Q3 2023 O'Reilly Automotive Inc Earnings Call

[music].

Welcome to the O'reilly Automotive, Inc. Third quarter 2023 earnings call.

My name is Holly and I will be your operator for today's call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session.

During the question and answer session. If you 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 Holly.

Good morning, everyone and thank you for joining us during today's conference call, we will discuss our third quarter 2023 results and our outlook for the remainder of the year.

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

Before we begin this morning, I would like to remind everyone that our comments today contain forward looking statements and.

And we intend to be covered by and we claim the protection under the Safe Harbor 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 to differ materially from any forward looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31 2022.

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 third quarter conference call participating on the call with me. This morning are our co presidents brand Beckham and Brent Kirby as well as 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'd like to begin today's call by congratulating team O'reilly on outstanding results in the third quarter and express my deep appreciation to our team of over 88000 professional parts people for their steadfast dedication to our customers.

This unwavering commitment to excellent customer service is the hallmark of O'reilly auto parts and the key to earning our customers' business every day.

Our team's ability to deliver sustained profitable growth as evidenced by a robust eight 7% increase in comparable store sales coupled with a 17% increase in diluted earnings per share for the third quarter.

Our results have exceeded our expectations throughout the year driven by the team's high level of execution.

Service and product availability are critical pieces of our value proposition and our ability to remain intensely focused on these fundamentals has continued to drive growth on both the professional and DIY sides of our business.

As we announced in July upon my retirement in January Brent Bakken will be promoted to the position of Chief Executive Officer, and Brent Kirby will be promoted to the role of company President.

Brad and Brendan a tremendous leaders, who bring world class ability.

Experience and passion to 30, I'm, sorry, yes, <unk> been passed into their new roles, even more importantly, Brian and Brian are incredible standard bearers of the O'reilly culture and I am very excited about what our future holds under their leadership.

Our transition of the operations of the company to Brad and Brent has progressed smoothly and seamlessly and as a result todays earnings call represents my last call as CEO.

Such it is appropriate for me to leave the bulk of our discussion of third quarter results to Brad Brent and Jeremy but before I turn the call over I would like to thank our shareholders for their continued confidence in and support of our company during my tenure as CEO.

Finally, I'd like to again, thank team O'reilly for your hard work and commitment to our customers.

It's been my absolute honor and privilege to work alongside you for the last 41 years with a front row seat to see you achieved so many incredible milestones along the road to success for O'reilly auto parts.

Even though I won't get to actively participate in the next chapter of our Companys success I'm still very excited for the many opportunities ahead and look forward to watching our company's continued growth and future success.

I'll now turn the call over to Brad Beckham Fred.

Thanks, Greg and good morning, everyone I would like to begin by congratulating team O'reilly on another excellent performance in the third quarter.

The ability of our team to deliver continued industry, leading sales performance requires a consistent and intense focus on our culture and the fundamentals of excellent customer service.

I would like to thank all of our team members for their hard work commitment and dedication to our great company.

Now I would like to walk through the details of our sales performance for the quarter on both the professional and DIY sides of our business. We spoke on our last call to the strong start to the quarter and July driven in part by extreme heat in many of our markets. As we were pleased to see these very strong volumes carry on throughout the quarter.

From a cadence perspective, we saw a similar top line outperformance in each month of the quarter as compared to both the expectations. We built into our plan coming into 2023 and the updated guidance. We provided on last quarter's conference call.

As we've discussed throughout 2023, our prior year comparisons get more challenging as we move throughout the back half of the year and this dynamic was reflected in the cadence of our comparable store sales in the third quarter with our strongest comps for the quarter in July and August However, on a two year stacked basis are performed.

Thats was much more consistent through the quarter with September only slightly below the full quarter performance due to a moderation of the hot weather benefit we realized earlier in the quarter.

While we did see outperformance during the quarter and categories impacted by heat such as cooling and HVAC.

We also experienced broad strength in application specific hard part categories as well as maintenance categories, such as oil and filters.

These dynamics give us confidence that while we did benefit from weather. It was not the primary driver of our above expectation result, and the sales we are generating and failure and maintenance categories indicate a healthy level of broad based consumer demand.

Our professional business continues to be the more significant outperformer and our team was able to deliver another quarter of mid teens comparable store sales growth in our professional business in the third quarter.

This outstanding growth was in line with the professional sales increase we achieved in the second quarter, while facing increasingly challenging prior year comparisons.

We are extremely pleased with our team's ability to gain share through consistently executing our business model and providing industry leading value to our professional customers.

Our expectation is to continue to grow our share in the professional business as we see plenty of opportunity in both new and existing markets to consolidate the overall <unk> market.

Turning to our DIY business, we were pleased to generate solid comparable store sales growth with our top line growth consistent with the first half of the year, even as we saw an expected moderation in the benefit from inflation.

In line with the trends we've seen this year, our DIY comparable store sales growth has been driven primarily by increased average ticket values. However, we were pleased to see positive DIY ticket count comps in the third quarter.

Our teams continue to execute our dual market strategy driving market share growth in our DIY business alongside our robust growth in professional.

However, our portion of the total DIY market share in the U S is still relatively low and we see continued DIY growth is a tremendous area of opportunity for our company.

Now I would like to provide some color on our average ticket and ticket count performance.

Average ticket growth was again in the mid single digits on a combined basis and was slightly larger slightly larger share of our comparable store sales increase while we are seeing the expected reduced benefit from same SKU inflation as we move throughout the year, our moderation and total average ticket growth has not been a <unk>.

<unk> due to offsetting strength, we've seen from parks complexity and product mix.

Moving forward, we expect a more normalized same SKU inflation benefit but are confident that future average ticket growth will be supported by increased parts complexity, which has been the primary historical driver of our average ticket.

Even though average ticket growth was the larger contributor to our comparable store sales growth. We are very pleased with our ticket count comps, which was the larger contributor to the outperformance versus expectations.

Our team's ability to out hustle and out service our competition for this increased traffic volume is paramount to ensuring these share gains translate into repeat business. It has never been more important to ensure that we have highly trained teams of professional parts people supported by superior product availability in every single.

One of our 6000 plus stores.

As I finish up our remarks on sales performance in the quarter I would like to highlight our updated full year sales guidance.

We have increased our full year comparable store sales guidance to a range of 7% to 8% from our previous range of 5% to 7% and increased our total sales guidance to a range of $15 $7 billion to $15 8 billion.

This update is reflective of our year to date performance through today's call, including a solid start to the quarter with October trends in line with how we exited the third quarter.

As we finish out 2023, our fourth quarter reflects our most challenging comparisons of the year as we lap that 9% comparable store sales increase in the fourth quarter last year and expect to see a fully normalized same SKU benefit.

Our outlook for the remainder of the year is consistent with the guidance we have maintained throughout 2023.

While we've been very pleased with the degree to which our performance has outpaced our expectations in the first nine months of 2023, we're always cautious as we approach. The last few months of the year, which historically can be volatile due to variability in winter weather and pressures consumers can face during the holiday shopping season.

As a reminder, our prior year comparisons are the most challenging in December as we benefited from broad based strength in weather related categories at the end of 2022.

Against this backdrop, we maintain a positive outlook on the fundamentals of our industry. We are confident that the key demand drivers for the aftermarket, including steady recovery in miles driven and a very favorable U S vehicle fleet dynamics are in place to support steady growth moving forward.

We also believe that our customers have remained resilient and are continuing to prioritize the maintenance of their existing vehicles in order to avoid taken on a payment for a higher priced newer vehicle.

As you have heard from me already today, we see lots of opportunities in our markets to grow faster than the industry.

Our team is charged up by the results, we're seeing from our solid execution of the basic fundamentals of our business that translate to success.

Next I would like to take some time to discuss our SG&A performance in the quarter SG&A as a percentage of sales was 31% a deleverage of 29 basis points from the third quarter of 2022, driven by an increase in SG&A per store of approximately eight 5%.

Our SG&A growth in the third quarter was above our expectations. So I want to provide some additional color on what drove the results in the third quarter.

As we saw in the first half of 2023, the majority of our outsized year over year SG&A growth is as compared to our historical growth rates was the result of planned investments and initiatives targeted at enhancing our long term operational strength.

Our spend on these items was largely in line with our expectations coming into the quarter and we remain pleased with the positive impact we are generating by reinvesting in our stores technology and most important in team O'reilly.

While these initiatives continue to play out as planned our total SG&A dollar spend per store in the third quarter was higher than we expected coming into the quarter.

This was driven by incremental costs necessary to support our significant comparable store sales outperformance, but which also resulted in better leverage of SG&A expenses than we saw in the second quarter.

Our focus remains on relentlessly pursuing the excellent customer service that strengthens the long term relationship we have with our customers and we will continue to be aggressive where we see opportunities to accelerate topline growth and in turn create leverage over time driving long term returns.

Based on our results in the third quarter and expectations for the remainder of the year. We now expect to see SG&A per store increased seven to seven 5% for the full year.

With this increase from prior guidance, we still expect our full year operating margin to come in within the range of $19, 8% to 23% of sales driven by leverage on our strong topline results expense.

Troll remains as important to the O'reilly culture as it always has and we will be judicious in how we manage our spend to ensure we are seeing long term results from the investments we make in the business.

This focus on profitable growth has drove our 17% increase in third quarter diluted earnings per share. We are updating our full year EPS guidance to $37 80.

To $38 30.

Representing an increase of 75 cents at the midpoint, reflecting the strong performance in the third quarter.

Before I turn the call over to Brad I would like to again, thank team O'reilly for their hard work and dedication to the O'reilly culture, Greg has been a tremendous leader for our company an incredible mentor to me and is a tough act to follow but I am very excited for the future of our company and our entire team is committed.

To our company's continued success now I'll turn the call over to Brent.

Thanks, Brad I would like to Echo, Greg and Brad and congratulating team O'reilly on the outstanding performance in the third quarter. They.

The continuation of our strong sales performance and proven ability to outperform the market is a testament to our team's unwavering commitment to excellent customer service.

To thank all of our team members for their dedication to our company and to our customers.

Now I will cover our third quarter gross margin results, what we're seeing in the competitive environment and provide some updates on our store and distribution growth inventory investments and capital expenditure plans.

Starting with gross margin our third quarter gross margin of 51, 4% was 46 basis point increase from the third quarter of 2022, and just above our expected range.

We are pleased with the stability of our gross margin results as our third quarter continued the strong trend we saw in the second quarter our.

