Q1 2022 O'Reilly Automotive Inc Earnings Call

Speaker 1: And feel like that was the right thing to do, headed into the remainder of 2022, to ensure we're supporting service levels and some of the initiatives you asked about to take share this year. Greg, as bradson is prepared comments, you know, comparing against first quarter last year- we had unusually low last gn a last year and we're comparing against that and the first first half last year. I'm sor specifically first quarter and as we compare against that, you know, as we've said last year and Brad and Jeff before him said, that was really a number that we knew needed to increase from a service level standpointry. So we planned for a little higher gn in the first quarter and we fully expect that to come back down in that two and a half range for the balance of the year. It's Greg, its a little bit more about. If we could have spent more last year, we would have right.

Speaker 2: Thank you. Our next question on M comes from Chris workers, fromim J P Morgan. Thanks, good morning guys. So my first question is on the inquoter shocks of the gas price surge in the war. Can you talk about how that played out? Did the consumers initially sort of dip down but then sort of the trend subsequently rebound after that initial shock, and is that what ultimately allowed you to, you know, have that strong two year and three year trend in March?

Speaker 3: Yes Chris, I'll tell you as well. As we said, the first part of the quarter was really choppy, especially on the DIY side. There was a lot of. There was more fluctuation in sales volume earlier in the quarter for the reasons you called the resurgence of omacrron. We felt like that impacted us earlier in the quarter. Fuel impact probably didn't happen as much until the midpoint of the quarter to the back half of the quarter but, as I said in my prepared comments, we started to see more consistency in our DIY comp as we progressed through the quarter, specifically in the last month of the quarter and and leading up to the call today.

Speaker 4: Got it and then you know, maybe can you talk more specifically about. You know what you're seeing in April in markets where spring is at least started to break. Are you seeing that three-year trend that you saw in March hold? And then on your comment that your trending below the midpoint of the God guide, is that, is that a year-to-date comment, and would you say that you're trending below the low end of the guide as well?

Speaker 5: Chris, appreciate the question. April is a short portion in April . To date is a short portion of the second quarter, So probably not appropriate for us to parse that out again. Refer back to the last 8: weeks have been a much more consistent volume.

Speaker 6: Okay Thanks very much.

Speaker 3: Thanks Chris.

Speaker 2: Thank you. Our next question line comes from exact Freedom from welllds Fargo. Please go ahead.

Speaker 7: Good morning and congrats to Jeremy and Tom on the new roles. So first question: is there any way to quantify the weather headwind on the quarter for both DIY and do a forming comps, and how do you think about the dynamics between purely lost sales versus sales that could land later once weather begins to cooperate?

Speaker 3: That great, great question I wish. I wish that a crystal ball and really understood exactly what the impact wasi'll tell you there's really two facets to weather in the first quarter that we've dealt with as long as I've been in the industry and that is: 1, winter weather and 2, spring weather. So when you look at winter weather, specifically in the early part of the quarter, you know bad winter weather helps us in some market short term with cells of things like batteries and wipers and where people have with a cars Al Star because their battery died because of the cold weather, then there's a lingering effect that you know that, based on the winter that we saw this year, we would expect to see some benefit in the second and third quarters. That's typically caused by, you know, resting components under vehicles from Salty roads damaged to steering and chastis components because of, you know, roads being damaged by the harsh weather. That would come typically later in the year, post spring.

Speaker 3: The other weather component would be, you know, later in the in the, you know the quarter and that's based on the timing of spring weather coming and that's really what's been choppy this this year is is spring. It seems like every time you get a, a nice day, there's there's 3, it gets cold again and start raining and a lot of our DI? Y customers, you know, depend on, you know, non wet dry, warm days on the weekend to do their repairs and it seems like we've been pressured with a lot of damp weekends and a lot of our markets this year. So So weather weather had an impact. Quantifying that as as a portion of some of the other headwinds we talked about, that we've seen we really just can't do that.

Speaker 7: Got it- appreciate the color and then a follow-up. With respect to the outlook, can you help me understand the dynamics around your sales, EBIT and EPS outlooks all staying the same, but since you're now incorporating about seven million in incremental buybacks versus last quarter, does this imply that we should think about your sales or margins closer to the low end of the range versus the previously higher of the range in? Are there any particular line items that would be most impacted by this?

