O'Reilly Automotive 1Q07 Results: Five Metrics By Which To Judge

O'Reilly Automotive today announced record revenues and earnings for the first quarter ended March 31, 2007, representing 54 consecutive quarters of record revenues, earnings, and comparable store sales increases for O'Reilly since becoming a public company in April 1993.

- O'Reilly Automotive Inc., First Quarter Earnings Press Release, April 24, 2007

O'Reilly Automotive 1Q07 Results
O'Reilly Automotive, Inc. (ORLY) is one of the largest chains of auto parts stores in America, with most of their stores in the Midwest. They sell anything from simple items such as wiper blades, car waxes, and oil lubricants, to (for example) a really hard to find fan belt for a 1988 Oldsmobile Cutlas Cruiser.

About half of the sales are to someone like you or me that might walk into the store looking to do the repair ourselves (this is called the do-it-yourself, or DIY market). Although considering I accidentally set the toaster on fire when I was a kid, you probably don't want me involved with anything mechanical. It had something to do with learning the cheese does not go on top of the toaster to make grilled cheese.

The other half of O'Reilly's sales (where I fit in) are to professional repair shops (like a Midas or Jiffy Lube called commercial customers) who may be working on that 1988 Oldsmobile Cutlas and call someone at O'Reilly and ask them to run the fan belt out to them.

As you may remember, On April 10, 2007 I moved O'Reilly Auto Parts down to the #7 slot in the autoretailstocks rankings. I did so because I expect O'Reilly to earn about $3.35 in 2012. If my forecast is correct, based on what O'Reilly's stock price closed at yesterday, it means for every $100 of O'Reilly stock you buy today, you'll have claim to (ownership of) $9.60 of what O'Reilly earns in 2012 (a 9.6% "earnings yield").

My outlook or general opinion of O'Reilly did not change. Only O'Reilly's earnings' yield compared to the other stocks in the index left it at number 7. As a reminder, I try to only make adjustments to the rankings at the beginning of every quarter versus react to the daily movements in the stock prices. And this is where O'Reilly landed at the time of the rankings. It is only when serious structural shifts (in both cases it was caused by a management change) occur at a company do I intervene "intra quarter."

So how is O'Reilly progressing along this path toward my 2012 forecast?

O'Reilly Company Wide Progress
I expect O'Reilly in 2007 to earn $1.74 for every share of stock folks own of the company. My estimate is pretty much in line with what management said they expect to earn in 2007 on their fourth quarter conference call. Specifically, management said they thought they would earn somewhere between $1.71 per share to $1.78 per share.

I can tell you that when the company reported first quarter results last night (what they earned in January, February and March), they said O'Reilly earned $0.42 per share.

Aside from the results being better than the $0.40 I thought O'Reilly would earn in the quarter, and the $0.41 the professional analysts thought, this means O'Reilly is 24% of the way to my 2007 earnings forecast. Here are some interesting statistics:

- In the first quarter of 2006, O'Reilly's earnings were 23% of what they earned for all of 2006.

- In the first quarter of 2005, O'Reilly made only 21% of their entire earnings for 2005.

- In the first quarter of 2004, they made 22% of what they earned for the full year.

In other words, they are more than on track to meet my 2007 earnings objective for them.

But one year does not tell us what the long term returns will be. So with a 2012 forecast of $3.35, what I am saying is that O'Reilly will need to double its earnings per share between now and then. Or another way of thinking about it, assuming they meet my 2007 forecast, they are a little more than halfway toward my 2012 earnings goal (51.9% to be technical).

Let me put this in a little perspective for you. If you take O'Reilly's two closest peers/competitors AutoZone (AZO) and Advance Auto Parts (AAP) (with similarly reported financial metrics), and also assume a 9.6% "earnings yield" on those two companies, based on yesterday's closing stock prices, it means AutoZone will need to earn $12.82 per share in 2012, and Advance would need to earn $3.94 in 2012. Notice Advance and AutoZone are not in the rankings, so these are clearly hypothetical figures.

But if you think the 18 analysts surveyed by Zack's that forecast AutoZone will earn about $8.55 per share for the twelve months ending in August of 2007 are close, it means AutoZone is about 67% of the way there (hypothetical 2012 earnings forecast). And for Advance, based on the $2.44 the 17 analysts polled by Zack's think the company will earn for the 12 months ending in December of 2007, Advance is already 62% of the way there (hypothetical 2012 earnings forecast).

Now hold on a second, O'Reilly is only 51.9% of the way toward my target, whereas to get the same return (earnings yield) AutoZone is nearly 70% of the way there, and Advance is a little more than 60%. Are you saying there is less risk to O'Reilly achieving this earnings yield objective than AutoZone or Advance? Even though the two companies are closer to the goal today? Yes. That is EXACTLY what I am saying.

If I were trying to win the approval of some management team for banking business or begging them to go on a road show with me to meet with big time mutual fund managers (so those funds will trade stocks and pay commissions to my brokerage firm), I probably would need to give you some confusing discounted cash flow or economic value added valuation so you didn't understand this is what I was saying. But the mission of my company has something to do with insights (understanding) so I am stuck having to be more transparent.

Now I may be dead wrong about Advance and AutoZone not reaching these hypothetical earnings in 2012. I really think AutoZone and Advance are great organizations (and I obviously am not saying this because of some undue influence).

But I think AutoZone (nationwide) and Advance (41 eastern states) are in a lot of markets already. So expansion becomes more difficult. And almost $9 out of every $10 worth of product AutoZone sells is to the DIY market, and between $7 - $8 out of every $10 worth of stuff Advance sells are to DIY customers. In my opinion, they're still trying to figure out the commercial (professional repair shop) market. Whereas with O'Reilly, sales are pretty evenly split between professional repair shops and DIY customers.

As a result, I just see an easier path (less risk) for O'Reilly to continue expanding and equally serving DIY and professional repair shop customers. While I think AutoZone and Advance will find it more difficult to expand as they need to focus on trying to figure out this growing piece of the pie (the commercial market). Although I still think AutoZone and Advance should do an "end run around" the repair shop and go directly to the do-it-for-me customers (almost analogous to "Intel inside.") But that's a discussion we have had before and needs to be reserved for another day.

So how do we measure O'Reilly's path toward my 2012 earnings objective versus its two closest peers/competitors? Below are five metrics I have put together to help measure the company's progress.

I plan to add metrics in the coming quarters (and your input is encouraged). Specifically, I think we (in the investment community) need to do a better job measuring how much value is being returned to shareholders (dividends, share repurchases, etc.), Something I think AutoZone and Advance are doing really well and not getting a lot of credit for.

In any case, I hope these metrics simplify things a bit for you. Once again, right or wrong, the objective is to help you understand the industry and investments better.

1) Average Revenue Per Store
Up 2% for O'Reilly in 1Q07. In January, February and March (the first quarter) of 2007 O'Reilly sold about $363,453 worth of stuff at each of its stores (on average). This was about 2% better than the $356,273 average in the first quarter of 2006.

AutoZone down 2% in fiscal 2Q07. In the 12-weeks ended February 10, 2007 (granted a different time period), AutoZone sold around $320,000 worth of stuff at each of its stores in the United States (on average). This was down about 2% from the $327,000 level each store was running at (on average) over the same 12-weeks last year.

Advance Auto Parts down 2% in 4Q06. Advance hasn't reported first quarter results yet. But for the period ending December 31, 2006 (so the fourth quarter), Advance sold about $329,000 worth of stuff at their stores (on average), down almost 2% from the $335,000 I calculate in the fourth quarter of 2005. Although I seem to recall Advance benefiting from an extra week in the fourth quarter of 2005, so that might help to explain the decline.

2) Average Gross Profit Per Store (what I sold the part for versus what I bought it for per store)
O'Reilly made (gross profit) about 3% more on the products it sold per store to nearly $160,000 per store in the first three months of 2007, from about $155,000 per store in the first three months of 2006.

AutoZone made (gross profit) about 1% less on products it sold per store to $166,000 per store during the 12 weeks ended February 10, 2007 (fiscal 2Q07) versus a little less than $169,000 per store in fiscal 2Q06. Keep in mind, this figure is just my best guess, as AutoZone's gross profit figures include its Mexico stores and AllData division. I have simply taken AutoZone's total gross profit and divided by its domestic store count. Any deviation in the profitability at these divisions could skew this calculation (but we just don't know the segment profit break out).

Advance Auto Parts made (gross profit) about 1% less per store to $155,000 per store in the fourth quarter.

3) Average Operating Income Per Store (sales less cost of the product I sold and all other operating expenses)
O'Reilly average operating profit per store was up 6% to nearly $46,000 per store in the first three months of 2007, from about $43,000 per store in the first three months of 2006.

AutoZone average operating income per store was up 1% to $49,000 per store during the 12 weeks ended February 10, 2007 (fiscal 2Q07) versus around $48,794 in fiscal 2Q06. Once again, keep in mind this is just a best guess given the unknown of Mexico and AllData division profits.

Advance Auto Parts average operating income per store was down 15% to $20,793 per store in the fourth quarter from $24,492. Keep in mind you have the new stock option accounting rules dragging down (in part) the operating results with this figure.

4) Total Store Growth
O'Reilly total stores up 12% to 1,687 in the first quarter 2007 press release, from the 1,506 they reported with their first quarter 2006 results. Management also said they remain on track to open 190 to 195 new stores in 2007, about 12% growth from 2006 store levels. As you may recall from yesterday, I was only forecasting about 10% new store growth. My lower new store forecast (than what management plans) is probably just wishful thinking on my part. But I remain concerned about any company in this space (even O'Reilly) expanding too fast when I think the aftermarket parts market risks being saturated (i.e. too many auto parts stores on every corner).

AutoZone total domestic stores up 5% to 3,847 when they reported results for the period ended February 10, 2007 (fiscal 2Q07) versus around 3,655 when they reported fiscal 2Q06 results.

Advance Auto Parts total stores up 7% to 3,082 in the fourth quarter from 2,872 at the end of the fourth quarter 2005. And on the conference call, management said they were slowing their expansion plans a bit as they assessed the industry environment.

5) Tax rate

O'Reilly 37.3% in the first quarter of 2007, up slightly from the 37.1% we saw in the first quarter of 2006. And for all of 2006, O'Reilly had a tax rate of 36.9%.

AutoZone 36.5% in the period ended February 10, 2007 (fiscal 2Q07) versus 37% in fiscal 2Q06.

Advance Auto Parts 37.5% in the fourth quarter from 38% in the fourth quarter 2005.

ORLY-AZO-AAP 1-yr chart: