Thank you for your patience and welcome to the O'Reilly Automotive First Quarter 2021 Earnings Call. I will now turn the conference over to Tom McFall. Please proceed, Mr. McFall.

Thank you, Jack. Good morning, everyone, and thank you for joining us. During today's conference call, we'll discuss our first quarter 2021 results and our updated outlook for the full year of 2021. 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, 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 Greg Johnson.

Thanks, Tom. Good morning, everyone, and welcome to the O'Reilly Auto Parts first quarter conference call. Participating with me this morning 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 present. I want to start by acknowledging Team O'Reilly for another exceptional record-breaking quarter. Our expectations were for a strong first quarter based on business trends and comparisons, but the results truly exceeded our expectations, highlighted by a 24.8% increase in comparable store sales, a 526 basis point increase in operating margin, and a remarkable 78% rise in diluted earnings per share. The past year since the pandemic began has been one of the most challenging times in our company's history, so we are particularly proud that our team consistently rose to the occasion and delivered these impressive results while adhering to strict safety protocols. Team O'Reilly has shown remarkable dedication to providing excellent customer service, and I am deeply grateful for the hard work and sacrifices made by each member of our team. As we shared in our press release yesterday, our first quarter comparable store sales benefited from the continuation of strong, broad-based sales trends we have seen for several quarters, as well as favorable weather conditions for most of the quarter. We are very satisfied with our comparable sales performance through the first 2.5 months of the quarter. In mid-March, the most recent round of government stimulus payments contributed to a meaningful acceleration in our sales growth. The quarter unfolded with outstanding results in January, boosted by favorable weather and additional government stimulus. February followed a similar pattern, although we faced some pressure from adverse weather in the middle of the month, significantly affecting many of our Southern U.S. markets not accustomed to that kind of winter weather. This challenge briefly impacted our professional business as customers were hesitant to drive their vehicles for service, yet we still finished February above our expectations. March produced our highest comparable sales of the quarter, taking advantage of softer prior year comparisons and driven by ongoing strong trends, favorable spring weather timing, and the stimulus effect. Overall, our first quarter comparable store sales growth of 24.8% and our two-year comparable store sales growth of 22.9% significantly surpassed our expectations. We are also pleased with the composition of our sales results in the first quarter, with strong performance from all areas of our business. Both DIY and professional segments significantly contributed to our sales results, with the DIY business being the larger contributor, as in recent quarters, fueled by strong ticket count and average ticket comps. Our professional business also excelled despite the brief adverse impacts in February, showing an acceleration in ticket count comps and strong average ticket growth. Average ticket values on both sides of our business remained robust, indicating our customers' willingness to invest in their vehicles and take on larger projects, despite a minor benefit from inflation. From a category perspective, we continue to see strong sales trends across categories with particular strength in our DIY categories and batteries. Additionally, we benefited from strong demand for weather-related categories and undercar hard parts, as the severe winter weather this year created the wear and tear on vehicles. Looking ahead, we anticipate this will support demand in undercar categories over the next two quarters. I would now like to update our full year comparable store sales guidance and our outlook for the remainder of the year. We are increasing our full year guidance for comparable store sales to a range of 1% to 3%, up from our previous guidance of down 2% to flat. This adjustment is based on the strength of our first quarter results and our strong performance in April so far. This is a deviation from our usual practice where we do not usually incorporate business trends after the reporting quarter into our guidance revisions due to potential volatility. However, the continued momentum we witnessed at the end of March, supported by the latest round of stimulus, has persisted into April, and we believe it is appropriate to reflect this outperformance in our annual guidance update. As we look to the remainder of 2021, we are confident in the positive underlying fundamentals of consumer demand in our industry. Prior to experiencing the impact of the recent stimulus, we were already capitalizing on robust demand from DIY consumers taking on larger projects and investing in vehicle maintenance. We have also been encouraged by improving trends on the professional side of our business despite lower employment and reduced driving in the U.S. Although we cannot predict the pace of improvements given the uncertainty of the economic recovery from the pandemic, we believe we will benefit as driving patterns return to normal. However, we remain cautious in our outlook for the remainder of 2021 and expect potential variability in the next few quarters as the benefits from government stimulus fade and some demand may have been pulled forward due to favorable weather. We are also facing challenging year-over-year comparisons throughout the rest of the year, especially in our DIY business, with the most significant challenges anticipated in the second and third quarters. While it is difficult to forecast how the remainder of the year will unfold for our industry or the broader economy, we know that a significant driver of our success lies within our control, and we are committed to leveraging the strength of our business model and our industry-leading team to capture market share in 2021. Turning to gross margin, for the quarter, our gross margin of 53.1% reflects a 76 basis point improvement compared to the first quarter of 2020. This improvement surpassed our expectations and was driven by strong performance in our higher-margin DIY business as well as effective management of distribution costs due to high sales volume. For 2021, we continue to expect our gross margin to be in the range of 52.2% to 52.7%. Our guidance includes a conservative expectation regarding any gross margin benefits