Welcome to the O'Reilly Automotive Inc. Third Quarter 2023 Earnings Call. My name is Holly and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct our question-and-answer session. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher you may begin.

Thank you, Holly. Good morning everyone and thank you for joining us. During today's conference call, we will discuss our third quarter 2023 results and our outlook for the remainder of the year. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements. and we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend, or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31st, 2022 and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Greg Johnson.

Thanks Jeremy. Good morning everyone and welcome to the O'Reilly Auto Parts third quarter conference call. Participating on the call with me this morning are Co-President, Brad Beckham, and Brent Kirby as well as Jeremy Fletcher, our Chief Financial Officer. Greg Hensley, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman are also present on the call. I'd like to begin today's call by congratulating Team O'Reilly on outstanding results in the third quarter and express my deep appreciation to our team of over 88,000 professional parts people for their steadfast dedication to our customers. This unwavering commitment to excellent customer service is the hallmark of O'Reilly Auto Parts and the key to earning our customers' business every day. Our team's ability to deliver sustained profitable growth is evidenced by a robust 8.7% increase in comparable store sales, coupled with a 17% increase in diluted earnings per share for the third quarter. Our results have exceeded our expectations throughout the year, driven by the team's high level of execution. Service and product availability are critical pieces of our value proposition, and our ability to remain intensely focused on these fundamentals has continued to derive growth on both the professional and DIY sides of our business. As we announced in July, upon my retirement in January, Brad Beckham will be promoted with the position of Chief Executive Officer, and Brent Kirby will be promoted to the role of Company President. Brad and Brent are tremendous leaders who bring world-class ability, experience, and passion to their new roles. Even more importantly, Brad and Brent are incredible standard bearers of the O'Reilly culture, and I'm very excited about what our future holds under their leadership. Our transition to the operations of the company to Brad and Brent has progressed smoothly and seamlessly, and as a result, today's earnings call represents my last call as CEO. As such, it is appropriate for me to leave the bulk of our discussion of the third quarter results to Brad, Brent, and Jeremy. But before I turn the call over, I would like to thank our shareholders for their continued confidence in and support of our company during my tenure as CEO. Finally, I'd like to again thank team O'Reilly for your hard-working commitment to our customers. It's been my absolute honor and privilege to work alongside you for the last 41 years with a front-row seat to see you achieve so many incredible milestones along the road to success for O'Reilly auto parts. Even though I won't get to actively participate in the next chapter of our company's success, I'm still very excited for the many opportunities ahead and look forward to watching our company's continued growth and future success. I'll now turn the call over to Brad Beckham. Brad?

Thanks, Greg, and good morning, everyone. I would like to begin by congratulating Team O'Reilly on another excellent performance in the third quarter. The ability of our team to deliver continued industry-leading sales performance requires a consistent and intense focus on our culture and the fundamentals of excellent customer service. I would like to thank all of our team members for their hard work, commitment, and dedication to our great company. Now I'd like to walk through the details of our sales performance for the quarter on both the professional and DIY sides of our business. We spoke on our last call to the strong start to the quarter in July, driven in part by extreme heat in many of our markets as we were pleased to see these very strong volumes carry on throughout the quarter. From a cadence perspective, we saw a similar top-line outperformance in each month of the quarter as compared to both the expectations we built into our plan coming into 2023 and the updated guidance we provided on last quarter's conference call. As we have discussed throughout 2023, our prior year comparisons get more challenging as we move throughout the back half of the year, and this dynamic was reflected in the cadence of our comparable store sales in the third quarter with our strongest comps for the quarter in July and August. However, on a two-year stacked basis, our performance was much more consistent through the quarter, with September only slightly below the full quarter performance due to a moderation of the hot weather benefit we realized earlier in the quarter. While we did see outperformance during the quarter in categories impacted by heat, such as cooling and HVAC, we also experienced broad strength and application-specific hard part categories as well as maintenance…

