O'Reilly Automotive, Inc.

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 1 on your telephone keypad. I will now turn the call over to Mr. McFaul. You may begin, sir.

Thank you, Brandon. Good morning, everyone, and thank you for joining us. During today's conference call, we'll discuss our second quarter 2019 results and our outlook for the third quarter and full year of 2019. After our prepared comments, we'll 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 1995. 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 end of December 31, 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 Johnson.

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 McFaul, 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 the 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 faced 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 a strong start to our quarter in April, but experienced unseasonably cool and rainy weather in many of our markets as we moved through the quarter, which significantly impacted the 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 SG&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'd 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 counts 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 historical practice in our industry, these acquisition cost increases have been rationally passed 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 in same-skew pricing will likely be offset by pressure to tick accounts 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 in 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 continue to see Solid demand in both sides of our business, in line with our expectations, and are pleased with the performance of key undercar 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 age and complexity of vehicles. While weather conditions can cause short-term volatility in our business, Our team remains focused on providing the best possible service to our customers every day in all of our markets, and this consistency in execution drives our ability to take share in all market conditions. With more normal summer weather we have experienced thus far in the quarter, we're 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 our unchanged expectations for the demand conditions in our industry, we are maintaining our full year comparable 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 in line with our full year gross margin guidance. During the quarter, our slower-than-anticipated seasonal sales resulted in a mixed benefit to gross margin percentage, and the year-over-year stability in gross margin highlights our industry's 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 and second-half expectations, we now expect to be above the midpoint. 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, we're 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 SG&A, 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 81,000 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'll now turn the call over to Jeff Schaaf. Jeff.