Thank you for standing by, and welcome to the O'Reilly Automotive First Quarter 2021 Earnings Call. Thank you. I'd now like to hand the conference over to Tom McFall. Mr. MacFaul, please go ahead.
Thank you, Jack. Good morning, everyone, and thank you for joining us. During today's conference call, we'll discuss our Q1 20 are in the Q1 results and our updated outlook for the full year of 2021. After our prepared comments, we'll host a question and answer period. Are 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 and Company's latest annual report on Form 10 ks for the year ended December 31, 2020, 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 Craig Jackson.
Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts First Quarter Conference Call. Participating on the call with me this morning are Jeff Shaw, our Chief Operating Officer and Co President and Tom McFall, our Chief are in the line with our Chief Financial Officer. David O'Reilly, our Executive Chairman and Greg Hensley, our Executive Vice Chairman, are also present on the call. I'd like to begin our call today by thanking team O'Reilly on another outstanding record breaking quarter.
While our expectations were for a strong are in the 1st quarter based on business trends and comparisons. To say the results of the Q1 were record breaking just doesn't do real justice The incredible performance of our team, highlighted by a 24.8% increase in comparable store sales, a 526 basis The last year plus since the onset of the pandemic has been one of the most challenging periods in the history of our company, and we are especially pleased
call.
Simply put, team O'Reilly has responded in an amazing fashion to provide excellent are in the same store, and I am profoundly grateful for the hard work and sacrifice of each member of our team. As we highlighted in our press release yesterday, our 1st quarter comps benefited from a continuation of the robust are in the position of the company's performance. As a result of these factors, we're very pleased with our comp performance through the 1st 2.5 months of the In mid March, the most recent round of government stimulus payments hit, at which point we saw Our sales growth accelerate meaningfully. From a cadence perspective, our quarter played out with very strong results in January, Aided by beneficial weather and additional government stimulus. February followed a similar trend with some offsetting pressure from inclement weather in the middle of the month have significantly impacted many of our Southern U.
S. Markets that are not accustomed to this type of winter weather. But we still finished February above our expectations. March was easily our highest comp of the quarter against saw soft prior year comparisons driven by continued strong underlying trends, favorable timing of spring weather and the In total, our 1st quarter comparable store sales growth of 24.8% And our 2 year comparable store sales stack of 22.9% strongly exceeded our expectations. As you would expect, we were also pleased with the composition of our sales results in the Q1 as we saw strength in all areas of our business.
Both our DIY and Professional businesses contributed strongly to our sales results for the quarter, with our DIY of business being the bigger contributor, similar to what we've experienced in recent quarters, driven by strong ticket comp, are well with the brief inclement weather pressure in February I just discussed. On that side of
in the business, we also saw an
acceleration in ticket count comps and strong growth in average ticket. Average ticket on both sides of our business was are healthy despite a limited benefit of approximately 1.5% from same SKU inflation, indicated a continued ability and willingness of our customers to invest in their vehicles and work on larger projects. From a category standpoint, we continue see broad based robust sales trends across categories with strong performance in our DIY out front categories and batteries. During the Q1, we also benefited from strong demand in weather related categories as well as undercar The harsh winter weather this year and the associated wear and tear it inflicts on vehicles is a positive development after the last 2 mild winters in our industry and should support demand in undercar categories as we move through the next two quarters. Now I'd like will discuss the update to our full year comparable store sales guidance and our outlook for the remainder of the year.
As we announced in our earnings release yesterday, we are increasing
are seeing our full year comparable store sales
guidance to a range of 1% to 3% from our previous range of down 2% are flat. This increase in our expectations is based on the strength of our Q1 results and our continued robust performance quarter to date in April. This is an exception to our normal practice where we historically have not factored into our guidance revisions any business trends subsequent are in line with the results of the Q1 we are reporting because of the extreme volatility we can see over such a short time frame. However, the continued extremely strong sales momentum we saw at the end of March, aided by the latest round of stimulus, continued into April, and we feel it appropriate to reflect this outperformance in our annual guidance update. As we look forward to the rest 2021, we remain confident in the positive underlying fundamentals of consumer demand in our industry.
