O'Reilly Automotive, Inc.

Welcome to the O'Reilly Automotive, Inc. fourth quarter and full year 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 touch-tone 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 fourth quarter and full year 2025 results and our outlook for 2026. 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 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, 2024, and other recent SEC violence. 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 fourth 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 am once again pleased to begin our call today by congratulating Team O'Reilly on another strong year in 2025. We finished the year with a comparable store sales increase of 5.6% in the fourth quarter, which brought our full year comp for 2025 to 4.7%. The 4.7% was at the high end of our revised guidance range of 4 to 5% and above the expectations we set in our initial guidance coming into 2025. Our strong comparable store sales performance coupled with the continued successful execution of our new store expansion drove a total sales increase of 6.4% to $17.8 billion. To provide some perspective, our 2025 sales reflect an increase of over 50% in total sales volume over the last five years, representing growth of over $6 billion since 2020. Our ability to continue to grow our business and capture market share year in and year out is a testament to our team's commitment to providing excellent customer service. I want to thank each member of Team O'Reilly for their daily commitment to our customers and our company. To touch on the rest of our results as we finish out the year, I want to briefly highlight both areas of strength and some headwinds we faced in 2025 before Brent provides more color in his remarks. For the full year, we generated operating profit of $3.5 billion, a 6.4% increase over 2024. On a sales, a percentage of sales basis, our 2025 operating profit of 19.5% was flat to the prior year and right at the midpoint of the guidance range we maintained throughout 2025. We are pleased with our team's ability to drive robust gross margin results in an environment of rising costs and prices by ensuring that we are providing exceptional value to our customers to earn their business. We are also pleased that our team continues to capitalize on the investments we have made in our business, including enhancements to our distribution and HubStore network, expanded inventory assortments, and strategic technology investments. We believe our continued sales growth trends reflect share gains won by consistently executing our proven business model while also delivering incremental improvements to further differentiate our service from the competition. We will continue to prioritize these initiatives to lean into our business to sustain our growth momentum. However, we unfortunately also faced substantial cost pressures in 2025, including headwinds reflected in our fourth quarter results, primarily from rising costs related to our team member health care and self insurance programs. We are certainly not pleased that these headwinds dampened an otherwise strong finish for our company in 2025, but we remain intensely focused on managing our business effectively to deliver the excellent customer service that drives long-term growth and profitability. During the fourth quarter, we generated diluted earnings per share of 71 cents, which represents an increase of 13% over the prior year. For the full year, we generated EPS of $2.97, which was an increase of 10% over 2024. As we noted in yesterday's press release, our 2025 results represent our 33rd consecutive year of annual comparable store sales increases and record levels of revenue, operating income, and EPS. This remarkable track record of strong, consistent earnings growth is a reflection of the effectiveness of Timo Reilly's customer service-oriented culture in our focus on profitable, sustainable growth. Now I'd like to take a few minutes to provide some color on our fourth quarter sales results. Our comparable store sales for the fourth quarter grew 5.6%, which was at the high end of our expectations. Similar to the third quarter, growth in our professional business was the stronger driver of our sales results, with an increase in comparable store sales of over 10% for the second consecutive quarter. We're also pleased to generate a positive DIY comp in the low single digits as this side of our business also performed largely in line with the trends we saw in the third quarter. Our comparable store sales increase in the fourth quarter reflected growth in both transaction volume and average ticket value, with the average ticket growth representing the stronger of the two drivers. average ticket grew in the mid-single digits on both sides of our business, driven by a contribution from same-skew inflation of approximately 6%, partially offset by a headwind from the composition of our product mix. As we have noted throughout 2025, the pricing environment has remained rational in response to tariff-induced product cost pressures. After a significant ramp in these cost pressures and corresponding price changes in the third quarter, the fourth quarter leveled out, and the inflation benefit was very consistent month to month. This dynamic aligned with our expectations given the timing of the impact we have seen in tariff and acquisition costs, and we believe also reflects a stable pricing environment in the aftermarket. We were pleased with a positive contribution to comps, from ticket count growth in the fourth quarter, driven by continued robust growth in our professional business, partially offset by modest pressure in DIY transaction counts. Our fourth quarter performance in our professional business matched the consistent strength we saw throughout 2025. The value proposition we are creating for our customers is clearly distinguishing O'Reilly as the preferred partner to the professional service provider. Next, I want to provide an update on the results in our DIY business in the fourth quarter. As we have discussed throughout 2025, we have remained cautious regarding the impact to consumers from broad-based inflation and macroeconomic pressures. This included our comments on the pressure trends to transaction counts we saw midway through our third quarter and into the beginning of Q4. As we move through the fourth quarter, we saw stabilization in the demand backdrop in our DIY business, including some modest improvements in DIY transactions month to month, but both in absolute terms and relative to our initial plan expectations for the cadence of our business. To be clear, we still experienced some pressure that resulted in slightly negative