Earnings Call Transcript
O REILLY AUTOMOTIVE INC (ORLY)
Earnings Call Transcript - ORLY Q1 2024
Operator, Operator
Welcome to the O'Reilly Automotive, Inc. First Quarter 2024 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.
Jeremy Fletcher, CFO
Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our first quarter 2024 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, 2023, 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.
Brad Beckham, CEO
Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts first quarter conference call. Participating on the call with me this morning are Brent Kirby, our President, and Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman, and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'll begin our call today by thanking our over 90,000 team members for their relentless dedication to providing the knowledge and expertise our customers have come to expect and rely on from the professional parts people at O'Reilly Auto Parts. We are truly in a people business where relationships and customer service are paramount, and Team O'Reilly continues to demonstrate their ability to outhustle, outperform and, in turn, outperform our competition. We finished the first quarter with a 3.4% comparable store sales growth on top of a 10.8% in the prior year. Our continued strong top line sales results are dependent on and driven by consistent daily execution across all of our 6,200-plus stores in the U.S., Mexico, Puerto Rico and now Canada. Driving continued growth in our store volumes does not get easier as our company gets bigger, especially as we build on the significant market share gains we have captured over the last few years. Our single greatest challenge as a company and the driving factor in our success is our ability to build and develop teams and leaders who will be the standard bearers of our culture far into the future. Our leaders across our stores, distribution centers and corporate offices are relentlessly dedicated to perpetuating our culture and investing in our people. Thank you, Team O'Reilly, for your commitment to our customers, our company, and your fellow team members. Now I'd like to start our discussion of the first quarter by walking through the details of our sales performance. Starting with comparable store sales, our growth of 3.4% in the quarter was within our full year guidance range, but slightly below our expectations as we saw some volatility I will discuss in more detail in a moment. We drove solid performance and positive comps in both our DIY and professional businesses in the quarter with mid-single-digit comps in Professional being the larger driver of our results, consistent with our expectation and ongoing trends. Increases in average ticket values and ticket counts were both contributors to comp growth on both sides of our business with inflation at about 1%, in line with our full year expectations. Next, I want to provide some color on the cadence of our sales results in the first quarter. As we have discussed in the past, our first quarter can be volatile as we see variability in our business from both the type and severity of winter weather and from the timing of the onset of spring. We were pleased to generate positive comparable store sales results in each month of the quarter. However, we did experience the choppiness that can be characteristic of first quarter, especially as we exited with a slow start to spring. As we reported on last quarter's earnings call, we produced solid results in January, which benefited from harsh winter weather in many of our markets. Moving past the winter weather in January, our business was negatively impacted through much of February by the timing of individual income tax refunds. Typically, we see a benefit starting early in February and ramping through the month that coincides with the distribution of tax refunds. However, there was a noticeable delay in the processing of refunds this year that pressured both sides of our business. These pressures moderated as the cumulative amount of refunds began to catch up to the prior year, and we saw improved trends at the end of February in the first half of March. However, we also experienced unseasonably cool wet weather throughout March across many of our markets. As a result, March and the full quarter finished slightly below our expectations. The trends we saw as we exited the first quarter have continued into April as we still really haven't seen the uptick in our business that typically accompanies sustained favorable spring weather. The choppiness we saw in the first quarter more significantly impacted DIY business, which is in line with what we have seen historically. Our DIY customers are often working on their vehicles in their driveways, so weather conditions can impact their ability and willingness to perform repair, maintenance, and tune-up items that may have been on hold during the winter. While our DIFM business was also impacted by the delayed timing of tax refunds, our professional customers tend to be more insulated from weather pressures