All right, so moving on to a company I am super honored to introduce. Probably does not need an introduction, not only because it probably has the most catchy tune in the world, but also because of their almost 7,000 stores within North America. They are one of the leading automotive aftermarket retailers with a dual market strategy serving both DIY and professional customers. Happy to introduce Brad Beckham, the CEO, and Jeremy Fletcher, CFO, here to present for us. As I walk back, just maybe just start with a quick introduction of O'Reilly and how you are positioned in the industry.
Yeah. Thanks, everybody. Great to be here. So yeah, I think everybody knows our story pretty well, but started out in 1957, a small family business, and started out in the DIFM business through the '50s, '60s, '70s, on into the '80s. Our company was literally founded on the professional service dealer, also sold to independent parts stores back in the day. But really, the O'Reilly family had this vision for this dual market strategy back in the '70s. In 1978 specifically is when our dual market strategy was really defined, and the thought was, we have this amazing culture. We promote people from within. We have great parts people. We have great inventory availability, great distribution. Why are we not selling to the retail public? That was the thought.
Back then, Auto Shack, who is now AutoZone, OTASCO, Montgomery Ward, there was a lot of players in the retail DIY auto space. The company, through the family, decided to get after the retail side, the DIY side of the business. Really through the '70s and '80s, developed this dual market strategy, started opening stores, distribution centers, and up until 1993 when we took the company public. Basically in the four-state area at the time, basically Missouri, Oklahoma, Kansas, and Arkansas, and really were no different than a lot of the WDs that we still compete against on the DIFM side of the business today, just that regional player that went public. The O'Reilly family did all of us a huge favor by actually discouraging their kids from coming in the business.
They had the thought that if the business was handed off to a fourth and fifth generation, at some point you have a generation that takes the business for granted and does not have the sweat equity built in the company. So fortunate for all of us, their vision was tap into the capital markets, take the company public, grow faster, and we are going to still do it, promote from within, and develop our own people that are going to take full ownership of the future. Really through the '90s, through the 2000s, we have grown, as everybody knows, just through a lot of great organic growth, just playing off our dual market strategy, going after both sides of the business, growing our distribution network.
We're quick to say that beyond culture and promote from within our people, our supply chain and the way it operates today is really our biggest competitive advantage. The way we've been able to build out these DCs and have these big regional distribution centers in the metro markets where the people and the cars are is absolutely a differentiator still yet today versus any of the other big three, as well as the WDs. We've been able to build out this amazing culture, amazing promote from within philosophy where we have parts people running the company and this amazing distribution network as well as the broader supply chain.
Jeremy, myself, and kind of this generation of the business has just been fortunate to be able to take responsibility and have the responsibility that we do today to all of you, to the street, and to our 96,000 team members.
Yes, I guess we'll start off leaning in there. You recently held an Investor Day at the new Atlanta, Georgia distribution center where I think everybody walked away with kind of two main themes of the company there being the culture and the supply chain as kind of main aspects of continued share gains and outperformance. Maybe just touching on the company culture and promote within, just how you ensure that kind of culture stays at each level of the business, each kind of store, regional, and yeah, each part of the company.
No, I think that's a great question, and it's one we love to talk about, especially myself that had the fortune to grow up in all those field ranks, starting out 30 years ago this year, sweeping floors and stocking shelves, didn't even go to college. When we had 180 stores when I started, I can tell you, even though we only documented our culture in 1998 when we were buying Hi/LO Auto Supply down in Houston, Texas, the culture of the company has absolutely been alive and well since 1957.
The family and leaders like Ted Wise, Greg Henslee, Greg Johnson, Jeff Shaw, Tom McFall, so many before us really instilled in us, really through generations, that promote from within and having our people that really have the sweat equity built in the company, that care about our customers, that care about our fellow team members is just absolutely vital. We have been able to keep this promote from within culture. It is one thing to promote from within, Jeremy says this a lot, but to promote the right people and have them ready and able to take leadership roles and actually succeed and not set them up for failure is a full-time job at every level of our leadership ranks. Sometimes I think it is missed, and we did talk about this in Atlanta, but I will say it again.
