Q2 2019 Earnings Call
Good morning, and welcome to the O'reilly automotive Inc. second quarter 2019 earnings Conference call. My name is Brandon and I'll be your operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a 30 minute question and answer session.
During the question and answer session. If you have a question. Please press star one on your telephone keypad I will now turn the call over to Mr. Mcfall, you may begin sir.
Thank you Brandon good morning, everyone and thank you for joining us.
During today's conference call, we will discuss our second quarter 2019 results and our outlook for the third quarter and full year of 2019.
After our prepared comments, we will host a question and answer period.
Before we begin this morning, I'd like to remind everyone that our comments today contain forward looking statements and we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 90 to 95.
You can identify these statements by forward looking words, such as estimate May could will believe expect would consider should anticipate project plan intend or similar words.
The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 30, Onest 2018, and other recent SEC filings.
The company assumes no obligation to update any forward looking statements made during this call at this time I'd like to introduce Greg cap.
Thanks, Tom.
Good morning, everyone and welcome to the O'reilly auto parts second quarter Conference call.
Participating on the call with me. This morning are Jeff Shaw, our Chief operating Officer, and co President and Tom Mcfall, Our Chief Financial Officer.
David O'reilly, our executive Chairman is also present.
I'd like to begin our call today thanking team O'reilly for their continued dedication to providing excellent service that earns our customers business every day.
Our team remains relentlessly committed to our customers and the growth of the O'reilly brand in all of our markets.
In the second quarter, we generated a 3.4 comparable store sales growth as our core underlying business was very solid.
However, we face some adverse weather headwinds during the quarter, which resulted in comparable store sales coming in towards the bottom end of our guidance range.
We saw strong start to our quarter in April , but experienced unseasonably cool and rainy weather in many of our markets as we move through the quarter, which significantly impacted demand, we typically see in seasonal heat related categories.
As we called out in our press release yesterday, the significant precipitation we have seen thus far in 2019 has also delayed new store construction and pushed back our anticipated new store opening schedule, which Jeff will discuss in his prepared comments.
The combination of these top line pressures, coupled with continued headwinds and SGN a expenses from an inflationary cost environment resulted in our second quarter earnings per share performance of $4.51 falling below our guided range of $4.55 to $4.65.
We are not pleased whenever our actual results fall short of our expectations, but remain confident in the drivers of underlying demand in the automotive aftermarket and in the ability of our team to outperform our competition and grow market share.
Now I would like to provide some additional color on the composition of our second quarter comparable store sales results.
Both the DIY and professional sides of our business contributed positively to our comp growth in the second quarter with professional again being the stronger contributor.
In aggregate comparable store sales gains continued to be driven by increased average ticket as a result of continued increasing parts complexity and inflation.
Comparable ticket counts for the quarter were flat with solid growth on the professional side offset by pressure to the DIY ticket count is consistent with our recent trends as customers on this side of the business remain more susceptible to rising prices.
On a year over year basis, we experienced product acquisition inflation, driven by tariffs and other input cost increases passed on from our suppliers.
As has been the historical practice in our industry. These acquisition cost increases have been rationally pass through to increase pricing.
During mid June the additional round of 15% tariffs went into effect and we anticipate the related acquisition price increases will be passed along in selling price.
However, we expect the incremental benefit and same skew pricing will likely be offset by pressure to ticket counts and good better best product mix headwinds.
Next I would like to provide some additional details on category performance and the cadence of our comparable store sales growth during the second quarter.
As I previously mentioned the quarter started off well, but demand slowed as we moved into May and June .
Typically we see a seasonal increase during these months and heat related categories, such as air conditioning and refrigerants.
However, with the unseasonably cool and rainy weather in many of our markets in May and June we experienced sluggish demands in these categories.
Excluding the headwinds we saw in these categories. We saw we continue to see.
Solid demand in both sides of our business in line with our expectations and are pleased with the performance of key under car hard part categories, including brakes ride control and chassis.
We continue to have a positive outlook on the strength of our industry, including positive trends in core underlying demand drivers steadily increasing miles driven and increasing agent complexity of vehicles.
While weather conditions can call short term volatility in our business. Our team remains focused on providing the best possible service to our customers every day and all of our markets and this can system see an execution drives our ability to take share in all market conditions.
With more normal summer weather, we have experienced thus far in the quarter were off to a solid start in the third quarter and are establishing our third quarter comparable store sales guidance at 3% to 5%.
Based on the first half performance and are unchanged expectations for the demand conditions in our industry. We are maintaining our full year comparable store sales guidance of 3% to 5%.
