Welcome to
the O'Reilly Automotive, Inc. First Quarter 2018 Earnings Conference Call. My name is Jenny, and I'll be your session. Please note I will now turn the call over to Tom MacFaul. Mr.
MacFaul, you may begin.
Thank you, Jenny. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our Q1 2018 results and our outlook for the Q2 and full year of 2018. After our prepared comments, we will host a question and answer period. Before we begin this morning, I'd 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 ks for the year ended December 31, 2017, and other recent SEC filings. The company assumes no obligation to update any forward looking statements made during this call.
At this time, I'd like to introduce Greg Henson. Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts' Q1 conference call. Participating on the call with me this morning are our Co Presidents, Greg Johnson and Jeff Shaw as well as Tom McVall, our Chief Financial Officer and David O'Reilly, our Executive Chairman is also present. Hopefully, everyone has had a chance to read our Q1 earnings press release last night.
I'll make just a few brief comments on our Q1 results before turning the call over to Greg, Jeff and Tom. I'd like to begin by congratulating team O'Reilly on a solid Q1 and by thanking our team of over 76,000 dedicated team members for their continued commitment to providing the excellent service that earns our customers' business every day. Our team was able to deliver a solid comparable store sales increase of 3.4% and a 28% increase in earnings per share in the Q1, both of which were above the midpoint of our guidance ranges and are a testament to the relentless focus of our professional parts people on taking outstanding care of our valued customers. I'll let Greg provide more color on our results and outlook for the remainder of the year during his prepared comments, but I will add that we were pleased with our start to the year and remain confident in the health of our business and our team's ability to provide industry leading customer service and drive profitable growth in 2018. As we announced in February, Greg Johnson will be promoted to the position of Chief Executive Officer in conjunction with our Annual Shareholders Meeting on May 8.
And I will continue my career with O'Reilly both in an executive role and Board member as Executive Vice Chairman, subject to election by our shareholders. I have a lot of confidence in both Greg and Jeff Shaw, who will be promoted to Chief Operating Officer in conjunction with Greg's promotion. Greg and Jeff are outstanding examples of our company's culture of promoting from within, and I'm very confident in their ability to lead our company, and I'm very excited about what our future holds under their leadership. This succession plan continues to progress very smoothly. And as a result, this quarter's conference call represents my last call as CEO.
And from this point forward, I will be present during the calls along with David O'Reilly, but will not be an active participant during our prepared remarks and Q and A, similar to the role David has played for many years. As such, it is appropriate for me to leave the bulk of our discussion of our Q1 results to Greg, Jeff and Tom. But before I turn the call over, I would like to thank our shareholders, many of which have been loyal owners of our company since I assumed the role of CEO for their outstanding support of our company. I would also like to again thank team O'Reilly for their excellent work and commitment to our customers during my tenure as CEO. It's been my honor to have served as Chief Executive Officer of our incredible company the past 13 years, and I look forward to our company's continued success in the future.
I'll now turn the call over to Greg Johnson, who will be hosting our question and answer session following the remainder of our prepared remarks. Greg?
Thanks, Greg, and good morning, everyone. I'd like to begin my comments today by congratulating our team on a solid start in 2018 and thanking them for their continued dedication to providing exceptional service to our customers. As Greg mentioned, this unwavering commitment to customer service drove comparable store sales and earnings per share results, which were above the midpoint of our guidance and we're very well positioned to continue to drive profitable growth throughout 2018. Now I'd like to provide some additional color on our Q1 comparable store sales results. Both our Professional and DIY sides of the business were positive contributors to our comparable store sales growth with professional performing better as we saw strong ticket count growth on that side of the business in the Q1.
Average ticket continues to be a strong contributor to our comparable store sales increase driven by the increasing complexity of vehicle repairs, a favorable overall business mix and continued effective pricing management which benefited from some inflation on same SKU pricing primarily on seasonal items similar to what we saw in the Q4 of 2017. On a category basis, we saw strength in winter related categories throughout the quarter in most of our markets, partially offset by some pressure late in the quarter for typical spring maintenance categories as a result of the continued cool wet weather we experienced much across the country. We look at our sales progression during the quarter versus our expectations. Our comparable store sales increase was consistently solid throughout the year with the best performance realized in January as we benefited from normal winter weather. As winter extended well into the quarter, we saw some pressure from the delayed arrival to spring at the very end of our Q1, but in aggregate, March results were still very solid and in line with our expectations.
