O'Reilly Auto Parts 2013 Annual Report Download - page 36

FORM 10-K
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We believe the increased sales achieved by our stores were the result of high levels of customer service, 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 our stores, compensation programs for
all store Team Members that provide incentives for performance and our continued focus on serving both DIY and professional service
provider customers.
Our comparable store sales increase for the year ended December 31, 2012, was driven by an increase in average ticket values, partially
offset by a decrease in DIY customer transaction counts. The improvement in average ticket values was a result of the continued growth
of the more costly, hard part categories, as a percentage of our total sales. The growth in the hard part categories is driven by the increase
of professional service provider customer sales as a percentage of our total sales mix and the continued growth in DIY hard part sales,
as consumers continue to maintain and repair their vehicles. The strong increases in our professional service provider customer transaction
counts, driven by our acquired markets, have been offset by pressured DIY transaction counts. DIY customer transaction counts continue
to be negatively impacted by macroeconomic pressures on disposable income, including sustained unemployment levels above historical
averages. Both DIY and professional service provider customer transaction counts also continue to be negatively impacted by better-
engineered and more technically advanced vehicles, which have been manufactured in recent years. These vehicles require less frequent
repairs and the component parts are more durable and last for longer periods of time; however, when repairs are required, the cost of the
repair is typically greater.
We opened 180 net, new stores and acquired 56 stores during the year ended December 31, 2012, compared to 170 net, new stores for
the year ended December 31, 2011. At December 31, 2012, we operated 3,976 stores in 42 states compared to 3,740 stores in 39 states
at December 31, 2011.
Gross profit:
Gross profit for the year ended December 31, 2012, increased to $3.10 billion (or 50.1% of sales) from $2.84 billion (or 49.0% of sales)
for the same period one year ago, representing an increase of 9%. The increase in gross profit dollars was primarily a result of the increases
in sales from new stores and the increases in comparable store sales at existing stores. The increase in gross profit as a percentage of
sales was primarily due to DC efficiencies, acquisition cost improvements and improved inventory shrinkage, partially offset by the
impact of increased commercial sales as a percentage of the total sales mix. DC efficiencies are the result of continued leverage on our
increased sales volumes and more tenured and experienced DC Team Members in our maturing DCs. In addition, during 2012 we
increased our store-level inventories as a component of our focus on providing higher service levels. The costs to move this additional
inventory into the stores were more efficient than routine restocking activity and, as a result, we realized a one-time benefit from capitalized
distribution costs. This capitalization of costs benefited gross margin by approximately 20 basis points versus the prior year. Acquisition
cost improvements are the result of our ongoing negotiations with our vendors to improve our inventory purchase costs. The improved
inventory shrinkage is driven by our continued focus on inventory control and accountability through our distribution and store networks.
Commercial sales typically carry a lower gross profit as a percentage of sales than DIY sales, as volume discounts are granted on wholesale
transactions to professional service provider customers, therefore, creating pressure on our gross profit as a percentage of sales.
Selling, general and administrative expenses:
Selling, general and administrative expenses (“SG&A”) for the year ended December 31, 2012, increased to $2.12 billion (or 34.3% of
sales) from $1.97 billion (or 34.1% of sales) for the same period one year ago, representing an increase of 7%. The increase in total
SG&A dollars was primarily the result of additional employees, facilities and vehicles to support our increased store count. The slight
increase in SG&A as a percentage of sales was primarily the result of our focus on store staffing levels to continue to deliver industry-
leading customer service while adjusting to the slower sales environment, as well as an overall deleverage on soft comparable store sales.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2012, increased to $977 million (or 15.8%
of sales) from $867 million (or 15.0% of sales) for the same period one year ago, representing an increase of 13%.
Other income and expense:
Total other expense for the year ended December 31, 2012, decreased to $36 million (or 0.6% of sales), from $51 million (or 0.9% of
sales) for the same period one year ago, representing a decrease of 30%. The decrease in total other expense for the year ended December
31, 2012, was primarily due to one-time charges related to our financing transactions that were completed in January of 2011 (discussed
in detail below), partially offset by increased interest expense on higher average outstanding borrowings and increased amortization of
debt issuance costs as compared to the prior year.
Income taxes:
Our provision for income taxes for the year ended December 31, 2012, increased to $356 million (37.8% effective tax rate) from $308
million (37.8% effective tax rate) for the same period one year ago, representing an increase of 15%. The increase in our provision for
income taxes was due to the increase in our taxable income.