Welcome to the O'Reilly Automotive Incorporated Third Quarter Earnings Release Conference Call. My name is Ethan, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a 30 minute question and answer session. Please note that this conference is being recorded.
I will now turn the call over to Mr. Tom McFall. Mr. McFall, you may begin.
Thank you, Ethan. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our Q3 of 2015. 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 certain forward looking statements that we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995.
You can identify these statements by forward looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward looking statements due to several important factors described in the company's latest annual report on Form 10 ks for the end of December 31, 2014, 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 Q3 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. It's my pleasure to again begin our quarterly call by congratulating Tim O'Reilly on another record breaking quarter and an extremely successful first three quarters of 2015.
Our team of over 72,000 dedicated team members continues to win business and take market share by providing consistently excellent customer service, evidenced by our 3rd quarter 7.9% comparable store sales increase. In all three quarters of 2015, we have generated comparable store sales growth in excess of 7% and these results are on top of difficult comparisons as our team has generated a remarkable 8 straight quarters of comparable store sales growth in excess of 5%. This consistently robust top line performance is the direct result of our team's dedication to living the O'Reilly culture of providing incredible levels of service to each of our valued customers. And I want to thank each of our team members for their continued contributions to our company's long term success. For the Q3, we robustly grew our total sales by 10.8% and with our focus on growing sales profitably and controlling our expenses, we generated our first ever 20% operating profit quarter.
During the quarter, we resolved a historic tax item, which added $0.11 to our quarterly EPS of $2.64 This resolution, while very positive for the company, is not part of our ongoing business. So I think the more appropriate number to focus on is an adjusted 3rd quarter EPS of $2.53 which represents an increase of 23% over the prior year. I couldn't be more pleased with the consistent efforts of our team members to provide unsurpassed service levels to our customers as the Q3 of of percent. The comparable store sales increase
of 7.9%
strongly exceeded
our comparable store sales guidance of 3% to 5%, and our performance was relatively consistent on a month to month basis. The composition of our comparable store sales growth in the 3rd quarter was also very similar to the 1st two quarters of the year. Both our professional and DIY sides of the business were strong contributors to our comparable store sales growth with professional being slightly higher. Increases in our comparable transaction count and ticket average contributed equally to our growth with a larger contribution from our professional ticket count, although our DIY ticket count growth continues to be strong. The increase in average ticket continues to be driven by the secular industry driver of parts complexity with little to no help from increases in selling price as inflation remains muted.
Our performance for the Q3, as we've seen over the past 1.5 years, was driven by in July, we were very pleased with our heat related categories such as HVAC or temp control, batteries and rotating electrical. Through July, the latest data available, miles driven were up 3.6% for the year, representing 17 straight months of year over year increases. We feel this increase, driven by relatively low gas prices and improving employment, has been important factors in fueling our robust comparable store sales growth. In our business, the 4th quarter can be highly variable based on weather, especially in the second half as consumers focus on holiday shopping. Therefore, we feel it's appropriate to establish our 4th quarter comparable store sales guidance at a range of 3% to 5%.
And reflecting on our strong year to date sales results, we are increasing our full year comparable store sales guidance to a range of 6.5% to 7%. Based on the strength of our first three quarters results, we are raising our full year operating margin guidance from a range of 18.3 percent to 18.7 percent of sales to a range of 18.6% to 18.9 percent of sales. This guidance range includes the negative impact
of the
$19,000,000 litigation charge from the Q2, which we discussed during last quarter's conference call. We are establishing our 4th quarter earnings per share guidance at a range of $1.97 to $2.01 And based on our strong year to date results, we are increasing our full year earnings per share guidance from a range of $8.59 to $8.69 to a range of $8.97 to $9.01 This full year guidance range includes the negative impact of the 2nd quarter litigation charge as well as the positive impact in the 3rd quarter from the resolution of the historical tax item I discussed earlier, which on a net basis essentially offset one another. Before I finish up my prepared comments, I would like to again thank our team for our record breaking 3rd quarter results. 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 by consistently providing industry leading service to our customers every day at every store. Again, congratulations to team O'Reilly for the very strong year to date results and the solid start we have to our Q4 through this point in October.
I'll now turn the call over to Jeff Schall. Jeff?
Thanks, Greg, and good morning, everyone. I'd like to begin today by echoing Greg's comments and congratulating team O'Reilly on another outstanding quarter. I couldn't be more proud of our team's get it done attitude as they roll up their sleeves every day with the focus of providing top notch customer service and winning our customers' business. Our industry leading comparable store sales growth of 7.9 percent for the quarter and 7.4% for the 1st 3 quarters of 2015 is a testament to our team of 72,000 plus team members who are committed to providing consistently excellent customer service as we work tirelessly to make sure that we're the friendliest and most knowledgeable parts store in every market we serve. For the quarter, we grew total revenues 10.8% and total gross margin dollars by 12.5%, proving yet again that our ability to provide exceptional service, a wide product offering at competitive prices and superior parts availability allows us to sustainable profitable growth.
This growth doesn't happen without the dedication of our store, DC and office support teams. For the quarter, SG and A levered 87 basis points on our strong the higher than we planned at the beginning of the year. However, we've seen the opportunity to add ours to the stores to accelerate our share gain. Based on our strong year to date results, we're very pleased with the direction we've taken, but we continue to closely monitor our sales volumes will make the appropriate adjustments to ensure store payroll levels match the business. With our strong sales and profitability results, we've also seen a corresponding increase in variable compensation throughout the organization as we reward team members at every level of the company for running their business like they own it.
For the year, we now expect average SG and A A percent. We successfully opened 58 net new stores during the quarter and we continue to be very pleased with the performance from our new stores. The quarter, we opened stores in 27 different states with the highest concentration in the Great Lakes area, which is primarily based on
the weather dictating development time frames.
For the year, we're confident we hit our target of 205 net new stores. For 20 16, we expect to open 2 10 net new stores spread across our existing footprint and in new markets. Our ability to provide consistently excellent service at the stores is supported by our industry leading parts availability, and I'd like to thank our supply chain groups for the great service levels they provide to our stores. We're constantly evaluating stocking levels, expediting product with higher than planned sales, filling in on back order product, modifying routes to handle higher freight volumes and continually monitoring and adjusting our hub, DC City Counter and weekend routes to ensure we have the best availability in each store sales gain and is critical to our future ability to continue to grow market share. On that front, we continue to be on pace to open our San Antonio, Texas DC in the Q2 of 2016.
We've had a great year so far and we are well positioned to continue to provide our customers exceptional service levels and the best parts availability in the industry so that we finish up the year strong. That said, we can never rest on our past successes and we have to go out and earn the business each and every day out hustling and out servicing our competitors, and I'm confident in our team's ability to do just that. Great job, team O'Reilly. Now I'll turn the call over to Tom.
Thanks, Jeff. I'd also like to thank all of team O'Reilly on another outstanding quarter. Now we'll take a closer look at our quarterly results and update our guidance for the remainder of 2015. For the quarter, sales increased $203,000,000 comprised of $145,000,000 increase in comp store sales, a $58,000,000 increase in non comp store sales, a $2,000,000 increase in non comp non store sales and a $2,000,000 decrease from closed stores. Based on our strong year to date performance, we are raising our full year total revenue guidance to a range of $7,850,000,000 $950,000,000 For the quarter, gross margin was 52.4 percent of sales and improved 78 basis points over the prior year.
This was in line with our expectations as positive mix and leverage on distribution costs offset a higher than expected LIFO charge of $5,000,000 which was a 10 basis excuse me, which was 10 basis points less than last year. Based on our year to date results, we're tightening our full year gross margin guidance from a range of 51.8% to 50 2.2% of sales to a range of 52.0% to 52.2% of sales. Our effective tax rate for the 3rd quarter was 33.6 percent pretax income. During the Q3 of each year, we typically experience a lower tax rate as we adjust our tax reserves for closed tax periods. And as Greg mentioned earlier, we had a non typical tax reserve adjustment this year related to a previous acquisition.
This non typical adjustment is a nonrecurring noncash item, which added $0.11 to our quarterly EPS and lowered our effective tax rate by 2.7 percent pretax income. Excluding this item, our effective tax rate would have been 36.3%, which is where we thought we'd be. For the Q4, we expect an effective tax rate of approximately 37.3 percent of pretax income. Now I'll move on to free cash flow and the components that drove our results in the quarter and our updated guidance expectations for the full year of 2015. Free cash flow for the quarter was $254,000,000 Based on our strong year to date performance, we are revising our full year guidance for free cash flow to a range of $800,000,000 reflecting an increase of $75,000,000 on both ends of the range.