and the volatility on this side of our business was more muted during the quarter. We continue to be pleased with the performance of our professional business even as we face very challenging comparisons. As we outlined in our full year guidance on last quarter's earnings call, we are seeing an expected moderation in professional comps as we calendar significant share gains that drove a professional comp performance that exceeded 20% in the first quarter of last year. Against these challenging comparisons, we believe our professional results in the first quarter of this year reflect continued share gains. We are excited by our team's ability to leverage the momentum we have created in our professional business and continue to grow our share of what remains a highly fragmented professional market across all of North America. Now I'd like to provide some comments as to how we are thinking about the sales outlook for the balance of the year. As I noted previously, the volatility we have seen so far in 2024 is not uncommon for our business in the first quarter. As many of you listening today have heard us say before, we are cautious not to overreact to choppiness at this point in the year. As we move forward, we expect any weather-driven variability will moderate and business will normalize into the summer selling season. Given this outlook, we are maintaining our full year comparable store sales guidance of 3% to 5% and would also expect our quarterly comp results to fall within the same range. Inherent in our guidance expectations is our belief that demand for our industry is resilient and our end consumer continues to be reasonably healthy. In situations of heightened economic pressures, we believe consumers will continue to prioritize investing to maintain their vehicles, particularly given the significant cost and monthly payment burden of a new or replacement vehicle. We believe the composition of our sales results supports this view of the consumer in the current environment. We are encouraged to see broad-based performance across our category mix with continued strength in categories such as oil and filters as consumers continue to prioritize recurring maintenance jobs. Additionally, we are not seeing notable evidence of trading down within our categories; rather, we are seeing better and best level value spectrum products continue to perform well as consumers prioritize higher-quality products that carry extended warranties and in turn, provide long-term value to their investment in transportation. However, we still remain cautious of the potential deterioration in the broader macro environment that could push consumers to begin more carefully considering where and how they spend their money. Our experience gives us confidence that these demand headwinds are short-term. And over time, the consumer will continue to prioritize their transportation needs given the value proposition that is present. All of this being said, we will not settle for industry average growth or allow our teams to accept macroeconomic pressures as an impediment to growth. We know there is substantial opportunity to gain a bigger piece of the pie in our industry and the mission we have set before our team is to be the leader in all of our markets and on both sides of our business. Before I move on from our sales discussion, there are a few items I would like to call out as discrete impacts to our sales. First, the Easter holiday shifted into our first quarter this year, which was built into our plan and met our expectations as a headwind of approximately 20 basis points to comparable store sales on the quarter. Next, we received the benefit of an additional selling day as a result of leap day in the first quarter of 2024. We exclude the impact of leap day from our comparable store sales calculation, but this benefit was included in our total sales guidance and came in as expected, representing 125 basis points of our total sales increase of 7.2% on the quarter. Last, we closed on the acquisition of Groupe Del Vasto on January 22, and their operating results from that point forward are included in our reported numbers. The first quarter total sales increase benefited by approximately 70 basis points from the inclusion of Vast-Auto sales results, which are also excluded from our comparable store sales like Mexico. Moving on to diluted earnings per share. We are increasing our full year EPS guidance to a range of $41.35 to $41.85. Our lift in EPS guidance is driven by the gross margin and SG&A results that Brent will cover next as well as a lower-than-planned tax rate and the impacts of shares repurchased through the date of our earnings release today. As Brent will share with you here in a moment, we have been pleased with our team's ability to manage costs while still making steady progress on the numerous initiatives and projects we have in motion to further enhance our competitive position. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for their hard work and dedication to start 2024. Now I'll turn the call over to Brent.
