O`Reilly Automotive Inc (ORLY) — Q4 2017 Earnings Call Transcript

Thank you, Jason. Good morning everyone and thank you for joining us. During today's conference call, we will discuss our fourth quarter 2017 results and our outlook for the first quarter and full year of 2018. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I'd 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, 2017, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I'd like to introduce Greg Henslee.

Thanks Tom. Good morning everyone and welcome to the O'Reilly Auto Parts fourth quarter conference call. Participating on the call with me this morning are our Co-Presidents, Greg Johnson and Jeff Shaw; as well as Thomas McFall, our Chief Financial Officer. David O'Reilly, our Executive Chairman, is also present. Hopefully, everyone had a chance to read both our fourth quarter earnings release and our leadership succession plan press release. I'll briefly discuss our fourth quarter results and our succession plan before turning the call over to Greg, Jeff, and Tom. I'd like to start the call today by thanking all of our team members for their hard work and dedication to our company. 2017 was a challenging environment for our industry. However, through your commitment to providing outstanding customer service and living the O'Reilly culture, we were able to generate our 25th consecutive year of comparable store sales growth, record revenue, and operating income every year since becoming a public company in 1993. Our comparable store sales for the fourth quarter grew 1.3%, which was in line with our guidance expectations. As we discussed on last quarter's call, we faced very difficult comparisons to last December due to favorable weather across the country in December of 2016 and headwinds from a shift in the calendar. This calendar headwind resulted from an additional Sunday, our lowest volume day in 2017's fourth quarter when compared to 2016, as well as the timing of the Christmas holiday, which fell on Monday this year versus Sunday last year. These calendar shifts were a combined headwind of approximately 70 basis points to our comparable store sales growth for the quarter. When we look at our sales progression during the quarter versus our expectations, we got off to a solid start but hit some weather-related softness mid-November to mid-December and finished strong with the onset of harsh winter weather in the last half of December. In absolute terms, October and November were solid comparable store sales growth months and December was negative for the reasons I mentioned. Greg will give you some additional color on our fourth quarter comparable store sales growth and our expectations for 2018. Our earnings per share for the quarter of $3.52 benefited significantly from two tax-related items. These were a $0.15 benefit from the new stock option accounting requirements and a $0.62 related to adjusting our deferred tax liabilities in conjunction with the Tax Cuts and Jobs Act of 2017. Tom will discuss these impacts to the quarter and our outlook for next year in more detail in a few moments. Excluding these tax impacts, our earnings per share for the quarter was $2.75, which was at the top end of our guidance range. Again, Greg and Tom will be covering the details of our fourth quarter performance and our outlook for this year in a moment. As was disclosed on our two press releases last night, after 33 years of serving in many different roles in our company, I plan to take on yet another new role. Succession planning has always been an important and methodical process at our company, and over the period from now until our Annual Shareholder Meeting on May 8th, we will transition the day-to-day operations of the company to Greg Johnson and Jeff Shaw. As you know, they assumed the roles of Co-President a year ago. This will allow me a little more free time for my personal life, yet allow me to continue my participation in the direction and management of our company. Subject to our shareholders' meeting or subject to our shareholders electing me to the Board in May, our Board has asked that I assume the role of Executive Vice Chairman, and Greg Johnson will be promoted to Chief Executive Officer and Co-President; and Jeff Shaw will be promoted to Chief Operating Officer and Co-President. I will continue to be highly involved in the operations of the business as will David O'Reilly who will continue as our Executive Chairman. For those of you who know our company's history, this transition is very similar to the 2005 transition when Ted Wise and I were promoted from Co-Presidents to COO and Co-President and CEO and Co-President, respectively, and took over the day-to-day operations from David. Greg and Jeff are both extremely talented and experienced individuals who have the full support of our team and our Board, and I have complete confidence they will continue our company's long-term track record of success. Before I finish up my prepared comments, I'd like to again thank our team for continuing to provide industry-leading service to our customers every day and growing our market share during this difficult past year. I'm extremely proud of all of you and I'm confident 2018 will be an outstanding year for our company. I'll now turn the call over to Greg Johnson.

