O'Reilly Auto Parts 2014 Annual Report Download - page 17

Download and view the complete annual report

Please find page 17 of the 2014 O'Reilly Auto Parts annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 90

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90

FORM 10-K
10
Pricing
We believe that competitive pricing is essential to successfully operate in the automotive aftermarket business. Product pricing is generally
established to compete with the pricing of competitors in the market area served by each store. Most automotive products that we sell
are priced based upon a combination of internal gross margin targets with additional savings offered on some items through volume
discounts and special promotional pricing and competitor price comparisons. 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 greater than one percent 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 $246 billion, according to The Auto Care Association.
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 $140 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
The sale of automotive aftermarket items is highly competitive in many areas, including customer service, product availability, store
location, brand recognition and price. 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, CARQUEST, NAPA and
the Pep Boys - Manny, Moe and Jack, Inc.)
• regional retail and wholesale automotive parts chains
• 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
to support, such as the capital expenditures required for our distribution and store networks and working capital needed to maintain
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 supplier
incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. To the extent our
acquisition costs increase 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.