Welcome to the O'Reilly Automotive, Inc. Third Quarter 2025 Earnings Call. My name is Matthew, and I will be your operator for today's call. I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 2025 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 31, 2024, 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 Brad Beckham.

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 Brent Kirby, our President; and 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'll begin our call today by expressing my appreciation to more than 93,000 team members across all in North America for the hard work they put in to deliver the third quarter results we released yesterday. Team O'Reilly continues to win in each of our markets. Our team's dedication to excellent customer service drove the solid comparable store sales increase of 5.6% we generated in the third quarter. This performance was at the high end of our expectations, and we are pleased with the momentum our teams have been able to sustain on both sides of our business. The combination of our strong sales results with a 9% increase in operating income and a 12% increase in diluted earnings per share demonstrates our team's focus on driving profitable growth. Thank you, Team O'Reilly for your commitment to our culture, and absolute dedication to taking care of our customers. Now I'll walk through the details of our comparable store sales performance for the third quarter. Our professional business continues to be the more significant driver of our sales results with an increase in comparable store sales of just over 10%. We continue to be pleased with the strength in our Pro ticket count growth, which was the primary driver of our professional comp increase and the biggest contributor to our outperformance relative to our expectations. We also saw increased benefit in the quarter from average ticket on both sides of our business that I will detail in a minute. We remain confident that the professional sales growth our teams are delivering is the result of share gains and as we continue to be the supplier of choice for our professional customers. Our share gains have been broad-based with strong contributions from all of our market areas. The strength of our professional business is anchored in the valuable relationship we have developed with our customers who value the end-to-end partnership our team is able to provide to their business through service, availability, and business tools that help them be a service provider of choice to their customers. We were also pleased to deliver DIY comparable store sales growth with this side of our business, finishing the quarter with a low single-digit comp, driven by average ticket benefits, partially offset by pressure to ticket counts. Our DIY business was in line with our expectations in July, after having experienced pressure in June as we exited the second quarter. We began to encounter modest pressure to DIY transaction counts midway through the third quarter, which we believe reflects some degree of initial short-term reaction by DIY consumers in response to rising price levels. The contribution to same SKU inflation during the third quarter, which was felt evenly on both sides of the business, was just over 4%. As we've anticipated coming into the third quarter, we saw a significant ramp in tariff-driven acquisition cost increases and made appropriate adjustments to selling prices. On a category basis, the pressure to our DIY business as we moved through the quarter was primarily felt in some categories where we could be seeing some deferral in larger ticket jobs. However, we continue to see strength broadly in other DIY maintenance categories, including oil, filters, and fluids that have continued the outperformance we have seen throughout the year. We want to emphasize that we are still in the early stages of the consumer response to the ramp-up in price levels. It can be difficult to parse to finally the initial response from our DIY customers, but the pressure we have seen thus far is modest and in line with consumer reactions to economic shocks we have seen in the past. As we've noted the last several quarters, we remain cautious in our outlook on the consumer and expect that we could continue to see a conservative stance from consumers and how they manage spending in this environment. However, even in this environment, our DIY consumers are still showing a willingness to invest in and maintain their vehicles and we believe any potential deferral pressure will be short-term. When looking at category dynamics on the professional side of our business, we are seeing very strong performance across both failure and maintenance-related categories and are pleased with the resiliency of customer demand. The customer has taken their vehicle to a professional shop for their repair and maintenance work tends to be less economically constrained than our average DIY customer and less reactive to inflationary pressures on spend in a largely nondiscretionary category of their wallet. Looking at the cadence of our sales results. In total for the quarter, we generated consistently strong comparable store sales growth as we move through the quarter with positive comps on both sides of our business in each month. We would characterize weather as neutral on balance for the quarter as we experienced normalized summer weather across most of our market areas. Now I would like to provide some color on our updated full year comparable store sales guidance. As noted in yesterday's press release, we updated our guidance from the previous range of 3% to 4.5% to a range of 4% to 5%. At the midpoint of our full year range reflects our outlook when factoring in current sales volumes as we progress through September and thus far into October. We have incorporated into our guidance range the current pricing environment. While the broader tariff landscape has the potential to remain fluid, at this stage, we believe we have seen the lion's share of the cost impacts we are expecting as they relate to the tariffs currently in effect. As a result, we anticipate a mid-single-digit same-SKU benefit in the fourth quarter, but have also factored into our guidance a continuation of the pressure to our DIY customers from the dynamics I mentioned earlier. Our industry has continued to behave rationally in response to the pressure tariffs have placed on product acquisition costs and we continue to monitor industry pricing adjustments to ensure we are competitively priced for the value proposition we provide. Our industry backdrop remains or continues to be both stable and supportive. We believe the dynamics of the consumer uncertainty and continued pressure to the DIY business are being felt industry-wide. Most importantly, we believe our teams are winning share on both sides of the business against the current macroeconomic backdrop. In times when spending decisions become more difficult for our customers, having our excellent customer service, superior product availability, and professional parts people to guide them becomes an even more important piece of the value we deliver. Before I turn the call over to Brent, I would like to highlight our updated diluted earnings per share guidance. As noted in our press release, we have updated our EPS guidance to a range of $2.90 to $3. This incorporates our year-to-date performance, the revised sales outlook, and our expectations for gross margin and SG&A for the fourth quarter, which Brent will discuss next. At the midpoint, our current EPS guidance is an increase of approximately 2% from the midpoint of our previous guidance and a year-over-year increase of 9%. We are pleased that the team has been able to deliver both strong sales and earnings growth even in a rapidly changing environment of economic uncertainty. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for their strong performance in the third quarter. Now I'll turn the call over to Brent.