Gross margin for the third quarter faced pressure from the sustained strong performance in our professional business, creating a customer mix headwind, but we have been able to offset these headwinds through improved acquisition costs and outstanding support from our supplier partners.

Pricing to both DIY and professional customers has remained rational within the industry.

We continue to see modest inflation in the third quarter and remained very successful in passing along increases in product acquisition cost and other inflationary pressures in selling price.

While our quarter to quarter gross margin rate can see normal fluctuations from seasonality and product sales mix and leverage of distribution costs relative to overall volumes the stability of our results in light of the share gains we're experiencing demonstrates our team's ability to win share.

Share through service and product availability.

As a result of our solid year to date performance, we are maintaining our full year gross margin guidance of 58 to 51, 3%.

But would now expect to come in within the top half of this range.

Inventory per store finished the quarter at $758000, which was up 4% compared to the beginning of the year. We would now expect our average inventory per store increased to finish the year in a range between our original guidance of 2% growth and the current levels driven by our continued.

Opportunistic investments to support our sales momentum.

Our AP to inventory ratio at the end of the third quarter was 134% inline with the beginning of the year and slightly better than expectations driven by strong sales volumes and inventory turns we now expect to finish 2023 at a similar level.

The health of our supply chain, and resulting store in stock positioning continues to be a competitive strength.

Optimizing our assortments across our D C hub and store network, while simultaneously partnering with our supplier community to achieve industry, leading fill rates is absolutely playing a key role in our exceptional sales results and we continue to regard inventory availability as a critical priority for our business.

Alongside the investments, we're making in inventory. We also remain focused on leveraging the benefits of the tiered nature of our distribution model.

This strategy has been an important aspect of our supply chain for many years and begins with placing distribution centers in large metro areas to provide same day availability to a wide range of skus for our customers.

Strategically located hub stores augment our SKU availability on a more localized basis and represent the very important second tier within our distribution supply chain.

We continually evaluate this network, including the number location and size of our hub stores to ensure that all our stores have the best access to inventory in their respective markets.

Next I would like to discuss our capital investments and expansion opportunities beginning with the investments we are making in our distribution network.

As we discussed on last quarters call. We are very pleased with the successful opening of our Guadalajara, Mexico D. C. In July.

But are also excited on today's call to announce two additional expansion projects that we currently have underway.

First our distribution teams are actively working on a relocation of our Atlanta D. C, which is a large project that will enable expanded more efficient store servicing capabilities within that market as.

As well as providing direct import processing capability within this new facility.

This new 690000 square foot building is expected to be complete by the end of 2024 and will increase the number of stores. We can support in this critical market by 100 stores.

Next we have an exciting distribution expansion project that is in progress and Stafford, Virginia, where we have purchased aside and began construction on a large new distribution facility that will service, the Washington D C, Maryland, and Virginia corridor.

The new DC will be approximately 530000 square feet and our initial plan is to build out capacity to serve is 350 stores.

Holly: Welcome to the O'Reilly Automotive Inc. 3rd quarter, 2023 earnings call. My name is Holly and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. During the question and answer session, if you have a question, please press star one on your touchtone phone.

We anticipate this distribution center will be open and operational by the middle of 2025.

And we could not be more excited about the store development opportunity. This provides us and what is largely untapped market area for a rally today.

Our distribution center teams are diligently executing on these projects.

Jeremy Fletcher: I will now turn a call over to Jeremy Fletcher. Mr. Fletcher, you may begin. Thank you, Holly.

Enthusiastically looking forward to further expanding our DC footprint and our industry leading parts availability.

Jeremy Fletcher: Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our 3rd quarter, 2023 results and our outlook for the remainder of the year. After our prepared comments, we will host a question in the 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.

Turning to store growth and expansion, we successfully opened 40 stores during the third quarter, bringing our year to date total to 140 net new store openings for 2023.

Our team is confident we will achieve the goal of 180 to 190 net new store openings for 2023.

Jeremy Fletcher: 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 10K for the year-ended December 31st, 2022 and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call.

As we noted in our press release yesterday, we announced our 2024 new store opening target of 190 to 200 net new store openings.

Our strong new store performance continues to prove that our investments in both new stores and the necessary distribution infrastructure to support those stores is an attractive use of capital.

Total capital expenditures for the first nine months of 2023 or $754 million a considerable increase over prior year, but reflective of the attractive opportunities, we see to deploy capital against projects and initiatives to drive long term growth and enhance our competitive positioning.

Included within our press release yesterday was an update to our full year capital expenditure guidance to a range of $900 million to $950 million from the previous range of $750 million to $800 million. The primary driver of this increase was the progress that we've made on the new Virginia distribution expansion project as well.

Greg Johnson: At this time, I would like to introduce Greg Johnson. Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts 3rd quarter conference call. Just fitting on the call with me this morning, our co-presidents Brad Beckham and Brent Kirby, as well as Jeremy Fletcher, our chief financial officer. Greg Hensley, our executive chairman, and David O'Reilly, our executive vice chairman, are also present on the call. I'd like to begin today's call by congratulating Team O'Reilly on outstanding results in the third quarter and express my deep appreciation to our team of over 88,000 professional parts people for their steadfast dedication to our customers.

A higher mix of owned new stores and the pace of investment in technology and store infrastructure initiatives.

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'd also like to thank team O'reilly for their continued hard work and outstanding performance in the third quarter.

Greg Johnson: This unwavering commitment to excellent customer service is the hallmark of O'Reilly Auto Parts and the kids earning our customers business every day. Our team's ability to deliver sustained, profitable growth is evidenced by a robust 8.7% increase in comparable store sales, coupled with a 17% increase in diluted earnings per share for the third quarter. Our results have exceeded our expectations throughout the year, driven by the team's high level of execution. Service and product availability are critical pieces of our value proposition, and our ability to remain intensely focused on these fundamentals has continued to drive growth on both the professional and DIY sides of our business.

Now we will cover some additional details on our third quarter results and guidance for the remainder of 2023.

For the quarter sales increased $405 million, driven by an $8, 70% increase in comparable store sales and a $78 million non comp contribution from stores opened in 2022 and 2023.

Not yet entered the comp base.

Our third quarter effective tax rate was 23, 2% of pretax income comprised.

Comprised of a base rate of 24, 3% reduced by a one 1% benefit from share based compensation.

With both of the components of our rate in line with the third quarter of 2022.

Greg Johnson: As we announced in July, upon my retirement in January, Brad Beckham will be promoted to the position of chief executive officer, and Brent Kirby will be promoted to the role of company president. Brad and Brent are tremendous leaders who bring world class ability. Experience and passion to their new roles. Even more importantly, Brad and Brent are incredible standard bearers of the Eorali culture and I'm very excited about what our future holds under their leadership.

Our third quarter base tax rate was in line with our expectations with a total effective tax rate below our expectations due to higher than planned benefits from share based compensation.

For the full year of 2023, we continue to expect an effective tax rate of 22, 5% comprised of a base rate of 23, 4% reduced by a benefit of 0.9% per 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.

Greg Johnson: Our transition to the operations of the company to Brad and Brent has progressed smoothly and seamlessly and as a result, today's earnings call represents my last call as CEO. As such, it is appropriate for me to leave the bulk of our discussion of third quarter results to Brad, Brent and Jeremy but before I turn the call over, I would like to thank our shareholders for their continued confidence in and support of our company during my tenure as CEO.

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

Now, we will move on to free cash flow and the components that drove our results.

Free cash flow for the first nine months of 2023 was $1 7 billion versus $1 $9 billion in the same period in 2022.

Greg Johnson: Finally, I'd like to again thank Team O'Reilly for your hard work and commitment to our customers. It's been my absolute honor and privilege to work alongside you for the last 41 years with a front row seat to see you achieve so many incredible milestones along the road to success for Eorali auto parts. Even though I won't get to actively participate in the next chapter of our company's success, I'm still very excited for the many opportunities ahead and look forward to watching our company's continued growth and future success.

The reduction was the result of the increase in capital expenditures Brent discussed in his remarks as well as a lower working capital benefit from reduction in net inventory this year versus 2022.

These headwinds were partially offset by growth in income and they benefit from favorable timing of tax payments and disbursements for renewable energy tax credits.

For 2023 weeks continue to expect free cash flow at a range of one nine to $2 2 billion with an.

Brad Beckham: I'll now turn the call over to Brad Beckham. Brad. Thanks, Greg and good morning everyone.

Brad Beckham: I would like to begin by congratulating Team O'Reilly on another excellent performance in the third quarter. The ability of our team to deliver continued industry leading sales performance requires a consistent and intense focus on our culture and the fundamentals of excellent customer service. I would like to thank all of our team members for their hard work, commitment and dedication to our great company. Now, I'd like to walk through the details of our sales performance for the quarter on both the professional and DIY sides of our business.

Kris and expected cash flow from operations offsetting the increase to our Capex guidance.

Moving on to debt, we finished the third quarter with an adjusted debt to EBITDAR ratio of 193 times, which is up compared to our end of 2022 ratio of 184 times. The increase in total indebtedness was comprised of borrowings under our commercial paper program, which we successfully launch.

In the third quarter.

We continue to be below our leverage target at two five times and plan to prudently approach that number overtime.

Brad Beckham: We spoke on our last call to the strong start to the quarter in July, driven in part by extreme heat in many of our markets as we were pleased to see these very strong volumes carry on throughout the quarter. From a cadence perspective, we saw a similar top line out performance in each month of the quarter as compared to both the expectations we built into our plan coming into 2023 and the updated guidance we provided on last quarter's conference call.

We continue to be pleased with the execution of our share repurchase program and during the third quarter, we repurchased 852000 shares at an average share price of $938 and 11.

Total investment of $800 million.

Year to date through our press release yesterday, we repurchased three 4 million shares at an average share price of $879 74.

Brad Beckham: As we have discussed throughout 2023, our prior year comparisons get more challenging as we move throughout the back half of the year and this dynamic was reflected in the cadence of our comparable store sales in the third quarter with our strongest comps for the quarter in July and August. However, on a two-year stack basis, our performance was much more consistent through the quarter with September only slightly below the full quarter performance due to a moderation of the hot weather benefit we realized earlier in the quarter.

For a total investment of $3 billion.

We remain very confident that the average repurchase price inclusive of the current excise tax cost is 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 capital excess capital to our shareholders.

As a reminder, the updated EPS guidance outlined by Brad earlier includes the impact of shares repurchased through this call, but does not include any additional share repurchases.

