Welcome to the O'Reilly Automotive Incorporated Third Quarter Earnings Release Conference Call. My name is Adrienne, and I'll be your operator for today's call. Please note this conference is being recorded. I'll now turn the call over to Tom McFall. Mr.
McFall, you may begin.
Thank you, Adrienne. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our Q3 2016 results and our outlook for the Q4. 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, 10 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, 2015, 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 Hensley.
Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts 3rd quarter conference call. Participating on the call with me this morning is, of course, Tom McFall, our Chief Financial Officer and Jeff Shaw, our Executive Vice President of Store Operations and Sales. David O'Reilly, our Executive Chairman and Greg Johnson, our Executive Vice President of Supply Chain are also present. I am once again pleased to begin our call today by congratulating team O'Reilly on another solid quarter and strong year to date results.
Our team made up of over 74,000 dedicated team members now across 45 states continues to earn our customers business and gain market share by consistently providing unsurpassed levels of customer service. This unwavering commitment to customer service drove our 3rd quarter comparable store sales increase of 4.2%, which continues to significantly outpace our industry. These solid results were in line with our guidance of 3% to 5% and were on top of last year's excellent third quarter comparable store sales increase of 7.9%, representing this year's most difficult comparison to the prior year. For the 1st 3 quarters of 2016, our comparable store sales increased 4.8% or 12.2% on a 2 year stack basis. And this consistent market leading performance is a testament to the quality of our team and the commitment we've made to providing incredible levels of service to our valued customers.
In total, we grew sales for the quarter by 6.8%, and our ongoing focus on profitable growth and expense control translated this solid top line performance into a record 3rd quarter operating margin of 20.2%. Our diluted earnings per share for the Q3 of $2.90 is a 10% increase over our reported EPS for the Q3 of 2015 of $2.64 As a reminder, last year, our 3rd quarter EPS results included a larger than typical tax benefit of $0.11 from the resolution of certain historical tax positions. As we called out on the call last year, this benefit, while very positive for our company, was not representative of our expected tax rate going forward or our ongoing operating performance, and it's appropriate to focus on our EPS excluding this benefit from last year. On this basis, our Q3 2016 EPS grew 15% compared to adjusted EPS for the Q3 of 2015, representing our 31st consecutive quarter of adjusted EPS growth of 15% or greater. Our team's track record of strong earnings growth over such a long period of time is a reflection of the effectiveness of our customer service oriented culture, dual market strategy and focus on profitable, sustainable growth.
The composition of our comparable store sales growth in the Q3 was very balanced with our professional and DIY sides of our business contributing equally to our comparable store sales growth. We saw solid increases in both comparable ticket average and transaction count with a slightly larger contribution from our professional ticket count, although our DIY ticket count continues to be solid. As has been the case for several quarters, the increase in average ticket has been driven by increasing parts complexity rather than inflation or pricing, which has remained very static in our industry. On a category basis, we saw strong performance throughout the quarter in weather related categories such as batteries and air conditioning as a result of the hot summer weather. We also continue to see solid performance in key hard parts categories such as chassis and brakes against very difficult comparisons for these categories in the Q3 of 2015.
Moving on to the cadence of our comparable store sales growth in the quarter. Our monthly results in 2016 were impacted by a shift in the number of Sundays, our lightest volume day, both in July August as compared to last year. Adjusting for this calendar shift, our monthly comparable store sales increase was consistently solid throughout the quarter. Overall, the macroeconomic environment continues to be a positive contributor to demand for our industry and was a factor in our continued steady comparable store sales growth for the Q3. Unemployment levels have stabilized over the last year at around 5% and the associated commuter miles, along with the continued low gas prices, have benefited total miles driven in the U.
S, which are up 3.1% year to date through August. We expect the current stable macroeconomic environment to continue to be a positive for the health of our industry. However, as we continue to lap the strong year over year 2015 benefit from these tailwinds, we are also cautious as we look forward to the Q4 when our business can be variable based on the holiday season and weather volatility. In light of these factors and the very tough comparisons we again face in the Q4, we feel it is appropriate to set our 4th quarter comparable store sales guidance at a range of 3% to 5%. We are focused to finish the year strong and are off to a good start in the 4th quarter as the solid business trends in the 3rd quarter have continued thus far into October.