Thanks Greg and good morning, everyone. I'd like to begin my comments today by thanking our team for their deep commitment to outstanding customer service and continuing to build our market share through a tough environment. By always putting the customer first, we're well-positioned to sustain profitable growth in our business. Now, I'd like to provide some additional color on our fourth quarter comparable store sales results and outline our guidance for 2018. For the fourth quarter, our comparable store sales results were driven by an increase in average ticket offset in part by pressure on ticket counts on the DIY side of the business. The Professional business outperformed the DIY business during the fourth quarter. The increase in average ticket continues the long-term trend of increasing parts complexity, although we did see some inflation on same SKU pricing, primarily seasonal items, during the fourth quarter, which if it continues, will lend additional support to our top-line growth moving forward. On a category basis, we saw strength in winter-related categories across most of the country, which was partially offset by extremely tough comparisons to 2016 for winter-related categories on the West Coast, which did not see the same benefits last year. For the first quarter of 2018 and the full year, we're establishing comparable store sales guidance at 2% to 4%. The key assumptions in developing our guidance are total employment will remain strong and support a modest improvement in miles driven. However, increasing gas prices could limit the growth of miles driven and put added pressure on lower-income consumers. We further assume weather will be normal, pricing in the industry will be rational, and inflation will continue to be muted. Our final major assumption is that pressure in our industry from the depressed new vehicle sales totals during the period from 2008 to 2011 will begin to abate. Thus far in the quarter, harsh winter weather across the country has helped support the benefit in our northern markets, although unusual snow and ice in the southern markets have been a headwind to business since these markets are much less equipped to handle inclement weather and consumers frequently stay home until conditions improve. In total, we're pleased with our business thus far in the quarter. However, built into our guidance is consideration that our sales volume in Q1 is seasonally weighted to the end of the quarter where we have our toughest comparisons. In general, the much more inclement weather this winter season has compared to the past two mild winters should help drive our business throughout the year. For the quarter, our gross margin of 52.9% was within our expectations and our full-year gross margin of 52.6% was in the middle of our updated full-year guidance of 52.5% to 52.7%. For 2018, we're establishing our full-year guidance at 52.5% to 53% of sales. The increased expectations are attributable to better leverage on fixed cost for more robust sales, modest improvement in merchandise margin and a slightly lower LIFO charge of $18 million versus $22 million in 2017, partially offset by pressure to increase transportation cost. We expect our 2018 LIFO charge will be front-loaded in the first two quarters of the year based on current vendor negotiations, with cost increases most likely offsetting the negotiated price decreases in the back half of the year. The Tax Cuts and Jobs Act of 2017 will dramatically reduce our future tax expense. We expect the savings to be approximately $215 million in 2018 and we feel it's appropriate to take a portion of these savings and allocate it back to the business with a focus on continuing to improve the levels of service we offer our customers. Our focus is to further enhance the levels of customer service we offer by accelerating enhancements to our omnichannel efforts and to continue to build on our industry-leading customer service. The cost of this investment to represent a 70 basis point headwind to our SG&A and an incremental $30 million of capital expenditures. Jeff will give further details in the improvements of our in-store service levels, but I'd like to take a minute to discuss our omnichannel efforts. Regardless of how our customers begin their interaction with us, whether it's in-store, online, or over the phone and complete their transactions whether in-store, at-home delivery or with us delivering the order at their shop, we want to provide a seamless shopping experience that engages the customer and delivers a superior customer experience. During 2018, we'll accelerate our investment in our electronic portals O'Reilly.com for our DIY customers and First Call Online for our professional customers. Our projects focus on improving the usability, content, search functionality, and general touch and feel of these portals to ensure we're exceeding our customer expectations. We will also be focused on better using the data we collect to increase the speed of customer interactions and transactions, improve the smoothness of transactions between the different channels, and use fast buying patterns to better anticipate our customers' needs. Without going into the details of these specific projects, I do want to say that we're excited about our enhancements and we'll be able to achieve this year the foundation we'll put in place for improvements in this dynamic part of our business. With the additional spend on operating expenses for these investments and the omnichannel and service levels with our customers, we're setting our 2018 full-year operating profit guidance at 18.5% to 19%. For the first quarter, we're setting our earnings per share guidance at $3.55 to $3.65. For the full year, our guidance is $15.10 to $15.20. Our full-year guidance includes an estimate for the tax benefit for the new option accounting adopted in 2017 and the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I turn the call over to Jeff, I'd like to thank our team for their hard work in 2017. I look forward to serving as the company's Chief Executive Officer and I'm excited about the potential for our performance in 2018 and beyond. I'll now turn the call over to Jeff Shaw.