Thanks Brad. I would like to echo Greg and Brad in congratulating Team O’Reilly on the outstanding performance in the third quarter. The continuation of our strong sales performance and proven ability to outperform the market is a testament to our team's unwavering commitment to excellent customer service. I want to thank all of our team members for their dedication to our company and to our customers. Now I will cover our third quarter gross margin results, what we are seeing in the competitive environment, and provide some updates on our store and distribution growth, inventory investments, and capital expenditure plans. Starting with gross margin, our third quarter gross margin of 51.4% was 46 basis point increase from the third quarter of 2022 at just above our expected range. We are pleased with the stability of our gross margin results as our third quarter continued the strong trend we saw in the second quarter. Our gross margin for the third quarter faced pressure from the sustained strong performance in our professional business, creating a customer mix headwind. But we have been able to offset these headwinds through improved acquisition costs and outstanding support from our supplier partners. Pricing to both DIY and professional customers has remained rational within the industry. We continue to see modest inflation in the third quarter and remained very successful in passing along increases in product acquisition costs and other inflationary pressures in selling price. While our quarter to quarter gross margin rate can see normal fluctuations from seasonality in product sales mix and leverage of distribution costs relative to overall volumes, the stability of our results in light of the share gains we are experiencing demonstrates our team's ability to win share through service and product availability. As a result of our solid year to…

Thanks Brent. I would also like to thank Team O’Reilly for their continued hard work and outstanding performance in the third quarter. Now we will cover some additional details on our third quarter results and guidance for the remainder of 2023. For the quarter sales increased $405 million driven by an 8.7% increase in comparable store sales and a $78 million non-comp contribution from stores opened in 2022 and 2023 that have not yet entered the comp base. Our third quarter effective tax rate was 23.2% of pre-tax income comprised of a base rate of 24.3% reduced by a 1.1% benefit from share-based compensation with both of the components of our rate in line with the third quarter of 2022. Our third quarter base tax rate was in line with our expectations with the total effective tax rate below our expectations due to higher than planned benefits from share-based compensation. For the full year of 2023 we continue to expect an effective tax rate of 22.5% comprised of a base rate of 23.4% reduced by a benefit of 0.9% from share-based compensation. Our fourth quarter effective tax rate is expected to be lower than the other three quarters due to the tolling of certain tax periods. Variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first nine months of 2023 was $1.7 billion versus $1.9 billion in the same period in 2022. The reduction was the result of the increase in capital expenditures Brent discussed in his remarks as well as a lower working capital benefit from reduction in net inventory this year versus 2022. These headwinds were partially offset by growth…

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question for today is coming from Michael Lasser at UBS.

Good morning. Thanks a lot for taking my question. Your guidance, implied guidance for the fourth quarter implies a significant slowdown in the business. Outside of the uncertainty associated with the weather and the holidays, is there anything that you would point to that would have influenced such a slowdown or deceleration in the performance of the comp?

Good morning, Michael. It's Brad. I'll take a stab at that and see what the other guys want to follow up with. Great question. As you know, Michael, I think generally speaking directly to your question, the answer is not really. As you know, as we always say, the fourth quarter can be the most volatile from the weather standpoint, from the holidays. I think the key is just to remind you what I said earlier that we feel really good about how October is going so far. Generally the first few weeks of the quarter have been very consistent with what we saw with the exit rate, especially from a two- and three-year stack basis. But we still have almost half the quarter to go. December is a huge comparison. And we just want to make sure that we're just being cautious overall. But generally speaking, we're really happy with the way volumes are holding up and really excited to do everything we can to finish the quarter strong here.

Yes. Maybe, Michael, the only thing I would add is just the characterization of a significant slowdown in our business. We've really spoken all year to just the timing of how that one-year comp is going to look as comparisons just naturally get more challenging as we move through the year. While there is some time left in the quarter and we've been pleased with our performance all year long, what we're anticipating as we finish out the year is pretty consistent with where we've been. It's not reflective of anything that we're seeing when we think about our sales from a week-to-week volume, understanding the seasonality of the business as we move into the fourth quarter. Unfortunately, we're going to have to begin some really tough compares, but that's also a good spot to be in, and really nothing has changed in how we think about the current pace of the business.

I got you. For O’Reilly, tough compares is a way of life, but that's okay. My second question is on the outlook for SG&A spending. It's obvious that the returns on the investments that you're making have been quite productive in light of the market share that O’Reilly has been achieving. Would you expect a similar rate of SG&A dollar growth on a per-store basis moving through 2024? Are there opportunities to invest such significant amounts that would generate similar returns? Thank you.

Thanks, Michael. Another good question there. As we've said, we're extremely pleased with the returns we've seen from investing back in the business. As you know, there's a big difference for us at O’Reilly between investments and judiciously managing our expenses. Like I said earlier, expense control is a huge part of what we do. We never like to delever, except in the case of this year, when we know that we were playing from a position of strength and we knew there were some areas that are really just paying off. We're very happy with the ROI we've seen on all our initiatives where we re-invested back in the business this year. As you know, a lot of that is some catch up from COVID, the years of COVID, and everything that we wanted to spend that we didn't quite get to. Michael, honestly, we're in the middle of working on our plan for 2024. That always starts with the top line number, and then we back into what we feel like is the right thing to do for short, mid, and long-term, especially when it comes to those mid and long-term returns. We look forward to talking about our plan in February '24, but we just want to be careful talking about '24 just yet.

I understood. Good luck to Greg Johnson. Thank you so much.

Thanks, Michael.

Your next question is coming from Brett Jordan from Jeffries.

Hey, good morning, guys.

Good morning, Brett.

Good morning Brett.

As you guys continue to gain market share in the space, could you talk a little bit about where you're seeing both that coming from smaller DIFM independence or national accounts, and then, I guess, obviously, it's got to be a shared donor as well, so is that also the smaller WDs that you're picking up from, or are things changing in market share relative to larger peers?

Hey, thanks, Brett. Another good question. Honestly, Brett, you've heard us say for a long time, it's always hard to tell all the moving pieces. We have extreme respect. We take all our competitors extremely seriously, the big four, the independence. We have tough, tough competitors on both the DIY and the professional side of the business. We spend our time focusing on we're our own worst competitor, meaning that we always have execution opportunities. We always have areas to get better. Honestly, to try to answer your question the best I can, we feel like it's a little bit of all the above. We feel like that everything from store operations, execution, service levels, continuing to work on our retention and turnover, got a brag on our supply chain team, continued improvements with our product availability, our assortments, and just really getting away from the COVID hangover, so to speak, when it comes to our supply chain, Brent and the entire supply chain team have done just an incredible job. But generally speaking, I think it's a little bit of everything you mentioned. I think pretty broad based from a customer standpoint, and we think it's probably fairly broad based from where it could be potentially coming from from a competitor aspect as well.

Okay. I guess sort of a follow up to that. Now you're saying there's such big dispersion between execution on the distribution side. Are there any increased M&A opportunities, either large regional distributors that are private that you sort of see to maybe fill in some of that geographic white space you have out there around sort of between the Midwest and those Virginia DC?

Yes. Sure. I'll lead that off and then let Brent hit on kind of the first part of your question there. I'll just speak maybe to the M&A opportunities, as you know, we're always looking for opportunities when it comes to Greenfield expansion, but also strategic acquisitions that make a lot of sense from acquiring not only real estate and locations, but great teams of parts people that understand the professional side of the business and teaching those type companies how to be a dual market company. And so we're hopeful that maybe as things evolve the next year or two, valuations and things like that could look a little bit more attractive than they have the last couple of years, but still a bit hard to say, but absolutely, we're always looking at the one store deals, the our job or customers that we still have that potentially don't have an exit plan, one store deals, two store deals all the way up to some of the regional things. And we're hopeful that as we continue to get more aggressive in the upper mid-Atlantic and the true northeast that some of our other opportunities come to light.

Yes. And Brett, I would just add maybe on the distribution and supply chain side of things, certainly the the exciting news about our Stafford facility that I talked about in my prepared comments, we're super excited about getting another large DC in the Mid-Atlantic. We see that as a big, untapped geography for us. And we're certainly investing to begin to take more advantage of that opportunity. And when you think about our distribution infrastructure, for us, it's something we're constantly looking at. And talked about the strength of where our DCs are located and, our DCs are where the cars are, where the people are, and we don't see that as an opportunity necessarily to, use 3PLs or, we want to own that. We want to run it. We want to operate it the way we always have. And we're always looking at hub store opportunities and how they augment the tiering of our DCs and where they are and how we can, be first in class in every market that we operate in in terms of parts availability. So we're going to continue to do that. We certainly see that that geography as a continued opportunity moving forward.

