Welcome to the O'Reilly Automotive Inc. First Quarter Earnings Conference Call. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Please note that this conference is being recorded.
Following the company's prepared comments, we will conduct a 30 minute question and answer session. I will now turn the call over to Mr. Tom McFall. You may begin.
Thank you, Christine. Good morning, everyone, and welcome to our conference call. Before I introduce Greg Hensley, our CEO, we have a brief statement. The company claims the protection of the Safe Harbor for forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward looking words such as expect, believe, anticipate, should, plan, intend, estimate, project, will or similar words.
In addition, statements contained within the earnings release and on this conference call that are not historical facts are forward looking statements, such as statements discussing among other things expected growth, store development, integration and expansion strategy, business strategy, future revenues and future performance. These forward looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental regulations, the company's increased debt levels, credit ratings on public debt, the company's ability to hire and retain qualified employees risks associated with the performance of acquired businesses weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described or implied in these forward looking statements. Please refer to the Risk Factors section of the Annual Report on Form 10 ks for the year ended December 31, 2013 for additional factors that could materially affect the company's financial performance.
These forward looking statements speak only as of the date they were made and the company undertakes no obligation to publicly update any forward looking statements whether as a result of new information, future events or otherwise, except as required by applicable law. At this time, I'd like to introduce Greg Hensley. Thanks, Tom.
Good morning, everyone, and welcome to the O'Reilly Auto Parts Q1 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 is also present. I would like to begin our call today by congratulating team O'Reilly on another record breaking quarter. Our team's relentless commitment to providing consistent excellent customer service our Our sales results for the Q1 exceeded our expectations as we were able to capitalize on the strong demand generated from the harsh winter weather conditions in many of our markets.
Our robust 6.3% comparable store sales increase was above the top end of our 4 percent to 6% guidance range and is a testament to our team's commitment to providing unsurpassed levels of customer service. The 6.3% increase was on top of a 0.6 percent increase during the prior year, but I would like to remind everyone that on an even calendar basis, the Q1 of 2013 would have been 150 basis points higher after adjusting for the headwinds from the Easter calendar shift and the comparison to the extra leap day in 2012. We estimate that our Q1 of 2014 benefited approximately 20 basis points from the impact of the Easter shift back into the Q2 of this year, which was inherent in our guidance. Total sales for the Q1 increased 9% to $1,700,000,000 and we are especially proud of our team's ability to robustly grow our top line, while also increasing our operating margin by 78 basis points to a 1st quarter record of 16.6 percent of sales. Our team's commitment to consistent excellent customer service delivered EPS growth of 18 point 4% for the quarter, which represents our 21st consecutive quarter of adjusted earnings per share growth of 15% or greater.
As one might expect, during the Q1, the harsh winter weather conditions drove sales in our cold weather related categories such as batteries, rotating electrical, heating and cooling and wiper blades. Vehicles driven on damaged roads during the quarter also benefited undercar repairs and boosted sales in categories such as ride control, chassis parts and driveline. We believe the potholes in the roads and other wear and tear caused by the harsh winter weather will result in higher levels of parts failures in the coming months. Looking back on each of the months during the quarter, business remained relatively consistent throughout the period, although the coming of spring has been sporadic throughout our markets and did lead to some fluctuations on a weekly basis. With the overall mix of business benefiting from the extreme winter weather, our cold weather markets performed better than our Southern and Western markets.
Our comparable store sales increase was driven equally by both our professional and DIY business. Our professional business continues to grow across all our markets with our less mature Eastern and Western markets showing the strongest results. The extreme weather was also a catalyst for growth in our DIY business as our customers were forced to brave the cold to perform needed repairs to keep their vehicles on the road. Ticket and traffic contributed equally to comparable store sales growth during the quarter. Average ticket increased in both the professional and DIY businesses with inflation contributing very little to the growth of our comparable store sales.
As we have seen over the last several years, average ticket growth was driven by mix as more of our sales continue to come in higher priced hard part categories. In addition, the increasing complexity of vehicles and improvements in the quality of component parts continues to drive up the cost of vehicle repair, while stretching repair intervals.
We expect this trend will continue and will be
a driver of intervals. We expect this trend will continue and will be a driver to long term average ticket growth. Transactions in the Professional business were again positive for the quarter and we were very pleased with the growth we saw on the DIY side where transactions were also positive for the quarter. As we look ahead to the Q2, we are establishing our comparable store sales guidance at a range of 2% to 4%. The midpoint of this range represents a 2nd quarter 2 year stack of 9.5 percent, which is a modest acceleration from the Q1 2 year stack of 8.2 percent adjusted for the leap year comparison from 2012 and the timing of Easter and is in line with our Q4 2013 2 year stack of 9.6%.
