As an automotive aftermarket retailer that serves both do-it-yourself (DIY) and professional service provider (PSP) customers primarily in the United States, O’Reilly benefits from three key factors: the number of miles driven, the size of the nationwide vehicle fleet, and the average age of vehicles on the road. Americans drive more than three trillion miles per year, while the number of light vehicles on the road is near 280 million. And the average age of vehicles is close to 12 years.
These metrics do not register massive year-over-year growth, but they do rise consistently in almost any macroeconomic environment. Americans need to drive, which leads to more wear and tear, and subsequent maintenance and repairs for cars. The urgency and importance of having a working automobile is mission-critical for people, and it can’t be delayed like a discretionary purchase.
O’Reilly’s revenue increased at a compound annual growth rate (CAGR) of 7.1% from 2014 through 2019, while net income during the same time grew at a 12.3% annual clip. Also, increasing gross and EBIT (earnings before interest and taxes) margins indicate the company’s ability to flex its bargaining power with suppliers, and the fragmented nature of the automotive aftermarket industry means that O’Reilly can keep growing its domestic portfolio of nearly 5,600 stores by opening new locations and by executing prudent acquisitions. Even in a crisis-filled year, management expects to end 2020 with close to 165 new stores.
Performance during 2020
After comparable-store sales (comps) dropped 13% in the four-week period from mid-March to mid-April of 2020, business has come roaring back. Comps in both the second and third quarters were above 16%, driven by strength in all product categories.
“Our sales trends are even more encouraging in light of the fading tailwinds to our business from the expiration of government stimulus payments and enhanced unemployment benefits under the CARES Act as we moved further past when those dollars were being injected into the economy,” highlighted CEO Greg Johnson on the most recent earnings call describing record performance in Q3. The coronavirus pandemic has allowed O’Reilly to take business away from both independent shops and mass retailers.
Management felt comfortable enough with its liquidity position and the return of sustainable business activity that it reinstituted O’Reilly’s long-standing share repurchase program in late May after suspending it in March. The consistency with which O’Reilly buys back shares every single year is a key reason I like the stock so much.