O'Reilly Auto Parts 2003 Annual Report Download - page 32

management’s discussion and analysis
of financial condition and results of operations (continued)
page 30
Gross profit increased 15.4% from $553.4 million (42.2% of product sales) in 2002 to $638.3 million (42.2% of product sales) in
2003. The increase in gross profit dollars is due to the increase in product sales.
Operating, selling, general and administrative expenses (OSG&A) increased $58.0 million from $415.1 million (31.6% of product sales) in
2002 to $473.1 million (31.3% of product sales) in 2003. The increase in these expenses in dollar amount 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 expenses as a percent of product sales was primarily due to achieving greater economies
of scale resulting from increased product sales and through management’s expense control initiatives.
Other expense, net, decreased by $2.1 million from $7.3 million in 2002 to $5.2 million in 2003. The decrease was primarily due to
a reduction in interest expense as a result of lower average borrowings under the Company’s credit facility and to a lesser extent lower
average interest rates.
Provision for income taxes increased from $49.0 million in 2002 (37.4% effective tax rate) to $60.0 million in 2003 (37.5% effective
tax rate). The increase in the dollar amount was primarily due to the increase of income before income taxes.
Principally as a result of the foregoing, net income in 2003 was $100.1 million (6.6% of product sales), an increase of $18.1 million or
22.1%, from net income in 2002 of $82.0 million (6.3% of product sales).
2002 compared to 2001
Product sales increased $220.4 million, or 20.2% from $1.09 billion in 2001 to $1.31 billion in 2002, due to 106 net additional
stores opened during 2002, and a 3.7% 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, and continued improvement
in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to
increased product sales.
Gross profit increased 18.3% from $467.8 million (42.8% of product sales) in 2001 to $553.4 million (42.2% of product sales) in
2002. The increase in gross profit dollars is primarily due to increases in sales. The decrease in gross profit as a percent of product
sales is primarily due to increased product sales to independent jobbers, which are at a lower gross margin, and increased distribution
costs at the distribution centers acquired from Mid-State Automotive Distributors, Inc.
Operating, selling, general and administrative expenses increased $61.1 million from $354.0 million (32.4% of product sales) in
2001 to $415.1 million (31.6% of product sales) in 2002. The increase in these expenses in dollar amount 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 expenses as a percent of product sales was primarily due to reductions in payroll,
benefits and other OSG&A expenses through management’s expense control initiatives.
Other expense, net, increased by $215,000 from $7.1 million in 2001 to $7.3 million in 2002. The increase was primarily due to
interest expense on increased borrowings under our credit facility and a decrease in interest income.
Provision for income taxes increased from $40.4 million in 2001 (37.8% effective tax rate) to $49.0 million in 2002 (37.4% 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 rate was primarily due to changes in the mix of business between the states in which we operate.