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O’Reilly Automotive Inc. (ORLY - Analyst Report) witnessed a 20% increase in earnings per share to $1.32 in the third quarter of 2012 from $1.10 per share in the same period last year. Quarterly earnings also surpassed the Zacks Consensus Estimate of $1.27. Net income increased 7.3% to $159.3 million (9.9% of sales) from $148.4 million (9.7%) in the third quarter of 2011.

Revenues in the quarter rose 4.3% to $1.60 billion from $1.54 billion a year ago, marginally missing the Zacks Consensus Estimate of $1.62 billion. Comparable store sales (change in sales for stores open at least one year) stood at 1.3% compared with 4.8% in the third quarter of 2011.

Gross profit for the quarter increased 6.8% to $805.5 million (50.3% of sales) from $754.2 million (49.1% of sales) a year ago. Selling, general and administrative expenses escalated 5.7% to $542.2 million (33.9% of sales) from $513.2 million (33.4% of sales) in the prior-year quarter.

Operating income improved 9.2% to $263.3 million from $241.0 million a year ago, while operating margin improved to 16.4% from 15.7% in the third quarter of 2011.

During the quarter, O’Reilly opened 37 new stores across 20 states. As of September 30, 2012, the company has operated 3,896 stores. It expects to open 24 new stores in the year to meet its management guidance.

O’Reilly plans to open 190 new stores in 2013. The company also plans to open its 24th distribution center in Lakeland, Florida in the first quarter of 2014. This new store will support the company’s existing store in Florida and help it expand across the entire state.

Share Repurchase

During the quarter, O’Reilly repurchased 6.4 million shares of its common stock at an average price of $84.76, implying a total investment of $539.0 million. Subsequent to the end of the third quarter until October 25, the company has repurchased an additional 1.5 million shares for an average price of $83.49, implying a total investment of $128.0 million.

During the first nine months of the year, the company has repurchased 12.6 million shares at an average price of $89.62, leading to a total investment of $1.13 billion.

Since the inception of the share repurchase program in January 2011 until October 25, the company has repurchased 30.1 million shares at an average price of $74.45, implying a total investment of $2.24 billion. As of October 25, 2012, the company had approximately $263 million remaining under its share repurchase program.

Financial Position

O’Reilly had cash and cash equivalents of $422.7 million as of September 30, 2012, up from $276.7 million as of September 30, 2011. Inventories of $2.2 billion constituted a significant 76.6% of current assets as of September 30, 2012. Long-term debt was $1.1 billion as of September 30, 2012, up from $797.8 million as of September 30, 2011.

In the first nine months of the year, net cash flow from operations improved to $1.0 billion from $840.1 million in the prior-year period. Capital expenditures (net) decreased to $217.3 million from $243.3 million in the first nine months of 2011. As a result, free cash flow improved to $815.8 million during the period from $596.8 million a year ago.

Guidance

For the fourth quarter of the year, O’Reilly expects earnings per share of $1.03 to $1.07 and consolidated comparable store sales to increase in the range of 2% to 4%.

For full year 2012, the company anticipates earnings per share in the range of $4.64 to $4.68, up from the previous guidance of $4.56 to $4.66 per share. It expects lower consolidated comparable store sales of 3%-4% compared with the prior guidance of 3%-5%.

O'Reilly lowered its revenue guidance to $6.15 billion–$6.20 billion from $6.15 billion–$6.25 billion. The company expects gross margin between 49.8% and 50.0% and operating margin between 15.5% and 15.8% for the year.

It expects to incur $300 million to $320 million in capital expenditure in the year, down from the earlier projection of $315 million to $345 million. However, it raised the free cash flow guidance to $800 million to $830 million from $725 million to $775 million for the year.

Our Take

O'Reilly Automotive is the third largest specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the U.S., selling products to both Do-it-Yourself (DIY) customers and Do-it-for-Me (DIFM) or professional installers.

The company sells an extensive line of products consisting of new and remanufactured automotive hard parts (such as mufflers, brakes, and shock absorbers), maintenance items, accessories, a complete range of auto body paint and related materials, automotive tools and professional service equipment. Its main competitors are Advance Auto Parts Inc. (AAP - Analyst Report) and AutoZone Inc. (AZO - Analyst Report).

The company currently retains a Zacks #3 Rank, which translates to a short-term rating of Hold, and we have a long-term recommendation of Neutral on its shares.

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