Q1 2020 Earnings Call
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At this time, all participants are any listen only mode.
Later, we'll conduct a 30 minute question and answer session.
During the question answer session. If you have a question. Please press Star then one on your Touchtone phone.
I'll now turn the call over to Tom Mcfall missed him in fall you may begin.
Thank you look.
Good morning, everyone and thank you for joining us.
During today's conference call will discuss our first quarter 2020 results.
I didn't business update on the company's actions in response to the impact for the Nobel Corona virus Cobot 19.
Prepared comments will host a question and answer period.
Before we begin this morning, I like to remind everyone that our comments today contain forward looking statements and we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward looking statements contained in the private Securities litigation.
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Really any forward looking statements due to several important factors described in the company's the latest annual report on form 10-K for year ended December 31st 2019, and other recent that's easy filings the company assumes no obligation to update.
These forward looking statements made during this call.
At this time I'd like to introduce Greg Johnson.
Thanks, Tom.
Good morning, everyone and welcome see early March 1st quarter Conference call.
Just fighting on the call with me. This morning are Jeff Shaw, our Chief operating Officer, and co President and Tom fall or Chief Financial Officer.
David O'reilly, our executive Chairman.
Greg Henslee, our executive Vice Chairman also personal to call.
Since we reported our fourth quarter 2019 results.
Set our full year 2020 guidance on February 5th.
It would be an understatement to say that the world has experienced a dramatic change with the onset.
Cobot 19 and Debbie.
As I begin my comments today, it's appropriate to start up discussion on the impact we haven't felt facing this uniquely challenging time in both the life of our country and for our customers and team members.
First and most importantly, I want to expressed a profound gratitude I have for a dedicated team much hard working professional parts people.
Never have our culture values of dedication hard work and professionalism anymore.
Simply put the parts and services, we provide to our customers are absolutely crucial whether that means health care providers first responders people working in a central industries for everyday customers, who rely on their vehicles to meet their families basic needs.
Our dedicated team members in our stores distribution system centers and offices have demonstrated an extraordinary commitment flexibility and resilience in responding to the covert 19 crisis.
Adjusting how we operate our business keep all of our stores open to take care of our customers safest way possible.
I want to think each member of team O'reilly for your unwavering commitment to providing excellent customer service during these challenging times.
We've undertaken many measures during the course of the Cobot 19 pandemic to promote the continued health and safety of our customers and team.
Keeping all of our stores opened to service our customers.
From the beginning of the response to Cobot 19, our industry was deemed to be an essential service in the executive orders that have been issued by the various governmental entities, including the federal Memorandum issued March 16th.
Since that time, we have closely monitored and adapted to the evolving information recommendations.
Permits issued by the centers for disease control and prevention World Health organization and state and local governmental agencies.
Extensive actions we've taken companywide include significantly increased cleaning and sanitation efforts the inflammation of the implementation of social dispensing practices and the ongoing adjustments of those practices as new recommendations and regulatory guidelines have been issued.
We're providing our team members with necessary personal protective equipment and are working hard to continue to replenish supplies. Despite challenges in sourcing these products.
We have also put in place programs to relax attendance policies as well as advanced sick time to help team members, who are sick or any time away to support family numbers.
In addition to all of these steps we have also implemented measures to change how we interact with our customers in our stores, which Jeff will cover in more detail in his prepared comments.
As a result of these efforts all of our stores remain open with only limited disruptions for temporary closures in a few instances, where we have determined more extensive cleaning was warranted.
Now I'd like to provide a little more color on the cadence of ourselves in the first quarter and the impact we began to see as a result of cobot 19.
As noted in our earnings release sales in January were below our expectations due to the mild winter weather headwinds in categories, such as batteries and antifreeze and that.
And that whether headwind persisted in February.
As we entered March sales result, strengthened in conjunction with the onset of spring weather and we were anticipating a solid finished your quarter.
We saw the solid sales trends until the cobot 19 stay at home recommendations at orders began to be issued in the middle of March.
With a short period of time. These orders took effect across virtually all of our market areas, resulting in a somewhat similar headwinds throughout our store base.
As we noted in our release yesterday, the negative impact caused by Cobot 19, beginning in the middle of March and extending through the first two weeks of April resulted in a decrease in comparable store sales of 13% for that four week time period.
The lack of beneficial hard harsh weather and the significant impact of cobot 19 in the last two weeks of March drove our comparable store sales decline at 1.9% in the first quarter.
Sales over the past week of reflected the benefit from the receipt.
Our customers of economic impact payments under the Corona virus aid relief and economic security or cares Act.