All right. Thank you.

Yes. Thank you.

Thanks Brett.

Thanks Brett.

Your next question for today is coming from Daniel Imbro from Stephens.

Yes. Hey, good morning, everybody. Thank you for taking our questions.

Good morning, Daniel.

Follow-up on Brett question about [indiscernible] here. Just curious how's the onboarding of the new customer progress? Any hiccups or learnings? Has he won so much business so quickly that any bottlenecks are limiting growth? Is that kind of behind some of these infrastructure investments you guys are talking about?

Yes, maybe I'll start there. This is Jeremy and a little bit of interference on your sound. But I think the question really focuses around what, what have we learned as we've, as we've seen the share accelerate within our business in how is that impacting how we move forward? For sure, the increase volume that we're picking up, those are completely new customers that are unfamiliar to us in the markets that we're in. Every market we exist in, we spend on the professional side of our business, considerable amount of time understanding the market, understanding the shop's formulas, relationships. For us, the focus is always on how do we create value for those customers? How do we ensure that we're partnering with their businesses to help them be successful even as we grow business? For sure, as we've seen more and more opportunities to earn business over the course of really the last several years during the course of the pandemic, but especially as we've seen the ability to grow on top of growth with those customers, our touch points when we get that extra opportunity to provide outstanding service are just critical to being able to compound that growth. And I think as much as anything, what we've seen as we move through the last several quarters is our ability to provide excellent service to really to demonstrate the values that Brad talked about earlier, that we can provide excellent service, great informed technical people within our stores that understand the business can support the work of our professional customers, incredible parts availability, and just a broader support has provided an excellent value and continues to give us more and more opportunities.

That's helpful. And maybe I want to dig into the SG&A spend a little bit more. Are there any specific initiatives you can unpack around maybe what you're spending on, whether it's tech for your professional customers or delivery efficiency? Does anything need to help on that or clarify what you're spending on so we can better understand how it's driving sales? Thanks.

Yes, I mean, I think that the general things that we've talked about are similar to how we've spoken to this item throughout throughout the course of the year. And we're always, I guess, somewhat reluctant to get too far down in the weeds. We think they're great investments for our company. And we, just competitively, we want to see them play out for a long period of time. But for sure, we've made a concerted effort to continue to invest within our team. And we've talked about enhanced benefits, PTO and 401-K improvements, and just more broadly how we think about how our store managers manage their work week and things along those lines. We continue to invest in the image and appearance of our stores and our fleet vehicles and ensuring that we get the safest vehicles on the road possible. And then technology continues to be a huge ongoing investment as we think about all the areas of the business where we can bring better tools online to support the work that our store teams are doing and taking care of our customers.

Fair enough. [indiscernible] and best of luck.

Thanks Daniel.

Your next question for today is coming from Zach Fadem from Wells Fargo.

Hey, good morning, guys. I think we're getting a lot of mixed data points on the state of the industry. And putting your outperformance aside for a minute, curious to hear if you think the broader category is slowing or not? And to what extent the impact of a broader consumer slowdown would have on the aftermarket?

Yes. Hey, Zach, it's Brad. I'll take a stab at that. And then I may flip it over to Brent to talk generally about what we're seeing and not seeing on some of those fronts. But generally speaking, Zach, we're just not seeing that. As part of our results, as you can imagine, it's just hard for us to say that we're really seeing that. When I look at, our positive DIY ticket count that I cited in our prepared comments, I mean, that's, that's encouraging for us. We're very excited about the execution of our teams on the DIY side, as well as the, as well as the professional side, when I review the, the data that comes in every week from our sales team on the professional side, we have all our comments and sales call recaps that come through our CRM. That that's not to say that, that within the service space that I see comments that some shops may be a little bit slower than other shops. But it's just hard for us to say with our results and what we hear and see on the street every day that there's an overall slowdown, we're just not seeing that. Again, there's times you see that some shops may be seeing a little less car count than others. And just like on the service side, or excuse me, just like on the, the aftermarket part side of our industry, there's some service providers that are taking more share and there could be some that are losing some share. So it's just hard to parse all that out and say that we're seeing an overall slowdown when we're really just not seeing that.