Inventory per store at the end of the quarter was $576,000 which is a 1.5% decrease from the end of 2014. Our ongoing goal is to ensure we grow per store inventory at a lower rate than the comparable store sales growth we generate, and we definitely accomplished that goal through the 1st 3 quarters of 2015. We continue to make great progress on reducing slow moving and overstock product and replacing it with additional store level inventory of products that are entering higher demand cycles. However, part of decrease is timing related to the very strong sales during the 1st 3 quarters of the year, and we continue to expect our per store inventory to increase a little less than 1% per store for the full year. Our AP to inventory ratio finished the 3rd quarter at 101%.
This is the first time our net inventory investment has been negative. We're excited about the accomplishment, but this ratio was aided by seasonality and Capital expenditures for the 1st 9 months were $296,000,000 which is a little less than we planned, but we still expect our 2015 CapEx to be within the range of $400,000,000 to $430,000,000 Moving on to debt. We finished the 3rd quarter with an adjusted debt to EBITDA ratio of 1.6x, still well below our targeted ratio of 2 to 2.25. We continue to believe our stated range is the appropriate level for our business, and we will move into this range when the timing is appropriate. We continue to execute our share repurchase program.
And from July 1 through yesterday, we repurchased 1,300,000 shares of our stock at an average cost of $239.81 per share for a total investment of $305,000,000 We continue to view our buyback program as an effective means of returning available cash to our shareholders after we take advantage of opportunities to emphasis on long term returns for our shareholders. For the 4th quarter, we're establishing diluted earnings per share guidance of 1.9 $7 to $2.01 Based on our above plan results thus far in 2015 and additional shares repurchased since our last call, for the full year, we're raising our guidance to $8.97 to $9.01 per share, representing an increase of $0.35 per share at the midpoint from our previously announced guidance. As a reminder, our diluted earnings per share guidance for both the Q4 and full year take into account the shares repurchased through yesterday but do not reflect the impact of any potential future share repurchases. Finally, I'd like to once again thank the entire O'Reilly team for their continued dedication to the company's success. Congratulations on another outstanding performance in the Q3.
This concludes our prepared comments. At this time, I'd like to ask Keith and the operator to return to the line, and we'll be happy to answer your questions.
And our first question comes from Michael Lasser from UBS. Michael, please go ahead.
Good morning. Thanks a lot for taking my questions. First on the labor side and your SG and A investments, you've made these investments for the last couple of years. So at what point do you start to see some diminishing returns where your SG and A is going up, but you're just not seeing the
benefit from it? Go ahead, Tom. Michael, thanks for the question. This is Tom. What I would tell you is that we manage our payroll on a store by store basis, and it's a bottoms up management.
We monitor the business, obviously, on a daily and weekly basis and adjust payroll with a long term view to grow the business. But to the extent that the ability to take market share wasn't as significant as we feel like it is right now, we wouldn't put as many hours in the store. So what I would tell you is it's very variable based on what store operations view is of the opportunity to accelerate growth.
And why do you feel the opportunity to gain share is greater today than it might have been in the past?
Well, Michael, this is Greg. What I'd tell you, there's just a lot going on in the industry. You guys have seen the M and A activity that's going on. As some of the companies that have previously been more retail have come into the wholesale business, we see pressure being put on some of the weaker players in each market, which provides some opportunity for us. We've kind of beefed up our supply chain and the number of times that we touch each store in the last few years and improved some of the retail services that we provide.
So we and we've proven, I think, over the last 2 or 3 years or whatever that we have the ability to pick up some market share. And I think that we're going to continue to be able to do that. And for that reason, we're pretty robust in the way we deploy staffing in the stores as a means of continuing that trend of gaining market share.
And Greg, on that point, does that accelerate given some of the activity this week with Pep Boys switching ownership?
Well, I think that's just one of the M and A things with Advance and Carquest coming together. That's another. I mean, and there's other smaller ones that have taken place, like the Uni Select thing with Carl Icahn and things like that.
Okay. One last item to add, Michael, is there's a lot of tailwinds in our industry. Unemployment is coming down, commuter miles driven are going up, miles driven are going up. So there's more opportunity for there's a backdrop that says there's more business out there for us.
Great. Thank you so much and good luck with the rest of the year.
Thank you, Michael.
And our next question comes from Matthew Fassler from Goldman Sachs. Matthew, please go ahead.
Thanks. Excuse me, good morning.
Good morning.
