Q3 2024 O'Reilly Automotive Inc Earnings Call
Okay.
Speaker Change: Good day and welcome to the O'reilly automotive incorporated third quarter 2024 earnings call.
Sally: My name is Sally and I will be your operator for today's call.
Sally: At this time all participants are in a listen only mode.
Sally: Later, we will conduct a question and answer session.
Sally: During the question and answer session. If you have a question. Please press star one on your Touchtone phone.
Speaker Change: I'll now turn the call over to Jeremy Fletcher Mr. Fletcher you may begin.
Jeremy Fletcher: Thank you Ali good morning, everyone and thank you for joining us during today's conference call. We will discuss our third quarter 2024 results and our outlook for the remainder of the year.
Jeremy Fletcher: After our prepared comments, we will host a question and answer period.
Jeremy Fletcher: Before we begin this morning, I would like to remind everyone that our comments today contain forward looking statements.
Jeremy Fletcher: 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 1985.
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 guidance target or similar words.
Jeremy Fletcher: The company's actual results could differ materially from any forward looking statements due to several important factors described in the Companys latest annual report on Form 10-K for the year ended December 31, 2023 and <unk>.
Jeremy Fletcher: Other recent SEC filings the company assumes no obligation to update any forward looking statements made during this call.
Jeremy Fletcher: At this time I would like to introduce spread back.
Speaker Change: Thanks, Jeremy and good morning, everyone and welcome to the O'reilly Auto parts third quarter conference call participating on the call with me. This morning are Brent Kirby, our president and 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 would like.
Speaker Change: To begin our call today by thanking our over 92000 dedicated team members across North America for their incredible commitment to our customers during challenging conditions.
Speaker Change: Our teams our teams continued to deliver positive comparable store sales results and market share gains, which I will discuss in more detail in a moment.
Speaker Change: First like to highlight the tremendous resolve our team showed us they persevered through major weather events since our last call Hurricane Helene at the end of our quarter in September and Milton following shortly after our quarter end in October along with substantial flooding in North Carolina created some very trying circumstances for our team.
<unk>, our customers and our communities.
Speaker Change: Yeah.
Speaker Change: These events impact not only in the direct path of the storms, but also multiple teams across our store distribution and support networks, who actively prepare for the storms and navigate the recovery.
Speaker Change: Our business is built on people and relationships and our relentless commitment to providing excellent customer service to our customers is more critical than ever in a time of need.
Speaker Change: Our thoughts and prayers continue to be with the individuals and communities facing significant challenges in the aftermath of these storms.
Speaker Change: I'm, so very proud of the continued dedication of chemo rally to our customers and we stand ready to do our part as these communities rebuild.
Speaker Change: As we noted in our press release yesterday, our third quarter comparable store sales increased one 5% stacked on top of impressive eight 7% and seven 6% third quarter increases in 2023 and 2022, respectively.
Speaker Change: As impressive as our multi year sales growth has been our sales results for the third quarter of 2024 were below expectations and our high performance standards.
Speaker Change: We had a solid start to the quarter and July however, sales softened at the end of the month and these trends continued throughout much of August and September.
Speaker Change: As a result, the cadence of our sales performance relative to our expectations was fairly consistent during the third quarter with our team driving positive comp growth each month.
Speaker Change: We attribute the sales softness to a challenging industry demand backdrop I'll discuss in a moment in view of the weather impact in the quarter as neutral with the exception of the final week in September where we saw a modest headwind from hurricane Helene.
Speaker Change: Overall, our comparable store sales growth continues to be driven by the strength in our professional business, where our team delivered another quarter of mid single digit comps.
Speaker Change: Consistent with the first half of the year. The majority of our professional sales growth is being driven by growth in ticket counts.
Speaker Change: Our team is continuing to generate these share gains on top of mid teens professional comps in the prior year.
Speaker Change: In an industry built on service availability and strong customer relationships, our ability to not only defend the share we have taken but also to capture incremental business is concrete evidence of the incredible consistency and execution of our team.
Speaker Change: We are pleased with the sustained momentum we've been able to create in our professional business and see a long road of opportunity ahead of us in what remains a highly fragmented market.
Speaker Change: Our professional comps continued to be partially offset by pressure to DIY comparable store sales, which were down approximately 1% in the quarter due to negative ticket count comps.
Speaker Change: Average ticket values were positive on both sides of our business and included a benefit from same SKU inflation of approximately 1%.
Speaker Change: On a category basis, we remain encouraged by solid performance within maintenance categories, such as oil filters and spark plugs. We also continue to see customers prioritizing the better and best level products on the value spectrum.
Speaker Change: With as many customers trading up on the spectrum as those trading down to entry level products.
Speaker Change: Both of these dynamics reflects strong support of the value proposition for our consumers of maintaining and investing in an existing vehicle.
Speaker Change: The softness we are experiencing continues to be more pronounced in our discretionary categories, such as appearance chemicals accessories tools and performance parts.
Speaker Change: As we noted in the past these categories did not comprise a significant portion of our business and typically are not primary drivers of comparable store sales performance.
Speaker Change: That said this is an area where consumers can pullback when being more cautious with their spend that in turn create some volatility during pressure times.
Speaker Change: We are also seeing a trend of softness across some repair categories impacted by cumulative wear and tear on vehicles.
Speaker Change: We firmly believe that our experienced store teams of professional parts people supported by a robust tiered distribution network offer the best combination of service and availability in the industry.
Speaker Change: We remain confident in our ability to outperform the market within these repair cost categories as conditions improve.
Speaker Change: While we are relentless in pursuing every opportunity to improve our service levels and capture incremental business. We view. The results. We are experiencing now as indicative of broader pressure across the industry.