Thanks, Fred. I would like to start by thanking Team O'Reilly for their outstanding work during the quarter. Our team continues to outperform and remain steadfast in their focus on our culture and our customers to drive our success. Today, I will start by discussing our third quarter gross margin and SG&A results as well as provide an update on capital expansion and our updated outlook on these items. Starting with gross margin. For the third quarter, our gross margin of 51.9% was up 27 basis points from the third quarter of 2024 and in line with our expectations. Our team was able to offset the gross margin headwind resulting from our customer mix from faster growth on the professional side of the business with prudent supply chain management and solid distribution productivity. While the third quarter gross margin rate was above our full year gross margin guidance range, we expected a higher gross margin rate in the third quarter as compared to the rest of the year, which is typical for the seasonal composition of our product mix and consistent with our results in 2024. We are maintaining our full year gross margin guidance range of 51.2% to 51.7% and expect to see a similar progression of gross margin rate from the third to fourth quarter as we experienced last year. Our supply chain teams continue to work diligently, both internally and with our supplier partners to navigate the evolving tariff environment. Our ability to maintain consistent gross margins with the amount of change we have faced during the year is a true testament to their hard work and dedication. As expected, we realized significant acquisition cost pressure from tariffs in the quarter. The impact from product cost inflation in the quarter closely mirrored in timing the adjustments we made in pricing. As Brad mentioned earlier, we have now seen the biggest impacts from the current tariff environment, and our guidance for sales and gross margin does not contemplate substantial impacts from further tariffs beyond what is reflected in our product acquisition costs today. However, to the extent any future tariff revisions result in further acquisition cost increases, we will prudently navigate those in the same way that we have done to date. As the tariff landscape and cost environment have evolved in 2025, we have maintained a close eye on the pricing environment within our industry to ensure that we are making the appropriate adjustments in remaining competitive. Against this volatile backdrop, our goal remains the same: to provide the exceptional service and industry-leading availability our customers know and expect from O'Reilly Auto Parts to continue to earn their business. Overall, we believe our supply chain is at its healthiest point since we emerged from the pandemic. With the support of a strong supplier community, we have sustained robust in-stock availability across our tiered distribution network, this strong distribution infrastructure is the foundation for our industry-leading inventory availability and a critical factor in how we serve our customers and earn additional share. Our merchandising teams work diligently to maintain our diversified supplier base in order to actively manage exposure and risk on numerous fronts. This risk can range from country of origin to diversification of supply within a single product category. Supplier health and supplier performance can often go hand in hand. So an important part of our risk management process is monitoring our supplier partner health from all angles, ranging from shipping performance, product quality, catalog support, all the way to financial stability. While these processes always involve some level of effort to mitigate risk in a small subset of our supplier base, we would again reiterate that we are pleased with the collective health of our supplier partners. Our goal is always to foster supplier partnerships that are both long-standing and deep as we repeatedly earn our status as the desired priority customer for each of our suppliers. Now I'd like to turn to SG&A and give some color on the quarter. Our SG&A per store growth of 4% was at the top end of our expectations for the quarter. Driving this spend were expenses related to our strong sales performance, coupled with continued inflationary pressures in our cost structure, again, centered around medical and casualty insurance programs. Based on our third quarter results and outlook for the remainder of the year, we expect our SG&A per store growth to come in at or slightly above the top end of our full year guide of 3.5%. We have factored in our updated expectations for comp sales and corresponding incremental SG&A dollars into our guide, and we have been pleased with how our teams are managing expenses while driving sales volumes above expectations. As a reminder, our fourth quarter SG&A per store growth is expected to be below the full year run rate as a result of comparing against the charge we took in the fourth quarter of 2024 and to adjust reserves for self-insurance liability for historic auto liability claims. Based on our SG&A expectations and projected gross margin range, we continue to expect our full year operating margin to come within our guidance range of 19.2% to 19.7%. As always, our top objective in managing our expense structure is ensuring that we are meeting our high standard of customer service by supporting our team of experienced professional parts people. Turning to an update on our expansion. We opened 55 net new stores across the U.S. and Mexico during the third quarter, bringing our year-to-date store opening to 160 stores. We are on track to achieve our 2025 new store opening target of 200 to 210 net new stores by year-end, and we continue to be pleased with the performance of our new stores. New store growth remains an attractive use of capital for us, and we see ample growth opportunities spread across all of our North American footprint. In this regard, we are pleased to announce our 2026 store opening target of 225 to 235 net new stores. Just as our 2025 growth has been spread across 37 U.S. states, Puerto Rico and Mexico, we anticipate growth in all of those markets as well as in Canada in 2026. Our store growth in 2026 will continue to be concentrated in the U.S. markets but we will also continue our measured growth within our international markets as we work to develop the teams and infrastructure to support our O'Reilly operating model. Our tiered distribution network continues to help drive our stores' competitive advantage in parts availability, and we are pleased to begin servicing stores out of our new Stafford, Virginia distribution center in the fourth quarter of this year. I would like to express my gratitude to our distribution and supply chain teams for all the hard work that has gone into this state-of-the-art new greenfield distribution center in the Mid-Atlantic market. This distribution center will be an important stepping stone for us to begin adding store count within heavily populated and untapped markets for us in the Mid-Atlantic I-95 corridor. As excited as we are about this new facility, there is no pause for our dedicated supply chain teams as we are full steam ahead with distribution growth and progress at our upcoming Fort Worth, Texas facility as well as future opportunities that will further support our store growth and inventory availability. Capital expenditures supporting both store and DC growth for the first 9 months of 2025 and were $900 million and are slightly below our expectations. Based on our year-to-date spend and fourth quarter outlook, we are reducing our full year capital expenditure guidance by $100 million to a range of $1.1 billion to $1.2 billion. This reduction is primarily the result of timing of spend on store and distribution center growth projects that we now expect to incur in 2026. As I close my comments, I want to once again thank Team O'Reilly for their hard work in driving our company's success. Your commitment to providing consistent, excellent service to all of our customers is the foundation for our long-term growth. Now I will turn the call over to Jeremy.