For the quarter, our gross margin of 52.8% was a 36 basis point improvement over second quarter, 2018 margin and inline with our full year gross margin guidance.
During the quarter, our slower than anticipated seasonal sales resulted in a mix benefit to gross margin percentage and the year over year stability in gross margin highlights our industrys ability to pass along acquisition price increases.
For the year, we're leaving our full year gross margin guidance unchanged at 52.7% to 53.2% of sales.
Although based on year to date results in second half expectations, we now expect to be above the mid point.
Our operating profit dollar growth was 4% for the second quarter and 4.5% for the first half of 2019.
And we continue to expect our full year operating profit as a percent of sales to be within our previously guided range of 18.7% to 19.2%.
For earnings per share were establishing our third quarter guidance at $4.73 to $4.83.
We are maintaining our full year EPS guidance of $17.37 to $17.47.
Based on our year to date results expected headwinds from delayed new store openings and continued anticipating pressure to as DNA.
We expect to come in near the bottom of the range.
Our full year guidance includes the impact of shares repurchased through the call, but does not include any additional share repurchases.
Before I turn the call over to Jeff I would like to again, thank our team of over 81000 dedicated team members for their continued dedication and commitment to our customers.
We remain very confident in the long term drivers for demand in our industry.
And we believe we're very well positioned to capitalize on this demand by consistently providing industry, leading service to our customers every day.
I will now turn the call over to Jeff Shaw Jeff.
Thanks, Greg and good morning, everyone.
I'd like to join Greg in thanking team O'reilly for their hard work steadfast commitment out heavily in the competition to earn our customers business by providing the best service in our industry.
Our team continues to successfully navigate choppy sales environment by staying focused on the fundamentals of our business and ensuring we are doing everything possible to take care of our customers.
I'd like to begin my comments today by discussing our SGN a results for the quarter and provide some color on our approach to executing our business model and managing expenses.
As DNA as a percent of sales was 33.6% a de leverage of 64 basis points from 2018.
On average per store SGN a basis, our SGN, a grew 3.4% which is higher than our expectations for the quarter. While total SGN a dollar spend was on plan.
The majority of the deleverage from the prior year was expected as we continue to see structural cost pressure from rising wage rates and other variable cost in a tight labor market.
At the same time.
We continue to invest in our goals to continually enhance customer service, both in store and and our omni channel and technology initiatives.
The higher than expected per store SG net growth is the result of delays in new store openings.
When a new stores opening date is pushed back a month or two a portion of the staff for the new store has already been hired and is in training in an existing store.
Adjusting for these delays is extremely difficult, especially in this tight labor market.
Our field management teams have flexibility to adjust staffing levels to appropriately responds persistent trends in our business, but will not adjust drastically in short periods of time in an attempt to hit a short term target.
We're very confident in the strategy and feel that our consistency in delivering excellent customer service in all market conditions has been critical to our long term success.
However, we do encounter pressure to our SG nay when facing sales volatility, particularly when we experienced significant weather driven swings in the business in the short term.
We constantly evaluate the opportunities we have to and drive to to drive increased sales and profitability, we can and will prudently adjust expenses over time when appropriate for our business.
As Greg discussed earlier as we look forward to the remainder of 2019, we continue to have a positive outlook for the demand in our industry and are maintaining our sales guidance.
As a result, we're also maintaining our guidance range for full year growth in ESG on a per store of 2.5% to 3% with the expectation we will come in towards the higher end of that range based on the results in the first half of 2019.
Next I'd like to provide an update on our store expansion during the quarter and our plans for the remainder of the year.
In the second quarter, we opened 43 net new stores, bringing our total 2019 store openings to 105 through the first six months of the year.
While the construction installation and opening of over 100 stores in the first half of the year is the result of a significant amount of hard work and dedication by our team.
We unfortunately are well behind the planned schedule for new store openings, we establish coming into 2019.
This shortfall is the result of this significant level of precipitation we saw in markets with new store projects in development.
Consistent with our approach in previous years, our projected calendar for new store openings is more heavily weighted towards the front half of the year.
Which affords us the opportunity to put new team in place and let them get their feet underneath them before entering the busy summer season.
We're accustomed to seeing and adjusting to delays for any number of reasons, including weather and typically would not have a material impact to our overall schedule.
Unfortunately, the wet weather in 2019 has been waiting for a widespread and persistent enough on a week to week basis.
That is delayed many projects for extended periods of time and has impacted our overall schedule significantly.
As Greg mentioned earlier this delay created topline pressure in our second quarter that will persist as we catch up in the back half of the year.