We have a dish, just if you think about your question on store operations, sales, field operations where I grew up. We have roughly a district manager for every 10 stores. It could be eight, it could be 12, but for every 10 stores on average, we have a district manager. So we have about 650 of those. Not one of them came from outside the company. Of those 650 district managers, every one of those men and women ran a successful O'Reilly store. Proven performers running the model, running the operating model, the business model, executing, taking market share, knowing how our supply chain works, how to find parts, how to out-hustle and out-service the competition. 650 out of 650. The next rung up is our regional directors that have roughly 8-10 district managers or 80-100 stores.
Every one of those men and women, there are 78 of them today, 78 out of 78 ran a successful O'Reilly store, successful O'Reilly district. You will pick up on my theme. 14 division vice presidents, every one of them ran a successful O'Reilly store, district, region. Four senior vice presidents of store operations and sales ran an O'Reilly store, district, region, division, now area. Jason Tarrant, that has the role that I used to have as our EVP of store operations, and myself, every one of us ran a store, district, region, division, area, and EVP of store operations. So, we could say that about our corporate office, we could say it about distribution operations, but I think sometimes it is missed versus any of our competitors, and some of them do this to some degree, but a lot of them have not.
In our business, where it is a blue-collar business, you have men and women with dirt under their fingernails working the parts counter, matching up parts, greasy seals, greasy bearings, turning bays out in the shops. When you bring in somebody that has never stood on that counter or never turned a wrench in their life, maybe from another facet of retail to be a district or regional manager in our business, that does not go very well because you lose respect and credibility of the men and women that are on the parts counter every day and that are running the shops. So, it may work for some, but it would never work for us, and I think that is a critical component of our culture and our promote-from-within philosophy.
Yeah. Certainly a very impressive culture you guys have cultivated there, and I'm sure could have spent the whole half hour there, but just for the sense of time, we'll touch on some of the supply chain strategy dynamics you have going at the company. Maybe just give a quick overview of the overall strategy, I guess mainly touch on some of the DC philosophies and kind of what differentiates your guys' strategy there compared to-
Yeah, I think maybe just to go back, another great question we love to talk about. When you go back and think about our company growing up as more of a warehouse distributor starting out in Springfield, Missouri, first other major metro market we went to back in the day was Kansas City. So where else are we going to put our DC? We'll put it in Kansas City. That's where the people and the cars are. We go to Oklahoma City, that's where the DC goes. You go to Houston, that's where the DC needs to be. You go to Dallas, that's where the DC needs to be.
You go to Atlanta, Chicago, Boston, L.A., Northern California, Seattle, Phoenix, Minneapolis, St. Paul, and it's been something that we figured out a long time ago, as long as we could build the capital in early into our cost structure to put these regional distribution centers that have on average 170,000 SKUs, if you can put them in the major metro markets when your retail competitors are kind of running a big box retail play, they have their DCs about half the amount we have to start out, a lot less SKUs, and then you put them out in rural markets where it's kind of a free land, tax breaks, better employment, things like that.
It's a competitive disadvantage versus our 32 distribution centers that we've been able to build out over a long period of time, again, already built into our cost structure, and we've just continued to build and pour gas on that. When we go to Washington, D.C., for example, we can put a DC in Stafford, Virginia, just south of the D.C. market, where again, where the people and the cars are. What that does, before you ever get to hub stores and spoke stores, is it puts these 170,000 SKUs not only in the metro market, but you're able to replenish your stores five nights a week. That's just kind of a decision we made a long time ago that if we brought a bunch of consultants in, the first thing they would do is look at our supply chain and say, this is too expensive.
You can service your stores once or twice a week. What we figured out a long time ago is when you service your stores five nights a week with overnight replenishment, you can also put special orders on that same truck, and you can keep only breadth in the stores. You don't have to keep depth in the stores to replenish themselves. We replenish our stores five nights a week, but we're also trucking overnight what we call must-haves, which is already sold parts, special orders. The other thing it does from a competitive standpoint, you all hear us talk about city counter service.
