O'Reilly Automotive, Inc.

Welcome to the O'Reilly Automotive Inc. 3rd Quarter 2025 Earnings Call. My name is Matthew, and I'll be your operator for today's call. At this time, all participants are on a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star 1 on your touchtone phone. I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 2025 results and our outlook for the remainder of the year. After our prepared comments, we will host a question and answer period. Before we begin this morning, I would 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 works. 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, 2024, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Brad Beckham.

Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts third quarter conference call. Participating on the call with me this morning are Brent Kirby, our president, and Jeremy Fletcher, our chief financial officer. Greg Hensley, our executive chairman, and David O'Reilly, our executive vice chairman, are also present on the call. I'll begin our call today by expressing my appreciation to more than 93,000 team members across all of North America for the hard work they put in to deliver the third quarter results we released yesterday. Team O'Reilly continues to win in each of our markets, and our team's dedication to excellent customer service drove the solid comparable store sales increase of 5.6% we generated in the third quarter. This performance was at the high end of our expectations, and we are pleased with the momentum our teams have been able to sustain on both sides of our business. The combination of our strong sales results with a 9% increase in operating income and a 12% increase in diluted earnings per share demonstrate our team's focus on driving profitable growth. Thank you, Team O'Reilly, for your commitment to our culture and absolute dedication to taking care of our customers. Now I'll walk through the details of our comparable store sales performance for the third quarter. Our professional business continues to be the more significant driver of our sales results with an increase in comparable store sales of just over 10%. We continue to be pleased with the strength in our pro ticket count growth, which was the primary driver of our professional comp increase and the biggest contributor to our outperformance relative to our expectations. We also saw increased benefit in the quarter from average ticket on both sides of our business that I will detail in a minute. We remain confident that the professional sales growth our teams are delivering is the result of share gains as we continue to be the supplier of choice for our professional customers. Our share gains have been broad-based with strong contributions from all of our market areas. The strength of our professional business is anchored in the valuable relationship we have developed with our customers who value the end-to-end partnership our team is able to provide to their business through service, availability, and business tools that help them be a service provider of choice to their customers. We were also pleased to deliver DIY comparable store sales growth with this side of our business finishing the quarter with a low single-digit comp driven by average ticket benefits partially offset by pressure to ticket counts. Our DIY business was in line with our expectations in July after having experienced pressure in June as we exited the second quarter. We began to encounter modest pressure to DIY transaction counts midway through the third quarter, which we believe reflects some degree of initial short-term reaction by DIY consumers in response to rising price levels. The contribution to same-skew inflation during the third quarter, which was felt evenly on both sides of the business, was just over 4%. As we've anticipated coming into the third quarter, we saw a significant ramp in tariff-driven acquisition cost increases and made appropriate adjustments to selling prices. On a category basis, the pressure to our DIY business as we moved through the quarter was primarily felt in some categories where we could be seeing some deferral in larger ticket jobs. However, we continue to see strength broadly in other DIY maintenance categories including oil, filters, and fluids that have continued the outperformance we have seen throughout the year. We want to emphasize that we are still in the early stages of the consumer response to the ramp up in price levels. It can be difficult to parse too finely the initial response from our DIY customers, but the pressure we have seen thus far is modest and in line with consumer reactions to economic shocks we have seen in the past. As we've noted the last several quarters, we remain cautious in our outlook on the consumer and expect that we could continue to see a conservative stance from consumers and how they manage spending in this environment. However, even in this environment, our DIY consumers are still showing a willingness to invest in and maintain their vehicles, and we believe any potential deferral pressure will be short-term. When looking at category dynamics on the professional side of our business, we are seeing very strong performance across both failure and maintenance related categories and are pleased with the resiliency of customer demand. The customers taking their vehicle to a professional shop for their repair and maintenance work tends to be less economically constrained than our average DIY customer and less reactive to inflationary pressures on spend in a largely non-discretionary category of their wallet. Looking at the cadence of our sales results in total for the quarter, we generated consistently strong comparable store sales growth as we moved through the quarter with positive comps on both sides of our business in each month. We would characterize weather as neutral on balance for the quarter as we experienced normalized summer weather across most of our market areas. Now I'd like to provide some color on our updated full year comparable store sales guidance. As noted in yesterday's press release, we updated our guidance from the previous range of 3 to 4.5% to a range of 4 to 5%. At the midpoint of our full-year range reflects our outlook on factoring in current sales volumes as we progress through September and thus far into October. We have incorporated into our guidance range the current pricing environment. While the broader tariff landscape has the potential to remain fluid, at this stage, we believe we have seen the lion's share of the cost impacts we are expecting as they relate to the tariffs currently in effect. As a result, we anticipate a mid-single-digit same-skew benefit in the fourth quarter, but have also factored into our guidance a continuation of the pressure to our DIY customers from the dynamics I mentioned earlier. Our industry has continued to behave rationally in response to the pressure tariffs have placed on product acquisition costs, and we continue to monitor industry pricing adjustments to ensure we are competitively priced for the value proposition we provide. Our industry backdrop remains or continues to be both stable and supportive. We believe the dynamics of the consumer uncertainty and continued pressure to the DIY business are being felt industry-wide. Most importantly, we believe our teams are winning share on both sides of the business against the current macroeconomic backdrop. In times when spending decisions become more difficult for our customers, having our excellent customer service, superior product availability, and professional parts people to guide them becomes an even more important piece of the value we deliver. Before I turn the call over to Brent, I would like to highlight our updated diluted earnings per share guidance. As noted in our press release, we have updated our EPS guidance to a range of $2.90 to $3. This incorporates our year-to-date performance, the revised sales outlook, and our expectations for gross margin and SG&A for the fourth quarter, which Brent will discuss next. At the midpoint, our current EPS guidance is an increase of approximately 2% from the midpoint of our previous guidance and a year-over-year increase of 9%. We are pleased that the team has been able to deliver both strong sales and earnings growth, even in a rapidly changing environment of economic uncertainty. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for their strong performance in the third quarter. Now, I'll turn the call over to Brent.

