O'Reilly Auto Parts 2010 Annual Report Download - page 16

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Forward Looking Information
We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. You can identify these statements by forward-looking words such as “expect,” “believe,” “anticipate,” “should,”
“plan,” “intend,” “estimate,” “project,” “will” or similar words. In addition, statements contained within this annual report that are not
historical facts are forward-looking statements, such as statements discussing among other things, expected growth, store
development, CSK Auto Corporation (“CSK”) Department of Justice (“DOJ”) investigation resolution, integration and expansion
strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates,
projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks,
uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in
general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated
with the integration of acquired businesses including the acquisition and integration of CSK, weather, terrorist activities, war and the
threat of war. Actual results may materially differ from anticipated results described or implied in these forward-looking statements.
Please refer to the “Risk Factors” section of this annual report on Form 10-K for the year ended December 31, 2010, for additional
factors that could materially affect our financial performance.
PART I
Item 1. Business
Introduction
O'Reilly Automotive, Inc. and its subsidiaries, collectively “we”, “O’Reilly” or the “Company”, is one of the largest specialty retailers
of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-
yourself (“DIY”) customers and professional service providers. O’Reilly Automotive, Inc. was incorporated in 1957 as a corporation
and was founded by Charles F. O'Reilly and his son, Charles H. ''Chub'' O'Reilly, Sr. and initially operated from a single store in
Springfield, Missouri. The Company’s common stock has traded on The NASDAQ Global Select Market under the symbol “ORLY”
since April 22, 1993.
On December 29, 2010, we completed a corporate reorganization creating a holding company structure (the “Reorganization”). The
Reorganization was implemented through an agreement and plan of merger under Section 351.448 of The General Corporation Law of
the State of Missouri, which did not require a vote of the shareholders. As a result of the Reorganization, the previous parent company
and registrant, O’Reilly Automotive, Inc., was renamed O’Reilly Automotive Stores, Inc. (“Old O’Reilly”) and is now a wholly
owned subsidiary of the new parent company and registrant, which was renamed O’Reilly Automotive, Inc. In the Reorganization,
each issued and outstanding share of common stock of Old O’Reilly was converted into a share of common stock of the Company,
with the same designations, rights, qualifications, powers, preferences, qualifications, limitations and restrictions, and without any
action being required on the part of holders of shares of Old O’Reilly common stock or any exchange of stock certificates. Shares of
the Company’s common stock were substituted for the shares of common stock of Old O’Reilly listed on The NASDAQ Global Select
Market and continue to trade under the same “ORLY” symbol but with a new CUSIP Number (67103H 107).
At December 31, 2010, we operated 3,570 stores in 38 states. Our stores carry an extensive product line, including the products
bulleted below:
•new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components,
batteries, belts, hoses, chassis parts and engine parts;
•maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products; and
•accessories, such as floor mats, seat covers and truck accessories.
Many of our stores offer enhanced services and programs to our customers, including those bulleted below:
•used oil and battery recycling
•battery diagnostic testing
•electrical and module testing
•loaner tool program
•drum and rotor resurfacing
•custom hydraulic hoses
•professional paint shop mixing and related materials
•machine shops
On July 11, 2008, the Company completed the acquisition of CSK Auto Corporation (“CSK”), which was 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 at the date of acquisition.
To fund the transaction, we entered into a Credit Agreement (“ABL Credit Agreement”) on the
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acquisition date for a $1.2 billion asset-based revolving credit facility (the “Credit Facility”) arranged by Bank of America, N.A.
(“BA”), which we used to refinance debt, fund the cash portion of the acquisition, pay for other transaction-related expenses and
provide liquidity for the combined company going forward. The results of CSK’s operations have been included in our consolidated
financial 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. This acquisition 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. The integration of CSK has focused on the implementation
of our dual market strategy, the ability to effectively serve both DIY customers and professional service providers, which required
conversion of store and distribution information systems, enhancements to the distribution infrastructure, inventory offerings and the
infusion of the O’Reilly culture into the acquired CSK stores. Conversion of all CSK stores to the O’Reilly systems began in October
of 2008 and concluded in November of 2010. Store décor and graphic package changeovers will be completed in all CSK stores by the
end of the second quarter of 2011. In order to implement our proven dual market strategy throughout the CSK store network, we
added distribution centers (“DC”) in Seattle, Washington, in November of 2009; Moreno Valley, California, in January of 2010;
Denver, Colorado, in March of 2010; and Salt Lake City, Utah, in May of 2010. We also relocated an existing CSK DC in Dixon,
California, to a larger DC in Stockton, California, and converted two existing CSK DCs, one in Detroit, Michigan, and one in Phoenix,
Arizona, to the O’Reilly systems. As of December 31, 2010, we had converted all CSK stores to O’Reilly systems, merged 41 CSK
stores with existing O’Reilly locations, closed 17 CSK stores and opened five new stores in CSK historical markets.
See "Risk Factors" beginning on page 15 for a description of certain risks relevant to our business. These risk factors include, among
others, risks related to our growth strategy, the integration of CSK, increased debt levels, our acquisition strategies, competition in the
automotive aftermarket business, our dependence upon key and other personnel, future growth assurance, our sensitivity to regional
economic and weather conditions, legal proceedings and related matters arising from CSK, the effect of sales of shares of our common
stock eligible for future sale, unanticipated fluctuations in our quarterly results, the volatility of the market price of our common stock,
our relationships with key vendors and availability of key products, complications in our DCs, deteriorating economic conditions,
downgrade in credit rating and environmental legislation and regulations.
Our Business
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our
growth strategy. We remain confident in our ability to continue to gain market share in our existing markets and grow our business in
new markets by focusing on our dual market strategy and core O’Reilly values of customer service and expense control. Our intent is
to be the dominant auto parts provider in all the markets we serve by providing superior customer service and significant value to both
professional service providers and DIY customers.
Competitive Advantages
Proven Ability to Execute a Dual Market Strategy - We have an established track record of effectively serving, at a high level, both
DIY customers and professional service providers. We believe our ability to execute a dual market strategy is a competitive
advantage. The execution of this strategy enables us to better compete by targeting a larger base of consumers of automotive
aftermarket parts, by capitalizing on our existing retail and distribution infrastructure, by operating profitably in both large markets
and less densely populated geographic areas that typically attract fewer competitors, as well as by enhancing service levels offered to
DIY customers through the offering of a broad inventory and the extensive product knowledge required by professional service
providers.
We have been committed to our dual market strategy for over 30 years. In 2010, we derived approximately 62% of our sales from our
DIY customers and approximately 38% of our sales from our professional service provider customers. We have historically derived
approximately 50% of our sales from both our DIY and professional service provider customers, and as we continue to grow our
commercial business in the acquired CSK stores, we would expect our DIY and professional service provider sales mix to
approximate historical averages. As a result of our historical success of executing our dual market strategy and our over 450 full-time
sales staff dedicated solely to calling upon and servicing the professional service provider, we believe we will continue to increase our
sales to professional service providers and will continue to have a competitive advantage over our retail competitors who derive a high
concentration of their sales from the DIY market. We have a tremendous opportunity to build on the strong retail base at the acquired
CSK stores by growing the commercial business through the implementation of our dual market strategy and capitalizing on our other
competitive advantages.
FORM 10-K