The paragraph introduces the O'Reilly Automotive Incorporated Third Quarter 2024 Earnings Call, moderated by the operator, Ali. Jeremy Fletcher then provides opening remarks, stating that the call will cover the company's third-quarter 2024 results and outlook for the rest of the year, followed by a Q&A session. He notes that forward-looking statements will be made, which are covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The actual results may differ due to factors in the company's SEC filings. Jeremy Fletcher then introduces other participants on the call: Brad Beckham, Brent Kirby, Greg Henslee, and David O'Reilly.

The speaker begins by expressing gratitude to over 92,000 team members in North America for their dedication during challenging conditions. The teams have succeeded in achieving positive sales and market share gains, despite facing major weather events like Hurricane Helene, Milton, and flooding in North Carolina. These events affected not just the directly impacted areas but also the wider store, distribution, and support network. The company emphasizes its commitment to customer service and support for affected communities. Although there was a 1.5% increase in third-quarter comparable store sales, results were below expectations and high standards, with sales softening towards the end of July and continuing through August and September.

The sales performance during the third quarter was consistent and driven by positive growth in the professional segment, despite a challenging industry demand and a minor setback from Hurricane Helene. The company achieved mid-single-digit growth in professional sales primarily through increased ticket counts, building on strong previous year performance. The market remains fragmented, and there are opportunities for further growth. However, the do-it-yourself (DIY) segment saw a 1% decline due to reduced ticket counts, though average ticket values remained positive, aided by a 1% inflation impact on the same SKUs. Maintenance categories performed well, and customers showed varied preferences between premium and entry-level products.

The paragraph discusses the current challenges and opportunities in the automotive aftermarket industry. Despite experiencing softness in discretionary categories like appearance chemicals and accessories, which aren't major sales drivers, the company highlights the strength of its core value proposition: maintaining and investing in existing vehicles. They note a trend of reduced spending in repair categories due to vehicle wear and tear but express confidence in outperforming the market as conditions improve. The company believes the industry pressure is temporary and not indicative of changes in core demand drivers. They emphasize the long-term growth potential due to the aging and expansion of the North American car market and the ongoing need for vehicle maintenance.

The paragraph discusses the current behavior and outlook of consumers in a DIY-focused business amid economic uncertainty and an upcoming election. While consumers remain resilient, they exhibit caution, especially DIY customers who are economically pressured. The company anticipates a 2% to 3% increase in full-year comparable store sales, reflecting third-quarter results. They acknowledge potential volatility in the fourth quarter due to winter weather, holiday demand, and election impacts but expect benefits from easier year-over-year comparisons and fewer Sundays. October sales have aligned with these expectations.

The paragraph discusses the update to a company's outlook, emphasizing that it will not affect the field teams' attitude and competitiveness. The company maintains high performance standards and remains optimistic about growth opportunities in both DIY and professional markets. They are committed to executing their successful playbook and providing top-notch customer service. The speaker thanks team O'Reilly for their dedication, and Brent Kirby takes over to express gratitude for the team's commitment. Kirby reports on the company's third quarter performance, highlighting a gross margin of 51.6%, which met expectations despite dilution from the Canadian business acquisition. The company anticipates similar dilution impacts for the full year 2024.

In the discussed paragraph, the company faced an unexpected challenge in its gross margin due to a shift in its DIY and professional business mix, with higher pressure on the higher-margin DIY segment. Despite this, the company managed to offset the impact through strong merchandise margin performance, thanks to improved acquisition costs and strong supplier partnerships. While the acquisition cost environment appears stable, a mix of slight cost improvements and inflation pressures is expected by the end of 2024. The company aims to maintain its gross margin outlook between 51% and 51.5% for the year, given its strong performance in the first nine months. In terms of SG&A, there was a 4.2% increase per store in the third quarter, partially due to incorporating Canada's results. SG&A spending was higher than expected, resulting in some deleverage due to sales headwinds. Despite efforts to manage staffing and expenses in response to growing sales pressure, flexibility was limited by increased self-insurance costs from Hurricane Helene and deferred compensation.

The paragraph discusses the company's financial expectations and operational updates for 2024. SG&A costs per store are expected to increase by 3.5% to 4% for the year, with the lowest growth anticipated in the fourth quarter due to stronger comparisons from the previous year. Despite careful adjustments to SG&A spending to maintain customer service and long-term growth, the operating margin guidance has been revised down to a range of 19.4% to 19.9% due to lower third-quarter sales and revised sales expectations for the year. Inventory per store ended the quarter at $781,000, reflecting a 3% increase from last year, with a continued target of 4% growth, excluding Vast Auto inventory. The supply chain and in-stock position are strong, and 47 new stores were opened in the third quarter, totaling 111 new stores for the year so far.

The company is experiencing slight delays in new store openings due to construction and permitting issues, but aims to open 190 to 200 new stores in 2024 and 200 to 210 in 2025. The success of new stores is attributed to the quality of store teams and a disciplined site selection process. The company supports these teams with a strong playbook and inventory availability, focusing on promoting from within to ensure effective leadership. Capital expenditures for the first nine months of 2024 totaled $733 million, aligning with expectations, and the full-year guidance remains $900 million to $1 billion. The company is optimistic about future growth opportunities across its markets.

