Welcome to the O’Reilly Automotive Inc. fourth quarter and full year earnings conference call. My name is Jason, and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a 30-minute question-and-answer session. At that time, if you should have a question, please press star then one on your touch-tone phone. Also, please note this conference is being recorded. I will now turn the call over to Mr. Tom McFall. You may begin, sir.
Thank you, Jason. Good morning, everyone. Thank you for joining us. During today's conference call, we will discuss our fourth quarter 2017 results and our outlook for the first quarter 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. 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-K for the year ended December 31st, 2016, 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 Henslee.
Thanks, Tom. Good morning, everyone. Welcome to the O’Reilly Auto Parts fourth quarter conference call. Participating on the call with me this morning are our Co-Presidents, Greg Johnson and Jeff Shaw, as well as Tom McFall, our Chief Financial Officer. David O’Reilly, our Executive Chairman, is also present. Hopefully, everyone had a chance to read both our fourth quarter earnings release and our leadership succession plan press release. I'll briefly discuss our fourth quarter results and our succession plan before turning the call over to Greg, Jeff, and Tom. I'd like to start the call today by thanking all of our team members for their hard work and dedication to our company. 2017 was a challenging environment for our industry.
Through your commitment to providing outstanding customer service and living the O'Reilly culture, we were able to generate our 25th consecutive year of comparable store sales growth, record revenue, and operating income, every year since becoming a public company in 1993. Our comparable store sales for the fourth quarter grew 1.3%, which was in line with our guidance expectations. As we discussed on last quarter's call, we faced very difficult comparisons to last December due to favorable weather across the country in December 2016 and headwinds from a shift in the calendar. This calendar headwind resulted from an additional Sunday, our lowest volume day in 2017's fourth quarter when compared to 2016, as well as the timing of the Christmas holiday, which fell on Monday this year versus Sunday last year.
These calendar shifts were a combined headwind of approximately 70 basis points to our comparable store sales growth for the quarter. We look at our sales progression during the quarter versus our expectations, we got off to a solid start but hit some weather-related softness mid-November to mid-December and finished up strong with the onset of harsh winter weather in the last half of December. In absolute terms, October and November were solid comparable store sales growth months, and December being negative for the reasons I mentioned. Greg will give some additional color on our fourth quarter comparable store sales growth and our expectations for 2018. Our earnings per share for the quarter of $3.52 benefited significantly from two tax-related items.
These were a $0.15 benefit from the new stock option accounting requirements and $0.62 related to adjusting our deferred tax liabilities in conjunction with the Tax Cuts and Jobs Act of 2017. Tom will discuss these impacts to the quarter and our outlook for next year in more detail in a few moments. Excluding these tax impacts, our earnings per share for the quarter was $2.75, which was at the top end of our guidance range. Greg and Tom will be covering the details of our fourth quarter performance and our outlook for this year in a moment. As was disclosed in our two press releases last night, after 33 years serving in many different roles in our company, I plan to take on yet another new role.
Succession planning has always been an important and methodical process at our company. Over the period from now until our annual shareholders meeting on May 8th, we will transition the day-to-day operations of the company to Greg Johnson and Jeff Shaw. As you know, they assumed the roles of Co-President a year ago. This will allow me a little more free time for my personal life, yet allow me to continue my participation in the direction and management of our company. Subject to our shareholders electing me to the board in May, our board has asked that I assume the role of Executive Vice Chairman, and Greg Johnson will be promoted to Chief Executive Officer and Co-President, and Jeff Shaw will be promoted to Chief Operating Officer and Co-President.
I will continue to be highly involved in the operations of the business, as will David O'Reilly, who will continue as our Executive Chairman. For those of you who know our company history, this transition is very similar to 2005 when Ted Wise and I were promoted from Co-Presidents to COO and Co-President and CEO and Co-President, respectively, and took over the day-to-day operations from David. Greg and Jeff are both extremely talented and experienced individuals who have the full support of our team and our board, and I have complete confidence they will continue our company's long-term track record of success. Before I finish up my prepared comments, I would like to again thank our team for continuing to provide industry-leading service to our customers every day and growing our market share during this difficult past year.
I'm extremely proud of all of you, and I'm confident 2018 will be an outstanding year for our company. I'll now turn the call over to Greg Johnson.
Thanks, Greg, and good morning, everyone. I'd like to begin my comments today by thanking our team for their deep commitment to outstanding customer service and continuing to build our market share through a tough environment. By always putting the customer first, we're well-positioned to sustain profitable growth in our business. Now, I'd like to provide some additional color on our fourth quarter comparable store sales results and outline our guidance for 2018. For the fourth quarter, our comparable store sales results were driven by an increase in average ticket, offset in part by pressure on ticket counts on the DIY side of the business. The professional business outperformed the DIY business during the quarter.
