Operator:

Welcome to the O'Reilly Automotive, Inc. Second Quarter 2024 Earnings Call. My name is Holly, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Brad Beckham:

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 Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer; Greg Henslee, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'd like to begin my comments today by thanking our team of over 91,000 hard-working professional parts people across North America for their continued dedication to our customers during a challenging second quarter. As we will discuss during our call today, our second quarter results were below our expectations as we faced broader headwinds to demand in our industry. However, we are pleased with the job our teams did to uphold our commitment to providing top-notch customer service to our customers on both sides of our business. Despite a sales performance that fell short of what we have come to expect, we continue to outperform the industry. This is the direct result of our team maintaining a high level of attention to detail and doubling down on their efforts to provide even better service to our customers. We finished the second quarter with a 2.3% comparable store sales increase on top of a 9% in the prior year. The pressure to topline sales also negatively impacted our operating profit and earnings per share results and we have revised our full-year outlook for these metrics as outlined in our press release last night. Though our results were below our expectations for the quarter, we were still able to generate increased operating profit and EPS on top of several years of robust growth. We now expect our full-year EPS to come in within a range of $40.75 to $41.25 with the adjustments reflecting our results in the second quarter and revised full-year comparable store sales and operational outlook. At the midpoint of our updated range, our guidance represents a forecasted 7% increase in full-year EPS, which matches our EPS growth in the first half of 2024. Our ability to generate solid EPS growth in a challenging macro environment, especially in light of the comparison to the 15% growth we delivered in 2023 is a testament to the continued strong execution by Team O'Reilly. Now I'd like to dig in further to our results in the second quarter by walking through the details of our sales performance, starting with our cadence of sales in the quarter. As we discussed on our last call, our quarter started off with sluggish results in April as we faced headwinds from cool wet weather during the spring selling season. The softness in our business persisted into May, which we believe reflected broad-based pressure throughout the industry. As we entered June, we saw improved trends driven by strong performance in hot weather-related categories. On a week-to-week basis relative to our original guidance expectations, June represented the strongest performance for our quarter. So far in July, sales trends have remained solid with weather benefit we saw in June, moderating somewhat as we compare to similar favorable hot weather in July of last year. Our comparable store sales growth in the second quarter was driven by continued strength in our professional business, where we delivered yet another quarter of mid-single-digit comps. While increases in average ticket values were positive contributors to comps on both sides of our business, the majority of our professional sales growth was fueled by robust growth in ticket counts. Our results in the second quarter came on top of prior year comparisons to mid-teens professional comps in 2023, and we attribute our robust two-year stack performance to our industry-leading customer service and inventory availability. We continue to be excited by our team's ability to leverage the momentum we created in our professional business, and we remain bullish on our prospects to compound our share growth in what remains a highly fragmented professional market. The strength in our professional business was partially offset by headwinds in DIY comparable store sales, which were down just shy of 1% for the quarter from pressure on ticket counts. Average ticket values on both sides of our business benefited from modest same-SKU inflation of less than 1%. From a category perspective, our results for the quarter were highlighted by the strong performance in hot weather categories, including batteries and HVAC as well as solid performance in maintenance categories like brakes, oil changes and spark plugs, which we believe reflects the ongoing priority our customers are placing on keeping their vehicles on the road and running well. The sales softness we experienced in the quarter was more pronounced in the discretionary appearance and accessory categories. These categories comprise of a small percentage of our business and typically are not primary drivers of our comparable store sales results. However, demand for these products is more susceptible to volatility in periods where consumers are pressured and that dynamic contributed to our sales shortfall in the second quarter. We also saw some sluggishness on both sides of our business in certain undercar hard part categories, which performed below the company average. These types of repair parts are impacted by cumulative wear and tear and have been key contributors to our professional sales growth and share gains over the past two years. While we still believe we are performing well in these categories relative to the industry, our results in the second quarter maybe indicative of temporary pressure across the broader industry. Against this backdrop of mixed results in our business for the first half of 2024, we continue to have confidence in the long-term fundamental drivers of demand for our industry, but also remain cautious about the current market environment. We still view the average consumer as relatively healthy with strong employment and wage rates underpinning the ability of our customers to invest in the repair and maintenance of their vehicles. However, we also believe we are seeing some level of conservatism in how consumers are managing their spend as they face the cumulative impact of elevated price levels and uncertainty about the broader macroeconomic conditions. Historically, more challenging periods in our industry are characterized by this type of short-term adjustment on the part of economically constrained DIY consumers. That said, we are cognizant of the potential that demand could be impacted during the back half of the year if this economic uncertainty persists, particularly during an election year. Given this outlook and the trends we have seen in the first half of 2024, we are lowering our full-year comparable store sales guidance to 2% to 4%, which reflects both our second quarter results and our updated expectations for the third and fourth quarter. We believe the pressure that our industry is experiencing will prove to be a short-term headwind. Our experience through multiple similar cycles in our company's history gives us confidence that the core drivers of demand for the automotive aftermarket remain very solid. The size and growth of the car park in North America coupled with the quality of vehicles and a continually rising average vehicle age drive resilient demand in our industry. We expect to see continued steady growth in total miles driven, underpinned by population growth and the critical nature of the daily transportation needs of vehicle owners. We also believe that the value proposition for continued investment in an existing vehicle has never been higher and that consumers will continue to prioritize funding the cost of repair and maintenance of older, higher mileage vehicles. Ultimately, the macroeconomic conditions we face do not affect our company's philosophy for how we execute our business model. We have instilled an ownership mentality throughout our organization. Our run it like you own it philosophy does not accept external pressures as an excuse when there is still market share to gain in every local market, simply by outhustling and outservicing our competition. Even though we believe we gained market share in the first half of 2024 in a tough environment, I can guarantee that none of our teams in our stores, distribution centers and offices are satisfied with a 2.8% year-to-date comparable store sales increase. Our teams are committed to putting in the work, it takes to win every day in every one of our markets and remain hungry to achieve performance that matches the high bar we have set as a company. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for your commitment to our customers, our company and to your fellow team members. Now I'll turn the call over to Brent.

Jeremy Fletcher:

Thanks, Brent. I would also like to add my thanks to all of Team O'Reilly for their continued dedication to our company's long-term success. Now we will cover some additional details on our second quarter results and outlook for the remainder of 2024. For the quarter, sales increased $203 million, driven by a 2.3% increase in comparable store sales and a $70 million non-comp contribution from stores opened in 2023 and 2024 that have not yet entered the comp base. For 2024, we now expect our total revenues to be between $16.6 billion and $16.9 billion. Our second quarter effective tax rate was 23.3% of pretax income, comprised of a base rate of 23.9% reduced by a 0.6% benefit for share-based compensation. This compares to the second quarter of 2023 rate of 22.5% of pretax income, which was comprised of a base tax rate of 24.3% reduced by a 1.8% benefit for share-based compensation. For the full-year of 2024, we continue to expect an effective tax rate of 22.4% comprised of a base rate of 23.2%, reduced by a benefit of 0.8% for share-based compensation. We expect the fourth quarter rate to be lower than the other three quarters due to the totaling of certain tax periods and variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the six months of 2024 was $1.2 billion, in line with the first half of 2023, with growth in income offset by a lower benefit from a reduction in net inventory this year versus 2023. For 2024, our expected free cash flow guidance remains unchanged at a range of $1.8 billion to $2.1 billion. Our AP as a percentage of inventory finished the second quarter at 130%, down from 131% at the end of 2023. This ratio was slightly above our expectations, driven by the timing of inventory investments in the first half of the year. We continue to expect to see moderation in our AP to inventory percentage in the back half of 2024 and expect to finish the year at a ratio of approximately 127%. Moving on to debt. We finished the second quarter with an adjusted debt-to-EBITDAR ratio of 1.97x as compared to our end of 2023 ratio of 2.03x, with the decrease driven by a reduction in borrowings under our commercial paper program. We continue to be below our leverage target of 2.5x 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 second quarter, we repurchased 784,000 shares at an average price of $1,012 for a total investment of $794 million. Year-to-date through our press release yesterday, we repurchased 1.3 million shares at an average share price of $1,020 for a total investment of $1.3 billion. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance Brad outlined earlier, includes the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I close my comments today, I have one final item to cover as it relates to our Investor Relations function at O'Reilly and the change we will be making to our team. After more than 15 years as our Head of IR, Mark Merz will be transitioning into another key role with our company. Many of you who have interacted with Mark closely over the years understand that in addition to his duties managing our investor engagement and communications, Mark is also a senior leader in our finance team and a key partner to business leaders across our company. Beginning in a few months, Mark will be leveraging that deep experience and knowledge of our business as he takes on a new role as an in-country leader in our Mexican operation. As we continue to grow our business in Mexico, we have an opportunity to build on a strong foundation for success and growth in what we believe will be a large and important market for our company. In this new position, Mark will be taking on a key senior leadership role, working in tandem with our growing leadership team in Mexico. We plan to make this transition at the end of our third quarter, so Mark will continue to serve in his current role and be available to answer your questions about our business and second quarter results. During that process, he will also be managing the handoff of our primary Investor Relations contact function to Leslie Skorick. Leslie is a tenured O'Reilly team member with over nine years of experience with our company and currently heads up our tax function as Senior Director of Tax, but will now be adding Investor Relations to her duties. Mark and Leslie will be managing this hand off over the next couple of months, including the opportunity for you to meet Leslie at our upcoming Analyst Day in August in Chicago. In addition, many of you have interacted with Eric Bird, another senior leader on our finance team, and he will continue to serve in his same role as an additional point of contact to support engagement with our investor community. This concludes our prepared comments. At this time, I would like to ask Holly the operator, to return to the line, and we will be happy to answer your questions.

Scot Ciccarelli:

Good morning, guys, Scot Ciccarelli. Two quickies.

Scot Ciccarelli:

Hi. You talked about softness in your discretionary goods. Can you provide more color on what percent of mix you consider discretionary and how negative those sales were down mid-single digits high single digits, low double digits, et cetera? And then secondly, I may have missed it or misunderstood it, but I thought you said you expect Canada to be more dilutive to gross margins than originally expected. But that you're maintaining your full-year gross margin guide. Can you just help reconcile that? Thank you.

Scot Ciccarelli:

Understood. Thank you.

Brad Beckham:

Thanks, Scot.

Gregory Melich:

Hi, thanks. I wanted to follow up on the July trends. I think you guys said it was – remained solid, but it sounds like it might have been not as good as June. Would that be fair?

Jeremy Fletcher:

The other thing to keep in mind there, too, Greg, is that the timing of the weather benefit that we've seen so far this year compared to prior year saw really a shift in the second quarter. We're probably up against some of our more challenging comparisons in all of the back half here as we work through July because that's when – if you remember, in 2023, we saw the hot weather come on and the benefits you got. And it's always a challenge. We're always reluctant to try to draw in too many conclusions and extrapolate off of a two, three year period when that hot weather, it just impacts in a different way over years as it comes in. To Brad's point, we feel confident in what we think the read is just broadly across our business outside of some of these fluctuations, and that's really what's informed how we think about the back half of the year, not just kind of a short look at a week or two.

Brad Beckham:

Yes. Hey, Greg. This is Brad again. Great question. We called that out. When we look at our business really on both sides of the business, but we look at professional, especially these last two or three years, we have really taken a lot of share. When we look at the data we look at from a share perspective and those undercar, underhood, but specifically undercar hard part category lines, we're going up against some unbelievable compares and then you start to think about maybe a little bit of a mild winter in the last couple of years and you look at those categories. I think what we're seeing is, to answer your question directly, is some deferral. So I think there is some deferral with those high ticket service items on both sides of the business, but especially in the repair shops. What we're still not seeing, Greg, and Brent may want to help me here, what we're still not seeing is the trade down that you asked about, a little bit of deferral but not trade down our line design.

Brad Beckham:

And Greg, I may just one more thing, cap that. And just back to the root of your question, on the some pressure we've seen on the undercar categories. We still feel good about our share and our share gains when we look at the data we look at.

Brad Beckham:

Thanks, Greg.

Michael Lasser:

Good morning. Thank you so much for taking my question. Congratulations, Mark Merz. Do you think another round of either price or expense investment is necessary in order to maintain or perhaps even accelerate your market share gaining from here, especially if the industry goes through a period of protracted softness as we've seen in the last couple of quarters? Thank you.

Michael Lasser:

Okay. My follow-up question is what do you think the catalyst is to accelerate growth across the industry? Is it just getting into the fourth quarter with comparisons to ease and then put the – the calendar to get in the next year? And if this period of softness persists into next year as the industry gives back some of the gains in the last few years. What's the minimum level of growth in SG&A per store that O'Reilly can manage through just so we can probably calibrate our model? Thank you.

Jeremy Fletcher:

Yes. Maybe, Mike, just to add a little bit to also what Brad said. If we think about just the broader dynamics in the industry, we've seen periods of time like this in the past before. But we have a lot of conviction around the long-term strength, the core fundamentals that drive our business and having been through many of these cycles, we know that our industry is very much supported by the ability to support a consumer that's economically constrained and give them an option to conserve part of their monthly budget that needs to go into other areas because they can keep their cars on the road. The question around what the right SG&A spend is or where we leverage. It's always a challenging one for us to answer. We don't put a fine point on it because it depends on the markets and the circumstances we're in, what broader level of inflation looks like overall – obviously, we don't – we don't provide that long-term outlook or guide into 2025 versus where we're at today. I think what's more important for us is what – what Brent touched on in his prepared comments and that we've got a team that very effectively manages how we think about the cadence and pace of the business and appropriately dialing in our operations to address the business when it gets a little bit soft, but to do so in a way that does not sacrifice really the value proposition, the relationships, the service that were the needs that the consumer do not change in these type of environments. So we're always going to be able to balance that well while you're making sure that we're investing in the long-term for our business. And feel – and feel confident that whether that we're in a higher inflation environment, lower inflation, whatever that might look like that we can manage well the productivity of our spend to support our results.

Brad Beckham:

Thanks.

Operator:

The next question for today is from Steven Forbes with Guggenheim Securities.

Jeremy Fletcher:

Good morning, Steve.

Brad Beckham:

Yes. No. Thanks, Steven. I'll say a few things and let Brent jump in. But no, nothing has changed on the store front – on the store growth front in the U.S. or Mexico or Canada. We still feel really good about the pace of our new store openings. First half of the year has gone really well. Still feel good about the back half. So nothing out there to slow us down or speed us up necessarily. We really still feel like we have the right number in terms of store openings domestically and internationally and feel good about how we're going to end the year.

Steven Forbes:

And then maybe just a quick follow-up to Michael's question, maybe asked a different way. We think about how the employee mix has shifted sort of full-time versus part-time over the past few years. And would it help us frame up, right, sort of what that has done to the fixed versus variable cost structure of the business, right, as we potentially may be entering a period of more moderate growth sort of another way of asking Michael's question, but it does appear right that there could be some pressure on expenses. And so any way to sort of frame of how we think about the fixed cost structure versus variable cost structure of the business.

Brad Beckham:

Yes. And maybe, Steven, just to build on what Jeremy said or maybe just to put a point on it is that we feel really good about the work that Jason Tarrant and our store operations leaders have done as we came out of COVID, and we kind of drew a lot in the sand as we increase that full-time mix as well as just made our retention and even higher focus. It's always been a huge focus at O'Reilly. You can't have professional parts people if you have turnover on the counter. It just doesn't work. And so we feel really good about those investments we made in not only full time, but all our initiatives come out of COVID, the slow down that store turnover. And we've made a lot of progress. We feel really good about the progress. We feel like it's paying off in productivity, customer service levels and the stability of our business. Still work to be done. It's an ongoing thing to continue to work on that retention. But really feel good about those investments and the work that the store operations teams have done.

Brad Beckham:

Thanks, Steven.

Christopher Horvers:

Thanks. Good morning, guys. So my first question is maybe turn the industry growth question around a little bit. Do you think that weather was a net benefit or a net headwind to the category and your growth in the second quarter here? Because I know June got a weather benefit, but you had a pretty late spring in the north. So as you're trying to disaggregate the underlying trend of the business, how do you think about the influence of weather? And then related to that, as you saw about July's solid performance, are you also seeing that on the DIY side of the business being better than what you experienced in the second quarter?

Christopher Horvers:

And then on the DIY into July versus what you experienced in the second quarter?

Christopher Horvers:

Got it. And then following up on an earlier gross margin question. So just to clarify, did 2Q benefit from lower product acquisition costs like – and I guess, how – if it didn't, it sounds like you're expecting that to happen in the back half of the year. So is there some sort of accounting like waiting for the inventory turn? Like, was there anything unique in the second quarter on that side that turns that to a benefit as the year progresses?

Jeremy Fletcher:

Yes. And Chris, there's nothing unique from an accounting perspective. There was a net benefit in the second quarter. We just think incrementally to Brent's point, we can add to that as we move through the back half of the year.

Jeremy Fletcher:

Yes. I mean, we feel comfortable with where our guide is at and obviously, what that implies for the back half of the year.

Jeremy Fletcher:

Thank you, Chris.

Brian Nagel:

Hi. Thanks for slipping me in here. So some shorter-term question, so I apologize, but maybe just a follow-up in on Chris' question as well. But can you help us understand better? You talked about the business solidifying or strengthening in June. How much stronger June was than the prior two months in the quarter? And then my second question, with the moderation of the guidance, because that reflects primarily the weakness in the first half of the year? Or you're actually also moderating expectations for the second half of the year?

Brian Nagel:

Okay. That's helpful. I appreciate it. Thank you.

Brent Kirby:

Thanks, Brian.

Brad Beckham:

Thank you, Holly. We would like to conclude our call today by thanking the entire O'Reilly team for your continued hard work and dedication to our customers in the second quarter. I would like to thank everyone for joining our call today, and we look forward to reporting our third quarter results in October. Thank you.

Operator:

Welcome to the O'Reilly Automotive, Inc. First Quarter 2024 Earnings Call. My name is Matthew, and I'll be your operator for today's call. [Operator Instructions]

Jeremy Fletcher:

Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our first quarter 2024 results and our outlook for the remainder of the year. After our prepared comments, we will host a question-and-answer period.

Jeremy Fletcher:

Thanks, Brent. I would also like to congratulate Team O'Reilly on a solid start to the year. Now we will fill in some additional details on our first quarter results and outlook for the remainder of 2024.

Operator:

[Operator Instructions] The first question comes from Chris Horvers from JPMorgan.

Brad Beckham:

Chris, thanks for the question. Well, there was a lot of moving pieces in the quarter really directly to your question there. And really, what we saw just kind of walking through the quarter again is January, we were really pleased with January. And in a lot of the markets, you're really true winter markets where harsh weather really drives that demand, we felt like that really exactly played out that way in January.

Christopher Horvers:

So does the -- I guess, in markets that where you've seen spring break, have the comps been consistent with the 3% to 5% outlook for the quarters in the year?

Christopher Horvers:

Understood. And I know you mentioned that you're seeing -- as a follow-up question, I know that you mentioned that you're seeing consumers trade up, haven't seen trade down. And I also understand that you have a low mix exposure to national accounts. And even within that, you're not selling to the A and B SKUs like brake pads or something like that. But in that channel or any other parts of the business, are you seeing any evidence of deferral of some bigger ticket type repairs or even oil change or anything else?

Operator:

Your next question is coming from Seth Basham from Wedbush Securities.

Brent Kirby:

Yes. Seth, this is Brent. I'll start and then Jeremy can jump in, I'm sure on some of that on the back end of it. But yes, as I talked about in the script, biggest driver of our SG&A per store really is our store payroll. And our teams have been very focused on balancing that with the demand and the opportunity that they see in their markets, and they manage through a period in Q1 where we did have some of that choppiness that we've talked about. But really proud of the job overall that the teams did there, and we're obviously approaching any kind of choppiness with an eye to expense control, but we do have some of that investment depreciation pressure that I mentioned in my script that we're going to see as we move through the year. That's why our plan was not a peanut butter spread on SG&A for this year. So -- and Jeremy, you may have a couple of other thoughts on that.

Jeremy Fletcher:

Yes. I can probably talk to that. And maybe the first caution that I would say is we're still within a relatively tight end of what we thought from expectations and I know Brad mentioned it within his response. The confidence that we feel is just from the broader mix of our business, the ability to see solid performance really across the core categories that we know are indicative of how the consumer is thinking about the backdrop has been good.

Operator:

Your next question is coming from Michael Lasser from UBS.