Our professional business performance was consistently solid throughout the Q1. And as we would expect, the weather resulted in significant volatility on the DIY side of our business. As we look ahead to the Q2, we are establishing our comparable store sales guidance at a range of 2% to 4% and reiterating our full year guidance at the same 2% to 4%. In establishing our guidance for the year on last quarter's earnings call, we discussed our major assumptions for our industry for 2018, which included our expectation that we would see modest improvement in miles driven as the unemployment as the employment and economic outlook for consumers remain stable with the potential for any increase in gas prices pressuring lower income consumers and constraining the growth of miles driven. We still feel these assumptions continue to be appropriate and remain confident in our full year guidance after a solid start to the year in the Q1.
Also included within our sales growth assumptions is an expectation for normal weather and that's exactly how we would characterize what we saw this winter. After very mild winters the previous 2 years, much more inclement weather this winter season should help drive business throughout the year. However, while the comparison to the past 2 years is much more favorable, we really view this as a normal winter and our assumptions for the benefit we'll receive throughout 2018 are in line with the typical failure related demand driven by normal winter weather. As I mentioned previously, we did experience some pressure to our DIY comparable store sales performance at the end of March as a result of the delay of typical spring weather and that pressure has continued into April as we continue to see very unseasonably cold and wet weather throughout many of our markets. While we don't provide specific details for such a short timeframe, I can say that our performance so far in the quarter outside of these easily identified weather impact of specific days on the DIY side of our business is in line with our expectations and we continue to be pleased with the performance of our professional business, which is much less impacted by the delay in spring weather.
While we certainly are ready for spring to finally arrive in all of our markets, we have experienced this kind of volatility in Mother Nature's timing several times before we remain confident in our outlook for the Q2 as we move past this temporary pressure. For the quarter, our gross margin of 52.6% was within our expectations and our full year gross margin guidance at 52.5% to 53% of sales. The improvement of 17 basis points versus the Q1 of 2017 was driven by a modest improvement in merchandise margin and a lower LIFO charge, which was partially offset by pressure from the increased transportation cost. We continue to see rational pricing within our industry and are leaving our full year guidance for gross margin unchanged. As we outlined when we provided our 2018 guidance on the Q4 2017 conference call, we are significant beneficiaries of tax reform and feel it appropriate to allocate some of these savings back into the business to continue to improve the levels of service we offer our customers.
The cost of these investments were in line with our plan in the Q1 and we are pleased that our teams were able to generate a solid 5% growth in operating profit dollars while also investing in our business. We continue to expect our full year operating profit for 2018 to be within our previously guided range of 18.5% to 19% of sales. This unwavering commitment to profitable growth also resulted in a 28% increase in earnings per share to $3.61 for the Q1, which reflects our solid sales and operating profit growth as well as the benefit of the lower tax rate and reduced share count. For the Q2, we are setting our earnings per share guidance at $3.95 to $4.05 We are also updating our full year EPS guidance to $15.30 to $15.40 an increase of $0.20 at the midpoint, reflecting our Q1 results and the shares we have purchased through the call today. Tom will discuss our tax rate in detail in a few moments, but I would remind everyone that our full year guidance includes the impact of shares repurchased through this call but does not include any additional share repurchases.
To close my prepared remarks, I'd like to add my thanks to the team for solid performance in the Q1 their continued dedication to our customers. Greg leaves some very big shoes to fill as CEO, but I'm extremely excited for the opportunities that lie ahead for team O'Reilly and am fully committed to the company's continued success. I'll now turn the call over to Jeff Schall. Jeff?
Well, thanks, Greg, and good morning, everyone. I'd like to echo Greg's comments and thank our team members for their hard work and dedication to providing top notch customer service. Our team's high level of dedication was more apparent than ever this past quarter as we experienced a normal winter after 2 years of winters and our team members battled the elements to keep our stores open to take care of our customers as many of our stores experienced multiple rounds of inclement weather. We certainly welcome the sales demand created by the typical winter weather, but without our store team's efforts to keep our stores open for our customers and our DC team's hard work in completing their routes and keeping our stores in stock, we wouldn't have been able to capitalize on this demand. As significant as the sales we pick up is the lasting goodwill that we earn from customers when we're the only park store in town able to meet a customer's critical needs during bad weather.
