Good day, everyone, and welcome to the O'Reilly Automotive, Inc. Third Quarter 2020 Earnings Conference Call. My name is Howard, and I will be your operator for today's call. I will now turn the call over to Mr. Tom McFall. Mr. McFall, you may begin.

Thank you, Howard. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 2020 results. After our prepared comments, we'll host a question-and-answer period. Before we begin this morning, I'd like to remind everyone that our comments today contain forward-looking statements, and we intend to be covered by and we claim the protection under the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest annual report on Form 10-K for the year ended December 31, 2019 and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I'd like to introduce Greg Johnson.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts third quarter conference call. Joining me today are Jeff Shaw, our Chief Operating Officer and Co-President; and Tom McFall, our Chief Financial Officer. David O'Reilly, our Executive Chairman; and Greg Henslee, our Executive Vice Chairman, are also on the call. We are excited to report record-breaking performance for our third quarter and are once again impressed by Team O'Reilly's capability to deliver such remarkable results during one of the toughest periods in our company's history. Our team has been dedicated to our customers, achieving an outstanding 16.9% increase in comparable store sales for the third quarter and a 39% rise in diluted earnings per share to $7.07, all while consistently implementing our protocols to safeguard the health and safety of our team members and customers amid the COVID-19 crisis. Although the challenges we faced in 2020 have been extraordinary, our teams have done a fantastic job adapting to the current environment and changing the way we do business during this pandemic. They managed to do this without compromising our commitment to excellent customer service or the value our customers expect. We remain diligent in our efforts to continuously evaluate and update our safety protocols as advised by public health and government agencies and are highly focused on implementing best practices across the company. Before we move on to our prepared remarks, I want to express our sincere appreciation for our team's hard work and dedication to our customers. There is no doubt about the importance of our business in fulfilling our customers' critical needs, and I couldn't be prouder of Team O'Reilly for their contributions during this unprecedented challenge. Now, I would like to share some details about our strong performance in the third quarter. As we mentioned in the second quarter conference call, we started the third quarter by continuing the strong sales trends we established from mid-April through June. As the quarter progressed, we maintained steady, strong sales performance in both areas of our business. In terms of performance cadence, our comparable sales remained in the mid to high teens throughout the quarter, reaching the highest performance at the beginning of July. We maintained consistent performance through August and September after accounting for Sunday comparison differences between these months. As mentioned in our press release yesterday, our comparable store sales in the fourth quarter have so far remained strong and are trending slightly below the exit rate from the third quarter in the low double-digit range. As we indicated during our last two earnings calls, we have approached our sales outlook with caution given the unprecedented uncertainty in our markets and the broader economy. This includes comments made during last quarter's conference call where we expressed that we expected a moderation in sales from the record-setting pace we were experiencing. We have been somewhat surprised and pleased with the steady nature of our strong sales trends. To the extent that volumes did moderate in the third quarter and into the fourth quarter, that moderation has been much more gradual compared to the rapid acceleration we saw in April when demand shifted significantly in our favor. Our sales trends are even more encouraging considering the diminishing benefits to our business from the expiration of government stimulus payments and enhanced unemployment benefits under the CARES Act as we move beyond the period when those funds were injected into the economy. Moving to the composition of our strong sales performance in the third quarter, our DIY business was the stronger contributor during the quarter, but our professional business also performed very well, and the relative trends on both sides of our business tracked along with the cadence for total sales in the quarter I just discussed. From a ticket perspective, we continue to see robust increases in both ticket count comps and average ticket comps on both sides of our business, even though we saw a muted impact in average ticket from same SKU inflation, which is in line with our expectations. As we saw in the second quarter, our category performance reflected strong performance across all of our product lines with some of the best performance in outfront categories in our DIY business as well as another extremely strong sales quarter for batteries. We believe these results indicate a continued ability and willingness of our DIY customers to work on larger projects. I want to be clear that even though these more discretionary categories have been our better performers for the last two quarters, we have still