O’Reilly Automotive, Inc. and its subsidiaries, collectively “O’Reilly” or the “Company”, is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-yourself (“DIY”) customers and professional installers. O’Reilly Automotive, Inc. was incorporated in 1957 as a corporation. The Company was founded by Charles F. O’Reilly and his son, Charles H. “Chub” O’Reilly, Sr. and initially operated from a single store in Springfield, Missouri. The Company’s common stock trades on The NASDAQ Global Select Market under the symbol “ORLY”.
At December 31, 2009, we operated 3,421 stores in 38 states. Our stores carry an extensive product line, including, but not limited to, the products bulleted below (we do not sell tires or perform automotive repairs or installations):
•new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components, batteries, belts, hoses, chassis parts and engine parts;
•maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products;
•accessories, such as floor mats, seat covers and truck accessories; and
•a complete line of auto body paint and related materials, automotive tools and professional service equipment.
On July 11, 2008, we completed the acquisition of CSK, one of the largest specialty retailers of auto parts and accessories in the western United States and one of the largest such retailers in the United States, based on store count. Pursuant to the merger agreement, each share of CSK common stock outstanding immediately prior to the merger was canceled and converted into the right to receive 0.4285 of a share of O’Reilly common stock and $1.00 in cash. To fund the transaction, we entered into a Credit Agreement (“ABL Credit Agreement”) for a $1.2 billion asset-based revolving credit facility (“ABL Credit Facility”) arranged by Bank of America, N.A. (“BA”), which we used to refinance debt, fund the cash portion of the acquisition, pay for other transaction-related expenses and provide liquidity for the combined company going forward. The results of CSK’s operations have been included in our consolidated financial statements since the acquisition date.
At the date of the acquisition, CSK had 1,342 stores in 22 states, operating under four brand names: Checker Auto Parts, Schuck’s Auto Supply, Kragen Auto Parts and Murray’s Discount Auto Parts. This acquisition added stores in twelve new states: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Michigan, Nevada, New Mexico, Oregon, Utah and Washington, and a number of new markets in states where O’Reilly had a presence prior to the acquisition. The integration of CSK is focused on the implementation of our dual market strategy, the ability to effectively serve both DIY customers and professional installers, which requires conversion of store and distribution information systems, enhancements to the distribution infrastructure, inventory offerings and infusion of the O’Reilly culture. Conversion of all CSK stores to O’Reilly branded stores began in October of 2008 and will continue into 2011. In order to implement our proven dual market strategy throughout the CSK store network, we have added a distribution center in Seattle, Washington, in November of 2009, and Moreno Valley, California, in January of 2010, and will add distribution centers in Denver, Colorado and Salt Lake City, Utah, in the first half of 2010. As of December 31, 2009, we had converted 405 CSK stores to O’Reilly systems, merged 41 CSK stores with existing O’Reilly locations, closed 13 CSK stores and opened five new stores in CSK historical markets.
These risk factors include, among others, risks related to our growth strategy, the integration of CSK, increased debt levels, our acquisition strategies, competition in the automotive aftermarket business, our dependence upon key and other personnel, future growth assurance, our sensitivity to regional economic and weather conditions, legal proceedings and related matters arising from CSK, the effect of sales of shares of our common stock eligible for future sale, unanticipated fluctuations in our quarterly results, the volatility of the market price of our common stock, our relationships with key vendors and availability of key products, complications in our distribution centers, and environmental legislation and regulations.
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our growth strategy. We remain confident in our ability to continue to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and core O’Reilly values of customer service and expense control. Our intent is to be the dominant auto parts provider in all the markets we serve by providing significant value to both installer and DIY customers.
Management’s Discussion and Analysis of Financial Condition and Results of Operations: OVERVIEW
O’Reilly Automotive, Inc. is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. We are one of the largest automotive aftermarket specialty retailers, selling our products to both do-it-yourself (DIY) customers and professional installers. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items and accessories and a complete line of auto body paint and related materials, automotive tools and professional installer service equipment. As of December 31, 2009, we operated 3,421 stores in 38 states.
Operating within the retail industry, we, along with other retail companies, are influenced by a number of general macroeconomic factors including, but not limited to, fuel costs, unemployment rates, consumer preferences and spending habits and competition. The difficult conditions that affected the overall macroeconomic environment in recent years continue to impact our company and the retail sector in general. We cannot predict whether, when, or the manner in which, these economic conditions will change.
We believe that the number of U.S. miles driven, number of U.S. registered vehicles, average vehicle age, new light vehicle sales, unperformed maintenance and product quality differentiation are key drivers of current and future demand of products sold within the automotive aftermarket.
As of January 31, 2010, we employed 44,822 total team members (30,379 full-time team members and 14,443 part-time team members), of whom 37,517 were employed at our stores, 5,756 were employed at our distribution centers and 1,549 were employed at our corporate and regional offices. A union represents 53 stores’ team members in the Greater Bay Area in California, and has for many years – except for these team members, our team members are not represented by a labor union. Our tradition of 53 years has been to treat all of our team members with honesty and respect and to commit significant resources to instill in them our “Live Green” Culture, which emphasizes the importance of every team member’s contribution to the success of O’Reilly. This focus on professionalism and fairness has created an industry-leading team and we consider our relations with our team members to be excellent.
Our Internet address is www.oreillyauto.com. Interested readers can access, free of charge, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Securities and Exchange Commission website at www.sec.gov and searching with our ticker symbol “ORLY”. Such reports are generally available the day they are filed. Upon request, the Company will furnish interested readers a paper copy of such reports free of charge by contacting Thomas McFall, Executive Vice President of Finance and Chief Financial Officer, at 233 South Patterson, Springfield, Missouri, 65802.