Brad Beckham: While we did see out performance during the quarter in categories impacted by heat such as cooling and HVAC, we also experienced broad strength and applications with specific hard part categories as well as maintenance categories such as oil and filters. These dynamics give us confidence that while we did benefit from weather, it was not the primary driver of our above expectation results and the sales we were generating in failure and maintenance categories indicate a healthy level of broad-based consumer demand.

Finally, before I open up our call to your questions I would like to again, thank the O'reilly 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 Holly the operator to return to the line and we will be happy to answer your questions.

Thank you we will now begin the question and answer session. If you have a question. Please press star one on your phone if you will.

Brad Beckham: Our professional business continues to be the more significant out performer and our team was able to deliver another quarter of mid-teens comparable store sales growth in our professional business in the third quarter. This outstanding growth was in line with the professional sales increase we achieved in the second quarter while facing increasingly challenging prior year comparisons. We are extremely pleased with our team's ability to gain share through consistently executing our business model and providing industry leading value to our professional customers.

Just to be removed from the queue. Please press star two.

We ask that law posing your question you. Please pickup your handset that's listening on speaker phone to provide optimum sound quality.

Please limit yourself to one quick.

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.

Our first question for today is coming from Michael Lasser at UBS.

Good morning, Thanks, a lot, particularly my question your guidance implied guidance for the fourth quarter implies a significant slowdown in the business.

Brad Beckham: Our expectation is to continue to grow our share in the professional business as we see plenty of opportunity in both new and existing markets to consolidate the overall DIFM market. Turning to our DIY business, we were pleased to generate solid comparable store sales growth with our top line growth consistent with the first half of the year, even as we saw an expected moderation in the benefit from inflation. In line with the trends we have seen this year, our DIY comparable store sales growth has been driven primarily by increased average ticket values.

Outside of the uncertainty associated with the weather and the holidays is there anything that you would point to that would have influenced such a slowdown or deceleration in the and the performance of the comp.

Brad Beckham: However, we were pleased to see positive DIY ticket count comps in the third quarter. Our teams continue to execute our dual market strategy driving market share growth in our DIY business alongside our robust growth in professional. However, our portion of the total DIY market share in the US is still relatively low and we see continued DIY growth as a tremendous area of opportunity for our company.

Hey, good morning, Michael It's Brad I'll take a stab at that and see what the other guys want to follow up with you.

Great question as you know Michael I think generally speaking directly to your question. The answer is not really you know as you know as we always say the fourth quarter can be the most volatile from the weather standpoint from the holidays.

I think the key is just to remind you what I said earlier that we feel really good about how October is going so far.

Generally.

First few weeks of the quarter had been very.

Very consistent with what we saw with the exit rate, especially from two years, two and three year stack basis, but we still have almost half the quarter to go.

Brad Beckham: Now I would like to provide some color on our average ticket and ticket count performance. Average ticket growth was again in the mid single digits on a combined basis and was slightly larger was the slightly larger share of our comparable store sales increase. While we are seeing the expected reduced benefit from same-skid inflation as we move throughout the year, our moderation in total average ticket growth has not been a significant due to offsetting strength we have seen from parks complexity and product mix.

December is a huge comparison and.

We just want to make sure that we're just being cautious overall, but generally speaking we're really happy with the way volumes are holding up and are really excited to do everything we can to finish the quarter strong here.

Maybe Michael the only thing I would add is just the character of the characterization of a significant slowdown in the in our business.

We really spoke at all year to just the timing of how how that one year comps going to look as comparisons just naturally get more challenging as we move through the year.

Brad Beckham: Moving forward, we expect a more normalized, same-skid inflation benefit but are confident that future average ticket growth will be supported by increased parks complexity, which has been the primary historical driver of our average ticket. Even though average ticket growth was the larger contributor to our comparable store sales growth, we are very pleased with our ticket count comps which was the larger contributor to the outperformance versus expectations. Our team's ability to out-hustle and out-service our competition for this increased traffic volume is paramount to ensuring these share gains translate into repeat business. It has never been more important to ensure that we have highly trained teams, a professional parks people supported by superior product availability in every single one of our 6,000 plus stores.

While there is some time left in the quarter and we've been pleased with our performance all year long.

What we're anticipating as we finish out the year is pretty consistent with with where we've been it's not reflective of anything that we're seeing when we think about our sales from a week to week volume understanding the seasonality of the business as we move into the fourth quarter.

Unfortunately, we went up against some really tough compares but but that's also a good spot to be in and it really nothing has changed in how we think about the current pace of the business.

I got you.

For O'reilly tough compares as a way of life, but thats okay.

My second question is on the outlook for SG&A spending it is obvious that the returns on the investments that youre, making.

Brad Beckham: As I finish up our remarks on sales performance in the quarter, I would like to highlight our updated four-year sales guidance. We have increased our full-year comparable store sales guidance to a range of 7 to 8 percent from our previous range of 5 to 7 percent and increased our total sales guidance to a range of 15.7 billion dollars to 15.8 billion dollars. This update is reflective of our year-to-date performance through today's call, including a solid start to the quarter with October trends in line with how we exited the third quarter.

Been quite productive in light of the market share that O'reilly has been achieving would you expect a similar rate of SG&A dollar growth on a per store basis, moving through 2020 for other opportunities to invest significant amounts that would generate.

Generates.

Similar returns thank you.

Thanks, Michael is another another good question there.

Well as we've said we're extremely pleased with the returns we've seen from investing back in the business as you know there's a big difference for us at O'reilly between investments and judiciously managing our expenses like I said earlier expense controls a huge part of what we do.

Brad Beckham: As we've finished out 2023, our fourth quarter reflects our most challenging comparisons of the year, as we lap the 9% comparable store sales increase in the fourth quarter last year and expect to see a fully normalized same skew benefit. Our outlook for the remainder of the year is consistent with the guidance we have maintained throughout 2023. While we've been very pleased with the degree to which our performance has outpaced our expectations in the first nine months of 2023, we are always cautious as we approach the last few months of the year, which historically can be volatile due to variability in winter weather and pressures consumers can face during the holiday shopping season. As a reminder, our prior year comparisons are the most challenging in December, as we benefited from broad base strength in weather related categories at the end of 2022.

You know, we never liked to delever, except in the case of this year. When we know that we were playing from a position of strength and we knew there were some areas that are really just paying off we're very happy with the ROI. We've seen on on all our initiatives, where we've reinvested back in the business. This year as you know a lot of that is some catch up.

From Covid the years of Covid and everything that we wanted to spend that we didn't quite get to so.

Michael Honestly you know we're in the middle of working on our plan for 2024 that always starts with the top line number and then we back into what we feel like is the right thing to do for short mid and long term, especially when it comes to those mid and long term returns and so.

Brad Beckham: Against this backdrop, we maintain a positive outlook on the fundamentals of our industry. We are confident that the key demand drivers for the aftermarket, including steady recovery and miles driven and a very favorable US vehicle fleet dynamics are in place to support steady growth moving forward. We also believe that our customers have remained resilient and are continuing to prioritize the maintenance of their existing vehicles in order to avoid taking on a payment for a higher priced newer vehicle.

We look forward to talking about our our plan in February 24, we just want to be careful talking about 24, just yet.

Understood and good luck to take Greg Johnson. Thank you so much.

Thanks, Michael.

Your next question is coming from Bret Jordan from Jefferies.

Hey, good morning, guys.

Good morning, Brett.

As you guys continue to gain market share in the space could you talk a little bit about where you are seeing both that coming from smaller.

Brad Beckham: As you have heard from me already today, we see lots of opportunities in our markets to grow faster than the industry. Our team is charged up by the results we are seeing from our solid execution of the basic fundamentals of our business that translate to success.

Independents or national accounts, and then I guess.

He has got to be a share donor as well. So is that also the smaller WD is that youre picking up from or are things changing in market share relative to larger peers.

Brad Beckham: Next, I would like to take some time to discuss our S-GNA performance in the quarter. S-GNA as a percentage of sales was 30.1%, a deal average of 29 basis points from the third quarter of 2022, driven by an increase in S-GNA per store of approximately 8.5%. Our S-GNA growth in the third quarter was above our expectations, so I want to provide some additional color on what drove the results in the third quarter.

Hey, Thanks, Brad another good question.

Honestly, Brad as we you know you've heard us say for a long time, it's always hard to tell all the moving pieces.

We have extreme respect for we take all of our competitors extremely seriously the big for the independents, we have tough tough competitors on both the DIY and the professional side of the business. You know, we we spend our time focusing on where are we are our own worst competitor, meaning that we always have exit.

Brad Beckham: As we saw in the first half of 2023, the majority of our outsize year-over-year S-GNA growth as compared to our historical growth rates was the result of planned investments and initiatives targeted at enhancing our long-term operational strength. Our spend on these items was largely in line with our expectations coming into the quarter, and we remain pleased with the positive impact we are generating by reinvesting in our stores, technology, and most important in Team O'Reilly.

Houston opportunities, we always have areas to get better.

Honestly to try to answer your question the best I can.

We feel like it's a little bit of all of the above you know we feel like that everything from store operations execution service levels, continuing to work on our retention and turnover.

Got to brag on our supply chain team continued improvements with our product availability, our assortments and just really getting away from the Covid hangover so to speak when it comes to our supply chain bread and the entire supply chain team have done just an incredible job, but generally speaking I think it's a little bit of everything you mentioned I think.

Brad Beckham: While these initiatives continue to play out as planned, our total S-GNA dollar spend per store in the third quarter was higher than we expected coming into the quarter. This was driven by incremental costs necessary to support our significant comparable store sales outperformance, though which also resulted in better leverage of S-GNA expenses than we saw in the second quarter.

Pretty broad based from a customer standpoint, and we think it's probably fairly broad based from from where it can be potentially coming from from a competitor aspect as well.

Brad Beckham: Our focus remains on relentlessly pursuing the excellent customer service that strengthens the long-term relationship we have with our customers, and we will continue to be aggressive where we see opportunities to accelerate top line growth, and in turn, create leverage over time driving long-term returns. Based on our results in the third quarter and expectations for the remainder of the year, we now expect to see SGNA per store increase 7 to 7.5% for the full year.

Okay, and I guess sort of a follow up to that now you are saying there is such a big dispersion between execution on the distribution side are there any increased M&A opportunities either large regional distributors that are private that you sort of see to maybe fill in some of that geographic white space you have out there.

<unk> sort of between the Midwest and those Virginia D C.

Yeah sure I'll read I'll leave that off and then let Brent hit on kind of the first part of your question. There I'll just speak maybe to the M&A opportunities. You know we're as you know we're always looking for opportunities when it comes to Greenfield expansion, but also strategic acquisitions that make a lot of sense from acquiring not only real estate.

