O'Reilly Auto Parts 2005 Annual Report Download - page 30

O’REILLY AUTOMOTIVE 2005 ANNUAL REPORT
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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, continued improvement in the merchandising and store layouts of most stores, and
compensation programs in place 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 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 the change in inventory 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 as well as the change in inventory accounting method.
OSG&A increased $79.6 million, or 16.8%, 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 due 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 as well as corrections of errors related to lease accounting totaling $10.4 million (see Note 1 to the
Company’s consolidated financial statements.) The increase in OSG&A as a percentage of sales was primarily attributable to increased costs for
team member health insurance coverage and the lease accounting correction discussed above.
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.
As a result of the impacts discussed above, income before the cumulative effect of the inventory accounting change increased $17.6 million or
17.6% from $100.1 million (6.6% of product sales) in 2003 to $117.7 million (6.8% of product sales) in 2004. Net income in 2004, after the cumulative
affect of the accounting change, was $139.6 million (8.1% of product sales.)
liquidity and capital resources
Net cash provided by operating activities was $213.3 million in 2005, $226.5 million in 2004 and $168.8 million in 2003. The decrease in cash provided
by operating activities in 2005 compared to 2004 was primarily due to a smaller increase in accounts payable of $43.2 million in 2005 compared to
the significant increase in 2004 of $94.6 million. The increase in accounts payable in 2005 and 2004 was primarily due to management’s continued
efforts with vendors to extend the terms of payments. The effect on operating cash flows of the 2005 decrease in accounts payable growth was partially
offset by the effect of the 2005 increase in net income.
The increase in cash provided by operating activities in 2004 compared to 2003 was primarily due to increases in net income and accounts payable,
partially offset by increases in receivables and inventory. The increases in accounts receivable and inventory primarily relate to the increased level of
our operations.
Net cash used in investing activities was $269.1 million in 2005, $172.0 million in 2004 and $130.6 million in 2003. The increase in cash used in investing
activities in 2005 and 2004 was primarily due to increased purchases of property and equipment and the acquisition in 2005 of Midwest Auto Parts
Distributors, Inc. (“Midwest”), which included 72 stores and distribution centers in St. Paul, Minnesota and Billings, Montana.
Capital expenditures were $205.2 million in 2005, $173.5 million in 2004 and $136.5 million in 2003. These expenditures were primarily related to
the opening of new stores, as well as the relocation or remodeling of existing stores. We either opened or acquired 221, 140 and 128 net stores in 2005,
2004 and 2003, respectively, including the 72 stores acquired with the acquisition of Midwest in 2005. We remodeled or relocated 37 stores in 2005,
remodeled or relocated 30 stores and remodeled one distribution center in 2004 and remodeled or relocated 46 stores and two distribution centers
in 2003. In 2004, we acquired one new distribution center near Atlanta, Georgia. We acquired an additional facility near Indianapolis, Indiana in
2005 for the opening of a distribution center in 2006. One new distribution center was acquired in 2003, located near Mobile, Alabama.
Our continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements. Our
2006 growth plans call for approximately 170-175 new stores and capital expenditures of $210 million to $220 million. The costs associated with the
opening of a new store (including the cost of land acquisition, improvements, fixtures, inventory and computer equipment) are estimated to average
approximately $900,000 to $1.1 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site.