O’Reilly Earnings: Competitive Edge Remains Intact, but Pace of Top-Line Gains Gradually Abating

Wide-moat O’Reilly’s first-quarter results came in slightly below our expectations as comparable sales growth of 3.4% lagged our 4.5% estimate and operating margin declined 40 basis points to 18.9%. However, our confidence in the firm’s growth trajectory and margin profile is intact as we acknowledge that the auto-parts retailer was lapping a difficult 11% growth figure from last year. Ongoing operational investments in technology and stores contributed to near-term margin degradation, though we expect these costs to abate over time and were impressed by the firm’s 51.2% gross margin (up 20 basis points annually). We expect O’Reilly’s financial marks to improve as the year progresses and continue to forecast mid-single-digit comp growth and operating margin that slightly exceeds 20% in fiscal 2024, closely aligning with management’s reaffirmed outlook. Our long-term outlook remains intact, and we believe O’Reilly enjoys a durable competitive edge that primarily stems from superior product availability, expertise, and speed of service. With a vast hub-and-spoke distribution network and favorable supplier relationships, the firm’s status as a leading auto-parts retailer is well cemented, in our opinion. We plan to slightly raise our $780 fair value estimate primarily due to the time value of money but view shares as overvalued.