O’Reilly Automotive’s (ORLY) CEO Greg Johnson on This autumn 2021 Outcomes – Earnings Name Transcript

O’Reilly Automotive, Inc. (NASDAQ:ORLY) This autumn 2021 Earnings Convention Name February 10, 2022 11:00 AM ET

Firm Members

Tom McFall – Chief Monetary Officer

Greg Johnson – Co-President and Chief Govt Officer

Brad Beckham – Chief Working Officer

Brent Kirby – Chief Provide Chain Officer

Convention Name Members

Scot Ciccarelli – Truist Securities

Christopher Horvers – JPMorgan

Bret Jordan – Jefferies

Greg Melich – Evercore ISI

Michael Baker – D.A. Davidson

Chris Bottiglieri – BNP Paribas

Michael Lasser – UBS

Daniel Imbro – Stephens

Operator

Welcome to the O’Reilly Automotive, Inc. Fourth Quarter and Full Yr 2021 Earnings Convention Name. My title is James, and I’ll be your operator for in the present day’s name. Right now, all contributors are in a listen-only mode. Later, we are going to conduct a question-and-answer session. [Operator Instructions]

And I’d now like to show the decision over to Tom McFall. Mr. McFall, you could start.

Tom McFall

Thanks, James. Good morning, everybody, and thanks for becoming a member of us. Throughout in the present day’s convention name, we’ll focus on our fourth quarter 2021 outcomes and our full yr outlook for 2022. After our ready feedback, we’ll host a question-and-answer interval.

Earlier than we start this morning, I’d wish to remind everybody that our feedback in the present day include forward-looking statements, and we intend to be coated by and we declare the safety beneath the Protected Harbor provisions for forward-looking statements contained within the Personal Securities Litigation Reform Act of 1995.

You’ll be able to establish these statements by forward-looking phrases reminiscent of estimate, might, might, will, imagine, count on, would, think about, ought to, anticipate, challenge, plan, intend or comparable phrases. The corporate’s precise outcomes might differ materially from any forward-looking statements on account of a number of essential components described within the firm’s newest Annual Report on Type 10-Ok for the yr ended December 31, 2020, and different latest SEC filings. The corporate assumes no obligation to replace any forward-looking statements made throughout this name.

Right now, I’d wish to introduce Greg Johnson.

Greg Johnson

Thanks, Tom. Good morning, everybody, and welcome to the O’Reilly Auto Elements fourth quarter convention name. Collaborating on the decision with me this morning are Brad Beckham, our Chief Working Officer; and Tom McFall, our Chief Monetary Officer. Greg Henslee, our Govt Chairman; David O’Reilly, our Govt Vice Chairman; and Brent Kirby, our Chief Provide Chain Officer, are additionally current on the decision.

I’d like to start our name in the present day by congratulating Crew O’Reilly on the great ends in the fourth quarter, which capped off one other record-setting yr. This yr marked our firm’s sixty fifth yr since our founding and our twenty ninth yr as a publicly traded firm, and I really feel very comfy saying it was our greatest yr but pushed by the actually exceptional contributions of our staff of over 83,000 hard-working skilled components folks.

Our staff’s efficiency in 2021 was highlighted by our comparable retailer gross sales development of 13.3% and diluted earnings per share development of 32%. This excellent efficiency is much more spectacular when you think about that our staff delivered these outcomes on prime of a record-setting yr in 2020, after we achieved comparable gross sales improve of 10.9% and development in earnings per share of 32%.

There are a selection of various metrics I might present to focus on the energy of our enterprise, and we’ll discuss by means of a lot of these particulars in our customary updates through the name in the present day. Nonetheless, there are two particular numbers that I’d like to offer an unimaginable image of simply how a lot development Crew O’Reilly has generated for our shareholders over the previous two years.

For 2021, our common retailer generated gross sales of $2.3 million, which represents a rise of over 23% from the typical retailer gross sales quantity simply two years in the past in 2019. Throughout this identical time – time frame, our working revenue {dollars} per retailer has grown by an unimaginable 42% as our retailer and distribution groups leveraged our twin market enterprise mannequin to drive very robust working revenue flow-through. I wish to take this chance to thank Crew O’Reilly on your great back-to-back annual efficiency. One of many guiding rules of our tradition is our staff’s dedication to our prospects and fellow staff members, and that dedication was actually on show in 2021.

Rolling out the numbers for over the $13 billion of gross sales, it may be simple to lose sight of the context of what it takes to ship these outcomes. These huge development numbers are made up of thousands and thousands of particular person interactions with our prospects, the place our staff members continually go the additional mile to offer the very best customer support in our {industry} to earn our prospects’ present and future enterprise.

Our staff actually lived a “By no means Say No” philosophy in 2021, whereas on the identical time, constantly executing on greatest practices to guard the well being and security of our prospects and staff members and deal with head on the numerous challenges introduced on by the pandemic. It’s taken a monumental effort, and I once more wish to categorical my gratitude for the selfless dedication, onerous work and sacrifice of every member of Crew O’Reilly.

Now I’d wish to take a couple of minutes and supply some coloration round our fourth quarter outcomes. Our comparable retailer gross sales for the fourth quarter grew 14.5%. From a cadence perspective, we proceed to see regular development of elevated gross sales ranges all through the quarter, persevering with the constant broad-based energy we’ve skilled because the second quarter of 2020.

Because of this, our gross sales outcomes had been pretty constant all through the quarter, with December being the strongest month on a two and three-year stack foundation. We’ve continued to see strong gross sales volumes. The outcomes so far in 2022 have been impacted by the Omicron variant and by some inclement climate given choppiness in sure areas of the corporate – or nation, quite.

I’ll spend extra time on this in a couple of minutes on our gross sales outlook for 2022, however I’d like so as to add that we’re all the time happy to see any such harsh climate as the wear and tear and tear it inflicts on autos advantages us all year long. Our comparable retailer gross sales outcomes had been pushed by considerably stronger development on the skilled aspect of our enterprise, which continues to development – which continues the development we skilled within the second and third quarters.

Nonetheless, our DIY enterprise was additionally very robust within the fourth quarter and our expectations in opposition to tough compares from the prior yr. For the quarter, we had been more than happy to see the strong development on each common ticket and comparable ticket counts in each our skilled and DIY companies, with common ticket being the bigger contributor.