Thanks Greg and good morning everyone. To begin today, I'd also like to thank our team for their tireless commitment to providing outstanding customer service. Your dedication to our valued customers has allowed us to strengthen existing relationships and to build new ones. We ran our business to develop long-term relationships with our customers who expect high service levels regardless of the sales environment. And as a result, we have a relatively high fixed cost model, which has supported our market share growth year after year. With our business model and new store growth rate, our leverage point for SG&A is in the comparable store sales range of 2.5% to 3%. Comparable store sales of 1.3% for the quarter and 1.4% for the year is well below our historic and expected future growth rates. We tightly manage our expenses in all sales environments, but at the sales levels, we expect to experience deleverage on our SG&A as we will not make short-term dramatic cuts in our SG&A since that would significantly impact our service levels and damage our long-term customer relationships. As a result, we experienced SG&A deleverage of 87 and 66 basis points for the quarter and year respectively. When we look at total increase in average SG&A spend per store, we were up 1.2% for the year, which was below our beginning of the year guidance and reflects our efforts to prudently manage expenses lower during slower sales periods. Looking closer at our full-year SG&A spend, we were below expectations on payroll, incentive compensation, and professional services and fees, offset in part by rising benefit cost, utilities, and vehicle costs. As Greg mentioned earlier, we're going to take a portion of our tax savings and allocate it to increase operating expenses to further enhance our best-in-class customer service. This investment, combined with normalization of incentive compensation, will result in 2018 SG&A per store increasing in the range of 3% to 3.5%. This additional spend is focused in three main areas; omnichannel, which Greg already discussed, enhanced benefits and wages level, and in-store technology to improve the efficiency of our store teams. The key driver of our in-store customer service levels is the knowledge of our Professional Parts People. As we continue to experience wage pressure, driven by the waterfall effect and increasing minimum wages in the extremely labor tight market, we absolutely must be able to attract and retain team members who have automotive knowledge and a willingness to live the O'Reilly culture. We must also ensure our Parts Professionals continue to enhance their knowledge base and are as efficient as possible. We have several significant projects directly aimed at accomplishing this. We don't want to discuss these upcoming enhancements in detail, but we're very confident they will generate a solid return on the capital we invest. On the expansion front, we had a busy year. We opened 109 new stores, converted to 48 bond stores, and expanded our Greensboro DC from 300,000 to 500,000 square feet to support our continued growth. For the year, capital expenditures came in at $466 million, which was below our guidance due to a higher mix of lease stores, delays in some projects, and generally just tightening our belt during a soft year. For 2018, we're setting our CapEx guidance at $490 million to $520 million. We plan to open 200 new stores during the year, and the primary increase in our CapEx is accelerating our IT project spend. I'd like to conclude my comments today by again thanking our team for their continued dedication to providing the best customer service in our industry. Our teams have responded to the market conditions we faced throughout 2017 by working that much harder to take care of our customers and that relentless commitment is the key ingredient as we move forward to continue to take market share. Now, I'll turn the call over to Tom.

Thanks Jeff. Now, I'll take a closer look at our quarterly results and our guidance for 2018. For the quarter, sales increased to $92 million, comprised of $38 million increase in comp store sales, a $53 million increase in non-comp store sales, a $2 million increase of non-comp non-store sales, and a $1 million decrease from closed stores. For 2018, we expect our total revenue to be $9.4 billion to $9.6 billion. The Tax Cut and Jobs Act of 2017 had a dramatic impact on our fourth quarter earnings and it will continue to have a significant positive impact on our tax rate on a go-forward basis. For the fourth quarter, we recorded a tax benefit of $53 million or $0.62 per share related to the remeasurement of our federal deferred tax liability from a tax rate from 35% down to the new 21% tax rate. This deferred liability relates to differences for our historic past deductions exceeded our deductions recorded for GAAP. These differences reverse over time but will now reverse at the new lower tax rate. During the quarter, we also recorded a tax benefit of $30 million, $0.15 per share relating to the new accounting for share-based compensation. For the full year, our tax benefit for the new required accounting for share-based compensation was $49 million or $0.50 per share. For 2018, we expect our tax rate to be approximately 23% to 24% of pretax income. The new lower rate is a result of lower federal tax rate. In comparison to 2017, we expect our EPS to be affected by a $0.59 headwind from the one-time reduction of our deferred tax liabilities in the fourth quarter of 2017, a $2.50 increase from the new lower federal tax rate, and a $0.30 headwind from a tax deduction per share-based compensation with the lower benefit driven by lower expected gains on exercises of options. We expect the quarterly tax rate will be relatively consistent; however, the quarter-to-quarter differences in the tax benefit from share-based compensation will create fluctuations on our quarterly tax rate as a percent of pretax income. Now, we'll move on to free cash flow and the components that drove our results for the year and our expectations for 2018. Free cash flow for 2017 was $889 million, which was a decrease of $89 million in the prior year. This decrease was due to a lower decrease in net inventory, offset in part by lower capital expenditures. In 2018, we expect free cash flow to be in the range of $1.1 billion to $1.2 billion, with the increase driven by higher pretax income and lower cash taxes, offset in part by higher CapEx. Inventory per store at the end of the quarter was $600,000, which was a 4.2% increase from the end of 2016. Our ongoing goal is to ensure we grow per store inventory at a lower rate than the comparable store sales we generate. And unfortunately, we didn't achieve that goal this year as soft sales, especially in seasonal categories, resulted in a higher year-end inventory value than anticipated. We expect this cycle through this excess inventory in 2018 and we anticipate we'll grow our per store inventory in the range of 1% to 2% this year. Our AP-to-inventory at the end of the quarter was 106%, which was where we ended in 2016. We anticipate a slight improvement to 107% at the end of 2018, which will be driven by the higher level of sales. Moving on to debt. We finished the fourth quarter with an adjusted debt to EBITDA ratio of 2.12 times as compared to our ratio of 1.63 times at the end of 2016. The increase in our leverage ratio reflects the $750 million 10-year bonds we issued in August and incremental borrowings of $1.2 billion unsecured revolving credit facility. Our increased borrowings moved us into our targeted range of two times to 2.25 times. We continue to execute our share repurchase program and for 2017, we repurchased 9.3 million shares at an average price of $233.57 for a total investment of $2.2 billion. Subsequent to the end of the year through the date of our press release, we repurchased 0.5 million shares at an average price of $261.72. We remain very confident that the average repurchase price is supported by expected discounted future cash flows of our business and we continue to be our buyback program as an effective means of returning excess capital to our shareholders. Finally, before I open up our call for questions, I'd like to thank the O'Reilly team for their dedication to the company and our customers. This concludes our prepared comments. And at this time, I'd like to ask, Jason, the operator, to return to the line and will be happy to answer your questions.

Hey guys. First question is, can you quantify what kind of impact are expecting from the improved car part that you mentioned during the call? Car part meaning the dropping of car sales you have, obviously, during the downturn.

When we look at the numbers, we see that that pressure is going to abate, quantifying that particular factor amongst all the factors is not something we do, but we feel like that was a pressure last year that will be less of a pressure this year. And obviously, we continue to have the aging of the vehicle fleet with more vehicles in the end of the order section that continue to drive demand and growth in our industry.

Okay. My follow-up question is regarding the reinvestment. If we consider the numbers, and I'm assuming we're discussing 70 basis points of margin, which people seem to interpret as around $65 million to $66 million, is that entirely allocated to wages, or are there other factors included? It appears to be a rather high figure on the wage side, but perhaps there are other elements contributing to it.

Yes, this is Jeff. I'll take a stab at that one. We feel it's about $65 million. And as I mentioned in the prepared comments, the spend is basically focused in three main areas: wage increases in excess of the historical norms, additional spend on information technology, and enhancements to our team member benefit offerings.

And kind of in that order, Jeff?

That's not something that we're going to quantify the individual pieces of, Scot.

Okay, got it. Thanks a lot guys.

Thanks Scot.