All that really means is, as we enter a market like Washington, D.C., no different than Houston, Dallas, Atlanta, Boston, wherever you want to say where we have another DC, is it has 170,000 SKUs that we are capitalizing on every hour on the hour with small vehicles that are running around the metro as many times as you can get around there from a traffic perspective. Before you ever even think about competitors that have hub stores, we have those 170,000 SKUs that are being delivered to the stores every hour on the hour.
If you think about an installer customer that is in Washington, D.C., as we put stores in that market, they can look at our B2B platform, O'Reilly Pro, and they can see a time-definite promise that Stafford, Virginia has that hard-to-find part that nobody else has, and it can be on the next truck to the store closest to me in an hour and a half. I have this man or woman in my shop that has to have their van out of there to pick their kids up by 3:00 o'clock. It's the biggest offense against our big competitors. It's the biggest defense. Quite frankly, us doing it that way, it's our biggest offense and defense against any big box players.
When e-tailers are talking about next day, we operate our business in minutes and seconds, and we're getting the car off the rack every hour on the hour in all these major metro areas. That service through our hub stores ends up touching 95% of our store network.
How's technology enabling that and making that even better and faster and more efficient for you?
Yeah. I think it's key to remember. It's a great question. I think table stakes these days would be hardware and software in the vehicles. Just imagine a pizza tracker if you order a pizza today. If you're a professional customer and you're writing service, you're looking at oreillyauto.com and you place an order, as soon as that ticket hits the printer in the store, or the DC or wherever, the clock starts. We run software that we built out ourselves that tracks in just in seconds. When that ticket prints, it immediately loads to the software, and in turn, immediately loads to the hardware. Our driver has basically a ruggedized cell phone, and all the routing, the inventory they're supposed to have, the vehicle they're in, they're being tracked as they drive.
Obviously, it's pinging a cell tower, and that's what drives our, what we consider our pizza tracker, so a customer can see exactly where the part is at all times.
Yeah.
I think it's important to remember, sometimes when we get the question about technology when it relates to this city counter and these overnight must-haves, it's easy to think about maybe technology in terms of AI and optimization of all that. I just caution everybody, that is an already sold part. We get the question a lot, well, why wouldn't you? You're running all these trucks all over the place. It sure seems expensive. Why wouldn't you optimize those city counter routes, or why wouldn't you optimize? Why can't AI or other technology help you have inventory in a better position where you don't have to run all those routes? You got to keep in mind demand. Even if we had chase trucks chasing each other in a metro market, demand is driving what's on those vehicles. That is a car or a truck in a bay.
It's an already sold part. There's nothing to optimize. It's sold. It's somebody in a bay waiting on that part, and we're delivering that on-time demand on average, less than 25 minutes on an average delivery.
It's Michael Lasser from UBS. I have a quick question for Brad and a quick question for Jeremy. My question for Brad is, this has been a pretty good year for the aftermarket from a sales perspective. It's been an even better year for O'Reilly. The magnitude of the outperformance for O'Reilly, it's been a little wider than it's been in the past. Do you think there's a correlation between O'Reilly's market share and the state of the aftermarket? Meaning, you can gain even more share in good times and less share when the aftermarket's a little slower? My follow-up for Jeremy is, you did see some pressure from not being able to pass along the inflation in the third quarter in more commodity-related products.
If this is the new norm and there is a persistent amount of inflation in these commodity-related categories, do you think that challenge is going to persist, or is that more unique to the third quarter and it will normalize over time? Thank you very much.
Yeah. I'll start with the first question, Michael. Great question. It's a little bit hard to tell. We still have a couple competitors that are still yet to report in the exact period that we reported, so we'll see what those gaps really look like. I don't know that I would say I think there is some benefit when things are good. If we're on our game in every facet of something that happens within a quarter or a six-month period or a year, I do think there's a multiplier effect to some degree. But I don't know that I would totally say that our opportunity is even better in good times to take share. Again, all I have is history, and in my 30-year career, our business has done really well in both cycles and everywhere in between.