The increase in average ticket continues the long-term trend of increasing parts complexity, although we did see some inflation on same-SKU pricing, primarily seasonal items during the fourth quarter, which, if it continues, will lend additional support to our top-line growth moving forward. On a category basis, we saw strength in winter-related categories across most of the country, which was partially offset by extremely tough comparisons to 2016 for winter-related categories on the West Coast, which did not see the same benefits last year. For the first quarter of 2018 and the full year, we're establishing comparable store sales guidance at 2%-4%. However, the key assumptions in developing our guidance are total employment will remain strong and support a modest improvement in miles driven. Increasing gas prices could limit the growth of miles driven and put added pressure on lower-income consumers.
We further assume weather will be normal, pricing in the industry will be rational, and inflation will continue to be muted. Our final major assumption is that the pressure in our industry from the depressed new vehicle sales totals during the period from 2008 to 2011 will begin to abate. Thus far in the quarter, harsh winter weather across the country has helped support the benefit in our northern markets, although unusual snow and ice in the southern markets have been a headwind to business since these markets are much less equipped to handle inclement weather and consumers frequently stay home until conditions improve. In total, we are pleased with our business thus far in the quarter. However, built into our guidance is consideration that our sales volume in Q1 is seasonally weighted to the end of the quarter, where we have our toughest comparisons.
In general, the much more inclement weather this winter season as compared to the past two mild winters should help drive our business throughout the year. For the quarter, our gross margin of 52.9% was within our expectations, and our full-year gross margin of 52.6% was in the middle of our updated full-year guidance of 52.5%-52.7%. For 2018, we are establishing our full-year guidance at 52.5%-53% of sales. The increased expectations are attributable to better leverage on fixed costs for more robust sales, modest improvement in merchandise margin, and a slightly lower LIFO charge of $18 million versus $22 million in 2017, partially offset by pressure to increase transportation costs.
We expect our 2018 LIFO charge will be front-loaded in the first two quarters of the year based on current vendor negotiations, with cost increases most likely offsetting negotiated price decreases in the back half of the year. The Tax Cuts and Jobs Act of 2017 will dramatically reduce our future tax expense. We expect the savings to be approximately $215 million in 2018, and we feel it's appropriate to take a portion of these savings and allocate it back to the business with a focus on continuing to improve the levels of service we offer our customers. Our focus is to further enhance the levels of customer service we offer by accelerating enhancements to our omni-channel efforts and to continue to build on our industry-leading customer service. The cost of these investments represents a 70-basis-point headwind to our SG&A and an incremental $30 million of capital expenditures.
Jeff will give further details on the improvements of our in-store service levels, but I'd like to take a minute to discuss our omni-channel efforts. Regardless of how our customers begin their interaction with us, whether it's in-store, online, or over the phone, and complete their transactions, whether in-store, at-home delivery, or with us delivering the order at their shop, we want to provide a seamless shopping experience that engages the customer and delivers a superior customer experience. During 2018, we will accelerate our investment in our electronic portals, oreillyauto.com for our DIY customers and First Call Online for our professional customers. Our projects focus on improving the usability, content, search functionality, and general touch and feel of these portals to ensure we're exceeding our customer expectations.
We will also be focused on better using the data we collect to increase the speed of customer interactions and transactions, improve the smoothness of transactions between the different channels, and use past buying patterns to better anticipate our customers' needs. Without going into the details of these specific projects, I do want to say that we're excited about our enhancements that we'll be able to achieve this year and the foundation we'll put in place for improvements in this dynamic part of our business. With the additional spend on operating expenses for these investments in the omni-channel and service levels we provide our customers, we're setting our 2018 full-year operating profit guidance at 18.5%-19%. For the first quarter, we are setting our earnings per share guidance at $3.55-$3.65. For the full year, our guidance is $15.10-$15.20.
Our full-year guidance includes an estimate for the tax benefit for the new option accounting adopted in 2017, and the impact of shares repurchased through this call, but does not include any additional share repurchases. Before I turn the call over to Jeff, I'd like to thank our team for their hard work in 2017. I look forward to serving as the company's Chief Executive Officer and am excited about the potential for our performance in 2018 and beyond. I'll now turn the call over to Jeff Shaw. Jeff?
Thanks, Greg, and good morning, everyone. To begin today, I'd also like to thank our team for their tireless commitment to providing outstanding customer service. Your dedication to our valued customers has allowed us to strengthen existing relationships and to build new ones. We run our business to develop long-term relationships with our customers, who expect high service levels regardless of the sales environment. As a result, we have a relatively high fixed cost model, which has supported our market share growth year after year. With our business model and new store growth rate, our leverage point for SG&A is in the comparable store sales range of 2.5%-3%. Comparable store sales of 1.3% for the quarter and 1.4% for the year is well below our historic and expected future growth rates.
