O Reilly Automotive Stock

Welcome to the O'Reilly Automotive, Inc. Second Quarter 2026 Earnings Call. My name is Matthew, and I'll be your operator for today's call. [Operator Instructions]

I'll now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our second quarter results and our updated outlook for the remainder of 2026. 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, and we intend to be covered by, and we claim the protection under the safe harbor provisions for forward-looking statements contained in 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-K for the year ended December 31, 2025, 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 second quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call.

It's once again my pleasure to begin our quarterly call by congratulating Team O'Reilly on another strong quarter and a very successful first half of 2026. Our team's steadfast commitment to providing consistently high levels of service to our customers drove a comparable store sales growth of 6% for our second quarter. Year-to-date, our comparable store sales have increased 7% and driven total sales growth of over 9%. As a result of our team's relentless focus on delivering profitable sales growth, we generated a 10% increase in diluted earnings per share in the second quarter, on top of the 11% growth we delivered in the second quarter of 2025. For the first 6 months of 2026, our diluted EPS grew 13%, and I want to thank all of Team O'Reilly for the momentum they have created in our business so far in 2026.

Now I'd like to take a few minutes to walk through the details of our second quarter comparable store sales performance. Our comp growth of 6% surpassed our expectations, driven by solid results in both our professional and DIY businesses. Our professional business continues to be the larger contributor to total comps, but we again saw the outperformance versus our expectations split evenly between both sides of our business, similar to first quarter results. In aggregate, our comparable store sales gains continue to be driven by increases in average ticket values and robust professional ticket count growth. The growth in average ticket was primarily the result of same SKU inflation, which totaled 5.5% for our consolidated business and was in line with our expectations.

Average ticket strength was the primary contributor to our low single-digit DIY comparable store sales increase in the second quarter. This benefit was partially offset by pressure to transaction counts, which were down low single digits and slightly below our expectations, in part, due to headwinds in hot weather-related categories. Despite this pressure, we believe we're outperforming the market and gaining DIY share, and we continue to see tremendous growth opportunity on this side of our business.

We also continue to be pleased with the robust sales growth we are generating with our professional customers. Comparable store sales on this side of our business grew right at 10% in the second quarter, reflecting our fourth consecutive quarter of double-digit comps. The sales growth was fairly evenly split between an increase in average ticket value that was in line with our expectations and robust ticket count growth, which again outpaced our forecast. We don't quantify the individual ticket and traffic components of our sales results on a quarterly basis. However, I will share that our professional ticket count growth was in the mid-single digits in the second quarter and has essentially been within that range every quarter since our business normalized coming out of the pandemic. We are very excited about the continued momentum in our professional business and our team's ability to compound the market share gains they are winning quarter after quarter, year after year, with our professional customers.

Next, I want to provide some detail on the cadence of our sales results as we move through the quarter. As I previously mentioned, our second quarter results surpassed our expectations, and we outpaced these projections each month of the quarter with April's results outperforming a little more than May and June. As we discussed on last quarter's call, favorable spring weather supported by strong volumes in both our DIY and professional businesses as we exited the first quarter, and we saw much of that momentum continue in April. As we moved into our summer selling season, our sales trends moderated to a very consistent week-to-week pace through the remainder of the quarter.

Finishing out the quarter, our June sales were solid on a 1-year basis against a softer comparison in June of 2025, but we didn't realize the normal ramp-up in demand for certain hot weather-related categories that we typically like to see from the onset of summer heat at the end of the second quarter. We have definitely seen summer take hold across our markets in July, though, and we are very pleased with a strong step-up in sales results to start the third quarter.

Turning to our revised full year guidance. I want to provide some color on the update to our expected comparable store sales range. As noted in yesterday's press release, we have increased from the previous range of 3% to 5% to a range of 4% to 6%. This update flows through the outperformance we delivered in the first half of 2026, but leaves our expectations for comparable store sales growth for the back half of the year unchanged. Looking forward, we are pleased with a strong start to the third quarter, but we're cognizant of the potential that the benefits we have realized so far this quarter are the result of normal month-to-month weather volatility, and we don't want to overreact to trends that could moderate over time.

Included in our outlook for the remainder of the year is our expectation for the same SKU benefit to moderate in the third and fourth quarters as we calendar the tailwind from tariff-driven price increases that we realized in 2025. As a reminder, those benefits started to flow into our comp results as we move through the third quarter last year with the lion's share of the impact reflected in price levels by the time we exited the third quarter. As a result of this dynamic, we are projecting the inflation benefit to moderate to 1% to 2% for the back half of 2026 with the third quarter expected at the top end and continued moderation to the bottom end of that range by the fourth quarter.

These assumptions reflect our standard approach for setting guidance. We assume only modest levels of prospective future price changes. While we have passed along some incremental price increases in 2026, resulting primarily from the cost pressures due to increased crude oil prices, we are cautious as to how long these benefits will persist through the balance of the year. We are also cautious concerning the potential adverse impact to consumers and their resulting response in the face of continued economic pressure.

We have some very relevant recent experience that points to the potential for choppiness in consumer demand in the face of volatility in price levels. However, we have been pleased with the resiliency of the consumer and believe our customers have adjusted well to the current economic conditions and will continue to prioritize the maintenance and repair of their existing vehicles. Ultimately, we remain optimistic about the health of our industry, and our teams are committed as ever to build on our strong sales momentum, but we believe it's prudent to incorporate into our updated guidance expectations some potential volatility as we finish out 2026.

Before I move on from our guidance, I would also like to note that we are increasing our full year diluted earnings per share guidance to a range of $3.20 to $3.30. Our increase in EPS guidance is driven by our sales and operating performance in the first half of 2026 and the impact of shares repurchased through the date of our earnings release yesterday. Before I wrap up my prepared comments and turn the call over to Brent, I'd like to spend a few minutes discussing our strategic priorities for use of capital and how these priorities align with the growth opportunities we see for our business.

We are off to a strong start in 2026, and we remain extremely excited about our opportunities to build on this momentum to drive continued growth and to capture a larger share of the fragmented addressable market in our industry. We have refined our strategy to capitalize on this tremendous opportunity over many years, building and strengthening a world-class customer service organization and executing a sustainable growth plan. Our capital allocation priorities directly align with that consistent long-term strategy. Our top priorities for use of capital continue to be reinvestments in our existing store and distribution network and organic growth through new store openings.

We are currently 6,695 stores strong across North America, and Team O'Reilly includes over 95,000 of the most technically competent and customer-focused professional parts people in our industry. Our greatest opportunity to grow our business is to match the hard work and dedication of these team members with attractive stores, robust inventory availability and enhanced technology. Our teams operate with a continuous improvement mindset, and we have been pleased with the returns on targeted investments in our existing business, which have helped fuel industry-leading comparable store sales growth.

We have also been pleased with the continued success of our organic store growth and remain excited about opportunity to further consolidate the industry through the opening of stores in both new geographies and existing market areas. The success of our organic growth strategy is the result of our commitment to never compromise on our proven model. For each new store we open, we aggressively identify and develop a knowledgeable and enthusiastic team of professional parts people to provide unsurpassed customer service from day 1, supported by the very best inventory availability and selling tools in the industry.

Over the course of our history, we have supplemented our capital investments in our existing network and our organic store growth with targeted opportunistic acquisitions. While we continue to view the acquisition of existing parts stores as an effective use of capital, we will also remain highly selective and strategic as we evaluate future opportunities consistent with our proven framework. Our success with acquisitions has been directly tied to the discipline we apply in selecting and executing on those opportunities and then the process we undertake to integrate the acquired companies.

Our blueprint is focused on opportunities with a clear strategic rationale where we have a high degree of confidence we can implement the O'Reilly culture as well as our business and operating models. This disciplined strategy has allowed us to accelerate growth in markets that complement our existing footprint by quickly establishing both the proven O'Reilly model and a strong core of local parts professionals who have strong long-standing customer relationships.

We have successfully executed this strategy through acquisitions ranging from a single store to over 1,000 stores. With our commitment to fully integrating every acquisition, we view each transaction as significant. However, with our current footprint, we expect the universe of opportunities that meet our strategic criteria to be primarily smaller tuck-in acquisitions in expansion markets. This also means we have no expectation or intention of executing a large transformative acquisition in the foreseeable future.

Our final priority for use of capital after we have exhausted all opportunities to invest in our business is to return value to shareholders through our share repurchase program. Jeremy will provide a recap of the execution of our buyback program in his prepared remarks, but I would emphasize that we continue to feel good about the effectiveness of this program. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for their continued dedication to our company and strong performance in the second quarter.

Now I'll turn the call over to Brent.

Thanks, Brad. I would also like to join Brad in congratulating Team O'Reilly on a strong performance in the second quarter, driven by their steadfast dedication to our customers. I would like to begin my comments this morning by discussing our second quarter gross margin results and our outlook for the remainder of 2026.

For the second quarter, our gross margin of 51.4% was unchanged from the second quarter of 2025. In establishing our gross margin outlook, we assumed a slightly lower gross margin rate in the second quarter as compared to the full year, which is typical for the seasonal composition of our product mix. So while our gross margin rate for the second quarter came in slightly below our full year guidance range, our results were in line with our expectations for the quarter.

We continue to see very stable solid gross margin performance with only a few minor puts and takes driving the outcome for the quarter. We continue to benefit from incremental acquisition cost reductions and improved leverage of distribution cost on our strong top line sales performance. On a year-over-year basis, these benefits were offset by mix pressures from the faster rate of professional sales growth and our product mix in the quarter. We also faced our most challenging quarterly comparison in 2026 related to the timing benefit that we realized in the second quarter of 2025 from the impact of tariff-related cost and pricing adjustments.

Given our in-line first half performance and the current stable market environment, we are maintaining our full year gross margin guidance range of 51.5% to 52%. At the midpoint, this reflects an expansion of 16 basis points compared to 2025. Through the first half of 2026, we are on track with our full year target. with our year-to-date gross margin rate of 51.5%, representing an 11 basis point expansion over the prior year. We are pleased to be able to continue to deliver incremental margin expansion while at the same time, generating the robust gross profit dollar increases that come with our market-leading professional sales growth. Our experienced merchandise and supply chain teams continue to successfully partner with our supplier network to drive value for our customers and deliver these great results while also proactively managing through any disruptions to global supply chains.

Moving to SG&A. Our second quarter SG&A per store grew at 4.8%, which included incremental spend to support elevated sales volumes, similar to what we saw in the first quarter. We also experienced some modest incremental pressure from higher fuel prices. We continue to be pleased with our team's effectiveness in driving productivity through the management of our operating structure and our spend in the second quarter and first half of 2026 was within the range of our expectations. As we outlined coming into 2026, we anticipated growth in SG&A per store to be higher in the first half of the year, driven in part by expected year-over-year SG&A pressures from self-insurance and legal line items that ramped in the second half of 2025.

Our experience for the first 6 months of 2026 for those line items has been in line with our expectations. So while we saw modest pressure to our SG&A as a percent of sales, deleveraging 9 basis points in the second quarter, we outperformed versus our expectations as a result of the strong sales growth generated by our team. We continue to expect our full year SG&A per store growth to be at or below 4%, but we are making a slight revision to tighten our full year range to 3.5% to 4%, which incorporates the flow-through of our results for the first half of 2026. This reflects an expected moderation of per store operating expense in the back half of the year as comparisons ease, which is unchanged from our prior guidance.

We are also reiterating our full year operating profit guidance range of 19.3% to 19.8%, which reflects the sales, gross margin and operating expense forecast that we have outlined today. For the first half of 2026, our operating margin expanded 21 basis points split evenly between gross margin expansion and SG&A leverage and driving an increase in operating profit dollars of 10%. We strongly believe that our greatest long-term strategic opportunity is our ability to leverage our industry-leading business model and execution to provide the best customer service in our industry. Our company operates in a fragmented industry and still holds a small percentage of the total addressable market. We have demonstrated that we are willing to aggressively lean into the investments and initiatives that equip us to address this opportunity, and we are very pleased to deliver productive returns on those efforts so far in 2026.

Before I turn the call over to Jeremy, I want to provide an update on our store growth and capital investments for the first half of 2026 and our outlook for the remainder of the year. Year-to-date, we have opened 110 net new stores with that growth spread across 31 U.S. states, Puerto Rico, Mexico and Canada. And we remain on track to open 225 to 235 net new stores in 2026. Capital expenditures in the first 6 months of 2026 were $552 million, and we still expect a total capital expenditure investment for 2026 of $1.3 billion to $1.4 billion.

Our planned expenditures in 2026 mirror the capital allocation priorities that Brad outlined earlier, including acceleration in new store growth, corresponding enhancement of our distribution capabilities to support our industry-leading inventory availability and targeted initiatives to maintain and refresh the image and appearance of our store fleet and enhance our technology tools. We continue to pair these capital investments in our existing business with targeted investments in inventory.

Inventory per store finished the second quarter at $892,000, which was up 7% from this time last year and up 2% from the end of 2025. This growth is slightly below what we originally projected for the first half of the year as a result of normal seasonal timing differences in the deployment of inventory. However, we are still targeting growth of 5% per store by the end of 2026.

We are excited to be able to highlight the tangible impact of these investments when we host our upcoming Analyst Day at our new Atlanta distribution center on September 17. We relocated our previous DC in Atlanta to this new 690,000-square-foot facility at the end of 2024. The incremental distribution capacity provided by this DC is enabling us to unlock additional expansion in the Southeastern United States and support import processing capabilities. This new facility is a great illustration of our proven business model and the continuous improvements we make to refine the processes and technology in our buildings to relentlessly enhance inventory availability and the value proposition that we offer our customers.

As I close my comments, I want to once again thank Team O'Reilly for their commitment to providing excellent, consistent customer service to all our customers each and every day. Now I'll turn the call over to Jeremy.

Thanks, Brent. I would also like to thank all of Team O'Reilly for another strong quarter. Now we will fill in some additional details on our second quarter results and outlook for the remainder of 2026. For the second quarter, sales increased $367 million, driven by a 6% increase in comparable store sales and a $100 million noncomp contribution from stores opened in 2025 and 2026 that have not yet entered the comp base. For 2026, we now expect our total revenues to be between $18.9 billion and $19.2 billion.

Our second quarter effective tax rate was in line with our expectations at 22.6% of pretax income, comprised of a base rate of 23.3%, reduced by a 0.7% benefit for share-based compensation. This compares to the second quarter of 2025 rate of 22.4% of pretax income, which was comprised of a base tax rate of 23.2%, reduced by a 0.8% benefit for share-based compensation. For the full year of 2026, we now expect an effective tax rate of 22.5%. We expect the quarterly rate to fluctuate due to variations in the tax benefit from share-based compensation and the tolling of certain tax periods in the fourth quarter.

Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first 6 months of 2026 was $1.5 billion versus $904 million in the first half of 2025. The increase in free cash flow was primarily driven by robust growth in operating income and the timing of payment for renewable energy credits with a higher cash outflow for these payments occurring in the second quarter of 2025. For the full year of 2026, our expected free cash flow guidance remains unchanged at a range of $1.8 billion to $2.1 billion.

I also want to touch briefly on our AP to inventory ratio. We finished the second quarter at 124%, which was in line with the same level at the end of 2025. For 2026, we expect to see continued moderation resulting from our planned incremental inventory investment and expect to finish the year at a ratio of approximately 122%.

Moving on to debt. We finished the second quarter with an adjusted debt-to-EBITDAR ratio of 2.17x which was an increase from our ratio at the end of 2025 of 2.03x (sic) [ 2.06x ]. This incremental step-up in leverage reflects additional borrowings through our commercial paper program and is consistent with our intention to prudently approach our optimal leverage target of 2.5x. We continue to be pleased with the execution of our share repurchase program. And during the second quarter, we repurchased 17 million shares at an average share price of $90.40 for a total investment of $1.5 billion.

Our 2026 year-to-date share repurchases through the date of yesterday's press release totaled 34 million shares for a total investment of $3.1 billion. We have consistently viewed our buyback program as an effective means of returning excess capital to our shareholders and the step-up in share repurchase volume in 2026 reflects our strong cash flow generation and incremental borrowings as we move towards our leverage target.

As Brad discussed earlier, we are very excited about the opportunities we have to execute our strategic road map, and we will continue to prioritize capital investments in our existing business to grow market share. When it is appropriate to return excess capital to shareholders, we are very confident that the average repurchase price is supported by the expected discounted future cash flows of our business.

Before I open up the call to your questions, I would like to thank our team for their commitment to the excellent customer service that drives our success. 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 questions.

[Operator Instructions] The first question comes from Michael Lasser from UBS.

Brad, right or wrong, the investment community is going to parse all of your very helpful words around O'Reilly's approach to capital allocation and M&A very carefully. And this is all coming up given the speculation around O'Reilly's interest in the business of one of its main competitors. And the interpretation is, if that was the case, is this a signal that O'Reilly either sees the competitive landscape or the customer consolidation changing such that it needs to at least look at a competitor for an acquisition to maintain its competitive position in the market. Can you address that and potentially put this to rest one last time?

Michael, great question there. So yes, I want to start out by stating, as you know, it's been our long-time practice and our current practice not to comment or spend unproductive time on speculation or rumors. I think we were very clear in our prepared comments what our priorities are today and are going to be over the foreseeable future.

And I think to the kind of latter part of your question, the answer to that is no. We work in this amazing industry where we have 10% of the market. It's crazy for me to think over my 30-year history this year, starting in 1996 that we have well over 6,500 stores, and we still only have 10% of the market, both in the U.S. and when you look across North America.

And so what I would say to that, Michael, is we are more convicted than ever about the fundamentals of our industry. We're more convicted than ever about the strength of O'Reilly and the fact that we feel like there's going to continue to be consolidation organically through us running our playbook, doing what we do well, focusing on our culture, promoting from within, being a store and customer-centric business that is focused on taking DIY share from our DIY competitors and continuing to do what we do on the DIFM side, investing in inventory, getting it closer to the customer, delivery service, relationships, all the things we're doing to continue to consolidate the industry on the DIFM side.

So my answer to you is no. There's nothing structural or fundamentally different about how we think about our ability to take market share and running our playbook that you know so very well.

My follow-up question is there's a lot of debate on what the demand and sales trends in the industry are going to look like in the back half of the year as this like-for-like inflation starts to fade. So is it your expectation that, particularly on the DIY side, there will be an acceleration in units as the moderation in pricing happens, especially at a time where gas prices probably remain elevated and there's a lot of distraction out there. And have you seen an acceleration in units in July? Does that give you any incremental confidence that the outlook would remain consistent even as this pricing dynamic unfolds?

Yes. Thanks again, Michael. Another great question. So I just want to start this one out with the fact that we, in the room here, couldn't be more pleased with our team's results on the DIY side of the business. As any year goes, in DIY, there's puts and takes month-to-month, quarter-to-quarter. I'm just so excited about not only the second quarter, but even more so what we've been able to do on the DIY side of the business in the first half of the year. We feel strongly that we're taking market share, and we're always working to continue to drive foot traffic and do everything we can to drive our retail business.

Second thing I would say is just to kind of reiterate what we said earlier is as we work through the second quarter, it was evident as we got toward the end of the quarter, it was just kind of wet and not as hot as it can normally be in the latter part of the second quarter. And we absolutely saw pressure to some of those hot weather-related categories that we would normally start to really see solid performance, especially in June. And we've been really pleased to see that come back here these first 3.5, 4 weeks of July. It's evident so far that those hot weather-related categories, it's absolutely gotten hot in the far majority of our markets, and we feel really good about where our DIY business is headed, at least for the beginning of the third quarter here.

