O'Reilly Auto Parts 2004 Annual Report Download - page 30

28 O’REILLY AUTOMOTIVE
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
2004 COMPARED TO 2003
Product sales increased $209.4 million, or 13.9% from $1.51 billion in 2003 to $1.72 billion in 2004, primarily due to 140 net additional stores
opened during 2004, and a 6.8% 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 16.4% from $638.3 million (42.2% of product sales) in 2003 to $743.2 million (43.2% of product sales) in 2004. Gross profit
dollars rose $100.4 million due to the increase in product sales and $4.4 million due to a change in accounting method. 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 $79.6 million from $473.1 million (31.3% of product sales) in 2003 to $552.7 million (32.1% of product sales) in 2004. 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.
Corrections of errors related to lease accounting represented $10.4 million ($3.5 million related to 2004) of the increase. Rent expense increased $4.4
million ($0.9 million related to 2004), as a result of corrections in the Company’s method of calculating straight-line rent expense. Depreciation
increased $6.0 million ($2.6 million related to 2004), as a result of corrections in the Company’s method of calculating amortization of leasehold
improvements. The Company’s policy is to amortize leasehold improvements over the lesser of the lease term or the estimated economic life of those
assets. Generally, for stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain
renewal option periods for which renewal is reasonably assured and failure to exercise the renewal option would result in an economic penalty. The
calculation for straight-line rent expense is based on the same lease term. Previously, leasehold improvements were amortized over a period of time
which included both the base lease term and the first renewal option period of the lease and rent expense was recorded as paid.
Other expense, net, decreased by $2.5 million from $5.2 million in 2003 to $2.7 million in 2004. The decrease was primarily due to a reduction in
interest expense as a result of lower average borrowings under our credit facility.
Provision for income taxes increased from $60.0 million in 2003 (37.5% effective tax rate) to $70.1 million in 2004 (37.3% effective tax rate). The
increase in the dollar amount was primarily due to the increase of income before income taxes.
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 inventoried 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.
Net income in 2004 was $139.6 million (8.1% of product sales), an increase of $39.5 million or 39.4%, from net income in 2003 of $100.1 million
(6.6% of product sales).
2003 COMPARED TO 2002
Product sales increased $199.3 million, or 15.2% from $1.31 billion in 2002 to $1.51 billion in 2003, primarily due to 128 net additional stores
opened during 2003, and a 7.8% 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 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.
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 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.