Brad Beckham: With this increase from prior guidance, we still expect our full year operating margin to come in within the range of 19.8 to 20.3% of sales, driven by leverage on our strong top line results. And we will be judicious in how we manage our spend to ensure we are seeing long-term results from the investments we make in the business. This focus on profitable growth has drove our 17% increase in third quarter diluted earnings per share. We are updating our full year EPS guidance to $37.80 to $38.30 representing an increase of 75 cents at the midpoint reflecting the results. The strong performance in the third quarter.

Eight locations, but great teams of parts people that understand the professional side of the business.

Teaching those type companies how to be a dual market company and so we're hopeful that it may be as things evolve. The next year or two you know valuations and things like that could look a little bit more attractive than they have in the last couple of years, but still a bit hard to say, but absolutely we are.

We're always looking at the one store deals the the our job our customers that we still have that potentially don't have an exit plan one store deals to store deals all the way up to some of the regional things and we're hopeful that as we continue to get more aggressive in the upper mid Atlantic and the true North east that some of the other opportunities come to light.

Brad Beckham: Before I turn the call over to Brent, I would like to, again, thank Timo Riley for their hard work and dedication to the O'Reilly culture. Greg has been a tremendous leader for our company and incredible mentor to me and is a tough act to follow. But I am very excited for the future of our company and our entire team is committed to our company's continued success.

Yeah, and Brett I would just add maybe on the distribution and supply chain side of things certainly the.

The exciting news about our Stafford facility that I talked about in my prepared comments you know we're super excited about getting another <unk>.

Large D C and the mid Atlantic, we see that as a big untapped geography for us and we're certainly investing to begin to take more advantage of that opportunity.

Brent Kirby: Now I'll turn the call over to Brent. Thanks, Brad.

Brent Kirby: I would like to echo Greg and Brad in congratulating Timo Riley on the outstanding performance in the third quarter. The continuation of our strong sales performance and proven ability to outperform the market is a testament to our team's unwavering commitment to excellent customer service. I want to thank all of our team members for their dedication to our company and to our customers.

When you think about our distribution infrastructure you know for us it's something we're constantly looking at and.

Talked about the strength of where our Dcs are located in our Dcs or where the cars are where the people are in.

We don't see that as an opportunity necessarily.

<unk> are you know we want to own that we want to run it we want to operate it the way we always have and we are always looking at hub store opportunities and how they augment the tiers of our Dcs and where they are and how we can be.

Brent Kirby: Now I will cover our third quarter gross margin results, what we are seeing in the competitive environment and provide some updates on our store and distribution growth, inventory investments and capital expenditure plans. Starting with gross margin, our third quarter gross margin of 51.4% was 46 basis point increase from the third quarter of 2022 and just above our expected range. We are pleased with the stability of our gross margin results as our third quarter continued the strong trend we saw in the second quarter.

The first in class in every market that we operate in in terms of parts availability. So we're going to continue to do that.

We certainly see that that geography, as a continued opportunity moving forward.

Great. Thank you.

Yep. Thank you Barbara.

Your next question for today is coming from Daniel Enbrel from Stephens.

Brent Kirby: Our gross margin for the third quarter based pressure from the sustained strong performance in our professional business, creating a customer mix headwind. But we have been able to offset these headwinds through improved acquisition cost and outstanding support from our supplier partners. Pricing to both DIY and professional customers has remained rational within the industry. We continue to see modest inflation in the third quarter and remained very successful in passing along increases in product acquisition costs and other inflationary pressures in selling price.

Yeah, Hey, good morning, everybody. Thanks for your question.

Good morning, Dino heated.

So up on Bretts question about partners there just curious how would be onboarding.

Any hiccups or learnings of the won so much business so quickly.

Any bottlenecks or limiting growth in that kind of behind somebody with infrastructure investments you guys are talking about.

Maybe I'll start there. This is this is jeremy.

A little bit a little bit of interference on yourself, but I think the question really focus around what we what we've learned as we've as we've seen the share accelerate within our business.

Brent Kirby: While our quarter to quarter gross margin rate can see normal fluctuations from seasonality and product sales mix and leverage of distribution costs relative to overall volumes, the stability of our results and light of the share gains we are experiencing demonstrates our team's ability to win share through service and product availability. As a result of our solid year-to-date performance, we are maintaining our full-year gross margin guidance of 50.8 to 51.3 percent. But would now expect to come in within the top half of this range?

In in <unk>.

How is that impacting how we move forward.

For sure.

The increased volume that we're picking up you know those are are completely new customers that are unfamiliar to us in the markets that we're in.

Every market, we exist and we spend on the professional side of our business a considerable amount of time understanding the market understanding the shops formula those relationships.

For us the focus is always on how do we how do we create value for those for those customers. How do we ensure that we're partnering with their businesses and help them be successful even as we grow our business.

Brent Kirby: Inventory per store finished the quarter at $758,000, which was up 4 percent compared to the beginning of the year. We would now expect our average inventory per store increase to finish the year in a range between our original guidance of 2 percent growth and the current levels, driven by our continued opportunistic investments to support our sales momentum. Our AP to inventory ratio at the end of the third quarter was 134 percent, in line with the beginning of the year and slightly better than expectations, driven by strong sales volumes and inventory turns.

Sure as we've seen more and more opportunities to earn business over the course of really the last several years during the course of the pandemic, but especially as we've seen.

The ability to grow on top of growth with those customers.

Our touch points, when we get that extra opportunity to provide outstanding service are just critical to being able to compound that growth and I think as much as anything what we've seen as we moved through the last several quarters is is our ability to provide excellent service to.

Brent Kirby: We now expect to finish 2023 at a similar level. The health of our supply chain and resulting store in stock positioning continues to be a competitive strength, optimizing our assortments across our DC, hub and store network while simultaneously partnering with our supplier community to achieve industry-leading fill rates is absolutely playing a key role in our exceptional sales results. And we continue to regard inventory availability as a critical priority for our business.

So really.

To demonstrate the values of Brett talked about earlier that we can provide excellent excellent service great.

Informed technical people within our stores that understand the business can support the work of our professional customers incredible parts availability.

Our broader support has has provided.

An excellent value and continues to give us more and more opportunities.

That's helpful. And then maybe I just wanted to dig into the SG&A has been a little bit more.

Brent Kirby: Alongside the investments we are making in inventory, we also remain focused on leveraging the benefits of the peer nature of our distribution model. This strategy has been an important aspect of our supply chain for many years and begins with placing distribution centers in large metro areas to provide same-day availability to a wide range of skews for our customers. Strategically located hub stores augment our skew availability on a more localized basis and represent the very important second tier within our distribution supply chain. We continually evaluate this network, including the number, location and size of our hub stores, to ensure that all our stores have the best access to inventory in their respective markets.

Specific initiatives you can unpack, maybe what youre spending on whether it's tech for your professional customers or delivery efficiency does anything to help us.

Clarify what you're spending on so we can better understand how it is driving sales. Thanks.

Yeah.

Yes, I mean, I think the general things that we've talked about are similar to how we've spoken to this item throughout throughout the course of the year.

We're always I guess somewhat reluctant to get too far down and Luis we think they're great investments for our company.

Just competitively, we we want to see them play out for a long period of time, but for sure we've made a concerted effort.

Two.

To continue to invest within our team and we've talked about and enhanced benefits PTO and form 8-K and improvements and just more broadly how we think about.

Brent Kirby: Next, I would like to discuss our capital investments and expansion opportunities, beginning with the investments we are making in our distribution network. As we discussed on last quarter's call, we are very pleased with the successful opening of our Guadalajara Mexico DC in July. But are also excited on today's call to announce two additional expansion projects that we currently have underway. First, our distribution teams are actively working on a relocation of our Atlanta DC, which is a large project that will enable expanded more efficient store servicing capabilities within that market, as well as providing direct import processing capability within this new facility.

Our store managers manage their work weekends and things along those lines, we continue to invest in the image and appearance of our stores in our fleet vehicles and ensuring that get the safest vehicles on the road possible and then technology continues to be a huge ongoing investment as we think about all areas of the business, where we can bring.

Brent Kirby: This new 600 and 90,000 square foot building is expected to be complete by the end of 2024, and will increase the number of stores we can support in this critical market by 100 stores. Next, we have an exciting distribution expansion project that is in progress in Stafford, Virginia, where we have purchased a site and began construction on a large new distribution facility that will serve as the Washington DC, Maryland, and Virginia corridor. The new DC will be approximately 530,000 square feet, and our initial plan is to build out capacity to service 350 stores.

<unk> tools online to support the work that our store teams are doing and taking care of our customers.

Fair enough.

And best of luck.

Thank you Daniel.

Your next question for today is coming from Zach Adam from Wells Fargo.

Hey, Good morning, guys I think we're getting a lot of mixed data points on the state of the industry and putting your outperformance aside for a minute curious to hear if you think the broader category is slowing or not and to what extent the impact of a broader consumer slowdown would have on the aftermarket.

Yeah, Hey, Zach it's Brad I'll take a stab at that and then I'll, maybe flip it over to Brad to talk generally about what we're seeing or not seeing on some of those fronts, but.

Generally speaking Zach we're just not seeing that.

Brent Kirby: Partners. We anticipate this distribution center will be open and operational by the middle of 2025. And we could not be more excited about the store development opportunity. This provides us in what is largely an untapped market area for O'Reilly today. Our distribution center teams are diligently executing on these projects and are enthusiastically looking forward to further expanding our DC footprint and our industry leading parts availability.

Uh huh.

As part of our results.

As you can imagine you know, it's just hard for us to say that we're really seeing that when I look at.

Our positive DIY ticket count that I cited in our prepared comments I mean, that's that's encouraging for us.

We're very excited about the execution of our teams on the DIY side as well as the as well as the professional side you know when I review the.

The data that comes in every week from our sales team on the professional side you know we have all our comments in sales call recaps they come through our CRM.

Brent Kirby: Turning to store growth and expansion, we successfully opened 40 stores during the third quarter, bringing our year-to-day totals to 140 net new store openings for 2023. Our team is confident we will achieve the goal of 180 to 190 net new store openings for 2023. As we noted in our press release yesterday, we announced our 2024 new store opening target of 190 to 200 net new store openings. Our strong new store performance continues to prove that our investments in both new stores and the necessary distribution infrastructure to support those stores is in that track of use of capital.

That's not to say that.