Brent Kirby, President
Thanks, Brad. I would also like to begin my comments this morning by thanking Team O'Reilly for their incredible hard work to ensure a solid start to 2024. We are proud to say that Team O'Reilly now extends across the United States, Mexico, Puerto Rico, and Canada. Regardless of the market we operate in, we know that the absolute key to our success is a team of professional parts people dedicated to the O'Reilly culture of excellent customer service. Today, I will cover our first quarter gross margin and SG&A results and provide a quick update on our expansion and capital investments thus far in 2024. Starting with gross margin. Our first quarter gross margin of 51.2% was an 18 basis point increase from the first quarter of 2023 and slightly better than our expectations for the quarter. As Brad previously noted, this was the first quarter to include the operating results from the acquisition of the Vast-Auto business, and the incremental dilution to our first quarter gross margin was in line with the full year 25 basis points we guided to at the beginning of the year. We have continued to see a stable supplier and supply chain environment, and experienced the anticipated mix of acquisition cost puts and takes in the first quarter. On a net basis, improved acquisition costs benefited gross margins driven by incremental buying improvements as well as market-driven reductions in freight cost. To the extent that we have seen modest inflation pressure in certain categories, we have been successful in passing those cost increases along in a continued rational pricing environment. Given our solid performance in the first quarter, we continue to expect our quarterly gross margin performance to land within our full year gross margin range of 51% to 51.5%. Turning to SG&A. We are pleased with our SG&A management in the first quarter results in line with expectations as a percentage of sales. Our first quarter average SG&A per store growth of 5.7% included an anticipated 100 basis point increase from the additional business day as a result of leap day. Additionally, the SG&A per store growth includes a 15 basis point increment on the quarter from the inclusion of Canada's operating results, which was in line with our expectations based on the portion of the quarter since we have owned that business. Our spend in the first quarter keeps us on pace for our full year plan of growing average SG&A per store by 4.5% to 5%. As we noted on our last call, the cadence of growth in average SG&A per store will moderate as we move throughout the year as a result of beginning to compare against the impact of 2023 investments that we made in the business. While we continue to move forward as planned on our growth initiatives, some of the investments we have been making in technology capabilities as well as enhancements to our vehicle fleet and the image and appearance of our store will begin to layer into our SG&A comparisons as we incurred ramping incremental expenses throughout 2023 in these areas. The impact of these comparison headwinds in our first quarter SG&A spend drove the planned deleverage of SG&A, which we also anticipate to moderate throughout the balance of this year. Given the top line choppiness we experienced during the first quarter, we believe our teams effectively balanced the incremental investments we are deploying in our business with prudent expense control. The decisions we make concerning the staffing levels within our stores remain the most significant driver of our SG&A spend in total. Our team is focused on judiciously managing our expenses as appropriate for the current conditions in our business, while also ensuring that we are delivering excellent customer service that develops and maintains long-term customer relationships. We feel that our consistency in delivering excellent customer service in all market conditions has been critical to our long-term success and reflects the high level of professionalism demonstrated by our team. We are confident that the investments we have made and are continuing to make position Team O'Reilly to provide industry-leading customer service at high levels of productivity. With the solid gross margin and SG&A performance we saw in the first quarter, our operating margin outlook is unchanged, and we continue to expect the full year to come in within the range of 19.7% to 20.2%, which includes the anticipated dilution of 15 basis points from the inclusion of Vast-Auto's results. Inventory per store finished the quarter at $773,000, which was up 2.5% from this time last year and 2.2% from the end of 2023. The addition of Vast-Auto's inventory and store count provided the 1% incremental increase we had anticipated, and we continue to target a range of 4% growth within our existing chain by the end of 2024. Inventory turnover has remained at 1.7x, and we are pleased to see strong inventory productivity as we have continually enhanced and refined the inventory deployment in each of our stores while also expanding hub and DC level inventories. Our store in-stock position remains strong, and our teams are working hard to ensure O'Reilly Auto Parts offers the best inventory availability in all of our markets. Turning to our progress on store growth and capital investments. We opened a total of 37 stores across the U.S. and Mexico during the first quarter. Additionally, we were pleased to officially bring the 23 Canadian stores into the fold. Our annual net new store opening guidance of 190 to 200 excludes the addition of the 23 Canadian stores. Capital expenditures for the quarter were $249 million, and we are on track for our annual goal of $900 million to $1 billion. Our DC relocation projects in Springfield, Missouri and Atlanta, Georgia, are making great progress, and we are excited to bring those new, larger, and more efficient facilities online later this year to further enhance service levels within those markets. We are also excited about the progress made so far on our Mid-Atlantic DC in Stafford, Virginia, that is slated to be operational in the middle of 2025. As I finish my comments, I would like to thank Team O'Reilly for their commitment to delivering excellent customer service one customer at a time. I look forward to the opportunities we have ahead and taking on that challenge as a team. Now I will turn the call over to Jeremy.