Thanks, Brad. I would like to start by thanking Team O'Reilly for their outstanding work during the quarter. Our team continues to outperform and remain steadfast in their focus on our culture and our customers to drive our success. Today, I will start by discussing our third quarter gross margin and SG&A results, as well as provide an update on capital expansion and our updated outlook on these items. Starting with gross margin. For the third quarter, our gross margin of 51.9% was up 27 basis points from the third quarter of 2024 and in line with our expectations. Our team was able to offset the gross margin headwind resulting from our customer mix from faster growth on the professional side of the business with prudent supply chain management and solid distribution productivity. While the third quarter gross margin rate was above our full year gross margin guidance range, we expected a higher gross margin rate in the third quarter as compared to the rest of the year, which is typical for the seasonal composition of our product mix and consistent with our results in 2024. We're maintaining our full year gross margin guidance range of 51.2 to 51.7% and expect to see a similar progression of gross margin rate from the third to fourth quarter as we experienced last year. Our supply chain teams continue to work diligently both internally and with our supplier partners to navigate the evolving tariff environment. Our ability to maintain consistent gross margins with the amount of change we have faced during the year is a true testament to their hard work and dedication. As expected, we realized significant acquisition cost pressure from tariffs in the quarter. The impact from product cost inflation in the quarter closely mirrored in timing the adjustments we made in pricing. As Brad mentioned earlier, we have now seen the biggest impacts from the current tariff environment, and our guidance for sales and gross margin does not contemplate substantial impacts from further tariffs beyond what is reflected in our product acquisition costs today. However, To the extent any future tariff revisions result in further acquisition cost increases, we will prudently navigate those in the same way that we have done today. As the tariff landscape and cost environment has evolved in 2025, we have maintained a close eye on the pricing environment within our industry to ensure that we are making the appropriate adjustments and remaining competitive. Against this volatile backdrop, our goal remains the same. To provide the exceptional service and industry-leading availability our customers know and expect from O'Reilly Auto Parts to continue to earn their business. Overall, we believe our supply chain is at its healthiest point since we emerged from the pandemic. With the support of a strong supplier community, we have sustained robust in-stock availability across our tiered distribution network. This strong distribution infrastructure is the foundation for our industry-leading inventory availability and a critical factor in how we serve our customers and earn additional share. Our merchandising teams work diligently to maintain our diversified supplier base in order to actively manage exposure and risk on numerous fronts. This risk can range from country of origin to diversification of supply within a single product category. Supplier health and supplier performance can often go hand in hand. So an important part of our risk management process is monitoring our supplier partner health from all angles, ranging from shipping performance, product quality, catalog support, all the way to financial stability. While these processes always involve some level of effort to mitigate risk in a small subset of our supplier base, we would again reiterate that we are pleased with the collective health of our supplier partners. Our goal is always to foster supplier partnerships that are both long-standing and deep, as we repeatedly earn our status as the desired priority customer for each of our suppliers. Now, I'd like to turn to SG&A and give some color on the quarter. Our SG&A per store growth of 4% was at the top end of our expectations for the quarter. Driving this spend were expenses related to our strong sales performance coupled with continued inflationary pressures in our cost structure, again centered around medical and casualty insurance programs. Based on our third quarter results and outlook for the remainder of the year, we expect our SG&A per store growth to come in at or slightly above the top end of our full year guide of 3.5%. We have factored in our updated expectations for comp sales and corresponding incremental SG&A dollars into our guide, and we have been pleased with how our teams are managing expenses while driving sales volumes above expectations. As a reminder, our fourth quarter SG&A per store growth is expected to be below the full-year run rate as a result of comparing against the charge we took in the fourth quarter of 2024 to adjust reserves for self-insurance liability for historic auto liability claims. Based on our SD&A expectations and projected gross margin range, we continue to expect our full-year operating margin to come within our guidance range of 19.2% to 19.7%. As always, our top objective in managing our expense structure is ensuring that we are meeting our high standard of customer service by supporting our team of experienced professional parts people. Turning to an update on our expansion, we opened 55 net new stores across the US and Mexico during the third quarter, bringing our year-to-date store opening to 160 stores. We are on track to achieve our 2025 new store opening target of 200 to 210 net new stores by year end, and we continue to be pleased with the performance of our new stores. New store growth remains an attractive use of capital for us, and we see ample growth opportunities spread across all of our North American footprint. In this regard, we are pleased to announce our 2026 store opening target of 225 to 235 net new stores. Just as our 2025 growth has been spread across 37 US states, Puerto Rico and Mexico, we anticipate growth in all of those markets as well as in Canada in 2026. Our store growth in 2026 will continue to be concentrated in the US markets, but we will also continue our measured growth within our international markets as we work to develop the teams and infrastructure to support our O'Reilly operating model. Our tiered distribution network continues to help drive our store's competitive advantage in parts availability, and we are pleased to begin servicing stores out of our new Stafford, Virginia distribution center in the fourth quarter of this year. I would like to express my gratitude to our distribution and supply chain teams for all the hard work that has gone into this state-of-the-art new Greenfield distribution center in the Mid-Atlantic market. This distribution center will be an important stepping stone for us to begin adding store count within heavily populated and untapped markets for us in the mid-Atlantic I-95 corridor. As excited as we are about this new facility, there is no pause for our dedicated supply chain teams. As we are full steam ahead with distribution growth and progress at our upcoming Fort Worth, Texas facility, as well as future opportunities that will further support our store growth and inventory availability. Capital expenditures supporting both store and DC growth for the first nine months of 2025 were $900 million and are slightly below our expectations. Based on our year-to-date spend and fourth quarter outlook, we are reducing our full-year capital expenditure guidance by $100 million to a range of $1.1 to $1.2 billion. This reduction is primarily the result of timing of spend on store and distribution center growth projects that we now expect to incur in 2026. As I close my comments, I want to once again thank Team O'Reilly for their hard work in driving our company's success. Your commitment to providing consistent, excellent service to all of our customers is the foundation for our long-term growth. Now, I will turn the call over to Jeremy.