However, we are uncertain as to the magnitude and duration of this benefit we will receive from these onetime stimulus famous and as a result are being cautious on how we plan for our business moving forward.
The composition of our comparable store sales growth for the first roughly two months of the quarter was similar to the trend we've seen for several quarters with our professional business outperforming our DIY business driven by continued strong performance in key under car Park par categories.
Likewise average ticket increases continue to drive our comp results inline with our expectations.
As ticket counts were pressured in January and February as a result of the mild winter weather.
As we begin to face the headwinds from Cobot 19 in the middle of March we saw pressure on both sides of our business as consumer sheltered at home and miles driven was pressured.
However, the impact was more severe for our professional business as we believe the demographic survivor professional customers is more likely to accommodate working from home than a typical DIY customer.
The escalation or the cobot 19 crisis and the severity of the slowdown in demand in our business at the time of our first quarter was obviously an anticipated.
I'm sorry, the end of our first quarter was obviously had anticipated and a significant impact on our operating profit and earnings per share results, both of which fell below our guided ranges. However, with an operating profit in excess of 17% of cells, we remain solidly profitable.
As the duration of this challenging environment is unknown, we've taken prudent steps to ensure the continued stability and financial flexibility of our company, including appropriate actions to reduce costs preserve cash.
And ensure adequate liquidity, which Jeff and Tom will discuss in more detail and they're prepared comments.
We are confident in our ability to protect the financial health of our company as we navigate through the current challenging environment, but we also recognize that we operate a business for the high fixed cost structure and we'll continue to see pressure to SGN a operating results in the short term.
For the quarter, our gross margin of 52.3% was below our expectations as we saw de leverage of fixed distribution costs and a negative mix impact from the sluggish sales of higher margin cold weather items.
Outside of mix differences product margins continued to be as expected and the pricing environment remains rational.
As reported in our press release last night, we have withdrawn our 2020 operating cash flow and capital expenditures guidance as we continue to evaluate and adjust to the current environment.
This isn't a steps we've taken lightly but simply put.
We just don't know how long the current prices will last or what the road ahead will look like as each of the communities. We serve navigate the ongoing crisis and begins to plan the reopening process.
Well, we feel that withdrawing our guidance is prudent decision because of the significant uncertainty of the current environment. We believe even more strongly that our industry and our business will rebuild successfully returned a robust growth as we exit this crisis.
The challenges presented by Cobot 19 are unique in that they have temporarily change consumer behavior.
However, these changes are not structural for permanent.
We will come out of this public health crisis position for future success.
Well, the lasting impact of economic damage could persist well after the more restrictive stay at home measures of lifted we are well positioned to rebound quickly and returned to solid growth even if the broader economy is still under pressure.
A significant majority of the demand in the automotive aftermarket as non discretionary in nature as the parks, we supply to our customers are necessary for the operation other vehicles.
Historically.
We have performed well in different macroeconomic environments as consumers deferred the purchase of new automobiles and invest in maintaining and repairing their existing vehicles at higher mileage is and we believe our ability to keep all of our stores open.
And operating positions us well for the economy, because the economy begins to reopen.
As I wrap up my prepared comments I want to again think team O'reilly for their resolving commitment to our customers.
This current prices is unlike anything any of us as seen in our careers, but I'm extremely proud of the resilience of our team and their willingness to go the extra mile to take care of our customers, especially now when it matter so much.
I'll now turn the call over to Jeff Shell Jeff.
Thanks, Greg and good morning, everyone.
To begin my comments today by echoing what Greg has already said about the great contributions of 14 over the last several weeks in responding to the covert 19 crisis.
Our team of professional parts people in our stores Dcs and headquarters has a long track record of Selflessly responding quickly in times of natural disasters, including Hurricanes tornadoes wildfires in many many other challenging situations.
While this is certainly an unprecedented public health crisis I see the same resolve and steadfast commitment in all the efforts our team has taken to respond to cope with 19 and keep taking care of our customers.
I'm extremely proud and grateful of the sacrifices our team members have made to keep our stores open and operating to meet our customers critical needs. During this crisis.
Excellent customer service has always been at the core of our culture and if you've ever spent much time, one of our stores, it's easy to see how we highly without you rolling up our sleeves interacting with our DIY customers at the parks counter or with our professional customers again their shops.
In light of the information and recommendations by the CDC DHL and other public agencies, we've taken extensive actions to adjust our operations to make sure our interactions with our customers as hard as safe as possible.
Inside our stores we've added signage.
After markers for markers and other measures to facilitate maintaining the recommended distance.
We are leveraging our omnichannel investments by enhancing our buy online pickup in store functionality to include curbside pickup, which has been very well received by our customers.