We expect to see a continued benefit during the Q2 from the residual effects of the very harsh winter and believe categories such as steering, suspension and ride control will be a tailwind to spring business. Although reported miles driven through February were down 1%, we believe this was the result of the extreme weather and we expect miles driven to moderately increase during the year as unemployment continues to abate contributing to increased commuter miles. Having said that, we have seen gas prices on the rise with year over year gas prices up 4% and year to date gas prices up over 11%. Consumers continue to be under significant economic pressure and we believe this pressure will continue throughout 2014. Based on our Q1 results and our expectation of continued solid demand in our industry, we are reiterating our full year comparable store sales guidance of a range of 3% to 5%.
For the Q1, our gross margin improved to 50.8%, which is a 41 basis point improvement over the Q1 of 2013. These strong results exceeded our expectations and were the result of a weather driven mix benefit. As we discussed on prior calls, our gross margin results for the Q4 of 2013 and the Q1 of 2014 faced significant headwinds from LIFO accounting. And Tom will provide more details on this impact in a few minutes. However, I will say that these headwinds have largely abated and we expect a higher quarterly gross margin for the remainder of the year.
And as such, we are reiterating our full year gross margin guidance range of 50.9% to 51.4%. This guidance is predicated on expected continued limited inflation and rational industry pricing. Before I turn the call over to Jeff, I would once again like to thank our more than 64,000 dedicated team members for the strong start to 2014. Through your hard work and relentless focus on providing consistent outstanding customer service, we continue to both gain market share and profitably grow our business. We are very pleased with our record first quarter operating margin of 16.6% and our 18.4% increase in 1st quarter EPS to $1.61 We remain very confident in the long term drivers for demand for our industry, including an increasing rate of new vehicle sales and stable scrappage rates, resulting in both a growing vehicle population as well as an aging vehicle population.
Most importantly, we are extremely confident in our team's ability to consistently execute our proven dual market strategy and gain market share. Based on these factors and our strong first quarter results, we are increasing our full year EPS guidance to a range of $6.82 to $6.92 This range includes share repurchases through yesterday that excludes any potential additional share repurchases. I would again like to thank team O'Reilly for our very strong start to 2014. And with that, I'll turn the
call over to Jeff Shaw.
Thanks, Greg, and good morning, everyone. I too would like to begin today by thanking team O'Reilly for our outstanding Q1 results. As I've said many times in the past, consistent top notch customer service is the key to our long term success, And our team members have once again proven that dedication to helping every customer who calls or walks in our stores yields strong top line results as well as profitable growth. Our team's high level of dedication was more apparent than ever this past quarter as our team members battled the elements to keep our stores open and take care of our customers. As Greg mentioned earlier, the extreme winter weather we experienced drove very strong demand for our products.
But without our team members' efforts to keep our stores open and being there for our customers, we wouldn't have been able to capitalize on this strong demand. To put it in perspective, the winter conditions forced us to close 2 47 stores for some portion of a day during the quarter. This only represents an insignificant one 10th of 1% of our store days for the quarter. What isn't insignificant is the lasting goodwill earned from customers when you're the only parts store in town open to take care of their needs. The harsh weather also forced 2 of our DCs to cancel some nightly deliveries.
But because of the robust tiered distribution network we built over the years and the hard work and dedication of our DC teams, we were able to provide all of our stores with the access to the inventory needed to take care of our customers. I can't say enough about how proud we are of the way our team pulled together to Taking a look at SG and A as a percentage of sales for the quarter, Taking a look at SG and A as a percentage of sales for the quarter, we levered 37 basis points due to our very strong comp performance. However, average SG and A per store increased 3 0.2% for the quarter, which was higher than we expected. The harsh winter weather negatively impacted our SG and A spend on many lot items during the quarter, including expenses for snow plowing, additional supplies, higher utilities and increased payroll. The higher than planned payroll was a result of increased commissions on our strong sales performance as well as additional hours needed to deal with the extreme weather conditions.
While our average per store SG and A was higher than we planned, we're happy with our ability to continue to control expenses during a period of very high demand. We feel we have our stores staffed at the appropriate levels to control cost, while also and most importantly staffed to provide consistent unsurpassed levels of customer service. And so for the year, we continue to expect average SG and A per store to increase by approximately 1.5%. And now I'd like to take a few minutes to update you on the progress of our distribution network expansion. As we mentioned on our Q4 call, our newest distribution center opened in Lakeland, Florida in early January has ramped up extremely well and is now providing nightly inventory replenishment to 70 6 stores.