Even before we started to see the impact of the most recent rounds of stimulus at the end of the Q1, we were capitalizing on strong demand from DIY consumers willing to take on larger jobs and invest in repairing and maintaining their vehicles. We've also been encouraged by the improving
are on track to deliver on the professional side of
our business even as we remain in an environment of decreased employment, increased work from home arrangements and lower miles driven in the U. We can't be certain regarding the pace of improvements in these factors given the uncertain nature of how the economy will exit the pandemic, But we remain confident we will benefit as miles driven return to historical norms. However, we remain cautious in our outlook as we move forward through the rest in 2021 still anticipate potentially significant quarter to date variability due to fading tailwinds from the government stimulus And the potential that some demand has been pulled forward as a result of the favorable weather backdrop and extremely strong demand in the Q1. As a reminder, we faced extremely difficult prior year comparisons for the remainder of the year, especially on the DIY side of the business, While it remains impossible to predict how the remainder of the year will play out for our industry or the broader economy, we know that a significant driver of our success is completely within our control, and we fully expect to continue to leverage the strength of our business model and industry leading team to held out strong share gains in 2021.
Moving on to gross margin. For the quarter, our gross margin of 50 3.1% was a 76 basis point increase from the Q1 2020 gross margin. Have a higher margin DIY business as well as good leverage of distribution cost on the strong sales volume. For the full year of 2021, we continue to expect our gross margin to be in the range of 52.2% to 52.7%. Our guidance continues to include a muted expectation for any gross margin benefit from inflation.
To the extent that we see more inflationary pressures than expected, We anticipate pricing in our industry will remain rational. For the Q1, our earnings per share of 7 point saw an increase of 78%, over $3.97 in the Q1 of 2020 and a compounded 2 year growth rate are over 30% compared to the Q1 of 2019. And I want to again congratulate team O'Reilly on this outstanding performance. For 2021, we are raising our full year guidance to $24.75 to 24.95 an increase of $2.05 from our previous guidance, driven by the strong year to date sales results and Excellent operating profit flow through, which Jeff will discuss in more detail in a moment. The midpoint of our revised guidance now represents an increase of 6 are in the range of $0.20 and a 2 year compounded annual growth rate of 18% compared to 2019.
Our EPS guidance include the impact of shares repurchased through this call but does not include any additional share repurchases. Before I turn the call over to Jeff, I want to spend a few minutes discussing our inventory position and the status of our supply chain. The strength of our supply chain, including our strong relationships with our supplier base and the historical investments we've made to build out our industry leading distribution network and inventory availability has long been a strategic competitive strength for our company. This competitive advantage has really shined through the past have been a key factor in our strong sales performance, but our supply chain has definitely been pressured as we've experienced We've been pleased with the strong performance of the majority of our supplier base, and overall, our supply chain has held are very well, but we do have room for improvement with a small number of suppliers who have underperformed due to pandemic impacts, raw material shortages or shipping We have also faced pressures in our distribution centers as our dedicated DC teams have been processing record levels support the extremely strong sales even as the current levels of volume have created stress on normal operating capacity of our facilities.
Will remain very committed to maintaining and growing our competitive advantage in inventory availability and view the current pressures we're facing as short term. To finish my comments, I want to again express my gratitude to our team for their continued selfless dedication to our are welcome to our customers. Our Q1 performance was truly incredible and is a testament to the hard work and commitment I'll now turn the call over to Jeff Schuckman.
Thanks, Greg, and good morning, everyone. I want to start today by echoing Greg's comments and thanking team O'Reilly for the remarkable results in the Q1. Our team has certainly proved over the course of time that they are steadfastly committed to our customers and able to overcome whatever challenges they encounter in are running our business. That dedication has certainly been on display in the past year as our team has responded selflessly The extreme demands and safety protocols during the pandemic. Our results in the Q1 are just another indication of the degree to which are customers, rely on us for excellent customer service, industry leading parts availability and a seasoned, dedicated, knowledgeable team But even as strong as our results were, I think it's actually impossible to fully appreciate the level of hard work and long hours required Our team's response to the extreme weather conditions they faced in the middle of the quarter is just another picture have a relentless commitment to going the extra mile for their customers.