However.
We remain very confident we'll achieve our goal of opening at least 200, new net new stores for 2019.
Now before I turn the call over to Tom I would like to provide an update on a couple of other expansion projects.
During the second quarter, we successfully completed the conversion of 20 Bennett auto supply stores acquired at the end of 2018.
And merged the remaining five stores into existing O'reilly locations.
The Bennett team has been a great addition, and we're pleased with the opportunities to continue to grow our business in Florida, which remains a key growth market for us.
Finally, I'm pleased to report that we continue to progress on schedule in the development of our Threed DC projects with planned new facilities and Twinsburg, Ohio, just south of Cleveland in Lebanon, Tennessee in the Metro Nashville market and in one like Mississippi, just south of Memphis.
We've established an aggressive schedule for these projects with a planned opening of twinsburg in the fourth quarter, followed by Lebanon opening in the first half of 2020 and Horn Lake opening in the second half of 2020.
Our DC team has repeatedly demonstrated the ability to successfully manage multiple ongoing new distribution projects.
While consistently achieving a high standard of service to our stores to get hard to find parts in our customers' hands faster than our competitors.
We are the industry leader in the investments we've made to establish a robust distribution infrastructure that supports the best parts availability in the aftermarket.
And we will aggressively work to enhance our distribution capabilities to maintain this competitive advantage.
As important as the physical locations of our 27, Dcs and our network of 350 hub stores are to our strategy is equally important that we execute on our business model of deploying the right inventory at the right location within our supply chain.
And effectively and efficiently delivering the right part to our customers faster than our competitors.
We're extremely confident in the ability of our teams to execute at a high level and lead the industry in inventory availability, but we will not rest on our past success as we strive to expand our industry leading advantage.
I'd like to once again, thank our store and distribution teams for their continued dedication to providing the best customer service in our industry.
Despite the fluctuations in industry demand, we experienced in the first half of the year. Our team has produced solid results and we're in great position to finish the year strong.
Now I'll turn the call over to house.
Thanks, Jeff I would also like to thank all of team O'reilly for their continued commitment to our customers, which drove our solid results in the second quarter.
Now, we'll take a closer look at our quarterly results.
For the quarter sales increased a $134 million comprised of an $81 million increase in comp store sales a $54 million increase in non comp store sales, which includes the contribution from the acquired Bennett stores.
And $1 million increase in non comp non store sales.
And a $2 million decrease from closed stores.
For 2019, we continue to expect our total revenue to be $10 billion to $10.3 billion.
As Greg previously mentioned, our gross margin was up 36 basis points for the quarter as we saw benefits from product mix.
On a year over year basis second quarter gross margin also benefited from the sell through of on hand inventory that was purchased prior to the tariff driven acquisition price increases which went into effect at the end of 2018 in the beginning of 2019.
And the corresponding retail and the wholesale price increases.
Within our guidance expectations coming into 2019 this benefit to gross margin was expected to be more significant to gross margin in the first half of the year.
And as Greg mentioned earlier, we are leaving our full year guidance unchanged, but our actual results will be impacted by the most recent round of tariffs and the timing of corresponding market price increases.
We remain confident that margins will remain rational industry as the non discretionary nature and immediacy of need of the parts, we sell affords us and our competitors significant pricing power.
Our second quarter effective tax rate was 23.9% of pre tax income.
Slightly above our expectations and comprised of base rate of 24.4%, which was on plan reduced by a half a percent benefit from share based compensation, which was less than expected.
This compares to the second quarter of 2018 rate of 21.5% of pre tax income, which was comprised of a base rate of 24.5% reduced by a 3% benefit for share based compensation.
For the full year of 2019, we continue to expect an effective tax rate of approximately 23.5% comprised of base rate of 24.1% reduced by a benefit of 0.6% per share based compensation.
While the benefit from share based compensation will fluctuate from quarter to quarter. We expect these variations to even out over the course of the year and are leaving our full year tax rate expectation unchanged.
We expect our base rate to be relatively consistent with the exception of the third quarter, which may be lower due to the tolling of certain open tax periods.
Now I will move on to free cash flow in the components that drove our results for the quarter and our guidance expectations for the full year 2019.
Free cash flow for the first six months of 2019 was $541 million versus $632 million in the first six months of 2018.
With that reduction driven by increased Capex and a higher accounts receivable balance, which is timing related due to the date of the day of the week the quarter ended.
Offset in part by higher pre tax income and a reduction in our net inventory investment.
For the full year, we're maintaining our free cash flow guidance in the range of $1 billion to $1.1 billion.
