Q1 2025 O'Reilly Automotive Inc Earnings Call
Welcome to the O'Reilly Automotive Inc. 1st quarter 2025 earnings call. My name is Matthew and I'll be your operator for today's call. At this time, all participants run a listen-only mode. Later we'll conduct a question-and-answer session.
Speaker Change: During the question and answer session, if you have a question, please press star one on your touch-tone phone. I'll now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.
Jeremy Fletcher: Thank you Matthew, good morning everyone, and thank you for joining us.
Jeremy Fletcher: During today's conference call, we will discuss our first quarter 2025 results and our outlook for the remainder of the year.
Jeremy Fletcher: After our prepared comments, we will host a question in answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements. Thank you very much.
Jeremy Fletcher: 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.
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
Jeremy Fletcher: The company's actual results could differ materially from uniform lifting statements due to several important factors described in the company's latest annual report on Form 10K for the year ended December 31, 2024, and other recent SEC filings.
Jeremy Fletcher: The company assumes no obligations to update any forward-looking statements made during this call.
At this time I would like to introduce Brad Beckham
Brad Beckham: Thanks Jeremy. Good morning everyone and welcome to the O'Reilly Auto Parts first quarter conference call. Participating on the call with me this morning our Brent Kirby, our President and Jeremy Fletcher, our Chief Financial Officer.
Speaker Change: Greg Hinsley, our Executive Chairman, and David O'Reilly, our Executive Vice Chairman, are also present on the call
Speaker Change: I'd like to begin today by thanking our over 93,000 team members for the hard work they put in during the first quarter to continue our track record of profitable growth delivering a solid start to 2025.
Speaker Change: We held our annual leadership conference in January and our theme and rally cry for this year is next level.
Speaker Change: Every single one of our leaders in every facet of our business are focused daily on how they can take their leadership, their ownership, and in turn our customer service in performance to the next level.
Speaker Change: It's incredible that O'Reilly has been a business for almost 70 years in the same fundamentals and next level mindset that made our company successful in the early years are still what makes us great today. Thank you very much.
Speaker Change: While I believe our people and our culture are truly world class today, our team absolutely never settles for the status quo.
Speaker Change: I cannot be more grateful to work with the team that is always on the hunt for ways to improve, get better, and take our company to the next level.
Speaker Change: Delivering excellent customer service and building top-notch teams to continue our company growing is not easy work. And I want to commend our team members for the pride they take in our company and the commitment they hold to being the best team in the business.
Speaker Change: Now I'd like to start our discussion on the first quarter by walking through the details of our comparable store sales results.
Speaker Change: Our com growth of 3.6% in the quarter was at the high end of our expectations, and we are pleased with the solid start to the year .
Speaker Change: Both sides of our business perform well relative to our expectations and our professional business was the larger driver of our total comfort results with a mid-single-digit comp consistent with our expectations and ongoing trends.
Speaker Change: DIY was a positive for the court was positive for the quarter with a low single digit comp and we were pleased to see our comp outperformance being driven by strong ticket counts relative to our expectations on both sides of the business.
Thank you. Thank you.
Speaker Change: Next I want to give some color on the cadence of our sales results as we move through the quarter.
Speaker Change: We've noted many times that our first quarter can be our most volatile with variability in our business resulting from the type and severity of winter weather and from the timing of the onset of spring.
Speaker Change: The timing and magnitude of individual income tax refunds can also be a factor impacting our results through much of February and into March
Speaker Change: While our results results for the quarter as a whole were strong, we did see the choppiness in our business that is characteristic of first quarter from these impacts.
Speaker Change: Winner Weather in January was largely as expected. The moving into February , we experienced more mixed weather patterns and some delays in the distribution of tax refunds
Speaker Change: As we entered the last week of February , tax refunds caught up and coincided with favorable spring weather moving into March that supported strong volumes on both sides of the business through the end of the quarter.
Speaker Change: March was our strongest month of the quarter and we produce solid results thus far into April .
Speaker Change: On Balance, we believe our underlying business and customer demand was steady throughout the quarter and the month to month cadence is very much in line with what we would have expected given the weather we experienced in the timing of tax refunds. [inaudible]
Speaker Change: Although ticket count was the primary driver of our comp sales growth and outperformance in the quarter, average ticket was also a contributor to comps on both sides of the business.
Speaker Change: The dynamic of increasing complexity continues to be a stable driver of average ticket within our industry .
Speaker Change: As better engineered and more complex parts continue to drive both higher product costs and resulting selling prices
Speaker Change: St. skew inflation was a minimal benefit on the quarter at less than half a percent.
Speaker Change: This was slightly below our expectations on both sides of our business primarily due to the normal puts and takes we see in rational competitive pricing in our industry. Thank you very much.
Speaker Change: I will discuss our thoughts on tariff developments in a moment, but I will note that tariff-related price changes had a very minimal impact to Saint-Stew inflation in the first quarter.
Speaker Change: Looking to the remainder of the year, we are maintaining our full year comparable store sales guidance of two to four percent.
Speaker Change: Now I'd like to spend a minute discussing what is driving our sales results and how we're thinking about what is ahead of us this year
Speaker Change: During the first quarter, weather-related categories perform well, and we continue to see strength in maintenance categories such as oil and filters as consumers are prioritizing the maintenance of their existing vehicles.
Speaker Change: We also continue to see pressure in discretionary categories in line with trends over the last few quarters, and a continued indicator to us that consumers are being cautious in a period of economic uncertainty.
Speaker Change: We saw solid results in failure-related hard-port categories and our customers continue to prioritize products that are higher quality on the value spectrum.
Speaker Change: We believe we're in a market where consumers are placing a high value on investments in their existing vehicles and will continue to be motivated to avoid the significant cost and monthly payment burden that comes with a new or replacement vehicle.
Speaker Change: The combination of these factors puts us in a backdrop that we would characterize as favorable for the industry and for O'Reilly yet carries a high degree of uncertainty
Speaker Change: There are several factors, namely tariffs and the ongoing international trade deliberations that have the potential to impose significant challenges on the consumer.