Many of our markets face severe impacts from the are in weather conditions, but our store teams went above and beyond to keep our stores open. And our distribution teams match that effort by ensuring access are encouraged to be the best to meet the critical needs of our customers. Challenges in our stores, such as treacherous road Conditions, loss of electricity and broken water pipes are nothing new for our team, who has proven their resilience in response to countless challenges over Now I'd like to spend some time reviewing the extremely strong operating profit performance and SG and A leverage in the Q1 and our updated outlook for 2020 For the Q1, we generated an astounding increase in operating margin of 5 20 are in the range of 6 basis
points and operating profit
dollar growth of 63%. As we've discussed since the Q2 of last year, The search in sales in a short time frame has generated historically high levels of profitability, and those sales gains have continued to outpace our rate SG and A growth, even as we redeployed more SG and A dollars back into our stores to adjust to the sales environment. Our Q1 of 2021 was an almost perfect case of this trend. The quarter saw us increase SG and A per store by 7%, which is well above our historical trends and yet far short of the 24.8% comparable store sales that we generated, resulting in an incredible improvement in SG and A leverage of 450 are participating in the process and associated benefits and other variable operating expenses to meet the strong sales demand as well as higher than normal incentive compensation at all levels over the company. As we've said for the last few quarters now, we know this level of SG and A expense leverage isn't the right long term answer for our This target is up from our original expectation based on our results so far in 2021 and matches the revised comp guidance range that Greg walked through earlier.
Based on strong leverage on the robust sales through
will be able to take a look
at the Q1 2019 guidance. On the expansion front, I'm extremely pleased to announce that this month, We successfully opened our newest DC in Horn Lake, Mississippi, which is just south of Memphis. This new Facility took well over a year to plan, design and build, made even more challenging by external delays caused by the onset of the pandemic. But our teams were able to stock the DC with an industry leading inventory set, and day 1 began shipping larger than expected orders to support Strong sales growth in our stores in the Memphis and surrounding markets. Over the next several weeks, We will fully ramp up this 580,000 square foot facility to support over 220 stores with additional capacity Our DC teams remain committed to enhancing our top notch Finally, before turning the call over to Tom, I'd like to provide a brief update on our store expansion during the quarter.
In the Q1, we opened 66 net new stores spread across 30 states. This progress And we continue to be pleased with our team's ability to successfully open great new store locations, but could still see some delays in design are submitting approvals dependent on local market conditions and municipal agencies. To conclude my comments, I want to once again thank team O'Reilly for their outstanding performance in the Q1. Now I'll turn the call over to Tom.
Thanks, Jeff. I'd
also like to thank all of Team O'Reilly for their continued commitment to our customers, which drove our tremendous first quarter performance. Now we'll take a closer look at our quarterly results and additional updates to our guidance for 2021. For the quarter, sales increased $614,000,000 comprised of $589,000,000 increase in comp store sales, A $53,000,000 increase in non comp store sales, a $10,000,000 increase in non comp non store sales, a $35,000,000 decreased from leap day 2020 and a $3,000,000 decrease from permanently closed stores. Greg previously covered our gross margin performance for the Q1, but I want to provide details on our positive LIFO impact, which We are anticipating a larger positive impact from LIFO in the first half of twenty twenty one, which will partially offset pressure to our POS margins from the tariff exclusions that have expired. Our first quarter effective tax rate was 23.5 percent of pretax income, comprised of a base rate of 24.4% and reduced by have benefits for share based compensation.