Thanks, Brent. I would also like to begin today by thanking Team O'Reilly for another successful quarter. Now, we will take a closer look at our third quarter results and update our guidance for the remainder of 2025. For the third quarter, sales increased $341 million, driven by a 5.6% increase in comparable store sales and a $101 million non-comp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. For 2025, we now expect our total revenues to be between $17.6 and $17.8 billion. Our third quarter effective tax rate was 21.4% of pre-tax income, comprised of a base rate of 22.2%, reduced by a 0.8% benefit for share-based compensation. This compares to the third quarter of 2024 rate of 21.5% of pre-tax income, which was comprised of a base tax rate of 23%, reduced by a 1.5% benefit for share-based compensation. As we noted in our press release, during the third quarter, we accelerated the payment timing of transferable renewable energy tax credits that were originally planned to settle in 2026. Our full-year income tax rate guidance has been revised to reflect the incremental benefits we expect from the accelerated payment. Accordingly, for the full year of 2025, we now expect an effective tax rate of 21.6% versus our prior expectation of 22.3%. The updated tax rate guidance includes an anticipated benefit of 1% for share-based compensation. We expect the fourth quarter rate to be lower than the first nine months of the year due to the totaling of certain open tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first nine months of 2025 was $1.2 billion versus $1.7 billion for the same period in 2024. The reduction in free cash flow was primarily the result of the accelerated timing of payment for renewable energy tax credits that I previously mentioned. For the full year 2025, we have updated our expected free cash flow guidance to a range of $1.5 to $1.8 billion, down from our previous range of $1.6 to $1.9 billion. This adjustment reflects the headwind from the accelerated tax payment timing, partially offset by the reduction in our capital expenditures guidance Brent discussed in his prepared remarks. Inventory per store finished the quarter at $858,000, which was up 10% from this time last year and up 7% from the end of 2024. Our inventory investments continue to generate strong returns, and we've been pleased with the overall in-stock positions of our store and distribution network. We have executed our inventory growth strategy in 2025 at a faster pace than our initial expectations and could see elevated inventory balances above our original 5% per store plan as we finish out the year. We continue to manage the timing of inventory enhancements to capitalize on current opportunities we see to drive our business and are pleased with the productivity of these investments. This incremental inventory investment has been more than offset by our AP to inventory ratio. We finished the third quarter at 126%, which was down from 128% at the end of 2024, but above our expectations. Moving on to debt, we finished the third quarter with an adjusted debt to EBITDA ratio of 2.04 times as compared to our end of 2024 ratio of 1.99 times with an increase in adjusted debt partially offset by EBITDA growth. We continue to be below our leverage target of 2.5 times and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program, and during the third quarter, we repurchased 4.3 million shares at an average share price of $98.08 for a total investment of $420 million. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, And we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance Brad outlined earlier includes the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I open up our call for your questions, I would like once again to thank the entire O'Reilly team for their continued hard work and dedication to providing consistently high levels of service to our customers. This concludes our prepared comments. At this time, I would like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star 1 on your phone. If you wish to be removed from the queue, please press star 2. We ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Please limit your questions to one question and one follow-up question. Once again, if you have a question, please press star 1 on your phone. Your first question is coming from Greg Mellick from Evercore. Your line is live.