been very pleased with our sales volume across our business. While demand in undercar hard part categories is more failure-related and did not perform quite as strong as the company average in the third quarter, sales for these traditional categories were still robust and significantly better than historical trends. At this point, I'm sure the question everyone listening in on today's call would like to have answered is, what are the discrete factors that are driving this incredible surge in our sales and how long will they persist? Well, it's impossible to provide a definitive answer to that question, but we do expect demand to remain solid and there are several potential tailwinds and headwinds we are watching as we look forward. We certainly saw for at least the last portion of our quarter, continued tailwinds from government stimulus under the CARES Act and likely saw some residual benefit as unemployment benefits were partially extended for a short period of time later in our quarter. Even as those payments have lapsed, the positive impact they have had to support the health of the consumer has mitigated the negative impact from economic pressure on consumers we would normally expect in a period of such rapid increase in unemployment and significant economic stress. We also have a long track record of experience from economic cycles in this industry, seeing consumers respond to economic uncertainty by deferring new vehicle purchases and investing more in maintaining their existing vehicles. The combination of this incentive to take care of an existing vehicle, coupled with the government stimulus, has likely driven a reduction in underperformed vehicle maintenance, and we expect our business will continue to benefit as economic conditions recover. Aside from the macro benefits that have helped the automotive aftermarket, it's also clear to us that our strong sales performance is the result of significant share gains our team has delivered over the course of the past several months. We execute a high-touch, capital-intensive business model that requires a well-equipped, technically proficient team of professional parts people, providing outstanding service. We have simply been blown away by the amazing commitment and resilience of our team. In the face of extremely difficult circumstances, they haven't wavered in delivering the value propositions we promise to our customers. Our team's consistency in providing excellent customer service differentiates us and helps us drive market-leading results in stable economic conditions, and these advantages are even more pronounced when everyone in the automotive aftermarket is facing enormous external challenges. As pleased as we are with our team's great performance in the third quarter, we know the goodwill we've created from meeting customers' essential needs during this crisis will drive customer loyalty and even further business in the long term. We remain optimistic about the health of the automotive aftermarket and believe we will continue to see strong demand in our industry, but remain cautious in our immediate sales outlook given the uncertainties that still exist. As miles driven have remained under pressure at the same time the government stimulus has ceased, we've been encouraged to see continued strong demand, particularly on our professional business, where the demographics of the ultimate consumer are more likely toward jobs that have instituted work-from-home arrangements. We can't anticipate what risk we could face if macroeconomic conditions worsen and miles driven stay depressed nor do we make any assumption as to whether there will be additional government stimulus or to the degree of which our demand would benefit. In the immediate short term, we would remind everyone on the call that our fourth quarter can be quite volatile, given the variable impact of weather and consumer demand dynamics during the holiday season, which could be more pronounced this year as some consumers face economic challenges as a result of the pandemic. We can also see some volatility as a result of the election next week as we did in 2016. Ultimately, we'll have to wait and see where our sales level out. We have been very encouraged by the stability of sales trends during the six-month period of record-setting comps and feel very confident our company will continue to deliver solid sales growth even if the broader economic conditions deteriorate. Moving on to gross margin for the quarter. Our gross margin of 52.4% was a 96 basis point reduction from the third quarter 2019 gross margin. The decrease from last year was driven by reduced LIFO benefits from the impact of merchandise purchased in 2019 before tariff-related cost increases, which Tom will discuss more fully in his comments, as well as the planned expected dilution from Mayasa. For the third quarter, our team delivered an operating profit margin of 22.6%, an increase of 250 basis points over the third quarter of 2019, and for the first nine months of 2020, we have generated $1.8 billion of free cash flow. Jeff will discuss our outstanding operating performance in more detail in his prepared comments. Again, I want to offer my congratulations to Team O'Reilly for another quarter of record-breaking sales and profitability. Your willingness to go the extra mile to ensure everybody who enters our stores, DCs or corporate offices, while also providing unwavering customer service, is truly outstanding. I'll now turn the call over to Jeff Shaw. Jeff?

