Q2 2023 O'Reilly Automotive Inc Earnings Call
Yes.
Welcome to the O'reilly Automotive, Inc. Second quarter 2023 earnings call. My name is Matthew and I'll be your operator for today's call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session. During the question and 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 Matthew good morning, everyone and thank you for joining us during today's conference call, we will discuss our second quarter 2023 results.
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, 2022, 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.
Thanks, Jeremy.
Good morning, everyone and welcome to the O'reilly auto parts second quarter conference call participating on the call with me. This morning are our co presidents bread Braskem and Brent Kirby is well as Jeremy Fletcher, our Chief Financial Officer, Greg.
Greg Henslee, our executive Chairman and David O'reilly, Our executive Vice Chairman are also present on the call.
I'd like to begin our call today thanking team O'reilly for their continued dedication to consistently providing excellent service to our customers our team's proven ability to execute our business strategy at a high level drove our second quarter comparable store sales increase of 9% exceeding our expectations on the both the professional and the <unk>.
Why sides of our business.
For the first six months of 2023, we generated a nine 8% increase in comparable store sales, which is the direct result of our team's unrelenting focus on providing the best customer service in our industry.
Our team members and our culture remains our greatest assets.
I made the exact same statement on our first quarter call, but it warrants repeating.
Our commitment to strengthening our culture and investing in our team is paying clear dividends and our continued strong performance and I want to congratulate all of team O'reilly on another outstanding job in the second quarter.
Driven by the strength of our top line performance. We're also pleased to deliver a robust 16% increase in diluted earnings per share.
Our operating cost spend was elevated above our elevated above our expectations, which Brad will discuss more in more detail. During his prepared comments, but we remain pleased with the investments we have made in our business to build on the momentum of our teams are generating.
Our EPS results reflect our ability to produce strong compounding operating profit dollar growth and we are committed to aggressively capitalizing on the opportunities we see to provide enhanced value for our customers and earn even greater market share.
As a result of our strong topline performance, we're increasing our full year 2023, EPS guidance to a range of $37.05 to $37 55 says, reflecting our second quarter results and shares repurchased since our last call.
At the midpoint of this revised range, we now expect our full year EPS increased 12% over 2022.
As we disclosed in our press releases last night.
After 41 years of service to our company I've made the decision to retire next January .
At that time, Brad backroom will take over my role as Chief Executive Officer with direct responsibility to the board as the leader of our executive team will also be promoting Brent Kirby to the role of company President.
As you know, Brad and Brent assumed the roles of co president earlier in the year and they have both taken on increasing levels of responsibility and prominence in the leadership of our business over the past several years.
Succession planning has always been a very important and methodical process at our company.
In many ways our upcoming change mirrors the successful leadership transitions, we have seen before in our company's history, including when Jeff Shell and I were elevated to lead the company in 2018, and Greg Henslee and Ted Ted Wise were selected as the first nano rally family members and the top leadership roles of C E O and C O O in 2005.
Brian and Brent are both extremely talented and experienced individuals who have the full support of our team and I have every confidence they will continue to deliver on our company's long term track record of success.
Over the period of now from now through January 31st we will complete the transition of the day to day operations of the company to Brian and Brian .
Finally, Greg Henslee, our executive Chairman and David O'reilly, Our executive Vice Chairman will also be continuing in their roles and along with our full board will support Brad Brent and our executive team and executing our strategy and driving long term value for our shareholders.
As I finish up my prepared comments I would like to again, thank our team for continuing to provide industry, leading customer service every day and generating excellent results in the first half of 2023.
I'm extremely proud of all of you and I am excited to keep the minimum strong momentum strong in the back half of the year.
I'll now turn the call over to Brad Burke Bret.
Thanks, Greg and good morning, everyone I would like to begin by congratulating team O'reilly on another excellent performance in the second quarter. Our continued industry leading sales performance is the direct result of our team's unwavering commitment to our company's culture of providing excellent customer service and I would like to thank all of our.
<unk> members for their hard work and dedication.
Over the last several quarters, our team has generated tremendous momentum in our business and that strength carried into the second quarter driving our outstanding top line sales performance.
As we've discussed on our last quarter's conference call. We faced some pressure from the timing of spring weather at the end of the first quarter, but our business rebounded with the onset of normal spring weather in April .
Those strong sales trends continue continued throughout the quarter, resulting in our outperformance versus our expectations in each month of the quarter.
From a cadence perspective, our results were very steady in each month of the quarter, both in absolute terms and as compared to our expectations.
The ability of our team to drive high levels of sustained sales growth month. After month is the product of consistent daily execution of our key business fundamentals and I couldnt be more pleased with how consistently team O'reilly has performed in the first half of 2023.
Now I would like to provide additional details on our sales performance in professional and DIY. Our professional business was again the outperformer in the second quarter. Our team delivered a mid teens comparable store sales increase in our professional business in the quarter with incredibly strong growth coming on top of double digit professional.
Comps in the second quarter of 2022.
The compounded gains we are seeing on this side of our business reflect a sustained high level of customer service and execution that has allowed us to translate increase sales gains in the future business opportunities.