As it is with all new greenfield DCs, it will take time for Lakeland to build the critical mass of stores necessary to operate at maximum efficiency. Having said that, we're very pleased with the Florida DC team's productivity and we're excited about the enhanced service levels we can now offer customers in our growing base of Florida stores. It's been a cold and snowy winter in Massachusetts and Illinois, but our 2 additional DC expansion projects are also progressing nicely. Our new facility in Naperville, Illinois, just west of Chicago, is slated to begin servicing stores in the fall and our new facility in Devons, Massachusetts just west of Boston will open and begin servicing stores in the Q4 of this year. As a reminder, the Naperville DC is a Greenfield facility and is needed to better penetrate the large and competitive Chicago land market, which is currently serviced out of our Indianapolis DC.
When our DC opens in Devons, we will relocate all of the operations from our existing DC in Lewiston, Maine to this new facility. The larger state of the art DC in Devons will give us the capacity needed to begin expanding our store base and growing our market share in the upper Northeast beginning in 2015. Our DC teams have a long and proven track record of successfully executing multiple DC projects at the same time and with the dedication and support of our experienced and knowledgeable DC operations team members, our 2014 DC expansion is moving along as planned. Now I'd like to spend some time talking about our store expansion during the quarter and our plans for the remainder of the year. In the Q1, we opened 50 net new stores, which was just shy of our planned openings for the period.
Not surprisingly, the harsh winter weather disrupted construction on many of our store projects and played the main role in the delay of some openings. The good news is that most of our markets have broken out of the grip of winter and we've been able to get most of our projects moving forward again. We expect to be close to our planned store openings by the end of the second quarter and we continue to be confident in our ability and original plan to open 200 net new stores for the year. As we discussed on our Q4 call, we will open stores all across the country this year. And in fact, during the Q1, we opened stores in 23 different states.
Our coast to coast footprint allows us to be very selective in new store site selection and more importantly allows us to develop and train great teams of professional parts people who are ready to provide top notch customer service from day 1. This diverse growth profile, which allows us to leverage our entire market area for new store development, is vital to the success of our new store openings, and we continue to be very pleased with the performance of our store openings over the past several years. Before I finish up today, I'd like to once again thank our store and distribution teams for providing consistent top notch service to all of our customers each and every day. Your hard work and dedication continue to drive our profitable record breaking results. I'll now turn the call over to Tom.
Thanks, Jeff. I'd like to start today by thanking team O'Reilly for continued dedication to providing excellent customer service. Your hard work generated outstanding results in the Q1 and has us off to a strong start for 2014. Now we'll take a closer look at our results and provide updates to our guidance. Comparable store sales for the Q1 increased 6.3%, which exceeded our guidance of 4% to 6% and was driven by our continued solid business trends and the harsh winter weather as Greg discussed earlier.
For the quarter, sales increased $143,000,000 comprised of a $99,000,000 increase in comp store sales, a $46,000,000 increase in non comp store sales, a $1,000,000 decrease in non comp non store sales and a $1,000,000 decrease from closed stores. This strong sales performance combined with our relentless focus on expense control resulted in 18% increase in diluted earnings per share to $1.61 which exceeded the top end of our Q1 guidance range by $0.04 I'd like to spend a little bit of time now providing some detail on the LIFO impact in the Q1. As we discussed on our last two calls, our success at reducing our acquisition costs over time has exhausted our LIFO reserve. With the result that additional cost decreases create one time non cash headwinds to our gross margin as we adjust our existing inventory on hand to the lower cost. We experienced a headwind of $23,000,000 related to this item in the Q1, which is higher than our expectations from our Q4 call due to better than planned cost decreases.
However, this higher than expected LIFO headwind was offset by a mix benefit resulting in a gross margin of 50.8%, which was within our range of expectations. We do not expect meaningful LIFO headwinds for the remainder of 2014. However, unforeseen significant acquisition cost decreases could occur and may create additional gross margin headwinds during the year. Moving to the balance sheet, inventory per store at the end of the Q1 was $569,000 versus the prior year of $568,000 which was in line with our expectations for the Q1. We continue to expect inventory per store to be flat for the full year as our teams diligently add the right inventory, leverage our existing investment and minimize non productive inventory.
At the end of the Q1, our AP to inventory ratio was 90%, representing a sequential improvement of 3% from the end of 2013. This improvement was a result of our better a result of our better than expected
first quarter sales and the
resulting higher churn of inventory. Since we believe most of the first quarter improvement is related to this timing benefit, we're maintaining our APE inventory target of approximately 90% for the end of 2014. Capital expenditures for the Q1 were $83,000,000 and we still expect our full year CapEx to be within the range of $390,000,000 to $420,000,000 This leads us free cash flow for the quarter, which was $262,000,000 We're revising our full year guidance for free cash flow to $580,000,000 to $620,000,000 reflecting an increase at the bottom end of our range from 5 $70,000,000 as a result of the strong operating income results in the Q1. Moving on to debt. We finished the Q1 with an adjusted debt to EBITDA ratio of 1.86 times.