from inflation. If we experience more inflationary pressures than anticipated, we expect pricing in our industry to remain rational. In the first quarter, our earnings per share of $7.06 represents a 78% increase from $3.97 in the first quarter of 2020 and a compound growth rate of over 30% compared to the first quarter of 2019. I want to congratulate Team O'Reilly again for this significant achievement. For 2021, we are raising our full year earnings guidance to a range of $24.75 to $24.95, an increase of $2.05 from our previous guidance, driven by our strong year-to-date sales and excellent operating profit flow-through, which Jeff will discuss shortly. The midpoint of our revised guidance now represents a 6% increase compared to 2020 and an 18% compounded annual growth rate compared to 2019. Our EPS guidance incorporates the impact of shares repurchased through this call but does not account for any further share repurchases. Before I hand the call over to Jeff, I want to spend a few moments discussing our inventory position and supply chain status. The strength of our supply chain, which includes solid relationships with our suppliers and the historical investments we've made to enhance our distribution network and inventory availability, remains a significant competitive advantage. This has been particularly evident over the past year and has contributed substantially to our strong sales performance, although our supply chain has been under pressure due to elevated sales volumes. While we have been pleased with the majority of our suppliers’ performance, we have faced some challenges with a few suppliers impacted by pandemic-related issues, raw material shortages, or shipping delays. Our distribution centers have also faced pressures as our teams manage record levels of shipments. Like our store teams, our distribution center teams have been working diligently to serve our customers and support strong sales, despite the current volume levels exerting strain on our facilities. We are committed to maintaining and enhancing our competitive advantages in inventory availability and view our current challenges as short-term. In closing, I want to extend my gratitude to our team for their continued dedication to our company and customers. Our first quarter performance was exceptional and a testament to our team's hard work and commitment. I will 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 thanking Team O'Reilly for the remarkable results in the first quarter. 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 running our business. That dedication has certainly been on display in the past year as our team has responded selflessly to the extreme demands and safety protocols during the pandemic. Our results in the first quarter are just another indication of the degree to which our customers rely on us for excellent customer service, industry-leading parts availability and a seasoned, dedicated, knowledgeable team of professional parts people. Our first quarter of 2021 was truly a record-setting performance. 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 for our team to produce these results. Our team's response to the extreme weather conditions they faced in the middle of the quarter is just another picture of their relentless commitment to going the extra mile for their customers. Many of our markets faced severe impacts from the extreme weather conditions, but our store teams went above and beyond to keep our stores open. And our distribution teams matched that effort by ensuring access to the parts our stores needed, enabling us to meet the critical needs of our customers. Challenges in our stores, such as treacherous road conditions, a pause in electricity and broken water pipes are nothing new for our team, who has proven their resilience in response to countless challenges over the years, whether it be severe winter weather, natural disasters or a global pandemic. Now I'd like to spend some time reviewing the extremely strong operating profit performance and SG&A leverage in the first quarter and our updated outlook for 2021. For the first quarter, we generated an astounding increase in operating margin of 526 basis points and operating profit dollar growth of 63%. As we've discussed since the second quarter of last year, the surge in sales in a short time frame has generated historically high levels of profitability, and those sales gains have continued to outpace our rate of SG&A growth even as we redeployed more SG&A dollars back into our stores to adjust to the sales environment. Our first quarter of 2021 was an almost perfect case of this trend. The quarter saw us increase SG&A per store by 7%, which is well above our historical trends and yet far short of the 24.8% comparable store sales increase that we generated, resulting in an incredible improvement in SG&A leverage of 450 basis points. The SG&A per store growth, which is adjusted for Leap Day in 2020, was driven by additional store payroll hours 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 of the company. As we've said for the last few quarters now, we know this level of SG&A expense leverage isn't the right long-term answer for our business, and we continue to plan to actively manage our cost structure to provide excellent customer service to match the sales environment and ensure that we're allocating sufficient resources through the image appearance of our stores as well as the training and development of our team members. We now estimate that our full year increase in SG&A per store will be approximately 3.5%. 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 the date of this call, we now expect operating profit to range between 19.9% to 20.4%, an increase of 90 basis points from our previous guidance. On the expansion front, I'm extremely pleased to announce that this month, we successfully opened our newest distribution center 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 distribution center with an industry-leading inventory set. And on day one, we 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 for store growth in the middle of the country. Our distribution center teams remain committed to enhancing our top-notch inventory availability, and we'll continue to develop our distribution network to support strong growth and set the bar for inventory availability in the industry. 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 first quarter, we opened 66 net new stores spread across 30 states. This progress is in line with our plan for total new store openings of 165 to 175 net new stores for 2021. 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 and permitting 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 first quarter. Now I'll turn the call over to Tom.