Now, I'd like to spend a few minutes discussing our SG and A results for the quarter. For the Q1, we delevered 34 basis points with an average SG and A per store growth of 2.7%, which was driven by the portion of the tax savings that we're allocating to incremental operating expense dollars in 2018 to further enhance our best in class customer service. The incremental investment in the Q1 consisted primarily of enhancing our team member benefit plans and was in line with our expectations. We remain confident in the opportunities we have to strengthen our industry leading customer service through redeploying a portion of the tax savings and we continue to expect to follow the plan that we outlined on our Q4 2017 conference call. We had some other puts and takes in SG and A during the quarter, including a benefit we realized on the positive outcome from the settlement of a longstanding litigation with a former service provider, which was offset by incremental SG and A expense associated with a charge for a change in direction on a specific technology innovation project under development.
In total, our SG and A for the Q1 was in line with our expectations and our guidance for the full year growth SG and A per store is unchanged at 3% to 3.5%. Our expense control focus is a key component of the team O'Reilly culture and each of our managers is held accountable for the profitability of their individual store, DC or corporate department. Moving forward, we will remain diligent in scrutinizing every operating expense dollar we spend with the top priority continuing to be enhancing the customer service in each of our stores by ensuring we attract and retain outstanding team members who have the desire to live in the O'Reilly culture and gain the automotive knowledge that's required to be a professional parts person and supporting those teams with the tools they need to deliver excellent customer service each and every day. Now, I'd like to spend some time talking about our store expansion during the quarter and our plans for the remainder of the year. In the Q1, we opened 78 net new stores, which was just shy of our planned openings for the period.
Not surprisingly, the extended winter weather disrupted construction on some of our projects. However, we continue to be confident in our plan to open 200 net new stores for the year. During the Q1, we opened stores in 25 different states as we continue to identify great opportunities to open stores across all of our market areas. Our coast to coast footprint allows us to be very selective in new store site selection and more importantly, it allows us time to develop and train great teams of parts professionals who are ready to provide top notch customer service from day 1. We continue to be very pleased with the performance of our store openings and very optimistic about our future growth prospects as we continue to identify attractive new store locations, staffing those stores with great teams and taking share in the new markets.
Before I finish up today, I'd like to once again thank our store and distribution teams for their continued dedication to providing the best customer service in our We're off to a solid start in 2018 and we're well positioned to continue to provide our customers top notch customer service and the best parts availability in the industry. Our teams are committed to winning our customers' business each and every day by out hustling and out servicing our competition, and I'm confident in our team's ability to deliver an outstanding year in 2018. Now I'll turn the call over to Tom.
Thanks, Jeff. I would also like to thank all of Temo Rybic on a solid Q1. Now I'll take a closer look at our quarterly results and update our guidance for the full year. For the quarter, sales increased $126,000,000 comprised of a $72,000,000 increase in comp store sales, a $53,000,000 increase in non comp store sales, a $2,000,000 increase in non comp non store sales and a $1,000,000 decrease from closed stores. For 2018, we continue to expect our total revenues to be $9,400,000,000 to $9,600,000,000 As Greg mentioned earlier, our gross margin was up 17 basis points and benefited from a lower LIFO charge, which totaled approximately $1,000,000 in the Q1 of 2018 compared to a charge of $7,000,000 in 2017, with the lower charge driven by price decreases from vendor negotiations, mostly offset by commodity cost increases.
We expect to see a LIFO charge in the Q2 of around $5,000,000 but our actual results will be driven by our ongoing negotiations with suppliers and potential cost inflation. The Tax Cuts and Jobs Act of 2017 had a dramatic impact on our first quarter earnings will continue to have a significant positive impact on our tax rate on a go forward basis. Our combined effective tax rate for the Q1 was 22 point 9% of pretax income, which included a benefit from tax deductions for share based compensation, which totaled approximately 1.6% of pretax income. Excluding the tax benefit from share based compensation, our effective tax rate of 24.5% was in line with our expectations. Our Q1 2018 tax rate compares favorably to the tax rate of 31.2% for the Q1 of 2017 as a result of the lower federal tax rate, partially offset by a smaller benefit from share based compensation.
For the full year of 2018, we continue to expect our tax rate to be approximately 23% to 24% of pretax income and continue to expect the quarterly tax rate to be relatively consistent. However, the change in tax benefit from share based compensation will create some fluctuations in our quarterly tax rate as a percent of our pretax income. Now we'll move on to free cash flow and the components that drove our results for the year and our guidance expectations for the full year of 2018. Free cash flow for the Q1 was $311,000,000,000 which was a $68,000,000 increase from the prior year, driven by higher income and a smaller increase in our net inventory investment than in the prior year. For the full year, we are maintaining our free cash flow guidance of $1,100,000,000 to $1,200,000,000 Inventory per store at the end of the quarter was 500 and $99,000 which was flat from the end of 2017.
