Q4 2020 O'Reilly Automotive Inc Earnings Call
Welcome to the O'reilly Automotive, Inc, fourth quarter and full year 2020 earnings Conference call. My name is Gigi 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. During the question and answer session. If you have a question.
Please press Star then one on your Touchtone phone I will now turn the call over to Tom Mcfall. Mr. Mcfall, you may begin.
Thank you Gigi good morning, everyone and thank you for joining us during today's conference call, we will discuss our fourth quarter, 'twenty and 'twenty results and our outlook for 2021.
After our prepared comments, we'll host a question and answer period.
Before we begin this morning, I'd like to remind everyone that our comments today contain forward looking statements and we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1995.
You can identify these statements by forward looking words, such as estimate May could will believe expect would consider should anticipate project plan intend or similar words.
And the company's actual results could differ materially from any forward looking statements due to several important factors described and the Companys of latest annual report on form 10-K for the year ended December 31, 20, and 19 and other recent SEC filings.
Company assumes no obligation to update any forward looking statements made during this call.
At this time I'd like to introduce Greg Johnson.
Thanks, Tom.
Morning, everyone and welcome to the O'reilly auto parts fourth quarter Conference call.
Participating on the call with me. This morning are Jeff Shaw, our Chief operating officer and co President.
And Tom Mcfall, our Chief Financial Officer.
David O'reilly, our executive Chairman and Greg Henslee, our executive Vice Chairman are also present on the call.
To begin today's call I would like to congratulate team O'reilly on delivering a truly remarkable year and 2020.
At this time last year when we first provided our outlook for 2020, we could never have anticipated the challenges we would face during the year.
The COVID-19 pandemic has disrupted every facet of daily life, and the United States and has required our teams to show tremendous flexibility and executing our business model and taking care of our customers.
There are simply aren't words to describe the selfless dedication and hard work and sacrifices our team members and our stores distribution centers and offices and demonstrated during 2020.
From the onset of the pandemic, we have closely monitored and quickly adapted to evolving information recommendations and requirements issued by public health agencies and state and local governments as we continually update our protocols and procedures to ensure best practices are followed.
Our top priority continues to be the protection of health and safety of our team members and customers while meeting the critical needs of our customers as an essential service provider.
Before I move on to the rest of our prepared comments today I want to thank team O'reilly furore of amazing dedication and performance during an incredibly challenging and successful 2020.
The bedrock of our company success of our founding 63 years ago has been providing excellent customer service and never has the value we provide to our customer has been more evident than during the past year.
Our team consistently stepped up to the plate to meet our customers critical needs in the midst of extremely challenging circumstances and delivered record breaking results and 2020 highlighted by full year comparable store sales growth of 10, 9% and and annual operating profit of 26%.
2020 represents our 28th consecutive year of comparable store sales growth record revenue and operating income. So none of the 27 preceding years was anything like 2020.
Now, we will cover our fourth quarter results and our full year expectations supporting our 2021 guidance.
Our comparable store sales for the fourth quarter grew at 11, 2% and.
As we discussed on the last two quarters calls, we anticipated that sales were to return to a level, which was closer to our expectations from the record setting pace. We saw in the middle of the year, but we remain very pleased at how steady and elevated our sales have been.
From a cadence perspective after starting the quarter on a strong trend as noted on our last conference call. We saw sales moderate somewhat in November but finished December with the strongest performance of the quarter as we saw robust underlying sales trends supplemented by a benefit from cold weather categories.
The composition of our strong sales performance and the fourth quarter and continue the trends we've experienced in the past two quarters with our DIY business being a stronger contributor during the quarter driven by robust increases in both ticket comp counts ticket count comps and average ticket comps. However.
Over our professional business also performed well and strengthened as we progressed through the quarter.
Our average ticket growth and the quarter and full year of 2020 exceeded our expectations. Despite of limited benefit from inflation, indicating a continued ability and willingness of our customers to work on larger projects.
From a category standpoint, we continue to see broad based robust sales trends across all categories with very strong performance and our DIY out-front categories and batteries.
Even in an environment of pressure on total miles driven as a result of the pandemic. We saw continued brisk sales and are under car hard part categories.
As we look forward to 2021, and we remain very confident about the health of the automotive aftermarket and we are monitoring several potential tailwind and headwinds that affect our outlook for the coming year.
While it is impossible to quantify the exact impact of the various factors that drove the surge in volume we experienced in 2020.
We believe our industry benefited from several positive tailwind that contributed to our extremely strong performance.
And the early stages of of pandemic governance government stimulus payments and enhanced unemployment benefits under the cares act provided immediate demand and our markets.
And have helped shore up the U S consumer even in the face of increased unemployment.
However, the strength of demand and our industry has stayed very strong throughout 2020 and and it is also clear that we benefited from and increased willingness by DIY consumers to invest and repairing and maintaining their vehicles for a number of reasons.
As we have seen repeatedly in previous economic cycles, and the current economic uncertainty drives consumers to defer new car purchases and invest and keeping their existing vehicles on the road.
The trend in 2020 for DIY Ers to take on larger jobs reflects this renewed focus on addressing underperformed maintenance.
We also believe the strength, we've seen and what has typically been more discretionary appearance and accessory categories reflects a shift and consumers allocating more of their time and spend to their vehicles and away from spending on other activities not possible during the pandemic.
As we evaluate the staying power of increased demand.
And we've seen and the DIY side of our business in 2020, we remained cautious knowing that some of those tail winds to automotive aftermarket demand may soften as we move further past the economic disruption brought on by the pandemic.
However, we have been encouraged by how resilient the strong sales trends have been as we've moved past the injection of additional dollars into the economy and remain confident that consumers will continue to see value and repairing and maintaining their vehicle and a difficult economic environment as we've seen during similar periods in our history.
Yeah.
We've also been pleased with our performance even in the face of declines of miles driven and the U S driven by decreased employment and increased work from home of arrangements as well as a slower pace of economic activity to.
Performance of our professional business took longer to stabilize after the initial pandemic shutdowns due to the consumers' initial reluctance to take their vehicle to of professional installer shop for repairs and the demographics of the consumers on the on this side of the business, making them more likelihood of work from home and drive less.
The professional business began to turnaround and May and delivered solid above plan results for the third and fourth quarter. However for the full year, our professional business was below our expectations.
And while sustained pressure to miles driven as a long term negative to our business. We're encouraged that we've performed well and the current environment and believe we will benefit as miles driven returns to historical norms post pandemic.
While it is evident that these positive tailwind.
We have experienced have also benefited the entire automotive aftermarket are extremely strong results and 2020 were also driven by significant share gains.
We offer a compelling value proposition to our customers, providing excellent customer service through a well equipped technically technically proficient team of professional parts people leveraging industry, leading parts availability.
The strength of this business.
Alright, and the strength of this business model and our team who worked tirelessly to keep our stores opened stocked and supplied was and continues to be a huge advantage and an incredibly difficult environment and differentiates us from the experience offered by some of our competitors and big box stores.
Each new customer is hard won and our team remains committed to deliver on the promise of outstanding customer service and each store every day.
We're confident the goodwill we've created for meeting our customer is essential needs. During this crisis will drive customer loyalty and earn their repeat business.
As we have thought through the dynamics of demand and our industry and our performance over the last several quarters with a focus and looking forward to 2021.
We remain confident and the strength of our industry and the ability for our team to continue to produce strong top line sales.
However, we have experienced a tremendous surge and our business. After the initial onset of the pandemic and we remain cautious as we plan for the coming year and anticipation of continued significant uncertainty and the potential for volatility and our results.
On the professional side of our business, we expect solid performance throughout the year as we anticipate our current momentum to continue as miles driven continues to rebound. However on the DIY side of the business, we face extremely difficult comparisons beginning in April as we lap the biggest surge and demand and a short period of time.
And our company's history.
As a result, we're.
<unk> two of comparable store sales range of down 2% to flat versus comparable store sales growth of 10, 9% and 2020.
And with the most significant pressure and that outlook expected for the second and third quarters as we left of record volumes.
Thus far and 2021, we've been pleased with our results as our strong sales trends have continued and we benefited from additional government stimulus and favorable winter weather.
For 2021, and we are reinstating our practice of providing selected annual guidance as we move through 2021, we anticipate we will face significant quarter to quarter uncertainty as the broader impact of recovery from the pandemic is difficult to predict.
The potential volatility coupled with dramatic different comparisons to the unique business trends. We saw play out in 2020. It makes it extremely difficult to project the timing and cadence of our business with a high degree of certainty.
As a result, we are limiting our guidance to expectations for the full year of 2021, and not providing guidance for individual quarters.
As a final note on our outlook our guidance doesn't incorporate any further benefits from additional government stimulus unemployment benefits since the timing and ultimate impact of these measures is difficult to project.
As we move through 2021, we will update our annual guidance as appropriate as we could see more significant volatility than we have historically as our industry and the U S economy charts of course out of this pandemic.
Moving onto gross margin.
For the fourth quarter, our gross margin of 52% was of 131 basis point decrease from the fourth quarter of 2019 gross margin.
The reduction from last year was driven by a reduced LIFO benefit from the impact of merchandise purchased in 2019 before tariff related cost increases as well as the planned expected dilution from my answer.
Both impacts are consistent with the pressure experienced in the third quarter and in line with our expectations.
As a reminder, on the tariff cost impact through 2019, we received of gross margin benefit from the sell through of on hand inventory that was purchased prior to the tariff driven acquisition price increases and 2018, and 2019, and we have experienced headwinds and the back half of 2020, as we compared against the <unk>.
And 19 benefit.
We also experienced headwinds to gross margin and the fourth quarter related to the expiration of certain tariff exclusions, we had received and the back half of 2019 that expired in 2020.
For the full year gross margin came in at 52, 4% and for 2021, we expect our gross margin to be and the range of 52.2 to 52, 7%.
For the quarter earnings per share of $5 40.
It represents an increase of 27% over $4 25, and the fourth quarter of 2019.
For the full year earnings per share were $23 53.
Which represents a 32% increase over 2019.
For 2021, our guidance is $22 70.
To $22 90 expense, representing a decrease of 3% versus 2020 at the midpoint.
However, on a two year compounded annual growth rate basis compared to 2019, our expected 2021 diluted earnings per share represents of forecasted annual increase of 12, 9%.
Our EPS guidance includes the impact of shares repurchased through this call, but does not include any additional share repurchases.
To finish my comments I want to again off from my appreciation to team O'reilly for an outstanding year, we truly have the best team and the country and we couldnt be proud of your hard work and dedication to our customers and 2020.
Ill now turn the call over to Jeff Shaw Jeff.
Yes.
Thanks, Greg and good morning, everyone.
I want to start by adding my congratulations and expressing my sincere appreciation to team O'reilly for another incredible quarter and and amazing full year performance in 2020.
2020 has presented wave after wave of changes and our teams have consistently stepped up to the challenge to run our business and take care of our customers.
Challenges remain and 2021 and our teams remain committed as ever to deliver and exceptional service and value to our customers.
At this time of year, we would normally be returning from our leadership conference.
Which is a huge in person gathering of all of our store field and DC leadership, where we enhance our product knowledge and technical proficiency.
Okay, new tools and strategies to improve our customer service and take market share and.
And to recognize the outstanding achievement throughout of our company.
Even though this year's event and had to take on a new format as our first ever virtual conference. We had an extremely successful event and.
And no slogan could be more on target and our conference team of O'reilly strong.
That will rally strength was on full display throughout 2020 and were especially proud of the daily sacrifices of our team made to go the extra miles to take care of our customers critical needs. While also ensuring that the health and safety of our team members and customers remain the top priority.
<unk>.
Now I'd like to spend some time, covering our SG&A and operating profit performance in 2020, and our outlook for 2021.
For the fourth quarter, we generated an impressive increase in operating margin of 111 basis points and and operating profit dollar growth of 21%.
For the full year, the improvements were 193 basis points and 26% of operating profit dollar growth, yielding a record 29% operating margin.
This increase and operating profit results for 2020 was driven by the combination of of robust 10, 9% comparable store sales growth and very limited per store SG&A growth of one 2% after adjusting for leap day, resulting and leverage of SG&A of 263 basis.
Thanks.
As we've discussed since our second quarter 2020 was a very unique year and our industry as the onset and progression of the pandemic created extreme short term sales volatility and our business.
Our corresponding actions to execute significant cost control measures to protect the company at the onset of the pandemic and our caution and adding back SG&A dollars created a situation where very strong sales generated levels of profitability that far exceeded historical performance and are not sustainable nor <unk>.
<unk> for the long term success of our business.
As we move through 2020, we've redeployed more SG&A dollars back and our stores to adjust that to the current sales environment because of continued to see sales outrun the growth of our SG&A and drive significant leverage.
And establishing our operating margin margin guidance for 2021, we're projecting and increase in SG&A per store of approximately two 5% after adjusting for leap day and 2020.
This outlook reflects our plans to continue to actively manage our cost structure to provide excellent customer service to match the sales environment and ensure we are allocating sufficient resources to the image and appearance of our stores and the training and development of our team members.
Even with the continued prudent outlook on managing SG&A will face very challenging comparisons in the middle of 2021 to the deliberate significant cost reductions we executed in 2020.
As we've evaluated our forecast for 2021, we've looked in the rearview mirror to not only last year, but 2019 as well.
And as compared to 2019, our current expectations for per store SG&A growth drive solid incremental leverage reflecting lessons learned as we've navigated through the high levels of sales and productivity gains and 2020, especially as we capitalize on the quality and experience of our team.
And as always we don't manage our business for short term results.
But we will invest the dollars necessary to provide the excellent customer service that drives our long term success.
Our assumptions for operating costs include anticipated wage pressures in line with existing and minimum wage statutes. Currently scheduled but does not include potential further increases at a federal state or local level.
Nor does it include any incremental top line inflation assumptions that we believe would result from the legislation.
Based on relatively flat gross margin and increasing operating expenses, we expect operating profit to decline between 150, and 200 basis points from 2000 Twenty's phenomenal results. However, our operating profit guidance range of 19% to 19, 5% of sales represent.
Solid growth from the 18, 9% operating profit that we achieved in 2019.
Our capital expenditures for 2020 were $466 million, which was lower than our typical capital expand and was below our original plan coming into 2020.
At the onset of the pandemic and the second quarter, we prioritize financial stability and flexibility and as we move forward and of COVID-19 World, We reset our expectations for new store DC and capital project development.
Our number one priority is to drive strong returns on our investments by ensuring our new store start with a great store teams to provide excellent customer service from day, one and our projects are completed successfully to enhance our service and drive efficiencies.
We resumed our capital deployment plan and the back half of 2020 and in line with our revised plans. We were successful and opening 156, net new stores and 2020, including our first Greenfield new store opening in Mexico during the fourth quarter.
We've been very pleased with our team's ability to successfully opened a great new store locations and a very difficult year and our 2020 stores are off to a great start.
For 2021, we're setting our capital expenditure guidance at $550 to $650 million. We've also established a target of 165 to 175 new store openings.
Our new store target is higher than our new store openings in 2020, but it's still restrained by expected delays in regards to design and permitting approvals.
We feel confident that we can achieve our target and opened and another strong class of new stores, but will be dependent on local market conditions and municipal agencies for us to stay on our development schedule.
After the successful opening of our newest distribution facility and 2020 and 11 in Tennessee, We have another major distribution project on the horizon for 2021 with the completion and opening of our new DC and Horn Lake, Mississippi, which is just south of Memphis, and the second quarter of this year.
<unk>.
This new DC will be approximately 580000 square feet and our initial plan is to build out capacity to service 250 stores servicing over 220 stores and startup.
The new DC will provide us with additional capacity per store growth and this region of the country and provide flexibility for the surrounding D. CS.
And while also accommodating a broader SKU capacity increase and our breadth of hard to find parts and allowing us to provide an even higher level of service to the Memphis Metropolitan area markets.
Our distribution teams are very experienced and planning designing building and opening our new Dcs and we're looking forward to another successful project and 2021.
Outside of our new store and distribution growth. We've also identified several exciting projects and initiatives in 2021 to enhance the service, we provide our customers and drive strong returns.
Several of these projects were included in our 2020 plan, but were delayed as we monitored our business to ensure a successful rollout while prioritizing the immediate needs of our customers during the pandemic.
Finally, we continue to invest heavily and enhancing our omni channel capabilities to meet our customers on their terms.
With solutions that meet their specific needs, whether they visit a store call us or click.
As it relates to our Mexican operations in Mexico, our new store growth target includes five new stores that we have slated to open towards the end of 2021, but we're still in the early stages of our expansion plans and don't expect of meaningful capital spend and Mexico. This year.
Our collaboration with our mass of team members was excellent and 2020, and we continue to learn and these new markets and lay a strong foundation for future growth.
Before I turn the call over to Tom I want to once again, thank team O'reilly for their dedication and hard work and 2020 now I'll turn the call over to Tom.
Thanks, Jeff.
I'd also like to thank all of team O'reilly for their continued commitment to our customers, which drove our record setting performance and the fourth quarter and full year of 2020.
Now, we'll take a closer look at our quarterly results and our guidance for 2021.
For the quarter sales increased $346 million.
Comprised of the $273 million increase and comp store sales.
$51 million increase and non comp store sales.
A $25 million increase and non comp non store sales and of $3 million decrease from permanently closed stores.
For 2021, we expect our total revenues to be between 11, five and $11 8 billion.
As Greg previously mentioned gross margin for the fourth quarter decreased of 131 basis points to 52%.
Which was driven by the year over year comparison to significant gross margin benefits, we captured and the fourth quarter of 2019 related the sell through of pre tariff on hand inventory and.
And tariff exclusions and certain product lines.
As well as dilution from the acquisition of Massa.
Looking at the fourth quarter of Standalone, we had a positive impact from LIFO of $6 million down.
Down from $23 million and 2019.
Included within our guidance for 2021 is the larger anticipated positive impact from LIFO, which will offset pressure to our Pos margins from the exploration of tariff exclusions, we benefited from in the first half of 2020.
We received a very minor benefit from same SKU inflation and the fourth quarter of 2020 in line with our expectations.
And our outlook for 2021 per.
And for sales and gross margin includes of muted expectation for same SKU inflation of 1%.
The pricing environment remains rational and we expect that to continue.
Our fourth quarter effective tax rate was 21, 4% of pretax income.
Comprised of a base rate of 21, 8% reduced by one 4% benefit from share based compensation.
This compares to the fourth quarter of 2019 rate of 26% of pretax income, which was comprised of a base rate of 23, 8% reduced by three 2% benefit per share based compensation.
The fourth quarter of 2020 base rate as compared to 2019 benefited from renewable energy tax credits in line with our expectations.
Yeah.
For the full year, our effective tax rate was 22, 7% of pretax income comprised of a base rate of 23, 4% reduced by one 7% benefit for share based compensation.
For the full year of 2021, we expect and effective tax rate of 23% comprised of a base rate of 23, 4% reduced by a benefit of <unk>, 4% per share based compensation.
We expect the fourth quarter rate to be lower than the other three quarters due to the expected timing of benefits from of Newell energy tax credits and tolling of certain tax periods and the fourth quarter.
These expectations assume no significant changes to existing tax codes.
Also variations and the tax benefit per share based compensation can create fluctuations in our quarterly tax rate.
Now I will move on to free cash flow and the components that drove our results and our expectations for 2021.
Free cash flow for 2020 was $2 2 billion.
Versus $1 billion and 2019.
The significant increase of $1 $2 billion or of 115% was driven by an increase in operating income a.
A reduction of net inventory and deferral of tax payments under the cares Act and a reduction in Capex.
And 2021, we expect free cash flow to be and the range of one to $1 3 billion.
With the year over year decrease due to increased net inventory investment.
Lori or operating profit on slower sales growth and a more normal SG&A spend.
Increased capex as Jeff previously outlined.
And then increase and cash payroll taxes paid as.
Is half of the taxes deferred and the 2020 cares act will be paid at the end of 2021.
Okay.
Inventory per store at the end of the quarter with 650000.
Which was up two 8% from the end of last year.
I wanted to touch briefly on our per store inventory growth and 2020 and our plans for 2021.
We came into 2020.
And have developed a plan to further enhance our store level of inventory position and build on our industry, leading parts availability and had targeted per store inventory growth of 5%.
This increase was driven by just over $100 million of additional inventory and our store and hub network above and beyond our normal new store and typical product conditions.
As we move through 2020, we needed to refocus our priorities.
Support the extremely solid sales volumes and a replenishment needs of our stores and had to delay some of the inventory initiatives. We have planned and finished the year below our original plan and an inventory increase of two 8%.