Speaker Change: Within the first quarter, most of this uncertainty was in the headlines and had yet to make its way to anything we would characterize as notable impact to our day-to-day business.
Speaker Change: As such, we have not made changes to the key assumptions behind our original comparable store sales guidance range of 2 to 4% that we discussed on our call in February . Thank you very much for your time.
Speaker Change: Tarrant certainly have the potential to impact the same ski inflation assumptions we have inherent within our guide.
Speaker Change: However, the high degree of uncertainty surrounding the duration, magnitude, and timing of potential tariffs coupled with the changes we have already seen to previously announced tariffs prevent us from frequently forecasting the inflationary impacts.
Speaker Change: Additionally, we have not seen adverse impacts to consumers that could also come with rapid and sustained changes to the pricing environment, but we are cautious in our outlook given the broader uncertainties in the macroeconomic environment.
Speaker Change: Based on these considerations, we have maintained an unshamed sales guidance range that is supported by current business trends and volumes.
Speaker Change: Brent will cover the gross margin outlook during this prepared comments, but I will note that our margin outlook was developed under the same thought process.
Speaker Change: Over the long term, regardless of any potential for short term disruptions in the broader macro environment, we stand by the fundamental drivers of our business, increasing miles driven on a growing and aging vehicle fleet by consumers that view transportation needs as critical to their day-to-day lives, provides a stable and supported backdrop for our industry.
Speaker Change: While tariffs may take up a significant bandwidth in the news, our teams are focused on what they do best, and that is getting incrementally better and executing our business model every single day in every single store. [inaudible]
Speaker Change: We have the absolute expectation that our industry leading service and availability will take market share against any market backdrop, and internally we certainly don't allow for excuses if results don't meet expectations
Speaker Change: We have competence in our industry and we know that even after years of sustained profitable growth as a company we still own a small fraction of the total addressable share.
Speaker Change: We believe we still have a ton of opportunity and we intend to take market share both aggressively and profitably [inaudible]
Speaker Change: Before I wrap up, I wanted to also note that we are increasing our diluted earnings per share guidance to a range of $42.90.
Speaker Change: to $43.40. Our increase in EPS guidance is driven by our first quarter sales performance as well as a reduction in our expected tax rate in the impact of shares repurchased through the date of our earnings release yesterday. Thank you.
Speaker Change: You might have also seen that we announced that our Board of Directors approved a 15 to 1 split of our common stock subject to shareholder approval at our annual meeting this May.
Speaker Change: This would mark our fourth stock split in our company history since going public in April of 1993 with our last split 20 years ago in 2005.
Speaker Change: Our primary motivation for a split is to make our stock more accessible to our team members and enable them to acquire whole shares rather than fractions more readily through our Employee Stock Purchase Program.
Speaker Change: Our stock purchase plan has been an excellent way for our team members to share in the successful Riley allowing full-time team members to begin purchasing stock at a discount right at the beginning of their career with the company.
Speaker Change: With the outstanding results, our team has been able to achieve over the years and the corresponding growth and share price. We believe this is the right time to split our stock and encourage our team members to join in the next chapter of growth through O'Reilly. Thank you very much.
Brent Kirby: As I wrap up my prepared comments, I would like to once again thank Timo Reilly for your hard work and commitment to excellent customer service with a solid start to 2025. Now I'll turn the call over to Brent.
Thanks, Brad.
Brent Kirby: I would also like to begin my comments this morning by congratulating Timo Riley on a solid start to 2025.
Brent Kirby: Today, I will further discuss our first quarter-grossed margin in SG&A results and provide a quick update on our expansion and capital investments thus far in 2025
Brent Kirby: Starting with Gross Margin, our first quarter gross margin of 51.3% was a 12 basis point increase from the first quarter of 2024, which was in line with our expectations for the quarter [inaudible]
Brent Kirby: The acquisition cost environment remains stable. And as Brad noted, this is coupled with a rational, processing environment within the industry.
Brent Kirby: Our first quarter gross margins were not materially impacted by the changing tariff environment.
Brent Kirby: At this point in time, we have begun to see some cost flow through from the initial round of incremental tariffs on product from China, but there is still a very high degree of ambiguity as it pertains to the subsequently announced tariffs.
Brent Kirby: We are still working through negotiations with our suppliers, and our team is working diligently to rapidly digest new information as it becomes available and respond accordingly.
Brent Kirby: As Brad mentioned earlier, and similar to what we noted on our last call at this stage, it is difficult to assess the exact timing, duration and magnitude of any tear for visions that will occur, and the way that suppliers, competitors and customers will respond to these changes.
Brent Kirby: It is still our expectation that we will be able to work with our supplier partners to actively negotiate the level of any tariff driven cost pressure they pass through to us in order to mitigate the impact to our customers. [inaudible]
Brent Kirby: In a similar fashion to how our industry and company has responded to previous tariff and other cost changes.
Brent Kirby: We also continue to believe that demand in our industry is resilient because of the nondiscretionary needs base nature of the products that we sell. Thank you very much.
Brent Kirby: As such, we believe we will still be able to profitably earn our customers business, but delivering a strong value proposition driven by our professional parts people and our industry leading parts of availability, even in an environment of rising prices.
Brent Kirby: Ultimately, we are confident in our ability to manage effectively through this period of uncertainty and believe that rational pricing will persist within our industry.
Brent Kirby: We also have more flexibility than ever in our company's history and how we manage our supply chain and where we source our products.
Brent Kirby: As we have previously stated, approximately one quarter of our products are sourced from China, and we have continued to reduce this percentage over the last several years [inaudible]
Brent Kirby: Given the uncertainties surrounding current trade deliberations, we would not anticipate significant country of origin changes in our sourcing in the near term.
Brent Kirby: However, we will continue to work closely with our supply chain partners to evaluate the most optimal strategic path forward
Brent Kirby: We have always been active managers of our supply chain in partnership with our supplier community, and we will work diligently to ensure that there is no barrier to us maintaining our inventory advantage that continues to position us as the industry leader in parts of availability. Thank you very much.