Speaker Change: We believe current industry headwinds will be short lived and remain confident in the long term fundamental drivers of demand supported by the value proposition of investment in the repair and maintenance of existing vehicles.
Speaker Change: Having experienced these cycles many times within our industry, we have confidence that the pressure. We're experiencing today is not reflective of any change in the core demand drivers in the automotive aftermarket.
Speaker Change: The North American car Park continues to grow and age and consumers place a heavy reliance on well maintained vehicle to meet their daily transportation needs.
Speaker Change: In our view the average consumer is still reasonably healthy, but we believe is exhibiting an element of caution when managing their pocket book in an environment of uncertainty surrounding price levels macroeconomic conditions and an upcoming election.
Speaker Change: Caution is demonstrated by consumers is more impactful in our DIY business as these consumers tend to be more economically pressured and perform work on their vehicles out of necessity.
Speaker Change: Our DIY customer base continues to represent a slightly over 50% of our business even with the non discretionary nature of most of the products. We sell we are not completely insulated from a consumer who is motivated to limit spending wherever possible.
Speaker Change: However, consumers in our industry are very resilient and eventually adjust the adverse economic circumstances and will prioritize keeping their vehicle in good working condition.
Speaker Change: This is especially true as our customer base is incentivized to keep their existing vehicles on the road at higher mileages in order to avoid the cost of replacement vehicles.
Speaker Change: While we are cautious that the current macro pressures could pursue persist as we finish out 2024 and inner next year. We are confident in our industry will return to more historical growth rates in the short term.
Speaker Change: Against this backdrop, we are tightening our full year comparable store sales guidance and are now expecting a full year increase of 2% to 3%.
Speaker Change: This update reflects our third quarter performance and how we're viewing the remainder of the year as a reminder, our fourth quarter can be quite volatile given the variability of winter weather and consumer demand dynamics during the holiday season, as well as potential impacts this year from the November election.
Speaker Change: We do expect a benefit in the fourth quarter as we lap our easiest comparisons of the year and have one less Sunday in our quarter.
Speaker Change: So far our October sales performance has been consistent with our third quarter trends and in line with our updated that updated guidance expectations.
Speaker Change: It is important for me to note that the update to our outlook has absolutely no impact on the attitude and aggressiveness of our field teams as they demonstrate as they go to the market on a daily basis.
Speaker Change: No one inside our company thinks our high bar of performance and the standards. We have set are impacted at all by conditions outside of our company nor do we change the amount of hustle, we demand of ourselves each and every day.
Speaker Change: We are very bullish on the future of our industry, but more importantly, the tremendous opportunity our company has to grow our share of both the DIY and professional markets. We will continue to execute the playbook that has driven success for our company for 67 years and are more committed than ever to providing the best possible.
Speaker Change: Customer service in every one of our markets.
Speaker Change: As I wrap up my prepared comments I'd like to once again, thank team O'reilly for your commitment to our customers our company and to your fellow team members now I'll turn the call over to Brett.
Thanks, Brad.
Brett: I'd also like to begin by thanking team O'reilly for their commitment to excellent customer service and focus on perpetuating our culture.
Brett: Our team's ability to drive share gains in a challenging environment demonstrates both their outstanding professionalism as well as the value our customers place on excellent service and product availability.
Brett: Today, I will give some color on our third quarter gross margin and SG&A results as well as our progress on expansion and capital investments.
Brett: Starting with gross margin our third quarter gross margin of 51, 6% was up 18 basis points from the third quarter of 2023 and in line with our expectations.
Brett: Dilution from our Canadian business came in as expected at approximately 26 basis points on the quarter.
Brett: We continue to expect approximately 30 basis points of gross margin dilution from the acquisition along with 15 basis points of operating profit dilution for full year 2024.
Brett: Our gross margin results included a headwind from the mix of DIY and professional business, which was slightly larger than anticipated as the sales pressures. We experienced were more significantly felt in our higher margin DIY business.
Brett: However, we were able to offset this headwind with strong merchandise margin performance achieved through a combination of both improved acquisition costs and strong partnerships with our supplier base to manage our product offerings, including our proprietary private label brands.
Brett: We would still characterize the acquisition cost environment is stable and.
Brett: And we would anticipate seeing a mix of both incremental cost improvements and modest inflation pressure as we finish out 2024.
Brett: These cost dynamics are coupled with the pricing environment that remains rational across our industry.
Brett: Given our solid performance in the first nine months of 2024, we're maintaining our gross margin outlook for the full year at a range of 51 to 51, 5%.
Brett: Moving on to SG&A, our average SG&A per store grew four 2% in the third quarter with the inclusion of Canada's operating results again, representing approximately 10 basis points of that growth.
Brett: Our SG&A dollar spend for the third quarter was at the high end of our expectations and drove a higher level of deleverage on the sales headwinds that we experienced.
Brett: Our teams in the field continue to effectively balance excellent customer service with dialing in our staffing levels to match business conditions and took appropriate steps to manage expenses as we saw incremental pressure to sales in the third quarter.
Brett: However, our SG&A flexibility was limited somewhat by pressure that we saw in self insurance cost for our retained exposure for vehicle liability and property losses, driven in part due to hurricane Helene.
Brett: As well as a headwind from deferred compensation.
Based on our year to date results in 2024 and updated outlook for the remainder of the year. We continue to expect full year SG&A per store to grow between three 5% to 4%.
Brett: This guidance range includes our expectation that our fourth quarter average SG&A per store growth will be at the lowest of the year, primarily resulting from a more fully loaded comparison in the prior year.
Brett: As we've managed our SG&A spend in 2024, our focus has been guided by an expectation that our high level of customer service will drive robust sales growth over the long term the.
Brett: The adjustments that we make to our SG&A spend our deliberate and measured and.
Brett: And we do not overreact to make dramatic adjustments that would negatively impact our customer service levels and long term growth opportunities.
Brett: Factoring in our year to date performance and our outlook for the remainder of the year. We are updating our operating margin guidance and now expect the full year to come in within a range of $19 four to 19, 9%.
Brett: Reduction from our previous guidance is driven by our third quarter sales performance and updated full year comparable store sales expectations.
Brett: Next I would like to provide an update on our inventory capital expenditures and expansion results.
Brett: Inventory per store finished the quarter at $781000, which was up 3% from both this time last year and the end of 2023.
Brett: We continue to be pleased with the health of our supply chain and our store in stock position remains strong.
Brett: We're leaving unchanged, our 2024 target of 4% growth in inventory per store within our existing chain, excluding the impact of the acquired vast auto inventory.
Brett: Our teams have been opportunistically deploying inventory throughout the year to supplement our store hub and D. C level inventories ensuring that we are offering the best inventory availability in all of our markets.
Brett: We opened a total of 47 stores during the third quarter, bringing our year to date store openings to a total of 111.
Brett: We are slightly behind our new store growth plan as we have had some third quarter stores pushback due to delays in construction and final permitting.
Brett: However, we remain on track to open 190 to 200, new stores in 2024.
Brett: And our new store performance continues to exceed our expectations even in tough market conditions.
Brett: I'm also pleased to announce our 2025 store opening target of 200 to 210 net new stores.
Brett: New store growth continues to be an attractive use of capital for our company our disciplined approach to Greenfield new store growth and a resulting success and generating high returns on new store locations is centered around one primary determining factor that.
Brett: The quality of the store team behind the counter the day, we opened the doors, we worked hard to support our new store teams by executing a rigorous playbook to select great sides informed by local market characteristics vehicle population and professional customer concentrations. We also ensure each location has our.
Brett: Three leading inventory availability right out of the gate.
Brett: Ultimately, though our success is all about assembling the right team to go out and win the business both inside the four walls of the store and in supporting roles and regional sales and field leadership.
Brett: Perpetuating our culture through a promote from within philosophy ensures that we have engaged leadership teams with proven success in executing our store operating model.
Speaker Change: Moving on our capital expenditures for the first nine months of 2024 were $733 million, which is inline with our expectations.
Speaker Change: And we are maintaining our full year guidance range of $900 million to $1 billion.
Speaker Change: Our projects and initiatives continue to track as planned and we are excited about the growth opportunities ahead of us and all of our market areas.
Speaker Change: I would like to extend congratulations to our distribution operations teams on the successful opening of our new Springfield distribution Center in September.
Speaker Change: And we look forward to a successful opening of our new Atlanta Metro D C in the fourth quarter.
Speaker Change: It is exciting to see the growth in our distribution network with the relocation of these two facilities opening this year as well as the continued progress on our new mid Atlantic D C and Stafford, Virginia, which will open in 2025.
Speaker Change: I want to express my deep gratitude for the hard work from all of the teams involved in the successful expansion of our industry leading distribution network.
Speaker Change: To close my comments I want to once again, thank team O'reilly for their continued dedication to our customers. Our team recognizes that our success is dependent upon providing the best customer service in our industry and I am excited about the opportunities ahead of US now I will turn the call over to Jeremy.
Jeremy Fletcher: Thanks, Brent I would also like to thank team O'reilly for their hard work during the quarter.
Jeremy Fletcher: Now we will cover some additional details on our third quarter results and outlook for the remainder of 2024.
Jeremy Fletcher: For the quarter sales increased $161 million driven by a one 5% increase in comparable store sales and a $66 million non comp contribution from stores opened in 2023, and 2024 that have not yet entered the comp base.
Jeremy Fletcher: For 2024, we now expect our total revenues to be between $16, six and $16 8 billion.
Jeremy Fletcher: Our third quarter effective tax rate was 21, 5% of pretax income.
Jeremy Fletcher: Comprised of a base rate of 23% reduced by a one 5% benefit for share based compensation.
Jeremy Fletcher: This compares to the third quarter of 2023 rate of 23, 2% of pre tax income, which was comprised of a base tax rate of 24, 3%.
Jeremy Fletcher: Reduced by a one 1% benefit for share based compensation.
Jeremy Fletcher: The reduction in our base rate was driven by the size and timing of recognition of benefits for certain tax credits.
Jeremy Fletcher: For the full year of 2024, we expect an effective tax rate of 21, 8% comprised of a base rate of 23% reduced by a benefit of one 2% for share based compensation.
Jeremy Fletcher: Yeah.
Jeremy Fletcher: We expect the fourth quarter rate to be lower than the other three quarters due to the tolling of certain tax periods.
Jeremy Fletcher: Also variations in the tax benefit from share based compensation can create fluctuations in our quarterly tax rate.
Jeremy Fletcher: Yeah.
Jeremy Fletcher: Diluted EPS for the quarter increased 6% with our year to date diluted EPS increase at 7%.
Jeremy Fletcher: We have updated our EPS guidance range to a range of $40 60.
Jeremy Fletcher: To $41.10.
Jeremy Fletcher: The 15th reduction to our range is driven by our third quarter sales results and our revised sales outlook for the remainder of the year.
Jeremy Fletcher: As a reminder, our EPS guidance includes the impact of shares repurchased through this call, but does not include any additional share repurchases.
Jeremy Fletcher: Now, we will move on to free cash flow and the components that drove our results.
Jeremy Fletcher: Year to date free cash flow for the first nine months of 2024 was $1 7 billion in line with the same period in 2023 with growth in income partially offsetting the expected headwind from cash taxes paid resulting from the timing of payment for renewable energy tax credits.
