Alright, so next up we have O'Reilly Automotive, one of the largest aftermarket distributors in the U.S., with about 5,873 stores across 47 states. O'Reilly has 60 million shares at $900 for a market cap of $54 billion, net debt of close to $5 billion for an enterprise value of $60 billion. Speaking with us today, we are lucky enough to have Brad Beckham, CEO, and Jeremy Fletcher, CFO. Gentlemen, thank you so much for joining us today. While I walk over there, maybe I'll just start kind of with a beginning question. If you could give us an overview of O'Reilly, you know, what do you sell? Who are your customers?
I'll start maybe just by saying that Brad's CEO-elect. He's not quite there yet. It'd be January, so before he gets ahead of himself, exactly. He can answer the rest of this question.
I apologize.
A couple months to, a couple months to screw it up. Thanks everybody. Appreciate the support and having us. Honored to be here. A lot of you, I know some of you, I don't. Looking forward to the conversation. Yeah, obviously we, as most everybody knows, we've been in business since 1957. You know, we're in the auto parts aftermarket, 6,000 stores. You know, our business is made up of just over 50%, closer to 55% roughly, that would be the DIY market and the remainder in the DIFM space. The company started, you know, really the first few decades just really servicing the independent jobber as well as the independent garage.
Really over time, over the decades, kind of morphed into what we know as our dual market strategy that's really been a differentiator in the markets we're able to enter, small and big, and just a great profitability model across the U.S. Yeah, we're in the automotive space. You know, as everybody knows, the majority, the far majority of our business is very non-discretionary in nature. We do sell, you know, some accessories and some other things, but the majority of what we do is what we consider backroom hard parts. It's the actual hard parts that are installed from, you know, both the DIY and the professional customer. We have a really great business and, yeah, looking forward to it.
Great. I think the big thing we talked about at this conference so far is just availability and immediacy of customer need. You touched on the non-discretionary aspect, but these are complex logistics, right? Can you kind of discuss your distribution network and how you make sure you meet the customer need?
Yeah, sure. Be glad to. As most everybody knows, we have basically 30 regional distribution centers that replenish our stores five nights a week. They are strategically placed in the metro markets in the U.S. We've had the fortune of this supply chain behind people and culture. I always say that our supply chain is probably the next strategic advantage that I feel like we still have today and really have my entire 27-year career with O'Reilly . We've had the fortune of placing these distribution centers in the metro markets. We started out Springfield, Missouri, ONE DC, Kansas City, Oak City. When we bought HiLo in Texas, we put the one in Houston and Dallas, basically close to the Bay Area, Southern Cal, Chicago.
We have this model that we're really the only one in the aftermarket that has these regional distribution centers that are 400,000 ft or 500,000 ft with roughly 175,000 SKUs that are in the metro market where not only our stores, but both customers on the DIY side and the professional can pull from that availability, not just the replenishment, three, four, five times a day from what we call a city counter route. Inventory that would be anywhere from 60,000 SKUs up to over 100,000 SKUs. Our average spoke store, the remainder of the 6,000, is roughly 22,000 SKUs. I always feel like the way we have those distribution centers placed, augmented by the hub stores, is really how we built the DIFM business in our company. It's really just a necessity for last mile when it comes to the DIYer as well.
Great. We've kind of talked about your, you know, the long-term strategy of this company, but once again, you delivered over 10% growth this year, and 40% growth since the beginning of COVID. Can you kind of talk about, going forward, the future, opportunities and investments that you're making? I know you discussed some on the call recently.
Yeah, you know, I think as everybody knows, we're roughly a $15 billion company. I think our total addressable market, as we see it pretty conservatively, is in the $147 billion range. Lots changed in my tenure with O'Reilly and in the industry, but one thing hasn't changed is the amount of market share that we have out there to take from competitors. As most everybody knows, the DIY side of our business with us and our larger competitors is fairly consolidated, but the DIFM side is extremely fragmented. I mean, we see our share of the DIFM side, even though that's how we founded our company, and we do a sizable, almost half our revenue, in DIFM, the DIFM side is incredibly fragmented.
We see opportunities to continue to consolidate the market, whether it be just taking share from some struggling competitors, smaller competitors, but also acquisition opportunities as well. I still feel like we have a tremendous amount of opportunity going into the next many years.