Brent Kirby: Factoring in these considerations, we are maintaining our 2025 full-year gross margin guidance range of 51.2 to 51.7%.
Brent Kirby: In line with Brad's discussion on our comp sales guidance, this reiterated guidance does not forecast any discrete impacts for varying tariff scenarios that may yet play out.
Brent Kirby: Turning to SGNA, our first quarter average SGNA for store growth of 4.1% was above our expectations.
Brent Kirby: As compared to those expectations, the pressure to SG&A was driven in part by team member payroll and benefit cost, reflecting variable spin on the sales results in the quarter and enhancements to store level pay plans, as well as some pressure in the quarter from medical plan cost.
Brent Kirby: We also saw some cost-pressure driven by maintenance and occupancy expenses, resulting from normal wear and tear to our stores during the winter months that outran our forecasts.
Brent Kirby: Our spin in the first quarter puts us on track to finish at the high end of our 2 to 2.5% full-year gunner's range for average SNA per-store growth.
Brent Kirby: On a quarterly basis for the remainder of the year, we are leaving our S-GNA expectations unchanged.
Brent Kirby: and we continue to expect to run approximately 2.5 to 3% in the second and third quarter. But we'll be below the four-year rate in the fourth quarter as we compare against the charge that we recognized for self-insured auto liability in the fourth quarter of 2024.
Inflationary Environment, More Broadly in the Economy
Brent Kirby: As always, we will diligently manage our SG&A spend to match business trends and the market share growth that we are driving in our stores and will not overcorrect in the short term in any way that would impact
Our High Standard for Providing Excellent Customer Service.
Brent Kirby: Based on our SGNA expectations and projected gross margin range, we have continued to expect our full year operating profit to come within our guidance range of 19.2 to 19.7 percent.
Brent Kirby: Inventory for Store finished the quarter at $806,000, which was up 4.3% from this time last year and up just under 1% from the end of 2024.
Brent Kirby: Inventory Turns Remains Strong at 1.6 Times as our teams work to continually enhance assortments by market.
Brent Kirby: The tiered nature of our distribution network with regional DCs and hubstores allow us to hold broad coverage in every market that we serve to provide the time definite promise that is so critical when immediacy of need drives our delivery times to be measured in minutes
Brent Kirby: We are still projecting to increase our average inventory per store by 5% in 2025, and we are pleased with the inventory investments that we have made thus far.
Brent Kirby: Lastly, to touch on our store growth and capital investments in the first quarter, we open to total of 38 net new stores across the US and Mexico.
Brent Kirby: Our new store performance continues to meet our high expectations driven by the teams of professional parts people that we have behind the counter in every new store and the distribution capability to deliver the inventory availability that our customers expect from us.
Brent Kirby: Capital expenditures in the first quarter were $287 million, and we still expect a total capital expenditure investment for 2025 of $1.2 billion to $1.3 billion to $1.2 billion.
Brent Kirby: The major projects behind this spend are on track, and we're excited about the growth opportunities ahead of us in all of our market areas. Thank you very much.
Brent Kirby: As I conclude my comments, I would like to thank the entire O'Reilly team for their hard work and dedication to starting the year right in 2025.
Brent Kirby: I look forward to the opportunities we have ahead of us this year and I have full confidence in our team to take on any challenge that presents itself.
Now I will turn the call over to Jeremy.
Jeremy Fletcher: Now we will fill in some additional details on our first quarter results and outlook for the remainder of 2025.
For the first quarter, sales increased $161 million dollars. [inaudible]
Jeremy Fletcher: Driven by a 3.6% increase in comparable store sales and a $73 million non-comp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base.
Jeremy Fletcher: Partially offset by 125 basis point headwind to our total sales increase from one from one less selling day as a result of lead day in the first quarter of 2024 .
Jeremy Fletcher: As a reminder, the impact from leak days is excluded from our comparable store sales.
Jeremy Fletcher: For 2025, we continue to expect our total revenues to be between $17.4 and $17.7 billion $17.
Jeremy Fletcher: Our first quarter effective tax rate was 21.3% of pre-tax income comprised of a base rate of 23.2% reduced by a 1.9% benefit for share-based compensation
Jeremy Fletcher: This compares to the first quarter of 2024 rate of 21.9% of pretaxing income, which was comprised of a base tax rate of 24.2% reduced by a 2.3% benefit for share-based compensation.
Jeremy Fletcher: Our first quarter effective tax rate was below our expectations as a result of the benefit we realized from share-based compensation.
Jeremy Fletcher: For the full year of 2025, we now expect an effective tax rate of 22.4 percent comprised of a base rate of 23 percent reduced by a benefit of 0.6 percent for share-based compensation .
Jeremy Fletcher: We expect the fourth quarter rate to be lower than the other three quarters due to the tolling of certain open tax periods. [inaudible]
Jeremy Fletcher: Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate as we saw in the first quarter
Jeremy Fletcher: Now, we will move on to free cashflow and the components that drove our results. [inaudible]
Jeremy Fletcher: Free Cash Flow for the first quarter of 2025 was $455 million, versus $439 million in 2024. The increase of $16 million was the result of modest working capital improvements, partially offset by higher capital expenditures. [inaudible]
Jeremy Fletcher: For 2025, our expected free cash flow guidance remains unchanged at a range of $1.6 to $1.9 billion dollars.
Jeremy Fletcher: I also want to touch briefly on our AP the inventory ratio. We finished the first quarter at 126%, which was down from 128% at the end of 2024, but slightly above our expectations. Thank you very much.
Jeremy Fletcher: For 2025, we expect to see continued moderation resulting from our plan in criminal inventory investment across a store and distribution network and currently expect to finish the year at ratio of approximately 125% .
Jeremy Fletcher: Moving on to debt, we finished the fourth quarter with an adjusted debt to EBITAR ratio of 2.03 times as compared to our end of 2024 ratio of 1.99 times with a modest increase in adjusted debt partially offset by EBITAR growth.
Jeremy Fletcher: We continue to be below our leveraged target of 2.5 times and plan to prudently approach that number over time.
