O'Reilly Auto Parts 2001 Annual Report Download - page 17

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The following discussion of our financial condition, results of
operations and liquidity, and capital resources should be read in
conjunction with our consolidated 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 remanufactured automotive
hard parts, maintenance items and accessories, and a complete
line of autobody paint and related materials, automotive tools and
professional service equipment.
Beginning in January 2000, we calculate same-store product
sales based on the change in product sales for stores open at least
one year. We also calculate 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 both same-store product sales methods based on store sales
results, which exclude sales of specialty machinery, sales by outside
salesmen and sales to employees.
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 store payroll, store occupancy, advertising
expenses, other store expenses, and general and administrative
expenses, including salaries and related benefits of corporate
team members, administrative office occupancy expenses, data
processing, professional expenses and other related expenses.
CRITICAL ACCOUNTING POLICIES
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 estimates of
shortages that are adjusted upon physical inventory counts in
subsequent periods 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 –
Operating, selling, general and administrative expense includes
estimates for worker’s compensation and other general liability
obligations, which are partially based on estimates of certain claim
costs and historical experience.
• Credit Operations – Allowance for doubtful accounts is estimated
based on historical loss ratios and consistently have been within
management’s expectations.
• Revenue – We recognize sales upon shipment of the products.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS