O'Reilly Automotive, Inc.

Good morning, and welcome to the O'Reilly Automotive fourth quarter and full year 2019 earnings conference call. My name is Zanara, and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touchtone phone. I will now turn the call over to Mr. Tom McFall. Tom, you may begin.

Thank you, Zunera. Good morning, everyone, and thank you for joining us. During today's conference call, we'll discuss our fourth quarter of 2019 results and our outlook for the first quarter and full year of 2020. 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 ended December 31st, 2018, and the 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 Dr. Jim.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts First Order 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, and Greg Hensley, our Executive Vice Chairman, are also present. To begin today's call, I would like to congratulate all of our team members on their solid results in 2019. As a result of your commitment to our dual market strategy and the O'Reilly culture values, we generated full-year comparable store sales growth of 4%. In a difficult macro environment of rising selling prices, rising acquisition costs, and rising expenses, your focus on profitable growth while maintaining expense control resulted in full-year sales growth of 6.4% and an increase in operating profit of 5.8%. For 2019, we generated our 27th consecutive year of comparable store sales growth, record revenue, and operating income every year since becoming a public company in 1993. And I would like to thank Team O'Reilly for your many contributions to support our growth and success in 2019. Before I get into the results, I would like to call out our press release from August 20th announcing we've entered into an agreement to purchase Mayasa Auto Parts, headquartered in Guadalajara, Mexico, and report to you that the transaction has closed and Mayasa became a part of Team O'Reilly at the end of November. Mayasa is an amazing family-run business founded over 65 years ago and has a very similar history and culture to O'Reilly. They currently operate 21 Orma-branded auto parts stores and supply over 2,000 jobbers through their six distribution centers. Because of their current mix of business, they run at a lower margin than the O'Reilly US stores, so they are slightly diluted to our operating metrics in the fourth quarter, but did not have a material impact on our earnings per share results for the year. 2020 will be a learning and planning year, as we work with the experienced MIASA leadership team to develop our future expansion plans. And as a result, our Mexico operations will be dilutive to our operating metrics in 2020, but will not have a material impact on our earnings per share. That said, we're very excited about the addition of the 1,100-plus MIASA team members, and we have a great opportunity to grow our footprint in Mexico over time. Now we'll cover our fourth quarter results and key expectations supporting our 2020 guidance. Our comparable store sales for the fourth quarter grew at 4.4%, which was in line with our expectations as both DIY and professional contributed strongly to our comparable store sales growth, with professional continuing to outperform DIY. From a comp store sales progression standpoint, Sales of our key undercard categories remain strong all quarter in line with the trends we saw throughout 2019. However, the lack of winter weather in most of our markets in December resulted in below expected levels of sales for cold weather categories. This marks the second year in a row that December sales have been below our expectation. Now we'll move on to the impact of inflation on our 2019 results. how we anticipate it will affect 2020 and the other drivers of sales we expect in 2020. For the fourth quarter, same skew inflation was at 3.5% for the full year. I'm sorry, it was 3.5% and for the full year, inflation was 3%, which was above our beginning of the year estimate of 2% as additional rounds of tariff increases went into effect. This higher than expected rate of inflation didn't affect our comparable traffic, which came in slightly above our expectations, but it did have a marked effect on the composition of our average ticket. Because of the increasing complexity of replacement parts on new or more advanced vehicles, we historically have seen robust growth in our base average ticket without the benefit of same skew inflation. In 2019, we experienced meaningful same-skew inflation, and some consumers reacted by buying down the value spectrum and consciously limiting the number of items per ticket, resulting in a lower than expected growth in the base average ticket. The combination of higher than expected same-skew inflation and lower base ticket growth resulted in total average ticket growth slightly below our expectations. For 2020, we expect same skew inflation to be 1% as we annualize last year's price increases and are not planning for changes in the current tariff structure. With the lower year-over-year selling price increases, we expect traffic count to improve and average ticket to remain a steady contributor to comps as the diminishing