O'Reilly Auto Parts 2007 Annual Report Download - page 22

20
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)
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, 2007 2006 2005
Sales 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse and
distribution expenses 55.6 55.9 56.4
Gross profit 44.4 44.1 43.6
Operating, selling, general and administrative expenses 32.3 31.7 31.3
Operating income 12.1 12.4 12.3
Other income/(expense), net 0.1 -- (0.1)
Income before income taxes and cumulative
effect of accounting change 12.2 12.4 12.2
Provision for income taxes 4.5 4.6 4.2
Net income 7.7% 7.8% 8.0%
2007 COMPARED TO 2006
Sales increased $239 million, or 10.5%, from $2.28 billion in 2006 to $2.52 billion in 2007, due to 190 net additional stores opened during 2007
which contributed $72.5 million to the sales increase, a full year of sales for stores opened throughout 2006 adding $83.5 million and a 3.7%
increase in same-store sales for stores open at least one year providing $82.6 million of the sales increase. We believe that the increased sales
achieved by our existing stores are the result of superior inventory availability, offering 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, compensation programs for all store team members that provide incentives for performance and our continued
focus on serving professional installers. The same store sales increase in 2007 of 3.7% was greater than the prior year’s increase of 3.3%, but
below our historical results. The decrease from historical trends is the result of challenging external macroeconomic factors in 2006 and 2007.
The external macroeconomic factors, which we believe negatively impacted our sales, were constraints on our customers’ discretionary income as
a result of increased interest rates and higher energy costs. Consumers also encountered higher gas prices which resulted in annual miles driven,
a key driver of demand for our products, remaining flat in comparison to the long term trend of annual increases. We anticipate that continued
store unit and sales growth consistent with our historical rates will continue in the future.
Gross profit increased $113.7 million, or 11.3%, from $1.01 billion (44.1% of sales) in 2006 to $1.12 billion (44.4% of sales) in 2007, primarily
due to the increase in sales resulting from a larger number of stores and increased sales levels at existing stores. The increase in gross profit as a
percent of sales is the result of improvements in product mix, lower product acquisition cost and distribution system efficiencies. Improvements
in product mix were the result of strategies which differentiated our merchandise selections at each store based on customer demand and vehicle
demographics in the store’s market and through ongoing Team Member training initiatives focused on selling products with greater gross margin
contribution. Product acquisition cost improved due to increased imports from lower cost providers in foreign countries as well as improved
negotiating leverage with our vendors resulting from our increased purchasing power. Improvements in our distribution system were the result of
capital projects designed to create operating expense efficiencies. We anticipate these trends to continue at a moderate rate throughout 2008.
SG&A increased $90.9 million, or 12.6%, from $724.4 million (31.7% of sales) in 2006 to $815.3 million (32.3% of sales) in 2007. 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 SG&A as a percentage of sales was the result of increased store salaries
primarily driven by the timing of new store openings, higher advertising costs, increased depreciation expense primarily driven by investment in
new store technology and increased stock compensation expense.
Other income, net, increased by $2.4 million from ($0.1) million in 2006 to $2.3 million in 2007. The increase was primarily due to decreased
interest expense on long-term debt resulting from a reduction in the interest rate on long-term debt as well as increased interest income derived
from a higher than average cash balance.
Provision for income taxes increased from $104.2 million in 2006 (36.9% effective tax rate) to $113.5 million in 2007 (36.9% effective tax rate).
The increase in the dollar amount was due to the increase of income before income taxes.
As a result of the impacts discussed above, net income increased $15.9 million from $178.1 million in 2006 (7.8% of sales) to $194.0 million in
2007 (7.7% of sales).