O'Reilly Auto Parts 2015 Annual Report Download - page 34

FORM 10-K
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These better engineered vehicles require less frequent repairs, as the component parts are more durable and last for longer periods of
time, which does create pressure on customer transaction counts; however, when repairs are required, the cost of replacement parts is,
on average, greater. Despite pressure from these better engineered vehicles requiring less frequent repairs, customer transaction counts
increased for both our DIY and professional service provider customers for the year ended December 31, 2015. These increases in
transaction counts were driven by an increase in miles driven and a corresponding increase in vehicle maintenance, which was led by
lower gas prices and decreasing unemployment levels. These factors created a positive macroeconomic environment, which was beneficial
to both DIY and professional service provider customer transaction counts. In addition, the increase in our DIY transaction counts
benefited from our continued focus on staffing our stores with knowledgeable parts professionals to assist our DIY customers during
high DIY traffic periods, including nights and weekends, and the increase in our professional service provider customer transaction counts
benefited from the continued growth of our less mature stores.
We opened 205 net, new stores during the year ended December 31, 2015, compared to 200 net, new stores for the year ended December 31,
2014. As of December 31, 2015, we operated 4,571 stores in 44 states compared to 4,366 stores in 43 states at December 31, 2014. We
anticipate total new store growth to increase to 210 net, new store openings in 2016.
Gross profit:
Gross profit for the year ended December 31, 2015, increased to $4.16 billion (or 52.3% of sales) from $3.71 billion (or 51.4% of sales)
for the same period one year ago, representing an increase of 12%. The increase in gross profit dollars for the year ended December 31,
2015, was primarily a result of the increase in comparable store sales at existing stores and sales from new stores. The increase in gross
profit as a percentage of sales for the year ended December 31, 2015, was primarily due to product acquisition cost improvements, a
smaller non-cash negative last-in, last-out ("LIFO") impact and distribution system efficiencies. Acquisition cost improvements are the
result of our ongoing negotiations with our suppliers to improve our inventory purchase costs based on our increasing scale. The non-
cash negative LIFO impact is the result of our continued product acquisition cost reductions, and due to these acquisition cost reductions,
we fully depleted our LIFO reserve in 2013. Our policy is to not write up inventory in excess of replacement cost, and accordingly, we
are effectively valuing our inventory at replacement cost. During the years ended December 31, 2015 and 2014, our LIFO costs were
written down by approximately $28 million and $41 million, respectively, to reflect replacement cost. Distribution system efficiencies
are the result of leverage on our increased sales volumes and lower fuel costs.
Selling, general and administrative expenses:
Selling, general and administrative expenses ("SG&A") for the year ended December 31, 2015, increased to $2.65 billion (or 33.2% of
sales) from $2.44 billion (or 33.8% of sales) for the same period one year ago, representing an increase of 9%. The increase in total
SG&A dollars for the year ended December 31, 2015, was primarily the result of additional Team Members, facilities and vehicles to
support our increased sales and store count and a $19 million litigation loss charge from an adverse verdict in a contract dispute with a
former service provider. The decrease in SG&A as a percentage of sales for the year ended December 31, 2015, was primarily the result
of increased leverage of store occupancy costs on strong comparable store sales results.
Operating income:
As a result of the impacts discussed above, operating income for the year ended December 31, 2015, increased to $1.51 billion (or 19.0%
of sales) from $1.27 billion (or 17.6% of sales) for the same period one year ago, representing an increase of 19%.
Other income and expense:
Total other expense for the year ended December 31, 2015, increased to $54 million (or 0.7% of sales), from $48 million (or 0.7% of
sales) for the same period one year ago, representing an increase of 11%. The increase in total other expense for the year ended December 31,
2015, was primarily the result of a decrease in the amount of capitalized interest in the current period, as compared to the same period
in the prior year.
Income taxes:
Our provision for income taxes for the year ended December 31, 2015, increased to $529 million (36.2% effective tax rate) from $444
million (36.3% effective tax rate) for the same period one year ago, representing an increase of 19%. The increase in our provision for
income taxes for the year ended December 31, 2015, was the result of higher taxable income in 2015, driven by our strong operating
results. The decrease in our effective tax rate for the year ended December 31, 2015, was primarily due to the non-typical favorable tax
reserve adjustment, which was related to historical tax positions due to a previous acquisition, partially offset by a decreased benefit in
the current period from the realization of employment tax credits.
Net income:
As a result of the impacts discussed above, net income for the year ended December 31, 2015, increased to $931 million (or 11.7% of
sales), from $778 million (or 10.8% of sales) for the same period one year ago, representing an increase of 20%.