Brad Beckham:

Michael, thanks for the question. I don't see it that way. Number one, I've been in this business here at O'Reilly for 27 years this year and been through challenging years, been through great years and been through election years and years that we get off to a little bit of a choppy start, and I've learned every time not to necessarily overreact that we all -- we take any potential slowdown or anything like that very seriously. We want to make sure we control what we can control. But it's always hard for us to base exactly where the share gains are coming from and it's sure hard to base it here short term on just a competitor reporting or something like that. We don't spend a lot of time internally trying to dissect that. What we do internally here is, we focus on our revenue versus the $147 billion, we believe, is being sold in the United States, and that just gets even bigger. Obviously, now that we're expanding to the rest of North America.

Michael Lasser:

Got you. Brad, you mentioned that you did see a bit of a slowdown in March, and that's continued into the first part of the quarter. Can you provide some frame of reference for that? And what does the P&L look like? How is the sensitivity of the P&L? If this is just one of those years where it's a bit of a slower backdrop for the aftermarket and the ultimate comp ends up at the low end or maybe even slightly below your guidance?

Operator:

Your next question is coming from Greg Melich from Evercore ISI.

Brent Kirby:

Yes. Greg, this is Brent. I'll start and then let the other guys jump in. But in terms of the cost environment, as I mentioned in the script, we kind of saw what we'd expect some typical puts and takes on cost. But I mean, in terms of inflation and what's out there, I think we kind of guided and felt like going into this year is going to be around 1%. It's kind of what we saw in Q1, kind of what we anticipate for the rest of the year. So we don't really see that changing a whole lot. Now with that said, the good news is we continue to be able to diversify our supply chain. Our merchandise team has done a fantastic job with that.

Gregory Melich:

Great. And I'd love to just make sure I got the comp trend correct there. The traffic in the first quarter, was that positive or negative or kind of flat if you look at the whole quarter?

Jeremy Fletcher:

It was a contributor.

Jeremy Fletcher:

Yes. Yes. I would tell you the traffic even on the DIY side of the business was still positive for the quarter [indiscernible] that was pretty significantly impacted by the strength that we saw in January, which we've talked about that side of the business is more volatile around the refund and just the spring impacts. But yes, we were positive, both sides of -- in both traffic and ticket.

Jeremy Fletcher:

Yes. Again, volatility there, Greg, as we saw in the first quarter. Some of that is similar to what we've seen from an accessory perspective and oftentimes, those are the add-on type things that hit when somebody is coming in to change brakes or to do that type of oil change. Not having a perfect read on how tax refund money flows through, that can also affect size in certain instances. But a little bit choppy there to be able to draw any really strong conclusions. But for sure, some of the -- some of what we've seen is that number not being a contributor, a little bit of a headwind for us in the quarter.

Gregory Melich:

That's great color. And good luck guys, and we'll be praying for some sunshine.

Operator:

Your next question is coming from Simeon Gutman from Morgan Stanley.

Jeremy Fletcher:

Yes, Simeon, great question, really is. I would tell you, we're as confident in our read right now as we ever are after first quarter. Brad mentioned it within the context of his comments, we think it's appropriate to not overreact to the things that we see in first quarter. For certainly a couple of things we know, the range of our -- the band of our performance has still been relatively tight even though we've seen choppiness move throughout. So we're not seeing the types of serious fluctuations in our business that come on where you do see things like oil changes being pushed back or brakes moving around more significantly. What we are seeing is what we often will see from a variability in business around choppiness of tax refunds.

Brad Beckham:

Yes, Simeon, what I would say, it's a fair question. And I think maybe just on the tax refunds, for example, there's no doubt that the delay impact of this, to some degree, there in February. I think the reason that we want to just be cautious with how that will play out is just the fact that we are in election year. There's a lot going on in the world. We have this weather that no doubt has played in to some extent. But we also know that the reality is when people get their tax refunds, it's normally pretty clear when we get that and how much of it we get. But we know our lower-end consumer. They're spending money, first and foremost, on groceries, their homes, insurance rates personally, things like that, that are a pressure to them right now. And we just want to -- we want to balance that. We know that is some of it, but we also know this weather is some of it as well.

Simeon Gutman:

My follow-up, if you take the PPI initiative and you look at the products that were impacted where price was lowered, it looks like the payoff was especially strong last year to that -- maybe to that market share question. Is -- are you still seeing growth in those PPI products? And are there any opportunities as you look across your pricing and your catalog where there may be some price differences where you can take advantage of that again?

Brent Kirby:

And Simeon, maybe to just further add to what Brad said on that, on the professional side. I mean when you look at the -- by category, when you look at some of the categories, brakes, chassis, driveline, ride control, all the big category, a lot of big categories, dollar categories that we're not seeing that growth stagnate, which I think is kind of where your question is going [indiscernible] running out of gas in those categories. We're not seeing that. We're seeing continued growth even on top of big comparisons year-over-year.

Michael Baker:

Two quick ones. One, with April -- end of March, April being a little bit slower because of the weather, does that -- are those sales off? Or does that get made up if and when the weather turns better?

Brad Beckham:

Yes, Mike, there could be some of the discretionary. There could be some of the short-term stuff that could potentially be lost. But I think as we always say, and we still believe this as much as we ever have that the underlying drivers of our business are absolutely there. When you look at vehicle's miles driven, you look at all the things that we look at to drive our business, average age of vehicles, not only in the U.S. but in North America, we still feel really good that demand is going to continue to be there.

Michael Baker:

Perfect. That makes sense. The other question I want to ask is a much more bigger picture, longer term, have you ever -- or could you ever talk about what you see as the potential size of your business down in Mexico? I think you have about 63 stores according to the press release here. What can that be over time? One of your competitors, I think, as close to 1,000? Any thoughts on where Mexico could be for you longer term?

Brad Beckham:

Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your unwavering dedication to our customers and the outstanding results you produced in the first quarter. I would like to thank everyone for joining our call today, and we look forward to reporting our second quarter results in July. Thank you.

Operator:

Welcome to the O’Reilly Automotive, Inc. Fourth Quarter and Full Year 2023 Earnings Call. My name is Matthew and I will be your operator for today’s call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Brad Beckham:

Thanks, Jeremy. Good morning, everyone and welcome to the O’Reilly Auto Parts fourth quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman and David O’Reilly, our Executive Vice Chairman are also present on the call. I’d like to begin our call this morning by congratulating Team O’Reilly on another strong performance in the fourth quarter. Our team faced our toughest prior year comparisons where we generated 9% comparable store sales in the fourth quarter last year, which represented our strongest quarterly performance in 2022. Against this very high bar, our team was able to deliver a strong comparable store sales increase of 3.4% in the fourth quarter of 2023. This was a direct result of their unwavering commitment to providing excellent customer service everyday in each of our over 6,000 stores. For the full year of 2023, our team generated a robust 7.9% comparable store sales increase, which was at the high end of the revised guidance range we provided on last quarter’s call. This performance was also almost 2 full percentage points above the high-end of our original 2023 comp sales guidance range of 4% to 6%. We are extremely pleased with the ability of our team to deliver industry leading results again in 2023, especially since this performance was on top of the incredible sales growth in the preceding 3 years. These strong top line sales results drove another year of record-setting earnings per share as diluted EPS increased 15% to $38.47, representing continued strong value creation for our shareholders. As strong as this performance was in 2023, I again think it’s helpful to view these continued outstanding results in a longer term context. To give some perspective, just in the last 4 years, our company has more than doubled earnings per share with our 2023 EPS 115% above the $17.88 we generated in 2019. After such an amazing run of performance, it would have been far too easy for our team to accept the idea that we may be forced to give back some of our growth. Instead, they did just the opposite, as our business accelerated in 2023. I couldn’t be more proud of our Team’s relentless dedication to outperforming the competition by providing the best customer service in the industry. As you would expect, the incredible momentum we built in our business this year has generated a lot of excitement for our team and that excitement was on full display at our annual leadership conference held in Dallas just 2 weeks ago. Each year, we bring all of our store managers and field leadership, including our sales and distribution management teams, together in one place to build leadership skills, enhance product knowledge, share best practices across our company, celebrate award winning performances, and most importantly, set our focus on the year to come. Our conference theme this year was Leaders in Motion, which perfectly defines the focus and attitude of our team. It’s clear the energy created by winning with our customers and driving industry leading performance is infectious. And all of our leaders are passionate about taking the next step forward and seizing the opportunities in front of us. Now I’d like to take a few minutes and provide some color on our fourth quarter results. As we discussed on last quarter’s conference call, we started the fourth quarter with solid sales results in line with trends we saw as we exited the third quarter. As we progress throughout the quarter, our results remain relatively consistent on a volume – from a volume perspective with each month performing better than our guidance expectations. As we expected, our comparable store sales results on a year-over-year basis faced pressure in December against very challenging comparisons the last 2 years when we capitalized on favorable winter weather. So far this winter, we have seen typical variability in winter weather with more of the harsh conditions that support our business arriving in January versus December. However, we are very pleased with how we finished out 2023 with broad-based solid performance across our core non-weather-related categories. Our comparable store sales results were driven by strength on the professional side of our business where our team delivered yet another quarter of double-digit comp growth in the fourth quarter. Our professional performance was primarily driven by robust growth in ticket counts, and we continue to be pleased with our team’s ability to execute our proven business model at a high level and gain share through exceptional customer service. Our professional strength was partially offset by pressure in our DIY business, where we faced challenging ticket count comparisons to the weather benefits we saw in 2022 as well as a moderating benefit from same SKU inflation. Overall, the combined impact of average ticket growth on both sides of our business was a contributor to our comp growth in the quarter. As we discussed on last quarter’s call, as we entered the fourth quarter, we had fully lapped the year-over-year inflation benefits that carried over from price levels that ramped throughout 2022. For the fourth quarter, our same SKU benefit was just over 1%, in line with our expectations. Next, I want to transition to a discussion of our guidance for 2024, starting with our sales outlook. As we disclosed in our earnings release yesterday, we’re establishing our annual comparable store sales guidance for 2024 at a range of 3% to 5%, and we want to provide some additional color on how we’re viewing both the broader economic conditions in our industry and the opportunities we have to outperform the market. As we progress through 2023 and now into 2024, we believe the fundamental backdrop for the automotive aftermarket industry is stable and the drivers for demand in our industry remains strong. The daily transportation needs of consumers, generates robust and resilient demand for our industry, and there continues to be a very compelling value proposition for consumers to invest in the repair and maintenance of their existing vehicles. We have been pleased to see improvement in the total miles driven in the U.S. over the last several quarters and expect to see continued steady growth in this metric in line with our – in line with long term industry trends driven by population growth and an increase in the size of the car park. We also believe our industry has benefited and will continue to benefit from the increasing average age of vehicles as consumers show a strong willingness to prioritize investments in their existing vehicles to keep them on the road longer at higher and higher mileages. From a broader macroeconomic standpoint, we view current conditions as favorable for our customers and in turn, our industry. We believe the economic health of the consumer is solid, supported by strong employment trends, improved wages, stable fuel prices and moderating inflation. However, our expertise is not in our ability to predict broader economic conditions. We remain cautious in our outlook regarding the potential for worsening economic conditions or the possibility of short-term economic shocks, particularly any impacts we could see from sustained higher price levels and interest rates, jumps in gas prices or election year volatility. As we have discussed in the past, we maintain our conviction that consumers in our industry quickly adjust to challenging environments and will prioritize the maintenance and repair of their existing vehicles as a countermeasure in the pace of economic pressures. Due to the resiliency of our customers and the nondiscretionary nature of our business, we have confidence our industry will perform well in 2024, even if the broader economy ends up facing challenges. While our outlook for 2024 incorporates our assumptions of a reasonably stable economic environment, ultimately, our performance this year will depend on our effectiveness in executing our business model, providing exceptional customer service and in turn, gaining market share. To that end, I want to spend a few minutes discussing how we view our opportunities on both sides of our business. We expect both our DIY and professional businesses to be positive contributors to our comparable store sales growth in 2024, with professional again expected to outperform. We have been truly blown away by the incredible momentum our Team has generated with our professional customer base, driving 3 consecutive years of comparable store sales growth in the mid-teens. We were especially excited with the ticket count gains we saw in 2023 as our store, sales, distribution and office Team members delivered on our commitment to excellent customer service and industry-leading inventory availability. We remain bullish in our outlook for growth in professional in 2024, but expect comps to naturally moderate as we compare against the higher bar we set in 2023. We also believe we have opportunities to gain share on the DIY side of our business, but anticipate that any share growth in the DIY will come in the context of the long-term industry trend of pressure to DIY ticket counts. We believe the industry dynamic of extended service and repair intervals resulting from increased complexity and quality of parts will drive down DIY ticket counts broadly in our industry. As a result, we anticipate DIY traffic will be flat to slightly down in 2024 with an expectation that we will continue to gain share to partially offset the normal industry drag on ticket counts. However, increased complexity and quality of parts also drives higher average ticket values, and we expect total DIY comps to be positive in 2024. For both sides of our business, we expect to see continued growth in average ticket values. However, our 2024 projections assume same SKU inflation will provide a smaller benefit than we have realized in the last 3 years. Overall price levels were very much more stable in 2023 and consistent with our historical practice, we are assuming only modest increases in price levels from this point forward in 2024. As a result, our guidance assumes a minimal tailwind of less than 1% from same SKU inflation with overall ticket expected to be up low single-digits, driven by increased complexity. Before I move on to sales guidance, I would like to highlight our expectation for the quarterly cadence of our sales growth in 2024. On a weekly volume basis, our business is fairly steady in 2023, and we expect our quarterly comparable store sales growth to be relatively even throughout 2024 absent any unforeseen seasonal variability in weather and a minor shift from the timing of the Easter holiday in the first quarter of 2024 versus the second quarter last year. We are pleased to be off to a solid start in 2024 aided by favorable winter weather in January. As I mentioned previously, we did not see much of the winter weather benefit in the fourth quarter. However, with the arrival of typical winter conditions in January, we would now view the weather backdrop as normal, and our assumptions underlying our sales guidance for the full year of 2024 do not include any material impacts from weather. Now I’d like to move on to discuss our capital investment and expansion results in 2023 as well as our plans for 2024. Our capital expenditures for 2023 were just over $1 billion, which exceeded the guidance range we updated on last quarter’s call and is approximately $200 million above our initial guidance for the year. As we progressed through 2023, we realized incremental opportunities to further invest in our store and distribution network as well as accelerate our spend on certain initiatives to refresh our vehicle fleet and enhance our store image and appearance. For 2024, we are setting our capital expenditure guidance at $900 million to $1 billion. While our expected total CapEx will approach a similar level of spend as 2023, the composition will change somewhat. A portion of our capital deployment in 2023 was directed at restarting initiatives that were delayed in previous years and accelerating certain projects where we saw an opportunity to improve the image and convenience of our stores. Our 2024 plans anticipate a leveling of capital investment for these type of projects back to a more normalized annual spend. We also expect to see a reduced CapEx spend for new distribution projects in 2024. We continue to be on track with our ongoing distribution expansion, and Brent will provide a status update on these projects in a few moments. While we still have substantial dollars to invest to move these projects forward in 2024, our anticipated investment this year will be below our spend in 2023 based upon development time lines for new facilities. These planned reductions in CapEx will be largely offset by an increased investment in new stores as well as continued strategic investments in technology projects and infrastructure. Our growth in new store CapEx is being driven by a shift toward owned store growth versus lease stores in our planned 2024 new store openings and future store development. As we disclosed last quarter, we have established a target of 190 to 200 net new store openings for 2024 spread across multiple markets in the U.S. and Mexico. We continue to be very pleased with the performance of our new stores and are excited about our growth opportunities in both new and existing markets alike. We have a long-held preference toward own properties as we fuel our expansion in our ability to successfully open stores that increasingly generate higher sales volumes and stronger cash flows is driving enhanced returns on capital invested in our new store growth. One of the strengths of our company and a key factor in our growth story has been our ability to balance our organic greenfield growth across geographic – across our geographic footprint, which – while also supplementing our expansion with strategic acquisitions. The most important factor in the success of our new stores is the ability to staff the store with highly trained professional parts people who live the O’Reilly culture and are committed to providing excellent customer service in their markets. Over the course of our history, we have been very fortunate to join forces with several great companies through acquisitions and our ability to partner with seasoned professionals, who have strong relationships with customers in markets that are new to our company has been paramount to our success. With this in mind, we are thrilled to have completed our acquisition of Groupe Del Vasto in January and are extremely excited to partner with their experienced leadership team to enter the Canadian market. As noted in our press release in December, the company is headquartered in Montreal, Quebec, Canada and operates as Vast-Auto Distribution. Vast-Auto is a highly respected family-owned business founded over 35 years ago with a company culture focused on the core values of hard work and excellent customer service. They currently operate 2 distribution centers and 6 satellite warehouses that support 23 company-owned stores, a network of strategic independent partners and thousands of professional customers across Eastern Canada. We are still in the very early innings of planning – of the planning process for our future expansion in Canada, and there will definitely be more to come as we grow our footprint. But for now, we are very excited to welcome the 500-plus Vast-Auto team members to Team O’Reilly. In a few moments, Brent will provide additional details on our gross profit and operating profit results as well as our expectations for 2024. But before I turn the call over to him, I want to highlight our earnings per share guidance we outlined in our press release last night. We have established our EPS guidance for 2024 at $41.05 to $41.55, while we expect the Vast-Auto acquisition to be slightly accretive to our bottom line in 2024 it will not have a material impact on earnings per share. Our 2024 operating plans and earnings and profitability outlook reflects our continued commitment to investing in our business to grow market share and drive industry-leading results. We have been pleased with our ability to capitalize on our strong competitive positioning and generate robust sales momentum and will continue to judiciously manage our capital and operating investments to drive long-term growth and high returns. Our entire team remains highly committed to our business and our customers, and we are very confident in our ability to build on the strong historical EPS results I outlined at the beginning of our call today. As I wrap up my prepared comments, I would like to once again thank Team O’Reilly for their hard work, dedication and performance in 2023. Now I will turn the call over to Brent.

Jeremy Fletcher:

Thanks, Brent. I would also like to congratulate Team O’Reilly on another outstanding year. Now we will fill in some additional details on our fourth quarter results and guidance for 2024. For the fourth quarter, sales increased $188 million, driven by a 3.4% increase in comparable store sales and a $71 million non-comp contribution from stores opened in 2022 and 2023 that have not yet entered the comp base. For 2024, we expect our total revenues to be between $16.8 billion and $17.1 billion. Our guidance for total revenues includes the benefit from leap day in 2024, but this additional day will not be included in our comparable store sales calculation consistent with our historical practice. Our fourth quarter effective tax rate was 17.7% of pretax income comprised of a base rate of 18.9%, reduced by a 1.2% benefit for share-based compensation. This compares to the fourth quarter of 2022 rate of 18.2% of pretax income, which was comprised of a base tax rate of 19.9%, reduced by a 1.7% benefit from share-based compensation. The fourth quarter of 2023 base rate as compared to 2022 was lower as a result of an increase in certain federal and state tax credits. For the full year, our effective tax rate was 21.9% of pretax income, comprised of a base rate of 23.1% reduced by a 1.2% benefit for share-based compensation. For the full year of 2024, we expect an effective tax rate of 22.6%, comprised of a base rate of 23.1%, reduced by a benefit of 0.5% for share-based compensation. We expect the fourth quarter rate to be lower than the other three quarters due to the tolling of certain tax periods, also variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. Now we will move on to free cash flow and the components that drove our results in 2023 and our expectations for 2024. Free cash flow for 2023 was $2 billion versus $2.4 billion in 2022. The decrease of $383 million was the result of the increased capital expenditures Brad discussed earlier as well as an increase in net inventory in 2023 versus the substantial working capital reduction in net inventory we realized in 2022. These headwinds were partially offset by growth in income and a benefit from favorable timing of tax payments and disbursements for renewable energy tax credits. For 2024, we expect free cash flow to again be in the range of $1.8 billion to $2.1 billion. We anticipate the benefit to free cash flow from growth in our operating income will be offset by a headwind as we compare to the benefit we realized in 2023 from favorable timing of tax payments and purchases of renewable energy tax credits. As Brad and Brent discussed in their prepared comments, in 2024, we have planned for capital expenditures and inventory growth at similar levels to the investments we made in 2023. And as a result, we expect a comparable impact to free cash flow. I also want to touch briefly on the component of our net inventory driven by our AP to inventory ratio. We finished the fourth quarter at 131%, which was reduced from the rate we saw through much of 2023. This moderation in AP reflects the timing impact of payments associated with the substantial inventory purchases we made at the end of 2022 to support our strong sales volumes and significant inventory additions as we exited last year. For 2024, we expect to see continued moderation and an impact from our Canadian acquisition and currently expect to finish the year at a ratio of approximately 127%. Moving on to debt. We finished the fourth quarter with an adjusted debt-to-EBITDA ratio of 2.03x as compared to our end of 2022 ratio of 1.84x with the increase driven by our successful issuance of $750 million of 3-year senior notes in November and borrowings under our commercial paper program, partially offset by the June retirement of $300 million of maturing notes. We continue to be below our leverage target of 2.5x and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. And for 2023, we repurchased 3.6 million shares at an average share price of $883.13 for a total investment of $3.2 billion. Since the inception of our share repurchase program in 2011, we have repurchased 94 million shares at an average share price of $247 for a total investment of $23.3 billion. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance, Brad outlined earlier includes the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I open up our call to your questions, I would like to thank the entire O’Reilly team for their dedication to our company and our customers. Your hard work and commitment to excellent customer service continues to drive our outstanding performance. This concludes our prepared comments. At this time, I would like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions.

