Q2 2021 O'Reilly Automotive Inc Earnings Call

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Welcome to the O'reilly Automotive, Inc. Second quarter 2021 earnings conference call.

My name is Victor 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 30 minute question and answer session. During the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone I will now turn the call over to Tom Mcfall.

So to make for you may begin.

Thank you Victor good morning, everyone and thank you for joining us during today's conference call. We will discuss for a second quarter of 2021 results and our updated outlook for the full year of 2021.

After our prepared comments, we'll host a question and answer period.

Before we begin this morning.

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Our comments today contain forward looking statements.

And 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 90 to 95.

Can identify these statements by forward looking words, such as estimate may could will.

I believe.

I'd like that would consider should anticipate project plan intend or similar words.

The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest annual report on form 10-K for the year ended December 31, 2020, and other recent SEC filings the company assumes.

The EBIT update any forward looking statements made during this call.

This time I'd like to introduce Greg Johnson.

Thanks, Tom.

Morning, everyone and welcome to the O'reilly auto parts second quarter Conference call.

Participating on the call with me. This morning are Jeff Shaw, our Chief operating officer, and co President and Tom.

You'll have the goal our chief financial Officer.

Henslee, our executive Chairman and David O'reilly, Our executive Vice Chairman are also present on the call.

I would also like to welcome Brad Beck, our executive Vice President of store operations and sales who is joining us for his first call.

I'd like to.

Our call today by expressing my gratitude to team O'reilly for the hard work you put into delivering yet another outstanding performance this quarter we.

We don't take for granted the exceptional results you generated in the second quarter, nor the high level of execution required every day to produce these results. So thanks for your team O'reilly for continuing to debt.

Alright, why you are the best in the business.

Our second quarter results were headlined by a robust 9.9% increase in comparable store sales and a 17% increase in diluted earnings per share. These results are especially impressive as they were achieved on top of a 16, 2% comparable store sales growth.

<unk> and 57% increase in diluted earnings per share we delivered in the second quarter of last year.

Over the past 5 quarters since the onset of the pandemic, we have grown earnings per share an average of 44% per quarter and this is truly remarkable performance and this truly remarkable remarkable performance.

Demonstrable chief through our team's selfless dedication and focus on safety, while at the same time, providing excellent customer service.

Congratulations team O'reilly on another exceptional quarter.

Before we dive into our results I'd like to take a moment to extend my congratulations to Jeff Shaw, our chief operating officer and Copa.

On his upcoming retirement.

As we noted in yesterday's press release, Jeff has decided to retire in early 2022 after more than 33 years of dedicated service to the company and his fellow team members.

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His career track is a prime example of our companies promote from within philosophy, having begun is O'reilly tenures of parts specialists on the counter and he has grown his career by being a key contributor for our company has tremendous growth.

Throughout his career progression to Chief operating officer and co President.

He has consistently championed our promote for them philosophy and has served as a mentor to many of O'reilly as current senior leadership team.

Jeff has earned the gratitude of all of team O'reilly for his incredible contributions to our company's success and we wish him a very happy and well deserved retirement.

Thanks to Jeff keen focus on succession planning, we're very pleased to announce Brad Beckham O'reilly as.

<unk> Vice President of operations of store operations and sales will step into the executive Vice President and Chief operating officer role upon Jeff's retirement.

Brad has been an O'reilly team member for over 24 years.

His career progression mirrors much of Jeff's, having also started his o'reilly career as a parts specialist.

Brad is an exceptional leader who shares just passion for providing excellent customer service and investing in our team members and I'm confident he will continue to lead our company's access to success well into the future.

Now I'd like to address the quarter's results and start by providing some color on our exceptional sales performance.

Our second quarter comparable store sales growth of 9.9% and our second quarter 2 year comparable store sales stack of 26, 1% greatly surpassed our expectations for the quarter.

As we continue to maximize the benefits from the robust broad based industry trends, we've experienced over the last several quarters, coupled with a favorable weather environment and the benefit of government stimulus.

As noted on our first quarter call. The last around the government stimulus payments started to be distributed in mid March.

At which point the sales volume accelerated meaningfully.

This growth continued in April before moderating at the end of April to a level of consistently strong sales volumes that carried through may and June which was well above our expectations.

These volumes translated into positive comps every month for the quarter.

Which was impressive in light of the extremely strong comparison, we faced in May in May and June of 2020.

These better than expected sales volumes have continued thus far in July and we have been pleased with the durable nature of strong sales volumes, we have been able to achieve.

Our robust comparable store sales results.

We generated have been underpinned by significant contributions from both the DIY and professional business.

We posted positive comps for DIY and professional in the quarter comprised of both ticket count comps and average ticket comp growth.

The professional business was the largest contributor to the.

Comparable store sales increase for the quarter, having faced softer comparisons on this side of the business, resulting from a more gradual recovery last year from the additional initial pandemic impact.

