O'Reilly Auto Parts 2006 Annual Report Download - page 21

o’reilly automotive 2006 annual report
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includes various assumptions, including the expected life of stock options, the expected volatility and the expected risk-free interest rate. These assumptions
reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company.
If the Company uses different assumptions for future grants, share-based compensation cost could be materially impacted in future periods. Also, under
SFAS No. 123R, the Company is required to record share-based compensation expense net of estimated forfeitures. The Company’s forfeiture rate assumption
used in determining its share-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from those estimates.
results of operations
The following table sets forth, certain income statement data as a percentage of sales for the years indicated:
years ended december 31, 2006 2005 2004
Sales 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse and
distribution expenses 55.9 56.4 56.8
Gross profit 44.1 43.6 43.2
Operating, selling, general and administrative expenses 31.7 31.3 32.1
Operating income 12.4 12.3 11.1
Other expense, net -(0.1) (0.2)
Income before income taxes and cumulative
effect of accounting change 12.4 12.2 10.9
Provision for income taxes 4.6 4.2 4.1
Income before cumulative effect of accounting change 7.8 8.0 6.8
Cumulative effect of accounting change, net of tax -- 1.3
Net income 7.8% 8.0% 8.1%
See Management’s Discussion and Analysis of Financial Condition and Results of Operations, 2005 Compared to 2004, for detailed information on
cumulative effect of accounting change.
2006 compared to 2005
Sales increased $237.9 million, or 11.6%, from $2.05 billion in 2005 to $2.28 billion in 2006, primarily due to 170 net additional stores opened
during 2006, a full year of sales for stores opened throughout 2005 and a 3.3% increase in same-store sales for stores open at least one year. We believe
that the increased sales achieved by our 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 for all store team members that provide incentives for performance. Also, our continued focus
on serving professional installers contributed to increased sales. The same-store sales increase in 2006 of 3.3% was below the prior year increase of
7.5% and our historical results. The decrease from the prior year is the result of extremely strong same-store sales in 2005 (higher than historical rates)
and external macroeconomic factors in 2006. The external macroeconomic factors which we believe negatively impacted our sales were constraints on
our customer's discretionary income as a result of increased interest rates and higher energy costs combined with a reduction in the miles driven due
to higher gas prices during the key summer selling season.
Gross profit increased $114.2 million, or 12.8%, from $892.5 million (43.6% of sales) in 2005 to $1.01 billion (44.1% of sales) in 2006, due to the
increase in sales. The increase in gross profit as a percent of sales is the result of improvements in product mix and product acquisition cost.
OSG&A increased $84.4 million, or 13.2%, from $640.0 million (31.3% of sales) in 2005 to $724.4 million (31.7% of sales) in 2006. 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 increase in OSG&A as a percentage of sales was the result of increased advertising and energy costs.
Other expense, net, decreased by $1.4 million from $1.5 million in 2005 to $0.1 million in 2006. The decrease was primarily due to decreased interest
expense on long-term debt resulting from a reduction in the interest rate on long-term debt.
Provision for income taxes increased from $86.8 million in 2005 (34.6% effective tax rate) to $104.2 million in 2006 (36.9% effective tax rate).
The increase in the dollar amount was primarily due to the increase of income before income taxes. The increase in the effective tax rate in 2006 is
primarily attributable to a non-cash adjustment of $6.1 million in the third quarter of 2005 resulting from the favorable resolution of prior year tax
uncertainties. This tax benefit was nonrecurring and reflected the reversal of previously recorded income tax reserves related to a prior acquisition.
As a result of the impacts discussed above, net income increased $13.8 million from $164.3 million in 2005 (8.0% of sales) to $178.1 million in 2006
(7.8% of sales).
management’s discussion and analysis
of financial condition and results of operations (continued)