Thanks, Jeff. I want to express my gratitude to the entire O'Reilly team for their dedication to our customers, which contributed to our impressive performance in the first quarter. Let's take a moment to examine our quarterly results and updates to our guidance for 2021. During the quarter, sales rose by $614 million, with $589 million coming from comparable store sales, $53 million from noncomparable store sales, and $10 million from noncomparable non-store sales, while we faced a $35 million decline due to Leap Day 2020 and a $3 million drop from permanently closed stores. For 2021, we now project total revenues will range between $11.8 billion and $12.1 billion. Greg has already discussed our gross margin for the first quarter, but I would like to highlight our positive LIFO impact, which was $9 million this quarter, aligning with our expectations and last year's figures. As previously mentioned when we established our full-year gross margin guidance, we anticipate a larger positive effect from LIFO in the first half of 2021, which will help mitigate the pressure on our POS margins from expired tariff exclusions. Our effective tax rate for the first quarter was 23.5% of pretax income, made up of a base rate of 24.4%, adjusted by a 0.9% benefit for share-based compensation. In comparison, the first quarter of 2020 saw a rate of 20.9%, with a base tax rate of 21.8% and the same share-based compensation benefit. The base rate for the first quarter of 2021 met our expectations. The lower tax rate from 2020 resulted from the timing of renewable energy tax credits applicable in that quarter. We anticipate realizing benefits from renewable energy tax credits in the fourth quarter of 2021. For the entire year of 2021, we still expect an effective tax rate of 23%, which includes a base rate of 23.4% and a 0.4% share-based compensation benefit. These predictions are based on no major changes to the current tax codes. Additionally, fluctuations in the tax benefits from share-based compensation may lead to variability in our quarterly tax rates. Next, I'll discuss free cash flow and the factors influencing our results and updated expectations for 2021. Our first quarter free cash flow was $790 million compared to $227 million in the same quarter last year, propelled by increased operating income, lower net inventory, and a rise in income tax payable, alongside differences in 2020’s investments in renewable energy projects and associated cash tax benefits. For 2021, we now expect free cash flow to fall between $1.1 billion and $1.4 billion, an increase from our previous guidance of $1 billion to $1.3 billion, driven by our strong first quarter operating profit and cash flow performance, although we anticipate some reversal of first quarter benefits related to reductions in net inventory and taxes payable as the year progresses. At the quarter's end, inventory per store stood at $637,000, a 2% decrease from the start of the year and a 0.8% decline from last year, a result of particularly strong sales volumes toward the quarter's conclusion. As previously discussed, our plan for 2021 includes adding just over $100 million in inventory to our store and hub network beyond regular new store and product additions. We still aim to grow inventory at approximately 4% per store this year. However, the timing of these additional inventory additions may be influenced by the pressing need to support our stores’ replenishment efforts, potentially leading to delays if sales trends continue to be exceptional. Our accounts payable to inventory ratio at the end of the first quarter was 119%, marking a record high for our company, significantly affected by strong sales and inventory turnover over the past year. We expect this ratio to gradually decrease as we complete our inventory investments and as sales growth stabilizes, anticipating an end-of-year ratio of about 109%. Capital expenditures in the first quarter totaled $95 million, a decline of $38 million from the same time last year, influenced by the scheduling of expenses for new store and distribution center developments. We continue to project total capital expenditures for the year to be between $550 million and $650 million. Regarding debt, we concluded the first quarter with an adjusted debt-to-EBITDA ratio of 1.88x, down from 2.03x at the end of 2020, due to substantial growth in first quarter EBITDAR. We remain below our leverage target of 2.5x and will approach this figure when suitable. Our share repurchase program is ongoing, during which we repurchased 1.5 million shares at an average price of $450.65, totaling $665 million. We are confident that this average repurchase price is justified by the expected future discounted cash flows of our business, and we regard our buyback program as a solid method of returning excess capital to shareholders. Before we open the floor for questions, I want to extend my appreciation once again to the O'Reilly team for their contributions to our remarkable results. This wraps up our prepared statements. Now, I would like to hand it over to Jack, the operator, so we can address your questions.

