The operator introduces the O'Reilly Automotive, Inc. Fourth Quarter and Full Year 2023 Earnings Call and turns it over to Jeremy Fletcher. Fletcher reminds listeners that their comments may contain forward-looking statements and introduces Brad Beckham, who congratulates the team on a strong performance in the fourth quarter. Other executives are also present on the call.

Despite facing tough prior year comparisons, the team was able to deliver a strong 3.4% increase in comparable store sales in the fourth quarter of 2023. This was a result of their commitment to providing excellent customer service in over 6,000 stores. For the full year, the team generated a robust 7.9% increase in comparable store sales, exceeding their revised guidance range and original guidance range. This led to another year of record-setting earnings per share, with a 15% increase from the previous year. In the last 4 years, the company has more than doubled their earnings per share. The team's dedication to outperforming the competition and providing the best customer service has led to continued outstanding results.

The company's annual leadership conference was a success, with a focus on leadership skills and setting goals for the upcoming year. The conference theme was "Leaders in Motion" and the team is excited about the opportunities ahead. The fourth quarter sales results were consistent and in line with expectations, with December facing pressure due to challenging comparisons in previous years. However, the company is pleased with the overall performance in 2023, particularly in non-weather-related categories.

In the fourth quarter, the company saw strong growth in their professional business due to increased ticket counts and exceptional customer service. However, their DIY business faced challenges due to difficult comparisons and moderating inflation benefits. The company has established a 3-5% annual comparable store sales guidance for 2024, citing stable industry conditions and strong demand for automotive aftermarket products. The company believes that consumer transportation needs and the value proposition for vehicle repair and maintenance will continue to drive demand in the industry.

The company is pleased with the increase in miles driven in the U.S. and expects this trend to continue due to population growth and an increase in the average age of vehicles. They believe the economic conditions are favorable for their customers and their industry, but remain cautious about potential challenges. They have confidence in their industry's ability to perform well, even in a challenging economic environment, and their success will depend on their execution and customer service.

In 2024, the company expects both their DIY and professional businesses to contribute positively to comparable store sales growth, with professional outperforming. They have seen strong momentum with their professional customers and anticipate continued growth, although comps may moderate. They also anticipate opportunities for share growth on the DIY side, but expect DIY ticket counts to be flat or slightly down due to industry trends. However, they expect total DIY comps to be positive due to higher average ticket values. The company also expects continued growth in average ticket values, although they anticipate a smaller benefit from same SKU inflation compared to previous years.

The overall price levels in 2023 were stable and there will only be modest increases in 2024. Sales growth is expected to be steady throughout the year, with a minor shift due to the timing of the Easter holiday. The company had a solid start in 2024 due to favorable winter weather. Capital expenditures for 2023 exceeded the initial guidance, and for 2024, the company plans to spend $900 million to $1 billion on capital investments.

In 2024, the company's total CapEx will be similar to 2023, but the composition will change. There will be a decrease in capital investment for delayed projects and distribution projects, but this will be offset by increased investment in new stores, technology projects, and infrastructure. The company plans to open 190-200 new stores in 2024, with a focus on owned properties to generate higher sales and stronger cash flows.

The company's success has been attributed to its ability to balance organic growth and strategic acquisitions. The key to their success has been their highly trained and committed staff who provide excellent customer service. The recent acquisition of Groupe Del Vasto, a family-owned business with a strong company culture, has allowed the company to enter the Canadian market. The company is currently in the planning process for further expansion in Canada. The company is excited to welcome the 500-plus team members from Vast-Auto to their team. More details on gross profit, operating profit, and expectations for 2024 will be provided by Brent.

The speaker highlights the earnings per share guidance for 2024, mentioning the Vast-Auto acquisition's impact on earnings. They express confidence in their ability to continue growing and generating high returns, and thank their team for their hard work. The call is then turned over to Brent, who congratulates the team on their performance and discusses their fourth quarter and full year results, mentioning an increase in gross margin.