Inventory per store at the end of the quarter was 610000.
Which was down slightly from the beginning of the year and up 1.6% from this time last year.
We continue to expect to grow per store inventory in the range of 2% to 2.5%. This year as a result of acquisition cost increases and the fourth quarter opening of the twinsburg DC, putting pressure on the growth percentage.
Our EPA to inventory ratio at the end of the second quarter was 108%, which is up from 106% from the end of 2018.
We still expect to finish 2019 at approximately 106%.
Finally capital expenditures for the first half of the year were $296 million, which is up $71 million in the same period of 2018, driven by our ongoing investments in new distribution projects. The conversion of the bonds excuse me conversion of the Bennett stores, and new store growth and technology investments.
We continue to forecast capex to come in between 625 and $675 million for the full year.
Moving on to debt, we finished the second quarter with an adjusted debt to EBITDA ratio of 2.35 times as compared to our ratio of 2.23 times at the end of 2018.
The increase in our leverage ratio reflects our may bond issuance and borrowings on our unsecured revolving credit facility.
We are below our stated leverage target of 2.5 times and we will approach that number when appropriate.
We continue to execute our share repurchase program and year to date, we have repurchased 2.6 million shares at an average share price of $359.63 for a total investment of $921 million.
Subsequent to the end of the second quarter and through the date of our press release, we repurchased point 2 million shares at an average price of $380.79.
We remain very confident the average price repurchase price is supported by expected discounted future cash flows of our business and we continue to view our buyback program as an effective means of returning available cash to our shareholders.
Before I open up our call to your questions I'd like to thank the O'reilly team for their dedication to our company and our customers.
This concludes our prepared comments and at this time I'd like to ask Brandon the operator turned in line and we'll be happy to answer your question.
Thank you Sir we will now begin the question and answer session.
If you have a question. Please press star one how do your telephone keypad.
If you'd like to be removed from the queue. Please press the pound sign or the ASCII if you're on a speakerphone. Please pick up your handset first before telling the numbers. Please limit your questions to one question and one follow up question.
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From Jefferies, We have Bret Jordan. Please go ahead.
Hey, good morning, guys.
Good morning, Brett.
Just a follow up on your your inflation commentary I mean, I guess as we look at Anniversarying last years tariffs, but then some potential new tariff additions this year, how do you see the.
Inflation stacking up in the second half of the year.
So our second quarter inflation was little bit over two similar to the first quarter.
We would expect as these tariffs start hitting our acquisition costs that we will flow through that into price. So we would expect that.
That will see a higher number originally we thought two for the year with it easing in the back half, but that looks like there will be additional pressure there will depend on how long. These tariffs stay in place our plan right now is that they will continue as is.
Okay, Great and then a question I guess when you look around the market you talked about even in the space a slow demand pricing was pretty rational are you seeing any.
Either pass through of tariffs than lower prices from competitors or more aggressive activity around I can a small commercial accounts are large national accounts.
Jeff you want take that one.
Well I mean the.
For the most part I mean, the you know everybody's under the same pressure from from the price increases.
And what we're seeing in the in the field is everybody's adjusting the prices accordingly.
I mean anytime there's there's pressure on sales you will see some competitors try to use price as a as a tool to gain business, but for the most part that's not the case, yes.
Yes are we we've it's been very rational bread and to Jeff's point any exceptions to that from some of these small regional players I wouldnt attribute to tariffs or inflation is just typically some of the things. They do during the course of a quarter.
Okay, great. Thank you.
From Goldman Sachs, We have Kate Mcshane. Please go ahead.
Hi, Thanks for taking my question just after the first two quarters of causing closer to 3% in the 5% were wondering why you're seeing that gives you confidence that you could potentially still reached the high end of that range and do you have an estimate of how much your business was impacted by the wet weather.
What we would tell you is when we look at our category by category performance that our underlying non seasonal business has been very strong where weve run into problems our seasonal business.
We would tell you that.
Absent the pressure we saw in the HCC refrigerant categories that Greg spoke to we would have been happy with our comps this quarter. So when we look at the rest of the year, we always plan for normal weather in that core underlying demand for hard parts remains good and gives us confidence in the last second half of the year.
Okay. Thank you and just with the delayed store openings I just cant off the top of my head recall a time. When this has been the case before is it purely just weather or is it just is there more specific circumstances that as to why this is happening now and then maybe not happening before that the timing of a number of doors.
