O'Reilly Automotive, Inc. Price & Performance (ORLY)

Good morning, everyone, and thank you for joining us. During today's conference call, we will our first quarter twenty twenty five 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 we intend to be covered by and we claim the protection under the Safe Harbor provisions for forward looking statements contained 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 ks for the year ended 12/31/2024, 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 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 Hensley, our Executive Chairman and David O'Reilly, our Executive Vice Chairman are also present on the call. I'd like to begin today by thanking our over 93,000 team members for the hard work they put in during the first quarter to continue our track record of profitable growth, delivering a solid start to 2025. We held our annual leadership conference in January and our theme and rally cry for this year is Next Level.

Every single one of our leaders in every fast of our business are focused daily on how they can take their leadership their ownership, and in turn our customer service and performance to the next level. It's incredible that O'Reilly has been in business for almost seventy years and the same fundamentals and next level mindset that made our company successful in the early years are still what makes us great today. While I believe our people and our culture are truly world class today, Our team absolutely never settles for the status quo. I could not be more grateful to work with a team that is always on the hunt for ways to improve, get better and take our company to the next level. Delivering excellent customer service and building top notch teams to continue our company growing is not easy work. And I want to commend our team members for the pride they take in our company and the commitment they hold to being the best team in the business. Now, I'd like to start our discussion on the first quarter by walking through the details of our comparable store sales results. Our comp growth of 3.6% in the quarter was at the high end of our expectations and we are pleased with the solid start to the year.

Both sides of our business performed well relative to our expectations and our professional business was the larger driver of our total comp results with a mid single digit comp. Consistent with our expectations, and ongoing trends. DIY was positive for the quarter with a low single digit comp and we were pleased to see our comp outperformance being driven by strong ticket counts relative to our expectations on both sides of the business. Next, I want to give some color on the cadence of our sales results as we move through the quarter. We've noted many times that our first quarter can be our most with variability in our business resulting from the type and severity of winter weather. And from the timing of the onset of spring. The timing and magnitude of individual income tax refunds can also be a factor impacting our results through much of February and into March. While our results for the quarter are as a whole were strong, we did see the choppiness in our business that is characteristic of first quarter from these impacts. Winter weather in January was largely as expected but moving into February, we experienced more mixed weather patterns and some delays in the distribution of tax refunds.

As we entered the last week of February tax refunds caught up and coincided with favorable spring weather moving into March that supported strong volumes on both sides of the business through the end of the quarter. March was our strongest month of the quarter and we produced solid results thus far into April. On balance, we believe our underlying business and customer demand was steady throughout the quarter and month to month cadence is very much in line with what we would have given the weather we experienced and the timing of tax refunds. Although ticket count was the primary driver of our comp sales growth and outperformance in the quarter, average ticket was also a contributor to comps on both sides of the business. The dynamic of increasing complexity continues to be a stable driver of average ticket within our industry, as better engineered and more complex parts continue to drive both higher product costs and resulting selling prices. Same SKU inflation was a minimal benefit on the quarter at less than half a percent. This was slightly below our expectations on both sides of our business, primarily due to the normal puts and takes we see in rational competitive pricing in our industry.

I will discuss our thoughts on tariff developments in a moment, but I will note that tariff related price changes had a very minimal impact to same SKU inflation in the first quarter. Looking to the remainder of the year, we are maintaining our full year comparable store sales guidance of 2% to 4%. Now I'd like to spend a minute discussing what is driving our sales results how we're thinking about what is ahead of us this year. During the first quarter weather related categories performed well and we continue to see strength in maintenance categories such as oil and filters as consumers are prioritizing the maintenance of their existing vehicles. We also continue to see pressure in discretionary categories in line with trends over the last few quarters and a continued indicator to us that consumers are being cautious in a period of economic uncertainty. We saw solid results in failure related hard part and our customers continue to prioritize products that are higher quality on the value spectrum. We believe we're in a market where consumers are placing a a high value on investments in their existing vehicles and will continue to be motivated to avoid the significant cost and monthly payment burden that comes with a new or replacement vehicle.