Every chance, we have with the professional customer to prove our exceptional value gives us the ability to earn the next call and capture even more of that customer's business.
As we have seen our business grow over the last few years. Our store teams have made the most of these incremental opportunities and we continue to see runway to leverage our proven business model and execution to gain market share.
Turning to DIY, we continue to be reasonably pleased with this side of our business with our teams delivering steady comparable store sales growth consistent with our overall trends in the first quarter.
As we move past the string wet spring weather volatility we experienced at the end of the first quarter and beginning of the second quarter. Our DIY business has been very steady with consistently positive performance in each month of the quarter.
Our comparable store sales increase in our DIY business was driven by increased average ticket values aided by same SKU inflation, but we were also pleased to see flat DIY ticket count comps in the second quarter.
Average ticket growth was in the mid single digits on a combined basis for both sides of our business and drove the larger share of our comparable store sales increase.
However, strength in ticket count comps, especially in our professional business was the larger contributor to our outperformance versus our expectations.
Our average ticket growth was driven primarily by same SKU inflation, which was in line with our expectations, coupled with a modest benefit from product mix and complexity in our professional business.
As anticipated same SKU inflation, we realized in the second quarter ticked down from the tailwind we saw in the first quarter.
We continue to expect to see this benefit moderate in the back half of 2023, as we lap impact of 2022 price increases.
This dynamic was built into our initial guidance expectations and remains unchanged.
To wrap up my comments on sales I would like to highlight our updated sales guidance and full year outlook from a macro perspective, we continue to remain bullish on the strength of our industry and prospects for the remainder of 2023.
Our customer base has continued to be very resilient and willing to prioritize the maintenance and repair of their existing vehicles in order to avoid taking on a payment for newer more costly vehicles.
While we still maintain an element of caution with regard to the outlook for the overall U S economy and the potential for heightened the economic pressures, we believe that current market dynamics combined to provide a strong backdrop for demand in our industry.
In light of this backdrop, we are increasing our full year comparable store sales guidance to a range of 5% to 7% from our previous range of 4% to 6% with a corresponding increase in total sales guidance to $15 $4 billion to $15 $7 billion.
This increase reflects our year to date performance through today's call.
As Ive already discussed we anticipate moderation in our comparable store sales expectations in the back half of the year as we realized less built in benefit from same SKU increases our expectations also incorporate more challenging ticket count comparisons as we move through the back half of the year.
The combined impact of both of these factors is driving the anticipated deceleration in our comparable store sales guidance in the second half of 2023 versus the nine 8% increase we generated in the first six months of 2023.
However, our teams remain highly motivated to take share in every market and we remain diligent and delivering a high level of customer service to accelerate our sales momentum.
Before I move on from sales I will add that we are pleased to be off to a strong start in the third quarter as we have seen the robust sales trends in the first half of the year continue.
With incremental strength from the extreme heat in many of our markets in the first few weeks of July .
Now I would like to discuss our second quarter SG&A results, which came in higher than our original expectations for the quarter and were above the long term growth rate necessary to operate our business model.
SG&A as a percentage of sales was 33% a deleverage of 71 basis points from the second quarter of 2022.
This deleverage was driven by an increase in SG&A per store of approximately 10%.
This heightened level of SG&A was incorporated in part into our initial expectations for 2023, but ultimately came in higher than anticipated driven by a few key factors I will briefly recap.
Coming into 2023, we identified several key initiatives targeted to enhance our long term operational strength with an intent to capitalize on the considerable momentum we have generated in our business to further separate ourselves from the competition and consolidate the market.
We have been pleased with the progress of these initiatives and in a few instances realized the opportunity to accelerate these investments in the second quarter.
A good example relates to our plans this year to increase our spend on refreshing the image and appearance of our stores, which is targeted at both strategic projects as well as improved general maintenance of our existing facilities we.
We have sought to return to a new normal post pandemic.
We have been excuse me as we have sought to return to the new normal post pandemic, we have been working hard to catch up on deferred maintenance needs of our stores that have unfortunately accumulated over the last couple of years as a result part of our SG&A pressure in the second quarter was driven by going faster than originally planned to address this issue.
The image appearance and shop ability of our stores is incredibly important to our ability to drive DIY traffic customer satisfaction and in turn share gains over time.
We are also seeing good traction in our efforts to enhance our team member experience and benefits.
Our initiatives here have reap better than expected team member retention, but have also contributed to the overall cost of these enhancements, which coupled with a deferred compensation SG&A headwind Jeremy will discuss in a moment added to our SG&A growth in the quarter.
Outside of these deliberate decisions to enhance our business. We unfortunately also faced pressure during the quarter from a higher than expected self insured auto liability exposure driven by inflation and claim costs are.
Ultimately, we remain we retain control of our most significant driver of our total SG&A spend and the decisions, we make around store payroll and appropriate staffing levels within our stores, ensuring we have the strongest possible team delivering the best customer service in the industry is one of the most important if not.
The most important driver of our long term success.
Our total payroll spend in the second quarter was another contributor to the higher than normal SG&A per store increase driven by total head count and staffing levels, coupled with higher incentive compensation with wage rates largely in line with our expectations.
As we've discussed often in the past we manage this key component of our SG&A spend with a long term focus as we've continued to see our business accelerate over the last year plus since exiting the pandemic, we have prioritized ensuring that our stores are delivering a high level of service on both sides of our business.
When we gain share with new and existing customers as we have seen over the last two years, we create an opportunity to prove our industry leading value proposition as a trusted supplier and in turn earn repeat expanded business.
In these situations we are judicious about how we manage staffing levels to ensure we are delivering the excellent customer service that develops and maintains long term relationships.
As we look forward to the balance of the year, we now expect to see in the SG&A per store increase of approximately 6%, which reflects our first half results and our outlook for the remainder of the year.
Implicit in this guidance is our expectation that per store SG&A growth will moderate versus what we've seen in the first half of 2023, even as we continue to pursue strategic initiatives in our business.
We remain highly committed to expense control as a culture value and it set high expectations for the long term productivity of the investments we're making today.
We have a long track record of diligently managing our expenses to match the business conditions, we are seeing in our markets and we will continue to prudently adjust our operating cost structure to drive long term value in our business.
Finally, we still continue to expect our full year operating profit margin to come in within the range of $19, 8% to 23% of sales.
Before I turn the call over to Brett I would like to thank our entire team for their unwavering hard work and commitment. So far in 2023, I am extremely humbled to have the opportunity to serve as our next our company's next chief Executive Officer, and I Couldnt be more excited to work side by side with our over 88000.
Dedicated parts professional parts people to provide the best service possible to our customers and in turn drive outstanding performance for years to come.
Now I'll turn the call over to Brent.
Thanks, Brad.
And I would like to join Greg and Brad and congratulating team O'reilly on the strength of our performance in the second quarter our.
Our strong top line sales performance and continued ability to outperform the market and gain share as a direct result of our team's relentless commitment to providing excellent customer service.
And I want to thank all of our team members for their dedication to our company and to our customers.
Now I will walk through our second quarter gross margin results, what we're seeing in the competitive environment and.
And discuss our investments in inventory exciting developments in our store and distribution growth and capital expenditures.
Okay.
Beginning with gross margin our second quarter gross margin of 51, 3% was down just six basis points from the second quarter of 2022 and at the top end of our expectations are.
Our second quarter of 2023 represents the first quarter. After we have fully lapped the rollout of our professional pricing initiative and atypical LIFO impacts, which provides us a much clearer read on a year over year gross margin performance. Excluding the noise that these factors have caused in prior quarters.
We are pleased with the stability of our gross profit results, especially in light of the pressure we continue to face from the extremely strong performance of our professional business.
As this side of our business has continued to outperform we have faced mix headwinds to gross margin, but have been able to offset this pressure with incremental improvements in acquisition cost solid leverage of distribution expenses and positive shrink results.
I would also like to provide some color on the cost and pricing dynamics, we're seeing in our industry.
Both on the acquisition side of our supply chain and across the competitive environment in our markets.
The short and Sweet answer is that our industry remains rational and.
And cost and pricing continued to be very stable consistent with what we've seen over the past several quarters.
Our supplier partners continue to see some degree of inflationary pressure while at the same time, we have been able to realize incremental opportunities to reduce acquisition costs across some product categories.
These puts and takes are occurring in a much more normalized pattern than what we experienced in 2021 and 2022 and are in line with how we would view normal conditions in our industry from a historical perspective.
Pricing to DIY and professional customers in the industry has remained rational.
And we have not seen significant changes in market pricing dynamics in the industry in 2023.
Where we have seen increases in product acquisition and other costs. We continue to be successful in passing these increases through and selling price and are confident that this will continue into the future.
As we have discussed many times on these calls prices ultimately not always the deciding factor that determines where a customer will take their business.
Our team continues to perform at a high level by delivering industry, leading product availability and excellent customer service and these strengths have enabled us to win share at appropriate gross margins in a competitive industry.
As we move into the back half of 2023, our gross margin results can vary based on product sales mix in any individual quarter or the timing of the pass through of acquisition cost changes, but we are maintaining our full year gross margin guidance and continue to expect the back half of the year to fall within the 58.
8% to 51, 3% range.
Inventory per store finished the quarter at $762000, which was in line with our expectations up 12% from this time last year and 4% compared to the beginning of the year. We continue to track toward our planned inventory per store increase of 2% by the end of 2023.
Our AP to inventory ratio at the end of the second quarter was 134% in line with the beginning of the year and slightly better than our expectations supported by strong sales volumes and inventory turns.
We are pleased with the health of our supply chain and continued improvements in.
And store in stock position it is clear to us that our industry, leading inventory availability has been a key factor driving our robust sales results that we continue to prioritize deploying the right inventory at the optimal position in our D C hub and store network.
Turning to our growth initiatives and capital investment we are extremely excited to complete the very successful opening of our first new a rally distribution center in Guadalajara, Mexico earlier in July .
This 370000 square foot facility will have the capacity to ultimately serve as 250 stores in the Guadalajara Metro area and surrounding regions in Mexico.