Within the service space that I see comments that some shops may be a little bit slower than other shops, but it's just hard for us to say with our results and what we hear and see on the Street every day that there is an overall slowdown we're just not seeing that again.

As times, you see that some shops may be seeing a little less car counts and others just like on the service side or excuse me just like on the the aftermarket parts side of our industry. You know Theres. Some service providers that are taking more share and there could be some that are losing some share. So it's a.

It's just hard to parse all of that out and say that we're seeing an overall slowdown.

Brent Kirby: Total capital expenditures for the first nine months of 2023 were $754 million. A considerable increase over prior year, but reflective of the attractive opportunities we see to deploy capital against projects and initiatives to drive long-term growth and enhance our competitive positioning. Included within our press release yesterday was an update to our full-year capital expenditure guidance to a range of 900 to $950 million from the previous range of $750 to $800 million.

And we're really just not seeing that yet.

Yes.

<unk> I would add to I mean.

To Echo Brad's comments, but it's really a tremendous testament to the culture and the execution of our teams out there our sales teams our distribution center teams I mean, they have just executed to an outstandingly high level and continue to and not that we're immune from any of those things that may happen in the greater macroeconomic.

Background, Budd, but we just have not seen the effect of that through the Q3 results and we're not seeing it as we get into Q4 at this point. So we're going to continue to stay focused on executing serving the need and meeting the demand out there and we feel like good things will continue to follow.

Brent Kirby: The primary driver of this increase was the progress that we have made on the new Virginia distribution expansion project, as well as a higher mix of owned new stores and the pace of investment and technology and store infrastructure initiatives.

Yes that may be the only I would add to that.

Brent Kirby: To close my comments, I want to once again thank Team Arali for their hard work and continued dedication to our customers.

I'm sorry, just.

One more thing I know you kind of talk to how do we think about that moving forward I think from a long term perspective, our view on the resiliency of our industry is unchanged. We've been we've been through different cycles of.

Jeremy Fletcher: Now I'll turn the call over to Jeremy. Thanks, Ram.

Jeremy Fletcher: I would also like to thank Team Arali for their continued hard work in outstanding performance in the third quarter. Now we will cover some additional details on our third quarter results and guidance for the remainder of 2023. For the quarter, sales increased $405 million, driven by an 8.7% increase in comparable store sales and a $78 million non-comp contribution from stores opened in 2022 and 2023 that have not yet entered the comp base.

<unk>.

Of challenges to the consumer in the past and there are always the potential for short term.

Shocks and impacts and fluctuations that might last a quarter or two and we're always cautious in how we think about that near term outlook, but with the underlying core drivers of demand within the aftermarket continues to be resilient and strong the value proposition there.

That investing in your existing vehicle has four for a consumer is very attractive. We think it continues to get more attractive with the vehicle dynamic in and people are still using their cars for so much of what encompasses daily life with miles driven.

Jeremy Fletcher: Our third quarter effective tax rate was 23.2% of pre-tax income comprised of a base rate of 24.3% reduced by a 1.1% benefit from share-based compensation. With both of the components of our rate in line with the third quarter of 2022, our third quarter base tax rate was in line with our expectations. With the total effective tax rate below our expectations due to higher than plain benefits from share-based compensation. For the full year of 2023, we continue to expect an effective tax rate of 22.5%, comprised of a base rate of 23.4% reduced by a benefit of 0.9% for share-based compensation.

Steadily expected to increase so so those things are all I think positive as we think about about really the longer term and that's really where our focus is as we think about building our business.

Okay, Great that's great color and with respect to competition. It seems like the wds had been operating with one hand tied behind their back in the early days post the pandemic, but with those businesses now back in stock and ready to recapture some of the share that they lost do you think we could be entering a P.

Jeremy Fletcher: Our fourth quarter effective tax rate is expected to be lower than the other three quarters due to the tolling of certain tax periods. Variations in the tax benefit from share-based compensation can't create fluctuations in our quarterly tax rate.

<unk> of choppy or pricing, particularly as we lap the double digit inflation in the industry.

Yes. This is Brad.

First thing I would say is I know, we all in the industry anecdotally felt like potentially some of the smaller players could have had a little bit more.

Jeremy Fletcher: Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first nine months of 2023 was 1.7 billion dollars versus 1.9 billion dollars in the same period in 2022. The reduction was the result of the increase in capital expenditures Brent discussed in his remarks as well as a lower working capital benefit from reduction in net inventory this year versus 2022. These headwinds were partially offset by growth and income and they benefit from favorable timing of tax payments and disbursements for renewable energy tax credits.

Adversity when it came to supply during the pandemic and I think that was probably true and I think it's probably accurate for the most part looking across the market that they're probably healthier than ever I think the key with that though is that is that we had our opportunities too.

Brendan I and none of us were totally happy with how we performed during the pandemic everything from merchandising to inventory control purchasing down to the distribution operations are our bar at O'reilly, knowing how important availability and replenishment is as high and so we werent totally happy with.

Jeremy Fletcher: For 2023 weeks continue to expect free cash flow at a range of 1.9 to 2.2 billion dollars with an increase in expected cash flow from operations offsetting the increase to our CAPX guys. Moving on to that, we finished the third quarter with an adjusted debt to EBITAR ratio of 1.93 times which is up compared to our end of 2022 ratio of 1.84 times. The increase in total indebtedness was comprised of borrowings under our commercial paper program which we successfully launched in the third quarter.

With where we were and.

We've made incremental improvement as well, but I think the key to remember Zach on on.

When we had opportunities to pick up share and we were able to maybe move from third call to second or we got the opportunity through <unk>.

Lack of supply from somebody else and we were able to step in there with relationship service and back that up with availability that that business as you know Zach, especially on the professional side is incredibly sticky.

Those relationships and that trust. It takes time to build that into gain that business. It takes a long time to gain that business and it is.

Jeremy Fletcher: We continue to be below our leverage target at 2.5 times in plain to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program and during the third quarter we repurchase 852,000 shares and an average share price of 938 dollars and 11 cents for total investment of 800 million dollars. Your today through our press release yesterday we repurchased 3.4 million shares and an average share price of 879 dollars and 74 cents for a total investment of 3 billion dollars.

It would be challenging or excuse me it would be it would be.

Out of the norm to lose that business very quickly when you have really stepped in when somebody else fell down and so you know.

I think we just got to remember that that business is very sticky the relationships are sticky and once that's built.

Very stable on the pricing no. We just we don't feel that way, we're not seeing that and we really don't see that as a as an issue moving forward I mean time will tell but as you know Zach when we rolled out our pro pricing initiative. For example, those that was very rifle approach strategically.

Jeremy Fletcher: We remain very confident that the average repurchase price inclusive of the current excess tax cost is 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 capital excess capital to our shareholders. As a reminder, the updated EPS guidance outlined by Brad earlier includes the impact of shares repurchase through this call but does not include any additional share repurchases.

<unk> towards some of the lines that maybe some of the WD and two steppers were more aggressive than we were and we purposely moved down and still stay north of where a lot of those priced price points, where we didn't come down to really compete knowing that.

Jeremy Fletcher: Finally, before I open up our call to your questions, I would like to again thank the O'Reilly, the entire O'Reilly team for their continued dedication to the company's long-term success. This concludes our prepared comments.

They can move further down in a lot of those folks live off volume anyway, and so we just don't see that as a near.

Near term threat.

And Zack maybe just maybe to add a couple of comments to what brad's already said on the pricing, especially from a WD perspective.

Holly: At this time I would like to ask Collie the operator to return to the line and we will be happy to answer your questions. Thank you.

If you think about what we did some of the things we did do to get stronger through some of the challenges of Covid that Brad talked about we've continued to diversify our supply chain.

Holly: We will now begin the question and answer session. If you have a question, please press star one on your phone. If you wish to be removed from the queue, please press star two. 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 yourselves to one 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.

Across more multiple suppliers for various lines, especially in our proprietary brands. We continue to see a proprietary brands grow so we and we continue.

Be pleased with what that is yielding in terms of our gross margins and how they were able to continue to enhance those moving forward I feel like we're in a much better strategic position probably than where we're going to into COVID-19.

If there is something irrational that that does come up out there, but we're just not seeing it at this point.

Michael Lasser: Our first question for today is coming from Michael Lasser at UBS. Good morning, thanks a lot for kicking my question. Your guidance, implied guidance for the fourth quarter implies the significant slowdown in the business outside of the uncertain and the associated with the weather and the holidays.

I appreciate the thoughts guys. Thanks for the time.

Yes. Thank you.

Your next question for today is coming from Simeon Gutman from Morgan Stanley.

Hey, Good morning, everyone. First question is on gross margin it step back a bit from price investments and we've come to accept that it probably won't snap back anytime soon anything new on that as you get leverage over some of the distribution costs are you reinvesting those is there any reason why we could see gross margin click back up.

Brad Beckham: Is there anything that you would point to that would have influenced such a slowdown or deceleration in the performance of the comp? Hey, good morning, Michael. It's Brad. I'll take a stab at that and see what the other guys want to follow up with. Great question. As you know, Michael, I think generally speaking directly to your question. The answer is not really. As you know, as we always say, the fourth quarter can be the most volatile from the weather standpoint, from the holidays.

Yeah, Hey, Sami it's Jeremy.

We continue to focus on gross profit dollar growth. So obviously in a few months here, we'll speak to where we were we think 'twenty four might look good.

Brad Beckham: I think the key is just to remind you what I said earlier that we feel really good about how October is going so far. Generally, the first few weeks of the quarter have been very consistent with what we saw with the exit rate, especially from two and three year stack basis. But we still have almost half the quarter to go. December is a huge comparison and we just want to make sure that we're just being cautious overall.

But at this stage in our hope I think from a longer term perspective, as we think about our gross margins.

Really kind of comes out what we can do incrementally to improve the unit volume out of our stores, which helps us leverage <unk> expenses.

Thank you.

That obviously during the course of the pandemic was pressured as the supply chain has got more challenging and feel like that that we've got an opportunity from a more normalized.

Standpoint to do a bit better there as we take market share.

Brad Beckham: But generally speaking, we're really happy with the way volumes are holding up and really excited to do everything we can to finish the quarter strong here. Yeah, maybe Michael, the only thing I would add is just the characterization of a significant slowdown in our business. You know, we've really spoken all year to just the timing of how that one year comp is going to look as comparisons just naturally get more challenging as we move through the year.

Certainly I think the value that that we have as a partner to our suppliers to be an excellent way for them to grow their business and to.

In the game market share themselves.