Jeremy Fletcher: We also completed the renewal of our revolving credit facility at the end of the first quarter, which extended the maturity for an additional five years and upsides the facility to $2.25 billion in dollars.
Jeremy Fletcher: We appreciate the support of our bank partners and believe this I think provides the appropriate amount of liquidity for our business
Jeremy Fletcher: We continue to be pleased with the execution of our share repurchase program and during the first quarter we repurchase 431,000 shares at an average share price of $1,297 for a total investment of $559 million.
Jeremy Fletcher: We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business and we continue to view our buyback program as an effective means of returning access capital to our shareholders [inaudible]
Jeremy Fletcher: As a reminder, REPS guidance read outlined earlier includes the impact of shares repurchased through this call, but does not include any additional share repurchases. [inaudible]
Jeremy Fletcher: Before I open our call for your questions, I would like to thank our team for their hard work and dedication to start 2025.
Jeremy Fletcher: This concludes our prepared comments. At this time I would like to ask Matthew the operator to return to the line and we will be happy to answer your questions.
Jeremy Fletcher: Thank you. We will now begin the question and answer session. If you have a question, please press star one on your phone.
Jeremy Fletcher: If you wish to be removed from the queue, please press star two.
Jeremy Fletcher: We ask that while posing your question, please pick up your handset if you're listening on speaker phone to provide optimum sound quality.
Jeremy Fletcher: Please number two questions to one question and one follow-up question. Thank you very much for your time.
Jeremy Fletcher: Once again, if you have a question, please press star one on your phone . . .
Speaker Change: Your first question is coming from Michael Lasser from UBS. Your line is live.
Good morning. Thank you so much for taking my question to answer your questions.
understanding that it's a very fluid situation.
Speaker Change: If you simply ram the terrorists that are in existence today... [inaudible]
through the rest of the year.
What would the potential impact...
Speaker Change: on your sales and earnings fee as it stands and how much price do you think you would be able to pass along in a scenario where Tarrant's even close to this level persist for the foreseeable future.
Speaker Change: Hey, good morning, Michael. Thanks for the question. This is Brad. I'll start off and then kick it over to Brent to talk about some of the pieces as it relates to Tara Gross margins and top line and all the things she covered there. So, first and foremost, we're extremely proud of our merchandise team and they put a really great playbook in place back in 2016 that we've ran today through the pandemic. A lot of inflation flowing through and we couldn't have more confidence in our industry.
Speaker Change: and our ability to play from a position of strength, nondestressionary, needs-based business in our such amazing supply chain and obviously our professional parts people. Fluid is the right word, Michael. I like that a lot. That's kind of how we're thinking about it. This is day to day, week to week, month to month.
Speaker Change: You know that the challenge a little bit with the way you framed it up is that extrapolating out what that would mean today has been different last week. It could be different next week and so that's a little bit of a challenge but I'll take it over to Brent to talk about some of the detail of how we're thinking about that.
Speaker Change: Yeah, Michael, thanks for the question, and it's a logical question. I think the challenge with answering it explicitly is really some of the moving pieces that still exist. You know, if you think about the fact that we've got this 90-day pause on reciprocal terraces out there.
Speaker Change: You think about there's a layer in between there where there's an exemption for automotive parts that's been given.
Speaker Change: and our team, to Brad's point, our merchandise team is working diligently with our supplier base as well to really understand the codes with the products that are exempt under that automotive exemption versus those that aren't.
Speaker Change: and there's not been a lot of scrutiny on some of those harmonized tariff schedule codes until this point and now there's obviously a lot within the industry for all those reasons. [inaudible]
Speaker Change: So there's a level and a layer of automatic parts, especially from China that's going to be...
Speaker Change: There's going to have some exclusion, you know, and have a 25% additional rate versus that . . .
Reciprocal Terra Freight,
Speaker Change: There's still some debate there on, you know, what is going to be in that layer and what's not going to be in that layer. And our team's working.
Speaker Change: with our industry association, our industry association is working with the administration to help them better understand it.
Speaker Change: because in some cases as with things government sometimes there's a lack of understanding of the details of something like this and then once the industry gets involved there becomes a better understanding working with government so all of that is playing out right now, so it's really um...
Speaker Change: wouldn't be prudent to share a number right now because that number whatever that number would be today is going to change when it's all said and done. What I can tell you though I have extreme confidence in. [inaudible]
Speaker Change: Our team, the work that they're doing, I have extreme confidence in our industry and the resiliency of it in times like this [inaudible]
Speaker Change: and I just feel like that we're well positioned, no matter where we end up with this, to be in a good place with our supplier base, with our customers and the resiliency of our industry.
Michael Lasser: Michael, it just lastly, maybe on that. As always, our goal is going to be to…
Michael Lasser: You know, our goal is going to be to do everything we can to maintain rate. It's yet to be seen. Totally where the true health of the consumer is. I think that again is yet to be seen. We're still positive, but you know, we're going to continue to work hard, hard to make sure that we're taking, taking great market share, doing it effectively, holding our suppliers accountable. We got a lot of great partners. We're still negotiating through a lot of that. We're going to continue. We're going to continue, we're going to continue.
Michael Lasser: and we feel like we're going to be in a good position. We feel like our industry is going to be in a good position, but we also like how we're positioned as well.
Speaker Change: My quick follow-up is that O'Reilly historically has been the premium service
Player, and not the low cost provider.
Speaker Change: Does that put O'Reilly at a disadvantage in an era of what could be hyperinflation within the category? And would there be any consideration to evolving that strategy given what is possible? [inaudible]
Brent Kirby: Michael, this is Brent, I can start on that, I think it's...
Speaker Change: It's a good question, a fair question. What I would tell you, though, when you think about the landscape of everything you're talking about
Speaker Change: is, you know, we see ourselves in this industry as a sharegainer.
Speaker Change: And we feel like a lot of our supplier partners see us as a share gainer as well and they want a partner with us because they see us that way. Now listen, we got to earn that every day with our customers, our team members, every transaction, we don't ever take that for granted. Thank you very much.
Speaker Change: puts this probably in a better negotiating position as it relates to the things you're talking about than a lesser negotiating position.