The company's full year gross margin was at 51.3%, in line with last year and at the high end of their guidance range. The first quarter was impacted by a pricing initiative, but gross margin improved in the remaining quarters. The company expects further expansion of gross margin in 2024 and has established a guidance range of 51% to 51.5%. The acquisition of Vast-Auto will have a 25 basis points dilution, but excluding this impact, gross profit is projected to increase by 24 basis points. The company is confident in their supply chain, store operations, and sales teams' ability to create a premium value proposition for customers.

The company's quarterly gross margin has remained consistent in 2023 and is expected to continue in 2024. The company has taken steps to manage inflation and expects a rational pricing environment. Their gross profit has increased by 10% in 2023 and is projected to continue growing in 2024. The company's success is attributed to their business model and commitment to providing customers with the best parts availability. They are currently working on projects to enhance their supply chain and distribution network, including building new distribution centers in Springfield, Missouri and Atlanta, Georgia.

The company is expanding its capacity to support new store growth and increased per store volumes. They are on track with two projects, the relocation of a facility in Springfield and the development of a new distribution center in Stafford, Virginia. These facilities will support the company's expansion into new markets. The company also prioritizes enhancing their hub store network to ensure quick access to inventory for their stores. They are committed to investing in this tier of their distribution model and their plans for 2024 align with this commitment. Inventory per store has increased by 4% due to investments to support sales momentum.

In the coming year, the company plans to increase inventory per store by 4% and add the acquired Vast-Auto inventory, resulting in 1% growth. They will focus on expanding inventory in relocated DCs and improving availability in their hub network. SG&A expenses were higher than expected in 2023 due to inflation and claims costs, but the company plans to grow average SG&A per store by 4.5%-5% in 2024, with half a percent of the increase coming from the addition of Vast-Auto. This is a step down from the significant investment made in 2023, but still higher than normal due to certain factors.

The anticipated increase in SG&A expense in 2024 is due to increased depreciation expense and continued investment in technology. Operating profit guidance is set at 19.7% to 20.2%, with a dilution of 15 basis points from the inclusion of Vast-Auto's results. The company is committed to growing market share and had a successful leadership conference in January.

In this paragraph, Jeremy Fletcher congratulates Team O'Reilly on their successful year and provides details on their fourth quarter results and guidance for 2024. He mentions that sales increased due to a rise in comparable store sales and new store openings. He also discusses the effective tax rate for the fourth quarter and full year and predicts a lower rate for the fourth quarter of 2024. Lastly, he discusses their free cash flow for 2023 and compares it to the previous year.

The decrease in net inventory and increase in capital expenditures led to a decrease of $383 million in free cash flow in 2023. However, income growth and favorable tax timing partially offset this decrease. In 2024, free cash flow is expected to be in a similar range, but with a headwind from tax timing. The AP to inventory ratio decreased in the fourth quarter, reflecting payments for inventory purchases made in 2022. In 2024, this ratio is expected to continue to decrease due to the Canadian acquisition. The adjusted debt-to-EBITDA ratio increased from 2022 to 2023 due to the issuance of senior notes and borrowings, but $300 million of maturing notes were retired in June.

The company is currently below its target leverage and has been executing its share repurchase program successfully. They have repurchased a significant number of shares since 2011 and believe the average repurchase price is supported by their future cash flows. The company thanks its team for their hard work and commitment to customer service. They are now taking questions from analysts. One analyst asks about the sustainability of growth in the commercial side of the business and whether it is coming from new customers or existing accounts. The CFO answers that they are confident in the sustainability of growth and attribute it to both new customers and increased wallet share with existing accounts.

The speaker acknowledges that there are many factors at play in the company's performance this year, and they are cautious when discussing the sustainability of their growth. However, they are confident in their team's ability to continue gaining market share, especially in the professional side of the business. They are focused on both acquiring new customers and growing with existing ones.