Thank you and good morning. The first question is a follow-up to Scot's. Simply put, do you think you would have made this $65 million investment without tax reform? You presumably began the 2017-2018 planning process before the final bill passed. Were some of these investments already part of the plan, or did you decide to invest once you realized you had the opportunity?

Scot, this is Tom. I'll take a shot at this one. When we look at our technology investments, we continued to invest strongly in those over the last three to four or five years. I think that the tax change has allowed us to accelerate those further. When we look at wage increases, this is the incremental amount in addition to known wage pressures we have. We feel like as the market has tightened and as others have taken action, that we need to be proactive in addressing especially our low-end store wages to make sure we can stay competitive in the market and attract the talent we need in our technical business.

Got you. My follow-up question is about the weather. There seems to be a distinction between good and bad weather, particularly in terms of how it affects parts failure and road maintenance. Considering the weather we've seen over the last few months, which has been more typical for winter, what are your thoughts on how the current weather conditions might impact your business in the summer months when we expect some parts failures to affect operations? Do you believe this weather backdrop will be beneficial as we approach midyear, or is it less significant?

Yes, Matt, this is Greg Johnson. As you mentioned, there are different types of weather impacts. As I stated in my prepared remarks, bad weather tends to be more advantageous for us in northern markets and less so in southern markets where we aren't as prepared. There are both short-term and long-term benefits to bad weather as well. In the fourth quarter, particularly towards the end, we experienced some positive effects from bad weather due to cold snaps in the north, and we expect to see ongoing benefits as we move into the spring and summer months. This could be linked to battery failures when temperatures rise, as well as issues with ride control and undercarriage components caused by damaged roads, which we typically see a few months after experiencing severe winter conditions.

Thank you so much. By the way congratulations on all the movements and promotions and such.

Thank you.

Hi, thanks. I want to follow-up on the first quarter comments where you said that the comparisons get more difficult later in the quarter and presumably March, but correct me if I'm wrong. They started a lot easier over the next couple of weeks as just starting right about now, we're up against when the tax refunds really follow the table last year. So, could you tell us how you expect that to play out over the next few weeks and how that plays into your guidance?

Yes, Mike. I can tell you, as I said in the prepared comments, we're pleased with where we stand thus far in the quarter. And looking forward, as you move later in the quarter, we typically see an uptick based on seasonality, we'll see an uptick in parts because our due to seasonality. And you're right, the tax benefit did hit us over the next couple of weeks and we were hopeful that we'll see improved sales during that period of time and we remain confident in our guidance of 2% to 4% for the quarter.

So, I guess when you say hopeful, I mean does that imply that the 2% to 4% assumes a pickup in the next few weeks? And then maybe a little bit of a drop off in March? Is that the right way to think about it?

This is Tom. What I would tell you is that we build our sales plan on a daily basis throughout the quarter and build our guidance based on overall market assumptions. And when we had the call last year, we have obviously were having a slower than anticipated beginning of the year and some of that was the impact of the timing of tax refunds. So, we've taken all that into account in developing our guidance for the quarter and we're comfortable with our 2% to 4% guidance based on our progression thus far in the quarter.

This is Greg Henslee. Let me just add one thing. When you talk about the quarter, and we recently talked about the importance of the end of the quarter and the comparisons is simply because of the seasonality that Greg mentioned and the fact that our sales typically ramp into the quarter. So, while we're pleased with where we are in the quarter, the majority of the quarter is in front of us, and we really didn't take a lot of the potential for the timing of tax refunds and stuff into our guidance, but we did consider just kind of how we did last year, how we would typically ramp, and where we're at in the quarter and, as Greg said, we're comfortable with the guidance we gave recognizing that we're pleased with where we're at, at this point in the quarter.

Okay. Appreciate that. I'll turn it over to somebody else.

Good morning. Maybe just a quick follow-up on the reinvestment. I kind of think about it, if you can touch on why 70 basis points? Why not more, given your margin structure and the likelihood of improving industry backdrop and the share opportunities that exist in certain regions around the country? How do you come up with the 70 basis points?

This is Tom. I'll respond to the question and then pass it to Jeff. When evaluating the potential for accelerating certain projects and assessing their ROI, we have a clearer understanding. However, when it comes to implementing competitive benefits to retain employees and lower turnover, the situation is somewhat more complex. Additionally, we analyzed wage pressures based on market changes and made an estimate. It's important to note that we don't apply a uniform approach to wages, which Jeff can elaborate on. Our focus is specifically on store wages.

