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Annual reports reveal O’Reilly Auto Parts' reason for success

Monday, November 28, 2016 - 09:00
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Annual report analysis plays a critical role to help managers better understand public companies’ comprehensive strategies, and, if performed closely, it may reveal managerial best practices that decision makers can adopt to their respective strategies. Managers who want to learn more about their rivals, customers or suppliers have much to reap from a trove of objective material in a 10-K. 

One reason why 10-K reports are so useful is that the evidence and data is neatly organized into four parts: business strategies, financial health, risk factors and corporate governance. This tells us what leadership values, because in order to secure stockholder funding to help finance their activities, they must be candid about what will be done with the capital. As well, transparency is required by the Securities and Exchange Commission to ensure that the information is accurate and truthful. Both factors directly benefit readers who are seeking to make informed decisions in their own work environment.

To demonstrate worthiness in annual reports and to try to gain insight into the company’s continuing annual financial success, I examined O’Reilly Auto Parts. In this practice exercise, I describe the business strategies outlined by O’Reilly management by following the same sequence appearing in their 2015 report. Because so much more information is available, but not covered here, I encourage managers to study the financial and growth strategy that ties into O’Reilly’s business model.  

In their 23rd consecutive year of positive comparable store sales growth, O’ Reilly Auto Parts reported that 2015 was a record year. Comparable store sales advanced 7.5 percent topping $7.9 billion and beating the prior year increase of 6.0 percent. Profit revenues grew $4.1 billion, and for 15 straight years through 2015, gross profit margins expanded 930 basis points from 43 percent to 52.3 percent. Other financial highlights indicated that operating income, accounts payable to inventory, working capital, and the like are metrics that are important to both management and shareholders alike.

Given such consistent performance, why is this 4,571 multi-store retailer so successful? Management states their recipe: “We believe that our effective dual market strategy, superior customer service, technically proficient store personal, strategic distribution network and experienced management team make up our key advantages…” And they add that growth for the sake of growth is not their focus; rather they are led by a commitment to sustained, profitable growth. This reoccurring five-point strategy that appears in the 2015 report also continues to pop up in prior reports dating back to the 1994 release. It merits further explanation.  

Dual market strategy: This term, coined in 1970, stems into C.F. and Chubb O’Reilly’s vision to become the friendliest parts store to meet the needs of both the DIYer and professional auto repair garage. First, every employee must be approachable. Chubb observed a pattern that walk-in customers yearned for a problem solver who could lend an emphatic ear. An inexperienced DIYer could count on free technical vehicle repair advice from a counter person with an auto repair background. 

And second, each store must be geographically accessible. By design, new stores are deployed in both heavily and lighter populated markets where fewer competitors operate.  

After more than 35 years, management still views this diversification profit revenue model as self-sustaining because the risk of unstable sales in either customer segment within a densely or rural market place can be counterbalanced in changing economic periods. In times of consumer uncertainty, DIYers often hold off on new car purchases and tend to do their own maintenance. This year 58 percent of O’Reilly’s sales came from the DIY segment and the remaining 42 percent came from commercial shops. In better times, customers will drive more miles, generate wear-and-tear, and seek out a garage. In the mid-2000s, the sales mix had been closer to 50 percent.

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