Q4 2016 Real-Time Call Brief

Highlights

We finished the year off with a comparable store sales increase of 4.8% in the fourth quarter, which matched our increase for the full year of 2016.

The solid 4.8% comp store sales growth for 2016 was at the high end of our guidance of 3% to 5% and came on top of 7.5% and 6% in 2015 and 2014 respectively.

For the fourth quarter, we grew total sales by 7.7% and for the full year, we generated 7.9% total sales growth.

Our ongoing focus on growing sales profitably and controlling expenses translated our solid top line performance into a record fourth quarter operating profit of 19.4%.

For the full year, we generated a record operating profit of 19.8%, which was a 77 basis point improvement over 2015.

During the quarter, we generated earnings per share of $2.59, which represents an increase of 18% over the prior year.

This quarter represents our 32nd consecutive quarter of EPS growth of 15% or greater excluding the atypical tax benefit in the third quarter of 2015.

For the year, we generated EPS of $10.73, which was an increase of 17% over the prior year.

This year represents our 8th straight year we have generated annual EPS growth of 17% or greater and this remarkable track record of strong, consistent earnings growth is a reflection of the effectiveness of Team O'Reilly's customer service-oriented culture, our dual market strategy and our focus on profitable sustainable growth.

For 2017, we are establishing comparable store sales guidance of 3% to 5%.

Over the past three year, the improving health of the economy and increase in employment and the associated increase in commuter miles has been key driver of the growth in miles driven, which are up 3% year-to-date through November 2016 after seeing an increase of 3% in 2015 and 1.7% in 2014.

Our first quarter represents almost difficult comparison for the year on a two and three-year stack basis as we compare against the 6.1% and 7.2% comparable store sales increases we generated in the first quarter of 2016 and 2015 respectively.

As a result of these factors, we feel it is prudent to establish our comparable store sales guidance range at 2% to 4% for the first quarter.

We are establishing our full year 2017 operating profit guidance at a range of 20.1% to 20.5% of sales.

For earnings per share, we're establishing our first quarter guidance at $2.78 to $2.88 and for the full year, our guidance is $12.05 to $12.15.

For the fourth quarter, we levered SG&A by 47 basis points, driven by our strong sales results and expense control for the quarter.

For the full year, we levered SG&A by 31 basis points, excluding a year over year benefit of 24 basis points as we calendared an adverse judgment in 2015.

Our increase in average SG&A per store for 2016 was 2.1%, which excludes the adverse judgment headwind in 2015.

Looking forward to 2017, we expect per store SG&A to grow at 1.5% to 2% for the year as we expect to see continued pressure from increasing wage rates, higher expected medical cost, additional investments in our internal information system capabilities and cost to convert the acquired Bond stores.

For the quarter, we opened 69 net new stores, bringing us to our goal of 210 new stores for the year. During 2016, we opened new stores in 39 different states and we continue to be very pleased with the performance of our new stores in both expansion and backfill markets.

As we discussed on our last call, our plan is to open 190 net new stores in 2017, which is below our typical new store target as we plan to devote significant resources to converting the Bond stores we acquired in December.

We will again spread our new store openings across our footprint with planned new store openings in 37 states.

For the quarter, sales increased to $150 million, comprised of a $91 million increase in comp store sales, a $59 million increase in non-comp store sales, a $1 million increase in non-store sales, and a $1 million decrease from closed stores.

For 2017, we're establishing our full year total revenue guidance at a range of $9.1 billion to $9.3 billion.

For the quarter, gross margin was 53.1% of sales and improved 35 basis points over the prior year, in line with our expectations as we continued to realize the benefit of acquisition cost decreases we secured earlier in the year and the LIFO headwind was minimum in the fourth quarter.

For the year, gross margin was 52.5% of sales, an improvement of 22 basis points over the prior year. This was right in the middle of our beginning of the year guidance of 52.3% to 52.7% as we benefited from better than expected acquisition improvements and leverage on distribution costs, offset in part by full year LIFO headwinds of $49 million, which exceeded the prior year amount by $21 million.

Looking forward to 2017, we expect gross margin to be in the range of 52.8% to 53.2% of sales.

Our effective tax rate for the year was 36.6% of pretax income, which was in line with our expectation.

Looking at 2017, we expect our tax rate to be approximately 37% for the year with the increase driven by lower amount of benefit from certain work tax credits.

For the year, free cash flow was $978 million, which was $111 million increase from the prior year, driven by increased income and a larger decrease in net inventory.

Our guidance for 2017 is $930 million to $980 million, which at the midpoint is slightly below our strong 2016 results, as we expect the decrease in our net inventory investment on a year-over-year basis will be less, offset in part by our planned increase in net income.

Moving to inventory per store, at the end of the quarter, it was $575,000 which was flat compared to the end of 2015.

However, as Greg discussed earlier, we finished the year on a strong sales trend, which put us in a favorable inventory position at the end of the year. Accordingly, for 2017, we expect our per store inventory to increase by 1.5% to 2%.

Our AP to inventory ratio finished the fourth quarter at 106%, which was an increase of 7% over the prior year as we benefited from incrementally improved terms and solid sales volumes.

For the year-end 2017, we expect to see a marginal improvement in our AP to inventory ratio to approximately 107% as we incrementally improve our vendor terms, but face structural impediments to further significant increases in our AP percentage.

Capital expenditures for the year ended up at $476 million, which is right in the middle of our guidance.

For 2017, we are forecasting CapEx of $470 million to $500 million.

Moving on to debt, we finished the fourth quarter with an adjusted debt to EBITDA ratio of 1.63 times, still well below our target range of 2 to 2.25 times.

We continue to execute our share repurchase program and for the calendar year 2016, we repurchased 5.7 million shares for an aggregate investment of $1.5 billion at an average share price of $264.21.

Since the inception of our buyback program through yesterday's earnings release, we have repurchased 57.9 million shares for an aggregate investment of $7.1 billion at an average share price of $122.91.