Q2 2022 O'Reilly Automotive Inc Earnings Call
Welcome to the O'reilly automotive incorporated second quarter 2022 earnings conference call. My name is Cheryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you would like to add.
Ask a question. Please press star zero and one on your touch on phone I will now turn the call over to Jeremy Fletcher Mr. Fletcher you may begin.
Thank you Cheryl good morning, everyone and thank you for joining us during today's conference call. We will discuss our second quarter 2022 results and our outlook for the remainder of the year.
After our prepared comments, we will host a question and answer period.
Before we begin this morning, I would 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 company's actual results could differ materially from any forward looking statements due to several important factors described in the Companys latest annual report on Form 10-K for the year ended December 31, 2021, and other recent SEC filings.
Company assumes no obligation to update any forward looking statements made during this call.
At this time I would like to introduce Greg Johnson.
Thanks, Jeremy.
Everyone and welcome to the O'reilly auto parts second quarter Conference call.
Depending on the call with me. This morning are Brad Bickham, our Chief Chief operating Officer, and Jeremy Fletcher, Our Chief Financial Officer.
Brent Kirby, our chief supply chain Officer, Greg Henslee, our executive Chairman and David O'reilly, Our executive Vice Chairman are also present on the call.
Also like to welcome Jeremy to his first earnings call.
I'd like to begin our call today by thanking team O'reilly for their continued dedication to our customers and their hard work that drove another solid quarter of financial performance.
Hopefully everyone had a chance to review the details on our second quarter earnings release during.
During the call today.
I'll walk through the performance in the quarter and our adjusted outlook for the remainder of the year.
It's important to begin by highlighting the strong results. Our team continues to generate and then put them into proper context against the backdrop of incredible growth we've delivered the past three years.
And the second quarter, our team was able to generate a four 3% comparable store sales increase after driving comp increases of nine 9% and 16, 2% in the second quarters of 2021, and 2020, respectively, resulting in an incredible three year stack of 34%.
Entering 2022, when your team had a daunting task ahead of them with a challenge to deliver continued growth on top of these outstanding results, which were fueled by and which are fueled in part by government stimulus payments in 2020 in 'twenty, one that did not repeat in 2022.
Our teams have set an incredibly high performance bar and their ability to comp the comp yet again is a testament to their relentless focus on providing excellent customer service.
T. Mo rally has continued to translate the revote robust sales growth into outstanding returns for our shareholders highlighted by second quarter diluted earnings per share of $8 78.
Which is an increase of 5% over our extremely strong second quarter 2021, when we grew EPS by 17%.
On a compounded basis compared to 2019, our second quarter EPS is up an impressive 25% per year, which is just another testament to the unwavering commitment of our team to growing profitable growth through their dedication to the O'reilly culture of excellent customer service.
Next I'd like to spend time walking through some details of our sales performance for the second quarter and the factors that drove our results as well as provide some color on our revised comparable store sales guidance for the full year.
As we discussed on our first quarter earnings call in April we began the second quarter facing headwinds from a delayed start to spring and rising fuel prices.
We're also lapping our historically strong comparable store sales performance driven in part by the tailwind as we saw from government government stimulus payments in 2021.
However, as we move through the quarter the volatility from these factors moderated and our business stabilized.
Since the past few years have been significant so significantly impacted by these affect the effects of the pandemic and timing of the stimulus payments. We think is most useful to evaluate the cadence of our conference and then also on a three year stack basis.
On this basis, our month to month results were fairly steady throughout the quarter.
As our business stabilized in the second quarter, we encountered more pronounced ticket count pressures on the DIY side of our business, resulting in top line results below our expectations for the quarter.
Our plan for the second quarter included an expected headwind to DIY ticket counts as we were up against extremely strong growth from the comparison to stimulus driven demand at the beginning of the second quarter 2021. However.
However, we saw more pressure than expected as our DIY customers faced high fuel prices and continued for a significant broad based inflation.
I'll spend some time in a few moments discussing our broader outlook for the industry and our business as we move forward, but for now I'll point out that it's not completely surprising to us to have experienced these types of pressures.
Any of our core DIY customers work on their own vehicles out of economic necessity and can be more susceptible to price inflation in short periods of time.
We believe what we're seeing now is comparable to other periods in our history. When our customers are going through these types of fuel price spikes.
The current environment is different to the degree that the spike in fuel prices is occurring at the same time broad based inflation is elevated but we expect consumers will adjust to these pressures as we've seen in the past and continue to prioritize vehicle repair and maintenance.
From a total DIY comp perspective, we did see an inflation benefit in average ticket values, but the macroeconomic pressures to ticket counts and difficult compares resulted in total DIY comparable store sales being slightly negative for the quarter.
Turning to the professional side of our business, we're very pleased with our team's performance in the second quarter, where we generated comparable store sales growth in the low double digits as a result of growth in both ticket counts and average ticket size.
We continue to be excited about the strength of our professional customer business as we grow our share and consolidate the industry.
As we discussed on our last two calls we anticipated this.
Out of our business will be the larger driver of our growth in 2022 and our results in the second quarter were in line with those expectations.
We continue to be pleased with the early returns from our professional pricing initiative and Brad will cover our professional customer momentum and this initiative in more detail in his prepared comments.
On a combined basis, including both DIY and professional sales our comparable store sales growth for the quarter was driven by strength in average ticket with professional ticket count growth only partially offsetting pressure we saw on DIY traffic.
Average ticket size came in around 10% for the quarter on both sides of our business due to a benefit from same SKU inflation at similar levels.