This compares to the Q1 of 2020 rate of 20.9 percent of pretax income, which was comprised of a base tax rate of 21.8%, reduced by a 0.9% benefit for share based compensation. The Q1 of 2021 base rate was in line with our expectations. The lower 2020 tax rate was the result of the timing of renewable energy tax credits realized in the Q1 of last year. For 2021, we expect to realize benefits from renewable energy tax credits in the Q4. For the full year of 2021, we continue to expect an effective tax rate of 23%, comprised of a base rate of 23.4%, reduced by a benefit of 0.4% are in a position to be in a position to be in a position to be in a
position to be in a position to be
in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a
position to be in a position to Also variations in the tax benefit for share based compensation can create fluctuations in our quarterly tax rate. Now we'll move on to free cash flow and the components that drove our results and our revised expectations versus $227,000,000 in the Q1 of 2020, with a significant increase driven by increased operating income, are in the range of $0.01 as a result of the timing of these projects and associated cash tax benefits last year. For 2021, we now expect free cash flow to be in the range of $1,100,000,000 to $1,400,000,000 versus our previous guidance of $1,000,000,000 to $1,300,000,000 Based on our strong Q1 operating profit and cash flow performance, offset by our expectation and some of the benefit we saw in the Q1 for the reduction in net inventory and taxes payable will reverse as we move through the year. Inventory per store at the end of the quarter was $637,000 which was down 2% from the beginning The year and down 0.8% from this time last year, driven by the extremely strong sales volumes, particularly at the ended the quarter. As we discussed on last quarter's call, when we outlined our full year expectations for inventory store and hub network, above and beyond our normal new store and typical product additions, and we still expect to complete this plan and grow inventory at approximately 4 are in 2020 1.
However, the timing of these incremental inventory additions will be impacted by the immediate needs of supporting The replenishment needs of our stores, and we could see some further delays to these initiatives if sales trends remain at historic highs. Our AP to inventory ratio at the end of the Q1 was 119%, which was an all time high for our company are heavily influenced by the extremely strong sales volumes and inventory turns over the last year. We anticipate that our AP to inventory ratio will gradually will accelerate from this historic high as we complete our additional inventory investments and when our sales growth moderates. Our current expectation is to finish 2021 at a ratio of approximately 109%. Capital expenditures for the Q1 were $95,000,000 which was We continue to forecast CapEx to come in between $550,000,000 $650,000,000 for the full year.
Moving on to debt. We finished the Q1 with an adjusted debt to EBITDA ratio of 1 point 8 times as compared to the end of 2020 ratio of 2.03 times, with the reduction driven by the significant growth in 1st quarter EBITDAR. We continue to be below our leverage target of 2.5 times and we'll approach that number when appropriate. We continue to execute our share repurchase program. And during the Q1, we repurchased 1,500,000 shares at an average price per share of 450.6 $0.65 for a total investment of $665,000,000 We remain very confident that the average repurchase price is supported by the expected are undervalued, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders.
Before I open up the call to answer your questions, I'd like to again thank the O'Reilly team for all their contributions to our company's
Greg Munt with Evercore ISI. Your line is open.
Hi, thanks guys and a tremendous quarter. I guess I'd love to follow-up on The trends between the DIY and the do it for me side of the business, you said that both were strong. I'm just wondering if the gap between them is gone except for that February period when you said weather really impacted the commercial side.
Yes, Greg. This is Greg. So we were very pleased with both sides of the business. We're very pleased with the Positive results we had both in traffic and ticket average on both sides of the business. Similar to what we saw last year, when government Stimulus has introduced the DIY side of our business typically benefits more quickly and more favorably than the DIFM side with The benefit that we saw in March and to a lesser degree, I guess, in January, that really impacted the DIY side of the business have broadened that spread over what we saw over the past couple of quarters, more similar to what we saw when the last incentive was in place, I guess, It was the 2nd or Q3 last year.
Got it. So both strong, but they're still DIY as long As long as that signal is there, the gap really isn't narrowing.
Right.
Got it. And then
I guess the follow-up would be
On MYASA, I'm just curious how the business there has gone, both from an integration standpoint and just actual demand.
Jeff, do
you want to take that one? Yes. Greg,
obviously, the pandemic really impacted our ability To get down and work with the team last year, I mean, we basically had to handle everything we've done via Zoom calls. But integration is going well. The team performed strong. They had a really good year last year. They were impacted by the pandemic in Mexico, somewhat like we were, probably not drastically and it was a little bit later, but business picked back up strong and they finished the year strong.
And everything is going good. Hopefully, The pandemic eases, we can get back down there and work with the team and continue the integration, but we're really excited about Mexico and the team and what they've accomplished.
Brett Jordan with Jefferies. Your line is open.
Hey, good morning, guys. Good morning, Brett.
Could you talk a little bit about the contribution of share gains To your results and maybe the sort of the magnitude of share gains in the DIFM versus the DIY business.
