O'Reilly Automotive, Inc. Business Information, Profile, and History

Company Perspectives

O'Reilly Automotive intends to be the dominant supplier of auto parts in our market areas by offering our retail customers, professional installers, and jobbers the best combination of price and quality provided with the highest possible service level. In order to accomplish this mission, O'Reilly will provide a benefit and compensation plan that will attract and keep the kind of people that will enable the company to reach its goals of growth and success.

History of O'Reilly Automotive, Inc.

O'Reilly Automotive, Inc., sells a variety of new and remanufactured auto parts, accessories, equipment, and supplies to both "do-it-yourself" (DIY) customers and professional car mechanics and service technicians. A portion of its business consists of selling parts wholesale to independent auto parts stores. A family firm, O'Reilly serves customers in mainly smaller communities in the Midwest and the South. The company has grown enormously since going public in 1993, reaching 1,470 stores by the end of 2005. Business typically follows an annual cycle, peaking as the extremes of summer and winter inflict seasonal fatigue and accidents on automobiles.

Early Origins

O'Reilly Automotive was founded by the descendants of Michael Byrne O'Reilly, an Irishman who fled the terrible potato famine in 1849. He came to St. Louis, earned a law degree, and worked as a title examiner.

His son was the first in the family to work in the auto parts industry. Charles Francis O'Reilly began in 1914 as a traveling salesman for Fred Campbell Auto Supply in St. Louis. In 1927 Charles's request for a transfer to the Springfield, Missouri, area was granted. By 1932, in the depth of the Great Depression, Charles was a manager of Link Motor Supply and his son Charles H. "Chub" O'Reilly had worked two years for Link. The father and son provided the crucial leadership to make Link the main auto parts store in the Springfield region.

In 1957 Link planned to retire Charles F. O'Reilly, age 72, and reassign his son Chub O'Reilly to Kansas City as part of a corporate reorganization in which Link was bought by Meyers Motor Supply in Joplin, Missouri. In a phone interview, Chub O'Reilly said he did not want to live in Kansas City because it was "too big" with all its "hustle and bustle" and heavy traffic. In addition, he did not want to uproot his family and be separated from those he loved.

Hence, the father and son broke away from Link and formed their own company. They founded O'Reilly Automotive in 1957 with 12 employees, some of whom owned stock in the new firm. (The company was originally incorporated as Springfield Supply and Motor Parts, Inc., in August 1957 but renamed O'Reilly Automotive, Inc., a couple of months later.) Charles F. O'Reilly was the first president, and Charles H. O'Reilly was the vice-president. In Springfield they rented their first building at 403 Sherman, an old structure they extensively remodeled. With the help of some excellent salesmen who also left Link, sales at O'Reilly reached $700,000 in 1958, the company's first full year in business.

When it began operations, O'Reilly Automotive faced the challenge of persuading major brand auto parts companies to sell them parts. Link Motor Supply Company tried to stop the manufacturers from selling to O'Reilly, but the O'Reilly founders gained the cooperation they needed because of their many years of working closely with the manufacturers' sales representatives. Early in its history, then, O'Reilly was able to sell A.C. Delco batteries and other brand name products.

In 1957 O'Reilly Automotive sold almost all its items wholesale to various garages and industrial customers who employed professional mechanics or installers. Gradually, however, they sold more parts retail to individuals who wanted to fix up their own cars.

Accelerating Growth: 1960-90

In October 1960 O'Reilly started Ozark Automotive Distributors to buy parts directly from manufacturers and then distribute those parts to O'Reilly and to independent automotive jobbers in the Springfield area. The following year O'Reilly Automotive's and Ozark's combined sales reached $1.3 million.

At first O'Reilly Automotive grew slowly. For example, its initial branch store in Springfield was not opened until July 1965. Ten years later, in 1975, O'Reilly's annual sales reached $7 million, and the company built a new 52,000-square-foot warehouse at 223 South Patterson in Springfield to serve its nine stores, all located in southwest Missouri. Chub O'Reilly said building the company's first warehouse was a "tremendous change." Later the firm increased the capacity of the Springfield distribution center to 297,000 square feet and built other distribution centers in Kansas City, Missouri (93,183 square feet) and Oklahoma City (122,800 square feet). By 1980 all four of Chub O'Reilly's children (Charles, Lawrence, and David O'Reilly and Rosalie O'Reilly Wooten) had become leaders in the growing family business.

