O'Reilly Auto Parts 2008 Annual Report Download - page 28

PG.26 O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT
MAN AGEMENT ’S DISCUS SION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross prot 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. e increase in gross prot as a
percent of sales is the result of improvements in product mix, lower product acquisition cost and distribution system eciencies. Improvements
in product mix were the result of strategies which dierentiated 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 eciencies. 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. e increase in
these expenses was primarily attributable to increased salaries and benets, rent and other costs associated with the addition of employees and
facilities to support the increased level of our operations. e 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. e 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% eective tax rate) to $113.5 million in 2007 (36.9% eective tax rate).
e 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). Diluted earnings per share increased $0.12 per share in 2007 to $1.67 per share on 116.1 million diluted shares outstanding
from $1.55 per share in 2006 on 115.1 million diluted shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $298.5 million in 2008, $299.4 million in 2007 and $185.9 million in 2006. Net cash provided
by operating activities in 2008 was consistent with the cash provided by operating activities in 2007 principally because an increase in net
inventory investment in 2008 was oset by an increase in operating income adjusted for non-cash depreciation and amortization expenses, and
a one-time non-cash charge of $9.6 million to align, where possible, CSK’s vacation policy with the Company’s policy. Net inventory investment
reects our investment in inventory net of the amount of accounts payable to vendors. e increase in net inventory investment in 2008 was
the result of investments made to improve the inventory availability in the stores acquired in the acquisition of CSK. e average per-store
inventory for core O’Reilly stores increased to $489,000 as of December 31, 2008, from $482,000 as of December 31, 2007. CSK store’s average
per-store inventory increased from $417,000 at the date of acquisition, to $461,000 as of December 31, 2008.
e increase in net cash provided by operating activities in 2007 was due to increased net income and a reduction in net inventory investment.
e reduction in net inventory investment is the result of reductions in our per-store inventory levels and our ongoing eort to extend terms
with our vendors. Reductions in our per-store inventory levels are driven by our continued optimization of inventory selection at our stores and
our ability to eciently deploy inventory throughout our distribution network.
Net cash used in investing activities was $367.6 million in 2008, $300.3 million in 2007 and $225.2 million in 2006. e increase in cash used in
investing activities in 2008 was principally due to an increase in capital expenditures and payments made in association with the acquisition of
CSK. Capital expenditures were $341.7 million in 2008, $282.7 million in 2007 and $228.9 million in 2006. e increase in capital expenditures
in 2008 was the result of the July 11, 2008 purchase of properties previously leased under our synthetic lease facility in conjunction with
the nancing of the acquisition of CSK, the addition of a distribution center facility in Lubbock, Texas, cash paid in the construction of a
distribution center in Greensboro, North Carolina planned to open in 2009 and capital investments made in the initial stage of our integration
of the operations of CSK. e 2008 increase in capital expenditures from these items was partially oset by decreased capital expenditures for
new store construction. We opened 150, 190 and 170 net stores in 2008, 2007 and 2006, respectively. e increase in cash used in investing
activities in 2007 compared to 2006 was due to increases in capital expenditures resulting from our increased number of new stores, store
relocations, enhancements in existing store technology and the purchase of $21.7 million of CSK shares. ese expenditures were primarily
related to the opening of new stores and distribution centers, as well as the relocation or remodeling of existing stores.