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.
Superior customer service and technically proficient parts people: Selling parts alone at the lowest price is a commodity business, but O’Reilly recognized that serving as a knowledge resource for their customers allows the counter people and sales teams to stand out as the differentiator in the industry. Repair shops rely on the 700 field sales representatives augmented by the stores that host a dedicated installer counter. Representatives undergo comprehensive and continual training, especially with hard part applications, and they are provided with tools to help a repair shop become their own profit center. Likewise, store employees receive similar training focusing on customer service, inventory management, financial literacy and store profitability. This involvement includes workshops and annual conferences.
Furthermore, to determine which product to stock by region, the corporate back office continually monitors product movement in their inventory management system, vehicle registration data, product failure rates and marketplace trends. Volume purchase discounts coupled with a supply chain finance-deferred payment plan has enriched SKU profitability while being able to set market-competitive pricing. To help consumers research their vehicle needs, they can use a dynamic content-rich, search engine powered website, which contains a wide variety of product images, schematics and technical information with pricing.
Strategic regional tiered distribution network: With approximately $25 billion in market capitalization, O’Reilly continues to multiply enormous efficiencies by creating supply chains that wrap around 44 states, leverage a powerful technology, and purchase more tools to support employees. To optimize coverage and fill rate, 26 regional distribution centers feed the stores, which enjoy same day or overnight access to roughly 146,000 SKUs. Each distribution center is capable of delivering to more than 250 stores. An additional 297 “master” hub stores stock an average of 44,000 SKUs within that network. For speedy product selection accuracy, every facility enjoys a conveyer system, voice picking technology and handling equipment.
Experienced management team: Roughly 850 managers populate senior, corporate, and district roles and have accumulated between 12 to 40 years industry tenure. Eleven senior executives boast more than 25 years. With experience cobbled together since the early years, the six founding family members boast more than 275 years of active service, some working well past the 1993 initial public offering when it would have been tempting to cash in their chips. In their late teens, many now-senior managers began a career path working in a distribution center or as an assistant store manager where family management exposed them to the parts business. Today, this collective tribal knowledge of what their customers’ value has been passed down to all of the employees. Twice Forbes Magazine listed O’Reilly among the top 250 best employers.
Consider one fundamental question drawn from this analysis: how does report data apply to your business versus material from anecdotes? The reality is, you need both. Personal experiences and observations still matter. A counter person, store manager, sales rep, product director, or CEO working for a competitor or a supplier offers a unique perspective. Personal experience should be factored in with what you glean from these reports because intuition can make a difference.
However, to a certain point, data is the bedrock for discussion on how you want to position your business. Ignoring 10-Ks altogether can mislead decision makers and pull them in opposite directions. By reading directly from the source, you can draw your own conclusions instead of letting an industry “expert” form your opinions, perhaps sending decision makers down the wrong path. Therein arises an opportunity for management to determine how their company may define its role in the Auto Care industry.
Editor’s note: Sources for this article included the O’Reilly Automotive 2015 Annual Report, 2015 Form 10-K O’Reilly Automotive Inc., O’Reilly Automotive 2010 Annual Report, 2010 Form 10-K O’Reilly Automotive Inc., O’Reilly Automotive 2005 Annual Report, 2005 Form 10-K O’Reilly Automotive Inc., O’Reilly Automotive 2000 Annual Report, 2000 Form 10-K O’Reilly Automotive Inc., and O’Reilly Automotive 1994 Annual Report.
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