Versus and we had a fairly aggressive plan in 2019 front loaded to that the first half of the year, but its entirely weather related I mean, we've always got issues a year to year, when you're making a plan and a forecast I mean could be environmental regulatory whatever the case may be either theres always weather issues and normally the second quarter is the most volatile quarter of new store openings. During the year that we have the most impact from weather and this year was just extremely tough and widespread and persistent.
Well, what I would add to that Kate is all of the locations for the year are in progress. So we're not looking for additional locations. It's just how quick we can get the doors open on the buildings.
Okay. Thank you.
From Wells Fargo, we have Zach Fadem. Please go ahead.
Hey, good morning.
You talked about the benefit of selling through pre tariff merchandise that post tariff pricing curious how much of a tailwind. This has been for you. So far this year and then as the more inflationary products start to roll in.
In the back half curious if you could walk us through the puts and takes here and at what point do you think this dynamic could shift to gross margin headwind.
Okay.
So we would tell you that the faster moving products there is less benefit because those are the ones where.
Most quickly reordering so it's more of the backend of the lines where were seeing the benefit.
And we tell you that it's a modest benefit and that is something that helps our gross margin.
But ultimately we look at last five what are what was our last bye.
Purchase price and Thats, how we are managing our business. So when we look at the ongoing forward tariffs.
We're going to take a look and make sure that that were priced appropriately for the market.
And looking at what margin, we think we need to make and should make based on the GM ROI of each product to set those prices. So we think that it was the impact will not be a negative.
Going forward and we think we'll be able to sustain our margin percentage.
Okay and on the CNS side.
How much of the 64 basis points at de leverage would would you specifically assigned to the delayed new store openings and.
Going forward with with SGN a per store expected up about 3% for the year are there any other buckets, where you anticipate a step down in the growth rate from here.
So.
Last year, we talked about ESG in a.
People invest in SDMA with the part of the funds they receive from the tax reduction in that going forward. If we saw a higher than average asking a growth we would expect to see inflationary pricing in the topline being a benefit in and that's what we've seen this year as the labor market continues to to be tighter. So when we looked at our guide. This year, we were going to anniversary. Some of those investments we made last year in store payroll, primarily more heavily weighted in the first and second quarter as they as they ramped up.
We would tell you that when we look at our guidance and you look at the guidance from the beginning of the year. The midpoint of our operating profit was an expectation of a decrease because of those pressures. We would tell you that when you look at the second quarter, specifically that most of the de leverage.
It was planned based on these higher structural store payroll.
Numbers.
But that a meaningful amount is due to slower comp sales in unexpected and lighter noncomp sales due to the store, it's not opening on time.
Got it that makes sense appreciate the time guys.
From Stephens Inc., we have Daniel Ambrose. Please go ahead.
Yes, Hey, good morning, guys. Thanks for taking our question.
Just a follow up on the last June a question actually you know one of your larger peers have talked more recently about investing more heavily into supply chain. Indeed, the wages are you feeling any specific pressures from those kind of investments in that part of your business or is it more broad based wage pressure.
I'd say, it's across the board and we're seeing we're seeing some some wage pressure in some of our store markets, that's driven by minimum wage changes where they are escalating some of those on the west coast, but across the country.
You know across really in the corporate office in the Dcs and in the stores, we're seeing we're seeing wage pressures and wages moving up.
One of the biggest areas weve seen some wage pressures as with our duty truck drivers in our Dcs.
It's become a very aggressive market.
Supply hasn't kept up with demand over the last couple of years and we've seen seen a lot of inflation and wage pressure there.
Okay, and then I think it was last quarter call before that you guys talked about the market, becoming more rational and being able to raise retail prices to offset some of these wage pressures. So curious if you are still thinking the market in a similar place. We're what's changed to keep you guys from being able to pass through these are industry wide cost pressures being able to pass that through in the form of inflation. Thanks.
Well I think we've spoken to the first and second quarter growth same SKU inflation being up slightly over two which is a reflection of passing through the inflationary pressures across the.
Across retail through our pricing to cover both the tariffs and.
And increasing expenses and I think you see that in our increase in gross margin percentage.
Okay. Thanks.
From Wolfe Research, we have Chris Bottiglieri. Please go ahead.
Thanks for taking the questions.
What did they go in a little bit on the Terrace, just hoping you maybe give us the lay of the land in terms of the percentage of skews affected in the level of price increases.
This net and just for clarity the next 15.
Those are the same skews affected or has that become a more expansive SKU set and then just like holistically thinking about this.
Given some of your reservations on deferred demand and customer trade down is this something you've already seen the first one to tariffs. That's what gives you the confidence that you won't see comps accelerate on the next as Dan.