Yes, and Zach, I would add to, I mean, just to echo Brad's comments, but it's really a tremendous testament to the culture and to the execution of our teams out there, our sales teams, our distribution center teams, I mean, they have just executed to an outstandingly high level and continue to and not that we're immune from any of those things that may happen in the greater macroeconomic, background, but, but we just have not seen the effect of that, through the Q3 results and we're not seeing it as we get into Q4 at this point. So we're going to continue to stay focused on executing, serving the need and meeting the demand out there. And we feel like good things will continue to follow.

Yes, that may be the only thing I would add to that. I'm sorry, just one more thing. I know you kind of talked to how do we think about that moving forward. I think from a long term perspective, our view on the resiliency of our industry is unchanged. We've been, we've been through different cycles of challenges to the consumer in the past. And there are always the potential for short term shocks and impacts and fluctuations that might last a quarter or two. And we're always cautious in how we think about that near term outlook. But the underlying core drivers of demand within the aftermarket continue to be resilient and strong. The value proposition that, that investing in your existing vehicle has for, for a consumer is very attractive. We think it continues to get more attractive with the vehicle dynamic. And, and people are still, using their cars for, for so much of what encompasses daily life with miles driven, steadily expected increase. So those things are all I think positive as we think about, about really the longer term. And that's really where our focus is as we think about building our business.

Okay, great. That's great color. And with respect to competition, it seems like the WDs had been operating with one hand tied behind their back in the early days post the pandemic. But with those businesses now back in stock and ready to recapture some of the share that they lost, do you think we could be entering a period of choppier pricing, particularly as we lap the double digit inflation in the industry?

Yes, Zach, it's Brad. Well, the first thing I would say is I know we all in the industry anecdotally, felt like potentially some of the smaller players could have had a little bit more adversity when it came to supply, during the pandemic. And I think that was probably true. And I think it's probably accurate, for the most part, looking across the market that they're probably healthier than ever. I think the key with that, though, is that is that we had our opportunities to, we, Brent and I, and none of us were totally happy with how we performed during the pandemic, everything from merchandising to inventory control, purchasing down to the distribution operations, our bar at O’Reilly, knowing how important availability and replenishment is high. And so, we weren't totally happy with where with where we were. And, we've made incremental improvement as well. But I think the key to remember, Zach, on, when we had opportunities to pick up share, and we were able to, maybe move from third call to second, or we got the opportunity through, lack of supply from somebody else, and we were able to step in there with relationship service and back that up with availability, that that business, as Zach, especially on the professional side, is incredibly sticky, those relationships and that trust, it takes time to build that and to gain that business. It takes a long time to gain that business. And it would be challenging, or excuse me, it would be, it would be out of the norm to lose that business very quickly when you've really stepped in when somebody else fell down. And so, I think we just got to remember that that business is very sticky, the relationships are sticky and once that's built, it's very stable. On the pricing, no, we don't feel that way. We're not seeing that, and we really don't see that as an issue moving forward. I mean, time will tell, but as Zach, when we rolled out our pro pricing initiative, for example, that was very rifle approach, strategically geared toward some of the lines that maybe some of the WDs and two steppers were more aggressive than we were, and we purposely moved down and still stayed north of where a lot of those price points were. We didn't come down to really compete, knowing that they can move further down, and a lot of those folks live off volume anyway, and so we just don't see that as a near-term threat.

Yes, and Zach, maybe to add a couple of comments to what Brad's already said on the pricing, especially from a WD perspective, if you think about what some of the things we did do to get stronger through some of the challenges that COVID that Brad talked about, we've continued to diversify our supply chain across multiple suppliers for various lines, especially in our proprietary brands. We continue to see our proprietary brands grow, so we continue to be pleased with what that is yielding in terms of our gross margins and how we're able to continue to enhance those moving forward. I feel like we're in a much better strategic position, probably, than we were going into COVID if there is something irrational that does come up out there, but we're just not seeing it at this point.

Appreciate the thoughts, guys. Thanks for the time.

Yes, thank you.

Thanks, Zach.

Your next question for today is coming from Simeon Gutman from Morgan Stanley.

Hey, good morning, everyone. First question is on a gross margin. It stepped back a bit from price investments, and we've come to accept that. It probably won't snap back anytime soon. Anything new on that as you get leverage over some of the distribution costs? Are you reinvesting those? Is there any reason we can see gross margin click back up?