Faced tougher comparisons on the DIY side, but we're very pleased with the performance in our DIY business as we calendar the exceptional sales volume.

From last year.

While both sides of our business exceeded our expectations for the quarter, our DIY business was responsible for producing the greater outperformance as compared.

To our expectations.

Same SKU inflation increased to slightly over 2% for the quarter up 1 for upfront.

Volume, 5%, we experienced last quarter.

We now anticipate we will see additional larger increases in same SKU inflation as we progress through the year, but the ultimate extent of the impact will be determined by the duration of pressures to pricing levels for cross cost increases in wage rates freight and raw materials.

The 1 we anticipate the benefit to our top line sales results will be partially offset as rising prices will likely cause some economically challenged customers to defer non critical maintenance for trade down on the product value spectrum.

Finally on a category basis, we saw broad based robust sales trends across.

Across all categories, with especially strong performance in under car hard part categories in weather related categories.

As we disclosed in our earnings release yesterday, we are increasing our full year comparable store sales guidance to a range of 5% to 7% from our previous range of 1% to 3%.

Included.

And in this upward revision.

And as our year to day performance as well as our continued strong performance to date in July.

As we move into the back half of the year, we continue to face strong compares to the prior year.

And while we have a constructive view of the demand.

For our constructive view of the demand backdrop for our industry.

We remain cautious as significant uncertainty remains surrounding the continued progression of the pandemic recovery as well as the expected end of additional federal unemployment benefits in all states.

Regardless of the uncertainties, we face we will continue to execute our proven business model and are extremely confident in our team's.

<unk> to drive further share gains moving forward.

The tremendous rapid growth in our business has given us the opportunity to earn many new O'reilly customers and the outstanding customer service. They received will be the key to earning their repeat business.

Turning to gross margin for the second quarter our gross.

<unk> of 52, 7% was a 26 basis point decrease from the second quarter 2020 gross margin.

This was in line with our expectations as we anticipated headwinds from DIY versus professional total sales mix and higher distribution costs compared to the second quarter of last year.

For the full year 2021, we are maintaining our gross margin guidance of $52.2 to 52, 7%.

While we are above the midpoint of our full year guidance through the first half we expect to see pressure from certain transitory distribution costs in the back half of the year.

Our distribution.

<unk> infrastructure is facing inefficiencies due to the massive sales spike over the last 5 quarters, the difficult labor environment and global logistics challenges.

We continue to view our distribution network is a key competitive advantage that supports our industry, leading parts availability and are steadfastly committed to protecting and.

Seeing this advantage.

So this and we've adjusted our near term cost expectations to match. The deliberate steps we are taking to ensure the highest possible distribution service levels and further deliver on our strategic inventory initiatives.

We put our dedicated supplier partners, an extraordinarily hard working distribute.

To enhance our team members have done an amazing job to support the surge in our sales volume and we remain committed to deliver excellent customer service as we navigate these transitory pressures.

Before handing the call off to Jeff I'd like to highlight our second quarter earnings per share of 17% to $8.30.

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With our year to date increase of 39% to $15.39.

Our second quarter earnings per share results represents a 36% 2 year compounded quarterly growth rate.

And I would once again like to congratulate and thank team O'reilly for delivering another quarter of except.

This performance.

We are raising our full year earnings per share guidance to $26.80.

To $27, an increase of $2.5 which at the midpoint now represents an increase of over 14% compared to 2020 and a 2 year compounded camp compounded annual growth rate of 20.

3%.

This increase in full year guidance, driven by our strong year to date sales results combined with excellent operating profit flow through which Jeff will provide more details on here shortly.

As a reminder, our EPS guidance includes the impact of shares repurchased through the call, but does not include any.

<unk> share repurchases.

To conclude my comments I want to express my confidence in the long term strength of our industry as consumers continue to value investments and the care and maintenance of their vehicles on O'reilly will be well positioned to meet those needs in the future.

I also want to again extend my.

Deepest thanks to our team for their commitment to our culture fellow team members and our customers.

Team O'reilly I'm proud of your continued outstanding performance and I look forward to what we will accomplish on the road ahead.

I'll now turn the call over to Jeff Jeff.

Thanks, Greg and good morning, everyone I'd also like.

Additionally, in my Congratulations and express my sincere thanks to team O'reilly for their outstanding efforts and results this quarter.

Our team's ability to grow comparable store sales and operating profit dollars on top of second quarter 2000, Twenty's record performance demonstrates just how deeply ingrained our culture is.

<unk> team O'reilly.

I couldnt be more proud to work with a team who regardless of the past successes or challenges. We faced will remain driven to win the business by rolling up their sleeves, and how it has clean and out servicing our competition every day.

We've had plenty of opportunities over the last year to show.

Within customers that we are in fact, the friendliest parts per 1 town and I believe the continued strength in our results speaks volumes to our team's ability to provide that consistent top notch customer service.

To begin my comments today I would like to provide some color on our SG&A expenses for the quarter.