As we think about our strengths in the areas of our business, especially over the course of the time period as we've come out of the pandemic, we've seen an opportunity to invest back in our business and double down on some of the momentum we've gained. You're right, you know, a little bit of eye-popping numbers in terms of the growth of the business since the course of the pandemic. Our ability to capitalize on that growth is still consistent and in line with all the same things from an execution perspective that have been important in our business for a long period of time. I think what we've seen and the opportunities that we've had have accelerated because of just some of the disruption that's been in the marketplace since COVID started.
As we look at our business today, the things that we think are good investments are those same types of things that Brad's talked about already. You know, how do we think about investing in our people and our culture? How do we extend our inventory advantages? What other aspects of our business can we bring tools to bear that are going to help us hit on all those many points of execution that are really critical, but aren't necessarily new in our industry? How well can you serve customers? How can you get them the part that they need as quickly? How can you ensure that you maintain a highly trained technical workforce that develops great relationships over the long term with our DIY and professional customers that ensures that we'll be that kind of trusted source of support when somebody needs a part?
You just touched on this, but something that has come up throughout the conference as well is the importance of knowing this industry. Having someone that's been in it and knows the unique aspects, can you talk about how you're able to keep your talent, but also any pressure on wages that might add over, given some wage inflation over the last few years?
Yeah, you know, we're always proud to talk about the fact that we've been able to really, you know, not only throughout my career, but previous to me, we've always been able to do this virtually 100% promote from within. There's some times that, you know, from a corporate standpoint, our now going to be President of the company, Brent Kirby, you know, there's times from a digital standpoint, from an omni standpoint, from a supply chain that we need somebody to make sure that we're not sniffing our own fumes, that we're open to things that we haven't experienced at O'Reilly . As most of you know, we have this special thing in place, especially in the field where, for every basically 10 stores, we have a District Manager. For our 600+ District Managers, not one of those District Managers came from outside O'Reilly .
Every one of those 600 DMs ran an O'Reilly store and ran a very good O'Reilly store. We have roughly 70 Regional Managers. Not one of them not only was not a successful District Manager, but they ran an O'Reilly store. We have 14 Division Vice Presidents that all came from within, ran a store, ran a district, ran a successful region. We have three SVPs , Field Operations, Central, East, and West. One of those guys came from the store ranks. We feel, you know, different than other parts of retail. I don't know any different, but from what I understand, other parts of retail, I think what's misunderstood sometimes is that when a DIY customer walks in our store or a DIFM customer calls the back counter, that's a consultant visit.
That is not walking into a retail establishment where the customer really knows what they need. We have to have these professional parts people. When it comes to our culture and it comes to promote from within and it comes to having experts and people that not only understand our business, but understand every facet of what our people in the stores go through every day, we feel like that's something very intangible a lot of times that is just a difference maker for us.
Maybe lastly, just as an example, not only do you have the knowledge with promote-from-within of what the customers are going through every day, what the team members are going through, but when you have all those field leaders that have been in the shoes of a store manager and been in the shoes of a parts specialist, they just have another level of get it done. They have another level of respect and credibility from the stores. When things get tough or we have challenges and adversity, our team, when they know everybody all the way up through me, has been in their shoes before, you just have a loyalty with our company that's really hard to explain, but it's pretty magical when it comes to them always wanting to grab another gear when it comes to taking market share and turning that into profit.
Yeah, the only thing that I would add is everything that Brad described has been just so critical over the course of the last three or four years, which is probably the most challenging, if not one of the most challenging labor markets we've seen in a long period of time, especially just from a scarcity of workers' perspective. We face that. We've talked about our turnover went higher than what we had anticipated. I think there was just a lot more of that, that ability for people to move jobs. We've responded to that. That's an area where we're not going to be uncompetitive in how we think about that. When you ask the wage rate question, I think just as important is how do you continue to track and to maintain the appropriate way to compensate your team members to have the best team.
Having the superstructure on top of that store, of that store team is important because that level of experience, of knowledge, of commitment and dedication to the business, that's not as impacted to what we would have seen during the course of a more challenging labor market. At the store level, as you think about store team members, even up to store managers, that has been a challenge. We feel like we've very much turned the corner there and have improved that.