We are also tightening our full year comparable store sales growth guidance to a range of 4% to 5%, which reflects our year to date results and our 4th quarter expectations. Finally, I would like to make a few comments about our announcement in yesterday's press release regarding our definitive agreement to purchase the assets of Bond Auto Parts. Bond is a very high quality auto parts company headquartered in the state of Vermont and operates 48 stores throughout Vermont, New Hampshire, Massachusetts and New York. Bond was actually founded 1 year before we were in 1956. And for the past 60 years, we have known them as the premier parts supplier for their markets in New England.
Their company stands out for their knowledgeable parts professionals and a culture of excellent customer service, and we are excited about the opportunities we will have together to continue our growth in the Northeast. We expect this transaction to close before the end of the year, and I want to take this opportunity now to express how excited we are to welcome the Bond team to team O'Reilly. Before I finish up my prepared comments and turn the call over to Jeff, I would like to again thank our team for another outstanding quarter and for their continued hard work and commitment to driving the success of our business. We remain very confident in the long term drivers for demand in our industry, and we believe we are very well positioned to capitalize on this demand and lead the industry by consistently providing outstanding service to our customers every day. I'll now turn the call over to Jeff.
Thanks, Greg, and good morning, everyone. I'd like to begin today by also congratulating team O'Reilly on another strong quarter. This quarter is just another example of our team's steadfast commitment to outhustling the competition to earn our customers' business by providing the best service in our industry. Our comparable store sales growth of 4.2% on top of an incredible 7.9% last year, once again, easily led the industry. And I want to thank each of our team members for their dedication to our ongoing success.
Now I'd like to spend a few minutes discussing our SG and A results for the quarter. For the Q3, we delevered 12 basis points, which similar to the 2nd quarter was primarily the result of the tough comparisons to the robust sales growth we generated in the comparable quarter of 2015 and a few specific items I'll address in a moment. Average per store SG and A for the 3rd quarter increased 2.8%. Based on our results so far 16 and looking forward into the Q4, we now expect our full year average SG and A per store guidance to increase slightly to approximately 2.5% over 2015 versus our previous expectation of 2% growth. As a reminder, this average store SG and A comparison excludes the headwind in the Q2 of 2015 from an adverse legal judgment.
As we've discussed many times in the past, 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. However, and I know I'm a broken record on this one, we will always manage our store level staffing expense for the long term and won't jeopardize the excellent customer service that develops and maintains long term relationships. In addition to the complexities of managing store payroll, we've seen pressure from healthcare costs as well as higher credit card costs, which should abate when we're fully rolled out with the chip and PIN technology in the Q1 of 2017. We will continue to closely monitor our sales volumes and we'll make appropriate adjustments as needed to prudently manage SG and A expenses both up and down to match business trends and the opportunities that we see in the marketplace. We successfully added 52 new stores during the Q3, bringing our net new store count to 141 for the year, and we continue to be pleased with the performance of our new stores.
So far this year, we've opened or acquired stores in 35 different states, including our first two stores in Rhode Island, our 45th state during the 3rd quarter.
Also
included in our year to date new store additions was our acquisition of Frank's Auto Supermarket, a 5 store chain in Western Pennsylvania, which gives us a jump start as we begin to open in the Pittsburgh market. Being able to open stores effectively across our national footprint allows us to balance our growth in our expansion markets in Florida, the Northeast and the Mid Atlantic region with backfill markets in Texas, California, the Great Lakes and throughout our other existing markets. This flexibility gives us a great advantage in selecting new sites and more importantly, identifying, hiring and training outstanding store teams to provide excellent customer service in our new stores. As Greg discussed earlier, we have entered into an agreement to acquire the 48 stores of Bond Auto Parts in New England. Assuming Bond closes prior to the end of the year, as we anticipate, we expect our full year addition to store count for 2016 to be approximately 258 net new stores, which reflects our previous new store target of 210 stores plus the addition of the Bond stores.
We've known the Bond family for many years and have a tremendous amount of respect for the quality of their people and their business. Their team members are truly professional parts people. We're extremely excited to welcome them to team O'Reilly as we look forward to growing on the outstanding foundation they've established in the Northeast. Over the course of our history, we've proven our ability to very effectively acquire existing store chains, implement our dual market strategy and instill the O'Reilly culture in the new store teams. However, as we've discussed repeatedly in the past, we're very disciplined buyers and will only deploy our shareholders' capital when we can identify companies that are a good fit with our culture and can be acquired at the right investment.
