O'Reilly Automotive, Inc. (ORLY) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the RBC Consumer and Retail Conference. Virtual, of course. We'd all rather be in Boston having a beer doing this. But we're still virtual because of the COVID scenario. With us today, we have for this session, the senior management team of O'Reilly Automotive. We're fortunate enough to have the CEO and Co-President, Greg Johnson; as well as Jeremy Fletcher, who's Senior Vice President of Finance and the Controller; as well as Mark Merz, who's Vice President of Investor Relations and Planning. I think got all those titles right. That's always one of the challenges. So guys, thank you so much for being here. I always love to hear from you guys, the team, et cetera. And look, I'll jump right into it.

You guys had, obviously, an incredibly first quarter, good start to the second quarter. Greg, if you were to kind of rank order what you think the key drivers of the business are today, kind of 1, 2, 3, what would you point to?

Scot, great question. I think there are several drivers. Some are more traditional drivers. Some are somewhat of anomalies that we experienced in the last 12 years -- or 12 months, excuse me. I think that the government stimulus, first, was definitely a tailwind for our business and much of retail, especially on the DIY side of the business. So I would attribute some of our sales increase to that. I think there was -- and has been and generally, it's not uncommon for there to be underperformance or under-maintained vehicles or lack of maintenance, and there were some pent-up demand there for that. And as some of our consumers were stuck at home, working from home, I think they caught up on some of that maintenance. And the other thing for our business in particular, I think we took some market share from our competitors.

So that all makes sense. But the truth is like we're like 3 standard deviations higher than we've ever been in terms of kind of sales pace. So maybe the -- and obviously, it's due to a lot of reasons. I think we probably argue a lot more personal vehicle usage because people don't want to be exposed to public transportation. And one of the other topics we're starting to hear about, and I'd love your perspective is, rising used vehicle prices, right? So now all of a sudden, like you're actually getting priced out of the market on another car that you're going to buy, so you start to fix your own vehicle. Are you carrying that from any of your stores and any of your commercial customers?

We are. We've heard that there is a return. During the peak of the pandemic, a lot of the jobs the shops were getting were tougher jobs to perform. They were the jobs that they may have turned down in the past or the jobs that they're big register rings, but they weren't the typical maintenance. They weren't the oil changes. They weren't the brake jobs. They weren't the undercar jobs that -- that our professional customers really build their business and their reputation on. They were the oddball jobs that, frankly, the DIY customers and light DIFM customers didn't want to perform themselves. So with used car prices -- well, first of all, there's a supply and demand issue, as we all know, new vehicle inventory, much of which is related to the semiconductor shortage. But on our -- on the used car market, gosh, there's a lot of 1-, 2-year old vehicles, low mileage that are being sold at, at or above new car prices. And that's great for our business. The more -- the more maintenance cycle or the more miles that are driven, the more maintenance cycles, the more wear and tear that are on those vehicles. So we are hearing that there's more maintenance being done. It's more of the traditional type maintenance. And some of that's probably attributed to used cars. Some of that may be attributed to having a more normal winter earlier this year, putting more wear and tear on the cars themselves, things like that.

Yes. Scot, whenever you see used car pricing go up and we're seeing kind of historic highs in used car pricing right now, people think hard about transitioning to a new vehicle, and they make conscious decisions to maintain their existing vehicles for a longer period of time. And I think we're seeing that right now, and that's a benefit to the aftermarket.

It's the exact same dynamic we're seeing in the housing industry, right? Like people won't buy a new house, they want more room, they want an office, whatever it is. And now all of a sudden, what -- you have been priced out of the market so you're going to add on to your home. So I'm not looking for an official forecast. This is purely an opinion. We will put as many disclaimers as you want around it. But when you look at all the factors playing into your industry right now and the elevated trends, how sustainable do you think it is? Like how much longer will we have these, like I said, 2, 3 standard deviation type kind of growth rates versus what we've historically seen?

Jeremy, you haven't taken one yet. You want to take that one?

I gave him the softball.

Yes. I mean that's obviously the million-dollar question. How long do I think a lot of folks are focused on. For sure, we have seen a tailwind, and Greg has spoken to it, from government stimulus dollars. We saw that at different points in time in 2020 and 2021. And I think the sense would be is that we're going to moderate from some of the peaks that we see when those dollars flood in. And to the extent that a lot of those get pointed to some of the things that we've talked about in terms of catching up on underperformed maintenance, working on projects, more discretionary things then that may revert, over the course of time, back to some norms. I think for us, what's been a positive that we've seen, I think there are a few dynamics that are pretty consistent with our history in market environments like this. Even as we talk about -- about the used car market and the shortage of new vehicles and the willingness for people to continue to invest in their existing vehicles, there's a little bit of that dynamic that's built into the current vehicle market. But a lot of that also points to, I think, the resiliency of demand and people willing, in more uncertain economic times, to hang on to their vehicles and invest in them at higher mileage. And we've seen in cycles in our industry historically, that as customers or as consumers go through that, it really does prove the value proposition of owning a higher mileage vehicle, that the interiors and exteriors, they hold up well, they look good, being able to keep those vehicles on the road, it's an investment that pays back. And as customers are pushed to that for whatever reason, be it uncertainty about the economy or the prices of used cars, whatever it might be, as they have invested in those types of activities to keep their vehicles on the road, it's given a good payback, and it's a good value proposition. On the other end of it, I think we've certainly, over the last 12 months, seen shifts of demand into our sector. And I think that's a big question for us as we think about some of the business that we've picked up that -- whether it came from larger players or smaller players, we think there's some stickiness to that because of the value proposition that we provide, particularly on the DIY side as we've seen that surge. So I can't really give you a prediction on where that sits. But especially as we move through 2020 and started to get further and further away from the stimulus events during the course of the year last year, we're pleased -- and we talked about being pleased with how our business had remained strong. And I think we've got the opportunities for some of that stickiness to keep us in strong business as we move through this year. Obviously, all the caveats come into play, right? We obviously see lots of things that we don't know about.