For 2021, we plan to complete our 2020 inventory expansion plan and expect per store inventory to increase approximately 4%.
Our AP to inventory ratio at the end of the quarter was 114, 5%.
It was significantly higher than our normal ratio and heavily influenced by the extremely strong sales volumes and inventory turns and the last nine months of the year.
We anticipate our AP to inventory ratio to come back off of these historic highs.
As we complete our inventory initiatives.
And our sales growth moderates.
Our current expectation is to finish 2021 at a ratio of approximately of 109%.
Moving on to debt, we finished the fourth quarter with and adjusted debt to EBITDA ratio of two or three times as compared to the end of 2019 of 234 times.
With the reduction driven by the significant growth and our EBITDAR during 2020.
We continue to be below our leverage target of two five times and we will approach that number when appropriate.
After a brief pause at the onset of the pandemic, we've continued to execute our share repurchase program and for 2020 based on the strength of our business, we were able to repurchase $4 8 million shares at an average share price of $431 93.
For a total investment of $2 1 billion.
Subsequent to the end of the year and through the date of our press release, we repurchased <unk> 7 million shares at an average share price of $447 40.
We remain very confident that the average repurchase price is supported by and expected future discounted cash flows of our business and we continue to view our buyback program as an effective means of returning excess capital to shareholders.
As we evaluate our liquidity leverage and use of capital and share repurchase program moving forward, we will continue to prioritize maintaining our strong financial position, including the 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 congratulate the O'reilly team on a great 2020, and thank them for their continued dedication to our company and our customers.
This concludes our prepared comments and at this time I would like to ask G. G of the operator to return to the line and 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.
I wish to be removed from the queue. Please press the pound per line or the hash key if you are using a speakerphone you may need to pick up the handset first before pressing the numbers.
Please limit yourself to one question and one follow up question. Once again, if you have a question. Please press Star then one on your Touchtone phone.
Your first question comes from the line of Simeon Gutman from Morgan Stanley. Your line is now open.
Hey, Good morning, everyone. My first question is on the sales line can you talk about and the outlook the minus two and zero comp can you talk about your assumption for industry growth versus market share and if there's any commentary you can provide looking backwards.
The 11% comp that you did in 2020.
And I know I think Greg Johnson mentioned in his prepared remarks that under car was doing well and.
Despite miles driven being down.
And does that should that make us more tempered about how the industry should recover as miles driven resumes to starts to grow again.
Tom do you and we kick that one off okay. So on the guidance for the comps of.
Negative 2% of flat, we break that into two pieces, we didnt see the incredible.
Upside on the professional side of the business that we saw and the DIY side of the business and.
Consumers have more time on their hands, they had government money and their pocket book and as we talked about took on larger projects some of which are very atypical for economic downturns, where they're working on projects.
And making sure their vehicles were maintained so when we look at the professional side of the business. We continue to see growth on that side of the business on the DIY side of the business. So much of our cyclical and after the huge gains in 2020, we would expect them to be pressured and 'twenty 'twenty one.
And the miles driven.
It kind of feeds off of that same comment we would expect as miles driven too.
Kris that our business will see a positive impact from that with the caveat that we sell out of DIY projects during the year ultimately for our business to be up that much.
And consumers were being more proactive and maintaining their vehicles and the amount of underperformed or <unk> maintenance <unk>.
Yes.
Yeah to add to that Sumit on the category question.
We were pleased with our performance across the board and I did call out under car.
Really the only categories.
Underperformed, where weather and miles driven and related things like lighting and wipers were softer than we would've liked to seen but one of the shifts that we saw during the quarter and and I also called this out is the willingness and ability of the DIY customer to take on larger jobs and then.
And perhaps they would have historically and.
And for example, so of our under car lines like brakes, really performed well and better than expected on the DIY side of the business.
And that we're typically that would be of stronger category for the DFM side.
Okay. Thanks for that my follow up is on incremental margins and I guess, maybe more for Tom If you look back pre Covid and you mentioned from 19 2019 stats your incrementals were more closer to 20%.
Don't know when we'll get to of no normal and I. Appreciate we're not kind of give 22 guidance at this time, but is there any reason why we can't get back to that level. When the business can grow again and as the leverage point of the business higher or can we look at <unk> 19, and <unk> 18 levels of incremental margin and use that as a normal.
Level going forward.
I don't think that the.
Incremental leverage point.
And for our business of changed 2020 with such a dramatic year with.
Sales being.
Softer at the beginning of the year and then down significantly at the onset of the pandemic.
And that protect the health of the business.
We made dramatic cuts and are our expenses and then.
April sales turn directly north so it was a very unusual circumstance, we weren't sure how long that was going to last and we're very prudent and adding back SG&A and obviously sales continue to be exceptionally strong. So a comparison to 2020 metrics is very difficult.
That said I don't think that the core underlying.
Economics of our business.
Have changed and I think that we will go back to continuing to execute.
Very similar business model.
Okay, Thanks, and good luck.
Thank you. Our next question comes from the line of Michael Lasser from UBS. Your line is now open.
Good morning, Thanks, a lot for taking my question how would you have thought about using this period of remarkable comps right.
Take a look at your pricing and make any investment in your pricing that might be necessary to ensure your competitiveness with both of your traditional and online competitors and.