When things are good, yeah, we can pour gas on the fire. We can continue to do what we do. But when things get a little bit tough, that's healthy in its own way for us too, not that we necessarily like that. But in our industry, where we're sitting here with 10% of the available market across North America, when things get a little bit tough, our team has a little bit of extra want and another gear to grab. Sometimes we see some big competitors, some smaller, that when things get tough, they overreact to maybe staffing levels. They cut a little too deep. They do things like that. Not saying that we're perfect, but when things get tough, we make sure we rally around our team because our team is very tough on themselves when things get tough.
They take a lot of ownership and a lot of accountability for our sales performance, as well as our P&L performance. When things get tough, I think we have similar opportunities. If I look back to the years after the recession, if I look back to election years, if I look back to maybe a 2012, 2008, 2012, some of those type tougher years, 2017, 2019, even though they may be tough on the whole, our team figures out where, if any, we have cracks. They just dig in that much deeper. They look harder. They just start grinding. Not that we're not always on the grind, but they are hell-bent, even in tough times, to make sure that as others may be licking their wounds and making excuses, we're focused on grabbing that next gear of market share gains.
To address the second question you have, I'd start by making sure that we frame it in the right way. You're really talking about just the commodity-driven, especially the petroleum-based products, where we've seen a little bit of rate pressure in the quarter. The reason why that's unique is because there are some just dynamics around how people think about the costs that are input to that and how they change over the course of time. What we've seen in the rest of our business is that the, I think, the experience from a market perspective of highly scrutinized cost changes, of how we understand how costs move and change, and then the ability of us and others within our industry to pass that along and maintain rate, that's held together very well within our space. None of that, I think, dynamic has changed.
But I think the uniqueness of what you see from some of the commodity-driven items is that the cost environment historically can be a little bit more volatile there. When you think about a hard part, that cost change that comes through, typically there are some more core structural factors that give rise to that. Once it gets passed along the street, it's much more likely for us to take that price through and rate, and you won't see a lot of variability in that. We hold onto those as a hard-won price increases, and typically you're not going to see costs revert back very quickly. So, that environment, particularly on items that are slow returning, where you have to maintain the inventories for a longer period of time, you see a lot more consistency.
There have been periods of time in the past where we've seen things like oil in particular, where there's a lot more cost volatility, it moves up and it moves down. When there is some level of uncertainty about how long something will persist, you see an environment like we've seen in this season, where there's just been, I think, a little bit more of a reluctance to be as aggressive to push it on. Still absolutely passing through the costs and then some that's accretive from a gross margin dollar and operating profit dollar perspective. That's, I think, a reason why you've seen a little bit of a delay in what that looks like.
To the extent that we see persistent cost and it becomes part of the new normal, we would still anticipate, in direct answer to your question, Michael, we'd still anticipate that the industry will pass along and that we'll see that come over the course of subsequent quarters when we look at it. We've had similar instances. I know when we had our earnings call last week, you heard Brad talk about it a little bit. We had some similar challenges around particularly supply that took a while to resolve themselves, and also took a while for the industry to pass through. There's nothing, I think, structural about that particular category where we would say in a new normal where costs have reset, that we would see a different relationship from a gross margin rate perspective.
Another question on market share, I guess. One of your large competitors that's going through a spin right now, I think, has been donating a bit more market share in recent years. What are the top couple reasons why you've been gaining share against that particular competitor? Given their independence and maybe more focus on the business, is it something that they can turn relatively quickly? Do you see their execution changing here in the next 12 or 18 months as a standalone company?
Well, I'll start that one. That's a great question. I want to be a little careful. We've known that company for a long time. We came from similar-
We didn't name them.
Yeah, well. Thanks, Bret. We've known them for a long time, came from very similar traditional backgrounds. Leaders before us at a lot of levels for a long time led the care board together. So they're a very well-respected competitor in so many ways. Have a lot of DIFM market share, do a lot of things right. Again, we've competed against them for a very long time. There has been a lot of moving pieces. We try to spend less time really focused on any one competitor than we do running the O'Reilly playbook. I don't know that I can give you a direct answer to the puts and takes of just how we see share gain specifically versus that competitor.
