Q4 2022 O'Reilly Automotive Inc Earnings Call
Welcome to the O'reilly Automotive, Inc, fourth quarter and full year 2022 earnings call.
My name is Paul 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 answer session. If you have a question. Please press star one on your Touchtone phone.
I will now turn the call over to Jeremy Fletcher Mr. Fletcher you may begin.
Thank you Paul.
Good morning, everyone and thank you for joining us during today's conference call, we will discuss our fourth quarter and full year 2022 results and our outlook for 2023.
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 company's latest annual report on Form 10-K for the year ended December 31st 2021.
And other recent SEC filings.
The company assumes no obligation to update any forward looking statements made during this call at this time I would like to introduce Greg Johnson.
Yeah.
Thanks, Jeremy.
Everyone and welcome to the O'reilly auto parts fourth quarter conference call.
Before we begin our discussion on our fourth quarter results and our plans for 2023 I'd like to take a few moments to discuss the announcement we made in January regarding the promotion of Brad Burke and Brent curve each co presidents.
Our company is extremely focused on identifying and developing leaders who in turn are relentless in building the very best team in our industry.
Our long term commitment to succession planning is a critical component of our human capital strategy inline.
In line with that strategy, we're extremely pleased to have Brent and Brett assume the elevated positions on co presidents.
Brad and Brent are exceptional leaders and are both driven by their passion for perpetuating a rally culture and providing excellent service to our customers.
Brian and Brent bring diverse and broad experience to their roles of co president.
Brad's career with O'reilly began 26 years ago, when he joined the company as a parts specialists and Wagner Oklahoma.
He has progressed through every leadership role in our store operations group from store manager through executive Vice President of store operations and sales before assuming the role of EVP and Chief operating officer and now co President.
Brad's leadership has been instrumental in the growth and expansion of our company and his impact is evident throughout the leadership ranks of our operational teams many of whom have been mentored and promoted directly by Brad.
As co President Brad is responsible for the company's domestic and international store operations and sales real estate and expansion human resources training legal risk management loss prevention and finance.
Like Brad Brent brings decades of retail leadership experience to his role as co president.
Brian began his 35 year retail career with Lowe's companies and progress through their ranks ultimately serving in the roles of senior Vice President of store operations, Chief Omnichannel Officer, and Chief supply chain Officer.
Brent joined team early in 2018, as our senior Vice President of Omnichannel and made an immediate impact in that role before assuming leadership of our supply chain and distribution efforts.
He has extensive experience in significant DIY and professional retail industry knowledge is critical to our efforts to enhance our industry leading inventory position.
<unk> technology investments to deliver powerful tools for our team and drive deep connections with our DIY and professional customers.
As co President Brent is responsible for the company's distribution operations logistics merchandising inventory management pricing advertising Omnichannel customer satisfaction program management electronic catalog and information technology.
Again, I'm very pleased to have Brad and brand step into these new roles and I am excited about the leadership they will provide the team O'reilly as co presidents.
Brad and Brent are participating on the call with me this morning, along with Jeremy Fletcher, our Chief Financial Officer.
Greg Henslee, our executive Chairman and David O'reilly, Our executive Vice Chairman are also present on the call.
I'm once again pleased to begin our call today by congratulating team O'reilly on another record breaking year in 2022.
We finished the year with incredible momentum posting a comparable store sales increase of 9% in the fourth quarter, representing an increase of almost 35% on a three year stack basis.
For the full year of 2022, our team generated a robust six 4% comparable store sales growth, which came in above the revised guidance range of four and a half to five 5%, we provided last quarter and above the midpoint of our original comp range of 5% to 7%. We said at the beginning of 2022.
Even more impressive our six four comparable store sales growth in 2022, followed record setting sales goals sales growth in 2021, and 2020, when we delivered comps of $13, three and 10, 9% respectively.
Resulting in three year stacked comps exceeding 30%.
These strong top line results drove another year of record earnings per share is diluted EPS increased 8% to $33 44.
Representing a three year compounded annual growth rate of 23%.
Our ability to continue to grow our business and capture market share year in and year out is a testament to our team's commitment to providing excellent customer service and we couldnt be more pleased with how our team finished 2022.
Entering 2023, we remain bullish on the opportunities. We see ahead of us and are anticipating another strong year of sales and earnings growth.
For earnings per share, we have established a guidance for 2023 at $35 75.
To $36 25, representing an increase of 8% versus 2022 at the midpoint.
Achievement of our 2023 guidance would result in us doubling our EPS over the last four years, representing a compounded annual growth rate over 19%.
This impressive performance in challenging target is a testament to the quality of our team and their commitment to our customers.
Brad Brent and Jeremy will walk through the rest of our detailed outlook in their prepared comments, but for now I will just say that we're excited about the aggressive plans, we have to invest in our business and continue to take market share and drive industry leading results.
Before I turn the call over to Brad I want to share a little bit about the incredible culture building experience. Our team just had in January and our annual leadership conference in Dallas.
Each year, we bring all of our store managers field leadership as well as our sales and DC management team members together in one place at one time to build leadership skills enhanced product knowledge share best practices across our company and celebrate our award winning performance.
The theme of this year's conference was one team reunited and it was definitely an appropriate rallying cry for our first in person leadership conference in three years.
The passion and energy displayed by our company leaders was infectious and it gives us even more confidence in the team around <unk> ability to drive future success through their unwavering commitment to our customers and fellow team members.
To wrap up my prepared comments I want to thank each of our team members for their dedication to our company's long term success and their outstanding performance in 2022 I'm.
I am extremely proud of all of you and I am confident 2023 will be another record setting year for team O'reilly.
Now I'll turn the call over to Brad.
Thanks, Greg and good morning, everyone.