As high a continues to be.

Uh huh.

I think.

Favre kind of a favored nation status for us and it obviously that's important for us as we as we work to manage our cost over the course of time and I think what we've seen during the course of some of our positive. This year has been the ability to do incrementally better on the acquisition cost perspective, but our focus is.

Brad Beckham: You know, while there is, you know, sometime left in the quarter and we've been pleased with our performance all year long, you know, what we're anticipating as we finish up the year is pretty consistent with where we've been. It's not reflective of anything that we're seeing when we think about our sales from a week to week volume understanding the seasonality, the businesses moving in the fourth quarter. Unfortunately, we're going up against some really tough compares, but that's also a good spot to be in and really nothing has changed in how we we think about the current pace of the business. I got you for a Riley tough compares is a way of life, but that's okay.

Always been how do we how do we partner well with their supplier base and our community how do we.

How do we improve availability so that we can drive top line sales growth and then and then gross profit dollars that flow from them.

Thanks, and then a quick follow up this is to clarify some of the points. Jeremy you made I think Brad made around market share.

It is the story of the incredible market share of this year is that you said more new accounts that you had in service before.

Brad Beckham: My my second question is on the outlook for S. Sheenay spending. It's obviously that the returns on the investments that you're making have been quite productive in light of the market share that O'Reilly has been achieving. Would you expect a similar rate of S. Sheenay dollar growth on a per store basis moving through 2024 are there opportunities to invest such significant amounts that would generate some similar returns. Thank you. Thanks Michael.

<unk> is being a primary distributor meeting number one on the call is that market share penetration keeps ticking higher.

Yes. Thanks for that question Simeon I would want it to be any confusion there, it's a little bit hard for us.

Two.

Really classify a new account versus not into account.

Our store teams are.

Man they.

Their relentless and understanding every dollar of business that's done in a market. We we will especially as you think about going into a new market, we're going to we're going to canvas that marketing and we're going to take around our credit app. So we're going to want to sign up everybody to be at O'reilly customer from day. One so the concept of of completely new customers is a little bit forward for us.

Brad Beckham: Another another good question there. Well, as we've said, you know, we're extremely pleased with the returns we've seen from investing back in the business. As you know, you know, there's a big difference for us at O'Reilly between investments and judiciously managing our expenses like I said earlier expense controls a huge part of what we do. You know, we never like to deliver except in the case of this year when we know that we were playing from a position of strength and we knew there's some areas that are really just paying off.

Brad Beckham: We're very happy with the ROI we've seen on on all our initiatives where we've reinvested back in the business this year. As you know, a lot of that is some ketchup, you know, from from COVID, the years of COVID and everything that we wanted to spend that we didn't quite get to. So, you know, Michael, honestly, you know, we're in the middle of working on our plan for 2024 that always starts with the top line number and then we back into what we feel like is the right thing to do for short mid and long term, especially when it comes to those mid and long term returns.

It's really how do you continue to grow a larger share of that of that wallet and I think what we've seen just broad based over the strong momentum. We've had is that is that we've been able to grow share on both.

Our larger accounts that were heavy.

Purchases of O'reilly parts, and then and maybe we already have first call status all the way down what the culture you would've looked like.

So it's pretty broad based for us I don't know if theres any one type of customer group that that we think is outside that moves the needle versus the broader population.

Okay. Thanks, good luck.

Okay. Thanks that makes Simeon.

Your next question for today is coming from Greg Melick with Evercore ISI.

Brad Beckham: And so we look forward to, you know, talking about our plan in February 24. But we just want to be careful talking about 24 just yet. I understand. Good luck to Greg Johnson. Thank you so much. Thanks, Michael.

Hey, guys. Good morning, it's Mike <unk> on for Greg Thanks for taking the question.

I wanted to ask first off if I could about the impact of inflation in the quarter can you just give us a sense of the level there and then.

Do you see inflation.

Bret Jordan: Your next question is coming from Bret Jordan from Jeffries. Hey, good morning, guys. Good morning, Bret.

Just basically turning into more disinflation in the fourth quarter or should we be thinking about the potential for outright deflation to come in.

Brad Beckham: As you guys continue to gain market share in the space, could you talk a little bit about where you're seeing in both that coming from smaller D.I.F.M, independence or national accounts? And then I guess, obviously it's got to be a share donor as well. So is that also the smaller WDs that you're picking up from or things changing in market share relative to larger peers? Hey, thanks, Bret. Another good question. You know, honestly, Bret, you've heard a say for a long time, it's always hard to tell, you know, all the moving pieces, you know, we, we have extreme, you know, respect for, we take all our competitors extremely seriously, the, you know, the big four, the independence, we have tough, tough competitors on both the D.I.Y, and the professional side of the business.

Yes, Mike Thanks for the question third quarter was.

It was kind of low single digits, and that's kind of continuing to ratchet down this year completely in line with what we expect.

We don't by any means anticipate deflation within our business, we think our industry over the long term has has been able to hold the price levels.

Uh huh.

There's a lot of inventory investment, it's the non discretionary spend.

For certain.

Even as some of us realize some cost improvements we've been able to hold all of their prices and that's what we would anticipate seeing moving forward, we've really sort of as we've exited third quarter and we think about fourth quarter.

We would really say in Nebraska in his comments a normalized inflation environment.

Brad Beckham: You know, we, we spend our time focusing on, you know, where are, we are our own worst competitor, meaning that we always have execution opportunities, we always have areas to get better. You know, honestly, to try to answer your question the best I can, you know, we, we feel like it's a little bit of all the above, you know, we feel like that everything from store operations, execution, service levels, continuing to work on our retention and turnover, got a brag on our supply chain team, continued improvements with our product availability, our sortments and just really getting away from the COVID hangover, so to speak, when it comes to our supply chain Brent and the entire supply chain team have done just an incredible job, but generally speaking, I think it's a little bit of everything you mentioned, I think, pretty broad base from a customer standpoint and we think it's probably fairly broad base from, from where it could be potentially coming from, from a competitor aspect as well.

We will have a little bit of it is going to be in that low single digits.

No no no.

Tailwind, but really more consistent with what we've historically seen within the business with.

With the opportunity from an added benefit perspective that as parts become more complex and the new applications are.

Better technology of the engineered bearings and the complexity is going to drive that.

Overall value are the changing dynamic of parts to <unk>.

Cause average tickets to go up and then it it's our challenge to continue to grow those tickets just on how we provide great service to our customers.

And just from a gross margin comparison I just wanted to ask anything to know from a LIFO perspective, as we head into the fourth quarter and or any impact from that on the third quarter.

No really as we think about our how we report and to think about our gross margin.

Brad Beckham: Okay, and I got sort of a follow up for that, you know, now you're seeing there's such big dispersion between execution on the distribution side, are there any increased M&A opportunities, you know, either large regional distributors that are private, that you sort of see to, you know, maybe fill in some of that geographic white space you have out there, you know, around sort of between the Midwest and these Virginia DC. Yeah, sure, I'll read that off and then let Brent hit on kind of the first part of your question there.

We view our reported gross margin is the best measurement of.

How we think about the business most most current reflection of what we're paying for parts today.

In in don't really I think internally or externally view.

Some of the changes in the in the Navajo LIFO reserves on our balance sheet to be as relevant for US is what we think the top line reported margin is in it.

We continue to expect that to be to be stable as we maintained our guidance really all year long on that item.

Brad Beckham: I'll just speak maybe to the M&A opportunities, you know, we're, as you know, we're always looking for opportunities when it comes to Greenfield expansion, but also strategic acquisitions that make a lot of sense from acquiring not only real estate and locations, but great teams, apart from people that understand the professional side of the business and, you know, teaching those type companies how to be a dual market company. And so, you know, we're hopeful that maybe as things evolve the next year or two, you know, valuations and things like that could look a little bit more attractive than they have in the last couple of years, but still a little bit hard to say, but absolutely, you know, we're always looking at, you know, the one-store deals, the, our job or customers that we still have that potentially don't have an exit plan, you know, one-store deals, two-store deals all the way up to some of the regional things. And, you know, we're hopeful that as we continue to get more aggressive in the upper Mediterranean and the true Northeast that some other opportunities come to life.

Thank you good luck.

Thanks, Mike.

Your next question is coming from Chris <unk> from J P. Morgan.

Good morning, guys and thanks for taking my question and best of luck and congratulations Greg.

My first question is trying to dial in a little bit more on the SG&A I guess.

Can you talk or help us think about how much of the SG&A is just nationally more of that variable relative to other retail models given how you.

Incentivize and reward our employees so like if you know.

If if comps were up three to five and we backed out the PTO adjustment, but then you ended up doing.

<unk>.

Now how would you think about that normalized SG&A per store growth of two to two and a half what would that go to holding everything else constant.

Brent Kirby: Bret, I would just add maybe on the distribution and supply chain side of things. Certainly the exciting news about our staffer facility that I talked about in my prepared comments. We're super excited about getting another large DC in the mid-Atlantic. We see it as a big untapped geography for us and we're certainly investing to begin to take more advantage of that opportunity. When you think about our distribution infrastructure for us, it's something we're constantly looking at and talked about the strength of where our DCs are located and where our DCs are, where the cars are, where the people are.

Yeah. Thanks, Chris I appreciate the question.

There are I think a lot of moving pieces in that especially in a year like this year. When we've when we've done some things that are outside of our normal cadence of spend is or relates to the investments that we've made.

We still continue to operate at a relatively high fixed cost model, just because of the nature of <unk>.

Of having so many units in the store teams that are that are there. So that does benefit us as we as we grow sales and I'd be.

Reluctant I think little bit the quantified try to parse out those individual numbers, but but I think there is a positive certainly in.

Brent Kirby: We don't see that as an opportunity necessarily to use 3PLs or we want to own that, we want to run it, we want to operate it the way we always have, and we're always looking at hub-store opportunities and how they augment the tearing of our DCs and where they are and how we can be first in class in every market. We get that we operate in in terms of parts availability, so we're going to continue to do that. We certainly see that geography as a continued opportunity moving forward.

In a year like this one really seen such an acceleration in growth. There is just a level of activity that that requires and thats a lot of what we saw here in the third quarter part of that is incentive comp, but but part of it is.

Especially on the professional side of the business, we don't want to ever be in a spot where we can get parts out to our shops really quickly and manage that business. So.

Brent Kirby: Thank you. Thanks for that.

It is a little bit of a mix between between the two and I think any kind of a little bit more of a normalized sales environment, we expected that we'd be in a pretty stable place but.