And give some additional insight into the outstanding performance of our team.

Our second quarter operating profit dollars increased by 8% as compared to last year with our SG&A leverage at 29, 7% of sales significantly outperforming our expectations as a result of our robust sales performance and solid.

Net expense control.

As we discussed last quarter, the strong sales trends continue to produce historically high levels of profitability.

Greg has already mentioned the extremely tough comp store sales comparisons we were up against in the second quarter and we also faced our toughest SG&A leverage and operating margin comparison.

Against the second quarter of last year.

As a reminder, last year's second quarter results were driven in part by cost adjustments, we made to our business in response to the initial impact of the pandemic, which generate a level of profitability that was unique to those specific circumstances and not sustainable.

<unk> or beneficial to our long term business.

While this unusually difficult comparison created pressure on our year over year operating margin rate, which declined 87 basis points were very pleased with the improvement in our profitability on a 2 year stack.

On this basis, our operating margin percent.

Of 23% is at 372 basis point improvement over our second quarter 2019 operating margin performance as our team was able to drive compounded topline growth at almost twice the rate of our SG&A increases.

SG&A per store grew 11, 5% in the second quarter.

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Per store SG&A dollar growth was above our expectations for the second quarter as we spend additional dollars in store.

Payroll variable operating expenses and incentive compensation in support of the much better than expected sales dollars.

Expense control remains an integral part of our culture and we will always carefully manage every dollar we spend while also ensuring our stores and store team members are welcome.

<unk> with to deliver the service levels, our customers know and expect.

Based on our results year to date, we're now estimating our full year increase in SG&A per store to be approximately 5%.

Due to the SG&A leverage above our expectations on the strong sales performance through the.

Well at this call, we're increasing the midpoint of our operating profit guidance by 55 basis points to a range of 25% to 29%.

Next I'd like to provide an update on our store growth during the quarter.

During the second quarter, we opened 50 new stores across.

<unk> 25 states, bringing our year to date total to 116 net new stores.

This page sets us up well to achieve our plan of 165 to 175 net new stores for 2021 and.

And we continue to be pleased with our new store performance, which is driven.

By a solid team of professional parts people in each of our new stores.

We're also pleased with performance and results from our team in Mexico and look forward to the growth ahead of us in that market.

As I wrap up my prepared comments I'd like to again, thank our team members throughout our stores.

D season offices for their steadfast commitment to our business and customers you've.

You've shown there is not a single challenger obstacle that will stand in the way of your team's success.

Finally.

I also want to thank Greg Johnson, Greg Henslee, David O'reilly and all of team O'reilly for the kind words in regard to moderate.

My retirement announcement.

As well as the opportunities that I've had over the years to be a part of a truly first class team and to play a role when team O'reilly has tremendous success story.

Looking forward I am extremely excited for the future of our company and the deep bench of solid leaders that we have who will drive the continued.

The success of our company.

As for my specific succession plan as Greg mentioned, Brad is a tremendous example of our promote from within philosophy.

Working his way up through the ranks based on outstanding performance and a deep knowledge of what drives our business.

He is an experienced and well respected.

Respective later in our company, who is fully prepared to step into the role of Chief operating officer, and I know he will do an outstanding job.

And since this will be my last quarter were all participate in the prepared comments I'm, especially pleased to transition this responsibility over to him.

And.

Just because my time as an O'reilly team member will soon be coming to an end as retiree I'll continue to be a long term shareholder and will be chairing team O'reilly on from the sidelines in the future.

Now I'll turn the call over to Tom.

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Thanks, Jeff I'd also like to thank all of team O'reilly for their continued.

<unk> hard work and commitment to excellent customer service, which drove our tremendous second quarter and year to date for performance.

In addition, I would also like to take this opportunity to congratulate Jeff and his upcoming retirement and thank him for his many years of top notch leadership.

Now, we'll take a closer look at.

Quarter results and add some additional color to our updated 2021guidance.

For the quarter sales increased $374 million comprised of a $298 million increase in comp store sales a $57 million increase in non comp store sales and a $19 million Inc.

Increase in non comp non store sales.

For the full year of 2021, we now expect our total revenue to be between $12, 3 and $12.6 billion.

Up from our previous guidance of $11.8 to $12.1 billion based on our strong year to date topline performance and our continued.

Our second half guidance and our team.

Greg covered our gross margin performance earlier, but I do want to provide details on our positive LIFO impact, which was $19 million in the second quarter and above our previous expectations.

As a reminder.

In the second quarter of 2020 reported a headwind.

<unk> can LIFO with a charge of $4 million.

When we set our full year gross margin guidance earlier. This year, we were anticipating a larger positive impact from LIFO in the first half of 2021 versus the back half.

However, as we continue to experience inflationary input cost increases.

And depending on the persistence of inflation.

We may see similar for more LIFO benefits in the back half of the year.