Yes.

Scot, additionally, let me just add one quick thing. As we've said for a few years now, as we exit the pandemic and the strength we saw in DIY last year, our expectation is the DIFM will come back and come back to where it's outperforming DIY. That continues to be our long-term settlement.

So that was actually one of my questions just regarding like, have you started to see, let's call it, any kind of correlation between a pickup in commercial sales where you've seen economies start to reopen, like relaxing restrictions, et cetera? Like can you kind of point to a direct correlation on that?

I don't know that I can point to a direct correlation on a market-by-market perspective. But I'll tell you, generally, we remain pleased on both sides of our business at this point.

So if you were -- it makes sense that commercial outperformed just because you're going to be coming up against magnitudes of difference in terms of kind of comparisons. If we're to look at it on, say, a 2-year stack basis or a run rate basis, would you still expect commercial to outperform in the balance of the year? Or is that probably more of a '22 event?

Well, as I said, it's more of a long-term play. I'm not going to speculate on exactly how the DIFM versus DIY perform during the year 2021. But as we've said for a number of years now, our expectation, due to complexity of vehicles and other reasons, would be long term for DIFM to outperform DIY. And considering the hurdles that we faced from our past 12 months or so on the DIY side, it's a lot easier compares on the DIFM side short term.

Yes. Not only -- go ahead, Mark, you were going to say something?

So inherent in our initial guidance that Greg and Tom in our press release that we had back in February was our underlying assumption that professional business would outperform DIY over the course of '21. We saw extraordinary strength on both sides of the business, but especially on the DIY side through our first quarter. As Greg mentioned earlier, we attribute a lot of that outperformance or performance above our expectations to the 2 rounds of government stimulus that we saw. December, January piece and then the piece in March. Our assumptions, like Greg said, is that DIY will come back, to some degree, over the levels that we've seen, and professional will outperform. We didn't see that during the first quarter and through April. But inherent in our updated guidance that we provided back in April was that assumption that the professional business would perform better over the course of '21 than DIY. We'll have to see how that ultimately turns out, but that's baked into our projections for the year.

Yes. That all makes sense. And then one of the confusions, I think, with -- for investors is, historically, you guys have had some correlation, even if it's a loose correlation, with miles driven and kind of repair activity. And yet we've seen miles driven starting to come back now. People are starting to get back to work, a little less work-from-home activity, et cetera. But how would you guys best frame that massive divergence we've seen between accelerated auto part sales and O'Reilly's has done a great job, but it's not just you, right? We're seeing it from Zone and the online guys, the Vance, you name it, and yet miles driven are down. Like how do you guys kind of connect those dots?

Yes. In a normal world, which we haven't experienced for the past 12 years, miles driven is a significant driver of sales in our industry. The more miles you drive, or as I said, the more maintenance cycles, the more wear and tear on vehicles. I think when you look at 2021, you have to look a little deeper and break down where those miles were driven. And in 2021, our DIY customers, most of them continue to work. Most of our DIY customers work blue-collar jobs. They continue to drive back and forth to work every day and continue to put miles on the road. In contrast, a lot of the white-collar workforce that may move a lot of their volume to the DIFM channel probably didn't drive the same number of miles. They're working from home. They're not driving to and from work. They're taking fewer vacations, entertainment venues are shut down. So I think there was a bigger impact to miles driven on the white-collar workforce DIFM segment than perhaps there was on the DIY segment. So as people begin to go back to work, there's a lot of speculation on what percentage of that workforce goes back to work versus continues to work from home. But undoubtedly, a significant portion of that will. We feel like miles driven will improve, and it will get back closer to normal growth than miles driven.

That makes sense. And then shifting gears a little bit. One of the big topics kind of throughout our conference with a number of verticals has been inflation. And I know you guys kind of talked about that, but you just had Advance literally update their inflation expectations 5 weeks later, right? They did a pre-announcement, provide guidance and then they decided to update their guidance because the amount of inflation that they're seeing, like whatever you're comfortable saying, like what's your latest thoughts on inflation? And is there any end to it? Or is this something that is just going to continue to build and build throughout the course of '22 -- or '21, excuse me?

Yes, I can probably jump in first on that and then Greg or Mark could can maybe add on. I want to be a little bit careful here. We really -- after our press release, we don't want to talk about what we've seen since then. But for sure, as we -- as we talked about on our call, inflation has been a little bit higher than what we've seen and have some expectation we could continue to see similar inflation really driven by all the types of things that everyone has talked about, the transportation costs, wage rates, those types of things that we're experiencing pretty widely. None of us, I think, are inflation prediction experts. We know those pressures are there. It will be, I think, interesting to see for how long they persist and what doesn't look particularly with some of those drivers. But I think from our perspective, we feel pretty comfortable with the ability of our industry for sure, but especially of our company to manage through those cycles to be able to pass through price increases, to have control price increases from the perspective of what we'll take from our suppliers, and then just to be rational in how we think about how those pass through to our customer base. And I think we have a lot of confidence in how that works, for sure, for what we've seen over the course of the history of our company and our industry. But especially as we think back to just recently with the tariff increases that came through and the success of the industry still maintain gross market rates and passing that through, it gives us pretty good indication that, that will continue to hold as we think about what we might see for the balance of this year and past this year.