tailwind from same skew inflation is mitigated by a return of the base underlying growth and average ticket to a more historical growth rate. Historically, we focused on growing our per store inventory slower than comparable store sales we generate. We're going to change that for 2020. Ongoing skewed proliferation and the inflation related to increases to acquisition costs, we feel we have an opportunity to improve our store level inventory position and build upon our industry-leading parts availability. In addition to the growth in inventory we would normally see in 2020 from new stores and product additions, we will be adding through the course of the year just over $100 million of additional inventory to our store and hub network. And from past experience, we know this will enhance the service we provide to our customers and drive sales. From a macro perspective, We anticipate that the demand drivers for the automotive aftermarket industry will remain solid as the robust SAR years, beginning after the Great Recession, continue to roll into our more addressable market, and miles driven continues to grow at a moderate pace, supported by continued record high levels of employment and stable gas prices. Based on our team's ability to provide industry-leading customer service and gain market share, and the impact of inflation, our inventory initiatives, and the overall outlook for the aftermarket, we're establishing our full-year comparable stores sales guidance at 3% to 5%. Our current business trends thus far in the first quarter continue to reflect solid growth in our core undercar and underhood categories. However, the lack of cold weather has been a significant drag on seasonal sales, so at this point in the quarter, we're behind where we would like to be. As a result, we're establishing our first quarter comparable sales guidance at 2 to 4%. For the fourth quarter, gross margin was 53.3% of sales, which was lower than expected due to the acquisition of MIASA and lower than expected sales of cold weather categories. For the full year, gross margin came in at 53.1%, which was towards the top end of our guidance range. As we discussed on last quarter's conference call, our gross margin benefited from sell-through of on-hand inventory that was purchased prior to tariff-driven acquisition price increases, which have gone into effect in stages, starting in the second half of 2018 and continuing throughout 2019, and the corresponding retail and wholesale price increases. During the past month, several of our key categories have received partial tariff exceptions. This will reduce the level of benefit we had expected to see in the first half of the year as we sell through the old merchandise. However, the reduction of replenishment acquisition costs will benefit us throughout the year as we anticipate. Current higher selling prices will remain in effect as we and others in our industry maintain rational pricing in the face of continued SG&A pressures. In aggregate for 2020, we expect our gross margin to be in the range of 52.5% to 53%, with the year-over-year decrease due to dilution from MIASA and less tailwind from merchandise purchase before the tariff-related acquisition cost increases. Operating profit for the fourth quarter came in at 17.8% of sales, which is below expectations based on how we expected gross margins on a week before cold, weather, sales, pressure on SG&A, which Jeff will discuss, and dilution from IASA. For the full year, operating profit was 18.9%, which was slightly below the midpoint of our guidance due to the shortfall in the fourth quarter. In 2020, we expect operating profit to be in the range of 18.4% to 18.9%. The decline from prior year is due to a lower gross margin, as I discussed, pressure on SG&A, which, again, Jeff will discuss, and the dilution from MIASA. For the fourth quarter, earnings per share of $4.25 represented an increase of 14% as the shortfall in operating profit was more than offset by a lower tax rate, which Tom will cover in his comments. For the full year, earnings per share were $17.88 which represents an 11% increase over 2019. For the first quarter of 2020, we're establishing earnings per share guidance of $4.37 to $4.47. And for the year, our guidance is $19.03 to $19.13. Our quarterly and full year guidance includes an estimate for the excess benefit from stock options and the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I turn the call over to Jeff, I'd like to briefly discuss our recent leadership conference. Two weeks ago in Dallas, we held our annual leadership conference attended by each of our store managers, sales team members, field management, and distribution management, totaling over 7,000 O'Reilly team members in all. The theme of this year's conference was Every Customer Counts, and we spent a lot of time talking about focusing on the fundamentals even more, rolling up our sleeves, and out-hustling and out-servicing the competition. Team O'Reilly left Dallas extremely motivated, and I'm very confident in our team's ability to provide excellent customer service and gain market share in 2020 and beyond. I'll now turn the call over to Jeff Shaw.