Greg Johnson
President and Chief Executive Officer at O'Reilly Automotive
Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts second quarter conference call.
Participating on the call with me this morning are Brad Beckham, our Chief Operating Officer and Jeremy Fletcher, our Chief Financial Officer. Brent Kirby, our Chief Supply Chain Officer; Greg Henslee, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'd also like to welcome Jeremy to his first earnings call.
I'd like to begin our call today by thanking Team O'Reilly for their continued dedication to our customers and their hard work that drove another solid quarter of financial performance. Hopefully, everyone had a chance to review the details in our second quarter earnings release. During the call today, I will walk through the performance in the quarter and our adjusted outlook for the remainder of the year. I think it's important to begin by highlighting the strong results our team continues to generate and then put them into proper context against the backdrop of the incredible growth we've delivered in the past three years.
In the second quarter, our team was able to generate a 4.3% comparable store sales increase, after driving comp increases of 9.9% and 16.2% in the second quarters of 2021 and 2020, respectively, resulting in an incredible three-year stack of 30.4%. Entering 2022, we knew our team had a daunting task ahead of them, with the challenge to deliver continued growth on top of these outstanding results, which were fueled in part by government stimulus payments in 2020 and '21 that did not repeat in 2022. Our teams have set an incredibly high performance bar, and their ability to comp the comp, yet again, is a testament to their relentless focus on providing excellent customer service.
Team O'Reilly has continued to translate the robust sales growth into outstanding returns for our shareholders, highlighted by second quarter diluted earnings per share of $8.78, which is an increase of 5% over our extremely strong second quarter 2021 when we grew EPS by 17%. On a compounded basis, compared to 2019, our second quarter EPS is up an impressive 25% per year, which is just another testament to the unwavering commitment of our team to growing profitable growth through their dedication to the O'Reilly culture of excellent customer service.
Next, I'd like to spend time walking through some details of our sales performance for the second quarter and the factors that drove our results as well as provide some color on our revised comparable store sales guidance for the full year. As we discussed on our first quarter earnings call in April, we began the second quarter facing headwinds from a delayed start to spring and rising fuel prices. We're also lapping our historically strong comparable store sales performance, driven in part by the tailwinds we saw from government stimulus payments in 2021. However, as we moved through the quarter, the volatility from these factors moderated and our business stabilized.
Since the past few years have been so significantly impacted by the effects of the pandemic and timing of the stimulus payments, we think it is most useful to evaluate the cadence of our comp results on a three-year stack basis. On this basis, our month-to-month results were fairly steady throughout the quarter. As our business stabilized in the second quarter, we encountered more pronounced ticket count pressures on the DIY side of our business, resulting in top line results below our expectations for the quarter. Our plan for the second quarter included an expected headwind to DIY ticket counts, as we were up against extremely strong growth from the comparison to stimulus-driven demand at the beginning of the second quarter of 2021. However, we saw more pressure than expected as our DIY customers faced high fuel prices and continued significant broad-based inflation.
I'll spend some time in a few moments discussing our broader outlook for the industry and our business as we move forward, but for now, I'll point out that it's not completely surprising to us to have experienced these types of pressures. Many of our core DIY customers work on their own vehicles out of economic necessity and can be more susceptible to price inflation in short periods of time. We believe what we're seeing now is comparable to other periods in our history when our customers have gone through these types of fuel price spikes. The current environment is different to the degree that the spike in fuel prices is occurring at the same time broad-based inflation is elevated, but we expect consumers will adjust to these pressures as we've seen in the past and continue to prioritize vehicle repair and maintenance. From a total DIY comp perspective, we did see an inflation benefit in average ticket values, but the macroeconomic pressures to ticket counts and difficult compares resulted in total DIY comparable store sales being slightly negative for the quarter.
Turning to the professional side of our business, we're very pleased with our team's performance in the second quarter where we generated comparable store sales growth in the low double digits as a result of growth of both ticket counts and average ticket size. We continue to be excited about the strength of our professional customer business as we grow our share and consolidate the industry. As we've discussed on the last two calls, we anticipated this side of our business will be the larger driver of our growth in 2022, and our results in the second quarter were in line with those expectations. We continue to be pleased with the early returns from our professional pricing initiative, and Brad will cover our professional customer momentum and this initiative in more detail in his prepared comments.
On a combined basis, including both DIY and professional sales, our comparable store sales growth for the quarter was driven by strength in average ticket with professional ticket count growth only partially offsetting pressure we saw in DIY traffic. Average ticket size came in around 10% for the quarter on both sides of our business due to a benefit from same SKU inflation at similar levels. We have continued to be highly successful in passing through product acquisition and operating expense inflation and selling price increases as we move through 2022, which is a benefit to average ticket values. Beginning in the third quarter, we began to anniversary the onset of higher inflation in 2021, which will moderate the year-over-year increase in average ticket value and is factored into our full year sales expectation.