The common ticket development was aided by heightened inflation with the profit we realized from same-SKU promoting costs touchdown within the excessive single digits. Nonetheless, we proceed to be happy to see development in common ticket past the constructive influence of same-SKU inflation pushed by the long-term elevated complexity of automotive know-how.

Demand in our {industry} has remained very resilient for the previous two quarters, whilst worth ranges and the broader financial system have risen sharply. The acquisition price will increase we noticed in 2021 had been in line with the fee pressures skilled throughout the automotive aftermarket, and the {industry} continues to be very rational in passing by means of the inflationary pricing.

Lastly, though common ticket was the bigger contributor to our comparable retailer gross sales for the quarter, we additionally imagine we’re happy to capitalize on strong ticket rely comps, which had been constructive for each the skilled and DIY companies. We’ve been inspired by the steadiness of our buyer visitors, particularly as we proceed to maneuver additional previous the foremost macro-level demand tailwinds supplied by the federal government stimulus. We imagine we’re very clearly benefiting from market share features and an elevated willingness of consumers to put money into their current autos.

Subsequent, I wish to transition to a dialogue of our 2022 gross sales steering in addition to our 2021 gross revenue efficiency and outlook for gross revenue for 2022. As we disclosed in our earnings launch yesterday, we’re establishing an annual comparable retailer gross sales steering for 2022 on the vary of 5% to 7%.

Our expectations are to generate constructive comparable retailer gross sales development on each side of our enterprise, with stronger development on the skilled enterprise. This vary and corresponding expectations for the approaching yr are greater than we will bear in mind ever offering in our preliminary annual steering.

So I wish to spend some further time to offer coloration on the premise for our forecast relating each to our common outlook for the approaching yr in addition to our deliberate technique to additional put money into pricing on the skilled aspect of our enterprise. To start, from a macro perspective, we stay very assured in regards to the well being of the automotive aftermarket and imagine the secure, sturdy development developments skilled in our {industry} are indicative of ongoing core underlying energy.

The worth proposition for customers to put money into their current autos stays very robust pushed by shortage of latest automobile provide, excessive demand for used autos, and the standard of engineering and manufacturing of autos at the moment on the street, deserves greater mileages. Our {industry} historical past has confirmed that point – in instances of financial uncertainty encourage customers to take extra cautious monetary outlook and allocate extra share of their pockets to keep up their current autos.

We imagine this has been a constructive for our enterprise because the onset of the pandemic and that this worth proposition will proceed to assist strong demand in our {industry}. We’re additionally inspired by the resilience of the robust gross sales developments in our enterprise we’ve moved – as we transfer additional previous the injection of presidency stimulus into the financial system and imagine that economically customers stay comparatively wholesome with employment rising and miles pushed steadily recovering.

Past this constructive macroeconomic backdrop, additionally it is clear to us that our extraordinarily robust gross sales outcomes are pushed by vital share features, with our outperformance the direct results of vital aggressive benefits afforded by the energy of our enterprise mannequin and provide chain.

For the DIY aspect of our enterprise, we anticipate delivering typically secure to barely detrimental ticket counts, with the headwind coming from lapping the constructive influence of governance stimulus within the first half of 2021 and anticipated pressures from elevated costs. We stay cognizant of the influence of sustained inflation on the economically challenged DIY customers, who’ve simply traditionally deferred non-critical upkeep and traded down the product worth spectrum as costs dramatically elevated.

We count on this stress to ticket comp counts to be greater than offset by elevated common ticket as our forecast consists of an assumption of mid-single digit same-SKU inflation. The anticipated profit from same-SKU inflation doesn’t embody vital incremental will increase in worth ranges from this level ahead in 2022, in line with our historic method to issuing steering.

Our projection displays the static costs from present ranges with anticipated good thing about same-SKU inflation being stronger within the first half of the yr as we examine worth ranges that ramp all through 2021.

On the skilled aspect of our enterprise, our steering expectations assume sturdy development in ticket counts supported by 4 components: the stronger financial resilience of the end-user prospects on this aspect of the enterprise; incremental enchancment in miles pushed from customers typically returning to an in-person work submit pandemic; the long-term {industry} demographic development for quicker development on the skilled aspect of our enterprise; and anticipated accelerated development from the skilled pricing initiative, which I’ll focus on subsequent.

All through our historical past, now we have been steadfast in incomes our skilled prospects enterprise by offering glorious customer support from extremely educated skilled components folks with speedy entry to industry-leading stock at aggressive costs. This unwavering dedication to customer support has allowed us to drive distinctive worth for our prospects and capitalize on aggressive benefits to earn a pricing premium in a lot of our markets.

Our service over worth philosophy stays unchanged, however we imagine now we have a possibility to speed up our skilled share achieve by means of focused aggressive changes to our skilled pricing technique. The previous two years within the automotive aftermarket have been very turbulent, characterised by volatility in buyer demand because of the pandemic, vital provide chain shocks and an evolving aggressive panorama.

These components have been extra disruptive on the do-it-for-me aspect of the enterprise, which stays very fragmented and the place the power to reply to difficult environments has differed considerably between market contributors. In opposition to this backdrop, now we have been very profitable in gaining skilled market share and rising considerably quicker than the general market by means of the energy of our industry-leading stock availability, tiered distribution and hub community and world-class skilled components folks.

Nonetheless, we imagine that the present disruptive surroundings presents a possibility for us to boost our aggressive positioning and leverage our aggressive benefits to drive accelerated long-term market share features. Over the course of the previous few quarters, we’ve examined a number of skilled pricing methods in a number of markets.

We’ve been very inspired by the outcomes of our testing. And after dialing in our technique, we rolled out the skilled pricing initiative company-wide in the beginning of February. For 2022, we count on to see a significant profit to our skilled buyer comps from share features, which we’ve included into our comparable gross sales development expectations.

The skilled pricing initiatives will stress our gross margin price, which now we have additionally included into our gross revenue steering. Whereas we frequently regulate pricing by location, by buyer and by product line to mirror altering market circumstances, we imagine the skilled pricing initiative we’ve put in place appropriately positions us to boost the worth proposition we provided our skilled prospects and solidify our place on the highest of the decision listing for 2022 and past.

