The operator welcomes participants to the O'Reilly Automotive Inc. Third Quarter 2023 Earnings Call and introduces Jeremy Fletcher. He reminds everyone that the comments may contain forward-looking statements and introduces Greg Johnson, Co-President, Brad Beckham, Brent Kirby, Jeremy Fletcher, Greg Hensley, and David O'Reilly who are present on the call.

The speaker begins by congratulating Team O'Reilly on their outstanding results in the third quarter and expresses appreciation for the team's dedication to customers. The team's ability to deliver sustained profitable growth is highlighted, as well as their focus on service and product availability. The speaker announces that upon their retirement, Brad Beckham will be promoted to CEO and Brent Kirby to Company President. The transition to their leadership has been smooth and the speaker thanks shareholders for their support. The speaker ends by thanking Team O'Reilly for their hard work and commitment to customers.

The speaker expresses their honor and privilege to have worked alongside their colleagues for 41 years and congratulates them on the company's success. They pass the call over to Brad Beckham, who discusses the company's strong sales performance in the third quarter and thanks the team for their hard work and dedication. The speaker also mentions that the company's sales were driven by extreme heat in many markets and that they exceeded expectations and guidance. They note that the previous year's comparisons were more challenging in the back half of the year, resulting in the strongest sales in July and August.

The company's performance was consistent throughout the quarter, with September being slightly lower due to a moderation in hot weather sales. While there was a boost in sales from weather-related categories, there was also strong performance in other categories, indicating broad consumer demand. The professional business continues to outperform, with mid-teens sales growth. The DIY business also saw solid sales growth, driven by increased average ticket values and positive ticket count comps.

The company's dual market strategy has led to growth in both the DIY and professional markets, but their share of the DIY market is still low. Average ticket growth was in the mid-single digits and ticket count performance was strong. The company expects future average ticket growth to be supported by increased parks complexity. The team's ability to out-hustle and out-service the competition is crucial for ensuring repeat business. The company has updated their four-year sales guidance to a range of 7%-8% for comparable store sales and $15.7 billion to $15.8 billion for total sales.

The company has had a strong start to the fourth quarter, but faces challenging comparisons to last year. They maintain a positive outlook for the remainder of the year, citing strong demand drivers and customer resilience. The company sees opportunities for growth and credits their solid execution of business fundamentals for their success. The next topic will be the company's SG&A performance in the quarter.

In the third quarter of 2022, SG&A as a percentage of sales increased slightly due to planned investments and initiatives aimed at improving long-term operations. While total SG&A dollar spend per store was higher than expected, this was offset by better leverage of expenses. The company remains focused on providing excellent customer service and plans to continue gaining share in the professional market.

In the third quarter, the DIY business saw solid comparable store sales growth, driven by increased average ticket values and positive ticket count comps. The company's dual market strategy is driving market share growth in both DIY and professional segments, with DIY still being seen as a major opportunity for growth. Average ticket growth was in the mid-single digits, with strength from parks complexity and product mix offsetting the reduced benefit from same-skill inflation. The company expects future average ticket growth to be supported by increased parks complexity. Ticket count comps were the larger contributor to the outperformance of expectations, showcasing the team's ability to out hustle and out service the competition to increase traffic volume and gain repeat business.

The company has increased its sales guidance for the year due to strong performance in the first nine months. However, the fourth quarter may be challenging due to tough comparisons from the previous year and potential volatility in winter weather and holiday shopping season. Despite this, the company remains confident in the industry's demand drivers and expects steady growth in the future.

In the third quarter of 2022, SG&A as a percentage of sales increased slightly due to planned investments and initiatives aimed at improving long-term operational strength. These investments have resulted in positive impacts and have helped drive strong comparable store sales. However, the total SG&A dollar spend per store was higher than expected due to necessary costs to support the company's outperformance.