Having the ability for that district manager to understand that managing through a cycle like that, at the same time where we can respond appropriately with wages, but can also not lose the broader institutional knowledge about how we execute our business in an environment where if you don't have that, you can very quickly see the nature of your organization change overnight if you can't spend that time. That didn't happen with us. We felt pain, and I think we've responded appropriately, but that gets limited because that group of district managers, a lot of those really experienced store managers, they kind of see who's winning. As things improve now, we can be back in a position where we rebuild our bench and continue to grow.
All of that really hinges on everything that Brad talked about, but also the picture it creates for our teams, for what an opportunity in our industry and in our business is to grow and to develop. Our really great store team members that are so good at this consultant visit, they like parts. They've done Infinity for cars. This is what they do. It's what they're interested in. A lot of them aren't, most of them aren't college graduates. This is what they want to do. They look at an opportunity with O'Reilly and they see this progression, and they're willing to invest long term at a point in a career where a lot of people aren't willing to think about and invest in that way.
Terrific. Just to stick on strategy, you've gained share in the U.S., but another potential growth opportunity sounds like Mexico. Can you talk about the DC in Guadalajara and the opportunity there?
Yeah, sure. We closed on that business at the end of 2019. Looking back, hindsight's always 2020. There are a few things that we missed a little bit during COVID. We lost just a little bit of time, the U.S. team traveling down to Mexico, but we acquired a really amazing family business. You hear us talk about the independents that are really tough in the U.S., and the Orendaine family, the Mayasa team, they were an alliance member. They were part of one of the buying groups from the U.S., and they're incredible operators. They sell as much to independent jobbers, yet with the fragmentation even more so in Mexico. They sell a lot still to the independent parts stores down there, just because of the way the market is. We have an incredible base of leadership, first and foremost, down in the Mexican market. We were really excited.
They operated roughly five small distribution centers that would almost be more like some of the smaller WDs in the U.S. It would be almost more like our hub stores. We've had a plan this entire time to get to the point of our opening of our state-of-the-art facility that's a true prototype O'Reilly distribution center there in Guadalajara. That's obviously from a replenishment and a special availability, special order standpoint. That was the platform behind people and culture that we really needed to get in place to really start growing and getting after it quickly. We really feel good about that opening. They opened in July, and we're really excited about the opportunities that still has in front of us, as well as just what we need to do from a system standpoint.
We're really just getting all the pieces in place to really build the muscle, real estate standpoint, from a purchasing standpoint, and most importantly, from a team building standpoint so we can really start to scale in that market.
Great. I think some of another growth area that comes up is just that you do have some white space in the U.S., maybe around the Northeast Mid-Atlantic area. Do you see that as a growth opportunity, you know, either greenfield or investing into?
Yeah, yeah. No, we, as a lot of you have heard us talk for a long time, that gap in footprint that we have, surely from a lack of distribution standpoint, that's all it is. You know, we've gotten the kind of joking question, is there something we don't like about the upper Mid-Atlantic? It's going to be a heck of a market for us. We just, we had our Greensboro, North Carolina facility. We have Akron, Ohio, and then we have Boston. We kind of skipped that gap in footprint, not on purpose, but because of a couple of acquisitions we did, six and 10 years ago in Bond, as well as VIP up in New England. That facility there in Boston was much needed. What we've got to do now is we got to go back and backfill.
Really what we've been waiting on, chicken or the egg, we need a facility to be able to service stores, but we needed enough stores open in the market to lever a new DC opening. We were really excited to officially announce last week on our call that we have a state-of-the-art facility being built there in Stafford, Virginia, which is just south, 95 Corridor, just south of the DC market. That facility has the opportunity to service up to 350 stores. It'll service some existing stores in Virginia, kind of going over toward Akron a little bit to the west. Those are incredible markets that are going to fuel a lot of our growth for the foreseeable future, both in greenfield expansion and also, hopefully we have some acquisition opportunities in those markets as well.
You have seen our customer, everyone, they're facing higher interest rates, they're facing higher costs. The aftermarket's probably pushed double-digit price increases over the last two years. Do you see an end customer potentially being pressured at all? Have you seen any dispersion between the failure-related and maybe more maintenance or discretionary parts?