Jeremy Fletcher, CFO
Thanks, Brent. I would also like to congratulate Team O'Reilly on a solid start to the year. Now we will fill in some additional details on our first quarter results and outlook for the remainder of 2024. For the quarter, sales increased $268 million, driven by a 3.4% increase in comparable store sales and a $73 million non-comp contribution from stores opened in 2023 and 2024 that have not yet entered the comp base. For 2024, we expect our total revenues to be between $16.8 billion and $17.1 billion. Our first quarter effective tax rate was 21.9% of pretax income, comprised of a base rate of 24.2%, reduced by a 2.3% benefit for share-based compensation. This compares to the first quarter of 2023 rate of 23.7% of pretax income, which was comprised of a base tax rate of 24.3%, reduced by a 0.6% benefit for share-based compensation. Our first quarter effective tax rate was below our expectations as a result of the timing and amount of benefit we realized from share-based compensation. For the full year of 2024, we now expect an effective tax rate of 22.4% comprised of a base rate of 23.1%, reduced by a benefit of 0.7% for share-based compensation. We expect the fourth quarter rate to be lower than the other three quarters due to the tolling of certain tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate, as we saw in the first quarter. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first quarter of 2024 was $439 million versus $486 million in 2023. The decrease of $47 million was the result of a larger increase in net inventory in 2024, partially offset by an increase in earnings. For 2024, our expected free cash flow guidance remains unchanged at a range of $1.8 billion to $2.1 billion. Our accounts payable as a percentage of inventory finished the first quarter at 127%, down from 131% at the end of 2023. This moderation was in line with expectations, including the impact from our Canadian acquisition and we would anticipate finishing the year in line with these levels. Moving on to debt. We finished the first quarter with an adjusted debt-to-EBITDA ratio of 1.95x as compared to our end of 2023 ratio of 2.03x with the decrease driven by a reduction in borrowings under our commercial paper program. We continue to be below our leverage target of 2.5x 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 first quarter, we repurchased 262,000 shares at an average share price of $1,029 for a total investment of $270 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, which Brent 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 to your questions, I would like to thank the entire O'Reilly team for their dedication to our company and our customers. Your hard work and commitment to excellent customer service continues to drive our outstanding performance. This concludes our prepared comments. At this time, I'd like to ask Matthew, the operator, to return to the line, and we will be happy to answer your questions.
Operator, Operator
The first question comes from Chris Horvers from JPMorgan.
Christopher Horvers, Analyst
Can you talk about, since the beginning of February, can you talk about the geographic performance that you've seen? And how correlated has that been to the arrival of spring? So markets where you have seen spring arrive, what is the performance of the comps look like versus markets that haven't?
Brad Beckham, CEO
Chris, thanks for the question. Well, there were a lot of moving pieces in the quarter really directly to your question there. And really, what we saw just kind of walking through the quarter again is January, we were really pleased with January. And in a lot of the markets, you're really true winter markets where harsh weather really drives that demand, we felt like that really exactly played out that way in January. As we got into February, it definitely kind of more normalized from a weather standpoint or early on in the month. And then not too long after that, we felt like there was a little bit of volatility more from lack of seeing some of the tax money roll in, Chris. And then kind of what we saw as things started to kind of stay cool and get a little bit more wet in the markets you don't necessarily want to see it, that kind of matched up with what we saw geographically in certain regions, in certain divisions, and it really kind of made sense to us, kind of what was happening with some unfavorable weather, especially on the DIY business for people to get out and work on stuff. So there was a lot of moving pieces there. When we looked at our regional performance versus our plan by region and you looked at the kind of the comparison from this time last year, everything was really fairly consistent, and it pretty much made sense based upon what the weather was doing.
Christopher Horvers, Analyst
In markets where you've observed spring break, have the comparisons been in line with the 3% to 5% outlook for the quarters this year?
Jeremy Fletcher, CFO
Yes. I think one of the challenges we've faced is the lack of consistency in how our business performs during a normalized spring season. As Brad mentioned on the call, the fluctuations we've experienced have been exactly that. We'll observe areas of improved performance as we progress, but nothing has been consistently reliable. The more volatile segments are where we notice this impact most clearly. Given several factors that affected us during the quarter, particularly the shifts in tax refund timelines, achieving a consistent performance rate week to week has been difficult. The quarter has been characterized by significant fluctuations.
Christopher Horvers, Analyst
Understood. You mentioned that consumers are trading up and not trading down, and that you have low exposure to national accounts, specifically not selling A and B SKUs like brake pads. In that channel or other parts of the business, are you noticing any signs of customers postponing larger repairs or oil changes?
Brad Beckham, CEO
Yes, that’s a good follow-up question, Chris. The answer is no. When we review our book of business, comparing independent garages to strategic accounts, whether regional or national, we find that national accounts represent a smaller portion of our business compared to some competitors. However, analyzing the mix, especially in our needs-based categories, we are pleased with the performance. In terms of our value spectrum, the better and best segments have shown encouraging results. The only area where we've noticed some weakness is in discretionary categories, such as truck and towing accessories or performance items. We did experience some pressure in Q1 that we intend to monitor closely. It’s worth noting that some of these categories tend to perform better when people are actively involved, like working in their driveways. While we are observing some pressure due to discretionary spending, this could be influenced by weather conditions. Overall, in terms of our maintenance and failure categories, we remain very encouraged.
Operator, Operator
Your next question is coming from Seth Basham from Wedbush Securities.
Seth Basham, Analyst
My first question is just on SG&A per store growth. You anticipate some moderation through the year here, and that's despite the fact that you expect comps to likely accelerate a little bit from here. Is that simply due to the investment comparisons or anything else?
Brent Kirby, President
Yes. Seth, this is Brent. I'll start and then Jeremy can join in. The primary factor influencing our SG&A per store is our store payroll. Our teams have been focusing on finding the right balance between that and the demand they see in their markets. They handled a period in Q1 with some fluctuations, as we've mentioned before. I'm really proud of the overall performance from the teams, and we're approaching any fluctuations with a focus on controlling expenses. However, we are facing some pressure from investment depreciation that I mentioned earlier, which will impact us as the year progresses. That's why we didn't plan for uniform SG&A growth this year. Jeremy, you might want to add some additional insights on that.
Jeremy Fletcher, CFO
Yes. No, I think, Brent, you said it well. Seth, I think we previewed a little bit on last quarter's call, but it's kind of hard to get the cadence quarter-to-quarter. As we just think like in particular about the timing of the impact of some of last year's investments and not to get too far down in the weeds here, but our depreciation headwind in first quarter was kind of high teens year-over-year growth there. And that's the number that through the balance of the year starts to moderate as we move down through. So more broadly speaking, especially as you think about the dollars, you also had impacts in the quarter with leap day. So it does create a little bit of noise in terms of the cadence. But against that broader backdrop, feel solid about the management SG&A. It's in line with where we would have expected to be. And as we work through the balance of the year, feel comfortable with how we think the teams are balancing both the investments that we continue to talk through and will execute on while also just being responsive to what we're seeing in the business.
Seth Basham, Analyst
That's helpful. And as my follow-up, just thinking about the DIY segment and the softness you called out discretionary categories, recognizing that some of that might be weather-driven. Is this a change in trend that you've seen with more pressure in the discretionary categories in recent months?
Jeremy Fletcher, CFO
Yes. I can probably talk to that. And maybe the first caution that I would say is we're still within a relatively tight end of what we thought from expectations and I know Brad mentioned it within his response. The confidence that we feel is just from the broader mix of our business, the ability to see solid performance really across the core categories that we know are indicative of how the consumer is thinking about the backdrop has been good. The entry into first quarter, both the tax refund money and with the weather backdrop, it tends to be a quarter that can be more volatile just generally on discretionary categories. Often, we're in the position like others within our industry of hoping that we've got both good weather and tax refund money hitting at the same time. So there's a reason why that can be volatility. We wouldn't call it out as a sea change. And for sure, in the broader sense of our business, it's a smaller piece, but it is just one area that we pay attention to as we're trying to make sure we've got a good read on what the consumer looks like.
Operator, Operator
Your next question is coming from Michael Lasser from UBS.
Michael Lasser, Analyst
While the indications are still coming in about the performance of the overall aftermarket, and it’s still pretty early. It does seem like O'Reilly's outperformance versus the rest of the industry is moderating versus where it's been. Why is that the case?