Now, I'd like to provide some color on how we view the conditions of our industry and our outlook on the remainder of the year. As we move through the back half of 2022, it remains a challenge to predict what we will encounter in a rapidly changing macroeconomic environment. Certainly, if we can look in the rear-view mirror for the beginning of the year and build our expectations based on inflation we haven't seen in decades and a global conflict accelerating growth in fuel prices, we would have landed in a different spot with our initial guidance. Despite these headwinds, we're pleased with our performance against this challenging macro backdrop, and we remain very confident in both the fundamental strength of our industry and the quality of our team and their proven ability to outperform the market and gain share.
While we believe we're seeing some short-term impact to demand as consumers respond to economic challenges, we're also confident that our industry benefits from the reality that very little of the demand in the automotive aftermarket is truly discretionary and the necessary maintenance and repairs can only be deferred for so long. In fact, as economic conditions worsen, our experience has been that our industry provides even more critical to consumers facing economic challenges. This plays out in many different ways.
We see it when one of our customers is able to hold off on a new car purchase and avoid a monthly expense because they're able to invest through repairs and maintenance on a higher mileage vehicle or when we help a DIY customer stretch their wallet a little further by providing incredible service from one of our professional parts people, who have technical knowledge and customer service skills to support the customer who needs a DIY fix to keep their vehicle on the road. These are just two of the many scenarios, which motivate our customers to prioritize taking care of their vehicles, when money is tight or consumers have less confidence in the state of the economy.
The core underlying factors that support demand in our industry also continue to be very healthy. The average age of vehicles on the road continues to increase, aided not only by headwinds to new vehicle sales and mileage and higher resale values -- I'm sorry, of older vehicles, but also the excellent engineering and manufacturing of vehicles on the road today. We are also bullish on the overall health of our customer base. Unemployment has remained at very low levels and increasing wage rates have been a positive partial offset to inflation, especially for the more economically constrained DIY customer base. We believe consumers are in a much stronger position than in recent periods of economic uncertainty. As we have discussed often in the past, miles driven is a critical metric for our industry and we are cognizant that the potential for miles driven growth could slow, if the broader economy slows. As a buffer against this pressure, we believe industry benefits from dynamics that will support miles driven growth over the long term, as we still see the potential in incremental miles from post-pandemic return to work, coupled with consumers' willingness to move further away from urban centers and utilize their vehicles to satisfy pent-up demand for personal travel.
Finally, while miles driven is an important factor for our industry, we have proven that during previous periods when miles drivens have flattened that we have the ability as a Company to drive top line growth as consumers prioritize the care and maintenance of their vehicles. The broader outlook for our industry is important in how we think about the prospects for future growth, but far more important is the opportunity we have to outperform the industry to drive outstanding financial results. We have the best team of professional parts people in the industry and we are very confident that we are well positioned to deliver excellent customer service and increase our market share in any market condition.
While we remain very positive on the prospects of our industry and our business, we are also cautious in our assessment of the pressures from high fuel prices and broad-based inflation that impacted our second quarter performance and the potential for continued pressure as we move through the balance of 2022. As a result, we have incorporated our year-to-date performance and expectations for the remainder of the year and our updated comparable sales guidance range of 3% to 5%. Ultimately, we'll have to see how the rest of the year plays out and we continue to be encouraged by the resilience of our business, but feel the prudent step is to adjust our expectations at this time. At the midpoint, our revised comparable store sales guidance range reflects solid growth over 2021 and a three-year stack increase of 28%, and we still view this as a very favorable outlook, reflecting our ability to outperform the market and gain share.
Before I move on from sales, I will note that we are pleased with our performance thus far in July. We've seen some improvement in July sales volume trends relative to our expectations, partially driven by the extreme heat we're seeing across many of our markets right now. We still have a lot of summer remaining, and ultimately, we'll have to see how the weather plays out for the rest of the year. As such, our guidance forecast assumes a normal weather backdrop for the remainder of the year, in line with our customary practice.
Moving on to gross margin. For the second quarter, our gross margin of 51.3% was a 136 basis point decrease from the second quarter of 2021 gross margin. This is in line with our expectations with a couple of key points I want to highlight. Our year-over-year gross margin is impacted primarily by the rollout of our professional pricing initiative as well as pressures from a reduced LIFO benefit and higher mix of professional business. As we discussed on last quarter's call, we rolled out our initiative in February and only saw a partial impact to gross margin rate in that quarter. Our second quarter gross margin reflects a full quarter impact from the initiative and is in line with our expectations. We are maintaining our full year gross margin range of 50.8% to 51.3%, with the expectation that gross margin in the back half of the year as compared to 2021 will be slightly below where we have run year-to-date based upon mix differences and timing of the reduced LIFO benefit.
Before handing the call off to Brad, I want to update our full year diluted earnings per share expectations. Based on the adjustment to our comparable store sales guidance, we are lowering our full year earnings per share guidance to $31.25 to $31.75. At the midpoint, this range now represents an increase of 1% compared to 2021 and a three-year compounded annual growth rate of 21%.
To wrap up my comments, I want to again thank Team O'Reilly for their continued dedication to consistently providing excellent customer service. It's your commitment to our culture, fellow team members and customers that drives our success.
I'll now turn the call over to Brad Beckham. Brad?