Thanks, Greg, and good morning, everyone. I want to start today by echoing Greg's comments and expressing my sincere thanks to Team O'Reilly for another incredible quarter. Our team's ability to diligently follow all of our pandemic protocols to protect the health and safety of our team members and customers while generating the best top-line results we've ever seen is simply remarkable. We operate a very stable business model that has been fine-tuned over many years to deliver exceptional value to our customers while maximizing the productivity of our human capital and shareholder investment. However, we would have never expected our model to be tested in the way it has in 2020. And we've never imagined a scenario where store volumes skyrocketed overnight and sustained such a high rate of productivity for six months. Simply put, delivering the results we announced yesterday requires a tremendous amount of hard work and ingenuity by the teams in our stores and DCs. As Greg previously discussed, we generated an increase in operating margin of 250 basis points to 22.6% and operating profit dollar growth of 35%, both of which represent record third quarter operating profit results for our company. We drove this increased profitability by generating 16.9% comparable store sales, capitalizing both on the strong macroeconomic environment and capturing market share while limiting our SG&A per store growth to 3.6% for the quarter. As we discussed last quarter, the timing and unique circumstances of the changes we've seen in our business in 2020, starting with the significant headwinds at the onset of the COVID-19 crisis, followed by the dramatic, immediate surge in business, have created a perfect opportunity for us to execute our model and drive record-breaking operating profits. As a result, we indicated on last quarter's call that we expected our SG&A expense would gravitate back towards historical levels as we refocused on important details in our business that can get deferred when we're focused solely on doing everything in our power to provide excellent customer service. In line with those expectations, we've seen incremental increases in our operating costs, but our sales have simply continued to outrun the growth of our SG&A. Looking forward, we've been encouraged by the steady sales trends we've seen, and as each week goes by and our team continues to adjust to the current environment, we've been better able to plan and manage our SG&A expenses, especially our store payroll. However, there is still a significant amount of uncertainty in how long and at what level the extremely strong sales will last. And we're remaining cautious in how we plan expenses, especially as we enter a more volatile sales season in the fourth quarter. Since our biggest challenge remains providing excellent customer service in the heavy sales environment, we acknowledge that there are certain important tasks, such as refocusing on the image and appearance of our stores and catching up on our team member training and development, which are still being deferred in some cases. As always, we will be extremely focused on controlling our expenses to match our service levels to customer demand and will leverage the lessons learned so far in 2020 as we respond to market conditions moving forward. Next, I'd like to touch briefly on our capital expenditure and expansion plans. On last quarter's conference call, I discussed our reset and expectations for new store, DC, and capital project development in light of the challenges we faced as a result of the pandemic. And my update today is that we've tracked along with those revised plans. Through the first nine months of 2020, we've opened 153 net new stores, which was within our expected range of 150 to 165 new stores, revised down from 180 new stores after we encountered delays for design and permitting approvals. We still have new stores on the schedule to open in the fourth quarter and expect our total count will ultimately fall towards the top end of that updated range. Now even in the best conditions, opening a new store takes a tremendous amount of hard work. So we've been especially pleased with our ability to open great new store locations with solid teams this year, and our 2020 cohort of new stores is off to a very strong start. We typically announce our new store target for next year on today's third quarter conference call. However, we're still fine-tuning our 2021 target based on our evaluation of how many stores we think we can get through the lengthy process of planning and permitting, given continued expectations that the pandemic will slow these timelines. After successfully opening our newest DC in Lebanon, Tennessee in the first quarter, we'd originally planned to open a second facility in Horn Lake, Mississippi, just south of Memphis this year, as well, but have shifted the opening of that DC to the first half of 2021 due to team member health concerns associated with the travel necessary to train new team members in preparation for opening the facility. Our distribution teams have a great track record of identifying strong DC leadership and running a smooth opening process, and this project is no exception. Finally, we've also made good progress on our other planned 2020 CapEx projects in the third quarter, including work we've discussed before, to update our store hardware, modernize our distribution vehicle fleet, and other initiatives to enhance the service we provide to our customers and drive strong returns. We remain extremely excited about the opportunities presented by these projects, and we'll continue to move forward aggressively even though a significant amount of the CapEx plan for 2020 will fall into next year. Before I turn the call over to Tom, I want to once again thank Team O'Reilly for their dedication and hard work in the third quarter. Hopefully, we will never see another year with the difficulties 2020 has posed, but I'm amazed at how our team has stepped up to meet the challenges, although I'm not surprised since Team O'Reilly has consistently proven to be the best in our industry. While we've never had a crisis that's affected all of our company in such a profound way as COVID-19, our teams have encountered many difficult environments over the years, including the full spectrum of national disasters, and they always prove their ability to weather the storm. To close, I'll repeat the same comment I made on our second quarter call. I'm especially proud of the commitment our team has shown to our customers, their diligence in executing best practices to protect the health and safety of everyone in our stores, DCs, and offices, while keeping our business running efficiently to provide our customers with the essential parts they need, is truly world-class. 