O'Reilly Auto Parts 2005 Annual Report Download - page 29

results of operations
The following table sets forth, certain income statement data as a percentage of product sales for the years indicated:
years ended december 31, 2005 2004 2003
Product sales 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse and
distribution expenses 56.4 56.8 57.8
Gross profit 43.6 43.2 42.2
Operating, selling, general and administrative expenses 31.3 32.1 31.3
Operating income 12.3 11.1 10.9
Other expense, net (0.1) (0.2) (0.3)
Income before income taxes and cumulative
effect of accounting change 12.2 10.9 10.6
Provision for income taxes 4.2 4.1 4.0
Income before cumulative effect of accounting change 8.0 6.8 6.6
Cumulative effect of accounting change, net of tax -1.3 -
Net income 8.0% 8.1% 6.6%
See Management’s Discussion and Analysis of Financial Condition and Results of Operations, 2005 Compared to 2004, for detailed information on
cumulative effect of accounting change.
2005 compared to 2004
Product sales increased $324.1 million, or 18.8% from $1.72 billion in 2004 to $2.05 billion in 2005, primarily due to 221 net additional stores opened
during 2005, and a 7.5% increase in same-store product sales for stores open at least one year. We believe that the increased product sales achieved
by the existing stores are the result of our offering of a broader selection of products in most stores, an increased promotional and advertising effort
through a variety of media and localized promotional events, continued improvement in the merchandising and store layouts of most stores, and
compensation programs for all store team members that provide incentives for performance. Also, our continued focus on serving professional
installers contributed to increased product sales.
Gross profit increased $149.3 million, or 20.1% from $743.2 million (43.2% of product sales) in 2004 to $892.5 million (43.6% of product sales) in 2005,
due to the increase in product sales. The increase in gross profit as a percent of product sales is related to improvements in our distribution cost and
improved product margin related to product acquisition cost.
OSG&A increased $87.3 million, or 15.8%, from $552.7 million (32.1% of product sales) in 2004 to $640.0 million (31.3% of product sales) in 2005.
The increase in these expenses was primarily attributable to increased salaries and benefits, rent and other costs associated with the addition of
employees and facilities to support the increased level of our operations. The decrease in OSG&A as a percentage of sales was the result of ongoing
expense management efforts and benefits from increased economies of scale resulting from our sales growth.
Other expense, net, decreased by $1.3 million from $2.7 million in 2004 to $1.5 million in 2005. The decrease was primarily due to increased interest
income as a result of higher average interest rates earned on comparable average cash and cash equivalent balances.
Provision for income taxes increased from $70.1 million in 2004 (37.3% effective tax rate) to $86.8 million in 2005 (34.6% effective tax rate). The increase
in the dollar amount was primarily due to the increase of income before income taxes. The decrease in the effective tax rate in 2005 is primarily attributable
to a non-cash adjustment of $6.1 million in the third quarter resulting from the favorable resolution of prior year tax uncertainties. This tax benefit is
nonrecurring and reflects the reversal of previously recorded income tax reserves related to a prior acquisition.
The cumulative change in accounting method, effective January 1, 2004, changed the method of applying our LIFO accounting policy for certain
inventory costs. Under the new method, we inventory certain procurement, warehousing and distribution center costs. The previous method was to
recognize those costs as incurred, reported as a component of costs of goods sold. We believe the new method is preferable, since it better matches
revenues and expenses and is the prevalent method used by other entities within the automotive aftermarket industry.
As a result of the impacts discussed above, income before the cumulative effect of the accounting change increased $46.6 million from $117.7 million in
2004 (6.8% of product sales) to $164.3 million in 2005 (8.0% of product sales). Net income in 2004, after the cumulative effect of the accounting change,
was $139.6 million (8.1% of product sales).
O’REILLY AUTOMOTIVE 2005 ANNUAL REPORT
27
management’s discussion and analysis
of financial condition and results of operations (continued)