I would also like to begin my comments. This morning by congratulating team O'reilly on another great year in 2022, our teams focus on providing consistent excellent customer service allowed us to generate the outstanding results. We reported yesterday and we were excited about the opportunities we see to continue to grow our business now.
Now I'd like to provide some additional color on our fourth quarter comparable store sales results and outline our guidance for 2023.
As we discussed on our third quarter conference call. We started the fourth quarter with strong sales volumes in line with trends, we saw as we exited the third quarter.
Those robust sales volumes continued through the end of the year delivering results solidly above our expectations on both the professional and DIY sides of our business each month of the quarter.
From a cadence perspective, the monthly comp was steady throughout the quarter with December being the strongest month of the quarter on a two and three year stack basis.
As we finished the year, we saw broad based strength across all of our markets and weather related categories, such as batteries cooling and antifreeze as well as our other core non weather related categories.
We saw strength in both our DIY and professional businesses with professional again, leading the way with double digit comparable store sales growth on robust increases in both ticket counts and average ticket size.
As we finish 2022, we were very pleased with our professional performance and we believe the momentum. We have created is the direct result of our team executing our proven business model at a high level and providing industry leading customer service.
We were also pleased to see the improved performance in our DIY business, which accelerated on a one two and three year comparable store sales growth basis, driven by our strong average ticket growth as anticipated DIY ticket counts were a partial offset to our comp growth due to difficult comps.
Ericsson's from strong traffic growth in the previous two years, but it improved sequentially in the fourth quarter continuing the trend we saw in the third quarter and exceeding our expectations.
As we saw throughout 2020 to growth in average ticket values drove our total comparable store sales growth in the fourth quarter.
Average ticket size grew in the high single digits on both sides of our business supported primarily by the mid single digit growth in same SKU inflation and augmented by a benefit from increasing parts complexity and improve quality and design of new parks.
On a year over year basis, we saw a moderation in the same SKU benefit after peaking in the second and third quarters as we lap the acceleration of higher inflation in 2021 and saw a modest increases in selling prices as we finished out 2022.
The moderation and selling price increases correlates with what were seeing in product acquisition costs as industry pricing has remained rational on both sides of the business and we've been successful in passing through cost increases.
Now I want to transition to a discussion of our 2023 sales guidance and our outlook for this year as we disclosed in our earnings release yesterday, we are establishing our annual comparable store sales guidance for 2023 at a range of 4% to 6% and we want to provide some color on the factors that are driving our.
Expectations as it relates to both our outlook for our industry as well as the specific opportunities we see for our company.
I'll begin with our view of the prospects for our industry, which we believe are still very favorable.
The health of the automotive aftermarket continues to be supported by strength in the core fundamental drivers of demand in the last few years have further reinforced the compelling value proposition that motivates consumers to invest in their vehicles.
Since the onset of the pandemic the scarcity of vehicles has forced many consumers to keep their vehicles longer.
These investments consumers have made to keep their vehicles, well maintained and paid off and we expect to see a continued willingness by consumers to invest in their high quality vehicles at higher and higher mileages.
We also have a positive outlook on the strength of the consumer in our industry and there are ongoing willingness to prioritize their transportation needs.
We continue to view the health of our customers is strong supported by extremely low unemployment and robust growth in wages over the past two years.
We think these factors provide a solid backdrop for growth in miles driven in our industry and solid demand over the next year.
While mass driven still remain below pre pandemic levels, we've seen growth in this key fundamental for our industry over the past 18 months.
We believe we will see a continuation of the long term industry trend of steady growth in miles driven resulting from population growth and an increase in the size of the U S car Park as we think about the broader macro factors that could impact the U S economy in the coming year, we remain cautious in our outlook for.
Outlook concerning ongoing headwinds from inflation and the potential for deterioration in economic conditions.
Negative trends in the broader economy.
Can't influence demand in our industry in the short term, but we have consistently seen over time that consumers adjust quickly in challenging environments. In fact in 2022 was a good illustration of how this can play out.
The pressure, we saw from elevated gas prices broad based inflation and global economic shocks weighed on our results versus our expectations in the first half of the year. However, our customers adjusted as conditions stabilize and our business rebounded to meet our full year sales growth expectations.
Our experience through multiple economic cycles in our company's history is that consumers will prioritize the maintenance and the repair of their existing vehicles.
A means to avoid a car payment and save money in the face of economic pressures.
Ultimately due to the non discretionary and value driven nature of our business, we have confidence our industry will perform well in 2023, even if we ended up facing challenges in the broader economy.
As confident as we are and the strength of our industry. The most important driver for our outlook for 2023 is the opportunity we see to outperform our competition and gain market share by out executing our excuse me by executing our business model and providing the best customer service in the industry.
To this end I would like to spend a few minutes discussing our outlook on both sides of our business.
We expect both our DIY and professional businesses to be positive contributors to our comparable store sales growth in 2023 with professional again expected to outperform.
We are excited about the strength, we built in 2022 and our professional business and we believe this will continue to accelerate our growth on this side of the business.
We remain highly committed to being the industry leader in the quality of service and inventory availability, we provide to the professional customer and our focus moving into 2023.
Is to aggressively lever these strengths to further consolidate this side of the market.
We also see significant opportunity to grow our DIY business, but are more cautious in how we view our ability to increase ticket counts on a year over year basis.
Our DIY ticket counts in 2022 were pressured in comparison to 2021 as we were still calendaring the impact of government stimulus and faced headwinds from gas price shocks and inflation.
We feel like we have now completely lap the artificial spikes in demand and are pleased with the steady DIY traffic we saw in the back half of the year.
While there has been a lot of volatility in our comparisons over the past three years, our overall growth in DIY ticket counts has been solidly positive in total during that timeframe. We have clearly taken market share since the onset of the pandemic through consistent execution and excellent service, even as we face the.