Subsequent, I’d like to offer some coloration on our fourth quarter gross margins and extra particulars supporting our full yr 2022 steering. Our fourth quarter gross margin of 52.7% was a 66 foundation level enchancment from our fourth quarter of 2020, which exceeded the expectations we mentioned on the third name – third quarter name.

For the complete yr, gross margin additionally got here in at 52.7%, which was 23 foundation factors greater than final yr and on the higher finish of our steering vary as a substitute of the underside half of the vary as beforehand anticipated. The principal driver of the better-than-expected efficiency was lower-than-expected distribution price.

As we’ve mentioned on earlier calls, our distribution infrastructure is going through inefficiencies on account of extraordinarily excessive gross sales volumes, the tough labor surroundings and world logistics challenges. Whereas we proceed to take focused actions within the fourth quarter to reply to these pressures, we didn’t incur the extent of incremental expense that we had anticipated.

For 2022, we count on gross margin to be within the vary of fifty.8% to 51.3%. The year-over-year stress to our gross margin price is pushed by the influence of our skilled pricing initiative, a lowered LIFO profit and a headwind from greater combine {of professional} enterprise, which we count on to develop quicker than DIY. We count on these headwinds to be partially offset by leverage of our distribution price as provide chain circumstances start to normalize.

Earlier than turning the decision over to Brad, I’d like to focus on our fourth quarter earnings per share improve of 41% to $7.64 with a full yr 2021 improve of 32% to $31.10. For 2022, our steering is $32.35 to $32.85, representing a rise of 5% versus 2021 on the midpoint. After delivering earnings per share development of 32% in each 2021 and 2020, our forecasted annual improve for 2022 diluted earnings per share represents a three-year compounded annual development price of twenty-two% and is a testomony to the historic outcomes our staff has been capable of generate and repeat by means of constant glorious execution.

To wrap up my feedback, I wish to once more thank Crew O’Reilly for an impressive yr. Your dedication to dwelling out our tradition and taking good care of our prospects each day drives our continued success.

I’ll now flip the decision over to Brad Beckham. Brad?

Brad Beckham

Thanks, Greg, and good morning, everybody. I wish to start my feedback in the present day by echoing Greg and congratulating Crew O’Reilly on one other superb yr. After our record-breaking yr in 2020, we got here into 2021 figuring out simply how tough it was going to be to maintain that very same stage of efficiency.

Nonetheless, our staff as soon as once more proved they had been as much as the problem and generated much more spectacular development in 2021. The core driver of our success is our staff’s relentless concentrate on offering glorious customer support, and we’re very excited in regards to the alternatives now we have in entrance of us in 2022.

Greg beforehand mentioned our strategic skilled pricing initiative, however I wish to add another level earlier than we transfer on to the remainder of my ready feedback. Anybody who has participated in our earnings calls or attended our Analyst Days for any size of time has heard us say on a number of events that worth shouldn’t be a very powerful issue on the skilled aspect of the enterprise and that you simply can’t win sustainable enterprise solely on worth. We wish to be very clear that this rule nonetheless holds true for our enterprise and our {industry}. We strongly imagine that the lion’s share of the skilled enterprise within the market is, one, day in and day trip by means of distinctive customer support and speedy stock availability.

Nonetheless, we imagine we will generate strong long-term returns by additional investing in skilled pricing. As an essential a part of our skilled pricing initiative, we’re deliberately not positioned because the lowest-price competitor in every market, and our retailer and gross sales groups stay as dedicated as ever to incomes our prospects’ enterprise by outhustling and outservicing our rivals. Our staff totally realizes that enterprise gained with worth alone is well misplaced to a lower cost, a competitor might resolve to supply. This initiative is geared to place us extra shortly to realize skilled market share based mostly on all of the companies we provide, together with a really aggressive worth.

Now I’d wish to take a while to overlaying our SG&A and working revenue efficiency in 2021 in addition to our outlook for 2022. For the fourth quarter, we generated a formidable improve in working margin of 165 foundation factors and working revenue greenback development of 27%. For the complete yr, we generated a 21% improve in working revenue {dollars}, yielding a brand new annual document of 21.9% working margin.

This improve in working revenue outcomes for 2021 was pushed by our staff’s potential to generate distinctive comparable retailer gross sales outcomes of 13.3% whereas limiting our per-store SG&A development to beneath 9%. The consequence was improved leverage of SG&A bills of 81 foundation factors.

Our 2021 outcomes are much more spectacular contemplating we delivered these outcomes on prime of leveraging SG&A by 263 foundation factors in 2020. The greenback development in our SG&A spend per retailer in 2021 was considerably greater than our typical development in working bills pushed by bills incurred in retailer payroll, incentive compensation and variable working bills to assist our gross sales development.

Over the past 1.5 years, our focus has been to match the great alternatives we’ve needed to achieve share and drive very robust gross sales development by delivering on the superb customer support commonplace that’s on the core of our enterprise, all whereas micromanaging our expense construction.

The consequence has been an enhanced stage of profitability that candidly has exceeded our earlier expectations for our potential to execute our mannequin successfully at this stage of SG&A productiveness. Nonetheless, our prime line development for the final seven quarters has been each sturdy and remarkably constant. This stability in robust gross sales volumes, coupled with excessive fastened low-variable price buildings for our shops to generate very favorable leverage for our enterprise mannequin.

As we capitalize on classes realized as we’ve navigated document excessive gross sales and productiveness features and sit up for 2022, we’re extra assured than ever that our seasoned skilled groups will proceed to have the ability to execute at this step change of elevated profitability.

Our estimated per-store SG&A displays our confidence in our potential to successfully management bills transferring ahead. Our groups have demonstrated this potential to leverage SG&A whilst now we have confronted vital wage price pressures. Our SG&A expectations for 2022 embody continued stress from inflation and wage charges at developments in line with what we noticed in 2021, greater than offset by effectivity features, leverage on fastened prices and incentive compensation deliberate at goal ranges.

For 2022, we estimate per-store SG&A will develop by roughly 2.5%, which is solidly under our comparable retailer gross sales we count on to generate. As all the time, our prime precedence is to make sure we’re offering glorious customer support, enabling us to develop long-term, loyal buyer relationships.

