O'Reilly Automotive, Inc.

Good day, ladies and gentlemen, and welcome to the O'Reilly Automotive Incorporated Third Quarter 2020 Earnings Conference Call. My name is Howard, and I will be your operator for today's call. 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 then 1 on your touch-tone telephone. I will now turn the call over to Mr. Tom McFall. Mr. McFall, you may begin.

Thank you, Howard. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 2020 results. 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 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 third quarter 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 on the call. We're pleased to announce record-breaking performance for our third quarter and are again amazed at the ability of Team O'Reilly to produce such excellent results in the midst of one of the most challenging periods in the history of our company. Our team remained dedicated to our customers and drove an outstanding 16.9% increase in comparable store sales in the third quarter The 39% increase in diluted earnings per share to $7.07, while also consistently executing on our protocols to protect the health and safety of our team members and customers in the midst of the COVID-19 crisis. While the challenges we faced during 2020 are far from routine, our teams have done an exceptional job adjusting to the current environments and modifying the ways we conduct business during this pandemic. They've done so without sacrificing our focus on providing excellent customer service or any of the value our customers have come to expect. We continue to be diligent in our efforts to constantly evaluate and revise our safety protocols as recommended by public health and governmental agencies and are extremely focused on executing best practices across our company. Before we continue with our prepared comments, I'd like to express our deep gratitude to our team for their hard work and commitment to our customers. There is absolutely no question about how important our business is in meeting our customers' critical needs, and I couldn't be prouder of Team O'Reilly for their contributions during this once-in-a-lifetime challenge. Now I'd like to provide some details on our robust performance in the third quarter. As we discussed on the second quarter conference call, we started off the third quarter with a continuation of the strong trends and top line sales volume we generated from mid-April through June. As we progressed through the quarter, we continued to see resilient, robust sales performance on both sides of our business. From a cadence perspective, comps were in the strong mid to high teens throughout the quarter, with the best performance at the beginning of the quarter in July. We had steady, consistent performance in the balance of the quarter in August and September, after adjusting for Sunday comparison differences between these two months. As we indicated on our press release yesterday, our comparable store sales thus far in the fourth quarter remain strong and are trending slightly below our third quarter exit rate in the low double-digit range. As we discussed on both our last two quarters earnings calls, We have been very cautious on how we thought about our sales outlook as we progressed through the unprecedented uncertainty in our markets and the broader economy. This includes a comment on last quarter's conference call that we expected sales would moderate from the record sitting pace we were seeing at that time as we moved through the back half of 2020. We've been somewhat surprised and definitely pleased at how steady our strong sales comps trends have been And to the extent volumes did moderate in the third quarter and into the fourth quarter, that moderation has been much more gradual than the immediate acceleration we experienced when demand swung heavily in our direction in April. Our sales trends are even more encouraging in light of the fading tailwinds to our business from the expiration of government stimulus payments and enhanced unemployment benefits under the CARES Act as we moved further past when those dollars were being injected into the economy. Moving to the composition of our strong sales performance in the third quarter, our DIY business was the stronger contributor during the quarter, but our professional business also performed very well and the relative trends on both sides of our business tracked along with the cadence for total sales in the quarter I just discussed. From a ticket perspective, We continue to see robust increases in both ticket count comps and average ticket comps on both sides of our business, even though we saw a muted impact in average ticket from same skewed inflation, which is in line with our expectations. As we saw in the second quarter, our category performance reflected strong performance across all of our product lines with some of the best performance in our front categories in our DIY business. as well as another extremely strong sales quarter for batteries. We believe these results indicate a continued ability and willingness of our DIY customers to work on larger projects. I want to be clear that even though these more discretionary categories have been our better performers for the last two quarters, we have still been very pleased with our sales volume across our business. While demand in undercar hard part categories is more