Long term industry trend of pressure to DIY ticket counts.
For 2023, we will continue to face this industry dynamic where increased complexity and quality of parts extend service and repair intervals. As a result, we anticipate DIY traffic will be down slightly in 2023 with an expectation that we will continue to gain market share to partially offset the normal.
Industry drag on ticket counts.
We expect the pressure to DIY traffic to be more than offset by increased average ticket.
We anticipate average ticket on both sides of our business to benefit from low single digit inflation arising from the carryover benefit on a year over year basis, as we compare against price levels that ramp throughout 2022.
Consistent with our historical practice, we are including only modest increases in price levels from this point forward in 2023.
We do not expect to see growth in average ticket values above and beyond same SKU inflation, resulting from increased product complexity and our ability to trade customers up to a higher quality product on the good better best spectrum.
As we move through 2023, we anticipate comps in the first half of the year to be stronger than the back half as a result of the year over year same SKU inflation benefit as well as easier comparisons and professional ticket counts, which ramp throughout 2022 and to a lesser degree DIY ticket counts, which.
Faced more pronounced pressure in the first half of last year.
We are off to a strong start thus far in 2023, and we are pleased to see continued momentum on both sides of our business.
Now I want to spend some time covering our SG&A and operating profit performance in 2022, and our outlook for 2023 before turning the call over to Brent who will provide color on our gross margin.
Fourth quarter SG&A expense as a percentage of sales was 32, 2% in line with the fourth quarter of 2021.
As we noted in our press release yesterday. This number includes a $28 million charge associated with our transition to an enhanced paid time off program for our team members.
Average per store SG&A for 2022 was just was up just over four 8% driven by incremental variable operating expenses on better than expected sales volumes and cost inflation and fuel wage rates and team member benefits.
Over the last several years, our teams have demonstrated an ability to and ability to drive an enhanced level of profitability and productivity on our SG&A spend as we are pleased with the strong finish to 2022.
As we look forward to 2023, we are planning to grow average SG&A per store by approximately four 5%.
This level of spend as a step change higher than we would normally forecast in our initial SG&A guidance.
While we anticipate facing some pressures to cost from ongoing inflation. The majority of our incremental spend anticipated in 2023 reflects deliberate decisions, we are making to invest in our business.
We are targeting initiatives, we believe will enhance the value proposition we offer to both our team members and customers by investing in our professional parts people in our customer service levels in turn driving both long term sales and operating profit dollar growth.
We plan to deploy these resources to enhance our long term operational strength with specific emphasis on strengthening our team member experience and benefits upgrading our store vehicle fleet refreshing.
And improving our store image in appearance and deploying incremental technology projects as well as investments in infrastructure.
We believe we have an opportunity to capitalize on our strong competitive position in our industry and further separate ourselves as we consolidate the market.
We are highly confident our investment in these initiatives will provide strong long term returns, but anticipate we will face initial pressure to our SG&A as a percentage of sales in 2023.
Based on these expectations, coupled with the normal drag from new store expansion and our anticipated gross margin rate, which Brent will discuss in a minute. We are setting our operating profit guidance range at $19, 8% to 23% of sales at.
At the midpoint of our guidance, we are expecting operating profit to increase over 4%.
Ultimately our leadership team is focused on enhancing the excellent customer service and overall value they create strong relationships with our customers on both sides of the business that in turn drive long term growth in operating profits.
To finish up my prepared comments I want to add to what Greg has already said about the incredible experience, we had as a leadership team in Dallas and the enthusiasm of our team showed for our business and the O'reilly culture.
This was my 26 leadership conference My first being in 1998, when I first became a store manager and there is no doubt in my mind. It was our best one yet.
Since there was.
Since this was our first in person conference since 2020, the last two being virtual there was certainly a lot for us to celebrate but I was blown away by the commitment I saw from our team to not rest on our laurels or be satisfied with our past success. Instead, our team was passionate about the opportunities we have in front of us.
As we look forward in 2023.
Set an ambitious plan to outperform the competition and gain market share we will be aggressive in supporting our teams and equipping them with the tools and resources to drive our company to an even higher level of performance I want to once again. Thank team O'reilly for their continued dedication to our company now I will turn.
The call over to Brent.
Thanks, Brad and good morning, everyone.
I would like to begin my remarks today by congratulating team O'reilly on yet another strong year.
Once again your commitment to consistent excellent customer service drove outstanding results in 2022.
As Greg and Brad have already shared it was a privilege to be able to get together with our industry leading team of professional parts people in our leadership conference in January and we are all incredibly excited about the strength of our business moving forward in 2023.
Today, I'm going to discuss our fourth quarter and full year gross margin and supply chain results and our outlook for 2023 and provide color on our capital investments.
Starting with gross margin.
Our fourth quarter gross margin of 59% was 183 basis point decrease from the fourth quarter of 2021, but in line with our guidance expectations for the full year gross margin came in at 51, 2%.
Which was 145 basis point decrease from last year.
Our year over year margin results were primarily impacted by the rollout of our professional pricing initiative combined with anticipated comparison headwinds to the LIFO benefits that we realized in 2021.
We are pleased to generate a full year gross margin rate in the upper end of our guidance range.
However, we're even more excited to drive strong gross profit dollar growth.
Our price investments and superior execution of our business model paid off in a solid 5% increase in gross profit dollars in 2022.
Which represents a three year compounded annual growth rate of 11%.
I want to thank our supply chain store operations and sales teams for their hard work in driving these results in a dynamic and very challenging market environment.
For 2023, we expect gross margin to be in the range of 58 to 51, 3%, which is consistent with how we viewed our margin guide throughout 2022.