We tightly manage our expenses in all sales environments, at these sales levels, we expect to experience deleverage on our SG&A, as we will not make short-term dramatic cuts in our SG&A, since that would significantly impact our service levels and damage our long-term customer relationships. As a result, we experienced SG&A deleverage of 87 and 66 basis points for the quarter and year respectively. When we look at total increase in average SG&A spend per store, we were up 1.2% for the year, which was below our beginning of the year guidance and reflects our efforts to prudently manage expenses lower during slower sales periods. Looking closer at our full-year SG&A spend, we were below expectations on payroll, incentive compensation, and professional services and fees, offset in part by rising benefit costs, utilities, and vehicle costs.
As Greg mentioned earlier, we're going to take a portion of our tax savings and allocate it to increased operating expenses to further enhance our best-in-class customer service. This investment, combined with normalization of incentive compensation, will result in 2018 SG&A per store increasing in the range of 3%-3.5%. This additional spend is focused in three main areas: omni-channel, which Greg already discussed, enhanced benefits and wages at the store level, and in-store technology to improve the efficiency of our store teams. The key driver of our in-store customer service levels is the knowledge of our professional parts people. As we continue to experience wage pressure driven by the waterfall effect of increasing minimum wages and the extremely tight labor market, we absolutely must be able to attract and retain team members who have automotive knowledge and a willingness to live the O’Reilly culture.
We must also ensure our parts professionals continue to enhance their knowledge base and are as efficient as possible. We have several significant projects directly aimed at accomplishing this. We don't want to discuss these upcoming enhancements in detail, but we're very confident they will generate a solid return on the capital we invest. On the expansion front, we had a busy year. We opened 190 new stores, converted the 48 Bond stores, and expanded our Greensboro DC from 300,000 to 500,000 square feet to support our continued growth. For the year, capital expenditures came in at $466 million, which was below our guidance due to a higher mix of lease stores, delays in some projects, and generally just tightening our belt during a soft year. For 2018, we're setting our CapEx guidance at $490 million-$520 million.
We plan to open 200 new stores during the year, the primary increase in our CapEx is accelerating our IT project spend. I'd like to conclude my comments today by again thanking our team for their continued dedication to providing the best customer service in our industry. Our teams have responded to the market conditions we faced throughout 2017 by working that much harder to take care of our customers. That relentless commitment is the key ingredient as we move forward and continue to take market share. I'll turn the call over to Tom.
Thanks, Jeff. We'll take a closer look at our quarterly results and our guidance for 2018. For the quarter, sales increased $92 million, comprised of a $38 million increase in comp store sales, a $53 million increase in non-comp store sales, a $2 million increase in non-comp non-store sales, and a $1 million decrease from closed stores. For 2018, we expect our total revenue to be $9.4 billion-$9.6 billion.
The Tax Cuts and Jobs Act of 2017 had a dramatic impact on our fourth quarter earnings and will continue to have a significant positive impact on our tax rate on a go-forward basis. For the fourth quarter, we recorded a tax benefit of $53 million, or $0.62 per share, related to the remeasurement of our federal deferred tax liability from a tax rate of 35% down to the new 21% tax rate. This deferred liability relates to timing differences where our historic tax deductions exceeded our deductions recorded for GAAP. These differences reverse over time but will now reverse at the new, lower tax rate. During the quarter, we also recorded a tax benefit of $13 million, $0.15 per share, relating to the new accounting for share-based compensation.
For the full year, our tax benefit for the new required accounting for share-based compensation was $49 million or $0.50 per share. For 2018, we expect our tax rate to be approximately 23%-24% of pre-tax income. The new, lower rate is a result of the lower federal tax rate. In comparison to 2017, we expect our EPS to be affected by a $0.59 headwind from the one-time reduction of our deferred tax liabilities in the fourth quarter of 2017, a $2.50 increase from the new lower federal tax rate, and a $0.30 headwind from the tax deduction for share-based compensation with the lower benefit driven by lower expected gains on exercises of options. We expect the quarterly tax rate will be relatively consistent.
The quarter-to-quarter differences in the tax benefit from share-based compensation will create fluctuations in our quarterly tax rate as a percent of pre-tax income. Now we'll move on to free cash flow and the components that drove our results for the year and our expectations for 2018. Free cash flow for 2017 was $889 million, which was a decrease of $89 million from the prior year. This decrease was due to a lower decrease in net inventory, offset in part by lower capital expenditures. In 2018, we expect free cash flow to be in the range of $1.1 billion-$1.2 billion, with the increase driven by higher pre-tax income and lower cash taxes, offset in part by higher CapEx. Inventory per store at the end of the quarter was 600,000, which was a 4.2% increase from the end of 2016.