In the early 1980s modest expansion occurred. In February 1983 O'Reilly opened its first store outside of Missouri in Berryville, Arkansas, a small town close to the southern Missouri border and thus close to the other O'Reilly stores. The Berryville store, the firm's 38th store, was gained as part of a seven-store acquisition of a parts company based in Harrison, Arkansas.

In 1986 the company decided for the first time to start stores in cities with more than 100,000 people. In August 1986 O'Reilly opened its first store in the Kansas City, Missouri metropolitan area. Eventually O'Reilly operated stores in other cities, such as Omaha, Oklahoma City, Tulsa, Des Moines, Wichita, and Kansas City, Kansas, but the firm continued its basic strategy of locating most of its stores in smaller communities.

Public in 1993

O'Reilly became a public corporation in April 1993 with the initial public offering of its stock. The following year the company began to remodel stores to conform to a standardized design featuring better lighting, increased parking, higher ceilings, and separate counters for professional installers.

In 1997 O'Reilly added ten new stores in both Nebraska and Oklahoma, eight in Kansas, seven in Iowa (the first in that state), four in Missouri, and one in Arkansas, for a company record high of 259 stores. As of December 31, 1997, O'Reilly owned 131 of those stores, leased 69 from others, and leased 59 stores from O'Reilly family real estate investment partnerships. With 1997 product sales of $316.4 million, up 22.1 percent from 1996, and 1997 net income of $23.1 million, an increase from 1996 net income of $19 million, O'Reilly proclaimed in its annual report that 1997 was "Our best year ever." Other statistics supported that conclusion, for the firm's total assets ($247.6 million) and stockholders' equity ($182 million) reached record levels. Also in 1997, O'Reilly conducted a two-for-one split of its common stock. At the end of 1997 O'Reilly employed 3,945 nonunionized individuals at its parts stores, distribution centers, and headquarters, but a major expansion was imminent.

In January 1998 the firm spent $47.8 million, or $4.35 per common share, to complete the acquisition of the Houston-based public company called Hi-Lo Automotive, Inc. (NYSE: HLO), which had sales of about $238 million for the year ending on December 31, 1997. The merger came after Hi-Lo ended its announced merger with Discount Auto Parts, Inc. Donaldson, Lufkin & Jenrette Securities Corporation advised O'Reilly on this merger, and NationsBank provided the financing. The St. Louis law firm of Gallop Johnson & Neuman, L.C. gave O'Reilly legal counsel on this and other concerns.

The purchase of Hi-Lo furnished O'Reilly with 189 new stores in California, Texas, and Louisiana. Hi-Lo's properties also included a 375,000-square-foot distribution center in Houston. As soon as the deal was complete, O'Reilly began converting Hi-Lo stores to the new owner's systems and strategies. Chub O'Reilly said that this was a major challenge, in part because the company had to replace Hi-Lo's older computers with new IBM computers. With good advance planning, however, this conversion took place rapidly as about 200 Team O'Reilly members left headquarters to supervise the changes at the Hi-Lo stores.

In April 1998 O'Reilly sold its seven Hi-Lo California stores to a competitor, Auto Parts Wholesale, doing business as Carquest of California. "The sale of these stores will allow us to concentrate our efforts on Hi/Lo's core business in Texas and Louisiana," stated President and Chief Operating Officer Larry O'Reilly in an April 30 press release.

The Hi-Lo acquisition, by far the largest in O'Reilly's history, propelled the company into the ranks of the nation's top ten auto parts chains. At the end of the first quarter ending March 31, 1998, O'Reilly operated 460 stores in nine states: Arkansas (17), Illinois (1), Iowa (10), Kansas (46), Missouri (111), Nebraska (11), Oklahoma (78), Louisiana (17), and Texas (169). The company planned in 1998 to add another 38 stores, as well as its fifth distribution center in Des Moines, Iowa, a warehouse with 160,000 square feet. O'Reilly estimated that its 1998 sales would exceed $615 million. O'Reilly also planned to open 80 new stores in 1999.