The combination of these factors puts us in a backdrop that we would characterize as favorable for the industry and for O'Reilly yet carries a high degree of uncertainty. There are several factors, namely tariffs and the ongoing international trade deliberations that have the potential to impose significant challenges on the consumer. Within the first quarter, most of this uncertainty was in the headlines had yet to make its way to anything we would characterize as notable impact to our day to day business. As such, we have not made changes to the key assumptions behind our original comparable store sales guidance range of 2% to 4% that we discussed on our call in February.

Tariffs certainly have the potential to impact the same SKU inflation assumptions we have inherent within our guide.

However, the high degree of uncertainty surrounding the duration magnitude, and timing of potential tariffs coupled with the changes we have already seen to previously announced tariffs, prevent us from prudently forecasting the inflationary impacts. Additionally, we have not seen adverse impacts to consumers that could also come with rapid and sustained changes to the pricing environment, but we are cautious in our outlook given the broader uncertainties in the macroeconomic environment. Based on these considerations, we have maintained an unchanged sales guidance range that is supported by current business trends and volumes. Brent will cover the gross margin outlook during his prepared comments but I will note that our margin outlook was developed under the same thought process. Over the long term, regardless of any potential short term disruptions in the broader macro environment, we stand by the fundamental drivers of our business, increasing miles driven on a growing and aging vehicle fleet by consumers that view transportation needs as critical to their day to day lives provides a stable and supportive backdrop for our industry. While tariffs may take up a significant bandwidth in the news, our teams are focused on what they do best. And that is getting incrementally better executing our business model every single day in every single store.

We have the absolute expectation that our industry leading service and availability will take market share against any any market backdrop And internally, we certainly don't allow for excuses if results don't meet expectations. We have confidence in our industry and we know that even after years of sustained profitable growth as a company we still own a small fraction of the total addressable share. We believe we still have a ton of opportunity and we intend to take market share both aggressively and profitably. Before I wrap up, I wanted to also note that we are increasing our diluted earnings per share guidance to a range of $42.9 to $43.4 Our increase in EPS guidance is driven by our first quarter sales performance as well as a reduction in our expected tax rate and the impact of shares repurchased through the date of our earnings release yesterday. You might have also seen that we announced that our Board of Directors approved a 15 to one split of our common stock subject to shareholder approval at at our annual meeting this May. This would mark our fourth stock split in our company history since going public in April of nineteen ninety three with our last split twenty years ago in 02/2005.

Our primary motivation for a split is to make our stock more accessible to our team members and enable them to acquire whole shares rather than fractions more readily through our employee stock purchase program. Our stock purchase plan has been an excellent way for our team members to share in the success of O'Reilly, allowing full time team members to begin purchasing stock at a discount right at the beginning of their career with the company. With the outstanding results our team has been able to achieve over the years, and the corresponding growth in share price, we believe this is the right time to split our stock and encourage our team members to join in the next chapter of growth for O'Reilly. As I wrap up my prepared comments, I would like to once again thank team O'Reilly for your hard work and commitment to excellent customer service with a solid start to 2025.

Now, I'll turn the call over to Brent.

Thanks, Brad.

I would also like to begin my comments this morning by congratulating team O'Reilly on solid start to 2025. Today, I will further discuss our first quarter gross margin and SG and A results. And provide a quick update on our expansion and capital investments thus far in 2025. Starting with gross margin, our first quarter gross margin of 51.3% was a 12 basis point increase from the first quarter of twenty twenty four. Which was in line with our expectations for the quarter. The acquisition cost environment remains stable. And as Brad noted, this is coupled with a rational pricing environment within the industry. Our first quarter gross margins were not materially impacted by the changing tariff environment. At this point in time, we have begun to see some cost flow through from the initial round of incremental tariffs on product from China. But there is still a very high degree of ambiguity as it pertains to the subsequently announced tariffs. We are still working through negotiations with our suppliers and our team is working diligently to rapidly digest new information as it becomes available and respond accordingly. As Brad mentioned earlier, and similar to what we noted on our last call, at this stage, it is difficult to assess the exact timing, duration, and magnitude of any tariff revisions that will occur and the way that suppliers, competitors and customers will respond to these changes.