This means that although we work hard on an ongoing basis to identify potential acquisitions, we often pass on potential deals which just don't fit our profile, which makes us that much more excited to have reached agreement this year to add such an outstanding business to team O'Reilly. As we look forward to 2017, we'll continue to execute our profitable new store growth strategy and have established a target of 190 net new store openings for the year, which is below our typical new store target as we plan to devote significant resources to converting the bond stores. Finally, before I close my comments, I'd be remiss if I didn't acknowledge the incredible efforts of our supply chain groups to support our new store growth, while also continually enhancing our industry leading parts availability, and I'd like to thank these teams for the great service levels they provide to our stores. As we discussed on the last call, these teams very successfully opened the San Antonio distribution center earlier this year and are on track to complete the expansion of our existing DC in Greensboro, North Carolina in the first half of twenty seventeen. This expansion will add approximately 200,000 square feet to this facility and allow us to service an additional 125 stores from this location as we continue to add stores in expansion markets in the Mid Atlantic.
Our ability to incrementally add capacity to our supply chain network and provide high levels of inventory availability to our expansion markets is a critical component of our growth strategy, and I'm very proud of the great work these teams do to support our growth. Before I turn the call over to Tom, I want to once again thank team O'Reilly for their continued dedication to our company's success. With 1 quarter left in 2016, we've had a solid year so far, but won't rest on our laurels as we push to finish the year strong. As always, the key to our success is providing unwavering customer service that surpasses expectations and continues to earn our customers' business. And I'm confident we have the team in place to outhustle and out service the competition and keep taking market share.
Now I'll turn the call over to Tom.
Thanks, Jeff. I'd also like to begin today by thanking the O'Reilly team for another very profitable and successful quarter. Now we'll take a closer look at our Q3 results and update our guidance for the remainder of 2016. For the quarter, sales increased $141,000,000 comprised of an $85,000,000 increase in comp store sales, a $50,000,000 excuse me, a $54,000,000 increase in non comp store sales, a $3,000,000 increase in non comp non store sales and a $1,000,000 decrease from closed stores. Based on our results for the 1st 9 months and our expectations for the Q4, we now expect our total revenue for 2016 to be $8,500,000,000 to $8,600,000,000 For the quarter, gross margin was 52.7 percent of sales, a 32 basis point increase over the prior year.
This was in line with our expectations for the Q3 as continued strong POS margins offset a higher than anticipated LIFO charge of $10,000,000 which was 23 basis points higher than last year, but significantly lower than the 2nd quarter. As we have discussed many times in the past, our success at reducing our acquisition costs over time has exhausted our LIFO reserve, and further cost decreases require us to reduce our existing inventory value to the lower cumulative acquisition cost, creating non cash headwinds to gross margin. However, these cost reductions benefit our POS margins on a go forward basis. Excluding the impact of LIFO from both years, gross margin increased 55 basis points year over year and 30 basis points sequentially from the Q2. Year to date, gross margin was 52.3 percent of sales.
However, excluding LIFO from both years, gross margin increased 50 basis points. For the year, are tightening our full year gross margin guidance from a range of 52.3% to 52.7% to a range of 52.4% to 52 point 6% of sales, with the expectation that our strong POS margin improvement will continue during the Q4 as a result of the cost decreases we've secured throughout 2016 and that pricing in the industry will remain rational. Our effective tax rate for the 3rd quarter was 35.5 percent of pretax income, which is slightly below the 35.8% we expected for the quarter. Our 3rd quarter effective tax rate this year was significantly above the 33.6 percent we saw in the Q3 of 2015, which as a reminder benefited from a larger than typical tax reserve adjustment of $11,000,000 related to a previous acquisition. We expect our 4th quarter to return to a more normal rate of approximately 30 7.3 percent of pretax income.
Moving on to our free cash flow results. I'll provide some color to our results and our updated full year free cash flow guidance. Free cash flow for the Q3 was $234,000,000 which was $21,000,000 less than the prior year. Year to date, we generated $812,000,000 in free cash flow, which is $46,000,000 more than the prior year. The year to date improvement was primarily driven by our net income growth and continued successful management of working capital, specifically net inventory, partially offset by higher year over year capital expenditures.
Capital expenditures for the 1st 9 months were $356,000,000 in line with our expectations and resulted from our continued store growth and distribution expansion projects, as Jeff discussed earlier. We continue to expect capital expenditures will finish the year in the range of $460,000,000 to $490,000,000 Based on our strong year to date free cash flow performance, we're increasing our full year free cash flow guidance to a range of $850,000,000 to $900,000,000 reflecting an increase of $50,000,000 at both ends of the range. Inventory for store at the end of the quarter was $592,000 which was a 3% increase from the end of 2015. This growth rate was in line with our expectations for the quarter, but above our full year expectation of inventory per store growth of approximately 1.5%, driven by normal seasonality. Our ongoing goal is to ensure we grow per store inventory at a lower rate than the comparable store sales growth we generate, we generate, and we expect to continue our success of effectively deploying inventory.
