O'Reilly Auto Parts 2010 Annual Report Download - page 39

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RESULTS OF OPERATIONS
The following table sets forth certain income statement data as a percentage of sales for the years ended December 31, 2010, 2009 and
2008:
Years ended December 31,
2010 2009 2008
Sales 100.0 % 100.0 % 100.0 %
Cost of goods sold, including warehouse and distribution expenses 51.4 52.0 54.5
Gross profit 48.6 48.0 45.5
Selling, general and administrative expenses 35.0 36.9 36.1
Legacy CSK DOJ investigation charge 0.4 0.0 0.0
Operating income 13.2 11.1 9.4
Debt prepayment costs - - (0.2)
Interim facility commitment fee - - (0.1)
Interest expense (0.7) (0.9) (0.7)
Interest income - - 0.1
Gain on settlement of note receivable 0.2 - -
Other income, net 0.1 0.1 -
Income before income taxes 12.8 10.3 8.5
Provision for income taxes 5.0 4.0 3.3
Net income 7.8 % 6.3 % 5.2 %
2010 Compared to 2009
Sales:
Sales increased $550 million, or 11%, from $4.85 billion in 2009 to $5.4 billion in 2010. The following table presents the components
of the increase in sales for the year ended December 31, 2010 (in millions):
Increase in Sales for the Year
Ended December 31, 2010,
compared to the same period
in 2009
Comparable store sales $ 417
Stores opened throughout 2009, excluding stores open at
least one year that are included in comparable stores
sales 56
Sales of stores opened throughout 2010 74
Non-store sales including machinery, sales to independent
parts stores and team members 8
Sales in 2009 for stores that have closed (5)
Total increase in sales $ 550
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, sales to team members and sales during the one- to two-week period certain CSK
branded stores were closed for conversion. Comparable store sales increased 8.8% for the year ended December 31, 2010, versus
4.6% for the year ended December 31, 2009.
We believe that the increased sales achieved by our stores are the result of superior inventory availability, a broader selection of
products offered in most stores, a targeted promotional and advertising effort through a variety of media and localized promotional
events, continued improvement in the merchandising and store layouts of the stores, compensation programs for all store team
members that provide incentives for performance and our continued focus on serving professional service providers. The
improvement in comparable store sales for the year was driven both by increased transaction counts and higher average ticket values.
We believe that the increase in transaction counts is a result of the customer’s focus on better maintaining their current vehicles, the
stabilization of the economy and gas prices during the year and the growth of our commercial business in the acquired CSK markets.
The improvement in average ticket value is primarily the result of a larger percentage of our total sales derived from higher priced
hard parts categories.
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Store growth:
At December 31, 2010, we operated 3,570 stores compared to 3,421 stores at December 31, 2009. We anticipate new store unit
growth to increase to 170 net new stores in 2011 versus 149 net new stores in 2010.
Gross profit:
Gross profit increased $294 million, or 13%, from $2.33 billion (48.0% of sales) in 2009 to $2.62 billion (48.6% of sales) in 2010.
The increase in gross profit dollars was primarily a result of the increase in sales from new stores and the increase in comparable store
sales at existing stores. The increase in gross profit as a percentage of sales was the result of improved product mix, lower product
acquisition costs and decreased inventory shrinkage at converted CSK stores, partially offset by the impact of increased commercial
sales as a percent of the total sales mix and reduced leverage on the expanded number of distribution centers. The improvement in
product mix is primarily driven by increased sales in the hard part categories, which typically generate a higher gross margin
percentage than other categories. Increasing hard part sales are the result of strong consumer demand as consumers retain their
vehicles longer and our enhanced and more comprehensive inventory levels in the hard part categories in the CSK stores, supported by
a more extensive and robust distribution network. Lower product acquisition costs are derived from improved negotiating leverage
with our vendors as the result of large purchase volume increases associated with the acquisition of CSK. The benefit of this
improvement in gross margin was realized in the first and second quarter of 2010 as compared to the same periods in 2009 when we
renegotiated these vendor contracts. Our gross margin results for the third and fourth quarters of 2010 reflect comparable periods of
improved purchasing leverage. The decrease in inventory shrinkage at converted CSK stores is the result of the more robust O’Reilly
point of sale system (“POS”), which was installed in all CSK stores when they converted to the O’Reilly distribution systems. The
O’Reilly POS provides our store managers with better tools to track and control inventory resulting in improved inventory shrinkage.
Commercial sales are growing at a faster rate than DIY sales as a result of the enhanced distribution model in our western markets,
which supports the implementation of our dual market strategy in these areas. Commercial sales typically carry a lower gross margin
percentage than DIY sales, as volume discounts are granted on wholesale transactions to professional customers, and create pressure
on our gross margin as a percent of sales. The reduced leverage on distribution center costs is the result of the additional distribution
centers, which have been opened in conjunction with the CSK integration plan. New team members in these distribution centers are
not yet fully proficient with distribution operations, resulting in inefficiencies. We believe that the long term impact of the improved
negotiating leverage with our vendors will allow us to generate gross margins at levels comparable to our 2010 full year results going
forward, however continued growth in our commercial sales, as a percent of the total sales mix, will continue to pressure our gross
margin results in the future.
Selling, general and administrative expenses:
SG&A increased approximately $100 million, or 6%, from $1.79 billion (36.9% of sales) in 2009 to $1.89 billion (35.0% of sales) in
2010. The increase in total SG&A dollars is primarily the result of additional employees, facilities and vehicles to support our
increased store count and dual market strategy in the acquired CSK stores, as well as increased incentive compensation for team
members resulting from strong comparable store sales. The decrease in SG&A as a percentage of sales was primarily attributable to
increased leverage of fixed costs on very strong comparable store sales levels.
Operating income:
Operating income increased $175 million, or 33%, from $538 million (11.1% of sales) in 2009 to $713 million (13.2% of sales) in
2010. The increase in operating income is the result of increased sales and gross profit, offset by the increased SG&A discussed
above as well as a $21 million charge related to the legacy DOJ investigation of CSK as discussed in Item 3, “Legal Proceedings” and
Note 14 “Legal Matters” to the consolidated financial statements. The increase in operating income as a percentage of sales is the
result of our improvements in gross margin and significant leverage on fixed SG&A costs from strong comparable store sales. This
full-year operating income as a percentage of sales represents a record high for the Company, and we would anticipate these operating
levels to be sustainable.
Other income and expense:
Interest expense decreased $6 million, from $45 million (or 0.9% of sales) in 2009 to $39 million (or 0.7% of sales) in 2010. The
decrease in interest expense during 2010 as compared to 2009 is the result of a lower level of average outstanding borrowings under
our secured asset-backed credit facility (“Credit Facility”). Included as a component of “Other income” for the year ended December
31, 2010, is a nonrecurring, non-operating gain of $12 million related to the favorable settlement of a note receivable acquired in the
acquisition of CSK.
Income taxes:
Our provision for income taxes increased $81 million from $189 million (38.1% effective tax rate) in 2009 to $270 million (39.2%
effective tax rate) in 2010. The increase in our provision for income taxes is due to the increase in our taxable income. The increase
in the effective rate is primarily the result of the charge related to the CSK DOJ investigation of $21 million which is not expected to
be deductible for tax purposes.
FORM 10-K