We've also modified store services, such as battery and check in July testing to ensure appropriate social distancing.
For sure the changes we've made to our business to protect the health and safety of our customers and team members has changed the way we interact with our customers.
But we're extremely pleased with how well our teams have adapted to the guidance and still providing excellent customer service.
Just as we've made adjustments to how we interact with our customers. We've also begun undertakes a difficult steps to adjust our operations and reduce cost to respond to the lower level of business. We've seen as result of cope with 19.
As we began to see the impact across our markets in March we started to more aggressively manage our store payroll and staffing levels.
We also implemented a reduction of store operating hours and began closing most awards at 730 PM versus the normal closing time as nine or 10 pm.
Well, we don't like the inconvenience to our customers have an earlier closing time. We felt this was an appropriate move to more effectively deploy payroll and operating costs given the changes we saw taking place broadly across retail.
We've also reduced distribution and headquarter expenses to bring them more in line with lower sales volumes.
The combined steps we took in March to prudently manage our expenses resulted in keeping our SGN eight per store flat after excluding the impact of an extra day in the quarter from leap day in a positive year over year benefit related to deferred compensation expense. However, the combination of this.
Significant sales shortfall occurring late in the quarter in the degree of fixed cost in our cost structure drove a de leverage of first quarter SGN expenses of 61 basis points versus the first quarter of 29 team.
We saw this pressure despite the deferred comp benefit of 33 basis points, which has an offsetting headwind in other expense.
As we've discussed many times in the past, we do everything we can to manage our business for the long run to ensure we are providing exceptional customer service and building strong relationships with our customers.
Which pays off in repeat business in good times and bad.
We will not change these core fundamentals of our business in the consistency of our service to our customers has been and we'll continue to be the driver of robust growth and profitability for our company.
However, as the current crisis has extended well into April we've continued to take aggressive steps to manage our cost structure in response to the sales pressure we're experiencing.
While these steps may not prevent us from seeing continued de leverage divest DNA expenses, if current conditions persist.
We remain highly confident the adjustments were making both preserve our companys financial strength and position us to return to our long track record of industry, leading profitable growth.
We're also reviewing our capital expenditure plans in all areas of our business to ensure both continued stability and financial flexibility as well as strong returns on our investments.
Through the first quarter, we opened 73 net new stores and we're well on our way to our target of 180 net new stores in 2020.
As the measures to combat the spread of colder 19 have been implemented including restrictions on travel and various other services. We began to see delays in the development schedules of new store properties slated for opening in 2020.
Additionally, we're being very judicious about how we're proceeding forward on new store development in that period of such significant economic uncertainty.
Both of these factors make it unlikely we will open our previous target of 180 net new stores. So at this time, we're also withdrawing our 2020 new store guidance.
Our number one priority in opening a new store is to be able to identify a great store team and equip that team to provide excellent customer service from day one.
We will monitor conditions in our planned development markets and make adjustments as we move forward to ensure that we're achieving that priority.
On the DC expansion front, we successfully opened our newest distribution facility in Lebanon, Tennessee, and eastern suburb of Nashville on March nine.
Nashville, and its surrounding markets have been very strong growing markets force and the additional capacity in the new 408000 square foot facility will was to take advantage as continued profitable growth in the region and accommodate a broader skew capacity to provide an even better Brett.
Hard to find parks to our stores in this market.
The Nashville team did a great job getting up and running without missing a beat and we're extremely proud of the excellent team, we haven't place providing outstanding enhanced customer service.
As we have with our new store development, we're continuing to evaluate the development schedule for our other major distribution project, our new facility in one like Mississippi, just south of Memphis, which was slated to open in the fourth quarter of 2020, but we will now likely be pushed into 2021.
At this stage, it's too early to tell what impact for potential delay, we'll see as we move forward, but we will make the appropriate adjustments as conditions change to ensure we have a successful completion of this project.
Outside of new store in DC growth. We're also taking a cautious approach and scrutinizing other plans capital projects for 2020.
As we discuss when we outlined our plan for capital investments on our last earnings call. We have several exciting projects and initiatives, which will enhance the service we provide to our customers and drive strong returns.
The ultimate opportunities presented by these projects hasn't been diminished and we will continue to move forward, where appropriate including our initiative to convert the hardware that runs our stores.
In other instances, we will monitor our business and resource needs and we're electing to defer or certain projects for a period of time to ensure a successful rollout.
The strength of our business and the consistency of the cash flows we generate allows us the ability to weather the storm like to one we're in right now without having to make drastic and severe pets to our operating and capital plans.
This type of financial flexibility puts us in a solid position.
But we remain committed to being good managers of our shareholders' capital and we'll make prudent decisions to ensure continued financial strength.