That said, there's a lot of quarter left, and we just want to be really careful, and we want to balance the fact that we feel like we have good momentum. We feel like our consumer and our customer specifically continues to be relatively healthy, but we also want to remain cautious in the way we're looking at the back half, not knowing what the future holds here in the short term. With oil prices, fuel prices, just still a cautious consumer. And so we want to just, as we always do, make sure that we balance that out with some cautiousness as it relates to how we feel like the rest of the year is going to play out.

I may let Jeremy just talk a little bit about your question on units and versus the inflation lap.

Yes. So maybe the only thing that I would add, Michael, it's a good question. To some degree, how we think about the back half, we're always going to be a little bit reluctant to polish our crystal ball any more than the rest of you guys do about what we see happening. But in large part, the way that we thought about it coming into this year and for sure now that we're halfway into the year about how to think about back half of the year is a little bit more consistent with what our broader view around guidance and expectations would be in any period. And that we continue to expect that average ticket is going to be a solid driver of our sales growth opportunity.

Historically, for us, that's typically meant a benefit from same SKU inflation, but it's been a little bit more muted within our industry in a lot of the periods of the time of the year in our history when we would have kind of formed this type of outlook. So we think we get a little bit from same SKU, but then some of the average ticket benefits that we get around the complexity of the mix of products that we sell that continues to be more valuable and costly even as that engineering and technology gets better for our customers.

And then having that average ticket supplemented by ticket count growth for our business that we feel like is still an opportunity for us. For sure, on the professional side of the business, that's been more robust. I think that's true broadly for the industry and for where we're at. DIY ticket counts just, I think, from a secular perspective are challenged by some of those same dynamics around the increased complexity of the parts, but we still think that we've got tremendous opportunity for growth in that area as well. So as we thought about the back half of the year, that's kind of the -- that's the outlook that we carry into most periods as to how we can drive comps and what our opportunity is to outperform the market.

Ultimately, there are opportunities for volatility that we could see, and we've outlined those, I think, pretty clearly. For sure, there was some of that last year. There were some partial offsets to the same SKU benefit that we saw in some of those components that we think kind of revert back to their norms. And that's sort of how we would kind of lay out what our expectation is, and that's what's implicit in what we've guided to, to finish out the year here.

Your next question is coming from Christopher Horvers from JPMorgan.

I wanted to dig more in on the DIY customers. The stacks looks like they slowed from the first quarter to the second quarter. You also had a moment where gas prices reached $4.50 in the middle of May. So I guess how would you diagnose what looks like a 2-point slowdown sequentially on gas versus DIY starting to exaggerate deferral as gas prices peak there? And then how are you thinking about the risk in the back half of the year?

As we got into the third quarter last year, there was a moment where you started to lap easy comparisons on the -- easier comparisons on the DIY side of the business. But then sort of the macro uncertainty and some of the pressures facing that low-end consumer sort of kept the trend where it was versus being alleviated by the easier comparison.

So a broad question of how do you think about what happened in DIY from 1Q to 2Q? What was the intra-quarter behavior around gas prices? And how are you thinking about the deferral potential in the back half of the year?

Yes. All great questions, Chris, and we'll try to kind of take them in order of how you've talked about them. For sure, some level of month-to-month change as we move through first quarter and here through second quarter. The gas price question is always a little bit of a challenge to parse out because often the reaction is not extended at any point in time. And you don't know that we would really point to anything in particular about consumer reaction to that, that we think is real noteworthy or meaningful as we move through the quarter. For sure, maybe for a short period of time in May, we could have seen some of that flow through. Sometimes when you start to parse too short a time frame, it gets a little bit challenging.

When we just think about overall kind of first quarter versus second quarter, obviously, pleased with where first quarter was at. We talked quite a bit about it last quarter on the call. We had an extremely strong March, a good start to the spring selling season. Absolutely felt like that was buoyed by some solid tax refund money that was working its way through the system and saw that as a really solid start to the quarter in the second quarter in April -- not quite as strong as April as we were in March, but all things, I think we spoke through.

The more we move through second quarter, we kind of feel like that we settled at a level that was that was indicative of strong results for us. We're pleased with how the cadence of the quarter progressed as we move through it. But certainly, we -- I think we understood that there was some part of what we saw in the first quarter that was unique to the weather and the consumer benefits around tax refunds that we saw within the quarter. As we move through that and into the back half of the year, second quarter, to Brad's point, finished on some of the hot weather categories, not quite as robust as you like to see. We figured we probably picked that back up here in July. And then we'll move through the balance of the year.

To your point, some of the comparisons were choppy as the broader economy and consumers kind of move through some of the responses to price levels being increased kind of really more broadly across the economy. And we talked through those as they occurred last year, and I think you articulated very well. We don't necessarily think that we'll see that level of volatility in the back half of the year. We think that there's probably a lot more stability there, although we're cognizant that it could -- we could see some of that again just depending upon what happens from a broader consumer perspective. But we'll have the opportunity in some of those periods to lap periods of time where maybe consumers were reacting a little bit to the things that were happening in 2025.

Broadly speaking, ultimately, we'll see where it all lands as we move through the rest of the year. We feel pretty good about momentum that we've been able to create from an execution perspective relative to where the market is at. So our focus and intention is to outperform and to be able to deliver solid results in any market. And ultimately, sometimes the highs and lows are determined by the short-term things that we see in the consumer.

Yes, absolutely. It seems like this year, your share gains have really widened. I wanted to follow up on the outlook for inflation, understanding in the back half of the year, you're sort of baking in the normalcy and what you assumed really at the start of 2026. But I want to pull apart, are you seeing, sort of, product cost increase requests related to the fuel cost of shipping products over from Asia that your vendors want to pass on from you? And if you get them, would you pass them through?

And then on the other hand, more of the periodic cost of shipping from DC to customer and to store, how do you anticipate handling that? Do you have -- has your outlook changed at all in that regard? And as you look back on the industry historically, does the industry pass on that sort of periodic cost of domestic transportation from DC to store and customer versus for sure, passing on the product input cost side?

Yes. Great questions, Chris. I'll start there, and Brad or Brent might want to add to anything I missed. From the kind of over the ocean freight, the inbound cost as we think about it as a component of our acquisition costs, that obviously fluctuates from period to period. And we've seen some minor impacts there, but nothing of huge concern to us at this point.

And to your point, we would kind of characterize that within the context of just broadly where we see acquisition and cost pressures and so forth. And that's -- we would tell you that, that's all been pretty rational and stable this year, and the industry continues to operate to pass those through to customers as appropriate for what we see and what others would see. So nothing really kind of, I think, in that dynamic that we would view as unusual, and that's kind of incorporated into how we have thought about sort of that normal rate of inflation that we're expecting for the back half of the year.

From an operating cost standpoint, we're seeing -- I think like everybody would be to run our trucks to maintain a high level of service to our customers. We're seeing some pressure from fuel prices that have been increased. We would -- just to dimensionalize that a little bit for you, it kind of falls within the range of some of the normal puts and takes that we see within our SG&A spend. Brent outlined it within his comments. That was pretty much in line with our expectations. So in any given quarter, we're going to have a range of where we think this and we were probably closer to the top end of that range with the sales volume being what it is and some of that incremental.

But by and large, in most instances, that's sort of managed along with the overall cost structure of the business. And it's not an item that you would see a discrete price change move through. Having said that, that's just part of the broader inflation that's always going to be a part of our operating costs below the gross profit line. And those are all things that as we see inflation and acquisition costs in our industry is very rational in how we pass those through. It's always been our approach to make sure we're maintaining gross margin rate in those instances, and that benefit helps us to cover the normal operating cost inflation dynamics that we see in our business, and they typically sync up pretty well.

If we were ever in a situation where we saw even more enhanced pressure on fuel or any other items that was sort of dislocated from the cost we paid for our products, then we feel really comfortable that we could identify that and pass it through and the market would be rational about that. But those things typically in our history and our business have worked pretty much in sync and in tandem.

Your next question is coming from Zack Fadem from Wells Fargo.

You're pointing us to an SG&A per store level that's moving back closer to that 3% range. And the first question is whether you think this is the right run rate now as we move past an elevated period. And as we normalize, is it fair to think about a 3% comp leverage point? And should we anticipate a return to operating margin expansion at this level?

Yes. Zack, this is Jeremy. I'll take the first stab at that question as well and completely understand and appreciate the question on the longer-term run rate. I'd be remiss if I didn't remind you that we'll provide guidance to you guys for 2027 as we move closer to the year. And so we're always reluctant to put a stake in the sand around what kind of the expected kind of core year-to-year guidance thought process should be on that because every environment just becomes a little bit unique and different. For sure, for us in the back half of the year, we're calendaring up against some pretty substantial pressures in our business, and we spent a lot of time, I think, last year talking about some of the things that we saw in third quarter and fourth quarter that elevated our SG&A level to levels that have been higher than what we had seen before.

And so the -- I think the one positive of that is as we calendar against some of those things, we'll see the impact of some of those pressures being built into the base and not necessarily seeing a reacceleration on top of that in the back half of the year. And that's part of why we've got comfort and why implicitly the per store SG&A growth rate within our guidance is less in the back half of the year than it is in the front half of the year.

I would caution against saying, well, that's now the new run rate because we'll roll into 2027. We'll obviously have to have a read on where we think the broader inflation environment is and the broader economy, particularly as it pertains to wage rates and those types of things. And then we'll also continue to be proactive and aggressive in our posture where we see that we have opportunities to lean into our business and do the types of things that we know will enhance the value that we create for our customers that helps us to drive the share gains that we have.

So it's not trying to be evasive around the question, but I would tell you, we don't view it internally in those ways. We're going to make sure that we match the business opportunities that we have in the market that we have to be sure that we're driving the right result for our customers and a long-term perspective that we know is going to help us to address this great opportunity that we talked about on the call.

Yes, Zack, I may just add that I feel really good about the back half and where we've said we're going to land. Still a lot of year to go, but have a lot of conviction about our ability to execute. But I just -- I'd be remiss if I didn't say that when I think about our 7% year-to-date comparable store sales increase, over top line growth of over 9%. Our focus, priority one, is this 10% of the market we have. We feel like we can change that very aggressively over the next few years, especially over the next decade. So our focus is on taking profitable share, first and foremost.

Our next priority is solidly driving operating profit dollar growth. And so we just want to -- we want to stay focused on those things. But we also want to balance that with the fact that we're very proud of the operating profit percentages we've been able to generate over the last couple of decades as well as our leverage points to make sure we're dragging it to the bottom line. And so we're focused on both, but we want to keep an eye on that top line, and we're not going to make short-term decisions that are going to affect our ability to take share for the mid and long term.

And putting your share gains aside for a minute, I think there is some concern that the broader industry is beginning to slow, call it, inflation, consumer pressures, oil prices, et cetera. And I'm curious to hear whether or not you agree with that sentiment and how you would view industry trends right now for both DIY and pro and how these dynamics influence your expectations for the broader category this year?

Yes. No, great question. Happy to address it, Zack. I mean, I think for us, clearly, there's going to be some impact from just the calendaring of the price increases that the industry passed through last year. And so I think like the clearest point of deceleration and really the one that I think we've been very clear about and articulating in the back half of the year is that's just the dynamic around comparisons that we should expect to see.

I think one of the benefits, obviously, that we have being able to see this day-to-day and week-to-week is we kind of understand the cadence of our business and the volumes that we do and what we see in terms of customers and their transaction counts that kind of moves from period to period. And so as we look at our consumer and what they have looked like in 2026, we still feel good about the resiliency of that consumer to be able to adjust to some of the pressures that are occurring within the broader marketplace.

We think that even as we've moved over the last calendar year through some of the stuff that caused some volatility last year and some of the puts and takes from fuel prices this year that we still operate in an industry with a very resilient consumer and that they'll respond well that they're going to take care of their vehicles and want to keep them on the road at higher mileages and older ages because that's -- it's a great decision for a car owner to do that. And we think all of those things lend probably more stability to how we view the outlook than there would be volatility.

We're always going to be cautious in the back half of the year. We know we'll get into -- further into the year and you start to get into the holiday selling season, everything else that could impact our customer. But outside of a very real calendaring of same-store inflation that will moderate back to kind of normal levels, the rest of how we would view the broader industry is positive and consistent with kind of our broader view on our industry in most periods.

Yes, Zack, I would just wrap that up by saying that while it's always a little hard for us to set share gains aside because that's our focus every day is taking existing share out in the market and turning it into O'Reilly's share. But if I do do that, I've just got to pull it back up to the fact that I don't know that I agree that the industry is going to slow. There could be some volatility. We'll see what happens with pressure to the consumer. But I'm sitting here looking at over 293 million light car and light truck vehicles in the U.S. now. That's an increasing number.

Average age, as you know, continues to increase to 13 years old. We're over 3.3 trillion miles driven in 2025 in the U.S. alone, and those dynamics are very similar in Mexico and Canada. And so while there could be some short-term volatility, I think really the way that Jeremy articulated and when I think about the core fundamentals of our industry, used car prices, new car prices, I don't know that I totally agree that we're going to see an industry slowdown.

Your next question is coming from Greg Melich from Evercore ISI.

I wanted to follow up on what really drove a lot of the like-for-like inflation, which is the tariffs. Have you guys received any rebates so far? And are any forthcoming in your guidance plans in the back half? And then my follow-up is on Phase 2 there.

Yes, Greg, this is Brent. I can start on the tariffs and these guys can add in. But yes, I mean, if you think about, obviously, the tariff environment has been pretty choppy for some time now. And our team has done a fantastic job navigating through that. Our merchandise team has done a tremendous job working with suppliers on that.

But one thing I will remind you is we are not paying a lot of direct tariffs. A lot of our sourcing model historically has been driven by other suppliers that were the importer of record. So in terms of just having a big tariff rebate check per se, that's really not the way our supply chain model has historically worked. Now with that said, we've worked very diligently and the team has done a fantastic job working with our suppliers to make sure that as those tariff refunds come in that we are benefiting from sharing the benefit from those refunds with our supplier partners.

In addition to that, as we always do, the team continues to do a fantastic job diversifying our supply chain with country of origin. We continue to make progress in that in the first half of the year. Very pleased with what we see there. And we're continuing to build capabilities that allow us to -- in the cases that it benefits us, become that importer of record. In the cases it doesn't, not be that importer of record.

But when you think about just direct tariff rebates or refunds as some retailers have spoken about it, that's something we are doing in cost and cost of goods and how we negotiate the cost of goods. And we've been very pleased with the job that the team has done throughout the tariff regime of the last 1.5 years and certainly been very proud of the work of the team in the first half of this year and feel comfortable with the ability to do even more of that as we move into the back half of the year and move forward in terms of benefit of best first cost of goods and best utilization of transportation dollars and bringing those goods to market at the best possible cost to be able to maximize our margin opportunity.

So that's really the way we think about it, and that's the way we've been operating. And I just feel like the team has done a great job. But yes, there is maybe a little bit of a misinterpretation about direct refunds when you think about our supply chain model versus some others in retail that maybe you guys cover.

Got it. And maybe then a follow-on to that is, given that you're working with your vendors, when you're working with them, is this something that basically ends up being an offset from what might be other rising energy cost pressures? And if there's a way to think about having more perhaps rate go up in gross margin to offset what you're seeing in SG&A from fuel costs?

Yes, everything is on the table in those negotiations. And yes, any input cost, whatever that may be, whether it's commodities, labor, raw materials, transportation, whatever those components are of cost of goods in total, everything is a part of those negotiations. So what I would tell you is we feel very confident in our ability and partnership with those suppliers to be able to continue to improve our gross margin performance, just kind of like I pointed to at the midpoint of the year in terms of our guide and maintaining that. We feel confident there as we look to the back half and feel confident even with some of the newer capabilities that we're building to even further address that as we move forward.

Your next question is coming from Simeon Gutman from Morgan Stanley.

I know you guys don't manage the stock price, but one of the premises is that the profit growth would need to accelerate to create earnings upside to drive the multiple and then obviously more earnings. So the sales are good. We know SG&A is coming down. I wanted to focus on gross margin, if there's any levers there that can be cranked up to think about how incremental margins can accelerate going forward?

Yes, I can start there, Simeon, and Brad, Brent can jump in. We -- Brent said it in his prepared comments, we feel good about our gross margin performance in the second quarter and front half of the year. There is, I think, for us, a pretty consistent playbook around how we feel like we can make incremental improvements from a margin perspective. We've proven over the long course of time that we're a great partner for our suppliers. We view the opportunities that we have in the business as a combined set of opportunities for us and our supplier partners. And as we grow, they benefit from it. And that, I think, helps us to be able to articulate a great value proposition that we can leverage to acquire parts better as we move forward.

I think that also has been inclusive of how we've managed our portfolio of proprietary brands and being very thoughtful and strategic about how we position ourselves around those. And then obviously, distribution is a huge part of our business, and we're working hard to lever those costs. But with the real eye towards the incredible productivity that our efforts there drive and the ability to drive sales gains and growth. And really, that's the underpinning of everything that we do, is how do we think about what's going to be able to allow us to support creating the best value proposition for our customers and how do you drive that gross profit dollar growth by being able to consolidate the industry and grow faster.

But at the same time, there are opportunities to incrementally improve that margin rate. We -- our capabilities and our flexibility, to Brent's point, to really leverage our supply chain from kind of the point of manufacturers continue to improve over the course of time. That's evolved as we work through a few tariff cycles, and we've been able to diversify country of origin. And we'll continue to pursue and exploit opportunities there to get incrementally better. But it's really all kind of consistently focused on what do we think the right long-term strategy is there. And in any given quarter, we're going to perform within a little bit tighter band and there'll be puts and takes, but we feel good about the longer-term trajectory of what we can do with gross margin rates.

Okay. And then a follow-up, flipping it back to sales and SG&A leverage. Would you invest more for another incremental point of comp, meaning do you think the business at its current run rate, taking an appropriate amount of share? Or would you -- if you could drive the gross profit dollars faster vis-a-vis more sales, you wouldn't let the business run back down to SG&A per store, call it, 3, [ you'd ] keep it a little higher.

Yes. Simeon, it's Brad. Great question. We -- that's what our team is focused on balancing every day is where our next best dollar spend is, the return on that dollar. And I would just say that we feel really great with your question right where we're at. We feel like we're making the right investments that we have the right ROI on. We feel like our store staffing when it comes to store payroll, Jason Tarrant and his team are doing an unbelievable job walking that piano wire they walk every day, making sure that we are giving excellent customer service, taking market share and also managing our largest controllable expense in store payroll. So we evaluate that ongoing, but we feel like we found the sweet spot in terms of what we're currently investing to get that top line return.

Thank you. We have reached our allotted time for questions. I'll now turn the call back over to Mr. Brad Beckham for closing remarks.

Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today. I'd also like to remind everyone that we will be webcasting our Analyst Day on Thursday, September 17, beginning at 8 a.m Eastern Time. Details will be available on our website, and we hope you'll be able to join us either virtually or in person. Thank you.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

Good day, and welcome to the O'Reilly Automotive, Inc. First Quarter 2026 Earnings Call. My name is Ali, and I will be your operator for today's call. [Operator Instructions]

I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Thank you, Ali. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our first quarter 2026 results and our updated outlook for 2026. 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, and we intend to be covered by, and we claim the protection under the safe harbor provisions for forward-looking statements contained in 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-K for the year ended December 31, 2025, 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 Henslee, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call.