Our ongoing goal is to ensure we grow per store inventory at a lower rate than the comparable store sales growth we generate, and we continue to expect to grow our per store inventory in a range of 1% to 2% this year. Our AP to inventory issue at the end of the Q1 was 106%, which was where we ended 2017. We anticipate a slight improvement to 107% by the end of 2018, which will be driven by the higher level of sales. Finally, capital expenditures for the Q1 of the year were $115,000,000 which is up slightly from the same period of 2017 and in line with our expectations. We continue to forecast CapEx at $490,000,000 to $520,000,000 for the full year of 2018.
Moving on to debt. We finished the 1st quarter with an adjusted debt to EBITDA ratio of 2.18x as compared to our ratio of 2.12x at the end of 2017. The increase in our leverage ratio reflects incremental borrowings on our unsecured revolving credit facility and is in line with our targeted range of 2x to 2.25x. We continue to execute our share repurchase program, and year to date, we have repurchased 2,600,000 shares at an average share price of $248.80 for a total investment of $36,000,000 We remain very confident that the average repurchase price is supported by expected discounted future cash flows of our business, and we continue to view our buybacks as an effective means of returning available cash to our shareholders. Finally, before I open up our call to your questions, I'd like to thank the O'Reilly team for their dedication to the company and our customers.
This concludes our prepared comments. And at this time, I'd like to ask Jenny, to turn to the call and we'll be happy to answer your questions.
Thank you. We will now begin the question and answer And we have a question from Matt Pfaffler from Goldman Sachs.
Thanks so much.
You so
much and good morning. My question relates to margin. Obviously, your sales performance was quite solid relative to expectations. I know that for Q1, it looked like EBIT margin was towards the low end of the range with sales above the midpoint of the range and seem to be guiding Q2 operating margin just kind of from bottoms up perspective to show a bigger decline than it did in Q1. So can you talk about how cost pressures
Sure. When we look at our operating margin guidance is for the full year, when we look at the balance of our sales, the Q1 is the lowest average daily volume based on the seasonality of our business, and we have a relatively high fixed cost business model. So that's why you see us at the lower end of our range. Typically, the second and third quarters are higher operating profits because of the higher sales dollars.
And can you talk about how factors like shipping, for example, whether it's diesel or freight rates, etcetera, are evolving relative to expectations? Are they intensifying? Or have they leveled off as you think about the remainder of the year?
When we look at those, we called that out on our Q4 call that our expectation was we were going to see pressure in those areas and that's why we wouldn't get more leverage out of our DC costs on higher sales and those costs have been in line with our expectations thus far this year.
Got you. Thank you so much for that.
And our next question comes from Michael Lasser from UBS.
Good morning. Thanks a lot for taking my question and Greg congratulations again on taking a step back or step up. My question relates to your commentary around quarter to date trends in the Q2. You kind of went to length to talk about some of the weather impacts and softness in the DIY business. So is that are we to assume that it's worse so far quarter to date than you saw in March when there were similar weather impacts that impacted the DIY business?
Michael, we're not going to share any details over a very short period of time thus far in the quarter. But as we said in our prepared comments, weather has impacted us late in the Q1 leading into the Q2. And at the end of the Q1, our DIFM business continued to be strong. And in the markets where we had good spring type weather, our DIY business was strong. In markets where we had and there were a lot of weekends during the month of March that the weather was okay and then the weekends resulted in snow and cold weather again, which impacts the DIY side of our business.
So what I'll tell you is this that what we've seen thus far in April supports our 2% to 4% guide and we feel good about our guidance for the quarter.
Okay. My follow-up question is on the longer term margin outlook for the business. There's a lot of concerns about price transparency and the potential for gross margins to come down. We have seen that your operating margin be a little bit pressure that's due to some investments. So can you just provide a bit of a framework and how we should think about once we get past this year, what is the longer run margin outlook for O'Reilly look like?
Michael, this is Tom. I'll take that one. We've given guidance for this year. We think that when we look at the value proposition that our business provides customers, it continues to be very strong and will be strong in the future. To give margin expectations beyond this year is not something that we typically do.