Our ongoing goal is to ensure we grow per store inventory at a lower rate than the comparable store sales we generate. Unfortunately, we didn't achieve that goal this year as soft sales, especially in seasonal categories, resulted in a higher year-end inventory value than anticipated. We expect to cycle through this excess inventory in 2018, and we anticipate we'll grow our per store inventory in the range of 1%-2% this year. Our AP to inventory ratio at the end of the quarter was 106%, which was where we ended 2016. We anticipate a slight improvement to 107% at the end of 2018, which will be driven by the higher level of sales. Moving on to debt. We finished the fourth quarter with an adjusted debt-to-EBITDA ratio of 2.12 times as compared to our ratio of 1.63 times at the end of 2016.
The increase in our leverage ratio reflects the $750 million 10-year bonds we issued in August and incremental borrowings on our $1.2 billion unsecured revolving credit facility. Our increased borrowings moved us into our targeted range of 2 to 2.25 times. For 2017, we repurchased 9.3 million shares at an average price of $233.57 for a total investment of $2.2 billion. Subsequent to the end of the year, through the date of our press release, we repurchased 0.5 million shares at an average price of $261.72. We remain very confident that the average repurchase price is supported by expected discounted future cash flows of our business. We continue to view our buyback program as an effective means of returning excess capital to our shareholders.
Finally, before I open up our call for 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 Jason, the operator, to return to the line, and we'll be happy to answer your questions.
Thank you. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Also, please limit yourself to one question and one follow-up question. Our first question comes from Scot Ciccarelli from RBC Capital Markets.
Hey, guys. First question is, can you help quantify what kind of impact you're expecting from the improved car park that you mentioned during the call? Car park meaning the drop in new car sales we had, obviously, during the downturn.
When we look at the numbers, we see that that pressure is gonna abate. Quantifying that particular factor amongst all the factors is not something we do, but we feel like that was a pressure last year that will be less of a pressure this year. Obviously, we continue to have the aging of the vehicle fleet and more vehicles in the end of or in the older section that continue to drive demand and growth in our industry.
Okay. Then a question, the follow-up has to do with the reinvestment amount. You kind of go through the numbers, and assuming we're talking about 70 basis points of margin, that's how I think people are interpreting that comment. It's about $65 million-$66 million. Is that all going to wages, or is there something else that might be in there? It just seems like a little bit of a high number on the wage front, but maybe there's something else in there.
Yeah, this is Jeff. I'll take a stab at that one. We feel it's about $65 million, as I mentioned in the prepared comments, the spend's basically focused in three main areas: wage increases in excess of the historical norms, additional spend on information technology, and enhancements to our team member benefit offering.
Kind of in that order, Jeff?
That's not something that we're going to quantify the individual pieces of, Scot.
Okay. Got it. Thanks a lot, guys.
Thanks, Scot.
Thank you. Next, we have Matt Fassler from Goldman Sachs.
Fassler, good morning to you. The first question is actually a follow-up of Scot's. I guess asking it simply, do you think you would have made this investment, this $65 million, without tax reform? Presumably, you'd started the 2018 planning process prior to the final bill being passed. Were some of these likely to be in the plan, or is this really kind of a switch that you flipped when you realized you'd have this windfall and the opportunity to invest some of those dollars?
Scot, this is Tom. I'll take a shot at this one. When we look at our technology investments, we've continued to invest strongly in those over the last three, four, five years. I think that the tax change has allowed us to accelerate those further. When we look at wage increases, this is the incremental amount in addition to known wage pressures we have. We feel like as the market has tightened and as others have taken action, that we need to be proactive in addressing, especially our low-end store wages, to ensure that we can stay competitive in the market and attract the talent we need in our technical business.
Got you. Then my follow-up relates to weather. I guess there's good bad weather and then bad bad weather, depending on, I guess, the offshoot between causing parts failure, and then keeping cars off the road. If you think about the weather that we've experienced over the past couple of months, a more normal winter for sure, how do you feel about the potential impact of the current weather backdrop on your business later in the year, during the summer months when some of that parts failure comes back to drive the business? Is this the kind of backdrop that should be more helpful to you come mid-year, or is there less relevance?
Yeah, Matt, this is Greg Johnson. As you said, there's good bad weather and bad bad weather. As I said in my prepared comments, bad weather is better for us typically in northern markets than in the southern markets, where they're not quite as prepared typically for the weather. Then there are short-term and long-term benefits to bad weather as well. Very late in the fourth quarter, we saw some benefits to bad weather because of the cold snaps up north. We do expect to see benefits as we get into the spring and summer months resulting from that as well. That could be the evidence of battery failures when the weather goes hot, turns hot rather, and ride control undercar categories from damage to roads, things like that we typically experience a few months down the road from the actual winter harsh weather.
Thank you so much. By the way, congratulations on all the movement and the promotions and such.
Thank you.
Thank you. Next, we have Mike Baker from Deutsche Bank.
