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Expansion Efforts to Aid O'Reilly (ORLY) Amid Coronavirus Scare

Zacks Equity Research

On Jun 1, we issued an updated research report on O'Reilly Automotive, Inc. ORLY. The company’s customer-centric business model and growing demand for technologically-advanced auto parts are likely to boost O’Reilly’s prospects. However, soaring SG&A costs on expenses for opening stores, distribution centers and maintaining the existing ones, along with efforts to provide superior customer services, might affect its performance.

Over the trailing four quarters, O'Reilly beat estimates on two occasions for as many misses, the average positive surprise being 1.37%.

Coronavirus Pandemic Hurts Q1 Results

O'Reilly reported first-quarter 2020 adjusted earnings of $3.97 per share, which beat the Zacks Consensus Estimate of $3.86. However, the bottom line declined from the year-ago quarter’s earnings of $4.05. The specialty auto parts retailer’s comparable store sales edged down 1.9% year over year, as against the 3.2% rise recorded in the year-ago period. The coronavirus crisis and stay-at-home orders in multiple states hit the company hard in March, in turn resulting in a comps decline.

What’s Driving the Stock?

Technological Advancement Stokes Growth

O’Reilly’s revenue growth is impressive. It has been generating record revenues since 27 consecutive years on stable growth in the auto parts market and expansion of the store base. The company’s customer-centric business model as well as growing demand for technologically-advanced auto parts will likely boost O’Reilly’s prospects. Moreover, increased complexity of auto parts and repairs are driving more people to independent repair shops. Thus, as the cars as getting more technologically advanced, high-quality auto parts are much in demand, which are likely to bolster the company’s sales and earnings.

Expansion through Store Openings & Buyouts

O’Reilly is poised to benefit from store openings and distribution centers in profitable regions. In addition to opening stores in new markets, the company has been actively increasing store count in less-populated areas. O'Reilly’s penetration in new and contiguous markets will fuel business growth in markets across the country. To help serve customers effectively amid the coronavirus mayhem, it is undertaking several initiatives like curb-side pick-up for Buy Online and Pick Up In-Store orders.

The company also has a competitive edge due to its dual-market strategy and a strong distribution network. O’Reilly’s wide-ranging product portfolio caters to Do-it-Yourself (DIY) and Do-it-for-Me (DIFM) customers, which are driving comparable store sales growth. The firm’s buyout of Mayasa Auto Parts bodes well and marks O’Reilly’s first international expansion transaction.

Few Headwinds to Counter

Weak Consumer Sentiment Amid Coronavirus Crisis

The coronavirus pandemic has rattled the auto sector with factory closures, low footfall at dealerships and supply-chain distortions. Thanks to the impact of COVID-19, the comparable store sales of O’Reilly decreased 13% for the four-week period beginning in the middle of March and through the first two weeks of April. Amid stay-at-home orders and travel restrictions, along with a weak consumer confidence, the near-term earnings of the company might have been adversely impacted. O’Reilly has withdrawn the annual view as well as suspended its buyback programs on the coronavirus scare.

Rising Costs to Hurt Margins

For the past few quarters, the company has bearing the brunt of rising selling, general and administrative (SG&A) expenses. This upswing is resulting from inflated expenses for opening stores, distribution centers and maintaining the existing ones, along with efforts to provide superior customer services. O’Reilly’s plan to pursue omni-channel goals is likely to further flare up expenses, thereby clipping profit margins. Notably, the company’s SG&A expenses rose 4.5% year over year to $872.3 million in the first quarter of 2020. Persistent rise in SG&A expenses are likely to strain margins further.

Price Performance

Shares of O'Reilly have depreciated 4.7%, year to date, compared with the industry’s decline of 5.7%.

Zacks Rank & Stocks to Consider

O'Reilly currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector are Tesla, Inc. TSLA, Niu Technologies NIU and Halfords Group Plc HLFDY, each carrying a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of Tesla have appreciated 114.7%, year to date, compared with its industry’s rise of 22.2%.

Shares of Niu have gained 23.9%, year to date, as against the industry’s decline of 16%.

Shares of Halfords have rallied 44.2%, year to date, as against its industry’s decline of 16%.

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