Hi, thanks. I wanted to start with a comment you guys made on the 4% same-skew inflation issue. that you've seen the lion's share of it. Does that mean that from here there's none, or is there still some residuals we flow through the next couple quarters?

Yeah, Greg. Hey, this is Jeremy. Thanks for the question. We still think that we'll see a tailwind from same skew as we move through fourth quarter and first quarter. You know, we talked to the mid-single-digit range. You know, as we move through third quarter, a lot of what we saw was – It came on pretty early on in the quarter, but there was some ramp during the course of the third quarter. As we look at incremental changes in prices moving forward, there's always the potential for some of that. And obviously, the tariff environment is a little bit more static now, but has the potential to move and change. But we think from what we've seen so far under the current regimes, most of that costs has flowed through to us. The adjustments that we needed to make are mostly behind us, and we don't see the same level of substantial incremental changes in how we go to market to what we've seen so far in 2025. Got it.

And then my follow-up is really on the price elasticity. I think you mentioned that that can take some time to play out. What have you seen historically from price elasticity, particularly on the DIY side?

Yeah, hey, good morning, Greg. This is Brad. Thanks for the question. Yeah, so, you know, in the past, you know, things can always change, but what we've always seen in our industry, at least in my, you know, 29 years this year, you know, working for O'Reilly and in this industry, is when we've seen shocks like this, you know, there can be, you know, some deferral, you know, failure. Our hardest part categories from a failure standpoint are, you know, obviously break-fix, but you do have those larger ticket jobs that can be deferred somewhat. If a brake job, if the pads are metal on metal, then most likely it is what it is and that job has to be made. If it's a chassis job, for example, and there's some more out ball joints or control arms or something like that, that's something that can be put off. normally for weeks, months, but obviously not years. And so kind of what we're seeing right now is what Brent and I talked about in our prepared comments is there's a lot of movement. Generally, we feel really good about what we're seeing on both sides of the business from a repair and maintenance standpoint. But to your question on the DIY side, what we did see a little bit of that we hadn't seen thus far this year, we saw in the third quarter was what we feel like could be some deferral of those larger ticket jobs and you know there's a lot of moving pieces you know you have not only it's not always a direct line just to what we feel like is a little bit of elasticity or what could be deferred you have different weather patterns you have uh you know two and three year stacks on some of those categories that have been extremely strong for us the last couple years but we still do think that we are seeing customers that are maybe putting some things off and we'll just have to see how that plays out in the fourth quarter

Got to appreciate it, and good luck. Thanks, Greg.

Thanks, Greg.

Thank you. Your next question is coming from Chris Horvers from J.P. Morgan. Your line is live.

Thanks. Good morning, and thanks for taking my question. I wanted to follow up on the elasticity concerns. You know, mid-single-digit inflation for the fourth quarter, that's basically in line with where you're implying, you know, comps are in the fourth quarter. So, Is like, as you think about guiding based on what you've seen over the past two months, is that elasticity function getting worse? Or I guess, why wouldn't your comp be higher than the inflation that you expect in the fourth quarter?

Yeah, thanks, Chris. You know, this is Jeremy. Lots of different things obviously go into how we think we'll finish out the full year, and that pushes us into I know how you guys read an implied guide in the fourth quarter. You know, when we think about our outlook just to finish out the year, there are a lot of moving pieces. You know, I remind everyone that it's our most difficult comparison as we think about where we finished up the year last year. As we look specifically at the question around the benefit from where price levels have gone to and where we've seen the same skew, it was clearly a net incremental benefit to us in the third quarter. There's nothing about a potential build within any of those pressures that might impact the DIY consumer market. that we're implicitly forecasting and how we think about fourth quarter to directly answer the question. To Brad's earlier point, you go into the back half of the year, for us, there's always a lot of different factors. There can be volatility that we see just from how weather plays out, how some of the Christmas shopping season plays out. And then we do have just, I think, a cautious view to how how a consumer might continue to react. But kind of understanding all those component pieces, there's nothing about how we've at least started the fourth quarter that really puts us in a changing environment. We're really still early stages on some of how we're viewing where the customer is going to go with these price levels, and we're cautious but still feel good about the overall trends in the business.