Primarily based upon the stress to gross margin Greg outlined earlier, partially offset by improved SG&A leverage, we count on working revenue to say no between 80 and 130 foundation factors from 2021’s phenomenal outcomes. Nonetheless, we count on working revenue {dollars} on the midpoint of our steering to extend roughly 2.5% and our working revenue information of 20.6% to 21.1% of gross sales brackets our 2020 working revenue, which represented an all-time excessive for our firm earlier than we expanded the document by one other 100 foundation factors in 2021.

Our capital expenditures for 2021 had been $443 million, which was decrease than our typical capital spend and under our authentic plan going into 2021. The decrease CapEx was pushed by just a few various factors, together with a heavier weighting of leased versus owned shops, the delay of sure expenditures restricted by constraints on availability of autos and tools and the timing of sure store-level strategic initiatives that needed to be pushed again as our groups prioritize supporting the present robust gross sales volumes.

As we set our expectations for 2022, our plan is to deploy capital for the initiatives that had been delayed in 2021 in addition to assist new retailer and DC improvement to assist our long-term development methods within the U.S. and Mexico. For 2022, we’re setting our capital expenditure steering at $650 million to $750 million. We now have additionally established a goal of 175 to 185 web new retailer openings.

Outdoors of our new retailer and DC improvement, now we have additionally recognized a number of thrilling initiatives and initiatives in 2022 to boost the service we offer our prospects and enhance our effectivity to drive robust returns. Our CapEx steering consists of deliberate investments in DC and retailer fleet upgrades; retailer initiatives to boost the picture, look and comfort of our shops; in addition to strategic investments in data know-how initiatives.

Stock per retailer on the finish of 2021 was $637,000, which was down 2% from the top of final yr. As we’ve mentioned on earlier calls through the course of 2020 and 2021, our intent has been to aggressively add incremental {dollars} to our store-level inventories. In the course of the robust gross sales surroundings the previous seven quarters, rolling out the complete scope of those initiatives has needed to take a backseat to the day-to-day replenishment wants of our shops. We nonetheless see vital alternative to construct upon our industry-leading components availability, and our plan for 2022 consists of the deployment of extra stock in our retailer and hub community above and past our regular new retailer and typical product additions.

On account of this plan to make amends for delayed initiatives for 2022, we’re planning our per-store stock to extend over 8%. This stage of stock development is considerably above our historic run charges and is pushed partly by our concentrate on assembly the extraordinarily robust gross sales demand in a supply-constrained market surroundings.

Our ongoing stock administration is geared to deploy the proper stock on the optimum place inside our tiered distribution community and consists of continuous changes to push out and pullback stock to attain this goal. Nonetheless, our overriding objective is to have the very best native stock providing, and that precedence drives how we handle our stock and, in flip, is the first motive for the upper ranges of stock additions deliberate for 2022.

Earlier than I flip the decision over to Tom, I wish to as soon as once more thank Crew O’Reilly for his or her dedication and onerous work in 2021.

Now I’ll flip the decision over to Tom.

Tom McFall

Thanks, Brad. I’d additionally wish to congratulate Crew O’Reilly on one other excellent yr. Now we’ll take a better have a look at our fourth quarter outcomes and supply some extra steering for 2022. For the quarter, gross sales elevated $463 million, comprised of a $398 million improve in comp retailer gross sales, a $56 million improve in non-comp retailer gross sales and a $9 million improve in non-comp non-store gross sales. For 2022, we count on our complete revenues to be between $14.2 billion and $14.5 billion.

Greg coated our gross margin efficiency earlier, however I wish to present extra particulars on our constructive LIFO influence. For the complete yr 2021, the LIFO influence was $80 million in comparison with $11 million within the prior yr. As a reminder, the constructive LIFO influence is a byproduct of the reversal of our historic LIFO debit. Since 2013, on account of negotiated acquisition worth decreases, our calculated LIFO stock balances exceeded the worth of our stock at substitute prices, and we elected the conservative method to not write up stock worth past the substitute price.

On account of this accounting, we’ve seen a profit from rising prices and worth ranges through the sell-through of lower-cost stock bought previous to the latest price will increase. Nonetheless, through the third quarter of 2021, our LIFO reserve flipped again to a credit score steadiness because of inflation and acquisition prices. And transferring ahead, we count on to be again to typical LIFO accounting and not valuing stock at a decrease substitute price. Because of this, we anticipate a restricted good thing about lower than $10 million in 2022 for the ultimate sell-through of the remaining lower-cost stock, which creates a headwind to our gross margin price.

Our fourth quarter efficient tax price was 19.4% of pretax revenue, comprised of a base price of 20.4%, lowered by 1% profit for share-based compensation. This compares to the fourth quarter of 2020 price up 21.4% of pretax revenue, which was comprised of a base tax price of 21.8%, lowered by a 0.4% profit for share-based compensation.

The fourth quarter of 2021 base price as in comparison with 2020 benefited from a better stage of renewable power tax credit, because of the timing of those initiatives, which was in keeping with our expectations. For the complete yr, our efficient tax price was 22.2% of pretax revenue, comprised of a base price of 23.5%, lowered by 1.3% per share-based compensation. For the complete yr of 2022, we count on an efficient tax price of 23.2%, comprised of a base price of 23.7%, lowered by a good thing about 0.5% per share-based compensation.

We count on the fourth quarter price to be decrease than the opposite three quarters because of the anticipated timing of advantages from renewable power tax credit and tolling of sure tax intervals. These expectations assume no vital adjustments to current tax codes. Additionally, variations within the tax profit from share-based compensation can create fluctuations in our quarterly tax price.

Now I’ll transfer on to free money circulate and the parts that drove our outcomes and our expectations for 2022. Free money circulate for 2021 was $2.5 billion versus $2.2 billion in 2020. The rise of $359 million or 16% was pushed by a rise in working revenue and a better discount in web stock in 2021 versus the prior yr. For 2022, we count on free money circulate to be within the vary of $1.3 billion to $1.6 billion, with the year-over-year lower primarily on account of elevated web stock funding and elevated CapEx, as Brad beforehand outlined.

Our AP-to-inventory ratio on the finish of the fourth quarter was 127%, which set an all-time excessive for our firm and was closely influenced by the extraordinarily robust gross sales volumes and stock turns in 2021. We anticipate our AP-to-inventory ratio to average off of this historic excessive as we full our extra stock investments and gross sales development average. Our present expectation is to complete 2022 at a ratio of roughly 120%.