Even more importantly, our new facility will be a game changer for our business model in Mexico since our entry into Mexico. In 2019, we have supported our inventory strategies by utilizing our network of smaller distribution centers and warehouses that were part of the historical operations of my ASO.
Our new facility gives us the ability to deploy a much more significant inventory investment and leverage this enhanced and highly competitive inventory availability position.
It is our goal in Mexico, just as in all our domestic markets to be the industry leader in putting the right part in the hands of our customers faster than the competition and our new facility in Guadalajara provides the necessary platform to execute our strategy.
We have a long history of successful distribution center openings, but each new facility is a significant undertaking and it requires incredible hard work and coordination across our organization.
We could not be more pleased with the partnership between our U S and Mexico teams that drove the highly successful acquisition development and opening of this new facility.
It is an understatement to say that our store teams in Mexico are very energized by the opportunities that our new distribution center unlocks and they are dedicated to leveraging all of our competitive advantages as they outwork the competition to grow market share.
Yeah.
From a store growth perspective, we successfully opened 42 stores during the second quarter, bringing our year to date total to 100 net new store openings. Our team is on pace to hit our plan of 180 to 190 net new store openings for 2023.
Our openings in the first half of the year, we're very well balanced across our store footprint.
With new stores coming online in 34 different states, Puerto Rico and Mexico.
Our ability to spread our growth across many markets positions us to be highly selective in hiring and training the outstanding teams that drive the success of our new stores.
We continue to be pleased with the performance of our new stores and view our organic store growth is a key priority for our use of capital.
Total capital expenditures for the first six months of 2023 were $461 million up substantially from the first six months of 2022, but in line with our ambitious plans to deploy capital against projects and initiatives that will drive long term growth and operational gains for our.
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We remain on target to hit our capital expenditure guidance range of $750 million to $800 million.
To close my comments I want to once again, thank team O'reilly for their hard work and continued dedication to our customers now I will turn the call over to Jeremy.
Thanks, Brent I would also like to thank team O'reilly for their continued hard work and exceptional professionalism.
Now we will cover some additional details on our second quarter results and guidance for the remainder of 2023.
For the quarter sales increased $398 million driven by a 9% increase in comparable store sales and a $75 million non comp contribution from stores opened in 2022, and 2023 that have not yet entered the comp base.
Brad covered our SG&A expense in the quarter in detail, but I did want to provide some additional color on our deferred compensation plan expenses given the nature of how this play runs through our income statement.
For many years the company has sponsored a nonqualified deferred comp played for team members, whose participation would otherwise be limited in our qualified for one K plan.
Since this is a nonqualified plan the company maintains a liability for the obligation to pay the value of the deferred compensation to team members in the future.
Adjusted to reflect asset performance.
It also holds a corresponding asset for the fully funded and participant directed assets in the plan.
However market value changes in the plan are reflected on different line items on our income statement with an increase in value driving an increase in SG&A expense and an offsetting benefit below the line in other income.
Historically, the net impact has not been significant for either line item, but given the increased size of the plan assets and the more significant market value changes both in the second quarter of 2023 and 2022, we wanted to highlight the difference. So that you will be able to update your models the.
The year over year swing in the market values of played assets drove a $9 million increase in SG&A expense or 24 basis points.
With a corresponding $9 million year over year favorable change in other income and expense.
Our second quarter effective tax rate was 22, 5% of pretax income.
Comprised of a base rate of 24, 3% reduced by a one 8% benefit from share based compensation.
This compares to the second quarter 2022 rate of 23, 8%.
Pre tax income, which was comprised of a base rate of 24, 3% reduced by a 0.5% benefit from share based compensation.
Our second quarter base tax rate was in line with our expectations.
The total effective tax rate below our expectations due to the higher than planned benefits from share based compensation.
For the full year of 2023, we now expect an effective tax rate of 22, 5%.
Apprised of the base rate of 23, 4% reduced by a benefit of 0.9% for share based compensation.
Our fourth quarter effective tax rate is expected to be lower than the other three quarters due to the tolling of certain tax periods.
Irrigation is a 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 cash flow for the first six months of 2023 was $1 2 billion in line with the first half of 2022 with growth in income and a benefit from favorable timing of tax payments and disbursements for renewable energy tax credits offset by increased capital expenditures in 2012.
<unk> three versus the prior year and a lower benefit from a reduction in that inventory this year versus 2022.
For 2023, we now expect free cash flow at a range of 1.9 to $2 2 billion up $100 million from our previous guidance range based on operating cash flow performance in the first half of the year.
Moving on to debt, we finished the second quarter with an adjusted debt to EBITDAR ratio of 1.92 times.
Which is up compared to our end of 2022 ratio of 184 times with the increase driven by borrowings on our revolving credit facility.
We continue to be below our leverage target at two five times in plain to prudent prudently approach that number overtime.
We continue to be pleased with the execution of our share repurchase program and during the second quarter, we repurchased 0.8 million shares at an average share price of $904 37.
For a total investment of $680 million.
Year to date through our press release yesterday, we repurchased two 2 million shares at an average share price of $855 22 for a total investment of $1 $9 billion. We remain very confident that the average repurchase price inclusive of the current excise tax cost.
