A Look At O'Reilly Automotive's 2Q Productivity Metrics

Chrysler Group has begun warning some of its weakest dealers that it may attempt to shut them down if they don't improve sales within six months, a sign the auto maker is moving more aggressively to cull its network of retail outlets. . .

Years of declining market share have left Chrysler, General Motors Corp. (GM) and Ford Motor Co. (F) with a surfeit of dealers. . .

GM has about 6,900 dealers, Ford has 4,200 and Chrysler 3,700. With U.S. market shares of about 23%, 16% and 14%, respectively, that amounts to about 300 dealers per one point of U.S. market share held by GM, about 280 a point for Ford and 270 for Chrysler.

By contrast, Toyota Motor Corp. (TM) has about 1,400 dealers, and its 16% market share gives it about 90 for each market-share point.

Source: Neal E. Boudette, Wall Street Journal, July 25, 2007

O'Reilly Second Quarter Productivity Metrics
Last night, O'Reilly (ORLY) reported earnings for the three months ended June 30, 2007 (second quarter).

Below is a snapshot of the store results:

click to enlarge

*Except the weighted average sales figure provided by management in the press release, all per store figures are calculated by taking the reported figure and dividing it by the ending store count for the quarter.

And I really want to thank management for including the employment count. So below is a snapshot of the company's productivity metrics (per employee)

Keep in mind, however, that this is total employment. At the end of 2006, O'Reilly had 21,920 total employees, with 17,153 (78%) being full time employees. Also, the 10k indicates 17,494 (80%) of them were employees at the store level.

So if you assume a similar % split, O'Reilly ended the quarter with about 18,650 full time employees and 19,128 employees working actually at the stores (11.1 per store) in the second quarter.

Importantly, I need to be very clear right from the start. This was not a good quarter for O'Reilly Auto parts when you look at store and employee productivity.

But in 2000, O'Reilly had 10,808 employees, with 8,937 (83%) being full time employees and 8,125 (75%) working at the stores (16.1 employees per store).

So I hope you can see that over the long run, management has proven highly adept at doing more with less (greater revenues and profits with fewer people per store). And you know how I feel about getting caught up in the quarterly ebbs and flows anyway.

Nonetheless, I will continue to encourage management to be very prudent (cautious) with expansion plans going forward. My opinion about the automotive hard parts market really being in decline (despite what the industry reports tell you) has not changed. Nor has my opinion about the companies (Advance, AutoZone, CSK, etc.), in the space expanding too aggressively.

I think O'Reilly has a great mousetrap ("entrepreneurial company owned jobber" model driven by variable compensation plans). And I think the O'Reilly Certified Repair Shop program has an awful lot of potential. But when a market starts to become "over stored" it encourages one thing: buy versus build.

If management can get the right price, it makes so much more sense to buy someone's customers, basically "gut" the place, and benefit from O'Reilly's purchasing cost leverage and systems and processes than to build a new store in an already saturated auto parts market (in my opinion).

5 Questions for O'Reilly Management on the Call

So here are the top 5 questions I think investors should want answered by the end of the call today:

· How much of the net store growth is acquisitions versus new "greenfield" stores?

· Why are they doing any greenfield stores when the productivity metrics are in decline?

· Why was the other income (expense) line item a profit of $781,000? Last year it was only a profit of $162,000. And for the first six months of 2006 the other income (expense) line item a loss of $290,000. Sometimes "extraordinary" gains can get thrown in this line item, so you might want to understand what caused the lift.

· The company opened up a total of 44 net new stores in the quarter, which given their capital expenditure budget of $76.5 million in the quarter, it worked out to $1.7 million in cap-x per net new store. In the second quarter of 2006, on the other hand, they were only spending $1.47 million per net new store. Why did net cap-x per store go up so much?

· Finally, why did "other liabilities" go from $22.3 million in the second quarter of 2006 to nearly $50 million in the second quarter of 2007? It just seems like a big spike.

ORLY 1-yr chart: