Welcome to the O'Reilly Automotive Inc. Third Quarter 2023 Earnings Call. My name is Holly and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct our question-and-answer session. I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Thank you, Holly. Good morning everyone and thank you for joining us. During today's conference call, we will discuss our third quarter 2023 results and our outlook for the remainder of the year. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would 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 31st, 2022, and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. At this time, I would like to introduce Greg Johnson.

Thanks Jeremy. Good morning everyone and welcome to the O'Reilly Auto Parts third quarter conference call. Participating on the call with me this morning are Co-President, Brad Beckham, and Brent Kirby as well as Jeremy Fletcher, our Chief Financial Officer. Greg Hensley, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman are also present on the call. I'd like to begin today's call by congratulating Team O'Reilly on outstanding results in the third quarter and express my deep appreciation to our team of over 88,000 professional parts people for their steadfast dedication to our customers. This unwavering commitment to excellent customer service is the hallmark of O'Reilly Auto Parts and the key to earning our customers' business every day. Our team's ability to deliver sustained profitable growth is evidenced by a robust 8.7% increase in comparable store sales, coupled with a 17% increase in diluted earnings per share for the third quarter. Our results have exceeded our expectations throughout the year, driven by the team's high level of execution. Service and product availability are critical pieces of our value proposition, and our ability to remain intensely focused on these fundamentals has continued to drive growth on both the professional and DIY sides of our business. As we announced in July, upon my retirement in January, Brad Beckham will be promoted to the position of Chief Executive Officer, and Brent Kirby will be promoted to the role of Company President. Brad and Brent are tremendous leaders who bring world-class ability, experience, and passion to their new roles. Even more importantly, they are incredible standard bearers of the O'Reilly culture. Our transition to the operations of the company to Brad and Brent has progressed smoothly and seamlessly, and as a result, today's earnings call represents my last call as CEO. As such, it is appropriate for me to leave the bulk of our discussion of the third quarter results to Brad, Brent, and Jeremy. But before I turn the call over, I would like to thank our shareholders for their continued confidence in and support of our company during my tenure as CEO. Finally, I'd like to thank Team O'Reilly for your hard-working commitment to our customers. It has been my absolute honor and privilege to work alongside you for the last 41 years, witnessing you achieve incredible milestones along the road to success for O'Reilly Auto Parts. Even though I won't actively participate in the next chapter of our company's success, I'm still excited about the many opportunities ahead and look forward to watching our company's continued growth and future success. I'll now turn the call over to Brad Beckham.

Thanks, Greg, and good morning, everyone. I would like to begin by congratulating Team O'Reilly on another excellent performance in the third quarter. The ability of our team to deliver continued industry-leading sales performance requires a consistent and intense focus on our culture and the fundamentals of excellent customer service. I would like to thank all of our team members for their hard work and dedication to our great company. Now I'd like to walk through the details of our sales performance for the quarter on both the professional and DIY sides of our business. We spoke on our last call about the strong start to the quarter in July, driven in part by extreme heat in many of our markets, and we were pleased to see these very strong volumes carry on throughout the quarter. From a cadence perspective, we saw a similar top-line outperformance in each month of the quarter compared to both the expectations we built into our plan coming into 2023 and the updated guidance we provided on last quarter's conference call. As we have discussed throughout 2023, our prior year comparisons get more challenging as we move throughout the back half of the year, and this dynamic was reflected in the cadence of our comparable store sales in the third quarter with our strongest comps for the quarter in July and August. However, on a two-year stacked basis, our performance was much more consistent through the quarter, with September only slightly below the full quarter performance due to a moderation of the hot weather benefit we realized earlier in the quarter. While we did see outperformance during the quarter in categories impacted by heat, such as cooling and HVAC, we also experienced broad strength in application-specific hard part categories as well as maintenance categories such as oil and filters. These dynamics give us confidence that while we did benefit from weather, it was not the primary driver of our above-expectation results, and the sales we are generating in failure and maintenance categories indicate a healthy level of broad-based consumer demand. Our professional business continues to be the more significant outperformer, and our team was able to deliver another quarter of mid-teens comparable store sales growth in our professional business in the third quarter. This outstanding growth was in line with the professional sales increase we achieved in the second quarter while facing increasingly challenging prior-year comparisons. We are extremely pleased with our team's ability to gain share through consistently executing our business model and providing industry-leading value to our professional customers. Our expectation is to continue to grow our share in the professional business as we see plenty of opportunities in both new and existing markets to consolidate the overall DIFM market. Turning to our DIY business, we were pleased to generate solid comparable store sales growth with our top-line growth consistent with the first half of the year, even as we saw an expected moderation in the benefit from inflation. In line with the trends we have seen this year, our DIY comparable store sales growth has been driven primarily by increased average ticket values, however, we were pleased to see positive DIY ticket count comps in the third quarter. Our teams continue to execute our dual market strategy driving market share growth in our DIY business alongside our robust growth in professional. However, our portion of the total DIY market share in the U.S. is still relatively low, and we see continued DIY growth as a tremendous area of opportunity for our company. I would like to provide some color on our average ticket and ticket count performance. Average ticket growth was again in the mid-single digits on a combined basis and was the slightly larger share of our comparable store sales increase. While we are seeing the expected reduced benefit from same-skill inflation as we move throughout the year, our moderation in total average ticket growth has not been as significant due to offsetting strength we have seen from parts complexity and product mix. Moving forward, we expect a more normalized same-skill inflation benefit, but are confident that future average ticket growth will be supported by increased parts complexity, which has been the primary historical driver of our average ticket. Even though average ticket growth was the larger contributor to our comparable store sales growth, we are very pleased with our ticket count comps, which was the larger contributor to the outperformance versus expectations. Our team's ability to out-hustle and out-service our competition for this increased traffic volume is paramount to ensuring these share gains translate into repeat business. It has never been more important to ensure that we have highly trained teams of professional parts people supported by superior product availability in every single one of our 6,000 plus stores. As I finish up our remarks on sales performance in the quarter, I would like to highlight our updated four-year sales guidance. We have increased our four-year comparable store sales guidance to a range of 7%-8% from our previous range of 5%-7% and increased our total sales guidance to a range of $15.7 billion to $15.8 billion. This update is reflective of our year-to-date performance through today's call, including a solid start to the quarter with October trends in line with how we exited the third quarter. As we finish out 2023, our fourth quarter reflects our most challenging comparisons of the year, as we lap the 9% comparable store sales increase in the fourth quarter last year and expect to see a fully normalized same SKU benefit. Our outlook for the remainder of the year is consistent with the guidance we have maintained throughout 2023. While we have been very pleased with the degree to which our performance has outpaced our expectations in the first nine months of 2023, we are always cautious as we approach the last few months of the year, which historically can be volatile due to variability in winter weather and pressures consumers can face during the holiday shopping season. As a reminder, our prior year comparisons are the most challenging in December as we benefited from broad-based strength in weather-related categories at the end of 2022. Against this backdrop, we maintain a positive outlook on the fundamentals of our industry. We are confident that the key demand drivers for the aftermarket, including steady recovery in miles driven and a very favorable U.S. vehicle fleet dynamics, are in place to support steady growth moving forward. We also believe that our customers have remained resilient and are continuing to prioritize the maintenance of their existing vehicles to avoid taking on a payment for a higher priced, newer vehicle. As you have heard from me already today, we see many opportunities in our markets to grow faster than the industry. Our team is energized by the results we are seeing from our solid execution of the basic fundamentals of our business that translate to success. Next, I would like to discuss our SG&A performance in the quarter. SG&A, as a percentage of sales, was 30.1 percent, a deleverage of 29 basis points from the third quarter of 2022, driven by an increase in SG&A per store of approximately 8.5%. Our SG&A growth in the third quarter was above our expectations, so I want to provide some additional color on what drove the results in the third quarter. As we saw in the first half of 2023, the majority of our outside year-over-year SG&A growth was the result of planned investments and initiatives targeted at enhancing our long-term operational strength. Our spend on these items was largely in line with our expectations coming into the quarter, and we remain pleased with the positive impact we are generating by reinvesting in our stores, technology, and most importantly, in Team O'Reilly. While these initiatives continue to play out as planned, our total SG&A dollar spend per store in the third quarter was higher than we expected coming into the quarter. This was driven by incremental costs necessary to support our significant comparable store sales outperformance, but which also resulted in better leverage of SG&A expenses than we saw in the second quarter. Our focus remains on relentlessly pursuing the excellent customer service that strengthens the long-term relationship we have with our customers, and we will continue to be aggressive where we see opportunities to accelerate top-line growth and, in turn, create leverage over sales increases we achieved in the second quarter while facing increasingly challenging prior year comparisons. We are extremely pleased with our team's ability to gain share through consistently executing our business model and providing industry-leading value to our professional customers. Our expectation is to continue to grow our share in the professional business as we see plenty of opportunity in both new and existing markets to consolidate the overall DIFM market. Turning to our DIY business, we were pleased to generate solid comparable store sales growth with our top-line growth consistent with the first half of the year, even as we saw an expected moderation in the benefit from inflation. In line with the trends we have seen this year, our DIY comparable store sales growth has been driven primarily by increased average ticket values; however, we were pleased to see positive DIY ticket count comps in the third quarter.