Yes. It's It's a great question, and I wish I had a great answer for it. We know that share gains are a contributor for the quarter, But we also know that stimulus is a contributor for the quarter and weather is a contributor for the quarter. So it's hard to differentiate How much of the benefit in the quarter was from share gain? And I'll tell you, if you talk to our stores up and down the streets, they'll tell you that we are without a doubt taking share of their sand and repeat customers.
We're focused on making are providing a high level of service to all those customers, and we still feel like we're hanging on to some of that share gain, both from big box And from some of the smaller 2 steppers, I just don't really have a good way to quantify how much of the sales improvement was are from share gain.
Okay.
And then maybe just give us a little color on the regional spread and performance and maybe what were the standout regions and maybe The gap between the weakest and the strongest areas.
Sure. Jeff, do you want that one?
Yes. With over 5,006 There are stores out there all across the country. There's always going to be markets that we just know that we can do better in, and that's what our sales and ops team are out there focused on every Hey, but honestly, we're pretty pleased with our performance across all our markets in the Q1, really exceeding our expectations on both sides of the business last year, and that trend really continued into the Q1 of 2021 as well. Now our newer markets in the Northeast and the Southeast continue to ramp up strongly, just as you expect they would based on the maturity And that was really due to the just the severe winter weather they experienced that they're just not accustomed to. But we always do everything in our power to make are very pleased that we're there for our customers when these type of weather events occur.
Whether it's extreme weather, winter weather like we just experienced or a flood or wildfires out west or hurricane, we always do our best to be the local store, the last store to close and the first store to open Taught disasters and neat parts. And this commitment to TopMox customer service just really it occurs at Store level, 1 customer and 1 store at a time. And I just can't say enough about how proud we are of our store and DC and teams as well as our support teams there in the offices.
Great. Thank you.
Chris Walvis with JPMorgan. Your line is open.
So I wanted to follow-up on the April commentary. Obviously, Last year, April was a bit of a tale of 2 halves. You had the sort of impact of shelter in place and the drop in miles driven early, But you talked about and your peers have talked about a big pickup when stimulus hit sort of mid to late month in April last share, but you also raised. So I know we're parsing out a shorter period of time, but can you talk about what you've seen as you've lapped Stimulus last year in the business, whether it's on a 1 or 2 year basis or DIY versus do it for me.
Chris, this is Tom. So it's unusual for us to include the quarter that we're in and I will update to our guidance and include that. So when the stimulus hit this year, business accelerated beyond our expectations. And as Greg talked about, especially on the DIY side of the business, So we've included that in our guide and talked about it being strong because of that driver. To parse out the individual weeks is something That we're not going to do, but I would tell you that throughout April, we've been very pleased with our performance, and it's been above expectation.
Got it. And then on the gross margin, I see the relative 4Q, I see the LIFO delta versus 4Q and I know that mix was probably an easier mix comparison on the DIY front last year in the Q1. The other piece seems to be the supply chain. It seems like you got a lot more leverage this quarter relative to the Q4. So are trying to parse out what changed there.
Was there some higher incentives perhaps you paid to supply chain workers in the Q4 or what was the change and Any thoughts on where you might end up in the range for the year would be helpful. Thanks so much.
So Chris, as you know, we don't talk about our actual distribution costs as a percent of sales. Our comments are in relation as Greg said, have done an outstanding job of making that happen. But whenever we see these The volumes that are going through the DCs is.
Right. So is the 25 versus the 11 is the essential big difference?
Our comments are versus last year's negative one, the 2.
Scott Ciccarelli with RBC Capital Markets. Your line is open.
Good morning, guys. Got you, Caroly. So on your updated outlook and Tom, you obviously just kind of referenced what you're experiencing so far in April. Is there any change to your prior back half expectations? Or is the increase in guidance really just reflective of The 1Q upside and some increase in 2Q due to the April start.
Scott, this is Gray. It's the latter. You know, early in the year, on our Q4 call, we talked about the uncertainty and all the unknowns that we would face in 2021, including government subsidies and weather and miles driven and vaccine availability and all of those things. So our updated guide is based solely on performance to date through this
Perfect. And then, Greg, if I could follow-up on one of your other comments regarding the acceleration you saw in the back half of March. Obviously, you had the stimulus benefit this year, but it also coincided with the big drop in sales last year. If you were to look at, let's call it a 2 year stack, would the back half of March still be a significant outlier on the upside or would it start to look a little bit more like the rest of the quarter?