Really, it would be at store-by-store market-by-market analysis and obviously, with what's going on in the industry and minimum wages coming up and things that we're hearing from other retailers about moving wages, we just wanted to be prepared for that and we'll react accordingly by market based on what was going on in the market. As I said in my prepared comments to make sure that we can not only attract, but retain good solid parts professionals.

Maybe just a follow-up on the topic. When you say wages, is it strictly just rate or is there also potential investment in incremental labor hours? And then just last one, just given the timing of this impact, should we think about the 70 basis points as an annualized impact or the annualized impact greater because of the potential timing of the wage increases?

This is Tom. I'll address the annualization. When you look at the benefit portions, when we roll out benefit changes, it's got an ongoing portion of expense, but it's also got an immediate expense impact to catch up our accruals to these new levels. So, we would expect the quarter-to-quarter impact to be pretty similar throughout the year and the annualization to be similar as we have more start-up costs on these items at the beginning of this year and then wages ramp, it will level out.

I mean, labor hours, my comment there is our philosophy is the same as it's always been. We staff with the appropriate volume of the business and we would continue to do that kind of buy market based on what we say our sales volume doing.

Hi thanks. First, Greg, I want to thank you for all your work over the years with us. And Greg and Jeff, congrats.

Thank you.

I have two questions. The first is about inflation. You mentioned that it started affecting you in the fourth quarter. Can you quantify how much of an impact that had on your guidance for this year and in the 2% to 4% comparable sales growth? How much inflation are you anticipating? I also have a follow-up.

This is Tom. Most of the inflation that we saw in the fourth quarter was on seasonal-type items. Our comments in the prepared remarks were that our expectation is that we're going to have yet another year where same SKU pricing doesn't come up. To the extent that we did see some, that would additional tailwind for us.

So, basically, same SKU is the same and it's just commodity sort of flowing through?

Well, we saw some same SKU inflation on seasonal items.

Okay, great. And then the second question was, when you thought about margin investment and ROI from that, it was pretty clear you went methodically through everything. And I'm curious as to where product investment or gross margin investment flushed out in that equation? Any reason why you didn't look to put some into the product margin or gross margin generally, even as part of a service offering when you look to invest margin?

Since this is a planned question, I'll address it. We are confident in our current pricing. We know that we are very competitive in the market, and our businesses are highly technical. The value to the customer is not determined solely by the price of our goods, and we believe we are priced appropriately for the services we offer.

And then, additionally, there's really nothing to gain for us by lowering price. I mean, if we lower our price today on any given category, you can bet our competitors, with the transparency of the internet on pricing, are going to lower their price tomorrow. So, there's just nothing to gain there. If we're priced online, we always have to fix that, but as Tom said, that's just not the case. We think our company and all of our competitors spend the time, spent a lot of time on ensuring that we're price competitive, and we just don't think there's anything to gain by lowering our prices as long as we're in a competitive position.

And on the IT investment, I mean, Home Depot made a big thing about ramping spend on more direct distribution. Is that part of the CapEx increase you guys are talking about or no?

This is Tom. I'll start and Jeff can add on. Investment and distribution is something we've always done and availability is such a crucial piece of what we do. That's always in our CapEx plan.

And frankly, the number of times that we touch a store now is so significant. Frankly, we've gone overboard in the past. And there was a time where we had a pretty important market where we were touching our stores 12 times a day out of the distribution center. And we finally realized, this is just it's crazy, that there are service levels are that high when they really didn't really need to because we were far out with our competitors. We realized we can outpace our competitors still just touching those stores eight times a day. So, if we felt like that we were even slightly in a not competitive position from an availability perspective, we've always got the ability to leverage up our service levels from our DCs and frankly, we feel like we are the best availability in the industry as it stands today.

Yes, that makes. I appreciate it guys. Good luck.

Thanks. Good morning guys. Just on the DIY versus commercial commentary, I think you said DIY was weaker. What do you attribute that to in the quarter? And I guess, was the DIY side of the business facing a more difficult comparison? I'm just wondering, has that improved here in the first quarter?