failure related, and did not perform quite as strong as the company average in the third quarter, sales for these traditional categories were still robust and significantly better than historical trends. At this point, I'm sure the question everyone listening in on today's call would like to have answered is, what are the discrete factors that are driving this incredible surge in our sales and how long will they persist? Well, it's impossible to provide a definitive answer to that question. but we do expect demand to remain solid, and there are several potential tailwinds and headwinds we are watching as we look forward. We certainly saw, for at least the last portion of our quarter, continued tailwinds from government stimulus under the CARES Act and likely saw some residual benefit as unemployment benefits were partially extended for a short period of time later in our quarter. Even as those payments have lapsed, the positive impact they have had to support the health of the consumer has mitigated the negative impact from economic pressure on the consumers we would normally expect in a period of such rapid increase in unemployment and significant economic stress. We also have a long track record of experience from economic cycles in this industry, seeing consumers respond to economic uncertainty by deferring new vehicle purchases and investing more in maintaining their existing vehicles. The combination of this incentive to take care of an existing vehicle coupled with the government stimulus has likely driven a reduction in underperformed vehicle maintenance, and we expect our business will continue to benefit as economic conditions recover. Aside from the macro benefits that have helped the automotive aftermarket, it's also clear to us that our strong sales performance is the result of significant share gains our team has delivered over the course of the past several months. We execute a high-touch capital-intensive business model that requires a well-equipped, technically proficient team of professional parts people providing outstanding service. We have simply been blown away by the amazing commitment and resilience of our team. In the face of extremely difficult circumstances, they haven't wavered in delivering the value propositions we promised to our customers. Our team's consistency in providing excellent customer service differentiates us and help us drive market-leading results and stable economic conditions. And these advantages are even more pronounced when everyone in the automotive aftermarket is facing enormous external challenges. As pleased as we are with our team's great performance in the third quarter, we know the goodwill we've created from meeting customers' essential needs during this crisis will drive customer loyalty and even further business in the long term. We remain optimistic about the health of the automotive aftermarket and believe we will continue to see strong demand in our industry, but remain cautious in our immediate sales outlook, given the uncertainties that still exist. As miles driven has remained under pressure at the same time the government stimulus has ceased, we've been encouraged to see continued strong demand, particularly on our professional business, where the demographics of the ultimate consumer is more likely to work jobs that have instituted work from home arrangements. We can't anticipate what risk we could face if macroeconomic conditions worsen and Miles Driven stays depressed, nor do we make any assumption as to whether there will be additional government stimulus or to the degree of which our demand would benefit. In the immediate short term, we would remind everyone on the call that our fourth quarter can be quite volatile given the variable impact of weather and consumer demand dynamics during the holiday season, which could be more pronounced this year as some consumers face economic challenges as a result of the pandemic. We could also see some volatility as a result of the election next week, as we did in 2016. Ultimately, we'll have to wait and see where our sales level out. We have been very encouraged by the stability of sales trends during this six-month period of record-setting comps and feel very confident our company continues to deliver solid sales growth, even if the broader economic conditions deteriorate. Moving on to gross margin for the quarter, our gross margin of 52.4% was a 96 basis point reduction from the third quarter 2019 gross margin. The decrease from last year was driven by reduced LIFO benefit from the impact of merchandise purchased in 2019 before tariff-related cost increases, which Tom will discuss more fully in his comments, as well as the planned expected dilution from IASA. For the third quarter, Our team delivered an operating profit margin of 22.6%, an increase of 250 basis points over the third quarter 2019, and for the first nine months of 2020, we have generated over $1.8 billion of free cash flow. Jeff will discuss our outstanding operating performance in more details in his prepared comments. Again, I want to offer my congratulations to Team O'Reilly for another quarter of record-breaking sales and profitability. Your willingness to go the extra mile to ensure everybody who enters our stores, DCs, or corporate offices while also providing unwavering customer service is truly outstanding. I'll now turn the call over to Jeff Shaw. Jeff?