It is still our expectation that we will be able to work with our supplier partners to actively negotiate the level of any tariff driven cost pressure they pass through to us in order to mitigate the impact to our customers. In a similar fashion to how our industry and company has responded to previous tariff and other cost changes. We also continue to believe the demand in our industry is resilient. Because of the non discretionary needs based nature of the products that we sell. As such, we believe we will still be able to profitably earn our customers' business delivering a strong value proposition driven by our professional parts people and our industry leading parts availability. Even in an environment of rising prices. Ultimately, we are confident in our ability to manage effectively through this period of uncertainty and believe that rational pricing will persist within our industry. We also have more flexibility than ever in our company's history and how we manage our supply chain. And where we source our products. As we have previously stated, approximately one quarter of our products are sourced from China.

And we have continued to reduce this percentage over the last several years. Given the uncertainties surrounding current trade deliberations, we would not anticipate significant country of origin changes in our sourcing in the near term. However, we will continue to work closely with our supply chain partners to evaluate the most optimal strategic path forward. We have always been active managers of our supply chain in partnership with our supplier community and we will work diligently to ensure that there is no barrier to us maintaining our inventory advantage that continues to position us as the industry leader in parts availability. Factoring in these considerations, we are maintaining our 2025 full year gross margin guidance range of 51.2 to 51.7%. In line with Brad's discussion on our comp sales guidance, this reiterated guidance does not forecast any discrete impacts for varying tariff scenarios that may yet play out. Turning to SG and A, Our first quarter average SG and A per store growth of 4.1% was above our expectations. As compared to those expectations, the pressure to SG and A was driven in part by team member payroll and benefit costs, reflecting variable spend on the sales results in the quarter and enhancements to store level pay plans as well as some pressure in the quarter from medical plan cost.

We also saw some cost pressure driven by maintenance and occupancy expenses resulting from normal wear and tear to our stores during the winter months that outran our forecasts. Our spend in the first quarter puts us on track to finish at the high end of our 2% to 2.5% full year guidance range for average SG and A per store growth.

On a quarterly basis, for the remainder of the year, we are leaving our SG and A expectations unchanged and we continue to expect to run approximately 2.5% to 3% in the second and third quarter. But will be below the full year rate in the fourth quarter as we compare against the charge that we recognized for self insured auto liability in the fourth quarter of twenty twenty four. While we view some of the SG and A pressure in the first quarter to be temporary, and aren't changing our outlook for the remainder of the year, we are cognizant of the potential for incremental impacts to our cost structure should we see an accelerated inflationary environment more broadly in the economy. As always, we will diligently manage our SG and A spend to match business trends and the market share growth that we are driving in our stores. And will not overcorrect in the short term in any way that would impact our high standard for providing excellent customer service. Based on our SG and A expectations, and projected gross margin range, we continue to expect our full year operating profit to come within our guidance range of 19.2 to 19.7%.

Inventory per store finished the quarter at $86,000 which was up 4.3% from this time last year and up just under 1% from the end of twenty twenty four. Inventory turns remained strong at 1.6 times as our teams work to continually enhance assortments by market. The tiered nature of our distribution network with regional DCs and hub stores allow us to hold broad coverage in every market that we serve to provide the time definite promise that is so critical when immediacy of need drives our delivery times to be measured in minutes, not hours. We are still projecting to increase our average inventory per store by 5% in 2025 and we are pleased with the inventory investment that we have made thus far. Lastly, to touch on our store growth and capital investments in the first quarter, we opened a total of 38 net new stores across The U. S. And Mexico. Our new store performance continues to meet our high expectations driven by the teams of professional parts people that we have behind the counter in every new store and the distribution capability to deliver the inventory availability that our customers expect from us. Capital expenditures in the first quarter were $287,000,000 and we still expect a total capital expenditure investment for 2025 of 1,200,000,000.0 to $1,300,000,000.

