O'Reilly Auto Parts 2009 Annual Report Download - page 44

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30
stores open at least one year decreased 1.7% for the portion of those stores’ sales since the July 11, 2008 acquisition by O’Reilly as
compared to the same period in 2007 when CSK’s sales were not included in our consolidated financial statements. We anticipate that
continued store unit and sales growth consistent with our historical rates will continue in the future. We expect future sales growth as
the CSK stores are converted to the O’Reilly dual market strategy. Comparable store sales are calculated based on the change in sales
of stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to team members.
Gross profit increased $508 million, or 45%, from $1.12 billion (44.4% of sales) in 2007 to $1.63 billion (45.5% of sales) in 2008.
The increase in gross profit dollars was primarily the result of the increase in sales resulting from the acquisition of CSK, the increase
from new stores and increased sales levels at existing stores. The increase in gross profit as a percentage of sales is the result of
improved product mix, lower product acquisition cost and distribution system improvements. We improved our product mix by
continuing to implement strategies to differentiate 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. Additionally, gross margin percentage improved as a result of the inclusion of sales from stores acquired in
the acquisition of CSK. Gross margin percentages on the sales at these stores are higher than existing O’Reilly stores primarily
because a greater proportion of these sales are made to DIY customers (which typically have higher gross margin percentages) and
because of market conditions, primarily overall price levels, which are specific 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 significant growth. Improvements in our distribution system were the result of
capital projects designed to create operating expense efficiencies.
SG&A increased $477 million, or 59%, from $815 million (32.3% of sales) in 2007 to $1.29 billion (36.1% of sales) in 2008. The
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. The 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 trademarks and
partial de-leverage of fixed 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. The
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 financing facility commitment fees related to the CSK acquisition and $7.2 million of debt prepayment costs
resulting from the payoff of our existing senior notes and synthetic lease facility.
Our provision for income taxes increased from $114 million in 2007 (36.9% effective tax rate) to $116 million in 2008 (38.4%
effective tax rate). The increase in effective tax rate is the result of our acquisition of CSK and the generally higher effective tax rates
in most states where the acquired CSK stores are located. The 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 $8 million from $194 million in 2007 (7.7% of sales) to $186 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. The increase in dilutive shares
outstanding is principally the result of shares exchanged in the acquisition of CSK.