Jeremy Fletcher: For 2024, our expected free cash flow guidance remains unchanged at a range of one eight to $2 $1 billion.
Jeremy Fletcher: Our AP as a percent percentage of inventory finished the third quarter at 129% down from 131% at the end of 2023.
Jeremy Fletcher: This ratio was slightly above our expectations driven by the timing of inventory investments throughout the year.
Jeremy Fletcher: We continue to expect to see moderation in our AP percentage through the end of 2024 and expect to finish the year at a ratio of approximately 127%.
Jeremy Fletcher: Moving on to debt, we successfully issued $500 million of 10 year senior notes in August.
Jeremy Fletcher: We finished the third quarter with an adjusted debt to EBITDAR ratio of 196 times as compared to our end of 2023 ratio of 2.03 times.
Jeremy Fletcher: With the decrease driven by EBITDAR growth.
Jeremy Fletcher: We continue to be below our leverage target of two five times and plan to prudently approach that number over time.
Jeremy Fletcher: We continue to be pleased with the execution of our share repurchase program and during the third quarter, we repurchased 499000 shares at an average share price of $1084 for a total investment of $541 million.
Jeremy Fletcher: Year to date through our press release yesterday, we repurchased one 6 million shares at an average share price of $1043 for a total investment of $1 7 billion.
Jeremy Fletcher: We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business and.
Jeremy Fletcher: And we continue to view our buyback program as an effective means of returning excess capital to our shareholders shareholders.
Speaker Change: Before I open up our call to your questions I would like to thank the entire O'reilly team.
Speaker Change: For their dedication to our company and our customers your hard work and commitment to excellent customer service, we will continue to drive our future success.
Speaker Change: Yes.
Speaker Change: Our prepared comments at this time I would like to ask Ali the operator to return to the line and we will be happy to answer your questions.
Speaker Change: Thank you we will now begin our question and answer session.
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Speaker Change: Thank you.
Speaker Change: Our first question is coming from Bret Jordan with Jefferies. Your line of sight.
Bret Jordan: Hey, good morning, guys.
Speaker Change: Good morning, Brad.
Bret Jordan: A question on supply chain with the Virginia, DC opening and obviously, you've got one in devins mask do those to allow you to touch into that metro sort of mid Atlantic Northeast, New York market or is there some additional supply chain expansion needed before you get to that white space in the northeast.
Bret Jordan: Yeah, Hey, Brett. Thanks. This is Brent I'll start and these guys can join in thanks for the question. Yes, we're super excited about that mid Atlantic D. C. As you know that opens up a corridor there the mid Atlantic that we've.
Bret Jordan: Just have a lot of opportunities to continue to store up and so we feel like it's going to really pave the way for us to open up that corridor to your point.
Bret Jordan: When we think about the distance between Stafford and devins, they'll likely probably will at some point be another one that would be a fill in there.
Speaker Change: But super excited to get started on having that capability in that location, yes, Brett the spread I may just jump in real quick Brent said, it pretty well, but I think the way I would think about it we still have such an opportunity in the northeast part of the country you know depending on where you draw. The lines you could come up with a third of the population of the U S. So we're.
Speaker Change: Dreamlike side, its still have a lot of opportunity in new England, and then when you get into Northern Virginia D. C Metro Baltimore Philly those type markets I think the way I would see it is that we're going to expand from the inside out from that Virginia D. C. We're going to concentrate.
Speaker Change: Right in those metros and not try to stretch ourselves too far out to quick in between those two dcs those are extremely competitive markets.
Speaker Change: A lot of store opportunity a ton of D. I F M opportunity a lot of retail opportunity, but we'll we'll work those rings from Masada acquisition standpoint, and in very tight bands of that Stafford facility.
Speaker Change: Okay, Great and then a big picture question on Hurricane impact I mean, it's sort of think about the net impact obviously store closures in short term sales losses, but is demand creation from hurricanes enough to offset that or are they at the end of the day, a positive or negative for <unk> sales volumes.
Speaker Change: Yeah. Good question, Bret will first and foremost I have to say like I mentioned earlier that we couldnt be more proud of our teams. It's just been devastating to watch what's happened. We were we were fairly fortunate in the Florida market here of late.
Speaker Change: But had had quite a bit of disruption with Helene specifically in South, Georgia, and then up in Western North Carolina, and we obviously, especially in that last week. There is Helene hit we saw some disruption but I.
Speaker Change: I think what we would say Bret we're a little bit careful with us being disappointed with our comp overall, we wanted to be a little bit careful talking about.
Speaker Change: Too many puts and takes we're not happy with a one 5% comp, but if we had to put a number on it it would have been pretty immaterial. It would've been possibly in the 10 to 15 basis points, maybe in the quarter in terms of how lean and then overall in the fourth quarter, it's yet to be seen kind of what will make up there, but I think when you look at <unk>.
Speaker Change: Third and fourth quarter, even with those bad storms I think I think whether it's a net neutral.
Speaker Change: Alright, great. Thank you.
Speaker Change: Thanks, Brett Thanks, Brent.
Thank you. Our next question is coming from Simeon Gutman with Morgan Stanley. Your line is live.
Simeon Gutman: Good morning, everyone. Thanks for the question.
Simeon Gutman: Hey, Brett anyone else. Good morning, I wanted to ask you made the comment about headwinds should be short lived.
Speaker Change: And I think that makes sense. If you look at the industry. The industry got weak almost you know maybe the year three quarters before your business has gotten a little softer.
Speaker Change: So why does it flip soon you know what about what what confidence do you have is there anything about like on a micro basis on an failure rates or are there any markets that you have.
Speaker Change: <unk> had some softening and then a re strengthening that you can point to.
