O'Reilly Auto Parts 2003 Annual Report Download - page 30

management’s discussion and analysis
of financial condition and results of operations
page 28
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 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 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 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, worker’s compensation and other general liability 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, devaluation programs, 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.