Thanks, Brent. I would also like to begin today by thanking Team O'Reilly for another successful quarter. Now we will take a closer look at our third quarter results and update our guidance for the remainder of 2025. For the third quarter, sales increased $341 million, driven by a 5.6% increase in comparable store sales and a $101 million noncomp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. For 2025, we now expect our total revenues to be between $17.6 billion and $17.8 billion. Our third quarter effective tax rate was 21.4% of pretax income comprised of a base rate of 22.2%, reduced by a 0.8% benefit for share-based compensation. This compares to the third quarter of 2024 rate of 21.5% of pretax income, which was comprised of a base tax rate of 23%, reduced by a 1.5% benefit for share-based compensation. As we noted in our press release, during the third quarter, we accelerated the payment timing of transferable renewable energy tax credits that were originally planned to settle in 2026. Our full year income tax rate guidance has been revised to reflect the incremental benefits we expect from the accelerated payment. Accordingly, for the full year of 2025, we now expect an effective tax rate of 21.6% versus our prior expectation of 22.3%. The updated tax rate guidance includes an anticipated benefit of 1% for share-based compensation. We expect the fourth quarter rate to be lower than the first 9 months of the year due to the tolling of certain open tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first 9 months of 2025 was $1.2 billion versus $1.7 billion for the same period in 2024. The reduction in free cash flow was primarily the result of the accelerated timing of payment for renewable energy tax credits that I previously mentioned. For the full year 2025, we have updated our expected free cash flow guidance to a range of $1.5 billion to $1.8 billion, down from our previous range of $1.6 billion to $1.9 billion. This adjustment reflects the headwind from the accelerated tax payment timing partially offset by the reduction in our capital expenditures guidance Brent discussed in his prepared remarks. Inventory per store finished the quarter at $858,000, which was up 10% from this time last year and up 7% from the end of 2024. Our inventory investments continue to generate strong returns, and we've been pleased with the overall in-stock positions of our store and distribution network. We have executed our inventory growth strategy in 2025 at a faster pace than our initial expectations and could see elevated inventory balances above our original 5% per store plan as we finish out the year. We continue to manage the timing of inventory enhancements to capitalize on current opportunities we see to drive our business and are pleased with the productivity of these investments. This incremental inventory investment has been more than offset by our AP to inventory ratio. We finished the third quarter at 126%, which was down from 128% at the end of 2024 but above our expectations. Moving on to debt. We finished the third quarter with an adjusted debt-to-EBITDA ratio of 2.4x and as compared to our end of 2024 ratio of 1.99x with an increase in adjusted debt partially offset by EBITDA growth. We continue to be below our leverage target of 2.5x and plan and 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 4.3 million shares at an average share price of $98.8 and for a total investment of $420 million. We remain very confident that the average repurchase price is supported by the expected discounted future cash flows of our business, and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance, Brad outlined earlier includes the impact of shares repurchased through this call but does not include any additional share repurchases. Before I open up our call for your questions, I would like once again to thank the entire O'Reilly team for their continued hard work and dedication to providing consistently high levels of service to our customers. This concludes our prepared comments. At this time, I would like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions.