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 incredible performance in the third quarter. Now we'll take a closer look at our quarterly results. For the quarter, sales increased $541 million, comprised of a $441 million increase in comp store sales; a $71 million increase in noncomp store sales; a $32 million increase in noncomp, nonstore sales; and a $3 million decrease from closed stores. As a reminder, we previously withdrew our 2020 guidance. And given the ongoing uncertainty related to COVID-19, we are not resuming guidance at this time. As Greg previously mentioned, gross margin for the third quarter decreased 96 basis points to 52.4%, which was driven by a year-over-year comparison to the significant gross margin benefits we captured in the third quarter of 2019 related to the sell-through of pre-tariff, on-hand inventory, as well as dilution from the acquisition of Mayasa. As a reminder, throughout 2019, we received a gross margin benefit from the sell-through of on-hand inventory that was purchased prior to tariff-driven acquisition price increases in 2018 and 2019 and anticipated we would see a continued benefit that would taper off each quarter in 2020. We did not receive a third quarter benefit in 2020 and since we received the full benefit of pre-tariff inventory in the first half of 2020 due to acquisition cost decreases in the second quarter, which created a short-term headwind but benefits future POS. Looking at the third quarter stand-alone, we did not have a materially positive impact from LIFO. We expect to see year-over-year headwind again in the fourth quarter as we compare against the prior year pre-tariff inventory benefit. We received a more muted benefit from same SKU inflation, in line with our expectations as we began annualizing last year's tariff-driven price increases in the third quarter. The price environment remains rational in the industry, and we expect that to continue. Our third quarter effective tax rate was 23.2% of pretax income, comprised of a base rate of 24.4%, which was in line with our expectations, reduced by a 1.2% benefit for share-based compensation. This compares to the third quarter of 2019 rate of 22% of pretax income, which was comprised of a tax rate of 22.5%, reduced by a 0.5% benefit for share-based compensation. Changes in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. And we continue to expect our rate for the fourth quarter to be lower as a result of the tolling of certain tax periods. Now we'll move on to free cash flow and the components that drove our results for the quarter and year-to-date. Free cash flow for the first nine months of 2020 was $1.9 billion versus $977 million in the first nine months of 2019, with the increase driven by an increase in net income, a reduction in net inventory, an increase in taxes payable as a result of deferral of tax payments under the CARES Act, and a reduction in CapEx, partially offset by the investment in solar projects. Inventory per store at the end of the quarter was $628,000, which was down 0.7% from the beginning of the year, but up 1.7% from this time last year. The inventory per store balance is below our expectations and reflects the strong sales volumes in the second and third quarter of 2020. Our AP to inventory ratio at the end of the second quarter was 116%, which is the highest ratio in our history and heavily influenced by the extremely strong sales volumes and inventory turns in the last six months. We still anticipate growth in per store inventory in the remainder of 2020, as we improve in-stock positions and resume our inventory enhancement initiatives, and this will also moderate the increase in AP percentage over time. Finally, capital expenditures for the first nine months of the year were $363 million, which was down $118 million from the same period of 2019, driven by lower new store project development spending and the prior year level of investment in new distribution projects, which exceeded distribution development in the first nine months of 2020. As Jeff previously discussed, we have resumed certain deferred CapEx projects, which were on pause due to the impact of COVID-19, and we'll continue to adjust our CapEx plans as appropriate, given the current environment. Moving on to liquidity and capital structure, we are very pleased to execute our second successful bond issuance in 2020, with the issuance of $500 million of 10-year senior notes at a rate of 1.8% on September 23. By far, our best rate since we moved to an unsecured capital structure and began issuing public debt 10 years ago. These notes replace our first bond issuance from January 2011, which carried an interest rate of 4.9%. We paid out these senior notes when we reached our redemption call date in October, so the proceeds from the September issuance were still sitting in excess cash on our balance sheet at September 30. We finished the third quarter with an adjusted debt-to-EBITDA ratio of 2.26x as compared to the second quarter ratio of 2.24x, and our end of 2019 ratio of 2.34x. This calculation excludes the $1.6 billion of cash we held as of the end of the quarter, but does include both the September bonds as well as the 2011 notes retired in October. We continue to be below our leverage target of 2.5x, and we'll approach that number when appropriate. As we discussed on last quarter's call, we resumed our share repurchase program on May 29, 2020 after temporarily suspending buybacks in March to preserve liquidity at the onset of COVID-19. We continue to judiciously execute our program in the third quarter and year-to-date, we have repurchased 2.6 million shares at an average share price of $415.28, for a total investment of $1.09 billion. Subsequent to the end of the third quarter and through the date of our press release, we repurchased 0.7 million shares at an average share price of $458.97. As a result of our continued strong performance in the third quarter, we finished the quarter with $2.2 billion of total liquidity in cash and available borrowings under our $1.2 billion revolving credit facility, net of the cash held to retire the 2011 notes in October. And we feel we have ample liquidity under this existing facility. As we evaluate our liquidity, leverage, use of capital and share repurchase program moving forward, we will continue to prioritize maintaining our strong financial position, including the investment-grade ratings and our public debt. We have a long history of conservatively managing our balance sheet and we'll continue to take prudent steps to ensure the long-term health and stability of our company. Before I open up our call to your questions, I'd like to thank the O'Reilly team for their hard work and continued dedication to our company and our customers. This concludes our prepared comments. And at this time, I'd like to ask the operator, Howard, to return to the line, and we'll be happy to answer your questions.