Even though we aren't anticipating a significant year over year change there are a few puts and takes that I want to call out that we expect to impact our gross margin in 2023.
To begin we will face some remaining incremental pressure in the first quarter from our professional pricing initiative as we lap a higher gross margin run rate at the beginning of 2022 before we fully rolled out the initiative in the middle of the first quarter.
We also will face headwinds from a number of other factors, including comparisons to temporary benefits in the first half of 2022 from the timing of selling price increases.
Our higher planned mix of professional business in 2023 is that side of the business continues to grow faster.
The calendaring of the remaining LIFO benefit that we realized in 2022.
And pressure on distribution costs as we continue to stabilize our network. After the disruptive periods, we have seen during the pandemic and face headwinds in the fixed cost we capitalized in inventory driven by a significantly smaller planned inventory build in 2023.
Offsetting these headwinds our gross margin outlook also includes an anticipated benefit from them for modest acquisition cost improvements on balance, we still expect to see inflationary pressure and acquisition cost in 2023.
Driven by rising labor and raw material cost in the supply chain.
These are these are specific areas that we have seen some relief in from cost pressure that were passed along to us over the course of the last two years.
Specifically in freight and transportation costs.
Beyond what we have built into our outlook for next year, we remain very cautious regarding the prospect for incremental reductions in acquisition cost as most of our supply chain partners continue to face broad inflationary pressures.
On an individual basis, none of it is discrete factors I just outlined represent a significant impact to our gross margin.
And candidly, we normally don't dig in at this level of detail and discussing the puts and takes that impact our margin.
However, we think it's important to provide additional color since there are so many moving pieces.
Over the last several years, we've seen variability in our quarterly margin results that are not typical of the normal cadence for our business driven by significant cost inflation. The reversal of our historic LIFO debit balance and the implementation of our professional pricing initiative.
In 2023, we anticipate quarter to quarter gross margins to be more consistent.
With only first quarter being slightly below our full year guidance driven by product mix.
However, since some of our comparisons are more challenging in the first half of the year, we do expect to see some pressure on gross margin rate on a year over year basis in the first two quarters.
Inventory per store at the end of 2022 was $730000, which was up 15% from the end of last year, which is significantly above the target that we set for inventory growth at the beginning of 2022.
Over the course of much of the last three years. It has been our intent to aggressively add incremental inventory dollars and we have been constrained by supply chain challenges and the necessity to keep up with the strong sales volumes and replenishment needs of our stores.
As we move through the back half of 2022, our supply chain distribution and store operations teams made tremendous progress in deploying additional inventory.
We also proactively took advantage of opportunities to incrementally add inventory to our network as we saw upside in capitalizing on strong sales demand as supply constraints begin to ease.
For 2023, we're planning per store inventory to increase approximately 2%, which is below our historical run rates.
This is primarily because of the inventory additions that we accelerated at the end of 2022.
Our ongoing inventory management is geared to deploy the right inventory at the optimal position within our tiered distribution network.
While our expected incremental additions in 2023 or modest our plans include continued adjustments to push out and pull back inventory to ensure that we're offering the best possible local inventory assortments.
A key part of our inventory deployment strategy is our ongoing evaluation and modification of all aspects of our hub store network, including the number of hub stores sizing of inventory assortments and market positioning.
A substantial amount of increased inventory that we deployed in 2022 and the dollars. We plan to rollout in 2023 are targeted in our hub stores to further enhance our industry leading inventory position.
Our AP to inventory ratio at the end of the fourth quarter was 135%.
We set an all time high for our company and was heavily influenced by extremely strong sales volumes and inventory turns along with the impact from increased inflation in product acquisition costs.
While we deployed significant incremental inventory into our distribution centers and stores in 2022, we actually saw a decrease in net inventory investment of $513 million.
We anticipate our AP to inventory ratio to moderate slightly as we move through 2023.
Currently expect to finish the year with a ratio of approximately 133%.
Our capital expenditures in 2022 were $563 million, which fell short of our original plan by approximately $140 million.
The lower Capex was driven by a few different factors, including a heavier weight of lease versus owned stores the delay of certain store DC and headquarter projects and planned maintenance and the timing of expenditures related to distribution expansion projects.
Included in our expectations for 2023.
Our plan to deploy capital for the initiatives that were delayed in 2022 as well as support new store and DC development to support our long term growth strategies in the U S and Mexico.
For 2023, we are setting our capital expenditure guidance at $750 million to $800 million.
We have also established a target of 180 to 190 net new store openings with a planned heavier mix of owned versus leased locations.
Our Capex outlook also includes significant investments in our distribution network as.
As we will complete and open our newest distribution center in Guadalajara, Mexico, and expect initial expenditures for future projects.
We have identified several exciting projects and initiatives in 2023 to enhance our service levels and provide customers.
Proved efficiency and product availability.
Our Capex guidance includes planned investments insignificant DC and store fleet upgrades store projects to enhance the image appearance and convenience of our stores and strategic investments in information technology projects.
Before I turn the call over to Jeremy I want to again, thank team O'reilly for their unwavering commitment to our customers and dedication to going the extra mile to delivery outstanding business results in 2022.
Now I'd like to turn the call over to Jeremy.
Thanks, Brett I would also like to congratulate <unk> on another outstanding year.
Now we will fill in some additional details on our fourth quarter results and guidance for 2023.
For the fourth quarter sales increased $353 million comprised of a $288 million increase in comp store sales.
A $65 million increase in non comp store sales, a $2 million increase in non comp non store sales.
And a $2 million decrease from closed stores for.
For 2023, we expect our total revenues to be between $15 to $15 5 billion.
Rick covered our gross margin performance and guidance earlier, but I want to provide a quick reminder, on how we view the application of LIFO in our gross margin results.