The speaker is responding to a question about the company's elevated SG&A growth and investment opportunities. They state that they are always thinking about the long-term and driving profitability through sustained share gains. They also mention that their focus is on store payroll, staffing levels, and investments in technology. They believe that their current success will continue in the future and that they only own 10% of the market in the U.S.

The company has a strong focus on investing in technology to improve customer service and streamline the customer experience. They are playing the long game and expect a return on their investments. They are also transitioning to more owned retail locations, which they believe will provide compounding returns for shareholders and allow for continued investment in the business.

The company has consistently prioritized using capital for improving existing stores and investing in growth opportunities. Recently, the economics of these investments have improved, particularly for owned stores. As a result, the company plans to increase the percentage of owned new stores in their mix from 40% to 60% this year. This may result in less money being allocated to share buybacks, but it aligns with the company's historical priorities for capital use.

The speaker reiterates the impressive performance of the company's ability to open new stores, attributing it to the team's efforts in site acquisition, build, and store execution. They are pleased with both backfill and greenfield markets. When asked about competition, the speaker mentions that they have been gaining market share but have not seen any changes in the competitive dynamic in the fourth quarter.

The speaker, Mike, states that they have been observing their competitors in the CRM tool and acknowledges that independent competitors are well-run and hold the most market share in the professional side of their business. However, they have not seen any significant changes from their competitors and attribute their tough competition to their strong performance in the previous year. The other speaker, Brent, adds that the pricing environment remains rational and they are confident in their proposition to win in terms of professional parts and service. Mike asks for clarification on the projected operating profit pressure in the first half, to which the speakers attribute to potential investments and increased store labor during that time.

Jeremy Fletcher and Mike Baker discuss the impact of investments made in 2023 and the timing of technology investments on the company's cadence. Brad Beckham addresses Michael Lasser's question about the company's guidance for 3-5% comp growth, stating that they are confident in their ability to continue taking market share and out-competing in both professional and consumer sides of the business. They see 2024 as a more "normal year" for the overall market.

The speaker discusses the definition of a normal year for the industry, stating that it is typically in the 2-3% range. They also mention that market share gains will not be as strong in 2024 as they were in 2023, due to increasingly difficult comparisons. Finally, the new CEO is asked about the company's peak operating margin rate and their focus on improving it over time.

The company's primary focus is to be the dominant auto parts supplier in all market areas and to drive operating profit dollar growth. They have had a high operating profit percentage in the past and aim to continue this trajectory through share gains and profitable growth. Their goal is to achieve the highest operating profit percentage possible.

Simeon Gutman from Morgan Stanley asks about the company's SG&A spending and whether they considered maintaining a higher level of spend. Brad Beckham responds by saying they have a solid discipline on return on spend and feel good about their current spending. They will continue to invest in areas such as technology, safer vehicles, and store appearance. Brent Kirby adds that they will continue to lean into their current spending levels.

The speaker adds to Brad’s comment about the company’s recent acquisition and mentions that they are still investing in future opportunities. He also answers a follow-up question about the impact of weather on the company’s fourth quarter results, stating that there was a slight impact due to the timing of winter and the holiday season. However, it was not a significant factor and did not create any major deferred maintenance.

In response to a question about sales and SG&A, the company stated that December sales were negative, but better than expected. They also mentioned that they are currently running above their forecast for the first quarter, but did not give specific numbers. They attributed the negative sales to harsh weather in January. The company also clarified that inflation for the year is expected to be around 1%, with an additional 200 bps from complexity and mix. However, they did not provide a specific breakdown for 2024.

The company expects to benefit from an increase in average ticket sales, driven by growth in the professional side of the business. This, along with expected growth in ticket count, is expected to contribute to the company's positive results in the upcoming year. The call concludes with thanks to the O'Reilly team for their hard work and a reminder of the next earnings report in April.

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