O'Reilly Automotive reports 5.6% sales growth, updates EPS guidance to $2.90-$3.00, navigating inflationary pressures and pro business strength.

OPERATOR - (00:00:00)

In the Private Securities Litigation Reform act of 1995. 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 due to several important factors described in the Company's latest Annual Report on Form 10-K for the year ended December 31, 2024 and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time I would like to introduce Brad Beckham.

Brad Beckham - (00:00:40)

Thanks, Jeremy. Good morning everyone and welcome to the O'Reilly Automotive third quarter conference call. Participating on the call with me this morning are Brent Kirby, our President, and Jeremy Fletcher, our Chief Financial Officer Greg Hensley, our Executive Chairman and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'll begin our call today by expressing my appreciation to more than 93,000 team members across all of North America for the hard work they put in to deliver the third quarter results we released yesterday. O'Reilly Automotive continues to win in each of our markets and our team's dedication to excellent customer service drove the solid comparablearable store sales increase of 5.6% we generated in the third quarter. This performance was at the high end of our expectations and we are pleased with the momentum our teams have been able to sustain on both sides of our business. The combination of our strong sales results with a 9% increase in operating income and a 12% increase in diluted earnings per share demonstrate our team's focus on driving profitable growth. Thank you team O'Reilly for your commitment to our culture and absolute dedication to taking care of our customers. Now I'll walk through the details of our comparablearable store sales performance for the third quarter. Our professional business continues to be the more significant driver of our sales results with an increase in comparablearable store sales of just over 10%. We continue to be pleased with the strength in our pro ticket count growth which was the primary driver of our professional comparable increase and the biggest contributor to our outperformance relative to our expectations. We also saw increased benefit in the quarter from average ticket on both sides of our business that I will detail in a minute. We remain confident that the professional sales growth our teams are delivering is the result of share gains as we continue to be the supplier of choice for our professional customers. Our share gains have been broad based with strong contributions from all of our market areas. The strength of our professional business is anchored in the valuable relationship we have developed with our customers who value the end to end partnership our team is able to provide to their business through service availability and business tools that help them be a service provider of choice to their customers. We were also pleased to deliver DIY comparablearable store sales growth with this side of our business finishing the quarter with a low single digit comparable driven by average ticket benefits partially offset by pressure to ticket counts. Our DIY business was in line with our expectations in July after having experienced pressure in June as we exited the second quarter, we began to encounter modest pressure to DIY transaction counts midway through the third quarter, which we believe reflects some degree of initial short term reaction by DIY consumers in response to rising price levels. The contribution to same stock-keeping unit (SKU) inflation during the third quarter which was felt evenly on both sides of the business was just over 4%. As we've anticipated coming into the third quarter, we saw a significant ramp in tariff driven acquisition cost increases and made appropriate adjustments to selling prices on a category basis. The pressure to our DIY business as we move through the quarter was primarily felt in some categories where we could be seeing some deferral in larger ticket jobs. However, we continue to see strength broadly in other DIY maintenance categories including oil filters and fluids that have continued the outperformance we have seen throughout the year. We want to emphasize that we are still in the early stages of the consumer response to the ramp up in price levels. It can be difficult to parse too finely the initial response from our DIY customers, but the pressure we have seen thus far is modest and in line with consumer reactions to economic shocks we have seen in the past. As we've noted the last several quarters, we remain cautious in our outlook on the consumer and expect that we could continue to see a conservative stance from consumers and how they manage spending in this environment. However, even in this environment our DIY consumers are still showing a willingness to invest in and maintain their vehicles and we believe any potential deferral pressure will be short term. When looking at category dynamics on the professional side of our business, we are seeing very strong performance across both failure and maintenance related categories and are pleased with the resiliency of of customer demand. The customers taking their vehicle to a professional shop for their repair and maintenance work tends to be less economically constrained than our average DIY customer and less reactive to inflationary pressures on spend in a large, largely non discretionary category of their wallet. Looking at the cadence of our sales results, in total for the quarter we generated consistently strong comparablearable store sales growth as we move through the quarter with positive comparables on both sides of our business in each month. We would characterize weather as neutral on balance for the quarter as we experienced normalized summer weather across most of our market areas. Now I'd like to provide some color on our updated full year comparablearable store sales guidance. As noted in yesterday's press release, we updated our guidance from the previous range of 3 to 4.5% to a range of 4 to 5% at the midpoint of our full year. Range reflects our outlook when factoring in current sales volumes. As we progress through September and thus far into October, we have incorporated into our guidance range the current pricing environment. While the broader tariff landscape has the potential to remain fluid at this stage, we believe we have seen the lion's share of the cost impacts we are expecting as they relate to the tariffs currently in effect. As a result, we anticipate a mid single digit same stock-keeping unit (SKU) benefit in the fourth quarter, but have also factored into our guidance a Continuation of the Pressure to our DIY customers From the dynamics I mentioned earlier, our industry has continued to behave rationally in response to the pressure tariffs have placed on product acquisition costs and we continue to monitor industry pricing adjustments to ensure we are comparableetitively priced for the value proposition we provide. Our industry backdrop remains or continues to be both stable and supportive. We believe the dynamics of the consumer uncertainty and continued pressure to the DIY business are being felt industry wide. Most importantly, we believe our teams are winning share on both sides of the business against the current macroeconomic backdrop. In times when spending decisions become more difficult for our customers, having our excellent customer service, superior product availability and professional parts people to guide them becomes an even more important piece of the value we deliver. Before I turn the call over to Brent, I would like to highlight our updated diluted earnings per share guidance. As noted in our press release, we have updated our earnings per share guidance to a range of $2.90 and to $3. This incorporates our year to date performance, the revised sales outlook and our expectations for gross margin and SGA for the fourth quarter which Brent will discuss next at the midpoint. Our current earnings per share guidance is an increase of approximately 2% from the midpoint of our previous guidance and a year over year increase of 9%. We are pleased that the team has been able to deliver both strong sales and earnings growth even in a rapidly changing of economic uncertainty. As I wrap up my prepared comments, I would like to once again thank O'Reilly Automotive for their strong performance in the third quarter. Now I'll turn the call over to Brent.