Transferring on to debt. We completed the fourth quarter with an adjusted debt-to-EBITDA ratio of 1.69 instances as in comparison with our finish of 2020 ratio of two.03 instances, with the discount pushed by the numerous development in EBITDAR throughout 2021 and a lower in adjusted debt, together with the redemption of $300 million of senior notes within the second quarter. We proceed to be under our leverage goal ratio of two.5 instances, and we are going to method that quantity when acceptable.

We additionally proceed to execute our share repurchase program. And for 2021, based mostly on the energy of our enterprise, we had been capable of repurchase 4.5 million shares at a mean share worth of $545.78 for a complete funding of $2.5 billion. Subsequent to the top of the yr and thru the date of our press launch, we repurchased 0.3 million shares at a mean share worth of $660.23.

We stay very assured that the typical repurchase worth is supported by the anticipated future discounted money flows of our enterprise, and we proceed to view our buyback program as an efficient technique of returning extra capital to our shareholders. As a reminder, our EPS steering for 2022 consists of the influence of shares repurchased by means of this name however doesn’t embody any extra share repurchases.

Earlier than I open up our name to your questions, I’d wish to thank the O’Reilly staff for his or her dedication to our firm and our prospects. Your onerous work and dedication to glorious customer support continues to drive our excellent efficiency.

This concludes our ready feedback. And at the moment, I’d wish to ask James, the operator, to return to the road, and we’ll be joyful to reply your questions.

Query-and-Reply Session

Operator

Thanks. [Operator Instructions] Our first query is from Scot Ciccarelli of Truist Securities.

Scot Ciccarelli

Good morning, guys. Hope, you’re properly. I believe we will admire that worth isn’t a very powerful consider driving a buyer’s choice. However I suppose my questions are, primary, why are we making these worth investments now, as in what has modified? After which quantity two, why couldn’t we see this spherical of worth cuts grow to be one other set of worth cuts sooner or later sooner or later, doubtlessly threatening one of many key funding pillars of this vertical? Thanks.

Greg Johnson

Sure, Scot, that is Greg. I’ll take that one after which see if Tom and Brad might have one thing so as to add to it. As to – to start with, I wish to reiterate what you mentioned. Our philosophy hasn’t modified. We all the time lead with service. Service is most essential adopted by stock availability after which worth.

So far as why now, while you have a look at the previous couple of years, we’ve been by means of two years of inflation, worth will increase. We’ve seen rising costs. We’ve seen provide chain disruption. And I believe we’ve carried out higher than loads of our rivals over the previous couple of years, particularly our smaller rivals.

While you have a look at the skilled aspect of our enterprise as a complete, as , it’s very, very fragmented. There’s loads of gamers on the market on that aspect of our enterprise, a few of that are the massive nationwide gamers, a few of that are the smaller WDs and two-steppers. We compete in opposition to every of these each day in each market that we function in. So we felt like coming off of a few years of inflation and provide chain disruption, once more, the place we’ve carried out properly, and the anticipation that a number of the provide chain disruption might average within the again half of the yr, timing was proper to implement this variation.

We – what we did right here is de facto no totally different than what we do day in and day trip with our pricing staff. Our pricing staff continually displays pricing on each side of our enterprise and makes tweaks to pricing at each the skilled and the DIY stage throughout our prospects. And this initiative particularly targets our DIFM prospects and – simply we really feel like it will allow us to take extra market share on that aspect of the enterprise. In order that’s why now.

Brad, did you wish to add something to that or take the second a part of the query?

Brad Beckham

Sure. Hello, good morning, Scot. I’d simply actually echo what Greg mentioned, Scot, by way of you in addition to anyone on the decision is aware of how fragmented the DIFM aspect of the enterprise is. And you know the way actually little share while you add up us and our public rivals on the – actually the addressable DIFM share in america continues to be very small.

And so I’d simply reiterate actually what you mentioned and what Greg mentioned that it’s so essential for us to convey that this isn’t a change by way of our focus. We now have constructed our firm on service. We now have constructed our firm on relationships. And as , we constructed our firm on the skilled buyer, and retail got here later. And so this isn’t abandoning all of the issues that obtained us the place we’re and the issues which are going to get us into the longer term.

To your level on the timing of it, Greg had some nice feedback there. And the opposite factor I’d say, Scot, is with the whole lot that our {industry} and actually all people on the planet has been by means of the final couple of years, particularly our skilled prospects. Whether or not or not it’s a shade tree mechanic to an impartial storage to the nationwide and regional accounts, now we have not backed off of being on the market, calling on them, which means truly visiting their retailers day in, day trip, week in, week out. And a possibility that we noticed the final couple of years is our retailers are telling us, I imply, our service is the place it must be. Our groups within the shops, the whole lot that we’ve performed with stock availability.

And on the subject of the independents on the market and the two-step-type mannequin rivals in addition to a number of the specialty-type rivals that perhaps simply centered on a few classes, we simply merely see a possibility from our gross sales staff and within the discipline to exit and with a rifle method, goal these areas; and with current prospects which may be shopping for a certain quantity from us, perhaps shopping for a certain quantity from an impartial in one other quantity from a real specialty firm, consolidating that buyer and actually getting a primary and solely name, and we really feel superb about that.

Greg Johnson

And Scot, simply in your second a part of your query, I wish to reiterate that it is a focused method. This can be a very scientific method we’re taking. This isn’t throughout the board. This worth enhancement was performed by class, by SKU. And we nonetheless really feel like that based mostly on our efficiency, our provide chain energy, that we will nonetheless cost a premium to our skilled prospects. So we don’t really feel like it is a race to the underside. We don’t really feel like we’re low-balling price. We’re simply getting aggressive with a few of our rivals on the market available in the market to take extra market share.

Scot Ciccarelli

Bought it. Thanks lots for the time guys.

Greg Johnson

Thanks, Scot.

Operator

Our subsequent query is from Christopher Horvers of JPMorgan.

Christopher Horvers

Thanks, good morning. I’ll be the second to ask in regards to the pricing. I assumed that was an incredible reply. I simply wish to concentrate on a few issues. So first, going again to the introductory remark that you simply deliberately strive to not be the bottom worth available in the market as a result of you’ve gotten the main service mannequin. Do you continue to count on that to be true going ahead? And if a few of that is simply you’re not passing alongside the inflation that you simply’re experiencing, what’s the chance that you simply truly decrease the market – decrease the low vary of the market worth vary? Are you aware what I imply?

