TOP CONTRIBUTORS

Michael Francis

ORLY AT A GLANCE

P/E ► 19.2 AVG EV/EBITDA ► 9.88 AVG ROA ► 7.5% AVG ROE ► 11.6% AVG Debt to Equity ► 0.801 AVG Current Ratio ► 1.79 AVG Interest Coverage Ratio ► 10.5 AVG

 

 

 

 

 

 

O’Reilly Automotive is a leading US retailer of automotive parts and accessories to do-it-yourself customers (DIY, 52% of sales) and is a leader of the do-it-for-me (DIFM, 48% of sales) automotive customer segment. Founded in 1957, the company operates 1,640 stores, the vast majority of which are in the United States. Like most companies in the DIY and DIFM segments, AAP targets demographic regions in which they estimate there to exist a large number of old vehicles, given these cars’ propensity for repairs and maintenance. However, unlike many of its competitors, the company has turned to opening and operating stores in regions less densely populated that, hence, attract fewer competitors. Using this expansion strategy, the company has increased store count at 10.8% annualized over the previous 5 years. The company has also achieved same-store sales growth around 3.3% during the same time period^[1]

Like other competitors, ORLY has been facing pressure in a consolidating auto parts manufacturer industry (related to the woes of the Big Three Auto Makers), which in turn decreases the pricing power it enjoys as one of the largest auto parts retailers in the U.S. Also, in the longer term, the company may see decreased demand in auto parts due to continually rising oil prices, which could decrease the mileage driven by American and thus decrease the demand for car repairs and maintenance.

Financials

Below are revenue and operating profit figures, as well as store metrics for ORLY. Top line growth has been 11.7% compounded over the previous 5 years. Additionally, the company has also been successful at increasing efficiency with modestly increasing sales per store and sales per square feet from 2002 to 2006; most growth has come from opening new stores.

Trends and Risks

• The automotive aftermarket for parts has steadily, albeit modestly, increasing demand. In the US, increases in the number and age of vehicles, number of miles driven annually, licensed drivers, and total number of light trucks (which generally require greater upkeep) provide for a relatively steady and growing automotive parts market.^[4] The market, however, is mature and unlikely to experience significantly higher rates of growth. Also, increases in the quality of cars may offset the need for secondary purchases of repair equipment and parts. Major players in the automotive industry may rely on growth by acquisition/consolidation going forward, perhaps rolling up the fragmented, independent companies in the industry.

• ORLY has succeeded in geographic areas where competitors have not. By tackling generally unattractive demographic regions with a dual DIFM/DIY strategy for greater market participation and a larger customer base, ORLY has built its business in 25 contiguous states in the Midwest, Southwest, and West. It has succeeded thus far in its dual-strategy approach, and because of it has built something of a local competitive advantage by being able to enter low-population demographic areas with reasonable scale.

• AAP auto part suppliers have been experiencing a wave of consolidation. Auto part manufacturers, which operate in a generally troubled industry, have been consolidating via mergers in recent years.^[5] A more concentrated vendor base for auto part retailers, then, limits the number of companies that the firm can purchase inventory from, and may provide suppliers with greater pricing power, putting pressure on ORLY’s margins. The largest five suppliers of ORLY represented 30% of inventory purchases, and the largest represented 13%.^[6]

• Oil Prices continue to rise. As oil prices continue to increase, drivers may begin to purchase newer, more fuel efficient vehicles, including hybrid and fuel cell vehicles and/or limit their driving mileage. Greater numbers of new car purchases and fewer drivers accumulating heavy mileage mean that consumer demand for repairs and new parts may be hampered, meaning less business for ORLY.

Competition and Market Share

The auto-part aftermarket retailer industry is a highly competitive and generally fragmented $118 billion/year market, with an estimated $35 billion represented by the DIY category, $75 billion by the DIFM category, and the rest represented elsewhere.^[7]. Companies compete on a mix of customer service, product selection, price, and location.

In the DIY segment, which comprises 52% of the company's revenue, ORLY competes with other major DIY (do-it-yourself) retailers, like Advance Auto Parts (AAP) , O'Reilly Automotive (ORLY) , CSK Auto (CAO), Pep Boys-Manny, Moe & Jack (PBY), and AutoNation (AN). In the DIFM segment (48% of revenue) it competes with Advance Auto Parts (AAP) as well as a highly fragmented base of small, single store mom-and-pop shops, repair destinations, full-service mechanics and other independent automotive destinations that sell parts or repair vehicles.

Auto Parts DIY Segment: Operating Metrics & Market Share

Below is a comparison of major operating metrics for the company’s DIY segment (52% of overall sales) as compared to other companies' DIY breakouts:

^[9]

^All sales and market share figures an estimate based on DIY business only

^^ORLY's estimated DIFM market share is <1%

Footnotes

1. ↑ ORLY 2006 Annual Report, pg 28
2. ↑ ORLY 2006 Annual Report, pg 7
3. ↑ ORLY 2006 Annual Report, pg 27
4. ↑ CSK Annual Report 2006, pg 9
5. ↑ AZO Annual Report, “Risk Factors,” pg 12
6. ↑ ORLY 2006 Annual Report, pg 6
7. ↑ 2006 Automotive Aftermarket Industry Association (AAIA) Report
8. ↑ Market Share calculated as Company Sales/Total Industry Segment Sales nationwide as provided by 2006 AAIA Report
9. ↑ Figures compiled from ORLY, AZO, AAP, CAO, and PBY 2006 Annual Reports