O'Reilly Auto Parts 2008 Annual Report Download - page 25

O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT PG.23
MAN AGEMENT ’S DISCUS SION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PRODUCT QUALITY DIFFERENTIATION – We provide our customers with an assortment of products that are dierentiated by quality and price for
most of the product lines we oer. For many of our product oerings, this quality dierentiation reects “good”, “better”, and “best” alternatives. Our
sales and total gross margin dollars are highest for the “best” quality category of products. Consumers’ willingness to select products at a higher point
on the value spectrum is a driver of sales and protability in our industry. We believe that the average consumer’s tendency has been to “trade-down”
to lower quality products during the recent challenging economic conditions. We have ongoing initiatives targeted to marketing higher quality
products to our customers and expect our customers to be more willing to return to purchasing up on the value spectrum in the future.
RECENT DEVELOPMENTS
On July 11, 2008, we completed the acquisition of CSK, one of the largest specialty retailers of auto parts and accessories in the Western United
States and one of the largest such retailers in the United States, based on store count. Pursuant to the merger agreement, each share of CSK
common stock outstanding immediately prior to the merger was canceled and converted into the right to receive 0.4285 of a share of O’Reilly
common stock and $1.00 in cash. To fund the transaction, we entered into a Credit Agreement for a $1.2 billion asset-based revolving credit
facility arranged by Bank of America, N.A., which we used to renance debt, fund the cash portion of the acquisition, pay for other transaction-
related expenses and provide liquidity for our combined Company going forward. e results of CSK’s operations have been included in our
consolidated nancial statements since the acquisition date.
At the date of the acquisition, CSK had 1,342 stores in 22 states, operating under four brand names: Checker Auto Parts, Schuck’s Auto Supply,
Kragen Auto Parts and Murray’s Discount Auto Parts. is added stores in twelve new states: Alaska, Arizona, California, Colorado, Hawaii,
Idaho, Michigan, Nevada, New Mexico, Oregon, Utah and Washington, and a number of new markets in states where O’Reilly had a presence
prior to the acquisition. As of December 31, 2008, we had converted 51 CSK stores to O’Reilly brands, merged 35 CSK stores with existing
O’Reilly locations, closed six CSK stores and opened four new CSK stores.
RESULTS OF OPE R AT IONS
e following table sets forth, certain income statement data as a percentage of sales for the years indicated:
Years ended December 31, 2008 2007 2006
Sales 100% 100% 100%
Cost of goods sold, including warehouse and distribution expenses 54.5 55.6 55.9
Gross prot 45.5 44.4 44.1
Selling, general and administrative expenses 36.1 32.3 31.7
Operating income 9.4 12.1 12.4
Debt prepayment costs (0.2) -- --
Interim facility commitment fee (0.1) -- --
Interest expense (0.7) (0.1) (0.2)
Interest income 0.1 0.1 0.1
Other income, net -- 0.1 0.1
Income before income taxes 8.5 12.2 12.4
Provision for income taxes 3.3 4.5 4.6
Net income 5.2% 7.7% 7.8%