Brad Beckham, CEO
Thank you for the question, Michael. I don't view the situation that way. I've been with O'Reilly for 27 years and have experienced both challenging and successful times, including election years and periods that started off a bit unevenly. I've learned not to overreact in these situations. We take any potential slowdown seriously and focus on what we can control. However, it is difficult to pinpoint where our share gains are coming from, especially based on short-term competitor reports. We don't spend much time dissecting that internally. Instead, we concentrate on our revenue in relation to the $147 billion market in the United States, which is expanding as we grow into the rest of North America. I don't see any significant changes in our competitive stance. Our competitors are strong, and we respect them, whether they are large public companies or independent operators. I'm very proud of our team's accomplishments over the last few years, and I believe our share gains will continue.
Michael Lasser, Analyst
Got you. Brad, you mentioned that you did see a bit of a slowdown in March, and that's continued into the first part of the quarter. Can you provide some frame of reference for that? How is the sensitivity of the P&L? If this is just one of those years where it’s a bit of a slower backdrop for the aftermarket and the ultimate comp ends up at the low end or maybe even slightly below your guidance?
Brad Beckham, CEO
Thank you, Michael. I'll start out and answer your question on just kind of the cadence of the exit and kind of how we're feeling about the last few weeks, and then I'll let Jeremy talk to the last part of your question there on SG&A. So Michael, really, the thing I want to be a little careful of is, even though we have a few weeks, it is just 3 weeks, and we have a lot of quarter left, and I think the reason that we're trying to balance the choppiness with not knowing what the future holds, all with the fact that we have had some of this weather that it's just not ideal. It's a different weather story than like in January, where we love harsh winters, and we love hot summers. The stuff that's in the middle can just be a little bit not conducive to what our DIY customers want and need to get out and work on their stuff. I'm sitting here in Springfield, Missouri this morning, looking out the window, 50-something-degree weather, and it's raining out there. And our operational teams absolutely did not spend any time focusing on things that they can't control like weather. But we don't want to say too much about the choppiness because there has been some, but there's also just been this weather factor, and we feel like that we got a lot of quarter left and we just want to see how that plays out. But we just want to balance those things, and I'll let Jeremy take the SG&A.
Jeremy Fletcher, CFO
Yes. As we look further down the income statement for the remainder of the year, Michael, I can tell you that our expectations regarding how we respond to various market conditions remain consistent with our long-term perspective. We do not intend to overreact to short-term fluctuations, especially considering the volatility experienced in the first quarter. Additionally, we recognize that we are in an election year, which brings an added layer of uncertainty that may introduce both challenges and opportunities as we progress through the year. It is crucial for us to maintain a high level of service while also adhering to our established expense control culture. We will manage the business in line with the market environment and feel confident about our teams' performance so far this year, as Brent mentioned.
Operator, Operator
Your next question is coming from Greg Melich from Evercore ISI.
Gregory Melich, Analyst
I wanted to revisit the discussion on inflation and the decrease in acquisition costs. We now expect inflation to stabilize and follow a consistent pattern each quarter moving forward. Additionally, can we anticipate some relief in acquisition costs if interest rates rise again? How does that factor into the overall equation?
Brent Kirby, President
Yes. Greg, this is Brent. I'll start and then let the other guys jump in. But in terms of the cost environment, as I mentioned in the script, we kind of saw what we'd expect some typical puts and takes on cost. But I mean, in terms of inflation and what's out there, I think we kind of guided and felt like going into this year is going to be around 1%. It's kind of what we saw in Q1, kind of what we anticipate for the rest of the year. So we don't really see that changing a whole lot. Now with that said, the good news is we continue to be able to diversify our supply chain. Our merchandise team has done a fantastic job with that. We've done a fantastic job with our proprietary brand portfolio and continue to grow that. It's resonating with our customers. So that gives us an ability to control cost in some respects by dual sourcing and multi-sourcing different lines. And we continue to see that as a competitive strength of where we are and how we're positioned. But that's kind of the outlook we have in terms of cost and where we are going into this year.
Gregory Melich, Analyst
Great. And I'd love to just make sure I got the comp trend correct there. The traffic in the first quarter, was that positive or negative or kind of flat if you look at the whole quarter?
Brent Kirby, President
It was positive.
Jeremy Fletcher, CFO
It was a contributor.