Helpful. Thank you.
Yeah, Chris I'll take the first part of that let Tom take the the backend question.
There's been a total I think this is the fourth round of tariffs. The first was more of a component.
Tariff increase and then we hit more and more skews in the in the second and third round. The third round was the most impactful there was a 10% and this latest round is an additional 15% on the 10% and for basically the same base of skews that as we said in previous quarter calls just because there's a tariff increase either at the component level or at the SKU level of 10% that doesn't mean that we're going to take the full 10% tariff on that.
We direct import a very small subset of our SKU base most of our direct most of our import lines coming from China flow through one of our suppliers facilities here in the U.S. So the impact of tariffs is a little less for us than if we direct imported all that product. So what we would expect and what we've seen thus far is this this next round of 15%. We would also take on less than 15% increase on on this room.
In relation to your second question, we started to see some inflation on commodity type items.
Second quarter of last year and as prices go up, especially on items that are more discretionary what we see is pressure on our lower end consumer our DIY consumer and thats been reflected in pressure on their traffic counts, we see less of that pressure on our professional side of the business as the general demographic. There is less impacted by price increases. So when we look at rolling through this additional round of tariffs we'd expect the.
The professional side of the business to be less impacted on traffic and see a benefit there in average ticket on the DIY side, you will see that ticket average go up but we'd expect to see additional pressure on traffic as people work harder to defer to save money.
Got you that's helpful. And then just a quick strategic question is there anything you can do to address this I know like you know the tooling is pretty difficult but.
Is there any way to diversify outside of China is there an exposed to one country that sounds like it's feasible or JV or did you lose some of that up to scale from doing that just not a road with traveling.
No. It's definitely an option, it's just not a short term option you know, we we try and for years, we've tried to diversify where we buy our products across.
Multiple suppliers to mitigate risk and where we can across multiple countries to also mitigate some of that risk. So for brake category. For example, we've got brake products coming in.
From China from Indiana and from some other smaller countries. So we'll continue to work with our suppliers to see what alternate sourcing locations, we have but thats just typically not a short term.
Change because it's not like the capacity sitting there in these other countries they have to build that capacity.
Got you that makes sense all right. Thank you for the Hunter.
From credit Suisse. We have set segment. Please go ahead.
Thanks for taking the question Hey, guys I just wanted to clarify on the full year guidance. So I think the earlier comment was that you are expecting EPS to now be at the low end of the range for the year is that due to the first half performance or are you actually modifying your expectations for the second half as well.
Well I think this physically order we used was lower.
It's based on really two factors that are are different.
Second quarter results and our expectation that we're going to continue to be.
Have a drag from new store openings, we're we're not going to generate as many non comp store sales dollars as we expected as we both catch up and stores that open later in the year don't generate quite as much revenue as they have a later date to start ramping up their business.
Okay makes sense and then a follow up question on the gross margin can you just talk about the performance in the quarter, specifically you highlighted mix as a benefit if you quantify that that would be really helpful. And then I think previously you had talked about gross margin being flattish for the second half of the year is that still the right way to think about it I mean, you do have higher pricing now I guess incremental to what you expected previously.
So should we actually expect that that could be a little bit higher for the year or at least for the back half of the year.
Up we've maintained our guidance, we think will be a little bit of above the midpoint of the guidance set I'm sorry, we repeat the first question.
The first part was just around the gross margin performance in the quarter you highlighted mix Im just wondering if you could quantify that.
I'm sorry about that.
We're not going to get into the Nitty gritty of the details, but what we would tell you is a lot of the seasonal products in HPC and refrigerant are big ticket items, but carry a lower gross margin percentage, so not having those sales hurt our comps, but helped our gross margin percentage mix.
Got it understood Okay. Thanks, Tom.
From Wedbush Securities, we have Seth Basham. Please go ahead.
Thanks, a lot and good morning.
For the questions around the trends between DIY and DIFM, if you could give us a sense of whether or not the performance gap of comps between those two customer segments widen this quarter relative to the last quarter that would be helpful.
Yes overall, the the spread was very similar to what we saw last quarter.
With professional out Comping DIY.
Right and as you look back further.
In 2018.
Was it a narrower gap than we have seen thus far in 2019.
It's been pretty similar for the last.
Four quarters.
Got it Okay, and just lastly, as you roll forward do you think about the impact of terrorists and the pressure on DIY customer you think this next round leading to higher price increases in more pressure on the DIY buyers.
Pocketbooks is going to lead to a further widen the gap.
I think it likely will and it's not just that said you know it's.
The complexity of products.