Gregory Melich with Evercore ISI, your line is open.

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 was 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 and broadened that spread over what we saw in the past couple of quarters, more similar to what we saw when the last incentive was in place, I guess, was the second or third quarter last year.

Got it. So both strong, but there's still DIY, as long as that stimulus is there, that the gap really isn't narrowing, right?

Right.

Got it. And then I guess the follow-up would be on Mayasa. 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 as 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, as 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.

Bret Jordan with Jefferies, your line is open.

Could you discuss how share gains have contributed to your results and the extent of those gains in the DIFM compared to the DIY business?

Yes, it's a great question, and I wish I had a clear answer for it. We know that share gains contributed to the quarter, but we also recognize that stimulus and weather played a role as well. It's difficult to determine how much of the benefit this quarter came from share gain. If you speak to our stores, they will confirm that we are definitely taking market share. They're experiencing repeat customers, and we are focused on providing a high level of service to all of them. We believe we are retaining some of that market share from both larger competitors and smaller players. However, I don't have a precise way to quantify how much of the sales improvement was due specifically to 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 5,600 stores across the country, there are always markets where we believe we can perform better. Our sales and operations team focuses on this every day. Overall, we are pleased with our performance in the first quarter, as we exceeded our expectations on both sides of the business since May of last year, and this trend continued into the first quarter of 2021. Our newer markets in the Northeast and the Southeast are ramping up strongly, as expected given the maturity of those stores. However, as Greg noted, February was a bit softer for us, particularly in our Southern markets, due to the severe winter weather that they are not used to. We strive to be there for our customers during these weather events, whether it’s extreme winter weather, floods, wildfires, or hurricanes. We do our best to be the last store to close and the first to reopen during these catastrophic events. We understand the importance of being there for customers who need parts during disasters. Our commitment to exceptional customer service happens at the store level, one customer and one store at a time. I am incredibly proud of our store and distribution center teams, as well as our office support teams.

Chris Horvers with JPMorgan, your line is open.

I want to follow up on the commentary from April. Last year, April was quite different, with the effects of shelter in place and a decline in miles driven at the beginning. However, there was a significant increase when the stimulus was implemented around mid to late April last year. Given that we're looking at a shorter time frame now, can you discuss what you've observed as the stimulus effects have lapsed in your business, whether considering a one- or two-year time frame or distinguishing between DIY and do-it-for-me services?

Chris, this is Tom. It's not typical for us to include updates on the current quarter in our guidance. However, when the stimulus was introduced this year, we saw our business grow more than we anticipated. As Greg mentioned, this was particularly notable in the DIY segment, which is why we've reflected that strength in our guidance. While we're not going to break down performance by individual weeks, I can say that we have been very satisfied with our results throughout April, and they have exceeded our expectations.

Got it. Regarding the gross margin, I see the LIFO difference compared to the fourth quarter. Last year, the mix on the DIY side was likely a more favorable comparison in the first quarter. Additionally, it seems like there was more leverage in the supply chain this quarter compared to the fourth quarter. I'm trying to understand what changed. Did you perhaps offer higher incentives to supply chain workers in the fourth quarter? What was the reason for the change? Any insights on where you might expect to land for the year would be helpful.

