Q1 2021 O'Reilly Automotive Inc Earnings Call
Thank you for standing by and welcome to the O'reilly automotive first quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be at 30 minute question and answer session to ask a question during the session. Let me Digress Star and then the number one on your telephone keypad.
Now I'd like to hand, the conference over to Tom Mcfall. Mr. Mcfall. Please go ahead.
Thank you Jack good morning, everyone and thank you for joining us during today's conference call. We will discuss our first quarter 2021 results and our updated outlook for the full year of 2021.
After our prepared comments, we will host the 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 the.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's at the latest annual report on form 10-K for the year ended December 31, 2020, and other recent SEC filings.
The 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 and good morning, everyone and welcome to the O'reilly auto parts first 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.
I'd like to begin our call today by thanking team O'reilly on another outstanding record breaking quarter.
While our expectations were for a strong first quarter based on business trends of comparisons to say the results of the first quarter record breaking just doesn't do real justice to the incredible performance of our team.
Highlighted by a 24, 8% increase in comparable store sales of 526 basis point increase in operating margin at an impressive 78% increase in diluted earnings per share.
The last year plus since the onset of the pandemic has been one of the most challenging periods in the history of our company and we were especially pleased our team was able to once again rise to the occasion and deliver these outstanding results, while adhering to strict safety protocols.
Simply put team O'reilly has responded at an amazing fashion to provide excellent customer service.
I'm profoundly grateful for the hard work and sacrifice of each member of our team.
As we highlighted in our press release yesterday, our first quarter comps benefited from a continuation of the robust broad based broad based sales trend we've experienced for several quarters now as well as of favorable weather environment for most of the quarter.
As a result of these factors, we're very pleased with our comp performance through the first two and a half months of the quarter end.
In mid March the most recent round of government stimulus payments hit at which point, we saw ourselves grow.
Our sales growth accelerate meaningfully.
From a cadence perspective, our quarter played out with very strong results in January aided by beneficial weather and additional government stimulus.
February followed a similar trend with some offsetting pressure from inclement weather in the middle of the month significantly impacted many of our southern U S markets that are not accustomed to this type of winter weather.
This headwind temporarily shut in at our professional business as customers held off on risking the roads to bring their vehicles and for service, but we still finished february above our expectations.
March was easily our highest comp of the quarter against the soft prior year comparisons driven by continued strong underlying trends favorable timing of spring weather and the stimulus benefit.
In total our first quarter comparable store sales growth of 24, 8% and our two year comparable source stores sales stack of 22, 9% strongly exceeded our expectations.
As you would expect we're also pleased with the composition of our sales results from the first quarter as we saw strength in all areas of our business.
Both of our DIY and professional businesses contributed strongly to our sales results for the quarter with our DIY business the business being the bigger contributor.
Similar to what we've experienced in recent quarters, driven by strong ticket comp ticket count comps as well as continued robust increases in average ticket comps.
Additionally, our professional business also performed extremely well.
With the brief inclement weather pressure in February I just discussed.
On that side of the business. We also saw an acceleration in ticket count comps and strong growth in average ticket.
Average ticket on both sides of our business was healthy despite a limited benefit of approximately one 5% from same SKU inflation indicators of the continued ability and willingness of our customers to invest in their vehicles and work on larger projects.
From a category standpoint, we continue to see broad based robust sales trends across categories with strong performance of our DIY out for our categories and batteries during.
During the first quarter, we also benefited from strong demand and weather related categories as well as under car hard part categories. The.
The harsh winter weather this year and the associated wear and tear at inflict some vehicles as a positive development. After the last two mild winters and our industry and should support demand in under car categories. As we move through the next two quarters.
Now I'd like to discuss the update I'd like to discuss the update to our full year comparable store sales guidance and our outlook for the remainder of the year.
As we announced at our earnings release yesterday, we are increasing our full year comparable store sales guidance to a range of 1% to 3% from our previous range of down 2% to flat.
This increase in our expectations as the based on the strength of our first quarter results and our continued robust performance quarter to date in April.
This is an exception to our normal practice, where we historically have not factored into our guidance revisions any business trends subsequent to the end of the quarter. We are reporting because of the extreme volatility we can see over such a short timeframe.
However, the continued extremely strong sales momentum we saw at the end of March aided by the latest round of stimulus has continued into April and we feel it appropriate to reflect this outperformance in our annual guidance update.
As we look forward of the rest of 2021, we remain confident in the positive underlying fundamentals of consumer demand in our industry.
Even before we started to see the impact of the most recent round of stimulus at the end of the first quarter. We were capitalizing on strong demand from DIY consumers willing to take on larger jobs and invest in repairing and maintaining the vehicles.