No, it's a great question. We really haven't, at least at this stage. It's hard for us to say definitively that for certain, some of that isn't going on, that there's not some pressure that has caused a little bit of a headwind to the industry. For us, as we've gone through different types of cycles where there might be a short-term impact within our business and within our industry, strictly, it's not persistent. It's a few quarter phenomenon before customers will return to repairing and maintaining their vehicles because of the value of being able to keep an existing vehicle on the road. Historically, when we've entered into periods where there is some pressure, we have a few kind of leading indicators or, I guess, concurrent indicators that we see.
We start to see referral in certain types of categories, whether it's an oil change, that's always the easiest one on the DIY side. Some of the other maintenance or repair categories that are a little bit more discretionary or professional shops might see customers putting off brake jobs or only doing components of brake jobs and those types of things. Most of that type of thing, we might see activity around professional customers on a more broad-based perspective through our CRM, where even most of the customers in the market are just talking about business being slower. Those are the types of things historically that we would just see as indicators that there's pressure on. We just haven't seen that in any kind of comprehensive, significant way at this point.
We really do think that even as a consumer in different sectors of retail might be a little bit more conservative or more pressured, we do have the benefit of being insulated from some degree of that, a significant degree because of how non-discretionary the products are that we sell. Because there is a value proposition for a customer to keep an existing vehicle well maintained, repaired, and on the road because of the cost of a new vehicle. We think those things combined with employment still continues to be strong. I think wage rate increases have helped, for sure a lot of our DIY customers and those things are there. It doesn't mean that you don't see potential indicators. Some of, and I think Brad talked about it on the last earnings call.
For sure, there are some professional customers that are talking about business not being as strong. It's hard to parse out for us if those customers aren't maybe just at a competitive disadvantage and seeing a shift on that part of the industry as well. At least so far, you know, in our results and what we see in our business, we haven't really seen any of that pressure at this stage.
You also talk about kind of the evolving or transitioning nature of your private label and national accounts. Can you discuss that strategy and then also the good, better, best model now that might drive earnings growth?
Yeah, I can probably start there and maybe Brad can jump in. We continue to see growth in private label as a strong way of delivering value to both our professional and DIY customers. We've always taken a little bit different approach there than I think some in that we've leaned pretty heavily on kind of a portfolio of brands that we own. Many of them were more traditional automotive aftermarket brands that over the course of time we've had the ability to acquire. It's given us, to your point, Caroline, it's just given exposure across that good, better, best value spectrum, where we've got some premium level brands that I think have a strong customer impression within the marketplace that we've been able to build over the course of time.
That's just given us a lot of flexibility in the control that we have within delivering value through those brands to our customers. It gives us flexibility on the supply side. We can improve diversity of our supply. I think especially as we move through the pandemic, that was a strength of ours but also an opportunity for us to continue to leverage that. More broadly, the control of those brands and how we can market them and how we can build them over the course of time to our benefit has been positive. For sure, there are certainly traditional automotive aftermarket brands that are still important to us and that we partner with our supplier partners. Those continue to be important and will be important for a long time.
We support those, but to the extent that we've been able to develop our own advantages, it's been, I think, effective for us.
Another topic that's come up in the conference is just kind of the evolving vehicle, how it's becoming more complex and actually how that's a benefit to the aftermarket. You've talked about it in your ticket oftentimes around that conversation. Can you talk about how that benefits you, but then also touch on, you know, the slow, but somewhat inevitable penetration of electric vehicles?
Yeah, absolutely. The industry has always, I think, historically been one where the technologies and how, and the makeup of vehicles have changed. Over the course of time, that has just generally trended in the direction of more complex, higher costs, more of a proliferation of parts within that vehicle. I think that's created challenges within the automotive aftermarket historically for the really good suppliers and the good manufacturers to maintain that pace of support. To the extent that that's occurred, it's been a positive both in just how some of us that deal within those challenging situations well, how we can gain share and adapt over the course of time. That has been a positive for sure. We don't think that that trend changes. Obviously, it changes moving forward.
We will, if you could look in a crystal ball, look at an end point in time, whether that's 10, 20, 30 years down the road, our expectation is you will see a different vehicle technology platform that will emerge and that will change. We continue to have more and more confidence every year that that platform will still be incredibly complex, that it will be costly. The component parts to support that will be costly. Even as those technologies shift over the course of time, the really good, the way good manufacturers and suppliers, the really good distributors, retailers, we put ourselves within that camp, will be successful in meeting that need and demand. We have more confidence than ever that the need for older vehicles and automotive aftermarket to support that continues to be true. Though it will be an interesting road as that changes.