We have continued to be highly successful in passing through product acquisition and operating expense inflation and selling price increases as we move through 2022, which is a benefit to average ticket values.
Beginning in the third quarter, we began to anniversary the onset of higher inflation in 2021, which will moderate to the year over year increase in average ticket value and is factored into our full year sales expectation.
Now I'd like to provide some color on how we view the conditions of our industry and our outlook on the remainder of the year.
As we move through the back half of 2022 remains a challenge to predict where we will encounter in a rapidly changing macro economic environment.
Certainly if we can look in the rearview mirrors at the beginning of the year and build our expectations based on inflation, we haven't seen in decades, and our global conflict accelerating growth in fuel prices, we would have landed a different spot with our initial guidance.
Despite these headwinds we are pleased with our performance against this challenging macro backdrop, and we remain very confident in both fundamental strength of our industry and the quality of our team and their proven ability to outperform the market and gain share.
While we believe we are seeing some short term impact to demand as consumers respond to economic challenges.
We're also confident in our industry benefits from the reality that very little of the demand in the automotive aftermarket is truly discretionary and the necessary maintenance and repairs can only be deferred for so long.
In fact as economic conditions worsen our experience has been that our industry provides even more critical.
I'm sorry.
In fact as economic conditions worsen our experience has been that the value of our industry provides is even more critical to consumers facing economic challenges.
This plays out in many different ways, we see it in one of our customers is able to hold off on a new car purchase and avoid a monthly expense because they are able to invest in repairs and maintenance on a higher mileage vehicles or when we have a DIY customer stretch there was a little further by providing incredible service for one of our <unk>.
Park's people with technical knowledge and customer service skills to support the customer who needs a DIY checks to keep their vehicles on the road. These are just two of the many scenarios, which motivate our customers to prioritize taking care of their vehicles when money is tight where consumers have less confidence in the state of the economy.
The core underlying factors that support demand in our industry also continues to be very healthy. The average age of vehicles on the road continues to increase aided not only by headwinds to new vehicle sales and mileage and higher resale values.
I'm sorry.
Of older vehicles, but also the excellent engineering and manufacturing of vehicles on the road today.
We're also bullish on the overall health of our customer base.
Unemployment has it remained at very low levels and increasing wage rates have been a positive partial offset to inflation, especially for the more economically constrained DIY customer base.
We believe consumers are in a much stronger position than in recent periods of economic uncertainty as.
As we have discussed often in the past miles driven is a critical metric for our industry and we are cognizant that the potential for miles driven growth could slow.
If the broader economy slows.
As a buffer against this pressure, we believe industry benefits from dynamics that will support and miles driven growth over the long term as we still see the potential in incremental miles from post pandemic returned to work coupled with consumers' willingness to move further away from urban centers and utilize their vehicles to satisfy pent up demand for personal travel.
Finally.
While miles driven is an important factor for our industry. We have proven that during previous periods, where miles driven have flattened that we have the ability as a company to drive topline growth as consumers prioritize the care and maintenance of their vehicles.
The broader outlook for our industry is important and how do we think about the prospects for future growth, but far more important is the opportunity we have to outperform the industry to drive outstanding financial results.
We have the best team of professional parts people in the industry and we are very confident we are well positioned to deliver excellent customer service and increase our market share in any market condition.
While we remain very positive on the prospects of our industry and our business. We're also cautious in our assessment of the pressures from high fuel prices and broad based inflation that impacted our second quarter performance and the potential for continued pressure as we move through the balance of 2022.
As a result, we have incorporated our year to date performance and expectations for the remainder of the year and our updated comparable sales sales guidance range of 3% to 5%.
Ultimately, we will have to see how the rest of the year plays out and we continue to be encouraged by the resilience of our business, but feel the prudent step is to adjust our expectations at this time.
At the midpoint of our revised comparable sales store sales guidance range reflect solid growth over 2021, and a three year stack increase of 28% and.
We still view this as a very favorable outlook, reflecting our ability to outperform the market and gain share.
Before I move on from sales I will note that we're pleased with our performance. Thus far in July we have seen some improvement in July sales volume trends relative to our expectations, partially driven by the extreme heat, we're seeing across many of our markets right now.
We still have a lot of summer remaining and ultimately we will have to see how the weather plays out for the rest of the year as such our guidance forecast assumes a normal weather backdrop for the remainder of the year in line with our customary practice.
Moving on to gross margin for the second quarter. Our gross margin of 51, 3% was 136 basis point decrease from the second quarter of 2021 gross margin.
This was in line with our expectations with a couple of key points I want to highlight.
Our year over year gross margin is impacted primarily by the rollout of our professional pricing initiative as well as pressures from a reduced LIFO benefit and higher mix of professional business.
As we discussed on last quarter's call, we rolled out our initiative in February and only saw a partial impact gross margin rate in that quarter.
Our second quarter gross margin reflects a full quarter impact from the initiative and is in line with our expectations.
We are maintaining our full year gross margin range of 58% to 51, 3% with the expectation that gross margins in the back half of the year as compared to 2021 will be slightly below where we've run year to date based upon mixed differences in timing of the reduced LIFO benefit.
Before handing the call off to Brad I want to update our full year diluted earnings per share expectations based on the adjustment to our comparable store sales guidance, we are lowering our full year earnings per share guidance to $31 25.
The $31 75.
At the midpoint this represents.
This range now represents an increase of 1% compared to 2021, and a three year compounded annual growth rate of 21%.
To wrap up my comments I want to again, thank team O'reilly for their continued dedication to consistently providing excellent customer service.