Joshua Young:

Hi, good morning. This is Joshua Young on for Scot. As we look to 2024, how are you thinking about the sustainability of the growth rates you’ve been putting up on the commercial side of the business? Then as we think about the transaction growth in commercial, would you attribute it more to doing business with new customers or is that coming more from wallet share with existing accounts?

Joshua Young:

Got it. Very helpful, thanks. And then, just this year, you obviously had the elevated SG&A growth on that investment spending. And it sounds like that may be the case again in ‘24. Could you just give us some more color on where your biggest remaining investment opportunities are? And do you think you’ll be finished with this sort of accelerated investment cycle by the end of this year? Thanks.

Brent Kirby:

Yes. And the only thing I would add Josh, to Brad’s comments, especially as it relates to the tech investments, everything we invest in, to Brad’s point, we’re playing the long game, but we invest through a filter of expecting a return on it and a return in the marketplace and an outsized return with our customer base. So that’s the lens we look through when we make those investments.

Brad Beckham:

Yes, thank you.

Kate McShane:

Hi. Good morning. Thanks for taking our questions. I wondered if you could talk a little bit more about the change to more owned retail. And can you walk us through what that means for availability of cash for share buybacks over the longer term?

Brad Beckham:

Yes. And Kate, I may just jump in. This is Brad. Jeremy did a great job kind of really framing up your – the answer to your question. The one thing I would highlight and just reiterate from what Jeremy said was how incredibly impressed we are with our ability to open new stores. Our team is just doing from site acquisition all the way through the build, all the way through the store execution and our field team’s ability to build the right team with a great store manager professional parts people. We are just incredibly pleased with our new store performance both in backfill markets in kind of the center part of the country and our existing footprint as well as our new greenfield markets.

Brad Beckham:

Thanks Kate.

Operator:

Your next question is coming from Mike Baker from D.A. Davidson. Your line is live.

Brad Beckham:

Hi. Good morning Mike, it’s Brad. I will take a stab at that. So, maybe just to answer your question directly on the NAICS data, we, in our business, at least at O’Reilly, have never been able to tie that out exactly to correlate the way that some do. Not to say directionally, there is not something there. But we haven’t seen anything change in the competitive dynamic as we look at our performance in Q4 by month. I – Mike, I spent a lot of time just looking at the outputs from our CRM tool that our sales team has out in the field. And listen, those independent competitors that you know very well, I mean they are incredibly well run. We have a tremendous amount of respect for those WDs, the independents, the two steppers. They do an incredible job. And they are honestly our toughest competitor and they hold the most market share when we look at the total addressable market on the professional side of our business, that they are great competitors. That said, there has been nothing that we see that has pointed to anything that has been a step change or anything different, but they were tough all year last year, and they continue to be tough in Q4. And so I wouldn’t tie that directly to what you are seeing in that data, we just really aren’t seeing that.

Mike Baker:

Okay. That makes sense. One – another follow-up to something you said. You talked about the operating profit pressure to be a little bit greater in the first half, but gross margin is relatively consistent and comps relatively consistent. So, presumably, the SG&A is a little bit higher in the first half. Is that just timing of when you are adding some investments or more store labor in the first half of the year versus second half? Just curious what would cause that to occur?

Mike Baker:

Yes. It makes perfect sense. Alright. I appreciate the color. Thank you.

Operator:

Thank you. Your next question is coming from Michael Lasser from UBS. Your line is live.

Brad Beckham:

Good morning Michael.

Brad Beckham:

Hi. Good morning Michael, great question. We appreciate it. So, kind of – obviously, we want to balance our confidence in our ability to continue to take share, to continue to out-comp the market in all both sides of the business, not just professional. As I have said earlier, I think maybe Brent and I both did, we see 2024 generally as an overall market as more of a “normal year”. Now, what’s the definition of normal, you look back at the last many years and how much volatility, how much opportunity, how many things have happened, kind of previous to COVID, we generally think that a normal year based upon all our history, all our decades of doing this, that a normal year for the industry is probably more in that 2% to 3% range. And so I think that ties into kind of what we are saying with our guide. Again, like you know, Michael, we always say we are not very good at predicting the future, and it’s hard to say exactly what the future holds for the industry in 2024. But I think I would generally point you to that kind of 2% to 3% range.

Michael Lasser:

Okay. My follow-up question is, Brad, as you begin the tenure of being the CEO of O’Reilly, do you think that the company is at a peak operating margin rate level? And how much within your focus is on continuing to improve the percentage rate of this organization over time, given that there has been a lot of investment spend made over the last few years? Thank you very much.

Michael Lasser:

Thank you very much.

Operator:

Thank you. Your next question is coming from Simeon Gutman from Morgan Stanley. Your line is live.

Brad Beckham:

Yes. Hi. Thanks Simeon. I will start that off and see if the guys have anything else. So, yes, I think that’s right. We feel really good. There has been a lot of talk about kind of – we have been asked about catch-up with what we spent this last year. And I think we want to more reframe that to timing because anything that we were “catching up on”, to Brent’s point earlier to one of the other questions, we have a very solid discipline internally here on a return on every amount of spend that we make, whether it would be SG&A, whether it would be CapEx and how those play together between CapEx and OpEx with depreciation. And so we feel really good about the money we spend. We feel really good about the returns. And we are going to continue to lean into that, both directions. And we – that’s really what got us to where we are at today to kind of your – the root of your question is where is that line of what’s the right spend and that really just lanes us back to our guidance. We feel really good about every moving piece of our SG&A. We feel good about the returns as well as CapEx and everything that we are talking about when it comes to tech investments, when it comes to safer vehicles, the image and appearance of our stores and all the things you have heard us talk about, we are going to continue to lean into that as you have seen.

Simeon Gutman:

And a follow-up – oh, please.

Simeon Gutman:

Yes. And a quick follow-up, more short-term, I don’t think I heard it in the prepared remarks, maybe you never venture to guess what weather means in a quarter. Given that you face 2 years of favorable weather, but any idea and is there deferred maintenance or that got resolved with the ongoing run rate of the business?

Simeon Gutman:

Yes, any fourth quarter impact? And then does that create deferred maintenance, or has that just gotten realized as the weather has become more favorable for maintenance and repair?

Simeon Gutman:

Okay. Thanks for the question. Good luck.

Operator:

Thank you. Your next question is coming from Greg Melich from Evercore. Your line is live.

Jeremy Fletcher:

Yes. So, I can answer both of those questions, Greg. The December was negative for us. It was better than our plan candidly, but we kind of knew it would be – it was substantially good last year. We don’t give discrete quantification of where we run at the beginning of the year just because there is always a challenge with short periods of time and how the weeks-to-weeks can vary just on a 1-year comp. But we do feel comfortable that we are running well. We are pleased with how we set up and we largely attribute that shrink so far to the couple of weeks of really, really harsh weather that we got in January.

Jeremy Fletcher:

Yes. I don’t know that I would put too finer point like that on it, Greg, for 2024. But first, I don’t know what inflation will be in 2024. Our guidance is a little bit less than 1%. We will get a benefit from the average ticket above that, even independent of professional growing faster, which naturally pulls the total company average ticket up. But we would still expect that a portion of our comp expectations for next year are driven by ticket count growth as the professional side of the business is expected to continue to be solid.

Brad Beckham:

Thank you, Greg.

Operator:

Thank you. We have reached our allotted time for questions. I will now turn the call back over to Mr. Brad Beckham for closing remarks.

Operator:

Thank you. This does conclude today’s conference call. You may disconnect your phone lines at this time, have a wonderful day. Thank you for your participation.

Operator:

Welcome to the O'Reilly Automotive Inc. Third Quarter 2023 Earnings Call. My name is Holly and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct our question-and-answer session. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher you may begin.

Greg Johnson:

Thanks Jeremy. Good morning everyone and welcome to the O'Reilly Auto Parts third quarter conference call. Participating on the call with me this morning are Co-President, Brad Beckham, and Brent Kirby as well as 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'd like to begin today's call by congratulating Team O'Reilly on outstanding results in the third quarter and express my deep appreciation to our team of over 88,000 professional parts people for their steadfast dedication to our customers. This unwavering commitment to excellent customer service is the hallmark of O'Reilly Auto Parts and the key to earning our customers' business every day. Our team's ability to deliver sustained profitable growth is evidenced by a robust 8.7% increase in comparable store sales, coupled with a 17% increase in diluted earnings per share for the third quarter. Our results have exceeded our expectations throughout the year, driven by the team's high level of execution. Service and product availability are critical pieces of our value proposition, and our ability to remain intensely focused on these fundamentals has continued to derive growth on both the professional and DIY sides of our business. As we announced in July, upon my retirement in January, Brad Beckham will be promoted with the position of Chief Executive Officer, and Brent Kirby will be promoted to the role of Company President. Brad and Brent are tremendous leaders who bring world-class ability, experience, and passion to their new roles. Even more importantly, Brad and Brent are incredible standard bearers of the O'Reilly culture, and I'm very excited about what our future holds under their leadership. Our transition to the operations of the company to Brad and Brent has progressed smoothly and seamlessly, and as a result, today's earnings call represents my last call as CEO. As such, it is appropriate for me to leave the bulk of our discussion of the third quarter results to Brad, Brent, and Jeremy. But before I turn the call over, I would like to thank our shareholders for their continued confidence in and support of our company during my tenure as CEO. Finally, I'd like to again thank team O'Reilly for your hard-working commitment to our customers. It's been my absolute honor and privilege to work alongside you for the last 41 years with a front-row seat to see you achieve so many incredible milestones along the road to success for O'Reilly auto parts. Even though I won't get to actively participate in the next chapter of our company's success, I'm still very excited for the many opportunities ahead and look forward to watching our company's continued growth and future success. I'll now turn the call over to Brad Beckham. Brad?

Brent Kirby:

Thanks Brad. I would like to echo Greg and Brad in congratulating Team O’Reilly on the outstanding performance in the third quarter. The continuation of our strong sales performance and proven ability to outperform the market is a testament to our team's unwavering commitment to excellent customer service. I want to thank all of our team members for their dedication to our company and to our customers. Now I will cover our third quarter gross margin results, what we are seeing in the competitive environment, and provide some updates on our store and distribution growth, inventory investments, and capital expenditure plans. Starting with gross margin, our third quarter gross margin of 51.4% was 46 basis point increase from the third quarter of 2022 at just above our expected range. We are pleased with the stability of our gross margin results as our third quarter continued the strong trend we saw in the second quarter. Our gross margin for the third quarter faced pressure from the sustained strong performance in our professional business, creating a customer mix headwind. But we have been able to offset these headwinds through improved acquisition costs and outstanding support from our supplier partners. Pricing to both DIY and professional customers has remained rational within the industry. We continue to see modest inflation in the third quarter and remained very successful in passing along increases in product acquisition costs and other inflationary pressures in selling price. While our quarter to quarter gross margin rate can see normal fluctuations from seasonality in product sales mix and leverage of distribution costs relative to overall volumes, the stability of our results in light of the share gains we are experiencing demonstrates our team's ability to win share through service and product availability. As a result of our solid year to date performance, we are maintaining our full year gross margin guidance of 50.8% to 51.3% but would now expect to come in within the top half of this range. Inventory per store finished the quarter at $758,000 which was up 4% compared to the beginning of the year. We would now expect our average inventory per store increase to finish the year in a range between our original guidance of 2% growth and the current levels driven by our continued opportunistic investments to support our sales momentum. Our AP-to-inventory ratio at the end of the third quarter was 134% in line with the beginning of the year and slightly better than expectations driven by strong sales volumes and inventory turns. We now expect to finish 2023 at a similar level. The health of our supply chain and resulting store in stock positioning continues to be a competitive strength, optimizing our assortments across our DC hub and store network while simultaneously partnering with our supplier community to achieve industry leading fill rates is absolutely playing a key role in our exceptional sales results and we continue to regard inventory availability as a critical priority for our business. Alongside the investments we are making in inventory, we also remain focused on leveraging the benefits of the tiered nature of our distribution model. This strategy has been an important aspect of our supply chain for many years and begins with placing distribution centers in large metro areas to provide same-day availability to a wide range of SKUs for our customers. Strategically located hub stores augment our SKU availability on a more localized basis and represent the very important second tier within our distribution supply chain. We continually evaluate this network including the number location and size of our hub stores to ensure that all our stores have the best access to inventory in their respective markets. Next I would like to discuss our capital investments and expansion opportunities beginning with the investments we are making in our distribution network. As we discussed on last quarter's call we are very pleased with the successful opening of our Guadalajara Mexico DC in July but are also excited on today's call to announce two additional expansion projects that we currently have underway. First our distribution teams are actively working on a relocation of our Atlanta DC which is a large project that will enable expanded more efficient store servicing capabilities within that market as well as providing direct import processing capability within this new facility. This new 690,000 square foot building is expected to be complete by the end of 2024 and will increase the number of stores we can support in this critical market by 100 stores. Next we have an exciting distribution expansion project that is in progress in Stafford Virginia where we have purchased a site and began construction on a large new distribution facility that will service the Washington DC, Maryland and Virginia corridor. The new DC will be approximately 530,000 square feet and our initial plan is to build that capacity to service 350 stores. We anticipate this distribution center will be open and operational by the middle of 2025 and we could not be more excited about the store development opportunity this provides us in what is largely an untapped market area for O’Reilly today. Our distribution center teams are diligently executing on these projects and are enthusiastically looking forward to further expanding our DC footprint and our industry leading parts availability. Turning to store growth and expansion, we successfully opened 40 stores during the third quarter bringing our year-to-date total to 140 net new store openings for 2023. Our team is confident we will achieve the goal of 180 to 190 net new store openings for 2023. As we noted in our press release yesterday we announced our 2024 new store opening target of 190 to 200 net new store openings. Our strong new store performance continues to prove that our investments in both new stores and the necessary distribution infrastructure to support those stores is an attractive use of capital. Total capital expenditures for the first nine months of 2023 were $754 million, a considerable increase over prior year but reflective of the attractive opportunities we see to deploy capital against projects and initiatives to drive long-term growth and enhance our competitive positioning. Included within our press release yesterday was an update to our full-year capital expenditure guidance to a range of $900 million to $950 million from the previous range of $750 million to $800 million. The primary driver of this increase was the progress that we have made on the new Virginia Distribution Expansion Project as well as a higher mix of owned new stores and the pace of investment in technology and store infrastructure initiatives. To close my comments I want to once again thank Team O’Reilly for their hard work and continued dedication to our customers. Now I will turn the call over to Jeremy.

Operator:

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question for today is coming from Michael Lasser at UBS.

Brad Beckham:

Good morning, Michael. It's Brad. I'll take a stab at that and see what the other guys want to follow up with. Great question. As you know, Michael, I think generally speaking directly to your question, the answer is not really. As you know, as we always say, the fourth quarter can be the most volatile from the weather standpoint, from the holidays. I think the key is just to remind you what I said earlier that we feel really good about how October is going so far. Generally the first few weeks of the quarter have been very consistent with what we saw with the exit rate, especially from a two- and three-year stack basis. But we still have almost half the quarter to go. December is a huge comparison. And we just want to make sure that we're just being cautious overall. But generally speaking, we're really happy with the way volumes are holding up and really excited to do everything we can to finish the quarter strong here.

Michael Lasser:

I got you. For O’Reilly, tough compares is a way of life, but that's okay. My second question is on the outlook for SG&A spending. It's obvious that the returns on the investments that you're making have been quite productive in light of the market share that O’Reilly has been achieving. Would you expect a similar rate of SG&A dollar growth on a per-store basis moving through 2024? Are there opportunities to invest such significant amounts that would generate similar returns? Thank you.

Michael Lasser:

I understood. Good luck to Greg Johnson. Thank you so much.

Operator:

Your next question is coming from Brett Jordan from Jeffries.

Jeremy Fletcher:

Good morning, Brett.

Brett Jordan:

As you guys continue to gain market share in the space, could you talk a little bit about where you're seeing both that coming from smaller DIFM independence or national accounts, and then, I guess, obviously, it's got to be a shared donor as well, so is that also the smaller WDs that you're picking up from, or are things changing in market share relative to larger peers?

Brett Jordan:

Okay. I guess sort of a follow up to that. Now you're saying there's such big dispersion between execution on the distribution side. Are there any increased M&A opportunities, either large regional distributors that are private that you sort of see to maybe fill in some of that geographic white space you have out there around sort of between the Midwest and those Virginia DC?

Brad Beckham:

Yes. And Brett, I would just add maybe on the distribution and supply chain side of things, certainly the the exciting news about our Stafford facility that I talked about in my prepared comments, we're super excited about getting another large DC in the Mid-Atlantic. We see that as a big, untapped geography for us. And we're certainly investing to begin to take more advantage of that opportunity. And when you think about our distribution infrastructure, for us, it's something we're constantly looking at. And talked about the strength of where our DCs are located and, our DCs are where the cars are, where the people are, and we don't see that as an opportunity necessarily to, use 3PLs or, we want to own that. We want to run it. We want to operate it the way we always have. And we're always looking at hub store opportunities and how they augment the tiering of our DCs and where they are and how we can, be first in class in every market that we operate in in terms of parts availability. So we're going to continue to do that. We certainly see that that geography as a continued opportunity moving forward.

Jeremy Fletcher:

Yes. Thank you.

Brent Kirby:

Thanks Brett.

Daniel Imbro:

Yes. Hey, good morning, everybody. Thank you for taking our questions.

Daniel Imbro:

Follow-up on Brett question about [indiscernible] here. Just curious how's the onboarding of the new customer progress? Any hiccups or learnings? Has he won so much business so quickly that any bottlenecks are limiting growth? Is that kind of behind some of these infrastructure investments you guys are talking about?

Daniel Imbro:

That's helpful. And maybe I want to dig into the SG&A spend a little bit more. Are there any specific initiatives you can unpack around maybe what you're spending on, whether it's tech for your professional customers or delivery efficiency? Does anything need to help on that or clarify what you're spending on so we can better understand how it's driving sales? Thanks.

Daniel Imbro:

Fair enough. [indiscernible] and best of luck.

Operator:

Your next question for today is coming from Zach Fadem from Wells Fargo.

Brad Beckham:

Yes. Hey, Zach, it's Brad. I'll take a stab at that. And then I may flip it over to Brent to talk generally about what we're seeing and not seeing on some of those fronts. But generally speaking, Zach, we're just not seeing that. As part of our results, as you can imagine, it's just hard for us to say that we're really seeing that. When I look at, our positive DIY ticket count that I cited in our prepared comments, I mean, that's, that's encouraging for us. We're very excited about the execution of our teams on the DIY side, as well as the, as well as the professional side, when I review the, the data that comes in every week from our sales team on the professional side, we have all our comments and sales call recaps that come through our CRM. That that's not to say that, that within the service space that I see comments that some shops may be a little bit slower than other shops. But it's just hard for us to say with our results and what we hear and see on the street every day that there's an overall slowdown, we're just not seeing that. Again, there's times you see that some shops may be seeing a little less car count than others. And just like on the service side, or excuse me, just like on the, the aftermarket part side of our industry, there's some service providers that are taking more share and there could be some that are losing some share. So it's just hard to parse all that out and say that we're seeing an overall slowdown when we're really just not seeing that.

Jeremy Fletcher:

Yes, that may be the only thing I would add to that. I'm sorry, just one more thing. I know you kind of talked to how do we think about that moving forward. I think from a long term perspective, our view on the resiliency of our industry is unchanged. We've been, we've been through different cycles of challenges to the consumer in the past. And there are always the potential for short term shocks and impacts and fluctuations that might last a quarter or two. And we're always cautious in how we think about that near term outlook. But the underlying core drivers of demand within the aftermarket continue to be resilient and strong. The value proposition that, that investing in your existing vehicle has for, for a consumer is very attractive. We think it continues to get more attractive with the vehicle dynamic. And, and people are still, using their cars for, for so much of what encompasses daily life with miles driven, steadily expected increase. So those things are all I think positive as we think about, about really the longer term. And that's really where our focus is as we think about building our business.