We view our reported gross margin as the best measurement of our performance.
Since the GAAP cost of goods sold under the LIFO method most closely matches our current acquisition costs.
As a result, we don't view the normal application of LIFO was a discrete charge in our evaluation of gross margin.
In the first quarter of 2022, we did receive a limited benefit of just under $10 million, resulting from the reversal of our historic LIFO debit balance in the final sell through of inventory purchased prior to acquisition cost increases.
This comparison headwind as a component of our gross margin expectations that Brian outlined earlier.
Our fourth quarter effective tax rate was 18, 2% of pretax income comprised of a base rate of 19, 9% reduced by a one 7% benefit for share based compensation.
This compares to the fourth quarter of 2021 rate of 19, 4% of pretax income, which was comprised of a base tax rate of 24% reduced by a 1% benefit for share based compensation.
The fourth quarter of 2022 base rate as compared to 2021 was lower as a result of an increase in certain state tax credits.
For the full year, our effective tax rate was 22, 4% of pretax income comprised of a base rate of 23, 3% reduced by a 0.9%.
For benefit for share based compensation.
For the full year of 2023, we expect an effective tax rate of 22, 9% comprised of a base rate of 23 four.
Reduced by a benefit of 0.5% for share based compensation.
We expect the fourth quarter rate to be lower than the other three quarters due to the tolling 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 and our expectations for 2023 free.
Free cash flow for 2022 was $2 4 billion versus $2 5 billion in 2021 the.
The decrease of $178 million was driven by higher capital expenditures in 2022 versus 2021 and differences in accrued compensation.
For 2023, we expect free cash flow to be in the range of one eight to $2 $1 billion.
As Brent discussed earlier, the expected year over year decrease is due to a planned increase in net inventory in 2023 versus the benefit we realized in 2022 as well as the planned increase in Capex.
These headwinds are expected to be partially offset by a benefit of approximately $300 million in 2023.
Resulting from favorable timing of tax payments and disbursements for renewable energy tax credits.
Moving on to debt, we finished the fourth quarter with an adjusted debt to EBITDA ratio of 184 times as compared to our end of 2021 ratio of 169 times with the increase driven by our successful issuance of 800 $850 million of 10 year senior notes in June offset by the <unk>.
September retirement of $300 million of maturing notes.
We continue to be below our leverage target of two five times and plan to prudently approach that number over time.
We continue to execute our share repurchase program and for 2022 based on the strength of our business. We were able to purchase 5 million shares at an average share price of $661 66.
For total investment of $3 3 billion.
Since the inception of our share repurchase program in 2011, we have repurchased 91 million shares at an average share price of $224 eight sets for a total investment of $20 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.
Before I open.
Bart call to your questions I would like to thank our team for your hard work and dedication to our company and our customers. This concludes our prepared comments at this time I would like to ask Paul the operator to return to the line and we'd be happy to answer your questions.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your phone.
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We ask that while posing your question you. Please pick up your handset if listening on speaker phone to provide optimum sound quality.
Please limit your questions to one question and one follow up question.
Once again, if you have a question. Please press star one on your phone at this time.
And the first question today is coming from Michael Lasser from UBS, Michael Your line is live.
Good morning, Thanks, a lot for taking my question, so part of the pandemic Morris O'reilly.
Recently guided comp in that 3% to 5% range. This new that outlook calls for 46% increase.
Backing into that based on the investments that you're making in SG&A.
You need the sales level in order to drive leverage to cover the buildup of cost.
So does that create some downside comp risk.
Similar to how last year played out.
Yeah. Michael This is Greg I mean, the answer to your question is absolutely not.
Brad and talked a lot about.
Our bullish thesis on both the industry and.
While we expected from our company in 2023, and you know the fact that miles driven has improved not to the point of pre pandemic levels fuel prices have stabilized.
New car sales and used car sale prices have been elevated in an overall sales have been softer over the past few years I think there'll be some recovery there in 2023.
We still see tremendous opportunity just because new car sales may improve that doesn't mean that the millions of cars that are on the road today will just simply vanish cars are built better there are lasting longer and for all those reasons that Brad laid out we're very very optimistic about the future, but as always we're cautious.
The onset of spring impacts our volumes, but overall on an annual basis, we remained very bullish for our future.
We feel.
Very positive about how we think about the opportunities we have from a share.
<unk> as we move through next year and those are things that we have confidence in because of the trends that we've seen.
For the last couple of quarters as we've as we've seen the.
I think our customer base be really resilient and respond and we've seen traction and momentum on both sides of our business.
That makes sense my follow up question and you've gotten a lot recently is that costs have come down quite a bit whether its supply chain caught in the form of lower containers are petroleum prices.
Can you quantify the savings that O'reilly is experiencing from these lower input costs.
Are you passing along the savings in the form of lower prices or is that helping the profitability and offsetting some of the other pressures that you had identified.
Yes, Michael maybe let me answer your question backwards in it the second part first yes.
We're absolutely whenever we see any potential benefits were.
We've been able to take that to the bottom line, we have not seen.
To date any market movements to roll back some of the increases that we've seen has there been any relief of pressures and Brent talked about that as a positive within his prepared comments. We we do expect some some benefits there. This year I think to the first part of your question.
We haven't quantified.
And I would maybe caution a little bit to treat that as.
A big factor moving in one direction.
There continues to be cost pressure on balance, we think that we'll see that.
More cost increases this year, then decreases as our suppliers continue to stay under pressure and while we while we've seen some.
Some reductions and those are good we're positive about that were very cautious in how we think about that moving forward and the benefits that we would bake in and I think you see that reflected in it.
I think we've talked about this for the last couple of quarters, but then also as we played out our outlook.