Our AP to inventory ratio finished the Q3 at 107.5%, which exceeded our expectations and once again represents a new high for this ratio. Our AP percentage continues to benefit from incrementally improved terms and strong sales volumes over the last 12 months. We expect our AP to inventory ratio will moderate somewhat during the Q4 from its current level, but we expect to finish this year at a ratio strongly above 100% as we incrementally improve our vendor terms, but face the headwinds of seasonality. Moving on to debt. We finished the 3rd quarter with an adjusted debt to EBITDA ratio of 1.66x, down from the 1.69x at the end of the 2nd quarter, driven by our strong trailing 12 month operating income performance, but up from the 1.57x at the end of the Q3 last year.
We are still well below our targeted range of 2x to 2.25x. However, we continue to believe our stated leverage range is appropriate for our business and we'll move into this range when the timing is appropriate. We continue to execute our share repurchase program. And during the Q3, we repurchased 400,000 shares of our common stock at an average price of $281.04 per share. Year to date through yesterday, we've repurchased 3,900,000 shares at an average share price of $262.32 for a total investment of $1,000,000,000 We continue to view our buyback program as an effective means of returning available cash to our shareholders after we take advantage of the opportunities to invest in our business at a high rate of return, and we will prudently execute our program with an emphasis on maximizing long term returns for our shareholders.
We're establishing our 4th quarter earnings per share guidance at a range of $2.44 to $2.54 Based on our year to date results and the additional share repurchases since our last call, for the full year, we are tightening our earnings per share guidance to a range of $10.58 to $10.68 which represents a $0.13 increase from the midpoint of the previous annual guidance we provided on our Q2 earnings release in July, driven by our stronger than expected 3rd quarter operating results and incremental share repurchases. As a reminder, in line with our normal practice, our guidance includes all of the shares repurchased through this call but does not include any future share repurchases. Before I turn the call over to our analysts for questions, I would once again like to thank the entire O'Reilly team for their continued hard work, dedication and unrelenting focus on providing consistently superior levels of customer service. Your ongoing efforts continue to drive our profitable growth, and we cannot thank you enough. This concludes our prepared comments.
At this time, I'd like to ask Adrienne, the operator, to return to the line and we'll be happy to answer your questions.
Thank you. We'll now begin the question and answer session. And our first question comes from Chris Biegleri from Wolfe Research. Please go ahead.
Hi, great. Thanks for taking my question. I was hoping you could maybe talk a little bit more about the BAWN acquisition that you made. Is it have any DCs? Do they own their stores?
Does this generally speaking, does this signal your intention to accelerate growth into the Northeast?
Yes, sure. Well, this acquisition is one that we overlap very little. They have a distribution center located in Barrie, Vermont, which we will utilize for some period of time. And we're kind of talking about right now whether or not we would utilize that facility for anything in the future. But kind of the plan is that we would further leverage our distribution capacity in Devons, Massachusetts and supply those stores from there, while not sacrificing the benefit they have of availability by having as many parts as they have available in Central Vermont.
So we would, over time, alleviate the need to have availability by putting in a big hub or something like that, but ultimately the replenishment would come out of Evans. From a real estate standpoint, the company doesn't actually own the real estate. We've entered a lease agreement with some of the family members to lease the locations that they own and then we have other third party leases that we would take over those leases and run the stores as leased properties.
Okay, cool. And then just a question generally in the Northeast is the new territory for you, obviously. Can you talk about your experience thus far? Has the delivery model been as efficient, as cost effective as elsewhere in the country? How are you ramping in DIY versus DIFM?
Are you leading with DIFM just given your track record of buying VIP? Any additional commentary there would be helpful.
Well, I think it would typically be the case in a new store. Our DIY business generally comes on a little faster. With VIP stores up in primarily Maine, those stores were heavy DIY stores. They really weren't a supplier on the do for me side because of the conflict they had with the shops that the previous owner had. So what I would say is that our DIY businesses come on a little faster.
We're doing a good job on the do it for me side as we progressively established what our company is about and availability model and the service model and those kinds of things. So it continues to build. We see a lot of opportunity in the Northeast. There's a lot of high population areas that we're not in. We have a lot of capacity in Devon's that we've not yet used.
So our plan will be to continue to build out that area of the country and become one of the dominant parts suppliers on the professional side, but then also put a big dent in the DIY business up there.