Brad Beckham:

Yes, Zach, it's Brad. Well, the first thing I would say is I know we all in the industry anecdotally, felt like potentially some of the smaller players could have had a little bit more adversity when it came to supply, during the pandemic. And I think that was probably true. And I think it's probably accurate, for the most part, looking across the market that they're probably healthier than ever. I think the key with that, though, is that is that we had our opportunities to, we, Brent and I, and none of us were totally happy with how we performed during the pandemic, everything from merchandising to inventory control, purchasing down to the distribution operations, our bar at O’Reilly, knowing how important availability and replenishment is high. And so, we weren't totally happy with where with where we were. And, we've made incremental improvement as well. But I think the key to remember, Zach, on, when we had opportunities to pick up share, and we were able to, maybe move from third call to second, or we got the opportunity through, lack of supply from somebody else, and we were able to step in there with relationship service and back that up with availability, that that business, as Zach, especially on the professional side, is incredibly sticky, those relationships and that trust, it takes time to build that and to gain that business. It takes a long time to gain that business. And it would be challenging, or excuse me, it would be, it would be out of the norm to lose that business very quickly when you've really stepped in when somebody else fell down. And so, I think we just got to remember that that business is very sticky, the relationships are sticky and once that's built, it's very stable. On the pricing, no, we don't feel that way. We're not seeing that, and we really don't see that as an issue moving forward. I mean, time will tell, but as Zach, when we rolled out our pro pricing initiative, for example, that was very rifle approach, strategically geared toward some of the lines that maybe some of the WDs and two steppers were more aggressive than we were, and we purposely moved down and still stayed north of where a lot of those price points were. We didn't come down to really compete, knowing that they can move further down, and a lot of those folks live off volume anyway, and so we just don't see that as a near-term threat.

Zach Fadem:

Appreciate the thoughts, guys. Thanks for the time.

Jeremy Fletcher:

Thanks, Zach.

Simeon Gutman:

Hey, good morning, everyone. First question is on a gross margin. It stepped back a bit from price investments, and we've come to accept that. It probably won't snap back anytime soon. Anything new on that as you get leverage over some of the distribution costs? Are you reinvesting those? Is there any reason we can see gross margin click back up?

Simeon Gutman:

Thanks, and then a quick follow-up. This is to clarify some of the points, Jeremy. You made, I think, Brad made around market share. The story of the incredible market share of this year, is that you said more new accounts that you hadn't serviced before, or is being a primary distributor meeting number one on the call, is that market share penetration, it keeps ticking higher?

Simeon Gutman:

Okay, thanks. Good luck.

Operator:

Your next question for today is coming from Greg Melich with Evercore ISI.

Jeremy Fletcher:

Yes, Mike, thanks for the question. Third quarter was kind of low single digits, that's kind of continued ratchet down this year, completely in line with what we expect. We don't, by any means, anticipate deflation within our business. We think our industry over the long-term has been able to hold the price levels. There's a lot of inventory investment. It's a nondiscretionary spend for certain, even as some of us realize some cost improvements. We've been able to hold on to our prices, and that's what we would anticipate seeing moving forward. We've really, sort of, as we've exited third quarter, and we think about fourth quarter, we would really say, and I'll break that in his comments, a normalized inflation environment, we'll have a little bit of it. It's gonna be in that low single digits, not a huge tailwind, but really more consistent with what we've historically seen within the business, with the opportunity from an added benefit perspective that as parts become more complex and the new applications have better technology, the engineered better, the complexity is going to drive the overall value of the changing dynamic of parts to cause average tickets to go up, and then it's our challenge to continue to grow those tickets just on how we provide great service to our customers.

Jeremy Fletcher:

No, really, as we think about our, how we report and think about our gross margin, we view our reported gross margin as the best measurement of how we think about the business, most current reflection of what we're paying for parts today and don't really, I think, internally or externally view some of the changes in the nominal LIFO reserves on our balance sheet to be as relevant for us as what we think the top line reported margin is, and we continue to expect that to be stable as we've maintained our guidance really all year long on that item.

Jeremy Fletcher:

Thanks, Mike.

Operator:

Your next question is coming from Christopher Hoevers from JPMorgan.

Jeremy Fletcher:

Yes, thanks, Chris. Appreciate the question. And there are, I think, a lot of moving pieces in that, especially in a year like this year when we've done some things that are outside of our normal cadence that's spend as it relates to the investments that we've made. You know, we still continue to operate a relatively high fixed cost model just because of the nature of having so many units in the store teams that are there. So that does benefit us as we grow sales and be reluctant, I think, a little bit to quantify or try to parse out those individual numbers, but I think there is a positive. Certainly in a year like this when we've seen such an acceleration in growth, there's just a level of activity that that requires and that's a lot of what we saw here in the third quarter. Part of that's incentive comp, but part of it is, especially on the professional side of business, we don't want to ever be in a spot where we can't get parts out to our shops really quickly and manage that business. So it is a little bit of a mix between the two and I think it kind of a little bit more of a normalized sales environment. We expect that we'd be in a pretty stable place, but for sure our approach this year has been as we have gained the momentum that we have have the opportunity to accelerate that growth by investing in the business has been a key priority for us.

Brad Beckham:

Hey Chris, this Brad, that's a great question and I'll take a stab at it and then maybe flip it to Brent for any other commentary on private label. And I think your overall, I think it's accurate what you said, this is my 27th year with the company when you think back to the early 2000s and you think about the 90s, just in my experience back then, there was less quality in some cases going into private label boxes back then and we sold against that for a long, long time with a lot of success with more of the national brands in the national company, so to speak, but really is really the last couple of decades have evolved. The quality that goes into our exclusive national brands is unbelievable, a lot of those same parts, not only meet OE quality fit form and function, but they exceed and so you think about the success we've had with Import Direct specifically to what you're talking about with the European name plates along with the Asian, we couldn't have more confidence in the quality fit form and function that's going into that OE box and it is again, not only OE, in a lot of cases, it's better than OE and so I do think that dynamic has changed some over the decades and so we have a lot of confidence in what's going into our exclusive national brand box and we feel really good, we have a lot of opportunity to continue to get better at gaining share in the specifically European shops, we have a lot of tremendous competitors out there that have been really great at that for a long time but we feel really good about all those things so Brent, any other thoughts on the private label?

Christopher Hoevers:

Make sense, thanks very much guys.

Operator:

We have reached our allotted time for questions, I will now turn the call back over to Mr. Greg Johnson for closing remarks.

Operator:

Thank you, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Operator:

Welcome to the O’Reilly Automotive, Inc. Second Quarter 2023 Earnings Call. My name is Matthew, and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Greg Johnson:

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 our Co-Presidents, Brad Beckham and Brent Kirby; as well as Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman; and David O’Reilly, our Executive Vice Chairman, are also present on the call. I’d like to begin our call today thanking Team O’Reilly for their continued dedication to consistently providing excellent service to our customers. Our team’s proven ability to execute our business strategy at a high level drove our second quarter comparable store sales increase of 9%, exceeding our expectations on the – both the professional and DIY sides of our business. For the first six months of 2023, we generated a 9.8% increase in comparable store sales, which is the direct result of our team’s unrelenting focus on providing the best customer service in our industry. Our team members and our culture remain our greatest assets. I made the exact same statement on our first quarter call, but it warrants repeating. Our commitment to strengthening our culture and investing in our team is paying clear dividends in our continued strong performance and I want to congratulate all of Team O’Reilly on another outstanding job in the second quarter. Driven by the strength of our top line performance, we’re also pleased to deliver a robust 16% increase in diluted earnings per share. Our operating cost spend was elevated above our expectations, which Brad will discuss in more detail during his prepared comments, but we remain pleased with the investments we have made in our business to build on the momentum our teams are generating. Our EPS results reflect our ability to produce strong, compounding operating profit dollar growth, and we are committed to aggressively capitalizing on the opportunities we see to provide enhanced value for our customers and earn even greater market share. As a result of our strong top line performance, we are increasing our full year 2023 EPS guidance to a range of $37.05 to $37.55, reflecting our second quarter results and shares repurchased since our last call. At the midpoint of this revised range, we now expect our full year EPS to increase 12% over 2022. As we disclosed in our press releases last night, after 41 years of service to our company, I’ve made the decision to retire next January. At that time, Brad Beckham will take over my role as Chief Executive Officer with direct responsibility to the Board as the leader of our executive team. We will also be promoting Brent Kirby to the role of company President. As you know, Brad and Brent assumed the roles of Co-President earlier in the year, and they have both taken on increasing levels of responsibility and prominence in the leadership of our business over the past several years. Succession planning has always been a very important and methodical process at our company. In many ways, our upcoming change mirrors the successful leadership transitions we have seen before in our company’s history, including when Jeff Shaw and I were elevated to lead the company in 2018 and Greg Henslee and Ted Wise were selected as the first non-O’Reilly family members in the top leadership roles of CEO and COO in 2005. Brad and Brent are both extremely talented and experienced individuals, who have the full support of our team, and I have every confidence they will continue to deliver on our company’s long-term track record of success. Over the period of now – from now through January 31, we will complete the transition of the day-to-day operations of the company to Brad and Brent. Finally, Greg Henslee, our Executive Chairman; and David O’Reilly, our Executive Vice Chairman, will also be continuing in their roles and along with our full Board will support Brad, Brent and our executive team in executing our strategy and driving the long-term value for our shareholders. As I finish up my prepared comments, I would like to again thank our team for continuing to provide industry-leading customer service every day and generating excellent results in the first half of 2023. I’m extremely proud of all of you, and I’m excited to keep the momentum strong in the back half of the year. I’ll now turn the call over to Brad Beckham. Brad?

Brent Kirby:

Thanks, Brad. And I would like to join Greg and Brad in congratulating Team O’Reilly on the strength of our performance in the second quarter. Our strong top line sales performance and continued ability to outperform the market and gain share is a direct result of our team’s relentless commitment to providing excellent customer service. And I want to thank all of our team members for their dedication to our company and to our customers. Now I will walk through our second quarter gross margin results, what we are seeing in the competitive environment and discuss our investments in inventory, exciting developments in our store and distribution growth and capital expenditures. Beginning with gross margin. Our second quarter gross margin of 51.3% was down just six basis points from the second quarter of 2022 and at the top end of our expectations. Our second quarter of 2023 represents the first quarter after we have fully lapped the rollout of our professional pricing initiative and atypical LIFO impacts, which provides us a much clearer read on a year-over-year gross margin performance, excluding the noise that these factors have caused in prior quarters. We are pleased with the stability of our gross profit results, especially in light of the pressure we continue to face from the extremely strong performance of our professional business. As this side of our business has continued to outperform, we have faced mix headwinds to gross margin but have been able to offset this pressure with incremental improvements in acquisition cost, solid leverage of distribution expenses and positive shrink results. I would also like to provide some color on the cost and pricing dynamics we are seeing in our industry, both on the acquisition side of our supply chain and across the competitive environment in our markets. The short and sweet answer is that our industry remains rational and cost and pricing continue to be very stable, consistent with what we have seen over the past several quarters. Our supplier partners continue to see some degree of inflationary pressure, while at the same time, we have been able to realize incremental opportunities to reduce acquisition costs across some product categories. These puts and takes are occurring in a much more normalized pattern than what we experienced in 2021 and 2022 and are in line with how we would view normal conditions in our industry from a historical perspective. Pricing to DIY and professional customers in the industry has remained rational. And we have not seen significant changes in market pricing dynamics in the industry in 2023. Where we have seen increases in product acquisition and other costs, we continue to be successful in passing these increases through in selling price and are confident that this will continue into the future. As we have discussed many times on these calls, prices ultimately not always the deciding factor that determines where a customer will take their business. Our team continues to perform at a high level by delivering industry-leading product availability and excellent customer service, and these strengths have enabled us to win share at appropriate gross margins in a competitive industry. As we move into the back half of 2023, our gross margin results can vary based on product sales mix in any individual quarter or the timing of the pass-through of acquisition cost changes. But we are maintaining our full year gross margin guidance and continue to expect the back half of the year to fall within the 50.8% to 51.3% range. Inventory per store finished the quarter at $762,000, which was in line with our expectations, up 12% from this time last year and 4% compared to the beginning of the year. We continue to track toward our planned inventory per store increase of 2% by the end of 2023. Our AP-to-inventory ratio at the end of the second quarter was 134%, in line with the beginning of the year and slightly better than our expectations, supported by strong sales volumes and inventory turns. We are pleased with the health of our supply chain and continued improvements in store in-stock position. It is clear to us that our industry-leading inventory availability has been a key factor driving our robust sales results, and we continue to prioritize deploying the right inventory at the optimal position in our DC, hub and store network. Turning to our growth initiatives and capital investment, we are extremely excited to complete the very successful opening of our first new O’Reilly distribution center in Guadalajara, Mexico earlier in July. This 370,000 square foot facility will have the capacity to ultimately service 250 stores in the Guadalajara Metro area and surrounding regions in Mexico. Even more importantly, our new facility will be a game changer for our business model in Mexico. Since our entry into Mexico in 2019, we have supported our inventory strategies by utilizing a network of smaller distribution centers and warehouses that were part of the historical operations of Mayasa. Our new facility gives us the ability to deploy a much more significant inventory investment and leverage this enhanced and highly competitive inventory availability position. It is our goal in Mexico, just as in all our domestic markets, to be the industry leader in putting the right part in the hands of our customers faster than the competition. And our new facility in Guadalajara provides the necessary platform to execute our strategy. We have a long history of successful distribution center openings, but each new facility is a significant undertaking and requires incredible hard work and coordination across our organization. We could not be more pleased with the partnership between our U.S. and Mexico teams that drove the highly successful acquisition, development and opening of this new facility. It is an understatement to say that our store teams in Mexico are very energized by the opportunities that our new distribution center unlocks. And they are dedicated to leveraging all of our competitive advantages as they outwork the competition to grow market share. From a store growth perspective, we successfully opened 42 stores during the second quarter, bringing our year-to-date total to 100 net new store openings. Our team is on pace to hit our plan of 180 to 190 net new store openings for 2023. Our openings in the first half of the year were very well balanced across our store footprint with new stores coming online in 34 different states, Puerto Rico and Mexico. Our ability to spread our growth across many markets positions us to be highly selective in hiring and training the outstanding teams that drive the success of our new stores. We continue to be pleased with the performance of our new stores and view our organic store growth as a key priority for our use of capital. Total capital expenditures for the first six months of 2023 were $461 million, up substantially from the first six months of 2022, but in line with our ambitious plans to deploy capital against projects and initiatives that will drive long-term growth and operational gains for our business. We remain on target to hit our capital expenditure guidance range of $750 million to $800 million. To close my comments, I want to once again thank Team O’Reilly for their hard work and continued dedication to our customers. Now, I’ll turn the call over to Jeremy.

Q - Simeon Gutman:

Hey, good morning, everyone. It’s Simeon Gutman. Congratulations to Brad, Brent and you, Greg. My first question is market share. It looks like the spread with O’Reilly in the industry is accelerating, at least it has in this calendar year. A question is to what do you attribute it? The only thing that we could put our finger on is a year ago the PPI [ph] initiative, so maybe it just took a year for those investments to ruse, so curious what your take on the market share acceleration is due to.

Greg Johnson:

Yes. Simeon, if I could maybe add to what Brad said there. First of all, thanks for the congrats and Brad did a nice job of expressing confidence in the supply chain team and our inventory position. Obviously, as we’ve said over and over again, we’ve got to be competitive on price, which we are and continue to be and will continue to be, but what outweighs price is inventory, availability and service level. And Brad and his teams in the field have just done an outstanding job of making sure we’re positioned to provide the highest level of service in the industry.

Jeremy Fletcher:

Yeah, great question, Simeon, and I think you’ve picked up I think the key thesis behind this is we’ve talked about it really all year that, that coming into 2023. We’ve just identified areas that, that we felt really from a long-term perspective allow us to invest within our business and continue to really double down on the momentum that we’ve seen. For us to have, I think such a sustained expense control culture within our organization for such a long period of time, that’s a substantial undertaking to think about it in those ways and to move forward and absolutely as we’ve done that that has been very focused and targeted towards a strong return on those dollars that we’re spending. And we’ve thought about that from a long-term perspective. We -- here we are, we sit in July halfway through our year, and I think we’ve given clear expectations around where we think we’ll finish out the year and funny, we don’t really provide guidance for 2024 until later on and we get closer so it’s -- I think it’s a little bit premature for us to I think talk too specifically about that. For sure, 2023 has been a heightened year for us. A -- but at the same time, to your question, I’m not going to say that as we move forward, we won’t find other opportunities for us to invest in our business and we will continue to do so aggressively when we feel like that’s appropriate. Having said that, we have an expense control focus and we’re diligent in how we manage to that, and it’s our expectation that, that we’ll continue to see the levels of productivity on a long-term basis and improvements in how we think about the returns on our operating cost spend, that, that, it’s consistent with what we’ve seen over the long course of our business.

Jeremy Fletcher:

Thanks, Simeon.

Operator:

Thank you. Your next question is coming from Greg Melich from Evercore ISI. Your line is live.

Brent Kirby:

Yes, yes, Greg. We -- I think we had said that, as mid-single digits in the quarter, we think that moderates in the back half of the year. It won’t get all the way to flat but we would expect it to – by the time, we kind of exit this year. At that stage, you’re really just talking about kind of what we’ve seen in the current year from a year-over-year perspective. And we’ve kind of – as Greg mentioned in – or I’m sorry, as Brent mentioned in his comments, we’ve kind of normalized to what we think are more kind of historical long-term rates there. So that would – that puts you kind of in the low single digit range and – but really – as Brent mentioned, that’s all fallen almost directly in line with what we would’ve anticipated for this year.

Brent Kirby:

Yes, Greg. Speak to – I’ll speak to a little bit of that in terms of categories at a high level. I mean, we always are looking for – we have complete lines across good, better, best product offerings. We’re always looking, is there any trade down – trade across, trade up, depending on where the consumer is. And similar to what we saw in the first quarter and how we answered this question on the call a quarter ago, we actually saw a little bit of a trade up from better to best and good kind of stayed where at the normal baseline that we’ve seen historically there. So we’re not seeing trade down with the consumer at this point. I mean, in terms of categories where we have seen strength, I would attribute a lot of that strength to better in stock position, in categories like radiators and in some cases break components versus where we were a year ago on a comparable basis or even where we were in first quarter on some of those categories. So we continue to see our store in-stock position improve. And as we talked about in our prepared comments, we really believe that’s a huge contributor to our share gains.

Greg Melich:

Got it. That’s great. And good luck.

Operator:

Thank you. Your next question is coming from Chris Horvers from JPMorgan. Your line is live.

Brad Beckham:

Hey, good morning, Chris. It’s Brad. Hey, I’ll start this one and a couple others may want to jump in, but great question. I think, as you know us growing our company over the last few decades from humble beginnings here in the center part of the country and growing out toward the coast through acquisition and greenfield expansion. We founded our company on the independent garage. What you called up and down the Street accounts, the small everything from a shadetree mechanic to the larger independent garages that compete very well with the larger players. And then obviously as we – we’ve grown over time, you have your small accounts, you have your mid-size accounts, and then obviously, we do have a sizable book of strategic account business that’s made up of both national players and regional players. Part of that is, as you know, Chris, is we still have that gap in footprint, we have kind of in the upper mid-Atlantic and going up into New York and those markets, that doesn’t always match up with some of the biggest national players. So that’s still an opportunity for us as we build out the U.S. But really from what we’ve seen from your direct question about kind of what we’re seeing in our share gains and momentum and how that relates to pricing on the Street. We’re seeing every bit of our business grow very consistently from the small shops, the larger independent garages, our strategic accounts, all that is very consistent in what we’re seeing. And we’ve never quantified the exact how that splits out between our strategic and our other book of business. But I would tell you that our – by far the foundation of our professional business is the independent garage and the way that we built that from the ground up.

Chris Horvers:

Got it. Thank you for that. My follow-up question is for you, Jeremy, I mean, if you look back historically, gross margin seasonality is pretty flattish over the year X periods where you have inflation or deflation – I’m sorry, like yes, inflation or disinflation in the business. And you talk about things getting back to normal. So I guess, does that – would that suggest that the back half of the year is maybe in the sort of the upper half of the – upper half of your guide, sort of consistent with the year-to-date level? Thank you.