Our first question or comment comes from the line of Greg Melich from Evercore.

I wanted to follow-up a bit more on the traffic and the share gains in the ticket. So if you think about it, is that gap now between DIY and do-it-for-me, both are healthy, but it sounds like into this quarter, they're still narrowing a bit. Was that fair to interpret that? And then second, when you say that you've been gaining share, do you think that's been bigger on the DIY side or the do-it-for-me side?

Greg, a lot of questions there. First, on the traffic and ticket question, I would tell you that if you divide that into the four quadrants, cash and charge for each, all four of those quadrants were positive. And we were pleased with both our ticket count and our average ticket. Looking at the gap between our DIY and DIFM side of the business, it did narrow slightly this time. Our overall comp was less. So our side of the business performed well to our expectation. And our DIY traffic was off slightly from where we were last quarter.

What I would add to that is if we reflect back to the beginning of the second quarter, where we saw a significant drop in business and then a spike in continued strong sales from the middle of April, that was primarily on the DIY side of the business. The professional side of the business was impacted longer due to the customer service nature of dropping off your car to have it worked on. So it took longer for the professional business to come back. So the narrowing of the gap in the third quarter, I think, is more a reflection of the more significant challenges that the professional side of the business had in the second quarter.

And do you think you gained more share in DIY or do-it-for-me?

That's a hard one to determine. We will see over time as others report, and we look at industry data. What we would tell you is that we think we gained significant share on both sides of the business.

Congratulations on a strong performance. My first question is about sales trends, especially considering the strength we've experienced over the last few quarters has continued into the fourth quarter. As we look at the transition from Q3 to Q4, are you noticing any significant differences? I apologize for the technical issues; I'm on my cellphone. Specifically, regarding sales from Q3 to Q4, have there been any notable changes in the categories where you are performing? Are you observing different shopping behaviors from customers as the challenges related to COVID persist?

Brian, I want to point out that the positive trend we experienced in the second quarter has continued into the third quarter. Many of our traditional categories that did well remain strong into this period. For instance, batteries have performed particularly well. We noticed solid performance in numerous DIY categories, similar to what we saw in the second quarter. Additionally, some categories that usually do not perform as strongly, such as hot rod parts, performance parts, and car detailing products, are seeing better results. We believe that many of the DIY customers now have more time to carry out repairs themselves, leading to a shift from taking their vehicles to a shop for repairs to completing those tasks at home.

Brian, what I would add to that is, as our professional business strengthens as we work away from COVID in the restrictions on their business that, that drove. That business is much more focused on hard part repairs. So to the extent that those have performed better, it's narrowed the gap, but more about raising more of the traditional categories than weakness in others.

My first question was just with regards to the SG&A dollar growth. Tom, I know you went through that a little bit in your prepared comments. But can you remind us of the areas where you're still being able to limit that spend?

Okay. Jeff covered those comments, but I'll go through because it sounds like an accounting question. When we look at our SG&A, the biggest driver of our SG&A expense is store payroll. When COVID hit and we experienced four weeks of poor sales, we prepared for the worst and reduced our staff. Jeff can discuss the specifics of how we evaluated our staff and its implications for our long-term business. We remain very conservative in our sales outlook, ensuring that we are adequately staffed to run the business and provide excellent customer service while being mindful that sales trends could shift. Examining our P&L, many items have been deferred, such as maintenance. Fuel-related costs, including utilities and gas for delivery vehicles, have been significantly lower than anticipated. Some of our CapEx projects have been postponed; while they offer great returns over time, they initially impact our implementation. These deferrals have positively affected our short-term P&L, but the primary driver of our SG&A is still store payroll. I'll now turn it over to Jeff to comment on that.