Thanks, Brad. I would like to echo Greg and Brad in congratulating Team O’Reilly on the outstanding performance in the third quarter. The continuation of our strong sales performance and proven ability to outperform the market is a testament to our team's unwavering commitment to excellent customer service. I want to thank all of our team members for their dedication to our company and to our customers. Now I will cover our third quarter gross margin results, what we are seeing in the competitive environment, and provide some updates on our store and distribution growth, inventory investments, and capital expenditure plans. Starting with gross margin, our third quarter gross margin of 51.4% was a 46 basis point increase from the third quarter of 2022 at just above our expected range. We are pleased with the stability of our gross margin results as our third quarter continued the strong trend we saw in the second quarter. Our gross margin for the third quarter faced pressure from the sustained strong performance in our professional business, creating a customer mix headwind. However, we have been able to offset these headwinds through improved acquisition costs and outstanding support from our supplier partners. Pricing to both DIY and professional customers has remained rational within the industry. We continue to see modest inflation in the third quarter and remained very successful in passing along increases in product acquisition costs and other inflationary pressures in selling price. While our quarter-to-quarter gross margin rate can see normal fluctuations from seasonality in product sales mix and leverage of distribution costs relative to overall volumes, the stability of our results in light of the share gains we are experiencing demonstrates our team's ability to win share through service and product availability. As a result of our solid year-to-date performance, we are maintaining our full year gross margin guidance of 50.8% to 51.3%, but would now expect to come in within the top half of this range. Inventory per store finished the quarter at $758,000 which was up 4% compared to the beginning of the year. We would now expect our average inventory per store increase to finish the year in a range between our original guidance of 2% growth and the current levels driven by our continued opportunistic investments to support our sales momentum. Our AP-to-inventory ratio at the end of the third quarter was 134%, in line with the beginning of the year and slightly better than expectations driven by strong sales volumes and inventory turns. We now expect to finish 2023 at a similar level. The health of our supply chain and resulting store in-stock positioning continues to be a competitive strength, optimizing our assortments across our DC hub and store network while simultaneously partnering with our supplier community to achieve industry-leading fill rates is absolutely playing a key role in our exceptional sales results, and we continue to regard inventory availability as a critical priority for our business. Alongside the investments we are making in inventory, we also remain focused on leveraging the benefits of the tiered nature of our distribution model. This strategy has been an important aspect of our supply chain for many years and begins with placing distribution centers in large metro areas to provide same-day availability to a wide range of SKUs for our customers. Strategically located hub stores augment our SKU availability on a more localized basis and represent the very important second tier within our distribution supply chain. We continually evaluate this network including the number, location, and size of our hub stores to ensure that all our stores have the best access to inventory in their respective markets. Next, I would like to discuss our capital investments and expansion opportunities beginning with the investments we are making in our distribution network. As we discussed on last quarter's call, we are very pleased with the successful opening of our Guadalajara Mexico DC in July, but are also excited on today's call to announce two additional expansion projects that we currently have underway. First, our distribution teams are actively working on a relocation of our Atlanta DC which is a large project that will enable expanded more efficient store servicing capabilities within that market as well as providing direct import processing capability within this new facility. This new 690,000 square foot building is expected to be complete by the end of 2024 and will increase the number of stores we can support in this critical market by 100 stores. Next, we have an exciting distribution expansion project that is in progress in Stafford Virginia where we have purchased a site and begun construction on a large new distribution facility that will service the Washington DC, Maryland, and Virginia corridor. The new DC will be approximately 530,000 square feet and our initial plan is to build that capacity to service 350 stores. We anticipate this distribution center will be open and operational by the middle of 2025, and we could not be more excited about the store development opportunity this provides us in what is largely an untapped market area for O’Reilly today. Our distribution center teams are diligently executing on these projects and are enthusiastically looking forward to further expanding our DC footprint and our industry-leading parts availability. Turning to store growth and expansion, we successfully opened 40 stores during the third quarter bringing our year-to-date total to 140 net new store openings for 2023. Our team is confident we will achieve the goal of 180 to 190 net new store openings for 2023. As we noted in our press release yesterday, we announced our 2024 new store opening target of 190 to 200 net new store openings. Our strong new store performance continues to prove that our investments in both new stores and the necessary distribution infrastructure to support those stores is an attractive use of capital. Total capital expenditures for the first nine months of 2023 were $754 million, a considerable increase over prior year but reflective of the attractive opportunities we see to deploy capital against projects and initiatives to drive long-term growth and enhance our competitive positioning. Included within our press release yesterday was an update to our full-year capital expenditure guidance to a range of $900 million to $950 million from the previous range of $750 million to $800 million. The primary driver of this increase was the progress that we have made on the new Virginia Distribution Expansion Project as well as a higher mix of owned new stores and the pace of investment in technology and store infrastructure initiatives. To close my comments, I want to once again thank Team O’Reilly for their hard work and continued dedication to our customers. Now I will turn the call over to Jeremy.