Greg Johnson

Sure, Chris. On the primary, we completely really feel like that this makes us aggressive within the market. And so far as reducing, once more, we’re not doing this to be the bottom worth within the market. We really feel like that there’s great worth within the companies that we offer and the relationships. You must bear in mind the skilled buyer, whereas worth is essential, we’re not seeing worth shouldn’t be essential, what’s extra essential to that skilled buyer is the connection now we have with them, the stock availability that now we have and our constant efficiency and talent to get that half to them well timed to allow them to full the roles they’re engaged on.

Our skilled prospects will all the time prioritize that over worth, once more, assuming that we’re aggressive on worth. So we really feel like this transfer will allow us to take extra market share each from current prospects and achieve market share from prospects we might not be getting enterprise from in the present day.

Tom McFall

Chris, to handle your second a part of your query, you’re completely proper. In lots of instances, because of the vital inflation – same-SKU inflation, it varies throughout product line. In lots of instances, this isn’t decreasing The Road worth. It’s simply not taking that acquisition improve to The Road in worth.

Christopher Horvers

Bought it. After which as a follow-up, you talked about form of concentrating on form of product traces and classes the place you see some specialty gamers having share. So are you able to perhaps increase on that? Is that this focused at share with like nationwide accounts? Is it up and down The Road mechanics? And to what extent it’s one thing like, I don’t know, like gas injection traces that perhaps have a sure diploma of specificity the place that specialty participant offers differentiated form of product?

Tom McFall

Properly, Chris, that is Tom. I’m going to begin with the reply. So that the reply goes to be we’re not going to offer that. However I actually wish to guarantee that – we’re speaking a few broad pricing technique. We don’t talk the main points of our pricing technique. Lots of science, loads of work goes into it, loads of historical past. So we’re not going to get down into the main points of what this system is. However typically, I’ll flip it over to Brad for his feedback.

Brad Beckham

Sure, Chris, I believe what’s essential to speak about right here is that this isn’t a, once more, new technique or initiative that’s centered on one buyer group. Once more, that is going to – that is our dedication to all people from the Shade Tree to the impartial garages to the regional gamers to the nationwide accounts. And Chris, as , we nonetheless have a spot in footprint in part of the – Northeast a part of the nation that retains us from actually being the primary name for a number of the nationwide guys from a matchup standpoint.

However what I’d say, once more, to recollect is that whereas now we have new alternative for brand spanking new prospects all the time, one of many issues that we actually like about that is our current prospects which are shopping for a bit from us, perhaps a bit from our public rivals, a extremely huge piece from the independents after which one other piece of their month-to-month purchases from a specialty firm.

And we’re already delivering to those retailers. In some instances, we’re delivering a part of the job that perhaps they needed to get one other merchandise from some other place. And so we simply see great alternative. And our prospects are telling us that with our stock availability, our service, our folks, if we will make some changes there, we actually have an enormous alternative to show into the primary and solely name for these garages.

Christopher Horvers

Is smart. Thanks very a lot.

Greg Johnson

Thanks, Chris.

Operator

Our subsequent query is from Bret Jordan of Jefferies.

Bret Jordan

Hey, good morning, guys. I’ll soar from pricing to provide chain. Might you speak about perhaps the cadence of provide chain disruption? Or I believe in prior quarters, we talked about some classes particularly being actually onerous from an import or manufacturing standpoint. Might you speak about the way you noticed your availability of stock within the fourth quarter?

Greg Johnson

Sure, Bret, I’ll begin that, after which I’ll see if Brent has something so as to add as a result of he lives that day in and day trip. We now have seen enchancment. And while you speak about provide chain constraints over the previous a number of months, it’s larger than simply provide and demand. There’s been loads of sides to that.

I’d say that it has improved from abroad. Container availability has improved. We nonetheless have some port challenges. We nonetheless have some focused suppliers, primarily suppliers which are working in smaller markets domestically which are having – nonetheless having some labor points. We obtained some uncooked materials challenges that a few of our suppliers are having.

Total, I’d inform you that our fill price from our DCs to our shops has improved. I’d inform you that our in-stock place at our shops has and continues to enhance, and most of our suppliers total fill price has improved. Now that mentioned, we nonetheless have some suppliers which are challenged, and we nonetheless work with these. I do know Brent and his staff, a few of our suppliers there assembly with weekly and even a number of instances per week to work by means of these constraints. Brent, did you wish to add something to that?

Brent Kirby

Sure. Bret, Greg gave a very good abstract. I imply, I believe we’re seeing common developments of enchancment, as he alluded to. We nonetheless have some spotty suppliers that we’re working extra carefully with than others. However typically, we’re inspired by what we’re seeing, and we anticipate that enchancment to proceed, hopefully, as we work by means of the primary half of the yr and into the again half of the yr.

Bret Jordan

Okay. Nice. And my follow-up query goes to be on worth. However you mentioned you’re going to be aggressive within the markets. And I suppose, given your greater service ranges and traditionally greater in-stocks than friends, are you able to be priced nonetheless above these friends simply given the opposite values you supply within the transaction? Or are you considering by aggressive, do you imply you’ll be priced on a greenback foundation in line?

Greg Johnson

No. Bret, we nonetheless really feel like we could be priced at a better worth level than our rivals based mostly on the companies we offer, which has been our historic stance on this. Tom, did you…

Tom McFall

The factor that I’d level to, Bret, is now we have a variety of rivals, and Brad touched on them earlier. Some compete solely on worth. Lots of specialty one-line suppliers, they get enterprise by being completely the bottom worth, and that’s not our enterprise mannequin. So after we say we’re going to be extra, we’re going to be inside a aggressive vary. Clearly, it relies on how costly the half is. If it’s $1 half, you’re $1 over, that’s a heck of lots. When you’re $1 over and it’s a $100 half, that’s a special factor.

And what we obtained to recollect is the most important price for skilled installers is that they’re lat. And that potential to show these bays is what turns their revenue. So we wish to guarantee that we’re pricing holistically for the standard of the product, the supply of the product, the staff that we provide, companies that we provide. So we have a look at it in mixture. However there’s all the time going to be somebody, and we talked about it in our ready feedback, who’ll be the bottom worth. And if that’s the way you maintain your small business, if anyone comes alongside, decides to drop the worth, you’re going to be in bother. And we wish to have a relationship and a partnership with our skilled retailers that assist them become profitable over the long-term.

