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O’Reilly Automotive Inc. (ORLY - Analyst Report) posted a 37.4% increase in earnings to $1.58 per share in the second quarter of 2013 compared with $1.15 in the year-ago quarter. Earnings also exceeded the Zacks Consensus Estimate by 9 cents. Net income improved 21.2% to $177.1 million (10.3% of sales) from $146.1 million (9.3%) in the second quarter of 2012.

Quarterly revenues scaled up 9.7% to $1.71 billion from $1.56 billion in the same period a year ago, marginally beating the Zacks Consensus Estimate of $1.70 billion. Comparable store sales increased 6.5% compared with 2.5% in the second quarter of 2012. Comparable store sales increase surpassed the quarterly estimate of 4% to 6%.

Gross profit ascended 11.8% to $871.9 million (50.8% of sales) from $779.9 million (49.9% of sales) a year ago, due to improved acquisition costs, product mix and pricing management.

Selling, general and administrative expenses rose 7.3% to $575.6 million (33.6% of sales) from $536.3 million (34.3%) in the 2012-quarter. Operating income increased 21.6% to $296.3 million (17.3% of sales) from $243.6 million (15.6% of sales) for the same period last year. The year-over-year improvement was driven by management’s focus on expense control along with better gross margin.

Store Information

During the quarter, O’Reilly opened 47 stores and closed 1 store, bringing its total store count to 4,087 in 42 states as of Jun 30, 2013. Sales per weighted average-store increased to $419,000 from $404,000 a year ago.

Share Repurchases

Recently, O’Reilly’s board of directors approved an increase in share repurchase authorization by an additional $500 million. Thus, the cumulative authorization under the share repurchase program has been increased to $3.5 billion.

During the quarter, O’Reilly repurchased 2.5 million shares of its common stock for $274 million, reflecting an average price of $107.61. During the first half of 2013, the company repurchased 5.0 million shares for $502 million at an average price of $100.10. Subsequent to the end of the second quarter and through the date of the earnings release, the company has repurchased an additional 0.5 million shares for $56.0 million, implying an average price of $113.66.

Since the inception of the share repurchase program in January 2011, O’Reilly repurchased a total of 37.6 million shares for $2.98 billion, reflecting an average price of $79.27. As of Jul 24, 2013, the company had approximately $521 million worth of shares remaining under its share repurchase program.

Financial Position

O’Reilly had cash and cash equivalents of $365.9 million as of Jun 30, 2013, compared with $367.7 million as of Jun 30, 2012. Long-term debt increased to $1.4 billion as of Jun 30, 2013 from $797.4 million as of Jun 20, 2012. This translated into a higher long-term debt-to-capitalization ratio of 41.0% as of Mar 31, 2013 compared with 23.4% as of Jun 30, 2012.

In the quarter, net cash flow from operations declined 36.5% to $439.4 million from $691.5 million in the previous-year quarter. The decrease in cash flow was primarily attributable to higher accounts receivable. Meanwhile, capital expenditures (net) increased to $175.9 million from $149.3 million in the same quarter of 2012.

O’Reilly projected earnings per share in the range of $1.60–$1.64 and consolidated comparable store sales to increase in the band of 4% to 6% for the third quarter of 2013.

For full year 2013, the company raised its earnings per share guidance to the range of $5.79 to $5.89 from the earlier range of $5.64 to $5.74. However, O’Reilly reiterated its guidance of consolidated comparable store sales increase of 3% to 5% for the year. The company also reiterated revenue guidance of $6.6 billion to $6.7 billion, upgraded gross margin guidance to 50.3% to 50.7% from 50.0% to 50.4%, and reiterated operating margin guidance between 16.0% and 16.4% for the year.

O’Reilly reinstated capital expenditures guidance of $385 million to $415 million and free cash flow guidance between $450 million and $500 million for the year.

Our Take

O'Reilly Automotive is a prominent player in the automotive replacement parts and accessories industry along with Advance Auto Parts Inc. (AAP - Analyst Report), AutoZone Inc. (AZO - Analyst Report) and CarMax Inc. (KMX - Analyst Report). It sells its products to both Do-it-Yourself (DIY) customers and Do-it-for-Me (DIFM) or professional installers. Currently, it retains a Zacks Rank #3 (Hold).

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