Scott, this is Tim. I'll answer that question. So our discussion of performance was versus our expectations. Obviously, our expectations for the in March were a raised comp because of the soft performance last year, same thing for the beginning of April. So versus Since we have a higher level of expectation, we outperformed that as we've outperformed our expectations all quarter long through the date of this
call. Okay. But no commentary on in terms of what that actual line might look like, Tom? Correct. It's a year?
Okay, got it. All right. Thanks a lot guys.
Thank you.
Brian Nagel with Oppenheimer, your line is open.
Great quarter. Congratulations.
Thanks, Brian.
So my first and I apologize, I know a number of questions are focused on stimulus, but I want So clearly, you called out the stimulus as a benefit to your sales here lately. So I guess my questions are, One, I mean, realizing we've had there's been a number of stimulus events, so to say, through the pandemic. How do you how would you think about the kind of sustainability of that? And then the demand that's driving, I know this is difficult to answer, but is it more Incremental in nature or is there a pull forward aspect to it?
Great questions, and a lot of unknowns around those Questions, Brian. We did benefit in March and into April. We feel like a significant part of that benefit was from stimulus. Unfortunately, we don't know how long that trend will continue. Historically, that's not lasted much beyond a quarter or are a few weeks into the following quarter.
It has carried on over into April this time, but we just don't know how long that trend will last nor Do we know if there will be additional government stimulus? It seems less likely that there will be future stimulus this time, but we just really don't know what that will be. Tom, do you want to take the second half?
Yes. So in our prepared comments, we did discuss that One of the items that we're thinking about through the remainder of the quarter is when Was there some pull forward in this big rush of business at the end of March through April? For those of you who followed our for a while, you know that there can be some movement between the 1st and second quarter based on the timing of spring when customers get out And do their spring cleanup. Within this acceleration of business, were assuming that some of that was pull forward, and that's inherent within our guidance for the year.
Got it. Thank you. And then my follow-up, if I could, also with regard to sales. But Suisse, you and others in your industry talked about one factor that really helped to drive outsized sales growth through the pandemic of last year was This Hovius customer, someone that maybe got more aggressive through the pandemic, as we now start to approach these more difficult comparisons, How are you seeing that portion of your business track?
Yes, Brian. Some days, I wish I wouldn't have even called that out because We called it out more of an anomaly that car care, Washes, waxes, a lot of performance products, we just saw more growth than we typically see last are now when you compare that to batteries and a lot of other hard part categories, sales were much stronger in those categories last year than they were in these, what you call, hobby categories. We called it out last year because it was some sort of an anomaly. When you look at 2021 performance in the Q1, we did sell a lot of are in the Q1. We did sell a lot of car care products and performance was still performed very well.
Matter of fact, all of our categories performed well. When you look at those categories, those unusual categories that spike performance, there's an enthusiast out there that buys performance are in the market, but your average consumer doesn't buy a lot of performance parts. They buy OE replacement parts. So we have seen that trend continue, but probably to a lesser degree than what we saw last year. But again, that's really not are a significant driver to the comp.
The more significant driver are our core categories, battery brakes, undercar, things like that, which also have performed are very well this
year. You're very helpful. I appreciate it. Thank you.
You bet.
Michael Lasser with UBS. Your line is open.
Good morning. Thank you for taking my question. Recognizing that there is a lot of uncertainty and you're very early in the second quarter, if we assume It would imply that you'll do mid to high single digit comp decline in the back half of the year. In that case, your compound annual growth rate for sales would be a couple of 100 basis points below where you've been running on compound annual growth rate for a long time. Should we assume that's what you have embedded may be guiding for demand being pulled forward.
I know there's a lot in that question trying to frame this all out.
Okay. Michael, I'm going to try to answer your question. You were breaking up a little bit. I'm not sure the premise Your question that you started with is accurate. We're obviously not providing quarterly guidance this year as we've done in the past.
But what I'd like to remind everyone is that when we discussed the Q2 last year in Quite a bit of detail. You'll ask for 2 or 3 weeks in April on the onset of the pandemic that were very difficult, and then we saw stimulus come in and the business reverse. That carried through May June, and May June are our toughest compares of the year. So I'm uncertain that The premise you laid out at the beginning is how we're thinking about the business when we look at 2 year stacks and performance On a monthly basis for the full year.