The major projects behind this spend are on track and we are excited about the growth opportunities ahead of us in all of our market areas. As I conclude my comments, I would like to thank the entire O'Reilly team for their hard work and dedication to starting the year right in 2025. I look forward to the opportunities we have ahead of us this year and I have full confidence in our team to take on any challenge that presents itself. Now, I will turn the call over to Jeremy.

Thanks, Brent. I would also like to thank all of team O'Reilly for their continued commitment to our company and our customers. Now we will fill in some additional details on our first quarter results and outlook for the remainder of 2025. For the first quarter, sales increased $161,000,000 driven by a 3.6% increase in comparable store sales, a $73,000,000 non comp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. Partially offset by a 125 basis point headwind to our total sales increase from one less selling day as a result of lead day in the first quarter of twenty twenty four. As a reminder, the impact from leap day is excluded from our comparable store sales. For 2025, we continue to expect our total revenues to be between $17,400,000,000 and $17,700,000,000 Our first quarter effective tax rate was 21.3% of pre tax income comprised of a base rate of 23.2%, reduced by a 1.9% benefit for share based compensation. This compares to the first quarter of twenty twenty four rate of 21.9% of pre tax income, was comprised of a base tax rate of 24.2% reduced by a 2.3% benefit for share based compensation.

Our first quarter effective tax rate was below our expectations as a result of the benefit we realized from share based compensation. For the full year of 2025, we now expect an effective tax rate of 22.4% comprised of a base rate of 23% reduced by a benefit of 0.6% for share based compensation. We expect the fourth quarter rate to be lower than the other three quarters 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 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 twenty twenty five was $455,000,000 versus $439,000,000 in 2024. The increase of $16,000,000 was the result of modest working capital improvements partially offset by higher capital expenditures. For 2025, our expected free cash flow guidance remains unchanged at a range of 1.6 to $1,900,000,000. I also want to touch briefly on our AP to inventory ratio, We finished the first quarter at 126% which was down from 128% at the end of twenty twenty four but slightly above our expectations.

For 2025, we expect to see continued moderation resulting from our planned incremental inventory investment across our store and distribution network, and currently expect to finish the year at a ratio of approximately 125%. Moving on to debt. We finished the fourth quarter with an adjusted debt to EBITDA ratio of 2.03 times, as compared to our end of twenty twenty four ratio of 1.99 times with a modest increase in adjusted debt partially offset by EBITDAR growth. We continue to be below our leverage target of 2.5 times and plan to prudently approach that number over time. We also completed the renewal of our revolving credit facility at the end of the first quarter, which extended the maturity for an additional five years and upsized the facility to $2,250,000,000 We appreciate the support of our bank partners and believe this sizing provides the appropriate amount of liquidity for our business. We continue to be pleased with the execution of our share repurchase program And during the first quarter, we repurchased 431,000 shares at an average share price of $12.97 dollars for a total investment of $559,000,000 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, 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 our call for your questions, I would like to thank our team for their hard work and dedication. To start 2025. 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 Thank you. We will now begin a question and answer session. If you have a question, please press 1 on your phone. If you wish to be removed from the queue, please press 2. We ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Please limit your questions to one question and one follow-up question. Once again, if you have a question, please press 1 on your phone. Your first question is coming from Michael Lasser from UBS. Your line is live.

Good morning. Thank you so much for taking my question.

Understanding that it's a very fluid situation.

If you simply ramp the tariffs that are in existence today through the rest of the year what would the potential impact on your sales and earnings be as it stands? And how much price do you think you would be able to pass along in a scenario where tariffs even close to this level persist for the foreseeable future.