We've also been encouraged by the improving trends on the professional side of our business even as we remain in the environment of decreased employment increased work from home of arrangements and lower miles driven in the U S.
We can't be certain regarding the pace of <unk>.
Improvements from these factors given the uncertain nature of how the economy will exit the pandemic.
But we remain confident we will benefit as miles driven returned to historical norms.
However, we remain cautious at our outlook as we move forward through the rest of 2021 and still anticipate potentially significant quarter to date variability due to fading tail winds from the government stimulus.
And the potential of some demand has been pulled forward as a result of the favorable weather backdrop and extremely strong demand in the first quarter.
As a reminder, we faced extremely difficult prior year comparisons in the for the remainder of the year, especially on the DIY side of the business with the most significant pressure.
And that outlook expected for the second and third quarters.
While it remains impossible to predict how the remainder of the year will play out for our industry or the broader economy, we know that a significant driver of our success is completely within our control and we fully expect to continue to leverage the strength of our business model and industry, leading team to build out.
Strong share gains of 2021.
Moving on to gross margin for.
For the quarter, our gross margin of 53, 1% was the 76 basis point increase from the first quarter 2020 gross margin.
The improvement was above our expectations built into our guidance range and benefited from the outperformance of the higher margin DIY business as well as good leverage of distribution costs from the strong sales volume.
For the full year of 2021, we continue to expect our gross margin to be in the range of $52 two to 52, 7%.
Our guidance continues to include of immediate expectation for any gross margin benefit from inflation to the extent that we see more inflationary pressures than expected we anticipate.
Pricing in our industry will remain rational.
For the first quarter earnings per share of $7 six represents an increase of 78% over $3 97.
In the first quarter of 2020 and of compounded two year growth rate of over 30% compared to the first quarter of 2019, and I want to again congratulate team O'reilly on this outstanding performance.
For 2021, we are raising our full year guidance to $24 75.
The $24 at 95 cents, an increase of $2 five says from our previous guidance.
Driven by the strong year to day sales results and the excellent operating profit flow flow through which Jeff will discuss in more detail at the moment.
The midpoint of our revised guidance now represents an increase of 6% versus 2020, and a two year compound compounded annual growth rate of 18% compared to 2019.
Our EPS guidance includes the impact of shares repurchased through this call, but does not include any additional share repurchases.
Before I turn the call over to Jeff I want to spend a few minutes discussing at our inventory position and the status of our supply chain.
The strength of our supply chain, including our strong relationships with our supplier base and the historical investments. We've made the build out of our industry, leading distribution network and inventory availability has long been a strategic competitive strength for our company.
This competitive advantage has really shine through the past year and been a key factor in our strong sales performance, but our supply chain has definitely been pressured as we've experienced elevated sales volumes.
We've been pleased with the strong performance of the majority of our supplier base and overall our supply chain has held up very well, but we do have room for improvement with a small number of suppliers, who have underperformed due to pandemic impacts raw material shortages, we're shipping delays.
We have also faced pressures in our distribution centers as our dedicated DC teams have been processing at record levels of inbound and outbound shipments.
Just like in our stores, our DC teams have been working extremely hard to take care of our customers and support the extremely strong sales.
Even at the current levels of volume have created stress on normal operating capacity of our facilities.
We remain very committed to maintaining and growing our competitive advantage of inventory availability in view of the current pressures we're facing of short term.
To finish my comments I want to again express my gratitude to our team for their continued selfless dedication to our company and to our customers are.
Our first quarter performance was truly incredible and is a testament to the hard work and commitment of our team.
I'll now turn the call over to Jeff Shaw.
Thanks, Greg and good morning, everyone.
I want to start today by echoing Greg's comments and thanking team O'reilly for the remarkable results in the first quarter.
Our team has certainly proved over the course of time that they are steadfastly committed to our customers enabled to overcome whatever challenges they encounter and running our business.
Net dedication has certainly been on display in the past year as our team has responded selflessly to the extreme demands and safety protocols during the pandemic.
Our results in the first quarter are just another indication of the degree to which our customers rely on us for excellent customer service the industry, leading parts availability and a season of dedicated knowledgeable team of professional parts people.
Our first quarter of 2021 was truly a record setting performance.
But even as strong as our results were I think it's actually impossible. The fully appreciate the level of hard working long hours required for our team to produce these results.
Our team's response to the extreme weather conditions faced in the middle of the quarter is just another picture of the relentless commitment to going the extra mile for their customers.
Many of our markets faced severe impacts from the extreme weather conditions at our store teams went above and beyond to keep our stores open and our distribution teams match that effort by ensuring access to the parks are stores needed, enabling us to meet the critical needs of our customers.