Which is expected to partially offset pressure on our higher than planned distribution cost that Greg discussed earlier.

While some of the components driving our overall gross margin outlook have changed from.

General expectations at the beginning of the year, we still expect to finish the full year within our original stated gross margin range of 52 to 52.7 per cent.

Our second quarter effective tax rate was 23, 1% of pretax income.

Comprised of a base rate for 'twenty.

<unk> for 4% reduced by a 1.3 per cent benefit for share based compensation.

This compares to the second quarter of 2020 rate of $24..1 per cent of pretax income, which was comprised of a base rate of 24, 5% reduced by $1.4 per cent benefit for share based compensation.

For the second quarter of 2021 base rate was in line with our expectations and for 2021, we continue to expect to have a lower fourth quarter base rate based on the expected tolling of certain tax periods and realizing benefits from and renewable energy tax credits.

For the full year of 2021.

We continue to expect an effective tax rate of approximately 23%.

These expectations assume no significant changes to the existing tax scope.

Also variations in the tax benefit from share based compensation can create fluctuations in our quarterly tax rate.

Now, we'll move on to free cash flow in the component.

Ponant that drove our results as.

As well as our updated expectations for 2021.

Free cash flow for the first 6 months of 2021 was $1.5 billion.

From $1.2 billion for the first 6 months of 2020.

With the improvement driven by an increase in net income for larger benefit from.

Our net inventory investment.

And our larger prior year investment in solar projects, partially offset by decreases in income taxes payable and tax withholdings, both resulting from the ability to defer certain income tax and payroll tax payments in the prior year under the provisions of the cares Act.

We do anticipate.

Dissipate additional investments in solar projects in the fourth quarter of 2021.

For the full year of 2021, we now expect free cash flow to be in the range of 1.5 to $1.8 billion up $400 million at the midpoint from our previous guidance.

Our strong year to date operating profit and cash flow performance.

Strong net inventory performance.

Inventory per store at the end of the second quarter was 636000, which was down 2% from the beginning of the year, but up 1% from this time last year driven by extremely strong sales volumes and a corresponding improvement in inventory turns.

Drew.

And prior quarters, earning call we discussed our plan for 2021 initiative to add just over $100 million of additional inventory in our store and hub network above and beyond our normal new store in typical product conditions.

While we are still making progress on this plan, which when fully executed will result in approach.

<unk>, 4% increase in average per store inventory.

Our strong year to date sales volumes and the resulting replenishment needs of our stores continue to be the priority.

As a result, we could see some further delays in our inventory growth initiatives. If we were able to maintain our high level of sales.

Gross our AP to inventory ratio at the end of the second quarter was 126%, which was another all time high for our company and was heavily influenced by the extremely strong sales volumes and inventory turns over the last year.

We anticipate our AP to inventory ratio decrease from this historic high as we continue to execute on or an additional inventory.

<unk> investments as well as our sales growth moderating.

Our updated expectation is to finish 2021 had an AP inventory ratio of approximately 115%.

Capital expenditures for the first 6 months of 2021 were $223 million, which was down $22 million.

For the same period of 2020, primarily driven by the timing of expenditures for new distribution and development activities.

We continue to forecast capex to come in between 550 and $650 million for the full year.

Moving on to debt, we finished the first quarter with an adjusted debt.

The EBITDA ratio of 176 times as compared to our year end 2020 ratio of 2.3 times.

With the reduction driven by a decrease in adjusted debt as well as growth in our trailing 12 month EBITDA.

During the second quarter, we used available cash on hand to redeem $300 million of our senior notes.

Which were scheduled to mature in 2021 and carried a coupon rate of 465%.

We continue to be below our leverage target of 2.5 times and we'll approach that number when appropriate.

During the second quarter, we also successfully upsized, our revolving credit facility, which was scheduled to expire early next year.

For the new 5 year facility has an aggregate capacity of $1.8 billion up from the $1.2 billion on the old revolver, which provides us with additional financial flexibility moving forward.

We continue to execute our share repurchase program and during the second quarter, we repurchased <unk> 7 million shares at an.

Cash price of $537.25 for.

For a total investment of $400 million.

Year to date through our press release yesterday, we repurchased 2.4 million shares an average price of $488.59 for a total investment of $1.2 billion.

We remained very.

Average rent that the average repurchase price is supported by the expected future discounted cash flow serve business and we continue to view our buyback program as an effective means of returning excess capital to shareholders.

Before I open up our call for your questions I'd like to once again, thank the O'reilly team for all their dedication and.

Continued hard work.

For contributions continue to drive our record breaking results.

This concludes our prepared comments and at this time I'd like to ask Victor the operator to return to the line and we'll be happy to answer your questions.

Thank you we will now begin the question answer session.

Of course.

Question. Please press star.

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Yeah.

Our first question comes from the line of Simon Gutman from Morgan Stanley You may begin.

Hey, good morning, everyone and Jeff Congratulations Brad Congratulations to you My first question.