Okay.
To close my comments I'd like to again express my deep appreciation to team O'reilly for your hard work dedication and commitment to meeting our customers' needs. During these challenging times.
Now I'll turn the call over to Tom.
Thanks, Jeff I would also like to thank all of chemo Riley for their hard work and dedication to taking care of our customers in the midst of this extremely difficult environment.
Now, we'll take a closer look at our quarterly results.
For the quarter sales increased $66 million comprised of $44 million decrease in comp store sales.
$52 million increase in non comp store sales, but $34 million increase from leap day.
$26 million increase in non comp non storage sales and a 2 million dollar decrease from stores permanently closed inline with our 2020 plan.
Clarification. These store closures were plan and are broken up consistent with our past reporting practices.
As Greg previously discussed we have withdrawn all 2020 guidance.
Our first quarter effective tax rate was 20.9% of pretax income.
Comprise the base rate of 21.8% reduced by a 0.9% benefit per share based compensation.
Both of which were better than our expectations.
This compares to the first quarter of 2019 rate of 22.5% of pre tax income, which was comprised of the base tax rate of 24.5% reduced by 2% benefit per share based compensation.
The first quarter of 2020 base rate as compared to 2019.
Fitted from solar tax credits, which were in line with expectations and total dollars and drove a lower effective tax rate on pretax income that was below our expectations.
Changes in the tax benefit from share based compensation concrete fluctuations in our quarterly tax rate.
And we continue to expect our rate for the remainder of 2020 to be lower in the fourth quarter as result of the tolling of certain tax periods.
Now move on free cash flow in the components that drove our results for the quarter.
Pre cash flow for the first quarter of 2020 was $227 million versus $279 million in the first quarter of 2019.
With the reduction driven by lower pretax income and investments that solar projects offset in part by lower credit card receivable balances.
Compared to the same time in 2019.
The investment in solar projects generate investment tax credits, which will benefit cash taxes paid in the remainder of 2020, but the timing of these investments concrete on even that and our quarterly cash flows.
Inventory per store at the end of the quarter was 643000.
It was up 1.6% from the beginning of year end up 5.6% from this time last year.
The increase reflects the additional inventory investments we have planned for 2020 as well as increases resulting from soft first quarter sales.
Our PD inventory show at the end of the first quarter was 105.7%, which was above our expectations and 104.4%. We finished 2019.
Finally capital expenditures for the first three months of the year were $133 million, which was down $20 million from the same period of 2019, driven by the prior year level of investment in new distribution projects versus the first quarter of 2020.
As Jeff previously discussed we continue to monitor the impact of Coven, 19, and will adjust our capex plans as appropriate given the environment.
As of the Coca 19 crisis worsen and we began to see pressure to operations in the middle of March we took appropriate steps to preserve capital and liquidity, including drawing down $250 million on our line of credit and holding that balance in cash.
We were also very pleased to further strengthen to strengthen our liquidity position through the successful issuance of a 500 million dollar 10 year senior note at a rate of 4.2% on March 25th in the midst of a market challenge by the Cobot 19 crisis.
We finished the first quarter with an adjusted debt to EBITDA ratio of 2.59 times as compared to our ratio of 2.34 times at the end of 2019 and above our stated leverage target of 2.5 times.
Excluding incremental borrowings we elected to hold in cash at March 31st our leverage ratio was 2.49 times.
As a further step to conserve liquidity in the middle of March we temporarily suspended our share buyback program.
Our year to date repurchases prior to this decision totaled 1.5 million shares at an average share price of $386.71 Red total investment of $574 million.
As of yesterday, we had $1.1 billion, a total liquidity and cash in available borrowings under our $1.2 billion revolving credit facility and we feel we have ample liquidity under this existing facility.
As we evaluate our liquidity leverage use of capital on share repurchase program moving forward will continue to prioritize and maintaining our strong financial position, including invest an investment grade rating on our public debt.
We have a long history of conservatively managing our balance sheet and we'll continue to take prudent steps to ensure the long term health and stability of our company.
Before I open up our call to your questions I'd like to think deal Riley team.
For the resilience they've shown over last several weeks and for their continued dedication to our company and our customers.
This concludes our prepared comments at this time I'd like desk, let's keep the operator turned in line until we'll be happy to answer your questions.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.
If you wish to be removed from the Q. Please press the pound side or have to see.
If you are using the speaker phone you may need to pick up the handset first before pressing the numbers.
Please limit your questions to one question and one follow up question.
Once again, if you have a question. Please press Star then one on your Touchtone phone.
Greg Melich from Evercore ISI is online with your question.