Yes, the DIY was definitely up against a tougher compares and we're seeing a little bit of an uptick in our professional business there in the fourth quarter. Yes, a key driver of that is during the cold weather in 2016, battery sales were pretty incredible, because batteries that didn't fail during the prior winter failed during that winter. Batteries are lined, it is heavily skewed to the DIY side of the business. But over time, we would expect as the complexity of cars continues to be more prevalent, that our do-it-for-me business would simply be a stronger business than our DIY business.

Okay. Understood. And then I just want to follow for higher expenses for 2018. I know it was asked in a lot of different ways, is there a way to help us understand what is sort of catch-up spending from 2017? And talked about payroll, incentive comp, professional fees all being lower than you had planned in 2017. So, of that 70 basis points, how much are just simply catch-up?

Well, what we tried to communicate is that the 70 isn't incremental thought our SG&A plan would look like absent the pressures created by the new tax code. We would expect the investment to continue in 2019, but we would hope the investments that we're making that the incremental spending would provide even higher levels of service and leverage that with better sales and really increase team member productivity through technology enhancements as well as reducing our team member turnover.

Thank you for taking my question. So, thank you, Greg Henslee, for everything that you've done in the past and certainly congratulations to both Greg Johnson and Jeff on your new appointments. My first question is a follow-up on the reinvestment from the tax reform. So, certainly, one would assume that you're making these investments because you believe that you can yield a higher rate at some point in the future. Would it be reasonable to assume that these higher returns would start in 2019 or will they be further out than that?

Well we try to drive higher sales every day. Our plan encompasses the traction we think we'll get this year. Some of these investments are longer-term investments. We would tell you, a big opportunity for us is to reduce our store level turnover as it impacts our service levels.

And if I can add to that, and Tom mentioned, turnover and omnichannel. It takes a lot to learn how to sell parts. And by decreasing turnover, we feel like long term, we put ourselves in a significantly better position to provide service levels to our customers and just be the professional parts people that our company has been built on. So, that really starts generating immediate returns as we start decreasing the percentage of turnover that we have annually. And then omnichannel, we feel like that if you have an opportunity to do better than we do today. And I feel like we do pretty well today. We can do a lot better. And as we make those improvements to our platforms, I think we'll see pretty immediate effects of those improvements, but they're incremental. It builds over time, as our professional customers using our portal, learn to use our software, like our software, become committed to us, partly because of service, mainly because of service, but partly because they like the way our interface works. And same thing applies to our DIY customers. So, while all this is incremental over time, some of it has an immediate positive effect.

Hi, thanks everyone and congratulations to everyone. Greg, thanks so much for your service so far. Just quickly, I guess, my one question would just be, do your cash and earnings estimates include any benefit from the new guidelines around the 100% expensing of certain assets?

That sounds like an accounting question. I'll take that one. Over the years, there have been many programs that have accelerated the depreciation of certain fixed assets and we've taken advantage of those, but I would tell you is that the change in the law changed those this year for us from a headwind as we turned the corner on having a bigger GAAP deduction and tax deduction to equal. So, the answer is yes, it does include that. That benefit is not as big for us because of past opportunities to accelerate depreciation.

Good morning. Thanks a lot for taking my question. And congratulations everyone, that's great news. My question is a little bit geared towards the first quarter. So, you got a 2% to 4%, you said you're pleased with the business, you talked about some of the ebbs and flows. Are you surprised that business hasn't come back stronger?

What I would say is that we always do as much as we can to drive as much business as we can within reason. I think one of the factors that has probably caused business not to be maybe stronger than it is, but again, we're not displeased with our business. We're pleased with how we've done in January. As Greg mentioned, some of the cold weather that we had pushed down into markets that don't benefit from cold weather immediately. When Dallas-Fort Worth shuts down, and you look at your window and there's no cars on the road, that's just not a good day for us. And those factors existed in many southern markets, which helped dampen maybe the positive effect that we're having from a cold winter. Longer term, the fact that we're having this cold weather and we've had this cold weather through some of the markets, it's going to be a positive thing for our industry this year, I would think.

And without getting too granular on what you're seeing by market, when the business does come back in those markets that are normally not used to seeing the weather, is it better than it's been? So, the store may be closed when there's a lot of snow, but then the next day it's quite good? Or is that not how it's happening?