Yes. Michael, if you look at the dollars as opposed to the percentages on a 2 year basis, I think our projections are still pretty aggressive.
Understood. That's very helpful. My second question is, over the last few months, what's been the internal conversation about taking some of this have remarkable sales strength and using it to reinvest back into operating expenses in the business. Inevitably, will labor the labor market is going to get tighter, wage growth is going to increase. Does it better prepare you for the long run, if you take some of the short term strength and reinvest it back in the business.
Okay. I'll answer that question. We've always had a very long term view on payroll. And when business is not as good as we'd like it to be, that doesn't mean, especially on the professional side of the business, the customer experience expectations go down, customer service requirements actually go up. When the business is really good like it is now, it's hard, As Jeff talked about in his prepared comments to add enough staff to keep up with that.
And what we don't want to do is add More staff than we're going to need in the foreseeable future. Our focus, and I'll turn it over to Jeff, has Jeff, would you like to add to that?
Well, you pretty well covered it, Tom. But there, again, I mean, we've always taken a long term on staffing and doing what's right for our business kind of store by store and really making sure that we staff are to grow the business, provide excellent customer service and grow our business, and that varies by store. We've Definitely, we skew to hiring back more full time team members. And it's just a full time team member provides They're more tenured, they're more experienced, and they provide just a higher level of service. And one of our, I I guess our weaknesses for a long time that we're really focused on is just improving our service levels on our nights and weekends and really are trying to shore up there, and that's been a big initiative for several years now.
And we feel we're making pretty good headway on that.
David Bellinger with Wolfe Research. Your line is open.
Hey, everyone. Great quarter. So my first question here is just on parts inflation. I think last quarter, You indicated a 1 percentage point increase was embedded in your full year forecast, and I think you called out 1.5% in Q1 alone. So how high could Same SKU inflation goals and balance of the year.
Can you talk about the magnitude of some of the price increases you're seeing now? And was that a factor in raising No full year sales guidance at all.
Wow, that's a tough question. There have been pressures on supply chains Within our industry, in the economy in general and shipping pressure, so how soon those ease and how we come out of the pandemic will determine that. We hear the word transitory a lot from economists. To To the extent that they persist, we could see higher inflation than we had projected. We saw a little bit higher than expected here in the Q1, although we expected that to ease In the back half of the year, to the extent it doesn't, we are going to remain rational in our pricing and we would expect the industry to also
remain rational.
Got it. Okay. And maybe just a follow-up on that. Is there potentially something Sorry, just a follow-up on that last one. Is there anything different about the inflationary backdrop now?
Can some of those Price increases that are normally passed through, can those be used as a competitive lever to keep these new and reacquired customers in your system?
When we look at pricing for the vast majority of the things we sell, they're need based. We We want to be competitive in price, but we really want to win on service. So when we look at what's the appropriate pricing. We manage that on a SKU by SKU, store by store market basis, but we expect to continue to follow
are Kate McShane with Goldman Sachs. Your line is open.
Thank you. Good morning. I just wanted to follow-up on the Inflation question, but when it comes to gross margins, so if there is more inflation that comes down the pipe, Would there be a quarter or 2 delay of when you would see that in the gross margin? And as DIFM does come back here, hopefully miles driven resume and gas demand goes up. How does that come into play with your gross margin guidance for the year?
Okay. So when we see price inflation,
we want to react in a timely basis. Part of that depends on how much inventory we have, what the competitiveness of the market is. But our expectation is that If we're going to have acquisition price increases, we're going to attempt to maintain a gross margin percentage and those additional dollars that come with rising prices will help offset SG and A rising prices because they go hand in hand. On the professional side of the business, Our guidance for the year was that we were going to have very tough compares on the DIY side of the business and the Professional was going need to grow and professional carries a lower gross margin because those customers are buying with volume discounts. So that was inherent are within our guide for the year that we would have stronger growth on the professional side of the business.
And as Greg called out in our Q1, part of the gross margin growth above our expectation was due to DIY growing
Liv Suzuki with Bank of America, your line is open.