Because you did not call out pricing has an impact to your gross margin during during the period and.
And one might think that.
And that given some of the competitive factors out there, especially with one of your.
Large competitors talking about price investments of that would've been the case.
Yes, Michael this is Greg.
Really 2020 was no different than any other year, we have competitors out there both on the professional side of the business and the retail side of the business.
And Theres price movement based on cost inputs theres price input based on commodities.
Go into the product there is price inputs based on trying to grow sales changing suppliers, it's and all.
Ongoing.
And that'll and it's something that we face year over year and really we work hard both on the professional side of the business and the retail side of the business to make sure we're price competitively and frankly.
And not see 2020.
And as being any different than any other year in that respect we did the same things we pass along cost increases.
Or we could as we always do and we closely monitored our competitive pricing trends. So so really I don't think we did anything any different in 2020 of them and we would do any other year.
And just to confirm there were no price investments that were of significant contributor to your gross margin.
Being down more in the fourth quarter and then it was in the third quarter.
When we look at our fourth quarter of gross margin versus our third quarter. It was pretty consistent except for on the distribution side.
We have lower volume, so we have less leverage on our distribution costs and.
And quite frankly, our distribution centers have worked tirelessly all year and some of the normal maintenance and inventory maintenance had to be put aside as we work to fulfill record volumes and we had some catching up to do on our distribution side and had to spend additional payroll there.
Okay and my follow up question and so as you look out to 2021 sales are weaker than you expected because theres more demand that was pulled forward and what you anticipated how would you manage your SG&A and response to that will it still be up two five per cent.
Otherwise might you have underinvested and operating expenses in 2021, and then need to catch up this year, which might limit some of your flexibility.
And.
Jeff do you want to start that off and maybe Tom will add to it yes.
Michael I'll, just say that.
We always have managed our SG&A to our business and and we manage our payroll store by store.
And really adjust to the sales demand in the in the in the market and.
And if so.
Sales of a little softer we adjust accordingly, maybe it's less hours, it's less overtime, maybe less head count and vice versa like we've seen last year.
And it is the most dramatic swing, we'd ever seen and having a ramp down and up.
And we would normally ramp up going into season and it had to immediately try to ramp back up the best we could to meet the incredible sales demand.
Its always fluid last year was was incredibly volatile.
Adjusted Accordingly for the long term health of our business and what's best for our customer service.
Michael what I would add to that is as a multiunit retailer we have of relatively high fixed costs to operate the stores.
You saw in 2020 is that if we of the expectation we're going to of a significant downturn in volumes that we can and will take very active steps to address our SG&A.
Awesome. Thank you so much.
Thanks, Michael.
Thank you. Our next question comes from the line of Chris <unk>.
From Jpmorgan. Your line is now open.
Thank you all my my appears leaving me the opportunity to ask about LIFO.
Tom can you talk about that the LIFO benefit of $6 million here and the fourth quarter on an absolute basis is that a fair base assumption as you look into 2021 and on a quarterly basis.
Or are you expecting that to rise as there were some parts and inflation.
Price inflation coming through and then more broadly can you provide some color on sort of gross margin cadence over the year.
So from a LIFO standpoint, and 6 billion and the fourth quarter, we would expect to be around that number maybe just a little bit higher looking at the price increases we're aware of currently and our expectation from moderate inflation rate of 1%.
Throughout the year.
So hopefully that covers our LIFO number obviously was significantly different and lower in 2020 than it was 2019 after the 2018 and 2019.
<unk> of price increases.
That could change based on the tariffs, but as you know we plan to.
<unk> exist and the current tariff tax.
World and as those change we make the appropriate changes within our business. When we look at gross margin for next year I would tell you that absent any of those significant shifts we would expect to be relatively flat throughout the year.
Okay.
Got it okay understood and then I guess more broadly on the balance sheet and share repurchases seem to be sticking to this very consistent buyback, which has always been the hallmark of O'reilly, but at the same time you are below your long term leverage target and your valuation is.
And has dislocated.
Relative to history.
As you as you think about that and think about the opportunity to maybe add some debt to the balance sheet to fuel some extra buyback do you want to see what happens and the middle part of the year of as you lap through these tremendous stimulus fuel DIY comps.
Is there some prudence there that that you are just trying to play out given that uncertainty.
So when we look at our leverage and we look at our plan in 2021 with the lower.
EBITDA rate, we will have some.
Fluctuations and our rate will go up as some of those quarters roll off in relation to the buyback, we evaluate where we think the stock is trading in relation to our discounted cash flows and we're going to continually buyback shares.
And when we feel that there is that dislocation you talked about we're going to buyback more shares when we look at 2020, we suspended our buyback at the onset of the pandemic for.
And for an abundance of caution and to make sure that.
Liquidity is king and those situations and I think our results show that in good times and bad our model generates significant cash and to the extent that we can't deploy that.
The way within the business that creates the right ROI will consist of.
Consistently buyback shares and and try to buyback more when we think the about the market as of perceiving the value of the stock price.
Understood very helpful Best of luck guys.
Thanks.
Thank you. Our next question comes from the line of Scott can you or Kevin from RBC Capital. Your line is now open.
Hi, guys Scot Ciccarelli.
Okay, I think we all recognize that E commerce his.