Okay, great. Really helpful. Thanks for the time.
Thank you.
And our next question comes from Chris Horvers from JPMorgan. Please go ahead.
Thanks. Thanks and good morning.
Good morning.
I wanted to get your thoughts on the Amazon risk. We're getting a lot more questions about the risk relative to the industry. So we'd love to hear your thoughts on how you think about the competition? What structural advantages do you see on your side from availability and service? What's the risk relative risk between commercial and DIY?
And then how do you think about the risk of competitive price and encroachment?
Okay. Well, what I would say is that we've had pretty strong competitors on the e commerce side in the DIY business for quite some time with some other suppliers that do a pretty good job there. Our DIY business is doing really well. As I said in my prepared comments, both our DIY and our do it for me business were pretty well even contributors to our 4.2% comp store sales. So we're doing pretty well in DIY.
Obviously, we see these e commerce players that sell at prices below the brick and mortar companies online. There's a lot of elements that play into auto parts that I think differentiate us from many other retail channels. But primarily, it's about and speaking just on the DIY side, many times when a DIY customer walks into our stores, they're really needing help figuring out how to solve a problem that they have, and we provide that help. And not only we provide the help, but we are able to tell them the tools that they need to fix the car, just a whole array of things. And we even loan them tools.
We got a very significant loaner tool program where a customer will put a tool that they might otherwise not be able to buy because the expense of a specialty tool or something, they can put it on a credit card, use it to install the part and fix their car, then bring it back for a full refund when they're done and we put it back on the shelf and reuse it again for the next customer that needs to use that. So those kinds of services are pretty hard to quantify, but they're incredibly valuable when servicing the DIY customer. On the B2B side, and I speak from having done this for 32 years and previously being in the repair business, that none of the shops or very few of the shops stock parts. They may stock a small array of filters or maybe a few belts or a few batteries, stuff like that. But almost every repair that they make, the parts have to be delivered.
And it's just so incredibly important that they're able to turn their bays over quickly and keep their technicians busy in order to provide gainful employment for the technicians, but also maximize the revenue and the profitability of the shop. And most shops nowadays know that they can get 30 to 45 minute service out of these out of a company like ours that has a wide array of parts and our competitors in many cases have these wide array of parts. It's just hard for me to see a company like Amazon being a significant player on the do it for me side. And I would tell you on the DIY side, well, there's some people that are going to buy some parts and some accessories over the Internet because they can wait because they know what they're doing in making the repair. The vast majority need help and appreciate the advice, recommendation and the help that we give them in repairing their cars.
Thanks, Fred. That is very, very helpful. And then I just wanted to ask about the intra quarter trend. A lot of well, a couple of peers of yours talked about some acceleration in August and or September, while you spoke to consistent trends in the quarter. And obviously, you've been the most consistent operator out of any of your peers.
But was curious if you had any thoughts on why they saw some acceleration versus you being more consistent. Is that perhaps geographic exposure? Is it the balance of the business? Is it share acquisition and so forth? Thank you.
Well, there could be differences for all the things you said. In my prepared comments, I spoke August July on a monthly basis being Sunday affected, which Sunday is our lowest volume day. Probably a more from a trend standpoint, a more meaningful way to look at our comp cadence throughout the quarter would be to look at it on a weekly basis. And I've got that in front of me now. I can tell you, our sales on a weekly basis were just pretty darn consistent throughout the period.
And that consistency has continued to this point in the quarter. And this quarter, our toughest compares to last year are this month in December. We have a softer comparison in November, and we've carried this healthy strong trend that we were on into this point in Q4. It's hard to say what our competitors were up against from a comparison standpoint on a weekly basis, what they're up against from just a geography standpoint because I know some are more exposed to the weather affected areas in the Northeast. And again, this quarter, we saw a difference in the areas that we would consider to be weather affected versus not.
And then taking into consideration the maturity of some of the stores or maybe the lack of maturity of some of those stores, we still would look at somewhere in the 400 to 500 basis point difference in comp performance between the weather affected stores and the non weather affected stores.
Thank you very much.
Thank you.
And your next question comes from Alan Rifkin from BTIG. Please go ahead.
Thank you very much So Greg, just as a follow-up to your commentary that you just gave. So the solid trends of Q3 have continued in Q4 despite October being one of the most difficult months. Is that correct? That's correct. Okay.
And on the DIFM side of the business, can you maybe add a little bit more color as to where you're seeing the growth come from? Are you seeing some new account additions or are current accounts of yours just spending more? What are you seeing there?