O'Reilly's competitors in the do-it-yourself market included chains such as Pep Boys, AutoZone, Parts America (formerly called Western Auto), independent stores, car dealerships, and large discount stores (like K-Mart) that carried auto parts. Competing in the professional installer market were car dealers, AutoZone, independent stores, and national warehouse distributors and associations, such as Carquest, Parts Plus, and the National Automotive Parts Association (NAPA).

O'Reilly felt in 1998 that it was prepared to expand and thus help consolidate what it called in its 1997 10-K SEC Report a "still highly fragmented" industry. The ability of chains like O'Reilly and its major competitors to engage in efficient purchasing, inventory, and advertising because of economies of scale gave them a major advantage over small independent parts dealers. The chains also could spend more money on training their store personnel, a necessity as cars became more and more complex with the use of microcomputers and other high-tech electronics. The days of the simple "grease-monkey" were long gone.

O'Reilly's inventory management and distribution system was a good example of a modern high-tech operation. Each O'Reilly store was linked by computer to a distribution center. Bar codes enabled the company to record automatically when a part was sold and then order a replacement part from a distribution center. O'Reilly had an inventory of more than 105,000 SKUs (stock keeping units), so the necessity of such a computerized system was obvious.

Like other firms, O'Reilly worked to make sure its computer systems were prepared to deal with the "millennium bug" and thus be able to recognize the year 2000. The firm's management expected the Y2K project to be "substantially complete by early 1999," according to its 1997 annual report.

To keep its customers happy, O'Reilly started its "Right Part, Right Price, Right Now" policy, which gave customers a 5 percent discount on the retail price if one of the company's 15,000 most commonly requested items was not available immediately. Items usually were available from another store or a warehouse within 24 hours. According to O'Reilly annual reports, "The Company believes that its principal strengths are its ability to provide both the DIY and Professional Installers same day or overnight availability to more than 105,000 SKUs."

O'Reilly served its professional installer customers by using vans or small trucks to deliver parts and supplies, granting trade credit to qualified individuals, employing sales representatives specializing in the professional installer market, and conducting seminars on technical, safety, and business issues. The firm also published Tech Talk three times a year, Tools & Equipment twice a year, and the Finisher's Choice (paint and body catalog) quarterly for its professional installer market.

The company relied on purchasing parts and supplies from about 350 vendors, including name brand companies such as A.C. Delco, Gates Rubber, Prestone, Quaker State, STP, Armor All, and Turtle Wax. Most products were covered by manufacturers' warranties, but O'Reilly also provided warranties on some products. O'Reilly sold some of its own private label parts as well.

For several years O'Reilly has sponsored race cars as part of its advertising program. At state fairs, smaller local races, and major shows, O'Reilly has promoted its name and image on stock cars and high-powered race cars. For example, in June 1998 the 27th annual O'Reilly Spring Nationals were held at the Tulsa International Raceway. On its web site, O'Reilly listed the dates of more than 100 events between June and November 1998 at which the company was sponsoring contestants, including some truck and tractor pulls and bike racing competitions.

O'Reilly remained a family firm. Its officers included Chub O'Reilly, chairman emeritus; Charlie O'Reilly, board chairman; David O'Reilly, president and chief executive officer; Larry O'Reilly, president and chief operating officer; Rosalie O'Reilly Wooten, executive vice-president; and Ted Wise, executive vice-president.

The auto parts industry recognized the leadership of O'Reilly officers. The Automotive Warehouse Distribution Association honored David O'Reilly and the Automotive Aftermarket magazine presented both David and Larry O'Reilly with Retailers of the Year awards. Such recognition was based in part on the fact that O'Reilly Automotive consistently had increased its annual sales and net income from 1989 through 1997. Based on that financial performance and the major acquisition of Hi-Lo in 1998, O'Reilly Automotive seemed well prepared to continue its role as a major auto parts supplier in its chosen markets.