Yes, hey, Simeon, it's Jeremy. We continue to focus on gross profit dollar growth, so obviously in a few months here, we'll speak to where we think '24 might look, but at this stage, in our hope, I think from a longer-term perspective, as we think about our gross margins, really kind of comes to what we can do incrementally to improve the volume amount of our storage, which helps us leverage DC expenses. I think that obviously during the course of the pandemic was pressured as the supply chain's got more challenging and feel like that we've got an opportunity from a more normalized standpoint to do a bit better there as we take market share. Certainly, I think the value that we have as a partner to our suppliers to be an excellent way for them to grow their business and to, in the game, market share themselves is high, it continues to be, I think, kind of a favorite nation status for us, and obviously that's important for us as we work to manage our costs over the course of time, and I think what we've seen during the course of some of our pauses this year have been the ability to do incrementally better on the acquisition cost perspective, but our focus has always been how do we partner well with the supplier base and their communities, how do we improve availability so that we can drive top-line sales growth and then grow as proper dollars that flow from that.

Thanks, and then a quick follow-up. This is to clarify some of the points, Jeremy. You made, I think, Brad made around market share. The story of the incredible market share of this year, is that you said more new accounts that you hadn't serviced before, or is being a primary distributor meeting number one on the call, is that market share penetration, it keeps ticking higher?

Yes, thanks for that question, Simeon, I wouldn't want there to be any confusion there. It's a little bit hard for us to really classify a new account versus not a new account. Our store teams are, man, they're relentless in understanding every dollar business that's done in the market. We will, especially, think about going into a new market. We're gonna canvas that market, and we're gonna take around our credit apps, and we're going to want to sign up everybody to be an O'Reilly customer from day one. So the concept of completely new customers is a little bit foreign for us. It's really how do you continue to grow our larger share of that wallet? And I think what we've seen, just broad-based over the strong momentum we've had, is that we've been able to grow share on both our larger accounts that were heavy purchases of O'Reilly parts, and maybe we already had first-class status all the way down what the culture would have looked like. So it's pretty broad-based for us. I don't know if there's any one type of customer group that we think is outside that moves the needle versus the broader population.

Okay, thanks. Good luck.

Thanks, Simeon.

Your next question for today is coming from Greg Melich with Evercore ISI.

Hey, guys, good morning. It's Mike [indiscernible] on for Greg. Thanks for taking a question. I wanted to ask, first off, if I could, about the impact of inflation in the quarter. Can you just give us a sense of the level there? And then, do you see inflation just basically turning into more disinflation in the fourth quarter, or should we be thinking about the potential for outright deflation to come in?

Yes, Mike, thanks for the question. Third quarter was kind of low single digits, that's kind of continued ratchet down this year, completely in line with what we expect. We don't, by any means, anticipate deflation within our business. We think our industry over the long-term has been able to hold the price levels. There's a lot of inventory investment. It's a nondiscretionary spend for certain, even as some of us realize some cost improvements. We've been able to hold on to our prices, and that's what we would anticipate seeing moving forward. We've really, sort of, as we've exited third quarter, and we think about fourth quarter, we would really say, and I'll break that in his comments, a normalized inflation environment, we'll have a little bit of it. It's gonna be in that low single digits, not a huge tailwind, but really more consistent with what we've historically seen within the business, with the opportunity from an added benefit perspective that as parts become more complex and the new applications have better technology, the engineered better, the complexity is going to drive the overall value of the changing dynamic of parts to cause average tickets to go up, and then it's our challenge to continue to grow those tickets just on how we provide great service to our customers.

And just from a gross margin comparison, I just wanted to ask anything to know from a LIFO perspective, as we head into the fourth quarter and or any impact from that on the third quarter?

No, really, as we think about our, how we report and think about our gross margin, we view our reported gross margin as the best measurement of how we think about the business, most current reflection of what we're paying for parts today and don't really, I think, internally or externally view some of the changes in the nominal LIFO reserves on our balance sheet to be as relevant for us as what we think the top line reported margin is, and we continue to expect that to be stable as we've maintained our guidance really all year long on that item.

Thank you, good luck.

Thanks, Mike.

Thanks Mike.

Your next question is coming from Christopher Hoevers from JPMorgan.