Thank you so much and good luck to Brad and Brent in their new roles and the entire team.
Thank you Michael.
Thank you. The next question is coming from Simeon Gutman.
From Morgan Stanley Your line is live.
Hey, guys I'm going to ask one follow up now.
Now the first question on SG&A growth is this a 2023 event or are spending on the stores people or do you foresee some of this spilling into next year and then to clarify if product. The second just a follow up if product acquisition costs start coming down.
Because you did have recorded a charge.
Does that create does that when do we start creating a new debit balance I'm, just I think that that won't help the gross margin that since you didnt create a charge you just buildup of another reserve I just want to make sure that that's right.
Yes.
I'll take the <unk> I'll start to SG&A response here, and then maybe Jeremy or or Brent will want to chime in.
We haven't changed our focus our focus continues to be growing operating margin dollars. Our focus continues to be to grow top line faster than we grow SG&A. None of that's changed we still talk about our core culture value of expense control day in and day out. This change this year was a deliberate.
And a prudent effort to try to position us for future growth and there's there's a lot that's changed over the past two years.
And in the retail market in industries as a whole across across all industries are actually and we faced we face wage pressures. There's no secret there we face turnover and we really looked ourselves in the mirror this year and had conversations with our team members about what is important we want to stop the turnover get back to <unk>.
<unk> rates make sure we have the ability to recruit promote and retain the best talent, which is what we've been successful with for also.
Part of that initiative and I'm not going to go into all of it you know, perhaps brenner, Brad would want to go into more detail, but we called out the initiative on the PTO. That's one example of US listening to our team members as to what's important to them in an effort for us to position ourselves for future growth I don't know if Jeremy.
Do you think that maybe the only thing I would say.
We establish our SG&A guidance, one year at a time and I don't want to guide from a pure dollar perspective, what what we look like beyond that I think with great points to though is that we remain highly committed to making sure that we're driving the.
The right results out of out of every part of what we invest in our business from an expense control standpoint.
So.
As we move beyond this year.
We intend that these investments pay off that we lever SG&A as a result of them in that.
What you would expect to see from that perspective Hasnt.
It Hasnt changed from a long term standpoint.
Does that mean, we won't find other things as we continue to move forward to invest and we'll continue to evaluate that it is our intent.
To do what we can do to build the long term strength of our business and I think what you see.
In our in.
Our guidance and what we've talked about matches up with that maybe just briefly to.
The address your second question around the LIFO perspective to the extent, we see cost decreases in the coming year. We again don't expect that on balance substantially theyre going to offset cost increases it would require a magnitude of change there thats far in excess of what we would expect for our life our life for our.
LIFO accounting pushed back into debit balance so we'll we'll be on a credit LIFO for the foreseeable future and the impact of that is as we see cost increases that will get reflected pretty rapidly within our reported results.
Thank you thanks.
Thanks Amy.
Thank you. The next question is coming from Gregg Melnick from Evercore ISI, Greg Your line is live.
Great. Thanks.
My first question was on wages, what was the inflation and average hourly wage as you saw last year.
What are you expecting this year and the guidance.
Yes. It was significant in 2022 it was in the mid to high single digit range for inflation it depends on.
On market type of type of position for us, we expect that to moderate off of those levels. We will have some carryover impact.
They're from a comparator.
Situation of wells, but we're still we're still building in an expectation of somewhere in the mid single digit range from a wage perspective because of those factors what I would tell you is that we see that as the as the ongoing.
A regular management of our business and we expect that as we saw in 2022 that will have the ability to pass along those cost increases to the extent that we have planned and if that number ends up being different than than what we foresee at this point in time, we will we will have the ability to pass it along as well.
<unk>.
Got it and then my second question is on mix shift you mentioned that as being a slight headwind.
The gross margin I'd love to have a little more detail on that and color within DIY and pro is there any trade down occurring.
You know what sort of behaviors are you seeing from your customers on both sides of the house.
Yeah, Greg This is Brad I can start on that and then others can chime in.
We really net overall, we haven't seen a lot of trade down in some categories. We've actually seen trade up is.
Cars become more sophisticated in OE requirements on batteries as an example, with AGM and some of the higher price points that are required on a lot of replacement batteries today.
So we've seen a lot of that actually move the consumer from the best to the better.
A lot of cases or better to best rather.
We have seen a little bit a category, where we still had some a lot of inflation in the oil category and we've had majors that have still struggled with their supply chains. In some cases, we've seen customers trade down to some of our proprietary brands on the oil and quite frankly, they are they are happy with what they're getting and we're seeing we're seeing some stickiness.
There with those customers with some of our proprietary brands, which long term is a good thing for us but.
Net net we haven't seen any violent move one way or the other in terms of trade up or trade down.
And Greg maybe specifically to your question in French prepared comments when you talked about.
The modest headwinds there that's really on the professional versus DIY mix, because we anticipate professional in our topline grows faster than that Craig's just.
The mathematical pressure on that.
That's the category mix effect amount within the two sides.
That is the side of business mix effect, not with us within each side from a category.
Expectation that difm's going to outperform DIY.
Got it perfect good luck and thanks.
Yes, correct.
Thank you. The next question is coming from Seth Basham from Wedbush Seth Your line is live.
Thanks, Rob and good morning, My questions are on the DIY side business, you mentioned that you see some opportunities for.
Ticket growth that you're more cautious even with easier comparisons there in the first half of the year with market growth.
Account growth I should say in the first half of 2023.
Yes, just to clarify.
Seth and Brad's comments, we said, we expect DIY tickets to be slightly down now we see some benefit.
As we continue to perform well against the marketplace. We are gaining share on the DIY side of our business and we will have some easier comparisons in the first part of the year because of the pressures. We saw lesser that you mentioned, that's really all partial offsets against the longer term industry trend that we and others have talked.