New Leadership, New Goals for the New Millennium

The position of company president was held by someone from the O'Reilly family until 1999, when Greg Henslee and Ted Wise were selected to share the office. (Henslee, with the company since 1989, succeeded David O'Reilly as CEO in 2004, while Wise, who had joined in 1970, would become chief operating officer.) Investor's Business Daily later commented on their careful efforts to perpetuate the company's culture. "If team members are happy and pleased with the company they're working for, they'll treat customers the way they want to be treated," said Henslee.

By the end of 2000, O'Reilly had 672 stores. Sales were about $900 million. O'Reilly had started another vehicle for growth, an online parts ordering alliance with General Parts Inc. and other investors.

Much of the company's growth was coming through shrewd acquisitions. O'Reilly built up its Texas holdings with the purchase of a handful of small companies, including Gateway Auto and Hinajosa Automotive. It added the 14-store KarPro Auto Parts chain in 2000. KarPro, based in Little Rock, had sales of about $25 million a year.

In 2001, Mid-State Automotive Distributors, owned by a publicly traded British company, was acquired for $19.5 million and the assumption of debts worth $26.5 million. The deal extended O'Reilly's reach east of the Mississippi. O'Reilly was the fifth largest consumer auto parts chain in the country. The aftermarket parts industry was thriving in the slow lane economy, as people tried to keep older cars on the road longer.

O'Reilly opened its one thousandth store, in Chattanooga, in January 2003. The company had gone from 145 stores when it went public less than ten years earlier. O'Reilly was preparing for a push into the Southeast by opening a distribution center in Mobile, Alabama. Sales exceeded $1.5 billion in 2003.

Although O'Reilly had a relatively long tradition in an established industry, the business was being managed like a state-of-the-art enterprise, observed many commentators in the business and trade press. The company was a practitioner of the new art of demand management, using sophisticated software to handle products from thousands of vendors. This freed up $66 million in a few years, according to KMWorld, while shifting more of inventory from the stores to the ten distribution centers. Net income of $140 million for 2004, when revenues were $1.7 billion, was ten times the figure for 1995. The company became ever more profitable as it increased in scale; net income per share was on a steady climb from $0.41 in 1995 to $1.87 in 2004.

O'Reilly bought W.E. Lahr Co. and its Midwest Auto Parts unit for $61 million in June 2005. Its founder, Bill Lahr, had died the previous year; he had reportedly admired O'Reilly's business practices. Midwest had 71 stores in five states, 700 employees, and sales of about $100 million a year.

Most of O'Reilly's new stores were being added in the Southeast; a 358,000-square-foot distribution center was opened in the Atlanta area in February 2005. By this time, the company had 30 stores in the area, but the new center had the capacity to supply another 230. O'Reilly had set a goal of reaching $2 billion in sales by 2005, according to Investor's Business Daily. It made its goal, doubling revenues in just four years. O'Reilly had 1,470 stores at the end of 2005 and planned to add up to 175 in 2006.

Principal Subsidiaries

Ozark Automotive Distributors, Inc.; Greene County Realty Co.; O'Reilly II Aviation, Inc.; Ozark Services, Inc.; Hi-Lo Investment Company; Hi-Lo Management Company.

Principal Competitors

AutoZone, Inc.; Advance Auto Parts; CSK Auto Corporation; The Pep Boys-Manny, Moe and Jack, Inc.; Wal-Mart Stores, Inc.

Chronology

• Key Dates
• 1957 The company is incorporated in Missouri as Springfield Supply and Motor Parts, Inc. (soon renamed O'Reilly Automotive, Inc.).
• 1958 Sales are $700,000 in the company's first full year.
• 1960 O'Reilly forms Ozark Automotive Distributors.
• 1965 O'Reilly opens its first branch store in Springfield.
• 1975 The company has nine stores and builds its first warehouse; sales reach $7 million.
• 1983 An acquisition expands the chain into Arkansas.
• 1993 O'Reilly goes public.
• 1998 The acquisition of Houston-based Hi-Lo Automotive, Inc. brings O'Reilly nearly 200 new stores at a cost of $48 million.
• 2001 Total sales are about $1 billion.
• 2003 The 1,000th store is opened.
• 2005 Sales reach $2 billion.