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O’Reilly: Rain, Delayed Tax Refunds Dampen First-Quarter Results

For O’Reilly Automotive, the first three months are the most volatile time period of the year, and the first quarter of 2019 was no exception.

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The auto parts business is especially sensitive to weather patterns. For O’Reilly Automotive, the first three months are the most volatile time period of the year, and the first quarter of 2019 was no exception.

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O’Reilly reported first-quarter sales of $2.41 billion, up 6% from $2.28 billion in first-quarter 2018, and diluted earnings per share of $4.05, up 12% from first-quarter 2018. However, Wall Street was hoping for bigger numbers, and that drove O’Reilly’s stock price lower after the results were announced.

“While we saw a fair amount of frigid, snowy weather that drove business during the quarter, and should help drive demand for the remainder of the year, we also experienced abnormally high levels of rain, which is not conducive to our business,” CEO Greg Johnson said in a news release. “Additionally, delays in tax refunds and a reduction of total refund dollars during the quarter were a headwind to our business.”

Another factor: The first quarter had an additional Sunday, which is the company’s slowest day of the week.

“As a result, our first-quarter comparable-store sales increase of 3.2% was at the bottom end of our guidance range due to the short-term impact of the headwinds we saw during the quarter,” said Greg Henslee, executive chairman of the board, during O’Reilly’s April 25 conference call with analysts.

Extreme temperatures – hot or cold – typically are good for business, Henslee explained, as “they drive demand and cause failure of rubber parts.” The freeze/thaw cycles that occur during cold spells tend to create potholes, which can damage chassis and steering parts.

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“But snow in and of itself is not good for our business unless it’s accompanied by incredibly cold weather that causes the freeze/thaw and bust-up of the roads,” Henslee added. “When it snows hard, schools close, people stay home and our DIY business on those days is soft. In some markets, we experienced some of that, along with the rain in February.”

Still, O’Reilly finished the quarter on an upbeat note in March, which was “easily our strongest month of the quarter, even with the extra-Sunday headwind,” Henslee noted. The company saw strong sales in cold-weather categories such as batteries and wipers as well as brakes, lighting and driveline products, according to Henslee.

At the time of the conference call, O’Reilly was continuing to see “a solid business trend to this point in April.”

“Given the delay in timing of tax refunds, and refund dollars down approximately 3%, it’s difficult to fully estimate the impact [of tax refunds] to our first-quarter results, but we are confident in the core underlying fundamentals that drive demand in our business moving forward,” Henslee said.

During the first three months of 2019, O’Reilly opened 62 new stores (factoring in store closures) across 27 states, according to the company, and purchased a 580,000-square-foot facility in Horn Lake, Mississippi, to serve as a new distribution center.

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“This facility will allow us to provide an even higher level of service to the Memphis-area markets, while also adding capacity for additional store growth throughout the central and southern regions of the country,” Johnson said. “Our industry-leading parts availability and highly trained and technically proficient team members are our greatest strengths, and we continue to be pleased with the opportunities to profitably grow and gain share in new and existing markets.”

Continuing a recent trend, O’Reilly’s professional and DIY businesses both were “positive contributors” to the company’s increase in comparable store sales, according to Henslee, and growth in sales to professional customers outpaced sales to DIYers.

“The impact of weather volatility during the quarter was most evident in DIY ticket counts,” Henslee added. “However, the demand on this side of the business was otherwise consistent with recent trends even as these customers feel the pinch of rising prices across the economy.”

For DIY and DIFM customers, average ticket prices continued to rise, “driven by the increasing complexity of vehicle repairs and a favorable overall business mix,” according to Henslee.

O’Reilly expects comparable store sales to grow 3% to 5% in the second quarter.

“As we look ahead to the second quarter and the remainder of 2019, our outlook on the strength of our industry and our opportunity to continue to gain market share by executing our business model of providing the best customer service in our industry has remained unchanged since we provided guidance at the beginning of the year,” Henslee said.

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