Good morning, guys, and thanks for taking my question and best of luck and congratulations, Greg. My first question is trying to dial in a little bit more on the SG&A. I guess, can you talk or help us think about how much of the SG&A is just naturally more variable relative to other retail models given how you incentivize and reward your employees? So like if, if comps were up three to five and we backed out the PTO adjustment, but then you ended up doing an eight, how would you think about that normalized SG&A for store growth of two to two and a half? What would that go to holding everything else constant?

Yes, thanks, Chris. Appreciate the question. And there are, I think, a lot of moving pieces in that, especially in a year like this year when we've done some things that are outside of our normal cadence that's spend as it relates to the investments that we've made. You know, we still continue to operate a relatively high fixed cost model just because of the nature of having so many units in the store teams that are there. So that does benefit us as we grow sales and be reluctant, I think, a little bit to quantify or try to parse out those individual numbers, but I think there is a positive. Certainly in a year like this when we've seen such an acceleration in growth, there's just a level of activity that that requires and that's a lot of what we saw here in the third quarter. Part of that's incentive comp, but part of it is, especially on the professional side of business, we don't want to ever be in a spot where we can't get parts out to our shops really quickly and manage that business. So it is a little bit of a mix between the two and I think it kind of a little bit more of a normalized sales environment. We expect that we'd be in a pretty stable place, but for sure our approach this year has been as we have gained the momentum that we have have the opportunity to accelerate that growth by investing in the business has been a key priority for us.

Understood. And if we went back at 10 to 15 years ago, there was always this view that there was a view that you actually originally agreed with that like private label parts aren't gonna work for certain type of cars, whether it's a foreign name plate, certain mechanics didn't like private label and there was this push to have access to OEM parts, particularly on the foreign name plate side. Do you think the industry has changed in any way where there is the customer, the mechanics more amenable and how has your capabilities around that changed over time?

Hey Chris, this Brad, that's a great question and I'll take a stab at it and then maybe flip it to Brent for any other commentary on private label. And I think your overall, I think it's accurate what you said, this is my 27th year with the company when you think back to the early 2000s and you think about the 90s, just in my experience back then, there was less quality in some cases going into private label boxes back then and we sold against that for a long, long time with a lot of success with more of the national brands in the national company, so to speak, but really is really the last couple of decades have evolved. The quality that goes into our exclusive national brands is unbelievable, a lot of those same parts, not only meet OE quality fit form and function, but they exceed and so you think about the success we've had with Import Direct specifically to what you're talking about with the European name plates along with the Asian, we couldn't have more confidence in the quality fit form and function that's going into that OE box and it is again, not only OE, in a lot of cases, it's better than OE and so I do think that dynamic has changed some over the decades and so we have a lot of confidence in what's going into our exclusive national brand box and we feel really good, we have a lot of opportunity to continue to get better at gaining share in the specifically European shops, we have a lot of tremendous competitors out there that have been really great at that for a long time but we feel really good about all those things so Brent, any other thoughts on the private label?

I think maybe just a couple of other thoughts on private label, what we've seen, Brad called out the success of our proprietary brand, Import Direct but as we've continued to build more quality and spec in the box, we've just continued to see more adoption and uptake for those, we launched, we have our break best break line, we got good better best, we've got full line designs in our proprietary brands now, we launched break breath select pro earlier this year, we've seen tremendous both uptake on both the DIY and the professional side, again, customers looking for quality and they're looking for something that's gonna meet their need at the time of need so we've talked a little bit about proprietary brand penetration now being over 50% of our revenue, we continue to see that number grow, we continue to see strong adoption of those proprietary brands, both with our DIY and professional customers so we'll continue to lean into that strategy and we'll also continue to have a national brand as part of our line design and where we think it has relevancy in that particular category.

Make sense, thanks very much guys.

Thanks Chris.

We have reached our allotted time for questions, I will now turn the call back over to Mr. Greg Johnson for closing remarks.

Hey, this is Brad, thank you Holly. We would like to conclude our call today by thanking the entire O'Reilly team for your unwavering dedication and the great results you have generated throughout 2023. I would like to thank everyone for joining our call today and we look forward to reporting our fourth quarter and full year results in February, thank you.

Thank you, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.