But I would tell you that we remain very comfortable with the long term opportunities for our business.
And comfortable wouldn't mean that it would you're not expecting it to go down meaningfully over time?
We think that our business model will remain similar as it has for the past decade. Obviously, retail continues to evolve, but we're comfortable with the value proposition that we provide.
Okay. Thank you very much. Good luck.
Thanks, Michael.
And our next question comes from Christopher Horvers from JPMorgan.
Thanks. Good morning and nice quarter. Curious, you talked about the DIY volatility at the end of the quarter, but could you shed some light on the commercial performance? Were trends relatively consistent over the quarter in an absolute sense sort of relative to your own expectations? And does the timing of spring tend to impact that side of the business as well as do people bring their cars in for oil changes and tire changes as weather breaks historically?
Yes, Chris, I'll start that one and then I'll turn it over to Jeff and see if he wants to add one more color. But generally, what I'll tell you is across the country throughout the quarter, our DIY film was stronger than our DIY for the reasons we talked about in our prepared comments and what I said earlier. From a weather perspective, because most of our DIY customers do the repairs outdoors, in their driveway, what have you, they are more susceptible to weather than the DIFM customers. DIFM customers, the shops can do the work no matter what the temperature is, no matter what the level of precipitation is. So the DIFM side is less dependent upon weather or contingent upon weather than the DIY side.
Jeff, do you want to add something to that?
Yes. Yes, I would say that we looking back at 2017, our professional business was just really soft throughout the majority of the year. And we knew at some point it'd have to pick up, which we started seeing that in the Q4. And those trends continued well into the Q1. And there's no doubt that the more normalized winter weather benefited our professional customers and that's kind of carried through.
They're not near as impacted, as Greg said, by the cold spring. But we're pretty excited what the rest of the year holds as far as hopefully some pent up demand from the more normalized winter and the longer term demand created by that. I was reading an article the other day on potholes. I think it was a AAA article, and it was talking about the damage that's done. I think it was like $3,000,000,000 of damage that's done annually from potholes.
Obviously, that would be more the case with the kind of winter that we've had and the average repair
is somewhere in
the neighborhood of $300 So we'd hope to see some more of that throughout the remainder of the year. That's
a great segue to my follow-up, which is what do you from an evidence point that the weather and the car park thesis, like what are you seeing in under car suspension, brakes, that sort of demand that would support the view that there should be a good lagged impact from the weather or maybe that's just too early?
Yes, Chris, it's really playing out exactly as we would have thought. When you look back in January early in the quarter where we had the biggest impacts of winter weather, we were selling categories you would expect to sell. We were selling winter related, weather related categories, lighting and batteries and wipers, things like that, some rotating electrical spikes back in January. And then as you move through the quarter and we get into March where you typically see warmer weather and you see the long term effects of the harsher or more normal winters that we've had and the potholes that Jeff spoke about later in the quarter. The encouraging part is on the DIFM side of the business, we started to see growth come back in steering, suspension, chassis type lines, which is what we would typically see in the spring and we expect that to follow on the DIY side as the weather cooperates.
Excellent. Best of luck, guys.
Thanks.
And our next question comes from Bret Jordan from Jefferies.
Hi. Good morning, guys.
Good morning, Brett. Could you talk
a little bit about regional performance? I got on a couple of seconds late, so maybe it was in the prepared remarks, but maybe talk about market strength versus weakness and maybe what the spread was between the best and the worst markets?
Sure. Jeff, do you want to
take that one? Well, really, it's about what you'd expect. I mean, early winter was good in most markets. And then as we move kind of later into the quarter, the markets that weren't as affected by the cold, snowy, wet weather performed better than the markets that were affected from kind of the lingering winter. As Greg said earlier, I think in all markets where we've seen normal spring type weather, our business has been pretty decent.
Okay. And then a question on your inflation comment. I guess some of the same SKUs that are going up and we saw it in batteries, I guess, in the Q1, there was some supply shortage and pricing went up. Have those inflationary prices held? And I guess from an inflation standpoint from your suppliers, what are you hearing from folks that are seeing labor costs coming up in Asia and metals costs and factoring costs going up.
What's the talk from the in the supply chain about inflation on a full year basis?
Yes. Brett, there's talk about inflation, there is talk about tariffs. We are talking about all those things. From an inflation standpoint, we have seen a bit more inflation on the input side this quarter than we've seen in previous quarters. Most of it is commodity driven, but we started to see some.