Chris, as you know, we don't talk about our actual distribution costs as a percent of sales. Our comments are in relation to the first quarter of last year, though significant leverage this year helped our gross margin improvement. In relation to the fourth quarter, we continue to work hard to push a lot of volume through our boxes more than was really ever designed. So our teams, as Greg said, have done an outstanding job of making that happen. But whenever we see these high volumes, we're going to have more leverage than we normally would, offset by inefficiencies just created by how high the volume that is going through the distribution centers is.

Right. So is the 25 versus the 11 the essential big difference?

Our comments are versus last year's negative 1, the 2.

Scot Ciccarelli with RBC Capital Markets, your line is open.

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?

Yes. Scot, this is Greg. It's the latter. Early in the year on our fourth quarter 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 those things. So our updated guide is based solely on performance to date through this point in April. We've made the same assumptions that we made first part of the year on the back half of the year. And there's just so many unknowns that we didn't make any adjustments for the back half.

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?

Scot, this is Tom. I'll answer that question. So our discussion of performance was versus our expectations. Obviously, our expectations for the end of March were raised comp because of the soft performance last year. Same thing for the beginning of April. So versus our expectations, 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? The 2 year?

Correct.

Brian Nagel with Oppenheimer, your line is open.

Great quarter. Congratulations. I apologize for the focus on stimulus, but I want to explore this further. You've mentioned that stimulus has positively impacted your sales recently. How do you view the sustainability of this boost, considering the various stimulus events during the pandemic? Additionally, in terms of the demand generated, is it primarily incremental, or is there a component of pulling forward future sales?

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 was from stimulus. Unfortunately, we don't know how long that trend will continue. Historically, that's not lasted much beyond a quarter or 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'll 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. In our prepared comments, we mentioned that one of the things we're considering for the remainder of the quarter is whether there was a pull forward due to the significant increase in business at the end of March and into April. Those familiar with our industry understand that there can be shifts between the first and second quarters based on the timing of spring when customers engage in their spring cleanup. With this increase in business, we're assuming that some of it was pulled forward, and this is reflected in our guidance for the year.

Yes.

Got it. And then for my follow-up regarding sales, you and others in your industry mentioned that a key factor driving significant sales growth during the pandemic last year was the hobbyist customer, someone who became more engaged during that time. As we begin to face tougher comparisons, how are you seeing that segment of your business perform?

Yes, Brian, there are times I wish I hadn't mentioned that. We pointed it out as an anomaly because we saw more growth in car washes, waxes, and performance products last year than usual. In comparison, sales in categories like batteries and other hard parts were significantly stronger last year than in these so-called hobby categories. We highlighted it last year due to this unusual spike. In the first quarter of 2021, we had strong sales of car care products, and all our categories performed well. However, in these categories with unusually high performance, there are enthusiasts who consistently buy performance parts, while the average consumer tends to purchase OE replacement parts. We've noticed this trend continuing, though perhaps not as strongly as last year. However, it's not a major factor influencing our comparison. The more significant contributors to our core categories like battery, brakes, and undercar parts have performed very well this year.

Michael Lasser with UBS, your line is open.

Recognizing that there is a lot of uncertainty and you're very early in the second quarter, if we assume that you comp up mid-single digits in Q2 to get to the high end of your 1% to 3% comp guidance for the full year, 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 hundred 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 in your guidance 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 if the premise of 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 second quarter last year in quite a bit of detail, after 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 and June. And May and 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 discussions have taken place regarding utilizing the strong sales performance to reinvest in operating expenses for the business? The labor market is likely to tighten, and wage growth is expected to rise. Would it be beneficial for the long term to reinvest some of this short-term strength back into 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 then I'll turn it over to Jeff, has been on more full-time people, and we want to make sure that we're planning appropriately for the long term. Jeff, would you like to add to that?

You've covered it well, Tom. We've always maintained a long-term perspective on staffing, tailoring our approach to each store to ensure we can provide excellent customer service and grow our business. This strategy varies by location. We've been focusing on hiring more full-time team members, as they tend to be more experienced and capable of delivering a higher level of service. One area we've identified as needing improvement is our service levels during nights and weekends, and we've made it a priority for several years now. We feel we're making significant progress in that area.

David Bellinger with Wolfe Research, your line is open.

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 go over the 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 full year sales guidance at all?

Wow, that's a tough question. There have been pressures on supply chains within our industry and in the economy in general and shipping pressures. 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 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 first quarter, 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?

