O’Reilly Automotive (NASDAQ:ORLY) executives highlighted the company’s promote-from-within culture, metropolitan distribution network and inventory availability strategy as central drivers of its market-share ambitions during a recent investor presentation.
Chief Executive Officer Brad Beckham said the automotive aftermarket retailer’s dual-market approach, serving both do-it-yourself customers and professional repair businesses, dates to 1978. The company began as a family business in 1957 and initially focused on the professional service dealer market before expanding into retail auto parts.
Beckham said O’Reilly’s culture and supply chain remain its major competitive advantages. The company has grown from a regional operator concentrated in Missouri, Oklahoma, Kansas and Arkansas at the time of its 1993 public listing into a network of nearly 7,000 North American stores.
Promote-from-within culture
Beckham, who said he joined O’Reilly 30 years ago by sweeping floors and stocking shelves, emphasized that the company develops leadership internally. He said its promotion strategy is intended not simply to fill management roles internally, but to ensure leaders have the operating experience needed to succeed.
According to Beckham, all approximately 650 O’Reilly district managers previously managed successful O’Reilly stores. The company’s 78 regional directors, 14 division vice presidents and senior store-operations leaders also advanced through store, district and regional positions, he said.
“When you bring in somebody that has never stood on that counter or never turned a wrench in their life” to manage automotive parts operations, Beckham said, that person can lose the respect and credibility of store teams and repair-shop customers.
Chief Financial Officer Jeremy Fletcher said the company’s approach is not static, describing O’Reilly as “relentless” about improving execution, inventory availability and its employee base. He said the company focuses on maintaining the right product assortment in its spoke stores, which typically carry 22,000 to 23,000 stock-keeping units.
Distribution network and delivery
Beckham said O’Reilly operates 32 distribution centers, generally located near major metropolitan markets rather than in lower-cost rural areas. Those facilities carry an average of 170,000 SKUs and allow the company to replenish stores five nights per week, he said.
The company uses its distribution centers and hub stores to support what Beckham called “city counter service,” in which smaller vehicles deliver parts from metro-area inventory locations to stores and professional customers throughout the day. O’Reilly’s hub-store service reaches 95% of its store network, he said.
Beckham said the model is designed around already-sold parts needed for vehicles in repair bays, rather than around route optimization. O’Reilly’s average delivery time for those orders is less than 25 minutes, he said.
The company also uses internally developed software and vehicle hardware to track deliveries. Beckham compared the customer experience to a pizza tracker, allowing professional customers to monitor the status of ordered parts.
Market share and pricing comments
Asked whether O’Reilly gains more share during stronger aftermarket conditions, Beckham said the company has performed well across different business cycles and does not view its opportunity as limited to favorable markets. He said tougher conditions can prompt O’Reilly teams to intensify their focus on sales and profit-and-loss performance, while some competitors may react by reducing staffing too aggressively.
Fletcher addressed third-quarter pressure related to commodity-driven, especially petroleum-based, product categories. He said the issue reflected volatility in input costs and a greater reluctance across the market to immediately pass through such changes. He said O’Reilly was still passing through costs at levels accretive to gross-margin dollars and operating-profit dollars.
Fletcher said the company expects the industry to pass along persistent cost increases over subsequent quarters if those costs become part of a new normal. He said the company does not see a structural change in the gross-margin-rate relationship for those categories.
Store growth and Canada plans
Fletcher said O’Reilly’s ability to accelerate new-store growth depends primarily on having strong store leadership and sufficient district and regional management support. The company recently announced a 40-store increase in planned new openings for next year, which Fletcher said reflects confidence in its ability to execute.
Beckham said O’Reilly has about 6,500 U.S. stores, compared with an estimated 40,000 parts stores nationwide. He said the company continues to see expansion opportunities in rural and metropolitan markets, including areas where additional stores can increase overall sales.
In Canada, Beckham said O’Reilly is working to integrate inventory, systems, supply-chain and operating capabilities at the Vast-Auto business it acquired more than two years ago. He said the company expects to place the O’Reilly name on Canadian stores in roughly a year and a half to two years, after ensuring those locations can deliver the same customer experience associated with O’Reilly stores in the U.S.
About O’Reilly Automotive (NASDAQ:ORLY)
O’Reilly Automotive, Inc is a specialty retailer of automotive aftermarket parts, tools, supplies and accessories. The company serves both do-it-yourself customers and professional service technicians, offering products used for vehicle maintenance, repair and customization. Its merchandise includes replacement parts, batteries, filters, lighting products, shop equipment, automotive chemicals and related accessories.
Founded in 1957 by the O’Reilly family, the company began as a single store in Springfield, Missouri.
