Clean books make O'Reilly 'a giant killer.' - regional O'Reilly Automotive performs well against larger chain operations - The Power Retailers: O'Reilly

Discount Store News, Nov 4, 1996

`O'Reilly the Giant Killer." Perhaps it's local pride talking, but giant killer is what Kevin Dyches, a Springfield, Mo., equity research analyst, calls O'Reilly for its ability to face the challenge of AutoZone and Pep Boys--Manny, Moe & Jack, chains seven times its size, by boosting its presence in its competitor's market.

Out of 208 O'Reilly stores, 104 compete with AutoZone and 37 with Pep Boys. Another sign that O'Reilly can hold its own against giants in the industry: it has opened 25 stores in Kansas City, home of Western Auto, which makes Kansas City its largest metro market.

In several indicators of financial performance, O'Reilly ranks No. 2 or No. 3 among publicly traded auto parts chains, Salomon Brothers slated in a July report.

In terms of gross margin, O'Reilly even edged out AutoZone to head the list at 42.0%. That compares with 41.5% for AutoZone, famed for its low prices, and 28.6% for Pep Boys, last on the list of seven chains.

O'Reilly recorded an operating margin last year of 10.0% behind AutoZone at 12.6% and Discount Auto Parts at 12.2%.

With a pristine balance sheet and little interest and less depreciation and amortization expenses than many competitors, its net margin in 1995 was 7.0%, No. 2 behind AutoZone, at 7.7%, and far ahead of highly leveraged Pep Boys, 5.1%.

With a reputation like that, institutional investors have snapped up 50% of the company's stock.

Some of the largest investors are Janus, which holds as 9% stake; Wasatch Advisors, 8.4%; Nicholas 4.9%; Northwest Mutual 4.4%; Kauffman, 3.3%; and Texas Teachers, 3.3%.

Subtracting the 38% that the O'Reilly family still owns after an initial public offering in 1993 and a secondary stock offering last November, that leave just 12% of the stock held by the general public.

Although the stock is thinly traded, with average daily volume of just 16,000 shares, the share the price has more than doubled from $17.50 beginning with the IPO three years ago to $37.75 on Oct. 18.

Recommending a buy on O'Reilly, Salomon Brothers, New York, called it "the hottest retailer in the industry right now" in an August research report on the Automotive aftermarket.

"First-half same store sales growth was close to 20%," analyst Darren Kimball noted, "and EBIT [operating] profit growth is up to 40%.

"Third quarter comps, while still strong an estimated 8%, will not match the unusually strong first half numbers because of a more difficult comparison."

Operating profit for the third quarter should increase around 25%, he added.

At press time, third quarter results were unavailable.

O'Reilly cash flow--an estimated $23.6 million on expected sales of $256.7 million for 1996--"presents a compelling view of the strength of O'Reilly," said Dyches, retail analyst for George K. Baum & Co.

In an August report, Dyches projected an operating profit margin of 11.1% for 1996 and 11.0% for 1997.

Net income this year will gain 31.7% to $18.6 million, or $1.78 per share, from $14.1 million and $1.58 per share in '95. For '97, Dyches projected net income of $22.3 million or $2.12 per share, a 20.0% gain.

Morgan Keegan, Memphis, also rated O'Reilly a "buy."

"Since becoming a public company, O'Reilly has enjoyed tremendous financial stability," analyst Paul Berg noted in a September report for Morgan Keegan.

"The company typically operates at little or no debt with a substantial amount of cash on hand," Baum wrote. It also typically generates sufficient cash to finance operations, as well as a majority of 18% to 20% store unit growth. Following the November 1994 secondary offering, which netted the company $48 million to help finance a new distribution center, O'Reilly's financial condition has been immaculate.

"At the end of 1996's second quarter, the company had essentially no debt and still had $12.7 million of cash on hand. Superb financial conditions have been the norm," Baum noted.

Robinson-Humphrey, Atlanta, recently began following O'Reilly, also with a "buy" recommendation.

"O'Reilly is in excellent financial condition," analyst David Magee noted in an August research report, "as total debt constituted less than 1% of total capitalization at June 30, 1996."

The firm's track record shows it to be a "superior operator," Magee wrote.

"We believe the company will continue to benefit operationally from its strong management team, recent upgrades in technology, dense geographic market coverage, the firm's expertise in the commercial side of the business, successful new stores in new markets and distribution efficiencies brought about by the new Oklahoma City warehouse," Magee added.

Including $19.8 million from its 1993 IPO and $48 million more in its secondary offering last November, O'Reilly raised almost $68 million in equity to help finance its recent expansion debt-free, said cfo Jim Batten.

On a capital budget of $30 million next year, O'Reilly will open 30 to 40 more stores in '97. To finance them, O'Reilly has $10 million cash on hand, plus $10 million more from operational cash flow. For the remaining $10 million, it will have to borrow from its $35 million credit facility, he said.