Your commitment to our culture fellow team members and customers that drives our success.
I'll now turn the call over to Brad Beckham breath.
Thanks, Greg and good morning to everyone.
I would like to begin my comments today by thanking team O'reilly for their continued dedication to our company's success and their steadfast commitment to excellent customer service.
Greg has already discussed our sales results and how we view the current industry environment I don't want to spend a lot of time repeating what he said however.
However, I do want to highlight our company's philosophy for how we execute our business model in more challenging macroeconomic conditions.
Simply put we never accept external market pressures as an excuse for falling short of our goals.
Our guiding philosophy, and our company, especially in our store operations group from our store manager up through the chain to senior Vice President's States that as long as their customer vehicles in the parking lot of our competitors are there our competitors delivering to our professional customers in our markets. We haven't captured all the business.
We are entitled to and we're missing out on an opportunity to grow sales.
We believe our commitment to never settling for subpar performance is a key to our success and also served as well in the second quarter.
While pressures to our DIY customers from spikes in fuel prices and persistent high inflation weighed down the top line sales growth we were expecting to see we are still pleased with our team's ability to drive solid positive sales increases on top of two consecutive years of record growth for arc.
Company.
More importantly, we remain excited about the opportunities we see to grow our business as we move forward.
I am sure not an expert in predicting what the rest of the year will hold for the U S economy, but I am highly confident that even challenging market conditions can present, an opportunity for us to capitalize on our competitive advantages our focus on maintaining an extremely high standard of customer service in any mark.
Environment allows us to build long term relationships ultimately reinforcing our industry leading position.
Now I would like to provide some color on our professional sales performance in the quarter as well as review, what we're seeing from our professional pricing initiatives.
As Greg mentioned in his prepared remarks, our professional business was the driver of our comparable store sales growth with the double digit increase in line with our expectations for the quarter.
Before I provide an update on our progress with our professional pricing initiatives I think it's important to first focus on the key factors that drive our professional sales growth.
Our company's foundation was largely built on the professional customer and we have proven decade. After decade that the most important drivers of our success on the professional side of the business are also our competitive advantages and strong customer relationships excellent customer service and superior <unk>.
Inventory availability.
For our professional customer base, the efficient and reliable service they receive from their part supplier is the most important factor in driving the economic success of their business. We strongly believe that professional business can only be one by consistently delivering a high level of customer service and this.
Was the primary reason, we were able to deliver robust comps in the second quarter.
We also believe what we're seeing in professional comps is consistent with the long term demographic industry trend of faster professional growth as well as the stronger economic resilience of the end user do it for me customer on this side of our business.
However, our professional customers are completely insulated from the economic pressures of high fuel prices and inflation that are impacting our DIY business.
We believe our ability to post significant professional sales growth in this environment against the extremely difficult comparisons reflects the momentum we are generating through our professional pricing initiatives. So its only one piece of our value proposition.
We are very pleased with the response, we've seen from our store teams and our sales force as well as our existing and new perspective customers are store and sales teams have been energized as they leverage this initiative as another tool in their toolbox to win professional business.
It truly is a combination of strong customer relationships excellent customer service and industry, leading inventory availability, coupled with our more competitive pricing, which drives the superior value proposition, we provide to our professional customers simply put the best overall value and the after.
Market has gotten even better.
Since the professional business is driven primarily by strong customer relationships exceptional customer service and inventory availability. It is difficult for us to parse the direct impact of our pricing initiatives now that it has been rolled out across our company for several months.
We believe the results we are seeing lineup favorably with the expectations. We developed in our thorough testing process, leading up to launching this initiative.
We are excited about the immediate positive results, we've seen but I want to caution everyone that we are still in the early innings of this initiative.
Our pricing actions are clearly removing some barriers, which had previously existed however business is ultimately one.
With consistent execution after being given a chance to earn new business.
These new opportunities don't necessarily open up instantly and we expect that we will have to grind out gains overtime, which is no different than how we've executed our playbook for 65 years and in turn established our company as the premier supplier to the professional market.
Finally, before I move on I want to reiterate that the execution of our professional pricing initiative hasnt changed the broader pricing dynamic in our industry. We have not seen significant competitive pricing actions in response to our initiatives and as Greg mentioned, we continue as a company and industry.
To rationally pass along inflation in pricing.
Now I'd like to discuss our SG&A and operating profit results for the second quarter and our updated expectations for the full year <unk>.
SG&A as a percentage of sales was 29, 6% a leverage of 15 basis points from the second quarter of 2021.
At this level SG&A is down over 400 basis points from pre pandemic levels in the second quarter of 2019. This incredible step change in our profitability is a testament to our team's commitment to grow sales exercised diligent expense control improved productivity.
And drive long term value.
On an average per store basis, our SG&A grew two 5%, which was largely in line with our expectations for the quarter.
On a full year basis, we are revising our guidance for SG&A per store to grow 3% up from our previous guidance of two 5%.
Our teams have been diligent in managing costs to mitigate the impact of inflation. Thus far this year with our overall spend largely in line with our expectations, but the prolonged and heightened inflation, we're experiencing especially in fuel and energy cost has driven up our forecast for the remainder.
Of the year.
Wage rates have also been in line with our expectations year to date, but we could also see pressure in the back half of the year, if we see further sustained inflation.
We are also updating our operating profit guidance and now expect a full year to be in the range of 20% to 23%, which reflects the adjustment to SG&A per store and our revised comparable store sales range.
As we look to the back half of the year and planned SG&A, we will be appropriately responsive to the changing business trends and sales opportunities and we'll make prudent adjustments to staffing levels to provide excellent customer service and grow our business while at the same time controlling our expenses.