It's supported by the discounted expected future 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, the updated EPS guidance outlined by Greg earlier 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 again, 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 Matthew the operator to return to the line and.
And we will be happy to answer your questions.
Thank you we will now begin the question and answer session.
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Your first question is coming from Simon Gutman from Morgan Stanley . Your line is live.
Hey, good morning, everyone. It Simeon Gutman can correct congratulations to Brad Brent and Greg. My first question is market share it looks like the <unk>.
Fred with O'reilly and the industry is accelerating at least it has in this calendar year.
A question as to what do you attribute it the only thing that we could put our finger on as a year ago. The PPI initiative. So maybe it just took a year for those investments to route. So curious what your take on the market share acceleration is due to.
Yeah, Hey, good morning, Simeon Thanks, Brad.
Yeah, I you know I think the P. P is a little bit easier to point to because it's a little bit more tangible for everybody looks into our company but.
I I would say that you know if you talked to our operators like we do every day you know the biggest thing we're seeing is just a huge opportunity starting with our team our culture.
The things we've done to stabilize our team to rebound from kind of the Covid hangover in terms of some of the turnover and maybe what was subpar for us from a service standpoint is we just feel really great first and foremost about the teams we bill.
What we're doing with our human capital and the service that our store teams our distribution teams and our corporate offices that are providing.
<unk> thing I would say is that especially from from you know from operations and sales. The first thing they point to when we talk to them about what we're seeing in the markets in EMEA and as is the position we're in from a supply chain standpoint.
As you know as good as anybody or our immediacy of need and non discretionary business. It's all about on both sides of the business. It's all about who has the right part at the right place at the right time and I just couldn't be more pleased with the job the Brent and the merchant team the inventory management purchasing team and our.
<unk> teams are doing for our store operators that they have just got us in a better position than we've been in it a long time and we feel like we're playing from a position of strength from the from the team side from the supply chain side and all the work we're doing with our professional customers.
In the field everyday making sales calls and then obviously, we still feel good about everything we did with PPI.
Yes, I mean, if I could maybe add to what Brad said, there first of all thanks for the congrats and Brad did a nice job of of you know expressing.
Confidence in the supply chain team and our inventory position.
Obviously, as we've said over and over again, we've got to be competitive on price, which we are and continue to be and will continue to be but what I always price is inventory availability and service level and Brad and his teams in the field have just done an outstanding job of making sure we're positioned to provide the highest level of service in the industry.
Yeah, and maybe the follow up on that point this year, you're investing it sounds like a little more of this in the stores to get the experience improve service was part of it.
Is there a case that you should continue to lean in.
Given that you have transitions happening at competitors.
We see that the flow through to be a little weaker as you should just lean into the business and especially given how strong. It is is that a is that a thought that investment mode may.
You may continue.
Yeah, Great Great question Simeon.
You've picked up.
I think the key thesis behind this is we've talked about it really all year are they coming in to into 'twenty. Two 'twenty three we've just identified areas there.
That we felt really from a long term perspective allow us to invest within our business and continue to really double down on the momentum that we've seen.
Yeah.
For us to have I think such a sustained expense control culture within our organization for such a long period of time, that's a that's a substantial undertaking to think about it in those ways and to move forward. It absolutely as we've done that that has been very focused and targeted towards.
Towards.
A strong return on those dollars that we're spending and we've thought about that from a long term perspective.
We.
Here, we are we sit in July halfway through our year and I think we've given clear expectations around where we think we'll finish out the year and funny, we don't really provide guidance for 2024 until later on as we get closer. So you know so it's I think it's a bit premature for us to I think talk too specifically about that.
For sure 2023 has been a heightened year for us.
Eight.
At the same time to your question, but I'm going to say that as we move forward, we wont find other opportunities for us to invest our business.
We will continue to do so aggressively when we feel like that's appropriate having said that.
We.
We have an expense control focus and we're diligent in how we manage to that and it's our expectation that that will continue to see the levels of productivity.
On a long term basis and improvements in how we think about the.
The returns on our operating cost spin that it's consistent with what we've seen over the long course of our business.
Yeah, Thanks, well done and good luck in the second half.
Thanks, David.
Sure.
Thank you. Your next question is coming from Greg Melick from Evercore ISI. Your line is live.
I think some.
My first question is on the.
Same SKU right of Disinflation, you said, it's it's coming in as planned.
Could you just update us on what that actually was on the quarter and what you expect it to be in the back half.
Okay.
Yes, Greg we I think we had said that it was mid single digits in the quarter, we think that moderates in the back half of the year.
It won't it won't get all the way to flat.
But we would expect it by the time, we kind of exit this year.
At that stage, you're really just talking about kind of what we've seen in the in the current year from a year over year perspective, and we've kind of as Greg mentioned in or I'm, sorry, as Brent mentioned in his comments, we kind of normalize to what we think are more kind of historical long term rates. There. So that would that put you kind of in the low low single digit range and but really.
<unk>.
As Brent mentioned, that's all all former almost directly in line with with what we would've anticipated for this year.
