O'Reilly Automotive, Inc.

Thank you for standing by, and welcome to the O'Reilly Automotive First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a 30-minute question-and-answer session. To ask a question during the session, you will need to press star and then the number 1 on your telephone keypad. Thank you, and I'd like to hand the conference over to Tom McFall. Mr. McFall, please go ahead.

Thank you, Jack. Good morning, everyone, and thank you for joining us. During today's conference call, we'll discuss our first quarter of 2021 results and our updated outlook for the full year of 2021. 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, 2020, 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 Craig 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 McFall, our Chief Financial Officer. David O'Reilly, our Executive Chairman, and Greg Hensley, our Executive Vice Chairman, are also present on the call. I'd like to begin our call today by thanking Team O'Reilly on another outstanding, record-breaking quarter. While our expectations were for a strong first quarter based on business trends and comparisons, to say the results of the first quarter were record-breaking just doesn't do real justice to the incredible performance of our team. highlighted by a 24.8% increase in comparable store sales, a 526 basis point increase in operating margin, and an impressive 78% increase in diluted earnings per share. The last year plus since the onset of the pandemic has been one of the most challenging periods in the history of our company, and we are especially pleased our team was able to once again rise to the occasion and deliver these outstanding results while adhering to strict safety protocols. Simply put, Team O'Reilly has responded in an amazing fashion to provide excellent customer service, and I am profoundly grateful for the hard work and sacrifice of each member of our team. As we highlighted in our press release yesterday, our first quarter comps benefited from a continuation of the robust broad-based sales trend we've experienced for several quarters now, as well as a favorable weather environment for most of the quarter. As a result of these factors, we're very pleased with our comp performance through the first two and a half months of the quarter. In mid-March, the most recent round of government stimulus payments hit, at which point we saw our sales growth accelerate meaningfully. From a cadence perspective, our quarter played out with very strong results in January, aided by beneficial weather and additional government stimulus. February followed a similar trend with some offsetting pressure from inclement weather in the middle of the month that significantly impacted many of our southern U.S. markets that are not accustomed to this type of winter weather. This headwind temporarily cut into our professional business as customers held off on risking the roads to bring their vehicles in for service, but we still finished February above our expectations. March was easily our highest comp of the quarter against the soft prior year comparisons driven by continued strong underlying trends, favorable timing of spring weather, and the stimulus benefit. In total, our first quarter comparable store sales growth of 24.8% and our two-year comparable store sales stack of 22.9% strongly exceeded our expectations. As you would expect, we were also pleased with the composition of our sales results in the first quarter as we saw strength in all areas of our business. Both our DIY and professional businesses contributed strongly to our sales results for the quarter, with our DIY business being the bigger contributor, similar to what we've experienced in recent quarters, driven by strong ticket count comps as well as continued robust increases in average ticket comps. Additionally, our professional business also performed extremely well with the brief inclement weather pressure in February I just discussed. On that side of the business, we also saw an acceleration in ticket count comps and strong growth in average ticket. Average ticket on both sides of our business was healthy despite a limited benefit of approximately one and a half percent from same skew inflation. indicated a continued ability and willingness of our customers to invest in their vehicles and work on larger projects. From a category standpoint, we continue to see broad-based robust sales trends across categories with strong performance in our DIY out front categories and batteries. During the first quarter, we also benefited from strong demand and weather related categories, as well as undercar hard part categories. The harsh winter weather this year and the associated wear and tear it inflicts on vehicles is a positive development after the last two mild winters in our industry and should support demand in undercar categories as we move through the next two quarters. Now I'd like to discuss the update to our full year comparable store sales guidance and our outlook for the remainder of the year. As we announced in our earnings release yesterday, we are increasing our full-year comparable store sales guidance to a range of 1% to 3% from our previous range of down 2% to flat. This increase in our expectations is based on the strength of our first quarter results and our continued robust performance quarter to date in April. This is an exception to our normal practice where we historically have not