O'Reilly Automotive Growth Pulls Away From Peer Pack

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O'Reilly Automotive ( ORLY ) is getting a lot of mileage from new-store openings.

Last month, the Missouri-based auto-parts retailer opened in Tampa, Fla., its 4,000th store -- the start of what will be an aggressive expansion into the Sunshine State.

Florida offers significant growth opportunities, chiefly because "we're not there yet," said company spokesman Mark Merz. "There are lots of cars in the Florida market. It has robust, growing markets."

Actually, O'Reilly operates a modest number of stores in the northern part of the state, close to distribution centers in Mobile, Ala., and Atlanta.

Tampa is a sharp turn south. A new distribution center in the works in Lakeland, Fla., will better serve that market as well as others expected to open in central Florida and farther south.

The distribution center is on track to open early next year. Management has said that about 25 new stores would open initially and up to 350 in the state, longer term.

O'Reilly is one of the largest auto-parts chains in the U.S., smaller than No. 1AutoZone ( AZO ) but now slightly larger thanAdvance Auto Parts ( AAP ) in sales and store count.

Of the three, O'Reilly is growing the fastest on both the top and bottom lines. In 2012, earnings rose 25% over the prior year to $4.75 a share.

Geographic Expansion

Double-digit profit growth is being driven in part by geographic expansion, as Morgan Stanley analysts said in a Feb. 8 report on O'Reilly, titled "Pulling Away From the Pack."

O'Reilly drove into another new region recently, New England. Its acquisition of Maine-based VIP Parts, Tires & Service at the end of December gave it 56 retail stores in Maine, New Hampshire and Massachusetts, plus distribution centers.

The company plans to make use of those distribution centers to expand farther into New England and other northeastern markets, such as New York State.

Morgan Stanley analysts figure that the Northeast and Florida account for about 25% of industrywide auto-parts retail revenue based on total light vehicle registrations. They say the two major markets could ultimately translate into $1.5 billion to $2 billion in annual revenue for O'Reilly.

Last year, O'Reilly took in nearly $6.2 billion, a 7% gain over 2011.

Analysts expect O'Reilly's revenue to grow 8% this year, to nearly $6.7 billion.

They estimate that AutoZone and Advance Auto sales will grow slightly less this year, 7%, according to Thomson Reuters, with AutoZone's to total $9.2 billion and Advance $6.6 billion. Advance's profits are seen growing the slowest, at 7%.

O'Reilly plans to open 190 new stores this year, on top of 180 last year. Management has said it could open around 200 new stores a year for the foreseeable future.

"We've more than doubled our size in the last five years," said Merz. Top states currently are Texas and California.

A swift acceleration occurred in 2008, when more than 1,300 stores were acquired from CSK Auto, giving O'Reilly a new presence in the Western half of the U.S.

Those stores were viewed as underperforming with average annual volume of $1.35 million a year.

As O'Reilly integrated its systems and culture, CSK stores have been posting stronger sales, outpacing growth at the firm's mature stores.

Since most of the CSK stores are in major metro markets compared to O'Reilly's larger mix of legacy stores in smaller markets, management thinks CSK stores can reach $1.8 million in per-unit volume. They're not there yet.

Average unit volume chainwide is now $1.6 million.

Same-store sales and margins should continue to get a lift from improving performance at CSK acquired stores, analysts say.

O'Reilly's operating margin in 2012 was a record 15.8%.

A little more than half of sales are from do-it-yourselfers with the rest from mechanics on the commercial, or professional, side.

Sales in the fourth quarter rose 7% to $1.49 billion, while earnings jumped 21% to $1.14 per share.

After Q4 and full-year results were released late on Feb. 6, shares jumped 8% in the next day's trading session.

In contrast, AutoZone's stock fell nearly 2% on Tuesday after it reported disappointing results for its second fiscal quarter ended Feb. 9. At the close, shares were down less than 1%, however.

Though earnings beat views, AutoZone's revenue came in below Wall Street's consensus, rising 2.8% to $1.85 billion. Same-store sales fell 1.8% vs. O'Reilly's 4.2% gain in the fourth quarter.

Analysts estimate O'Reilly's earnings will rise 20% this year to $5.72 a share and go up 13% in 2014, according to Thomson Reuters.

Expense controls have contributed to strong profits, from negotiating better prices from suppliers based on greater scale to keeping travel budgets down. For example, managers share hotel rooms when they are away on business. Even the CEO and CFO have shared a room, Merz says.

Comparisons could get easier this year over last year, when an unusually mild winter caused less stress on car parts.

Cold Weather

After noticing softer demand for products, management announced June 27 that it wouldn't meet earlier guidance of 3% to 5% same-store sales growth in Q2, sending shares tumbling 14%.

Benefits of this winter's cold weather and snowstorms will likely be "felt in spring/summer," said Stifel Nicolaus analysts in a Feb. 8 note. Since then, heavy snowstorms hit major O'Reilly markets in Kansas, Missouri, Texas and others especially hard.

A cold snap, a Stifel Nicolaus report said, "warms our hearts to auto parts."

The company's stock, though volatile, has benefited from a share buyback program begun in January 2011. Some 32 million shares were bought through the end of December, for $2.4 billion. Over that time, shares rose nearly 50%. Shares are up 14% year-to-date.

Management plans to use excess cash to keep purchasing shares.

"We're able to generate more free cash than we can use to grow our business organically (and profitably)," Merz said.

On the downside for the company's near-term prospects, analysts say, new-car sales continue to pick up. More new cars on the road mean fewer repairs and parts are needed, at least in the first few years.

O'Reilly's take is a bit different. Management says that better engineered new cars will stay in use longer, meaning today's new-car customer "is going to be our customer five or six years down the road," as Merz put it.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AAP , AZO , ORLY

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