We continue to believe our targeted leverage range of 2 to 2.25 times reflects our optimal capital structure and we'll move into this range when the timing is appropriate. We also continue to execute our share repurchase program and year to date we've repurchased 400,000 shares of our stock at an average cost of $145.94 per share for a total investment of $56,000,000 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 higher rate of return. And we'll prudently execute our buyback program with an emphasis on maximizing long term returns for our shareholders. For the Q2, we're establishing diluted earnings per share guidance of $1.79 to $1.83 Based on our above planned results in the Q1 and additional shares repurchased since our last call, for the full year, we're raising our guidance from $6.74 to $6.84 per share to a range of $6.82 to $6.92 per share. As a reminder, our diluted earnings per share guidance for both the 2nd quarter 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 once again like to thank the entire O'Reilly team for their continued dedication to the company's success. Congratulations on a great start to 2014. This concludes our prepared comments. And at this time, I'd like to ask Christine, the operator to return to the line and we will be happy to answer your questions.
Thank you. We will now begin the question and answer session. Our first question is from Scot Ciccarelli of RBC. Please go ahead.
Hey, guys. How are you doing?
Good. How are you doing, Scot?
All righty. Question on the gross margin. Given Tom's commentary on the LIFO impact, it looks like gross margins would increase by about 170 basis points year over year. And I guess what I'm trying to figure out is how much of that is just from the lower procurement costs that we've been discussing? And then how much of that was from mix?
In other words, kind of what's sustainable and what might be more temporary just because of mix impact?
Tom, you want to take that? Yes.
I think if you look at our guidance for the remainder of the year, you can calculate what we think the run rate is. The bigger piece was obviously LIFO, but we did see a benefit from the winter mix of products that we sold.
To be fair, you guys tend to be a little conservative in your gross margin outlook. So I guess, again, just looking at the increase that we saw, would you call kind of a fifty-fifty split between mix and kind of procurement costs?
I think if you push the math, you'll find that it's a bigger procurement and mix is more an offset to the higher than expected LIFO number. But we are comfortable with our guidance for the remainder of the year. And gross margin is an item that is influenced by a lot of external factors. So we think that the given the current business situation, the margin range we've given is appropriate.
More than fair. Thanks, guys.
Thanks, Scott.
And thank you. Our next question is from Matthew Fessler of Goldman Sachs. Please go ahead.
Thanks a lot and good morning. My first question relates to the buyback. Totally hear you on the leverage target and on the long term goals. This quarter did mark a bit of a change in cadence from the time that you had started the buyback in earnest. Just want to understand the factors that influence the timing of buybacks and whether this quarter represents any sort of directional change in terms of the velocity with which you expect to be in the market?
Yes. Well, it certainly doesn't indicate any directional change. As Tom said in his prepared comments, we first look for opportunities to invest in our business and then we're from a long term perspective going to continue to buy back shares as is appropriate, but nothing has changed. And Tom, I don't know if you have any additional comments on that.
Definitely agree with that comment from a long term perspective. On the short term basis, we have a very short open window because of the year end close time to adjust our grids. And I think that that's also a factor in the amount of
shares that we bought this quarter.
Got it. And then just a quick follow-up. For the past several quarters, I think the industry has been battling fading inflation to put it mildly, if not perhaps a little bit of deflation. At least one of your competitors talked about some stabilization in terms of materials drivers of pricing. Just curious as you think forward over the next year or 2 and contrast it with the environment that you've had for the past few quarters, do you see any change in direction there?
I would say that as an industry is raw materials continue to increase in price at least some of them oils and resins and things like that that we will start to see more of an inflationary cycle again. But right now we're not seeing much of that, but we would expect to some in the future. Tom, I don't know if you
have any additional Our guidance is for the remainder of the year is based on continuing to see below historical average rates of inflation.
Got it. Thank you so much guys.
Thanks, Matt. Thank you. Our next question is from Dan Weaver of Raymond James. Please go ahead.
Thanks. Greg, I have one long term question, one short term question. First, long term, gross margin rate for O'Reilly is up 900 basis points over the last decade and your competitors achieved similar improvements. If you were to go back and read the company's forecast say from a few years ago, you were indicating minimal margin improvements ahead due to the growing sales contribution from commercial. And now in hindsight that clearly was extremely conservative.
What do you think that we've got wrong on this margin expansion thesis? Why is it so much more robust than what we were expecting a couple of years ago? Is it procurement costs that Tom was alluding to a second ago or?