I'm excited to begin our call by thanking our over 93,000 team members for the incredible results they were able to deliver in the first quarter. Their hard work and absolute dedication to excellent customer service produced a strong start to 2026 for O'Reilly with an 8.1% increase in comparable store sales. This was above our expectations for the quarter and when combined with our new store sales and contributions from our international business drove double-digit total sales growth of 10.2% for the first quarter of 2026. Our team successfully translated these robust sales results into an impressive 14% increase in operating profit through our focus on profitable growth, and expense control. We coupled this strong operating performance with the return of excess capital through our share repurchase program to deliver a 16% increase in diluted earnings per share in the quarter.

Thank you again, Team O'Reilly for keeping our culture strong and providing the best customer service in the business.

Now I'd like to take a few minutes to walk through the details of our first quarter comparable store sales performance. Our comp growth of 8.1% solidly surpassed our expectations, and we were pleased to see above-planned contributions from both sides of our business in the quarter. Our professional business continues to be the larger contributor to our total comp results with our first quarter results making the third straight quarter we have posted double-digit professional comps.

We also saw strength in our DIY side of our business, which generated a mid-single-digit comp during the first quarter. While DIY was the smaller overall contributor to the total comparable store sales growth in the first quarter, it was an equal driver of the outperformance we delivered versus our expectations coming into the quarter. This outperformance was driven by better-than-expected growth in ticket counts on both sides of the business. We believe there were some favorable industry tailwinds that aided our results in the first quarter that I will discuss in a moment. However, we are just as confident with our sales momentum also reflects share gains our team is winning on both sides of our business.

Next, I want to provide some detail on the cadence of our sales results as we move through the quarter. We note every year that first quarter is often our most volatile quarter as we experience variability in our business resulting from the tight and severity of winter weather and the timing of the onset of spring. In addition to this, the timing and magnitude of individual income tax refunds can also be a factor impacting our results through much of February and into March.

Beginning with this January, winter weather was favorable and largely as expected, providing a strong start to the quarter. Moving into February, weekly volumes began increasing as tax refunds started to flow to consumers. Our business often receives some level of benefit from tax refund season, but is not always a direct correlation to average refund size or total refund dollars as weather and general economic conditions can play a role in the extent to which consumers spend these refund dollars and where they are spent.

This year, we do believe the combination of an increased average -- in average refund size as well as higher total refund dollars coincided with favorable weather to produce a benefit for our business. Warm and generally dry conditions in most of our markets provided a supportive backdrop for consumers looking to perform vehicle maintenance in conjunction with the benefit from tax refunds. While we surpassed expectations each month, our business strengthened as we moved through the quarter relative to both our plan and on a 1-, 2- and 3-year stack comp basis. April has had the expected degree of seasonal moderation in volumes relative to March, but our business continues to be strong in both DIY and professional.

From a category perspective, our results were driven by broad-based strength across the business with solid results in many of our undercar hard part categories, coupled with continued healthy performance in our maintenance categories, including oil, filters and fluids. Even in light of widespread strong comp contributions across a broad range of categories, we still see some evidence of consumer caution. Discretionary categories were not as pressured from a relative comp perspective as we've seen in the past few quarters, but this was mainly due to the soft comparisons as we are lapping periods of pressure in this small subset of our business.

I will discuss in more detail in a moment, but our outlook assumes a continuation of this uncertain stance by consumers. Growth in average ticket was a mid-single-digit contributor to comps on both sides of our business. While average ticket growth represented the larger driver of our comp for the first quarter, these results were essentially in line with our expectations. As I referenced earlier, it was really the growth in transactions that exceeded our expectations.

Coming into the quarter, we assumed average ticket would benefit from same SKU inflation of approximately 6% and actual results came in right in line with those expectations. As a reminder, the front half of 2026 is expected to receive a larger benefit from same SKU inflation as we do not compare against the more significant cost and associated price increases in 2025 until the third quarter.

Turning to guidance. We maintained our full year comparable store sales guidance range of 3% to 5%. We are very pleased with the strong start to 2026 that our team has been able to deliver. The first quarter results exceeded our plan and right now have pushed us to the top half of our full year range. However, we remain cautious in our outlook for the consumer. Rapid increases in fuel costs have the potential to impact consumer spending even in predominantly nondiscretionary sectors like our industry. While the more fundamental long-term demand drivers of miles driven and the average age and size of the vehicle fleet are expected to remain supportive and change very gradually over time, spikes in prices at the pump and the impact it can have on other day-to-day spending in the life of a consumer can cause short-term reactions.

So far, our first quarter results and trends thus far in April have not indicated a pullback in consumer demand. However, we remain cognizant that sustained inflation pressure on the consumer or potential for future shocks could create volatility in demand. Likewise, we are always cautious to not overreact to first quarter results, which can be susceptible to demand variability driven by weather and tax refund dynamics. Given these considerations, we have kept our sales and operating margin outlook for the remaining 3 quarters of the year unchanged from our previous guidance. It goes without saying that our team is highly motivated to sustain our first quarter momentum as we move through 2026.

Ultimately, we will lean on our business model of service and availability to grow our business with both our existing and new customers the same. We have confidence in the health of our industry and even more in our ability to take market share in any market backdrop. Our store and sales teams operate with a high degree of discipline within their markets. We expect to win business by delivering value through deep win-win relationships, excellent customer service, superior product availability as our teams focus on partnering with our professional customers who recognize this value and place us in a position of preferred supplier as a result of the consistent execution of our team. This same high standard of customer service also drives our DIY business since these customers are just as dependent on the trusted advice of our professional parts people to help them solve problems, go the extra mile and in turn, keep their vehicles on the road and well maintained.

Before I wrap up, I would like to note that we are increasing our full year diluted earnings per share guidance to a range of $3.15 to $3.25. Our increase in EPS guidance is driven by our first quarter sales and operating performance and the impact of shares repurchased through the date of our earnings release yesterday. We are pleased to be delivering an increase to our full year guide after kicking off the year and look forward to the opportunity to execute on our fundamentals and generate strong results throughout the remainder of the year.

As I wrap up my prepared comments, I'd like to take the opportunity once again to thank Team O'Reilly for your hard work and commitment to growing our business.

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 a strong start to 2026 as your hard work continues to earn business and take share. Today, I will further discuss our first quarter gross margin and SG&A results and provide an update on the progress toward our expansion and capital investment plans for 2026.

Starting with gross margin. Our first quarter gross margin of 51.5% was a 19 basis point increase from the first quarter of 2025, which was in line with our expectations. Within the first quarter, our gross margin did encounter some pressure from seasonal product mix, but we are pleased to be able to offset this pressure with acquisition cost reductions and improved leverage of our distribution cost driven by solid DC productivity and strong sales volumes. The acquisition cost environment remains stable, and the pricing environment continues to be rational across our industry. Our first quarter gross margins were not materially impacted by the changes within the tariff environment as our net tariff exposure has remained relatively stable. Additionally, at this point, neither our first quarter results nor our outlook include any benefit from tariff refunds. We actively monitor these topics as they develop and are being proactive to ensure our sourcing is competitive and reflects the scale of our company.

The conflict in Iran and resulting constraints on global oil supply have the potential to be disruptive to certain categories, particularly motor oil and could impact supply chain costs such as freight. However, we did not see a material impact in the first quarter and have not adjusted our full year outlook assumptions for these factors. We have strong relationships with our supplier community and have been working through challenging situations surrounding international trade and geopolitics for an extended period of time now. While every situation can be unique, our expectation is that our merchandise teams will continue to successfully navigate these environments and that we will be able to leverage our long-term relationships with supplier partners as well as our scale to ensure that we lead the industry in availability.

We are maintaining our full year gross margin guidance range of 51.5% to 52%. At this stage, we believe we have the ability to manage the current dynamics surrounding product acquisition cost and freight within our full year guidance range. Our supply chain teams work to not only actively mitigate cost increases, but also to diversify our supplier base and seek alternative sourcing options when necessary. A significant benefit to us on this front has been the continued development of our private label brand portfolio. Our private label penetration has climbed to over 50% of total revenue, and we will continue to work to prudently leverage the strength of our proprietary brands.

The benefits of our private label strategy range from improving margins and customer brand loyalty to improve sourcing capabilities as we have control over the product within the box and can seamlessly source a single SKU from multiple suppliers. When supply chain constraints emerge, having the ability to adjust orders and demand across a broader base of suppliers is an important tool for our teams to leverage in order to maintain a strong in-stock position.

Moving to SG&A. Our teams generated an impressive 34 basis points of SG&A leverage as they diligently managed our cost structure and delivered robust sales results. Our total SG&A dollar spend was at the higher end of our expectations for the first quarter due to incremental spend to support elevated sales volumes. This produced SG&A average SG&A per store growth of 5.5% for the first quarter. And we are still expecting our full year SG&A per store growth to run approximately 3% to 4%. Our first quarter SG&A was expected to drive the highest average per store growth rate of the year, and we expect our per store growth to moderate as we move through the year and compare against the SG&A ramp that occurred throughout 2025.

Within our SG&A, gas price increases had a muted impact on balance for the quarter. We do operate a large delivery fleet across our stores and quick timely delivery of product to our professional customers is an incredibly important part of our value proposition. As a result, there is certainly the potential for some level of impact to our SG&A, but this is heavily dependent on the extent and the duration of fuel price increases.

When managing our cost structure and in particular, when gauging our response to cost pressures over a short time frame, we always view our business through a long-term lens with a focus on serving our customers and supporting high levels of service and availability. In keeping our SG&A and margin guidance unchanged for the remainder of the year, we have considered the potential for modest pressure from rising fuel prices and the opportunities we have to manage those pressures within the broader context of our overall cost structure. We are raising our full year operating profit guidance range by 10 basis points to an updated range of 19.3% to 19.8%. This reflects the flow-through of operating cost leverage from our strong first quarter results and our unchanged outlook for the remainder of the year.

At the midpoint, this updated guidance range projects full year operating margin expansion of 9 basis points over 2025, which is a testament to Team O'Reilly's dedication to profitable growth. Inventory per store finished the first quarter at $874,000, which was up 8.5% from this time last year and up 0.5% from the end of the year. We are still targeting growth of 5% per store by the end of 2026. Our inventory position at the end of the first quarter was slightly below our plan, resulting from the strong sales performance and the timing cadence of inventory additions. Our turns remain strong at 1.6x, and we are pleased with the productivity we have seen from our inventory investments and our efforts to continually enhance inventory deployment within our tiered distribution network. We absolutely believe that our industry-leading inventory availability is a factor contributing to the share gains that we are compounding, and we will continue to aggressively capitalize on opportunities to bring our inventory closer to the customer.

Lastly, to touch on our store growth and capital investments in the first quarter, we opened a total of 59 net new stores across the U.S., Mexico and Canada. Domestic new store performance continues to meet our high expectations, and we are pleased with the opportunities we have across the U.S., both to backfill existing markets and expand into new greenfield markets. Our international markets continue to make progress in building the O'Reilly store growth engine, and we remain on track for our 2026 store opening goal of 225 to 235 net new stores.

Capital expenditures for the first quarter were $244 million, and we still expect a total capital expenditure investment in 2026 of $1.3 billion to $1.4 billion. The major projects driving this expected level of spend are on schedule, and we are excited for the growth opportunities in store for us in all of the markets that we operate in.

Before I turn the call over to Jeremy, I want to once again thank our entire team of Team O'Reilly for their continued hard work and unwavering commitment to our customers. Now I'll turn the call over to Jeremy.

Thanks, Brent. I would also like to thank all of Team O'Reilly for their continued hard work and dedication to our customers. Now we will fill in some additional details on our first quarter results and updated guidance for 2026. For the first quarter, sales increased $424 million, driven by an 8.1% increase in comparable store sales and a $91 million noncomp contribution from stores opened in 2025 and 2026 that have not yet entered the comp base.

For 2026, we continue to expect our total revenues to be between $18.7 billion and $19 billion. Our first quarter effective tax rate was in line with expectations at 22.5% of pretax income, comprised of a base rate of 23% reduced by a 0.5% benefit for share-based compensation. This compares to the first quarter of 2025 rate of 21.3% of pretax income, which was comprised of a base tax rate of 23.2%, reduced by a 1.9% benefit for share-based compensation.

For the full year of 2026, we continue to expect an effective tax rate of 22.6%, comprised of a base rate of 23.0% reduced by a benefit of 0.4% for share-based compensation. We expect that the quarterly rate will fluctuate due to variations in the tax benefit from share-based compensation and the tolling of certain tax periods in the fourth 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 2026 was $785 million versus $455 million in 2025. The increase in free cash flow was primarily driven by robust growth in operating income, a reduction in net inventory and timing of CapEx spend. For 2026, our expected free cash flow guidance remains unchanged at a range of $1.8 billion to $2.1 billion.

I also want to touch briefly on our AP to inventory ratio. We finished the first quarter at 125%, which was up from 124% at the end of 2025 and above our expectations. For 2026, we expect to see moderation resulting from our planned incremental inventory investments and expect to finish the year at a ratio of approximately 122%.

Moving on to debt. We finished the first quarter with an adjusted debt-to-EBITDA ratio of 2.03x, flat to our ratio at the end of 2025. We continue to be below our leverage target of 2.5x and plan to prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. And during the first quarter, we repurchased 10 million shares at an average share price of $92.45 for a total investment of $923 million. 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, our 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 up our call for your questions, I would like to thank our team for their commitment to the excellent customer service that drives our success. This concludes our prepared comments. At this time, I would like to ask Ali the operator to return to the line, and we will be happy to answer your questions.

[Operator Instructions] Our first question today is coming from Simeon Gutman with Morgan Stanley.

Brad, I wanted to ask about market share. The data I look at, it looks like the spread for O'Reilly versus the industry is actually accelerating. And granted, we don't know what everyone's first quarters look like. But the last time we saw this was somewhat in the post-COVID period or the COVID period where you took a lot of share versus the industry. So I wanted to ask if your data more or less says the same thing, if that's corroborated. And then are there any trends? Is it markets where you're investing? Is it broad-based? And then how you think and where it's coming from?

Yes, happy to talk to that. First off, I can't jump into that question without just bragging on the team. We are extremely proud of the execution by the entire team. When I think about store operations, the sales team, when I think about the supply chain teams, all of our teams are just executing at a high level. And yes, I think directionally, we look at a lot of data. As you know, we probably spend less time worrying about what everybody else is doing than we do trying to figure out how to get our company to the next level when it comes to share gains, comparable store sales and taking that to the bottom line and really investing not just for the short term, but more importantly, for the mid and long term.

But yes, I think directionally, when we look at the data that we see, both internally and externally, we do agree with you that our team continues to drive solid share gains. beyond maybe even what we've seen in the last couple of years and on both sides of the business. Our teams are highly focused on taking share from all types of competitors when it comes to retail and professional, the same. And so yes, we concur with what you said there, Simeon.

And just following up on the same topic, this is a wild guess, the percentage of your customers where you are the primary distributor. And then is that percentage of that share being primary, is that continuing to tick up? And if you're willing to tell us where that number might sit?

Yes. Just maybe talk broadly about kind of our customer buckets on the professional side. Very pleased overall when we look at our performance really by market, by customer type, and kind of the way we look at where we sit on the call list at a micro level, seeing really broad-based performance when it comes to both existing customers, as I spoke about in my prepared comments as well as seeing a lot of success with new customers, whether it be in new markets or it be new customers within existing markets.

And I always like to point out that no matter if you're looking at the most mature part of our company, kind of in the Missouri, Oklahoma, Kansas, Arkansas, Texas, Iowa, Nebraska, when you look at those markets versus a brand-new market, we're still very immature even in our most mature markets. We have 10% share. We're going to continue to aggressively go after the remainder of that business in North America. And we don't disclose exactly what that percentage looks like to that part of your question, but just feel really good about overall performance across all markets and all customer types, both with new customers and existing customers the same.

Our next question is coming from Greg Melich with Evercore ISI.

I'd love to follow up on your -- what you were seeing in like-for-like inflation, the 600 basis points. And how do you think about the changing input costs and how that could impact that as we go through the year? Do we still expect that to decelerate to, let's say, 2% as we wrap the tariff increases? Or could it possibly only decelerate to 3 or 4 points, especially given what you mentioned on gasoline costs and how that flows through to SG&A?

Greg, thanks for the question. This is Jeremy. I want to make sure I know lots of questions about this. And I think reasonable speculation about what could happen for the balance of the year. Just from a clarity perspective, as we think about where same SKU would go this year and what we baked into our guidance, that really is unchanged for us at the 3%. And I think that for us is as much just our approach to these items as much as it is anything else. It's just historically been our approach that we try not to speculate too much on the future movements in prices without a lot of clarity around what we're going to see or candidly, really mostly what we've already seen.

And so what informed our outlook from an inflation perspective this year was really how we saw price levels change last year, where that had stabilized and kind of how we've entered and moved into 2026 and haven't really seen fundamental shifts or movements. Brent mentioned it in his prepared comments, but we've kind of seen a normal acquisition cost environment, some puts and takes. And so for us, as we kind of move through the remainder of the year, we would expect that we'll still have some year-over-year tailwind based upon where prices are at today in the second quarter, and then we'll start to compare against the price increases from last year as we move into our back half.

As we think about the back half, I still think that we'll benefit from average ticket growth and shrink. That's been consistent in our business and really in the industry for a long time. Within that number, we still have a muted inflation expectation. There's obviously the potential that, that could change if we see fuel prices pass through. But we've got to see where that goes and how sustained and how long term that is what the industry does. We would expect the rationality within the industry to continue on that. But it's also pretty early in that ballpark. We would have to see just more broadly what that market looks like as we kind of roll through the rest of the year. And that's really our approach and how we would think about what that broader framework would be like for the remainder of the year.

Great. And my follow-up, if I could, was on the consumer demand and tax refunds. You mentioned it several times. I guess looking back now at the end of the quarter and into April, is it fair to say that maybe tax refunds is an extra couple of hundred basis points of demand versus what you were thinking back in February? Or how should we even think about that and that cadence as we go into the spring and summer?

Greg, it's Brad. I'll try to answer that the best we can. We want to be a little bit careful trying to quantify what was tax refunds, what was weather. There's a case to be made from the seat we set in that there was to your question, some -- maybe some pent-up demand. The consumer has been under pressure for many quarters now, more so in the discretionary areas, but even to some extent, as we've talked to you about what we see in a little bit of deferred maintenance, some pushed out repairs that can be pushed out even though that's minimal. And so there's a case to be made that what we saw was some catch-up.

Part of that, we feel is contributed to -- or should be attributed to tax refunds. Part of that, we feel like even though there was some choppiness week-to-week from a weather perspective, weather on balance was a tailwind for us, we feel. And so there was just a lot of moving pieces. We just want to be careful trying to quantify what we think that is, but we definitely feel like tax was a helper, and we feel like weather was a helper overall.

Yes. Maybe the only thing that I would add to that is those are the typical types of things that we see in first quarter. And sometimes it's hard to assess. It's the reason why we said within the prepared comments, we tend not to overreact to what we see in this part of the year. And we said that in years when results weren't as favorable for us. Ultimately, we think that works itself through the system and you get a pretty good read on that as you move through second quarter.

For sure, we want to make clear what Brad referenced on the earlier question. We still feel like we're performing well compared to what the opportunity is in the industry. So it's a balance of the 2. Hard to know at this stage where it's at. But when we look to the balance of the year, the thing that I think still has us most excited is the ability to execute our model to provide industry-leading service and to continue to grow our share of the market.