The paragraph announces the successful opening of O'Reilly's new Springfield distribution center and the upcoming opening of the Atlanta Metro distribution center in the fourth quarter. It highlights the growth in the distribution network and progress on the Mid Atlantic distribution center in Virginia, set to open in 2025. Gratitude is expressed to the teams for their dedication, emphasizing the importance of customer service for success. It then transitions to Jeremy Fletcher, who provides details on the company's third-quarter results, noting a $161 million sales increase and plans for 2024 revenues between $16.6 and $16.8 billion. The third quarter's effective tax rate was 21.5%, lower than the previous year's 23.2%, due to the timing and size of certain tax credits.

The company expects an effective tax rate of 21.8% for 2024, influenced by share-based compensation benefits. The fourth quarter tax rate is expected to be lower due to timing of tax periods. Fluctuations may occur due to share-based compensation tax benefits. Diluted EPS increased 6% for the quarter, with a year-to-date increase of 7%. EPS guidance has been adjusted to $40.60 to $41.10, lowered due to third-quarter sales results and sales outlook. The year-to-date free cash flow is $1.7 billion, consistent with 2023, despite cash tax timing for renewable energy credits. Free cash flow guidance remains between $1.8 billion and $2.1 billion for 2024. The AP to inventory ratio was 129% at the end of the third quarter and is expected to finish at 127% by year-end. The company issued $500 million of 10-year senior notes in August and ended the third quarter with a reduced adjusted debt-to-EBITDAR ratio of 1.96x, down from 2.03x at the end of 2023 due to EBITDAR growth.

The paragraph discusses the company's financial strategy, highlighting their share repurchase program and leverage target. They repurchased 499,000 shares in the third quarter at an average price of $1,084, totaling $541 million, and 1.6 million shares year-to-date at an average price of $1,043, totaling $1.7 billion. The company believes the repurchase price is justified by future cash flow expectations and sees it as an effective way to return capital to shareholders. The speaker expresses gratitude to the O'Reilly team for their commitment and believes their efforts will drive future success. Finally, the call is opened to questions, starting with Bret Jordan from Jefferies, who inquires about the supply chain expansion in the mid-Atlantic and Northeast regions, to which Brent Kirby responds positively about the opportunities from their new distribution centers.

The paragraph discusses expansion plans and market opportunities for a business, focusing on the Northeast region of the U.S., particularly around Virginia, DC, Baltimore, and Philadelphia. The strategy is to expand gradually in tight areas without overextending. Additionally, there's a discussion with Brad Beckham about the impact of hurricanes on sales, noting that while there are short-term sales losses due to store closures, hurricanes may create demand that could offset those losses. Recent disruptions were caused by Hurricane Helene in certain areas like South Georgia and Western North Carolina.

The paragraph discusses a company's cautious outlook regarding its 1.5% comparable sales growth, which they find unsatisfactory. They mention that weather has been a neutral factor, despite bad storms. Simeon Gutman from Morgan Stanley asks about the expectation for short-lived headwinds and when improvement might occur, given that the industry's downturn started earlier. Brad Beckham responds by acknowledging the unpredictability, noting past successes during the pandemic, and highlighting the company's extensive experience in overcoming similar situations, despite being displeased with the current growth rate.

The paragraph discusses the company's outlook amid economic uncertainty and higher inflation, especially during an election year. Despite these challenges, there is confidence that the industry will return to normal growth patterns, supported by historical trends. Jeremy Fletcher highlights that the company has always focused on managing through difficult periods to quickly capitalize on improvements. This strategy has been effective over time, positioning the company to move forward strongly. Simeon Gutman acknowledges the discussion and asks about market share, noting that while the company previously had a significant lead over the industry, it continues to gain market share even this year.

In the paragraph, Jeremy Fletcher from O'Reilly discusses the company's approach to forecasting for the next year in response to a question from Michael Lasser of UBS. Fletcher emphasizes that O'Reilly expects to grow faster than the market due to their team, distribution advantages, and momentum. Fletcher acknowledges that while this year has been challenging in terms of demand predictions, the company will finalize their expectations for 2025 soon and incorporate a market share component. Lasser also asks about the potential impact on O'Reilly's traditional growth algorithm and margin expansion if the industry continues to experience sluggish growth.

In this paragraph, Jeremy acknowledges that the current year has been unusual for their business but not unprecedented within the industry. Despite having some insights, they cannot precisely predict the future performance or sequence of events for their business moving forward. They plan to establish their guidance for 2025 by evaluating the situation over the coming period, considering factors like expense structure and cost levels. Jeremy expresses confidence in their ability to gain market share and maintain strong returns. In response to a follow-up question from Michael Lasser about tariff preparation, Jeremy's comment shifts focus back to their overall strategic positioning and planning approach.