Well, I think it's a combination of 2 things. I think it's procurement costs. I think the fact that as our company has grown and some of our larger competitors have grown, we've been able to take more advantage of some of the import products that we can bring across the sea in large containers and take
advantage of supply chain efficiencies, which
help improve our gross margin. It's also just rational in large containers and take advantage of supply chain efficiencies, which help improve our gross margin. It's also just rational pricing in the marketplace. I think that most of the players in the industry realize that our business is a service business and that it's hard to win repeat customers on the especially on the professional side of the business with price that is a result of great service. So I think that as an industry we've been very rationally priced and I think that's been maybe a little bit more of a tailwind than would have foreseen a few years ago.
When you think out the next 3 years, would you expect margin to continue increasing knowing that your commercial mix is going to further increase?
I would certainly not expect the kind of increases we've had over the past few years. We've got a great team of people here that work every day on making sure that we're price competitive on the street and making sure we do all we can to maximize our gross margin and maintain our customer service levels. But I think we've gotten to a point where there's just not much there's really no low hanging fruit left and we're working to maintain and incrementally grow our gross margin at a slow rate, but I certainly would not expect the grow our gross margin at a slow rate, but I certainly would not expect the kind of improvements that we've seen over the past few years.
Yes. Well, I think I'll say the same thing in 2011. My other question more short term, talking about the weather benefits. And you talked about the this continuing through the Q2 as the end of car damage begins to benefit sales. Does this exhaust itself at the end of the Q2?
Or are you thinking that the deferred maintenance and repairs over the last two
depends on the condition of our customers economically. A lot of the things that are damaged in harsh weather like we had in the winter are failures that you have to fix immediately. If your battery is shot or your starter alternator doesn't work, if you want to drive your car, you've got to fix it right away. If your axle shaft CV joint starts making noise because it's been through some abuse and maybe the boot got torn and it slipped the grease out of it, you can drive it making noise for quite some period of time. And so I would say that some people if they're in good shape economically will get their car fixed as soon as they start hearing the racket.
Other customers will drive it through the summer maybe even into winter before and then not fix it till it absolutely has to be fixed. So these harsh conditions are generally good for our industry both short term and longer term. And when I say harsh conditions, I mean weather extremes in the winter and weather extremes in the summer. What would be ideal for us is on the tail of this really harsh winter is to have a blistering hot summer driving cooling system and air conditioning and all the other type failures you can have in addition to more battery business. The battery business has been good I think for the whole industry this winter and batteries get really damaged in the extreme heat and many times you see the failure in the winter.
So a real hot summer this summer would be helpful for that also.
Right. Great. Thank you and good luck. Okay. Thanks.
Thank you. Our next question is from Gary Balter of Credit Suisse. Please go ahead.
Thank you. Just a couple of questions. California has been more in a drought like they're almost the opposite of what's going on in the other markets right now. Has that had an impact? Is that one of your weaker markets at the current time?
To some degree it is Gary. The categories like wiper blades and stuff like that in California have not been as strong as they have been especially on the DIY side out there our DIY business out there because a lot of the kind of things that you sell to the DIY customers are things like wiper blades and stuff like that that are directly heat related. It has been a little bit of a drag on our business in the West Coast.
So how much could you
do you want to quantify the drag or
I'd rather not if that's we try to stay away from as much regional information as we can just from a competitive standpoint.
And then well my second question is also regional. You mentioned Florida and your expansion already in the distribution center. What's the size like what's the potential in that market? How many stores are you looking at?
It's yet to be determined, but we could potentially have somewhere in the area of 300 stores in Florida. So far, our new store startups in Florida have done incredibly well and we're very encouraged by our performance down there. And if you ask us 2 years ago, how we thought we would start in Florida, we would have undershot how we've actually performed. So I think we're a little we're more optimistic now than ever about our ability to be successful in Florida.
And you have where are you down to in Florida?
We're down south of Tampa now. Our DCs in Lakeland, they're between Tampa and Orlando. And we're south of Tampa now.
Okay. And then you're working your way all the way down to like Miami and the Keyes?
Yes. We're looking at properties now in the northern north side of Miami. We're not down in Miami, but we're looking at properties in the north side of Miami.
Okay. And actually I'll let somebody else ask. Thank you very much. Okay. Thanks, Gary.
Thanks.
Thank you. Our next question is from Alan Rifkin of Barclays. Please go ahead.
Thank you very much. Greg, the DC opening slated for all of 2014, the 3 of them really marked the most concentrated effort since the very early days after the CSK acquisition when you're opening up DCs to support those 1300 stores back then, would it be reasonable to expect that the drag on margins from these 3 DCs would be similar in duration as to what we saw back in the early days following CSK?