Challenges in our stores such as treacherous road conditions at of electricity and broken the water pipes are nothing new for our team who has proven that resilience in response to countless challenges over the years, whether it be severe winter weather natural disasters for a global pandemic.
Now I'd like to spend some time reviewing the extremely strong operating profit performance and SG&A leverage in the first quarter and of our updated outlook for 2021.
For the first quarter, we generated an astounding increase in operating margin of 526 basis points and operating profit dollar growth of 63%.
As we've discussed since the second quarter of last year the surge in sales in a short timeframe as generate at historically high levels of profitability and those sales gains have continued to outpace our rate of SG&A growth, even as we redeploy more SG&A dollars back into our stores to adjust for the <unk>.
<unk> environment.
Our first quarter of 2021 with an almost perfect case of this trend the.
The quarter saw us increase SG&A per store by 7%, which is well above our historical trends and yet far short of the 24, 8% comparable store sales increase that we generated.
The resulting in an incredible improvement in SG&A leverage of 450 basis points.
The SG&A per store growth, which is adjusted for leap day in 2020 was driven by <unk>.
Additional store payroll hours and associated benefits and other variable operating expenses to meet the strong sales demand as well as higher than normal incentive compensation at all levels of the company.
As we've said for the last few quarters now we know this level of SG&A expense leverage isn't the right long term answer for our business and we continue to plan to actively manage our cost structure to provide excellent customer service to match the sales environment and ensure that we're allocating sufficient resources through the image of the parents of our.
Stores as well as the training and development of our team members.
We now estimate that our full year increase in SG&A per store will be approximately three 5%.
This target is up from our original expectation based on our results. So far in 2021 and matches the revised comp guidance range at Greg walked through earlier.
Based on strong leverage on the robust sales through the date of this call. We now expect operating profit to range between 19, 9% to 24% an increase of 90 basis points from our previous guidance.
On the expansion front I am extremely pleased to announce at this month, we successfully opened our newest DC in Horn Lake, Mississippi, which is just south of Memphis.
This new facility took well over a year to plan design and build made even more challenging by external delays caused by the onset of the pandemic.
But our teams were able to stop the DC within the industry relating the inventory set and day, one began shipping larger than expected orders to support strong sales growth in our stores in the Memphis and surrounding markets.
Over the next several weeks, we will fully ramp up is 580000 square for the facility to support over 220 stores with additional capacity for store growth in the middle of the country.
Our DC teams remain committed to enhancing our topnotch inventory availability and we will continue to develop our distribution network to support strong growth in <unk>.
Set the bar for inventory availability in the industry.
Finally, before turning the call over to Tom all of that could provide a brief update on our store expansion during the quarter.
In the first quarter, we opened 66 net new stores spread across 30 states.
This progress is in line with our plan for total new store openings of 165 to 175 net new stores for 2021, and we continue to be pleased with our team's ability to successfully open great new store locations, but could still see some delays in design and permitting and approvals.
Dependent on local market conditions and municipal agencies.
To conclude my comments I want to once again, thank team O'reilly for their outstanding performance in the first quarter now.
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 tremendous first quarter performance.
Now, we'll take a closer look at our quarterly results.
And additional updates to our guidance for 2021.
For the quarter sales increased $614 million comprised of the $589 million increase in comp store sales of <unk>.
<unk> 3 million increase in non comp stores sales at $10 million increase in non cash non store sales of <unk>.
$35 million decrease from Leap day 2020.
And the $3 million decrease from permanently closed stores.
For 2021, we now expect our total revenues to be between 11, eight and $12 1 billion.
Craig previously covered our gross margin performance for the first quarter, but I want to provide details on our positive LIFO impact, which was $9 million in the first quarter.
In line with our expectations and the prior year.
As we discussed when we set our full year gross margin guidance, we are anticipating the larger positive impact from LIFO in the first half of 2021, which will partially offset pressure to our Pos margins from the tariff exclusion that have expired.
Our first quarter effective tax rate was 23, 5% of pretax income comprised.
Comprised of the base rate of 24, 4% and reduced by 9% benefit for share based compensation.
This compares to the the first quarter of 2020 rate of 29% of pretax income, which was comprised of the base tax rate of 21, 8% reduced by one 9% benefit for share based compensation.
The first quarter of 2021 base rate was in line with our expectations.
The lower 2020 tax rate was the result of the timing of renewable energy tax credits realized in the first quarter of last year.
For 2021, we expect to realize benefits from our renewable energy tax credits in the fourth quarter.
For the full year of 2021, we continue to expect an effective tax rate of 23% comprised of the base rate of 23, 4% reduced by the benefit of 4% for share based compensation.
These expectations assume no significant changes to existing tax codes.
Also variations in the tax benefit for share based compensation can create fluctuations in our quarterly tax rate.