Tom that the that are impacting that as well and it's not just our industry, we talk a lot about.
The average DIY consumer their spend is being impacted in everything they buy because of these tariffs.
So their discretionary.
Income and discretionary money they have to spend on non essential items is just it's less than it was and they will likely postpone any repairs that they don't have to make.
Understood. Thanks, a lot.
From Oppenheimer, we have Brian Nagel. Please go ahead.
Hey, guys its David Bellinger on for Brian Thanks for taking my questions.
So first I want to push a little further on the monthly cadence of sales anything anything in particular, there that you can point to in terms of underlying demand improving as the quarter progressed, maybe certain category trends or geographical trends they could get into to help give us further comfort that comps in the back half of the year could potentially tracked better than what we've seen so far in the first two quarters.
Sure David I'll take that and then I'll, let Jeff speak to the regional trends you know on the last call the team talked about.
On a more normal winter along with with the follow up you know with the normal winter you have road conditions deteriorating have break breaking of Undercar products things like that our product categories, rather and Thats to Tom's point earlier that thats, what we saw in the quarter. So we had a more normal weather pattern for April . So April was the strongest month of the quarter.
And then in May and enter into June those weather patterns changed and it was a cooler weather than we normally see during that time of year and much wetter across much of the country that we normally see and and that impacted.
Primarily those heat related categories that Tom spoke to and I said in my prepared comments. So what we would say is from a from a cadence standpoint April would have been our strongest month of the quarter followed by June .
And then May would have been the softest month for the quarter.
Got it and then on the continued expense pressures, you're seeing mostly on the wage side are there any indication that those impacts are subsiding in any way and how should we think about overall expense growth over the next couple of quarters if comps potentially.
Track towards that lower end of the 3% to 5% range and also as we as we begin to look more towards 2020.
So our expectation is that payroll will continue to be a pressure item as unemployment stays very low and people are out there competing for folks.
When we look at our SGN eight you our expectation is we're going to have solid sales for the last two quarters absent, but with the exception of of some pressure from new store openings timing, but our comps will be solid and that our SDMA will come in at the high end of our average SDMA growth per store up further for the full year, which means being on plan for the third and fourth quarter.
Understood. Thank you.
From Jpmorgan, we have Chris Horvers. Please go ahead.
Thanks. Good morning, So just want to I want to follow up on the gross margin with respect to the terrorists.
And I understand your comments Tom so.
Is it that why wouldn't gross margin you see that similar gross margin benefit. So asked another way are people not raising ahead of it and sort of waiting to roll into that acquired inventory and then raise the price on it and is that is that sort of the different.
Behavior in the competitive market place around pricing.
Well, what we see as an uneven.
Application of the increase of price. So some of it has to do with whether it was on the water. It depends how much is in your supply chain year. What we've typically seen is that when the faster moving items, which are the higher volume items. When you are starting to reorder those in the sell through obviously a much faster rate. When you are reordering those at higher prices and started to sell through and Thats. When we are seeing the prices be addressed in the market. So the slower moving items that you have many more days of supply are the items, where you get that benefit.
And and the first time around last fall the prices go up more quickly on the slower moving items.
Well they go up across the line typically we will the tariffs will be addressed across the line. It's just when you're ordering them.
What I would tell you is that.
The first round of tariffs the pass through was more uneven than what we see here in the latest round of tariffs obviously, it's a bigger number we've all gone through this process.
So we're expecting.
We will pay more even probably quicker application of those price increases.
So hi, Inge so does that suggest that it. So it is so it seems like.
People in the marketplace or sort of feeling their way through this price increase is that the right way to think about it.
Yes.
Got it.
And then in terms of understood.
And then in terms of.
I'm not sure I, just two follow ups.
Was may negative and then also from a regional performance was this mid west with the flooding in the rains in California, which is cooler versus the northeast not sure. If you touched on that yet.
Yes. It may it was not negative we didnt have any negative months or weeks. During the quarter may was just softer than than June in April and jet fuel take original sure you on the regional performance really the underperformance we saw in the quarter was consistent across most of our markets as you'd expect with the weather conditions across the majority of the country.
Where we experienced most unfavorable wet weather, we saw more impact our business, especially our DIY business.
Anyways, calling out the areas that were most impacted that would be the really the center part of the country and the west coast.
Understood.
Best of luck for us there.
Thanks, Steve.
From Morgan Stanley we have somebody on Goodman. Please go ahead.
Thanks, Good morning, everyone.
Ex the weather if we look at the first half in total not just for the second quarter do you have a sense of where the comp would end up would you would it be at the midpoint or could have been at the high end of the full year guide.