There are some differences. When we opened the CSK DCs, we had a lot of underperforming stores that we immediately kind of rolled into those distribution centers. In this case, we have a we opened a DC that took stores from a distribution center that was way over its max to generate the best efficiency it can generate there in Atlanta. Our Chicago DC is kind of the same thing. We'll put several stores on it as quick as we can once it opens to relieve some of the stores that we have in an overcapacity state.
They're in Indianapolis and in Minneapolis. And then in of course, it's to fund our expansion in the Northeast and the 56 stores that we bought as part of VIP will immediately start being serviced by that DC through the closure of our Lewiston DC. So it's similar, but it's different in some ways. Our distribution team does a fantastic job of ramping our the cost that we can control through payroll and productivity up to match the number of stores that we service. So we would not expect a noticeable hit to our gross gross margin as a result of these openings.
Okay. Thank you. And
Tom wants to add something to that. Two items
I would add to that. When we look at the CSK transition, those stores were going from the 1 night a week delivery to 5. These stores are already on 5 night a week delivery. So we have a freight savings because of proximity. And the other item that I would add is from a proportion basis, this is 3 into a bigger proportion.
So the impact will be less dilutive. So we aren't expecting a really meaningful impact on our gross margin.
Okay. That makes a lot of sense. And one follow-up if I may. Greg, the number of categories that you mentioned that should benefit going forward from the harsh winter that of the undercarriage, the chassis and the steering suspension things like that. Collectively, approximately what percent of your revenues do those categories represent?
Well, it depends on what you of course include in the things that would be affected. There are a lot of things affected by harsh weather including electric stars and alternators, batteries, driveline, ride control, steering suspension all that. Those are the kind of the core part of our hard parts business absent the things that would be in place to service drivability issues like emission, ignition, fuel, things like that. So I really don't have a percentage. It would be it's at least if you include brakes, it would be more than half of our hard parts categories for sure.
Okay. Thank you very much. Good luck going forward. Thanks, Alan.
Thank you. Our next question is from Chris Horvers of JPMorgan. Please go ahead.
Thanks. Good morning, guys. If I recall last year, I think April really started to rebound for the industry with categories like brakes starting to come back industry wide, obviously, you guys were doing a lot better. So it would seem like the comp stacks that you're referring to are actually accelerating here in April on average. So just curious how your brake business is doing as we start to lap the step up?
And is it a fair comment to say that the stacks have accelerated in April? And is sort of the outlook more prudent? Or is there something else that's providing you with caution?
The way we stack in our comparison from the quarter we're into 2013 is that April would be a slightly stronger comparison than June. We kind of business last year in the Q2 kind of ramped down a little bit. Yes, brakes are doing good. This time of year brakes generally do well from a comparison standpoint. We're happy with our brake performance as it exists today.
How we do through the rest of the quarter is yet to be seen, but we would expect our brake business to be good through the Q2.
Chris, this is Tom. What I would remind everyone is that when we talk about the strength of our business, we look at comp they generate. So we've been at 2% to comp they generate. So we've been at 2% to 4% guidance because we have tough comparisons. That said, we're still performing on a total dollar basis strong as we have been, but that flushes out our comp range.
So you're saying if you sort of whatever you're doing on a per weekly basis year to year and you project that out that would put you into a 2% to 4% for the quarter?
It would put us into the range that we've given, yes.
Okay.
That's in spite of the comparisons being a little easier in May June?
Like Tom said, we do kind of a we do a plan, a weekly plan for the whole year. And our weekly plan based on the comparisons that we have in the Q2 would yield what we think would be somewhere in the area of a 2% to 4% comp for the Q2. Now what's unknown about this is the real effect that the harsh winter we had will have during the Q2. It's hard to know. There are a lot of factors.
It's the harshest winter we've had in a long time. Gas prices are up a little bit. Unemployment is improving a little bit. So it's yet to be seen, but we feel good about the business yet. We felt it would be imprudent for us to make 2 year stack acceleration greater than we did with the guidance we gave at 2% to 4%.
Totally understand. And then longer term, Craig, the great debate out here is average age or I think more importantly, the TsarCliff as you look to 2015 and lapping that 2,009 class of 10,000,000 vehicles sold in the trough of the cycle. So I was just curious if it give you the opportunity to talk about how you think about facing that StarClip and the cars going into that 6 year old class versus the cars exiting that 10 to 11 year old class, which is the sort of end of the proverbial historical peak repair years?
Sure. Well, I mean, I've read a lot of the information that many of the analysts have written about this. And we do a lot of analysis inside our industry also some of our suppliers and so forth do a lot of work on this. There's no question that the data is what it is relative to the 6 to 12 year old vehicles. The total count of those vehicles decreasing in the coming years as a result of the lower car sales back in 2010 and during the recession and so forth.