Speaker Change: Help us think about timing I know, there's no crystal ball, but it's a tricky a tricky setup.
Speaker Change: Yes, great Great question, Simeon I'll try to do the best I can here. So I think generally when you look back is we don't want to live in in pandemic times and you know, we obviously saw a lot of success. There. So we built our base you know definitely several step changes there and on both sides of the business, obviously more predominantly on the profession.
Speaker Change: <unk> side, but you know when we think about a year like this and again we.
Speaker Change: We've said this a lot you've heard us say it a lot, but you know in my 28 years in the industry and with O'reilly. We we've just lived this so many times that while we're not.
Speaker Change: Happy with our one 5% comp and really our year to date comp.
Speaker Change: The reason that the that I called out short lived earlier is just because when we've lived this in an election year in times of of higher inflation and all the things that have been on the consumer this year with just the uncertainty.
Speaker Change: Once once we get past the election, and you think about how the inflation has moderated and.
Speaker Change: A lot of things are piling up to the fact that we feel even though we're not guiding to 'twenty. Five obviously, yes, we do feel confident that history repeats itself in our in our industry and we continue to feel good that we're going to get past. This here soon and get back to kind of normal industry growth.
Speaker Change: And maybe I mean, the only thing I would add there.
Speaker Change: Specifically to are we seeing anything in any granular way, that's pointing us to that at this point, we would say no to that to that question won't be clear about that.
Speaker Change: Given a one 5% comp in the third quarter.
Speaker Change: We are at where we're at the confidence that we have is what Brad talked about I think though importantly, one of the things that you identified is just.
Speaker Change: Just as a as a company our focus has always been how do we best manage through these periods to put ourselves in the best position possible as conditions start to improve to be able to be the first to capitalize and take advantage of that.
We always want to be in a situation where it doesn't seem like we're participating in industry slowness until.
Speaker Change: Until it's persisted for a while and we want to be the first ones to come out of it and I think our teams have demonstrated the ability to do that over the course of time from a consistency perspective, and so I think that coupled with what Brian said about what we've seen from an industry perspective over the long term gives us confidence that.
Speaker Change: That we're going to be well positioned to move forward from this point.
Speaker Change: It makes sense and then a quick follow up question on market share two years ago.
Speaker Change: The spread O'reilly to industry was significant it blew out this year, we're still taking share it looks like it's narrowed a little when you as you approach. How you forecast next year first you always put a market share component into your own comp expectation and then how do you how.
Speaker Change: How do you figure, where where that lands into the normal year, just one of the puts and takes.
Excellent question, Simeon and one that will we'll spend a fair amount of timeline between now and next quarter. When we when we provide our guidance for next year for sure are our expectation is that because of the team that we have our advantages from a distribution availability perspective.
Speaker Change: <unk> and the momentum we've created that debt.
Speaker Change: We think it is yes. It is our entitlement to grow faster than the market. So for sure you should have an expectation that as we as we finalize that work and let you know next quarter, what our expectations are for 2025 that will include a component of that.
Consistent with where we've been really for.
Speaker Change: For much of our history.
Speaker Change: Fair enough good luck.
Speaker Change: Thanks, Tim as any stimulus.
Speaker Change: Thank you. Our next question is coming from Michael Lasser with UBS. Your line is live.
Speaker Change: Good morning. Thank you so much for taking my question.
Speaker Change: Being a year, where uncharacteristically O'reilly has just got Miss gauged.
Speaker Change: The demand in the market and has had to die down a couple of times now.
Speaker Change: We're only going to be a few months away from how you're starting to think about 2025. If we go through the next few months lets say it's normal.
Speaker Change: Season from a weather perspective.
Speaker Change: And you don't see your trends improve would you still be coming out at the outset of the year with normal.
Speaker Change: Oh Riley algorithm in the 3% to 5% comp range and Thats it.
Speaker Change: The second part of that question is.
Speaker Change: If the industry is going to have another slug. This year next year, what does the O'reilly think the right level to comp is in order to generate sustained margin expansion on the on the Penn side put it another way how low can comp fee next year without having some deleverage.
Speaker Change: Will you see your SG&A per store still grow 2% to 3% or higher.
Speaker Change: If indeed trends remained sluggish next year. Thank you.
Jeremy Fletcher: Yeah, Michael Thanks for the question this is Jeremy.
Jeremy Fletcher: I think you're accurate in saying that the year like we're having this year is uncharacteristic.
Jeremy Fletcher: I think for us for our history although.
Jeremy Fletcher: Though it's not completely.
Jeremy Fletcher: It's not completely unprecedented we've had years like this our industry's had years like this.
Speaker Change: Thank you.
Speaker Change: For us.
Speaker Change: Having a near term focus to try to predict exactly the sequence of timing as to exactly how the business performs and moves out of it.
Speaker Change: Is one that we've got some some insight into bid.
Speaker Change: Frankly, we don't have the same.
Speaker Change: We don't have a crystal ball that all of you don't have and it will.
Speaker Change: We'll have to evaluate what our best read is when we establish our guidance for 2025. So it's a challenge to to answer that from a hypothetical situation because we do still have I think some pretty relevant time period between now and how we how we form kind of from a concrete perspective, what those opinions are I think that is.
Speaker Change: Same answer applies to how we think about the expense structure.
Speaker Change: And what our read is on what overall cost levels are going to be next year and in how we think the components of what our 2025 guide will be comprised what benefit we might think we see in same SKU inflation and those things I think maybe to step back from near term.
Speaker Change: Questions that they try to pull forward our guidance setting process for next year.
Speaker Change: And to just talk I think structurally on how we feel like we can operate our business and the profitability of our business.
Speaker Change: We still believe that we are positioned well to take share gains to be productive in doing so and to provide strong returns for how we're investing in the business.