Our next question is coming from Christopher Horvers with JPMorgan.

It's Christian Carlino on for Chris. On the oil price shock, is it fair to say you generally pass along any product cost inflation from commodities or higher ocean freight, but you probably absorb the impact of higher domestic fuel costs from moving inventory within your supply chain and doing the DIFM deliveries. And...

Pardon, Christian. You're breaking up pretty badly.

Can you hear me now?

Are you there?

Can you hear me? Hello?

Operator, we can move on to the next call come back if we can.

Okay. Sir, can you hear me clearly? Sir, can you hear me clearly before I move to the next caller. Okay, folks. If you could bear with me one moment, please. [Technical Difficulty]

All right. I believe we have everyone back together. Is that correct, sir? You can hear me now?

Yes, yes.

Okay. I believe it was your line that have broken up, so I've left Christopher on the line. Christopher, can you try asking your question again, sir?

It's Christian Carlino on for Chris. My question was on the oil price shock. And is it fair to say you generally pass along any product cost inflation from commodities or higher ocean freight, but probably absorb the impact of higher domestic fuel costs from moving inventory within your supply chain and doing the DIFM deliveries? And if that's right, is there a point where you start to pass on the cost of higher domestic freight, whether that's through surcharges or another method?

Yes. Thanks for the question, Christian. I think it's probably a good framework with which to look at that. When we think about product acquisition cost, I think, into the U.S., the freight component, we've historically thought about that, I think, is a component of what -- of the cost of the product and when it takes to get. And I think that's consistent with the framework Brent outlined earlier about how we can consider sources of supply and the flexibility that we have there. So historically, for us, a lot of times, that's also meant that our suppliers have taken care of a big portion of that. And so what we see there, we view from that lens of product cost, and it's -- I think no different for us than any other kind of components of input costs that we would pass through to a customer and pricing, obviously, after having worked with our supplier community to be able to work to mitigate that.

If we think about just the operating cost of our business, and that shows up in our distribution costs within gross margin and then also within SG&A, our cost of fuel is a part of that. It's an important part, but it's obviously not the biggest part of that spend. And it's generally, I think, viewed for us within the broader context of how we manage our costs within our distribution and within our store operating costs in that way.

And I think just to reiterate maybe what Brent said on that topic, we feel like that while we could see some pressure there that it's manageable kind of within that broader context of our expense outlook for the remainder of the year and within sort of the ranges of how we've talked about our margin guidance from that perspective.

Ultimately, for any of those types of costs, from an operating cost perspective, to the extent that they're sustained and we think they're broad-based, our industry, I think, has the ability to pass that through. Historically, that has not really been decoupled from a similar acquisition cost type of pressure. So generally, what happens is products get more expensive and you have some inflation to pass along and it helps to cover pressures in those other areas, and we would anticipate as we move forward that it would continue to operate in a similar fashion.

Got it. That's really helpful. And I think you had talked about maybe roughly 5% comps quarter-to-date when you reported the fourth quarter. So that would put the exit rate maybe in the double-digit range for the first quarter. So is it fair to say that quarter-to-date trends are continuing to hunt in that double-digit range? And I guess just when you put together comparisons and weather and stimulus benefits fading, how are you thinking about the shape of the comps in the second quarter and beyond?

Yes. So just from a clarity perspective on the cadence in the first quarter, we felt like we started solidly and then improved as we move throughout the quarter. It's always a little bit of a challenge to talk about nominal comps because they compare differently. We feel well with how we finished the quarter in February and March. We were also up against, I think, a pretty challenging comparison within March and ended up in a good place on that side of our quarter.

As we move here into April, we've seen a little bit of moderation off of the strength in March. I think that's pretty consistent with what we've seen from a seasonal perspective a lot of times. Still, I think, running well, strong, better than maybe we would have expected, but pretty early in the quarter. And obviously, we have to balance out a lot of quarter left and what the business looks like as we move kind of into the beginning of the summer months.

Our next question is coming from Mike Baker with D.A. Davidson.

Can I focus on costs, please? And this was an issue when you reported the fourth quarter, some cost overruns. Your costs were still high this quarter, but presumably, a lot of that was due to increased labor to support the high comps rather than the legal and health care situation that had been impacting you. But could you just remind us where you are in improving your costs? Your guidance clearly shows it improving throughout the year. What of the 9% increase this quarter was just because of the higher comps versus that legal situation? And how does that evolve throughout the year?

Yes. Thanks, Michael. This is Jeremy again. I would tell you, great question. And our actual results would tell you it would be pretty much in line with what we thought, a little bit higher, as Brent mentioned in his comments, and it's mostly just, I think, on the pace of the business being faster. When we look at it from a year-over-year perspective, we had an expectation that first quarter, in particular, and a little bit in the first half, we would see a higher per store SG&A growth rate just because of the kind of the cadence of what we saw from a pressure perspective in the back half of last year.

So when we just look at the growth rate in first quarter, it's still, I think, made up of similar things that we saw last year. Obviously, important core operational costs to run our business, continue to, I think, lean into areas that make a lot of sense to help move our business forward. But then also, I think, a more pressured item on a year-over-year basis for things like the insurance and the other types of liabilities that we've been talking about for a couple of quarters now. That type of exposure for us was very much in line with what we had expected. And I don't think there was any kind of trend change from what we saw in the back half of the year. It was sort of in line but we knew it would be more pressured just given the comparisons from a year-over-year perspective.

So really, I think from that standpoint, the only kind of difference for us as we move through the quarter is we saw the business pick up and had the opportunity to address the incremental transactions that we were driving in our business as well as some of the incentive comp that goes along with that, we ended up maybe more towards the high end of a range we would have set for ourselves in the first quarter. But beyond that, everything else kind of was in line with what we would have thought.

Okay. That makes sense. If I could ask -- we'll call it a follow-up, but candidly, probably a different subject. But back to the tax refunds, you said maybe there was some spending of pent-up demand there. How about the other way? Could that be a pull forward? And so when you have spikes related to either weather or tax refunds, how does that impact subsequent quarters? In other words, people did their maintenance in the first quarter with their tax refund dollars, does that impact spending in the second and third quarter historically?

Yes. Great question, Mike, and this is Brad. Being in this business, having the fortune to be in this business for almost 30 years myself and all that being at O'Reilly, what I'm getting ready to say is less data-driven, just more about just kind of instinctually coming out of a quarter like we just came out of that we've been through many times, some better, some not. I generally feel like that -- and we generally feel like that there was -- it would be more of the -- what I said earlier that there was some pent-up demand when I look at category performance. And even though we haven't seen a lot of deferred maintenance or trade down in terms of bigger ticket jobs, we did talk about that some in the previous quarters.

So it makes sense for us when I look at the retail business by category, I look at the professional business by category and all the work that Brent and the merchandise teams do, again, we feel like it would be more catch-up than it would be pulled forward. I'm not saying that, that couldn't be to some degree, a factor, but not as much how we're feeling about how things played out.

Our next question is coming from Bret Jordan with Jefferies.

On the private label discussion, you talked about getting over 50%. I guess is there a reasonable target for that? And when you think about private label penetration by market where you're really established sort of back in that Missouri area, are you meaningfully higher where people know your brand versus as you push to the Northeast, is there less private label mix where you've got sort of room to make up?

Yes. Bret, this is Brent. Good question. I can start on that one and the other guys can chip in. Yes, the team has done a fantastic job. David Wilbanks, our merchandise team. They do a fantastic job developing a good, better, best line design across our proprietary brands, and we've just continued to see them grow in brand penetration. Our strategy, though, is still we're going to have relevant national brands where it makes sense as part of our line design by category and teams do a great job of mixing those in.

So we don't have a stated goal that we're going after there in terms of percent penetration. We let the customer vote with their wallet. Just like we talked about in the prepared comments, the great thing about that private brand portfolio is it does give us that sourcing capability that is much broader, and we can source from multiple suppliers, the same SKU, quality in the box, form fit and finish. And the teams have just done a fantastic job with that.

So we want to go to market that way. Customers vote with their wallets, where our national brands, and we've got some fantastic national brands as well, where they compete head-to-head with those proprietary brands. We want the consumer to have the choice for both. But we don't have a stated goal that we're going after there. We're just pleased with the performance of the team and the portfolio.

Bret, this is Brad. Brent said it extremely well. Maybe just on the second part of your question. We really don't see that. As well as we are established in the most mature markets, there's not really a disparity between what we see in our new expansion markets in terms of how they are adopting our proprietary national brands. Again, I just want to give credit to Brent, to David Wilbanks and the merchandise team as well as our sales team. We have the fortune of having this diversified branding, not just one brand, not just O'Reilly, but like we do in oil, but we have these brands that used to be national brands that we've acquired over a long period of time that customers just trust.

So whether it's a mature market or whether it's a brand-new market like the upper Mid-Atlantic, we see customer adoption of things like precision chassis and U joints. It used to be a national brand. It's been our own brand for a long time, Murray air conditioning, SYNTEC oil, it doesn't matter if you're really talking about the DIY side or the DIFM side. We see our proprietary brand performance performing very well equally both in mature and immature markets.

Great. A quick question on motor oil. I think you called out some supply chain impact. Is that likely just to be seeing significant price inflation? Or are there issues? I think some of the synthetic sourcing in the Middle East might be challenged. Is there actual risk of some supply shortage versus just higher prices?

Yes, I can start on that one, too, Bret. There is some consumer motor oils and a lot of that, while we're energy independent as a country, a lot of that does come from the Far East, and there is some pressure across our supplier base right now on pricing there, and that's something that our merchandise teams are working with those oil suppliers on. So there could be some pressure there, again, depending on the duration of the conflict and how long some of the oil price inflation persists. But our teams are working through that. We feel confident in our ability to do that.

Our next question is coming from Scot Ciccarelli with Truist Securities.

SG&A follow-up, actually. We saw 5.5% SG&A per store growth, but labor is by far your highest SG&A item. And I believe employees per store are down a few percent for the fourth quarter in a row. So I guess my question is, is the growth rate of the SG&A being driven more by wages rather than hours? Or is it all coming from those other items you mentioned, liability costs, et cetera?

Yes. No, it's a great question, Scot. I think principally, when we look at that, the first place you have to go is just wage rates. And we've been, I think, kind of pleased with the trajectory of that trend for a little while. Obviously, there were a few years that was pretty heightened in turnover was, I think, a pretty big challenge. But we have felt good with where that's gone. I think, obviously, there's some puts and takes. Our focus is on having excellent customer service within our stores, having team members that we can train, help form relationships on the professional customer side, help our DIY customers. And so to the extent that we're able to retain team members, you can see some rate pressure from that as well.

When we look at the rest of it, we do, I think, have the ability and flexibility to manage the mix of full-time and part-time in our stores. And I think over the course of time, that's kind of influenced a little bit how you might otherwise look at just the per team member counts. To the extent that we need to support increased transaction volumes, we've done that with ours. But we've also felt like that over the course of the last several years as we've continued to make investments within our team, been able to really, I think, help support how they function and they can provide service to our customers. We've also seen some benefits from a productivity perspective, which is kind of what we would have expected to see given how we've leaned into that area of our business over the last few years.

Yes. And Scot, I may just jump in. This is Brad. Jeremy said it really well. Good, very good observation on the pieces of our SG&A. I just have to brag on Jason Tarrant and the store teams, all the field leadership out there overseeing our stores. They just continue to do a phenomenal job walking the fine line of giving excellent customer service, industry-leading customer service on all hours of operation while really managing our labor well, even though we continue to grow SG&A at the rate we do.

To your point, they have -- we've invested in wages. There's been a lot of wage inflation, but they've been able to take on that wage inflation, continue to reduce store level turnover, improve retention. And to your point, we've seen really solid productivity in return. They're also doing a great job just with a continuous improvement mindset in the way that we push labor from the office, the way that we reduce tasks in the stores to make sure that all of our store managers and store teams are just really have the ability to focus on serving customers, great teamwork, focused on the customer-facing team member focused on the customer. And even though that it sets in gross margin, our DC teams continue to do the same thing, continuous improvement, reducing turnover, improving retention and overall giving better service and levering expenses.

Our next question is coming from Max Rakhlenko with TD Cowen.

So first, just on the consumer front, what's the latest thinking around the level of gas prices where there could be some impact to miles driven. Historically, I think you guys talked about $4 a gallon, but maybe that's now moving a little bit higher as there hasn't seemly been much change, at least on a national level for miles driven. So just curious how you guys are thinking about that.

Yes. Max, this is Brad. Great question. So maybe just to kind of pull it up, again, a lot of history through fuel price costs, both with diesel and gasoline. What we've seen over a long period of time is that it takes a sustained level of heightened fuel prices to really start even to a minimal level affecting miles driven. What we've seen is that -- what we've seen over time is that even though that takes a longer period of time, more sustained high levels, which we haven't seen yet, still very early to tell really what's going to happen with fuel costs. But really, what we've seen is it taking -- we've always kind of thrown out the number of a sustained level over $4 a gallon.

And when you look at the broader U.S. market and the majority of the markets we operate in, we have not seen that yet. Diesel prices have been very high. Obviously, gasoline prices have crept up. But as we mentioned earlier, on the business front, aside from expenses on the sheer consumer front and what we're seeing from consumer demand, we have not seen an impact that we would tie directly to gas prices, and we're not really great at predicting where this is going to go or the future, but it would take a sustained level of heightened gas prices and well north of that $4 a gallon if history repeats itself, for us to see any kind of impact to miles driven.

Again, just with the caveat that we said earlier that the short-term spikes at the pump can just create a shock with a consumer that even though we define the consumer today is still relatively healthy, the low income to middle income consumer that's our core customer has seen a lot of inflation over the last couple of years and a lot of other ways that they operate their household and everything they do. And so could see some short-term shocks, but it would take a sustained level well over those numbers that we have yet seen.

Okay. Great. That's very helpful. And then can you speak to the competitive environment with the folks on the independents and WDs? How are they dealing with an increasingly challenging operational backdrop? And then ahead, what is your take on O'Reilly's ability to take market share at a faster pace maybe than what we've seen historically?

Yes, absolutely, Max. A little bit hard for us to speak from the independent side. Obviously, we have a lot of insights, but we try to stand our own lane and focus on what we know is going to take share versus exactly what an independent parts store or a WD or some of the larger regional players are exactly doing. But we do feel like a sizable part of our share gains currently is coming from the kind of that weaker or smaller independent player. Within that independent space, you have a lot of different cohorts of competitors. You have everything from true mom-and-pops that maybe are a part of a buying group to some of the 8 to 10 store chains all the way up to some of the most sophisticated private equity-backed type independent WD players that are scaled across the U.S.

And so I think when you start at the bottom and talk about the small independents with interest rates, with holding cost of inventory, inflation and inventory investments that are needed to truly compete. I think there probably is quite a bit of disruption going on right now. To some degree, maybe a little lesser degree with kind of those midsized competitors. And then we never take anybody for granted, but for sure, don't take the more scaled competitors on the WD side for granted because they're scrappy. They never lose their grid. They're well ran, and they're figuring out how to navigate this even like the largest of players. So that would be how I'd categorize the competitive landscape on the independent side.

And then to your point on just outsized share gains as we move forward, number one, I want to be careful because we want to stay humble. We want to stay hungry. We don't take anything for granted. We don't take any competitors for granted, first and foremost. That said, we have a lot of conviction right now in the high level of execution that our team continues to deliver. We've got a lot of good things in flight. We're executing well. We feel like we have the right strategies on both sides of the business to continue to take share in any market backdrop. To say what will be outsized versus what we've seen in the last couple of years, I think we just want to let our numbers do the talking.

Ladies and gentlemen, unfortunately, we have reached our allotted time for questions. So I will now turn the call back over to Mr. Brad Beckham for closing remarks.

Thank you, Ali. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our second quarter results in July. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.

Welcome to the O'Reilly Automotive, Inc.'s Fourth Quarter and Full Year 2025 Earnings Call. My name is Matthew, and I'll be your operator for today's call. [Operator Instructions]

I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our fourth quarter and full year 2025 results and our outlook for 2026. 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, and we intend to be covered by and we claim the protection under the safe harbor provisions for forward-looking statements contained in 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-K for the year ended December 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 fourth quarter conference call. Participating on the call with me this morning are Brent Kirby, our President; and Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman; and David O'Reilly, our Executive Vice Chairman, are also present on the call.

I am once again pleased to begin our call today by congratulating Team O'Reilly on another strong year in 2025. We finished the year with a comparable store sales increase of 5.6% in the fourth quarter, which brought our full year comp for 2025 to 4.7%. The 4.7% was at the high end of our revised guidance range of 4% to 5% and above the expectations we set in our initial guidance coming into 2025.

Our strong comparable store sales performance coupled with the continued successful execution of our new store expansion drove a total sales increase of [ 6.4% ] to $17.8 billion. To provide some perspective, our total '25 sales reflect an increase of over 50% in total sales volume over the last 5 years, representing growth of over $6 billion since 2020. Our ability to continue to grow our business and capture market share year in and year out is a testament to our team's commitment to providing excellent customer service. I want to thank each member of Team O'Reilly for their daily commitment to our customers and our company.

To touch on the rest of our results as we finish out the year, I want to briefly highlight both areas of strength and some headwinds we faced in 2025, before Brent provides more color in his remarks. For the full year, we generated operating profit of $3.5 billion, a 6.4% increase over 2024. On a sales -- a percentage of sales basis, our 2025 operating profit of 19.5% was flat to the prior year and right at the midpoint of the guidance range we maintained throughout 2025.

We are pleased with our team's ability to drive robust gross margin results in an environment of rising costs and prices by ensuring that we are providing exceptional value to our customers to earn their business. We are also pleased that our team continues to capitalize on the investments we have made in our business, including enhancements to our distribution and hub store network, expanded inventory assortments and strategic technology investments.

We believe our continued sales growth trends reflect share gains won by consistently executing our proven business model while also delivering incremental improvements to further differentiate our service from the competition. We will continue to prioritize these initiatives to lean into our business to sustain our growth momentum.

However, we unfortunately also faced substantial cost pressures in 2025, including headwinds reflected in our fourth quarter results, primarily from rising costs related to our team member health care and self-insurance programs. We are certainly not pleased that these headwinds dampened an otherwise strong finish for our company in 2025, but we remain intensely focused on managing our business effectively to deliver the excellent customer service that drives long-term growth and profitability.

During the fourth quarter, we generated diluted earnings per share of $0.71, which represents an increase of 13% over the prior year. For the full year, we generated EPS of $2.97, which was an increase of 10% over 2024. As we noted in yesterday's press release, our 2025 results represent our 33rd consecutive year of annual comparable store sales increases and record levels of revenue, operating income and EPS. This remarkable track record of strong, consistent earnings growth is a reflection of the effectiveness of Team O'Reilly's customer service-oriented culture and our focus on profitable, sustainable growth.

Now I'd like to take a few minutes to provide some color on our fourth quarter sales results. Our comparable store sales for the fourth quarter grew 5.6%, which was at the high end of our expectations. Similar to the third quarter, growth in our professional business was the stronger driver of our sales results with an increase in comparable store sales of over 10% for the second consecutive quarter. We're also pleased to generate a positive DIY comp in the low single digits as this side of our business also performed largely in line with the trends we saw in the third quarter.

Our comparable store sales increase in the fourth quarter reflected growth in both transaction volume and average ticket value, with the average ticket growth representing the stronger of the 2 drivers. Average ticket grew in the mid-single digits on both sides of our business, driven by a contribution from same-SKU inflation of approximately 6%, partially offset by a headwind from the composition of our product mix.