Thanks Brent. I would also like to thank Team O’Reilly for their continued hard work and outstanding performance in the third quarter. Now we will cover some additional details on our third quarter results and guidance for the remainder of 2023. For the quarter, sales increased $405 million driven by an 8.7% increase in comparable store sales and a $78 million non-comp contribution from stores opened in 2022 and 2023 that have not yet entered the comp base. Our third quarter effective tax rate was 23.2% of pre-tax income comprised of a base rate of 24.3% reduced by a 1.1% benefit from share-based compensation with both components in line with the third quarter of 2022. Our third quarter base tax rate was in line with our expectations with the total effective tax rate below our expectations due to higher than planned benefits from share-based compensation. For the full year of 2023, we continue to expect an effective tax rate of 22.5% comprised of a base rate of 23.4% reduced by a benefit of 0.9% from share-based compensation. Our fourth quarter effective tax rate is expected to be lower than the other three quarters due to the tolling of certain tax periods. Variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first nine months of 2023 was $1.7 billion versus $1.9 billion in the same period in 2022. The reduction was the result of the increase in capital expenditures Brent discussed in his remarks as well as a lower working capital benefit from the reduction in net inventory this year versus 2022. These headwinds were partially offset by growth in income and a benefit from favorable timing of tax payments and disbursements for renewable energy tax credits. For 2023, we continue to expect free cash flow at a range of $1.9 billion to $2.2 billion, with an increase in expected cash flow from operations offsetting the increase to our CAPEX guidance. Moving on, we finished the third quarter with an adjusted debt to EBITDA ratio of 1.93 times, which is up compared to our end of 2022 ratio of 1.84 times. The increase in total indebtedness was comprised of borrowings under our commercial paper program, which we successfully launched in the third quarter. We continue to be below our leverage target at 2.5 times and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program and during the third quarter we repurchased 852,000 shares at an average share price of $938.11 for a total investment of $800 million. Year-to-date through our press release yesterday, we repurchased 3.4 million shares at an average share price of $879.74 for a total investment of $3 billion. We remain very confident that the average repurchase price inclusive of the current excess tax cost is supported by the discounted expected future cash flows of our business, and we continue to view our buyback program as an effective means of returning capital excess capital to our shareholders. As a reminder, the updated EPS guidance outlined by Brad earlier includes the impact of shares repurchased through this call but does not include any additional share repurchases. Finally, before I open up our call to your questions, I would like to again thank the entire O’Reilly team for their continued dedication to the company's long-term success. This concludes our prepared comments. At this time, I would like to ask Holly, the operator, to return to the line and we will be happy to answer your questions.

Thank you. We will now begin the question-and-answer session. Our first question for today is coming from Michael Lasser at UBS.

Good morning. Thanks a lot for taking my question. Your guidance, implied guidance for the fourth quarter implies a significant slowdown in the business. Outside of the uncertainty associated with the weather and the holidays, is there anything that you would point to that would have influenced such a slowdown or deceleration in the performance of the comp?