It is on a short term question on the commentary around July.

Is there any way we could assume that that your comments around demand holding up means that the 2 year or 3 year stack for holding and if that's fair.

We're looking at the second half guidance, you know implying negative is there anything else that we should.

Besides just tough compares but if you've already gotten through the worst of it in July.

Is it just prudence in your second half guidance.

Yeah.

So we continue to be very happy with our daily performance in July and that's carried through from from those volumes in May and June.

We've rolled that into our comp guidance for the full year.

Remains a lot of uncertainty in relation to the recovery in the pandemic.

The variance that are out there.

We still have a tough comparison in August and September and put up a great account for in the third quarter of last year. So we feel like.

It's prudent to give the guidance that we gave for the full year.

Okay fair enough.

Can I ask Greg or Tom thinking about how much of the demand this year in 'twenty 1.

If there's any framework you are thinking about whats pent up versus pull forward.

Does the current year.

Become a base from which we grow or does the industry or your business have to digest some of this.

I know, it's early to guide in the out year, but anything that you're that you can share sort of the puts and takes to think about.

The future growth.

Yes, I mean, we were obviously not guiding into 2022.

Beyond at this point, but.

You know as we said in my prepared comments, we're pleased with our performance during the second quarter, we're pleased with.

Virtually every category, both the DIY and <unk> side of the business quite frankly, the business outperformed our expectations.

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As Tom said, there is a lot of unknowns as we move into the back half of the year and into 2022 and beyond as it relates to pandemic supply chain things like that.

So we're hopeful that the sales trends continue but.

We're not guiding.

Anything beyond this year, Tom do you have anything to add to that what.

What I'd add to that is last year in.

On the call today are both Greg and Jeff discussed that we've seen dramatic increases in customer traffic and we see new customers an illness was on us too.

Earn.

Customers repeat business by providing them great customer service. If you look at our guide at the beginning of this year. The expectation was we were going to give some of that business back from last year. So having sitting where we are at the top level that we're sitting at this year I think speaks to as Jeff said in his prepared comments are.

Our ability to earn more customers repeat business. So we are very pleased with the business and we can clearly stepped up the.

The base, what we determined to be the base business.

Okay. Thanks, guys.

Thank you.

Our next question comes from the line of Bret Jordan from Jefferies. You may begin.

Hey, good morning, guys.

Good morning on the on the sales exceeding expectations I guess could you just sort of parse out what might be underlying sort of broad strength in demand versus share gains.

Trends I mean, it seems like you guys have been outperforming the underlying market but.

Your share gains exceeding expectations or just the general trend in the market.

It's really Brad as you know, it's really hard to differentiate the.

The difference between what is share gains and in what may be pent up demand.

And you're coming off of a very strong.

Year end 2021, and having a strong of a year as we've had thus far this quarter. We're confident that they were taking market share. We're confident we're taking market share on both sides of the business.

As far as parsing out how much of that is market share gain versus.

You know just pure demand it would be just purely a guess to try to differentiate the 2 but but I mean in summary, we're confident of breath that we are taking market share today.

Okay, Great and then a quick question on supply chain I mean, the cadence of availability are obviously a lot of the supply.

And what has Russian could you talk maybe as to is the trend improving or are we bumping along the bottom as far as.

Access and cost.

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Sure sure. So you know.

If you break the supply chain down into the various areas you know or as we set our distribution.

Tribunal centers have been pressured by the volume and you know as most companies across the U S have seen we've had difficulty with the labor market and keeping those D. C staffed and caught up so that's been a hurdle that we've challenged throughout the year. This year things are starting to improve in.

Supply several markets and we're optimistic that through the balance of the year. Our Dcs, we will continue to get caught up and perform better from a supplier perspective.

For the last couple of quarters I've commented that we had a handful of domestic suppliers that we're facing challenges and fill rate and it really.

While it may be a couple of differences, it's pretty much the same suppliers their challenges are similar to our some of its raw materials a lot of it is carryover from Covid and labor.

Labour just having enough people to to build manufacture and distribute the product. So we're we're.

Looking very very closely with those suppliers each of those suppliers our supply chain team is meeting with at the highest levels on a weekly basis now to try to find creative ways to help them get caught up.

And then the you know.

The elephant in the room, which everybody knows is a container shortage with product coming from overseas.

We were all facing those challenges and we're doing everything we can do to keep our our product flowing I would say that overall that Bret even with all those challenges we continue to be pleased with our business.

And our performance of our stores.

We've always talked for some of the strengths of our supply chain.

We're seeing the fact that we have especially in our major categories. We have multiple suppliers in those categories and that's really helped us through this period, where you may have different countries of origin for some of those manufacturers where you have whirlpool.

Suppliers per category and also our good better best offering so while we may.

May not have the exact product every consumer wants on the shelf, we've got a product that fits their application and I think consumers today.

Like it or not no matter what store they walk into whether its a grocery store hardware store an auto parts store the.