Speaker Change: So I think.
Speaker Change: As we put together those those expectations for 2025 Youll Youll see.
Speaker Change: A.
Speaker Change: Similar conviction around the success of our business that we've had underlying our results for for a long time.
Speaker Change: Okay.
Speaker Change: My follow up question is how much work are you doing today.
Speaker Change: To prepare for the prospect of tariffs in the next couple of months and how disruptive would be 30% to 60% tariff on goods coming from China, and some degree of tariff coming in.
Speaker Change: Good coming from all other countries. Thank you.
Brent: Yeah, Hey, Hey, Michael This is Brent great question and I can start and these guys can can add in.
Speaker Change: Most.
Speaker Change: The most recent point of reference we have on any kind of a scenario like that would be back 2018, when we had the <unk> 2017 2018 before.
Speaker Change: You know honestly, we were able to pass those.
Speaker Change: Those increased costs through in selling price.
Speaker Change: And really that wasn't just us it was the entire industry. So it was kind of a non event in terms of some of those components, what I will tell you.
Since then and since Covid and through Covid.
Our teams our supply chain teams sourcing teams merchandise teams have done a fantastic job.
Speaker Change: Continuing to look at alternate.
Speaker Change: Supply sources countries of origin.
Speaker Change: We continue to leverage the strength of our proprietary brand portfolio to source from multiple suppliers.
Speaker Change: So I would tell you that we are less dependent on anything from China. Then we were not to say that we still don't have some dependencies. There we do in our industry does.
Speaker Change: Really proud of the work the team has done over the last several years to reduce that dependency, but but where that does come into play specifically with China I still feel confident in our ability to pass those cost alone.
Speaker Change: They may become a part of cost of goods, yeah, Michael the only thing I would add or reiterate to brents point is our supply chain teams our merchandise team.
Speaker Change: They put a solid playbook in place back through the years that Brent talked about in.
Speaker Change: They will be what they'll be in.
Speaker Change: It will somewhat be a level playing field for us and our competitors and everybody else. We can compete against out there and I feel really good that our team has the has the strategy in place to pass those along and do all the things that Brian talked about.
Speaker Change: So we feel good that <unk>.
Speaker Change: We'll be able to handle that if it comes.
Speaker Change: Thank you very much and good luck.
Speaker Change: Thanks, Michael Thanks, Michael Michael.
Speaker Change: Thank you. Our next question is coming from Zach <unk> with Wells Fargo. Your line is now.
Speaker Change: Hey, Good morning. This has been asked a couple different ways, but taking a different angle here just curious as you look back over the course of the year.
Speaker Change: If you can pinpoint when specifically that deferred maintenance dynamic started to materialize in your data and as you look to Q4 and beyond <unk> any thoughts on what the drivers historically tend to be.
Speaker Change: That unlock our catch up pent up demand be it.
Speaker Change: Lower gas prices, which we're starting to see today or whether any thoughts there.
Speaker Change: Yeah, Hey, Thanks, Zach this is Brad I'll kick that off and then and then let the other guys kind of clean me up here, but.
Speaker Change: First off I think if you think back to the last couple of quarters.
Speaker Change: For a long time, there, even though we were seeing some pressure in discretionary going back a quarter or two ago.
Speaker Change: You mentioned maintenance, we actually are very pleased with our maintenance categories. We look at it more from.
Speaker Change: The biggest part of our business is non discretionary failure repair type jobs some of that stuff can still be a little bit delayed we're fairly pleased with our with our failure in.
Speaker Change: Repair categories maintenance has been really good I called that out in my prepared comments things like oil changes all filters oil spark plugs things like that maintenance.
Speaker Change: We haven't seen a lot of deferral now there could be some deferral and there in other parts of it could be later model vehicles that are somewhat offsetting that theres a lot of moving pieces.
Speaker Change: Really what we continue to see but what we see what we saw more pronounced.
Speaker Change: In Q3, then we have year to date would have been even more so discretionary and then we saw a little bit more trade down and you've heard us talk a lot about actual trade up.
Speaker Change: From from good to better and better to best we did see some offset in that in Q3, while we still saw.
Speaker Change: Customers trading from better to best we did see some that were moving down to some extent there in Q3. So that's kind of what I would say in May let Brent.
Speaker Change: Yes.
Brent: The thing I would say is a.
Speaker Change: Great question I mean, the trend is everything Brad just described has kind of been a theme that has continued to.
Brent: Perpetuate throughout the year and as it is it's continue.
Brent: Continued to hang on it's continued to have more of an impact I think thats, what youre seeing across not only our results in Q3, but the results of the industry in Q3 and comparable timeframe. So.
Brent: The great thing about the industry as people are going to maintain their vehicles and.
Speaker Change: Just Jeremy made the comment earlier, we're doing everything we can to be best positioned in those categories maintenance repair failure categories.
Speaker Change: <unk> had the best inventory availability in every market we serve to have the best service in every market. We serve and then to go out and earn that business as it continues to come back, but we know it will as the car park continues to age and people maintaining their vehicles. So we feel good about where we are I think the trend youre talking about is just the trend and it will begin to have.
Speaker Change: <unk> as we all know.
Speaker Change: When you look back to the tough historically tough years in this industry. The 2000 seventeens into 'twenty OE. It's back in those time frames. When you look at the following year Nobody has a crystal ball, but when you look at the following year that we did see a bounce back and we did see the customer returns. So we're confident that that is going to happen in this scenario as well and we're going to be ready for it.
Speaker Change: Got it I appreciate the thoughts there and then your outlook would imply some.
Speaker Change: Q4 year over year operating margin ethane relative to the declines we saw in Q2 and Q3, you mentioned lower SG&A per store so.