Chris Horvers:

Thanks guys. Best of luck.

Operator:

Thank you. Your next question is coming from Scot Ciccarelli from Truist. Your line is live.

Brad Beckham:

Hey, good morning, Scot. It’s Brad. As you said, we don’t sell tires and I want to be careful not to speak for the professional customer installer base. But what we see generally is kind of good and good meaning if our shops are selling a lot of tires, then they have wheels off, they have, they’re looking at, they’re doing inspections, they’re looking at brake parts, they’re looking at the chassis, they’re looking at a lot of different things. But then, if they’re not selling tires, they have a little bit more time on their hands to spend a little bit more time with customers and diagnose better and potentially get ahead of some of the DIFM job. So I just want to be careful to answer that two pointed versus that population. But we haven’t really seen anything with softer tire sales. The way business comes to us, we really haven’t seen anything on that front.

Brent Kirby:

Hey, Scot, just maybe to add one other point to the points that Brad and Jeremy have already made. Interestingly enough, we’ve continued to see strength in under car ride control, chassis, a lot of those categories that are getting looked at when the cars up on the rack. So just throw that in as well for color.

Jeremy Fletcher:

Yes, we would expect it would stay at reasonably elevated levels there. Sometimes it can moderate a bit just on seasonality of how some things flow through in the back after the year within our free cash flow expectations. We’ve got a little bit of that built in. But we continue to see a strong productivity out of our existing inventory, even as we’ve added over the course of the last year. And ability to turn that inventory helps us to maintain that negative net investment that is so nice to have.

Greg Johnson:

Thanks, Scot.

Brian Nagel:

Hi. Good morning. Thank you for taking my question. I would like to add my congratulations to the promotions all around.

Brian Nagel:

So the question I have – the first question, just with respect, I guess looking to the back half of the year, and you talked about sort of say the waning benefits of, I guess inflation from a sales perspective. But as we think about that then, should we also expect on the other side potentially – at least the potential for more benefits on the gross margin front with potentially easing sourcing costs?

Brian Nagel:

Got it. That’s helpful. So my follow-up question, just with respect to June. So we’ve heard others in your sector talk about weaker June, in others – in retail talk about a weaker June. I mean it sounds like your business was pretty steady. So I guess the question is, I mean, did you see anything in the month of June to suggest weakness? And if you didn’t, can you – is there an explanation of why O’Reilly performed much better than others in that month?

Brian Nagel:

I appreciate it, and congrats again.

Brent Kirby:

Thanks Brian.

Kate McShane:

Hi. Good morning. Thanks for taking my question. We just wanted to make sure that aside from the moderating inflation and some of the challenging ticket count compares, if there was anything else driving the sequentially lower comp outlook for the second half of the year?

Kate McShane:

Thank you.

Brent Kirby:

Thanks Kate.

Mike Baker:

Okay. Thanks. Real quick, can you just talk about the heat that we’re seeing throughout the country and how this impacts your business? And specifically, I think you said – I hate to put – to have two short-term, but you said that July was continuing the strength that you saw in June with incremental benefit from the weather. So does that actually mean that July was better than June?

Jeremy Fletcher:

Yes, Mike. Brent said it right. We don’t ever overreact to three-week periods of time. But it should come as no surprise, you walk outside, you know that, that hot weather is good for us. And that’s how we would, I think frame Brad’s comments in the prepared comments around that is, yes, we’ve seen the benefit that you would expect to see with the weather we’ve had.

Jeremy Fletcher:

Yes. We don’t – we don’t do a lot of forecasting within our guide there. We hate to even talk about it, but it does create noise on that other income and expense line. It just really kind of depends on the broader market activity that impacts those accounts. And in normal periods, it’s not a needle mover, but it just happened coincide in the second quarter that it creates noise.

Jeremy Fletcher:

Yes. Yes. When the market recovers, we see the liability go up, the assets go up. Its net nothing, it literally – it perfectly offsets, it just creates noise.

Jeremy Fletcher:

Yes, agreed.

Operator:

Thank you. Your next question is coming from Seth Basham from Wedbush Securities. Your line is live.

Jeremy Fletcher:

Yes. So maybe I can start there and then others can chime in, Seth, and probably answer the second question first. Overall, from a workforce perspective, continuing to see pressure from a wage rate standpoint there. I’d tell you, it’s largely in line with what we’re seeing with the inflation benefit that we’ve seen on our top line. And all of that were within our expectations. I know Brad talked about the SG&A as we’ve seen the opportunities to invest. But none of our spend outside of our original guide was driven by wage rates. Those were in line with where we had expected. And we continue to anticipate that we’ll have opportunities from an investment perspective in the team member experience enhancements that we’ve had. We felt very positive about those [indiscernible]. I talked about those at length. Those start to moderate just on a comparison basis as we move throughout the year for the things that we’ve been executing. In terms of where that’s driven us from a productivity perspective on the sales per team member, absolutely, we’re seeing a very robust top line. And Brad talked about it at length in the sense that we really believe that we’re winning business based upon the strength of our team and the service and value that they’re providing. And we think that our ability to double down on the strength of our team is really going to help us continue to sustain that and improve it as we move forward.

Greg Johnson:

Thanks Seth.

Operator:

We have reached our allotted time for questions. I will now turn the call back over to Mr. Greg Johnson for closing remarks.

Operator:

Thank you. This concludes today’s event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Operator:

Greetings, and welcome to the O'Reilly Automotive Incorporated First Quarter 2023 Earnings Call. My name is Ali, and I will be your operator for today's call. At this time all participants are in a listen-only mode and later we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. Jeremy Fletcher. Mr. Fletcher, you may begin.

Greg Johnson:

Thanks, Jeremy. Good morning everyone and welcome to the O'Reilly Auto Parts first quarter conference call. Participating on the call with me this morning are our Co-Presidents, Brad Beckham and Brent Kirby; and Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'd like to begin our call today by congratulating Team O'Reilly on a strong start to 2023. Delivering such consistent strong results requires an unrelenting commitment to excellent customer service from our team of over 86,000 professional parts people across the U.S. and Mexico. I am extremely grateful for the hard work our team puts in each and every day. Our first quarter results were highlighted by a robust 10.8% increase in comparable store sales as our team continued to deliver outstanding growth on top of strong performance in the prior year. These top line results exceeded our expectations and demonstrated O'Reilly strength on both the professional and DIY sides of our business. Team O'Reilly charged out of the gate this year, highly motivated to execute on our initiatives to invest in our people, further refine and enhance our business tools and aggressively grow our market share. We have been very pleased with the momentum our teams have generated in 2023. Our team members and our culture remain our greatest assets. And our ongoing commitment to build on both of these competitive advantages is paying clear dividends through the sustained strong results delivered quarterly quarter after quarter. Team O'Reilly remains highly focused on expense control and prudent capital deployment, enabling us to translate our sales gains and growth into outstanding returns for our shareholders. For the first quarter, our diluted earnings per share of $8.28 represents a 15% increase over the prior year. We are increasing our full year 2023 EPS guidance to a range of $36.56 – $36.50 to $37 even, reflecting our first quarter outperformance and shares repurchased since our last call. At the midpoint of the revised range, we now expect our full year EPS to increase 10% over 2022. Before I turn the call over to Brad and Brent to provide additional detail on the first quarter, I'd like to reiterate our confidence in the favorable outlook for both our industry and our company for the balance of 2023. We view our first quarter top-line results as a clear reflection of the strong demand backdrop in our industry. We also remain firm in our belief that consumers will continue to prioritize the maintenance and repair of their existing vehicles in the face of economic pressures in order to avoid taking on a payment for a higher priced newer vehicle. This value proposition compelling consumers to reinvest in their existing vehicles continues to be further supported by elevated new and used vehicle prices. Encouragingly, the U.S. consumer remains resilient with low unemployment rates, wage growth and stabilization in fuel prices, supporting both consumer health and the steady growth in miles driven. While we still maintain an element of caution with regard to the outlook for the overall U.S. economy and potential for heightened economic pressures, we believe the current market dynamics combine to provide a strong backdrop for demand in our industry. Even more importantly, we believe our strategic competitive advantages uniquely position our company to capitalize on the positive fundamentals of the automotive aftermarket and grow at a faster rate than the industry as a whole. To wrap up my comments, I want to again thank Team O'Reilly for continuing to uphold our culture of excellent customer service. Your commitment to our culture, our fellow team members and our customers drives our success and makes you the best team in the business. Lastly, I would also like to extend our gratitude to our shareholders. This past week marked our 30th anniversary as a public company with our initial public offering in April of 1993. The O'Reilly family had the wisdom and foresight to recognize the benefits of obtaining capital through the public markets to grow our business as well as extending ownership opportunities to our team members to allow us all to share in the company's success. Our incredible financial performance as a public company is a true testament to the dedication of our team. In each of the 30 years since 1993, our team has delivered growth in both sales and EPS, driving returns to our shareholders in excess of 22% per year on a compounded annual basis. We see a bright future for O'Reilly and are thankful for the trust and confidence our shareholders have placed in the O'Reilly team over the years. I'll now turn the call over to Brad Beckham. Brad?

Brent Kirby:

Thanks, Brad. I would also like to give my thanks to Team O'Reilly for your performance in the first quarter. These outstanding results are a testament to your efforts and focus on our culture of providing excellent customer service. Now I will take some time to walk through our first quarter gross margin results, discuss our inventory position and provide color on our store growth and capital investments. Beginning with gross margin. Our first quarter gross margin of 51% was an 84 basis point decrease from the first quarter of 2022, but in line with our expectations. As we noted in our last call, we anticipated comparison pressures in the first two quarters of this year. Our results in the first quarter hit those expectations, and I will now provide some color on what we saw. First, our year-over-year gross margin results for the first quarter were impacted by the rollout of our professional pricing initiative last year, which began in the middle of the first quarter of 2022. We fully lapped the higher gross margin run rate in the first half of the quarter and will be apples-to-apples in the comparison for the remainder of 2023. Secondly, we have a headwind as we compare against the final roll-through of our historic LIFO accounting benefit in the first quarter of 2022, which we noted at the time was approximately $10 million in that quarter. Both of these headwinds were in line with our expectations for the quarter and will not impact gross margin moving forward. In addition to the anticipated pressure from the first quarter in pro pricing and LIFO, we also saw continued gross margin pressure from a higher mix of professional business, some of which was planned and some resulting from our outperformance versus our expectations as that side of the business continues to grow faster but also carries a lower gross margin. However, product margin on both sides of our business has been slightly better than expected, resulting from positive acquisition cost benefits, offsetting some of the pressure from the higher-than-planned mix of professional sales. While we are pleased with our results so far this year we remain cautious regarding the cost outlook for the remainder of 2023, including the prospect for incremental reductions to acquisition costs. Our supply chain partners continue to face anticipated broad inflationary pressures, and we expect to see a relatively stable cost environment with potential for puts and takes in both directions. Pricing in the industry has remained rational. If we see future increases in product acquisition or other costs, we are confident in our ability to pass those cost increases through in selling price. We are maintaining our full year gross margin guidance of 50.8% to 51.3% and expect our quarterly gross margin performance for the remainder of the year to be consistent on a quarter-to-quarter basis and within that range. Inventory per store finished the quarter at $754,000, which was up 14% from this time last year but flat compared to the beginning of the year. We continue to track toward our planned inventory per store increase of 2% by the end of 2023 and are constantly working to deploy our inventory at the optimal position across our distribution centers and hub stores in our tiered distribution network. Our supply chain and store in-stock positions are as strong as they have been in several years. And the diligent work that our merchandise inventory management and distribution teams have done to deploy the best possible local inventory assortment is reaping benefits and strong top line results. Our AP to inventory ratio at the end of the first quarter was 133% and continues to be supported by strong sales volumes and inventory turns. Net inventory investment remained flat compared to the beginning of the year, and we remain pleased with the returns generated from ensuring that we are the industry leader in product availability. Turning to our progress on store growth and capital investments; we successfully opened 60 new stores during the first quarter. Within these openings, there are a few milestones that I would like to highlight. First, we kicked off the year with our entrance into Maryland, marking our 48th state. Not long after we celebrated the opening of our 6,000th store on February 23rd with a ribbon-cutting ceremony in Fort Gibson, Oklahoma. Finally, we successfully opened our first two stores and a distribution center in Puerto Rico in March. We are truly proud of these accomplishments and would like to thank and congratulate all of the teams involved in achieving these milestones. Growth is always hard work, and Team O'Reilly does an outstanding job of rolling up their sleeves and ensuring that each O'Reilly store is a model of excellent customer service and industry-leading product availability. Our team's ability to perpetuate our culture and execute on our dual market strategy is the reason our store growth continues to drive premium returns on the capital that we invest. Our team is marching ahead toward our goal of 180 to 190 net new store openings for 2023. We still have an ambitious year ahead of us in terms of growth initiatives and capital investments to fund those plans. Our capital expenditures for the first quarter were $223 million. And our projects and initiatives are still on track for us to hit our capital expenditure guidance of $750 million to $800 million. Progress on our distribution center in Guadalajara, Mexico remains on schedule for an opening this summer. We are excited about the opportunity that this new facility will create for us in terms of enhanced service levels to the Guadalajara metropolitan area as well as future store growth across Mexico for many years to come. Before I turn the call over to Jeremy, I want to once again thank Team O'Reilly for their accomplishments during the quarter and for their enthusiasm for excellent customer service. It is a real privilege to be a part of the best team in the automotive aftermarket. Now I will turn the call over to Jeremy.

Operator:

Thank you. [Operator Instructions] We will now begin a 30 minute question-and-answer session. [Operator Instructions] Our first question is coming from Scot Ciccarelli with Truist Securities. Please go ahead.

Brad Beckham:

Hi. Good morning, Scot. This is Brad. Hey, I'll take the kind of the first part of your question there on professional. As you know our business, we're really excited about – really a lot of things that Brent talked about. Me speaking from the store side of the house and looking at our supply chain, we're just incredibly proud of the way that our supply chain teams have found resolve over this last year and the last many years. And to Brent's point, we're in a better in-stock and ship rate percentage as we've been in a long time. And I can speak for our store operators and our sales team just that that's just an incredible accomplishment and was a large part of what drove our – what we feel like our share gains in our top line, especially on the professional side of the business, that being such a high service, high touch side of the business. And so yes, supply chain, continued execution on properly staffing our stores, getting the customer service out there calling on those customers. Just all the tools that come out of our toolbox that we talk all the time, we feel really good and are really excited about how we started the year from a professional standpoint. And Scot, on the pricing side of it, as you know, we've talked for basically a year now that we've lapped this thing, we've lapped pro price initiative. We feel really good about that investment we made just over a year ago. But as we've talked for several quarters now that – that was a one-time decision. We felt like we had an opportunity to move our overall matrix down to a point that we could really – felt like we were really competing better with the two-step competitors, the independent competitors that kind of by historical have been somewhat cheaper than us in some of our retail and larger close-end competitors. So we feel really good about what we did. But around here, it's kind of back to business as usual. We've lapped this thing. It's in the past and we have no plans for a second round.

Greg Johnson:

Thanks, Scot.

Brad Beckham:

Thanks, Scot.

Chris Horvers:

Thanks. Good morning guys. So I wanted to follow up on the question, on Scot's question. So first on the DIY side, do you think your DIY performance was in line with the market? And any gander on how much you outgrew the professional market in the first quarter?

Chris Horvers:

And so two quick follow-ups. First, do you think that any of the – you're getting back in stock on the inventory side is driving some of that pro share in addition to pricing? And if so, when did you get back in stock? And secondly, on the gross margin, given that you should have some freight costs that are capitalized that are coming down, why shouldn't we see better gross margin performance sequentially as the year progresses?

Chris Horvers:

Thanks guys. Have a great finish to this spring.

Jeremy Fletcher:

Thanks, Chris.

Operator:

Thanks you. Our next question is coming from Greg Melich with Evercore ISI. You may proceed.

Jeremy Fletcher:

Yes, Greg, I wouldn't say that the ticket counts are necessarily positive from an ongoing trend stability standpoint. I want to parse too closely into just a few weeks here in April as it relates to that. Our full year expectation is that we would see kind of net on balance, a little bit of pressure on the DIY ticket counts that would reflect in our guidance. And so just maybe around your specific question for us that we did see the DIY business rebound in April. Now for sure, some of that we interpret cautiously the first really nice week in the spring or week in spring hit us in April, and there's some of that, that we carried over out of first quarter and picked it up there. But feel good that, that's kind of stabilized at this stage and really haven't changed our outlook or expectations for the balance of the year from a DIY perspective.

Jeremy Fletcher:

Yes. No, Greg, really, the only change there from our beginning of the year outlook, which was a range of 4 to 4.5, is as sales did exceed our expectations in the first quarter. We have some incremental costs associated with that, especially on the professional side of the business. We're running more trucks out for more hours, those types of things. And then in addition to that, just some of the incentive pressures there. So most of what we would attribute that small change is the sales are running a little bit better than what we would have expected and would plan to be above midpoint there, but we have kept that operating profit guide where it's at and the per store spend is really just reflective of that.

Brent Kirby:

Yes, Greg, I can speak to that. We really honestly continue to see our proprietary brand penetration continue to grow. It's slightly north of 50%, which we're really proud of. We continue to build very competitive offerings with good, better, best progression through the lines across all our proprietary brands. And they continue to gain traction with our customers, both DIY and professional. So we're extremely proud of that. I think the second part of your question, could you ask that again?

Brent Kirby:

Yes you know that's something we watch very closely, Greg. And honestly, we have not seen that. I know some retailers are talking about that. We've actually seen a slight gravitation from the better to the best, believe it or not. And again, we think that's probably just the strength of the offering and consumers wanting quality when they have to repair their vehicle. But we've not seen any material evidence of any trade down at this point.

Brent Kirby:

Thanks, Greg. Appreciate it.

Bret Jordan:

Hey, good morning guys.

Jeremy Fletcher:

Good morning Bret.

Brad Beckham:

Yes. Hey Bret, this is Brad. Really, we were fairly pleased overall with how consistent most every market performed. As you can imagine, you've heard from others in red, there's obviously some pressure more on the DIY side on the West Coast. Some of that rolled in a little bit to the center part of the country. But honestly, even though there was puts and takes, the puts and takes kind of changed per geography based upon what the weather was doing, especially on the DIY side on the weekends specifically. So it kind of moved around a little bit. And really surprisingly, even for March where we had the most pressure, there wasn't just huge swings. There was just a little bit more pressure broad-based. And as you know, we don't have quite the concentration of stores that some do in the true Northeast or New England. But overall, really our northern markets performed pretty well.

Jeremy Fletcher :

Yes, Bret, great question. This is Jeremy. We are excited about the inroads that we have made in the Northeast. We entered there originally in 2012 with the acquisition of VIP, and then we bought Bond a few years later and opened our distribution center in Boston. So we're kind of closing the gap to those markets that we haven't been in already. I think as much as anything, we've been excited about the teams and the culture we've been able to both inhere from our acquisitions, but also grow from as a platform in those markets. So, very attractive for us. We are cautious on how aggressively we pursue any individual market. One of the benefits that we have with our large footprint is we can continue to grow really across that footprint. And that helps us to be able to identify the strong store teams that we need to be successful in our growth, and that's true up in the Northeast as well. But we've been aggressively working to acquire the properties that we'll need and to work to build the teams. And you'll continue to see our growth up there and get to a level of density. I think it's going to be consistent with a lot of our markets.

Bret Jordan:

Okay, great. Thank you.

Brad Beckham:

Thanks Bret.

Zach Fadem:

Hey good morning. Could you talk about the level of DIY comp you think you left on the table due to weather in March? And then big picture as we lapped the unit pressures last year for DIY, to what extent do you think the DIY industry has now normalized back to a more typical low single-digit unit decline? Or is there any reason to believe DIY units can actually inflect positive, given the macro and used vehicle dynamics?

Zach Fadem:

Got it.

Zach Fadem:

Hey Brad.

Zach Fadem:

Perfect and appreciate the color. And then on the pro side, do you attribute the outperformance in the industry to better-than-expected industry growth or better-than-expected share gains? And then as your price investments lap, to what extent do you expect to hold the share gains through the year, particularly against the tougher compares?

Zach Fadem:

Thanks for the time guys.

Brad Beckham:

Thanks Zach.

Liz Suzuki:

Great. Thank you for squeezing me in. Can you just talk about the private label approach you've taken and just how you've been able to grow that portfolio of products so successfully without losing any of your professional customers that tend to be more brand sensitive? And then if you could give any comment about your private label penetration by retail channel versus commercial, that would be helpful, too.