As we discussed on multiple occasions over the years, we are very deliberate in how we manage our SG&A spend and leverage a variety of tools to manage store payroll on a store by store day by day basis.
We believe sudden dramatic changes in store staffing levels have a noticeable negative impact on customer service and as a result, we manage adjustments gradually over time to match the sales environment in conjunction with the normal seasonality of our business.
As always our top priority in managing expenses is to ensure consistent excellent customer service that is critical to building long lasting relationships with both our DIY and professional customers. We strongly believe this long term view of never sacrificing excellent customer service has been a key.
Factor in our success and was the foundation that drove the incredible gains in profitability that our team has generated over the last several years.
Next turning to inventory we finished the second quarter with an average inventory per store of $679000, which was up 7% from both the beginning of 2022 and this time last year.
Parts availability is a key driver of our success in our business and we continue to execute our plan to aggressively add incremental dollars to our store level inventories as we move throughout 2022.
While we still face constraints in certain areas of our supply chain. We are very optimistic we will see continued improvement as we move through the back half of the year and still expect our per store inventory to be up over 8% by year end.
Our investments in inventory and daily execution, both continued to be focused first and foremost our replenishment and fill rates than on having the right combination of common as well as hard to find parts. In every one of our stores that is tailored to that specific market then backed up by our <unk>.
Dynamic multi tier hub and distribution Center network.
Our extensive industry, leading network powers, our best in class parts availability and equips us to be the dominant auto parts supplier in all of our market areas.
We feel strongly that these investments in inventory as well as enhanced supply chain capabilities will continue to be a critical part of our success on both sides of the business and in turn provide long term share gains as well as returns.
Before turning the call over to Jeremy I'll provide an update on our store growth during the second quarter.
Open 62, new stores across 28 states in the U S, bringing our year to date total to 116 net new store openings.
We are on pace to hit our plan of 175 to 185 net new store openings for the year.
We continue to be pleased with our performance of our new stores and I am very proud of the outstanding teams of professional parts people, we have in each of our new stores.
To close my comments I want to once again, thank team O'reilly for their continued dedication to our customers. Our teams are committed to winning our customers' business each day by out hustling and out servicing our competition and I am confident in their ability to deliver a strong finish to 2022.
Now I will turn the call over to Jeremy.
Thanks, Brad I would also like to add my thanks to all of team O'reilly for their continued dedication to our company's long term success now.
Now we will cover some additional details on our quarterly results and updated guidance for the remainder of 2022.
For the quarter sales increased $205 million comprised of a $145 million increase in comp store sales.
A $56 million increase in non comp store sales.
$5 million increase in non comp non store sales and a $1 million decrease from closed stores.
For 2022, we now expect our total revenues to be 14.0 to $14 3 billion.
Which is a reduction from our previous range of $14 two to $14 5 billion as a result of our revised comparable store sales guidance range.
Greg covered our gross margin performance for the second quarter and reiterated our full year guidance, but I want to briefly recap that we are not expecting a significant LIFO benefit to our gross margin results in 2022 as a result of more typical LIFO accounting after our reserve returned to a credit balance in 2021.
Our year to date results were in line with those expectations and our outlook on this item for the year is unchanged.
Our second quarter effective tax rate was 23, 8% of pretax income comprised of a base rate of 24, 3% reduced by a 0.5% benefit for share based compensation.
This compares to the second quarter of 2021 rate of 23, 1% of pretax income, which was comprised of a base tax rate of 24, 5% reduced by a one 4% benefit for share based compensation.
The second quarter of 2022 base rate was in line with our expectations for the full year 2022, we now expect an effective tax rate of 23.0%.
Comprised of a base rate of $23 five reduced by a benefit of zero, 5% for share based compensation.
Our expected tax rate is down slightly from our previous guidance of 23, 2%.
Due to anticipated benefits from renewable energy tax credits and we continue to expect the fourth quarter rate to be lower than the other three quarters. As a result of the timing of these benefits and totaling of certain tax periods.
Also variations in the tax benefit from share based compensation can create fluctuations in our quarterly tax rate.
Now, we will move on to free cash flow and the components that drove our results free.
Free cash flow for the first six months of 2022 was $1 2 billion.
Versus $1 5 billion for the first six months of 2021 with the decrease driven by a smaller benefit from reduction of net inventory investment in 2022 versus 2021 and differences in accrued compensation.
Capital expenditures for the first six months of 2022 were $229 million, which was in line with the same period of 2021.
We continue to expect Capex to come in between $650 million to $750 million for the full year with the balance of this spend for the remainder of the year supporting new store and DC development.
Initiatives to enhance the image appearance and convenience of our stores.
And store fleet upgrades and strategic investments in information technology projects.
Our AP to inventory ratio at the end of the second quarter was 131%, which once again has set an all time high for our company and was heavily influenced by the extremely strong sales volumes and inventory turns over the last 12 months.
We anticipate our AP to inventory ratio to moderate off of this historic high as we complete our additional inventory investments.
Based on the anticipated moderation in this ratio and the heavier spend on Capex for the second half of the year. We are keeping our expected full year free cash flow guidance unchanged at a rate of one three to $1 6 billion.
After generating $1 2 billion in the first half of 2022.
Moving onto that in June we were pleased to execute a very successful debt transaction with the issuance of $850 million of 10 year senior notes at a rate of four 7%.
As a result of the bond issuance. We finished the second quarter with an adjusted debt to EBITDAR ratio of 195 times as compared to our end of 2021 ratio of 169 times.