factored into our guidance revisions any business trends subsequent to the end of the quarter we were reporting because of the extreme volatility we can see over such a short timeframe. However, the continued extremely strong sales momentum we saw at the end of March aided by the latest round of stimulus has continued into April and we feel it appropriate to reflect this outperformance in our annual guidance update. As we look forward to the rest of 2021, we remain confident in the positive underlying fundamentals of consumer demand in our industry. Even before we started to see the impact of the most recent rounds of stimulus at the end of the first quarter, we were capitalizing on strong demand from DIY consumers willing to take on larger jobs and invest in repairing and maintaining their vehicles. We've also been encouraged by the improving trends on the professional side of our business. Even as we remain in an environment of decreased employment, increased work from home arrangements and lower miles driven in the US. We can't be certain regarding the pace of improvements in these factors, given the uncertain nature of how the economy will exit the pandemic, but we remain confident we will benefit as miles driven return to historical norms. However, we remain cautious in our outlook as we move forward through the rest of 2021. and still anticipate potentially significant quarter-to-date variability due to fading tailwinds from the government stimulus and the potential that some demand has been pulled forward as a result of the favorable weather backdrop and extremely strong demand in the first quarter. As a reminder, we faced extremely difficult prior year comparisons for the remainder of the year, especially on the DIY side of the business, with the most significant pressure in that outlook expected for the second and third quarters. While it remains impossible to predict how the remainder of the year will play out for our industry or the broader economy, we know that a significant driver of our success is completely within our control and we fully expect to continue to leverage the strength of our business model and industry leading team to build up strong share gains in 2021. Moving on to gross margin. For the quarter, our gross margin of 53.1% was a 76 basis point increase from the first quarter 2020 gross margin. The improvement was above our expectations built into our guidance range and benefited from the outperformance of the higher margin DIY business, as well as good leverage of distribution cost on the strong sales volume. For the full year of 2021, we continue to expect our gross margin to be in the range of 52.2% to 52.7%. Our guidance continues to include a muted expectation for any gross margin benefit from inflation. To the extent that we see more inflationary pressures than expected, we anticipate pricing in our industry will remain rational. For the first quarter, our earnings per share of $7.06 represents an increase of 78% over $3.97 in the first quarter of 2020 and a compounded two-year growth rate of over 30% compared to the first quarter of 2019. And I want to again congratulate Team O'Reilly on this outstanding performance. For 2021, we are raising our full-year guidance to $24.75 to $24.95, an increase of $2.05 from our previous guidance, driven by the strong year-to-date sales results and the excellent operating profit flow-through, which Jeff will discuss in more detail in a moment. The midpoint of our revised guidance now represents an increase of 6% versus 2020 and a two-year compounded annual growth rate of 18% compared to 2019. Our EPS guidance includes 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 want to spend a few minutes discussing our inventory position and the status of our supply chain. The strength of our supply chain, including our strong relationships with our supplier base and the historical investments we've made to build our industry-leading distribution network and inventory availability, has long been a strategic competitive strength for our company. This competitive advantage has really shined through the past year and been a key factor in our strong sales performance. But our supply chain has definitely been pressured as we've experienced elevated sales volumes. We've been pleased with the strong performance of the majority of our supplier base and overall our supply chain has held up very well. But we do have room for improvement with a small number of suppliers who have underperformed due to pandemic impacts, raw material shortages, or shipping delays. We have also faced pressures in our distribution centers as our dedicated DC teams have been processing record levels of inbound and outbound shipments. Just like in our stores, our DC teams have been working extremely hard to take care of our customers and support the extremely strong sales even as the current levels of volume have created stress on normal operating capacity of our facilities. We remain very committed to maintaining and growing our competitive advantage in inventory availability and view the current pressures we're facing as short term. To finish my comments, I want to again express my gratitude to our team for their continued selfless dedication to our company and to our customers. Our first quarter performance was truly incredible and is a testament to the hard work and commitment of our team. I'll now turn the call over to Jeff. Thanks, Greg.