Now I'll move on to free cash flow and the components that drove our results and our revised expectations for 2021.
Free cash flow for the first quarter of 2021 was $790 million versus $227 million in the first quarter of 2020.
With the significant increase driven by increased operating income.
Kris net inventory.
An increase in accounts excuse me an increase in income tax payable and the comparisons to the 2020 investments in renewable energy projects as a result of the timing of these projects and associated cash tax benefits last year.
For 2021, we now expect free cash flow to be in the range of $1, one to $1 4 billion versus our previous guidance of $1 to $1 3 billion.
Based on our strong first quarter operating profit and cash flow performance offset by our expectation at some of the benefit we saw in the first quarter for the reduction of net inventory and taxes payable will reverse as we move through the year.
Inventory per store at the end of the quarter with 637000, which was down 2% from the beginning of the year and down 8% from this time last year driven by at the extremely strong sales volumes, particularly at the end of the quarter.
As we discussed at last quarter's call when we outlined our full year expectations for inventory per store are planned for 2021 for carryover from 2020.
Is the at just over $100 million of additional inventory in our store and hub network above.
The above and beyond our normal new store in typical product conditions.
And we still expect the complete this plan and grow inventory of approximately 4% per store in 2021.
However, the timing of these incremental inventory additions will be impacted by the immediate needs of supporting the replenishment needs of our stores and.
And we could see some further delays for these initiatives give sales trends remain at historic highs.
Our AP to inventory ratio at the end of the first quarter was 119%, which was an all time high for our company and heavily influenced by the extremely strong sales volume and inventory turns over the last year.
We anticipate that our AP to inventory ratio will gradually moderate from this historic high as we complete our additional inventory investments and when our sales growth moderates.
Our current expectation is to finish 2021 at a ratio of approximately 109%.
Capital expenditures for the first quarter were $95 million, which was down $38 million from the same period of 2020, driven by the timing of expenditures for new stores in BC development activity.
We continue the forecast capex to come in between 550 and $650 million for the full year.
Moving on the debt we finished the first quarter with an adjusted debt to EBITDA ratio of 188 times as compared to the end of 2020 ratio of two point of over three times with.
With the reduction driven by the significant growth in first quarter EBITDA.
We continue to be below our leverage target of two five times and we'll approach that number when appropriate.
We continue to execute our share repurchase program and during the first quarter, we repurchased one 5 million shares at an average price per share of $450 65.
For the total investment of $665 million.
We remain very confident that the average repurchase price is supported by the expected future discounted cash flows of our business and we continue to view our buyback program as an effective means of returning excess capital to our shareholders.
Before I open up the call the answer your questions I would like to again, thank the O'reilly team for all of their contributions to our company's outstanding results.
This concludes our prepared comments and at this time I would like to ask Jack the operator at returned your line and we'll be happy to answer your questions.
Certainly we will now begin the question and answer session. If you have a question. Please press Star then the one on your Touchtone phone if you wish to remove from the queue. Please press the pound sign or hash key if you're 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.
Greg Miller with Evercore ISI your line is open.
Hi, Thanks, guys and the tremendous quarter.
I'd love to follow up on the trends between the DIY and the do it for me side of the business you said the both were strong.
I'm just wondering if the gap between them is gone it's up for that February period. When you said weather really impacted the commercial side.
Yes, Greg.
This is Greg. So we were very pleased with both sides of the business, we're very pleased with the.
The positive results, we had both in traffic and ticket average on both sides of the business.
Similar to what we saw last year.
When the government stimulus has introduced the DIY side of our business typically benefits more quickly and more favorably from the difm's side with the the.
Benefit that we saw in March and two of lesser degree I guess at January <unk>.
It really impacted the DIY side of the business and broaden that spread over what we saw all of the past couple of quarters more similar to what we saw when the last incentives in place I guess it was the <unk>.
Second of third quarter last year.
Yeah.
Got it so both strong, but theyre still DIY as long as Thats been also there that the GAAP really isn't there right.
Right.
Got it.
I guess the follow up would be.
On the.
So I'm just curious how the business there has gone.
Most of them integration standpoint than just the actual demand.
<unk>.
Jeff you want to take that one yeah at Greg GAAP.
Obviously, the the pandemic really really impacted our ability to.
To get down at work with the team last year I mean, we basically have the handle everything we've done the zoom calls but.
And the integration is going well the the team performed strongly ahead of had a really good year last year. They were they were impacted by the the.
The pandemic of Mexico somewhat like we were probably not as drastically and it was a little bit later, but.
As the pick back up strong end they finished the year strong.
Everything is going good hopefully as the pandemic eases, we can get back down there and worked with the team in and continue the integration, but we're really excited about Mexico and the team of what they've accomplished.
That's great good luck.