Hey, good morning, Michael. Thanks for the question. This is Brad. I'll start off and then kick it over to Brent. To talk about some of the pieces as it relates to tariff gross margins and top line all the things you covered there. So first and foremost, we're extremely proud of our merchandise team and they put a really great playbook in place back in 2016 that we ran today through the pandemic, a lot of inflation flowing through and we couldn't have more confidence in industry and our ability to play from a position of strength. Non discretionary needs based business and are such amazing supply chain and obviously our professional parts people. Fluid is the right word, Michael. I like that a lot. That's how we're thinking about it. This is day to day, week to week, month to month. You know, the challenge a little bit with the way you framed it up is extrapolating out what that would mean today has been different. Last week. It could be different next week. And so that's a little bit of a challenge. But I'll kick it over to Brent to talk about some of the detail of how we're thinking about that.

Yeah, Michael, thanks for the question. And a logical question. I think the challenge with answering it explicitly is really some of the moving pieces is still exist. If you think about the fact that we've got this ninety day pause on reciprocal tariffs that's out there you think about there's a layer in between there where there's an exemption for automotive parts that's been given, and our team, you know, to Brad's point, our merchandise team is working diligently with our supplier base as well to really understand the, the codes with the products that are exempt under that automotive exemption versus those that And, you know, there's there's not been a lot of scrutiny on some of those, harmonized tariff schedule codes until this point. And now there's obviously a lot within the industry for all those reasons. So, there's there's a level and a layer of automotive parts especially from China. That's going to be there's going to have some exclusion you know, and have a 25% additional rate versus that reciprocal tariff rate. There's still some debate there on on, you know, what is gonna be in that layer and what's not gonna be in that layer.

And and our team's working with our industry association. Our industry association is working with the administration to help them better understand it. Because in some cases, as with things government sometimes there's a lack of understanding of the details something like this. And then once the industry gets involved, there becomes a better understanding working government.

So all of that is playing out right now. So it's really wouldn't be prudent for to to to share a number right now because that number, whatever that number would be today is gonna change when it's all said and done. What I can tell you though, I have extreme confidence in our team, the work that they're doing. I have extreme confidence in our industry, and the resiliency of it in times like this. And, you know, I I just feel like that, we're well positioned no matter where we end up with this. To be in a good place with our supplier base with our customers and the resiliency of our industry.

Michael, just lastly, maybe on that as always, our goal is going to be to our goal is going to be to do everything we can to maintain rate It's yet to be seen. Totally where the true health of the consumer is. I think that again is yet to be seen. We're still positive, but we're going to continue to work hard to make make sure we're taking great market share, doing it effectively, holding our suppliers accountable. We got a lot of great partners. We're still negotiating through a lot of that. And we feel like we're going to be in a good position We feel like our industry is going to be in a good position, but we also like like how we're positioned as well.

My quick follow-up is that O'Reilly historically has been the premium service player and not the low cost provider. Does that put O'Reilly at a disadvantage in an era of what could be hyperinflation within the category And would there be any consideration to evolving that strategy given what is possible.

Hey, Michael, this is Brent. I can start on that. Think it's it's a good question, a fair question. What I would tell you though, when you think about the landscape of everything you're talking about, is, you know, we see ourselves in this industry as a share gainer. And, we feel like a lot of our supplier partners see us as a Share gainer as well, and they want to partner with us because they see us that way. Now listen, we got to earn that every day with our customers, our team members, every transaction. We don't ever take that for granted. But we are absolutely focused on continuing to grow, continue to gain share, with the backdrop of a very rational and a very resilient industry. So I I would tell you that I feel like we're we're positioned with our high service, high touch, high availability puts us probably in a better negotiating position as it relates to the things your doc about than a lesser negotiating position.

Yes, and Michael, this is Brad. The other thing I'd say directly to what you the way you frame that up is our pricing profiles today on both sides of the business are extremely competitive. You know, when I started this business back in the 90s, when we were less of a DIY supplier and still really better at the professional side, the item side of the business that the way you framed it up would have been more the case. As we became a national player and operate in all the markets we do, We are extremely competitive on the DIY side, the retail side, that business is more transparent. We have and need to be competitive especially with all our brick and mortar retailers and on the professional side, we couldn't feel better about the way we're positioned from a pricing standpoint. We're always going to do everything we can to have a premium there because frankly, our professional parts people and our industry leading supply chain allow us to do so. That said, everything we've been through the last many years with our professional pricing initiative and the way that we use data and science along with the Street View of how we need to be from a competitive pricing standpoint.

