O'Reilly Automotive, Inc.

Welcome to the O'Reilly Automotive Incorporated First Quarter 2020 Earnings Conference Call. My name is Lateef, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a 30-minute question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touch-tone phone. I will now turn the call over to Tom McFaul. Mr. McFaul, you may begin.

Thank you, Lateef. Good morning, everyone, and thank you for joining us. During today's conference call, we'll discuss our first quarter 2020 results and provide a business update on the company's actions in response to the impact for the novel coronavirus, COVID-19. 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 early from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the end of December 31, 2019, 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 first 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, and Greg Hensley, our executive vice chairman, are also present on the call. Since we reported our fourth quarter 2019 results and set our full year 2020 guidance on February 5th, it would be an understatement to say that the world has experienced a dramatic change with the onset of the COVID-19 pandemic. As I begin my comments today, it's appropriate to start our discussion on the impact we have felt facing this uniquely challenging time in both the life of our country and for our customers and team members. First and most importantly, I want to express the profound gratitude I have for our dedicated team of hardworking professional parts people. Never have our culture values of dedication, hard work, and professionalism meant more. Simply put, the parts and services we provide to our customers are absolutely crucial, whether that means healthcare providers, first responders, people working in essential industries, or everyday customers who rely on their vehicles to meet their family's basic needs. Our dedicated team members in our stores, distribution centers, and offices have demonstrated extraordinary commitment, flexibility, and resilience in responding to the COVID-19 crisis by adjusting how we operate our business to keep all of our stores open to take care of our customers in the safest way possible. I want to thank each member of Team O'Reilly for your unwavering commitment to providing excellent customer service during these challenging times. We've undertaken many measures during the course of the COVID-19 pandemic to promote the continued health and safety of our customers and team members, while keeping all of our stores open to service our customers. From the beginning of the response to COVID-19, our industry was deemed to be an essential service in the executive orders that have been issued by the various governmental entities, including the federal memorandum issued March 16th. Since that time, we have closely monitored and adapted to the evolving information, recommendations, and requirements issued by the Centers for Disease Control and Prevention, World Health Organization, and state and local governmental agencies. The extensive actions we have taken company-wide include significantly increased cleaning and sanitation efforts, the implementation of social distancing practices, and the ongoing adjustments of those practices as new recommendations and regulatory guidelines have been issued. We are providing our team members with necessary personal protective equipment and are working hard to continue to replenish supplies despite challenges in sourcing these products. We have also put in place programs to relax attendance policies as well as advance sick time to help team members who are sick or need time away to support family members. In addition to all these steps, we have also implemented measures to change how we interact with our customers and our stores, which Jeff will cover in more detail in his prepared comments. As a result of these efforts, all of our stores remain open with only limited disruptions for temporary closures and a few instances where we have determined more extensive cleaning was warranted. Now I'd like to provide a little more color on the cadence of our sales in the first quarter. and the impact we began to see as a result of COVID-19. As noted in our earnings release, sales in January were below our expectations due to the mild weather with headwinds in categories such as batteries and antifreeze, and that weather headwind persisted in February. As we entered March, sales results strengthened in conjunction with the onset of spring weather, and we were anticipating a solid finish to our quarter. We saw these solid sales trends until the COVID-19 stay at home recommendations and orders began to be issued in the middle of March. Within a short period of time, these orders took effect across virtually all of our market areas, resulting in a somewhat similar headwind throughout our store base. As we noted in our release yesterday, the negative impact caused by COVID-19 beginning in the middle of March and extending through the first two weeks of April resulted in a decrease in comparable store sales of 13% for that four-week time period. The lack of beneficial harsh weather and the significant impact of COVID-19 in the last two weeks of March drove our comparable store sales decline at 1.9% in the first quarter. Sales over the past week have reflected a benefit from the receipt of our customers of economic impact payments under the Coronavirus Aid, Relief, and Economic Security, or CARES Act. However, we are uncertain as to the magnitude and duration of this benefit we will receive from these one-time stimulus payments, and as a result, are being cautious on how we plan for our business moving forward. The composition of our comparable store sales growth for the first roughly two and a half months of the quarter was similar to the trend we have seen for several quarters, with our professional business outperforming our DIY business, driven by continued strong performance in key undercar, hardcar categories. Likewise, average ticket increases continued to drive our comp results, in line with our expectations as ticket counts were pressured in January and February as a result of the mild winter weather. As we began to face the headwinds from COVID-19 in the middle of March, we saw pressure on both sides of our business as consumers sheltered at home and miles driven was pressured. However, the impact was more severe for our professional business as we believe the demographic served by our professional customers is more likely to accommodate working from home than a typical DIY customer. The escalation of the COVID-19 crisis And the severity of the slowdown in demand in our business at the time of our first quarter was obviously unanticipated. I'm sorry, at the end of our first quarter was obviously unanticipated. And a significant impact on our operating profit and earnings per share results, both of which fell below our guided ranges. However, with an operating profit in excess of 17% of sales, we remain solidly profitable. As the duration of this challenging environment is unknown, We have taken prudent steps to ensure the continued stability and financial flexibility of our company, including appropriate actions to reduce costs, preserve cash, and ensure adequate liquidity, which Jeff and Tom will discuss in more detail in their prepared comments. We are confident in our ability to protect the financial health of our company as we navigate through the current challenging environment. But we also recognize that we operate a business with a high fixed cost structure and we'll continue to see pressure to SG&A and operating results in the short term. For the quarter, our gross margin of 52.3 percent was below our expectations, as we saw deleverage of fixed distribution costs and a negative mixed impact from the sluggish sales of higher margin cold weather items. Outside of mixed differences, product margins continue to be as expected, and the pricing environment remains rational. As we reported in our press release last night, we have withdrawn our 2020 operating, cash flow, and capital expenditures guidance as we continue to evaluate and adjust to the current environment. This isn't a step we've taken lightly, but simply put, we just don't know how long the current crisis will last or what the road ahead will look like as each of the communities we serve navigates the ongoing crisis and begins to plan the reopening process. While we feel that withdrawing our guidance is the prudent decision because of the significant uncertainty of the current environment, we believe even more strongly that our industry and our business will rebound successfully and return to robust growth as we exit this crisis. The challenges presented by COVID-19 are unique in that they have temporarily changed consumer behavior. However, these changes are not structural or permanent. and we will come out of this public health crisis positioned for future success. While the lasting impact of economic damage could persist well after the more restrictive stay-at-home measures are lifted, we are well positioned to rebound quickly and return to solid growth, even if the broader economy is still under pressure. A significant majority of the demand in the automotive aftermarket is non-discretionary in nature, as the parts we supply to our customers are necessary for the operation of their vehicles. Historically, we have performed well in different macroeconomic environments as consumers defer the purchase of new automobiles and invest in maintaining and repairing their existing vehicles at higher mileages. And we believe our ability to keep all of our stores open and operating positions us well for the economy as the economy begins to reopen. As I wrap up my prepared comments, I want to again thank Team O'Reilly for their resolve and commitment to our customers. This current crisis is unlike anything any of us have seen in our careers, but I am extremely proud of the resilience of our team and their willingness to go the extra mile to take care of our customers, especially now when it matters so much. I'll now turn the call over to Jeff Schall. Jeff?