Daniel Imbro: Our next question for today is coming from Daniel Embro from Stevens. Yep. Hey, good morning, everybody. Thank you for your question. Good morning, Daniel. Follow-up on a breath question about Marcus here. Just curious, how are we on-boarding? How do you do customer progress? Any hiccups or learnings as you want? So much business so quickly that any bottlenecks that are limiting growth in that kind of behind some of these infrastructure investments that you guys are talking about?

But for sure our our our approach this year has been as we have gained the momentum that we have have.

The opportunity to accelerate that growth by investing in the business has been it's been a key priority for us.

Understood and.

If we went back at 10 to 15 years ago. There was always this view that there was a view that you actually originally agreed with with that like private label parts aren't going to work for certain type of cars, whether it's a foreign foreign nameplates certain mechanics didn't like private label and you know there is this push to have.

Jeremy Fletcher: Yeah, maybe I'll start there. This is Jeremy and a little bit of interference on your sound. But I think the question really focused around what we learned as we've seen the share accelerate within our business and how is that impact on how we move forward? You know, for sure, the increase volume that we're picking up, you know, those are completely new customers that are unfamiliar to us in the markets that we're in.

Access to.

OEM parts, particularly on the foreign nameplates side.

Do you think the industry has changed in any way, where where there is the customer is more the mechanics more amenable and how is your capabilities around that changed over time.

Hey, Chris This is Brad Thats, a great question and I'll take a stab at it and then maybe flip it to brand for any other commentary on private label.

Jeremy Fletcher: You know, every market we exist in, we spend on the professional side of our business, considerable amount of time, understanding the market, understanding the shops, formulas, relationships. For us, the focus is always on how do we create value for those customers? How do we ensure that we're partnering with their businesses to help them be successful even as we grow business? For sure, as we've seen more and more opportunities to earn business over the course of really last several years, during the course of pandemic, especially as we've seen the ability to grow on top of growth with those customers.

I think your overall I think it's accurate what you said you know this is my 27th year with the company and when you think back to the.

Early two thousands when you think about the nineties.

Just in my experience back then.

It was less quality in some cases going into private label boxes back then and you know we sold against that for a long long time with a lot of success with more of the.

The national brands and.

And the National company so to speak.

Jeremy Fletcher: Our touch points, when we get that extra opportunity to provide outstanding service are just critical to being able to compound that growth. And I think as much as anything, what we've seen as we move through the last several quarters is our ability to provide excellent service to really demonstrate the values of Brad talked about earlier that we can provide excellent service. This is great, informed technical people within our stores that understand the business can support the work of our professional customers, incredible parts of availability. And just a broader support has provided an excellent value and continues to give us more and more opportunities.

But really is really the last couple of decades have evolved.

The quality that goes into our exclusive national brands is unbelievable a lot of those same parts not only meet OE OE quality fit form and function, but they exceed and so you think about the success, we've had with important direct specifically to what youre talking about with the European nameplates along with.

The Asian, I mean, we couldnt have more confidence in the quality fit form and function, that's going into that OE box and it is again not only.

Okay.

And a lot of cases, it's better than OE.

So I do think that dynamic has changed some over the decades and so we have a lot of confidence in what's going into our exclusive national brand box and we feel really good we have a lot of opportunity to continue to get better.

Jeremy Fletcher: That's helpful, and maybe I want to dig into the S.G.A, spend a little bit more on the specific initiatives you can unpack, or maybe what you're spending on, whether it's tech for your professional customers or delivery efficiency, does anything they help unpack or clarify what you're spending on so we can better understand how it's driving them. Thanks. Yeah, I mean, I think that the general things that we've talked about are similar to how we've spoken to this item throughout the course of the year.

At at gaining share in the specifically European shops, we have a lot of tremendous competitors out there that have been really great at that for a long time, but we feel really good about all those things so Brent any other thoughts on that.

The label I think maybe just a couple other thoughts on private label, what we've seen you know.

Brad called out the success of our proprietary brand import drag but.

Jeremy Fletcher: And we're always, I guess, somewhat reluctant to get too far down in the weeds. We think they're great investments for our company and we, you know, just competitively, we want to see them play out for one period of time. But for sure we've, we've made a concerted effort to, you know, to continue to invest within our team. And we've talked about an enhanced benefits, PTO inform, OK, improvements and just more broadly how, how we think about how our short managers manage their work week and things along those lines.

As we continue to build more quality inspect in the box. We just continue to see more adoption and uptake for those we launched we have a break best brake line. We got good better best we've got full line designs in our proprietary brands now relaunch break bread select pro earlier this year, we're seeing tremendous.

Both uptake on both the DIY and the professional side again customers looking for quality and Theyre looking for.

Something thats going to meet their need at the time of need so.

Jeremy Fletcher: We continue to invest in the image and appearance of our stores and our fleet vehicles and ensuring that get the safest vehicles on the road possible and then technology continues to be a huge ongoing investment. As we think about all areas, the business where we can bring better tools online to support the work that our short teams are doing and taking care of our customers.

We've talked a little bit about proprietary brand penetration now being over 50% of our revenue. We continue to see that number grow we continue to see strong adoption of those proprietary brands, both with our DIY and professional customers. So we'll continue to lean into that strategy and we will also continue to have a national brand as part of our land is on.

And where we think it has relevancy in that particular category.

Makes sense, thanks, very much guys.

Zach Adam: Your next question for today is coming from Zach Adam from Wells Fargo. Hey, good morning, guys. I think we're getting a lot of mixed data points on the state of the industry and putting your outperformance aside for a minute, curious to hear if you think the broader category is slowing or not.

Thanks, Chris.

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

Hey, this is Brad. Thank you Holly we would like to conclude our call today by thanking the entire O'reilly team for your unwavering dedication and the great results you have generated throughout 2023, I would like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and full year results in February. Thank you.

Brad Beckham: And to what extent the impact of a broader consumer slowdown would have on the aftermarket. Yeah, hey, Zach, it's Brad. I'll take a stab at that and then I may flip it over to Brent to talk generally about, you know, what we're seeing and not seeing on some of those fronts. But, you know, generally speaking, Zach, you know, we're just not seeing that, you know, we, you know, as part of our results, as you can imagine, you know, it's just hard for us to say that we're really seeing that.

Okay.

Thank you. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.

Brad Beckham: You know, when I look at, you know, our positive DIY ticket count that I cited in our prepared comments. I mean, that's encouraging for us. You know, we're very excited about the execution of our teams on the DIY side as well as the professional side, you know, when I review the data that comes in every week from our sales team on the professional side, you know, we have all our comments and sales call recaps that come through our CRM.

Brad Beckham: You know, that's not to say that, you know, that within the service space that I see comments that some shops may be a little bit slower than other shops. But it's just hard for us to say with our results and what we hear and see on the street every day that there's an overall slowdown. We're just not seeing that. Again, there's times you see that some shops may be seeing a little less car count than others and just like on the service side, or excuse me, just like on the the aftermarket parts side of our industry, you know, there's some service providers that are taking more share and there could be some that are losing some share.

Brad Beckham: So, you know, it's just hard to parse all that out and say that we're seeing an overall slowdown when we're really just not seeing that. Yeah, and Zach, I would add to, I mean, you know, to echo Brad's comments, but it's really a tremendous testament to the culture and the execution of our teams out there, our sales teams, our distribution center teams, I mean, they have just executed to an outstandingly high level and continue to and not that we're immune from many of those things that may happen in the greater macroeconomic, you know, background, but we just have not seen the effect of that, you know, through the Q3 results.

Brad Beckham: And we're not seeing it as we get into Q4 at this point. So we're going to continue to stay focused on executing, serving the need and meeting the demand out there. And we feel like good things will continue to follow.

Brent Kirby: Yes, that's maybe the only thing I would add to that. I'm sorry, just one more thing. I know you kind of talked to how do we think about that moving forward. I think from a long term perspective, our view on the resiliency of our industry is unchanged. We've been through different cycles of challenges to the consumer in the past. And there are always the potential for short-term shocks and impacts and fluctuations that might last a quarter or two.

Brent Kirby: And we're always cautious on how we think about that near-term outlook. But the underlying core drivers of demand within the aftermarket continue to be resilient and strong. The value proposition that investing in your existing vehicle has for a consumer is very attractive. We think it continues to get more attractive with the vehicle dynamic. And people are still using their cars for so much of what encompasses daily life with miles driven, you know, steadily expected the increase. So those things are all I think positive as we think about about really the longer term.

Zach Adam: And that's really where our focus is as we think about building our business. Okay, great. That's great color. And with respect to competition, it seems like the WDs had been operating with one hand tied behind their back in the early days post the pandemic.

Brad Beckham: But with those businesses now back in stock and ready to recapture some of the share that they lost, do you think we could be entering a period of choppy or pricing, particularly as we lap the double digit in inflation in the industry? Yeah, Zach is Brad. Well, the first thing I would say is I know we all in the industry anecdotally, you know, felt like potentially some of the smaller players could have had a little bit more adversity when it came to supply, you know, during the pandemic.

Brad Beckham: And I think that was probably true. And I think it's probably accurate for the most part looking across the market that they're probably healthier than ever. I think the key with that though is that is that we had our opportunities to, you know, we, you know, Brent and I and none of us were totally happy with how we performed during the pandemic. Everything from merchandising to inventory control, purchasing down to distribution operations, our bar at O'Reilly, you know, and how important availability and replenishment is is high.

Brad Beckham: And so, you know, we weren't totally happy with where we were. And, you know, we've made incremental improvement as well. But I think the key to remember Zach on, you know, when we had opportunities to pick up share and we were able to, you know, maybe move from third call to second or we got the opportunity through, you know, lack of supply from somebody else and we were able to step in there with relationship service and back that up with availability.

Brad Beckham: That that business is, you know, Zach, especially on the professional side is incredibly sticky, you know, those relationships and that trust, it takes time to, to build that and to gain that business. It takes a long time to, to gain that business and it, it would be challenging or excuse me, it would be, it would be out of the norm to lose that business very quickly when you've really stepped in when somebody else fell down.

Brad Beckham: And so, you know, I think we just got to remember that that business is very sticky, the relationships are sticky and once that's built, it's very stable. On the pricing, no, we just, you know, we don't feel that way. We're not seeing that and we really don't see that as an issue moving forward. I mean, you know, time will tell, but as you know, Zach, you know, when we rolled out our pro pricing initiative, for example, you know, that was very rifle approach strategically geared toward some of the lines that maybe some of the WDs and two steppers were more aggressive than we were and we purposely, you know, move down and still stayed north of where a lot of those price points where we didn't come down to, you know, really compete, you know, knowing that, you know, that they can move further down.