I just the way you frame that up. I don't think that's the case. Think we're going be playing from a position of strength. I feel good about our pricing and I feel like even if that was the case to some degree, the offsets are going to come in weaker players in the industry You know, the complexity of things coming down the pipe for some of the independent side of things and, you know, we feel really good about that. Thank you very much and good luck.

Michael. Thank you, Michael.

Thank you. Your next question is coming from Simeon Gutman Morgan Stanley. Your line is live.

Hey. Good morning, everyone. So Brad, the last couple of years, O'Reilly has invested a lot into SG and A. And you presented again with this unique moment. Your share gains have been solid, balance sheet is good. And your buying leverage has got to be among the best in the industry. I wanted to take your temperature on the debate, if you're having any, about ramping up SG and A spend and then even handling tariffs to lean in a little bit on price to push the market share? Is that even a thought? Or you just trying to manage the environment as best as you can right now?

Yeah. Hey, thanks, Simeon. It's more of the latter. Maybe to take the SG and A piece first. Listen, we are somewhat disappointed with our SG and A performance in the first quarter. We were just out with our guidance a couple months ago. And sometimes models don't get exactly right from quarter to quarter based upon how we see it internally. So there's a little bit of that, but we were somewhat disappointed with our SG and A performance in the quarter. Our team takes great pride in managing every detail of SG and A. And we still feel good as we mentioned in our prepared comments, Simeon, about the way that we laid out our cadence of SG and A, we wanted to be transparent the way we're thinking about it is the high end of our SG and A guidance range for the full year and as Brent pointed out earlier, you know, basically for Q2 and Q3, we're going to be at that 2.5% to 3% range and then less than that in the fourth quarter part of that being the self insurance charge comparison. So, we don't want anybody to see this as yet an additional cycle from an SG and A spend standpoint.

We feel really good about our guidance. We feel good about our plan. And, you know, we're going to make sure we manage diligently the remainder of the year and make sure that we come into expectations and really our team did a good job in the first quarter We had a couple of things that popped up, nothing alarming, nothing that our team necessarily mismanaged. Brent called out that we had a minor change in the way that we compensate our store managers. We had an enhancement to that pay plan. That resulted in just a timing issue that's not a big deal that will flush out in the remainder of the year. To Brent's point earlier, had a little bit of maintenance and occupancy cost things that again, just a little bit of timing, but also some things we can always manage better.

And then on the tariff side, in terms of pricing, really for what we've seen so far this year, Simeon, continue to see a very rational environment [indiscernible] of the Q1 wrapped up and we get into Q2, continue to see what you would expect. It's still a little bit early to tell what's being pushed through, but there's no plans to invest in price in terms of the way you asked that. [indiscernible] on inventory. I remember in the COVID period, you got ahead of inventory, you had a better position and you were able to take share. In light of industry conditions, which could get better, because of the price of a new vehicle and the demand will go up to keep a nuke on the road. Anything you're changing with inventory and related to expectations for industry growth for the year?

No.

Simeon, this is Brent. I would tell you no. In terms of inventory, our goal is to have the best parts availability in every market that we operate in and our teams are have been committed to that. Through COVID and and ever since. And I I would tell you when you look at our fill rates and in stock performance, it's the highest it's been since pre covet in Q1 and we don't have any anticipation of changing the focus there. Yeah, I think maybe just wrap that up, Simeon, with disruption or without disruption, we couldn't feel better about our investments in inventory. We've been pouring into this for a long time. It's a competitive strength of ours. We're going to continue to make sure it's a competitive strength to Brent's point in every single market We're going to continue to run our playbook when it comes to new DCs, upgrading our distribution centers, hub stores and really most importantly, every spoke store having the right inventory deployed exactly where it needs to be. And our teams are doing a really great job doing that in a disciplined way. So we're going to continue continue to invest in the inventory obviously do it in a disciplined way.