My primary question My primary question relates to ticket trend and you've spoken I think more eloquently than most about parts complexity as a driver of the business and that's a fundamental contributor to your strength. Can you talk about the degree to which this is building? If you think about the inning that we're in, this might be an endless game, I guess. What point do you feel like, I guess, for perspective, you saw this start to move the ticket? And is it having a growing impact on ticket as we move forward here?
I think it has had a growing impact and I think it will continue to for the foreseeable future. Cars continue to increase in complexity. There's a lot of technology that's being deployed in cars that wasn't a few years ago and I would expect that continue to continue to increase. An example would be, and we were talking about this internally the other day, when it comes to vehicle ignitions. For instance, cars just a few years ago had distributor caps with a rotor and each cylinder had a ignition wire.
And today, most vehicles have an ignition coil on each spark plug. And while the ignition coils aren't replaced as part of normal vehicle maintenance during a tune up and the cap and rotor and the ignition wires would have been, when those coils fail, they're very expensive. And at higher mileages, they fail. And the trade off is that we sell a lot fewer units and maybe the frequency of the sale is less. But when we do sell a coil, it's a much more expensive sale.
And since there's 1 on each cylinder, there's several of them on a car. And that kind of thing exists in several different areas. Fuel pumps, used to cars had mechanical fuel pumps or a in line fuel pump going up to the carburetor or throttle body injection. And today, vehicles have an in tank fuel pump that acts as not only the fuel pump, but also the fuel gauge sending unit down in the fuel pump. It's a very technical part.
They sell for, on average, maybe a couple of $100 a piece, whereas the older fuel pumps might sell for to $40 apiece. So while they're good products, maybe don't fail as often as the old mechanical pumps or the in line pumps, they're more expensive when they do.
Thanks for the detailed answer, Greg. And just a very brief follow-up, a very brief follow-up. On working capital, to your point you made it to negative working capital, you hadn't ever really guided past that 100% level. I understand that it's easier to do when your velocity is what it has been. But in an environment where velocity recedes, if that were to happen, would you still have a trajectory in your view from a working capital perspective?
Tom, you want to share your
perspective on that? What I would tell you is that we continue to work with each supplier to see where opportunities are. We're excited that we got to 101. This particular period, we'll have some pressure as we go into the end of the year just based on velocity of business. We hadn't posted the extremely strong comps that we have, we wouldn't have that ratio.
When we look at long term, we continue to have some opportunities to extend some of our suppliers. But I think the key for us now is to really focus on what our inventory turns are, as we talked about in the prepared remarks, to make sure, A, that we have the right products in stores that are moving to provide the right customer service, tiered throughout our layers to optimize that, but really to work on where do we have inventory deployed that we're not getting return and how do we adjust that. So that's a big driver to our AP to inventory ratio.
Thank you so much.
Thanks, Matt.
And our next question comes from Christopher Horvers from JPMorgan. Christopher, please go ahead.
Thanks. Good morning, guys. So I wanted to, Greg, get your thoughts around weather in the sense that there's a lot of discussion around El Nino. How do you think about as you look into 2016, how that potentially plays out versus some of the structural positives around gas prices in the aging car fleet? And as you look back over the past three quarters, do you think weather has been, I guess, a plus or minus or a neutral?
We're not great predictors of the weather. And really looking back few years, we really didn't spend much time even talking about it. But as we've gotten bigger, it's become a little bit more of a factor with our geographic expansion and so forth. This fall, most markets have not had really very cold weather yet. And some of the periods that we compare to last year, where you have cold snaps that might drive short term demand for batteries or something like that, we've not really had that yet in most markets, so that's yet to come.
What I would say is that if we have a mild winter, some of the more extreme winter would be deferred a little bit. It would go into maybe next year if there were parts that were going to fail in the wintertime or pressure that was put on parts that were going to fail anyway at some point, but didn't have the pressure put on them by the cold weather. So that might be kicked down the road to maybe the winter of 'sixteen or something like that. So as we've always said, extreme weather is generally good for us. Real cold, real hot causes parts to feel more premature than they would typically, but they're still going to fail.
So it may push some of it down the road a little bit that we might gain during more extreme weather. I think this year has been pretty normal weather. I think that the summer started out pretty mild, but it turned out being pretty hot in most markets and we did well in some of the heat related categories, as I mentioned in our prepared remarks. I think that the average winter, I don't think it was extreme in most markets. And I think we benefited as we typically would from the damage that's done to cars and the extreme cold.
