. On our year over year operating margin

Speaker 4

rate, which declined 87 basis points, we're very pleased with the improvement in our profitability on a 2 year stack. For fiscal 2020. On this basis, our operating margin percent of 23% is a 372 basis point improvement for 2019 operating margin performance as our team was able to drive compounded top line growth at almost twice the rate of our SG and A increases. SG and A per store grew 11.5% in the 2nd quarter, for comparable store sales growth we achieved over the same period. For store, SG and A dollar growth was above our expectations for the 2nd quarter for the Q1.

Speaker 4

As we spend additional dollars in store payroll, variable operating expenses and incentive compensation in support of the much better than expected sales dollars. Expense control remains an integral part of our culture, and we will always carefully manage every dollar we spend, for also ensuring our stores and store team members are well equipped to deliver the service levels our customers know and expect. Based on our results year to date, we're now estimating our full year increase in SG and A per store to be approximately 5%. For Due to the SG and A leverage above our expectations on the strong sales performance through the date of this call, we're increasing the midpoint of our operating profit guidance 55 basis points to a range of 20.5% to 20.9%. For next year.

Speaker 4

Next, I'd like to provide an update on our store growth during the quarter. During the Q2, we opened 50 new stores across 25 states, bringing our year to date total to 116 net new stores. This pace sets us up well to achieve our plan of 165 for 175 net new stores for 2021. And we continue to be pleased with our new store performance, for which is driven by a solid team of professional parts people in each of our new stores. We're also pleased with the performance and results from our team in Mexico for today's call.

Speaker 4

As I wrap up my prepared comments, I'd like to again thank our team members throughout our stores, DCs and offices for their steadfast commitment to our business and customers. For. Finally, for I also want to thank Greg Johnson, Greg Hensley, David O'Reilly and all of team O'Reilly for the kind words in regard to my retirement announcement as well as the opportunities that I've had over the years to be a part of a truly first class team and to play a role in team O'Reilly's tremendous success story. For Looking forward, I'm extremely excited for the future of our company and the deep bench of solid leaders that we have for the company. As for my specific succession plan, as Greg mentioned, for Brad is a tremendous example of our promotion within philosophy, working his way up through the ranks based on outstanding performance and a deep knowledge for what drives our business.

Speaker 4

He's an experienced and well respected leader in our company who is fully prepared And since this will be my last quarter where I'll participate in the prepared comments, I'm especially pleased to transition this responsibility over to him. For Just because my time as an O'Reilly team member will soon be coming to any end. As a retiree, I'll continue to be a long term shareholder today's

Speaker 1

conference call. Now I'll turn the call over to Tom. For Thanks, Jeff. I'd also like to thank all of TIM O'Reilly for their continued hard work and commitment to excellent customer service, and thank him for his many years of top notch leadership. Now we'll take a closer look at our Q2 results and add some additional color our updated 2021 guidance.

Speaker 1

For the quarter, sales increased $374,000,000 comprised of a $298,000,000 increase in comp store sales, a $57,000,000 increase in non comp store sales for the full year of 2021, We now expect our total revenue to be between $12,300,000,000 $12,600,000,000 up from our previous guidance of 11.8 for $12,100,000,000 based on our strong year to date top line performance and our continued confidence in our team. For Greg covered our gross margin performance earlier, but I do want to provide details on our positive LIFO impact, which was $19,000,000 in the 2nd quarter

Speaker 3

2019 and above our previous expectations.

Speaker 1

As a reminder, in the Q2 of 2020, we recorded a headwind in LIFO with a charge of $4,000,000 When we set our full year gross margin guidance earlier this year, we were anticipating a larger positive the impact from LIFO in the first half of twenty twenty one versus the back half. However, as we continue to experience inflationary input cost increases for the year. And depending on the persistence of inflation, we may see similar or more LIFO benefits in the back half of the year, for questions, which is expected to partially offset pressure on our higher than planned distribution costs that Greg discussed earlier. While some of the components driving our overall gross margin outlook have changed from our original expectations at the beginning of the year, we still expect to finish the full year within our original stated the gross margin range of 52.2% to 52.7%. Our 2nd quarter effective tax rate was 23.1 percent of pretax income comprised

Speaker 3

of a

Speaker 1

base rate of 24.4 percent for share based compensation. This compares to the Q2 of 2020 rate of 20 4.1 percent of pretax income, which was comprised of a base rate of 24.5%, reduced by a 0.4% benefit for share based compensation. For The Q2 of 2021 base rate was in line with our expectations. And for 2021, We continue to expect to have a lower 4th quarter base rate based on the expected tolling of certain tax periods and realizing benefits the full year of 2021, we continue to expect an effective tax rate of approximately 23%. For These expectations assume no significant changes to the existing tax code.