Greg Johnson:

Hey Liz, this is Greg. Just to add to that, I would say that the shift in the growth of proprietary brands is it's intentional. Proprietary brands give us the ability to leverage multiple suppliers, mitigate risk, help us better control cost of those products and the quality of products that are in the box. And don't forget that a few of our proprietary brands that we're calling proprietary brands today were national brands a few years ago. So we continue to look for opportunities to take those national brand names that we now own as proprietary brands and spread them across additional categories. So we're very pleased with the performance of our proprietary brands, as Brent said on both sides of our business.

Greg Johnson:

Thank you.

Operator:

Thank you. Our next question is coming from Michael Lasser with UBS. You may proceed.

Brad Beckham:

Hi. Good morning, Michael. It's Brad. I'll take a stab. A lot of assumptions there, but I probably jump to really your question specifically about kind of where it's coming from and customer type, competitor type, and so I may start out just on the customer front. As you know, with that gap in footprint that we talked about earlier on the call kind of between Washington D.C. and up to, through New York City, we still don't have a big book of national or strategic account business. We have a lot of regional-type service providers that are outstanding customers, and we have second, third, fourth call with some of the big national service providers. But really, when we look at our book of business and our – by customer types, it's coming from a lot of places but primarily the independent garage. There's obviously some on the national and regional accounts side, but it's not one big move in one area to your question directly. It's a lot of small moves moving from third call to second from second to first. And we're just – we feel like that is extremely sustainable, and we're really proud of the way we've been able to build that the right way. When you ask about SG&A there, what I would say is there's no doubt, we started the year fully committed to making sure that we had our back counter staffed, our professional parts people making sure that we have efficiencies in the back of the store, that obviously is an investment. It's an investment to keep our small vehicles rolling to the Hot Shot delivery to the shops. As you know well, we talk a lot about getting the car off the rack and making sure that we're safe, we're very efficient in the way that we route deliveries. So we're turning those bays and helping these people retain good technicians and all those things. So no doubt, all those things that are investment from an SG&A standpoint. Michael, as you can imagine when retail gets a little bit softer in a month like March; could our operators have scaled back a little bit from a payroll standpoint? Sure, they could have but it may or may not have been the right thing to do for the rest of the year in the mid- and long-term when it comes to our customer service levels. And so part of that was when the business pulled back a little bit there in March is we kept our pedal down to keep those service levels top notch, and we feel like that will pay off for the remainder of the year.

Michael Lasser:

So can I clarify that, Jeremy? Is O'Reilly in this era over the last couple of years, last year but with the price investments this year with more SG&A investments, O'Reilly is in an era where it's making sizable investments to gain share. It's gaining share, but at some point you'll be able to see better flow-through on those investments, assuming the share continues because the peak of the investment cycle is happening now. And as part of that why don't you raise the comp guidance because it implies a sizable slowdown over the next couple of quarters. So are you not going to see as much share gain over the next couple of quarters?

Michael Lasser:

Best of luck. Thank you so much.

Jeremy Fletcher:

Thanks Michael.

Simeon Gutman:

Hey everyone nice result. Thanks for getting my question. I guess will beat the dead horse here, the commercial outperformance. Can you talk about any new accounts versus existing? I don't think there's probably much change there. And then did anything distinctly happen in ticket growth in commercial? And I'll just ask my follow-up now so I don't – you don't have to hear me again. I wanted to ask you about the import space. We talked a bit about private brands. Can you talk about your strategy there, which is OE like with Import Direct? Are you able to penetrate that market fully with that product line or any aspiration to do it with the OE lines?

Brent Kirby:

Yes. And Simeon, this is Brent. On the second half of your question regarding Import Direct, we continue to be very pleased with the performance of Import Direct and our offering there. And we continue doing coverage of it, and we continue to see customers continue to penetrate that brand. So very happy there and feel like we compete well.

Simeon Gutman:

Thank you. Good luck.

Brad Beckham:

Thanks Simeon.

Operator:

Thank you. We have reached our allotted time for questions. I will now turn the call back over to Mr. Greg Johnson for closing remarks.

Operator:

Thank you. This does conclude today's call. You may disconnect your lines, and have a wonderful day. We thank you for your participation.

Operator:

Welcome to the O’Reilly Automotive, Inc. Fourth Quarter and Full Year 2022 Earnings Call. My name is Paul and I will be your operator for today’s call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Greg Johnson:

Thanks, Jeremy. Good morning, everyone and welcome to the O’Reilly Auto Parts fourth quarter conference call. Before we begin our discussion on our results and our plans for 2023, I’d like to take a few moments to discuss the announcement we made in January regarding the promotion of Brad Beckham and Brent Kirby to Co-Presidents. Our company is extremely focused on identifying and developing leaders who in turn are relentless in building the very best team in our industry. Our long-term commitment to succession planning is a critical component of our human capital strategy. In line with that strategy, we are extremely pleased to have Brent and Brad assume the elevated positions of Co-Presidents. Brad and Brent are exceptional leaders and are both driven by their passion for perpetuating our O’Reilly culture and providing excellent service to our customers. Brad and Brent bring diverse and broad experience to their roles of Co-President. Brad’s career with O’Reilly began 26 years ago when he joined the company as a parts specialist in Wagoner, Oklahoma. He has progressed through every leadership role in our store operations group, from Store Manager through Executive Vice President of Store Operations and Sales, before assuming the role of EVP and Chief Operating Officer and now Co-President. Brad’s leadership has been instrumental in the growth and expansion of our company and his impact is evident throughout the leadership ranks of our operational teams, many of whom have been mentored and promoted directly by Brad. As Co-President, Brad is responsible for the company’s domestic and international store operations and sales, real estate and expansion, human resources, training, legal, risk management, loss prevention and finance. Like Brad, Brent brings decades of retail leadership experience to his role as Co-President. Brent began his 35-year retail career with Lowe’s Companies and progressed through their ranks, ultimately serving in the roles of Senior Vice President of Store Operations, Chief Omnichannel Officer, and Chief Supply Chain Officer. Brent joined Team O’Reilly in 2018 as our Senior Vice President of omnichannel and made an immediate impact in that role before assuming leadership of our supply chain and distribution efforts. His extensive experience and significant DIY and professional retail industry knowledge is critical to our efforts to enhance our industry-leading inventory position, leverage technology investments to deliver powerful tools for our team, and drive deep connections with our DIY and professional customers. As Co-President, Brent is responsible for the company’s distribution operations, logistics, merchandising, inventory management, pricing, advertising, omnichannel, customer satisfaction, program management, electronic catalog, and information technology. Again, I am very pleased to have Brad and Brent step into these new roles and I am excited about the leadership they will provide to Team O’Reilly as Co-Presidents. Brad and Brent are participating on the call with me this morning, along with Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman; and David O’Reilly, our Executive Vice Chairman, are also present on the call. I am once again pleased to begin our call today by congratulating Team O’Reilly on another record-breaking year in 2022. We finished the year with incredible momentum, posting a comparable store sales increase of 9% in the fourth quarter, representing an increase of almost 35% on a 3-year stack basis. For the full year of 2022, our team generated a robust 6.4% comparable store sales growth, which came in above the revised guidance range of 4.5% to 5.5% we provided last quarter and above the midpoint of our original comp range of 5% to 7% we said at the beginning of 2022. Even more impressive, our 6.4% comparable store sales growth in 2022 followed record-setting sales growth in 2021 and 2020 when we delivered comps of 13.3% and 10.9% respectively, resulting in 3-year stacked comps exceeding 30%. These strong top line results drove another year of record earnings per share as diluted EPS increased 8% to $33.44, representing a 3-year compounded annual growth rate of 23%. Our ability to continue to grow our business and capture market share year-in and year-out is a testament to our team’s commitment to providing excellent customer service and we couldn’t be more pleased with how our team finished 2022. Entering 2023, we remain bullish on the opportunities we see ahead of us and are anticipating another strong year of sales and earnings growth. For earnings per share, we have established the guidance for 2023 at $35.75 to $36.25, representing an increase of 8% versus 2022 at the midpoint. Achievement of our 2023 guidance would result in us doubling our EPS over the last 4 years, representing a compounded annual growth rate over 19%. This impressive performance and challenging target is a testament to the quality of our team and their commitment to our customers. Brad, Brent and Jeremy will walk through the rest of our detailed outlook in their prepared comments. But for now, I will just say that we are excited about the aggressive plans we have to invest in our business and continue to take market share and drive industry-leading results. Before I turn the call over to Brad, I want to share a little bit about the incredible culture building experience our team just had in January at our Annual Leadership Conference in Dallas. Each year, we bring all of our store managers, field leadership as well as our sales and DC management team members together in one place at one time to build leadership skills, enhance product knowledge, share best practices across our company, and celebrate our award-winning performance. The theme of this year’s conference was

Brent Kirby:

Thanks, Brad, and good morning, everyone. I would like to begin my remarks today by congratulating Team O’Reilly on yet another strong year. Once again, your commitment to consistent, excellent customer service drove outstanding results in 2022. As Greg and Brad have already shared, it was a privilege to be able to get together with our industry-leading team professional parts people at our leadership conference in January, and we are all incredibly excited about the strength of our business moving forward in 2023. Today, I’m going to discuss our fourth quarter and full year gross margin and supply chain results and our outlook for 2023 and provide color on our capital investments. Starting with gross margin. Our fourth quarter gross margin of 50.9% was 183 basis point decrease from the fourth quarter of 2021, but in line with our guidance expectations. For the full year, gross margin came in at 51.2%, which was 145 basis point decrease from last year. Our year-over-year margin results were primarily impacted by the rollout of our professional pricing initiative, combined with anticipated comparison headwinds to the LIFO benefits that we realized in 2021. We are pleased to generate a full year gross margin rate in the upper end of our guidance range. However, we’re even more excited to drive strong gross profit dollar growth. Our price investments and superior execution of our business model paid off in a solid 5% increase in gross profit dollars in 2022, which represents a 3-year compounded annual growth rate of 11%. I want to thank our supply chain store operations and sales teams for their hard work in driving these results in a dynamic and very challenging market environment. For 2023, we expect gross margin to be in the range of 50.8% to 51.3%, which is consistent with how we viewed our margin guide throughout 2022. Even though we aren’t anticipating a significant year-over-year change, there are a few puts and takes that I want to call out that we expect to impact our gross margin in 2023. To begin, we will face some remaining incremental pressure in the first quarter from our professional pricing initiative as we lap a higher gross margin run rate at the beginning of 2022 before we fully rolled out the initiative in the middle of the first quarter. We also will face headwinds from a number of other factors, including comparisons to temporary benefits in the first half of 2022 from the timing of selling price increases, a higher planned mix of professional business in 2023 as that side of the business continues to grow faster, the calendaring of the remaining LIFO benefit that we realized in 2022, and pressure on distribution costs as we continue to stabilize our network after the disruptive periods we have seen during the pandemic, and face headwinds in the fixed cost we capitalized in inventory driven by a significantly smaller planned inventory build in 2023. Offsetting these headwinds, our gross margin outlook also includes an anticipated benefit from modest acquisition cost improvements. On balance, we still expect to see inflationary pressure in acquisition cost in 2023, driven by rising labor and raw material costs in the supply chain. These are specific areas that we have seen some relief in from cost pressure that were passed along to us over the course of the last 2 years, specifically in freight and transportation costs. Beyond what we have built into our outlook for next year, we remain very cautious regarding the prospect for incremental reductions in acquisition costs as most of our supply chain partners continue to face broad inflationary pressures. On an individual basis, none of the discrete factors I just outlined represent a significant impact to our gross margin. And candidly, we normally don’t dig in at this level of detail in discussing the puts and takes that impact our margin. However, we think it’s important to provide additional color since there are so many moving pieces. Over the last several years, we have seen variability in our quarterly margin results that are not typical of the normal cadence for our business, driven by significant cost inflation, the reversal of our LIFO debit balance and the implementation of our professional pricing initiative. In 2023, we anticipate quarter-to-quarter gross margins to be more consistent, with only first quarter being slightly below our full year guidance, driven by product mix. However, since some of our comparisons are more challenging, in the first half of the year, we do expect to see some pressure on gross margin rate on a year-over-year basis in the first two quarters. Inventory per store at the end of 2022 was $730,000, which was up 15% from the end of last year, which is significantly above the target that we set for inventory growth at the beginning of 2022. Over the course of much of the last 3 years, it has been our intent to aggressively add incremental inventory dollars, and we have been constrained by supply chain challenges and the necessity to keep up with the strong sales volumes and replenishment needs of our stores. As we move through the back half of 2022, our supply chain distribution and store operations teams made tremendous progress in deploying additional inventory. We also proactively took advantage of opportunities to incrementally add inventory to our network as we saw upside in capitalizing on strong sales demand as supply constraints begin to ease. For 2023, we are planning per store inventory to increase approximately 2%, which is below our historical run rates. This is primarily because of the inventory additions that we accelerated at the end of 2022. Our ongoing inventory management is geared to deploy the right inventory at the optimal position within our tiered distribution network. While our expected incremental additions in 2023 are modest, our plans include continued adjustments to push out and pull back inventory to ensure that we’re offering the best possible local inventory assortments. A key part of our inventory deployment strategy is our ongoing evaluation and modification of all aspects of our hub store network, including the number of hub stores, sizing of inventory assortments and market positioning. A substantial amount of increased inventory that we deployed in 2022 and the dollars we plan to roll out in 2023 are targeted in our hub stores to further enhance our industry-leading inventory position. Our AP to inventory ratio at the end of the fourth quarter was 135%, which sets an all-time high for our company, and was heavily influenced by extremely strong sales volumes and inventory turns along with the impact from increased inflation and product acquisition costs. While we deployed significant incremental inventory into our distribution centers and stores in 2022, we actually saw a decrease in net inventory investment of $513 million. We anticipate our AP to inventory ratio to moderate slightly as we move through 2023 and currently expect to finish the year with a ratio of approximately 133%. Our capital expenditures in 2022 were $563 million, which fell short of our original plan by approximately $140 million. The lower CapEx was driven by a few different factors, including a heavier weighing of leased versus owned stores, the delay of certain store DC and headquarter projects and planned maintenance, and the timing of expenditures related to distribution expansion projects. Included in our expectations for 2023, our plan to deploy capital for the initiatives that were delayed in 2022 as well as support new store and DC development to support our long-term growth strategies in the U.S. and Mexico. For 2023, we are setting our capital expenditure guidance at $750 million to $800 million. We have also established a target of 180 to 190 net new store openings with a planned heavier mix of owned versus leased locations. Our CapEx outlook also includes significant investments in our distribution network as we will complete and open our newest distribute center in Guadalajara, Mexico and expect initial expenditures for future projects. We have identified several exciting projects and initiatives in 2023 to enhance our service levels and provide customers an improved efficiency and product availability. Our CapEx guidance includes planned investments in significant DC and store fleet upgrades, store projects to enhance the image, appearance and convenience of our stores, and strategic investments in information technology projects. Before I turn the call over to Jeremy, I want to again thank Team O’Reilly for their unwavering commitment to our customers and dedication to going the extra mile to deliver outstanding business results in 2022. Now I’d like to turn the call over to Jeremy.

Operator:

Thank you. [Operator Instructions] And the first question today is coming from Michael Lasser from UBS. Michael, your line is live.

Greg Johnson:

Yes, Michael, this is Greg. I mean, the answer to your question is absolutely not. Brad and – talked a lot about our bullish thesis on both the industry and what we expected from our company in 2023. And the fact that miles driven has improved, not to the point of pre-pandemic levels, fuel prices have stabilized, new car sales and used car sale prices have been elevated, and overall sales have been softer over the past few years, I think there’ll be some recovery there in 2023, but we still see a tremendous opportunity just because new car sales may improve, that doesn’t mean that the millions of cars that are on the road today will just simply vanish. Cars are built better, they are lasting longer. And for all those reasons that Brad laid out. We’re very, very optimistic about the future. But as always, we’re cautious. First and fourth quarters are more volatile. And I don’t know what’s going to happen with the economy. The onset of spring impacts our volumes. But overall, on an annual basis, we remain very bullish for our future.

Michael Lasser:

That makes sense. My follow-up question, and you’ve gotten this a lot recently, is that costs have come down quite a bit, whether it’s supply chain costs in the form of lower containers, petroleum prices. Can you quantify the savings that O’Reilly is experiencing from these lower input costs? And are you passing along the savings in the form of lower prices or is that helping the profitability in offsetting some of the other pressures that you had identified?

Michael Lasser:

Thank you so much and good luck to Brad and Brent in their new roles, and the entire team.

Brent Kirby:

Thank you, Michael.

Simeon Gutman:

Hey, guys. I’m going to ask the one and a follow-up now. The first question on SG&A growth. Is this a 2023 event or – are the spending on the stores and people? Or do you foresee some of this spilling into next year? And then to clarify, if product the second is to follow up, if product acquisition costs start coming down, because you didn’t record a charge, does that create – does that – do we start creating a new debit balance? Just I think that, that won’t help the gross margin then since you didn’t create a charge you just build up another reserve. I just want to make sure that’s right.

Jeremy Fletcher:

Yes. Maybe the only thing I would say is we establish our SG&A guidance 1 year at a time, and I don’t want to guide from a pure dollar perspective, what we look like beyond that. I think what Greg points to, though, is that we remain highly committed to making sure that we are driving the right results out of every part of what we invest in our business from an expense control standpoint. And so as we move beyond this year, we intend that these investments pay off, that we lever SG&A as a result of them. And I think what you would expect to see from that perspective hasn’t changed from a long-term standpoint. Does that mean we won’t find other things as we continue to move forward and invest in, we will continue to evaluate that. It is our intent to do what we can do to build the long-term strength of our business. And I think what you see in our guidance and what we talked about matches up with that. Maybe just briefly to address your second question around the LIFO perspective, to the extent we see cost decreases in the coming year, we again, don’t expect that on balance substantially. They are going to offset cost increases. It would require a magnitude of change there that’s far in excess of what we would expect for our LIFO accounting to push back into a debit balance. So, we will be on a credit LIFO for the foreseeable future and the impact of that is as we see cost increases that will get reflected pretty rapidly within our reported results.

Jeremy Fletcher:

Thanks.

Greg Melich:

Great. Thanks. I guess my first question was on wages. What was the inflation in average hourly wage that you saw last year? And what are you expecting this year in the guidance?

Greg Melich:

Got it. And then my second question is on mix shift. You mentioned that as being a slight headwind to gross margin, I would love to have a little more detail on that and color within DIY and pro. Is there any trade-down occurring? What sort of behaviors are you seeing from your customers on both sides of the house?

Greg Johnson:

And Greg, maybe specifically to your question, in Brett’s prepared comments, when you talked about some modest headwinds there, that’s really on the professional versus DIY mix, because we anticipate professional and our top line grows faster in that that creates just the mathematical pressure on…

Greg Johnson:

That is side of business mix effect, not within each side from a category.

Greg Melich:

Got it. Perfect. Well, good luck and thanks.

Operator:

Thank you. The next question is coming from Seth Basham from Wedbush. Seth, your line is live.

Greg Johnson:

Yes. Just to clarify, Seth, in Brad’s comments, we said we expect DIY tickets to be slightly down. Now, we see some benefit as we continue to perform well against the marketplace, we are gaining share on the DIY side of our business. And we will have some easier comparisons in the first part of the year because of the pressures we saw last year that you mentioned. That’s really all partial offsets against the longer term industry trend that we and others have talked about that pressures ticket count comps because of the increasing costs and complexity of vehicle parts that supports the average ticket price, but possibly lead to service intervals and repair cycles that extend out. So, we anticipate that, that is a bigger impact for us as we move through the year. But – and that is kind of consistent with how we would normally think about DIY tickets.

Greg Johnson:

Correct.

Greg Johnson:

Thanks Seth.

Brian Nagel:

Hi. Good morning. Thanks for taking my questions. Congratulations on the promotions.

Brent Kirby:

Thank you, Brian.

Jeremy Fletcher:

Yes. Brian, thanks for the question. The weather is a part of the acceleration, I would tell you, it’s not all of the acceleration. So, we continue to see traction. And maybe I will start here and the other guys can jump in. We continue to see strong traction within our professional business and the trends there we have seen, we are very encouraged by. From a DIY perspective as we move further out in the middle part of the year when we saw pressure that, that customer has proven to be resilient and stabilized quite a bit. And we have seen some incremental improvements there that are positive. Obviously, as we think about those things, we look at them on a stack basis because of the comparison questions. But those types of things were positive. As we got to the last couple of weeks of the year, we had a cold snap that stretched across a lot of the country and we can see that pretty clearly. But even in that period of time, what we saw was broad-based across a lot of our regions and markets and customers. And we have been pleased with how we continue to see strength in the first quarter.