Okay, thanks guys.

Good luck.

Thanks, Simeon. Thanks, Simeon.

Thank you. Your next question is coming from Greg Melich from Evercore. Your line is live.

Hi, thanks. I wanted to get a little [indiscernible] particularly foreclosures from and just disruption with independents. So do you see the M and A opportunities shifting? Or is this a good time to ramp investments that you have planned in the pipeline?

Hey, good morning, Greg. You cut out a couple of times, but I think we picked everything up So, yeah, competitive landscape, Greg, you know, it's not a lot has changed. You know, it's competitive market out there. We have a lot of big competitors. They continue to do an amazing job from execution standpoint. You know, we have some struggling competitors you know, landscape really continues to be pretty much how we've talked about it in terms of the other big three as well as the strong independence there's some mediocre independence and then some independence that are struggling. That is always an opportunity. You know, I think, you know, from a, you know, from a disruption in terms of what you asked about in terms of one competitor, You know, really, it's still a little bit early to tell in terms of store closures. I know we've said that for a couple of quarters here, but the reality is the way we understand it, a lot of those wrapped up kind of toward the tail end of Q1 and we know there's going to be something there, but we just want to continue to temper that knowing that those volumes were really low and some of that may not be addressable or things that we want at our margin profile.

That said, you know, Jason Terrence teams, our store operations teams and all our support teams from the distribution centers and the corporate office are doing everything in our power to make sure that we're out there calling on those customers, understanding who they are, DIY and DIFM. And so obviously we're going to work very hard to turn any of that share into a rally share. Again, just tempered with don't know how material that's going to be and it's going to probably take another quarter or two to really see how that plays out. We don't want to misspeak to that. And then on the M and A front, Greg, yeah, I mean, you know, M and A continues to be an opportunity for us. You know, when I think about it, especially as we start to really fill in kind of the Upper Mid Atlantic and getting into New York City, and all those type markets. We feel there's going to continue to be solid opportunities from an M and A standpoint. It's probably going to be more in the context of kind of onesies and twosies and then maybe some smaller chains that have five, six, seven stores.

Don't know that there's anything large in material. In those markets, but kind of yet to be seen, but yes, we're staying opportunistic, in terms of kind of the last two put together, there's been some opportunities to change some job bers over to our Park City program. It's been pretty small. Been a couple of onesies and twosies type opportunities to to tuck in kind of spread across the country from that disruption and we're going to continue to look for those opportunities.

That's great. And on gross margins, I just love to follow-up given how EBIT margin did fall in 1Q. As we look forward to get EBIT margins up for the year, how much should we expect gross margins to expand? In 2Q and in the rest of the year?

Yes, Greg. This is Jeremy. Good question. We would still view our gross margin performance as we as we move through the year to be relatively consistent, For sure, probably most likely on a cadence, it's going to look a lot like what it it it did last year. Keep in mind, last year second quarter was a softer gross margin quarter for us, but still kind of relatively within an entire band. There's just some mixed things that happened in second quarter. As we move through the balance of the year, our expectation is that that performs a little bit better in the back half and puts us kind of solidly within that range that we provided. I can tell you that just versus our expectations, q one gross margins were exactly where we would have expected that they would have been.

Got it. Thanks and good luck guys.

Thanks, Greg.

Thanks, Greg.

Thank you. Your next question is coming from Chris Bottiglieri from BMP. Your line is live. Hey, guys. Thanks for taking the question.

Can you elaborate more about your experience Hey. Good morning. Can you elaborate more about your experience moving product from China since the last out of tariffs? How long does it take to move sourcing? Is there anything about the first five points of sourcing? That you move that made it easier? How feasible to move the five to 10 if it comes to that? Sounds like right now you're staying put, but just kinda curious, like, how to think of the timeline of moving?