Bret Jordan

Nice. Thanks. Respect it.

Tom McFall

Thanks, Bret.

Operator

And our subsequent query from Greg Melich of Evercore ISI.

Greg Melich

Thanks. I suppose I’d like to go to the steering on the highest line, the 5 to seven comp information. I believe you mentioned it was mid-single-digit inflation in that. And assuming that blend continues to be constructive. Is it honest to say models might be flat and even barely down this yr?

Tom McFall

So 5 to seven – that mid-single digit inside the 5 to seven was particularly for the DIY aspect of the enterprise, and we might count on it to make sure on the ticket rely there. Due to the worth – the skilled worth initiative, we gained’t see as sturdy a rise in same-SKU inflation on the skilled aspect. So we have to generate a significant improve in common ticket on the skilled aspect, in order that – your numbers are proper, however that was only for the DIY aspect.

Greg Melich

Bought it. Thanks. After which I suppose the follow-up linked to that’s, if we have a look at the gross margin price in your steering this yr versus final yr, I suppose, LIFO is perhaps 50 bps. Might you give us how a lot of it’s the professional pricing initiative versus simply the traditional combine change you’d count on to professional outperformance?

Tom McFall

So Greg, you’ve picked up on a very good level. A part of it’s going to be only a combine shift. As skilled grows quicker than DIY as a result of they’re shopping for on quantity, the gross margin is decrease. We additionally benefit from the availability chain. I’d inform you that the skilled pricing is bigger than LIFO, however we’re not going to get into parsing out as a result of the subsequent we’ll be speaking about our distribution prices, and that’s one thing we simply don’t do.

Greg Melich

Bought it. That’s useful. Thanks and good luck.

Greg Johnson

Thanks, Greg.

Tom McFall

Thanks, Greg.

Operator

And our subsequent query from Michael Baker of D.A. Davidson.

Michael Baker

Hello, thanks lots. I want I might add one thing not about pricing, however that is the subject. So – what do you count on the aggressive response to be? Do you’ve gotten any precedent for doing one thing like this? And what have you ever seen rivals do? And I suppose, associated to that, simply to be clear, who’s – who do you assume you’re taking share from, from this initiative? It sounds prefer it’s extra about taking share from smaller gamers quite than your huge public rivals, however I simply needed to substantiate that.

Brad Beckham

Hey Mike, that is Brad. I’ll soar in there and see what Greg and Tom must say about it. However on – I’ll reply the share query. And on the share, it’s onerous slightly bit to all the time inform precisely the place it’s coming from. However I’d say that what we’re seeing, it’s extra from the – extra of the mid-tier, perhaps the mediocre or perhaps the weaker, impartial rivals which have struggled the final couple of years with provide and issues like that.

Mike, as , nearly as good as anyone, I imply, now we have great public rivals that now we have the utmost respect for after which now we have these regional rivals which are the robust, robust impartial two-step-type rivals that not too way back, we had been within the Ozarks and type of our previous a part of the corporate. However I’d simply say on the share that we’re seeing loads of various things, however the majority of the chance we see is with the smaller independents and those which have struggled the final couple of years.

Greg Johnson

Sure. Mike, on what the response could be, I can inform you based mostly on the check that we had been in, in a number of markets earlier than rolling this out, the response was clearly favorable or we wouldn’t have rolled it out company-wide.

Michael Baker

While you say the response, so I imply the aggressive response, not the shopper response. So while you say the aggressive response was favorable, I presume meaning you didn’t essentially see them drop worth as properly?

Greg Johnson

Sure.

Tom McFall

That’s appropriate, Michael. We will – clearly, our rivals are going to do what they do with their worth. I believe we simply wish to stress that we’re not setting the low market worth right here. So it’s not as if rivals which are profitable enterprise on worth alone usually are not going to nonetheless be the bottom.

Michael Baker

Understood. Is smart. And I believe all these solutions make clear the technique fairly a bit. So I admire that.

Tom McFall

Thanks

Operator

Our subsequent query from Chris Bottiglieri of BNP Paribas.

Chris Bottiglieri

Hey guys, thanks for taking the query. So my query goes to be, I suppose, on stock/inflation. So the stock funding you spoke of plus 8%. It feels like your steering assumes type of like flattish inflation, perhaps even deflation for This autumn 2022, I’d assume, with the worth investments.

So are you successfully simply elevating in-store stock models or by year-end? After which do I’ve that proper first? After which how do you consider the cadence of that stock? Is it going to be fairly easy as you all year long? Is it front-half loaded? I imply any context there could be useful.

Tom McFall

That is Tom. Let me take a shot at that one. So after we speak about 8% improve, we don’t have – and we talked about it for the final seven quarters, we’re not sitting on as a lot stock as we’d usually sit on due to provide constraints and due to the excessive quantity. So a part of it’s to get again to the place we usually could be. And a part of it – these initiatives return to our 2020 steering.

And I suppose it will be the top of 2019 fourth quarter name the place we had a plan so as to add to the hub-and-spoke community. So it’s a mix of these two objects. After we have a look at how briskly we will roll this stock in, all people on this room and all people on our staff wish to have it tomorrow. The query is, how briskly can suppliers provide it? How briskly can we push it by means of the distribution community? So that is, as Brent mentioned earlier in the present day, and he can add to this, that is going to be an all-year challenge. We’re going to maneuver loads of models.

Greg Johnson

Sure. Once more, Chris, this isn’t a brand new technique. It’s one thing we’ve had deliberate for a few years, however provide chain constraints and the volumes we pushed by means of our DCs within the final couple of years have simply prohibited us from getting this stock rolled out.

Chris Bottiglieri

Bought you. That is smart. After which a associated query, on the LIFO, the $10 million, is that extra like type of a Q1-ish occasion? Or is it – are these slow-turning SKUs that may trigger you to take that all year long? After which like – sure, that’s it for me.

Tom McFall

An ideal query. That ought to all roll in, within the first quarter.

Chris Bottiglieri

Bought you. Okay. Thanks, guys. Respect it.

Tom McFall

Thanks, Chris.