Makes a lot of sense. I want to ask a longer term question. You are accelerating the unit growth next year. It looks like it'll be over 4% in 26 based on what you mentioned earlier. Can you talk about your latest thoughts around the U.S. store potential and maybe Mexico and Canada as well to the extent that you have some thoughts there? And do you think as we look out over the next few years, Could international accelerate enough that you bend that four-ish type unit growth rate higher? Thank you.

Yeah, great question, Chris. This is Brad. So first off, we feel extremely good about our new store cohorts. We continue to be extremely pleased with the way that our field teams are opening up new stores, you know, just from a quality of the team, professional parts people perspective. Putting in place the right store managers, the right district managers, that absolutely drives the quality of our new store locations. Obviously, there's a lot more that goes into it than just the teams, but that's primarily how we make those decisions is our ability store count wise to staff them with great teams. We're also extremely pleased with the way our design and development teams have continued to develop here in the corporate office, not just from a U.S. perspective, but how those teams have matured and really understanding how the machine runs, what it really looks like as we as we ramp up internationally. You know, to your question about where we can go in the U.S., you know, we haven't put a new fine point on that, but I would just tell you, you know, every year that goes on, we continue to ramp that number up of what we feel like our store count could be in the U.S., not just from a – Really not just from the way we've always looked at it, but its consolidation continues in the industry, which we believe it will continue to do so. We feel really good about continuing to ramp up and continue to have a higher number in the U.S. and where we feel like that could be in five and ten years. We're very excited about our international opportunities. Continue to look at Mexico as such a huge opportunity for us mid to long term. We lost a little bit of time during the pandemic in terms of our ability to build the muscle that we wanted to build. in-country in Mexico and the inability to really get down there, build the muscle from a people standpoint, a structural standpoint, supply chain systems, etc. But we've made a lot of progress over this last couple years, Chris, and, you know, we're really excited about what the future holds in virtually an untapped market for us in Mexico over the next many years. You know, really same thing for Canada. You know, we're early stages in Canada, excited to make the announcement that Brent mentioned earlier in his prepared comments that our expansion is officially going to start in the Canadian market in 2026. And, you know, while that doesn't hold the total addressable market that a Mexico or obviously the U.S. does, The car park is very similar in Canada. We feel like that is an untapped market from a retail and DIFM standpoint in terms of our scale and size and ability to build the right teams, especially off that vast platform that's such an amazing people platform for us in Canada. So excited about all those markets and really excited about our target for 2026. That's great. Thanks so much.

Thanks, Chris. Thank you. Your next question is coming from Scott Ciccarelli from Truist Securities. Your line is live.

Good morning, guys. Hopefully two quickies. Any notable differences in terms of geographic performance, given some of the weather patterns that we've seen? And then secondly, you did spend a little bit more time than usual talking about supplier health. So can you directly address any risk or exposure you may have to the first brand situation? Thanks.

Hey, good morning, Scott. Yeah, I'll take the first portion of that on regional performance and kick it over to Brent for first brand. So actually, we didn't see a lot of material differences in our geographies and regional performance in Q3. There's always going to be some differences, but directionally, they weren't much different than what we originally had planned with our internal plan month to month by region. So no material differences. There was a

a tad bit of difference in our north south and a little bit east and west but really nothing material that rolled up to any major differences that we would call out yeah and scott this is brent on the second question around supplier health yeah um you know obviously the question about first brands and you know as i said in the prepared comments generally we feel better about our supplier health for the industry than we have since since the pandemic so we're in a backdrop of a very healthy industry coming off of, you know, some years that were challenging for sure. In terms of first brands specifically, you know, they're a little bit more than 3% of our, you know, cogs. So it's not a huge material thing when you think about the fact that we've got, we're dual and triple and quadruple sourced on most of our lines. We do that by DC. Again, over 50% of our revenue is in our proprietary brands, which gives us a lot of ability to multi-source with multi-suppliers. So, you know, and quite frankly, a lot of the brands that First Brands has acquired over the last several years, you know, we had longstanding relationships with those brands even before they were acquired by the parent company of First Brands. And we're still working with a lot of those same teams and you know, feel very confident that, you know, in our ability to work with them and with the rest of our supplier base to manage through what we don't really see as any disruption from wherever that may land. So we feel good overall, again, about the overall supplier health in the industry.

Scott, I may just follow up really quick. We have really good engagement with the new leadership at First Brands and a lot of leaders that have been there for some time. We also have great engagement from their competitors, meaning that, to Brent's point, when you think about the majority of the lines that they provide to us, we have our distribution network. split up, meaning that whether it be a First Brands or one of their competitors in some of these categories, we are dual and triple source, sometimes quadruple to Brent's point. And so we have our DC split up accordingly. So we're hopeful that First Brands you know, really gets where they need to be on fill rates, which we believe they will. But we also have opportunities to fill in with backfill orders. And we also have opportunities with other existing suppliers that compete in those categories to take on another DC or two here and there. And we don't feel like we'll have a material impact. Great. Thanks, guys.