Speaker 1

Also variations in the tax benefit from share based compensation and create fluctuations in our quarterly tax rate. Now we'll move on to free cash flow and the components that drove our results as well as our updated expectations for 2021. Free cash flow for the 1st 6 months of 2021 was $1,500,000,000 for the Q1 of 2019, up from $1,200,000,000 for the 1st 6 months of 2020, with the improvement driven by an increase in net income, a larger benefit from our for net inventory investment and a larger prior year investment in solar projects, partially offset by decreases in income taxes payable and tax withholdings, for both resulting from the ability to defer certain income tax and payroll tax payments in the prior year under the provisions of the CARES Act. We do anticipate additional investments in solar projects in the Q4 of 2021. For the full year of 2021, We now expect free cash flow to be in the range of $1,500,000,000 to $1,800,000,000 up $400,000,000 at the midpoint from our previous guidance.

Speaker 1

Based on our strong year to date operating profit and cash flow performance and strong net inventory performance. For. Inventory per store at the end of the second quarter was $636,000 which was down 2% from the beginning of the year, for the Q1 of 2019, but up 1% from this time last year, driven by the extremely strong sales volumes and corresponding improvement in inventory turns. During prior quarter's earnings call, we discussed our plan for 2021 initiative to add just over $100,000,000 of additional inventory for in our store and hub network, above and beyond our normal new store and typical product additions. While we are still making progress on this plan, for which when fully executed will result in approximately 4% increase in average per store inventory.

Speaker 1

Our strong year to date sales volumes And the results in replenishment needs of our stores continue to be the priority. As a result, we could see some further delays in our inventory for growth initiatives if we are able to maintain our high level of sales growth. Our AP to inventory ratio at the end of the Q2 was 126%, which was another all time high for our company and was heavily influenced by the extremely strong sales volumes and inventory turns over the last year. For We anticipate our AP to inventory ratio to decrease from this historic high as we continue to execute on our additional inventory investments 2019 as well as our sales growth moderating. Our updated expectation is to finish 2021 at an APE to inventory ratio of approximately 115 for the 1st 6 months of 2021 were $223,000,000 which was down $22,000,000 from the same period of 2020, primarily driven by the timing of expenditures for new distribution and development activities.

Speaker 1

For We continue to forecast CapEx to come in between $550,000,000 $650,000,000 for the full year. Moving on to debt. We finished the Q1 with an adjusted debt to EBITDA ratio of 1.76 times as compared to our year end 2020 ratio of 2.03x, with reduction driven by a decrease in adjusted debt as well as growth in our trailing 12 month EBITDA. For During the Q2, we used available cash on hand to redeem $300,000,000 of our senior notes, which were scheduled to mature in 2021 and carry a coupon rate of 4.625%. We continue to be below our leverage target of 2.5 times And we'll approach that number when appropriate.

Speaker 1

During the Q2, we also successfully upsized our revolving credit facility, which was scheduled to expire early next year. For The new 5 year facility has an aggregate capacity of $1,800,000,000 up from the $1,200,000,000 on the old revolver, for fiscal 2020, which provides us with additional financial flexibility moving forward. We continue to execute our share repurchase program. For And during the Q2, we repurchased 700,000 shares at an average price of $537.25 for a total investment of $400,000,000 Year to date through our press release yesterday, we repurchased 2,400,000 shares at an average the full year 2018. We remain very confident that the average repurchase price It's supported by the expected future discounted cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to shareholders.

Speaker 1

For questions. Before I open up our call to your questions, I'd like to once again thank the O'Reilly team for all their dedication and continued hard work. For your questions. This concludes our prepared comments. And at this time, I'd like to for Victor, the operator, turn to the line, and we'll be happy to answer your questions.

Operator

Thank you. We will now begin the question and answer session.

Speaker 5

For

Operator

for please limit your questions to one question and one follow-up question.