Thanks for thanks, Craig.
Bret Jordan with Jefferies. Your line is open hey.
Hey, good morning, guys.
Good morning, Brett could you talk a little bit about the contribution of share gains to your results and maybe the sort of the magnitude of share gains in the in the <unk> versus the DIY business.
Yeah, that's of Great question, and I wish I had a great answer for it at.
We know the share gains are a contributor for the quarter, but we also know that stimulus as a contributor for the quarter and weather as a contributor for the quarter. So it's hard to differentiate how much of of.
The benefit in the quarter was from share gain the I'll tell you. If you talk to two of our stores up and down the streets. They will tell you that we are without a doubt taking share of there seeing the repeat customers were focused on making sure we're providing a high level of service to all of those customers and we still feel like we're hanging onto some of that share.
Gain both from Big box end from some of the smaller two steppers I just don't really have a good way to quantify how much of the sales improvement was from.
Specifically from share gain.
Okay, and then maybe just gives us a little color on the regional spread in performance and maybe what were the standout regions and maybe the the gap between the <unk> the weakest in the strongest areas.
Sure, Jeff you won't do yeah.
With over 600 stores out there all across the country, there's always going to the markets that we we just know that we can do battery in and that's what our sales and ops team rather focused on every day.
Honestly, we're pretty pleased with our performance across all our markets in the first quarter.
Really exceeding our expectations on both sides of the business since may of last year.
And that trend really continued at the end of the first quarter of 2021 as well now.
Now our newer markets in the in the northeast and the southeast continue to ramp up strongly.
Just as you expect they would based on all of the maturity of that group of stores.
But as Greg mentioned in his prepared comments there February was a little softer for us, especially in our southern markets and any of that was really due to the just the severe winter weather they experienced that theyre just not accustomed to.
But we always do everything in our power to make sure that we're there for our customers. When these type of the weather events occur.
The rates at the extreme weather winter weather like we just experienced or a flood of wildfires out west or hurricane we always do our best to be the local store the last toward at close in the first store to open during these catastrophic events. We just know how important it is to be there for our customers that are living.
Through these type of disasters and in the parks.
And at this commitment is top notch customer service, just really hit of cars at store level, one customer at one store at the time.
And I just can't say enough about how proud we are of our store and DC teams as well as our support teams theyre in the offices.
Great. Thank you.
Chris <unk> with Jpmorgan Your line is open.
I wanted to follow up on the the April commentary obviously.
The last year April was a bit of tale of two halves yet.
For the sort of impact of shelter in place and the drop in miles driven early but you talked about.
And your peers have talked about a big pickup when stimulus hit.
Sort of mid to late month in April last year, but you also raised so we're parsing out of short of period of time, but can you talk about what you've seen as you've lapped stimulus last year in the business, whether it's on a one or two year basis or.
DIY versus do it for me.
Hi, Chris This is Tom so it's unusual for us to include the.
Quarter that we're in and provide updates to our guidance and include debt. So when the stimulus hit this year you business accelerated beyond our expectations and as Greg talked about the especially on the DIY side of the business.
So we've included that in our guidance talked about it being strong because of that of that driver.
Power South of the individual weeks of something that that were not going to do but I would tell you that throughout April we've been very pleased with our performance and it's been above expectation.
Got it.
And then on the gross margin I see the relative to <unk> I see the LIFO Delta versus <unk> and I know that mix was probably an easier mixed comparison on the DIY from last year in the first quarter. The other piece seems to be the supply chain.
It seems like you've got a lot more leverage ish this quarter relative to the fourth quarter. So trying to parse out what change there was there some higher incentives, perhaps you paid to the supply chain workers in the fourth quarter or what was the change in any thoughts on where you might end up in the range for the.
Here would be helpful. Thanks, so much.
The Chris as you know, we don't talk about our actual.
Distribution costs as a percentage of sales. So our comments are in relation to the first quarter of last year kind of significant leverage this year out there our gross margin improvement.
In relation to the fourth quarter, we continued to work hard to push a lot of volume through our boxes.
You're more than was really ever design teams as is.
Greg said have done an outstanding job of.
Of making that happen, but whenever we see these high volume, we're going to have more leverage than.
And then we normally would offset by inefficiencies just created by how gosh darn high the volume that are going through the diseases.
Right. So is the 25% versus the 11 is the essential big difference.
Our comments are versus last year's negative.
<unk> got at the two.
Alright.
Scott since the rally with RBC capital markets. Your line is open.
Good morning, guys Scot Ciccarelli.
So on your updated outlook in Tommy obviously, just kind of reference what youre experiencing so far in April.
Is there any change to your prior back half expectations or is the increase in guidance really just reflective of the <unk> upside and some increase in <unk> due to debt the April start.