Speaker 5: So when we look at our guidance, in our prepared comments we said currently we're trending towards the lower end of our range. Gross margin was where we thought it would be. Sa, total spends where we thought it would be little more pressure on the Sa than the glsross margin. Which is the change in the epss where we've brought shares in to the extent that there is a benefit to those Steers but there is a benefit for those shares. For the rest of the year implied a little bit down on EPS, mostly driven by the SGA SDA spend from the first quarter.

Speaker 8: Thank the time guut Thank, Thank you.

Speaker 2: Thank you once again for any questions on the line. That's zero than one on your touchstone phone.

Speaker 2: Our next question line comes from Mr Bryan nagegel from Oppenheimer. Please go ahead.

Speaker 9: Hi good morning the first 1, Tom and Jeremy. Congratulations and your new roles.

Speaker 10: Thank you.

Speaker 9: It's my first question I I know it's me a bit of a follow-up but just with respect to.

Speaker 9: Gas prices. Obviously now higher gas prices are getting a lot of attention.

Speaker 9: You you know is is a potential headwind to consumer spending. Historically, gas prices have had impacts upon new Aria and.

Speaker 9: In the category broad, I guess iguess ICEs, maybe a little more color what you're ING. If I hear the comments you made in the prepared comments, addition to some response to the, it seems there may have been an initial impact to higher gas prices, but then you've that fade, I guess, or may a little more color, what? What you're seeing in gas pric? Frankly, you know if you're, if you're surprised with the consumers this time reacting to gas prices.

Speaker 3: Yeah Brian , this is Greg. I'll take that one and then see if you know bad or tomor or bren has anything to add. You know I don't look at price points specifically to to driving consumers, driving habits. You know gas prices definitely are going to impact miles driven over time. Unfortunately, miles driven data you know, as you guys know, lingers for a couple of months and we don't have data for the past few weeks. But you know what what we believe is is: if gas prices ramp up incrementally over time, especially a DI Y consumer who's typically more economically challenged, will adapt to that and budget for it. When you see spikes in fuel prices, like we saw a late February , early March, often that will have more of an impact on miles driven and impact our business a little differently. But that's a short term impact. I mean over over time those, those customers and consumers.

Speaker 11: Employment numbers, which is also positive for our business.

Speaker 1: Brian , this is Brad. The only thing I' add to I thinkit'swellsaid by Greg and Tom. But, as you well know, with our company either way, it's obviously a concerned with the longer term, you fuel prices and miles driven. But some of the years we've had that pressure are the years that we all face that- us and our competitors, the small competitors and the large competitors. And so just operationally, as you know, like we always talk, we don't operationally. Our teams aren T out there talking about gas prices, weather and things like that, there out there trying to figure out how to take market share. And some of the times that we've had some of those headwinds are the years we feltlike we tookthe most share. So that's how we're looking at it.

Speaker 9: It's all really helpful. I appreciate it. And then my my follow up question, and I think it's a question I've asked: what prior calls too? But just with regard to inflation and in product price place, are you, are you seening yet any any, any indications of demand destruction, as as it's a cost of your products to start to rise?

Speaker 3: We're watching that really closely. We look at and our product in a good better, best category mix and we have not seen evidence thus far of any trade down or any significant trade down. What we have seen is more of a supply chain issue than a pricing issue, where some of our customers have been willing to trade from branded to proprietary or proprietary to branded or up and down the value spectrum as needed. When we don't have maybe exactly the brand of oil they want in stock at that time they'll trade across brands or trade up and down. But from a price inflation standpoint we've seen no evidence of consumers trading down. Thanks in a Congress. Again, Thank you.

Speaker 2: Thank you. Our next question on mine comes from Bret Jordan, from brejefffriys. Please go ahead, egg. Good morning guys.

Speaker 12: Grant mgrren, can you talk a little bit more about Mexico? Now that you're putting a DC in down there, maybe what you see is a potential eventual store count and if the profit model down there is meaningfully different than what you see in the U S?

Speaker 3: Sure So we we, you know we we're slow to announce some things and we want to wait til the D C was was underway in the contracts for sign and everything before we talked about that publicly, BR. But you know we are, we are, we're happy with our, with our progress we're making in Mexico. We're opening stores, albeit at a slow pace. You know our strategy in Mexico is similar to our strgy here in the U's. We want to make sure we've got the supply chain infrastructure in place before we really ramp up our store growth at a more aggressive pace, because we want that customer experience to be what it's going to be long term and we want that service level from our D C for our professional customers to be at the very highest level from day one and so. So we're growing the market incrementally. You won't see there Ali brand down in Mexico right now. You'll still see my as warmant and that's part of our strategy. Will' transition that over time.