Speaker Change: Yeah, and Michael, this is Brad. The other thing I'd say directly to what the way you frame that up is our pricing profiles today on both sides of the business are extremely competitive. [inaudible]
Speaker Change: and on the professional side, we couldn't feel better about the way we're positioned from a pricing standpoint. We're always going to...
Speaker Change: Do everything we can to have a premium there because, frankly, our professional parts people in our industry-leading supply chain allows to do so. That said, everything we've been through the last many years with our professional pricing initiative in the way that we use data and science along with the street view of how we need to be from a competitive pricing standpoint. I just the way you friend that up, I don't think that's the case. I think we're going to be playing from a position of strength. I feel good about our pricing and I feel like even if that was the case, [inaudible] I don't know if that was the case. I don't know if that was the case. I don't know if that was the case.
Speaker Change: to some degree, the offsets are going to come in weaker players in the industry, you know, the complexity of things coming down the pike for some of the independent side of things. And you know, we feel really good about that.
Thank you very much for the luck.
Thanks Michael. Thank you Michael
Speaker Change: Thank you. Your next question is coming from Simeon Gutman from Morgan Stanley . Your line is live.
Simeon Gutman: Take a morning everyone. So Brad, the last couple of years O'Reilly has invested a lot in 2SGNA.
Simeon Gutman: and you presented again with this unique moment, your share gains have been solid, balance sheets good, and your buying leverage has got to be among the best in the industry. I wanted to take your temperature. Sure.
Simeon Gutman: on the debate if you're having any about ramping up SG&A spend and then even handling tariffs to lean in a little bit on price to push the market share. Is that even a thought are you just trying to manage the environment as best as you can right now? [inaudible]
Simeon Gutman: Yeah, hey, thanks, Emilian. It's more of the latter. You know, maybe to take the SG&A piece first. Listen, you know, we are somewhat disappointed with our SG&A performance in the first quarter. You know, we were just out with our guidance a couple of months ago. And, you know, sometimes models don't get exactly right from quarter to quarter based upon how we see it internally. So there's a little bit of that. But we were somewhat disappointed with our SG&A performance in the quarter. You know, our team takes great pride in [inaudible]
Simeon Gutman: in managing every detail of SGNA, and we still feel good as we mentioned in our prepared comments, Simeon, about the way that we laid out our cadence of SGNA. We wanted to be transparent that the way we're thinking about it is the high end of our...
Brent Kirby: S-DNA Guidance Range for the four-year and his Brent pointed out earlier, basically for Q2 and Q3, we're going to be at that two and a half to three percent range and then less than that in the fourth quarter, part of that being the self-insurance charge comparison. [inaudible]
Brent Kirby: So, we don't want anybody to see this as yet an additional cycle from a S-GNA spin standpoint. We feel really good about our guidance, we feel good about our plan, and we're going to make sure we manage diligently the remainder of the year and make sure that we come into expectations. And really our team did a good job in the first quarter.
Brent Kirby: We had a couple of things that popped up. Nothing alarming, nothing that our team necessarily mismanaged. Brent called out that we had a minor change in the way that we compensate our store managers. We had an enhancement to that pay plan.
Brent Kirby: that resulted in just a timing issue that's not a big deal that will flush out in the remainder of the year. And, you know, to Brent's point earlier, had a little bit of maintenance and occupancy cost things that, again, just a little bit of timing, but also some things we can always manage better. Thank you very much.
Simeon Gutman: and then on the on the tariff side in terms of pricing we you know really for what we've seen so far this year Simeon continue to see a very rational environment you know is the kind of the q1 wrapped up and we get into q2 [inaudible]
Simeon Gutman: You know, continue to see what you would expect. It's still a little bit early to tell what's being pushed through but there's no no plans to invest in price in terms of the way you asked that.
Speaker Change: Okay, now follow up on inventory, I remember in the COVID period, you got ahead of inventory, you had a better position and you're able to take share in light of industry conditions which could get better.
Simeon Gutman: because of the price of a new vehicle and the demand will, you know, go up to keep a nuke on the road. Anything you're changing with inventory and anything related to expectations for industry growth for the year. [inaudible]
Brent Kirby: No, Simeon, this is Brent. I would tell you, no, in terms of inventory, our goal is to...
Brent Kirby: have the best parts of availability in every market that we operate in and our teams have been committed to that.
Brent Kirby: through COVID and ever since. And I would tell you, you know, when you look at our fill rates and and in stock performance, it's the highest it's been.
Brent Kirby: since pre-COVID in Q1, and we don't have any.
anticipation of changing the focus there. Thank you.
Simeon Gutman: Yeah, I think maybe just wrap that up, Simeon. With disruption or without disruption, we couldn't feel better about our investments in inventory. We've been pouring into this for a long time. It's a competitive strength of ours. We're going to continue to make sure it's a competitive strength to Brent's point in every single market. We're going to continue to run our playbook when it comes to...
Simeon Gutman: continued investment inventory, obviously do it in a discipline way.
Thanks, guys. Good luck.
Thanks, Amy. Thanks, Amy.
Speaker Change: Thank you. Your next question is coming from Greg Melich from Evercore. Your line is live.
Hi, thanks. I wanted to dig a little bit.
Competitive Environment, and particularly for our closures from...
Speaker Change: and just disruption with independence. Do you see the M&A participating in these shifting? Or is this a good time to ramp investments that you have planned in the pipeline? No, I don't think so.
Speaker Change: Hey, good morning, Greg. You cut out a couple of times, but I think we picked everything up. So, yeah, competitive landscape Greg, you know, it's not a lot has changed, you know, it's a competitive market out there. We have a lot of, you know, big competitors. They continue to do an amazing job from the execution standpoint. You know, we have some struggling competitors, you know, landscape really continues to be pretty much how we've talked about it in terms of the other big three, as well as
Speaker Change: The, you know, strong independence, there's some mediocre independence, and then some independence that are struggling that is always an opportunity. The, the, the, the, the, the, the,
. . . . . .
Speaker Change: You know, I think, you know, from, you know, from a...
