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# O'Reilly Automotive, Inc. (ORLY): Business, Risks and Management's Discussion
O'Reilly reports on a calendar fiscal year. The annual material below covers fiscal 2025, the year ended December 31, 2025; the current-period material covers the second quarter of fiscal 2026, ended June 30, 2026. Share and per-share figures reflect the 15-for-1 forward stock split completed on June 10, 2025.
## Business
*Source: Annual Report on Form 10-K for the fiscal year ended December 31, 2025, accession 0000898173-26-000009.*
O'Reilly is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in North America. It sells through company-operated stores to two customer groups at once: do-it-yourself (DIY) consumers and professional service providers such as repair shops, which it calls its "dual market strategy." In 2025 each group generated roughly 50% of sales. The company does not sell tires or perform for-fee repairs or installations. It reports a single operating segment, and its revenue and long-lived assets are mainly in the United States.
**Store footprint.** At December 31, 2025 the company ran 6,585 stores: 6,447 in 48 U.S. states and Puerto Rico, 112 in Mexico and 26 in Canada. It opened 207 net new stores in 2025. Texas (878 stores), California (614) and Florida (318) are the largest states. A domestic store averages about 8,000 square feet and carries about 24,000 SKUs. Of all stores, 2,791 were owned, 3,728 were leased from unaffiliated parties, and 66 were leased from entities tied to affiliated directors or their families.
**What it sells.** The range runs from new and remanufactured hard parts (alternators, batteries, brake components, starters, water pumps and similar) to maintenance items (oil, filters, fluids, wipers) and accessories. Stores also offer free services: battery and electrical testing, check-engine-light code extraction through the company's VeriScan tool, a loaner tool program, and used oil, filter and battery recycling. Merchandise mixes national brands with a private-label range priced at "good, better, best" levels. Private labels include BesTest, BrakeBest, MasterPro, MicroGard, Super Start, Syntec and Ultima. Sales and gross profit dollars are generally highest in the "best" tier.
**How it makes money.** The economics rest on parts availability. A regional, tiered distribution network gives stores same-day or overnight access to more than 156,000 SKUs. It consists of 32 distribution centers with about 14.0 million operating square feet, plus 399 Hub stores that carry an average of 63,000 SKUs (up to about 115,000 in select markets). More than 95% of stores receive multiple same-day deliveries of hard-to-find parts. About 825 full-time sales staff call on professional customers. Professional sales have historically grown faster than DIY because the professional market is more fragmented. Professional sales also carry a lower gross margin than DIY sales. The company buys from more than 655 suppliers. The five largest accounted for about 23% of 2025 purchases, and the largest alone about 8%. It has no long-term purchase commitments with suppliers.
**Market and competition.** The company cites an Auto Care Association estimate that the U.S. automotive aftermarket is about $435 billion, and it estimates its own addressable U.S. market at about $165 billion to $175 billion. Competitors include national parts chains (AutoZone, Advance Auto Parts, CARQUEST, NAPA), regional chains, independent jobber stores, car dealers, and mass merchants and online sellers such as Walmart and Amazon.
**Growth plan.** For 2026 the company planned 225 to 235 net new stores and estimated that an owned new store costs about $3.2 million to $3.5 million, including land, building, fixtures, vehicles and net inventory. The distribution network has capacity for roughly 400 to 550 more domestic stores. A new distribution center opened in Stafford, Virginia in 2025. The Lakeland, Florida center is to be expanded in 2026, and a new center in the Fort Worth, Texas area is planned for 2028. Acquisitions remain part of the strategy. The most recent named acquisition is Groupe Del Vasto ("Vast Auto"), bought in January 2024, which added 23 stores in Canada. Earlier deals added Mexico (Mayasa, 2019) and the Bond (2016) and Bennett (2018) chains in the U.S.
**People.** At January 31, 2026 the company had 92,923 Team Members, 84% of them full-time. Promotion from within is central to its culture: its 649 district managers average 14 years of service. Union representation is limited to about 464 Team Members in 49 Bay Area stores, about 28 truck drivers at one domestic distribution center, and union groups in Mexico and Canada. The business is somewhat seasonal: sales and profits are historically higher from April through September.
## Risk factors
*Source: Form 10-K, Item 1A, accession 0000898173-26-000009. The Form 10-Q for the quarter ended June 30, 2026 (accession 0000898173-26-000045) reports no material changes to these risk factors.*
The risks below are the ones the company describes as material, condensed:
- **Demand and the economy.** Most purchases are non-discretionary, but sales still depend on customers' finances, including inflation, tariffs, interest rates, fuel prices and unemployment. Long-run demand depends on miles driven, the number of vehicles, their age and unemployment. In the company's own 2025 results, DIY transaction counts fell, which the company attributed to pressure on consumers' discretionary spending and on certain hard-part categories across the industry.
- **Vehicle technology and repair access.** New vehicle technologies, including electric and hybrid drivetrains, may mean fewer repairs, longer-lasting parts or some repairs disappearing entirely. Manufacturer or regulatory limits on access to telematics, diagnostic tools and repair information could push owners toward dealers.