The unknown factor and kind of the comments that I've made in the past have been that we feel like that the way cars have been built for many years now even back into the '90s, but for sure in 2000 that they're just going to stay on the road longer. They and they're more drivable at higher mileages. I had lunch with one of our good customers yesterday and we were talking about this very subject and he works on cars every day. And he knows nothing about vehicle population and the Sarcliff and all this kind of stuff. He's just out there trying to make sure he keeps all this techs busy and drives his business every day.
And he made the comment, he said it's amazing how many miles cars have on today and people are still willing to invest big money in keeping them on the road because the engines and transmissions and the interiors the bodies and all those things still are in good condition at 200,000 plus. It sounds crazy to say this, but there are cars being driven that look pretty darn good going down the road. They have over 300,000 miles on them. And the engines transmissions are still functioning properly. So I think that our those that feel that this Saar cliff is going to hurt demand significantly are discounting the fact that these vehicles that are past 12 years old are still on the road and still being maintained.
And unless we see a decrease in the vehicle population in general, which would not be expected that this is going to have a minimal impact on our industry.
Perfect. Thanks very much.
Okay. Thank you.
Thank you. Our next question is from Michael Lasser of UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. As you look out over the intermediate term, Greg, what are the chances that all of these harsh conditions and this cold weather has simply pulled forward demand where the vehicle population has seen an upgrade to some of its hard parts, all of the parts that you mentioned and now there won't be a need to replace some of those items for a period of time?
Yes. Well, I mean, Michael, there's always when a let's say a steering part, a tie rod end or a control arm or I mean a center link or a suspension part like a control arm or ball joint or something like that that fails because of potholes and bad weather, it was going to fail at some point. It was a matter of time. Some of the things that happen relative to subzero temperatures that drives belt failures stuff like that, that belt may last a long time. It's been driven at a perfect temperature for its whole life.
But extremes drive demand, but in some cases, it creates demand earlier than the part typically would have failed. Sometimes it's just demand that was going to happen at that point in time anyway. So it's really hard to speculate on that, Michael. We I feel like we as an industry, we've started talking about weather a lot the last couple of years when for most of my career, we just didn't talk about it.
I moved back when David was
the CEO, we never talked about weather. And he kind of made it his policy that the weather is the weather and we really can't do much about it. So we're going to just sell as many parts as we can. It really that's kind of what we do today. Our operations guys, they don't look at weather forecast to staff stores unless it's a major storm that shuts everything down and stuff like that.
So demand for auto parts is really driven by miles driven specifically in cars that are out of warranty. And sure you can pull demand a little bit forward in real harsh conditions, but it eventually comes around.
Okay. My second question is on the AP to inventory ratio. There's precedent in the industry to show that it can go north of 100 percent. In fact, it can go north of 110%. Are there any structural factors that are unique to O'Reilly that would prevent it from reaching the level the best in class level of the peer group?
Yes. That factor is that we carry several lines of products that are products preferred by the professional customers. And that mix of business is not going to allow us to get to where some of our competitors are, simply because these the for that reason, we for that reason, we're going to be a little more limited than what some of our more retail based competitors are.
And have you been surprised at how good the terms you've gotten already have been?
No. We fully expected what we got. And so we're happy with where we've gotten to. But no, I we're not I mean, we're not surprised. We've worked hard to get it.
We know exactly how it happened. And our factoring program being what it is has helped our vendors be in a position to where they couldn't give us the terms that they've given us. But we're getting to the point it's going to be hard to grow it a lot past where we're at today.
Michael, this is Tom. I think the one thing that has surprised us is since January of 2011, we to an unsecured structure and could offer this vendor financing program. The rate at which we got to a number that we thought we could get to has been a little surprising. The total isn't surprising. We just thought it would take longer.
Okay. Thank you very much.
Thank you.
Thank you. Our next question is from Daniel Hofkin of William Blair and Company. Please go ahead.
Good morning. Very nice quarter. The I guess I just wanted to at the risk of beating the guidance topic to death, just to maybe finish encapsulating it. Is it fair to say that you guys basically set your guidance in this case really before the winter weather was in effect, including for the Q2? And so while maybe you did see some weather benefit thus far in the quarter, Your guidance for the remainder of the quarter does not explicitly incorporate an ongoing weather benefit.
And so if you saw that it could theoretically be additive?
We talked about this last week and decided for sure what our guidance was going to be. So it wasn't something that was preplanned as part of our 2014 planning. Our 2 if you take the Easter out of the equation because Easter leveled out with Easter being in the Q1 in 2013 and being in the Q2 in 2014 and you just look at the adjustment for leap day which you have to make, our Q1 2 year stack is 8.2%. And at the midpoint of our guidance for the Q2, our 2 year stack is 9.5%. So we feel like that's reasonable guidance.