Speaker 3

For questions.

Operator

Our first question will come from the line of Simon Gutman from Morgan Stanley. You may begin.

Speaker 6

For Hey, good morning everyone. Jeff, congratulations. Brad, congratulations to you. My first question is on, I guess, short term question on the commentary around July. For Is there any way we could assume that your comments around demand holding up means that the 2 year or 3 year stacks are holding?

Speaker 6

And if that's fair, Obviously, we're looking at the second half guidance implying negative. Is there anything else that we should be aware of besides just tough compares. But if you've already gotten through your worst of it in July, is it just prudent in your second half guidance?

Speaker 1

So we continue to be very happy with our daily performance in July, and it's carried through from those volumes in for May June. We've rolled that into our comp guidance for the full year. There remains a lot of uncertainty for In relation to the recovery and the pandemic and the variance that are out there, we still have tough compares in August September and put up a great comp in the Q3 of last year. So we feel like it's prudent to give the guidance that we gave for the full year.

Speaker 6

For Okay, fair enough. Can I ask Greg or Tom, thinking about how much of the demand this year in 2021, If there's any framework you're thinking about what's pent up versus pull forward, does the current year become a base from which for We grow or does the industry or your business have to digest some of this? I know it's early to guide in the out year, but anything that you can share of sort of the puts and takes to think about future growth.

Speaker 2

Yes. I mean, we're obviously not guiding into for 2022 or beyond at this point. But as we said in our prepared comments, we're pleased for the Q2. We're pleased with virtually every category, both the DIY and DIFM side of the business. Quite frankly the business outperformed our expectations.

Speaker 2

And as Tom said, there's a lot of unknowns as we move into the back half of the year for and into 2022 and beyond as it relates to pandemic supply chains, things like that. For So we're hopeful that sales trends continue, but we're not guiding for anything beyond this year. Tom, do you have anything to add to that?

Speaker 1

What I'd add to that is last year and on the call today, for Both Greg and Jeff have discussed that we've seen dramatic increases in customer traffic, and we've seen new customers. And The onus was on us to earn those customers repeat business by providing them great customer service. If you look at our guide at the beginning for the Q1 of 2019. The expectation was we were going to give some of that business back from last year. So having sitting where we are at the comp level that we're sitting at this for the next year, I think, speaks to, as Jeff said in his prepared comments, our ability to earn more customers repeat business.

Speaker 1

So we for Are very pleased with the business, and we've clearly stepped up the base what we have determined to be the base business. For

Speaker 6

Okay. Thanks guys. Thank you.

Operator

Our next question comes from the line of Bret Jordan from Jefferies. You may begin.

Speaker 7

Hey, good morning, guys. Good morning. On the sales exceeding expectations, I guess, Could you sort of parse out what might be underlying sort of broad strength in demand versus share gains trends?

Speaker 3

I mean, it Seems like

Speaker 7

you guys have been outperforming the underlying market, but are your share gains exceeding expectations or just the general trend in the market?

Speaker 2

For It's really Brad, as you know, it's really hard to differentiate the difference between what is share gains and what may be pent up demand and what have you coming off of a very strong year end 2021 and having a strong of a year as we've had thus far for this quarter. We're confident that we're taking market share. We're confident we're taking market share on both sides of the business. As for As far as parsing out how much of that is market share gain versus just pure demand, it would be just purely a guess to try to differentiate the 2. But I mean, in summary, we're confident, Brett, that we are taking market share today.

Speaker 7

For Okay, great. And then a quick question on supply chain. I mean, the cadence of availability or obviously a lot of supply disruption. Could you talk maybe as to for Is the trend improving or are we bumping along the bottom as far as access and cost of a product?

Speaker 2

Sure, sure. For If you break the supply chain down into various areas, our as we said, our distribution centers for have been pressured by the volume. And as most companies across the U. S. Have seen, we've had difficulty for with the labor market and keeping those DC staffed and caught up.

Speaker 2

So that's been a hurdle that we've challenged throughout the year this year. For Things are starting to improve in several markets and we're optimistic that through the balance of the year, our DCs will continue to get caught up and perform better. From a supplier perspective, the last couple of quarters, I've commented that we had a handful of domestic suppliers that were facing for challenges in fill rate. And really while it may be a couple of differences, it's pretty much the same suppliers. Their challenges are similar to ours.