Scott at this Greg its the ladder.
Early in the year on our fourth quarter call, we talked about the uncertainty in all of the unknowns that we would face in 2021.
The including government subsidies and whether in miles driven and vaccine availability and in all of those things.
So our update at our updated guide is based solely on performance to date through at this point in April we've made the same assumptions that we made the first part of the year on the back half of the year and Theres. Just so many unknowns that we didn't make any adjustments for the back half.
Perfect and then Greg if I could follow up on one of your other comments regarding the the acceleration of sell in the back half of March.
Obviously, you had the stimulus benefit this year, but it also coincided with the big drop in sales last year. If you were to look at lets call at a two year stack.
The back half of March still be a significant outlier on the upside or would it start to look a little bit more of like the rest of the quarter.
Scott I'll answer that question. So our discussion of performance was versus our expectations, obviously, our expectations for the end of March were.
Ah braised comp because of the soft performance last year same thing for the beginning of April so versus our expectations.
A higher level of expectation, we outperform that as we outperformed our expectations all quarter long.
The date of this call.
Okay, but no commentary on in terms of what that actual line might look like Tom.
Correct the two year.
Okay got it alright, thanks, a lot guys.
Thank you.
Brian Nagel with Oppenheimer. Your line is open.
Great quarter congratulations.
Thanks, Brian.
My first one I apologize I know of a number of questions of friction on stimulus, but I wanted to dive a little deeper into this as well so clearly you've called out the <unk>.
Stimulus as the benefit your sales here lately. So I guess my questions are.
The one I mean.
Realize that we've had you know theres been a number of stimulus events, so to say through the through the pandemic.
How do you how would you think about it.
The kind of the sustainability of that and then the demand that's driving I know this is difficult to answer but is it is it more.
The incremental in nature or is there a pull forward of aspect to it.
Great questions.
A lot of unknowns around those questions Brian.
We did benefit in March and into April we felt like a significant part of the debt benefit was from stimulus.
Unfortunately, we don't know how long debt that trend will continue.
Historically, that's that's not lasted much beyond a quarter or a few weeks some of the following quarter at has carried on over into April. This time, but we just don't know how long that trend will last nor do we know of there'll be additional government stimulus at seems less likely that there'll be future stimulus at this time, but we just.
Really don't know what that'll be Tom do you want to take the second one of them yet so in our prepared comments, we did discuss that.
Or one.
One of the items that you were thinking about through the remainder of the quarter is was there some pull forward in this big rush of business at the end of March through April.
For those of you followed our industry for a while you know that there can be some some movement between the first and second quarter based on the timing of spring when customers get out and do their spring cleanup.
Within this.
Yes.
Acceleration of business, we're assuming that some of that was pull forward and thats inherent within our guidance for the for the year.
Got it and then thank.
Thank you and then my follow up if I could.
Also with regard to sales but.
So as you would you you and others in your industry talked about why the one factor that really helped to drive outsized sales growth through the pandemic of last year was this the hobbyist customer you know some of that maybe got more aggressive through the pandemic.
We now start to approach these more difficult comparisons how are you seeing that portion of your business track.
Yes, Brian.
Some days I wish I wouldn't have even called that out because we called it out more of an anomaly.
The car car care, Wes what I'm, sorry, washes Y axes of lot of performance products. We just saw more growth than we typically see last year now when you compare that to batteries at a lot of other hard part categories sales were much stronger in those categories.
Last year than they were at least what you call hobby categories, we called it out last year because it was some sort of an anomaly. When you look at 2021 performance in the first quarter.
We did sell a lot of car care products and moving performance was still performed very well matter of fact of all of our categories performed well when you look at those categories. Those those unusual categories that spike.
Performance there isn't the enthusiasts out there of the best performance parts day in and day out, but your average consumer doesn't buy a lot of performance products. They buy OE replacement parts. So we have seen that trend continue but probably to a lesser degree than what we saw last year, but again thats really not.
A significant driver to the comp the more significant driver or our core categories battery breaks under car things like that which also performed very well this year.
Very helpful. I appreciate it thank you.
Okay.
Michael Lasser with UBS Your line is open.
Good morning, Thanks, a lot for taking my questions recognizing that there is a lot of uncertainty and you're very early in the second quarter.
The new Commvault.
Good day.
Q2, you get to the high end of.
You're one of three.
At the same guidance for the full year from.
Imply that you'll do mid to high single digit comp decline.
In the back half of the year.
Net.
The compound annual growth rate for Julio.
We'd be at a couple hundred basis points.
Below where you've been running the compound annual growth rate for a long time.
That's what you have embedded.
Guidance for demand.
I know there was a lot of that question trying to for.
With all of them.