Yes. I'd just add that as we talked about in the second quarter, the tail end of the second quarter, is we made headway and ramped up our staffing levels to try to meet the demand, and that trend can continue into the third quarter, but we still remain very cautious in our staffing just not knowing how long the sales demand will last. Now the other thing I'd mention is we've had an ongoing focus on our company about increasing our full-time team member mix, and we've made headway with that this year. There are several benefits that, obviously, the higher levels of service, especially on nights and weekends from a more tenured full-time team member but really just as important, it continues to build our bench for our future promotions from within. And obviously, there's a cost associated with that besides the wages, the additional health benefits, and paid time off, but we believe it's the right thing to do to drive even higher levels of service. And over the long term, that will make for a more productive workforce.

And then my follow-up question was just on the very strong used car sales that we've been seeing. I wondered in the history of the company if you've seen probably not a similar level, but just when there are higher used car sales, how it worked through your business? And what kind of sales lift and timing could we expect from that over the long term?

Historically, when we've seen used car sales go up and the prices go up, that's a benefit to our business from two standpoints. One, the price increase is being driven by people who are seeking used cars as opposed to as many new cars. So more miles driven are on cars outside of warranties. That's a positive for us. The other big positive for us is it's a used car sale, but it's new to somebody else. So both on the seller side, people are making repairs to sell their vehicles. And as people acquire new vehicles, they're making repairs to those vehicles. Both of which benefit us.

Could you discuss the impact of the discretionary or product project categories and how that compares to Q2? Additionally, regarding the hobby customer, are you noticing an increase in new customers compared to your typical run rate?

Well, Zach, it's hard to really determine. Some categories, it's obvious that it's 'the hobby customer.' Other categories, it's really hard to tell. When you sell spark plugs, is that a hobby customer? Or is that a maintenance need? Are they working on a project car that's had dust on it with a cover on it for four or five years that they just have time to work on all of a sudden because they've got more time from working from home. They don't have the daily commute, things like that. So I would say those categories that we called out, performance, car care, things like that, they performed similarly to the second quarter. But again, I don't want to send any impression to anybody that, that was the meat of our sales improvement because it's not. We did see that is an unusual trend for our industry to see sales in those categories. But really the meat and potatoes of our P&L were the traditional categories that we sell that continue to sell throughout the quarter.

Got it. That makes sense. And for Tom, on the gross margin line, can you talk about how the LIFO dynamics have compared to your expectations at the beginning of the year? And when you think about the initial 52.5% to 53% gross margin guide, I know that's no longer on the table, but is the low end of that range the right way to think about the gross margin run rate going forward? Or are there any other one-off items around mix or the supply chain that we should keep in mind?

Well, Zach, I appreciate that you acknowledge that we've suspended guidance and therefore, I can't make any comments in relation to past guidance because it's been suspended. But we'll talk about the gross margin for the quarter. So as we talked about on our third quarter 2019 conference call, and we're very pointed in calling out as we were seeing a benefit and gross margin from items where tariffs have been imposed, prices on the street, selling prices had increased, but we were able to sell through the merchandise that we had on hand, and we were seeing a benefit from that. We expected that to benefit to continue, although declining through the first and second quarter of this year. In the second quarter of this year, we actually saw more price decreases, primarily as suppliers work to adjust their supply chains to limit the impacts of tariffs. So when we get to the third quarter, we've really annualized those items. And it's reflected in our LIFO charge or our LIFO benefit as the case may be. In this case, it's a benefit. So you'll see it in our Q last year, we had a LIFO benefit in the third quarter of $22 million. This year, it was $1 million.

Can you talk a bit more about some of these better performing categories, particularly the battery category, where sales have been incredibly strong over the past few quarters? So how is supply shaping up at this point? And are you working through any constraints now? And what does that mean subsequently to gross margins?