As we have noted throughout 2025, the pricing environment has remained rational in response to tariff-induced product cost pressures. After a significant ramp in these cost pressures and corresponding price changes in the third quarter, the fourth quarter leveled out and the inflation benefit was realized in a very consistent -- was very consistent month-to-month. This dynamic aligned with our expectations given the timing of the impact we have seen in tariff and acquisition costs, and we believe also reflects a stable pricing environment in the aftermarket.

We were pleased with the positive contribution to comps from ticket count growth in the fourth quarter driven by continued robust growth in our professional business, partially offset by modest pressure in DIY transaction counts. Our fourth quarter performance in our professional business matched the consistent strength we saw throughout 2025. The value proposition we are creating for our customers is clearly distinguishing O'Reilly as the preferred partner to the professional service provider.

Next, I want to provide an update on the results in our DIY business in the fourth quarter. As we have discussed throughout 2025, we have remained cautious regarding the impact to consumers from broad-based inflation and macroeconomic pressures. This included our comments on the pressure trends to transaction counts we saw midway through our third quarter and into the beginning of Q4.

As we moved through the fourth quarter, we saw stabilization in the demand backdrop in our DIY business, including some modest improvements in DIY transactions month-to-month, but -- both in absolute terms and relative to our initial plan expectations for the cadence of our business. To be clear, we still experienced some pressure that resulted in slightly negative traffic comps as we finished out our fourth quarter. This was most evident in the small subset of our DIY business that is highly discretionary in nature, including categories like appearance and accessories.

On balance, we view the current sales trends in our DIY business is pretty consistent with what we have seen for the last several quarters now. However, we are pleased to not see any heightened pressure to the consumer that would indicate a more significant negative reaction to economic conditions.

Turning to the cadence for the quarter for our consolidated business. Our results were fairly consistent throughout the quarter, with December being slightly stronger than the first 2 months. This was due in part to a solid performance as we finished out the year in winter weather-related categories. These categories performed well even against tougher comparisons to last year. We view this season, both in the fourth quarter and what we have seen so far in '26, as typical winter weather and consistent with last year. Beyond the strength in our winter weather-related categories, we also saw strong results in the fourth quarter in maintenance-related categories, in line with the trends we have seen for several quarters now.

Next, I want to transition to a discussion of our guidance for 2026, starting with our sales outlook. As we disclosed in our release yesterday, we're establishing our annual comparable store sales guidance for 2026 at a range of 3% to 5%.

We want to provide some additional color on how we're viewing the economic conditions in our industry and the opportunities -- and our opportunities to outperform the market. Beginning with our industry outlook. We view the fundamental backdrop for the automotive aftermarket as relatively stable. While we believe the industry has experienced some sluggishness over the last several quarters from a more cautious consumer, we believe the drivers for demand in our industry remain very solid. There continues to be a very compelling value proposition for consumers to invest in the repair and maintenance of their existing vehicles to meet their daily transportation needs.

The U.S. car parc has seen an increase in total miles driven of approximately 1% over the last 2 years. We expect to continue to see steady growth in this metric supported by growth in the total size of the car parc. Due to the resiliency of our customers and the nondiscretionary nature of our business, we have confidence in a steady industry environment in 2026 even if we continue to see a cautious stance from consumers.

Ultimately, our performance this year will depend on our effectiveness in executing our business model, providing exceptional customer service and, in turn, gaining market share. To that end, our 2026 comparable store sales guidance includes expected growth in both our professional and DIY businesses that we anticipate will again outpace the industry.

For 2026, we expect to see continued growth in average ticket values, primarily supported by anticipated same-SKU inflation. As a reminder, our 2025 results reflected a muted impact from inflation in the first half of the year before we began to pass through tariff cost increases beginning in the third quarter. In total, 2025 saw same-SKU inflation of just under 3% on both sides of our business, and we anticipate similar levels in 2026. However, we expect to see most of this benefit in the first half of the year as the inverse of the 2025 timing as we calendar the period before the ramp in tariff costs and associated price increases.

These projections reflect our typical assumption of only modest incremental changes in prices from the current levels exiting 2025 as we move throughout the year. This assumption also reflects our best read on the broader pricing environment in our industry. As such, our guidance expectations do not anticipate incremental changes in tariffs or subsequent impacts to the pricing environment within our industry. Given the uncertainty surrounding potential future changes in this landscape, we still expect the industry to behave rationally from a pricing perspective and only react as necessary to realize changes in acquisition costs.

Consistent with our experience in 2025, we anticipate there will be limited incremental benefit within our average ticket growth outside of inflation. However, as we begin to calendar the comparison to the ramp in same-SKU inflation in the back half of '25, we expect a return to the normal dynamics supporting our average ticket. So for the back half of 2026, we expect growth in average ticket to reflect muted inflation and a more substantial benefit from increasing parts complexity.

We anticipate average ticket growth will be the larger contributor to our projected comparable store sales performance, but we also expect ticket count growth to positively support our comps in 2026. We believe professional ticket counts will continue to be strong and will reflect incremental market share gains on this side of our business.

Given our history of performance in growing our share in the professional business, our 2026 expectations anticipate some moderation in ticket growth as we compare against the high bar we have set. However, we have been extremely pleased with our team's ability to comp the comp and stack continued professional transaction growth year after year, and anticipate 2026 will be no different.

We also continue to believe that we have substantial opportunities to earn a bigger piece of the pie in our DIY business. In 2026, we expect DIY transaction counts to be pressured and slightly negative as a result of the long-term industry trend of better engineered and manufactured parts and extended service and repair intervals, along with our continued caution regarding the confidence of the entry-level DIY consumer. Even though we have seen some pressure to transaction counts on this side of our business, we still believe we're outperforming the industry and gaining share.

Before I move on from our sales guidance, I would like to highlight our expectations for the quarterly cadence of our sales growth in 2026. On a weekly volume basis, our guidance assumes our business will be fairly steady in 2026 absent unforeseen seasonal variability in weather. As a result, our quarterly comparable store sales assumptions are primarily driven by the comparisons to the results we generated in 2025. Based on the same-SKU inflation dynamics I outlined earlier, we would anticipate the first half of the year to generate a strong comp, at the high end of our guidance range, with the back half of the year reflecting the more challenging comparisons.

We are pleased to be off to a solid start in 2026, in line with these expectations, supported by favorable winter weather in January. Now I'd like to move on to discuss our capital investment and expansion plans.

Our capital expenditures for 2025 came in just under $1.2 billion, in line with our revised full year guidance range and up approximately $150 million from 2024. For 2026, we are setting our CapEx guidance at $1.3 billion to $1.4 billion. The primary driver of the increase in our projected investment is centered around our planned acceleration in new store growth.

As we noted on last quarter's call, we have established a target of 225 to 235 net new store openings for 2026, an increase of approximately 25 stores over our growth in 2025. This new store target contemplates a step-up in U.S. store openings as well as a similar growth in Mexico to the 25 stores we added in that market last year. The increase in new store openings is motivated by our continued strong new store performance and the confidence we have in our ability to grow strong store teams and effectively execute our business model across our North American footprint.

We are also pleased to have opened our first greenfield location in Canada in the fourth quarter of 2025. We anticipate a handful of our projected 2026 new store openings to be opened in Canada as we see the early fruits from the development of our organic growth machine in this expansion market.

The second major component of our 2026 CapEx outlook is our continued investment in distribution capabilities. Our anticipated investment in these projects is expected to be down slightly in 2026, but still represents a key element of our business model and growth strategy. Brent will provide an update on our current distribution projects and expectations for '26 during his supply chain update. Finally, our capital investment outlook includes an expected step-up in our ongoing investments to maintain and refresh the image and appearance of our store fleet as well as continued strategic investments in technology projects and infrastructure.

As I wrap up my comments before turning the call over to Brent, I want to take a moment to thank our team for their continued dedication to our customers and our company. We once again had the privilege to come together with the entire leadership team of our company at our annual Leadership Conference in January of this year. Our conference theme was "Built for This," and there absolutely could not have been a more appropriate rallying cry to capture the excitement we have for our company's prospects as we enter 2026.

Time and again, our professional parts people have proven they truly are the most highly-skilled and customer-focused team in our industry, and they continue to be the key to our success. We couldn't be more excited about the coming year, and I look forward to the next chapter of outstanding performance our team is going to deliver.

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 another strong year. Once again, your commitment to excellent customer service drove our performance in 2025. Today I will further discuss our fourth quarter and full year operational results and provide some additional color on our outlook for 2026.

Starting with gross margin. Our fourth quarter gross margin of 51.8% was a 49 basis point increase from the fourth quarter of 2024 and above our expectations. Our full year gross margin came in at 51.6%, representing an increase of 39 basis points over last year and in the top half of our guidance range. Our team was able to deliver this strong gross margin performance despite facing a headwind from the robust performance in our professional business for both the fourth quarter and the full year.

Our gross margin performance is the result of the collective efforts of our supply chain, store and distribution operations teams. Our supply chain teams, with outstanding support from our supplier partners, were highly effective in navigating the rapidly evolving cost environment in 2025 to drive improved gross margins through incremental improvements in acquisition costs and effective management of the pricing environment.

Our distribution teams were equally effective at driving efficiencies and capitalizing on our strong sales momentum. Our DC teams generated improved leverage on our distribution cost while relentlessly delivering the highest standard of service and support to our stores. Finally, our store teams executed at a high level to maximize our value proposition to our customers. Their ability to consistently provide excellent customer service and industry-leading inventory availability enabled us to generate a healthy margin in an environment of increasing acquisition cost.

For 2026, we expect to continue to see further expansion of gross margin as we calendar our gains in 2025 and capitalize on incremental improvements to reduce acquisition costs as we progress through the year. We have established a guidance range for 2026 of 51.5% to 52%, which at the midpoint would represent a 16 basis point increase over 2025. Our guidance reflects our continued confidence in the ability of our teams to effectively manage costs and leverage the premium value proposition that they create for our customers to generate improvements in our gross margin rate, despite expected incremental headwinds from a faster growth rate in our professional customer sales.

Our gross margin rate also reflects an anticipated benefit from the continued evolution of our business in Mexico, away from a distribution model to independent jobbers. As we continue to increase our store count in Mexico, we anticipate a continued rapid transition away from jobber sales that historically represented the majority of our sales mix in Mexico. The reduction of these lower gross margin sales creates a mix tailwind to our consolidated gross margin rate, but also modestly pressures our SG&A rate as we reduce the leverage benefit of these non-store sales.

From a cadence perspective, our quarterly gross margin remained fairly consistent throughout 2025, with the quarter-to-quarter differences reflecting the pace of improvement we realized as we progressed through the year. We expect a similar quarterly cadence for 2026.

As Brad mentioned during his remarks, our guidance for 2026 assumes a stable cost and price inflation environment. Our baseline assumptions include the normal puts and takes in the cost environment that we would expect in a typical year and do not include any projections for volatility related to changes in tariffs in either direction. Ultimately, we expect our industry to continue to behave rationally and have confidence in our team's ability to effectively navigate through any changes that we may encounter in the coming year.

Next, I want to provide an update on some supply chain and distribution initiatives. To start on the distribution side of our business, we are very excited to report the successful opening of our newest distribution facility in Stafford, Virginia in the fourth quarter. The addition of this DC opens up a new section of the map in the heavily populated and important untapped markets for us in the Mid-Atlantic I-95 corridor.

We're also making great progress on the development of our new distribution center in Fort Worth, Texas, and expect this facility to be operational in Q1 of 2028. This new facility will expand our available capacity in some of our most important mature core markets, enabling continued new store growth and support of increased per-store volumes that have grown significantly over the last several years.

Finally, our capital investment outlook for 2026 includes dollars allocated to future expansion and development of our distribution infrastructure. Coming into 2025, we had a similar provision in our CapEx plan that was ultimately allocated to the Fort Worth project. So while we do not currently have specific details to announce on the next slate of projects, we are steadfast in our commitment to proactively enhance our distribution network to support the store growth opportunities that Brad outlined earlier.

The success of our industry-leading distribution infrastructure is a direct reflection of the professionalism of our distribution operations teams. These leaders have proven time and again their effectiveness in planning, building and seamlessly opening new distribution centers, often successfully executing multiple DC projects at the same time.

Moving on to inventory. Our inventory per store at the end of 2025 was $870,000, which was up 9% from the end of last year. The investment exceeded our initial plans on a per store basis, driven by our continued opportunistic investments to support our sales momentum. For 2026, we expect per-store inventory to increase approximately 5%, comprised of investments in hub store inventories and targeted additions in store assortments. We continue to prioritize incremental inventory enhancements to capitalize on the opportunities that we see to accelerate our growth momentum and are pleased with the productivity of these investments.

Now I want to spend some time covering our SG&A and operating profit performance for 2025 and our outlook for 2026. Fourth quarter SG&A expense as a percent of sales was 33.0%, down 25 basis points from the fourth quarter of 2024. This reduction was the product of the favorable comparison to the $35 million charge that we recorded in the fourth quarter of 2024 to adjust reserves relating to our self-insurance liabilities for historic auto liability claims.

The leverage benefit came in below our expectations for the quarter as a result of an elevated per-store SG&A increase of 3.3%. A portion of this higher-than-anticipated spend reflects incremental expenses in support of our strong sales momentum, which finished the quarter at the high end of our expectations, as Brad noted earlier. However, the larger impact driving our spend in the quarter was the broad-based pressures that we saw from continued heightened cost inflation in our self-insurance programs, including headwinds in team member health care cost, workers' compensation and general claims expenses, litigation costs and auto liability reserves.

Average per-store SG&A expenses for the full year of 2025 were up 4%, finishing 0.5 point above our full year guide as a result of these same drivers. Outside of the headwinds that we faced from these discrete expense pressures, our remaining SG&A was in line with our expectations. Our ongoing priorities for our expense management remain focused on improving our operational strength in our stores, opportunistically pursuing enhanced technology and further equipping our teams.

As we look forward to 2026, we are planning to grow average SG&A per store by 3% to 4%. Our SG&A expectations reflect ongoing management of our expense structure to support our core operations and lean into the sales growth opportunities that Brad outlined earlier. We have also factored in continued plans to prioritize enhancements to our hub network, development of incremental tools for our teams, and improvements in technology, infrastructure and capabilities.

Also included within our assumptions is a cautious outlook regarding potential continued pressure in the self-insurance and legal line items that created the headwinds throughout 2025. While our recent experience for these costs have been more pressured than is typical for our business, at times in our history, we have experienced similar periods of accelerated above-trend increases. Ultimately, we believe the inflation growth rates for these expenses will stabilize over time, but we remain cognizant of the potential to see further pressures in 2026.

Based on the anticipated cadence of our SG&A spend during the year and how our comparisons to 2025 lay out, we are anticipating SG&A growth on a per store basis to be higher in the first half of the year than the back half of the year, consistent with the comparable store sales cadence that Brad detailed earlier.

Based on our SG&A expectations and projected gross margin range, we are setting our operating profit guidance range at 19.2% to 19.7%, which at the midpoint is in line with our full year 2025 results. Stepping back for a moment from the puts and takes that drove our operating cost dynamics over the past year and our expectations for 2026, we remain pleased with our team's ability to drive consistent top line growth at stable, strong operating margins. Our focus on enhancing our strong competitive positioning to sustain our industry-leading growth momentum is the strategic North Star that drives how we leverage our capital and operating investments to drive long-term growth and high returns.

Before I turn the call over to Jeremy, I want to once again thank Team O'Reilly for their continued hard work and unwavering commitment to our customers. 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 hard work and dedication to our customers. Now we will fill in some additional details on our fourth quarter results and guidance for 2026.

For the fourth quarter, sales increased $319 million, driven by a 5.6% increase in comparable store sales and a $94 million non-comp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. For 2026, we expect our total revenues to be between $18.7 billion and $19 billion.

Our fourth quarter effective tax rate was 21.5% of pretax income, comprised of a base rate of 21.8%, reduced by a 0.3% benefit for share-based compensation. This compares to the fourth quarter of 2024 rate of 19.6% of pretax income, which was comprised of a base tax rate of 20.4%, reduced by a 0.7% benefit for share-based compensation. The fourth quarter of 2025 base rate as compared to 2024 was higher as a result of the timing of recognition of certain tax credits.

For the full year, our effective tax rate was 21.7% of pretax income, comprised of a base rate of 22.6%, reduced by a 0.9% benefit for share-based compensation. For the full year of 2026, we expect an effective tax rate of 22.6%, comprised of a base rate of 23.0%, reduced by a benefit of 0.4% for share-based compensation. We expect the quarterly rate to fluctuate due to variations in the tax benefit from share-based compensation and the tolling of certain tax periods in the fourth quarter.

As we outlined in our press release yesterday, we have established our earnings per share guidance for 2026 at $3.10 to $3.20, which reflects an increase over 2025 EPS of 6.1% at the midpoint. This year-over-year increase in our guidance range reflects the anticipated headwind of approximately $0.04 from the increase in our expected effective tax rate.

Now we will move on to free cash flow and the components that drove our results in 2025 and our expectations for 2026. Free cash flow for 2025 was $1.6 billion, versus $2 billion in 2024. The reduction in free cash flow was driven by the accelerated timing of payment in the third quarter of renewable energy tax credits that were originally planned to settle in 2026, and higher CapEx, partially offset by growth in operating income.

For 2026, we expect free cash flow to be in the range of $1.8 billion to $2.1 billion. The expected increase in free cash flow is driven by the inverse impact of the timing of the 2025 tax credit purchase payment and growth in operating income, partially offset by the step-up in capital expenditures Brad outlined in his comments.

I also want to touch briefly on our AP-to-inventory ratio. We finished the fourth quarter at 124%, which was down from 128% at the end of 2024 and slightly below our expectations for the end of 2025. For 2026, we expect to see continued moderation resulting from our planned incremental inventory investment, and we expect to finish the year at a ratio of approximately 122%.

Moving on to debt. We finished the fourth quarter with an adjusted debt-to-EBITDAR ratio of 2.03x, as compared to our end of 2024 ratio of 1.99x, driven by a modest increase in adjusted debt. We continue to be below our leverage target of 2.5x and plan to prudently approach that number over time.

We continue to be pleased with the execution of our share repurchase program. And for 2025, we repurchased 23 million shares at an average share price of $92.26, for a total investment of $2.1 billion. Since the inception of our share repurchase program in 2011, we have repurchased 1.5 billion shares at an average share price of $18.77, for a total investment of $27 billion.

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, our EPS guidance includes the impact of shares repurchased through this call, but does not include any additional share repurchases.

Before I open up our call to your questions, I would like to thank our team for their continued commitment to the excellent customer service that drives our success.

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 questions.

[Operator Instructions] Your first question is coming from Scot Ciccarelli from Truist Securities.

Based on your history, how long could we see some of these expenses, like the health care that you mentioned, continue to run above historical levels? And then related to that, if SG&A per store growth is expected to moderate in 2H, does that also imply that's kind of the exit rate and we should expect more normalized SG&A growth as we roll into '27?

Scot, this is Jeremy. Thanks for the questions. I'll probably take the second one first here. I don't know that any of us would feel super comfortable talking maybe to where exit rate would be and how we would think about how we would view 2027, outside of maybe how we would just think in a normal environment, the kind of the structural pieces of where we've been managing spend within our business where we feel good about the efficiency of how we're attacking taking care of customer service and managing kind of all the core day-to-day expenses.

