Quite a few things are different from July 2008 when O'Reilly acquired CSK Auto. Initially, some naysayers said O'Reilly paid
too much and inherited a poorly performing parts retailer.
Today, shares of O'Reilly are slightly off of recent highs of $40.50, and the company has now begun turning sales trends around
at CSK, with same store sales (SSS) running positive after 12 consecutive quarters of comparable revenue declines. While there
remains a significant amount of work to do, recent results would suggest that O'Reilly is likely further along with the integration
than even management's own expectations.
In hindsight, we don't think the timing could have been better. CSK stores were under/insufficiently inventoried, overpriced
and under-staffed. We believe poor merchandising and limited core hard parts inventories spurred softening sales trends. In
turn, we believe that lower store level productivity ultimately forced management to decrease labor hours and headcount in
an effort to preserve earnings, only further exacerbating the issue.
O'Reilly's ability to improve its balance sheet, bettering parts availability and hard parts assortment, has resonated with
the store-level associates. Morale appears greatly improved, as employees are encouraged by sales and the core O'Reilly culture
of teamwork and placing the customer first. Efforts to bring additional personnel back to the network, develop a stronger
field management team and extend store hours, are all making a material contribution. Core O'Reilly stores posted 8.2 percent SSS growth in Q1, with the first phase nearing completion in the next few weeks. SSS
increased 1.5 percent at unconverted stores as traction from inventory enhancements was partially offset by price reductions
and some lag as CSK associates undergo training and cultural adaptation.
With respect to synergies and anticipated cost savings, the company is on its way to the realization of the anticipated $75
million in merchandise savings and $25 million from operating expense reductions.
The implications of O'Reilly's Q1 results extend to the aftermarket in general. In our opinion, this industry should continue
improving as the year progresses and even beyond 2010. We think miles driven are on the cusp of a sustained period of positive
improvement, with the first sign being February's +2.7 percent year-over-year gain on a leap year adjusted basis. Also, we
are seeing a structural change with new vehicle purchases, and ultimately the level of demand for maintenance and repair on
an aging fleet. And with GM's announcement of significant dealer closings, along with Chrysler's bankruptcy filing, there
could be accelerated distribution demand for companies such as O'Reilly, Advance Auto and AutoZone.
Roughly $23 billion of wholesale parts distribution business is handled through the OE dealer network, in aggregate. Also,
recall that the outlook for dealer closings is in the range of 2,000 to 4,000 (10 to 20 percent of total), which could bring
the number of dealerships down to the +16,000 range. While hard to quantify, we believe there will be a surge of business
heading into the independent aftermarket, at minimum an additional $2 to $2.5 billion of parts distribution opportunity beginning
in late 2009 and 2010.
BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive
Aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, Inc., NYSE/SIPC. Scott & Stringfellow is
a registered broker/dealer subsidiary of BB&T Corporation, the nation's 14th-largest financial holding company with $130.8
billion in assets.
