O REILLY AUTOMOTIVE INC Q1 2026 earnings call

Thank you, Ali. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our first quarter 2026 results and our updated outlook for 2026. After our prepared comments, we will host a question and answer period. Before we begin this morning, I would 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 31, 2025, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Brad Beckham.

Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts First Quarter Conference Call. Participating on the call with me this morning are Brent Kirby, our President, and Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman, and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'm excited to begin our call by thanking our over 93,000 team members for the incredible results they were able to deliver in the first quarter.

Their hard work and absolute dedication to excellent customer service produced a strong start to 2026 for O'Reilly, with an 8.1% increase in comparable store sales. This was above our expectations for the quarter, and when combined with our new store sales and contributions from our international business, drove double-digit total sales growth of 10.2% for the first quarter of 2026.

Our team successfully translated these robust sales results into an impressive 14% increase in operating profit through our focus on profitable growth and expense control. We coupled this strong operating performance with the return of excess capital through our share repurchase program to deliver a 16% increase in diluted earnings per share in the quarter. Thank you again, Team O'Reilly, for keeping our culture strong and providing the best customer service in the business.

Now I'd like to take a few minutes to walk through the details of our first quarter comparable store sales performance. Our comp growth of 8.1% solidly surpassed our expectations, and we were pleased to see above-plan contributions from both sides of our business in the quarter. Our professional business continues to be the larger contributor to our total comp results, with our first quarter results making the third straight quarter we have posted double-digit professional comps. We also saw strength in our DIY side of our business, which generated a mid-single-digit comp during the first quarter.

While DIY was the smaller overall contributor to the total comparable store sales growth in the first quarter, it was an equal driver of the outperformance we delivered versus our expectations coming into the quarter. This outperformance was driven by better-than-expected growth in ticket counts on both sides of the business. We believe there were some favorable industry tailwinds that aided our results in the first quarter that I will discuss in a moment. However, we are just as confident with our sales momentum also reflects share gains our team is winning on both sides of our business.

Next, I want to provide some detail on the cadence of our sales results as we move through the quarter. We note every year that first quarter is often our most volatile quarter as we experience variability in our business resulting from the type and severity of winter weather and the timing of the onset of spring. In addition to this, the timing and magnitude of individual income tax refunds can also be a factor impacting our results through much of February and into March. Beginning with this January, winter weather was favorable and largely as expected, providing a strong start to the quarter. Moving into February, weekly volumes began increasing as tax refunds started to flow to consumers.

Our business often receives some level of benefit from tax refund season, but is not always a direct correlation to average refund size or total tax refund dollars as weather and general economic conditions can play a role in the extent to which consumers spend these refund dollars and where they are spent. This year, we do believe the combination of an increased average, in average refund size as well as higher total refund dollars coincided with favorable weather to produce a benefit for our business.

Warm and generally dry conditions in most of our markets provided a supportive backdrop for consumers looking to perform vehicle maintenance in conjunction with the benefit from tax refunds. While we surpassed expectations each month, our business strengthened as we moved through the quarter relative to both our plan and on a one, two, and three-year stack comp basis.

April has had the expected degree of seasonal moderation in volumes relative to March, but our business continues to be strong in both DIY and professional. From a category perspective, our results were driven by broad-based strength across the business with solid results in many of our undercar hard part categories, coupled with continued healthy performance in our maintenance categories, including oil, filters, and fluids. Even in light of widespread strong comp contributions across a broad range of categories, we still see some evidence of consumer caution.

Discretionary categories were not as pressured from a relative comp perspective as we've seen in the past few quarters, but this was mainly due to the soft comparisons as we are lapping periods of pressure in this small subset of our business. I will discuss in more detail in a moment, but our outlook assumes a continuation of this uncertain stance by consumers.

Growth in average ticket was a mid-single-digit contributor to comp on both sides of our business. While average ticket growth represented the larger driver of our comp for the first quarter, these results were essentially in line with our expectations. As I referenced earlier, it was really the growth in transactions that exceeded our expectations. Coming into the quarter, we assumed average ticket would benefit from same-SKU inflation of approximately 6%, and actual results came in right in line with those expectations. As a reminder, the front half of 2026 is expected to receive a larger benefit from same-SKU inflation as we do not compare against the more significant cost and associated price increases in 2025 until the third quarter. Turning to guidance, we've maintained our full-year comparable store sales guidance range of 3%-5%.

