By
Timothy M. Otte
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More Articles
February 21, 2008
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Comparable-store sales growth is the mantra of all retailers. But when the top line hits a speed bump, it gets tougher to bring home the bottom line.
Reviewing the last four quarters, O'Reilly Automotive (Nasdaq: ORLY ) has proved this in spades. The company really knows how to bring home the bacon when comps are strong. But when top-line growth decelerates, earnings growth seems to fall in tandem.
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% Change
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Q1
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Q2
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Q3
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Q4
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Comp Sales
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6.8%
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2.0%
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4.3%
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2.1%
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EPS*
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18.3%
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4.4%
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9.6%
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0.0%
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Source: O'Reilly Automotive earnings releases. *.
Earnings growth skidded to a halt despite the fourth quarter's 2.1% increase in same-store sales and 8.2% rise in sales. The culprit?
My first guess would have been that O'Reilly was the victim of one-time costs relating to its on-again, off-again attempts to acquire CSK Auto (NYSE: CAO ) . However, the main contributor to the earnings stall actually was higher operating expenses, which rose 110 basis points, mainly thanks to higher store payroll and a loss of leverage resulting from a rapid sales slowdown.
O'Reilly has been coasting for some time now, as customers are scaling back discretionary spending. While AutoZone (NYSE: AZO ) showed last quarter that it can still burn rubber, rivals are showing signs of industry weakness. Advance Auto Parts (NYSE: AAP ) just reported negative comps for its most recent quarter, while guiding analysts toward flat results in 2008. Meanwhile, Pep Boys (NYSE: PBY ) is in the midst of restructuring its business.
To me, O'Reilly has the best long-term growth prospects in the sector, it just needs to tighten its belt a bit on the expense side. If the company can remain disciplined in its spending habits, O'Reilly should be positioned to thrive when the economy finally ignites its growth engine again.
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