Okay, Michael I'm going to try to answer your question you were breaking up a little bit.
I'm not sure of the premise of your question that you started with this accurate, we're obviously not providing quarterly guidance. This year as we've done in the past, but what I'd like to remind everyone as debt.
When we discuss the second quarter last year and quite of bit of detail you'll asher.
The three weeks in April on the onset of the pandemic that were very difficult and then we saw stimulus come in in the business reverse that carried through May and June and May and June are our toughest compares of the year. So I'm uncertain at the premise you laid out at the beginning is how we're thinking about the business when we look.
At the two year stacks at performance.
On a monthly basis and for the full year, yes.
Yes, Michael.
If you look at if you look at the dollars as opposed to the percentages on the two year basis.
I think our projections are still pretty aggressive.
Understood.
Very helpful. My second question is.
For the last few months, what's been the earn internal conversation about taking some of his remarkable sales strength and using it to reinvest back into the operating expenses.
And the business inevitably.
Labor the labor market is going to get tighter wage growth is going to increase.
Does it better prepare you for the long run if you take some of these short term strength and reinvest it back in the business.
Okay.
I'll answer that question, we've always had a very long term view on payroll.
And when business is not as good as we'd like it to be that doesn't mean, especially on the professional side of the business the customer experience expectations go down customer service requirements actually go up when.
The when the business is really good like it is now at as hard as Jeff talked about in his prepared comments to add enough staff to keep up with that and what we don't want to do is is at more staff and we're going to need in the foreseeable future.
Our focus now I'll turn it over to Jeff has been at more full time people and we want to make sure that we're planning appropriately for the long term.
Jeff would you like to add to that or are you pretty well covered at Tom but their enemy.
We've always taken a long term view on on on staffing and do what's right for our business kind of store by store.
And really making sure that we staff to grow the business provide excellent customer service and grow our business and net.
And that varies by store we've definitely.
We skew to higher end back more full time team members.
And.
It's just the full time team member of provides the are there more tenured they either in the more experienced and they provide just the.
Higher higher level of service and you know one of our.
I guess, our weaknesses for a long time that we're really focused on is just improving our service levels on our nights and weekends.
And really trying to shore up there and that's been a big initiative for several years now and we feel we're making pretty good headway on that.
Thank you very much goodbye.
David Bellinger Wolfe Research your line is open.
Hey, everyone great quarter.
My first question here is at least some part of inflation I think last quarter. You indicated of one percentage point increase was embedded in your full year forecast and I think you called out one 5% in Q1 alone.
So how high could same SKU inflation go over the balance of the year can you talk about the magnitude of some of the price increase that youre seeing now and with that of factor in raising full year sales guidance at all.
Yes.
Wow, that's a tough question there has.
Then the pressures on supply chains did within our industry and in the.
The economy in general in shipping pressure, so how soon those ease and how we come out of the pandemic.
We will determine that.
Yeah.
We hear the word transitory a lot and from economists to the.
That they persist we could see higher inflation than we had projected.
We saw a little bit higher than expected here in the first quarter, although we expected that the ease in the back half of the year to the extent it doesn't we're going to remain rational in our pricing and we would expect the industry also remain rational.
Got it okay, maybe just the follow up on that is is there potentially.
The topping.
Okay.
At year end.
Thank you.
But the.
I'm, sorry, we're having a hard time hearing your question.
Sorry.
Follow up on that last one is there anything different about the the inflationary backdrop now can some of those price increases that are normally pass through condos leaves us at a competitive levered at the new.
When we acquired customers in your system.
When we look at price and for the vast majority of the things we sell their need base. We are we want to be competitive in price.
But we really want to win on service. So when we look at what's the appropriate pricing, we manage that on the SKU by SKU store by store market basis.
But we expect to continue to.
Followed the pricing.
Strategy that we've used for a long time, that's made us successful.
Yeah.
Kate Mcshane with Goldman Sachs. Your line is open.
Thank you good morning, I just wanted to follow up on the inflation question, but.
When it comes to gross margin.
So it is there is more inflation that comes down the pipe would there be a quarter of two delay when you would see that in the in the gross margin and as the ISN does come back here is hopefully miles driven for human and gasoline goes up.
How does that come into play with your gross margin guidance for the year.
Okay. So when we see price inflation.
We want to react in a timely basis.
Part of that depends on.
How much inventory, we have what the competitiveness of the the market is but our expectation is that if we're going to of acquisition price increases were going at.
Maintain the gross margin percentage in those additional dollars that come with rising prices will help offset SG&A rising prices because they go hand in hand on the professional side of the business.
Our our guidance for the year was the.
We're going to have very tough compares on the DIY side of the business and the professional is going to continue to grow and professional carries a lower gross margin because of those customers are buying with volume discounts. So that was inherent with within our guidance for the year that we would have stronger growth on the professional side of the business and as Greg.