The pressures.
Count comps because of the increasing cost and complexity.
Of.
The vehicle parts that supports the average ticket price, but it also leads to the service intervals repair cycles that extend out. So so we anticipate that that has a bigger impact for us as we move through the year, but and that is kind of consistent with how we would normally think about about DIY tickets.
Got it okay, so a little bit less pressure in the first half of the year and then more normal thereafter.
Correct.
Thank you very much.
Thanks, Ed.
Thank you. The next question is coming from Brian Nagel from Oppenheimer, Brian Your line is live.
Hi, good morning, Thanks for taking my questions.
Oh gratulate congratulations on the promotions.
Thank you Brian .
So the first question.
I guess, it's pretty simple but.
It did accelerate just from a comp perspective, you've been stacked up nicely here in Q4 then.
Could help to explain why the business has strengthened further off of already strong levels.
Yes, Brian Thanks for the question.
Whether it is a part of the acceleration I would tell you it's not all of the acceleration. So we we continue to see traction and maybe I'll start here.
And the other guys can jump in we continue to see.
Strong traction within our our our professional business and in the trends there we've seen we're very encouraged by.
From a DIY perspective.
As we move further out of the middle part of the year. When we saw pressure that that customer has proven to be resilient and.
And stabilized quite a bit and we've seen some incremental improvements there that that you know.
Our positive obviously as we think about those things we'd look at them on a stack basis because of the comparison.
<unk>, but but those those types of things where a positive as we got through the last couple of weeks of the year.
We have had a cold snap that stretch across a lot of the country and we can see that pretty clearly, but but even in that period of time, what we saw which was broad based across a lot of our regions and markets and customers.
We've been pleased with how we've continued to see strength in in the first quarter, Yes, Brian I think one of the things we called out I think you're referencing is the strength in winter categories. We did see.
He was the expected strength, where we saw.
Cold weather Snowy weather.
Obviously, you have north snow is probably better for us and it isn't the south but the recovery component. After the snow gets cleared in the south helps us out as well.
Got it helpful. And then my second question look I know it's early.
You've been talking about it as an investment community inflation within your business for a while.
Nobody's, maybe as you're starting to see those inflationary pressures begin to abate in recognizing youre not lowering prices, but prices may not be going up as much as they once were.
<unk> seen consumers react favorably to that in other words I'm asking are you starting to see the early indications of what maybe sort of seen elasticity of demand here.
Yes, it's kind of it's kind of tough.
<unk>.
To see that Brian I think.
It lays into a lot of other factors with the consumer we don't see the same types of pressure on our customers.
When.
We have those things pass through the shocks are a big deal we saw shocks in 2022.
But pretty quickly our consumer adjusts to that day.
They have a real non discretionary need for what what they buy from us They got they've got to keep their car on the road to be able to get to get to work to take their kids activities to do so many things that are part of American life. So as we move past that.
We have I think some benefits people are a little bit more constrained, maybe but we have more of an opportunity to add items to a job and sell them up on the value perspective.
We feel positive, but I think our positivity is just around the overall strength of how we view that consumer yeah, Brian and you know to <unk> earlier comments about trading up trading down we just really haven't seen evidence of a significant trade down to drive us to think that you know.
There was tremendous cost pressure on the consumer some of the trade up trade down trade across as I've said in previous quarters was about inventory availability, perhaps we didn't have the particular brand. They wanted but a lot of that subsided with improvement in our supply chain. So really haven't seen any evidence of elasticity or trade down.
Alright.
Guys. Congrats again, thank you. Thanks.
Thanks, Brian Thanks, Brian .
Thank you and the next question is coming from Mike Baker from D. A Davidson Mike Your line is live.
Okay. Thanks, guys.
Sort of.
Dance around this I think a little bit but.
I wanted to ask you about any concern about a price war or aggressive pricing, we talked about a year ago. There was a big concern.
It never really materialized, but now advance auto is talking about getting more aggressive in pricing. Your gross margin. The midpoint is down can you just address how you talk about or think about pricing amongst your.
Close in competitors. Thanks.
Yeah, Mike as we said last year when we introduced this concept of <unk>.
Adjusting our prices it was a very scientific process. We went about it was it was thought out it was tested it was evaluated and it wasn't across the board. It was it was directed to individual skus across individual categories.
And we did not see any movement from our competitors at that time you know since then we've clearly taken some market share. So what our competitors do going forward. We don't know we have no control over but we've seen no evidence of that today, Brad you live this day in day out what are your thoughts Yeah, Hey, good morning, Mike.
Yes, as you know.
As we talked for a long time all of US here, but in this industry a long time, we've been at the company a long time, that's the first time in my 26 year career that we have really moved our framework down.
The way, we did and we have no plans to do that again.
We felt like as you know there was a huge opportunity.
We work in a $130 billion industry.
We do we have 10% share and as you know on the professional side.
So much more fragmented and with the disruption we saw the last couple of years in supply chain and some other things that hit the independents and some of the smaller players harder, especially some of the weaker ones. It was very strategic for us to make the decision we made and we feel not only as good as we did a year ago, but we feel better and the decision we made.
But it's made we did it we rolled it out and there's no plans to do that again and just to remind you Mike.
Our teams pro price initiative.
Is <unk>.
Probably fifth or sixth down the list when our operational and sales teams go to market that they are focused on having relationships with installers. They are focused on having relationships with the decision makers given the best delivery service in town and helping them turn their bays and I don't necessarily contribute a large portion of our success last year to <unk>.
Just pricing its backing up the pricing with the top 234 things that make the pricing pay off and we feel really good about how that's going to continue to build in 2023.