Thanks, Scott. Thanks, Scott.

Thank you. Your next question is coming from Simeon Gutman from Morgan Stanley. Your line is live.

Hey, good morning, guys. First, to follow up, Brad, you mentioned some of the deferral that's happening in DIY. To what extent is that just price elasticity, and is there any sense that it could be the timing of when prices are moving around in the marketplace? It sounds like you've narrowed it down, but curious if that's one of the potential, maybe a head fake that's happening with some of the demand.

Yeah, good morning, Simeon. Great question. Well, the reason we want to be balanced on that, and we just wanted to characterize it as some categories, And the potential for some deferral is because it's, you know, to Jeremy's point earlier to another question, it's still so early and there's enough factors, you know, with weather, seasonality, the way the week's played out in Q3 and as we get into Q4. You know, again, just really the first time we've seen some pressure to some of those larger ticket jobs, but it wasn't across the board, Simeon. You know, and it's not always directly tied to the exact categories, lines or sub lines that we're seeing the tariffs. And so that line is not direct, you know, and where we saw some pressure to some categories, we didn't see it in others. And so, you know, really on the professional side, we continue to have a lot of conviction, even though the DIFM consumer can be a little bit cautious that we're not seeing any pressure there. And when we look at the DIY side, you know, the thing that, you know, gives us balance on the other side of it is just the fact that we are seeing it in some categories, not seeing it in others. And again, it's not directly tied to tariff-driven cost pressures always by line, by category. but also we continue to see strength in a lot of our DIY categories. You know, like we mentioned, oil changes, oil filters, you know, chemicals, fluids, et cetera. And so we just want to sit back a little longer and really see how the fourth quarter plays out. Our teams are always just focused, as you know, just continuing to take share and just watching that closely. The other thing we didn't say is, in our prepared comments Simeon is we're really not seeing any trade down you know we're seeing some pressure to those bigger ticket categories potentially those bigger ticket jobs but um you know the way we look at good better best um you know we're really not seeing any material shifts if anything we continue to see while some people may be moving down so to speak on the price side we continue to see even the lower to middle income consumers on the DIY side trading up because they're looking for value, not just the cheapest price. They're trading up in areas like batteries and things like that to get a better warranty. And so long answer said a lot of things there. But I think the key is we just want to continue to take a balanced look and see how the rest of the year plays out.

Okay. And my follow-up is on your investment posture. We've had SG&A per store elevated for the better part of the last, call it two years. Now you're stepping up your store growth. So is there maybe a shift from per store to new stores? And then within that, any different way you're approaching the operating margin of the business, either holding it or even letting it go down to take advantage of disruption or opportunities in the market?

Yes, I mean, good questions, and maybe take the second one first. You know, there's not been, I think, any fundamental shift as we think about, you know, our operating margin, our profile for how we go to market. You know, having said that, I think, you know, it's less of a question or consideration for where we see the potential kind of competitive balance or market opportunities so much as it does How do we run and operate our business? What do we think allows us and puts us in a position to be competitive? And I think much of what you've seen over the course of the last couple of years, when we think about the investment profile of how we thought about our business has been really geared around to where we see opportunities to continue to strengthen our operating posture, to help put our teams in the best position, to also support the teams that we've got. taking care of our customers within our stores. Some of what we've seen, candidly, in the current year are just more inflation-driven cost pressures in some of the areas of our business that I think have put pressure on us that we would not have maybe anticipated as as being as significant as it was when we came into the year, ultimately those things from time to time are going to move and flex. We'll obviously have to take a hard look at that and think about where that sits for the next year, but that hasn't really changed our outlook on how we think about the right way to manage the business to take care of our customers and grow our share.

Simeon, the one thing I'd add to that is, you know, Really just, you know, when I think about the controllables within our four walls, we're very pleased. Jeremy, Brent and I are very pleased with the way that our internal teams are managing SG&A to sales. walking the fine line between acceptable SG&A profitability and taking our service levels to the next level. Some of the things we saw throughout the year and for sure in Q3 was just some of that inflation and some of the medical and some of the self-insurance stuff that's somewhat out of our control. There's always things we can do better and different from a safety and health and well-being of our team members, but some of that's out of the control of the team, and we feel really good about the way the teams are managing SG&A.

Thanks. Appreciate it. Thank you. Your next question is coming from Michael Lasser from UBS. Your line is live. Good morning.

Thank you so much for taking my question. You talked about a mid-single-digit inflation benefit in 4Q, which it sounds like that will be the peak of the inflation contribution. So, A, is that right? Is that the way we should think about it? And, B... Overall, is this as good as it gets, that O'Reilly can do a mid-single-digit comp under the right conditions? It's just a different model than it's been in the past. Thank you very much.