traffic comps as we finished out our fourth quarter. This was most evident in the small subset of our DIY business that is highly discretionary in nature, including categories like appearance and accessories. On balance, we view the current sales trends in our DIY business as pretty consistent with what we have seen for the last several quarters now. However, we are pleased to not see any heightened pressure to the consumer that would indicate a more significant negative reaction to economic conditions. Turning to the cadence for the quarter for our consolidated business, our results were fairly consistent throughout the quarter, with December being slightly stronger than the first two months. This was due in part to solid performance as we finished out the year in winter weather-related categories. These categories performed well even against tougher comparisons to last year. We view this season, both in the fourth quarter and what we have seen so far in 26, as typical winter weather and consistent with last year. Beyond the strength in our winter weather related categories, we also saw strong results in the fourth quarter in maintenance related categories, in line with the trends we have seen for several quarters now. Next, I want to transition to a discussion of our guidance for 2026, starting with our sales outlook. As we disclosed in our release yesterday, we're establishing our annual comparable store sales guidance for 2026 at a range of 3% to 5%. We want to provide some additional color on how we're viewing the economic conditions in our industry and our opportunities to outperform the market. Beginning with our industry outlook, we view the fundamental backdrop for the automotive aftermarket as relatively stable. While we believe the industry has experienced some sluggishness over the last several quarters from a more cautious consumer, we believe the drivers for demand in our industry remain very solid. There continues to be a very compelling value proposition for consumers to invest in the repair and maintenance of their existing vehicles to meet their daily transportation needs. The U.S. car park has seen an increase in total miles driven of approximately 1% over the last two years. We expect to continue to see steady growth in this metric, supported by growth in the total size of the car park. Due to the resiliency of our customers and the non-discretionary nature of our business, we have confidence in a steady industry environment in 2026, even if we continue to see a cautious stance from consumers. Ultimately, our performance this year will depend on our effectiveness in executing our business model, providing exceptional customer service, and in turn gaining market share. To that end, our 2026 Comparable Store Sales Guidance includes expected growth in both our professional and DIY businesses that we anticipate will again outpace the industry. For 2026, we expect to see continued growth in average ticket values, primarily supported by anticipated same skew inflation. As a reminder, our 2025 results reflected a muted impact from inflation in the first half of the year before we began to pass through tariff cost increases beginning in the third quarter. In total, 2025 saw same skew inflation of just under 3% on both sides of our business, and we anticipate similar levels in 2026. However, we expect to see most of this benefit in the first half of the year as the inverse to the 2025 timing as we calendar the period before the ramp in tariff costs and associated price increases. These projections reflect our typical assumption of only modest incremental changes in prices from the current levels exiting 2025 as we move throughout the year. This assumption also reflects our best read on the broader pricing environment in our industry. As such, our guidance expectations do not anticipate incremental changes in tariffs or subsequent impacts to the pricing environment within our industry. Given the uncertainty surrounding potential future changes in this landscape, we still expect the industry to behave rationally from a pricing perspective and only react as necessary to realize changes in acquisition costs. Consistent with our experience in 2025, we anticipate there will be limited incremental benefit within our average ticket growth outside of inflation. However, as we begin to calendar the comparison to the ramp in same-scale inflation in the back half of 2025, we expect a return to the normal dynamics supporting our average ticket. So for the back half of 2026, we expect growth in average ticket to reflect muted inflation and a more substantial benefit from increasing parts complexity. We anticipate average ticket growth will be the larger contributor to our projected comparable store sales performance, but we also expect ticket count growth to positively support our comps in 2026. We believe professional ticket counts will continue to be strong and will reflect incremental market share gains on this side of our business. Given our history of performance in growing our share in the professional business, our 2026 expectations anticipate some moderation in ticket growth as we compare against the high bar we have set. However, we have been extremely pleased with our team's ability to comp the comp and stack continued professional transaction growth year after year and anticipate 2026 will be no different. We also continue to believe that we have substantial opportunities to earn a bigger piece of the pie in our DIY business. In 2026, we expect DIY transaction counts to be pressured and slightly negative as a result of the long-term industry trend of better engineered and manufactured parts and extended service and repair intervals, along with our continued caution regarding the confidence of the entry-level DIY consumer. Even though we've seen some pressure to transaction counts on this side of our business, we still believe we're outperforming in the industry and gaining share. Before I move on from our sales guidance, I would like to highlight our expectations for the quarterly cadence of our sales growth in 2026. On a weekly volume basis, our guidance assumes our business will be fairly steady in 2026, absent unforeseen seasonal variability in weather. As a result, our quarterly comparable store sales assumptions are primarily driven by the comparisons to the results we generated in 2025. Based on the same skew inflation dynamics I outlined earlier, we would anticipate the first half of the year to generate a strong comp at the high end of our guidance range, with the back half of the year reflecting the more challenging comparisons. We are pleased to be off to a solid start in 2026 in line with these expectations,