Historically hasnt been a very big part of your business, but just given the broader acceleration that we've seen and E. Comm penetration this year, even across sectors, where it's never really been prevalent.
Can you update us on the size of your E Commerce business today, and how much of that is focus versus ship to home.
Scott Here's what I would tell you you know that our sales overall grew.
Incredible pace this year and our E. Com sales grew at an incredible pace. This year, but the end result is that E. Commerce is still a very very small percentage of our overall sales number when you break it down by.
Buy online pickup and store or ship to store versus.
Ship purchase in store.
Our growth was substantially higher.
Pickup and store ship to store, just demonstrating that the consumer again sees tremendous value and coming to our brick and mortar business, whether it's curbside pickup or they actually come into our stores and Lou of.
Buy online ship to home, where they actually get additional discounts. So we're very pleased with our E. Com results. Although again, it's a very very small percentage of our total overall sales.
Got it very helpful. And then just a second quick question here.
We are still hearing about product shortages.
And the category.
Can you help us there and understand how you guys are thinking about price availability and whether you think that that.
And your ability to obtain product as potentially played a role and some of the share gains you referenced today.
Yes, I mean, Scott the strength of our supply chain and I think really it's been one of our competitive strength forever and I think it really shine through in 2020, and just demonstrated that true strength.
And one of the things that we elected to do years ago was to require our international suppliers to keep product state side here and the U S and that helped us early and the pandemic and we were very aggressive with with our ordering on the onset because we could see of sales began to trend.
Upward.
That said you know our supply chain and was definitely pressured and 2020 and.
We did have supply of some suppliers that underperformed, we still have a handful of suppliers that are not performing at the level that we would like for them to and we're working very aggressively.
To ensure that they get back up to speed some of that much of that is related of the pandemic, whether domestic or international we have one domestic supplier that has has challenges with COVID-19 right now and the market that theyre doing theyre manufacturing and distribution.
Really being hit hard right now, but that's of short term pain.
And then there is a couple of suppliers that we are having issues with its more of an industry wide of it where we lost a supplier and the category early on this year.
But what I would tell you generally as things have improved from a supply standpoint, and we feel good about that.
Very few suppliers that we have that are that are not performing well.
Super helpful. Thanks, a lot of Guy.
Yes. Thanks.
Thank you. Our next question comes from the line of Chris We'll take Larry from Exane BNP Paribas. Your line is now open.
Hey, everyone for taking the question.
So I guess the first of all I wanted to do is just kind of clinical and then and go through gross margin. So I heard you right. It sounds like relative to Q3 of the gross margin how much of Q4 of the LIFO compared with similar.
The D C pressure was in totality of worst in Q3.
Tariff with something new and my ask is something similar.
Is there anything else and that gross margin headwinds like ocean freight was that of impact.
And how about tariffs is that just a one time event or is this something we'll see and throughout 'twenty, one as well until you anniversary it.
The tariff exclusion of referring to.
The tariff items.
And are ongoing and have more to do with that.
Being consistent with last year is comparing to 2019, when they were new items.
Tariff exclusions, I think we talked to Joe occurred and.
And the 2019 and 2020 and produce premium margins when those prices with when the acquisition price went down but the selling prices didn't go down.
So hopefully that addresses that laundry list of questions.
On the Ocean freight and I don't think that we have seen we I think we've all read that that is an area of pinch point right now and prices are going up I don't think that we've seen at this point of view meaningful impact of that but obviously, we're keeping a close eye on that to the extent that that rises within our industry, we tend to all of them.
Player of the similar parts from similar areas and we view that as a inc.
Cost of should hit all of the.
All of the retailers and wholesalers.
Got you and that makes sense, Okay, and then just kind of one bigger picture question, obviously isn't a tremendous year.
And if the industry in terms of behavioral shifts from your customer base in terms of the projects they are tackling.
In terms of of channels of their shopping at.
Just any of this do you think.
Of this being kind of.
And once the economy reopens.
Think of any of this could stick like are people going to continue to tackle some of these hobbies.
A chance they want a continuous thing and auto part stores, rather than the big box and I guess anything that that O'reilly specifically is doing per <unk>.
<unk> kind of a day.
Net sales would be helpful.
Yes, Chris as as we talked about there are several levers several tow wins that benefited us and 2020 and we certainly hope.
Some of those dynamics carryover into 2021, obviously not depend and make itself some of the other trends when you look at it and where are we.
And we feel like we made the most progress from a share gain perspective in 2020, we feel like it was some of the smaller WD players out there that maybe don't have the supply chain strength, we did and have the proud the product availability that we had.
I think that shift assuming that our stores.
And did a good job servicing those customers, which we all know they did we hope that some of that is sticky business and we're in a relationship business and and hopefully some of those customers on both sides both of the professional and the retail side continue to come into our stores and the other area, where we feel like we.
Some share as big box.
And retailers and when you think about what's your experience when you walk into a big box store today, there is a little more apprehension with a lot of consumers of about going into that environment for fear of of.
Contracting disease, your mast and obviously all of those things, but I think some of the consumers rather than walk to the back of the store to pick up of battery or wiper blades or what have you fight that crowd take that risk and then go home and install of those products themselves.
And they came to O'reilly and what they saw all of US Hey, we've got quality products, we've got competitive pricing and guess, what we will install of those products for you there and the parking lot.
