O'Reilly Automotive, Inc. — 2024 Q1

Chris, thanks for the question. Well, there was a lot of moving pieces in the quarter really directly to your question there. And really, what we saw just kind of walking through the quarter again is January, we were really pleased with January. And in a lot of the markets, you're really true winter markets where harsh weather really drives that demand, we felt like that really exactly played out that way in January.

Yes. I think one of the challenges -- this is Jeremy. I think one of the challenges we've had is we just haven't really seen consistency in how our business would perform on a sustained normalized spring business. I think, as Brad described on the call, the choppiness that we've seen has been exactly that. We'll see pockets of improved performance as we move through. But there's not anything that's been consistent and sustained. And for sure, the areas that have been more volatile are the ones where we can see the impact of that. But at this stage, with a few of the different factors that we saw impact us during the quarter, especially as we move through that period of time when tax refund money shifted around, it's been harder to get a more consistent rate just week to week on the underlying businesses. There's just been a lot of the choppiness that's characterized the quarter.

Yes, great follow-up question, Chris. The answer is no. When we look at kind of our book of business and you look at the general independent garage versus strategic accounts, whether it be a regional account or whether it be a national account. As you know, we have a smaller portion of our business that is the national account business and some of our competitors. And -- but when we look at the mix of business, when you look at the category of customer and then you really break it down to the last part of your question, we're just -- we're not seeing that. Especially when you look at our nondiscretionary categories, the needs-based categories when Brent and I, when we look at our [indiscernible] categories, when we look at our maintenance categories, we're extremely pleased with how those categories are performing.

Yes. Seth, this is Brent. I'll start and then Jeremy can jump in, I'm sure on some of that on the back end of it. But yes, as I talked about in the script, biggest driver of our SG&A per store really is our store payroll. And our teams have been very focused on balancing that with the demand and the opportunity that they see in their markets, and they manage through a period in Q1 where we did have some of that choppiness that we've talked about. But really proud of the job overall that the teams did there, and we're obviously approaching any kind of choppiness with an eye to expense control, but we do have some of that investment depreciation pressure that I mentioned in my script that we're going to see as we move through the year. That's why our plan was not a peanut butter spread on SG&A for this year. So -- and Jeremy, you may have a couple of other thoughts on that.

Yes. No, I think, Brent, I think you said it well. Seth, I think we previewed a little bit on last quarter's call, but it's kind of hard to get the cadence quarter-to-quarter. As we just think like in particular about the timing of the impact of some of last year's investments and not to get too far down in the weeds here, but our depreciation headwind in first quarter was kind of high teens year-over-year growth there. And that's the number that through the balance of the year starts to moderate as we move down through. So more broadly speaking, especially as you think about the dollars, you also had impacts in the quarter with leap day.

Yes. I can probably talk to that. And maybe the first caution that I would say is we're still within a relatively tight end of what we thought from expectations and I know Brad mentioned it within his response. The confidence that we feel is just from the broader mix of our business, the ability to see solid performance really across the core categories that we know are indicative of how the consumer is thinking about the backdrop has been good.

Michael, thanks for the question. I don't see it that way. Number one, I've been in this business here at O'Reilly for 27 years this year and been through challenging years, been through great years and been through election years and years that we get off to a little bit of a choppy start, and I've learned every time not to necessarily overreact that we all -- we take any potential slowdown or anything like that very seriously. We want to make sure we control what we can control. But it's always hard for us to base exactly where the share gains are coming from and it's sure hard to base it here short term on just a competitor reporting or something like that. We don't spend a lot of time internally trying to dissect that. What we do internally here is, we focus on our revenue versus the $147 billion, we believe, is being sold in the United States, and that just gets even bigger. Obviously, now that we're expanding to the rest of North America.

Thank you, Michael. I'll start out and answer your question on just kind of the cadence of the exit and kind of how we're feeling about the last few weeks, and then I'll let Jeremy talk to the last part of your question there on SG&A. So Michael, really, the thing I want to be a little careful of is, even though we have a few weeks, it is just 3 weeks, and we have a lot of quarter left and I think the reason that we're trying to balance the choppiness with not knowing what the future holds, all with the fact that we have had some of this weather that it's just not ideal. It's a different weather story than like in January, where we love harsh winters, and we love hot summers. The stuff that's in the middle can just be a little bit not conducive to what our DIY customers want and need to get out and work on their stuff. I'm sitting here in Springfield, Missouri this morning, looking out the window, 50-something degree weather and it's raining out there.

Yes. Just from the -- I guess, further down the income statement as we think through the balance of the year, Michael, I'd tell you, nothing really changes about our expectation on how and the degree to which we can respond to different market conditions than really we've had for a long time within our business. From our history that -- that we really do truly manage the business from a long-term perspective and will not overreact in short periods of time to fluctuations and cognizant of the volatility we've seen in the first quarter, but also understanding that we're in an election year and there's just a little bit more uncertain backdrop that we could face some puts and takes as we move through the year. It's important for us to maintain a high level of service and to prioritize that as we move through the business. While at the same time, we've got a pretty long-standing expense control culture, and we will address how we manage the business, we think, appropriately to the right market environment and feel good about how the teams have performed in that way, as Brent mentioned, during the course of this year so far.

Yes. Greg, this is Brent. I'll start and then let the other guys jump in. But in terms of the cost environment, as I mentioned in the script, we kind of saw what we'd expect some typical puts and takes on cost. But I mean, in terms of inflation and what's out there, I think we kind of guided and felt like going into this year is going to be around 1%. It's kind of what we saw in Q1, kind of what we anticipate for the rest of the year. So we don't really see that changing a whole lot. Now with that said, the good news is we continue to be able to diversify our supply chain. Our merchandise team has done a fantastic job with that.