Brian Nagel:

Got it. And then helpful. Then my second question, look, I know it’s early. We have been talking about it as an investment community inflation and within your business for a while. But maybe as you are starting to see those inflationary pressures begin to abate and recognizing you are not lowering prices, but prices may not be going up as much as they once were, are you seeing consumers react favorably to that? In other words, I am asking, are you starting to see the early indications of what may be sort of say, an elasticity of demand here?

Greg Johnson:

Brian, and to Brent’s earlier comments about a trading up, trading down, we just really haven’t seen evidence of a significant trade-down to drive us to think that there was tremendous cost pressure on the consumer. Some of the trade-up, trade-down, trade-across, as I have said in previous quarters, was about inventory availability. Perhaps we didn’t have the particular brand they wanted. But a lot of that subsided with the improvement in our supply chain. So, really haven’t seen any evidence of elasticity or trade-down.

Greg Johnson:

Thanks Brian.

Mike Baker:

Okay. Thanks guys. We sort of danced around this, I think a little bit, but I wanted to ask you about any concern about a price war or aggressive pricing? We talked about it a year ago, there was a big concern. It never really materialized. But now as auto is talking about getting more investment in pricing, your gross margin, the midpoint is down, can you just address how you talk about or think about pricing amongst your close-end competitors? Thanks.

Brad Beckham:

Yes. Hi, good morning Mike. Yes. As you know, as we talked for a long time, all of us here have been in this industry a long time. We have been with the company a long time. That’s the first time in my 26-year career that we have really moved our framework down the way we did. And we have no plans to do that again. We felt like, as you know, there was a huge opportunity. We work in a $130 billion industry, and we do – we have 10% share. And as you know, on the professional side, it’s so much more fragmented. And with the disruption we saw the last couple of years in supply chain and some other things that hit the independents and some of the smaller players harder, especially some of the weaker ones, it was very strategic for us to make the decision we made. And we feel not only as good as we did a year ago, but we feel better in the decision we made. But it’s made, we did it, we rolled it out. And there is no plans to do that again. And just to remind you, Mike, our team’s pro-price initiative is probably fifth or sixth down the list when our operational and sales teams go to market. They are focused on having relationships with the installers. They are focused on having relationships with the decision makers, given the best delivery service in town, helping them turn their base. And I don’t necessarily contribute a large portion success last year to just pricing, it’s backing up the pricing with the top two, three, four things that make the pricing pay-off. And we feel really good about how that’s going to continue to build in 2023.

Brent Kirby:

Yes. This is Brent. I was just – the only thing I would add to the comments Greg and Brad have already made on professional pricing is the framework remains intact and we monitor it on an ongoing basis. We monitor all our pricing on an ongoing basis. But we have stayed very rigorous around being competitive, but winning on service and parts availability. That’s how we win.

Greg Johnson:

Thank you.

Chris Horvers:

Thanks for squeezing me in. Dovetail on a couple of earlier questions. I guess on that DIY acceleration, you got past – gas prices came down, you had some favorable weather in December. But I guess as you would look at DIY, do you think your share gains accelerated sequentially? Like, to what degree was the acceleration some more of like non-specific to O’Reilly factors versus share gains that you have been driving?

Chris Horvers:

And so I have sort of a two-part follow-up. So, one is, I guess on the PTO program, to what extent is this sort of a competitive need where direct competitors, companies like Walmart are – had a higher PTO option that you are reacting to in the environment? And then just second, as you think about the first half, obviously, weather always has an impact. It hasn’t been that great of a winter so far. Is the expectation as you lap that gas shock that is essentially muting what’s been a relatively warm winter?

Jeremy Fletcher:

And then maybe on the weather part of your question Chris. I would say, obviously, we have had some positives there at the end of our fourth quarter just maybe more on balance, we would view weather as neutral. I think depending upon market, we see things, plus or minus, there is nothing from a significant change perspective that at least at this point, we would call out as having an overhang effect as we move through to the next couple of quarters as we think about cadence during the year, and I know Brad mentioned it in his comments. We do expect more strength in the first half of the year because of some of the opportunities on average ticket in the comparisons from a DIY and professional ticket count perspective is as we run up against some more opportunities there. But on balance, I think weather, we would say it’s favorable constructive for the type of demand we would like to see in 2023.

Greg Johnson:

Thanks Chris.

Scot Ciccarelli:

Hi guys. Scot Ciccarelli. Thanks for squeezing me in as well. Just – I guess one more question regarding kind of the same SKU inflation comments you guys have already made. Are some vendors actually reducing product costs, or are we just talking about reducing the magnitude of increases, because obviously, that’s two different things.

Jeremy Fletcher:

And just to be completely clear on that one, Scot, when we say our guide, it does include some benefit from cost reductions. I think what Brent is saying there is that we are not anticipating a lot of incremental things versus what we haven’t seen already.

Jeremy Fletcher:

Yes. Scott, we did have an accrual catch-up. As we converted to the plan, we had some existing balances and some other types of sick and personal time items that as we enhanced, we had a one-time catch-up for team members. And then our run rate will be higher as a result of what we have seen. On a comparative basis, it will have normal comparisons there with the difference, obviously, that it will be a run rate throughout ‘23 as opposed to a fourth quarter charge in ‘22.

Greg Johnson:

Thanks Scot.

Greg Johnson:

Thank you, Paul. We would like to conclude our call today by thanking the entire O’Reilly team once again for their unwavering commitment to our customers and for our strong results we have posted in 2022. We look forward to another strong year in 2023. I would like to thank everyone for joining our call today, and we look forward to reporting 2023 first quarter results in April. Thank you.

Operator:

Welcome to the O'Reilly Automotive Inc. Third Quarter 2022 Earnings Call. My name is Vanessa and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct our question-and-answer session. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. You may begin.

Greg Johnson:

Thanks Jeremy. Good morning everyone and welcome to the O'Reilly Auto [ph] Parts third 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 Hensley, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman are also present on the call. I'd like to begin our call today by thanking Team O'Reilly for your hard work and commitment to providing excellent customer service, which drove our strong results in the third quarter. Our quarterly results were highlighted by a 7.6% increase in comparable store sales resulting in an impressive two and three-year comp sales stack of 14.3% and 31.2% respectively. Before we walk through the details of our performance and our prepared comments I want to begin the call today by acknowledging all of those affected by Hurricane Ian. On behalf of all of Team O'Reilly, I wanted to express our greatest sympathies for the devastation and loss being felt by so many families in the regions impacted by the hurricane. As a company, we were very fortunate to have incurred only limited damage and our teams were simply incredible in their rapid response to the recovery from the storm. I am always extremely proud of the way Team O'Reilly shines during these challenging times and we are all incredibly appreciative of how our team members once again stepped up in the aftermath of Hurricane Ian to serve their communities with critical supplies necessary in the recovery efforts. Thank you to each of our over 84,000 team members for living our culture of excellent customer service so well, for truly being the friendliest parts store in town, and producing the outstanding results we will discuss today. Now, I'd like to turn to our comparable store sales performance and provide some color on what we saw on both sides of our business as we move through the quarter. We started the quarter in July with improving volume trends, driven in part by warm weather across many of our markets and we're pleased to see these trends continue through the quarter with positive comparable store sales growth on both the DIY and professional side of the business, each month of the quarter. Our sales volumes accelerated, as we moved through the quarter and exceeded the guidance we communicated on our second quarter call. On a three-year stack basis, our comparable store sales were strong each month, with September finishing as the strongest month of the quarter. Our professional business again outperformed in the third quarter, producing double-digit comparable store sales growth on robust growth in both ticket counts and average ticket size. Our third quarter professional comparable store sales growth was a continuation of the strength we saw in the second quarter, with the continued benefit from average ticket growth supplemented by accelerating ticket count gains and we're very pleased to see the strong durable nature of our professional sales volume. We're very excited about the momentum we've seen in our professional business and remain highly confident in our competitive advantages in customer service and inventory availability on this side of our business. We expect to continue to consolidate the industry and grow our professional share and our team is highly motivated to outperform the competition in all of our market areas. Shifting to the DIY business. We were pleased to generate positive results in the third quarter against extremely difficult two and three-year comparisons, reversing the trend of pressure to DIY sales in the first half of the year and outperforming our guidance forecast. As I previously noted, our DIY business was positive each month of the quarter, with comparable store sales increases, driven by growth in average ticket, being partially offset by anticipated traffic pressures, with both metrics outperforming our expectations for the quarter. We saw improvement in ticket counts on the DIY side, as we progress through the quarter, while calendaring very challenging prior year comparisons and we are pleased to see the resilience in our DIY customer base, in spite of continued pressure from broad-based inflation. Although the professional side of our business continues to be the stronger performer, the improvement in our DIY business was the larger driver in surpassing our expectations for the third quarter. In total, our combined DIY and professional comparable store sales growth was again driven by strength in average ticket, which was approximately 10% on both sides of the business and consistent with what we saw in the second quarter. Same-SKU inflation benefit in the third quarter, were also consistent with the second quarter levels, coming in at similar levels to our average ticket increases, which was above our expectations. In the third quarter, we began to anniversary the acceleration of higher inflation in 2021. However, we did not see as much moderation as originally expected in this benefit on a year-over-year basis. We have continued to experience increases in product acquisition and operating costs that we are passing through in selling price increases. Pricing in our industry remains rational, and we continue to be pleased with our ability to pass through cost increases, but also maintain an element of caution, as our consumers face persistent inflation across the economy, that could result in traffic headwinds for our business. From a category standpoint, we saw broad-based support across our business including strength in the categories that normally benefit from summer heat, as we experienced warm temperatures at the beginning of the quarter. However, the benefit in weather-related categories was modest in relationship to our total business, and as such, we do not view weather as a significant contributor to our outperformance in the quarter. From a regional perspective, our performance was fairly consistent across our market areas, with widespread outperformance versus our expectations as we move through the quarter. Now, I'd like to turn to our updated sales guidance and industry outlook. As noted in our press release yesterday, we have updated our full year comparable store sales guidance to a range to 4.5% to 5.5%. This increase in our expectations for the full year is primarily a result of updating for third quarter performance. Looking ahead to the fourth quarter, we are pleased to see the volume trends we have experienced thus far in October, which have been in line with our third quarter results. We have seen sustained resilience in consumer demand, but remain cautious as we face continued broad-based inflation, the upcoming holiday season and spending pressures that places on consumers and weather dynamics that can vary significantly for the remainder of the year. While gas prices have retreated from the peaks we experienced in June, providing some level of relief to many consumers, we recognize that current fuel prices remain very volatile and well-above where we started the year as well as this time last year. It is important to note that the fact these factors can influence demand in the short-term such as fuel price spikes, weather and economic uncertainty can be distinguished from the long-term fundamental drivers of demand in our industry. We continue to be confident in the health of the automotive aftermarket, supported by steady recovery in miles driven and very favorable US vehicle fleet dynamics. We still view our customer base as healthy and believe consumers are in a stronger position now than in recent periods of economic uncertainty with continued support from strong employment and wage growth. Consumers continue to be able to capitalize on the strong value proposition of investing in their existing vehicles at higher and higher mileages as a result of the increasing quality of manufacturing and engineering vehicles on the road. We expect for demand in our industry to remain resilient as consumers who are facing high inflation and economic uncertainty, prioritize the maintenance of their existing vehicles in order to avoid taking on a payment for a higher price than newer vehicle. Now, turning to gross margin. For the third quarter, our gross margin of 50.9% was 132 basis point decrease from the third quarter 2021 gross margin, but in line with our guidance expectations. Our year-over-year margin continues to be primarily impacted by the rollout of our professional price initiative, combined with pressures from a reduced LIFO benefit, which Jeremy will discuss in more details in his prepared comments and a faster growth of our professional business. After incorporating our third quarter results, we continue to expect full year gross margin to be in the range of 50.8% to 51.3%. Our team worked relentlessly to translate to strong top line results into outstanding earnings per share growth with third quarter diluted EPS increasing to $9.17, a 14% increase over a strong comparison in 2021. While the year-over-year increase is impressive alone on a three-year compounded basis compared to 2019, our third quarter EPS increased 22% per year, highlighting our team's ability to deliver consistent profitable growth through executing our business model regardless of the tough comparisons we have faced. We are increasing our full year 2022 EPS guidance to $32.35 to $32.85, reflecting our year-to-date results and fourth quarter expectations. As a reminder, our EPS guidance includes the impact of shares repurchased through this call, but does not include any additional shares. To wrap up my comments, I want to again thank Team O'Reilly for never backing down from a challenge and providing consistent excellent customer service to our customers each and every day. It is your commitment to our culture, your fellow team members and our customers that drives our success and makes you the best team in the business. I'll now turn the call over to Brad Beckham. Brad?

Jeremy Fletcher:

Thanks, Brad. I would also like to add my thanks to all of Team O'Reilly, for your performance in the third quarter and continued dedication to our company's long-term success. Now we will cover some additional details on our quarterly results, and updated guidance for the remainder of 2022. For the quarter, sales increased $319 million comprised of a $257 million increase in comp store sales, a $60 million increase in non-comp store sales, a $4 million increase in noncomp nonstore sales and a $2 million decrease from closed stores. For 2022, we now expect our total revenues to be $14.1 billion to $14.3 billion, which is an increase from our previous range of $14.0 billion to $14.3 billion and is in line with the updated comparable store sales guidance range Greg discussed earlier. Greg covered our gross profit performance earlier, noting that gross margin for the third quarter was in line with our expectations with anticipated year-over-year pressure from the rollout of the Pro pricing initiative, LIFO comparisons and accelerated professional sales mix headwind. Since I'm sure you're all anxiously awaiting a detailed accounting discussion, I want to provide some additional details on the LIFO comparison, and how we view the flow-through of acquisition cost inflation in our gross margin results. We think it is helpful to contrast the impact of our earlier LIFO reporting prior to 2022, when we were still in a debit LIFO position versus the current situation where we have returned to a traditional LIFO credit balance. As we discussed throughout 2021, the application of LIFO accounting meant that as acquisition costs and selling prices went up, we realized the benefit from the sell-through of existing on-hand inventory that we carried at a lower historical cost due to our debit LIFO position. This nonrecurring benefit is a comparison headwind for 2022, and which we anticipated in our gross margin guidance and we've seen results in line with those expectations. Since our LIFO reserve flipped back to a credit balance in the third quarter of 2021, we are now back to typical LIFO accounting. And I think it is useful to clarify, how we view the application of LIFO and the treatment of inventory acquisition costs in our gross margin results. Under last and first out accounting, the cost of goods sold or runs through our reported gross margin results, most closely reflects our current acquisition costs and we believe this is the best picture of our gross margin performance. This reporting aligns with how we manage our process, of evaluating and adjusting prices based on changes in inventory costs. Our teams diligently work to pass along cost increases in a timely manner, consistent with or ahead of our actual receipt of cost increases from suppliers. From a balance sheet perspective, in periods when costs are rising, we see an increase in our LIFO inventory credit balance, which reflects the application of the LIFO calculation. However, because we evaluate gross margin performance on the basis of current acquisition costs and selling prices, we do not view the normal application of LIFO as a discrete charge to our gross margin results. Since we take this approach, we can see some temporary impact in our gross margin results to the extent that the timing of cost changes and corresponding pricing movements did not align perfectly. The last several years have created volatility in our reported results driven by the exhaustion of our debit LIFO balance, as well as significant inflation in acquisition costs and disruptions in supply chains. But ultimately, we expect to see a much more muted impact from LIFO moving forward as our reported results reflect a more consistent relevant picture of gross margin performance. Our third quarter effective tax rate was 23.2% of pre-tax income comprised of a base rate of 24.3% reduced by a 1.1% benefit for share-based compensation. This compares to the third quarter of 2021 rate of 22.5% of pre-tax income comprised of a base rate of 24.2% reduced by a 1.7% benefit for share-based compensation. The third quarter of 2022 base rate was in line with our expectations. For the full year of 2022, we continue to expect an effective tax rate of 23.0% comprised of a base rate of 23.5% and reduced by a benefit of 0.5% for share-based compensation. Our fourth quarter and full year expected tax rate is expected to be below our year-to-date rate of 23.6%, due to anticipated benefits in the fourth quarter from our continued commitment to renewable energy investments and the tolling of certain tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax 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 2022 was $1.9 billion versus $2.2 billion for the first nine months of 2021 with the decrease driven by higher capital expenditures in 2022 and versus 2021 and differences in accrued compensation. Capital expenditures for the first nine months of 2022 were $389 million versus $341 million for the first nine months of 2021. We now expect CapEx to come in between $550 million to $650 million for the full year with the balance of the spend for the remainder of the year continuing to support new store and DC development projects, initiatives to enhance the image appearance and convenience of our stores, and strategic investments in the information technology projects. The reduction in our expected CapEx from our previous guidance range of $650 million to $750 million is primarily the result of ongoing supply chain challenges to acquire new fleet vehicles and complete various store and DC projects. Our AP to inventory ratio at the end of the third quarter was 135%, which once again has set an all-time high for our company and was heavily influenced by the extremely strong sales volumes and inventory turns along with the impact from increased inflation in product acquisition costs. We do not anticipate our AP to inventory ratio to moderate off of this – I'm sorry, we do anticipate our AP to inventory ratio to moderate off of this historic high as we complete our inventory – additional inventory investments, but we now expect to finish the year slightly below our third quarter ratio. After generating $1.9 billion in year-to-date free cash flow and based on our updated net inventory and CapEx spend expectations for the remainder of the year, we are increasing our expected full year free cash flow guidance to a range of $1.8 billion to $2.1 billion, an increase of $0.5 billion from our previous guidance of $1.3 million to $1.6 billion. Moving on to debt, in September we retired $300 million of maturing 10-year senior notes using available cash on hand. As a result of the maturity, we finished the third quarter with an adjusted debt-to-EBITDA ratio of 1.84 times which is down from our second quarter ratio of 1.95 times and but above our end of 2021 ratio of 1.69 times. We continue to be below our leverage target of 2.5 times. And we'll approach that number when appropriate. We continue to be pleased with the execution of our share repurchase program. And during the third quarter we repurchased one million shares at an average share price of $683.09 for a total investment of $710 million. Year-to-date through our press release yesterday, we repurchased 4.6 million shares at an average share price of $650.43, for a total investment of $3 billion. We remain very confident, that the average repurchase price is 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 our shareholders. Finally before I open up our call to your questions, I would like to again thank the entire O'Reilly team, for their commitment to our customers and our company. This concludes our prepared comments. At this time, I would like to ask Vanessa, the operator, to return to the line. And we will be happy to answer your questions.

Greg Melich:

Hi. Thanks. Just to kick it off on the current trends into the quarter -- when you say that it's as strong as it was in the third quarter is that on a three-year view or year-over-year, or how are you measuring that?

Greg Melich:

Got it. And then, second, could you give us a little more color on inflation and average ticket size between, Pro and DIY. It seems like, they would be a little higher in DIY and a little less than Pro because of PPI, but any color there would be great.

Greg Melich:

And then last is trade down. Have you seen anything through the box on either side of the business?

Greg Melich:

That’s great. Thanks guys and good luck.

Operator:

We have our next question from Christopher Hoevers with JPMorgan.

Greg Johnson:

Yes. Yes, Chris. I think, you're thinking about this right. As we called out, we were pleased with our third quarter performance. We're pleased with quarter-to-date through October without a doubt. The challenge we have is the unknowns and the volatility. And frankly, the challenges that we may very well experienced in the back half of the quarter. When you look at fourth quarter, we always worry about weather, volatility you layer on the volatility in fuel prices, you layer beyond the weather just the uncertainty of the consumer and what they're going to do. And frankly, Chris, we just haven't seen an inflationary environment around the holidays in many, many years. And the holidays are always a wildcard in the fourth quarter as well. You layer on the inflation component. Those are all the reasons we're cautious in our outlook for the fourth quarter.

Jeremy Fletcher:

Yes, Chris, I don't know that we really would view it that optimistically. We're always going to work with our supplier base to ensure that we're walking a lockstep with any relief from pressure that they've seen from an input cost perspective. A lot of what we've seen so far over the course of the last year plus, has been driven by several factors, including raw materials costs, wage rates, pressures, obviously from freight that our suppliers have seen in. And we're always going to work to be sure that we're realizing appropriate reductions in rolling back cost increases where we can. But we're pretty cautious in building any expectation that that's going to be a significant helper for us as we move forward. Obviously we'll see and we'll see that play out. We do feel very confident that to whatever degree that we do see any relief on the cost side that the industry will be able to maintain those selling prices. That's certainly our intent. We'll, obviously, see how that plays out as well, but some of these cost increases are probably around the stay.

Jeremy Fletcher:

Yeah, Chris, I think the best way to look at that is just really what we called out positive good guys last year. We still have a headwind in the fourth quarter. It softens up a little bit. For us now, it's really more a function of as the cost environment moves around, how quickly and seem can you be sure to adjust prices. Sometimes we're out ahead. Other times we're just in line. But the more significant comparison headwinds for how we would have looked prior to when our LIFO credit foot back will largely be behind us after fourth quarter, a little bit less than fourth quarter and then first quarter and next year a little bit less than that.

Jeremy Fletcher:

Thanks, Chris.

Bret Jordan:

Hey, good morning guys.

Bret Jordan:

Question around fill rates, I guess my usual. Are you guys back to where you'd like to be from an inventory standpoint versus pre-COVID? And I guess, how do you see your fill rates versus the broader market? Are the WDs and some of the other competitors in the space relatively in stock as well, or is that still helping your market share?

Brent Kirby:

Yeah. Sure Bret, great question. Yeah, fill rates have improved sequentially from suppliers. We've got some suppliers that are really back to healthy fill rates. We've got a few that still are making sequential improvements but aren't fully back to where they were pre-COVID. I give our supply chain team a lot of credit for the work with our suppliers to make sure we've got the parts available that our customers need both DIY and professional. So we feel good with our availability position given the market backdrop that we're operating in. But yeah sequentially we're continuing to get better, but still a little work to do in some areas.

Brad Beckham:

Sorry, Bret. Just real quick I'll just back up what Brent said maybe from the Street and from the sales and store operations standpoint. Brent hit it pretty good. But we're basically -- we're pleased especially in some categories that we needed to get better we got better. We have a few that we still have some work to do, but really just from a competitive landscape Bret, we feel like our large competitors, they're great competitors that we always say we have tremendous respect for. They've done a good job. We hope we've done as good or better, but we are feeling like there's some share gains maybe against some of the smaller players for sure.

Brent Kirby:

Yeah. I think Bret, maybe to add a little to Jeremy's color around that on the previous question, while we've seen costs certainly can't go up forever and we are seeing some of that begin to normalize with suppliers and in the market. But if you think about wage inflation is pretty much baked into some of the cost of goods now. Yeah, we've seen ocean rates go down some, but we've seen rail rates come up. We've seen some domestic lanes come up. So trend is still high elevated versus historicals and probably is going to remain that way. So to Jeremy's point earlier, we remain cautious there and we remain confident in our ability to be able to pass those increases on in the event we see any more of those.

Brad Beckham:

Bret, there's a potential that it could work out that way. It's I think going to be determined a little bit by -- more broadly in the market where it hits. Those rates have more of a relative impact supplier to supplier than maybe some of the other things that go into the cost of providing the products that we buy in some won't have the same pressure that others may have. And so I think competitively you'll see some ability to push back on some of those. And in other instances they will flow through. We we're obviously active in those conversations and will work. There'll probably be some equilibrium that gets stuck at some point. But in the greener scheme of things, I think it is a part of how we think about acquisition costs. Some of the other things that Brent identified are obviously the bigger drivers. And we -- our views on that is that we do expect it to continue to stay around for a while.

Greg Johnson:

Thanks, Bret.

Simeon Gutman:

Good morning, everyone. First topic is on pricing and inflation and maybe the outlook, trying to think about how you're thinking about the cadence, we're about to lap some heavier price increases or inflation from a year ago. Does it -- and I think based on the prior answer, it seems like we're not going to have any material step down in the rate of inflation. It feels like it's structural. And if it subsides it doesn't feel like there will be a shock where we lose five points. Is that a fair way to think about it? And then I have a follow-up.

Simeon Gutman:

And maybe the follow-up thinking about gross margin this is directionally, obviously, not in magnitude. It does feel like and maybe some headwinds go away. I wouldn't jump to say there are tailwinds and I wanted to hear the reaction to it. Greg Johnson mentioned some of the pricing may hold industry has been rational. So, that in theory should be a good guide to the margin if pricing holds and there are some cost pullbacks. You're lapping PPI, it doesn't become an incremental headwind. And then to whatever extent freight and even some raw material costs moderate, that could be favorable for you. So, is it fair to say that some of the headwinds maybe go away they may not flip to tailwinds per se. I think you're being hesitant to acknowledge that but at least the removal of headwinds.

Greg Johnson:

And Simeon one other thing maybe to add on that topic. As you think about growth in our proprietary brands and our offering across good better best in those brands we're able to further diversify that supplier base than we are a national supplier base. So that kind of speaks to some of the point Jeremy just made as well if you think about it that way.

Greg Johnson:

Thanks Simeon

Michael Lasser:

Good morning. Thanks a lot for taking my question. One of the key debates on O'Reilly and the auto part retail sector more broadly is whether or not it can generate growth in 2023 in the absence of passing along all these price increases that have been the principal driver of growth up until now. So, A, do you think that there is elasticity within the category whereas the pricing pressure abates there will be elasticity of demand so volumes will improve? And B, even if the industry doesn't pick up and see elasticity next year can O'Reilly's share continue to grow at what seemed like an accelerating rate in the third quarter likely in response to a delayed reaction to the Pro pricing initiative that you implemented earlier this year?

Greg Johnson:

Yes Michael, just to add to that, we remain very bullish on both the industry as a whole, as I said in my prepared comments and our ability to continue to take market share. I don't want anyone to think that our growth this year has been purely the result of inflation or price inflation. We feel very confident that we're taking market share on both sides of the business and we'll continue to do so into 2023.

Greg Johnson:

Yes Michael, I'll generally answer your question and then kick it across to Brad. He's obviously, living these professional pricing programs day in and day out and dealing with our competitors and out in the marketplace. We said from the very beginning that it was going to take time to gain traction that this was not as easy as flipping a switch and everybody realizes our pricing is better and all of a sudden miraculously our sales grow. We knew it was going to take time and I think it did compound in the third quarter and will continue to grow over a reasonable period of time. At some point it will stabilize. But we do expect to see continued benefit from that. Brad do you want to talk to any specifics or anything you've seen?

Michael Lasser:

Awesome. Thank you so much.

Brad Beckham:

Thanks, Michael.

Scot Ciccarelli:

Thanks, guys. I guess I have a follow-up on Michael's question. Basically, it sounds like there's a -- let's call it almost a new store maturity curve that occurs with these pricing changes. Is that fair? I mean a typical store is going to kind of mature that Pro business over what a five, six kind of year time frame like -- are we talking about that kind of waterfall or is it something presumably much shorter than that?

Greg Johnson:

Yes Scot, I want to add to that. Let's keep in mind that pricing is only one component of market share growth and it's a smaller component than execution service level inventory availability and we continue to focus on those items as well to ensure market share growth. It's a lot more than just the pricing piece.

Jeremy Fletcher:

No, Scot, I don't know that we pointed out any real fundamental differences to what we do. Brad talked about it earlier, the keys to success -- and it was in our prepared comments, the keys success on the professional side of our business, are helping our customer partners run a more profitable business. So the things that we do to be sure that we're the best partner with our customers are the same things we've talked about for a long time. I think for us, continuing to push inventory availability, the investments that Brad talked about in the script in terms of what we've added stores this year, continue improvements in supply chain. I think those have helped us reap some of the benefit too. But this is a blocking and tackling business.

Brad Beckham:

Yes, Scott, this is Brad. I just want to real quick add nothing new, Jeremy said it best, blocking and tackling. We work in a simple business. It's not easy, but it's simple. And really, we had our regional managers from the field into Springfield last month. And our focus was on our fundamental execution. That didn't start in that meeting. But really all year, our battle cry from our EVP of Stores Doug Bragg has been, we're going to get out of the COVID funk and not accept where we may have high turnover in stores, high team member turnover, high store manager turnover, that's just not acceptable with the way we built our business, getting out seeing more customers, not having that excuse that unfortunately we made for ourselves the last couple of years, that we're just getting back to the execution that built our company and making sure that we don't have that hangover from COVID and everything we do.

Brad Beckham:

Thanks, Scot.

Greg Johnson:

Thank you, Vanessa. We'd like to conclude our call today by thanking the entire O'Reilly team for your continued hard work in the third quarter. I'd like to thank everyone for joining our call today and we look forward to reporting our fourth quarter and full year results in February. Thank you.

Operator:

Welcome to the O’Reilly Automotive, Inc. Second Quarter 2022 Earnings Conference Call. My name is Cheryl, and I will be your operator for today’s call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Greg Johnson:

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 by – which were fueled in part by government stimulus payments in 2020 and 2021 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 to 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 and 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 move through the quarter, the volatility from these factors moderated and our business stabilized. Since the past few years have been so significantly impacted by these effects – the effects of the pandemic and timing of the stimulus payments, we think 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 side 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 comparison resulted in total DIY and 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 discussed on the last two calls, we anticipated this side of our business will be a 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 where we will encounter in a rapidly changing macroeconomic environment. Certainly, if we could look in the rearview mirror at 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 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 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 – I’m sorry. In fact, as economic conditions worsen, our experience has been that the value our industry provides is even more critical to consumers facing economic challenges. This plays out in many different ways. We see it and 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 fixed 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 knowledge and higher resale values – I’m sorry, of older vehicles, but also the excellent engineering and manufacturing 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 driven 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 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’ll 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 and to $31.75. At the midpoint, this represents – 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?

Jeremy Fletcher:

Thanks, Brad. I would also like to add my thanks to all of Team O’Reilly for their continued dedication to our company’s long-term success. Now, we will cover some additional details on our quarterly results and updated guidance for the remainder of 2022. For the quarter, sales increased $205 million comprised of a $145 million increase in comp store sales, a $56 million increase in non-comp store sales, a $5 million increase in non-comp, non-store sales and a $1 million decrease from closed stores. For 2022, we now expect our total revenues to be $14.0 billion to $14.3 billion, which is a reduction from our previous range of $14.2 billion to $14.5 billion as a result of our revised comparable store sales guidance range. Greg covered our gross margin performance for the second quarter and reiterated our full year guidance, but I want to briefly recap that we are not expecting a significant LIFO benefit to our gross margin results in 2022 as a result of more typical LIFO accounting after our reserve returned to a credit balance in 2021. Our year-to-date results were in line with those expectations and our outlook on this item for the year is unchanged. Our second quarter effective tax rate was 23.8% of pretax income comprised of a base rate of 24.3%, reduced by a 0.5% benefit for share-based compensation. This compares to the second quarter of 2021 rate of 23.1% of pretax income, which was comprised of a base tax rate of 24.5%, reduced by a 1.4% benefit for share-based compensation. The second quarter of 2022 base rate was in line with our expectations. For the full year 2022, we now expect an effective tax rate of 23.0% comprised of a base rate of 23.5% reduced by a benefit of 0.5% per share-based compensation. Our expected tax rate is down slightly from our previous guidance of 23.2% due to anticipated benefits from renewable energy tax credits, and we continue to expect the fourth quarter rate to be lower than the other three quarters as a result of the timing of these benefits and tolling of certain tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. Now, we will move on to free cash flow and the components that drove our results. Free cash flow for the first six months of 2022 was $1.2 billion versus $1.5 billion for the first six months of 2021 with the decrease driven by a smaller benefit from a reduction in net inventory investment in 2022 versus 2021, and differences in accrued compensation. Capital expenditures for the first six months of 2022 were $229 million, which was in line with the same period of 2021. We continue to expect CapEx to come in between $650 million to $750 million for the full year with the balance of the spend for the remainder of the year supporting new store and DC development initiatives to enhance the image appearance and convenience of our stores, DC and store fleet upgrades and strategic investments in information technology projects. Our AP to inventory ratio at the end of the second quarter was 131%, which once again has set an all-time high for our company and was heavily influenced by the extremely strong sales volumes and inventory turns over the last 12 months. We anticipate our AP to inventory ratio to moderate off of this historic high as we complete our additional inventory investments. Based on the anticipated moderation in this ratio and a heavier spend on CapEx for the second half of the year, we are keeping our expected full year free cash flow guidance unchanged at a rate of $1.3 billion to $1.6 billion after generating $1.2 billion in the first half of 2022. Moving on to debt. In June, we were pleased to execute a very successful debt transaction with the issuance of $850 million of 10-year senior notes at a rate of 4.7%. As a result of the bond issuance, we finished the second quarter with an adjusted debt-to-EBITDA ratio of 1.95 times as compared to our end of 2021 ratio of 1.69 times. We continue to be below our leverage target of 2.5 times, and we will approach that number when appropriate. We continue to execute our share repurchase program. And during the second quarter, we repurchased 2.2 million shares at an average share price of $620.27. For a total investment of $1.4 billion. Year-to-date through our press release yesterday, we repurchased 3.8 million shares at an average share price of $637.47 for a total investment of $2.4 billion. We remain very confident that the average repurchase price is 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 our shareholders. As a reminder, our EPS guidance includes the impact of shares repurchased through this call, but does not include any additional share repurchases. Finally, before I open up our call to your questions, I would like to thank the entire O’Reilly team for their continued dedication to the company’s long-term success. This concludes our prepared comments. At this time, I would like to ask Cheryl the operator, to return to the line, and we will be happy to answer your questions.

Michael Lasser:

Good morning. Thanks a lot for taking my question. The auto parts industry has experienced a significant benefit from same-SKU inflation over the last several quarters, now that’s starting to moderate. Is your expectation that as the contribution from same-SKU inflation moderates, that there will be a corresponding increase in the number of transactions to drive steady growth for the overall sector?

Jeremy Fletcher:

Yes, I can maybe answer that first, Michael. I think when we think about the same-SKU dynamics as we move into the back half of the year; we’re not going to necessarily see a reversal of some of that inflation. I think the year-over-year benefit as we see that in the balance of the year, will moderate, as you’ve mentioned, and we’ve built that into our plan expectations. I think from a traffic perspective, since we won’t see the actual rate of pricing reverse necessarily and certainly, we wouldn’t want to give back anything on pricing, I don’t know that that’s going to be a dynamic that changes the ticket dynamics within our industry. I think for us, specifically, as we’ve thought about how the back half of the year lays out, we understand on a one year basis that, that we’ll see some pressure as average ticket moderates, but still continue to be very optimistic about continuing traction we’ll see on our professional pricing initiative. And then also, just more broadly, I feel like our industry performs very well in environments where consumers are pressured and that we’ll see support to overall demand, but not necessarily an offsetting pickup to the point that you mentioned. I think on top of that, we’re cautious as to how the rest of the year will play out from a macroeconomic perspective. And I think that comes into play here as well.

Greg Johnson:

Yes, Michael. I mean our assumption all along has been that our DIFM business would perform stronger than our DIY business. And we don’t see that changing. In the back half of the year, our expectations remain that DIFM will outperform DIY. Will DIY improve in the back half of the year? It’s really yet to be seen. It really depends on what happens in the macro, how quickly that turns around. Fuel price is a contributor, but it’s one of many contributors. We’ve historically talked a lot about fuel prices and the impact. This year, we’ve got a more significant inflationary impact across all of retail on top of fuel prices. So again, as Jeremy said, we remain pretty cautious on our outlook but remain very optimistic on the industry as a whole.

Greg Johnson:

Thanks.

Michael Baker:

Hi, thanks. So one question and one follow-up. You said July is better versus expectations. Can you tell us if it’s better – and really, I’m talking about it on a one-year comp basis, is it better than the second quarter? Or if you don’t want to answer it that way, maybe tell us what your expectation was for July. Did you expect July to be better or worse than the second quarter? Thanks.

Michael Baker:

Fair enough. The follow-up is a follow-up to your answer to Mike Lasser’s question. You said you certainly expect to hold on to price. So does that imply that if inflation does start to moderate, you should see a little bit of a gross margin benefit in the back half?

Michael Baker:

And that doesn’t seem – that potential gross margin benefit doesn’t seem to be in your back half guidance. Correct me if I’m wrong on that.

Michael Baker:

Fair enough. Thank you.

Operator:

Thank you. Our next question comes from Simeon Gutman from Morgan Stanley. Your line is now open.

Greg Johnson:

Yes. Simeon, good question. It’s really hard to break that out. That almost becomes an opinion. What I would tell you is, I think it’s more an impact of the inflationary environment. The negative ticket count was on the DIY side of our business. And as we’ve said, that consumer is a little more pressured right now with higher fuel prices and the overall inflationary environment. And we think it’s more of just a cash flow issue for that lower income consumer than maybe margins or any of that.

Jeremy Fletcher:

Yes, Simeon, I think you you’re right in saying that there are a lot of moving pieces, and it can be a little bit challenging to get a read through, particularly as we’ve seen stimulus in some of the comparative periods that have kind of pushed demand around it. And we know as we entered this year, we faced some volatility just as weather and timing has impacted us. I think where we sit today; we probably characterize this as a more normalized broader period around what we would expect for current economic conditions. I don’t know what time will tell moving forward, but as we think about just the overall makeup of our business, we certainly don’t view it as having still significant drivers that are things that are out of what we would have expected as we move through the pandemic and we sit where we are today.

Greg Johnson:

Thank you.

Scot Ciccarelli:

Thank you. Good morning everyone. So can you speak to what you guys are seeing on a geographic basis? I think your [indiscernible] previously geographically for most of the last two years. But I think we’re starting to hear about widening performance differences market to market over the last two quarters. If you can help clarify that, that would be helpful.

Brad Beckham:

Yes, sure. Hi, good morning Scott. Yes, really similar to last quarter, we were very pleased – the consistency of our business on both sides of the business, we looked across our regions and divisions. Lot of consistency, not a lot of differences from a geography standpoint. The one that we would call out, Scot, that is a little bit of a tough line to draw, but we did see a little bit of softness on the West Coast, specifically Northern California, even Pacific Northwest, Washington State that we would probably draw a line to some of the fuel prices out there, but that was a very minor difference in the way the rest of the company performed. So a little bit there, but other than that, very consistent.

Greg Johnson:

Scot, we’ve seen – over the past several years, we’ve seen more and more volume shift to private label. I think there’s a little less brand loyalty than there once was. And throughout the pandemic and supply chain issues, frankly, there’s definitely not as much brand loyalty. I think consumers are buying products you have not necessarily getting the products they want every time. But our private label program is about 50% of our volume today overall. And in the hard parts category, it’s between 60% and 65%. So it continues to grow as a percentage of our overall sales.

Scot Ciccarelli:

Thanks a lot guys.

Operator:

Thank you. Our next question comes from Zack Fadem from Wells Fargo. Your line is now open.

Jeremy Fletcher:

Yes. We saw pressure to units, primarily on the DIY side of our business. There are mix dynamics that play into what we’ve seen. And when we think about our professional business, specifically, continue to be encouraged by the progress we’ve made there, where our comp was driven by both average ticket growth, but also growth in tickets. And really, I think on that side of the business, the split between that average ticket count can depend on being able to add more things to the shop order, when you send it out the door. So we feel a positive there. We think that we’ve had the ability to continue to drive incremental business and incremental share relative to where the market is at. But we are pressured on the DIY side business. I expected that we would be as we came into the quarter with some of the stimulus compares ended up a little bit softer there than we anticipate because of the – some of the macroeconomic pressures we have spoken to.

Jeremy Fletcher:

Yes. I can take that one, Zack. The sequential first half to back half can be a little bit challenging because we do have different seasonality dynamics that come into play. So maybe to directly answer a few points to the question, we’re not anticipating incremental price investments on the professional side of our business. We expect that what we’ve done there is the full amount of what our plan was and that we would continue to maintain those levels. And that in and of its up doesn’t create incremental pressure other than you’ll have two full quarters of the impact versus first quarter being like. Beyond that, when we think about the back half of the year, we do have different mix dynamics from a seasonality perspective that we think will impact the gross margin rate some. But as we think about it on a more normalized basis, year-over-year, the pressures that we’ll see are because of some of the LIFO comparison because of some of mix. But the rest of what we would anticipate is – would have been incorporated in how we thought about or planned for the year just given those mix differences. The prior year comparable is going to be a little bit tough because we have had some LIFO impacts that have caused some of that normal cadence of the year to change for us. But really, that’s in line with what we would have thought when we came into the year.

Greg Johnson:

Thanks, Zack.

Chris Horvers:

Thanks, good morning. So my first question is a follow-up on the top line outlook in the back half of the year. On the pro pricing initiative, you had baked in some share gains in the back half and the original guidance causing some trend acceleration in the overall comp in the back half despite lapping inflation. In the updated guide, did you take that out given your heightened caution in the macro and that was part of the back half revision?