Speaker Change: Disruption in terms of what you asked about in terms of one competitor. Really, it's still a little bit early to tell in terms of store closures. I know we've said that for a couple quarters here but the reality is the way we understand it a lot of those wrapped up kind of toward the tail end of Q1 and we know there's going to be something there, but we just want to continue to temper that knowing that those volumes were really low and some of that may not be [inaudible]
addressable or things that we want at our margin profile.
Speaker Change: That said, you know, Jason Tarrant's teams, our store operations teams and all our support teams from the distribution centers and the corporate office are doing everything in our power to make sure in a jump ball that we're out there calling on those customers, understanding who they are, D-I-Y-N-D-I-F-M [inaudible]
Speaker Change: and so obviously we're going to work very hard to turn any of that sharing into a rally share. Again, just tempered with, we don't know how material that's going to be and it's going to probably take another quarter or two to really see how that plays out. We don't want to misspeak to that. And then on the M&A front, Greg. Yeah, I mean, M&A continues to be an opportunity for us when I think about it, especially as we start to really fill in the kind of the upper mid-Atlantic and getting into New York [inaudible]
Speaker Change: City, you know, and all those type markets. We feel there's going to continue to be.
Speaker Change: Solid Opportunities from an M&A standpoint. It's probably going to be more in the context of kind of onesies and twosies and then maybe some smaller chains that have 5, 6, 7, snores. Don't know that there's anything large in material in those markets, but kind of yet to be seen. But yeah, we're staying opportunistic, you know, in terms of kind of the last two subjects put together. There's been some opportunities to change some jobers over to our Park City program. It's been pretty...
Speaker Change: Small. Been a couple of ones these and two of these type opportunities to to tuck in kind of spread across the country from that disruption and we're going to continue to look for those opportunities. [inaudible]
Speaker Change: That's great. And on gross margins, I just thought to follow up, given how EBIT margin did fall in 1Q, is we look forward to get EBIT margins up for the year. How much do we expect gross margins to expand in 2Q and in the rest of the year?
Jeremy Fletcher: Yeah, Greg, this German good good good question, you know, we would still [inaudible]
Speaker Change: You are our Gorshmargin performance as we move through the year to be relatively consistent.
Speaker Change: For sure, probably most likely on a cadence, it's gonna look.
Speaker Change: A lot like what it did last year, just keeping in mind last year's second quarter was a softer, gross margin quarter for us, but still kind of relatively within an entire band there's just to make things that happen in second quarter [inaudible]
Speaker Change: As we move through the balance of the year, our expectation is that is that that performs a little bit better in the in the back half and
Speaker Change: and puts us, you know, kind of solvently within that range that we provided. You tell you that just versus our expectations, you won't cross margins where exactly where we would have expected that they would have been.
God, thanks and good luck guys.
Thanks, Greg. Thanks, Greg.
Speaker Change: Thank you. Your next question is coming from Chris Batiglieri from BMP. Your line is live.
Chris Bottiglieri: Hey guys, thanks for taking the question. Can you elaborate more about your experience? Hey, good morning. Can you elaborate more about your experience moving product from Chauda since the last out of Terrace? How long does it take to move sourcing? Is there anything about the first five points of sourcing?
Chris Bottiglieri: that you move and made it easier, how feasible to move the X5 to 10. If it comes to that, it sounds like right now you're staying put, but just kind of curious, like, how the pick of the timeline of moving.
Chris Bottiglieri: Yeah, Chris, this is Brent, I can start on that. It's a great question, you know, and honestly, as I mentioned in my prepared remarks, you know, we've continued to reduce our dependency on sourcing from China, really started back during COVID, the team has done a good job of continuing to move
Chris Bottiglieri: some of our sourcing out of that country. And where we've moved it, we're actually standing up capability in places like India, Vietnam, Thailand, other places.
Places,
Chris Bottiglieri: where we're building muscle, if you will, and have options to further move production there over time. And as I, again, as I mentioned in the comments, I mean, we're going to take a strategic look when we feel like... [inaudible]
Chris Bottiglieri: There's some true settling of where the tree direction is on tariffs. Hopefully we'll get that over the next couple of quarters at least. In long term we're going to make the best strategic decisions for our sourcing options globally. We'll see you in the next couple of quarters.
Chris Bottiglieri: The great thing is, and we've talked about this as well, but our proprietary brand portfolio gives us a great umbrella to do that under and the teams have done a great job, our purchasing team as well as our merchandise team have done a great job using those brands for multiple suppliers or those brands that meet our spec and
Chris Bottiglieri: really had a lot of success with that, so we feel like that's going to be a good enabler for us to make the best long term sourcing decisions once we get through the near term disruption we have right now. [inaudible]
Chris Bottiglieri: Chris, maybe the only thing I would add to that is, as Brent mentioned, we're in a better position, I think, based upon the work we've done over the last several years, in the...
Chris Bottiglieri: The close work we've done with our supply partners to be able to work through the process to stand up in other places because obviously there's some time there's an investment cycle to do that in. [inaudible]
Chris Bottiglieri: I think the big question that we all have in Brent Point is [inaudible]
Chris Bottiglieri: is exactly how how do you plan for what that outlook is going to be because because we're really cannibly the
Chris Bottiglieri: The piece that takes more deliberation is just understanding how to best think about what the long range looks like.
and knowing that that...
Chris Bottiglieri: that can cause that strategic path to take a few different directions just as a magnitude of things play out. Interestingly, as we looked at the process over the course of the last, really kind of. So, let's take a closer look at the process over the course of the last one.
Chris Bottiglieri: seven years or so. That really started to gain even more traction for us on a lot of our self-partners as some of the previous changes in the tariff regime.
Chris Bottiglieri: who sustained themselves through another administration, where there was some permanence around how that first round went from the early time period. And so there may be some degree to which we don't go as fast as we possibly could as we just want to be appropriately.
Deliver it about how we think about the right long range approach.
Speaker Change: Okay, that makes sense. Then a follow-up. Do the sense for, I think like you always want to own the most scale, which is a rarely incentive environment. But do you have a sense for like, how your petitors put the private side?