Yeah, Chris, this is Brent. I can start on that. A great question. You know, and and honestly, as I mentioned in my prepared remarks, we've continued to reduce our dependency on sourcing from China, really started back during COVID The teams have done a good job of continuing to move some of our sourcing out of that country and where we've moved it actually standing up capability in places like India, Vietnam, Thailand, other other places, where we're building muscle, if you will, and have options to further move production there over time. And as again, as I mentioned in the comments, I mean, we're going to take a strategic look when we feel like there's some true settling of where the true direction is on tariffs. Hopefully we'll get that over the next couple of quarters at least. Long term, we're going to make the best strategic decisions for our sourcing options globally. The great thing is, and we've talked about this as well but our proprietary brand portfolio gives us a great umbrella to do that under. And the teams have done a great job. Our purchase team as well as our merchandise team have done a great job using, those brands for for multiple suppliers for those brands that meet our spec and really have had a lot of success with that.

So we feel like that's going to be a good enabler for us to make the best long term sourcing decisions once we get through the near term disruption we have right now.

Yeah, Chris, maybe the only Chris, just maybe the only thing I would add to that is is we're, as Brent mentioned, we're in a better position, I think, based upon the work we've done over the last several years in the the close work we've done with our supply partners, to be able to to work through the process to to stand up in in other places, because, obviously, there's some time. There's an investment cycle to do that in I think I think the the big question that we all have in in in Brent point to is is exactly how how do you plan for what that outlook is going to be? Because because really candidly, the the the piece that takes more deliberation is just understanding how to best think about what the the the long range looks like. In knowing that that that can cause that strategic path to take a few different directions just as magnitude of things play out. Interestingly, as we looked at the process over the course of the last really kind of seven years or so I that that really started to to gain even more traction for us. A lot of our supplier partners as as some of the previous changes in the tariff regime sustained themselves through another administration.

Where there was, you know, some permanence around how that first round went from the earlier time period. And so there may be some degree to which we don't go as fast as we possibly could, as we just want to be appropriately deliberate about how we think about the right long range approach.

Gotcha. Okay. That makes sense. Then a follow-up. Do you have a sense for I would think, like, you always wanna own a company the most scale, which is O'Reilly in this type of environment. But do have a sense for, like, how your competitors, particularly the private side, are they sourcing generally from the same suppliers in countries of origin as the public are like O'Reilly? [indiscernible] didn't leave quickly China as quickly as you had in the last five years? Like, have a sense of your competitive position of source. I mean, moving forward, it sounds like be the most dynamic and nimble, but just curious whether, you know, where you think the private tip today? Yeah, Chris, I think what I will tell you is there are a lot of factories producing auto parts in various parts of the world. I would say we share some of those suppliers with some of our competitors. And in many cases, we don't share them with our competitors. It's a bit of a mixed bag. And then as it relates to national brands, I talked about proprietary We also go to market with a mix of proven national brands as well.

So those national brand partners, again, some of them do business with some of our competitors, some don't exclusively. So there's a mixed bag there as well. So would tell you probably the answer to your question is it's a bit mixed. But again, we feel very confident in our supply chain's ability to be nimble the environment that we're operating in and feel good long term strategically that we'll be able to source as good or better than anyone in our industry based on our position.

That makes sense. Thank you very much.

Thanks, Chris.

Thank you. Your next question is coming from Bobby Ohmes from Bank of America. Your line is live.

Hi, it's Bobby Ohmes. Thanks for taking my question.

Actually, I'm sorry to keep asking about tariffs, but I wanted some help with clarification on on what's happening right now. So are you guys are you guys are you receiving higher tariff goods right now? And when or when would you be receiving them? And when would stuff that would already be at the very high tariff out of China be, sort of flowing through your income statement and pressuring gross margin? And then, And then my other question is, are you seeing any signs of pull forward from your customers either on the Pro or DIY side that are concerned that tariffs will remain elevated and won't be excluded potentially. And so they're actually ordering excesses from you guys themselves right now.

Yeah. Hey, Robbie. This is Brent. I can start and the other guys can chip in. I mean, I think really, you know,