Well, we're not going to get into details.
That specific what we would tell you is that you.
Especially given the second quarter, if weather was more normal in those categories that were impacted.
Performed.
Okay, we would be happy with our counts.
Okay, That's fair and I just I forget did was the first quarter did you make a similar comment that weather that you underperforming I remember there was a soft part of that quarter as well maybe February .
So look I was just trying to get.
It's a sense of when we when we look at the first quarter, we had a deferral of lot of the spring weather into April which was a positive.
And you would that get out some cleanup in the spring is more of a DIY side of the business and we caught up on that in April .
When we look at the drivers.
Its hard parts, we had a more normal winter from a precipitation standpoint spring to celebrate quite as early so when we look at the first quarter to the second quarter and we look at the core categories that that really displayed long term demand in our business. The wear parts. The undercar parts are people taking care of their vehicles, the wear and tear on the vehicles those categories of look solid all year and that's translated into a more solid professional side of the business the seasonal categories when spring yet.
Comments air conditioning business that we do those have been a little bit of a headwind when we look at the back half of the year that core underlying demand for the key categories. In our industry is what gives us confidence to reaffirm our guidance for the year.
Okay. That's helpful.
My follow up is.
Your view on our towards larger chains.
I think it seems like the consolidation at the shop level is picking up a bit and I know in the past Youve 10 to the to veer away from some of these chains because it's not good for margin.
Just wanted to see if that's still the case.
Well there is a tremendous amount of shops in the country and there has been some consolidation.
When we look at at performance there is a lot of regional chains that do a fantastic job.
When we partner we want to partner with people that are providing great customer service have a model that we're efficient in supplying.
And we've got a lot of regional and national customers that fit that and we do a lot of great business with them. So I wouldn't say that we would shy away from any of that business.
We're going to make sure that we lead with service and all the business we do.
Thanks, Tom.
And from you, but yes, we have Michael Lester. Please go ahead.
Good morning, Thanks, a lot for taking my question. So far this year, you've done a 3.3% comp are still in the first half.
Last year to 3.8% comp for the full year. This year, you've had a 100 basis point of incremental inflation.
Yes in that unit.
Our.
Below where they were last year are running at a lower pace of growth.
Than they were last year, but why why would that be.
I'm, sorry did you cut off there Michael.
So Tom Mike My question is it seems like you're seeing a greater elastic demand to the price increases and would be.
Adjusted <unk>, then what's perceived by by Oh, what what you had assumed in your in your guidance. Your your comps year to date are running below where they were last year and this is with more inflation than you experienced last year.
So what we would tell you is our professional business continues to be strong we're seeing more of that volatility on the DIY side of the business.
You know a lot of DIY business also carries a very low average ticket with high volume was when you look at some of the maintenance items and in some of the hot appearance items that we do business in.
So.
Appearance, obviously has been under pressure with the late March weather wasn't very good.
And when you look at things like oil changes a lot of volume not as higher ticket those are items that either the customer can forgo or defer and that has created pressure on DIY traffic.
What will tell you is that the hard parts categories continued to perform well.
So when you look out to the second half the year.
Is your expectation that consumer is not going to defer these projects as much in that well, that's what will drive an improvement in the business.
In the second half when we look at it there is less seasonal categories that drive our business than in the first half.
Okay.
And then coming back just to the long longer term outlook, it's been several years since.
Riley's Comped up 5%.
It is the business now just in a different stage because the industry has become more consolidated you're doing higher per store volume and it is going to be more difficult.
For Riley to comp up 5%.
You know we had the same question in 2010 2011, we would tell you is that our business is a cyclical business you know kind of seven year cycles and the professional side of the business is much more stable when we see good DIY years for many different reasons, whether it's weather driven whether it's increase in miles driven wages. When we have those good DIY years Thats when you see the industry outperform.
When that guy like consumer is under pressure you see the industry.
Put up numbers quite as good.
And I'd tell you that at the current phase where in that that beginning part.
If we.
That took part where the DIY customers under pressure if we look back three years, we saw run a three years, where the DIY business swung up and you will go through these cycles overtime.
Okay. Good luck with the rest of the year.
Thank you.
Thank you and we have reached our allotted time for questions I will now turn the call back over to Mr., Greg Johnson for closing remarks.
Thank you Brandon.
We'd like to conclude our call today by thanking the entire O'reilly team for their continued hard work in delivering another solid quarter I'd like to thank everyone for joining our call today and we look forward to reporting our third quarter results in October . Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.