You said it correctly, it will change over the course of time. It's not, there's not an immediate change there for sure, but it will be important to see how it transitions. We think that it means a different set of parts that get sold, maybe less than what used to be sold as we see pressure to take accounts historically, but the level of complexity and cost will go up.
Great. Brian, did I see a question?
Hey guys, my question is on, I guess, a bigger picture. I mean, with respect to market share. O'Reilly Automotive's been performing extraordinarily well lately. We look at the numbers, you've clearly been taking a lot of shares, and you've alluded to that in this conversation. The question I have is, as you think about their share gains going forward, and they're sort of both fragmented in the industry, as we think longer term, is it just a grind out and taking share every year, or do you foresee some type of, given the structure of the industry, kind of unlock events happening where O'Reilly gets a leg up on some of these maybe smaller, weaker competitors?
Yeah, I'd love to tell you, Brian, we're just going to cop high single, no double digits from now and into perpetuity. That'd be great. We feel this is a very competitive and tough industry. We're very pleased with the momentum that we really created throughout the course of the pandemic, and how we've continued to be able to capitalize on that. We're performing better this year than what we expected at the beginning of the year. That's no surprise. We continue to raise our guidance. We don't think that that means that the industry per se has become less competitive. There has certainly been the ability, I think, to capitalize on a lot of the volatility within the industry that came about during the pandemic. We've been pleased to be able to gain that momentum.
Obviously, having gotten a long-term perspective, we understand the challenges of being a really good operator in the automotive aftermarket, how important execution is in that, and how tough the competition is. Before 2020, you had to work really hard to get those opportunities. When you use the term grind it out, I think you do have to grind out. It wouldn't, I think, surprise us to see it go back to that level of competition. Certainly, that matches the respect that we have for our competitors. The flip side of it is that even as I say that, you will hear bad tough lets from operators. That's not the expectation from their standpoint. They very much are leaning into the momentum that we've seen. There's, I think, a lot of excitement.
While we're cautious in how we see what that opportunity is, we're also pleased that we've been able to double down on the momentum that we've created and are going to aggressively pursue opportunities where we see to invest into that strength and continue to gain share.
Yeah, I think, as you know, Brian, it's pretty remarkable how the amount of parts stores in the U.S. really hasn't changed, you know, even over the decades. The ownership has. I think respectfully, I think that'll continue to be the case. I think the strong are going to survive and thrive, and the weak will continue, especially on the independent side, to struggle. I think the question that we had before on complexity, I think that plays in our favor as well. Things that are disruptive are good for us. We're going to play from a position of strength. We're going to learn. We're going to work with our supplier partners and make sure we keep up with the things that are coming. That's a little bit more of a challenge for some of the smaller players.
Right. You've seen AP- to inventory ratios increase to 130%. Can you kind of talk about the benefits of the supplier factoring programs that your suppliers enlist in? Given the higher interest rates, are they sustainable, I guess?
Yes, I think maybe the simple answer to the second question first is we absolutely view them as sustainable. I think what those programs have done is it's helped to create a mechanism for our suppliers to have a good cost of capital for that partnered investment that we have. We would argue that that is now table stakes to the game. It has been for a long time that as we have built the infrastructure that's necessary to be really, really successful in meeting customer needs from an auto parts perspective. For us, that's involved all the stores and the distribution to distribution network that I talked about, huge investment in people and tools and all those things.
For our suppliers, it also means that they have to partner with us to ensure that part that the professional customer needs in 20 minutes or that DIY customer needs to get their vehicle on the road, that their part is close enough to be able to manage that across the proliferation of future of my part. That ability to support that investment is just critical to the success of the industry. That's what our supply share of that is. As these programs get more costly, it becomes like an increased cost to our suppliers. Some suppliers don't see it in the same way because they've capitalized their business differently, but certainly to the extent it's broad-based, it becomes how do we best manage this overall cost of being successful within our business?
We don't think there's anything on the horizon that changes our anticipation of what that necessary investment is in our industry and how we'll share that with our supply partners.
Great. Brad, Jeremy, thank you so much for being here. We ran a little over time, but just so happy that you were able to come join us at this conference again. Thank you for your time.
Thank you.
Thank you.