I'm sorry, we're having a hard time hearing your question.

Sorry. Just to 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 consider pricing, most of our products are driven by customer needs. We aim to be competitive on price, but our main focus is on providing excellent service. Therefore, we determine the right pricing on a product-by-product and store-by-store basis. However, we plan to maintain the pricing strategy that has contributed to our long-term success.

Kate McShane with Goldman Sachs, your line is open.

I wanted to clarify the question about inflation in relation to gross margins. If we experience more inflation, might there be a delay of a quarter or two before that impacts the gross margin? Additionally, as DIY (Do It For Me) business picks up with an increase in miles driven and gas demand, how does that influence your gross margin guidance for the year?

When we experience price inflation, we need to respond promptly. This response is influenced by our inventory levels and market competitiveness. We aim to maintain our gross margin percentage despite any increases in acquisition prices. The extra revenue generated from rising prices will help counterbalance the rising costs of SG&A, as they are interconnected. Regarding the professional segment of our business, we anticipated challenging comparisons on the DIY side this year, while the professional segment is expected to continue its growth. The professional segment typically has a lower gross margin since those customers benefit from volume discounts. This expectation for stronger growth in the professional sector was built into our guidance for the year. Additionally, as Greg mentioned in our first quarter, part of the growth in gross margin that exceeded our expectations was attributed to the faster growth in the DIY segment.

Liz Suzuki with Bank of America, your line is open.

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?

Yes. Jeff, do you want to take that one?

Sure. I'd say overall pricing remains pretty rational. I mean, you see certain regional players maybe that run certain deals at certain times of the year. But all in all, across the board, pricing is pretty rational. We obviously stay on top of it and react accordingly to make sure that our price is always competitive in the marketplace and then really focus on winning with availability, service and relationships.

Great. And just a follow-up on the competitive landscape. 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&A as we might have expected in that kind of environment. So how does the pipeline for potential acquisition targets look today?

Yes. I would say that our industry performed quite well. We are in discussions with some smaller players that could present acquisition opportunities. We are always on the lookout for strategic acquisition targets that are either economical or provide a competitive edge, or help us enter new markets, and we assess these acquisitions based on the value they bring to the company. However, there are not many larger acquisition targets left in markets where we don't already have a presence. Therefore, our focus is primarily on smaller acquisitions. By smaller acquisitions, I mean chains with 1 to 10 stores, and we are open to larger companies like Bond or Vintage that may have 20 to 40 stores if they become available. We are also exploring acquisition opportunities outside of the U.S.

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, and they're not going to pass it on to the next generation. So that acquisition pipeline is more determined by individual events at different chains than macroeconomic circumstances.

Zach Fadem with Wells Fargo, your line is open.

I have a longer-term question on the DIY business. Obviously, having a great moment right now and 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 prepandemic.

Yes, that's a great question, Zach. The softness in new car sales combined with strong used car sales is largely driven by supply and demand, which is beneficial for our industry for a couple of reasons. As you mentioned, the DIY channel can accommodate a lot more of the maintenance repairs and service intervals. Furthermore, many vehicles are likely out of warranty, giving consumers two choices: they can go to their independent garage, which is one of our professional customers, or they can handle the repairs themselves. Most consumers typically wouldn't return to the dealer due to the costs of repairs. Over the past year, we've noticed that DIY consumers are more willing to perform repairs and maintenance on their vehicles than we have seen historically. Whether this trend will continue moving forward is uncertain, but I hope it does. I've mentioned before that there are certain traditions at play here. I have fond memories of changing the oil in my car with my dad when I was younger. I hope these traditions, where parents teach their children how to do simple repairs, like oil changes and brake work, remain prevalent in the DIY channel. Regardless, whether through the DIY channel or the DIFM channel, the strength in used car sales should positively impact our industry and the aftermarket.

That makes sense. And my follow-up for Tom, last quarter, you suggested your gross margin rate on an ex LIFO basis would be fairly consistent through fiscal '21. 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 need to review the transcript. I believe I mentioned that we anticipate our gross margin to remain relatively consistent overall. We had somewhat better performance than expected during the first quarter, but it isn't enough for us to alter our range.

We have reached our allotted time for questions. I will now turn the call back over to Mr. Greg Johnson 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 second quarter results in July. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.