Speaker 2

Some of it's raw materials. A lot of it's carryover from COVID for labor, just having enough people to build, manufacture and distribute the product. So for We're working very, very closely with those suppliers. Each of those suppliers, our supply chain team is meeting with at the highest levels on a weekly basis now to trying to find creative ways to help them get caught up. And then the elephant in the room, which everybody knows for container shortage with product coming from overseas.

Speaker 2

We're all facing those challenges and we're doing everything we can do to keep for I would say that overall, Brett, even with all those challenges, we continue to be pleased with our business for And our performance of our stores, we've always talked to some of the strengths of our supply chain being the fact that we have, for Especially in our major categories, we have multiple suppliers in those categories and that's really helped us through this period where you may have different countries of origin for some of those manufacturers where you have multiple suppliers per category and also our good, better, best offering. So While we may not have the exact product every consumer wants on the shelf, we've got a product that fits their application. And I think consumers today, like it or not, no matter what store they walk into, whether it's a grocery store, a hardware store, an auto part store, for The shelves are not as stocked as they typically would be. And I think the consumer has a little bit more of a willingness for the Q and A session. Brad, did you have anything you want to add

Speaker 8

to that? No, I think it's

Speaker 7

pretty well said. Great. Thank you.

Operator

Our next question comes from the line of Michael Lasser from UBS. Your question.

Speaker 5

Good morning. Thanks a lot for taking my questions and congratulations to everyone on their new roles and on your retirement. My question is on the DIY

Speaker 1

Michael? Yes. Michael? Yes. Can I interrupt you for just a little bit of hard for Understanding, you're not coming through clear?

Speaker 5

Thanks, Tom. Is that better?

Speaker 1

It's much better.

Speaker 5

For My question is on DIY retail. Presumably, it was strong in the quarter. It remains strong today.

Speaker 1

For Michael, I apologize. You went from clear to back burner, very hard to understand.

Speaker 5

Let's try this for the next time, Peter?

Speaker 1

We'll give it another shot.

Speaker 5

Okay. Last one. For So the crux of the question is why is DIY retail so strong? Is it simply a function for people are driving more, but despite the tough comparison, the vehicle the increase in vehicle miles driven continues to drive that for this. And should continue to drive that business even as a part rebates that's off a higher level into the spring and beyond?

Speaker 5

For

Speaker 1

Okay. Mike, we're going to answer the question of why does DIY remain so strong. The rest of the question was difficult for the question. I'll start to turn it over to Greg. We continue to see an environment where people are for somewhat concerned about their economics and are taking on more challenging jobs by themselves.

Speaker 1

Some people continue to work from home. That's a benefit for us. Used car price new car prices are hard to find and used car prices are very high. For So those items continue to be a positive for us, and we continue to think that we're taking share within the DIY marketplace.

Speaker 2

For Yes. The only thing I would add to that, Michael, is your comments probably accurate about miles driven. I think consumers a lot of consumers did not take vacations last year, for perhaps where they are this year and are doing more maintenance type things as well as perhaps more weather related the repairs. We had a normal winter last year for the first time in a couple of years, and that's really impacted for some of our mild undercar categories where consumers are able to replace shocks, brakes, things like that, that may have been damaged during the winter.

Speaker 5

For That's very helpful. My quick follow-up question is on what was the contribution from like for like price increases or inflation in the period? For the contribution from inflation over the next few quarters and how is this going to impact for the gross margin you already alluded to some of the life changes, but can you give us more explicit impact on gross margin as well?

Speaker 1

Okay. So for the quarter, I think we've talked to it in our prepared comments. Our LIFO number was for

Speaker 9

I'm going to have to

Speaker 1

look it up again now.

Speaker 5

I guess, I was more interested in the inflation impact, Tom?

Speaker 1

For I'm sorry. Okay. So inflation was slightly over 2%, as Greg talked about. We've got visibility of what our pricing is doing right now and expect that we're going to continue to see more inflation in the short term. For As Greg talked about, on many of our categories, freight is a big component, raw materials and labor.

Speaker 1

For Especially for freight and raw materials, we tend to price those separately and adjust the price based on those markets. So to the extent that for These pressures continue through the full quarter. We'd expect to see a higher inflation in the 3rd quarter and the 4th quarter. To the extent that they start to abate, we'd expect to see those costs come back down. So it will be dependent.