It was positive.

It was a contributor.

Yes. Yes. I would tell you the traffic even on the DIY side of the business was still positive for the quarter [indiscernible] that was pretty significantly impacted by the strength that we saw in January, which we've talked about that side of the business is more volatile around the refund and just the spring impacts. But yes, we were positive, both sides of -- in both traffic and ticket.

Yes. Again, volatility there, Greg, as we saw in the first quarter. Some of that is similar to what we've seen from an accessory perspective and oftentimes, those are the add-on type things that hit when somebody is coming in to change brakes or to do that type of oil change. Not having a perfect read on how tax refund money flows through, that can also affect size in certain instances. But a little bit choppy there to be able to draw any really strong conclusions. But for sure, some of the -- some of what we've seen is that number not being a contributor, a little bit of a headwind for us in the quarter.

Greg, maybe just to build on that basket question a little bit, kind of parse it out a little bit. An example of what we're not seeing is any issue with -- if somebody is doing a great job, we still feel with that something they need to do. They're still -- our teams are still able to work that customer from a DIY standpoint through having everything they need to do the job right. We don't see any basket issues in terms of not buying the hard parts they need to do the job and normally the things that go along with that.

We appreciate it, Greg.

Yes, Simeon, great question, really is. I would tell you, we're as confident in our read right now as we ever are after first quarter. Brad mentioned it within the context of his comments, we think it's appropriate to not overreact to the things that we see in first quarter. For certainly a couple of things we know, the range of our -- the band of our performance has still been relatively tight even though we've seen choppiness move throughout. So we're not seeing the types of serious fluctuations in our business that come on where you do see things like oil changes being pushed back or brakes moving around more significantly. What we are seeing is what we often will see from a variability in business around choppiness of tax refunds.

Yes, Simeon, what I would say, it's a fair question. And I think maybe just on the tax refunds, for example, there's no doubt that the delay impact of this, to some degree, there in February. I think the reason that we want to just be cautious with how that will play out is just the fact that we are in election year. There's a lot going on in the world. We have this weather that no doubt has played in to some extent. But we also know that the reality is when people get their tax refunds, it's normally pretty clear when we get that and how much of it we get. But we know our lower-end consumer. They're spending money, first and foremost, on groceries, their homes, insurance rates personally, things like that, that are a pressure to them right now. And we just want to -- we want to balance that. We know that is some of it, but we also know this weather is some of it as well.

I was just going to say maybe just one other thing to add on your question, and it is a good one. But when -- just like the guys talked about, when you think about maintenance categories and obviously, failure categories [indiscernible] maintenance categories, there is some discretion in those. And even on the DIY side, again, a lot of confidence still in the backdrop knowing that we still saw strength in motor oil filters in the category. I mean we didn't see any reason to believe that people were putting off the oil change to pay for groceries that we -- when we looked at it at a product level. So that was underlying in all of this, too. So just wanted to mention that.

Yes. Thanks, Simeon. So yes, I mean, when you talk about PPI, that's over 2 years old now. Basically, we're lapping at 24 months in. We feel extremely good about that investment we made. When you look at those categories, not only those categories, but kind of the halo categories that revolve around those [indiscernible] underhood categories, and it was very broad. It was a very [indiscernible] approach, but it was very broad by SKU, by line. We feel really good about what we've done there. We -- when I look at it, especially versus some of the WDs and the independent 2 separate type players, we feel really good about what we've done, and we haven't seen really any other reactions to any large degree out of our big competitors nor those other competitors. The reason that I feel like that we have made those investments pay, Simeon, is because our team has gotten out there and this just hasn't been a one-pronged approach.

And Simeon, maybe to just further add to what Brad said on that, on the professional side. I mean when you look at the -- by category, when you look at some of the categories, brakes, chassis, driveline, ride control, all the big category, a lot of big categories, dollar categories that we're not seeing that growth stagnate, which I think is kind of where your question is going [indiscernible] running out of gas in those categories. We're not seeing that. We're seeing continued growth even on top of big comparisons year-over-year.

Yes, Michael, it's always a little bit of a tough question to answer. Often that is the case with spring business that it's just a shift in demand. I think more broadly, the way that we view that is that none of the timing of what we're seeing or none of the impacts affect kind of core fundamental underlying demand within the industry. So it's always a little bit tough to know, will you get it rebound? How much can you really measure it when you do -- but more broadly speaking, as we move further into the quarter, that becomes less important of a dynamic, it's just the broader strength in our business will kind of prove out as we move into the balance of the quarter.

Yes, Mike, there could be some of the discretionary. There could be some of the short-term stuff that could potentially be lost. But I think as we always say, and we still believe this as much as we ever have that the underlying drivers of our business are absolutely there. When you look at vehicle's miles driven, you look at all the things that we look at to drive our business, average age of vehicles, not only in the U.S. but in North America, we still feel really good that demand is going to continue to be there.

Sure, Mike. Absolutely. Well, we're really excited about the Mexican market. We acquired Mayasa back in 2019 and we had our eyes on that market for a long time. And to your point, one of our toughest competitors has done an amazing job down there for several decades and has a tremendous business down there. That said, it is so fragmented down there, Mike. When you look at the average age of vehicles in the U.S. at 12.5, but then you look at the Mexico market at over 16 years of age on the average vehicle and how fragmented the independent market still is down there, we see a tremendous runway. I mean that's why it was our first international venture. We have a great team down there. The timing of when we acquired Mayasa back in 2019, we acquired a lot of great team members. We acquired a base of people and distribution.

Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your unwavering dedication to our customers and the outstanding results you produced in the first quarter. I would like to thank everyone for joining our call today, and we look forward to reporting our second quarter results in July. Thank you.