Called out in our first quarter part of the.
Gross margin growth above our expectation was due to the DIY growing faster.
Thank you.
The <unk> with Bank of America. Your line is open.
Great. Thank you just a question on the competitive environment are you seeing any changes in promotional behavior on pricing to pros in particular is that segment recovers I guess in other words is there a grab for market share and what's now the faster growing channel that could result in some gross margin pressure going forward.
Jeff do you want take that sure.
I'd say overall pricing remains pretty rational I mean, you see certain regional players maybe the run certain deals certain times of the year, but all in all across the board pricing is pretty rational.
We obviously stay on top of it and and react accordingly to make sure that.
Our price is always competitive in the marketplace and then really focus on winning with the availability service and relationship.
Great and just the follow up on the competitive landscape in the last year was clearly a very disruptive environment for the auto aftermarket, but there are a lot of small businesses also received support from PPP loans. So we didn't see maybe as much M&A as we might have expected and that kind of environment the hub.
The pipeline for potential acquisition targets with today.
Yes.
I would say that the did our industry actually performed pretty well there.
There are some small players that the.
We're having conversations with that may be an opportunity for us to acquire.
We're looking we're always looking at the acquisition targets. We're always looking for strategic acquisition targets that you know that are margin or a competitive advantage or a market that we need to move into.
And we value those those acquisitions of accordingly based on the value that it brings to the company Theres just not of lot of of bigger.
Bigger acquisition targets larger chains left out there that are in markets that we don't already have exposure too. So really what we're focused on is the smaller acquisitions and I wanted to say smaller acquisitions. I mean, 123, maybe 510 store change just whatever whatever comes down.
The pipe, we would absolutely be open to.
To some companies the size of of bond or have been at that May have 2030 40 stores.
Should those come available. We also continue to look for acquisition opportunities outside of the U S as well.
What I would add to that is.
Our history shows that we're a willing participant to consolidate the industry. When we look at the players that are still out there that would be of target for us that the.
Players that are left are strong performers at.
And those performers.
Tend to come up for sale when the when.
There is a change in ownership or it's a family run business and they don't they're not going to pass it onto the next generation. So.
The acquisition pipeline is more determined by individual events at at different chains and macroeconomic circumstances.
Got it okay. Thank you.
Zack <unk> with Wells Fargo. Your line is open.
Hey, good morning, guys kind of a low.
From question on the DIY business, obviously, having a great moment right now and plenty of one off drivers, but considering the rising population of older vehicles on the road curious how you think about the DIY industry structurally and whether you think the long term run rate could be higher versus pre pandemic.
Yes, it's a great question Zach.
The the fact that new car sales are softer in used car sales.
Have been pretty strong a lot of that is based on supply and demand. That's good for our industry. That's good for our industry for a couple of reasons.
One one as you alluded to the DIY channel.
Lot more of those maintenance repairs of maintenance cycles can be performed in the DIY channel and also most of the time or a significant portion of the time I should say those vehicles are probably out of warranty so they're out of the warranty period.
<unk> has two options option a is to go to their their independent garage at one of our professional customers for too do the repairs themselves or take it back to the dealer.
For most consumers probably would not use because of the cost factor of of making those repairs I think we've seen over over the past year of willingness of the DIY consumer to do more repairs and maintenance on their vehicles than we have historically seen.
Is that going to be.
We're going to continue into the future, it's hard to say I sure hope it does.
As I've said in the past I think that there is some traditions involved here I remember changing the role of my car with my debt when I was younger and hopefully some of these the east traditions, where you've had the father showing their children how to how to change the oil and may be changed suspension of breaks the easy repairs, hopefully a lot of that sticks and stays in the Dr.
<unk> channel, but either way, whether it's the DIY channel of the <unk> channel the.
The strength in used car sales should benefit our industry and the aftermarket.
That makes sense and my follow up for Tom last quarter. You had suggested your gross margin rate on an ex LIFO basis would be fairly consistent through fiscal 'twenty, one, but given the Q1 outperformance and changes in the same SKU inflation I'm curious if you could update us on your latest thinking here.
Well I'll have to look at the transcript I think that I said, we expect our gross margin to be pretty similar all in.
Obviously, the little better performance than we thought during the first quarter not enough to make us want to change our range.
Got it appreciate at the time guys. Thanks for fitting me in.
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 Jack we'd like to conclude our call today by thanking the entire O'reilly team for your continued hard work in delivering a record setting quarter.
Like to thank everyone for joining our call today, and we look forward to reporting our second quarter results in July. Thank you.
Thank you ladies and gentlemen, this concludes today's conference.
You for participating you may now disconnect.