Got it and then maybe if you could talk a little bit about the category mix that youre seeing in both pro and DIY. It sounded like some of the bigger ticket stuff for some of your competitors got a little softer maybe some trade out happening in those categories are.
Batteries, how some of these things we're doing on both sides of the house.
Yeah, Greg will speak to I'll speak to a little bit of that in terms of categories at a high level. I mean, we always are looking for.
We have complete lines across good better best product offerings. We're always looking you know is there any trade down trade across trade up dependent on where the consumer is and you know similar to what we saw in the first quarter.
How we answered this question on the call a quarter ago, we actually saw a little bit of a trade up from better to best and Oh. Good good kind of stayed where it the normal baseline that we've seen historically there. So we're not seeing trade down with the consumer at this point I mean in terms of categories, where we have seen.
Strength, you know I would attribute a lot of that strength to better in stock position you know in categories like radiators and in some case brake components versus where we were a year ago on a comparable basis or even where we were in first quarter on some of those categories. So.
We continue to see our store in stock position improve and you know as we talked about in our prepared comments, we really believe that's a huge contributed to our share gains yes. Greg. This is Gregg I just might add one comment there you know in addition to what Brent said, we continue to also see strength and growth in our proprietary brands as well.
That currently make up over half of ourselves overall.
Got it that's great and good luck.
Yeah, Thanks, Greg I appreciate it.
Thank you. Your next question is coming from Chris <unk> from J P. Morgan Your line is live.
Thanks, Good morning, everybody and congratulations to everybody on their on their updates my first question is.
Can you talk about what you're seeing from a national accounts versus the up and down the street business perspective as.
As one of relative strength.
Are you seeing any pricing differential in those two businesses. It sounds like the answer is no and then lastly, and I think it'd be helpful. Maybe if you could size how much national accounts contributes to the overall business.
Hey, good morning, Chris, It's Brad Hey, I'll I'll start this one in a couple of others may want to jump in but you know great question. You know I think as you know you know us growing our company over the last few decades from humble beginnings here in the center part of the country and growing out toward the <unk>.
The coast through acquisition and Greenfield expansion.
We founded our company on the on the independent garage you know the.
What you called the.
Up and down the street accounts, the small everything from Chatrier mechanic to the larger independent garages that compete very well.
With the larger players and then obviously as we grown over time you have your small accounts you have your mid size accounts and then obviously, we do have a sizable.
Book of strategic account business, that's made up of both.
National players and regional players.
Part of that as you know Chris is we still have that gap and footprint, we have kind of in the upper mid Atlantic and going up in the in the New York and those markets that doesn't always match up with some of the biggest national players. So that's still an opportunity opportunity for us as we build out the U S, but really from what we've seen from.
Your direct question about kind of what we're seeing in our share gains and momentum and how that relates to pricing on the street.
We're seeing every bit of our business grow very consistently from the small shops, the larger independent garages or strategic accounts all of that is very consistent and what were seeing.
And.
We've never quantified the exact how that splits out between our strategic and our other book of business, but I would tell you that.
That are by far the foundation of our professional business is.
Is the independent garage in the way that we built that from the ground up.
Chris If I just add one thing to that maybe in respect to your size question.
Brian talked about.
The national reach of course, they are very important customers to us are important part of our business.
We may differ from others and that the relative size of.
That business for US is it's not so significant that.
It's a huge needle mover to our overall performance it's important as Brad mentioned, it's a.
It is growing consistently.
Well all in with the rest of our business, but it is not a dynamic that has caused our results to be significantly different than the broader base of business.
Got it. Thank you for that my follow up question is for you Jeremy I mean, if you look back historically gross margin seasonality pretty flattish over the year ex periods, where you have.
Inflation or deflation I'm, sorry, like yeah, inflationary or disinflation in the business and he talked about things getting back to normal. So I guess does that would that suggest that the back half of the year as maybe in that sort of the upper half of the upper half of your guide you know sort of consistent with the year.
Year to date level. Thank you.
Yeah, no. Thanks, Chris I appreciate the question.
You've been you've been around our story for a really long time to go back to those periods. When you could say that the quarter to quarter wasn't impacted by some of the noisy items.
The LIFO story itself has been has been it has been a long history, but I think you are appropriate to identify that generally speaking seasonality. It has some impact on our gross margin results.
Product mix in any quarter can have some impact as well.
But they're going to be I think much less muted moving forward than some of the larger variances we've seen.
Yeah.
I'd tell you we'd be cautious in saying that the guidance would be in the back half of the year.
Or is that in the in the pop back the range in the back half of the year for no. Other reason than we we've.
We've seen our professional business continued to perform well and.
And we give a guidance range for a reason you know there's going to be some degree of a volatility around product mix and the timing of pricing in a brent called those out in the script, but we feel comfortable with the guidance range that we've had and really with the strength of our gross margin as we've as we've seen our business accelerated and be successful.
So it's important for us to be able to grow those sales in the right way and we've seen that with with the I think the steadiness of our gross margin results.
Thanks, guys best of luck.
Thanks, Chris.
Yes.
Thank you. Your next question is coming from Scott is really from Truest. Your line is live.
Good morning, guys Scot Ciccarelli.