Brad Beckham: And a lot of those folks live off all you many way. And so we just don't see that as a near term threat. Yeah. And Zach, maybe just maybe to add a couple of comments to what Brad's already said on the pricing, especially from a WD perspective. You know, if you think about what we did some of the things we didn't do to get stronger, you know, through some of the challenges of COVID that Brad talked about.

Brad Beckham: You know, we've continued to diversify our supply chain, you know, across more multiple suppliers for various lines, especially in our proprietary brands. We continue to hear proprietary brands grow. So we, and we continue to, you know, be pleased with what that is yielding in terms of our gross margins and how they were able to continue to enhance those moving forward. We feel like we're in a much better strategic position, probably the more we're going into COVID. If there is something irrational that does come up out there, but we're just not seeing it. I appreciate the thoughts, guys. Thanks for the time.

Mike Montani: Thank you. Your next question for today is coming from Simeon Gutman from Gordon Stanley. Hey, good morning everyone.

Simeon Gutman: First question is on a gross margin. It's step back a bit from price investments and we've come to accept that it probably won't snap back anytime soon. Anything new on that as you get leverage over some of the distribution costs. Are you reinvesting those? Is there any reason we can see gross margin click back up? Yeah, I mean, Jeremy, we continue to focus on gross profit, dollar growth. So, you know, obviously in a few months here, we'll speak to where we think 24 might look.

Simeon Gutman: But, but at this stage, in our hope, I think from a longer term perspective as we think about our gross margins, really kind of comes to what we can do incrementally. To improve the unit volume out of our stores, which helps us leverage DC expenses. I think, you know, that that obviously during the course of the pandemic was pressured is the supply chain got more challenging and feel like that we've got an opportunity from a more normalize standpoint to do a bit better there as we take market share, you know, certainly I think the value that that we have as a partner to our suppliers to be an excellent way for them to grow.

Simeon Gutman: They're business and to end the game market share themselves is is is is high continues to be. I think of a favor kind of a favor nation status for us and it and obviously, you know, that's important for us as we as we work to manage our costs over the course of time. And I think what we've seen during the course of some of our pauses this year, have been the ability to do, you know, incrementally better on on the act.

Simeon Gutman: The acquisition cost perspective, but our focus has always been how do we how do we partner well with the supplier base and our communities, how do we, how do we improve availability so that we can drive top by sales growth and then and then goes profit dollars that flow from them. Thanks. And then a quick follow up. This is to clarify some of the points Jeremy, you made I think Brad made around market share.

Simeon Gutman: In the story of the incredible market share of this year, is that you said more new accounts that you had in service before or is being a primary distributor, meaning number one on the call is that market share penetration and keeps ticking higher. Yeah, thanks for that question to me and I wouldn't want to be any confusion there. It's a little bit hard for us to really classify a new account versus not an account.

Simeon Gutman: You know, our store teams are, man, they, they're relentless in understanding every dollar business that's done in the market. We, we will especially think about going into a new market. We're going to, we're going to canvas that market and we're going to take around our credit apps. So we're going to want to find out everybody to be a no Riley customer from day one. So the concept of completely new customers is a little bit foreign for us.

Simeon Gutman: It's, it's really how do you continue to grow a larger share of that of that wallet. And I think what we've seen just brought base over the the strong momentum we've had is that is that we've been able to grow share on on both our larger accounts that that were, you know, heavy purchase of a variety of parts and then and maybe we already have first call sad if all the way down what the culture you want to look like.

Simeon Gutman: So it's it's pretty broad base for us. I don't know. There's any one type of customer group that that we think is outside the mood for needle versus the broader population. Thank you, thank you, thank you, thank you, thank you, thank you, thank you.

Chris Horvers: Your next question for today is coming from Greg Melich with Evercore ISI. Hey guys, good morning, it's Mike Montani on for Greg, thanks for taking a question. I wanted to ask first off if I could about the impact of inflation in the quarter. Can you just give us a sense of the level there? And then, you know, do you see inflation just basically turning into more disinflation in the fourth quarter? Or should we be thinking about, you know, the potential for outright deflation to come in?

Chris Horvers: Yes, Mike, thanks for the question. You know, third quarter was, you know, it was kind of low single digits and that kind of continued ratchet down this year completely in law line with what we expect. We don't buy any means anticipate deflation within our business. We think our industry over the long term has been able to hold the price levels. You know, with, there's a lot of inventory investment. It's a non discretionary spend for certain, you know, even as some of us realize some cost improvements.

Chris Horvers: We've been able to hold on our prices down. That's what we would anticipate seeing moving forward. You know, we've really sort of as we've exited third quarter and we think about fourth quarter. We would, we would really say in a, in a bracket in his comments, a normalized inflation environment. You know, we'll have a little bit of it. It's going to be in that low single digits, not a, not a, not a huge tail rim, but really more consistent with what we've historically seen within the business.

Chris Horvers: With the opportunity from an added benefit perspective that as parts become more complex and the new applications are have better technology, the engineered better, the complexity is going to drive the overall value of the changing dynamic of parts to cause average tickets to go up. And then it, you know, it's our challenge to continue to grow those tickets just on how we provide great service to our customers. And just from a gross margin comparison, I just wanted to ask anything to know from a life of perspective, you know, as we head into the fourth quarter and or any impact from that on the third quarter.

Chris Horvers: No, really, as we think about our how we report and think about our gross margin, you know, we do our reported gross margin is the best measurement of how we think about the business most most current reflection of what we're paying for parts today. And don't really, I think internally or externally view some of the changes in the in the nominal night life of reserves on our balance sheet to be as relevant for us is what we think the top line report margin is. And you know, we continue to expect that to be to be stable as we maintained our guidance really all your long on that item. Thank you. Good luck. Thanks, Mike.

Chris Horvers: Your next question is coming from Chris Horvers from JP Morgan. Good morning, guys. And thanks for taking my question and best of luck. And congratulations, Greg. My, my first question is trying to dial in a little bit more on the SNA. I guess, you know, can, can you talk, help us think about how much of the SNA is just naturally more valuable relative to other retail models given how you, you know, incentivize and reward your employees though like if, you know, if, if counts, we're up three to five and we backed out the PTO adjustment, but then you ended up doing an eight.

Chris Horvers: You know, how would you think about that normalized SNA per store growth of two to two and a half? You know, what, what would that go to holding everything else constant? Thanks Chris, appreciate the question. I think a lot of moving pieces in that, especially in a year like this year when we've done some things outside of our normal cadence of spend as it relates to the investments that we've made. We still continue to operate a relatively high fixed cost model just because of the nature of having so many units in the store teams that are there.

Chris Horvers: So that does benefit us as we grow sales and be reluctant, I think a little bit to quantify and try to parse out those individual numbers, but I think there is a positive certainly in a year like this one, we've seen such an acceleration and growth. There's just a level of activity that that requires and that's a lot of what we saw here in the third quarter. Part of that since then have come, but part of it is, especially on the professional side of the business way.

Chris Horvers: We don't want to ever be in the spot where we can't get parts out to our shops really quickly and manage that business. So it is a little bit of a mix between the two and I think in kind of a little bit more of a normalized sales environment, we expect that we'd be in a pretty stable place, but for sure our approach this year has been as we have gained the momentum that we have, have the opportunity to accelerate that growth by investment.

Chris Horvers: And the business has been, it's been a key priority for us. Understood. And you know, if we went back at 10 to 15 years ago, there was always this view that there was a view that you actually originally agreed with with that, you know, that like private label parts aren't going to work for certain type of cars, whether it's a foreign, foreign name played certain mechanics didn't like private label, and, you know, there was this push to have access to OEM parts, particularly on the foreign name plate side.

Chris Horvers: Do you think the industry has changed in any way where where there is the customer is more the mechanics more amenable? And how is your capabilities around that changed over time? Hey Chris, this Brad, that's a great question and I'll take a stab at it and then maybe flip it to brand for any other commentary on private label. And I think you're overall, I think it's accurate what you said, you know, this is my 27th year with the company when you think back to the, you know, the early 2000s and you think about the 90s, you know, just in my experience back then, there was less quality in some cases going into private label boxes back then.

Chris Horvers: And you know, we we sold against that for a long, long time with a lot of success with more of the national brands and the national company, so to speak. But really is really the last couple of decades have evolved the quality that goes into our exclusive national brands is unbelievable. You know, a lot of those same parts, you know, not only meet OE, OE quality fit form and function, but they exceed.

Chris Horvers: And so you think about the success we've had with import direct specifically to what you're talking about with the European name plates along with the Asian, I mean, we couldn't have more confidence in the quality fit form and function that's going into that OE box and it is again not only OE, it's in a lot of cases, it's better than OE. And so I do think that that dynamic has changed some over the decades.

Chris Horvers: And so we have a lot of confidence in what's going into our exclusive national brand box and we feel really good. We have a lot of opportunity to continue to get better, you know, at, you know, gaining, you know, share in the specifically European shops, we have a lot of tremendous competitors out there that have been really great at that for a long time. But we feel really good about all those things.

Chris Horvers: So Brandon, the other thoughts on the private label. I think maybe just a couple of the thoughts, you know, on private label, what we've seen, you know, Brad called out the success of our proprietary brand import direct. But, you know, as we continue to build more quality and spec in the box, we've just continued to see more adoption and an update for those, you know, we launched. We have our break best break line.

Chris Horvers: We got good better best. We've got full line designs in our proprietary brands now. We launched break best like pro earlier this year, we're seeing tremendous. Both uptake on both the DIY and the professional side. Again, customers looking for quality and they're looking for, you know, something that's going to meet their need at the time of need. So our, you know, we've talked a little bit about proprietary brand penetration now being over 50% of our revenue.

Chris Horvers: We continue to see that number grow. We continue to see, you know, strong adoption of those proprietary brands both with our DIY and professional customers. So we'll continue to lean into that strategy and we'll also continue to have a national brand as part of our line design and where we think it has relevancy in that particular category. [inaudible] Makes sense. Thanks very much, guys.

Holly: We have reached a lot of time for questions.

Brad Beckham: I will now turn the call back over to Mr. Greg Johnson for closing remarks. Hey, this is Brad. Thank you, Holly. We would like to conclude our call today by thanking the entire O'Reilly team for your unwavering dedication and the great results you have generated throughout 2023. I would like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and four year results in February. Thank you.

Holly: This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.