The company remains focused on providing excellent customer service and pursuing opportunities for top-line growth. They expect an increase in SG&A per store for the full year but still anticipate strong operating margins. They will continue to control expenses and prioritize profitable growth. The company has seen a 17% increase in third quarter diluted earnings per share and has updated their full year EPS guidance. The speaker congratulates the team and thanks them for their hard work and commitment to the company's success. He also expresses excitement for the future and thanks all team members for their dedication.

The company's third quarter gross margin of 51.4% was slightly above expectations and showed stability despite challenges in the professional business. This was due to improved acquisition costs and support from suppliers. Pricing has remained rational and the company has been successful in passing on inflationary pressures to customers. Inventory per store increased by 4% compared to the beginning of the year and is expected to finish the year within the original guidance range due to strategic investments to support sales momentum.

The company's AP-to-inventory ratio at the end of the third quarter was 134%, in line with expectations and driven by strong sales and inventory management. The company is focused on maintaining inventory availability and leveraging their tiered distribution model. They have recently opened a new distribution center in Guadalajara, Mexico and have two more expansion projects underway.

The company is actively working on relocating their Atlanta distribution center and building a new one in Stafford, Virginia. These projects will increase their store servicing capabilities and support for new stores in the Washington DC, Maryland, and Virginia area. They have opened 40 new stores in the third quarter and plan to open 180-190 more in 2023 and 190-200 in 2024. This demonstrates the company's confidence in their investments in new stores and distribution infrastructure.

The company experienced a significant increase in capital expenditures for the first nine months of 2023, driven by attractive opportunities for growth and competitive positioning. The full-year capital expenditure guidance has been updated to a range of $900 million to $950 million due to progress on the Virginia Distribution Expansion Project and investments in technology and store infrastructure. The company's effective tax rate for the third quarter was 23.2%, with the full-year rate expected to be 22.5% due to higher than planned benefits from share-based compensation.

In the fourth quarter, the effective tax rate is expected to be lower due to tolling of certain tax periods and fluctuations in the tax benefit from share-based compensation. Free cash flow for the first nine months of 2023 decreased compared to the same period in 2022 due to increased capital expenditures and lower working capital benefits. However, growth in income and favorable timing of tax payments and disbursements partially offset these headwinds. The company expects free cash flow to be between $1.9 billion and $2.2 billion for 2023. The adjusted debt to EBITDA ratio increased in the third quarter, but the company remains below their leverage target and continues to execute their share repurchase program.

The speaker expresses confidence in their buyback program and thanks the O'Reilly team. They then answer a question about a potential slowdown in business for the fourth quarter, stating that there are no specific factors that would cause this other than typical holiday and weather-related volatility. They also mention that October is going well so far.

The company is pleased with its performance in the first few weeks of the quarter and is cautiously optimistic about finishing strong. They anticipate tough comparisons in the fourth quarter, but this is expected and does not reflect a significant slowdown in business. The company expects to continue investing in SG&A and believes it will generate similar returns as it has in the past.

The speaker expresses their satisfaction with the returns from investing back into the business and emphasizes the importance of expense control. They mention that they are currently working on their plan for 2024 and look forward to discussing it in the future. The speaker also mentions gaining market share in the industry and acknowledges the difficulty in determining the source of this growth.

The company takes their competitors seriously and focuses on improving their own execution. They believe that their competitors are strong on both the DIY and professional sides. They are working on improving store operations, service levels, retention, and supply chain after the impact of COVID. They also see potential for M&A opportunities to fill geographic gaps.

The company is always looking for opportunities for expansion, both in terms of Greenfield expansion and strategic acquisitions. They are hoping that as the market evolves, valuations will become more attractive. They are also investing in their distribution infrastructure and want to continue owning and operating their distribution centers.

The company is focused on onboarding new customers and understanding their needs in order to create value and help them be successful. The increase in volume from new customers has led to infrastructure investments and a focus on being first in class in every market. The company is committed to continuing to grow and improve in order to provide the best service to its customers.