- **Competition and pricing.** Some competitors are larger and have more resources. Online and mobile platforms make prices easy to compare. Online rivals may run at a lower cost than O'Reilly, whose model depends on an extensive store network and distribution footprint, and that could pressure prices.
- **Suppliers, tariffs and trade policy.** Supplier consolidation, offshoring of manufacturing, labor strikes, shipping disruptions, tariffs and currency moves can raise costs or limit supply. Changes in trade policy, sanctions and port agreements could affect volumes and prices.
- **Distribution and systems interruptions.** Weather, war, unrest, infrastructure failures or pandemics could close distribution centers or stop nightly store deliveries. Inventory and transaction systems, some run by third parties, are exposed to outages and cyber-attacks.
- **Weather and natural disasters.** Severe weather keeps DIY customers away from stores. Extreme heat or cold can lift demand by raising part failure rates, while mild weather has less effect. Coastal stores and distribution centers face higher losses from disasters.
- **Leverage and credit ratings.** The company funds itself with a revolving credit facility, commercial paper and senior notes, and its covenants require a minimum fixed-charge coverage of 2.50x and a maximum leverage ratio of 3.50x. A ratings downgrade would raise borrowing costs. It could also reduce the number of financial institutions willing to fund the supplier finance programs. Less participation in those programs would increase the working capital the business needs.
- **Cybersecurity and data privacy.** A breach of customer, supplier or employee data could bring remediation costs, litigation and regulatory action, and the company notes that wider use of artificial intelligence could heighten some of these risks. It says it is not aware of any cybersecurity incident that has materially affected the business.
- **International operations.** Mexico and Canada bring local legal, tax and anti-corruption compliance risk and currency translation exposure. A 10% move in exchange rates at year-end 2025 would have reduced the value of net assets by about $46.2 million in Mexico and $16.2 million in Canada.
- **Growth execution, people and acquisitions.** Store growth depends on zoning, site development and available managers. Hourly roles have high turnover and face wage inflation. Acquisitions carry integration risk and the risk of liabilities that were not discovered.
- **Litigation and regulation.** Lawsuits include claims from accidents involving the company's large vehicle fleet. Minimum-wage, environmental, extended-producer-responsibility, climate and tax rules could raise costs.
- **Stock-price volatility.** Missing analyst expectations, even slightly, could hurt the share price, and periods of volatility can draw securities class actions.
## Management's discussion: fiscal 2025
*Source: Form 10-K, Item 7 and Item 7A, accession 0000898173-26-000009.*
**Results.** Sales rose $1.07 billion, or 6%, to $17.78 billion in 2025. Comparable store sales grew 4.7%, after 2.9% in 2024. Growth came from higher average tickets from both professional and DIY customers and more professional transactions, partly offset by fewer DIY transactions. Same-SKU selling prices rose mainly because tariffs raised inventory acquisition costs, which the company passed through to customers. More complex replacement parts also raised ticket values. Stores not yet in the comparable base added $354 million. The extra Leap Day in 2024 was a headwind.
**Margins.** Gross margin improved to 51.6% from 51.2% because of better acquisition costs and distribution efficiencies. A shift in mix toward lower-margin professional sales partly offset the gain. SG&A rose 8% to $5.71 billion, or 32.1% of sales against 31.7%, mainly because of medical and casualty insurance inflation and better store-level pay and benefits. Operating income rose 6% to $3.46 billion, with the operating margin flat at 19.5%. Net income was $2.54 billion and diluted EPS rose 10% to $2.97, on 856 million diluted shares against 881 million.
**Cash and capital returns.** Operating cash flow fell to $2.76 billion from $3.05 billion, mainly because of when payments for transferable federal renewable energy tax credits fell due. Capital expenditures rose to $1.17 billion for distribution and new-store projects. Free cash flow, a non-GAAP measure, fell to $1.56 billion from $1.99 billion. The company pays no dividend and returns cash through open-market buybacks. At year-end its covenant leverage ratio was 1.92x and its fixed-charge coverage 6.08x. Total debt was $6.02 billion, including $690 million of commercial paper at a weighted average rate of 3.979%. The shareholders' deficit was $763 million, a result of the buyback program.
**Commitments.** After year-end the company agreed, on a conditional basis, to buy about $450 million of transferable federal renewable energy tax credits. It expected to make the final closing payment by August 2026. It also had $275.9 million of construction commitments.
**Critical estimate.** Self-insurance reserves rose $175 million in 2025, mainly because of general litigation accruals, claim cost inflation and growth. The company estimates that a 10% change in reserves would equal about $44 million, or 1.4% of 2025 pretax income.