And then also have been pretty pleased with the places over the course of between 2025 and really the last few years where we've seen opportunities to lean into our business and I think equip some things that really help to drive that differentiation that helps us gain share and drive our sales momentum.

In terms of the first part of the question around the cadence, the timing of that, it's a little bit hard to completely troubleshoot that. I think you heard in Brent's comments that we're still kind of cautious for what we've seen there. The pressure that we've seen, candidly, I think has persisted longer than we would normally expect and has been a little bit of a story of increases on top of increases that we thought were already pretty dramatic. And so we do have a little bit of a cautious posture for that, for how we think about 2026, and in particular as we think about the first part of the year where we're not against as easy of comparisons because of the pressure that really came in over the last, I guess, half of 2025.

We understand, at some point, the base of that cost exposure builds up and we expect it to moderate and kind of stabilize over the course of time. But there's still some cautiousness, I think, as we approach how we think about that in 2026. And so that's why you kind of see a little bit of a balanced approach to how we thought about what that spend looks like as we move through the year.

Any other line items we need to be thoughtful of, just for modeling purposes?

Within SG&A, Scot?

Yes, correct.

Yes. So I mean, I think the component pieces that we talked about there, for sure, the pressured items I think that were different than what we expected as we move through the back half of 2025 were those self-insurance items. But we continue to I think see, and you can see it on our cash flow statement, a pretty heightened growth in the depreciation run rate that we've had. That's the key to the CapEx, and all the places that we're continuing to invest within our business. I think those are the areas.

And then for sure, a component piece of how we think about what we're managing and moving forward with and how we're deploying, I think, some tools within our businesses, the technology spend. That continues to be, I think, an important initiative for us.

Your next question is coming from Steve Forbes from Guggenheim.

Brad, I'm trying to think through the Virginia DC opportunity a little bit more. So I was hoping if you could maybe help frame up how you guys are planning to sort of build out the hub network and thinking through sort of capacity build behind Virginia. So I don't know if you can provide any color on the mix of stores that will be serviced from Virginia in the 2026 class. But really just hoping any color on gauging just how aggressive you guys are going to get sort of exploring the Northeast and the East Coast corridor.

Yes, absolutely. Steve, thanks for the question. Great one. Yes, we couldn't be more excited about the launch of our new DC. We have an unbelievable leadership team there in Stafford. That's a very large regional distribution center for us that kicked off with maybe 1/3 of its capacity roughly that transition from other distribution centers on the periphery of that area, from Greensboro, North Carolina, from the Ohio side.

Not much leverage to the north with our DC that sets up in Boston. But we -- I always like to talk about the fact that, depending on where you draw the line there in the upper Mid-Atlantic, between Virginia and getting all the way through to New York City, you can almost come up with 1/3 of the population of the U.S. and all the vehicles to go along with it, all the market share to go along with it, though you obviously have a lot of tough competitors, large and small.

But we look at really the way that we're going to store that market, really no different, Steve, than we look at any other expansion market. We're going to be -- our real estate teams are getting after that market, not only from a greenfield perspective, but also from a potential acquisition perspective. You've heard us talk about the Salvo acquisition of those 7 stores in that Baltimore, Maryland market.

And really the whole key to that distribution center, besides the 5 night-a-week replenishment that we can service out a couple of hundred miles, is that model where have well over 150,000 SKUs, once you build that DC out once you build out the store network, that will service not only overnight, but will service that Greater Washington, D.C. market basically every hour on the hour in that greater metro area, which provides just an unbelievable advantage over most every competitor we have, if not all of them.

And then we'll backfill that with our hub-and-spoke model no different than we have in any other parts of the country. Knowing there's a lot of traffic, a lot of cars in that market. We're going to make sure that all those runs from that city counter out of that DC, as well as any hub stores, we're going to make sure that it's absolutely appropriate for that market share that we know we can go get.

And the thing I would tell you in terms of kind of how that plays into the population that we'll bring in in '26, it will still be -- our new store cohort for 2026 will still be, even with Virginia, will still be really spread out over the U.S. When I think about the ability that our team has given us, from Brent to the entire supply chain team, as we've opened these DCs, we've opened up capacity not just in 1 or 2 DCs.

For example, in our network, we don't just have capacity, now that we've opened Virginia, in Greensboro and outside Akron, Ohio, out there in Twinsburg, we actually, when you lever those DCs, you end up levering next layer South and East and back West. And so that enables us to have backfill markets the same in a lot of our core, more mature markets. So even though we're really excited about the Stafford footprint itself and the next many years of progress, our '26 new store cohort will be still evenly spread over a lot of new and existing markets.

That's super helpful. And maybe just sticking with that a little bit and bringing it back to the expense growth profile, I think some of us, maybe myself for sure, thought there could be some pressure, right? You sort of build out the field to support the initiatives behind the expansion in the Northeast and the East Coast corridor, whether it's district managers, right, or dedicated commercial calling account staff. Is that a pressure in 2026? Like is there some deleverage coming from field build-out? Or is it more methodical and you're sort of expecting the productivity to sort of be onboarded that sort of neutralizes the field build-out initiative?

Steve, this is Jeremy. It's a really good question. And I would tell you that our model always I think is predicated on that organic growth kind of coming at some cost from a leverage pressure perspective. I mean we have that, I think, component piece every year. Some of it is for the types of infrastructure things that you talk about there. But some of it is just those are going to be the least productive stores when you bring them on. So to the extent that we've seen a little bit of an acceleration I think more broadly there, that's part of how we think about the broader cost structure.

In terms of just the how we think about building that infrastructure, I don't know that even within the Virginia DC, that incremental growth is all that different than what we would look at and see in other parts of our business.

Maybe the only nuance there that I'd call you to is we've really got a growth machine operating in 3 different countries right now. And some of the, I think, initial stages of building out that muscle in Mexico and Canada have included a little bit of what you're talking about there, where there's some maybe a little bit less efficiency in how we think about some of that growth because, looking at a company like -- or the growth that we're having in Canada right now, some of that infrastructure we're building for the first time, how do you go out and get after finding sites, and being able to build that construction muscle. So there's a little bit of, I think, that, that plays into our guidance. But by and large, it's mostly just how our flywheel was built.

Your next question is coming from Michael Lasser from UBS.

So your initial guidance for this year at 3% to 5% is 100 basis points higher than you guided originally for the outset of 2025. Is the only difference this year versus last year the visibility you have into inflation and like-for-like pricing? And is that -- if that's the case, what's the prospect that, if tariffs are rolled back, there could be broad-based deflation moving through the year in the industry?

Yes, Michael. I think it's a good observation. And as we sit here, I guess at the beginning of 2026 relative to where we would have been last year, we do, I think, fundamentally have a different pricing assumption built in. You're aware of what our historical prices is there, that we don't spend a lot of time and energy trying to predict those types of changes moving forward when we kind of set our initial guide. And even this year, I think what we've put in front of all of you is I think consistent with that idea that we're not trying to forecast a lot of different changes in the overall price levels, but we know that we'll calendar this benefit that we've seen.

The second part of your question, I can start there and Brad or Brent might want to jump in behind me on this. But historically, I think our industry has been pretty disciplined and pretty rational in hanging onto prices once we pass them through. When we think about the large amount of the business that's done on the professional side, where you're in your customers' businesses on a weekly, on a daily basis, and you're having to talk through those conversations, those are pretty hard-won pricing increases.

And over the course of time, you know that even if there is some, I think, relief from a cost pressure perspective, it's typically temporary, you'll see it kind of fill back in as you roll forward. And you don't want to have a lot of volatility in how you approach that from a customer perspective.

Ultimately, we'll see. We'll be priced competitively for the market. We think it'll behave rationally. We think we can earn a premium, gross margin premium, for how we take care of our customers and execute our business and the value that we create. And so we think that that holds out well. But ultimately, we'll just have to see where the market goes on it as well.

And Michael, this is Brent. I would add just on the tariff rollback front. I know that question is hanging out there. But we still believe that there's an environment out there with the administration that's focused on tariffs. And whether the first method worked, we feel like there's other levers that can be pulled. And we -- as Jeremy said, when we think about the outlook for '26, we're assuming what we know now, and we'll see where that goes.

Okay. My follow-up question is you're starting out the year with an assumption around 3% to 4% SG&A per store growth. Over the last few years, you've under-calculated or the growth rate had been a little hotter than what you had initially expected. What's the risk that the same scenario plays out this year? And we are seeing a similar amount of elevated growth in SG&A from another player within the industry. So to what degree is this just a function of the competitive environment, cost of doing business going up and we should not be expecting this to moderate over time?

Yes. No, it's a good question, Michael. And I think it's important, I think, for us to probably start where you started in talking about how has this looked over the last few years. Because I think that the story for what we've seen maybe in the last 6 months of 2025 has been a little bit more discrete for us, I think, at least relative to our expectations, and where we've seen a little bit more heightened inflation from items that are obviously a core part of how we have to run our business but are a little bit harder to control and are not some of the elective things we've done.

When we think about some of the rest of where we've managed our overall cost structure over the last, call it, 2, 3, maybe even 4 years, a lot of that has been a little bit more predicated upon where we feel like we've seen opportunities to lean into our business, to prioritize certain actions and steps that we think have been effective. And that in and of itself, I think, has moderated a little bit as we've moved year-to-year.

And we would tell you that we feel pretty good about how we go to the Street every day and the proposition we have. It doesn't mean that as we move through this year, we won't see additional places and opportunities. But some of what I think you've heard us talk about and what's been built into our model for I think a long time, but are also areas where we've leaned into the business a little bit more, are things like our hub store investments and how we think about the distribution capabilities, and leaning into those as our sales momentum has supported that.

So those are always, I think, on the radar screen for us. Those have been very opportunistic types of moves. We think that they have been productive in allowing us to contain -- to drive the sales momentum. And I'm talking about over the last several years. And so I think that's important. I don't -- as we sit here today, I don't think that that's a contributing cause that, industry-wide, that's just now different table stakes. We think that those are things that yield a positive benefit to us as we've moved.

As we think some of the other items, we talked about it I think already in the prepared comments and in the first question, I think we're cognizant of the fact that it could be pressure. Hopefully, we see that stabilize and it's less of a concerning item. But ultimately, we'll just have to see how some of those other items play out.

Your next question is coming from Greg Melich from Evercore ISI.

I wanted to follow up on some of the softness and cautiousness that you've talked about from the consumer. I think you mentioned in the last call that you saw some potential DIY deferral. How do you see that trend? It sounded like maybe a little better as we got into the winter. And then historically, linked to that, how do tax refunds, when they're elevated, historically impact both the DIY and do-it-for-me sides of the business?

Greg, it's Brad. Great question. I'll start out here and let the other guys chime in. So yes, as you know, these last couple of quarters, specifically last quarter, we had, really for the first time, talked about seeing some pressure to some of the larger ticket jobs, which was, again, kind of the first time we've seen that in more of the failure and maintenance categories. We've seen it for a longer period of time with discretionary stuff. But really Q4 [Technical Difficulty].

Still there?

Yes. Are you still there, Greg?

I am. I just -- I lost you for a second, Brad.

Okay. But yes, so just kind of wrapping up on that point, Greg, we -- it was really similar to what we saw last quarter on the larger ticket jobs, et cetera, though we did see some pretty good signs there in December as some of the winter weather started to kick in and things like that.

But generally, overall, Greg, I think we would categorize the consumer very similar to what we have. Still cautious, still watching expenditures and things like that with heightened inflation across homes and everything they do. But we continue to be cautiously optimistic at the same time with the resiliency of our business, the nondiscretionary nature.

And then really coming into tax time, to the second part of your question, every tax season is a little bit different. It's normally a busy time for us. I think it's still yet to be seen. As much positivities there's been on just what those dollars could actually look like, we still kind of want to wait and see just kind of how that really plays out across the different income levels. We obviously have a very low-income to middle-income DIY consumer and then kind of a middle-income to higher-income DIFM consumer. And so again, we just have to wait and see. Weather overall has been pretty conducive to business and we're right all over the tax season here, so we'll see how it plays out.

Yes. And just to jump in, in case it cut out for anybody else, I think just to summarize where Brad was at on the initial part of your question. Saw that, some of what you talked about in third quarter as we moved into fourth quarter, continue I think to see similar dynamics. They didn't accelerate from there. And I think as we kind of moved through the quarter, we saw a little bit more of a leveling out, to the point that we feel a little bit more like what we're seeing in the DIY business is more consistent with what we've seen over much of 2025 in 2026.

In addition to what these guys have already said is -- they've outlined pretty well what we see. The other thing is though that we still saw what we feel like we're pretty substantial share gains on both sides of the business even in the quarter. So we feel like we're well positioned or a challenging environment as well as a less challenging environment.

Got it. And then just a clarification, the 600 bps of same-SKU inflation, if average ticket would have been up, say, 4% to 5% because you had fewer items in basket and mix, is that a fair way to summarize 4Q?

Yes, that's correct. It's a little bit more of the mix of the basket than it is the pressure on items in basket, although there's a little bit of that there.

Part of the mix question too is just the normal kind of differences and how different component pieces of the basket perform. We had a lot of kind of the maintenance types of categories that did really well in the quarter, that are typically a lower ticket or a lower basket size type of transaction. So there's a little bit of that dynamic that's got -- that's probably just the normal course of how mix can change quarter to quarter.

Your next question is coming from Zack Fadem from Wells Fargo.

Just want to clarify on the comp guide, maybe asking in a slightly different way, is we do have a couple of feet of snow on the ground, we've got mid-single-digit inflation and largely expect a bigger than typical tax refund season. So I just want to understand, like to what extent you are or are not incorporating these factors in your 3% to 5% guide?

Yes, Zack. Yes, we always say around here, we're much better selling auto parts and kind of focusing on what we control than we are predicting the future. But we spend a lot of time on this plan and feel really good about where we've landed, balancing out the opportunities with still yet some cautiousness on the consumer.

So I think generally, I think again still yet to be seen on how weather plays out over a longer period of time. While we did have some good winter weather, to your point, here in the first part of the year, which really in our industry, the almost 30 years I've spent here, the extremes, long, tough winters and hot, hot summers, obviously play out well for us over a long period of time.

That said, there can be a lot of puts and takes in the short term with weather. Some of the weather that's hit some of our southern markets doesn't pay off in the mid to long term near as much as it does when the snowplows are on the road hard and heavy for months on end in some of the northern markets. So some of those can be a little bit of a takeaway, and we'll just have to see if that really plays out beyond what it does the next couple of months. But generally speaking, Scot -- or Zack, again, we feel really good about our guidance, feel good about what we can control this year, but also still have a certain amount of cautiousness with all the pressure on the end consumer.

Got it. And then as you think about the margin good guys and maybe bad guys in 2026, at the gross margin line, maybe we could talk about magnitude of supply chain and distribution tailwinds on the do-it-for-me mix drag offset by Mexico potential benefit. And then when you think through just the impact of health insurance and all these other factors, how long or to what extent are you incorporating those elevated levels as you think through 2026?

Yes. No, great questions. I'll try to make sure we kind of hit on all the points that you asked about there. We think about the gross margin, I guess, dynamics as we move through the year within kind of the context of how we think about the range of our gross margin. The magnitude of, I think, any of the individual drivers that are puts and takes either way are not as large as even that range.

So we're talking about items that are typically 10 to 20 basis points, maybe a little bit higher than that in each of the pieces. But for sure, a decent-sized, I think, headwind from the professional business growing as fast as it did, and particularly if you look at the third and fourth quarters where that was heightened. But on the positive end, I would tell you, both, I think, positive drivers. I think the acquisition cost improvement is a little bit a larger piece of that than what we saw on the distribution side, but I think also meaningful efficiencies from a distribution perspective.

Now when we look at just how that lays out for next year, I think knowing the gains that we've had this year and the opportunity to calendar those, we feel good about what our gross margin outlook is last year, I think more cautious of what we're going to be able to gain there than what we saw in 2025, which is I think a great gross margin year for us really on both of those, I think, positives that you look at.

And then just kind of the changing evolution of the Mexico business is a help. It's probably 4, 5 basis points than it is a big change. But it's a delta that moves us.

In terms of the question around how we're thinking about the cautiousness of pressure, that is, I think, on the SG&A side, for some of the types of costs that I think have bit us here in the last couple of quarters, we do think that that's more heightened in the front half of the year. Brent mentioned that in his prepared comments, I think, as much as anything, because the comparisons get a lot easier as you move into the balance of the year.

But we do expect that as we think about how the year plays out for our SG&A guide, that we would see more pressure from a dollar perspective on per store growth than in the front part of the year, particularly first quarter, and we would see kind of imbalance for the full year. Now that does match up with how we think about the sales cadence as well that we talked about I know quite a bit on the call already this morning. And so we probably land in a place that's, from a leverage perspective, it's a little bit more consistent quarter-to-quarter for our expectations of operating profit leverage, SG&A leverage. But for sure, kind of the thought process of how the dollars play out is going to be more pressured in the front part of the year.

Your next question is coming from Brian Nagel from Oppenheimer.

This is Brian Nagel. I want to go back, I know we discussed it a lot, but just the SG&A and SG&A per store guidance for '26. The question I want to ask is, we've been talking about these elevated expenses for a while, as you look beyond '26, given how persistent these expenses have been, I mean, are you starting to identify more aggressively levers that could be pulled, so to the extent these pressures continue, that internally O'Reilly can start to manage these costs better?

Yes. No, it's a great question, Brian. And interestingly, not -- I think not new questions. I think part of what we've experienced over the course of the last year, and the things that Brent lined out, some of the self-insurance cost pressures, those types of things around how we manage our vehicle fleet and team member expenses around health care and workers' comp, those types of items, it's been a big -- it's a big focus. A big part of how we run our business, has been for a long, long time.

And I think part of what we're running up against is it's been a pretty tightly and effectively controlled part of our cost structure for a long time. And so we've had some exposure that as inflation has really rolled in and we've seen it, that we don't have, I think, a lot of easy and quick levers to reduce what something that has always been a key management item for us.

Having said that, however, so many of these items are key items in stress and priority. And some of the things that we talk about from a technology perspective are things that we want to lean into to help us to manage safety and how we manage the overall value and what we're able to deliver from a team member benefits perspective. And so those things continue to be important pieces for us to manage and will be things, to your point, at a -- you'll get a high level of attention. But they also have always been I think important parts of how we think about managing our business well.

And so that's right -- I think the right outlook for you. But over the course of time, I think that gives us some confidence that not only does the market slowdown and the inflation environment normalize a little bit there, but that we'll continue to work hard to do everything we can and mitigate that pressure.

Your next question is coming from Steven Zaccone from Citi.

I want to follow up on the same-SKU inflation. So can you just help us understand the cadence of the year in a little bit more detail? Will the first quarter be similar to the level of same-SKU inflation that you had in the fourth quarter? And then someone asked earlier about this hypothetical if tariffs are reduced. How would that impact you from a timing of inventory perspective, right? If costs come down, would that more likely be like a second half of '26 phenomenon at this point?

Yes, Steve. I think on the first part -- and Brad talked about the -- how we think about inflation cadence in his prepared comments. It's really mostly a function of what are we comparing it against and what do we see in 2025. As you'll remember, first quarter was pretty muted in inflation. I think it was maybe 0.5 point. So we would expect to see a similar level of same-SKU. We'll ultimately have to see how it plays out. Some of that can be impacted by just the mix of things that you sell too, in terms of the magnitude of some of those cost changes.