We have been able to mitigate most of that by passing that along to end user pricing.
Okay, great. Thank you.
You bet.
And our next question comes from Scot Ciccarelli from RBC Capital
Hi, guys. Scot Ciccarelli. Other question about kind of the commercial versus DIY, I guess. So commercial outpaced DIY. The question is really, would you assume that means the worst of maybe the car park issues are behind you at this point?
Or do you think the performance delta was really just driven by weather and based on what you see by region, by product category, it really suggests weather was the primary reason we saw that difference.
This is Tom, Scott. We talked to the fact that we really felt like in 2018, the light sour years entering the entry port of our business, which tends highly to the professional side of the business, was going to stop being a headwind and flatten out, so what our number showed us. So we think it's a combination of that vehicle population dynamic along with weather that's helping drive that professional business to better results and have more opportunity on that side of the business than we had last year.
All right. So hard to delineate at this point. And then the second question is, with the debt leverage ratio approaching your target, should we assume interest expense largely flattens at the current run rate or should it continue to cut down?
Well, we would expect our interest rate to expense to be relatively flat for the Q1 to the extent that we don't issue additional bonds or incur additional debt. So I would plan for it to be the same. When we look at our guidance, we don't plan for additional debt or additional share repurchases in our guidance.
Understood. Thanks, guys.
And our
Longer term picture question here. Just what has something changed in this business in that you're guiding to 2% to 4% this year, which is certainly better than last year, but weather and or I should say the winter was more normal, the car park is the pressure there has peaked, 2% to 4% is a good number, but below the 4% plus that you guys generated for years. So what's changed bigger picture? Is it more competition? Is it less inflation?
Is it less share opportunity as some other guys maybe have stopped bleeding as much? Just curious your thoughts there.
Tom, do you want to speak to
the guide? When we look at our guidance, if we look at we had some ups and downs in our business over the years, and we've all been in the business for a long time, and we're going to see years where comps because of customer demand and vehicle dynamics run higher and some like last year where it runs lower. And we feel 2% to 4% comp guidance is the prudent guidance to give. We delivered right in the middle of slightly above that middle of that range in the Q1, and we're comfortable with our guidance for the Q2 and the full year.
But again and I presume you're not going to be talking about years beyond this year, so we can't any color on whether that's sort of the right outlook longer term as we try to model out beyond the next three quarters? Or is that something that you talk about at a later date?
Well, we see when we look at the demand drivers for our business, number of vehicles on the road, miles driven. So as the population increases, we expect those drivers to continue to increase and drive demand in our business over the long term. I think if you look at the AIA, they look at a 1% to 3% DIY growth year after year and a 2% to 4% on the professional side over a long time horizon. And we'd expect to continue to outperform the market. Okay.
One more, if I could. This is for Greg Johnson. Any thoughts on any big changes to the strategy? Maybe one thought perhaps a little bit more aggressive M and A, tuck in acquisitions, anything along those lines that you think the company will evolve towards under your leadership?
Mike, I think we've got a very sound business model we've executed on for years under David's leadership, under Greg's leadership. Market changes, retail changes, we'll adapt. Fundamentally, we're going to continue to do the same things we've done, which has been very successful for us. From an M and A standpoint, we continue to look for acquisition candidates both inside and outside the U. S.
Borders. It's what we've been doing for a few years now and we'll continue to do those things. There'll be some change. We'll adapt to a changing retail environment whether Greg is our CEO or I'm our CEO. But fundamentally, we feel like our business model works and works very well, and I don't see any substantial changes.
Okay. Appreciate the color. Thank you.
And our next question comes from Greg Melich from MoffettNathanson.
Hi, thanks. I wanted to step back just a little bit. I think you gave a lot of good information on the how the pro did better and was more durable. And it sounds like inflation is back at least a bit. But what is were we growing transaction counts in the quarter?
I mean, if we look at that comp, was there positive transactions? And is that true in DNOI as well?
Ticket count grew more on the DIFM side as well as the ticket average. On the DIY side, the growth was in ticket average.
Okay. So overall traffic, my transactions might have been up 1% and then the rest was ticket. Would that be a fair way to think about it?
Overall ticket counts were slightly down.
Okay. And if we think about the growth in the basket, how much of that would have been inflation versus, let's say, mix? I think you mentioned a lot of more undercarriage and those sort of higher ticket item parts.
