O'Reilly Auto Parts 2008 Annual Report Download - page 4

cohesive management direction. Facing serious constraints
on access to capital, CSK began exploring strategic alternatives
in early 2008. Due to a complementary geographic
distribution of stores, it had long been speculated that we
would be a likely acquirer of CSK. While we had, at various
times, undertaken cursory discussions along those lines, it
was never a serious consideration given the high price that
would have been necessary to acquire CSK and their public
unwillingness to entertain overtures to be acquired. In light of
their financial condition and public announcement to explore
strategic alternatives, we saw a tremendous opportunity
inherent in CSK at a much more reasonable acquisition
price, and we became very active both inside and outside of
their strategic evaluation process. The difficulty in raising
capital in a historically bad credit market in 2008 presented
a major obstacle to any potential acquirer of CSK. Based
on the strength of our balance sheet and the merits of our
consistently strong historical operating results, we were able
to obtain debt commitments sufficient for us to acquire CSK
in an all-cash deal. With the financing commitments in hand,
we were able to effectively negotiate to acquire CSK. We
were then able to alter the structure of the transaction to an
exchange offer, which allowed us to maintain the financial
flexibility necessary for strategic investments in CSK’s
distribution infrastructure and inventory position.
The true opportunity at CSK is to maintain CSK’s strong
retail base and dramatically increase the commercial business
by successfully implementing our dual market strategy. To
realize the value potential at CSK, we will convert all of the
CSK stores to the O’Reilly brand and implement our dual
market strategy. At the time of the acquisition, only 10% of
CSK’s sales were to commercial installers as compared to 50%
at O’Reilly. To successfully implement our proven dual market
strategy, we will focus on distribution, inventory availability
and culture.
CSK operated a retail-focused distribution network with
four main distribution centers (DCs) servicing stores on a
weekly basis. We are closing one CSK DC that overlaps with
an existing O’Reilly DC, renovating the remaining three
CSK DCs, adding four new DCs and utilizing three existing
O’Reilly DCs to service the acquired CSK stores. This large
investment in distribution infrastructure will allow for nightly
deliveries to all stores and multiple daily store deliveries in the
seven metropolitan areas where the DCs are located.
Prior to the acquisition, the average CSK store stocked
18,000 SKUs. We will eliminate non-core automotive
merchandise and bring the SKU count up to the O’Reilly
average of 21,000 with a clear focus on hard parts.
MARKET FACTORS
The fundamental drivers in our industry
remain strong. During challenging economic
conditions, our customers are more willing
to maintain and repair their current vehicle
rather than purchase a new vehicle. This
increase in the average age of vehicles on
the road drives demand for our products.
249 MILLION
VEHICLE POPULATION
2.9 TRILLION
MILES DRIVEN
9.8 YEARS
AVERAGE AGE OF VEHICLE
ROAD TESTED. RESULTS DRIVEN.
PG.2 O’REILLY AUTOMOTIVE 2008 ANNUAL REPORT
MARKET
CONSOLIDATION
OPPORTUNITY
The largest suppliers in the automotive
aftermarket make up a relatively small
percentage of the overall market, even
after several years of steady consolidation.
We continue to opportunistically pursue
strategic acquisitions to take advantage
of further market consolidation.
AUTOZONE ................................... 12%
ADVANCED AUTO PARTS ..................... 9%
O’REILLY AUTO PARTS .................... 9%
GENERAL PARTS INC./CARQUEST ....... 5%
GENERAL PARTS/NAPA .............. 3%
REMAINING MARKET .............. 62%