Speaker 3: But the first step is to get the distribution center open. As Brad said, that will happen in the first half of next year and then we would plan to ramp up our growth, our store count growth in Mexico and, as we grow, consider additional distribution centers that time. As far as capacity, one of our major competitors has over 600 stores down there and we feel like there's a pretty big opportunity to grow our store count somewhere in that range in Mexico as well.

Speaker 12: Okay great. And then on the pricing actions, it was hard to find a lot of disruption in the first quarter around that strategy. Could you talk about maybe, how broadly it's been rolled out, maybe as a percent? Just SKUs? Is it all behind the counter and is it pretty much done? Are are there other areas you're going to address pricing, or is what you announced on the fourth quarter pretty much in place now?

Speaker 1: Brad do you want to thank that MOR to bread I'll be glad to talk to that and try to answer your question. The best I can look we're a couple months into this bread as you know as we said earlier. We did complete what we're going to do in February and that was completely rolled out to our entire organization as you know on the installer side the professional side of the business. It's far majority back room hard parts to your question so that that would be a yes overall on your question. There what I would kind of want to just go back to the we talked about last quarter when we did this bread is this is absolute long term play. You. It's a share game play. It's something that we tested out extremely thoroughly really throughout the entire year. Last year we tested our test tested our test and we used a lot of science. A lot of data we use isolated markets. We use markets metro markets roural markets and.

Speaker 1: This was all about something that we felt like would absolutely be a share play and especially a unit growth and gross margin dollar growth strategy over time. As you well know, bread. You know the way that our installars and professional customers- whether it be a, you know, independent garage or a nationalional, regional account- you know that they make their buying decisions based upon the overall value proposition. You know and building our business, especially our professional business, which is how we founded our company- on the professional customer. You know pricing on down the list. You know it's critically important to have the right price but all that falls behind. You know getting a car off the Rack every day for those shops then buying from somebody they know in trust the overall service and value proposition and you know honestly, is an operator. I would just tell you that I feel even better about it, as I did 60 days ago, the more we've moved on and seeing the confidence in the team.

Speaker 1: And what we're hearing from our existing customers and the future customers, potential customers that we're calling on. They feel really good about everything we're doing. And lastly, I just remind you that what we did with pricing we're still at a premium. Like we said earlier, we what we don't want to be the cheapest. That's not winning strategy for us. We don't feel that to winning strategy in the professional business and so we really didn't expect to see any reaction from our big public competitors, nor the independence, So that doesn't surprisise us that we're not seeing a lot. It was a very rifle approach. I think Greg said that earlier. It was very targeted. To skuse, we felt like would not only give us a shot at moving more units with the discounted items, but the overall basket in the entire delivery with an entire job Bret. one more comment to that is our pricing team.

Speaker 3: Continues to do what they do day in a, day out, and that's monitor, make sure we're competitive in all of our markets. And we talk about the price decreases we made on the professional side, But keep in mind that's offset. We're looking for opportunities to increase prices as well as decreas our prices, and our pricing team will continue on that effort.

Speaker 12: Great Thank you appreciit. Thank you.

Speaker 2: Our next question. Mine comes from South bathm, from woedwish Securities.

Speaker 13: Thank a lot and good morning and congrret Jeremy and Tom on the new rules. My quest is around inflation first. Just in terms of LIFO Tom, you mentioned no major impacts despite higher inflation. Can you walk us through why you're not seeing you can change your LIFO forecast despite higher expected inflation?

Speaker 11: Well now that we're in typical LIFO County last and first out. So as we add layers we 're.

Speaker 11: Running the cost of goods from the late blast purchases through and we don't have a debit adbalts to run off anymore.

Speaker 8: Got it okay. And then secondly, as it relates to inflation' impact on DIY comps for the balance of the year, you expect higher inflation to offset lower transactions, such that DIY comp outlook for the second to fourth quarter is unchanged from what you communicated in February .

Speaker 11: We expect to continue to benefit from average ticket on the DIY side of the business and, based on the incredible growth of DIY traffic over the last two years, to have some pressure there.

Speaker 7: Got it. You're expecting additional pressure because of the inflation. In terms of transaction counts are not necessarily.

Speaker 11: Our expectations from the beginning of the year, and currently continue to be, that we're going to have some pressure on DIY tickets because of the extraordinary growth over the last two years.