Speaker Change: So first of all any any colors on the drivers be it slowing investments or otherwise and then on your gross margin you've had just really strong merch margin performance offset in part by Canada, but any thoughts on on on this dynamic going forward.
Speaker Change: Zack I think you've outlined that piece as well.
Speaker Change: It does start a little bit with just the top line expectations in the leverage benefit that you get as you Ajay.
Speaker Change: Thanks for a quarter that that does have the easiest comparisons from last year.
Speaker Change: <unk>.
Speaker Change: Somewhat of a benefit from a weekday perspective with the Sunday.
Speaker Change: And then gross margin, we we feel like has been consistent throughout the course of year. We continue to believe that that will be solid and in line with.
Speaker Change: Really the guidance the guidance, we've said it all year long or at least our full year will come in I would say within that within that guide from an SG&A perspective, it's not necessarily a change in the cadence of the investments, but as you remember as we as we move through 2023, we ramped fairly significant within the course of.
Speaker Change: That year.
Speaker Change: But things just like the depreciation overhang starts to run up against easier comparisons as a lot of those investments were in place before the fourth quarter in in and Theres less of a year over year Delta there for some of what we would've done.
Speaker Change: In 2023 that we've been lapping.
Speaker Change: More significantly in the previous quarters this year.
Speaker Change: Got it thanks for the time guys.
Speaker Change: Thanks, Doug.
Speaker Change: Thank you. Our next question is coming from Christopher <unk> with Jpmorgan. Your line is now.
Speaker Change: Thanks, Good morning, So a couple a couple of follow up questions first on the one last Sunday.
Speaker Change: I recall, it's a pretty modest benefit in less than what others have quoted because of the mix difference. So can you talk can you talk about how much.
Speaker Change: That is from a comp perspective, when does that roll into total sales are in comp and then.
Speaker Change: Was there any benefit related to that in the third quarter.
Speaker Change: Yes.
Speaker Change: Yeah. So third quarter was pretty was pretty even up from that perspective.
Speaker Change: Fourth quarter, when we have a Sunday difference can be a little bit variable just because the timing of the holiday can impact that too I'm, usually we would say it's somewhere in the call. It maybe 30 or 40 basis point range, depending on how you measure it but that's a benefit to comp and total sales.
Speaker Change: Got it.
Speaker Change: And then on the on the tariff side I think it at in 2022, you talked about total direct and indirect exposure to China of around 30% is that right and maybe how how far has that come down and then on the tariff side I don't think the tariffs went away in.
Speaker Change: I think it was around 25% is that right and if it does go up to 60%.
Speaker Change: So on that prior question like the consumer does feel like.
Speaker Change: Hand, it up to here in terms of taking inflation.
Speaker Change: You know what what gives you the confidence that you'll be able to pass that through.
Brent: Yes, Chris good follow up on that this is Brent I can start.
Brent: Couple of thoughts there.
Brent: When you think about the China exposure.
Brent: That has been significantly reduced.
Brent: Probably in the tune of 500 plus basis points to where it was.
Several years ago, So like I said earlier, we feel confident with the work the teams have done there to help reduce some of that exposure.
Brent: No.
Brent: And to your point on the percentage.
Brent: Okay.
Brent: Who knows.
Brent: What those percentages will be and it's hard to sit and forecast a scenario, we haven't seen before what would that would play through at especially at a percentage as high as 60%.
Brent: At this point.
Brent: Have to believe where we were able to pass it on in the 2025% range.
Brent: Effectively in the past that we still have the ability to do that as we move forward. If there's if there's a tariff out there that is.
Brent: Excessive to the to the percentages you are talking about that may be a first for the industry and we'll have to see how we deal with that at that point, but.
Brent: I think thats a little bit into.
Speaker Change: Into the future for me to be able to make a make a comment on at this point, yes, Chris I think the only thing I would add there is historically our industry has been very disciplined in how we pass through those cost increases.
Speaker Change: In the demand that meets those.
Speaker Change: Those higher price levels is there a resilient because.
Speaker Change: Because of the critical nature of transportation needs and so if.
Speaker Change: If a if you have a failure on your vehicle.
Speaker Change: Youre going to need to replace it and youre going to need to move forward.
Speaker Change: <unk>.
Speaker Change: What is most undetermined.
Speaker Change: What we'll have to see is just the broader impact to the consumer.
Speaker Change: Because its not obviously just what what we sell.
Speaker Change: That could could be harmful from an inflation perspective.
Speaker Change: Would we see a weakened consumer that now has to adjust and find ways to save money where ever they can so so that's where we we think that the.
Speaker Change: It did in the past when a consumer has been under pressure.
Speaker Change: They still have to make repairs, but.
Speaker Change: With that broader pressure caused because im trying to save money and differ in some way or trade down and those are things that.
Speaker Change: Or kind of the second level of effects that we're yet to see but that would be probably more likely to have an adverse impact to our consumer base than than the industry not being very disciplined because.
Speaker Change: Because it is we historically have.
Speaker Change: Because of the inventory investments required.
Speaker Change: The inelasticity of what.
Speaker Change: What we sell.
Speaker Change: Makes sense, thanks very much.
Speaker Change: Thank you Chris Thanks, Chris.
Speaker Change: Thank you. Our next question is coming from Scot Ciccarelli with twist your line is life.
Scot Ciccarelli: Good morning, guys. So you did make the comment that.
Scot Ciccarelli: You did make the comment that new stores are exceeding expectations.
Scot Ciccarelli: Given that factor in the broadly higher construction cost environment that we are seeing can you provide any kind of update in terms of how people should be thinking about new store economics, I E store costs, new store productivity payback et cetera.
Scot Ciccarelli: Yes.