Brent Kirby - President - (00:09:15)

Thanks, Brad. I would like to start by thanking Team O'Reilly for their outstanding work during the quarter. Our team continues to outperform and remain steadfast in their focus on our culture and our customers to drive our success today, I will start by discussing our third quarter gross margin and SG&A results as well as provide an update on capital expansion and our updated outlook on these items. Starting with gross margin for the third quarter, our gross margin of 51.9% was up 27 basis points from the third quarter of 2024 and in line with our expectations, our team was able to offset the gross margin headwind resulting from our customer mix from faster growth on the professional side of the business with prudent supply chain management and solid distribution productivity. While the third quarter gross margin rate was above our full year gross margin guidance range, we expected a higher gross margin rate in the third quarter as compared to the rest of the year, which is typical for the seasonal composition of our product mix. And consistent with our results in 2024, we are maintaining our full year gross margin guidance range of 51.2 to 51.7% and expect to see a similar progression of gross margin rate from the third to fourth quarter as we experienced last year. Our supply chain teams continue to work diligently both internally and with our supplier partners to navigate the evolving tariff environment. Our ability to maintain consistent gross margins with the amount of change we have faced during the year is a true testament to their hard work and dedication. As expected, we realized significant acquisition cost pressure from tariffs in the quarter, the impact from product cost inflation in the quarter closely mirrored in timing the adjustments we made in pricing. As Brad mentioned earlier, we have now seen the biggest impacts from the current tariff environment and our guidance for sales and gross margin does not contemplate substantial impacts from further tariffs and beyond what is reflected in our product acquisition costs today. However, to the extent any future tariff revisions result in further acquisition cost increases, we will prudently navigate those in the same way that we have done today. As the tariff landscape and cost environment has evolved in 2025, we have maintained a close eye on the pricing environment within our industry to ensure that we are making the appropriate adjustments and and remaining competitive. Against this volatile backdrop, our goal remains the same to provide the exceptional service and industry leading availability our customers know and expect from O'Reilly Auto Parts to continue to earn their business. Overall, we believe our supply chain is at its healthiest point since we emerged from the pandemic. With the support of a strong supplier community, we have sustained robust in stock availability across our tiered distribution network. This strong distribution infrastructure is the foundation for our industry leading inventory availability and a critical factor in how we serve our customers and earn additional share. Our merchandising teams work diligently to maintain our diversified supplier base in order to actively manage exposure and risk on numerous fronts. This risk can range from country of origin to diversification of supply within a single product category. Supplier health and supplier performance can often go hand in hand, so an important part of our risk management process is monitoring our supplier partner health from all angles ranging from shipping performance, product quality, catalog support, all the way to financial stability. While these processes always involve some level of effort to mitigate risk in a small subset of our supplier base, we would again reiterate that we are pleased with the collective health of our supplier partners. Our goal is always to foster supplier partnerships that are both long standing and deep as we repeatedly earn our status as the desired priority customer for each of our suppliers. Now I'd like to turn to SG&A and give some color on the quarter. Our SG&A per store growth of 4% was at the top end of our expectations for the quarter. Driving this spend were expenses related to our strong sales performance coupled with continued inflationary pressures in our cost structure, again centered around medical and casualty insurance programs. Based on our third quarter results and outlook for the remainder of the year, we expect our SG&A per store growth to come in at or slightly above the top end of our full year guidelines of 3.5%. We have factored in our updated expectations for comp sales and corresponding incremental SG and A dollars into our guide and we have been pleased with our teams are managing expenses while driving sales volumes above expectations. As a reminder, our fourth quarter SG and A per store growth is expected to be below the full year run rate as a result of comparing against the charge we took in the fourth quarter of 2024 to adjust reserves for self insurance liability for historic auto liability claims. Based on our SG&A expectations and projected gross margin range, we continue to expect our full year operating margin to come within our guidance range of 19.2 to 19.7%. As always, our top objective in managing our expense structure is ensuring that we are meeting our high standard customer service by supporting our team of experienced professional parts people. Turning to an update on our expansion, we opened 55 net new stores across the U.S. and Mexico during the third quarter bringing our year to date store opening to 160 stores. We are on track to achieve our 2025 new store opening target of 200 to 210 net new stores by year end and we continue to be pleased with the performance of our new stores. New store growth remains an attractive use of capital for us and we see ample growth opportunities spread across all of our North American footprint. In this regard, we are pleased to announce our 2026 store opening target of 225 to 235 net new stores. Just as our 2025 growth has been spread across 37 US states, Puerto Rico and Mexico, we anticipate growth in all of those markets as well as in Canada in 2026. Our store growth in 2026 will continue to be concentrated in the U.S. markets, but we will also continue our measured growth within our international markets as we work to develop the teams and infrastructure to support our O'Reilly operating model. Our tiered distribution network continues to help drive our stores competitive advantage in parts availability and we are pleased to begin servicing stores out of our new Stafford, Virginia distribution center in the fourth quarter of this year. I would like to express my gratitude to our distribution and supply chain teams for all the hard work that has gone into this state of the art new greenfield distribution center. The Mid-Atlantic Market this distribution center will be an important stepping stone for us to begin adding store count within heavily populated and untapped markets for us in the Mid-Atlantic I-95 corridor. As excited as we are about this new facility, there is no pause for our dedicated supply chain teams as we are full steam ahead with distribution growth and progress at our upcoming Fort Worth, Texas facility as well as future opportunities that will further support our store growth and inventory availability. Capital expenditures supporting Both store and DC growth for the first nine months of 2025 were $900 million and are slightly below our expectations. Based on our year to date spend and fourth quarter outlook, we are reducing our full year capital expenditure guidance by $100 million to a range of 1.1 to $1.2 billion. This reduction is primarily the result of timing of spend on store and distribution center growth projects that we now expect to incur in 2026. As I close my comments, I want to once again thank Team O'Reilly for their hard work in driving our company's success. Your commitment to providing consistent, excellent service to all of our customers and is the foundation for our long term growth. Now I will turn the call over to Jeremy. Thanks Brent.