We continued to be below our leverage target of two five times and we will we will approach that number when appropriate.
We continue to execute our share repurchase program and during the second quarter, we repurchased two 2 million shares at an average share price of $620 in 2007.
For a total investment of $1 4 billion.
Year to date through our press release yesterday, we repurchased $3 8 million shares at an average share price of $637 and 47.
For a total investment of $2 $4 billion, 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.
As a reminder, our EPS guidance includes the impact of shares repurchased through this call, but does not include any additional share repurchases.
Finally, before I open up our call to your questions I would like to thank the entire O'reilly team for their continued dedication to the company's long term success.
This concludes our prepared comments at this time I would like to ask Sheryl the operator to return to the line and we will be happy to answer your questions.
Thank you we will now begin the question and answer session.
Have a question. Please press <unk> one on your Touchtone phone.
These limit your questions to one question and one follow up question. Once again, if you have a question. Please press zero one on your Touchtone phone.
Our first question goes to Michael Lasser with UBS. Your line is now open.
Good morning, Thanks, a lot for taking my question. The auto parts industry has experienced a significant benefit from same SKU inflation over the last several quarters now and it's starting to moderate.
Our expectation that as the as the contribution from <unk>.
<unk> moderates that there'll be a corresponding increase in the number of transactions to drive steady growth for the overall sector.
Jeremy you don't take them, Yeah, I can maybe answer that first Michael I think when we think about the same dynamics as we move into the back half of the year.
We're not going to necessarily see a reversal of some of that inflation I think the year over year benefit as we see that in the balance of the year.
We'll moderate as you've mentioned and we've built that into our planning expectations I think from a traffic perspective.
Perspective, since we won't see the the actual rate.
Pricing reversed necessarily.
We wouldn't.
Want to give back anything on pricing.
I don't know that thats going to be a dynamic that changes the ticket dynamics within our industry I think for US specifically as we've thought about how the back half of the year lays out we understand.
On a one year basis that we will see some pressure as average ticket moderates, but but still continue to be.
Very optimistic about continued traction we'll see on a professional pricing initiative and then also just more broadly feel like our industry.
<unk> very well.
In an environment, where consumers are pressured and that we will see support to overall demand.
But but not necessarily.
Offsetting pick up to the point that you mentioned I think.
Top of that we're cautious as to how how the rest of the year will play out from a macroeconomic perspective, and I think that that comes into play here as well.
My follow up question is at the midpoint of your guidance for the back half of the year have you assumed that the DIY business is going to turn positive and have you already started to see that in response to the recent decline in gasoline prices.
Thank you Michael.
Michael I mean, our assumption all along has been that that our <unk> business wood wood performed stronger than our DIY business.
We don't we don't see that changing in the back half of the year, our expectations remain that will outperform DIY.
We'll DIY improve in the back half of the year, it's really yet to be seen it really depends on what happens in the macro how quickly that that turns around fuel prices a contributor but it's one of many contributors we bought we've historically talked a lot about fuel prices and the impact this year we've got.
A more significant inflationary input impact across all of retail on top of fuel prices. So again as Jeremy said, we remain pretty cautious on our outlook, but remain very optimistic on the industry as a whole.
Thank you very much good luck.
Thanks.
Our next question comes from Michael Baker from Davidson. Your line is now open.
Hi, Thanks.
One question and one follow up.
You said July is better versus expectations.
Can you tell us if it's better and really I'm talking about on a one year comp basis as it better than the second quarter or if you want to answer it that way maybe tell us what your expectation was for July did you expect July to be better or worse than the second quarter.
<unk>.
Yeah, I guess, maybe just two.
Clarify I think our improvement.
Really reflects how we were trending as we finished the second quarter and we do think we've seen business pick up a little bit.
There.
It's a short period of time, and we tend not to be.
Over influenced by what we see particularly as we've seen a lot of hot weather and we think that Thats a positive benefit to us.
Beyond that we feel we feel good about the overall level of what our business has seen.
Really saw that stabilize as we move through.
Through the second quarter and got past some of the stimulus challenges early in the quarter that we saw what we've seen is that set a little bit lower than we had expected.
But that is kind of continuing we think thats.
Thats, an appropriate way of thinking about as we move into the back half of the year encouraged by by July certainly.
But.
But also cognizant that as we move through the rest of the year weather can normalize a little bit and we're not.
We're not going to overreact to a few weeks.
Fair enough. The follow up is as a follow up to your answer to Mike <unk> question. You said, you certainly expect to hold on to price. So does that imply that if inflation does start to moderate.
See a little bit of a gross margin benefit in the back half.
Yes, certainly within within our industry.
And with and without our history, we want to hang onto price increases that we pass through we think that to the extent that we see moderation in price levels or we start to see some reversals in the.
The question around tariffs has come up.
We would expect to maintain pricing and our current levels and would hope to benefit from the reduction in acquisition costs.
That I think that.
That's largely in line with how how our business operates with price being a secondary or third factor for the value that we provide to our customers and being able to drive.
Continued strong performance of excellent customer service and making sure that we've got the part that our customers need when they need it I think that allows us puts us in a position where we wouldn't have to.
To see a reduction ultimately, we'll see how that plays out within the industry as we move through the balance of the year, but it would certainly be our intent to maintain pricing levels and see a benefit from that.
And that doesn't seem that that potential gross margin about if it doesn't seem to be in your back half guy.
Guidance correct me, if I'm wrong on that.
Yes.
We haven't forecasted a deflation in pricing and how we've thought about where we will go for the rest of the year.