Good morning, Michael. It's Brad. I'll take a stab at that and see what the other guys want to follow up with. Great question. As you know, Michael, I think generally speaking, directly to your question, the answer is not really. As you know, as we always say, the fourth quarter can be the most volatile from the weather standpoint, from the holidays. I think the key is just to remind you what I said earlier that we feel really good about how October is going so far. Generally, the first few weeks of the quarter have been very consistent with what we saw with the exit rate, especially from a two- and three-year stack basis. But we still have almost half the quarter to go. December is a huge comparison. And we just want to make sure that we're just being cautious overall. But generally speaking, we're really happy with the way volumes are holding up and really excited to do everything we can to finish the quarter strong here.

Yes. Maybe, Michael, the only thing I would add is just the characterization of a significant slowdown in our business. We've really spoken all year to just the timing of how that one-year comp is going to look as comparisons just naturally get more challenging as we move through the year. While there is some time left in the quarter and we've been pleased with our performance all year long, what we're anticipating as we finish out the year is pretty consistent with where we've been. It's not reflective of anything that we're seeing when we think about our sales from a week-to-week volume, understanding the seasonality of the business as we move into the fourth quarter.

I got you. For O’Reilly, tough compares is a way of life, but that's okay. My second question is on the outlook for SG&A spending. It's obvious that the returns on the investments that you're making have been quite productive in light of the market share that O’Reilly has been achieving. Would you expect a similar rate of SG&A dollar growth on a per-store basis moving through 2024? Are there opportunities to invest such significant amounts that would generate similar returns? Thank you.

Thanks, Michael. Another good question there. As we've said, we're extremely pleased with the returns we've seen from investing back in the business. As you know, there is a big difference for us at O’Reilly between investments and judiciously managing our expenses. Like I said earlier, expense control is a huge part of what we do. We never like to delever, except in the case of this year, when we knew we were playing from a position of strength and we knew there were some areas that are really just paying off. We're very happy with the ROI we've seen on all our initiatives where we've reinvested back in the business this year. As you know, a lot of that is some catch up from COVID, the years of COVID, and everything that we wanted to spend that we didn't get to. Michael, honestly, we're in the middle of working on our plan for 2024. That always starts with the top line number, and then we back into what we feel is the right thing to do for short, mid, and long-term, especially when it comes to those mid and long-term returns. We look forward to talking about our plan in February 2024, but we just want to be careful talking about 2024 just yet.

I understood. Good luck to Greg Johnson. Thank you so much.

Thanks, Michael.

Hey, good morning, guys.

Good morning, Brett.

Good morning Brett.

As you guys continue to gain market share in the space, could you talk a little bit about where you're seeing both that coming from smaller DIFM independents or national accounts, and then, I guess, obviously, it's got to be a shared donor as well, so is that also the smaller WDs that you're picking up from, or are things changing in market share relative to larger peers?

Hey, thanks, Brett. Another good question. Honestly, Brett, you've heard us say for a long time, it's always hard to tell all the moving pieces. We have extreme respect for all our competitors. We take all our competitors extremely seriously, the big four, the independents. We have tough, tough competitors on both the DIY and professional side of the business. We spend our time focusing on being our own worst competitor, meaning that we always have execution opportunities. Honestly, to try to answer your question the best I can, we feel like it's a little bit of all the above. We feel like everything from store operations, execution, service levels, continuing to work on our retention and turnover, got to brag on our supply chain team for their continued improvements with our product availability, our assortments, and really getting away from the COVID hangover. Generally speaking, I think it's a little bit of everything you mentioned. I think pretty broad-based from a customer standpoint, and we think it's probably fairly broad based from where it could be potentially coming from from a competitor aspect as well.

Okay. I guess sort of a follow up to that. Now you're saying there's such big dispersion between execution on the distribution side. Are there any increased M&A opportunities, either large regional distributors that are private that you sort of see to maybe fill in some of that geographic white space you have out there around sort of between the Midwest and those Virginia DC?

Yes. Sure. I'll lead that off and then let Brent hit on kind of the first part of your question. I'll just speak maybe to the M&A opportunities. As you know, we're always looking for opportunities when it comes to Greenfield expansion, but also strategic acquisitions that make sense from acquiring not only real estate and locations but also great teams of parts people that understand the professional side of the business and teaching those type companies how to be a dual market company. So we're hopeful that maybe as things evolve in the next year or two, valuations and things like that could look a little more attractive than they have in the last couple of years, but it is still a bit hard to say. However, we are always looking at the one-store deals, our job, or customers that we still have that potentially don't have an exit plan, one-store deals, two-store deals all the way up to some of the regional things. We’re hopeful that as we continue to get more aggressive in the upper mid-Atlantic and the true northeast that some of our other opportunities come to light.