Gregory Melich, Analyst
It was a contributor to comp. And so if presumably where that would have been negative in DIY by the exit rate, and that the gap between do-it-for-me and DIY that happened through the quarter at the end was basically traffic and therefore, weather-driven. I just want to make sure I'm interpreting what you guys are seeing.
Jeremy Fletcher, CFO
Yes, I can confirm that traffic on the DIY side of the business remained positive for the quarter, significantly influenced by the strong performance we observed in January. This area tends to be more volatile around refund periods and spring effects. Overall, we experienced positive trends in both traffic and ticket size.
Gregory Melich, Analyst
As consumers and DIYers engage, it seems there's not a trade down, but rather a trade up. However, I'm curious if items in the basket are under pressure and if that indicates any strain on the consumer.
Jeremy Fletcher, CFO
Yes, there was some volatility, similar to what we observed in the first quarter. This often relates to accessory purchases that occur when customers come in for services like brake changes or oil changes. We don’t have a clear understanding of how tax refund money impacts spending, which can also influence transaction sizes. It has been a bit inconsistent, making it hard to draw definitive conclusions. However, it is clear that some of the trends we observed indicated that this factor was not a plus for us and presented a slight challenge during the quarter.
Brad Beckham, CEO
Greg, to elaborate on that basket question, we are not observing any issues when customers are performing well. Our teams can effectively support those customers with everything they need to complete their tasks. We haven't identified any issues with customers not purchasing the essential parts for their jobs and the usual accompanying items. However, we are noticing some pressure on discretionary purchases, such as tools. For instance, customers who typically would buy a special tool for a brake job might opt to rent it from us for free through our loaner tool program. This illustrates some of the pressure we are experiencing, but not necessarily in terms of hard parts.
Operator, Operator
Your next question is coming from Simeon Gutman from Morgan Stanley.
Simeon Gutman, Analyst
Everyone, Brad and Jeremy, you've mentioned that the market has been choppy and there's no clear distinction between weather-related and non-weather-related factors. Can I ask if this is due to tax refund season, or are we seeing the effects of the used car market, along with consumers feeling pressure? Do you think there could be other variables influencing this situation, or are you optimistic that conditions will stabilize soon?
Jeremy Fletcher, CFO
Yes, Simeon, that's a great question. I would say we're as confident in our assessment now as we typically are after the first quarter. Brad mentioned this in his comments, and we believe it's important not to overreact to the first quarter results. We know that our performance range has been relatively stable, despite some fluctuations we've observed. We are not encountering the significant business changes that might lead to oil changes being delayed or brakes being more frequently replaced. Instead, we are experiencing the typical variability in business tied to the timing of tax refunds. These can have substantial impacts as we look to establish a consistent weekly performance. Taking a step back, we remain cautious about consumer behavior, which is a key focus for us. We often gain a clearer understanding of this as we move past some of the volatility. We are aware of the broader commentary in the retail sector and recognize that the effects often manifest for our business with a delay. We also understand that this is an election year, which adds another layer of caution. However, currently, we do not see the clear indicators suggesting the sustained pressure that we would normally anticipate.
Brad Beckham, CEO
Yes, Simeon, that's a valid question. Regarding tax refunds, there is certainly some delay that impacted us in February. We want to be careful in predicting how this will unfold, especially considering it's an election year and various global issues, along with the weather having some effect. Generally, we know when people receive their tax refunds and the amount they get. Our lower-income consumers are prioritizing spending on essentials like groceries, housing, and personal insurance, which are areas of financial pressure for them right now. We want to be mindful of these factors, acknowledging that both consumer behavior and weather conditions play a role in our situation.
Brent Kirby, President
I would like to add one more point to your question, which is a good one. As previously mentioned, when considering maintenance and failure categories, there is some discretion involved. Even in the DIY sector, we maintain a high level of confidence because we observed continued strength in the motor oil filters category. There was no evidence suggesting that consumers were postponing oil changes to cover grocery expenses when we assessed it at the product level. This was also a key consideration worth mentioning.
Simeon Gutman, Analyst
My follow-up question is regarding the PPI initiative and the products affected by price reductions. It seems the payoff was particularly significant last year, which might relate to the market share issue. Are you still experiencing growth in those PPI products? Additionally, are there any opportunities within your pricing and catalog where you can identify price differences to leverage that again?