Speaker Change: Are they sourcing generally from the same suppliers and countries of origin as the publics are like O'Reilly?
Speaker Change: Or are they still over next to the U.S. or they didn't leave quickly, China as quickly as you had in the last five years, just have a sense of your competitive position in sourcing. Moving forward, it sounds like you'll be the most dynamic and nimble that just curious within the private tip of that. [inaudible]
Speaker Change: Yeah, Chris, I think what I will tell you is there are a lot of factories producing auto parts in various parts of the world. I would say we share some of those suppliers with some of our competitors. In many cases we don't share them with our competitors. It's a bit of a mixed bag. [inaudible]
Speaker Change: You know, and then as it relates to national brands, I talked about proprietary brands. We also go to market with
Speaker Change: You know, a mix of proven national brands as well. So those national brand partners again, some of them do business with some of our competitors, some don't exclusively. So there's a mix bag there as well. So I would tell you probably the answer to your question is it's a bit mixed. [inaudible]
Speaker Change: But, again, we feel very confident in our supply change ability to be nimble in the environment that we're operating in and feel good long term strategically that we'll be able to source as good or better than anyone in our industry based on our position. Thank you very much.
that makes sense, thank you very much.
Thanks, Chris.
Speaker Change: Thank you. Your next question is coming from Body Alms from Bank of America. Your line is live.
Speaker Change: Oh, hi, it's Robbie Elms. Thanks for taking my question. Actually, I'm sorry to keep asking about tariffs, but I wanted some help with the clarification on what's happening right now. So are you guys?
Are you guys...
Speaker Change: Are you receiving higher tariff goods right now and when or when would you be receiving them and when would...
Speaker Change: Stuff that would already be at the very high tariff out of China
Speaker Change: Be sort of flowing through your income statement and pressure and gross margin. And then...
and then my other question is...
Speaker Change: Are you seeing any signs of pull forward from your customers either on the pro or DIY side that are you know concerned that you know tariffs will remain elevated and won't be excluded potentially and so they're actually ordering excesses from you guys themselves right now?
Brent Kirby: Yeah, hey, Robbie, this is Brent, I can start and the other guys can chip in. I mean, I think really, you know, the first part of your question, what are we experiencing now? You know, a couple of things, we, you know, our suppliers are. [inaudible]
Brent Kirby: by and large importer of record for most of our US business. So when you think about some of the stay that's been given on the reciprocal tariffs, down to 10% for the 90 days, yes some of that is
Brent Kirby: is starting to begin to impact, you know, being cost of goods. I will tell you though, as we said in our prepared remarks, there was virtually very little, I would call it immaterial impact of that in Q1 results. . .
Brent Kirby: Q2 results, we'll start to see some of that flow through but we're working very closely with our suppliers [inaudible]
Brent Kirby: On that, I also mentioned in the previous question around some of the automotive exemptions that are out there specifically from China that are still being worked through our suppliers and...
Brent Kirby: our teams diligently right now. And then you have this stay on the reciprocal tariffs for other countries. But
Brent Kirby: I would tell you, yes, there is some that's starting to begin to flow through and as we begin Q2 and it costs a good I would tell you that 90 day stay that's been given on the reciprocal tariffs gets you into the beginning of our Q3 Q3
Brent Kirby: So, even Q2 will be somewhat of a transitionary quarter to see how much of this really sticks versus it doesn't in terms of true long-term impact the cost of goods. So...
Brent Kirby: That's really kinda where we are at this point on that piece of it.
Hey, hey Josh, real quick on the...
Brent Kirby: Sorry, Robert, this is Brad. I'm just going to follow up on the customer side. Good question there. No pull forward that we're seeing. You know, that's pretty difficult in our business with the application. Thank you very much.
Brent Kirby: Pick up some stocking items, things like that, but for sure our retail customers don't behave that way and then really on the DIFM side, it's really the same. There's not a lot of that. Well we really haven't seen any of that, but just generally in our history, it's just not really how they operate. Our shops aren't set up to keep a lot of big stocking levels in their locations and don't really have the...
Brent Kirby: Necessary of the financial flexibility to do that, and that's a good thing, the way it works in our industry, we rely on each other, and so I wouldn't expect to see any of that.
That's really helpful. Thank you.
Brent Kirby: and Robbie, this is Brent, just one other item to talk about because we, you know, kind of a lot of these conversations on tariffs that have leaned toward China, but, you know, there's also been conversation around Mexico and Canada, and I'll just tell you again at this point back to your question in time. Let's go.
Brent Kirby: Pretty much everything we're bringing in, which again we bring in some product from Mexico, very little from Canada, but that is all, as long as it's still USA, USMCA compliant, there's been no additional tariff supplied there at this point in time too, so that's worth noting also.
That's great. Thank you
Thank you for the question.
Thanks.
Speaker Change: Thank you. Your next question is coming from Kate McShane from Goldman Sachs. Your line is live.
Kate Mcshane: Hi, good morning. Thanks for taking your questions. We had a question more around price increases if it could come to that.
Speaker Change: Obviously, there's been success in passing through inflation in this industry for a very long time.
Speaker Change: What do you think ultimately there will be maybe some U.S. to the impact maybe in more of like the maintenance and certainly the discretionary categories if those prices were to go beyond a certain level?
Jeremy Fletcher: Hey, Kate, this is Jeremy. It's a great question. And one that, you know, a different cycles within the course of time in our industry, you know, is always the question that gets asked into one that we're pretty cognizant of.
Some of that is going to depend.
Jeremy Fletcher: for sure on where we really do settle from the cost pressure side. Our industry has always been...
Jeremy Fletcher: One that has had a very, very substantial amount of pricing power just principally as you know, as we've talked about for a long period of time, the...
Jeremy Fletcher: The primary drivers of value that supports demand in our industry are not priced related there.
Jeremy Fletcher: They're great service, they're great availability, they help solve problems for DIY customers, they help get.
to allow our professional customers to run a very effective business in the parts that we sell are...
Jeremy Fletcher: to adjust off of, or you haven't seen a lot of elasticity that would cause people to go to market in some different way.