Hi, thanks. I wanted to follow up on the first quarter comments where you said that the comparisons get more difficult later in the quarter and presumably March. Correct me if I'm wrong, they sort of get a lot easier over the next couple of weeks as just starting right about now, we're up against when the tax refunds really fell off the table last year. Can you tell us how you expect that to play out over the next few weeks and how that plays into your guidance?
Mike, I can tell you, as I said in the prepared comments, we're pleased with where we stand thus far in the quarter. Looking forward, as you move later in the quarter, we typically see an uptick based on seasonality. We'll see an uptick in parts due to seasonality. You're right. The tax benefit did hit us over the next couple of weeks, and we were hopeful that we will see improved sales during that period of time. We remain confident in our guidance of 2% to 4% for the quarter.
I guess when you say hopeful, I mean, does that imply that the 2% to 4% assumes a pickup in the next few weeks and then maybe a little bit of a drop-off in March? Is that the right way to think about it?
This is Tom. What I would tell you is that we build our sales plan on a daily basis throughout the quarter and build our guidance based on overall market assumptions. When we had our call last year, we obviously were having a slower than anticipated beginning of the year, and some of that was the impact of the timing of tax refunds. We've taken all that into account in developing our guidance for the quarter, and we're comfortable with our 2% to 4% guidance based on our progression thus far in the quarter.
Okay.
Mike, this is Greg Henslee. I may just add one thing.
When we talk about the quarter and the reason we talked about the importance of the end of the quarter and the comparisons is simply because of the seasonality that Greg mentioned and the fact that our sales typically ramp into the quarter. While we're pleased with where we are in the quarter, the majority of the quarter is in front of us, and we really didn't take a lot of the potential for the timing of tax refunds and stuff into our guidance. We did consider just how we did last year, how we would typically ramp, and where we're at in the quarter. As Greg said, we're comfortable with the guidance we gave, recognizing that we're pleased with where we're at to this point in the quarter.
Okay. Appreciate that. I'll turn it over to somebody else.
Thank you. Next we have Steven Forbes from Guggenheim Securities.
Good morning. Maybe just a quick follow-up on the reinvestment. I think about it, if you can touch on why 70 basis points, right? Why not more, given your margin structure, and the likelihood of improving industry backdrop and the share opportunity that exists in certain regions around the country? How'd you come up with the 70 basis points?
This is Tom. I'll answer the question and then turn it over to Jeff. When we looked at what projects we thought we could accelerate and what the ROI was, that's a more cut and dry item. When we look at what we need to do to be competitive on benefits to retain people and reduce turnover, a little more of a cut and dry item. When we look at what we thought the wage pressures were going to be in total based on changes in the market, we did some work and made an estimate. What I'll tell you is that we don't do anything blanket with wages, and that's something that Jeff can describe better because we're talking about store wages.
It really would be a store-by-store, market-by-market analysis, and obviously, with what's going on in the industry and minimum wages coming up, and things that we're hearing from other retailers about moving the wages, we just wanted to be prepared for that, and we'll react accordingly by market based on what's going on in the market, as I said in my prepared comments, to make sure that we can not only attract but retain good, solid parts professionals.
Maybe just a follow-up on that topic. When you say wages, is it strictly just rate, or is there also a potential investment in incremental labor hours? Just last one, just given the timing of these impacts, should we think about the 70 basis points as an annualized impact, or is the annualized impact greater because of the potential timing of the wage increases?
This is Tom. I'll address the annualization. When we look at the benefit portions, when we roll out benefit changes, it's got an ongoing portion of expense, but it's also got an immediate expense impact to catch up our accruals to these new levels. We would expect the quarter-to-quarter impact to be pretty similar throughout the year and the annualization to be similar as we have more startup costs on these items at the beginning of this year, and then wages ramp, it will level out.
Yeah, on the labor hours, my comment there would be our philosophy is the same it's always been. We staff for the appropriate volume of the business, and we would continue to do that by market based on what we see our sales volume doing.
Thank you.
Thank you. Next, we have Greg Melich from MoffettNathanson.
Hi, thanks. First, Greg, I want to thank you for all your work over the years with us. Greg and Jeff, congrats.
Thank you.
I said two questions. One is on inflation. I think you'd mentioned that inflation started in the fourth quarter. Could you quantify how much that was and your guidance for this year in the 2%-4% comp, how much inflation do you expect? I had a follow-up.
This is Tom. Most of the inflation that we saw in the fourth quarter was on seasonal type items. Our comments in the prepared remarks were that our expectation is that we're going to have yet another year where same SKU pricing doesn't come up. To the extent that we did see some, that would be additional tailwind for us.
Basically, same SKU is the same, and it's just commodities sort of flowing through.
Well, we saw some same SKU inflation on seasonal items.