Yeah, maybe I can address the question there, Michael. At this point in time, when we think about the current tariff and pricing environment, We would think that most of the benefit that we might expect to see moving forward would be in the fourth quarter numbers. And I think both Brad and Brent spoke to that. You know, it's always a little bit of a crystal ball exercise to say exactly what happens from this point forward. And we're obviously going to be, you know, very... sensitive and responsive to making sure that from a market perspective, we're priced right and where we need to be. Ultimately, you know, that while it's an important consideration, it's a factor that obviously we're all paying pretty close attention to. That historically has not been what's driven our business and the ability to grow share. And we feel, you know, we still feel very bullish about our opportunity over the course of time. to be able to be a consolidator of the industry, to perform a model that's the best within our industry and to be able to gain share over the course of time. And we feel good about our performance, particularly when you look at it on a two-, three-year staff perspective. And so ultimately, it is, as we've talked many times, a very grinded-out business, and And the long-term trajectory of what we can deliver as we consolidate the industry and gain share is dependent upon executing day in and day out and growing faster than the marketplace. We'll see ultimately where those numbers push out. But there have been plenty of years within our history where the results that we're producing this year have been in line with that long-term growth rate. We feel good about it.

Yeah, no, Michael, good morning. Well said, Jeremy. I think the key is the reason we don't want to talk in absolutes if we've seen everything is because we don't know what's going to be in the headline next week or next month. It is still fluid. We feel good about what we said about the majority being already in. but we don't know what's next. What I do know, and this parlays into kind of your second part of your question, what I do know is when I look at Brent and our merchandise teams and our pricing teams, they are operating at a very high level. I feel very good about the way that they are navigating not only from a negotiation with our suppliers, the way we're thinking about pricing, but the overall way that we look at the fine line between walking all those things and just the way we can continue to compete, you know, the value proposition we provide. And, you know, we never think internally here that it's as good as it can get. We have 10% share. We have 10% share in North America. You know, we like to let our numbers do the talking versus the opposite. But to Jeremy's point, we have a lot of conviction here. that we have some great things in place for the mid and long term to continue to consolidate the industry, continue to get better operationally, the way we build teams, the way our supply chain runs, new DCs, hub stores, you know, all the things we do from a culture standpoint, promote from within, and supply chain, we really feel good about what we can do over the next many years.

Got you. My follow-up question, what conditions would be necessary for in order for O'Reilly to restore its SG&A per store growth back to the 2% range that was consistent for a long period of time prior to the last couple of years? And as a management team, how focused are you on deploying technology or making proactive investments today in order to ease some of the pressures from healthcare costs and other factors in order to restore that level of so you can generate the margin expansion that the market has known from O'Reilly. Thank you.

Yeah, Michael, appreciate that question. You know, it's a little bit of, I think, a challenge for us to really address a hypothetical around kind of a lot of the other broader conditions that contribute to how we might think about SGA moving forward. For sure, when we look at where we sit today versus other periods of time, where wage rate inflation was much more muted, where we weren't seeing some of the other inflation pressures, where we weren't seeing kind of rising price levels, I think, more broadly around the economy. Those were some of the, I think, broader macro conditions that we would have seen during the course of time there that I think play into the consideration. I think from our perspective, we've always had, I think, a pretty intense expense control focus as a company, and ultimately those are all things that we manage for the long-term growth rate and the success and health of our business. While we're always, I think, pushing to be more efficient and more effective, and there are always ways in which you can do that within our business, It's also important to note that I think one of the core strengths of our business is the ability to provide a high service level in an industry where that's still, I think, a critical factor in how consumers perceive value, how they make buying decisions. And so for us, there's always going to be some level of understanding that the strength of our business is built around running the best model and that ultimately our our ability to operate profit dollars from a long-term perspective means that we're we're going to want to to manage our business in the right way and we're not going to view it necessarily as just an offset well let's uh let's go find cuts and reductions that that don't otherwise make sense because some other components of the business have seen inflation so so so that's really from a philosophy perspective where we see it uh you know some of the some of where Where we've seen lower nominal numbers in different environments still reflected that same philosophy. And ultimately, I think that's the right way to manage the business for long term.

Yeah, and Michael, I may just real quick add, Jeremy said it very well. We, you know, we have a lot of pride in our ability to lever when we have, you know, a comparable store sales level that we've had. You know, we have a lot of pride in the operating profit rate that we've delivered over a long period of time. And that's going to continue to be our focus. That said, for the mid and long term, back to the, you we are going to continue to invest in our business in a very disciplined way when it comes to technology, when it comes to our teams. You know, when it comes to our supply chain, we are going to continue to play from a position of strength. We continue to feel like we have a unique opportunity over the next many years to do all that within the discipline we have with our capital allocation, the discipline we have with our And, you know, we're going to continue to balance the two sides of what I just said as good as we possibly can over the next year.