Speaker 5

Understood. Thank you very much.

Operator

For. Our next question will come from the line of Chris Horvers from JPMorgan. Your line is open.

Speaker 3

For today.

Speaker 10

Thanks. Good morning, guys, and congratulations to all. So a couple of follow-up questions. I guess, first in terms of the gross margin outlook, can you maybe just re summarize what the changes are for Relative to your original expectations and what are you expecting from a LIFO perspective in the 3rd and 4th quarters?

Speaker 1

For We're expecting to see more benefit from LIFO in the 3rd Q4 as our costs have increased and we reduced our LIFO debit. For We expect that to be offset by transitory distribution costs as we focus on getting into an even better inventory position and starting to work on our inventory And that will have some short term cost impacts on our distribution which flow into gross margin.

Speaker 10

Got it. So that catch up for on the inventory side is going to sort of also offset the fact that you are implying for less volumes year over year in the back half of the year given the comp guide.

Speaker 1

Yes. To some extent, our distribution centers for To keep up with the volume that we're doing right now, as Greg talked about in his prepared comments, are running inefficiently. So running for A lower volume would actually yield a better distribution percentage at this point. But mainly, we're talking about just for challenges on the labor side and how we get focused on getting it in even a better inventory position.

Speaker 10

For Understood. And then just

Speaker 3

a follow-up,

Speaker 10

just to parse out the volume commentary for May June. When you talk about comps similar in May June, is that relative to your expectations for volumes or is that a commentary that May June comps were the same basically?

Speaker 1

For Our comments relate to our expectations. Obviously, we had a lot different comp cadence from last year that we compared to. So our focus is really on what were our expected volumes and what can we achieve versus those expected volumes. And we were for Way above those in the beginning of April as we talked about on the Q1 call due to the stimulus that went out. But that base underlying trend of over expectations We saw at the end of April continued in May June, and we're focused on generating sales levels As opposed to the math from what was last year.

Speaker 10

Understood. Very helpful and best of luck. Thank you.

Speaker 2

Thanks, Chris.

Speaker 3

For questions.

Operator

Our next question comes from the line of Greg Melich from Evercore ISI. You may begin.

Speaker 11

For Thanks. My question was on the looking at sales versus 2019. So I guess they were up 26%, for a little acceleration from the Q1. Could you break down that comparison to 2019 for DIY and do it for me, Knowing how screwed up the comparisons over last year.

Speaker 2

Yes, Greg, we're not going to quantify that. But as we said in our prepared comments, DIFM was a larger contributor than DIY for the quarter.

Speaker 11

On a year over year basis, is that?

Speaker 2

Compared to prior year.

Speaker 11

Right. If we look back to 2019, is DIY still more Of the growth versus 2019, then do it for then pro or does that also

Speaker 1

If we look at aggregate sales dollars, and I think we covered this in the call, for When we look at the Q2, we know that DIY far surpassed professional business in the Q2 of last year due to the timing of stimulus, the work from home arrangements and hesitation for people to turn their car over to shops I haven't worked on it, and it recovered more slowly. So our comments that the 2nd quarter DIY for above our expectation, more strongly than the professional business indicates that on a 2 year basis that DIY is the bigger contributor.

Speaker 11

Got it. Okay, thanks. And then the second question is, I think in your prepared comments, you mentioned that as some of this inflation for closing to the back half, that you're expecting some potential trade down. Have you actually seen that already in some markets or in some products? Sir, is that just an anticipation given on what's happened in the past?

Speaker 2

Yes, Greg, we just called that out as a possibility if inflation continues. For you. Historically, we've seen when prices increase, when gas prices increase, things like that, that the for Economically challenged consumer has less discretionary cash to spend. Sometimes they will defer maintenance for And sometimes they'll trade down the value spectrum. So that's why we call that out.

Speaker 11

Okay. So it's more of an expectation of things that happened in the past, not about anything you're seeing today?

Speaker 2

That's correct.

Speaker 11

Great. Thanks. Good luck everyone.

Speaker 1

Thanks, Victor.

Operator

And our next question will come from the line of Daniel Imbro from Stephens. You may begin.