Okay, great. The second question was, when you thought about margin investment and ROI from that, it was pretty clear you went methodically through everything, I'm curious as to where product investment or gross margin investment flushed out in that equation. Any reason why you didn't look to put some into the product margin or gross margin generally, even as part of a service offering when you look to invest margin?
Since this is a blank question, it's Tom again, I'll answer the question. We feel comfortable with where our pricing is. Obviously, we are very competitive on the street. Our business is a very technical business. It's not just the price of the goods that determine what the value is to the customer, and we continue to feel like we're priced appropriately for the services we provide.
Yeah. Additionally, there's really nothing to gain for us by lowering price. If we lower our price today on any given category
You can bet our competitors, with the transparency of the internet on pricing, are going to lower their price tomorrow. There's just nothing to gain there. Now, if we're priced out of line, we always have to fix that, but as Tom said, that's just not the case. I think our company and all of our competitors spend a lot of time on ensuring that we're price competitive, and we just don't feel like there's anything to gain by lowering our price as long as we're in a competitive position.
On the IT investment, Home Depot made a big thing about ramping spend on more direct distribution. Is that part of the CapEx increase you guys are talking about or no?
This is Tom. I'll start and Jeff or Greg can add on. Investing in distribution is something we've always done, and availability is such a crucial piece of what we do. That's always in our CapEx plan. Frankly, the number of times that we touch a store now is so significant. Frankly, we've gone overboard in the past. There was a time where we had a pretty important market to us where we were touching our stores 12 times a day out of a distribution center. We finally realized, it's crazy that our service levels are that high when they really didn't need to be because we were far outpacing our competitors and realized we could outpace our competitors still just touching those stores eight times a day.
If we felt like that we were even slightly in a non-competitive position from an availability perspective, we've always got the ability to leverage up our service levels from our DCs. Frankly, we feel like we have the best availability in the industry as it stands today.
Yeah, that's great. Yeah, that makes sense. I appreciate it, guys. Good luck.
Thanks.
Thank you. Next, we have Seth Sigman from Credit Suisse.
Thanks. Good morning, guys. Hey, just on the DIY versus commercial commentary, I think you said DIY was weaker. What do you attribute that to in the quarter? I guess, was the DIY side of the business facing a more difficult comparison? I'm just wondering, has that improved here in the first quarter?
Yes. The DIY was definitely up against tougher compares. We've seen a little bit of an uptick in our professional business there in the fourth quarter. A key driver of that is that during the cold weather in 2016, battery sales were pretty incredible because batteries that didn't fail during the prior winter failed during that winter. Batteries are a line that is heavily skewed to the DIY side of the business. Over time, we would expect that as the complexity of cars continues to be more prevalent, that our do-it-for-me business would simply be a stronger business than our DIY business.
Okay. Understood. I just want to follow up on the higher expenses for 2018. I know it was asked in a lot of different ways. Is there a way to help us understand what is sort of catch-up spending from 2017? I know you talked about payroll, incentive comp, professional fees all being lower than you had planned in 2017. Of that 70 basis points, how much is just simply catch-up?
What we've tried to communicate is that the 70 is an incremental to what our SG&A plan would look like absent the pressures created by the new tax code.
Okay. I guess just given the incremental investments for this year, for 2018, bigger picture as you're thinking about past this year, do you see opportunities to continue to invest, or do you think some of these investments are more isolated to 2018?
We would expect the investment to continue in 2019. We would hope by the investments that we're making, that the incremental spending, we'd provide even higher levels of service and leverage that with better sales and really increase team member productivity through technology enhancements as well as reducing our team member turnover.
Okay. Understood. Thank you.
Thank you. Next, we have Alan Rifkin from BTIG.
Thank you for taking my question. Thank you, Greg Henslee, for everything you've done in the past, and certainly congratulations to both Greg Johnson and Jeff on your new appointments. My first question is a follow-up on the reinvestment from the tax reform. Certainly, one would assume that you're making these investments because you believe that you can yield a higher return at some point in the future. Would it be reasonable to assume that these higher returns would start in 2019, or will they be further out than that?
Well, we try to drive higher sales every day. Our plan encompasses the traction we think we'll get this year. Some of these investments are longer-term investments. What we would tell you is a big opportunity for us is to reduce our store-level turnover as it impacts our service levels.
Yeah. If I can add to that, Alan. The two things, and Tom mentioned one, turnover and omni-channel. It takes a while to learn how to sell parts and by decreasing turnover, we feel like long-term, we put ourselves in a significantly better position to provide service levels to our customers and just be the professional parts people that our company has been built on. That really starts generating immediate returns as we start decreasing the percentage of turnover that we have annually.
We feel like that we have an opportunity to do better than we do today. I feel like we do pretty well today. We can do a lot better. As we make those improvements to our platforms, I think we see pretty immediate effects of those improvements, but they're incremental. It builds over time as our professional customers using our portal learn to use our software, like our software, and become committed to us, mainly because of service, but partly because they like the way our interface works. The same thing applies to our DIY customers. While all this is incremental over time, some of it has an immediate positive effect.
