ORLY

O'Reilly Automotive, Inc. (ORLY)

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O'Reilly Automotive (ORLY)

Q1 2011 Earnings Call

April 28, 2011 11:00 am ET

Executives

Thomas McFall - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Gregory Henslee - Chief Executive Officer and Co-President

Ted Wise - Co-President and Chief Operating Officer

Analysts

Daniel Wewer - Raymond James & Associates, Inc.

Anthony Cristello - BB&T Capital Markets

Gary Balter - Crédit Suisse AG

Matthew Fassler - Goldman Sachs Group Inc.

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Michael Baker - Deutsche Bank AG

Scot Ciccarelli - RBC Capital Markets, LLC

Presentation

Operator

Good morning. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the O'Reilly Automotive 2011 First Quarter Earnings Release Conference. [Operator Instructions] Thank you. Mr. McFall, you may begin your conference, sir.

Thomas McFall

Thank you, Tamika. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, we have a brief statement. The company claims the protection of the Safe Harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words. In addition, statements contained within this conference call, if they are not historical facts, are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions that are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our increased debt levels, credit ratings on our public debt, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses including the acquisition of CSK Auto Corporation, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the Risk Factors section of the company's Form 10-K for the year ended December 31, 2010, for more details.

At this time, I'd like to introduce Greg Henslee.

Gregory Henslee

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts first quarter analyst call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer; and Ted Wise, our Chief Operating Officer. David O'Reilly, our Executive Chairman, is also present.

First, I'd like to again start by congratulating all of Team O'Reilly on the outstanding results in the first quarter. Our performance across most markets bounced back nicely after a bit of a slow start in January, and I want to say thanks to all of our dedicated team members for their continued commitment, focus and most importantly, for the incredible customer service we offer our loyal customers every day.

Generally speaking, we're very pleased with the performance of our company in the first quarter. As I mentioned on our fourth quarter conference call, January started off a little slow for us related to some major winter weather events in some of our markets. The sales for the quarter progressed nicely in February and March, and we were able to exceed our first quarter comparable store sales increased forecast of 3% to 5%, generating a 5.7% increase in comparable store sales.

We saw solid sales increases across most areas of the country, both core O'Reilly and converted CSK markets. The CSK converted stores continue to be some of our best performing markets when looking at comparable store sales, with stores that have been converted the longest performing the best. We're now well down the road with the CSK conversion process, having completed our Western distribution capability expansion and conversion of computer systems, inventory changeovers and are nearing the completion of our store resets and signage changes. By midyear, we'll be completed for the most part, and we'll retire the Checker, Kragen and Schuck's brands, as we have already done with the Murray's brand, and we'll focus all our advertising and marketing efforts on building the O'Reilly Brand.

July 11 for this year marks our third anniversary of the CSK acquisition, and I want to commend Team O'Reilly on the incredible job we've done managing the integration. It's been a huge effort on many fronts: distribution center openings, conversions and relocations, inventory conversions, computer system conversions, training, more training, store resets, signage, you name it. Most members of Team O'Reilly have had a hand in some part of the integration effort, and I think we're all very pleased with the results to this point. Our company is now in a position to expand even more opportunistically coast-to-coast, and we're currently looking at expansion opportunities in many markets as we work to open 170 new stores this year and plan next year's growth.

In addition to generating comparable store sales of 5.7% on top of the 6.9% increase we had last year, our first quarter performance was encouraging on many fronts. First, we're pleased with our gross margin performance improvement to 48.4% of sales. This is a 13-basis-point improvement over the same period last year and is reflective of the extensive efforts we're putting in to managing our gross margin as we aggressively expand our sales to professional customers in the converted stores. I think it goes without saying that the comparable store sales growth on the professional side of our business is outpacing our DIY growth in the conversion markets. This business generally generates a 400- to 500-basis-point lower gross margin rate compared to the DIY side, and we're working very hard to mitigate the effect this growth could have on our company-wide gross profit percentage by doing more analysis to drive our market-specific price variations, more competitor shops and, very generally, using more science and software capabilities in sales analysis, margin analysis and price setting. These efforts are yielding solid results and should benefit our company over time as we continue to enhance our pricing and margin management systems.

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