Yes, it's more so mix. We haven't seen enough inflation to really move the needle on that yet.
And our next question comes from Liz Suzuki, Bank of America. Hi,
guys. So growth in miles driven has started to slow. Is there any concern that consumer travel trends are changing in a structural way and that it could be a headwind for the auto parts broadly? Or do you think it's more of a temporary impact from higher gas prices?
It's probably a temporary deal for gas prices. We've seen this trend before. As gas prices grow and as gas prices really grow over time, consumers will do a really good job of adapting to that and changing their budgets accordingly. When gas prices spike very quickly, sometimes that's not the case. But I feel like today the miles driven is a result of slight increases in gas prices and we're watching that very closely.
And it's we frankly, we baked this into our plan. We budgeted for
a little higher gas price, fuel cost into our 2018 plan. If I could add to that, Greg. In 'fourteen, 'fifteen, 'sixteen, we saw average miles driven at the high end of the average range. So on a year over year basis, it's not growing as fast, but it continues to be pretty close to the long term average and continues to be a driver of our business in solid positive territory.
Great. Thank you. And how competitive do you think the pricing environment has been for national brand products that you can find online or at Walmart or other auto parts chains? And what percentage of your sales and profits do you think are in the more competitive product category? Yes.
I don't know about percentage per se, but we're competitive with our peers, our brick and mortar peers, absolutely. And in most cases, we're competitive with the online retailers. There are certainly examples where online national pricing, someone will have it less than us and someone will have a higher price than us. But from a brick and mortar perspective, our national brand pricing would be in line with our competitors. And most of our online business results in the transaction ending in our stores.
We're driving more footsteps to our stores through our online business. When we get to consumer in our store, we have a very competitive product offering even when we have an online retailer that may have a lower price point on the national brand, we will have a comparable product often in a private label offering that would have an equal to or lower price point even than the lowest price online retailers. Jeff, do you want to add to that?
Well, yes, I'd say that one other thing to remember is that the national brands would be more of our premium offering, and that's what most of our professional customers prefer. And there again with the professional customers, it's all about availability and how quick you can get it to the shop and help them turn their base.
Great. Thanks. That's very helpful.
And our next question comes from Carolina Jolley from Gabelli.
Good morning. Thanks for taking my question. Just one quick one here. It looks like you might have 2 suppliers consolidating in the near future. Do you have any thoughts on how that might affect the business, including, I guess, supplier incentives or availability to new brands?
Sure. I don't know about availability to new brands, but you're speaking of Tenneco acquiring Federal Mogul. We've had a long term relationship with both of those companies. Both of those companies have been good suppliers for us. We've got a great relationship with Tenneco.
One of the things that we like about this acquisition is there's really no competitive overlap between the 2 product offerings. They're really complementary of each other, not competing with each other. So we feel like Tenneco's leadership will be good for the overall company, and we look for good things to come from that relationship.
Great. Thanks. And our next question comes from Chris Bottiglieri from Wolfe Research.
Hi, thanks for taking the question. I have a long term strategic question I wanted to pick your brain on. A lot of your closest peers are attempting to evolve their DC strategies using hub strategies, mega hubs, we want to call them cross docking. I believe you don't currently use mega hubs. Can you tell us more about the advantages and virtues of your direct from DC strategy?
And why or when not a mega hub strategy would make sense for Riley? And just lastly, kind of like what are the trade offs and what does all this mean for Riley's market share in commercial?
Sure. And I'll start this and let Jeff add to it as well. We started out really focusing on the professional side of the business where a lot of our competitors started out focusing on the retail side of the business. So since day 1, we've had a very strong supply chain, a very strong DC footprint. Since day 1, we have our stores with replenishment and special order needs on a nightly basis.
So the strength of inventory between a distribution center SKU count and a hub store SKU count, the DC inventory is going to win out every time. Our DCs will have somewhere between 140,000 to 175,000 SKUs. Our hub stores would be closer to 70,000, 80,000 SKUs and our competitors may have up to 90,000, 100,000 SKUs in some of their larger hubs. But we kind of got that cost baked into our model. We've worked over several years to reduce our distribution cost and as a percent of sales.
And we just feel strongly that having that overnight availability to inventory at a DC SKU level is a significant advantage over the hub model. Jeff, you have anything to add?