Okay. Thank you. A follow-up, if I may. Throughout 2017, which was certainly a more difficult year than what many of us expected, you cited a number of factors that you thought were transient, whether it was the SAR number as a result of the recession, the weather, obviously, Hispanic population headwinds, tax return delays, e-com competition. As you sit here in the early stages of 2018 and you look back on what's happened in 2017, do you still believe that all of those factors that I just cited were in fact transient? Do you think any of them will be longer term in nature?
Go ahead. I'll take it. Well, I think as Tom said earlier, the SAR issue will resolve this year. It's hard to measure the extent to which that impacted our business, but we know it had some effect, but that's in the process of curing right now. To me, out of the things that we've talked about, SAR, weather, the Hispanic issue, and tax, I feel like weather, having two consecutive mild winters and a mild summer, I think that was probably the factor that impacted us largest. The Hispanic thing, I think, is pretty well resolved.
The tax thing is a matter of timing, although the timing is important because if people get their tax refunds at a time when cold weather's in place, they're having car trouble, that is going to increase the spend that they put in their car versus maybe springtime when they've gotten through the winter by patching their car together, and they've got improvements they want to make to their house or something. It puts them in a better position to maybe spend money on their house. The timing is important, but I think that's just a matter of something we look at year to year. I think the other factors, I think the Hispanic thing is cured a lot.
I think this winter is going to help a lot with the weather issue, and we'll see benefits of that this summer, and the SAR issue is in the process of curing.
Okay. Thank you. Thank you very much.
Thanks, Alan.
Thank you. Next, we have Carolina Jolly from Gabelli & Company.
Hi. Thanks, everyone, and congratulations to everyone. Greg, thanks so much for your service so far. Just quickly, I guess my one question would just be, do your cash and earnings estimates include any benefit from the new guidelines around the 100% expensing of certain assets?
That sounds like an accounting question. I'll take that one. Over the years, there have been many programs that have accelerated the depreciation of certain fixed assets, and we've taken advantage of those. What I would tell you is that the change in the law changed those this year for us from a headwind as we turn the corner on having a bigger GAAP deduction than tax deduction to equal. The answer is yes, it does include that. That benefit is not as big for us because of past opportunities to accelerate depreciation.
Okay, perfect. I guess another kind of accounting question. Can you quantify any effect from the LIFO charges that might have affected this quarter's margin?
We were in the $3 or $4 million range.
Okay, thanks.
Thank you. Next we have Michael Lasser from UBS.
Good morning. Thanks a lot for taking my questions. Congratulations, everyone. That's great news. My question is a little bit geared towards the first quarter. You got a 2%-4%, you said you're pleased with the business. You talked about some of the ebbs and flows. Are you surprised that business hasn't come back stronger?
What I would say is that we always do as much as we can to drive as much business as we can within reason. I think one of the factors that has probably caused business not to be maybe stronger than it is, but again, we're not displeased with our business. We're pleased with how we've done in January, is, as Greg mentioned, some of the cold weather that we had pushed down into markets that don't benefit from cold weather immediately. When Dallas-Fort Worth shuts down and you look out your window, there's no cars on the road, that's just not a good day for us. Those factors existed in many southern markets, which help dampen maybe the positive effect that we're having from a cold winter.
Longer term, the fact that we're having this cold weather and we've had this cold weather through so many markets, it's going to be a positive thing for our industry this year, I would think.
Without getting too granular on what you're seeing by market, when the business does come back in those markets that are normally not used to seeing the weather, is it better than it's been? The stores may be closed when there's a lot of snow, but then the next day it's quite good? Is that not how it's happening?
Usually those markets don't get as extreme a cold weather that would drive a part failure as the northern markets, which just get brutal cold weather, which causes rubber to not be as flexible, causes belts to break, causes starter motors not to work as well, causes batteries to fail, cooling systems freeze up. There's just all kinds of things that you can have in the extreme cold weather. You don't get quite as much benefit in the warmer markets that aren't used to cold weather because in Dallas-Fort Worth, when it gets to 20 degrees, that's really cold weather, but that's really not cold winter to cause the kind of damage that we're talking about in the northern markets.
Michael, this is Greg. Another benefit there, or it's fortunate that in many of those southern markets that when they get bad weather, and it does impact road conditions, and as I said, they're not as equipped to clear that, but typically the weather turns around really quickly. You don't have snow and ice on the roads very long, so the recovery's really quick to get back to business as normal.
My follow-up question is, we've all become accustomed to seeing massive share gains from O'Reilly and you guys widely outperforming your competition. Over the last 4 quarters, your comps have been a little bit more consistent with some of what the peers have been reporting. Do you think it's just harder to gain share, perhaps because share's going to other channels at this point?