Great. Thank you. Just a question on the competitive environment. Are you seeing any Changes in promotional behavior on pricing to PROs in particular as that segment recovers? I guess in other words, is there a grab for market share in what's now the faster growing channel that could result in some gross margin pressure going forward.
Jeff, do you want to Sure.
I'd say overall pricing remains pretty rational. I mean you see certain regional players are very comfortable. We obviously stay on top of it and react accordingly to make sure that our price is always competitive in the marketplace and are really focused on winning with availability, service and relationship.
Great. And just a follow-up on the competitive So I mean last year was clearly a very disruptive environment for the auto aftermarket, but a lot of small businesses also received support from PPP loans, so We didn't see maybe as much M and A as we might have expected in that kind of environment. So how does the pipeline for potential acquisition targets look today?
Yes, Liz. I would say that our industry actually performed pretty well. There are Some small players that we're having conversations with that may be an opportunity for us to acquire. We're looking we're always looking at acquisition targets. We're always looking for strategic acquisition targets know that our bargain or our competitive advantage or our market that we need to move into, and we value those acquisitions accordingly Based on the value that it brings to the company, there's just not a lot of bigger acquisition targets, larger chains left out there that are in markets that we don't already have exposure to.
So really, what we're focused on The smaller acquisitions, and when I say smaller acquisitions, I mean 1, 2, 3, maybe 5, 10 store chains, just Whatever comes down the pipe, we would absolutely be open to some companies the size of a Bond or a Bennett that may have 20, 30, 40 stores. Should those come available, we also continue to look for acquisition opportunities outside of the U. S. As well.
What I would add to that is our history shows that we're a willing participant to consolidate the industry. When we look at The players that are still out there that would be a target for us, the players that are left are strong performers. And those performers tend to come up for sale when there's a change in ownership or it's a family run business They're not going to pass it on to the next generation. So the acquisition pipeline is more determined
Got it. Okay. Thank you.
Zach Fadem with Wells Fargo. Your line is open.
Hey, good morning, guys. I have a longer term question on the DIY business. Obviously, having a great moment right now, plenty of one off drivers. But Considering the rising population of older vehicles on the road, curious how you think about the DIY industry structurally And whether you think the long term run rate could be higher versus pre pandemic.
Yes, it's a great question, Zach. The fact that new car sales are softer and used car sales have been pretty strong, a lot of that's based on supply and demand, That's good for our industry. That's good for our industry for a couple of reasons. One is, as you alluded to, the DIY channel, a lot more of those maintenance repairs and maintenance cycles can be performed in the DIY channel. And also, most at the time or a significant portion of the time, I should say, those vehicles are probably out of warranty.
So they're out of the warranty period. The Consumer has 2 options. Option A is to go to their independent garage, 1 of our professional customers or 2, themselves or take it back to the dealer, which most consumers probably would not choose because of the cost factor of making those I think we've seen over the past year a willingness of the DIY consumer should do more repairs and maintenance on their vehicles than we have historically seen. Is that going to be is that going to continue into the future? It's hard to say.
I sure hope it does. As I've said in the past, I think that there's some traditions involved here. I remember changing the oil in my car My dad, when I was younger and hopefully some of these traditions where you've had fathers showing their children have changed the oil and maybe changed suspension or brakes, the easy repairs. Hopefully, a lot of that sticks and stays in the DIY channel. But either way, whether it's the DIY channel or the DIFN channel, the strength in used car sales should benefit our industry and the aftermarket.
That makes sense. And my follow-up for Tom, last quarter you suggested your gross margin rates on an ex LIFO basis would be fairly consistent through fiscal 2021. But given the Q1 outperformance and changes in Same SKU inflation. I'm curious if you could update us on your latest thinking here.
Well, I'll have to look back at the transcript. I think that I We expect our gross margin to be pretty similar all in. Obviously, a little better performance than we thought during the Q1, Not enough to make us want to change our range.
For closing remarks.
Thank you, Jack. We'd like to conclude our call today by thanking the entire O'Reilly team for your continued hard work in delivering a record setting quarter. I'd like to thank everyone for joining our call today, and we look forward to reporting our 2nd quarter results in July. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thanks for participating. You may now disconnect.