The paragraph discusses the potential impact of a 30% to 60% tariff on goods from China, and additional tariffs on goods from other countries. Brent Kirby and Brad Beckham express confidence in their company's ability to manage these costs due to past experience with similar tariffs in 2017-2018. They highlight their teams' successful efforts in diversifying supply sources and reducing dependency on Chinese imports since the COVID-19 pandemic. Despite potential cost increases, they believe they can pass these costs to consumers and maintain competitiveness, thanks to their strategic planning and supply chain management.

In the paragraph, during a Q&A session, Zach Fadem from Wells Fargo inquires about the timing and reasons behind the emergence of deferred maintenance in the company's data. Brad Beckham responds by stating that while they noticed pressure in discretionary spending in earlier quarters, they were satisfied with their maintenance categories. He mentions that nondiscretionary repair jobs can be delayed but maintenance like oil changes and spark plugs has remained strong. Deferred maintenance might be impacted by newer vehicle models, which offset some demand. In Q3, they observed more discretionary spending challenges and some customers trading down in product quality, despite a general trend of trading up.

In the paragraph, Brent Kirby discusses the current trends in the automotive maintenance and repair industry, highlighting that ongoing trends have impacted third-quarter results for both their company and the industry. He emphasizes the importance of maintaining strong inventory and service in each market as people continue to maintain their aging vehicles. Kirby expresses confidence that the trend will reverse, drawing parallels to past tough years like 2008 and 2017 when the industry rebounded afterward. Zach Fadem then asks about the outlook for Q4, noting expectations of year-over-year operating margin easing, and seeks details on drivers such as slowing investments or other factors impacting gross margin performance, which has been strong despite some offset from Canada.

In the paragraph, Jeremy Fletcher discusses the company's financial outlook, highlighting positive expectations for the upcoming quarter due to easier year-over-year comparisons and a potential benefit from a weekday perspective involving Sundays. He mentions that gross margins have been consistent throughout the year and should align with the company's guidance. There is no change in the cadence of SG&A investments, and prior year investments will have less impact in upcoming comparisons. Christopher Horvers from JPMorgan asks about the impact of having an extra Sunday, to which Fletcher responds that it could affect the fourth quarter more variably, typically benefiting both comp and total sales by around 30 to 40 basis points.

In the paragraph, Christopher Horvers asks about the company's exposure to China and the impact of tariffs, noting previous levels of around 30% exposure and 25% tariffs. Brent Kirby responds, indicating that their exposure to China has been significantly reduced by over 500 basis points. While forecasting future tariff scenarios remains challenging, Kirby expresses confidence in the company's ability to successfully pass on costs at current levels, as they have done in the past. Jeremy Fletcher adds that the industry has historically been disciplined in passing through cost increases, with consumer demand remaining resilient due to the essential nature of transportation needs.

The paragraph discusses the potential impact of economic pressures on consumers, particularly in regard to vehicle repairs and maintenance. It highlights the concern that inflation could lead consumers to find ways to save money, possibly by deferring repairs or opting for cheaper alternatives. The speaker suggests that this could have a more adverse effect on their consumer base than the industry's lack of discipline, given the inelasticity of their products. The conversation then shifts to a question from Scot Ciccarelli about new stores, where Jeremy Fletcher responds by emphasizing that while construction costs are higher, the new stores are performing better than expected. This success has influenced their decision to invest more in owning stores despite the increased costs, with a typical store costing around $3 million.

In the paragraph, Brad Beckham discusses the company's positive productivity trends, especially at the mid-level maturity point of 5 or 6 years, despite a challenging year. He expresses excitement about plans to open 200 to 210 new stores in 2025, highlighting the resilience of the business amid rising construction costs and inflation. The company has managed these challenges by improving efficiency in site selection, construction, and field operations, supported by their supply chain and regional distribution centers. The conversation then shifts to a question from Steven Zaccone of Citi regarding the potential recovery in the business, particularly in the DIFM (Do It For Me) and DIY (Do It Yourself) segments, to which Brad Beckham responds, acknowledging the inquiry.

In the paragraph, the speaker discusses the performance of the company's DIFM (Do It For Me) and DIY (Do It Yourself) segments. Despite not being fully satisfied with the performance, the speaker is optimistic about the DIFM segment, which appears more resilient and poised to take market share as the industry stabilizes. Conversely, the DIY segment has been more impacted, but there is potential for recovery in the next 12 to 18 months. In addressing a follow-up question about competition from mass channels and warehouse clubs, Brad Beckham notes that these competitors mainly engage in discretionary items, which pose a limited threat to their core business involving more specialized parts.

During the pandemic, there was an opportunity as mass retail locations faced closures and service disruptions, which led to fewer customers visiting those stores. This allowed the company to gain some market share. However, they acknowledge that some of this gain might have been temporary. Despite this, their customer feedback indicates high satisfaction with offerings like curbside pickup and buy online, pick up in-store options, particularly due to the convenience of avoiding large retail environments. They remain confident in their smaller store service model, offering trusted advice and professional service, even as mass retailers continue to compete on price. The call concludes with appreciation for the O'Reilly team's efforts and an announcement of future reporting plans.

The paragraph instructs participants to disconnect their lines, wishes them a good day, and thanks them for their participation.

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