O'Reilly Auto Parts 2004 Annual Report Download - page 28

26 O’REILLY AUTOMOTIVE
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, results of operations and liquidity and capital resources should be read in conjunction with our consoli-
dated financial statements, related notes and other financial information included elsewhere in this annual report.
We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our
products to both do-it-yourself (DIY) customers and professional installers. Our stores carry an extensive product line consisting of new and remanu-
factured automotive hard parts, maintenance items and accessories, and a complete line of auto body paint and related materials, automotive tools and
professional service equipment.
We calculate same-store product sales based on the change in product sales for stores open at least one year. Prior to January 2000, we calculated
same-store product sales based on the change in product sales of only those stores open during both full periods being compared. We calculate the
percentage increase in same-store product sales based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and
sales to team members.
Cost of goods sold consists primarily of product costs and warehouse and distribution expenses. Cost of goods sold as a percentage of product sales may
be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs.
Operating, selling, general and administrative expenses consist primarily of salaries and benefits for store and corporate team members, occupancy,
advertising expenses, general and administrative expenses, data processing, professional expenses and other related expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend the business activities of our
company. To aid in that understanding, management has identified our “critical accounting policies.” These policies have the potential to have a more
significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they
require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
■Cost of goods sold – Cost of goods sold includes warehouse and distribution expenses and estimates of amounts due from vendors for certain
merchandise allowances and rebates. These estimates are consistent with historical experience.
■Operating, selling, general and administrative expense (OSG&A) – Operating, selling, general and administrative expense includes estimates for
medical, workers’ compensation and other general liability insurance obligations, which are partially based on estimates of certain claim costs and
historical experience.
■Accounts receivable – Allowance for doubtful accounts is estimated based on historical loss ratios and consistently has been within
management’s expectations.
■Revenue – Over-the-counter retail sales are recorded when the customer takes possession of merchandise. Sales to professional installers, also
referred to as “commercial sales”, are recorded upon delivery of merchandise to the customer, generally at the customer’s place of business.
Wholesale sales to other retailers, also referred to as “jobber sales” are recorded upon shipment of merchandise. All sales are recorded net of
estimated allowances and discounts.
■Vendor concessions – The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative
advertising, allowances for warranties and volume purchase rebates. Co-operative advertising allowances that are incremental to our advertising
program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in
which the advertising occurred. All other vendor concessions are recognized as a reduction of cost of sales when recognized in the consolidated
statement of income.