Speaker 7: Fair enough. Thank you guys, and that luck, Thank you.

Speaker 2: Thank you. Our next question: mnine comes from cian and cuttonman for Morgan Stanley .

Speaker 14: Good morning everyone. Congratulations, Jeremy Tom. My first question been asked. I'm not sure if this is an area we're going to speak to. Can you the markets in which weather has been more favorable, at least in the first quarter- nothing to do with April is- is the business performing the way you'd expect or better? Is there any commentary you can provide there to build the confidence that when the weather normalizes we will see the business come back everywhere?

Speaker 15: It Brad, you want'to take that MOR in simmean. You know, as you know, you know it's a fine line between the weather, the hhertz and the weather that helps, you know, especially long term. You know we're calling out weather so much because we do feel like it's really impacted our, our DI I Y business, so much more than the D F M business. You know when, when you look at the first quarter of 2022, we did have some markets that our used to the winter weather, So to speak, that when they got it it was a a little bit of difference in between what we were seeing in other markets. But when you look at our plan, you know, by region, by division and the two year stack, our performance, you didn't see the big weather swings from region to region. Really, what we were seeing, the kind of washed out by the end of the quarter simmean is, you know it wasn't like markets were' off due to weather from you know, month to month it was more kind of a day today, week to week thing. You would see a market that had unfavorable, you know, kind of lack of that spring weather we talked about.

Speaker 1: Over a weekend and they bounce right back the next weekend and Vice versus. So you know, not a lot of regional differences, a little bit, a little bit of difference in the first quarter. But again, when you look at the two years stback and we look at our play by region and division very, very consistent. Ok, that's helpful. And then the follow up: is you looking back at the volume that the business pained over the last two years and what's what's lapping underneath the comparison? You know there's probably been some discretionary business that happened when people were staying home, and I know there's no crystal ball to measure that. But it seems like in the conference called script today, you know you talked about some of these risks a little bit more than maybeeven the last quarter. Is that fair? Are you questioning, you know? Do we really know what's in there? What's reversion versus, whether gas prices, etcetera? It's also it's really just testing the confidencethat the business, you know, reaccelerate from here.

Speaker 3: sommean. We remain bullish both on the industry and on our company performanceyou know our DI F? M business has been strong and we expect it to be strong for the balance of the year. The uncertainty is around the DI? Y consumer and you know we're still very optimistic there, but there's just when you look at fuel prices and you look at some of the headwinds that we talked about in our prepared comments. We just wanted to make sure that we acknowledge- you know know- the risk for the balance of the year. We're still, we're still bullish, we still feel good. There's a lot of positives that will impact our DI? Y consumer. You know that they're driving their vehicles more miles, they're drive keeping them longer. You know there's lack of new car inventory, So there's there's puts and takes in this. But you know we're not trying to be negative, we're just trying to to acknowledge that there are some headwinds, potentially ok. thanks, Greg. Good luck everyone, Thank you.

Speaker 6: Thank you. Our exquestionion line comes from Scot chickari from Truist. Good morning guys. So in your commercial sales actually accelerate during the quarter as you made your pricing investments because you say it was having the desired effect.

Speaker 11: What we would say. Last year there was volatility in the quarterly numbers because of, because of the stimulus. What we would say is: versus our expectation. The professional business performed better at the end of the quarter versus our expectations in the beginning of the.

Speaker 16: Rather that, and then just a quick fall-up. Just wanted to clarify: did you guys make any price investments in the DIY side or was it all concentrate on the pro side?

Speaker 3: The DIY side of the business is much easier to monitor pricing in the industry and we always have and always will continue to make sure we're competitive on that side of our business. So DIY side is ongoing price adjustments, both up and down, to ensure our competitiveness. On the dim side's a little tougher and we took a more aggressive approach on the DIFM side this year.

Speaker 16: Okay So to just to where sor one quar, your actual what's called more aggressiveness on the pricing side was really focused on the Pro and then DIY, you're always sound pricing against the market.

Speaker 14: That's correct. That's correct. Okay, exceent thanks gut, Thank you, Thank you.

Speaker 2: And we have reached a lot of time for questions. I will now turn the call back over to Mr grh Johnson for closing remarksthank you, Richard.

Speaker 3: We'd like to conclude our call today by thanking the entire Riley team for your continued hard work, delivering yet another solid quarter. I'd like to thank you 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. Thank you for participating. You may now disconnect.