And I would expect that many markets would have some version of a cold winter this year. Although I know that there could be some effect from this El Nino. So that would be my comment. I don't think it's a major factor to consider. And I think that the economic issues that we discuss relative to gas prices, miles driven, the health of the consumer, employment rates improving or more powerful typically than what the weather would be.
Thanks very much. And then, Tom, on the gross margin, can you talk about how much is the gross margin improvement is more sales driven, I. E, the leverage that you're getting on distribution and perhaps better buying versus something more structural that's going on underneath?
Well, Chris,
we are very hesitant to talk about our distribution costs, so we're not going to break that up.
Okay. So is there something I guess, is there something else in terms of growing private label or some other efficiency that's driving your gross margin that is not necessarily depending on the level of sales growth?
Well, we continue to look at where our opportunities are to direct our own brands, and that's a margin opportunity for us. We continue to look at how we distribute parts. We continue to look at where our opportunities are to leverage our size and buy better, sometimes to buy direct. So those all play into it. So something I would
add to that, Chris, is that for most part, the vendors of aftermarket parts, they many of them can't supply all of this. So they supply some of this. So many of them make choices as to who they're going to do business with. And I think we're trying to pick companies that they feel like will do a good job distributing their products and representing their products. And I think to some degree, we've benefited from being recognized as a pretty high quality partner when it comes to partnering with a supplier.
And for that reason, we've been afforded some gross margin opportunities that maybe we weren't as a smaller company and we are today. And that I think our merchandise cost is a pretty good contributor to our gross margin results.
Understood. Thanks very much.
Okay. Thank you.
All right. And our next question comes from Scot Ciccarelli from RBC Capital.
That was a botch. Scott Ciccarelli. How are
you guys? Hey, Scott.
So the last 7 quarters or so, you guys have experienced a pretty material ramp up in your retail sales. It seems to coincide with the launch of your loyalty program, but it's not a standalone issue because you've been adding weekend and night hours, etcetera. So I guess 2 kind of related questions. Number 1, how much of your improvement in the retail sales are from these changes? And then how much do you think is just from improvements in the market such as the unemployment stuff you've already talked about?
Number 2, related to that, of the changes that you've made, what do you think has had the bigger impact? Has it been the loyalty program or has it been the increase in store hours?
Yes. Well, Scott, those things are hard to know for sure. We know, as you know, that our retail business has grown pretty robustly. And the things you make sure that the service levels that we provide are extremely high and that we now include in those the services we provide some things that we didn't 3 years ago relative to maybe the occasional battery installation or wiper blades or the occasional light bulb, pulling check engine light and trouble codes off cars, stuff like that. And then, of course, the over rewards program, which we now have over 18,000,000 enrolled customers, and we're averaging 120, 125 week new enrollees.
So all those things are contributors. And then of course, the economy improving, miles driven improving are big contributors also to just the demand for parts retail. It's really hard for us to know. I think all those things put together have got us where we are. I think the rewards program is very important.
I think the services that we provide that we didn't provide previously, I'm glad we're providing them now. We probably should have done it a little earlier. And the staffing is just something that we've focused on for a long time and we've just gotten better and better at it. And I think we'll continue to improve that as the time goes along, and we deploy better systems to help us manage the staffing in our stores and make sure the store managers have the information they need to optimize the way they staff stores. But it's hard for me to quantify which is the bigger contributor.
They're all significant contributors.
Okay. Let me rephrase part of the question then. So when you look at specifically the loyalty program, how much of your improvement or how much incremental sales, I guess, do you think that loyalty program has been able to drive? I mean, if you're doing 100 as of August, at least, doing 155,000 transactions per day on the loyalty program, like that's a really sizable impact to the business I would think, but I don't know what part is incremental and what part is just that these guys are just going to take advantage of the program?
Yes. Well, I don't have the numbers with me, but I'll tell you, if we look at it that way, and I have looked at it that way, it's pretty shocking the number of transactions and the dollar contribution from our loyalty program. The thing that's impossible to know is how much of that business were we getting prior to the loyalty program. And there are customers that were coming to us previously and we sign them up on a loyalty card and they continue to do business with them. And we hope they're more loyal maybe than they were before, but maybe they we were the only store they came to previously.