But when we think about where price levels sit now and understanding that the turn of that same-SKU benefit will benefit us more in the first half than the second half, that's kind of that thought process. And as we start to move up against periods where we realized a benefit in 2025 on a -- think about it on maybe a stacked basis, you're going to have similar results, but kind of a declining benefit as you move through the next year.

What was the second part of that?

On tariffs.

In terms of how we think about the tariff impact flowing through from a cost perspective, that's -- being a LIFO reporter, and we've been I think pretty straightforward over the course of the last few years in just talking about what we see reflected in our gross margin results and our cost of goods sold line, is more akin to what the current costs look like.

So to whatever extent that we see cost reductions, they typically will show up pretty quickly within our gross margin results. And so that's kind of the right way to think about sort of that tariff cadence that we might see in 2026. Again, with I think the note that Brent made earlier that we anticipate a pretty stable environment there. We might see some changes, but ultimately think that there are other methods by which the administration will have to execute what they want to do from a tariff landscape.

Okay. And the follow-up I had, Steve asked earlier about growing in the Northeast. Can you just help us understand where you are from a market share perspective maybe DIFM in like the Mid-Atlantic and Northeast, versus where you are from a market share perspective in some of your mature markets? How do you see the pace of that sales lift happening over the next couple of years now that the DC is opening and then probably more to come?

Yes. No, great question, Steven. Well, the good news is with us and our industry, if we work in this $170 billion industry, we have roughly 10% share, so surprising -- maybe surprisingly, maybe not so much for others, even when you look at our most mature markets, it's not the difference in having a 5% share and a 50%. It's, even when I look at our business here in Missouri or Oklahoma, Kansas, Arkansas, down in Texas, we still have so much market share to go get. And so the differences aren't near what you might think.

Now we've operated kind of in that core of the Mid-Atlantic, the Carolinas up into Virginia, kind of southern part of Virginia, like the Roanoke from the west, over to Richmond, over to Virginia Beach. We've been in those markets for many, many years. They were just more on the edge of where Greensboro would effectively service. And so those markets, along with the North Carolina type market, we would be a little bit more mature, but still immature overall. It would be a lot closer to our average 10% share than it would be some dominant position in terms of big percentage.

And so we don't necessarily disclose by market what our penetration is, but the markets that, as you get up into Northern Virginia and you look around the D.C. metro and you look at Baltimore and, obviously, as you get into Philly and New York, we don't have any presence. And so it would be a 0 and all opportunity for us.

But really, all of that is going to depend on our ability to execute our business model, do well on both sides of the business. And all that happens only by building really great teams at the store level, the sales force, all those things. And so we still have a tremendous opportunity in that market, but we still have a tremendous opportunity from a share perspective even in our most mature markets.

We have reached our allotted time for questions. I'll now turn the call back over to Mr. Brad Beckham for closing remarks.

Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our first quarter results in April. Thank you.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

Okay. Moving along, another absolutely terrific company and one that has been an amazing investment for investors who have entered almost at any point over the course of the last 20 years at O'Reilly Automotive, one of the leading aftermarket parts retailer and distributors that are out there. Just an absolute rocket ship from a stock perspective, just under 850 million, actually less than that now. I'll use the numbers when the book went to print, but about an $86 billion equity cap company, about a $92 billion total enterprise value.

We're delighted to have Brent Kirby, the company's President; and then Jeremy Fletcher, the company's CFO, here. And I'll let their numbers and their words speak for them as opposed to me. But thank you, gentlemen, very much for being here.

Thank you.

Thank you.

I guess just to start, I think that your story is well enough known in this room, but maybe to just take a couple of minutes about what you've seen over the course of the last 6 months to a year and where you see O'Reilly progressing for the next couple?

Sure. Yes, I can start. Good afternoon. Yes. O'Reilly, just a quick background on the company. I think most everybody knows, but the company started in 1957, Springfield, Missouri, the O'Reilly family started as a family business, warehouse distributor on the automotive parts side to begin with. As the company continued to grow kind of from the center part of the country out, really kind of shifted that strategy to a dual market strategy to pursue retail as well as wholesale and continue to grow through acquisitions, West Coast, South and really all over the country.

A lot of growth over the last -- went public in 1993 and have had a lot of growth over the years subsequent to that. Big opportunities for us, we see internationally as well in Mexico. We purchased a company down there in 2019. We've got over 100 stores there now, have a DC there and purchased -- feel like a great company, made a great acquisition about 1.5 years ago, 18 months ago in Canada as well, Vast-Auto. So we're just super excited about the growth opportunities in North America.

So to kind of catch up the -- to your question in terms of last 6 months and kind of going forward, this is just a resilient industry. And we feel like we're well positioned within this industry when you think about our dual market strategy. We feel like we have 2 strategic strengths and advantages in terms of how we go to market. Number one, it's our team, professional parts people. We have a fantastic team. We have a fantastic farm system where we grow our own leaders from the field.

And so -- and then we also go to market with parts availability and parts availability and our industry wins. And so depth, breadth, late model coverage, all those different things. So obviously, the industry has been some challenges through the COVID years. We saw a lot of share gain there. And then coming out of that, the subsequent years, what we've seen is the supplier base continuing to get very healthy, healthier than it was prepandemic, probably the first time -- this is the first year that I feel like we could say that since the pandemic, even in light of the tariffs and some of the noise we've had there. Some of the uncertainty that was created earlier this year, I feel like a lot of that is beginning to settle.

Certainly, there's been some cost pressure, both on the manufacturer side when you think about raw materials, labor. We've experienced some cost pressure in our business with labor and some other expenses as well. But we still see a very resilient industry, 298 million -- 289 million light-duty, medium-duty vehicles on the road in the U.S. have to be maintained. So demand has continued to be constant.

Consumer has been under pressure on the lower end, probably in the last little bit 12 -- 6 to 12 months, we've seen just a little bit of that, not a ton of that, but we have seen -- we've actually, believe it or not, seen more trade up than we've seen trade down. We have seen trade down in some very isolated categories, wipers being one of those that we've talked about. But we see some stabilization.

We continue to see rationalization across our industry in terms of passing costs through as they come through to the consumer. But we're very bullish long term on, number one, our growth opportunities across North America. We're super excited about opportunities in Mexico, Canada as well as domestically. We still think we have a lot of opportunity to backfill markets. We have a new distribution center opening in the Mid-Atlantic.

We have a lot of untapped opportunity geographically on the East Coast and the I-95 corridor. So long term, we feel very good about the next 6 to 12 months and where things are going to go. And I know there's a lot of question around the consumer and the pullback right now. But I think history would tell you in our industry, when you do see a pullback, it lasts for a quarter or 2, maybe 3, but customers have to maintain their vehicles.

Just starting off, you mentioned how important it is to get the product to the customer at the ideal amount of time. Can you just talk to us about your distribution network and the logistics of being a top automotive aftermarket distributor?

Yes. Great question. And again, I give the O'Reilly family a ton of credit. Really as the company was growing, really, our strategy has always been have our distribution centers where the populations are and where the vehicle populations are because we recognize the importance of immediacy of need in a very nondiscretionary business. So our DCs, 31 regional DCs, they're located in the major DMAs across the U.S. where the people are, where the vehicle count is.

Every one of our distribution centers has a different SKU count and a different SKU profile based on the vehicles and operation data for that geographic area. And one of our regional DCs is going to carry 150,000 to 160,000 SKUs. And we serve -- every store in our chain is replenished 5 nights a week and multiple times during the day. Those distribution centers have, what we call, city counter service. So within a 250-mile radius of that DC, we're making multiple runs, touching every store multiple times a day.

So what that means is if I'm a customer and I need an alternator for a 2003 Chevy Cavalier, and it's not in that store, that team member behind the counter can say, I don't have it in stock right now, but I'll have it at 1:00 p.m. today. So we have very time-definite promises around each of those touches to those stores that give us -- we feel like an advantage when you think about the immediacy of need for -- especially for hard part categories that you have to have to have your vehicle back on the road.

And people talk about Amazon Prime and half day, 24 hours, 12 hours, that's not fast enough in our industry. So the other thing really is our hub store network as we continue to build out that -- those regional distribution centers that I spoke about. We have over 300 hub stores where we have additional pools of inventory where we know we're going to have demand. And those hub stores can have anywhere from 60,000 SKUs to 110,000 SKUs in them depending on the market opportunity that we see.

A typical spoke store would have 22,000 to 25,000 SKUs in it, just to give you an example. So that tiered network of hub stores, and we're constantly adjusting that because if you think about the demand curve for late model coverage, early coverage, we're managing demand curves very discretely for literally hundreds of thousands of parts across all of those locations.

So as we do that, we have SKUs going into those hubs coming out based on demand. As that demand curve hits the top of the bell curve, we'll push those SKUs down into those spoke stores as well. And then as we see the demand for that particular part receding on the backside of the bell curve, we'll pull that inventory back up into hubs and then ultimately back into our regional DCs for those longest tail SKUs. So it's definitely a competitive advantage for us. Our team does a fantastic job managing that. But really, how we go to market distribution is the backbone of making that time-definite promise that our professional parts people are able to make every day.

A large part of your competition is -- are these local, maybe regional warehouse distributors. Are they able to keep up with kind of your distribution network and technological investments? Or is this a source of share gains in the future?

We're blessed to be in a very fragmented industry. And we say all the time internally is as successful as we've been as much share as we've gained, we got 10% of the total addressable market in North America. And so that is just what that screams to us is opportunity. That means there's 90% more out there for us to go get and compete to win. So the WDs and smaller regional players to your point, and we compete against a lot of great competitors in this industry, both the majors as well as some of the smaller ones that you're talking about.

What I would tell you is we feel like our scale gives us a decisive advantage in terms of buying and cost out of goods and opportunity versus a lot of the regional players. So scale is our friend, but we do compete against a lot of great WDs. I will tell you, some of those smaller players, the ones that are really good coming out of COVID got better and still compete well. There were a lot that didn't survive that, and that was a little bit of a thinning of the herd in some respects. But we still feel like we've got a lot of opportunity to take share from a lot of different sized competitors across the country.

Do you plan on opening 200 to 210 [indiscernible] stores this year, in the earnings call that next year you plan to open 225 to 235 stores. Can you just talk about the return on investment here and the decision to continue growing the opening?

Yes, I can probably jump in there and give Brent a little bit of a break. We've obviously been a company over the course of time that I think has demonstrated a real commitment to growing organically. It's been -- it's really been the primary use of capital beyond [Audio Gap] that has always been, I think, a pretty disciplined process for us in how we think about returns.

And I think that's -- it's important from the sense of how we view it in kind of the traditional sense, how do we think that, that investment produces in store and the stores being able to generate a return, and how do you think about that and calculate that. But for us, it's also pretty important just from a broader brand value and customer impact that we're able to open stores that not only can perform out of the gate, but can execute on a value proposition and a service proposition for our customers that validates, I think, what the long-term strength of our brand is.

And it's for that reason that as I think strong as our performance from a new store perspective has been, we're also pretty cautious in how we pace that performance out, probably the single most important factor in new store growth and the performance is how well we can assemble a team of professionals to be able to take care of our customers and establish really from the first day the stores opened a great customer experience, great value proposition for our customers.

And so that's been more of a gating item, and we've been pretty cautious in how we've thought about how we can scale those teams. You did reference that we're moving that target up with our expectations for next year and feel comfortable in doing that. I think in large part because from where we sit today, our opportunities to leverage the development of those new store teams are as strong as they've ever been.

Certainly, we've got new markets within Canada and Mexico that are still early stages, but are starting to become platforms for us. But then especially, I think, domestically here in the U.S., our ability to grow both in parts of the map where we're not at today or underpenetrated. And Brent mentioned the addition of our distribution center in Virginia. That will give us the ability to continue to expand in those markets and to support new teams really out of a lot of different existing footprint where we can grow and support.

But then really, when you look at the rest of the map, there's a lot of assembled talent really across the country, and we've shown our ability to spread that growth out and develop really great store teams. And I think that's allowed us to approach different levels of density than maybe 10 years ago, we would have thought we would have seen. So it's a very important part of how we think about capital and where we want to deploy it. We think it's been and will continue to be a primary use of capital for the company.

Michael?

It's Michael Lasser from UBS. Probably won't surprise you to know I have a 2-part question or one question and a follow-up around inflation. One is there's been some controversy and debate around how the industry is looking at inflation. We've heard different things from different players. If you could outline how you see the inflation contribution to your comp unfolding over the next couple of quarters, that would be very helpful. And two, one of the points of debate on O'Reilly has been that its growth in SG&A per store has been elevated over the last few years.

If this is just a reflection of the cost of doing business going up, is there a reason that you wouldn't pass along those increased costs to the consumer in the form of higher inflation moving forward even after you experienced this spike from tariff-induced inflation?

Thanks, Michael. I can probably get started there, and Brent may want to chime in with some more. Starting on the inflation question, absolutely good question. As you'd expect, it's, I think, the primary question that people are asking this week, maybe that in the consumer. I think important from a perspective of how to think about this moving forward, but I would also tell you, frankly, it's exactly kind of what we would expect at this point in time.

At any given point in time, when you see a cost environment, a pricing environment kind of influx like we're seeing, if you measure it at any individual point in time, you're just going to have some timing-related items as it impacts the different participants. And we talked a couple of weeks ago when we released our third quarter and how we're just looking at moving forward, we can give you our perspective on what we're seeing, but also understanding that we're not in control of the market, and we'll ultimately see where others land.

From our perspective, what we've spoken to is we feel like we've got pretty good visibility and have seen the lion's share of what we would anticipate seeing from a cost perspective. We've obviously worked pretty closely with our suppliers throughout this whole process of navigating the tariff landscape. And as much as some of the headlines have kind of changed here and there, I think the actual broader tariff environment has been stable, I think, for a little while now and has put us in a position where we could work through that manufacturer base to understand what we've seen and feel comfortable that we've both had the ability to pass through that in pricing.

But that also we've been able to think through and to move through most of what we would expect to see from that standpoint. And we are very proactive in how we view the response to those cost pressures and want to make sure that we are -- have some leadership position in where we think the pricing should go from a marketplace perspective. Because of that, we've said kind of what -- where we sit today and knowing that fourth quarter will end up a little bit higher, but also expect as we exit the year that we would have seen a lot of what we might expect to see.

Now in terms of how to assess where the broader market is at, we'll have to watch a little bit there as well. We know others, I think, have had different points of insight into where they may think they need to go where the broader market might go. We're certainly not the final price set in the market, and it's not been our practice or experience to try to take a different strategic approach to pricing if everyone else moves up. So if we see same SKU that continues to persist into 2026, we would anticipate that we would follow the market, and there might be some other benefits that we would see there. But from where we sit from our perspective at this point, that's kind of where we've landed.

Yes. And Michael, the only thing I would add to, when you think about what has passed through to this point, there's -- obviously, there's the headline of this percent or that percent for this country or that country. But what I would tell you is, honestly, the pricing and how it flows through is there's art and science to it. And to Jeremy's point, there's going to be varying degrees at any time check -- point in time as this moves through the industry.

But our merchandise team has done a fantastic job working with our supplier base, looking at it by line -- by category and by line to negotiate what those -- what that new cost may be on a certain item versus peanut butter spread. So there's been just a lot of great work there. But then coming back from the science to the art, our pricing team does a fantastic job monitoring the market as well.

And while we're in a very rational industry, again, it's moving through our competitors. It's moving through the entire supply chain to the consumer at a different pace, and it's very dynamic. So we look at that weekly. And we are always going to be in a space of being competitive, but we also are going to be in the space of knowing that there's a premium for what we offer in terms of our supply chain, our availability, our parts knowledge.

And we position ourselves there on a continuous basis, literally week by week. So when we talk about a quarter or we talk about a month or we talk about what quarter is it going to -- the bell curve is going to peak, it's -- we're working our way through the curve with every quarter we go through. So I just want to call that out. I know that's the million-dollar question everybody wants the answer to, but it's a very dynamic cadence as those things move through.

I think maybe just even beyond kind of that point in time and where are we at and all of those things, I think it's important to note, we don't think that we exit this in any way, shape and form where the broader pricing dynamic changes. Ultimately, this is a short period of time of adjustment, and we'll land where we land, and we would expect that I think from an industry perspective, everybody lands in the same place.

From an SG&A perspective, to the other part of your question, absolutely, we've been on an investment cycle there, and we've had some other pressures as we've seen this year. Again, don't want to get caught up in too myopic a view of how you think about that from a short-term perspective. But broadly speaking, we've shown as a business that we're able to get strong productivity out of our operating cost spend, expect that our focus will still be to generate operating profit dollars and [Audio Gap] deposit in the bank.

And ultimately, over time, we think that, that gives us the ability to leverage and that the industry largely treats those cost dynamics in a similar way to what you see on the product acquisition side that I think you would be comfortable. Now what that looks like, we'd have to wait and see how the broader cost environment plays out moving forward.

Brent, you mentioned that the pandemic thinned the herd a bit. Do you see the current price environment doing that, setting that up again for '26, some of the smaller players seeing a higher cost of inventory might destock and sort of allow the bigger players to take more share next year? Or is the herd generally healthy and sort of status quo for '26?

That's a great question, Bret. I think there will be some of that. There's going to be -- the supplier base is very diverse. I mean we deal with over 400 supplier partners. And we're by no means touching all of the supplier capacity that's out there globally when you [Audio Gap] that, that will be a challenge for some of the smaller players. But again, I think the better ones will adapt and they'll rationalize their base accordingly to continue to do what they do.

Max Rakhlenko, TD Cowen. Two quick ones. First one on DIFM. You guys service a lot of different channels. So just curious if you're seeing any sort of differences in trends across verticals, maybe a little bit softer in tire or anything else? And then separately on DIY, there's a lot of excitement around what refunds could look like next year. So just any sort of times in history you could point us to when refunds have been a little bit bigger or how the aftermarket was able to capture its fair share of that?

Yes. On the professional side of the business, it's -- I think it's been strong for us across really all the different channels. Others might have a little bit more of a nuanced view. We're not very intensely concentrated in any of those. We feel like we serve the entire market pretty well. So we're not as cognizant. I think more often than not, it's not a specific channel that we see variability in. It's the providers within each channel.

The stronger people are going to do better, but we see that from a more broad-based perspective. First quarter, we'll see what tax refunds do. It's important for the business. It's a good thing to see. But also, it's -- you have to think about it in the context of what's happening more broadly, and we'll just have to wait to see. In terms of what our experience has been in the past, more tax refund money is better, less is not as good.

Greg Melich with Evercore ISI. One of the big debates has been the DIY big ticket deferral that you guys talked about a few weeks ago. Just unpack that a little bit more as to where you saw it, what you think might be causing it? Do you think deportations or immigration changes may have something to do with it? Just sort of help us understand where that comment came from and what you're watching for to go forward to see the deferral sort of ends.

Yes, happy to start there, and Brent may chime in. I'd love to give you a lot more really in-depth color about it. But candidly, I think we're in early stages of what that might look like. And I think the timing of our comments in the period that we're in is exactly kind of what we've seen historically, if there's been some shock to the consumer and the types of thing that we can see pullback.

What we've seen and how we would characterize it is still pretty modest at this point. And so it's a little bit more challenging to parse some of the -- like the specifics around how it would look, knowing that there are lots of factors at play. I think more broadly, it's likely more reflective of consumer caution or confidence than it is the real health of the consumer at this stage and how we would view it, that's some of what we would see from a larger ticket perspective.