Well, it's that varies a lot by store, by market. In new markets where we work to get that first call, not first call status, but simply the first interaction with a shop. Of course, those in newer markets, it's new customers. In existing markets, it's just taking more of the business that they're doing. Most shops don't have just one parts provider.
They share that business among a few. And although the first call provider can be 70% or 80% or maybe even more of the parts provided, our work with those customers is to take more of their purchases. And I think we did a pretty good job on both. I feel like that we're gaining market share on the do it for me side. And I feel like we're gaining market share pretty significantly on the DIY side.
But it's hard to quantify whether our improvements in do it for me are coming from new customers or improvements in the purchases from existing customers. It's a mix of both and that's just something that's hard for us to fully quantify.
Okay. And one last one, if I may. While obviously bond pales in comparison to CSK or even earlier acquisitions like Midstate, does the same potential present itself to increase the EBIT margins at that business as what you've realized in some of the other acquisitions that you've made?
I think it'll be a great acquisition. I think anytime we buy a company that is from a size standpoint as much difference as what exists between our company and Bond, there's very significant opportunities from just a merchandise cost perspective. They run a very good business and they've built it over a number of years and the Bond family are great operators and they've got a great team there. So we would look more for the opportunity to be on the cost of goods side and then just our the advertising and marketing we can do to help them build a better DIY business. And then just some of the efficiencies that we have through systems and better, maybe product selection through some of the science and tools that we use to deploy inventory and make sure we've got exactly the right inventory and the breadth of inventory it takes to gain market share.
We're just a company that's very well capitalized to make sure that the stores are in the very best position they can be to compete and take additional market share.
Okay. Thank you very much.
Okay. Thank you, Alan.
And the next question comes from Bret Jordan from Jefferies. Please go ahead.
Hey, good morning, guys. Good morning, Bret. On the Bond deal, I mean, obviously, they're a member of the alliance, so they're pretty heavily skewed to branded parts. And I guess, what are the levers you pull there? You expand the hours and put in the more of the direct sourced mix.
And I guess when you think about the geography distributing up to Bond out of Devon's, how far west can you go as you get out towards Frank's? Do we need to build more distribution into the expansion markets?
From a product standpoint, we'll be very sensitive to the brands that they've built and the products that they carry to make sure that if and when we transition brands and products, we do have a lot of forethought and a lot of selling to the customers to make sure that they have confidence the brands will change. But again, we feel like that we've got an incredibly good lineup of products and they do too. And a lot of there's a lot of overlap. A lot of our history with the Alliance has led us to continuing to do business with a lot of the same suppliers the Alliance does business with. So I think we'll be good there.
From a distribution standpoint, we'll definitely need more distribution up in the Northeast. We'll need distribution in probably what Greg, would you say 2 or 3 additional distribution centers up there? Yes, we'll end up with 2 or 3 additional distribution centers up in the Northeast. So while we're working now to fill out the capacity that we have in Devon's, for us to move further west, we would need additional distribution capacity just to make sure we were in the position from a geographic reach standpoint to do what we do as far as at least overnight service, but in many cases, multiple times a day, same day service out of a big distribution center inventory.
And as you look at
Brett, the Frank stores in Pittsburgh, they actually get serviced out of Detroit. So as we grow, that's still quite a distance. So as we grow mass, we'll have to look to see where we position our additional distribution centers.
Okay. Thanks. And I just wanted
to follow-up. As you look
at the Alliance members, would you think about picking up an Eastern or somebody who's more of a WD to get some market share and distribution and building in a store base around that? Or is that too far from a retail model?
We're opportunistic. We would look at any opportunity to acquire a company that fits the profile that Jeff described in his prepared comments. So, we would look at any and all companies that might be for sale. And then our decision will be made based on fit, geographic overlap, price, multiple factors that come into consideration when we acquire companies.
All right. Thank you.
Okay. Thank you.
And our next question Just wanted to ask if I could
on the expense control side. Just wanted to ask if I could on the expense control side. Greg and Tom, can you talk about some of the initiatives you have there to take costs out and to manage around potentially FLSA, rising minimum wages that we're seeing across retail and healthcare costs? How do we get comfortable that you guys can get back towards 2% SG and A per store?
Tom, you will take that. What I would tell you is that when we look at Q3 SG and A, it was pretty much on our expectations. When we look at delevering, when we look at last year, obviously, we had a big, big comp number at 7.9%, so hard to lever against those sales. And if we look at the Q3 of 2015, there was 87 basis points year over year leverage. So very difficult compare.