So we really don't have a good way of knowing. Although, as said a moment ago, if you look just at the transactions and the dollar contribution from the people using our loyalty program, it's material. But again, we have any way of knowing what we would have gotten anyway. But I continue to believe that it's been a positive thing for us and will continue to be a positive thing for us as customers benefit from the rewards that we afford them and they reward us with their loyalty.
Okay. All right. All right. Thanks a lot, guys.
Okay. Thank you.
And our next question comes from Daniel Hofkin from William Blair and Company. Daniel, please go ahead.
Hi, good morning. Congrats Just a little more color on this whole general topic of comps. If I understood you correctly, it sounded like you were describing market share gains in both segments. You've talked in recent quarters about DIY showing maybe greater share gains for you, given some of the changes you've made the last couple of years. But it sounded like in addition to that, that commercial, you felt like either because of some of the squeeze out of smaller players, maybe that's picked up in terms of share gains for you as well.
Is that a fair characterization?
I think so. It's hard for us to measure share gains just like it's hard for you all to measure share gains. And really our only means of measuring wholesale share gains basically is by comparing to the results of our publicly traded competitors and those that we know in the industry that tell us how their sales are. That's really the only way we have of comparing. And I think the 7.9 percent comp that we generated in the 3rd quarter kind of speaks for itself relative to market share.
But really, it's a very basic comparison and a very general comment when we say we're gaining market share, and it's strictly based on our perception of how we're performing versus the companies that report publicly and those that we know in industry.
Yes. I mean, I guess, the question is, obviously, I don't think anyone's expecting that an 8 percent comp is the new run rate for you. But at the same time, your pace of share gains has picked up and the things that you described as positive for the industry should be positive for everyone, yet your relative performance seems to have widened. So just trying to get a sense for what aspects of the performance you think are most sustainable in the next couple of years in either segment?
Well, Daniel, what I tell you is we, me and 72,000 other people here come to work every day trying to do the best job we can to provide great levels of service to our customer and make sure we have the right parts in the right places and that we know what we're talking about when it comes to selling parts and fixing cars. And we're going to continue to do what we do and we're going to continue to try and improve the things we do and improve the way we educate team members and improve our supply chain, improve the number of time we touch stores, improve the science behind how we deploy inventory. So to the extent that those things are contributing to our market share gains, which I believe they are, I think will continue to be a market share gainer. Yet we're all of us are subject to just the macro backdrop and the business that the automotive aftermarket is doing. And right now pretty robust.
So some portion of the 7.9% comp and the 7.4% comp we've had for the year is a result of the market being pretty well. And they're very basic things, but they're things that we I mentioned that I think we do pretty well. And they're very basic things, but they're things that we've done for years and we've just improved on as our change in our ability to grow market share, but the change in our ability to grow market share, but the unknown to some degree is just the backdrop of what the macroeconomic environment provides.
That's very helpful. Last, just very quick housekeeping question is on the whole. You talked about the $0.11 benefit this quarter from the tax favorability. If I recall correctly, in the second quarter, you had the litigation on the unfavorable side. Don't those kind of wash out overall so that the base comparison, if we're thinking about projecting into next year and we look at the 1st 9 months as a whole, you still get to a relatively clean base level of earnings.
Am I correct about that?
Yes. Those 2 are pretty offsetting. One is pre tax, one is post tax. So they basically create a neutral.
Got it. Thanks. Best of luck in the Q4.
Okay. Thanks, Dan.
And our next question comes from Dan Wewer from Raymond James. Dan, please go ahead.
Thanks. I had a question regarding the 4th quarter guidance. In the 1st three quarters of the year, the actual earnings exceeded the high end of guidance by an average of $0.19 a share. Is there anything different about the upcoming Q4 that would make the comparisons more difficult?
Well, what I would tell you, Dan, is that in my history with, O'Reilly, which is 31 years, I can tell you the Q4 is the most variable. There are just things that can happen related to weather, winter sets in some markets and doesn't in some markets and that can be a significant driver of early demand. And then also the holiday shopping season is always an unknown and the effect of that on our business is always a little bit of an unknown. So we're always because of our history and our experience in all the 4th quarters that we've lived through, we know that Q4 is the most variable. And for that reason, we generally are pretty conservative, but we're even put more emphasis on our conservatism going into the 4th quarter as a result of the knowledge we have of the potential variability coming into the holiday season.
Okay. Second question, could you discuss O'Reilly's success with VIP acquisition knowing that those stores had a combination of parts and a service business. And with that in mind, is there any opportunity for O'Reilly to participate in the consolidation of the industry with the Bridgestone, the Pep Boys merger?