Yeah Yeah.
So article gone, Yes. This is Brian I would just the only thing I would add to the comments, Greg and Brad have already made on professional pricing is.
The framework remains intact and we monitor it on an ongoing basis, we monitor all our pricing on an ongoing basis, but we've stayed very rigorous around.
Being competitive, but winning on service and parts availability.
We win.
Yeah makes perfect sense I appreciate the color.
Thank you thanks, Mike.
Thank you. The next question is coming from Chris harbors.
From JP Morgan, Chris Your line is live.
Thanks for squeezing me in Dovetailing, a couple earlier questions I guess on that DIY acceleration.
<unk> got past gas prices came down you had some favorable weather in December but I guess as you look at DIY and do you think your share gains accelerated sequentially like to what degree was the acceleration some more of like non specific to O'reilly factors versus share gains that you've been driving.
Really hard to say Chris.
Think especially on the DIY side of the business the pace of the.
What we see from a ticket perspective.
More modest than on the professional side I think we've talked about.
Sure, it's very clear that we know we're outperforming the market, we think that likely throughout the course of all of 'twenty, two and frankly 2021 and 2020, we've been outperforming the market and taking share gains. So I don't know that we've seen a net incremental acceleration there I think it would be hard to see in may maybe you'd have to.
Watch it for a few more quarters I do think that a lot of what we've seen is our customers just continue.
To be strong and healthy and in the industry continues to prove out that there's there's a lot of value in investing in your in your vehicle it at higher mileages.
Theres a good payback on that for customers and I think thats been a positive as well for us.
And so I had sort of a two part follow up so one is I guess in the PTO program to what extent is this sort of a competitive need where who your direct competitors you know companies like Walmart or had a higher P. T O option that you're reacting to and the environment.
And then just second as you think about that first half obviously weather always has an impact hasn't been that great of a winter. So far is the expectation as you lap that gas shock that is essentially sort of muting, what's been a relatively warm winter.
Hi, Chris This is Brad I'll touch on the PTO and then kick it over for the other but.
As you know Chris we we work in a people business you've heard us talk for a long time about the importance of having tenure and knowledge in our professional parts people and quite frankly are at work.
We're very proud when Brent not talked whether it's the store teams. Our DC teams, we're very proud of our ability to retain and cut down on turnover amongst everything thats happened in the last couple of years, but frankly, Chris we're getting ahead.
We're going to we're going to we're going to invest in our people.
We're looking at human capital, we're looking at things that we are less looking at what may be competitors do or other parts of retail as we feel like this is very strategic we feel like our people.
Value their time off and we feel like we need to be more flexible in the way, we give them that time off and so really this for US is getting ahead not following anybody we're being proactive and we're going to invest in our people.
And then maybe on the weather part of your question, Chris I would say, obviously, we've had some positives there at the end of our fourth quarter.
Just maybe more on balance we view whether is neutral.
Sure.
I think depending upon market, we see things plus or minus there is theirs.
Nothing from a significant change perspective that at least at this point, we would call out as having an overhang effect as we move through.
We move through the next couple of quarters as we think about cadence during the year and I know Brad mentioned it in his comments, we do expect more strength in the first half of the year because of.
Some of the opportunities on average ticket.
The comparisons from a DIY and professional ticket count perspective is as we run up against some more opportunities there, but on balance I think whether we would say is.
Its favorable constructive for the type of demand, we would like to see in 2023.
Thanks, So much have a great spring.
Thanks for your answers.
Thank you and the next question is coming from Scott Ciccarelli from Truest Scott Your line is live.
Guys Scot ciccarelli, Thanks for squeezing me in as well.
I guess, one more question regarding kind of the same SKU inflation comments you guys have already made are some vendors actually reducing product costs or are we just talking about reducing the magnitude of increases because obviously, that's two different things.
Yes, Chris this is Brent.
Scott This is Brent.
I would tell you, it's a little bit of a mixed bag out there.
There are some suppliers that have been more impacted by wage rates and raw material costs and others. Obviously, we're always going to negotiate hard we're always going to negotiate for best first cost none of that stopped we're relentless with that we're going to continue to be.
So, but we are also still seeing some some continued inflation even later in the cycle loan petroleum products. So it's a mixed bag out there, but our guide anticipates.
We're not going to see any tailwind from from acquisition cost, we're going to negotiate hard and we're going to do everything we can to control cost and then where we do have to absorb any increases will be able to pass those along to our customers.
Just to be completely clear on that one Scott when we say our guidance does include some benefit from from cost reductions.
I'd say there is that we're not anticipating a lot of incremental things of versus what we havent seen already.
Got it Okay. That's very helpful. And then just clarity on the $28 million PTO charge and SG&A was that treated.
As a charge because that was like an accrual catch up of some sort and then we're basically on a run rate basis for 'twenty three.
Yes, Scott we did have an accrual catch up as we converted to the play and we had some existing balances and some other types of.
Second personal time items that as we enhanced we had a.
A onetime catch up for team members and then our run rate will be higher as a result of what we've seen on a comparative basis. It'll we'll have normal comparisons there with the difference obviously that it will be a run rate throughout 'twenty three as opposed to.
Fourth quarter charge in 'twenty two.
Very helpful. Thanks, guys. Thanks, Scott Thanks, Scott.
Thank you we have reached or a lot of time for questions I will now turn the call back over to Mr. Greg Johnson for closing remarks.
Thank you Paul we'd like to conclude our call today by thanking the entire O'reilly team once again for their unwavering commitment to our customers and for our strong results. We posted in 2022, we look forward to another strong year in 2023.
I'd like to thank everyone for joining our call today, and we look forward to reporting 2023 first quarter results in April Thank you.
Thank you. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day and thank you for your participation.