Thanks, Good morning, guys and great job getting through all this.
Hi, My my core question is on the actions to both reduce costs and position the business to help customers associates.
How should we think about the variable margin of the business as you are getting into that position.
I'm thinking that it's probably around 40% if we look back to prior downturns and just want to see if you still think Thats a fair benchmark.
Then I had a follow up.
The Tom you don't play so.
Greg.
This is a situation that we haven't seen before with miles driven significantly down.
Staying at home.
Within very unusual in the sales are down much more than we've experienced in the past.
As Greg talked about and prepared comments, we have a very high fixed model. When you look at multi locations open from.
730 in the morning tell 738 910 at night with the staff all of those hours.
So given that we have a high fixed model in we're seeing a pretty significant reduction in sales, we would expect to have more pressure and more of a negative.
Let's have a positive flow through.
On those sales so we'd expected to be more strict of number.
Got it so so more than 40% as would be reasonable just given the nature of the bump this downturn being so unique.
Yes.
Got it and then the follow up would be on the uniqueness of this.
What are you guys seen in terms of you mentioned that geographically across the stores. It's pretty similar have you seen any change in terms of essentially a less urban or more rural stores behaving differently I'm, just thinking about where there might still be movements of activity given that miles driven are probably down 40 or 50 per.
Anything on that would be helpful.
Jeff I'll take that yes.
Okay, Greg as we mentioned in his prepared comments now we really didnt have much of a winner in January and February so our cold weather markets start off pretty slow.
And then you know business picked up in the first half marks that we talked about and then the covert pandemic really hit.
And with 90% of the population really all across the country understand hold carriers impact was was was fairly widespread across all of our chain.
The one thing that would say in general is that the large metro markets appear to have been impact or to a greater degree and the rest of the markets and our chain and we assume that would be driven by the the better adherence to the stay at home orders.
Got it that's helpful. Good luck guys.
Thanks.
Thank you have a question a lot from Scott Ciccarelli of RBC capital markets.
Good morning, guys. Thank you for the question or you guys. They will provide us with the at least a general range of what your profitability was during that four week period, where are you posted a negative comp of about 13% I guess kind of directed by not.
Gregs question.
Yes.
Well first of all bridges accounting periods, but we don't give profitability metrics on short periods of time, what we would say.
Echo the comments, we've made regarding Gregs question is that the negative flow through will be higher because we have to staff the stores for the hours open and we'll see.
Quite a bit SGN a headwind.
Given a negative 13% count run rate.
Okay, all right I got.
Just.
Okay, sorry, obviously I forgot.
Obviously that depends also on what the sales look like for the rest of.
The quarter and.
How many miles are driven.
But given that rate.
It will be.
Let's go ahead.
Got it Okay, and then I guess a follow up question. Then is just given kind of that the magnitude of impact on your industry with the miles driven being down do you think this could lead to a more aggressive M&A posture from O'reilly or is that just not where your heads are at at this point given the current downturn in business.
Yes, Scott we as a company, we always look for strategic acquisitions and right now it's really no different.
I wouldn't say, we're focusing anymore or any less or looking at strategic acquisitions frankly.
We've been been really business really busy running the business and coping with what's going on but we would certainly be open to looking at strategic acquisitions, Afinion and presented themselves.
Understood. Okay. Good luck guys.
Thanks.
Thank you. Your next question online news from Simeon Gutman of Morgan Stanley.
Thank you everyone. Good morning, My first question more about Hey, good morning, first more of a housekeeping the the through mid April data point that you provided does that include the stimulus period and then the minus 13 broadly.
It sounds like the back half of March was weaker and we've seen improvement can you share how different the weeks in April have been so we can have a sense. The glean on how to think about the world going forward.
Yeah, we're not going to quantify that but but all kind of walk you through the quarter, along with a little more color than than what I did and prepared comments Simeon.
As we've said we started the quarter I'm very similarly to where we commented back in February January.
Mild winter that led into February.
Comps for both January and February or positive, although they didn't meet our expectations them both positive.
When we moved into March and the first couple of weeks of March.
Things improved weather improved sales were more typical of what we would expect to see with normal weather patterns.
In our business. So we saw improvement the first two weeks and then the middle of March when when Kobin really started to to present itself and and stay at home and shelter in place orders were issued present next four week period, we saw consistent.
Negative comp trends fairly consistent across all four of those weeks.
And then over the past we once the stimulus checks have started coming out checks and electronic payments, we've seen improvement over those prior four weeks.
Simeon this is Tom to add to that the reason we picked the last two weeks of March.
First two weeks of April were the performances were pretty consistent.