Speaker 3

Yes. Hey, thanks. Thanks for taking my questions and congrats everybody. Greg, I want to talk about the supply chain a little bit. And obviously, ocean freight is an issue, but some of your peers are talking more about direct for the first thing, maybe trying to go find cheaper labor, cheaper manufacturing to lower cost of goods.

Speaker 3

I'm curious, maybe what the strategic outlook would be for O'Reilly along that or maybe what are the benefits of using more full service suppliers like you guys do domestically to keep your service levels up?

Speaker 2

For Yes. As I spoke before, we do we don't do a great deal of direct importing. We a lot of our import suppliers. We require to keep inventory on hand here in the States. They're the owner of that freight until it hits the port.

Speaker 2

For That has worked well for us. Unfortunately, we've gone through some of that inventory over the past few months. So for today. It's probably not working as well for us as it normally would, because all that product inevitably has to come from overseas. For We continue, Daniel, to evaluate where it makes sense to bring product in from a direct import perspective versus through the for the quarter.

Speaker 2

3PL or warehouse here domestically. And it's really a matter for us of a it's an economic for calculation of is there enough demand and enough flow through of the product to justify bringing it in direct for bringing it in through their distribution centers here in the U. S. So we have a combination. We have SKUs we buy for some of these suppliers direct into for our 3rd party 3PL facilities.

Speaker 2

And then but the bulk of what we bring in from overseas would flow through the manufacturing facilities here domestically. Got

Speaker 3

for Got it. That is helpful. And then Tom, sorry to beat a dead horse. Just want to make sure we understand the inflation side a little bit. For So the guidance you've given assumes what Greg mentioned earlier that inflation does accelerate or are you assuming the benefit to LIFO Assuming inflation flat line with 2Q.

Speaker 3

I just want to make sure we understand what's embedded in that outlook you provided.

Speaker 1

So from a sales for the Q1. We anticipate that we will have some tailwinds from increased inflation for So it hasn't really impacted our total sales expectations.

Speaker 3

And what about on the gross margin side?

Speaker 1

On the gross margin side, being in a LIFO debit, as the prices go up, their last buyers below LIFOs who are for making more money on those products than we normally would. So that will be a benefit, and that benefit will be offset by additional distribution costs as for the Q and A. We strategically look to improve our inventory and get further ahead on our inventory initiatives.

Speaker 3

Got it. Thanks so much guys. Best of luck.

Speaker 6

Thank you.

Operator

Our next question comes from the line of Seth Basham from Wedbush.

Speaker 3

For questions.

Speaker 12

Thanks a lot. Good morning and congrats to Jeff. I actually have a question that Jeff maybe able to answer. If we look at the team member count, it remains below pre pandemic levels. How do you view this now?

Speaker 12

Do you think that you can offer your stores with less labor? Or is there an expectation to continue to ramp back up?

Speaker 4

Well, Seth, for We've been throughout the last really year and a half, I mean, since the pandemic hit, we had the downturn. For I mean, we really just kind of blocked down on payroll, not knowing what the future held and really dialed for our headcount, our payroll to what our business was doing. And then we just had the explosive growth in volume for mid April on. And we just really didn't know how long that was going to last. We were kind of playing it by ear, for really week to week, month to month and being very cautious in staffing backup.

Speaker 4

For And as we've seen the volume hold there in the 3rd Q4, we cautiously started ramping back up headcount to match the sales demand, and that's really carried into the Q1 and Q2 of this year as very for Cautiously ramping headcount back up as well as just a seasonal ramp up in the business. We continue to for focus on our full time initiative as well and replace maybe part time with more full time headcount, for Knowing that we provide better service levels with more tenured experienced team members. So that's part of it. And obviously, this is for Brad's wheelhouse. So I might let him speak to that if he's got any additional comments.

Speaker 8

Yes. Hey, Seth, I think directly to your question. I think it's a combination of both. I think this last year, like a lot of companies, I'm sure we've learned a lot about ourselves. When for We're looking at last spring.

Speaker 8

And worst case scenario, we had to make decisions on our headcount. We did that very surgically based upon team member productivity for And learned a lot in that Q1 to go through the pandemic. And then to Jeff's point, as we've gone on here, it's been kind of a short- to mid for the long term outlook in terms of what we thought the business was going to do. We always run our business like we always say for the long term when it comes to staffing and our service levels, While at the same time, being able to back ourselves out if we have points that business changes the other direction from a for store count from a headcount and from an hour standpoint. But we've been working this last year a lot on full time.