Yes. I'd just add that we've been delivering 5 nights a week to our stores for 60 years and back when it wasn't in fashion and people thought it wasn't the right thing to do. And it's panned out pretty well for us. Obviously, when you're in the DIFM side of the business, availability is absolutely key. I mean, getting that part of the shop and helping them turn their base is really how you earn the business and keep the business.
And honestly, to an extent, the more SKUs you have readily available, the more times you can say yes versus no. So we've always prided ourselves in a high level of inventory availability. There again, we kind of meet what the market bears when it comes to service levels. I mean, it could be overnight in some rural stores, but it's up to 7 or 8 times a day in metro markets. It's really what the market demands to provide the service to be able to earn the business and keep the business.
So Another thing to
add is over the past few years, we've also added weekend service out of our distribution centers.
Yes. And just one last item to note. We've run a significant hub network that augments our regional DCs. So availability is critical to success in our business, and we feel like we do a great job at it. It.
And our next question comes from Matt McClintock from Barclays.
I wanted to follow-up on just the national brand conversation that we're talking about earlier. You have some M and A going on. You have a competitor that just put together a somewhat exclusive deal with a national brand. And you're kind of seeing this in other segments of retail where one retailer will try to create an exclusive with a national brand to try to compete more effectively with another retailer. Are we seeing like an evolution in the way that your competitors think?
Or are we on the cusp of some type of new evolution in competition created by the suppliers, created by these brands? And just how do you think about this over the next several years being a potential threat to your business and your dominance? Thank you.
It's national brands versus private label has really evolved over time. We were most of our business as recently as 7 or 8 years ago, it was National Brands. National Brands, there's a competitive component. To Jeff's point, most of our National Brands are our premium products And we'll have, in most cases, a good, better, best offering at which point our national brands would be that best and we would have 1 or more layers of private label under that. So we've evolved from mostly national brands to a mix, a healthy mix of private label and national brands, which allows us to compete with both brick and mortar and online retailers.
So I think things continue to evolve. A lot of our private label brands are supplied by national brand providers. The example that you're speaking of in your example there, I think that's a category where we have created a national brand. And some of our national brands that we own that are proprietary brands once were national brands like Precision, for example, or Murray Air Conditioning. And we own the rights to those brands and they are now our private label brands.
But in the case of other categories like batteries is a good example, Super Start and Brake Vest and Brakes have become essentially national brands. So we're happy with our strategy of having a healthy mix of good, better, best and mixing in private label and national brands.
And our next question comes from Seth Basham from Wedbush Securities.
My question is on gross margin. Excluding LIFO in both periods, you saw your gross margin trend down year over year again this quarter. I just want to understand a little bit better if there are any things that were outside of your expectations impacting gross margin this quarter?
We had some puts and takes in gross margin. It was within our guidance. When we look at our expectations, we had a little less inventory than we usually end the Q1 with, and that had some cap headwinds to us. But we remain comfortable with our gross margin guide and our when we look at our POS margin without all the other items that go into it, we continue to be pleased with that.
Got you. And if we think bigger picture, there's been some conversation about price competition. We've also seen one of your largest competitors introduce a free overnight shipping offer for online orders over $25 Is that something that you think is material that you'll need to respond to? Or is it too small a piece of your business to matter?
Yes, Seth, it is a small part of our business, but we try to make sure we're competitive with our competitors and the products they and their programs like this. I saw something last week where one of our competitors was rolling out a test in select metro markets to provide overnight deliveries. I assume that's the one you're speaking to. What we've worked on is over time is and matter of fact over the period of the last quarter, we have expanded our shipping points to include all of our DCs and we'll also probably be layering on some hub store locations. So a significant portion of U.
S. Households today we're able to touch overnight with UPS ground shipping. And we've got a mid range to long term strategy to leverage that and use that as a selling advantage online. So we may not mirror exactly what our competitors do from an approach standpoint, but we want to make sure we have a comparable service level.
Got it. And lastly, Tom, housekeeping question, LIFO expectation for the year now?
That number is probably in the gosh, dollars 10,000,000 to $15,000,000 range.
Thank you.
Again, that to follow-up on that, that's highly dependent on what inflationary pressures we see.
We have reached our allotted time for questions. I will now turn the call back over to Mr. Greg Hensley for closing remarks.
Jenny, this is actually Greg Johnson. Thank you. Very much, Jenny. We would like to conclude our call today by thanking our entire O'Reilly team for your continued dedication to customer service in the Q1. I'd like to thank everyone for joining our call today, and we look forward to reporting our 2018 Q2 results in July.
Thank you.