Yes. I'll take the category question and see if Tom wants to comment on the margin component. As we said, all of our categories, we're very pleased with how all of our categories have performed. The only surprises, again, will be the call out. But I talked about the last question about performance, although not nearly as material as the traditional lines that sell very well for us. If you talk specifically about batteries, yes, we've seen significant battery sales for the quarter, actually, the past two quarters. Why? There's probably several reasons why I think some of it is related to maybe cars sitting at home because people are working from home. We had a mild winter last year, so there may be some pull forward. We'll have to see how that plays out in the fourth quarter. But as far as supply, we've had some supply issues throughout the third quarter from some of our suppliers. It's probably a handful of suppliers that had significant supply issues. There's only a couple of major battery suppliers in the industry. And both of those suppliers have performed well. One of them better than the other, but both have performed well. Like other categories, our suppliers have faced challenges with COVID related to the number of shifts they can work related to social distancing requirements, in one case related to wildfires out west. So it's been tough for our suppliers, just like it's been tough for us and our competitors to maintain staffing levels to keep up with demand. But overall, battery sales are great as we called out, and our suppliers are doing a good job.

I think that if you look at the chart of fill rate from our suppliers over the past six months since the pandemic began, you see the hockey stick effect and those few that are still not filling as well as we would like, we're starting to see an upturn in their fill rate. Tom, do you want to talk about the margin impact? Sure. To reiterate what Greg mentioned, we are pleased with the performance across all our categories. A 16.9% increase in comparable store sales indicates that all categories are performing well. We have observed some discretionary items that DIY consumers are purchasing, primarily for two reasons. First, in economically constrained conditions, these items typically see a decline, which makes this trend unusual. Secondly, consumers are keen on investing in their vehicles, leading to a decrease in both unperformed maintenance and repair costs, which positively influences our sales figures. Overall, all categories are performing well. The differences in gross margin between these categories and others are not significant enough to affect our overall gross margin composition.

Understood. And maybe just another follow-up on the previous margin question. So you walked us through the mechanics, post-tariffs and the flow-through there. But in the Q3 period, was there anything else out of the ordinary that you saw in terms of the year-over-year margin decline? Anything from a promotional perspective to keep some of these DIY customers in your ecosystem or higher transportation costs? And just anything out of the ordinary that further explains the year-over-year 96 basis point decline?

I would categorize it into three areas. Firstly, there's LIFO, which we've discussed. Secondly, we have some dilution from the Mayasa business in Mexico, which operates a more independent chopper business with a lower gross margin. In this scenario, we're not managing the stores directly, and instead, we share the gross margin with the independent chopper's operating stores. Typically, we would expect to gain leverage in our distribution centers with high volume, but the volume is currently so high that we are facing challenges in getting products shipped out effectively. As a result, we are experiencing some headwinds.

What Tom is referring to is just the incredible volume stream that just created inefficiencies in our receiving and shipping areas in our DCs. And with that volume and trying to stack that volume, we've had to use over time until we can catch up with headcount as well as temps to help us keep our shipping percentages where they need to be.

On the supply chain question, it sounds like a couple of suppliers, maybe one of the big battery guys has had some recent challenges. Could you give us color, sort of the cadence of supply chain stresses we heard back a quarter ago about some of the specialty performance parts being in short supply? Do you see your suppliers sort of having adjusted to the disruption in improving their in-stocks? Or I guess those weeks have the sustained period of above-average demand, is the supply chain having a harder time keeping up?

Yes, that's a good question, Brett. I can tell you that we have seen improvement. There are a few suppliers facing fill rate challenges that are within their control. Additionally, some smaller chemical suppliers are struggling to obtain containers for their products due to high demand for items like hand sanitizers. Fortunately, this situation is starting to improve as well. Overall, from the supplier perspective of our supply chain, we are seeing continued progress, with only a few suppliers still not meeting our desired fill rates. As for the entire supply chain, as Jeff mentioned, while our supply chain and distribution centers are strong, they are facing difficulties in keeping up with the sales volume we've experienced. We have been effective in getting products to our stores daily, but we are dealing with some incoming freight backlog, which we are actively working to resolve. Overall, we feel optimistic. Our suppliers are performing well, we are making progress in catching up, and we anticipate that our supply chain will return to normal within the next 30 to 45 days.

Okay. And then could you give us a quick update on regional performance, maybe the highs and the lows and what kind of spread you're seeing between those comps?

Sure. As we mentioned on our second quarter call, we were extremely pleased with the performance on both sides of the business across all of our markets, really exceeding our expectations. And really, that trend continued into the third quarter. As you'd expect, our newer markets continue to outcomp our more mature markets. But overall, the outperformance in the third quarter was really across all of our divisions. All of our divisions performed very well exceeding our expectations.

