ORLY

O'Reilly Automotive, Inc. (ORLY)

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O'Reilly Automotive (ORLY)

Q2 2011 Earnings Call

July 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

Alan Rifkin

Greg Melich - ISI Group Inc.

Michael Lasser - UBS Investment Bank

Kate McShane - Citigroup Inc

Anthony Cristello - BB&T Capital Markets

Matthew Fassler - Goldman Sachs Group Inc.

Christopher Horvers - JP Morgan Chase & Co

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

Unknown Analyst -

Presentation

Operator

Good morning. My name is Latasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the O'Reilly Automotive 2011 Second Quarter Earnings Conference Call. [Operator Instructions] I would now turn the call over to Mr. Tom McFall, Chief Financial Officer. Sir, you may begin.

Thomas McFall

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, that 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 revenue 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 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, and good morning, everyone, and welcome to the O'Reilly Auto Parts Second Quarter Conference Call. Participating on the call with me this morning is of course, Tom McFall, our CFO; and Ted Wise, our Chief Operating Officer; and David O'Reilly, our Executive Chairman is also present.

To start off, I'd like to again congratulate Team O'Reilly on the excellent performance. Our second quarter operating margin of 15% is a significant milestone and sets a new high watermark for our company. This performance, as always, is a direct result of the effort each one of us puts into abiding by our cultural values everyday, ensuring our customers receive the best customer service in our business, that we're all as productive as we can possibly be and that we manage our expenses with an eye toward making sure we create the best value in the automotive aftermarket for our loyal customers. Great job Team O'Reilly.

Now onto some details for our second quarter performance. As we discussed on our first quarter conference call, we projected second quarter comparable store sales in the range of 3% to 5%, and we ended the quarter in that range of 4.4%. We've been on a reasonably steady sales trend for sometime now, generating first and second quarter comparable store sales on a 2-year staff basis at 12.5% and 12.3% respectively. With consideration to the variation and comparisons we have by market, we saw solid sales performance across most of the country. As has been the case for sometime now, the markets in which we've converted CSK stores continue to be our best comparable store sales contributors, as the seeds we've sown during the integration of CSK continue to bear fruit.

July 11 marked the third anniversary of the acquisition of CSK. And I'm very pleased to announce that the vast majority of the integration work is now behind us. Ted will review this in more detail in a moment, but generally speaking, we're now able to focus all our efforts in these markets towards growing market share by establishing ourselves as an incredibly capable business partner for the commercial customers in each market, as well as an outstanding resource and supplier for the DIY customers. We still got a long way to go to reach our potential in the CSK markets, but we are well down the road and in good position to incrementally gain market share on both the commercial and retail sides our business. To this point in July, the steady sales trend we've been on has continued, and with the extremely high temperatures we've seen the past few weeks across much of the country, we've seen very good seasonal demand. However, with fuel prices approximately 35% higher than they were this time last year, miles driven down 1 percentage point for the year through May and unemployment hovering around 9%, we're inclined to be somewhat conservative in our comparable store sales forecast for the third quarter, especially when considering that we're comparing to the 11.1% comp store sales gain we generated last year. With this in mind, we're forecasting comp store sales for the third quarter in the 2% to 4% range, which is the midpoint what put us around a 14% increase on a 2-year staff basis.

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