We're hearing from the field that services facilities are seeing slower tire sales, presumably that would stem from increased economic pressure. So the questions are a are you hearing similar from your customers and then be even though you guys don't sell tires, you, presumably sell parts on a car being brought in for Saturday, So how much exposure.
<unk> to such a train could O'reilly had.
Just from a customer standpoint.
Hey, good morning, Scott its Brad.
As you said, we don't sell tires, and I want to be careful not to speak for the.
The professional customer installer base, but.
You know what we see generally as is.
Good and good meaning if our shops are selling a lot of tires than they have wheels off they have they're looking at they're doing inspections or looking at brake parts or looking at the chassis, they're looking at a lot of different things, but then you know.
If they're not selling tires, they have a little bit more time on their hands to spend a little bit more time with customers and diagnose better and potentially get ahead of some of the <unk> job. So.
I just wanted to be careful to answer that too pointed versus that population, but.
We haven't really seen anything with <unk>.
Softer tire sales.
The way business comes to US, we really haven't seen anything on that front, yes, I think maybe just more broadly Scott.
Sumer.
We engage and interact with continues to be resilient and healthy.
We will.
As you know we benefit from from just the nature of our industry and the.
The immediacy of need in the key against value of that transportation demand being so high that that debt.
We always tend to be a little bit lagging to others that would start to see pressure there.
We're.
We're cognizant that short periods of time, you can see customer reactions, but.
But we still we still have a lot of confidence in what we see as we interact with our customers there they're valuing the.
The proposition of keeping the cars on the road.
It's a good return on their investment I think we'll continue to see that as we have in past economic cycles, but but at this point.
We haven't seen any of those types of things that you would point to that that would indicate the customer our customers are suffering.
And it may be that <unk> got.
Hey, Scott just maybe to add one other point to the points that Brad and Jeremy have already made.
Interestingly enough, we've continued to see strength in under car ride control chassis a lot of those categories that are.
We're getting looked at when when the cars upon the rack so just.
Throw that in as well for color.
I appreciate that and then just a quickie on accounts payable and inventory stays pretty elevated Jeremy.
Is there any reason that should shift by the time, we hit year end or is it just you know the accelerated sales pace and we should continue to seek out like 120, 530% type ratio. Thank you.
Yes, we would expect it would it would stay.
Reasonably elevated levels. There is sometimes it can moderate a bit just on seasonality of of how some things flow through the back half of the year.
Within our within our free cash flow expectations, we've got a little bit of that built in but we continue to see.
Strong productivity out of our existing inventory, even as we as we've added over the course of the.
Last year and the ability to turn that inventory helps us to.
To maintain that negative net investment.
That is sort of our staff.
Awesome. Thanks, guys.
Thanks Scott.
Thank you. Your next question is coming from Brian Nagel from Oppenheimer. Your line is live.
Hi, good morning.
Thank you for taking my question.
I too would like to add my congratulations to the promotions all around.
Sure.
I have one.
First question there just with respect I guess looking to the back half of the year and you talked about sort of say the waning benefits of I guess inflation from a sales perspective, but as we think about that then should we also expect on the other side.
Essentially.
At least the potential for more benefits on the gross margin front would potentially easing sourcing costs.
Yes, Brian I can start on that I mean, you know I would just tell you and I mentioned it in the script you know a lot of suppliers are still.
There are some pressure from increased cost of capital increased raw materials increased labor cost I mean, we do see that.
We also though are always aggressively.
Looking at price and cost of goods and doing everything we can to drive out cost of goods and purchased the best we can you know Greg talked a little bit earlier about proprietary brands and our continued strength, we see in growth in those in those proprietary brands that gives us an opportunity to to shop that with multiple suppliers and b multi <unk>.
First in those categories, which is certainly a strategic strength for us and an opportunity on the cost side, but you know I would tell you in general the a lot of our suppliers would tell you theres still under cost pressure as you would expect them to report that but we feel like we're in a very good position to.
To mitigate that.
Through this period and.
We have done that in many cases.
Got it that's helpful.
My follow up question.
You know just with respect to June .
Others in your in your sector talk about <unk>.
Weaker June .
Other than others in retail to talk about a week or Germany, I mean, it sounds like your business is pretty steady. So I guess the question is I mean did you see anything in the month of June to suggest weakness and if you did in <unk>.
Or is there an explanation on why or why we performed so much better than others in that month.
To answer the question directly right, we didnt see weakness in June we were pleased with our results.
For the month the compares obviously a different month to month, but relative to our expectations.
You know it performed as strongly as in the other months actually little bit higher the actual comp they're all within a really tight band so.
So we feel we feel positive you know, we obviously a week to week month to.
Tomorrow.
All of the individual drivers of our business and I think it's tough.
In such a time period.
To be able to parse out too much what we see versus what others in the marketplace might see but but we saw solid demand really across regions and across categories throughout the quarter.
Got you I appreciate it and congrats again.
Thanks, Brian its Brian .
Thank you. Your next question is coming from Kate Mcshane from Goldman Sachs. Your line is live.
Hi, good morning, Thanks for taking our question.