Yes. And Brett, I would just add maybe on the distribution and supply chain side of things. Certainly the exciting news about our Stafford facility that I talked about in my prepared comments, we're super excited about getting another large DC in the Mid-Atlantic. We see that as a big, untapped geography for us, and we're certainly investing to begin to take more advantage of that opportunity. And when you think about our distribution infrastructure, for us, it's something we're constantly looking at. Our DCs are where the cars are, where the people are, and we don't see that as an opportunity necessarily to use 3PLs; we want to own that. We want to run it. We want to operate it the way we always have. We’re always looking at hub store opportunities, how they augment the tiering of our DCs, and where they are to be first in class in every market we operate in in terms of parts availability. So we're going to continue to do that. We see that geography as a continued opportunity moving forward.

All right. Thank you.

Yes. Thank you.

Thanks Brett.

Thanks Brett.

Yes. Hey, good morning, everybody. Thank you for taking our questions.

Good morning, Daniel.

Follow-up on Brett's question about. Just curious how's the onboarding of the new customer progress? Any hiccups or learnings? Has he won so much business so quickly that any bottlenecks are limiting growth? Is that kind of behind some of these infrastructure investments you guys are talking about?

Yes, maybe I'll start there. This is Jeremy and a little bit of interference on your sound. But I think the question really focuses around what we have learned as we've seen the share accelerate within our business and how that's impacting how we move forward. For sure, the increased volume that we're picking up involves completely new customers that are unfamiliar to us in the markets that we're in. In every market we exist in, we spend considerable time understanding the market and understanding the shop's formulas, and relationships. For us, the focus is always on how do we create value for those customers and how do we ensure that we're partnering with their businesses to help them be successful, even as we grow business. For sure, as we've seen more and more opportunities to earn business over the course of the last several years during the pandemic, especially as we've seen the ability to grow on top of growth with those customers, our touchpoints when we get that extra opportunity to provide outstanding service are just critical to being able to compound that growth. What we've seen as we move through the last several quarters is our ability to provide excellent service to demonstrate the values that Brad talked about earlier, that we can provide excellent service, great informed technical staff within our stores that support the work of our professional customers, incredible parts availability, and just a broader support has provided excellent value and continues to give us more and more opportunities.

That's helpful. And maybe I want to dig into the SG&A spend a little bit more. Are there any specific initiatives you can unpack around maybe what you're spending on, whether it's tech for your professional customers or delivery efficiency? Does anything need to help on that or clarify what you're spending on so we can better understand how it's driving sales? Thanks.

Yes, I mean, I think that the general things that we've talked about are similar to how we've spoken to this item throughout the course of the year. We think they're great investments for our company, and competitively, we want to see them play out for a long period of time. But for sure, we've made a concerted effort to continue to invest within our team. We've talked about enhanced benefits, PTO and 401-K improvements, and just more broadly how we think about how our store managers manage their work week and things along those lines. We continue to invest in the image and appearance of our stores and our fleet vehicles and ensuring that we get the safest vehicles on the road possible. Technology continues to be a huge ongoing investment as we think about all the areas of the business where we can bring better tools online to support the work that our store teams are doing and taking care of our customers.

Fair enough, and best of luck.

Thanks, Daniel.

Hey, good morning, guys. I think we're getting a lot of mixed data points on the state of the industry. Putting your outperformance aside for a minute, I'm curious to hear if you think the broader category is slowing or not? And to what extent the impact of a broader consumer slowdown would have on the aftermarket?

Yes. Hey, Zach, it's Brad. I'll take a stab at that, and then I may flip it over to Brent to talk generally about what we're seeing and not seeing on some of those fronts. But generally speaking, Zach, we're just not seeing that. As part of our results, as you can imagine, it’s just hard for us to say that we're really seeing that. When I look at our positive DIY ticket count that I cited in our prepared comments, I mean, that's encouraging for us. We're very excited about the execution of our teams on the DIY side, as well as the professional side. Although I see comments that some shops may be a little bit slower than others, it's just hard for us to say, based on our results and what we hear daily, that there's an overall slowdown.

Yes, and Zach, I would add to echo Brad's comments. But it's really a tremendous testament to the culture and to the execution of our teams out there, our sales teams, our distribution center teams. They have just executed at an outstandingly high level and continue to do so. We’re not saying we're immune from any of those things that may happen in the greater macroeconomic background, but we just have not seen the effect of that through the Q3 results, and we're not seeing it as we get into Q4 at this point. So we're going to continue to stay focused on executing, serving the need, and meeting the demand. We feel that good things will continue to follow.