We are very pleased with the strong start to 2026 that our team has been able to deliver. The first quarter results exceeded our plan and right now have pushed us to the top half of our full-year range. However, we remain cautious in our outlook for the consumer. Rapid increases in fuel costs have the potential to impact consumer spending, even in predominantly non-discretionary sectors like our industry. While the more fundamental long-term demand drivers of miles driven and the average age and size of the vehicle fleet are expected to remain supportive and change very gradually over time, spikes in prices at the pump and the impact it can have on other day-to-day spending in the life of a consumer can cause short-term reactions. So far, our first quarter results and trends thus far in April have not indicated a pullback in consumer demand.

Thanks, Brad. I would also like to begin my comments this morning by congratulating Team O'Reilly on a strong start to 2026, as your hard work continues to earn business and take share. Today, I will further discuss our first quarter gross margin and SG&A results and provide an update on the progress toward our expansion and capital investment plans for 2026. Starting with gross margin. Our first quarter gross margin of 51.5% was a 19 basis point increase from the first quarter of 2025, which was in line with our expectations. Within the first quarter, our gross margin did encounter some pressure from seasonal product mix, but we are pleased to be able to offset this pressure with acquisition cost reductions and improved leverage of our distribution costs, driven by solid DC productivity and strong sales volumes.

The acquisition cost environment remains stable and the pricing environment continues to be rational across our industry. Our first quarter gross margins were not materially impacted by the changes within the tariff environment as our net tariff exposure has remained relatively stable. Additionally, at this point, neither our first quarter results nor our outlook include any benefit from tariff refunds. We actively monitor these topics as they develop and are being proactive to ensure our sourcing is competitive and reflects the scale of our company. The conflict in Iran and resulting constraints on global oil supply have the potential to be disruptive to certain categories, particularly motor oil, and could impact supply chain costs such as freight. However, we did not see a material impact in the first quarter and have not adjusted our full year outlook assumptions for these factors.

We have strong relationships with our supplier community and have been working through challenging situations surrounding international trade and geopolitics for an extended period of time now. While every situation can be unique, our expectation is that our merchandise teams will continue to successfully navigate these environments, and that we will be able to leverage our long-term relationships with supplier partners as well as our scale to ensure that we lead the industry in availability. We are maintaining our full-year gross margin guidance range of 51.5%-52%. At this stage, we believe we have the ability to manage the current dynamics surrounding product acquisition cost and freight within our full-year guidance range. Our supply chain teams work to not only actively mitigate cost increases, but also to diversify our supplier base and seek alternative sourcing options when necessary.

A significant benefit to us on this front has been the continued development of our private label brand portfolio. Our private label penetration has climbed to over 50% of total revenue, and we will continue to work to prudently leverage the strength of our proprietary brands. The benefits of our private label strategy range from improving margins and customer brand loyalty to improved sourcing capabilities, as we have control over the product within the box and can seamlessly source a single SKU from multiple suppliers. When supply chain constraints emerge, having the ability to adjust orders and demand across a broader base of suppliers is an important tool for our teams to leverage in order to maintain a strong in-stock position. Moving to SG&A. Our teams generated an impressive 34 basis points of SG&A leverage as they diligently managed our cost structure and delivered robust sales results.

Our total SG&A dollar spend was at the higher end of our expectations for the first quarter due to incremental spend to support elevated sales volumes. This produced average SG&A per store growth of 5.5% for the first quarter. We are still expecting our full year SG&A per store growth to run approximately 3%-4%. Our first quarter SG&A was expected to drive the highest average per store growth rate of the year. We expect our per store growth to moderate as we move through the year and compare against the SG&A ramp that occurred throughout 2025. Within our SG&A, gas price increases had a muted impact on balance for the quarter.

We do operate a large delivery fleet across our stores, and quick, timely delivery of product to our professional customers is an incredibly important part of our value proposition. As a result, there is certainly the potential for some level of impact to our SG&A, but this is heavily dependent on the extent and the duration of fuel price increases. When managing our cost structure, and in particular, when gauging a response to cost pressures over a short time frame, we always view our business through a long-term lens with a focus on serving our customers and supporting high levels of service and availability. In keeping our SG&A and margin guidance unchanged for the remainder of the year, we have considered the potential for modest pressure from rising fuel prices and the opportunities we have to manage those pressures within the broader context of our overall cost structure.