Speaker Change: State that question, Chris we usually are Scott I'm, sorry, we usually get.
Speaker Change: Don't get too detailed on the specifics of that model other than the cost of the new stores I mean, we own the store.
Speaker Change: Kind of approaching that $3 million perspective, now I think for us historically that that model has just continued to improve from an economics perspective, we feel we feel really good and that in part informed.
Speaker Change: Some of our decision to leave a little bit more heavily into owned stores over the course of this year and what you've seen in the mix of our new store count.
Speaker Change: Just the productivity both from a rate perspective, and then just kind of at that there.
Speaker Change: Kind of mid level maturity pointed.
Speaker Change: Five or six years has continued to trade well and for sure over the last few years that's been.
Speaker Change: The beneficiary of.
Speaker Change: A rising tide within our total business, but we've been pleased that that's continued to be resilient, even as we've had a little bit more challenged year, yes Scott.
Speaker Change: Scott Scott This Brad just maybe to reiterate I appreciate you asking about growth.
Speaker Change: We're really excited to announce our 200 to 200 net 210 net new stores for 2025 continues to be our best way to.
To invest in our business.
Speaker Change: And when we talk about the productivity and we talk about the ROI. It's on it's on.
Speaker Change: Those new cost made in the last couple of years, yes, we've seen a lot a lot of inflation in construction costs, but we continue to be even more pleased even on those new numbers and so.
Speaker Change: Our teams are just doing an incredible job with site selection. Our construction teams continue even though they've had a lot of headwinds from a from an inflation standpoint, and the cost to build standpoint.
Speaker Change: It factors things like that they have continued to look for ways to get more efficient as we continue to scale and then our field teams continue to put together just unbelievable teams backed up with our supply chain and our regional Dcs in our hub stores and that all equals even though we've seen a lot of inflation that's why.
Speaker Change: We're ramping up couldnt be more happy with those returns Thats why we're ramping up to 200 to 210 for 25.
Speaker Change: I'll take the rest offline. Thank you.
Speaker Change: Thank you guys.
Speaker Change: Thank you. Our next question is coming from Steven Zaccone with Citi. Your line is life.
Speaker Change: Great. Good morning, everybody. Thanks, very much for taking my question.
Speaker Change: Wanted to focus on the potential recovery in the bedroom, how do you think that plays out.
Versus DIY, you've mentioned looking at history that you'd see a bounce back after 10 years of softness how do you think that plays out by the different segments.
Speaker Change: Yes, great question and good morning, Steve This is Brad.
Speaker Change: So.
Speaker Change: Even though we were necessarily pleased with our performance on either side of the business side kind of to kind of kick off. The question you don't want to frame up that.
Speaker Change: We feel really good about the way our teams continue to take share on the <unk> side and so when you think about.
Speaker Change: The overall market getting back to norms over the short to mid term here.
Speaker Change: And the way the complexity in.
Speaker Change: All those things are going to weigh in on on people being able to work on their own stuff. We continue to see an opportunity on both sides. It's obviously going to be outsized on the <unk> side, and so I think generally speaking the <unk> business.
Speaker Change: Most likely is going to stay a little bit more resilient that said.
Speaker Change: The I think it's balanced with the fact that the DIY business has been more impacted and so when that consumer comes back we can come back in.
Speaker Change: Reasonably good way and there could be some catch up to do there could be some things like that and so generally speaking I think <unk> is going to continue to stay a little bit more steady and resilient.
Speaker Change: But I also think that.
Speaker Change: DIY, what's a little bit more uncertain and I still feel like there's plenty of opportunity to get more healthy here in the next 12 to 18 months.
Speaker Change: Okay, Great and then just a follow up on the DIY side I'm sure you've gotten the question in the past, but you know some of the mass channel and the warehouse clubs, we heard about them getting more competitive have you seen that impact your business at all as you think about maybe pricing or just overall traffic.
Speaker Change: Yes sure so.
Speaker Change: Those type competitors there.
Speaker Change: Kind of.
Speaker Change: <unk> are pedal and some of our lines a lot of that stuff is the more discretionary type stuff less less hard parts and things like that that would be tough overall for them to compete and have the SKU proliferation and things like that but.
Speaker Change: Really we saw a huge opportunity as you know during the pandemic, where some of those were closed and service was closed and so less people were going through kind of their parts section so to speak of the mass mass retail and there is no doubt that we saw some.
Speaker Change: Recovery from those folks they do a good job on a lot of fronts, but nothing necessarily happening different in 2020 for Steven.
Speaker Change: We saw some of that happened over the last couple of years and so.
Speaker Change: We have our head in the sand if we said we didn't maybe give a little bit of that back but when we look at what we did during the pandemic versus mass retail when we talked to our store team members and we look at at our <unk> SaaS scores and we look at customer data and what customers are telling us.
Speaker Change: Most of that what we gain we continue to see is very sticky customers continue to tell us that the curbside has worked very well for them buy online pickup in store.
Speaker Change: Continuing to not have to go get stuck in a big parking lot going into a big box versus being able to get into our neighborhood store in in our professional parts people trusted advice. So we continue to have a lot of confidence that the majority of that was sticky.
Speaker Change: Those folks are always going to sell commodities. There are always going to be very sharply priced but we continue to have confidence in our ability to overcome that with our with our service model in our smaller box.
Speaker Change: I appreciate all the detail thanks.
Speaker Change: Thank you we have reached our allotted time for questions. So I will now turn the call back over to Mr. <unk> for closing remarks.
Speaker Change: Thank you Ali we would like to conclude our call today by thanking the entire O'reilly team for your continued hard work and dedication to our customers in the third quarter.
Speaker Change: 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.
Speaker Change: Thank you. This does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.