Yes, that may be the only thing I would add to that. I'm sorry, just one more thing. I know you kind of talked about how we think about that moving forward. From a long term perspective, our view on the resiliency of our industry is unchanged. We've been through different cycles of challenges to the consumer in the past. There are always the potential for short-term shocks and fluctuations that might last a quarter or two. We're always cautious in how we think about that near-term outlook, but the underlying core drivers of demand within the aftermarket continue to be resilient and strong. The value proposition that investing in your existing vehicle has for a consumer is attractive. We think it continues to get more appealing with the vehicle dynamics, and people are still using their cars for many aspects of daily life with miles driven expected to steadily increase. So those factors are all positive as we consider the longer term. That's truly where our focus is as we think about building our business.

Okay, great. That's great color. And with respect to competition, it seems like the WDs had been operating with one hand tied behind their back in the early days post-pandemic. But with those businesses now back in stock and ready to recapture some of the share that they lost, do you think we could be entering a period of choppier pricing, particularly as we lap the double-digit inflation in the industry?

Yes, Zach, it's Brad. Well, the first thing I would say is I know we all in the industry anecdotally felt like potentially some of the smaller players could have had a little bit more adversity when it came to supply during the pandemic. And I think that was probably true, and I think it's probably accurate. Across the market, they are probably healthier than ever. The key with that, though, is that we had our opportunities too. Brent and I, none of us were totally satisfied with how we performed during the pandemic. We've made incremental improvements as well. But the key to remember is that we had opportunities to pick up share during that time. We were able to move from third to second call or take the opportunity when others fell down, and we were able to step in there with relationship service backed up with availability. That business, especially on the professional side, is incredibly sticky, and those relationships and that trust take time to build. We believe it would be challenging to lose that business rapidly once built. On pricing, no, we don't feel that way. We're not seeing that as an issue moving forward. Time will tell, but when we rolled out our pro pricing initiative, we strategically moved down on some of the lines that maybe some of the WDs were more aggressive with, and we didn’t come all the way down to compete, knowing they footed much of their revenue through volume anyway. So we just don’t see that as a near-term threat.

Yes, and Zach, maybe to add a couple of comments on pricing, especially from a WD perspective. We've continued to diversify our supply chain across multiple suppliers for various lines, especially in our proprietary brands. We continue to see our proprietary brands grow, so we continue to be pleased with that yield in terms of our gross margins and how we're able to enhance those moving forward. I feel like we are in a much better strategic position than we were going into COVID if there is something irrational that comes up out there, but we’re just not seeing it at this point.

Appreciate the thoughts, guys. Thanks for the time.

Yes, thank you. Thanks, Zach.

Hey, good morning, everyone. First question is on gross margin. It stepped back a bit from price investments, and we've come to accept that. It probably won't snap back anytime soon. Anything new on that as you get leverage over some of the distribution costs? Are you reinvesting those? Is there any reason we can see gross margin click back up?

Yes, hey, Simeon, it's Jeremy. We continue to focus on gross profit dollar growth, so obviously in a few months here, we'll speak to where we think '24 might look. Our hope is that, from a longer-term perspective, we can improve the overall volume within our storage, which helps leverage DC expenses. Of course, during the pandemic, we faced significant pressure as the supply chain got more challenging. We feel we do have an opportunity from a more normalized standpoint to mitigate those margins as we seize market share. The value we have as a partner to our suppliers to grow their business and increase market share remains high, and we see that as vital as we manage our long-term costs.

Thanks. And then a quick follow-up. This is to clarify some of the points, Jeremy. You made, I think, Brad made around market share. The story of your incredible market share this year, is that you said more new accounts that you hadn't serviced before, or is it market share penetration, it keeps ticking higher?

Yes, thanks for that question, Simeon. I wouldn't want there to be any confusion there. It's a little hard for us to really classify a new account versus not a new account. Our store teams are relentless in understanding every dollar of business done in the market. We will canvas that market and take around our credit apps and sign up every customer possible from day one. The concept of completely new customers is a little foreign for us; it's really how we continue to grow our larger share of that wallet. Broad-based over our strong momentum has resulted in growth across our larger accounts and those that were heavy purchasers of O'Reilly parts.