We are raising our full-year operating profit guidance range by 10 basis points to an updated range of 19.3%-19.8%. This reflects the flow-through of operating cost leverage from our strong first quarter results and our unchanged outlook for the remainder of the year. At the midpoint, this updated guidance range projects full year operating margin expansion of 9 basis points over 2025, which is a testament to Team O'Reilly's dedication to profitable growth. Inventory per store finished the first quarter at $874,000, which was up 8.5% from this time last year and up 0.5% from the end of the year. We are still targeting growth of 5% per store by the end of 2026.

Our inventory position at the end of the first quarter was slightly below our plan resulting from the strong sales performance and the timing cadence of inventory additions. Our turns remain strong at 1.6x, and we are pleased with the productivity we have seen from our inventory investments and our efforts to continually enhance inventory deployment within our tiered distribution network. We absolutely believe that our industry-leading inventory availability is a factor contributing to the share gains that we are compounding, and we will continue to aggressively capitalize on opportunities to bring our inventory closer to the customer. Lastly, to touch on our store growth and capital investments in the first quarter, we opened a total of 59 net new stores across the U.S., Mexico, and Canada.

Domestic new store performance continues to meet our high expectations, and we are pleased with the opportunities we have across the U.S., both to backfill existing markets and expand into new greenfield markets. Our international markets continue to make progress in building the O'Reilly store growth engine, and we remain on track for our 2026 store opening goal of 225-235 net new stores. Capital expenditures for the first quarter were $244 million, and we still expect a total capital expenditure investment in 2026 of $1.3 billion-$1.4 billion.

The major projects driving this expected level of spend are on schedule, and we are excited for the growth opportunities in store for us in all of the markets that we operate in. Before I turn the call over to Jeremy, I want to once again thank our entire Team O'Reilly for their continued hard work and unwavering commitment to our customers. Now, I'll turn the call over to Jeremy.

Thanks, Brent. I would also like to thank all of Team O'Reilly for their continued hard work and dedication to our customers. Now, we will fill in some additional details on our first quarter results and updated guidance for 2026. For the first quarter, sales increased $424 million, driven by an 8.1% increase in comparable store sales and a $91 million non-comp contribution from stores opened in 2025 and 2026 that have not yet entered the comp base. For 2026, we continue to expect our total revenues to be between $18.7 billion and $19 billion. Our first quarter effective tax rate was in line with expectations at 22.5% of pre-tax income, comprised of a base rate of 23% reduced by a 0.5% benefit for share-based compensation.

This compares to the first quarter of 2025 rate of 21.3% of pre-tax income, which was comprised of a base tax rate of 23.2% reduced by a 1.9% benefit for share-based compensation. For the full year of 2026, we continue to expect an effective tax rate of 22.6%, comprised of a base rate of 23.0% reduced by a benefit of 0.4% for share-based compensation. We expect that the quarterly rate will fluctuate due to variations in the tax benefit from share-based compensation and the totaling of certain tax periods in the fourth quarter. Now we will move on to free cash flow and the components that drove our results.

Free cash flow for the first quarter of 2026 was $785 million versus $455 million in 2025. The increase in free cash flow was primarily driven by robust growth in operating income, a reduction in net inventory, and timing of CapEx spend. For 2026, our expected free cash flow guidance remains unchanged at a range of $1.8 billion-$2.1 billion. I also want to touch briefly on our AP to inventory ratio. We finished the first quarter at 125%, which was up from 124% at the end of 2025 and above our expectations. For 2026, we expect to see moderation resulting from our planned incremental inventory investments and expect to finish the year at a ratio of approximately 122%.

Moving on to debt. We finished the first quarter with an adjusted debt-to-EBITDA ratio of 2.03x, flat to our ratio at the end of 2025. We continue to be below our leverage target of 2.5x and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. During the first quarter, we repurchased 10 million shares at an average share price of $92.45 for a total investment of $923 million.

We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance Brad outlined earlier includes the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I open up our call for your questions, I would like to thank our team for their commitment to the excellent customer service that drives our success. This concludes our prepared comments. At this time, I would like to ask Ali, the operator, to return to the line, and we will be happy to answer your questions.