From a dollar standpoint, we ended up where we thought we should end up for the Q3. When we look at the items you're talking about, FLSA is a big focus of ours, and we've adjusted our compensation policies to retain our entrepreneurial focus, while minimizing the overall impact. But we want to continue to focus our store managers on growing their business, building a great book of business and growing it and compensating them for that. We think we've made some changes that keep the essence of our program, while complying with the laws. When we look at minimum wage, there are certain areas where minimum wage is going to be some pressure on expense.
For those geographic regions, we'll monitor pricing very closely and try to maintain our profitability.
Okay. And can you talk about your ability potentially to raise price and pass through any costs that you might incur that you can offset directly? And then also if you could, some of the initiatives you might have around omni channel, whether it be the loyalty program, the private label, just talk about some of the offensive things that you might have going on to build out the business and serve consumers regardless of channel?
Well, as Tom said, in these markets where costs are going up as a result of minimum wage changes and so forth, we work every day looking for opportunities to increase price while remaining competitive. So knowing that our competitors are under the same pressure that we are, Over time, I think this plays out and the fact that costs go up ultimately result in higher consumer prices and auto parts would be no different. As far as our opportunity and with omni channel and just the various opportunities we have in businesses, we have an opportunity on the Internet. We're not a big B2C e commerce player. We could do more.
And we're working now to replatform our website to do a little more of that business. Private label, we continue to be a very powerful company when it comes to building these private label brands. As you know, our strategy is not to have a single private label brand that's viewed as being a private label. It's our brands are really national brands that may have been retired by a supplier or whatever the case may be and we picked them up and reestablished the brand. And many of our brands are now recognized even though they're what would be considered as we discussed this here as private label.
They're really viewed by our shops as being a national brand, even though they're in our proprietary brand. And there are brands that we put products of equivalent quality to a branded product in the box. So there we feel like we have a lot of opportunity there to continue to grow market share in the brands that we own. And that growth is accretive to our gross margin as you know.
Okay, great. Thank you.
Thank you.
And our next question comes from Simon Gutman from Morgan Stanley. Please go ahead.
Greg, you mentioned the 400 to 500 basis point spread, I think, between weather and non weather. Have you said can you share what percentage of the markets are affected? And then I guess looking back at these years in which weather has had an impact, they tend to these nuances tend to resolve themselves. You hinted that we haven't seen any signs yet of that, I guess, because the trends have been somewhat consistent. But is that usual?
Should or do we have to for the next big weather trend to break, meaning colder temps? Or should we have started to see some of that change already?
Yes. I think we're starting to see some of the change already. And I think that is when we start getting the freezing weather in these markets is when I would say, okay, we got to call the weather thing to an end, because having come off of a very hot summer, when cold weather gets here, there will be a lot of battery failures, electrical system problems, things like that, that will be attributable to the winter weather. So really, once we anniversary into winter and start the freezing weather is when I would consider the effect of the 2015, 2016 2016 winter to be over.
On the regional question, we're providing some color for just difference performance in markets. But to further quantify it goes beyond our level of comfort in communicating regional performance.
But in addition, it's hard to draw a line. When Tom and I talk about this, it's very difficult for us to draw a line and say, okay, well, these are weather affected, these are not. Generally speaking, the center part of the country up in the upper Midwest and then also the Northeast are generally the weather affected markets. The South and Southwest and so forth aren't so much.
Okay. And then my follow-up on bond. Did you talk can you have you talked about or can you disclose revenue on for an annual basis and then implications for accretion or dilution next year?
We're a little uncomfortable talking about the specifics of that pre closing. We won't close until sometime before the end of the year, and we'd rather not get into the specifics about their financial performance at this time.
Okay. Thanks. Okay. Thank you.
And your next question comes from Seth Basham from Wedbush. Please go ahead.
My question is around price competition, whether or not you're seeing any signs of increased competition in the slower growth industry right now, either by customer segment, region, channel, etcetera?
Well, Seth, I'll tell you, I there's never been a time in my 32 years here that we haven't felt price competition. We feel it every day. Generally speaking, it's on the professional side of our business where companies that are trying to gain market share and the most recent entry of some of the larger retail type companies into the wholesale business is what's talked about most now, but for years we've had competition from a number of companies on the professional side. So there's always promotions, specials, new ideas, something that's happening here recently is kind of the kit idea where competitors are and us too now, we'll put 2 brake rotors and a set of pads and give it a kit price rather than the individual piece price. So there's always a lot of competition.