Okay, thanks. Good luck.

Thanks, Simeon.

Hey, guys, good morning. It's Mike on for Greg. Thanks for taking a question. I wanted to ask, first off, if I could, about the impact of inflation in the quarter. Can you just give us a sense of the level there? And then, do you see inflation basically turning into more disinflation in the fourth quarter, or should we be thinking about the potential for outright deflation to come in?

Yes, Mike, thanks for the question. Third quarter was kind of low single digits, and that's continued to taper down this year, in line with what we expect. We don’t anticipate deflation within our business. We think our industry has held the price levels over the longer term. It's a nondiscretionary spend for certain, even as some of us realize some cost improvements. We’ve been able to maintain our prices and that's what we would anticipate moving forward. As we exit the third quarter and move into the fourth, we’d say normalization of inflation will be low single digits, not a huge tailwind.

And just from a gross margin comparison, I just wanted to ask anything to know from a LIFO perspective as we head into the fourth quarter and or any impact from that on the third quarter?

No, really, as we think about our gross margin, we view our reported gross margin as the best measurement of how we think about the business. They are the most current reflection of what we're paying for parts today and we continue to maintain our guidance on that item.

Thank you, good luck.

Thanks, Mike.

Thanks, Mike.

Good morning, guys, and thanks for taking my question, and best of luck, and congratulations, Greg. My first question is trying to dial in a little bit more on the SG&A. I guess, can you talk or help us think about how much of the SG&A is more variable relative to other retail models, given how you incentivize and reward your employees? So like if comps were up 3% to 5%, and we backed out the PTO adjustment, but then you ended up doing an 8%, how would you think about that normalized SG&A for store growth?

Yes, thanks, Chris. I appreciate the question. There are a lot of moving pieces in that, especially in a year like this year when we've done some things that are outside of our normal cadence. We still operate a relatively high fixed cost model just because we have so many units in the store teams that are there. This structure benefits us as sales grow, and I can be a bit reluctant to quantify or try to parse out those individual numbers, but I think there is a positive trend. In a year when we’ve seen such acceleration in growth, there’s a level of activity that that requires. This is a lot of what we saw in the third quarter. Part of it is incentive comp, but part of it is that we don’t want to be in a position where we can’t get parts out to our shops quickly and manage that business. In a more normalized sales environment, we expect to be in a pretty stable place.

Understood. And if we go back 10 to 15 years ago, there was this view that private label parts weren't going to work for certain types of cars, whether it's a foreign nameplate, and certain mechanics didn't like private label and there was this push to have access to OEM parts, especially on the foreign nameplate side. Do you think the industry has changed in any way where the customers, the mechanics are more amenable? And how have your capabilities around that changed over time?

Hey Chris, this Brad. That's a great question. I'll take a stab at that and then maybe flip it to Brent for any other commentary on private label. I think your overall point is accurate. Having been here for nearly 27 years, I can say there was less quality in some cases going into private label boxes back then, and we sold against that for a long time with success through national brands. However, the last couple of decades have evolved drastically. The quality of our exclusive national brands is unbelievable and a lot of those parts not only meet OE quality fit, form, and function, but exceed it. I do believe that dynamic has changed and we feel very confident in what goes into our exclusive national brand box. We have many opportunities to improve share in the European shops, where we have tremendous competitors that have excelled in that space for a long time.

I think maybe just a couple of other thoughts on private label. What we've seen, Brad called out the success of our proprietary brand, Import Direct. As we've continued to build more quality and specification in the box, we've seen more adoption and uptake. We launched our break best brake line and have good better best offerings. We've got full line designs in our proprietary brands now, launched Break Breath Select Pro earlier this year and seen tremendous uptake on both the DIY and professional side. Customers are looking for quality to meet their needs at the time of need. We've talked about proprietary brand penetration now being over 50% of our revenue, we continue to see that number grow, and we have strong adoption from both DIY and professional customers. We'll continue to lean into that strategy while maintaining a national brand as part of our line design where we're relevant.

Make sense, thanks very much guys.

Thanks Chris.

We have reached our allotted time for questions, and I will now turn the call back over to Mr. Greg Johnson for closing remarks.

Hey, this is Brad, thank you Holly. We would like to conclude our call today by thanking the entire O'Reilly team for your unwavering dedication and the great results you have generated throughout 2023. I would like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and full-year results in February. Thank you.

Thank you, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.