Stay at home orders and companies converting people to working at home was pretty consistent we want to give you what the baseline was as Greg talked about.
On better since the stimulus checks were issued but we are uncertain the duration of that benefit.
Got it yes, that's really helpful.
I guess I'll put my question and just maybe a reaction to that if I understood. It properly because miles driven seems like it down significant not not not to be able to figure it out by market, but who knows maybe 40, 50%.
It implies a pretty stimulus than your business was run rating at a much much healthier rate than that and I think you're implying minus 13 before stimulus.
Which is quite decent so I know, Greg it's prudent to be cautious which is how you laid it out.
And it's hard to think about pent up demand here versus what stimulus is going to do.
But does it does the minus 13 inform you at all.
Relative to that degree the degree of miles driven that you know that there is maybe more installation here than you would've thought or you're not on I think about it.
Yeah, well, what we're at certain of is how much of the improvement is related specifically to the stimulus we feel like a significant amount of improvement we saw over the prior four weeks. The stimulus related you know as time goes on and the stimulus checks and the money runs out.
Just have to see how our performance.
Does over the next few weeks and you know it's unknown, what future stimulus will hit and the timing of that so we're being very cautious and conservative as we look toward.
Yes.
To add to Greg's comment.
The stimulus checks hit in essence, a week or 10 days ago. We didn't want include that in our comments because we're not sure if the duration.
From a miles driven standpoint.
We havent seen the national data on that yet.
I know theres a lot of assumptions out there on gas usage of calculating miles driven but that hasn't been I was a great indicator for us where we'd also tell you is that.
There are a lot of auto parts that are sold 10 or so by somebody that's not O'reilly and our opportunity is to go out and make long term relationships with customers and gaining more market share. You are our goal has always been to never settle for what the industry growth rate is to go out and.
Additional market share grow beyond that.
And one of the momentum going ahead.
That's why we've we've done our best to keep all of our stores opened in all of our local markets. It maybe that was with the skeleton crew, but at least we kept the doors open to be there for our customers.
Yeah I appreciate all the count color and good luck.
Thanks.
Thank you. Our next question on line comes from Michael Lasser of you'd be yes.
Good morning to make lots of taking my question.
The large aftermarket players have put a lot of emphasis on miles driven as a key factor that lighting industry.
As you look out over the next nine month, what's going to be more important to determining demand pretty aftermarket miles driven or the fact that many consumers are going to be under economic pressure.
In new car sales are likely to be weighing down which matters more.
Yeah, Michael Great question, I think it's all the above you know the biggest driver in our industry continues to be miles driven that's what causes.
Package wear and tear more maintenance cycles on vehicles. So I would I would add more weight to that obviously this period that we're approaching.
More so than the normal there other factors that you mentioned that would impact that but I would say that that miles driven would be the most significant.
As I said and prepared comments and we comment on frequently most of our purchases in our industry or non discretionary most of the people come into our stores to buy parts to repair or maintain their vehicles. They just really don't have a choice whether it's getting their kids to school or getting themselves to work they have to have their vehicle. So.
Because of being non discretionary in nature.
Economics definitely plays into this but but consumers have historically done a good job, we're prioritizing their spending on a weak economy and our industry as has performed well. So I think the single most important factor would continue to be miles driven.
If you look back to the recession in 2008 2009, what categories did you see the biggest acceleration and would those be the leading indicators for how the next few quarters could import it could you comment in what you expect inflation or deflation.
For the auto aftermarket could be.
For the year.
So when we look back at 2008, not surprising as people.
Determined they were going to keep their vehicles longer one to maintain the real worthiness.
Key drivers were hard parts.
Vehicles for.
People want to keep their vehicle maintaining it on the road well it wasn't a dress up wasn't in performance. It was it was those key hard parts.
The second question was.
Peter repeat second question I'm, sorry, Michael.
What's the outlook for inflation or deflation as you move through the next few quarters stuff.
Sorry about that yes. So our expectation is is unchanged we had anticipated no inflation.
No new inflation and that we would be anniversary.
Increases from the tariffs and last year, so same expectation.
Thank you very much and good luck.
Thank you. Our next question a lot comes from Brian Nagel of Oppenheimer.
Hi, Good morning, Thank you for taking my questions.
So the first question I have.
I guess are relatively simple ones that you'd mentioned your prepared comments and not surprising that due to the iwai business here is performing better than the commercial DIFM business could you give us some more details just on how how how thats how large of spread between the two side your business is growing tracking.
Yes, what we said is that a.
First of all we're not going to break out what what the spread is between those two.
But we we have seen.
Less pressure on the DIFM side.
Over the past week or so as we called out in our comments.
And.