So.
And those customers that experience that shift and 2020, we certainly hope of lot of that carries over 2021 and beyond.
Okay. That's really helpful. Thank you.
Thank you. Our next question comes from the line of Daniel Enbrel from Stephens, Inc. Your line is now open.
Yes. Good morning, guys. Thanks for taking my question.
Greg I wanted to start and a longer term question you. Obviously another outcome of the pandemic has been a bit of D. Urbanization and maybe increased used vehicle ownership, we've seen a lot of headlines around that and the dealers and the other auto names should that become a tailwind to your business as we think through 'twenty, one and longer term of between two and 23 of Theres more older vehicles, and the road or Alex.
And that impacts your business and a couple of years.
Yes, it should definitely be favorable to our business you know for every every consumer that buys a used vehicle as opposed to a new vehicle, which would be under warranty and the first few years of repairs may go back to the dealer.
And when those consumers elect to buy a used vehicle rather than a new vehicle typically those are out of the warranty cycle.
Which brings more of that volume into our stores sooner.
To add to Greg's comments.
And we'll have to see how it plays out long term, obviously, the new vehicle sales were down due to the economic concerns and production concerns and then have bounced back to the extent that.
Consumers.
Move more to the suburbs and rural and drive more miles that's good for our business long term to the extent that people decide they want to control more of their own transportation and vehicle count per household goes up that's another good item for us from a long term perspective.
Early in that cycle, we will see see how it trends out.
Got it that's helpful. And then just as a quick follow up to your last answer on the Big box market share is there anything youre seeing from those mass merchant or big box customers. That's different from your core customer or they're more price sensitive or are they using and loyalty rewards of discounts more and more frequently and do you think you've done it.
No.
During the pandemic to make that customer and market share as sticky as big box, maybe reopen some of their online or auto offering, but they took offline during the pandemic.
Yes, Daniel I don't know that we've looked at it from from a loyalty perspective, I don't know that when a customer walks and our store. If we really know if they were previously of big box shopper or not so from a loyalty perspective, you know a lot of a lot of the demographics of shops and the big box stores, you would think would be loyalty customers their death.
Really price sensitive customers that were coming.
And of our store as far as sticky transactions. It was a challenging year for us as Jeff said in his prepared comments and our store team members just did a heck of a job working long hours to take care of customers.
Meeting them in the parking lot doing curbside delivery.
We upped our service level and 2020, and we certainly hope that that pays off from a relationship standpoint to maintain a lot of that volume of 2021 and beyond.
Yes.
Got it thanks, so much and we all face day has been and best of luck.
Thank you. Thank you.
Thank you. Our next question comes from the line of cash Kingdom from Credit Suisse. Your line is now open.
Hey, guys. Thanks for taking the question I wanted to follow up on the quarter to date performance. You mentioned December was the strongest of Q4 and that of January had remained strong I assume the implication here as of Q1 is tracking ahead of that 11% and Q4, but if you could give us a little bit more on that and then.
Weather was talked about a little bit you alluded to some favorability are you seeing extreme conditions that beyond just the short term can provide some sort of tailwind looking out over the next few quarters.
So Seth.
Is that the first part of your question I think you can infer what you said from.
Our data points that we gave.
And the second part of the question Cold weather is good for us and cold weather breaks cars to the extent that we have very cold weather, especially on the electrical and battery system. It will weaken those faster.
And should provide support in the middle of the year when it gets really hot those weaker batteries will fail at a higher rate.
Got it Okay, and then just a follow up on the gross margin and a few <unk>.
And it has come down modestly in recent years, Youre basically, saying, it's stabilizing and 21 fully appreciating your focus on gross profit dollars, but just wondering is this the right run rate to be thinking about long term for gross margin rate.
Are there incremental gross margin initiatives and I'm talking about gross margin rate initiatives that should help long term like how should we be thinking about the long term outlook.
I think if you look back to our comments, especially in 2019.
We're pretty direct that we were making premium margin on many many products because of the shifts and the tariffs.
LIFO impact of having bought product before the tariffs, but having raised prices when the tariffs kicked in and then having premium pricing on items, where the tariffs came off from an exclusion, but the selling prices didn't change I think we were pretty clear that 2019 was an abnormally high year.
If we take that year out I think if you look over time, our goal is to incrementally improve margins 10 to 20 basis points through better buying.
And through.
More efficient distribution, obviously and Greg talked about it earlier pricing is very dynamic and our market and to the extent that we have a lot of acquisition price changes create.
The opportunity for better or worse margin, but as we've been in the last 10 years outside of 2000 and of 2018 and 2019 of pretty consistent acquisition costs very low same SKU inflation.
Gives you a more consistent margin, so I guess and short what I would tell you is that it.
And of 2018, 2019 presented some opportunities to charge a premium margin and our industry those of run their course, and I think we're back to and appropriate margin with incremental increases at a small level overtime.
Okay, that's great thanks very much.
Thank you.
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.
Thank you Gigi.
We would like to conclude our call today by thanking the entire O'reilly team once again for their continued selfless dedication to our customers and for.
For their incredible performance and 2020, we look forward to another strong year in 2021.
I'd like to thank everyone for joining our call today, and we look forward to reporting our 2021 first quarter results and.
<unk>.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
[music].