Yes. Well, what I would tell you is that when we assessed VIP, we were pretty skeptical and concerned of having stores with shops that joined. And we kind of worked out how we would do that. And to this point, we've been pleased with our results. It was certainly a challenge because competitors use the fact that we're attached to a shop as a means to imply that there's some partnership that might be unfair to the other professional customers that we provide parts to, which is not the case.
And we make it very transparent and clear that that's not the case. But VIP and John Cork, the owner, they've been great partners of ours, and I think both businesses have done well. And we're reasonably comfortable there. And I can tell you that our business continues to grow robustly in those stores. We're coming off a small base, but if you looked at the percentages, boy, you'd be impressed
if I told you what
it was, which I'm not going to. But talking about Pep Boys, I think that it's a lot different situation because of the size of it for one thing, but then also the amount of square feet. But what I would say is that if given the opportunity to look at that, we would assess that in due course just like we would any other opportunity and decide whether it made sense for us and what parts of it worked and what parts of it didn't and all those things. But I can tell you we probably wouldn't be scared of the fact that there's a shop attached.
What I would tell you though, Dan, is Bridgestone still has a tender offer out there to close Pep Boys. And as far as we've heard, we don't know what they're going to do. They may run the shops, they may not run the shops. So that might be a question better directed to those folks.
And our next question comes from Tony Cristello from BB and T Capital Markets. Tony, please go ahead.
Great. Thank you. Good morning.
Good morning, Tony.
Welcome to Tony. Good morning.
Thank you. I guess I wanted to talk a little bit about O'Reilly in the business model and the margin and how that looks in a normalized comp, assuming that 7.9% is not normalized, 20% EBIT margin is really solid. And I'm just wondering the variability of cost and labor and some of the other things, what does margin look like in a 3% to 5% comp versus a 7 percent, 9% comp?
Tom, you want to take that? Sure. Well, what we would tell you is that if we have lower it depends on the mix of products we sell, right, when we look at the gross margin. Our distribution is pretty highly variable, but there will be pressure on those fixed costs. When we look at the store costs, it's a difficult question to answer.
When we look at what our SG and A was per store with high sales volumes, we're staffed up to meet that. We're probably running over time because of the amount of business we have. We have a higher achievement of variable compensation. We're running a lot more trucks, bringing a lot more fuel. So all of those costs are very variable.
But obviously, there's some portion of payroll and there's occupancy costs that are fixed that we're levering. So at a lower comp, we're not going to all other things equal, we're not going to put up the operating profit we did this quarter, but we're going to make adjustments to fine tune the variable part of our business to match what the business is that's out there.
Okay.
And I guess, is it a benefit with the initiatives you've had for the retail side of the business, which I understand it to be a higher margin type business, if there's a stickiness there or what you've done from an initiative standpoint holds. Do you think that, that changes the margin profile for the longer term? Or do you think that, all else being equal, you'll just ebb and flow with what the comp does?
Well, the additional retail contribution is certainly favorable. It's like you said, higher gross margin and they bring the money with them. So it's a and you don't have to deliver the parts. So it's a great thing. So yes, to the extent that our retail business growth that we were able to hold on to that and we continue to grow it, which I think we will, that's a positive thing and is contributor to our to margin and will be helpful at a lower comp rate in generating flow through to operating margin.
Okay. And if I could just ask a follow-up on the hours, is it primarily geared toward the commercial side of the business or the hours intuitively driven towards extending reachable retail side?
Yes, the extended we open early of course for the wholesale customers because many of them get their shops up and running pretty early, and we want to be sure that parts that they may have ordered the day before or whatever get to their shop first thing. But we later in the day, DIYers, many of them work for a living obviously. And they are the reason we keep our stores open late and staff our stores right on nights and weekends is generally speaking to serve the DIY customers.
And we have reached our allotted time for questions. I will now turn the call back over to Greg Hensley.
Okay. Thank you, Ethan. We'd like to conclude our call today by thanking the entire O'Reilly team for the outstanding year to date results. We're extremely proud of our record breaking 3rd quarter results and remain extremely confident in our ability to continue to aggressively and profitably gain market share and are focused on continuing our momentum into the Q4. I'd like to thank everyone for joining our call today and we look forward to reporting our 2015 Q4 and full year results in February of next year.
Thank you.