I would like to ask about the gross margin. The gross margin decreased by 90 basis points. If we calculate the impact of LIFO, it appears to be a 65 basis point headwind. Can we conclude that the remaining impact is from Mexico? More importantly, how should we anticipate this in the fourth quarter? You mentioned that the dynamics will remain the same, but what about the extent of the impact? Should we expect a similar effect from the LIFO dynamic of approximately 65 basis points as we experienced this quarter?

We wouldn't assume that the mass is solely responsible for the factors affecting the situation, and we're not specifically commenting on their profit and loss. Looking ahead to the fourth quarter, we do not expect to see a significant impact from LIFO on our gross margin.

Not significant? Or not as significant. Sorry, I just didn't hear.

Not significant.

Not significant. Understood. Okay. And then, I guess... By way, perhaps a follow-up, if it's still in the P&L if that counts as the same general area. On the SG&A, my sense is after the second quarter, you were pretty insistent that you're going to ramp back up the SG&A because it was too low. And now it sounds like a little bit more cautious from the third quarter going into the fourth quarter. Is that because you've gotten the SG&A back to the level that you think is appropriate? Or is it more a commentary on where you think sales are going in the next three months?

Well, clearly, in the second quarter, the spike in volume caught us by surprise, and we had to reduce our workforce based on the first onset of COVID in the results. So there are many different grades of leverage. The second quarter leverage was extreme, and that's something that is sustainable or good for our business in the long term. And the third quarter, as Jeff talked about, we increased our staffing to match the expected sales or closer to the expected sales. We continue to see significant SG&A leverage in the third quarter. I think our comments around that are we're going to manage our SG&A and our spend per store prudently so that we can react to changes in sales volume to be the same and continue at this high-low double-digit rate or to the extent that we see fluctuations that we can actively manage our expenses.

Nice quarter. I wanted to follow-up on market share. Your results obviously outperforming the industry, it seems like by a wider margin than we've seen in the past. And it does seem like a good portion of that is actual share gains perhaps from independents. How much of this is transitory benefits from perhaps being able to manage inventory more effectively than others versus something that maybe is more structural? How do you think about the drivers of what's driving that outperformance right now?

Yes. So I think it's several things. And if you look at market share gains, one thing I would tell you is I think the pie itself is bigger this year. I think there's more money being spent in the aftermarket as a whole because of the stimulus and some of the incentives that consumers have. But if you look at where those market share gains are coming from, you mentioned the smaller independents, I think that is a result of supply chain string our leverage and our ability to have inventory within our supply chain and have that inventory positioned in such a way in our supply chain that gives us a competitive benefit. The other piece that I think, to a much lesser degree, would be from the mass retail side. I think we're taking some market share from the mass retail side, although to a much lesser degree because it's a lot fewer categories. I think the consumer in that case is frequently concerned about walking into a big box store to buy a battery or a set of wiper blades or some product, and there's been a shift to the smaller retail box like ours. And I think there's been a surprise and delight function that goes along with that, when that customer comes into one of our stores, not only are they able to get that product without having the degree of interaction that they would have in a big box store, but we also install that product for them as well. And I think that's evident. I get a lot of letters from customers over the years. And lately, a lot of those letters talking about the service level we provide have called out with a degree of surprise that we perform those functions. And we install those batteries and wipers. And our traditional customer knows we do that. So I think we've brought some new customers into our stores. And I think one of the keys to the market share that we've taken from both sides of the business is just the service level we provide and the stickiness and our focus on keeping those customers for the long term, from both channels that I described.

I want to take a moment to highlight our team's efforts. The past six months have been highly disruptive for our business. Our corporate office has effectively supported our teams in the distribution centers and stores. The teams at the distribution centers have performed exceptionally well despite the challenges, ensuring timely shipping to our stores and maintaining stock levels. Meanwhile, our store teams have handled the challenges and issues in their markets, including lockdowns and regulations, with remarkable execution, consistently taking care of our customers every day.

Okay. All right. And then just on one of the prior points around SG&A, it sounds like you'll continue to manage conservatively. Does that mean that if comps remain at this low double-digit rate, that SG&A growth may remain constrained in Q4 like we saw this quarter? Is that the way to think about it?

There's a lot of quarters left, and we'll see what happens with the sales volumes. What we would tell you is that we are going to be conservative, that means not staffing up to the current level of business because the current level of business has been heightened from historic norms. To the extent that we can continue to drive those results, we will continue to see strong leverage.

Thank you, Howard. We'd like to conclude our call today by thanking the entire O'Reilly team for their continued selfless dedication to our customers. I'd also like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and full year 2020 results in February.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.