We think a lot of that is because of the consumer that as the typical DIFM customer is probably more able to work from home and driving fewer miles than perhaps that DIY customer might be Tom do you want to add to that.
In the last week or 10 days since we've seen this stimulus checks we've seen those.
Both sides of the business improve.
I would tell you is that the DIY has over this period of time since the the significant outbreak in the crisis has gotten worse is performed markedly better.
Got it.
The second question I have.
Going back tubes.
After the comments some else made their question, which was look across retail.
The down 13, you talked about the mid March to mid April while not consistent with normal or why the products. This is actually not that at all relative to a wonderful retail is up there.
As you look at the backup up your business.
To what extent.
These are widely benefiting right now from new traffic, new customers coming to the store potentially reflected dislocations in the within the broader retail landscape, except that is happening.
How do you think about could we tend to these customers once it.
The pandemic or the crisis begins to abate.
So.
I guess the first thing I'd say is anytime we put up a negative comp quarter. It's happened so rarely it doesn't feel very good.
Despite the comparisons.
And the traffic, it's very hard to determine.
We can look at some of our overall wards data.
Because.
And we can look at that over a period of time to see how many new customers, we sign up and when we look at our shops because their business is suffering it's hard to know if you're losing more or less than the other other numbers. They have on the line and whether moving up the call list or not ultimately we feel good that we've been able to keep our stores open and.
Performed.
Operatively, well overtime, so we feel like those customer and actions, where we get a new customer in the door because.
The parts store that they normally go to hasn't been opened that we're going to provide great customer service and thats going to be sticky same thing on the professional side, which which we know for sure from past experience.
Yes, Brian I would I would add one thing to the you know our.
Most of our ecommerce business does result in that customer coming through our store as buy online pickup in store.
You know over the past several weeks, we have increased functionality there to roll out.
Hi, online ship to store functionality, which opens up our supply chain to provide often same day service to our stores either from a distribution center or hub store nearby. So we've added that functionality and in our ecommerce sales has picked up.
Additionally, on the pickup in store side.
Okay.
Thank you very much.
Thank you next questioner line comes from Chris Horvers of JP Morgan.
Thanks, Good morning, guys.
So my questions on on the gross margin line. So can you talk a little bit about how lapping tariff price increases played out what did that end up being a headwind and and and related that LIFO.
And did my Ass end up being a headwind to your gross margin rate and while you've pulled guidance as you think about all the puts and takes of what you're seeing so far any comment on the gross margin going forward.
Lapping the tariffs has played out as we expected.
On our last call when we laid out our gross margin guidance at the time.
Michael is more of a headwind this year, we're not seeing as much of the benefit as we saw last year, but that again is tracking as we'd expect.
As we talked about on the call last on my asset runs a big independent jobbers business, so they're selling to other parts stores. So they have a lower operating costs, but also lower gross margins. So that's a drag also.
When we look at our gross margin.
For the first quarter versus our expectations, it's really.
Less high margin in winter items, and then we have that relatively high.
Quite a bit of high fixed cost in our distribution center. When you look at management occupancy and routes that we run transportation. So when our volumes down that's going to be a drag.
Yeah, I want to add a little more color and distribution to what Tom said.
Fixed cost as Tom said, there three or they're going to be a drag on low volume one of the uniqueness is of the timing of the impact of the virus to US is it's in a period of time, where we're ramping up for spring volume. So if you look at a distribution center and you look at the labor in the distribution Center you got to look.
At the end, but outside inbound volume as well as the outbound volume so over the past several weeks our inbound volumes have been higher you know as a result of ramping up for the spring season, while our outbound volumes have presence and softer. So the dcs have been impacted and you would think that they would be able to reduce hours and cut some labor the head.
And been able to do that as much as as you might think because of the inbound volume and keeping up with the spring inflow of product.
Got it so basically the one key gross margin played out as you thought sounds the.
Our topline impact and so it's a good guide going forward and you know.
Two quick follow ups are two follow ups. One is what was the inflation impact the comp in the first quarter and.
And then just big picture that 2009 analogy, what how would you compare the puts and takes to what occurred back than we had the peak repair factor seemed like weather was better than new car sales dropped off.
Sort of sustained dropped off was was much bigger, but then on any of that.
The other hand, you've got higher share now you are your smaller players are probably suffering capital.
Pressures and there's 15 16000.
Small shops out there to take share from.
But you don't have the dealers closing so a lot of puts and takes Howard how are you thinking about that in comparison to that or nine timeframe.
Yes, so I'll take the first part, though Tom speak to the inflation question.
Chris.
