O'Reilly Automotive (ORLY)

Q2 2010 Earnings Call

July 29, 2010 11:00 am ET


Thomas McFall - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Gregory Henslee - Chief Executive Officer and Co-President

Ted Wise - Co-President and Chief Operating Officer


William Truelove - UBS Investment Bank

Kate McShane - Citigroup Inc

Anthony Cristello - BB&T Capital Markets

Gary Balter - Crédit Suisse AG

Matthew Fassler - Goldman Sachs Group Inc.

Daniel Wewer - Raymond James & Associates

Vincent Sinisi - BofA Merrill Lynch

Michael Baker - Deutsche Bank AG



Good morning. My name is Chantelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2010 O'Reilly Conference Call. [Operator Instructions] And now I would like to turn the call over to Mr. Tom McFall, Chief Financial Officer. Sir, you may begin.

Thomas McFall

Thank you, Chantelle. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Henslee, our CEO, we have a brief statement.

The company claims the protection of the Safe Harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by forward-looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words.

In addition, statements contained within this conference call that are not historical facts are forward-looking statements such as statements discussing, among other things, expected growth, store development, integration and business strategies, expansion strategies, future revenues and future performance.

These forward-looking statements are based on estimates, projections, beliefs and assumptions that are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, including the acquisition of CSK Auto Corp., weather, terrorist activities, war and the threat of war.

Actual results may materially differ from anticipated results described or implied in these forward-looking statements. Please refer to the Risk Factors section of the company's Form 10-K for the year ended December 31, 2009, for more details. At this time, I'd like to introduce Greg Henslee.

Gregory Henslee

Thanks, Tom. Good morning, everyone, and welcome to our second quarter conference call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer; and Ted Wise, our Chief Operating Officer.

I'd like to start off by congratulating Team O’Reilly on the outstanding second quarter results. Our solid performance and continued success across the 38 states in which we do business is the result of the commitment each of you has made to our culture values. Embracing these values has been the bedrock of our company's phenomenal growth over the years, and it's so encouraging to see that the way we do business continues to be so successfully ingrained in our stores and distribution centers across all markets. I strongly believe that we offer the very best service levels in our business and want to thank all of you for your hard work and dedication to the company's continued success.

Before moving on to the discussion of our operational performance during the quarter, I want to comment on the $15 million reserve we accrued in the second quarter to potentially fund settlement and related costs of the investigation of CSK Auto being performed by the United States Department of Justice. This investigation is related to the alleged wrongdoings at CSK Auto in 2006 and prior. As most of you know, we didn't purchase the company until July of 2008. Part of our due diligence process prior to this purchase was, of course, evaluating the exposure the company could have related to the alleged issues.

After extensive work, we reached the conclusion that the actions of the Department of Justice and the Securities and Exchange Commission would most likely stop short of penalizing or charging CSK based on the level of cooperation with the SEC and the DOJ, the merits of our acquisition, prior actions by the SEC and DOJ, our track record of solid management, Sarbanes-Oxley [Sarbanes-Oxley Act of 2002] compliance, along with many other factors.

As expected, in March 2009, the SEC determined to close the matter with respect to CSK without fine or penalties. In recent discussions with the DOJ, it's become clear that they feel a penalty against CSK is in order, and we've been working with them to reach an agreement as to the amount of that penalty.

I know all of our shareholders, many of which were previously CSK shareholders, will have difficulty understanding how penalizing our company at this point could be fair and justified. All I can tell you is that I completely understand your sentiments. We're doing our best to communicate our position to the DOJ as we continue to cooperate with their investigation of these legacy issues related to the individuals that were involved. We hope our good-faith efforts will bring closure to these matters in the near future.

Now on to our quarterly performance. I think it probably goes without saying that we're very pleased with our second quarter results. The strong business trend that began for us during the middle of the first quarter continued to the second quarter, and we continue to see solid sales results to this point in the current quarter.

These solid trends exist pretty much in all markets across the U.S. and yielded a very solid comparable store sales increase of 7.9% for the quarter on top of the 4.8% increase we had last year. We attribute the continued strong comp performance to a combination of solid execution in both the core O'Reilly stores and the CSK stores, along with the help from the tailwinds that are present for the automotive aftermarket as we benefit from the reduction in new vehicle sales in the U.S.

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