## Current quarter: second quarter of fiscal 2026
*Sources: Form 10-Q for the quarter ended June 30, 2026, accession 0000898173-26-000045; second-quarter earnings release furnished as Exhibit 99.1 to Form 8-K, accession 0000898173-26-000042; first-quarter earnings release, Exhibit 99.1 to Form 8-K, accession 0000898173-26-000024.*
**Growth sped up.** Second-quarter sales rose $367 million, or 8%, to $4.89 billion. Comparable store sales grew 6.0%, after 4.1% a year earlier. First-half sales rose 9% to $9.45 billion, with comparable sales up 7.0%. The drivers were the same as in 2025: higher tickets from both customer groups and more professional transactions, partly offset by fewer DIY transactions. Stores not yet in the comparable base added $100 million in the quarter. Professional sales were $2.47 billion against $2.20 billion a year earlier. DIY sales were $2.34 billion against $2.23 billion.
**Flat margin, higher interest cost.** Gross margin was 51.4%, unchanged from a year earlier: better acquisition costs and distribution efficiencies offset the shift toward professional sales. SG&A was 31.3% of sales, against 31.2%. Inflation and higher medical and casualty insurance costs outweighed the leverage from strong comparable sales. Operating income rose 8% to $986 million, with the margin steady at 20.2%. Other expense rose 16% to $62 million because of interest on higher average borrowings. The effective tax rate rose to 22.6% from 22.4% because share-based compensation produced smaller excess tax benefits. Net income rose 7% to $715 million. Diluted EPS rose 10% to $0.86, helped by a drop in diluted shares to 829 million from 858 million.
**Cash flow and buybacks.** First-half operating cash flow rose to $2.04 billion from $1.51 billion. The company attributes the increase to the timing of renewable energy tax credit payments and higher operating income, partly offset by a prepaid income tax position. Capital expenditures fell to $552 million from $588 million because of project timing. First-half free cash flow was $1.48 billion, against $904 million. The company repurchased 16.7 million shares for $1.51 billion in the quarter, at an average of $90.40, and 26.7 million shares for $2.43 billion in the first half. At June 30, about $2.0 billion of buyback authorization remained, after the board added $2.0 billion on June 1, 2026.
**Balance sheet.** In the first half the company issued $850 million of 5.100% Senior Notes due 2036 (March 12, 2026, priced at 99.690% of face value) and redeemed the $500 million of 3.550% Senior Notes due 2026. Commercial paper rose to $1.345 billion from $690 million, at a weighted average rate of 4.065%. Long-term debt reached $7.01 billion. The $750 million of 5.750% Senior Notes due 2026 remain classified as long-term because the company intends and is able to refinance them. The covenant leverage ratio rose to 2.07x from 1.95x a year earlier, still well inside the 3.50x limit. Fixed-charge coverage was 6.11x. Obligations under supplier finance programs stood at $5.1 billion, and accounts payable were 123.7% of inventory. The shareholders' deficit widened to $1.84 billion.
**Stores.** The company opened 51 net new stores in the quarter and 110 in the first half. At June 30, 2026 it ran 6,695 stores: 6,541 in the U.S. and Puerto Rico, 126 in Mexico and 28 in Canada. Total employment was 95,822.
**Industry backdrop.** U.S. miles driven rose 0.8% in the year to May 2026, according to the U.S. Department of Transportation. The 10-Q puts the average age of the U.S. vehicle population at 12.8 years in 2025, up from 11.5 years in 2015. It gives an estimate of about 16.5 million for 2026 new light-vehicle sales (the seasonally adjusted annual rate, or SAAR), against about 16.0 million in 2025.
**Guidance raised.** With the second-quarter results, the company raised its full-year 2026 outlook. Comparable store sales guidance went to 4.0% to 6.0%, from 3.0% to 5.0%, and total revenue guidance to $18.9 billion to $19.2 billion. Diluted EPS guidance rose to $3.20 to $3.30, using a share count that includes repurchases through the release date. The CEO linked the higher sales outlook to the strength of the industry's underlying demand drivers. The margin, cash flow and store-opening targets were unchanged.
## Subsequent events
*Sources as noted for each item.*
- **Continued buybacks.** From July 1 through August 7, 2026, the company repurchased another 7.6 million shares at an average price of $87.01, a total of $658.5 million. Since the program began in January 2011, cumulative repurchases reached 1.5 billion shares at an average price of $20.33, a total of $30.4 billion. (Form 10-Q, Note 9, accession 0000898173-26-000045.)
- **$1.6 billion senior notes offering.** On August 14, 2026 the company issued three new series of unsecured senior notes: $700 million at 4.800% due August 14, 2029, $500 million at 5.050% due August 14, 2031, and $400 million at 5.550% due March 14, 2037. The notes are not guaranteed by any subsidiary. Estimated net proceeds of about $1.59 billion are to repay a portion of amounts outstanding under the commercial paper program, with any remainder for general corporate purposes. (Form 8-K, accession 0001104659-26-097090; underwriting agreement in Form 8-K, accession 0001104659-26-094110.)
- **New supply chain chief.** On July 13, 2026 Colin Yankee joined as Executive Vice President and Chief Supply Chain Officer. He had held the same role at Tractor Supply Company, and his responsibilities cover merchandise, inventory management, distribution operations and transportation. (Form 8-K, accession 0000898173-26-000039.)
- The quarterly report discloses no acquisition, divestiture or litigation outcome after June 30, 2026.