We just wanted to make sure that aside from the moderating inflation in Senegal, and Townsend take account compares if there was anything else driving the sequentially lower comp outlook for the second half of the year.
No I mean, I think you've.
You have identified.
What really we've talked about since we established our guidance at the beginning of the year.
Most.
Of the cadence differences as we move quarter to quarter throughout 2023, and the actual math that pushes out our comp.
Relates to the the way volumes flowed in in 2022. So for sure. There is there is a waiting same SKU benefit.
'twenty two is also a unique year for us really on both sides of our business where from a transaction perspective, the back half was stronger than the first half.
For different reasons, you have the DIY, we faced some pressure in the front half of last year.
We're just volatility in the overall.
Macro economy, and then they respond better and then on the professional side, we've continued to see ramp growth there from a transaction perspective.
Really as we think about the balance of the year nothing has changed about where we would expect on a sequential volume basis to be in our overall business. When we say week to week from a dollar standpoint.
We're anticipating remained consistent and strong we're excited about the trends that we've produced in the business.
Thank you.
Thank you Sanjay.
Your next question is coming from Mike Baker from D. A Davidson your line is live.
Okay. Thanks real quick can you just talk about the heat that we're seeing throughout the country and how this impacts your business and specifically I think you said I hate to put you know to move to.
Two short term, but you said that July was continuing the strength that you saw in June with incremental benefit from the weather. So does that actually mean that July was better than June .
Hey, Thanks, Mike It's Brad.
As you know he we like heat, we like extremes in.
We work in enough markets, especially where the hot weather really contributes to to failure.
Whether it be immediate one thing to remember about heat is a lot of time something like a battery you know heat he kills batteries, but then it fills in the winter. So we want to be a little bit cautious but overall.
Overall, we're really excited about where our businesses. We're excited where we ended the quarter and we're really excited about how we've started July we're always a little bit careful with through a three week period, but theres no doubt in our minds that what we're seeing in the market and related to weather that.
It's good for us and we're doing everything we can to capitalize on it.
Yes, Mike and Brett Brett It said it right, we don't ever overreacted to three week period of time, but it should come as no surprise you walk outside and you know.
That.
That that hot weather is good for us and that's how we would I think frame brad's comments in the prepared prepared comments around that yes, we've seen the benefit that you would expect to see what the weather we've had.
Great excellent one more quick follow up the deferred compensation impact in the second quarter that you talked about that $9 million shift do we does that continue into the third and fourth quarter.
Presume if it does it doesn't and that's in the guidance, but just trying to think about how to how to think about that in terms of our models.
Yeah, we don't we don't do a lot of forecasting within our guide there we hate to even talk about it.
But it does create noise on that other income and expense line. It just really kind of depends on the broader market activity that impacts those accounts.
In normal periods, it's not a it's not a needle mover, but it just happened to coincide in the second quarter.
<unk> noise.
So in other words it wasn't a catch up in the second quarter.
It has to do I, presumably increase in stock price during the quarter, yeah, yeah, the market about that.
Yes, when the market recovers, we see the liability go up the assets go up.
It's a net nothing it literally.
It perfectly offset that just creates noise.
Right, it's important though because it makes it look like your SG&A is higher than expected in that.
While you beat earnings just because of the below the line items, but so I think it's important to understand it's just a change in the geography.
Yes agreed.
Thanks.
Thank you. Your next question is coming from Seth fashion from Wedbush Securities. Your line is live.
Thanks, a lot and good morning.
Sales productivity on a per employee basis was very strong reaching a new record by my calculation I encourage you see this as sustainable and then second can you provide more color on wages and benefits in the quarter and how you expect them to trend going forward on a year over year growth basis.
Yeah. So maybe I can start there and then others can chime in Seth and probably answer.
To answer the second question first.
Overall from a from a workforce perspective.
<unk> continued to see pressure from a wage rate standpoint there.
I would tell you it's largely in line with what we're saying.
With the inflation benefit that we've seen on our topline and all of that.
Were within our expectations that Brian talked about the.
The SG&A as we as we've seen the opportunities in bass.
None of our spend outside of our original guide was driven by wage rates those were in line with where we had expected.
We continue to anticipate that that will have opportunities from an investment perspective.
In in the team member.
Experienced enhancements that we've had we feel very positive about those red I talked about those that lag.
Start to moderate just on a comparison basis as we as we move throughout the year.
For the things that we've been executing.
Eight year in terms of where that drove us from a productivity perspective.
On a sales per team member you.
Absolutely we're seeing.
Very robust topline.
And and Brent talked about it at length.
Yeah.
The sense that we really believe that we're winning business based upon the strength of our team and the service and value that they're providing.
And we think that the.
Our ability to double down on the strength of our team is really going to help us continue to to sustain that.
Improve it as we move forward.
Got it I appreciate it thank you guys and congrats to Greg Brown <unk> Brown.
Thanks, Jeff and thanks.
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 Matthew we'd like to conclude our call today by thanking the entire O'reilly team for your unwavering dedication and the great results you've generated in the first half of 2023.
Like to thank everyone for joining the call today, and we look forward to reporting our third quarter results in October . Thank you.
Okay.
Thank you. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.
Okay.