Your first question is coming from Greg Melich from Evercore.

I wanted to start with I think a comment you guys made on the 4% same SKU inflation that you've seen the lion's share of it. Does that mean that from here, there's none? Or is there still some residual we flow through the next couple of quarters?

Yes, Greg. This is Jeremy. Thanks for the question. We still think that we'll see a tailwind from same SKU as we move through fourth quarter and first quarter we talked to the mid-single-digit range. As we move through third quarter, a lot of what we saw was came along pretty early on in the quarter, but there was some ramp during the course of the third quarter. As we look at incremental changes in prices moving forward, there's always a potential for some of that. And obviously, the tariff environment is a little bit more static now but has the potential to move and change. But we think from what we've seen so far under the current regime, most of that cost has flowed through to us. The adjustments that we needed to make are mostly behind us, and we don't see the same level of substantial incremental changes in how we go to market to what we've seen so far in 2025.

Got it. And then my follow-up is really on the price elasticity. I think you mentioned that, that can take some time to play out. What have you seen historically from price elasticity, particularly on the DIY side?

This is Brad. Thank you for the question. In the past, things can always change. However, based on my years at O'Reilly and in this industry, we have observed that when we encounter shocks like this, there may be a delay in larger ticket jobs. Some of these jobs can be postponed. For instance, if it's a critical job with metal on metal parts, that repair is necessary. On the other hand, for a chassis job with more flexible components, such as control arms, those can typically be deferred for weeks or months, but not for years. Currently, as Brent and I mentioned in our prepared remarks, there is significant activity in both sectors of our business regarding repair and maintenance. Specifically, concerning the DIY side, we noticed in the third quarter some delays in undertaking larger ticket jobs that we hadn't seen earlier this year.

I wanted to follow up on the elasticity concerns, mid-single-digit inflation for the fourth quarter. That's basically in line with where you're implying comps are in the fourth quarter. So is like as you think about guiding based on what you've seen over the past 2 months is that elasticity function getting worse? Or I guess, why wouldn't your comp be higher than the inflation that you expect in the fourth quarter?

Yes. Thanks, Chris. This is Jeremy. Lots of different things, obviously go into how we think we'll finish out the full year and that pushes us into I know how you guys read an implied guide in the fourth quarter. When we think about our outlook, just to finish out the year there are a lot of moving pieces. You have to remind everyone that it's our most difficult comparison as we think about where we finished up the year last year. As we look specifically at the question around the benefit from where prices have gone to and where we see in the same SKU, it's clearly a net incremental benefit to us in the third quarter. There's nothing about a potential build within any of those pressures that might impact the DIY consumer that we're implicitly forecasting how we think about fourth quarter to directly answer the question. To Brad's earlier point, you go into the back half of the year for us, there's always a lot of different factors. There can be volatility that we see just from how weather plays out, how some of the Christmas shopping season plays out. And then we do have just, I think, a cautious view to how consumer might continue to react. But kind of understanding all those component pieces, there's nothing about how we've at least started in the fourth quarter that really puts us in a changing environment. We're really still early stages on some of how we're viewing where the customer is going to go at these price levels, and we're cautious but still feel good about the overall trends in the business.