Fair enough. Thank you.
Thank you.
Our next question comes from Simeon Gutman from Morgan Stanley . Your line is now open.
Hey, good morning, everyone.
I wanted to ask around.
He wrote you talked about ticket tickets being down.
And I guess I don't know if they are in <unk>, but it sounds like in DIY.
I guess hard to parse, but can you try to talk to how much units are tickets are down because prices are higher versus how much might be reversion or digestion from the last couple of years.
Yeah Simeon good question, it's really hard to break that out.
It almost becomes an opinion, what what I would tell you is I think it's more an impact of the inflationary environment.
The negative ticket count was on the DIY side of our business and as we've said that consumers are a little more pressured right now with higher fuel prices and the overall inflationary environment and we think it's more of just a just a cash flow issue for that lower income consumer then then maybe margins.
Or any of that.
Okay, that's fair and maybe the follow up is connected.
It feel like because you have visibility into unit or ticket does it feel like if there is any digestion from post stimulus and post what consumers are spending on during the Covid period that this represents the re basing this is the renew baseline and then we move into 'twenty three and we could see the business look or act a little.
More normal I get there's a lot of moving pieces with price, but at least from a unit perspective or ticket. This puts in the floor.
Yes, I think you're right in saying that there are a lot of moving pieces and it can be it can be a little bit challenging to get a read through particularly as we've seen stimulus in some of the comparative periods.
It was kind of pushed demand around it and we know as we entered this year.
Faced some volatility just as weather and timing.
It has impacted us I think where we where we sit today.
We characterize this as a more normalized broader period around what we would expect for current economic conditions.
I don't.
I don't know what time will tell them moving forward, but as we think about just the overall makeup of our business.
We certainly don't view it as having still significant drivers that are are things that are out of what we would have expected as we move through the pandemic and we sit where we are today.
Okay. Thanks, guys. Good luck rest of the year.
Thank you.
Thank you. Our next question comes from Scot Ciccarelli from tourist Securities. Your line is now open.
Thank you good morning, everyone. So can you speak to what you guys are seeing on a geographic basis.
As Mike previously.
Previously.
Basically for most of the last two years, but I think we're starting to hear about widening performance is market to market over the last two quarters.
Can help clarify that that'd be helpful.
Scott you were breaking up a little bit, but we kind of gather the geographic performance component of the question Brad you won't take a shot at that yes, sure Hey, good morning, Scott.
Yes, really similar to last quarter, we were very pleased at the consistency of our business on both sides of the business. If you looked at the cost when we looked across our regions and divisions.
A lot of consistency not a lot of differences from a geography standpoint.
The one that we would call out Scott it is a little bit of a tough line to draw, but we did see a little bit of softness on the west coast, specifically, Northern California, even.
Pacific Northwest, Washington State that we would probably draw a line to some of the fuel prices out there, but that was a very minor difference in the way the rest of the company perform so a little bit there, but other than that very consistent.
Got it. Thank you and then just a quick one have you guys seen much of a shift towards private label.
Just in terms of that whole trade down potential concept.
Scott we've seen over the past several years, we've seen more and more volume shift to private label I think there's a little less.
Brand loyalty than there once was throughout the pandemic and supply chain issues frankly.
Definitely not as much brand loyalty I think consumers are buying products you have not necessarily getting the products. They want every time, but our our private label program is about 50% of our volume today overall and in hard parts categories between 60, and 65%. So it continues to grow as a percentage of our overall sales.
Hey, Scott Thanks, a lot Brad I would guess I would just add on that Scott. When you think about private label, we don't necessarily think of that as being a trade down.
I wouldn't want you to keep in mind that our.
Our exclusive national brands, while we have entry points, we have an equal amount of.
Better and best when it comes to our private label goods.
Good examples would be our important direct program precision chassis things like that so.
I just want you to keep in mind that when we talk about private label. We're also talking about exclusive national brands as a premium product.
Thanks, a lot.
Thank you.
Thank you. Our next question comes from Saks Needham from Wells Fargo. Your line is now open.
Hey, good morning, So following up on the average ticket question I believe you said it was up 10% and the question is this implies units were down 6% or if there are other factors at play like mix.
Yeah, we saw pressure to unit is primarily on the DIY side of our business.
There are mixed dynamics that play into what we've seen and when we think about our professional business specifically.
You will continue to be in.
Encouraged by the progress we've made there where our accomplish driven by.
Both average ticket growth, but also also growth in tickets.
Really I think on that side of the business.
Split between.
Between that average ticket count can depend on on being able to add more things to the shop order when you send it out the door. So so we feel positive there we think that that we've had the ability to to continue to drive incremental business incremental share relative to where the market's at.
But we are pressured on the DIY side business expected that we would be as we came into the quarter with some of the stimulus compares ended up a little bit softer there than we anticipated because of the some of the macroeconomic pressures we've spoken to you.
Got it and then on your gross margin outlook. It looks like on an ex LIFO basis gross margin has been tracking at about 51, 5% in the <unk>.
First half of the year, assuming my math is right and it looks like Youre guiding the second half about 100 basis points lower and I'm just trying to understand the moving parts how much of this is incremental pricing versus Q2 and.
Any other factors that we should consider on the input cost side.
Yeah, I can take that one.
The sequential first half to back half can be a little bit challenging because we do have different seasonality dynamics that come into play. So maybe maybe didn't directly answer a few points of the questions that were not anticipating incremental price investments.
On the professional side of our business week, we expect that what we've done there.
<unk>.
Is the full amount of what our plan was.