The shelves are not as stark as they typically would.

B and I think the consumer has a little bit more of a willingness to trade up or trade down as necessary. Brad as you have anything you want to add to that.

No I think that's pretty well set.

Great. Thank you.

Our next question comes from the line of Michael Lasser.

Yes.

Good morning, Thanks for taking my questions and congratulations to everyone on their new roles.

For the retirement.

My question.

The DIY Michael.

Can I interrupt you for just a little bit of a hard time understanding.

Ah you're not coming through clear.

Thanks, Tom is that better.

He is much better.

Okay.

My question is.

Retail.

Normally it was strong in the quarter. It remains strong today, but I think contract.

There's some other odd hold.

And in what categories.

Okay.

Michael.

You went from clear too bad credit very hard to understand.

Let's try to correct.

At a time.

We'll give it another shot.

Okay.

Hum.

The crux of the question is why is DIY retail. So strong is it simply a function of people are driving more for despite the tough comparison.

The increase in vehicle miles driven is continues to drive that day.

In.

Should continue the time debt.

Even as these rebates that offer higher level into the spring and beyond.

Okay, we're going to answer the question of why this DIY remains so strong for the rest of the question was difficult to answer.

Hum.

I'll turn it over to Greg.

We continue to see an environment, where people are somewhat concerned about their economics and are taken out of more challenging jobs by themselves.

Some people continue to work from home that's a benefit for us used car pricing new carpets are hard to find in used car.

It's very high.

So those items continue to be a positive for us and we continue to think that.

No that we're taking share within the DIY marketplace.

Yeah. The only thing I would add to that Mike was your comment is probably accurate about miles driven I think consumers a lot of consumers did not take vacations last year.

Perhaps where they are this year and are doing you know more maintenance type things as well as.

Perhaps more weather related repairs, we had a we had a normal winter last year for the first time in a couple of years and that's really impacted some of our model that under car categories where consumers.

<unk> are able to replace shocks breaks things like that that may have been damaged during the winter.

That's very helpful. My quick follow up question is what was the contribution for like for like price increases or inflation in the period.

Visibility you have.

For the contribution from inflation.

Over the next few quarters and how is this going to impact the gross margin.

Me too.

Michael.

Can you give it for more explicit impact.

Margin as well.

Okay. So for the quarter I think we talked to it in our prepared comments.

<unk>.

Our LIFO number was.

I'm Gonna have to look it up again now was I guess that was more interested in the inflation. Thanks Tom.

I'm sorry, Okay. So inflation was slightly over 2% as Greg talked about we've got visibility of what our pricing.

<unk> is doing right now.

Expect that we're going to continue to see more inflation in the short term.

Greg talked about.

Many of our categories freight is a big component for raw materials and labor.

Especially for freight and raw materials, we tend to price those separately and.

Just price based on those markets.

So to the extent that these pressures continued through the full quarter, we'd expect to see.

A higher inflation in the third quarter and the fourth quarter to the extent that they start to abate with debt.

To see those cost come back down so it will be dependent.

Understood.

Very much.

Our next question comes from the line of Chris <unk> from Jpmorgan. Your line is open.

Thanks, Good morning, guys and congratulations to all.

A couple of follow up questions I guess first in terms of the gross margin outlook can you maybe just.

Re summarize what the changes are.

Relative to your original expectations and and what are you expecting from a LIFO perspective in the third and fourth quarters.

We're expecting to see more benefit from LIFO in the third and fourth quarter as our costs have increased and.

Certain LIFO debit, we expect that to be offset by transitory distribution costs as we focus on.

Getting into an even better inventory position and starting to work kind of inventory initiatives and that will have some short term cost impacts on our distribution, which flow into gross margin.

Got it so that sort of that cash.

We renewed on the on the on the inventory side is going to sort of also offset the fact that you are implying.

Less volumes year over year in the back half for the year given the comp guide.

Yes to some extent our distribution centers.

To keep up with the volume that.

Catch up right now as Greg talked 11th prepared comments are running inefficiently, so running a lower volume would actually yield a better distribution percentage at this point, but mainly we are talking about.

Challenges on the labor side, and how we get it focused on getting an even a better inventory position.

Understood and then there's a follow up.

Just to parse out.

The volume commentary on May and June when you when you talk about.

Comps you know similar in May and June or is that relative to your expectations of volumes or is that a commentary that.

May and June comps for the same basically.

Our comments relate to our expectations, obviously, we have a lot different comp cadence from last year that we compare it to.

Our focus is really on what were expected volumes and what can we achieve versus those expected volumes.

<unk> and we were.

Way above those in the beginning of April as we've talked about on our first quarter call due to the stimulus that went out but that base underlying trend of over expectations that we saw at the end of April continued in.

In May and June were focused on <unk>.

<unk> sales levels as opposed.

And map from what from what was last year.

Understood very helpful and best of luck. Thank you.