Yes. Great question, Chris. This is Brad. So first off, we feel extremely good about our new store cohorts. We continue to be extremely pleased with the way that our field teams are opening up new stores, just from the quality of the team, professional parts people putting in place the right store managers, the right district managers that absolutely drives the quality of our new store locations. Obviously, there's a lot more that goes into it than just the teams, but that's primarily how we make those decisions is our ability store count wise to staff them with great teams. We're also extremely pleased with the way our design and development teams have continued to develop here in the corporate office, not just from a U.S. perspective, but how those teams have matured and really understanding what the machine — how the machine runs, what it really looks like as we ramp up internationally.

Hopefully, 2 quickies. Any notable differences in terms of geographic performance given some of the weather patterns that we've seen? And then secondly, you did spend a little bit more time than usual talking about supplier health. So can you directly address any risk or exposure you may have to the first brand situation?

Yes. I'll take the first portion of that on regional performance and kick it over to Brent. So actually, we didn't see a lot of material differences in our geographies and regional performance in Q3. There's always going to be some differences. But directionally, they weren't much different than what we originally had planned with our internal plan month-to-month by region. So no material differences. There was I had a bit of difference in our north south and a little bit east and west, but in terms of First Brands specifically, they're a little bit more than 3% of our COGS. So it's not a huge material thing when you think about the fact that we've got we're dual and triple and quadruple sourced on most of our lines. We do that by DC. Again, over 50% of our revenue is in our proprietary brands, which gives us a lot of ability to multi-source with multiple suppliers. In terms of supplier health and supplier performance, we have really good engagement with the new leadership at First Brands and a lot of leaders that have been there for some time. We also have great engagement from their competitors, meaning that to Brent's point, when you think about the majority of the lines that they provide to us, we have our distribution network split up, meaning that whether it be a first brands or one of their competitors in some of these categories, we are dual and triple sourced. So we have our DC split up accordingly. So we're hopeful that first brands really gets where they need to be on fill rates, which we believe they will, but we also have opportunities to fill in with backfill orders, and we also have opportunities with other existing suppliers that compete in those categories to take on another DC or 2 here and there, and we don't feel like we'll have a material impact.

First, a follow-up, Brad, you mentioned some of the deferral that's happening in DIY. To what extent is that just price elasticity? And is there any sense that it could be the timing of when prices are moving around in the marketplace?

Yes. Great question. Well, the reason we want to be balanced on that, and we just — we wanted to characterize as some categories and the potential for some deferral is because it's still so early, and there's enough factors with weather, seasonality, the way the weeks played out in Q3. And as we get into Q4, again, just really the first time we've seen some pressure to some of those larger ticket jobs, but it wasn't across the board. And it's not always directly tied to the exact categories lines or sublines that we're seeing the tariffs. And so that line is not direct.

Yes, Simeon, good questions, and maybe take the second 1 first. There's not been, I think, any fundamental shift as we think about our operating margin, our profile for how we go to market. Having said that, I think it's less of a question or consideration for where we see the potential kind of competitive balance or market opportunities so much as it does how do we run and operate our business, what do we think allows us and puts us in a position to be competitive.

Yes. And Michael, I may just real quick add, Jeremy said it very well. We have a lot of pride in our ability to lever when we have a comparable store sales level that we've had. We have a lot of pride in the operating profit rate that we've delivered over a long period of time, and that's going to continue to be our focus.

If you look at the expectations for 4% same-SKU inflation, are supply chains in the industry sort of creating a delta between your expectations maybe versus a peer?

Yes. Brett, this is Brent. I'll start and the other guys can chime in. I think we talked about supplier diversification for years now. And again, the team. Our merchandise team has done a fantastic job continuing to diversify that supplier base. And we've talked a little bit about China, what that looks like specifically for us. We're in the mid-20s. Some others may report somewhere in that range or a little bit less. But generally speaking, we feel like we're very diversified globally and the teams continue to get more diversified. That number is down hundreds of basis points from where it was a few years ago and continues to fall.

You talked about a mid-single-digit inflation benefit in 4Q, which it sounds like that will be the peak of the inflation contribution. So is that right? Is that the way we should think about it?

Yes, at this point in time, when we think about the current tariff and pricing environment, we would think that most of the benefit that we might expect to see moving forward would be in the fourth quarter numbers.

Yes. No, Michael, Well, Jeremy, I think the key is the reason we don't want to talk in absolute if we've seen everything. It's because we don't know what's going to be in the headline next week or next month. It is still fluid. We feel good about what we said about the majority being already in but we don't know what's next. Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. 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. 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.