I guess what I would tell you to try to answer it the best I can, Bret, is we feel like we just have a steady hand that maybe some others don't when it comes to just the, again, the culture of the company, the way we promote from within, the lack of turnover we have in our field leadership ranks. I think if you take that competitor, no different than some of our WD competitors, I think I'd just point back to these regional distribution centers that continue to execute this playbook of having that availability when some others may be running a lot of small boxes, where our hub store inventories would be a similar SKU count to some of those size facilities.
Oh, by the way, we have, on top of the 32 DCs, we have the 400 hub stores that we continue to pour into, which isn't a new strategy for us, but we continue to expand the size and the SKU availability in those hubs as well. So I really don't think it's anything new when it comes to taking market share from that competitor or anybody else. I think it's just running our playbook, excellent customer service, relationships, availability, and everything we've really already talked about today. So I think, hey, we've got to give them a ton of credit. Serve on the care board with Will. Know Will, met Cort a couple times, don't know him very well. But we got to give them the benefit of the doubt. They're scrappy. They know the DIFM business. They know who they are. Not necessarily focused on DIY.
We always There's not one competitor that we take for granted. We're going to assume that they're going to continue to get better and compete, and we're going to prepare to continue to compete as well.
Maybe the only thing I would add there, Bret, when Brad talks about the playbook, I mean, it's the same things that we talked about when we were here last year and two years ago, and five and 10. I mean, I think that's pretty well established how we go to market and what's important and what's valuable and what drives our business. But it's also, I think, it's a misnomer to think that that's a static approach to the business. I mean, we are just relentless about execution. We're relentless about availability. We're relentless about how we think about team and enhancing team.
I think some of the things that are missed at times is that the competitive balances or imbalances are determined by what the rest of the space does, and we really do think that we have more control over that than the rest of the market does. Not because we're changing the playbook a ton or because there's something that's new and dramatic about what it is, but when you think about leveraging what we look at, we're always pushing and getting better at what we do. It's why you see us talk about investments from a hub store perspective and leaning into where our strengths are there. One of the things that I think is underappreciated about our inventory availability strategy is that because of the ability to not have to distribute depth throughout all of our chain, we're incredibly nimble.
It's a thing that we work on every single day of the year. It's great that we have access up the echelons to the hubs, to the DCs, to get parts better and closer to customers, but we're also pretty committed to making sure that we always have the right set of SKUs in every spoke store that's got 22,000 to 23,000 SKUs. I think that flywheel of always grinding on those types of things is something that we are positioned well to spend time and focus and energy and attention. We've got a very seasoned team for that, and our guess would be that we have more focus and attention on those types of things than the rest of the competitive space has the ability to do.
And so that's where, at the end of it, against any individual competitor, we think we're able to take share anywhere because that's really what's driving our business.
Hey, guys. Thanks a lot. Max from TD Cowen. Last week you guys announced a little bit of a step up next year in U.S. store openings. Just curious, what's the gating factor to accelerating that a little bit more given how well the business has performed year after year after year? And then separately on Canada, you've now owned that asset for a couple years. What's sort of on the roadmap before you're comfortable starting to rebrand some of those stores and then accelerating openings there as well? Thank you.
Yeah, I'll start on the first one, Brad Beckham can maybe hit the second one. We've long said that our gating item for new store growth is how well we can execute from a team perspective in those stores. And that not only, I think, governs the total number that we feel like we can do, but how we think about concentrations in new market areas and expansion of our footprint. Because a critical, I think, factor We can execute a lot of the things as long as we know that we've got that distribution capacity that can support it. We can supplement with hub store inventories. We know we can operate the model the way that we want to in new stores. The key is to be sure that you've got a strong store leadership team. There's a good store manager that's supported well with a district manager.
It's a heavier lift to support new stores, and so we under-index the coverage of those DMs, those regional directors. It's making sure that we've got that bench and strength of bench to do that. And in Canada, we've probably been more conservative there, a little bit more risk-averse historically than what was necessary. And so when you see a step-up of 40-store increment in the new store growth next year, we wouldn't do that if we didn't have a lot of confidence that we could do that well. And we'll see ultimately as we grow into that number, where we can move from this point forward on that. We have the benefit of having the largest footprint we've ever had while also still having a concentration within the Northeast that's very under-indexed.