Thanks, Chris.

Our next question comes from the line of Greg Melick from Evercore ISI you may begin.

Thanks My question was on.

On the looking at sales versus 2019, so I guess they were up 26%.

A little acceleration from the first quarter could you break down that comparison for 2019 for DIY and do it for me.

Knowing how screwed up the comparisons over the last year.

Yeah, Greg we're not we're not going to quantify that.

But you know as we said in our prepared comments.

Oh, it was the larger contributor than DIY for the quarter.

On a year over year basis for that.

Compared to prior year.

Alright, if we look back to 19.

Is DIY still.

More of the of the growth versus 19 than do it for then pro or did that also if you look at aggregate sales of dollars I think we covered this in the call is that we will get the second quarter, we know that DIY fire surpassed professional business in the second quarter of last year due to the timing of stimulus.

The work from home arrangements and hesitation for people to.

Turning their carryover chops to have them work on it and it recovered more slowly so.

Our comment that the second quarter DIY.

Was.

Above our expectation.

More strongly than the.

Professional business indicates that on a 2 year basis. The DIY is the bigger contributor.

Got it okay. Thanks, and then.

Second question is I think in your prepared comments you mentioned that is some of this inflation flows into the back half.

That you're expecting some potential trade down have you.

Have you actually seen that already in some markets for some products or is that just an anticipation given on what's happened in the past.

Yes, Greg we just called that out as a possibility if if inflation continues.

Historically, we've seen you know in <unk>.

Prices increase when gas prices increase things like that.

That the economically challenged consumer.

As less discretionary cash to spend sometimes they will defer maintenance and sometimes they'll trade down the value spectrum. So that's why we called that out.

Okay. So it's more of a expectation of things have happened in the past not about anything youre seeing today.

Hey, that's correct.

Great. Thanks, Good luck everyone.

Thanks for things.

And our next question will come from the line of Daniel Umbro from Stephens may begin.

Hey, Thanks, Thanks, taking my questions and congrats everybody.

Greg I wanted to talk about the supply chain, a little bit and obviously you know ocean freight.

It is an issue, but some of your peers are talking more about direct store thing and maybe trying to go find cheaper labor team for manufacturing to lower cost of goods I'm curious.

Maybe what the strategy strategic outlook would be for O'reilly along that or maybe what are the benefits of using more foodservice suppliers like you guys do domestically.

To keep.

Your service levels up.

Yes.

As I spoke before you know we do we don't do a great deal of direct importing we a lot of our imports suppliers, we require to keep inventory on hand here in the states there the the owner of that parade until it hits the port that has worked well for us.

You know unfortunately, we've gone through some of that inventory you know over the past few months. So today, it's probably not working as well for us as it normally would because of all of that product inevitably has to come from overseas.

We continue Daniel to evaluate where it makes sense to bring product.

From a direct import perspective versus through the suppliers.

3 PL or warehouse here domestically and it's really a matter for us of our economic calculation of is there enough demand in the net flow through of the product to justify bringing it in direct.

This is bringing it in through their distribution centers here in the U S. So we have a combination of we have skus. We went out for some of these suppliers direct into.

Our third party <unk> facilities, and then but the bulk of what we bring in from overseas would flow through there the manufacturing facilities here domestically.

Got it that's helpful and then Tom sorry to beat a dead horse just want to make sure we understand the inflation side a little bit.

For the guidance, you've given assumes what Greg mentioned earlier that inflation does accelerate or are you assuming the benefit of LIFO, assuming inflation and flat lined with <unk> I don't want to make sure we understand what's embedded in that outlook you provided.

So from a sales perspective, we anticipate that we will have some tailwind from.

Increased inflation offset by deferrals right now so.

Isn't really impacted our total sales expectations and what about on the gross margin side.

On the gross margin side.

In a LIFO debit as the prices go up there last buyers for low light folks who are <unk>.

More money on those products then than we normally would so that will be a benefit and that benefit will be offset by additional distribution cost as we.

Strategically look to improve our inventory and getting further ahead entering.

Our inventory initiatives.

Thanks, So much guys best of luck.

Thank you.

Our next question comes from the line of Seth Basham Wedbush Nathan.

Thanks, a lot good morning, congrats to Jeff.

I actually have a question that Jeff may be able to answer if we look.

The team member count it remains below pre pandemic levels. How do you view. This now do you think peaking operating your stores with less labor or is there an expectation to continue to ramp back up.

Well, it's as you know we.

We've been throughout the last really year and a half I mean since the pandemic hit.

In a downturn.

I mean, we really just kind of blocked down on on payroll not knowing what the future held in really dial in our our head count our payroll to what our business was doing and then we just had the explosive growth in volume there.

<unk>.

Mid April on and we.

Really.

Didn't know how long that was going to last we were kind of playing it by year really week to week month to month and being very cautious in in staffing back up as we've seen the.

Holy.

They're in the third and fourth quarter.