Jeremy Fletcher: The only exception to that, and it's not necessarily been always as price-driven as you see, but when that consumer is under more significant pressure, you can't see instances where they'll defer over a short period of time It's a shame.
Jeremy Fletcher: or where they may try to trade down on the value spectrum. Typically, that's not always driven by factors within our industry.
from a price level perspective.
Jeremy Fletcher: That's more of broader pressures on the consumer. Probably the more significant timeframe that we saw that was back in the 2008-2009 period where unemployment was a little bit higher and there was a little bit more pressure. However, it was a little bit more pressure on the consumer, but it was a little bit more pressure on the consumer.
Jeremy Fletcher: It was interesting as we didn't see a substantial amount of that during...
Jeremy Fletcher: During the course of the pandemic when reflection was as elevated as it was...
Jeremy Fletcher: because I think the thing that supports the very resilient demand and industry is also a way for our customers to be able to be more efficient in how they manage their household budgets to keep cars on the road to avoid car payments.
Jeremy Fletcher: and things like that. So over the course of time, that's what we've seen. You know, it's been our experience. We would think that would be true. You know, it's some of the very high end of the potential discussed tariffs. [inaudible]
Jeremy Fletcher: Those are all clearly unprecedented and even unprecedented for the inflation that we would have seen during the course of the pandemic.
Jeremy Fletcher: I think that's a different dynamic. We would still feel like most of the same factors that I discuss would be in play there as well, but clearly it's hard to address things that would be unlike anything we've ever seen in the past.
in the industry
Thank you [inaudible]
Thanks, Kate. Thanks, Casey.
Speaker Change: Thank you. Your next question is coming from Christopher Horvers from JP Morgan. Your line is live.
Christopher Horvitz: Thanks guys, so I wanted to talk about Tarrants as well. I guess the first question is...
Speaker Change: Historically, the industry would take price out of cost in many situations and you sort of have this front end clip of the gross margin given how inelastic demand is.
Speaker Change: How do you think about that opportunity in this environment? Is it like, well, given what's going on with the consumer and the level, the potential level of inflation across the wallet?
Speaker Change: Do you do a wait and see approach and wait for the actual inventory to turn? And then related to that, one of the questions we're getting is given sort of life-alcounting, which is a bit of a mystery for most people. Is there any potential headwind or tailwind? [inaudible]
related to this potential power of inflation. [inaudible]
Speaker Change: Yeah, Chris, I can probably start there in Brad or Brent Kinshup Inn. Our protests historically
Speaker Change: to sync up how we think about the changes that we make in market pricing to when we see the cost impacts flow through our financial statements.
Speaker Change: which to your point, as a life foe shop, means that you're going to see that on the front end as you start to receive that higher product. Obviously there is...
Speaker Change: Still some impact in terms of when tariffs are implemented, how you negotiate through that time frame, working with the suppliers to, you know, to. [inaudible]
Speaker Change: Those higher POs are going to hit, but typically as they start to come in, we're wanting to be...
Speaker Change: synced up so that we don't have this impact from a life of perspective where...
Speaker Change: where we've got charges that flow through that aren't matched up. That's typically been our approach. From an industry right perspective that there are always kind of puts and takes in how that timing works out because it's not everybody's schedules line up in the same way in terms of win.
with particular...
Speaker Change: The impacts show up, but generally speaking, that all even within an industry perspective happens in a relatively...
Speaker Change: Contents Time Frame, at different points of time we've been out ahead of cost changes with price increases sometimes they lag a little bit just depending upon where the rest of the market is at they can cause. [inaudible]
Speaker Change: I just say maybe a quarter fluctuations at some point, but generally speaking those things align fairly closely in how we think about managing through these periods of time. [inaudible]
Brad Beckham: Hey Chris, this is Brad. One other thing I thought about while Jeremy was speaking there is I don't think we said this on the call yet but it's probably an obvious statement but I want to make sure I say it along the lines of the question you ask is that every...
Brad Beckham: consideration with each supplier. It's a negotiation, and we have a lot of amazing suppliers, a lot of great partnerships, but we partner with our suppliers to figure out who burdens what part of the cost, depending on the maturity of the supplier, depending on how proactive they've been, mitigating costs, getting more productive in their environment, pulling costs out the way we've done that the same. And so obviously don't think just through how we're going to go with a full pass through as much
Brad Beckham: which is, you know, every one of those, generally speaking, is shared between us and the supplier.
Speaker Change: So, my final business, can you put yourself in the position of if you're a WD or an independent?
in other times of sort of stress in the industry.
Speaker Change: It's created a market share opportunity at the global supply chain situation where obviously your sourcing capabilities are vastly better than
Speaker Change: Most of your competition. So is there is this a stress moment where I don't know the independence have working capital considerations or maybe are they going to be put in their stress run availability perspective? You know, does it create a market or opportunity or is this a sort of a quote rising tide for the entire industry? Thank you.
Speaker Change: Yeah, Chris, I don't want to give you a non-answer, this is Brad, but it is a little bit about, you know, only because the way that we view the WD's independence to stepers, you know, there's amazing operators that, you know, will operate very well in this environment and, you know, there's some that are probably middle of the road and...
Speaker Change: and some that may be struggling, and so I think really to the root of your question.
Speaker Change: I think there could be some disruption, you know, we want to be careful getting too far out there on that. We're going to work to capitalize on every opportunity but I think generally speaking, you know, Brent had a question earlier about. [inaudible]
Thank you.
Speaker Change: and the smaller companies have to rely more on the national brains.
Speaker Change: and even though they could be a similar supplier in the box, they have to rely more on the national brands and that gives us flexibility in itself. So, you know, don't want to take anything those folks do for granted they are amazing competitors, but we do feel like there can be some opportunity. Thank you.
Thanks guys, have a great spring.
Thanks, Chris.
Speaker Change: Thank you. We have reached our allotted time for questions. I'll now turn the call back over to Mr. Brad Beckham for closing remarks.
Speaker Change: Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers.
Speaker Change: I would like to thank everyone for joining our call today and we look forward to reporting our second quarter results in July Thank you