Brad Beckham, CEO
Thank you, Simeon. Regarding PPI, it's been over two years since we started that initiative, and we are very pleased with the investment we made. If you examine those categories and the related ones, our approach was extensive, covering various SKUs and product lines. We are confident in our efforts. When comparing ourselves to some of the independent players, we believe we’ve made significant progress without seeing major responses from our larger competitors. The success of our investments is largely due to our team actively engaging with customers and improving what we do well. Building relationships with customers, who often relied on independents, through service and other means, has been key. Our focus has been on aspects that matter more than just pricing, such as efficient delivery services and ensuring the right parts reach the right places at the right times. Our supply chain efforts over the past few years have contributed to our success. In response to your question about pricing, we are satisfied with our pricing matrix, which we adjusted on the professional side. We continuously refine and optimize within this framework and believe it is positioned well for the foreseeable future, without any competitive pressures suggesting we need to change again.
Brent Kirby, President
And Simeon, to expand on what Brad mentioned regarding the professional side, when we examine the various categories like brakes, chassis, driveline, and ride control, we are not observing any stagnation in growth within these significant dollar categories. I believe that’s the essence of your question about these categories running out of steam. Instead, we are experiencing continued growth, even when comparing to substantial figures from previous years.
Operator, Operator
Your next question is coming from Mike Baker from D.A. Davidson.
Michael Baker, Analyst
Two quick questions. First, with March and April being a bit slower due to the weather, are those sales affected? Or do we expect to recover them if the weather improves?
Jeremy Fletcher, CFO
Yes, Michael, that's always a challenging question to address. It’s often the case with spring business that there's just a change in demand. More generally, we believe that the timing of what we're experiencing and its impacts do not influence the core fundamental demand within the industry. It's always somewhat uncertain whether there will be a rebound and how measurable that will be. However, as we progress further into the quarter, this becomes a less significant factor; the overall strength of our business will become clearer as we move through the rest of the quarter.
Brad Beckham, CEO
Yes, Mike, there could be some of the discretionary. There could be some of the short-term stuff that could potentially be lost. But I think as we always say, and we still believe this as much as we ever have that the underlying drivers of our business are absolutely there. When you look at vehicles miles driven, you look at all the things that we look at to drive our business, average age of vehicles, not only in the U.S. but in North America, we still feel really good that demand is going to continue to be there. Could it be one of those years that the lower-end consumer is pressured? Very potentially. But as you know, Mike, when in tough years or when customers go through tough times, our industry is not immune to that, but it's more short term. And then as things move on, people hold on to their cars longer, they're working on their cars more often. And mid- to long-term, we couldn't feel better about how we're set up from a demand standpoint.
Michael Baker, Analyst
That makes sense. I have a broader question regarding the long-term potential of your business in Mexico. According to the press release, you currently have about 63 stores. How much could that number grow over time? One of your competitors is approaching 1,000 locations. What are your thoughts on the long-term potential in Mexico?
Brad Beckham, CEO
Sure, Mike. We're very excited about the Mexican market. We acquired Mayasa in 2019 and have been focused on that market for quite some time. As you mentioned, one of our biggest competitors has established a strong presence there for decades and has built a significant business. However, the market is quite fragmented. In the U.S., the average age of vehicles is 12.5 years, while in Mexico, it's over 16 years. Given this fragmentation in the independent market, we see a lot of potential for growth. That’s why Mexico was our first international expansion. We have a strong team there, and when we acquired Mayasa, we brought in valuable team members and distribution networks. Last summer, we opened our state-of-the-art O'Reilly prototype distribution center, which supports the growth you're asking about. While I can't provide specific revenue or store count projections, I can say that Mexico has the potential to contribute significantly to our growth in the coming years. There's no reason we can't pursue the Mexican market as aggressively as we have in the U.S. from coast to coast.
Operator, Operator
We have reached our allotted time for questions. I'll now turn the call back over to Mr. Brad Beckham for closing remarks.
Brad Beckham, CEO
Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your unwavering dedication to our customers and the outstanding results you produced in the first quarter. I would like to thank everyone for joining our call today, and we look forward to reporting our second quarter results in July. Thank you.
Operator, Operator
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.