Thank you very much, and good luck.

Thanks, Matt.

Thank you. Your next question is coming from Brett Jordan from Jefferies. Your line is live.

Hey, good morning, guys.

Morning, Brett. Morning, Brett.

If you look at the expectations for 4% same-skew inflation, are supply chains in the industry sort of creating a delta between your expectations maybe versus a peer? I think the Napa guys were saying maybe two and a half. Is that because they're sourcing out of different regions and markets and have less tariff exposure, or is everybody sort of at a relatively even playing field on a same-skew basis?

Yeah. Hey, Brett, this is Brent. I'll start and the other guys can chime in. You know, I think, you know, we've talked about supplier diversification for years now. And again, the team, our merchandise team has done a fantastic job continuing to diversify that supplier base. And, you know, we've talked a little bit about, you know, China, what that looks like specifically for us. You know, we're in the mid-20s. Some others may report somewhere in that range or a little bit less. But generally speaking, we feel like we're very diversified globally and the teams continue to get more diversified. You know, that number's down hundreds of basis points from where it was a few years ago and continues to fall. What's interesting, though, when you look at some of the other countries right now in the tariff environment that we've been operating in, especially in 2025, you know, some of the, when you think about 25%, you look at some of those other countries, you know, Vietnam, Thailand, India, some of the other countries that a lot of sourcing has moved to, supply has moved to, you know, Mexico as well, and some South American countries, you know, that 25% or more is the same rate. So, you know, what I would tell you is it's less about what's that China number look like, and it's more about the blend and the ability to multi-source from, you know, multiple countries of origin and to manage that dynamically and to work with suppliers that are managing that dynamically. And, you know, I feel like our team's done a great job with that. It continues to be a challenge, you know, and Brad mentioned earlier, and we've talked about on the call, you know, in the prepared comments about, you know, what we feel like the lion's share passed through in Q3 from tariffs. But I think we all know, we all listen to the news. I mean, there's still some some uncertainty about where that may go in the future with some of these countries until it's all said and done. So we feel like we're very well positioned to, you know, respond and react to whatever comes our way. The teams have done a great job with sourcing across the globe, and we're going to continue to do that and work with suppliers that are doing a great job of that.

Yeah, Brad, I may just jump in real quick. In terms of us directly to other competitors, we don't know. I mean, we don't spend near as much time, you know, frankly, looking at trying to, you know, parse the details of anybody else. You know, that would be up to them to explain. You know, what we know is our merchandise teams and our pricing teams, like I mentioned earlier, just doing a masterful job managing through this. We feel good about our scale, our negotiating power, our pricing power. Feel really good about the way that we have worked with our suppliers to mitigate all of this. Feel really good about where we're at from a pricing perspective versus all our competitors, both small and big. WD, independent all the way up to the other big three. Feel really good about all that. So, you know, hard to say in differences of COGS and all those things, but we feel really good about where we're at, the way we've negotiated, and just so proud of the teams managing through this.

Okay, and then as sort of follow through on that, in that 10% inventory per store growth, assuming maybe four of that is priced on the same SKU basis, the other six, are you buying ahead of expected further price increases, sort of getting a lower cost inventory into the DC ahead of additional expansion, or are you adding units just from a strategic standpoint to have a better fill rate and take more share, I guess? What's the growth in inventory X the price factor?

Yeah, Brett, it's really more just us executing on our inventory strategies and how we think about deploying incremental inventory enhancements. Price has a little bit less of an impact on the inventory balances just from the standpoint of being a LIFO reporter on this. You know, you really only see inflation have an impact to the extent that you're kind of adding layers on top. And there's been some of that, but not the same magnitude of what runs through the income statement. And I think conversely, no real changes in that strategy as it relates to the broader cost environment, which we think is pretty stable. But obviously, those are decisions that we make based upon the objective of being the best in the industry from an availability perspective. Obviously, the cadence and timing of that can change period to period. It doesn't always roll out in the same kind of schedule as you were because we're pretty active about how we think about the right time and where we see opportunities to be able to execute that strategy.

Yeah, and Brett, just to add on to what Jeremy said too, Brett, specifically speaking to Q3, You know, we're going to continue to optimize our network. We talk all the time about the strength of our tier distribution network, our regional DCs, our hub stores, and how we continue to optimize that network of, you know, skew count and depth and breadth by secondary tertiary market, even the ones outside of the reach of our regional DCs. The other thing, though, to consider and think about for Q3 is, you know, we were stocking up our new DC in Stafford, Virginia as well. That's another component that brings more dollars into a system in a given quarter that may prove to be a little bit lumpy quarter to quarter with the investments in a new DC. Great. Appreciate it. Thank you. Yep. Thank you.

Thank you. We've reached our allotted time for questions. I'll now turn the call back over to Mr. Brad Beckham for closing remarks.

Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and full year results in February. Thank you.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.