What happens in the next 2 months as we work through the Q2 is yet to be seen. We have every reason to think that business will continue to be good, but we have tough compares. So we'll see. But to answer your question specifically, this was not guidance that was planned early or before the end of last year. It's guidance that we talked about recently.
Okay. So there's some assumption implicit in there perhaps about whether it's not it wasn't set 6 months ago, it's kind of a recently updated number?
We talked about it last week. Yes.
Okay. The other question, I guess, just back to kind of the relatively more balanced performance between professional and DIY in the last several quarters. How much more opportunity do you think there is to sort of up your game as it seems like you have on the DIY side of the business through whether it's more parts availability in the store, higher in stock, some of the customer service and POS initiatives? How much more room is there to go on that?
Well, Daniel, I think there's always a lot of opportunity there. The DIY business is a they come in our store because we have professional parts people in our store. We have a great inventory and we give great service. And some of the things that we do today that we didn't do 2 or 3 years ago or 4 years ago relative to helping customers with diagnostics when check engine lights on, help them install wiper blades or battery or things like that or things that they kind of ramp, word gets around. We're not big advertisers of those kinds of things just with respect to our professional customers.
So these are things that build over time. Word-of-mouth helps drive DIY customers into our stores for those types of services. So we would expect to continue to see benefit from great customer service for a long time to come, because we consider all these things just kind of rolled up into the level of service that we try to offer and make sure that the level of service we offer exceeds that of most of our competitors. So we expect to continue to see benefit from the things that we do for some period of time. And every there's not a month that goes by that we don't consider things we can do to improve that through our point of sale system, our electronic catalog, things we're doing with our website and mobile e commerce things that we feel like will help tie our customers more directly to us.
Our rewards program, which now has 5,500,000 customers enrolled and just all those things.
Great. Well, best of luck.
Okay. Thank you. Thank you. Our next question is from Mike Baker of Deutsche Bank. Please go ahead.
Hi. Thanks guys. I wanted to ask you about the West Coast orders. Can you give us some sense as where those former CSK stores are in terms of their mix DIY versus DIFM and where they ultimately can get to? And then if you can put that together total company what's the percent of DIFM now versus DIY?
Thanks.
We're looking here just a second. Do you get the numbers down?
We're and the CSK we're about 35% professional business. Total company is around 46%. As we've talked about in the past, new stores bring on the DIY business faster than the do it for me.
Okay. So that 35% at CSK, I mean, I think you said in the past that that probably won't get to the fifty-fifty that the legacy O'Reilly stores did. Is that still the right way to think about it? And also where we're going to get to? Is forty-sixty the right kind of range?
Or could it be higher than that?
Let me go back for a second and correct one number. Consolidated professionals 42.
Okay.
And so what can CSK ultimately get to?
I'll turn that one over to
I'm sorry what was that? We were I was flipping through the numbers here.
So CSK at 35% commercial, I think you said in the past that it likely won't get to the fifty-fifty that legacy O'Reilly stores were or at least that's what you said when you made the acquisition. But I'm wondering if that's changed or the thought process there? Really the simple question is what can the percent of DIFM ultimately get to in the CSK stores?
We can get it
to above the back to the range the whole company is right now I think is about where you would get to with those CSK stores. The 42% commercial somewhere in that area and that's strictly an estimate based on our knowledge of the stores that we have that are in more retail areas that don't have a lot of professional business around them. I think because of that we'll have a hard time getting to the position that the core O'Reilly's or the historical O'Reilly stores are or were prior to buying CSK. But that changes over time as we leases come due and we may make relocations and things like that. But based on the state of our locations today, I would say somewhere in that 40% or low 40% range will be our commercial penetration out there.
And does some of the consolidation in the space impact that at all?
It can. Yes, as acquisitions happen that could certainly have some impact. Probably the bigger impact will be just the decisions we make as far as potential relocations of stores that might be in locations that are not conducive to
the professional business as
leases come due. Okay. Professional business as leases come due. Okay. Thanks a
lot guys. All right.
Thank you. Thank you.
We
have reached our allotted
time for questions. I will now turn the call back over to Greg Hensley. Thanks, Christine.
We would like to conclude our call today by again thanking the entire O'Reilly team. You've once again proven that hard work and excellent customer service are the keys to our long term profitable growth.
We're very proud
of our excellent start to 2014 and we're very confident in our ability to build upon our Q1 accomplishments and continue to gain share across all our markets. I would like to thank everyone for joining our call today and we look forward to reporting our Q2 2014 results in July. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.