Jeremy Fletcher - Chief Financial Officer - (00:18:17)

I would also like to begin today by thanking Team O'Reilly for another successful quarter. Now we will take a closer look at our third quarter results and update our guidance for the remainder of 2025. For the third quarter, sales increased $341 million driven by a 5.6% increase in comparable store sales and a $101 million non comp contribution from stores opened in 2024 and 2025 that have not yet entered the comparable base. For 2025. We now expect our total revenues to be between 17.6 and $17.8 billion. Our third quarter effective tax rate was 21.4% of pre tax income comprised of a base rate of 22.2% reduced by a 0.8% benefit for share based compensation. This compares to the third quarter of 2024 rate of 21.5% of pre tax income which was comprised of a base tax rate of 23% reduced by a 1.5% benefit for share based compensation. As we noted in our press release, during the third quarter we accelerated the payment timing of transferable renewable energy tax credits that were originally planned to settle in 2026. Our full year income tax rate guidance has been revised to reflect the incremental benefits we expect from the accelerated payment. Accordingly, for the full year of 2025 we now expect an effective tax rate of 21.6% versus our prior expectation of 22.3%. The updated tax rate guidance includes an anticipated benefit of 1% for share based compensation. We expect the fourth quarter rate to be lower than the first nine months of the year due to the totaling of certain open tax periods. Also, variations in the tax benefit from share based compensation can create fluctuations in our quarterly rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first nine months of 2025 was $1.2 billion versus $1.7 billion for the same period in 2024. The reduction in free cash flow was primarily the result of the accelerated timing of payment for renewable energy tax credits that I previously mentioned. For the full year 2025, we have updated our expected free cash flow guidance to a range of 1.5 to $1.8 billion down from our previous range of 1.6 to 1.9 billion. This adjustment reflects the headwind from the accelerated tax payment timing partially offset by the reduction in our capital expenditures guidance Brent discussed in his prepared remarks. Inventory per store finished the quarter at $858,000 which was up 10% from this time last year and up 7% from the end of 2024. Our inventory investments continue to generate strong returns and we have been pleased with the overall in stock positions of our store and distribution network. We have executed our inventory growth strategy in 2025 at a faster pace than our initial expectations and could see elevated inventory balances above our original 5% per store plan. As we finish out the year, we continue to manage the timing of inventory enhancements to capitalize on current opportunities we see to drive our business and are pleased with the productivity of these investments. This incremental inventory investment has been more than offset by our accounts payable to inventory ratio. We finished the third quarter at 126%, which was down from 128% at the end of 2024 but above our expectations. Moving on to debt, we finished the third quarter with an adjusted debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 2.04 times as compared to our end of 2024 ratio of 1.99 times. With an increase in adjusted debt partially offset by EBITDA growth, we continue to be below our leverage target of 2.5 times and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program and during the third quarter we repurchased 4.3 million shares at an average share price of $98.08 for a total investment of $420 million. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business and we continue.