And that we would continue to maintain those levels and this debt and have accepted and create incremental pressure other than youll have two full quarters of the impact versus the first quarter being that way.
Beyond that when we think about the back half of the year, we do have different mixed dynamics from a seasonality perspective that we think.
We will impact the gross margin rate as we think about it on a more normalized basis.
Year over year over year.
The pressures that we will see our because of some of the LIFO compares because of some of mix, but but the rest of what we would anticipate as would have been incorporated into how we thought about our plan for the year, just giving the given those mixed differences.
Prior year Comparables can be a little bit tough because we have had.
Some.
Some some LIFO impacts that have caused some of that normal cadence of the year to change for us.
But the but really that's that's in line with what we would've thought when we came into the year.
Got it thanks for the time.
Thanks, Brian .
Thank you. Our next question comes from Chris <unk> from Jpmorgan. Your line is now open.
Thanks. Good morning. So my first question is a follow up on on the top line outlook in the back half of the year.
On the pro pricing initiatives, you had baked in some share gains in the back half in the original guidance, causing some trend acceleration the overall comp in the back half despite lapping inflation.
In the updated guide did you take that out.
Given your heightened caution on the macro and that was part of the back half revision.
Yeah, Chris I would tell you is we thought about how our expectations with the change in the back half. It was really geared around what we said in the script and in the press release around the pressures, we're seeing on the DIY side of our business from a ticket perspective.
And even as we've.
We've talked about our full year expectations. This year, we've been cognizant of continued pressure that we could see there and thats really the change that we see.
As Brad mentioned in his prepared comments.
We're still early stages on a professional pricing initiative.
Still have a gains that we think that we can make there and we have built in incremental improvements as we move through the year, but there is nothing in our initial indications that have changed our outlook in perspective.
That for the balance of the year there.
Theres a lot of excitement I think on not just how.
How professional play out for the balance of the year, but as we move past this year, what that will look like.
Thank you that's very helpful.
And two follow ups first can you lay out what the LIFO headwind was then if anything changed in the back half of the year in the second quarter and then secondly, you bought back a lot of stock in the second quarter.
The cash balance has come down quite a bit but youre also sitting below your long term leverage target. So how do you think about deployment of capital and use of the balance sheet in the back half of the year.
It's sort of the earnings and capital returned to shareholders.
Yeah, absolutely I can I can take those Chris from a LIFO perspective, our LIFO was was neutral in the second quarter and Thats, where we expect will be for the for the full year.
So really our headwind is what we would have talked about it as a positive last year as we move through the year.
From from a repurchase perspective.
Yeah.
We continue to feel like we.
We utilize our repurchase program as an effective means of returning capital to our shareholders and I think for us over the course of time. It has been successful really because it's been driven by.
Our ability to be both consistent.
And and drive where our repurchases really month in month out because of the consistent nature of our.
Of our cash flows, but then also when we have opportunities to be opportunistic at times and I think you've probably saw some of that in the first half of the year.
Our philosophy Hasnt changed we will prioritize our capital for reinvestment in our business because we like those returns the vast but when we have an opportunity we will execute our buyback program with that same philosophy.
Thanks, very much best of luck.
Thanks, Chris.
Thank you. Our next question comes from Brian Nagel from Oppenheimer. Your line is now open.
Hi, good morning.
Good morning.
Question wanted to ask.
Just with regard to the commentary around round in inflation. So you.
And then any one and other a number of other retailers now we're saying the.
The same thing with <unk>.
There is this view that broad based inflationary pressures are weighed upon your sales so.
I guess the question I have is as you think about that.
Dynamic taking hold at the same time Youre O'reilly has been very good at some say strategically passing along higher costs.
As you look at that and I guess the question working towards as you look at that DIY category. Recognizing this is broader based inflation is now impacting your business is there a thought to maybe adjusting pricing or even rethinking the inflation within within O'reilly stores to help stimulate that business.
No no Brian we Havent considered that obviously that would just create a race to the bottom in retail which is not something we want we feel like we're competitively priced for our DIY and <unk> customers. We commented on the <unk> price.
<unk>, while we're constantly monitoring and adjusting prices on both sides of our business that one.
Really philosophy change that we made earlier in the year was a one time event on the <unk> side, and we have not had any consideration of making any type of mass change to the DIY side of retail side of our pricing.
And maybe the only thing I would add to that Brian is as we think about.
About how we will be impacted by or are being impacted by what consumers are seeing.
Even though we we think we're seeing some pressure.
It's not a significant as were other areas of retail will see and I think our our customer responds differently to it.
Over the course of time, we view a lot of these are these shocks as transitory because ultimately consumers that need their vehicles they need to see on the road. There is a real value proposition and being able to maintain an older vehicle and invest in it. So I think some of what we see.
On on our business is.
It is less impacted and it's probably shorter term in nature and as a result of that there is that that nature of the demand doesn't really make it.
Make it something that we can move around by moving prices and Thats why youre industry has been as rational.
As we've seen it yes, Brian keep keep in mind that we are.
Operating in an industry that's.
Mostly non discretionary and it's not a situation where if you lower the price on the category the consumers going to buy more of it that's typically not the way. It works, it's the customer buys products from us because we have a problem in that purchase solves the problem in most cases in our environment.
Okay.
Got it.
That's helpful. That's very helpful and then a follow up to that so.
So look I mean, we're I think what's happening right now which to some extent is unprecedented out there, but you talked in the past about.
Higher fuel prices and the impacts upon O'reilly.
For many reasons.