Michael, this is Tom. What I would tell you is that some of our competitors have a different scale, different measuring periods than we have. We obviously look at our comparable store sales on exactly their calendar, but we continue to be comfortable with our performance. The other thing I would say is that, a couple things is, one, the tire pressure is primarily a DIFM item as those new tires enter the repair cycle. That tends to be a DIFM customer, and we have a higher percentage than some of our competitors on the do-it-for-me side of the business. The other part is, if you look at our two and three-year stacks, there's quite a spread.
Yeah. Additionally, back a few years ago, we had some ground to gain just from a per store average standpoint as compared to our best competitors. Again, we have many great competitors, but our per store average has now caught up and ahead of most of our competitors. We simply just don't have as much to gain in a general basis, but we still feel like we're best positioned to lead the industry from a comp store sales perspective, and would expect to continue to do so.
Greg, one more thing to add to that is, it's not just about the publicly traded peers. There's over 36,000 parts stores all across the country, and there's a lot of market out there, and it happens one store at a time.
Yep.
That's helpful. Thank you so much, and congrats again.
Thanks, Michael.
Thank you. Next, we have Simeon Gutman from Morgan Stanley.
Thanks. Good morning. Congratulations to everyone. My first question's on sales. I guess following on Michael's question, can you just tell us, if you're comfortable for the start of the first quarter, how big is the spread in performance between markets? I don't know if we want to call it good or bad. Within the sales part, are you seeing any evidence that you're seeing the vintages of the six to 11-year-old cars creep back and any larger type weather repairs happening, not just batteries and starters and alternators?
Simeon, I would say that the spread across markets was fairly similar to what we've seen over the past few quarters, with our more mature markets being a bit softer than our less mature markets. Our northern markets and western markets have performed a little better early this winter than our central U.S. markets. I'm sorry, what was the second part of your question?
The vintages, if you're seeing any signs that you're seeing the sweet spot come back already in this part of the year, and then as part of that also, just after the weather, are you seeing any bigger type breakage or repairs begin to happen? There's usually a lag after some of the simple things that start to snap.
Yeah. I wouldn't say we're seeing anything yet. I think most of the upside from the weather is still yet to come, again, with the exception of the winter weather-related categories, wipers, batteries, things like that.
Just immediate demand. Yeah.
My follow-up is on gross margin. I'm trying to think through the components, maybe how price is behaving relative to the cost of goods sold. I'm curious if you're seeing any pressure on sort of the selling price, and the expansion that's embedded in the guidance is coming from just lowering acquisition costs vis-a-vis your suppliers.
Yeah. It's coming from a few different places. As we said, the lowering cost is a small part of that. We expect that to be more so on the front half of the year than on the back half of the year. A lot of it's coming just from leveraging stronger sales, leveraging our fixed costs across the stronger sales this year that we expect.
The selling price is generally stable?
Selling price is generally stable. We monitor our pricing with our competitors, as do they us, constantly, we feel like we don't expect to see a lot of inflation on the cost side or the selling price side this year.
Okay. Thanks, guys. Good luck.
Thanks.
Thank you. Next we have Christopher Horvers from JPMorgan.
Thanks, guys. A couple quick follow-ups on sort of the weather interquarter trend. As you look at December, it was a real tough compare. Did you accelerate on a two-year stack, and did you see, on that basis, much difference in the DIY versus the do-it-for-me side?
Chris, this is Tom. We don't comment on our monthly comps. I guess we commented on two months this year because they were negative and the only negative comp months we've had in a long time. Individually, we're not going to comment on monthly comps.
Okay, understood. On the southern markets, I understand the shutting down of DFW and how that would be a negative to overall, but does getting down to the 20s lead to better trends during the summer months in that region?
Not as much as with the northern months, but I think it is helpful. The cold weather is hard on a lot of components, but part of it is just due to damage to roads and things like that from extended freeze and thaw. You just don't have as much of that in the southern market. You have some benefit, but it's not nearly as positive of a benefit as it would be in the northern markets where you have the deep freeze and then the thaws that are so damaging to the roads.
The last question is, as you think about your weather assumption is neutral for the year. Obviously, January and early February starting out better than a year ago. What's your underlying assumption in terms of the outlook for the summer? Are you expecting a normal summer, a cooler summer? Is that going to offset the early strength on the winter front? Thanks very much.
Yeah, we would expect a warmer summer we would expect that based on, as we've said, the more harsh winter we've had this year, more product failures and a better summer selling season.
Thank you. We have reached our allotted time for questions. I will now turn the call back over to Mr. Greg Henslee for closing remarks.
Actually, it's Greg Johnson.
Yeah, Jason, this is Greg Johnson. Thank you very much. We'd like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to customer service in the third quarter. We look forward to a solid year in 2018. We look forward to reporting our 2018 first quarter results in April. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.