A lot of things are similar and then there are some things that are that are definitely different you know when we when we throw it over nine there was there was a lot of things we called out that were drivers you were talking we talked about the SAR, we talked about miles driven we talked about Hispanic hibernation and other things.
The one thing that that's unique about the situation. We're in now is the fact of the dramatic potentially dramatic impact miles driven so far.
With all of the stay home orders consumers had just have just not been driving their vehicles at all in a lot of markets. So miles driven we feel like is going to be significant down significantly drought down. We think that was a driver of a lot of the negative impact to our first quarter results.
Really just depends on how this thing plays out miles driven is going to be a key factor and what our business does going forward and it really just depends on the timing of when these stay home orders or release and people are able to go back to work and get back to their normal lives.
On the inflation that was little over two and a half which is pretty much exactly where we expected to be all driven by anniversary sale price increases from last year related last year's tariffs, we'd expect that to be the highest number the year and to decline as we anniversary last year's Terence.
Thanks, So much best of luck guys.
Thanks you.
Thank you. Our next question a lot to come from Bret Jordan of Jefferies.
Hey, good morning, guys.
Good morning.
Quick question I guess, when you think about the payables programs and I guess leverage ratio is likely to go up as EBIT comes down in that.
How many miles driven contraction due the banks get any more I guess.
Or less less credit available or higher rates on the payables programs in the next couple of quarter is that pretty well understood to be one off than worked out.
So our vendor financing program.
I am really tend to what our rating is and our expectation is that that will not change it will be very conservative in our balance sheet, Although we will see.
Yes sure from.
Operating standpoint, given the current environment, we generate a significant amount of cash and we expect to be able to very effectively manage our higher leverage ratios.
Great and then I guess a question as far as the broader industry.
Obviously, a lot of doors when you think about the independent distributors and all do you think that we're going to see meaningful contraction in the total number of doors just given the magnitude in the abruptness of this decline independence or buying group members that may go away.
Right I really don't think we're getting good so for that yet we've got will you know the when you look at the shops that are out there a lot of those shops or are strong financially. When you look at layer about that the wses. Those guys are strong financially I think it would be naive to think that there wouldn't be some doors closed throughout all of this.
Yes, but I just don't think at this point, we've got a scope.
Hi, due to the scope for the magnitude of that.
Great. Thank you.
Say Q or next question on line comes from Daniel Umbro of Stephens incorporated.
Hey, good morning, guys. Thanks for taking my questions.
Wanted to ask and apologies I hopped on late this RFP discussed this in your remarks, but have you seen an uplift in sales through your online channels relative to the last few quarters as we've seen this work from home environment and if so has it excludes any you know.
Weaknesses are areas that need investment in your infrastructure has given you guys any new learning around where future investments could drive incremental so on the online but.
Yes, Daniel So we I just say earlier that we have seen improvement.
In ecommerce sales, although it's still a very very small percentage of our total sales.
Throughout the last several weeks you know the stay at home orders clearly have driven more consumers to shop online. The one thing that hasn't changed during that process is how how those customers are buying from us.
Assistant lay over the years customers have have air to the side of.
Even to forego discounts to buy online pickup in store and that just speaks to the urgency of need in our industry and we've seen that an uptick in sales, but we haven't seen a change in those buying habits that most of those.
Purchases due resolved in the team members are the customers come into our stores. We we have advertised our curbside delivery and I think thats been very popular with a lot of consumers that just are not comfortable going in and socializing with people during this.
Hi damage. So we have done done a lot of business through that channel, but most of our volume continues to be our ecommerce volume continues to be buy online pickup in store.
Got it that's helpful. And then just a follow up on the working capital question earlier, Tom as you look at the balance sheet inventory did grow pretty meaningfully can you help with parse out how much of that was the proactive hundred million dollar inventory investment you planned for this year and any early signs that that that is helping.
Okay and incremental share can you parse out the impact depending on the rest of the BNL. Thanks.
So about half of it was the additional growth that we plan for this year and half of it was.
Just didn't move as many winter goods and again to spring as Greg talked about the inbound keeps coming so were planted for business than it was.
Very rough going the last two weeks as far as are the additional skews, making a difference that will take time to determine and there is so much disruption out there in the market right now that that is clouds every everything else from a testing perspective.
Got it thanks, guys best of luck.
Thank you.
We have reached our allotted time for questions I'll now turn the call back over to Mr., Greg Johnson for closing remarks.
Thanks, Steve.
We'd like to conclude our call today by thanking the entire O'reilly team for their continued selfless dedication to our customers.
I'd like to thank everyone for joining our call today, and we look forward to reporting our second quarter results in July.
Thank you ladies and gentlemen, this concludes todays conference. Thank you for participating you may now disconnect.
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