Quarter, we cautiously started ramping backup head count to match the sales demand and Thats really carried into the first quarter and second quarter of this year is very cautiously ramping head back head count back up as well as just the seasonal ramp up in the business.

We continue.

<unk> to focus on our full time initiative as well.

And.

And replace maybe part time with more full time head count knowing that we we provide better service levels with more tenured experienced team members. So that's part of it and obviously this is Brad wheelhouse.

I might let him speak to that if he's got any additional comments.

Yeah, Hey, Seth I think directly to your question I think it's a combination of both I think this last year like a lot of companies I'm sure. We've learned a lot about ourselves.

We.

Were looking at last spring and the worst case scenario, we have to make decisions on our head count.

We did that very surgically based upon team member productivity and learned a lot in that first quarter to go through the pandemic and then to Jeff's point as we've gone on here, it's been kind of a short to mid term outlook in terms of what we thought the business was going to do we always run our business like we always say for the long term when it comes to staff.

Housing and our service levels, while at the same time being able to back ourselves out if we have.

The business changes the other direction from a store count from a head count and from our standpoint, but.

We've been working this last year a lot of full time, we see some productivity increases from that and we also.

Have other.

Other initiatives on the productivity for us that we're working on right now we're pleased with those.

That's very helpful. Just 1 related follow up are you seeing a big increase in your mix of sales that are through.

Through the online channel is that a healthy operate more efficiently with labor how do you expect the online channel to develop over.

The next year or so.

Seth I'll take that 1 we have seen significant growth in our online channel.

And as we've said in previous quarters.

Most of that growth ends up in the stores.

Last quarter about 3 fourths of our our online sales.

We're pick up in store or ship to store some of that would could be curbside, but.

We.

But most of that the increases that we've seen as opposed to taking the discount that they are offered for ship to home have ended up in our stores and that that just goes.

Back to our thesis from.

Forever that those those consumers they need help they want to make sure they're getting the right part they needed timely and so Brad do you want to add to that yes. The other thing I would add is that a lot of times when we talk about online and.

Digital business, we talk about O'reilly auto Dot com that we talk about.

But what I would say is remind you of our <unk> business with our first call online and all of our shop management systems, where we directly integrate with so much of our professional business obviously to your question.

That's the other side of it that's been a huge productivity improvement incrementally at that for us and for our shops and.

Because not only do we have everything that Greg talked about with <unk>.

<unk> dot com bottomline pickup in store ship to home.

1 of our biggest initiatives with professional been our bread and butter is continuing to grow that digital business on the on the professional side in turn get the incremental gains in productivity on our.

So with our shops.

Wonderful thank you.

Yeah.

And our next question comes from the line of Bobby Griffin for Raymond James You May begin.

Hello, everyone. This is Mitch ingles filling in for Bobby Congrats on a great quarter.

So to start.

Any color on the performance by region would be helpful. For that theme are you seeing any slow down a day on daily sales for areas that have recently ramped up COVID-19 related restriction okay.

Brad you will take them sure.

Well, we're very pleased with all regions and really the consistency of our business across the.

The us in the second quarter.

Also on both sides of the business like we discussed on the DIY and professional side.

<unk> from.

<unk> for a little bit tough to talk about regional just because our time and energy really focus less on the macro trends like weather, but it was fairly favorable across our regions like Greg mentioned when he talked about the categories.

Instead of 100% fundamental execution of our business model that adds up to share gains really which to me is.

Our culture being alive alive, and well in every single market promoting prudent performers from within and be in the friendliest. Most professional parts store in every single market we operate in.

And then on.

But a question I don't think.

From a COVID-19 standpoint, where we've seeing ramp ups here recently, we have not seen that affect our business thus far.

Great. Thank you, Jeff and as a quick follow up is it fair to categorize what is for year to date as the most capable in the industry has seen over the past few years.

So for instance, gene without a rate that has been the heart of at least 7 years.

So, it's probably difficult to parse out with similar from Dnb recovery.

Any read as to what the benefit whether it's <unk> and year to date would be very helpful. Thank you.

So what I would tell you is that the last couple of years have been.

Not as favorable weather so.

In comparison, it's much better I can tell you over a long period of time, it's slightly above average.

When we talk about performance improvements, we're having a better AC year revenue better under carriers. The road's got tore up more of this winter a lot.

Is that were stressed in the winter GAAP replaced in the summer but to go.

We're not going to go through an attempt to quantify on this call.

This seasonal seasonal benefits, but what we would tell you is that we got back.

Slightly better than normal as compared to to pour in the last few years.

Understood. Thanks.

For the battery and best of luck guys.

Thanks.

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

Thank you Victor we'd like to conclude our call today by thanking the entire O'reilly team for their continued hard.

Hard work in delivering a record setting quarter.

I'd like to thank everyone for joining our call today, and we look forward to reporting our third quarter results in October. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now.

Now disconnect.

[music].

Okay.