O'Reilly Auto Parts 2008 Annual Report Download - page 27

O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT PG.25
MAN AGEMENT ’S DISCUS SION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
have higher gross margin percentages) and because of market conditions, primarily overall price levels, that are specic to the markets in which
the acquired stores are located. Product acquisition costs improved due to increased production by our suppliers in lower-cost foreign countries
and improved negotiating leverage with our vendors as a result of our signicant growth. Improvements in our distribution system were the
result of capital projects designed to create operating expense eciencies. We anticipate these trends to continue at a moderate rate in 2009,
with more signicant improvements resulting from continued product acquisition cost reductions relating to the CSK acquisition.
SG&A increased $477 million, or 59%, from $815.3 million (32.3% of sales) in 2007 to $1.29 billion (36.1% of sales) in 2008. e dollar increase
in SG&A expenses resulted primarily from the acquisition of CSK and from additional team members and resources to support our increased
store count. e increase in SG&A expenses as a percentage of sales was primarily due to the addition of the CSK store base which has a higher
expense structure than the core O’Reilly store base, a one-time charge of $9.6 million to align CSK’s vacation policy with the Company’s policy,
$5.3 million of non-cash amortization of CSK trade names and trade marks and partial de-leverage of xed SG&A expenses on low comparable
store sales increases.
Interest expense increased $22 million, from $4 million (or 0.1% of sales) in 2007 to $26 million (or 0.7% of sales) in 2008. e increase in
interest expense is the result of borrowings under our new asset-based revolving credit facility that were used to fund the CSK acquisition as
well as amortization of a portion of the debt issuance costs. Other one-time charges were incurred in 2008 of $4.2 million for interim nancing
facility commitment fees related to the CSK acquisition and $7.2 million of debt prepayment costs resulting from the payo of our existing
senior notes and synthetic lease facility.
Our provision for income taxes increased from $114 million in 2007 (36.9% eective tax rate) to $116 million in 2008 (38.4% eective tax rate). e
increase in eective tax rate is the result of our acquisition of CSK and the generally higher eective tax rates in most states where the acquired CSK
stores are located. e increase is also attributable to a one-time charge to adjust tax liabilities in the amount $3.1 million relating to the acquisition.
As a result of the impacts discussed above, net income decreased $7.8 million from $194.0 million in 2007 (7.7% of sales) to $186.2 million in
2008 (5.2% of sales). Diluted earnings per share decreased $0.19 per share in 2008 to $1.48 per share on 125.4 million diluted shares outstanding
from $1.67 per share in 2007 on 116.1 million diluted shares outstanding. e increase in dilutive shares outstanding is principally the result of
shares exchanged in the acquisition of CSK.
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, oering a broader selection of products in most stores,
an increased promotional and advertising eort 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. e 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. e decrease from historical trends is the result of challenging external macroeconomic
factors in 2006 and 2007. e 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 at 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.
December 31, 2007 compared to the same period in 2006
(In millions) Increase in Sales For the Year Ended
O’Reilly stores:
Comparable store sales $ 82.6
Stores opened throughout 2006, excluding stores open
at least one year that are included in comparable store sales 83.5
Sales of stores opened in 2007 72.5
Non-store sales including machinery, sales to independent parts
stores and team members 0.5
Total increase in sales $ 239.1