Greg Johnson

Thanks, Chris.

Operator

Subsequent query from Michael Lasser of UBS.

Michael Lasser

Good morning. Thanks lots for taking my query. What – as you had been laying out your plan for 2022, what did you assume that the general {industry} goes to develop at within the yr forward?

Tom McFall

That’s an attention-grabbing query, Michael. I believe what we have a look at is after we have a look at inflation, what we’re going to anniversary in same-SKU inflation, I believe that’s a fairly cheap quantity for the {industry}. I believe we’ll be pressured extra on the DIY aspect. Skilled will proceed to develop quicker, extra resilience to these worth will increase. In fact, we construct our plan from product line and retailer up, and it’s actually impartial of what the market goes to do. However our expectation is – as , has all the time been that we’re going to develop quicker than the market.

Michael Lasser

Sure. Clearly, the intent of the query was to try to dimension how a lot market share you count on to get for the worth investments that you simply’re going to be making. So is there one other solution to body that out? After which I’ll allow you to reply that, after which I’ve one fast follow-up.

Tom McFall

Okay. So there are loads of places and takes inside what we expect goes to occur with the enterprise, each on the DIY and the skilled aspect of the enterprise. And we’re assured that after we have a look at our gross margin {dollars} that that is going to be a winner for us. And we’ve rolled it out right here in February, and we’re very optimistic it’s going to exceed our expectations.

Michael Lasser

And my follow-up query is, do you count on this technique, which can weigh in your gross margin and drive market share, to be distinctive to 2022? Your steering implies that your gross margin price this yr goes to get again to ranges that it was final at in 2013, 2014. So what are the probabilities that you’ll have to proceed to execute this pricing and funding technique past 2022 such that your gross margins are going to drift decrease even after this yr?

Tom McFall

Properly, the factor, I suppose, I’d level out is that percents are good and {dollars} pay the payments. So I did see a notice the place in 2014, the gross margin % was the identical. However I’d say that we’re about 98% extra gross margin {dollars}, which is $3.5 billion. On the finish of the day, we’re making an attempt to determine how we construct a sustainable enterprise that generates rising working revenue {dollars} year-over-year. And we expect that this initiative continues to maneuver us in that route. And after the quantity workouts, I’ll flip it over to Greg.

Greg Johnson

Sure, Michael. We don’t have any deliberate initiatives like this past this yr. That mentioned, as I mentioned earlier, our pricing staff constantly day in and day trip appears at pricing within the market. And we tweak the SKU up, the SKU down simply to optimize our margin. So there’s all the time adjustments in our pricing construction each – on each side of our enterprise, however we don’t anticipate future larger-scale worth reductions like this.

Michael Lasser

Okay. So Greg, simply to make clear that you simply count on this yr, you’re going to make some worth tweaks away in your gross margin. After which after this, it will likely be regular course of enterprise to proceed with what you’ve performed up to now?

Greg Johnson

That’s appropriate.

Michael Lasser

Okay. Thanks very a lot.

Tom McFall

Thanks.

Greg Johnson

Thanks, Michael.

Operator

Our subsequent query from Daniel Imbro of Stephens.

Daniel Imbro

Sure. Hey, good morning, guys. Thanks for taking our query. I’ll ask one, not on pricing. Greg, I needed to ask one simply on the shopper. I believe you talked about the potential for buyer restore deferrals during times of inflation or perhaps financial uncertainty. Simply as we head into this yr, because the low-end client feels stress from broader inflation, are you seeing any indication early on of restore deferrals or one thing that make you assume that might occur this yr? And is there something like that baked into the comp steering you’ve given?

Greg Johnson

Sure, Daniel, we name that out as we regularly do as a result of traditionally, we’ve seen these adjustments to that lower-income client being one of many first issues they do. We now have not. We now have not seen any indicators of our DIY or our skilled prospects for that matter buying and selling down or deferring upkeep at this level.

Tom McFall

What I’d add to that’s we’ve seen fairly vital worth will increase. And to the extent after we look traditionally, when that’s occurred, DIY, particularly on the decrease finish, we confronted headwinds on buyer transaction counts. And we anticipate a few of that this yr and have constructed that into the forecast.

Daniel Imbro

Bought it. That’s useful coloration. After which I can ask a follow-up on SG&A. I believe SG&A per retailer, it appears like on the midpoint, name it, 3% to 4% improve. I suppose, one, is that proper? After which two, with wages being as inflationary – Tom, you talked about effectivity advantages earlier in type of fastened prices, however are there another initiatives you guys are doing to maintain that at such a muted tempo? I believe we count on there to be extra SG&A development given the wage backdrop we’re seeing. So making an attempt to grasp what’s driving that enchancment. Thanks.

Tom McFall

So I believe in our ready feedback, our math is round 2.5% improve. Final yr, we had been considerably above that, and gross sales had been considerably above that. As Brad talked about in his ready feedback, we handle our SG&A at a micro stage, particularly retailer payroll, which is our largest variable expense, to guarantee that we’re taking alternatives to realize share however not getting out over our skis. So that is based mostly on the gross sales forecast.

To the extent that we exceed the gross sales forecast, it will likely be greater than this. To the extent we’re lower than the gross sales forecast, you higher imagine it will likely be lower than this. So extra of a standard – truly, greater than our regular run price as a result of our comp information’s greater than our run price. On the SG&A efficiencies, eight, 9 years in the past, we used to speak lots about our initiatives, then they appear to grow to be different folks’s initiatives. So we have a tendency not to enter element on these.

Daniel Imbro

Truthful sufficient. I admire the colour and better of luck.

Tom McFall

Thanks, Daniel.

Greg Johnson

Thanks, Daniel.

Operator

And now we have reached our allotted time for questions. I’ll now flip the decision again over to Mr. Greg Johnson for closing remarks.

Greg Johnson

Thanks, James. We’d wish to conclude our name in the present day by thanking the whole O’Reilly staff as soon as once more for his or her unwavering dedication to our prospects and for his or her unimaginable efficiency in 2021. We sit up for one other robust yr in 2022. I’d wish to thank everybody for becoming a member of our name in the present day, and we sit up for reporting our 2022 first quarter ends in April. Thanks.

Operator

Thanks, women and gents. This concludes in the present day’s convention. Thanks on your participation. Chances are you’ll now disconnect.

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