Usually, those markets don't get as extreme a cold weather that would drive part failure as the northern markets, where it just get brutal cold weather which causes rubber to not be as flexible, causes belts to break, causes starter motors not to work as well, causes batteries to fail, cooling systems freeze up. I mean, there's just all kinds of things that you can have in the extreme weather. You don't get quite as much benefit in the warmer markets that aren't used to cold weather, because in Dallas-Fort Worth, when it gets to 20 degrees, that's really cold weather, but that's really not cold enough to cause the kind of damage that we're talking about in the northern markets.

And another benefit there, it's fortunate in many of those southern markets, that when they get bad weather and it does impact road conditions, and as I said, they're not as equipped to clear that. But typically, the weather turns around really quickly. You don't have snow and ice on the roads very long. So, the recovery is really quick to get back to business as normal.

Thanks. Good morning. Congratulations to everyone. My first question is about sales. Following up on Michael's question, can you share your comfort level regarding the start of the first quarter? How significant is the variation in performance between markets? Also, within the sales segment, are you noticing any signs that the six to eleven-year-old cars are beginning to return? Additionally, are you experiencing any large-scale weather-related repairs beyond just batteries, starters, and alternators?

Simeon, I would say that the spread across markets was fairly similar to what we've seen over the past few quarters with our more mature markets being a bit softer than our less mature markets. Our northern markets and western markets have performed a little better this winter than earlier this winter than our Central U.S. markets. I'm sorry, what was the second part of your question?

The vintages are showing signs of returning to the sweet spot at this time of year. Additionally, following the weather, are you noticing any larger repairs or breakages beginning to occur? Typically, there is a delay before some of the more straightforward issues start to arise.

Yes, I wouldn't say we're seeing anything yet. I think most of the upside from the weather is still yet to come. Again, with the exception of the winter weather-related categories, wipers, batteries, things like that.

Okay. My follow-up is regarding gross margin. I'm trying to understand the components, specifically how pricing is behaving compared to the cost of goods sold. I'm curious if you're experiencing any pressure on the selling price, and whether the expansion included in your guidance is primarily due to reduced acquisition costs from your suppliers.

Yes, I mean, it's coming from a few different places. As we say, the lowering cost is a small part of that. We expect that to be more so in the front half of the year than on the back half of the year. But a lot of it is coming just from leveraging stronger sales, leveraging our fixed cost across the stronger sales share that we expect.

And the selling price is generally stable?

Selling price is generally stable. We monitor our pricing with our competitors as do they us constantly, and we feel like we don't expect to see a lot of inflation on the cost side or the selling price side this year.

Thanks guys. A couple of quick follow-ups on sort of weather and the quarter trend. As you look at December, was that real tough compare? Did you accelerate on the two-year stack? And did you see on that basis much difference in the DIY versus the do-it-for-me side?

Chris, this is Tom. We don't comment on our monthly comps. I guess we commented on two months this year because they were negative and the only negative comp months we've had in a long, long time. But individually, we're not going to comment on monthly comps.

Okay, understood. On the southern markets, I know that the shutdown of DFW would negatively impact the overall situation, but does reaching the 20s indicate improved trends during the summer months in that region?

Not as much as it would in the northern months, but I think it is helpful. The cold weather is hard on a lot of components. The part of it is just due to the damage to roads and things like that from an extended freeze and thaw, and freeze and thaw, and you just don't have as much of that in the southern markets. So, you have some benefit, but it's not nearly as positive of a benefit as it would be in the northern markets where you had the deep freezes and then thaws that are so damaging to the roads.

As you mentioned, there are different types of weather. In my earlier remarks, I noted that bad weather usually benefits us in northern markets more than in southern markets, where we are generally less prepared. Additionally, there are both short-term and long-term advantages to experiencing bad weather. We anticipate a warmer summer, which we believe will be influenced by the harsh winter we've experienced this year, leading to more product failures and a more favorable summer selling season.

Actually, it's Greg Johnson.

Yes, Jason, this is Greg Johnson. Thank you very much. We'd like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to customer service in the third quarter. We look forward to a solid year in 2018. And we like to thank everyone for joining our call today and we look forward to reporting our 2018 first quarter results in April. Thank you.