O'Reilly Auto Parts 2012 Annual Report Download - page 22

FORM 10-k
12
Pricing
We believe that a competitive pricing policy is essential to successfully operate in the automotive aftermarket business. Product
pricing is generally established to compete with the pricing policies of competitors in the market area served by each store. Most
automotive products that we sell are priced based upon a combination of competitor price comparisons and internal gross margin
targets and are generally sold at a discount to the manufacturer’s suggested retail price with additional savings offered through volume
discounts and special promotional pricing. Consistent with our low price guarantee, each of our stores will match any verifiable price
on any in-stock product of the same or comparable quality offered by our competitors in the same market area.
Customer Payments and Returns Policy
Our stores accept cash, checks, debit and credit cards. We also grant credit to many professional service provider customers who meet
our pre-established credit requirements. Some of the factors considered in our pre-established credit requirements include customer
creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment
terms. No customer accounted for ten percent or more of our consolidated net sales, nor do we have any dependence on any single
customer.
We accept product returns for new products, core products and warranty/defective products.
INDUSTRY ENVIRONMENT
The automotive aftermarket industry includes all products and services purchased for light- and heavy-duty vehicles after the original
sale. The total size of the automotive aftermarket is estimated to be approximately $231 billion, according to the Automotive
Aftermarket Industry Association (“AAIA”). This market is made up of four segments – labor share of professional service provider
sales, auto parts share of professional service provider sales, DIY sales and tire sales. O’Reilly’s addressable market within this
industry is approximately $131 billion, which includes the auto parts share of professional service provider sales and DIY sales. We
do not sell tires or perform for-fee automotive repairs or installations.
Competition
We compete in both the DIY and professional service provider portions of the automotive aftermarket and are one of the largest
specialty retailers within that market. We compete primarily with the stores identified below:
• national retail and wholesale automotive parts chains (such as AutoZone, Inc., Advance Auto Parts, NAPA, CARQUEST and the
Pep Boys - Manny, Moe and Jack, Inc.)
• regional retail and wholesale automotive parts chains
• independently owned parts stores
• wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as
NAPA, CARQUEST, Bumper to Bumper and Auto Value)
• automobile dealers
• mass merchandisers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc.)
We compete on the basis of customer service, which includes merchandise selection and availability, technical proficiency and
helpfulness of store personnel, price, store layout and convenient and accessible store locations. Our dual market strategy requires
significant capital expenditures to support, such as the capital expenditures required for the distribution network, store network and
inventory levels necessary for providing products to both the DIY and professional service provider portions of the automotive
aftermarket.
Inflation and Seasonality
We have been successful, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of
vendor incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the
extent our acquisition cost increases due to base commodity price increases industry wide, we have typically been able to pass along
these increased costs through higher retail prices for the affected products. As a result, we do not believe our operations have been
materially, adversely affected by inflation.
To some extent our business is seasonal, primarily as a result of the impact of weather conditions on customer buying patterns. Store
sales, profits and inventory levels have historically been higher in the second and third quarters (April through September) than in the
first and fourth quarters (October through March) of the year.