Welcome to the O’Reilly Automotive, Inc. Fourth Quarter and Full Year 2023 Earnings Call. My name is Matthew and I will be your operator for today’s call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Thank you, Matthew. Good morning, everyone and thank you for joining us. During today’s conference call, we will discuss our fourth quarter and full year 2023 results and our outlook for 2024. 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 31, 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 Brad Beckham.

Thanks, Jeremy. Good morning, everyone and welcome to the O’Reilly Auto Parts fourth quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman and David O’Reilly, our Executive Vice Chairman are also present on the call. I’d like to begin our call this morning by congratulating Team O’Reilly on another strong performance in the fourth quarter. Our team faced our toughest prior year comparisons where we generated 9% comparable store sales in the fourth quarter last year, which represented our strongest quarterly performance in 2022. Against this very high bar, our team was able to deliver a strong comparable store sales increase of 3.4% in the fourth quarter of 2023. This was a direct result of their unwavering commitment to providing excellent customer service everyday in each of our over 6,000 stores. For the full year of 2023, our team generated a robust 7.9% comparable store sales increase, which was at the high end of the revised guidance range we provided on last quarter’s call. This performance was also almost 2 full percentage points above the high-end of our original 2023 comp sales guidance range of 4% to 6%. We are extremely pleased with the ability of our team to deliver industry leading results again in 2023, especially since this performance was on top of the incredible sales growth in the preceding 3 years. These strong top line sales results drove another year of record-setting earnings per share as diluted EPS increased 15% to $38.47, representing continued strong value creation for our shareholders. As strong as this performance was in 2023, I again think it’s helpful to view these continued outstanding results in a longer term context. To give some perspective, just…

Thanks Brad. I would also like to begin my comments this morning by congratulating Team O’Reilly on another great year in 2023 and welcoming our newest Canadian team members to our great company. We’re thrilled to partner with the Vast-Auto team to enter the Canadian market. Their experienced leadership team and excellent company culture, provide a strong foundation for our growth in Canada, and we view this acquisition as an important part of our strategic expansion plans. Today, I will further discuss our fourth quarter and full year operational results and provide some additional color on our outlook for 2024. Starting with gross margin, our fourth quarter gross margin of 51.3% was a 47 basis point increase from the fourth quarter of 2022 and at the high end of our expectations. Our full year gross margin also came in at 51.3%, in line with last year and also at the high end of our guidance range. As a reminder, our full year results as compared to 2022 were impacted by incremental pressure we faced in the first quarter from the final impacts of calendaring our 2022 professional pricing initiative. Subsequent to the first quarter, our gross margin for the remaining 3 quarters of the year improved approximately 30 basis points from the comparable period in 2022. We have been pleased with our consistent solid gross margin results, especially in light of the mix headwind we faced from our outsized strong performance in our professional business. Our supply chain teams with outstanding support from our supplier partners have worked diligently to drive improved gross margins through incremental improvements in acquisition costs and distribution efficiencies. For 2024, we expect to continue to see further expansion of gross margin as we calendar our gains in 2023 and drive similar incremental improvements as we…

Thanks, Brent. I would also like to congratulate Team O’Reilly on another outstanding year. Now we will fill in some additional details on our fourth quarter results and guidance for 2024. For the fourth quarter, sales increased $188 million, driven by a 3.4% increase in comparable store sales and a $71 million non-comp contribution from stores opened in 2022 and 2023 that have not yet entered the comp base. For 2024, we expect our total revenues to be between $16.8 billion and $17.1 billion. Our guidance for total revenues includes the benefit from leap day in 2024, but this additional day will not be included in our comparable store sales calculation consistent with our historical practice. Our fourth quarter effective tax rate was 17.7% of pretax income comprised of a base rate of 18.9%, reduced by a 1.2% benefit for share-based compensation. This compares to the fourth quarter of 2022 rate of 18.2% of pretax income, which was comprised of a base tax rate of 19.9%, reduced by a 1.7% benefit from share-based compensation. The fourth quarter of 2023 base rate as compared to 2022 was lower as a result of an increase in certain federal and state tax credits. For the full year, our effective tax rate was 21.9% of pretax income, comprised of a base rate of 23.1% reduced by a 1.2% benefit for share-based compensation. For the full year of 2024, we expect an effective tax rate of 22.6%, comprised of a base rate of 23.1%, reduced by a benefit of 0.5% for share-based compensation. We expect the fourth quarter rate to be lower than the other three quarters due to the tolling of certain tax periods, also variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. Now we will…

Thank you. [Operator Instructions] Your first question is coming from Scot Ciccarelli from Truist Securities. Your line is live.

Hi, good morning. This is Joshua Young on for Scot. As we look to 2024, how are you thinking about the sustainability of the growth rates you’ve been putting up on the commercial side of the business? Then as we think about the transaction growth in commercial, would you attribute it more to doing business with new customers or is that coming more from wallet share with existing accounts?

Yes, good morning, Josh, it’s Brad. I’ll kick this off and see if the guys have anything else. But as I think you know, there is a lot of moving pieces this year. We’re going up against a huge performance last year in 2023 on top of everything we generated with mid-teens, comp sales growth on the professional side in the last 3 years. So I want to be a little bit careful talking about the sustainability of that as a percentage as our bases continue to get bigger. Again, there is a lot of moving pieces in 2024. We want to be a little bit cautious of everything going on in ‘24. But what I can talk to you about from an absolute confidence perspective is our ability to continue to out comp the market and continue to take share, especially on the professional side of the business. We couldn’t be more confident in our team’s ability to continue to drive share gains on the professional side. As you know that side of the business is still extremely fragmented. And we have a lot of initiatives in place as well as just our fundamental everyday execution that we’ve always had to make sure we continue to drive share gains here in 2024. In terms of the transaction part of it, Josh, I would say it’s probably a combination of both. When we think about the makeup of our professional business and you think of kind of how we’re always working up that call list, we’re always going to be focused on new business. There is customers out there even in existing markets that still don’t buy hardly anything from us simply because of the relationship they have with somebody else. And that business and those relationships is built over time, but we’re out there chipping away on it every day. And so we have that business that we’re not doing today. And when Brent and I and Jeremy look at our performance on the professional side, we’re seeing fairly balanced growth, both with existing customers and new. And we feel like that is going to continue for the foreseeable future.

Got it. Very helpful, thanks. And then, just this year, you obviously had the elevated SG&A growth on that investment spending. And it sounds like that may be the case again in ‘24. Could you just give us some more color on where your biggest remaining investment opportunities are? And do you think you’ll be finished with this sort of accelerated investment cycle by the end of this year? Thanks.

Yes, I’ll take that, Josh. And again, see if the guys have anything else. Obviously, a very fair question. As you know, as we talk through the quarters in 2023, we continue to see opportunities to play from our position of strength. We’re always thinking about the long game when it comes to making sure that we’re driving the profitability of our business through sustained share gains that we talked about a minute ago. Really, as we said a couple of times last year, we had the question, is this going to continue in 2024? And our answers then the entire time that we’re going to wait and see and see how we feel about the continued ability for us to capitalize on some of the volatility that’s happening with some weaker competitors. And as you’ve seen, that’s still how we feel. Really, when we look at the makeup of that, we’re obviously rifle approach when it comes to our store payroll and how we manage that each and every day. We’re also still rifle approach on making sure those staffing levels to really affect both sides of our business on the share gains. We want to make sure that we continue to staff for that. Really, the makeup that Brent just talked about really how we’re seeing that is the biggest driver of that is going to be our continued investments in tech. And how we’re thinking about that is pretty simple. We have had an amazing run in the last many years, but we’re not looking backwards. We’re looking at the next many years of our business. We only own 10% of the market in the U.S. And so we have an extreme opportunity to get after some of these investments when it comes to technology and specifically in the form of how are we going to help our frontline team members to give better customer service. How are we going to remove friction from the customer experience, both with our DIY customers and our professional customers? And so we feel extremely good about those investments in SG&A, and we feel like there is things we could do, Josh, here for the short-term to drive down SG&A, but that wouldn’t be the right thing to do, knowing we only own 10% of the market and knowing that we’re playing the long game here.

Yes. And the only thing I would add Josh, to Brad’s comments, especially as it relates to the tech investments, everything we invest in, to Brad’s point, we’re playing the long game, but we invest through a filter of expecting a return on it and a return in the marketplace and an outsized return with our customer base. So that’s the lens we look through when we make those investments.

Great. Very helpful color. Thanks, guys.

Yes, thank you.

Thank you. Your next question is coming from Kate McShane from Goldman Sachs. Your line is live.

Hi. Good morning. Thanks for taking our questions. I wondered if you could talk a little bit more about the change to more owned retail. And can you walk us through what that means for availability of cash for share buybacks over the longer term?