I would say that it's consistent with what I've seen in the last 30 years, but nonetheless, there is a lot of competition.
Okay. Thank you. And my second question on the theme of gross margin, just thinking about LIFO, Tom, what kind of impact do you expect for 4Q and for 2017, if you have
a few points?
Well, hard to know for 2017. When we look at 2016, we'll have a moderate headwind, not as much as this quarter. This quarter, it was probably double what we thought it would be. We'll have to get together with the merchants and see what they have cooking for 2017 as they continue to work on getting us the best acquisition costs we can get.
Great. Thank you, guys, and good luck.
Okay. Thank you.
And our next question comes from Dan Weaver from Raymond James. Please go ahead.
Thank you. Tom, you had exceeded the 3rd quarter earnings by $0.03 a share, but you took $0.02 off for the high end of your fiscal year forecast. Looks like you're reducing your 4th quarter outlook by about $0.05 a share. I guess that's the reason why the stock is acting the way it is today. Can you explain what has changed in the Q4 outlook?
Is it a higher LIFO? Well I guess based on the previous question, it doesn't sound like that's an issue.
I would tell you that our guidance for our expectation for the 4th quarter is an inherent guidance in our net income have not changed from the last call. What I would tell you is that we had a wider range on the end of the last call because we had 2 quarters to go. Now we have 1 quarter to go, it would be hard to have a wider range on annual EPS than it is for the quarter. That wouldn't be logical. So you see a No,
I understand that. I guess I was just thinking reducing the high end of the year after.
What we would tell people and what we said on the script is we would focus on that we increase the midpoint of our guidance by $0.13 due to higher income in the Q3 and additional share repurchases. And that's what we think is the important data.
And to follow-up on the comments about the higher SG and A per store, In one of the things on Page 9 of the release, it indicates that the total employment count grew about 2.6% year over year compared to a 4.6% increase in the number of stores. So it looks like the employment per store has actually declined a bit. So if you could help reconcile that against the higher SG and A rate per store? Well that The SG and A dollars per store.
That has to do with the number of full time versus part time people that we employ. So what that number is telling you is we have a higher mix of full time people in that growth area, which also has a higher cost because you're providing benefits, but we also feel it has a much higher productivity level, which is in our top line.
So the implications are, if you look at the actual payroll hours per store, it's growing faster than the employment number?
Yes. We report just total team members versus FTEs. Okay. Thank you. Yes.
Thanks, Dan.
And the next question comes from Scott Cicillari from RBC Capital. Please go ahead.
Got you. I figured you guys would know it. Two things, just a clarification on the LIFO commentary, Tom, is the it came in above what you expected. Is that a function of better price concessions than what you previously anticipated? Or is that better sales of that particular vendor's product?
Can you just help us understand why it was $10,000,000 instead of $5,000,000
It's fully based on the number of new deals we signed and the impact of those cost reductions over the breadth of our inventory. So the short answer is we got more better deals than we anticipated.
Okay. Got it. And then shifting to SG and A, I know you guys talked about some of the reasons that you didn't have leverage this quarter. A lot of that makes sense to me and The Street, I think. But SG and A per store growth has been a bit elevated the last couple of quarters.
And I guess what I'm thinking of what I'm looking for is clarification on as we look out a little bit further, should we just assume SG and A per store growth will be up more like 2.5% rather than the 2% you've kind of historically run at just given the wage and healthcare pressures that you've cited?
Well, we haven't given guidance for next year and our guidance for the Q4 is a little slower growth. We've got a long process that we go through to plan not just the upcoming year, but years to follow. And we are going to sit down and health care continues to be a pressure item. The big item for us is making sure that we establish payroll levels with enough help in the stores to provide great customer service and grow the business. So a lot of that depends on what our outlook is for growth opportunities.
So we're not going to comment right now, but what we will make sure to say is that we manage SG and A over a long horizon, not just on a quarter or 6 month basis. So we're going to have to get back to you when we finalize our plan for next
year.
Understood. All right. Thanks, guys.
Thanks, Jeff.
We have reached our line of time for questions. I'll now turn the call back to Mr. Greg Hensley for closing remarks.
Thanks, Adrian. We'd like to conclude our call today by thanking the entire O'Reilly for our outstanding Q3 results. We are pleased with our solid Q3 and remain extremely confident in our ability to continue to aggressively and profitably gain market share and are focused on continuing our momentum as we finish out 2016. I'd like to thank everyone for joining our call today, and we look forward to reporting our 2016 Q4 and full year results in February. Thanks.
Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.