Good market area to grow into, kind of have it surrounded, can support that growth around those market areas. Then also be able to be very opportunistic in the rest of our footprint within the U.S. to be able to supplement where that growth comes from. That is really, I think, what drives it. For sure, as we have been able to execute well against that, we are also encouraged by the economics of how that works out for us, and that allows us to feel really confident in the acceleration.
Yeah, I may just talk a little bit, Max, before I talk about Canada. Jeremy said it very well, but we are just in a really great position with our entire distribution network in the United States, not only with bringing on Stafford, but with Dallas, the Fort Worth side, coming on here in the next few years. We just have the opportunity to really spread that growth out over multi regions, where we can open the teams and we can do all the things that Jeremy said to our standards. So we are really excited about that. It is just pretty incredible on both the rural side and the metro side and everything in between in the United States. There are areas that we have set the plow a little bit deeper on rural markets that we would have thought might have been too small not too long ago.
As you get into really what we do, we are finding just a lot of success in a lot of the rural markets. They are great P&L, solid top line, solid cash contribution. A lot of our metro markets, we may have had a store every 2 mi, and we find out that every one of those, if you have three stores in a row every 2 mi, every one of them is doing $3 million, $4 million, $5 million, and you can put two in the middle still and grow them all right back and gain an additional total $2 million or $3 million annually just in that one pocket in a metro area. I think the key is, it can be easy to feel like that with 6,500 stores in the United States, that we are fairly mature. I would just remind everybody, we have 6,500.
There are 40,000 parts stores in the United States. When you think about it, just surely from an ownership perspective, I am not talking about M&A as much as I am talking about just continuing to pour fuel on the fact that our new store economics, the cohorts of stores, new stores that we have and the way they are performing, we are going to continue to aggressively get after organic growth in a way that we feel like we can materially change the ownership piece and the amount of share we have in the United States through store count and how many of those outlets we could actually own. Probably every decade that has gone by, if you would ask us 10 years ago, we would have told you we thought we could have 6,000 stores in the United States.
Here we sit at 6,500, and every time we've refreshed our internal plan for the next decade, that number's gone up. We're going to stay very aggressive in the U.S., continue to do what we're doing incrementally in Mexico. Your question about Canada is a good one. We learned a long time ago through M&A, through acquisition opportunities, that as soon as you change the sign on a building, customers, both DIY and professional, they expect you to be O'Reilly. We have a very good reputation in the United States. When you think about putting that name on the building, we take that very seriously. That's not to take anything away from Mauro Cifelli and the team that runs the Vast-Auto group up in Canada. They're unbelievable. They are extremely strong. They're great leaders. They're great parts people.
They have great teams. They have great distribution. They have their own version of hub stores. They do a fantastic job. When we put the O'Reilly sign on the building in Canada, Canadians are going to expect us to be that O'Reilly Auto Parts store that they may shop in Northern Maine, in Chicago, in Detroit, in Seattle, Washington State. That has came through loud and clear, especially when you look at what's happened to some of the U.S.-based retailers that have tried to go to Canada, and they weren't the best version of themselves. That's something that we figured out very early with Mauro, is it was less about the name on the building.
It was all about taking all the amazing things that Vast-Auto did and really applying O'Reilly when it comes to just inventory coverage, our exclusive national brands, our store services on the DIY side, just everything that goes along with branding besides the name. We've been doing all that work ever since we acquired that business a little over two years ago. We're in really good shape. We're getting to the point here in the next probably, say, year and a half, two years, we'll have the name on the building. If you walk in a lot of those stores today in Canada, and you just don't look at the sign on the building, it's an O'Reilly store.
We're still finalizing all those capabilities, operational excellence capabilities, supply chain capabilities, and system capabilities to make sure we are absolutely O'Reilly in Canada, and not some other version of O'Reilly in Canada. That's what we're going to do.
It's no surprise you've been as successful as you've been. We wish you nothing but the best. Thank you very much for being here, Brad and Jeremy Fletcher. Been one of the best investments for our clients for the better part of the last 25 years. Thank you very much.
Yep. Thank you.
Yeah. Thanks, everyone. Appreciate it.