Yes. Hi Kate. Good morning. This is Jeremy. Great question. It’s been kind of an interesting transition over a lot of our history as a company. We have always had a preference or a bias towards owned properties. We feel like that long-term investment and our ability to get compounding returns out of an increasing store bases is an attractive part of how we are able to deploy capital for our shareholders, invest back in our business. And we have spoken kind of, gosh, over the long course of time, especially as we move to sort of our current capital structure in 2011 and started to dial up our share buyback, we have been consistent around how we think about the prioritization of our use of capital. And the first part of that’s always been within our existing operations and how we think about funding the things that are going to make our existing stores be better. And then as we focus on growth, we know that, that’s been a very valuable engine for a long course of time for our shareholders. That’s always been tempered a little bit by what are the best opportunities and things that are available within our market. And so we have always had a balance. As we work through the last few years, we have seen the economics on those investments improve really on both sides. But for sure, as we own those properties and the per store volumes and our profitability per store have improved, there is and even I think more powerful value creation mechanism there as we invest in owned stores, and I think that’s helped. I think there has also been an ability to identify those properties within the marketplace that has been a little bit easier. So, those have been the driving factors, and it’s obviously been moving that direction for at least some period of time. You don’t make those decisions for the next year at the beginning of the year, they have been in play. But for us, for this year, we would expect instead of being around 40% of owned new stores in our mix to be closer to 60% for the year and feel like that that’s a positive thing. In terms of how it affects our ability to deploy cash from a share buyback perspective, obviously, at the increments, it’s going to be less dollars that we would allocate to that. But that’s also in line with our historical priorities around use of capital.

Yes. And Kate, I may just jump in. This is Brad. Jeremy did a great job kind of really framing up your – the answer to your question. The one thing I would highlight and just reiterate from what Jeremy said was how incredibly impressed we are with our ability to open new stores. Our team is just doing from site acquisition all the way through the build, all the way through the store execution and our field team’s ability to build the right team with a great store manager professional parts people. We are just incredibly pleased with our new store performance both in backfill markets in kind of the center part of the country and our existing footprint as well as our new greenfield markets.

Thank you.

Thanks Kate.

Thanks Kate.

Your next question is coming from Mike Baker from D.A. Davidson. Your line is live.

Hi. Great. Thanks. Can you – you sort of alluded to it, but a little more color on the competitive situation. You guys have been pretty big market share gainers if you just look at your comps versus competitors or even your comps versus I don’t know if you look at the NAICS data, sales through automotive supply in entire stores. With your comps a little bit lower this quarter because of tough comparisons, you are a little bit below that industry data. I am wondering if there is anything changing in your view in terms of competitive situation or market’s ability to take market share or anything along those lines. Thanks.

Hi. Good morning Mike, it’s Brad. I will take a stab at that. So, maybe just to answer your question directly on the NAICS data, we, in our business, at least at O’Reilly, have never been able to tie that out exactly to correlate the way that some do. Not to say directionally, there is not something there. But we haven’t seen anything change in the competitive dynamic as we look at our performance in Q4 by month. I – Mike, I spent a lot of time just looking at the outputs from our CRM tool that our sales team has out in the field. And listen, those independent competitors that you know very well, I mean they are incredibly well run. We have a tremendous amount of respect for those WDs, the independents, the two steppers. They do an incredible job. And they are honestly our toughest competitor and they hold the most market share when we look at the total addressable market on the professional side of our business, that they are great competitors. That said, there has been nothing that we see that has pointed to anything that has been a step change or anything different, but they were tough all year last year, and they continue to be tough in Q4. And so I wouldn’t tie that directly to what you are seeing in that data, we just really aren’t seeing that.

Mike, this is Brent. I would add to everything Brad said. I would also add that we continue to see a very rational pricing environment out there amongst the competition and as it relates to our ability to continue to win when it comes down to professional parts people and parts availability and service, we feel very good with our proposition going forward.

Okay. That makes sense. One – another follow-up to something you said. You talked about the operating profit pressure to be a little bit greater in the first half, but gross margin is relatively consistent and comps relatively consistent. So, presumably, the SG&A is a little bit higher in the first half. Is that just timing of when you are adding some investments or more store labor in the first half of the year versus second half? Just curious what would cause that to occur?

No, Mike, it’s really a little bit more of the impact of the investments we made throughout 2023, and especially as those – some of those capital investments, thinking about things like the rollout of our store fleet or our ability to get all the way through all of our stores with our LED lighting upgrade. The timing of how those investments flowed in, in the prior year and the depreciation impact of that means that we have got some compare noise that would hit us a little bit heavier in the first part of our year. There is also some degree of timing of some of the technology investments that Brent spoke to, that is the cadence of what that looks like. So, that’s the reason for that, I guess commentary around how we would expect cadence to look.

Yes. It makes perfect sense. Alright. I appreciate the color. Thank you.

Thanks Mike.

Thank you. Your next question is coming from Michael Lasser from UBS. Your line is live.

Good morning. Thank you so much for taking my question. As you set your guidance…

Good morning Michael.

Good morning. As you set your guidance for 3% to 5% comp growth for the year, what have you assumed about the industry growth rate and your ability to take share within the industry? Have you assumed that essentially you will grow your share at the same rate that you did in 2023?

Hi. Good morning Michael, great question. We appreciate it. So, kind of – obviously, we want to balance our confidence in our ability to continue to take share, to continue to out-comp the market in all both sides of the business, not just professional. As I have said earlier, I think maybe Brent and I both did, we see 2024 generally as an overall market as more of a “normal year”. Now, what’s the definition of normal, you look back at the last many years and how much volatility, how much opportunity, how many things have happened, kind of previous to COVID, we generally think that a normal year based upon all our history, all our decades of doing this, that a normal year for the industry is probably more in that 2% to 3% range. And so I think that ties into kind of what we are saying with our guide. Again, like you know, Michael, we always say we are not very good at predicting the future, and it’s hard to say exactly what the future holds for the industry in 2024. But I think I would generally point you to that kind of 2% to 3% range.

Michael, the only thing I would add to that is, if you have to ask the question, do we think our market share gains will be as strong in 2024 as they were in 2023? The answer obviously is no. I mean we comped to 7.9% last year, and we are clearly not guiding to that range this year. We feel like that we still have the same competitive advantages. We really feel like our teams are energized and enthusiastic about the momentum we have created to move forward. But we are continuing to calendar is increasingly hard comps, especially on the professional traffic side of our business. So, that, I think implicit within how we think about the way this year will play out. It’s just our knowledge that we are going to continue to make gains, but we are doing that on a bigger base.

Okay. My follow-up question is, Brad, as you begin the tenure of being the CEO of O’Reilly, do you think that the company is at a peak operating margin rate level? And how much within your focus is on continuing to improve the percentage rate of this organization over time, given that there has been a lot of investment spend made over the last few years? Thank you very much.

Yes. Thank you so much, Michael. So, as you know, our primary focus, I have been here for 27 years, grew up with the company and our – everything that we do has always started as a company with our mission statement that we are going to be the dominant auto parts supplier in all our market areas. And we always focus on not just the business we have, but what’s out there in the market, total addressable not only for the U.S., but now Mexico and Canada. And so every – we start with that. And then we always have done that profitably, and our goal has always been to drive operating profit dollar growth. And that has not changed. When I think back, Michael, over the last 5 years, I absolutely don’t want to live in the past. But when you think about the fact that we ended 2019 with an operating profit percentage of 18.9%, ended the year with a 20.3% at 2023, I think that kind of to your question, kind of points to where we are thinking about the future in terms of what I want to make sure we do and what we want to make sure we do is we want to set up for a similar trajectory going forward in the years to come. Not meaning that we are assuring anybody of what our rate is going to be, but we know we can do it through share gains and driving operating profit dollar growth. That’s where our head is at. It’s where it’s always been at. Now, do we have pride in where we have gotten our rate, absolutely, especially since going all the way back to when we bought CSK in 2008, we are extremely prideful of where we have gotten our rate. And question has always been, hey, what is the right operating profit percentage, and our answer has always been as high as we can possibly get. So, we are going to continue to have that focus. We are going to focus on share gains, doing it profitably and driving that operating profit dollar growth, and we will continue to make sure that we drive that rate as much as we possibly can.

Thank you very much.

Thanks Michael.

Thank you. Your next question is coming from Simeon Gutman from Morgan Stanley. Your line is live.

Good afternoon everyone. Brad, we were talking about SG&A earlier. And last year, you spent a little more, and you did get a return. I know it’s not perfectly linked, but it looks like you got to pay off last year. How much debate did you have around maintaining an even higher level of spend? I know there is some tapering, but why not continue to lean in, while there is, call it, displacement going on in the industry behind you?

Yes. Hi. Thanks Simeon. I will start that off and see if the guys have anything else. So, yes, I think that’s right. We feel really good. There has been a lot of talk about kind of – we have been asked about catch-up with what we spent this last year. And I think we want to more reframe that to timing because anything that we were “catching up on”, to Brent’s point earlier to one of the other questions, we have a very solid discipline internally here on a return on every amount of spend that we make, whether it would be SG&A, whether it would be CapEx and how those play together between CapEx and OpEx with depreciation. And so we feel really good about the money we spend. We feel really good about the returns. And we are going to continue to lean into that, both directions. And we – that’s really what got us to where we are at today to kind of your – the root of your question is where is that line of what’s the right spend and that really just lanes us back to our guidance. We feel really good about every moving piece of our SG&A. We feel good about the returns as well as CapEx and everything that we are talking about when it comes to tech investments, when it comes to safer vehicles, the image and appearance of our stores and all the things you have heard us talk about, we are going to continue to lean into that as you have seen.

Simeon, I…

And a follow-up – oh, please.

Hey Simeon. Just one other thing to maybe add to Brad’s comment and kind of speak to your question too is, obviously, we just leaned into an acquisition, too, as part of investing in a future opportunity. And we feel good about that investment as well, still more shape to come to that over time, but definitely continue to lean in where we see opportunity.

Yes. And a quick follow-up, more short-term, I don’t think I heard it in the prepared remarks, maybe you never venture to guess what weather means in a quarter. Given that you face 2 years of favorable weather, but any idea and is there deferred maintenance or that got resolved with the ongoing run rate of the business?

You are talking about fourth quarter, Simeon?

Yes, any fourth quarter impact? And then does that create deferred maintenance, or has that just gotten realized as the weather has become more favorable for maintenance and repair?

Yes. No, I appreciate the question, a good one. For sure, there is a fourth quarter impact. I would tell you that for both the weather impact, the calendar, the timing of the holiday was a little bit unfavorable to us. The bulk of what we saw was anticipated and would have been built into how we thought about the guidance as we moved into the fourth quarter. It had a lot to do with how we performed in 2022, which was very strong, in ‘21 also. So, there is definitely a degree to which the timing of winter showing up in January versus December impacted those results. In terms of how you think about that for major shifts to deferral, we are not talking about like a huge needle mover and it’s really I mean, literally as simple as a couple of weeks in December last year versus a couple of weeks in January of this year. And that’s why within the prepared comments, we talked about kind of on balance as we think about the full winter season, we are sort of where we would expect to be in the setup for the remainder of the year is how we would view as kind of normal for our industry.

Okay. Thanks for the question. Good luck.

Thanks Simeon.

Thank you. Your next question is coming from Greg Melich from Evercore. Your line is live.

Thanks. I would like to follow-up on sales and then maybe a bit on SG&A. Just to make clear, I have got the fourth quarter, right. It was December, I think you said pressure, was it actually negative in December? And is the first quarter running above the range for the year, given the polar vortex?

Yes. So, I can answer both of those questions, Greg. The December was negative for us. It was better than our plan candidly, but we kind of knew it would be – it was substantially good last year. We don’t give discrete quantification of where we run at the beginning of the year just because there is always a challenge with short periods of time and how the weeks-to-weeks can vary just on a 1-year comp. But we do feel comfortable that we are running well. We are pleased with how we set up and we largely attribute that shrink so far to the couple of weeks of really, really harsh weather that we got in January.

Got it. And then maybe a follow-up on sales, I want to make sure I get the inflation and mix part of this right. So, inflation same SKU will be around 1%. And then should we assume another 200 bps of complexity and mix within your 3% to 5% guide? Is that a fair buildup?

Yes. I don’t know that I would put too finer point like that on it, Greg, for 2024. But first, I don’t know what inflation will be in 2024. Our guidance is a little bit less than 1%. We will get a benefit from the average ticket above that, even independent of professional growing faster, which naturally pulls the total company average ticket up. But we would still expect that a portion of our comp expectations for next year are driven by ticket count growth as the professional side of the business is expected to continue to be solid.

Great. Well, I will let somebody ask – someone else ask when do you get the flex capacitor in stock that we see on the website.

Thank you, Greg.

Have a good quarter.

Thank you. We have reached our allotted time for questions. I will now turn the call back over to Mr. Brad Beckham for closing remarks.

Thank you, Matthew. We would like to conclude our call today by thanking the entire O’Reilly team for your unwavering dedication to our customers and the outstanding results you produced in 2023. I would like to thank everyone for joining our call today and we look forward to reporting our first quarter results in April. Thank you.

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