From a commercial business should should be more insulated, but have you. Historically if you look back over time has there been any indication that there's a lead lag relationship or maybe.
You see the impacts first in DIY and that ultimately spills into commercial or are they two really distinct businesses in this regard.
No.
<unk> is not not immune to two impacts.
The economy like the fuel prices to your or to your point you're spot on it typically hits are more.
Cash constrained DIY customer before it would impact the typical <unk> customer who.
Who typically has.
Is it a better cash flow conversion, but there are definitely not immune to it.
Havent seen significant evidence of that thus far.
Got it.
Thank you I appreciate it.
Thanks, Brian .
Thank you. Our next question comes from Bret Jordan from Jefferies. Your line is now open.
Hey, good morning, guys.
Good morning, Brad Congrats I wanted to know that the price initiative is I guess largely rollout and complete could you talk to us maybe about sort of how broadly staked. It was like maybe what percentage of your <unk> sales were touched by that pricing initiative, but it seemed like maybe it was product or customer sort of narrowly focused but could you give us some color.
<unk>.
Yes, maybe I'll step into that first and then Brad can add comments.
We very intentionally haven't been too detailed in how we thought about that.
And talk to talk to folks about about the specifics of that I can tell you that.
The I.
Obviously it was significant in across.
Lots of different customer segments. It was it wasn't every item. It wasn't every line it was very.
Specifically focus on the areas, where we thought we would have opportunity and something as Brad mentioned in his prepared comments was thirdly tested or Brad you want to add anything to that yes, Brad just maybe keep in mind that.
You know where the majority of the share on the <unk> side lays in the in the U S with the the.
The amount of incredible independents out there.
All the competition with two step models that.
Our goal like it wasn't.
BSG for cheaper than those but thats, where the majority of the opportunity for share gains was for our professional pricing initiative and so in turn it was in those key categories, where we felt like we may have been too far out of line with those traditional players that had a lot of volume and we're gaining some either half of.
Basket or have a delivery that we wanted to turn into.
The entire delivery and jobs and change those buying habits over time and so.
We're really pleased with where we're at with it teams excited but like we mentioned earlier, it's just going to continue to take time.
The point that we lower price it could take.
600, 708 sales calls on an individual garage if they were previously buying from a local independent that they trusted for decades or more.
Just because we're that much more competitive in the first time, we call on them doesn't mean, they're going to call. The next day, you can take months to really get that opportunity and it may just be for second or third call.
But we're very pleased with what we're seeing on that front.
Great. Thank you a quick question on inflation for the second half I think one of your peers yesterday was talking about second half inflation expectations in line with what they saw in the second quarter.
But I think youre talking about maybe a little bit lower price impact in the second half.
How should we think about that I mean, I think you are close to 10 in the second quarter.
Just as we model it what should we think about top line from price.
Yes, I think for us the way we think about that question is from an overall price level perspective, we would expect the balance of the year to be relatively in line with where we are today.
I think when we've talked about that from a year over year perspective.
We are up against bigger comparison, so where we would have seen the same SKU number in second quarter.
At price levels that are consistent.
With where we sit today there was a bigger year over year change because some of that some of that increase happened in third and fourth quarter of last year, beginning part of this year. So thats really how we think about the.
Impact of that as we move through the rest of the year.
Okay, great. Thank you.
Thanks, Brett.
Our next question comes from Liz Suzuki from Bank of America. Your line is now open.
Great. Thank you for taking my question I'm, just curious what the what the M&A environment looks like or any small chain feeling a little bit more pressure in these challenging times and maybe the valuation multiples they were expecting have come down a little bit.
As we said before we are always looking for potential acquisition targets, both inside and outside of the U S and really nothing has changed over the years. The players that are out there that remain especially the smaller chains.
Theyre just solid performers a lot of these regional players that have survived what's happened in the past several years are solid performers.
We're constantly looking at smaller one two store chains, and we buy some of those throughout the year year over year, and we will continue to do that those are the things that don't make the headlines we don't talk a lot about but we've not seen any real uptick in opportunities from an M&A standpoint as far as.
Seeing companies that are that are reaching out looking for it.
Exit strategy.
Great. Thank you and just a quick one on on inventory I mean, it sounds like overall inventory per store grew at a similar rate to your plan, but with the slowdown in DIY demand are you finding that you have pockets of excess inventory and products like fluids that have more limited shelf life and you have to discount them or are you. Just are you able to just keep the product on the shelf.
And then paste your orders from your suppliers accordingly.
Brent do you want to take that one yes.
This is Brent I'll take that one.
Yes, a lot of the inventory growth is really Brad talked about it in his prepared comments a lot of it was really built into our plan this year.
We had some we typically are always looking to try to get inventory closer to customers and get it in the markets, where we think it's going to serve service best and we had to slowdown some of that expansion at the local level last year with some of the supply chain constraints that were out there and this year, we set a plan to kind of make up some of that ground as we went into 2000.
'twenty two.
We're continuing to do that that's really what's driving it there is not really anything there that is hangover or nonproductive inventory.
Great. Thank you.
Thank you. Thank you.
We have reached our allotted time for questions I will now turn the call back over to Mr. Greg Johnson for closing remarks.
Thank you Cheryl.
We'd like to conclude our call today by thanking the entire O'reilly team for your continued hard work in the second quarter I'd like to also remind everyone that we will be webcasting, our analyst day on Tuesday August 23rd beginning at 830 Central time details are available on our website and we hope you'll be able to join us I'd like to thank everyone for joining our call today, and we look forward to rich.
<unk>, our third quarter results in October thank you.
Yes.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
Okay.
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