The speaker explains that as the company has grown during the pandemic, they have had more opportunities to provide excellent service to their customers. This has been crucial in driving further growth. They have invested in initiatives such as technology for professional customers and delivery efficiency, but they are hesitant to share too many details as they want to maintain a competitive advantage. They have also made efforts to invest in their team through enhanced benefits and improved work management for store managers.

The company is investing in the appearance of their stores and vehicles, as well as technology to support their store teams and customers. They are not seeing a slowdown in the industry and are seeing positive results in their DIY and professional segments. While some shops may be slower than others, overall there is not a significant slowdown.

The speaker acknowledges that some shops may have lower car count than others and some service providers may be losing share, but overall, the company has not seen a slowdown in business. This is due to the strong culture and execution of the teams, and the company remains focused on meeting demand. The speaker also mentions that the aftermarket industry has been through challenges in the past, but the underlying demand remains strong.

The speaker discusses the positive outlook for the automotive industry in the long term, with an expected increase in miles driven and continued use of cars for daily activities. They also mention potential competition from smaller players now that they have recovered from supply issues during the pandemic, but express confidence in their own performance and improvements made in areas such as merchandising and inventory control.

The speaker discusses the importance of building and maintaining strong relationships with customers in order to gain and retain business. They also address concerns about pricing and state that they do not see it as a major threat in the near future. The company has taken steps to diversify their supply chain in order to strengthen their position during challenging times.

The company is pleased with the growth of their proprietary brands and their impact on gross margins. They feel well-positioned strategically and do not see any irrational events on the horizon. As for gross margins, the focus is on gross profit dollar growth and improving volume to leverage distribution costs. The company hopes to see improvement in this area as the supply chain becomes more normalized.

The speaker discusses the value of partnerships with suppliers and the importance of maintaining a good relationship with them. They mention their focus on improving availability to drive sales growth and increase market share. They clarify that their market share growth is not solely due to new customers, but rather an increase in their share of existing customers' business.

The speaker discusses the impact of inflation in the third quarter, stating that it was low single digits and in line with expectations. They do not anticipate deflation in the future and believe the industry has been able to hold price levels. Moving forward, they expect a normalized inflation environment with a little bit of inflation in the fourth quarter.

The company expects a low single-digit tailwind in the business, with the added benefit of more complex parts and new technology driving up average ticket prices. The company does not anticipate any impact on gross margin from LIFO reserves. An analyst asks about the variability of SG&A, and the company notes that their reported gross margin is the best measurement and expects it to remain stable.

Jeremy Fletcher, responding to a question about how the company would handle a higher-than-expected sales growth, notes that there are many factors at play, including the company's high fixed cost model and the need for increased activity and investment in the business. He does not provide specific numbers, but acknowledges that the company has prioritized investing in the business to accelerate growth.

The speaker, Brad Beckham, discusses how the industry's view on private label parts has changed over the past 10 to 15 years. He mentions that there was a push for access to OEM parts, especially for foreign nameplate cars, but now there is more acceptance from customers and mechanics. Brad also mentions that there has been an increase in quality of private label parts over the past couple of decades.

The quality of our exclusive national brands is exceptional and often surpasses OE standards. This has led to great success with our Import Direct line, particularly with European and Asian vehicles. We have a lot of confidence in our national brand products and see opportunities for growth in the European market. Our competitors in this market are strong, but we are confident in our products and our ability to gain market share.

Brent Kirby and Brad Beckham discuss the success of O'Reilly's proprietary brand, Import Direct, and the increasing adoption of their private label products. They have seen strong uptake from both DIY and professional customers, and their proprietary brand penetration is now over 50% of their revenue. They will continue to focus on this strategy while also incorporating national brands where relevant. The call concludes with thanking the O'Reilly team for their dedication and announcing that fourth quarter and full year results will be reported in February.

This summary was generated with AI and may contain some inaccuracies.