Speaker 8

For We see some productivity increases from that, and we also have other initiatives on the productivity front that we're working on right now, and we're pleased with those.

Speaker 12

For That's really helpful. Just one related follow-up. Are you seeing a big increase in your mix of sales that are through the online channel. Is that helping you operate more efficiently with labor? How do you expect the online channel to develop over the next year or so?

Speaker 2

For Yes, Seth, I'll take that one. We have seen significant growth in our online channel. As we've said in previous quarters, for Most of that growth ends up in the stores. Last quarter, about 3 4ths of our online sales for pickup in store or ship to store, some of that could be curbside. But for But most of that, the increases that we've seen as opposed to taking the discount that they are offered for ship And that just goes back to our thesis from forever that those consumers, they need help.

Speaker 2

They want to make sure they get in the right part. They need it timely. And so Brad, did you want to add to that?

Speaker 8

Yes. Seth, the other thing I would add is for A lot of times when we talk about online and digital business, we talk about O'Reilly, outer.com, and we talk about B2C. But what I would for today. It reminds you of our B2B business with our First Call online and all our shop management systems where we directly integrate with so much of our professional business. Obviously, to your question, for That's the other side of it.

Speaker 8

It's been a huge productivity improvement incrementally at that for us and for our shops. And so not only do we have everything that Greg talked about with O'Reilly Auto.com, buy online, pickup and store, ship to home. For One of our biggest initiatives with professional being our bread and butter is continuing to grow that digital business for on the professional side and in turn get the incremental gains in productivity on our side and with our shops.

Speaker 12

Wonderful. Thank you.

Operator

For. And our next question will come from the line of Bobby Griffin from Raymond James. You may begin.

Speaker 9

For Hello, everyone. This is Mitch Ingalls filling in for Bobby. Congrats on a great quarter. Yes, for questions. To start, any color on the performance by region would be helpful.

Speaker 9

And to that theme, are you seeing any slowdown at date on daily sales for areas that have recently ramped up COVID related restrictions. Thank you.

Speaker 2

Brad, do you want to take that one?

Speaker 8

Sure. For Well, we're very pleased with all regions and really the consistency of our business across the U. S. In the second quarter, for Also on both sides of the business, like we discussed on the DIY and Professional side, our from my seat, it's a little bit tough to talk about regional Our time and energy really is focused less on the macro trends like weather, but it was fairly favorable across our regions, like Greg mentioned when he talked about the categories. But instead 100% fundamental execution of our business model that adds up to share gains, really, which to me is for Our culture being alive and well in every single market, promoting proven performers from within and being the friendliest, most professional parts store in every single market we operate in.

Speaker 8

So and then on your last question, I don't think from a COVID standpoint where we've for ramp ups here recently. We have not seen that affect our business thus far.

Speaker 9

Great. Thank you, Jeff. And as a

Speaker 4

quick follow-up, for Is it

Speaker 9

fair to categorize the weather trends year to date as the most favorable the industry has seen over the past few years? So for instance, June is on record as being the hottest in at least 127 years. So it's probably difficult to parse out with stimulus and DMD recovery. For Any read as to what the benefit of weather could have been in 2Q and year to date would be very helpful. Thank you.

Speaker 1

So what I would tell you is that the last couple of years have been not as favorable weather. So for In comparison, it's much better. I'd tell you over a long period of time, it's slightly above average. When we talk about for performance improvements. We're having a better AC year.

Speaker 1

We're having a better undercar year as the roads got tore up more this winter. For A lot of batteries that were stressed in the winter got replaced in the summer. But to go we're not going to go through and attempt to quantify on this call the seasonal benefits, but what we would tell you is that we got back to a for slightly better than normal as compared to poor the last few years.

Speaker 9

Understood. Thanks for your time and best of luck guys.

Speaker 3

Thanks.

Operator

For questions. I will now turn the call over back to Mr. Greg Johnson for closing remarks.

Speaker 2

For Thank you, Victor. We'd like to conclude our call today by thanking the entire O'Reilly team for your continued hard work in delivering a record setting quarter. I'd like to thank everyone for joining our call today, and we look forward to reporting our Q3 results in October. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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Earnings Conference Call
O'Reilly Automotive Q2 2021
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