But it's also of the type of things that we might have seen in previous historical cycles that -- where you see just a little bit of a pressure there. Ultimately, we'll see to whatever extent it persists and builds. We're cautious for that, but we also we also feel like some of the types of categories that we're paying close attention to, some of those bigger ticket items have also been pretty favorable categories for us.

And our comparisons are tough. Our share gains have been, I think, pretty robust. Our performance early in the year was strong as well. So I think it's important for us to want to continue to be cautious about it. But candidly, that's sort of been our message all year long that this is something that I think we have to pay attention to. The more important factor from our perspective is that this is an incredibly resilient industry.

It's a very resilient customer, and we can all go crazy in short periods of time trying to think about what's the push/pull and what's the next month, quarter, week going to look like. Ultimately, the driving factor behind demand in our industry is people absolutely need their vehicles. They want to maintain them. And over the course of time, if the consumer gets really stressed, then it's the thing that they're going to prioritize because they can't afford a car payment. All of those things are still in place. We feel confident in that. We won't likely be talking about this stuff at this time next year. But obviously, there's a lot of focus on it now.

Next year will be #50 for us. So we hope we're not talking about it, but we will be talking. So thank you both for being here, and we always greatly appreciate the support.

Yes, absolutely.

Thank you.

Welcome to the O'Reilly Automotive, Inc. Third Quarter 2025 Earnings Call. My name is Matthew, and I will be your operator for today's call.

[Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin.

Thank you, Matthew. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 2021 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, and we intend to be covered by, and we claim the protection under the safe harbor provisions for forward-looking statements contained in 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-K for the year ended December 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 third 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'll begin our call today by expressing my appreciation to more than 93,000 team members across all in North America for the hard work they put in to deliver the third quarter results we released yesterday. .

Team O'Reilly continues to win in each of our markets. In our team's dedication to excellent customer service drove the solid comparable store sales increase of 5.6% we generated in the third quarter. This performance was at the high end of our expectations, and we are pleased with the momentum our teams have been able to sustain on both sides of our business. The combination of our strong sales results with a 9% increase in operating income and a 12% increase in diluted earnings per share demonstrates our team's focus on driving profitable growth.

Thank you, Team O'Reilly for your commitment to our culture, and absolute dedication to taking care of our customers. Now I'll walk through the details of our comparable store sales performance for the third quarter. Our professional business continues to be the more significant driver of our sales results with an increase in comparable store sales of just over 10%. We continue to be pleased with the strength in our Pro ticket count growth, which was the primary driver of our professional comp increase and the biggest contributor to our outperformance relative to our expectations. We also saw increased benefit in the quarter from average ticket on both sides of our business that I will detail in a minute.

We remain confident that the professional sales growth our teams are delivering is the result of share gains and as we continue to be the supplier of choice for our professional customers. Our share gains have been broad-based with strong contributions from all of our market areas. The strength of our professional business is anchored in the valuable relationship we have developed with our customers who value the end-to-end partnership our team is able to provide to their business through service, availability and business tools that help them be a service provider of choice to their customers. We were also pleased to deliver DIY comparable store sales growth with this side of our business, finishing the quarter with a low single-digit comp, driven by average ticket benefits, partially offset by pressure to ticket counts. Our DIY business was in line with our expectations in July, after having experienced pressure in June as we exited the second quarter. We began to encounter modest pressure to DIY transaction counts midway through the third quarter, which we believe reflects some degree of initial short-term reaction by DIY consumers in response to rising price levels. The contribution to same SKU inflation during the third quarter, which was felt evenly on both sides of the business was just over 4%. As we've anticipated coming into the third quarter, we saw a significant ramp in tariff-driven acquisition cost increases and made appropriate adjustments to selling prices. On a category basis, the pressure to our DIY business as we moved through the quarter was primarily felt in some categories where we could be seeing some deferral in larger ticket jobs.

However, we continue to see strength broadly in other DIY maintenance categories, including oil, filters and fluids that have continued the outperformance we have seen throughout the year. We want to emphasize that we are still in the early stages of the consumer response to the ramp-up in price levels. It can be difficult to parse to finally the initial response from our DIY customers, but the pressure we have seen thus far is modest and in line with consumer reactions to economic shocks we have seen in the past. As we've noted the last several quarters, we remain cautious in our outlook on the consumer and expect that we could continue to see a conservative stance from consumers and how they manage spending in this environment. However, even in this environment, our DIY consumers are still showing a willingness to invest in and maintain their vehicles and we believe any potential deferral pressure will be short term. When looking at category dynamics on the professional side of our business, we are seeing very strong performance across both failure and maintenance-related categories and are pleased with the resiliency of customer demand. The customer has taken their vehicle to a professional shop for their repair and maintenance work tends to be less economically constrained than our average DIY customer and less reactive to inflationary pressures on spend in a large -- largely nondiscretionary category of their wallet.

Looking at the cadence of our sales results. In total for the quarter, we generated consistently strong comparable store sales growth as we move through the quarter with positive comps on both sides of our business in each month. We would characterize weather as neutral on balance for the quarter as we experienced normalized summer weather across most of our market areas. Now I would like to provide some color on our updated full year comparable store sales guidance.

As noted in yesterday's press release, we updated our guidance from the previous range of 3% to 4.5% to a range of 4% to 5%. At the midpoint of our full year range reflects our outlook when factoring in current sales volumes as we progress through September and thus far into October. We have incorporated into our guidance range the current pricing environment. While the broader tariff landscape has the potential to remain fluid, at this stage, we believe we have seen the lion's share of the cost impacts we are expecting as they relate to the tariffs currently in effect. As a result, we anticipate a mid-single-digit same-SKU benefit in the fourth quarter, but have also factored into our guidance a continuation of the pressure to our DIY customers from the dynamics I mentioned earlier.

Our industry has continued to behave rationally in response to the pressure tariffs have placed on product acquisition costs and we continue to monitor industry pricing adjustments to ensure we are competitively priced for the value proposition we provide. Our industry backdrop remains or continues to be both stable and supportive. We believe the dynamics of the consumer uncertainty and continued pressure to the DIY business are being felt industry-wide. Most importantly, we believe our teams are winning share on both sides of the business against the current macroeconomic backdrop.

In times when spending decisions become more difficult for our customers, having our excellent customer service, superior product availability and professional parts people to guide them becomes an even more important piece of the value we deliver. Before I turn the call over to Brent, I would like to highlight our updated diluted earnings per share guidance. As noted in our press release, we have updated our EPS guidance to a range of $2.90 to $3. This incorporates our year-to-date performance, the revised sales outlook and our expectations for gross margin and SG&A for the fourth quarter, which Brent will discuss next.

At the midpoint, our current EPS guidance is an increase of approximately 2% from the midpoint of our previous guidance and a year-over-year increase of 9%. We are pleased that the team has been able to deliver both strong sales and earnings growth even in a rapidly changing environment of economic uncertainty. As I wrap up my prepared comments, I would like to once again thank Team O'Reilly for their strong performance in the third quarter.

Now I'll turn the call over to Brent.

Thanks, Fred. I would like to start by thanking Team O'Reilly for their outstanding work during the quarter. Our team continues to outperform and remain steadfast in their focus on our culture and our customers to drive our success. Today, I will start by discussing our third quarter gross margin and SG&A results as well as provide an update on capital expansion and our updated outlook on these items. Starting with gross margin. For the third quarter, our gross margin of 51.9%, was up 27 basis points from the third quarter of 2024 and in line with our expectations. Our team was able to offset the gross margin headwind resulting from our customer mix from faster growth on the professional side of the business with prudent supply chain management and solid distribution productivity. .

While the third quarter gross margin rate was above our full year gross margin guidance range, we expected a higher gross margin rate in the third quarter as compared to the rest of the year, which is typical for the seasonal composition of our product mix and consistent with our results in 2024. We are maintaining our full year gross margin guidance range of 51.2% to 51.7% and expect to see a similar progression of gross margin rate from the third to fourth quarter as we experienced last year. Our supply chain teams continue to work diligently, both internally and with our supplier partners to navigate the evolving tariff environment. Our ability to maintain consistent gross margins with the amount of change we have faced during the year is a true testament to their hard work and dedication.

As expected, we realized significant acquisition cost pressure from tariffs in the quarter. The impact from product cost inflation in the quarter closely mirrored in timing the adjustments we made in pricing. As Brad mentioned earlier, we have now seen the biggest impacts from the current tariff environment, and our guidance for sales and gross margin does not contemplate substantial impacts from further tariffs beyond what is reflected in our product acquisition costs today.

However, to the extent any future tariff revisions result in further acquisition cost increases, we will prudently navigate those in the same way that we have done to date. As the tariff landscape and cost environment has evolved in 2025, we have maintained a close eye on the pricing environment within our industry to ensure that we are making the appropriate adjustments in remaining competitive. Against this volatile backdrop, our goal remains the same. To provide the exceptional service and industry-leading availability, our customers know and expect from O'Reilly Auto Parts to continue to earn their business. Overall, we believe our supply chain is at its healthiest point since we emerged from the pandemic. With the support of a strong supplier community, we have sustained robust in-stock availability across our tiered distribution network, this strong distribution infrastructure is the foundation for our industry-leading inventory availability and a critical factor in how we serve our customers and earn additional share.

Our merchandising teams work diligently to maintain our diversified supplier base in order to actively manage exposure and risk on numerous fronts. This risk can range from country of origin to diversification of supply within a single product category. Supplier health and supplier performance can often go hand in hand. So an important part of our risk management process is monitoring our supplier partner health from all angles, ranging from shipping performance, product quality, catalog support, all the way to financial stability. While these processes always involve some level of effort to mitigate risk in a small subset of our supplier base, we would again reiterate that we are pleased with the collective health of our supplier partners.

Our goal is always to foster supplier partnerships that are both long-standing and deep as we repeatedly earn our status as the desired priority customer for each of our suppliers. Now I'd like to turn to SG&A and give some color on the quarter. Our SG&A per store growth of 4% was at the top end of our expectations for the quarter. Driving this spend were expenses related to our strong sales performance, coupled with continued inflationary pressures in our cost structure, again, centered around medical and casualty insurance programs. Based on our third quarter results and outlook for the remainder of the year, we expect our SG&A per store growth to come in at or slightly above the top end of our full year guide of 3.5%. We have factored in our updated expectations for comp sales and corresponding incremental SG&A dollars into our guide, and we have been pleased with how our teams are managing expenses while driving sales volumes above expectations.

As a reminder, our fourth quarter SG&A per store growth is expected to be below the full year run rate as a result of comparing against the charge we took in the fourth quarter of 2024 and to adjust reserves for self-insurance liability for historic auto liability claims. Based on our SG&A expectations and projected gross margin range we continue to expect our full year operating margin to come within our guidance range of 19.2% to 19.7%. As always, our top objective in managing our expense structure is ensuring that we are meeting our high standard of customer service by supporting our team of experienced professional parts people. Turning to an update on our expansion.

We opened 55 net new stores across the U.S. and Mexico during the third quarter, bringing our year-to-date store opening to 160 stores. We are on track to achieve our 2025 new store opening target of 200 to 210 net new stores by year-end, and we continue to be pleased with the performance of our new stores. New store growth remains an attractive use of capital for us, and we see ample growth opportunities spread across all of our North American footprint. In this regard, we are pleased to announce our 2026 store opening target of 225 to 235 net new stores.

Just as our 2025 growth has been spread across 37 U.S. states, Puerto Rico and Mexico, we anticipate growth in all of those markets as well as in Canada in 2026. Our store growth in 2026 will continue to be concentrated in the U.S. markets but we will also continue our measured growth within our international markets as we work to develop the teams and infrastructure to support our O'Reilly operating model. Our tiered distribution network continues to help drive our stores' competitive advantage in parts availability, and we are pleased to begin servicing stores out of our new Stafford, Virginia distribution center in the fourth quarter of this year.

I would like to express my gratitude to our distribution and supply chain teams for all the hard work that has gone into this state-of-the-art new greenfield distribution center in the Mid-Atlantic market. This distribution center will be an important stepping stone for us to begin adding store count within heavily populated and untapped markets for us in the Mid-Atlantic I-95 corridor. As excited as we are about this new facility, there is no pause for our dedicated supply chain teams as we are full steam ahead with distribution growth and progress at our upcoming Fort Worth, Texas facility as well as future opportunities that will further support our store growth and inventory availability.

Capital expenditures supporting both store and DC growth for the first 9 months of 2025 and were $900 million and are slightly below our expectations. Based on our year-to-date spend and fourth quarter outlook, we are reducing our full year capital expenditure guidance by $100 million to a range of $1.1 billion to $1.2 billion. This reduction is primarily the result of timing of spend on store and distribution center growth projects that we now expect to incur in 2026. As I close my comments, I want to once again thank Team O'Reilly for their hard work in driving our company's success. Your commitment to providing consistent, excellent service to all of our customers is the foundation for our long-term growth.

Now I will turn the call over to Jeremy.

Thanks, Brent. I would also like to begin today by thanking Team O'Reilly for another successful quarter. Now we will take a closer look at our third quarter results and update our guidance for the remainder of 2025. For the third quarter, sales increased $341 million, driven by a 5.6% increase in comparable store sales and a $101 million noncomp contribution from stores opened in 2024 and 2025 that have not yet entered the comp base. For 2025, we now expect our total revenues to be between $17.6 billion and $17.8 billion.

Our third quarter effective tax rate was 21.4% of pretax income comprised of a base rate of 22.2%, reduced by a 0.8% benefit for share-based compensation. This compares to the third quarter of 2024 rate of 21.5% of pretax income, which was comprised of a base tax rate of 23%, reduced by a 1.5% benefit for share-based compensation. As we noted in our press release, during the third quarter, we accelerated the payment timing of transferable renewable energy tax credits that were originally planned to settle in 2026. Our full year income tax rate guidance has been revised to reflect the incremental benefits we expect from the accelerated payment.

Accordingly, for the full year of 2025, we now expect an effective tax rate of 21.6% versus our prior expectation of 22.3%. The updated tax rate guidance includes an anticipated benefit of 1% for share-based compensation. We expect the fourth quarter rate to be lower than the first 9 months of the year 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 rate. Now we will move on to free cash flow and the components that drove our results. Free cash flow for the first 9 months of 2025 was $1.2 billion versus $1.7 billion for the same period in 2024. The reduction in free cash flow was primarily the result of the accelerated timing of payment for renewable energy tax credits that I previously mentioned. For the full year 2025, we have updated our expected free cash flow guidance to a range of $1.5 billion to $1.8 billion, down from our previous range of $1.6 billion to $1.9 billion. This adjustment reflects the headwind from the accelerated tax payment timing partially offset by the reduction in our capital expenditures guidance Brent discussed in his prepared remarks. Inventory per store finished the quarter at $858,000, which was up 10% from this time last year and up 7% from the end of 2024. Our inventory investments continue to generate strong returns, and we've been pleased with the overall in-stock positions of our store and distribution network.

We have executed our inventory growth strategy in 2025 at a faster pace than our initial expectations and could see elevated inventory balances above our original 5% per store plan as we finish out the year. We continue to manage the timing of inventory enhancements to capitalize on current opportunities we see to drive our business and are pleased with the productivity of these investments. This incremental inventory investment has been more than offset by our AP to inventory ratio. We finished the third quarter at 126%, which was down from 128% at the end of 2024 but above our expectations. Moving on to debt. We finished the third quarter with an adjusted debt-to-EBITDA ratio of 2.4x and as compared to our end of 2024 ratio of 1.99x with an increase in adjusted debt partially offset by EBITDA growth. We continue to be below our leverage target of 2.5x and plan and prudently approach that number over time. We continue to be pleased with the execution of our share repurchase program. And during the third quarter, we repurchased 4.3 million shares at an average share price of $98.8 and for a total investment of $420 million. 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, our 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 up our call for your questions, I would like once again to thank the entire O'Reilly team for their continued hard work and dedication to providing consistently high levels of service to our customers. 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 questions.

[Operator Instructions] Your first question is coming from Greg Melich from Evercore.

I wanted to start with I think a comment you guys made on the 4% same SKU inflation that you've seen the lion's share of it. Does that -- does that mean that from here, there's none? Or is there still some residual we flow through the next couple of quarters?

Yes, Greg. This is Jeremy. Thanks for the question. We still think that we'll see a tailwind from same SKU as we move through fourth quarter and first quarter we talked to the mid-single-digit range. As we move through third quarter, a lot of what we saw was came along pretty early on in the quarter, but there was some ramp during the course of the third quarter. As we look at incremental changes in prices moving forward, there's always a potential for some of that. And obviously, the tariff environment is is a little bit more static now, but has the potential to move and change. But we think from what we've seen so far under the current regime, most of that cost has flowed through to us. The adjustments that we needed to make are mostly behind us, and we don't see the same level of substantial incremental changes in how we go to market to what we've seen so far in 2025.

Got it. And then my follow-up is really on the price elasticity. I think you mentioned that, that can take some time to play out. What have you seen historically from price elasticity, particularly on the DIY side?

This is Brad. Thanks for the question. Yes. So in the past, things can always change. But what we've always seen in our industry, at least in my years this year working for O'Reilly and in this industry is when we've seen shocks like this, there can be some deferral, failure, our hardest part categories from a failure standpoint are obviously break fix, but you do have those larger ticket jobs that can be deferred somewhat.

You have -- if a great job, if the pads are metal on metal, the most likely it is what it is, and that job has to be made. If it's a chassis job, for example, and there's some more alcohol joints or control arms or something like that, that's something that can be put off normally for weeks, months, but obviously not years. And so kind of what we're seeing right now is what we -- Brent and I talked about in our prepared comments is there's a lot of movement. Generally, we feel really good about what we're seeing on both sides of the business from a repair and maintenance standpoint.

But to your question on the DIY side, what we did see a little bit of that we hadn't seen thus far this year, we saw in the third quarter was what we feel like could be some deferral of those larger ticket jobs. And there's a lot of moving pieces.

You have not only -- it's not always a direct line just to what we feel like is a little bit of elasticity or what could be deferred. You have different weather patterns. You have 2- and 3-year stacks on some of those categories that have been extremely strong for us the last couple of years. but we still do think that we are seeing customers that are maybe putting some things off, and we'll just have to see how that plays out in the fourth quarter.

Your next question is coming from Chris Horvers from JPMorgan.

I wanted to follow up on the elasticity concerns, mid-single-digit inflation for the fourth quarter. That's basically in line with where you're implying comps are in the fourth quarter. So is like as you think about guiding based on what you've seen over the past 2 months is that elasticity function getting worse? Or I guess, why wouldn't your comp be higher than the inflation that you expect in the fourth quarter?

Yes. Thanks, Chris. This is Jeremy. Lots of different things, obviously go into how we think we'll finish out the full year and that pushes us into I know how you guys read an implied guide in the fourth quarter. When we think about our outlook, just to finish out the year there are a lot of moving pieces. You have to remind everyone that it's our most difficult comparison as we think about where we finished up the year last year.

As we look specifically at the question around the benefit from where prices have gone to and where we see in the same SKU, it's clearly a net incremental benefit to us in the third quarter. there's nothing about a potential build within any of those pressures that might impact the DIY consumer that we're implicitly forecasting how we think about fourth quarter to directly answer the question. To Brad's earlier point, you go into the back half of the year for us, there's always a lot of different factors. There can be volatility that we see just from how weather plays out, how some of the Christmas shopping season plays out.

And then we do have just, I think, a cautious view to how consumer might might continue to react. But kind of understanding all those component pieces, there's nothing about how we've at least started in the fourth quarter that that really puts us in a changing environment. We're really still early stages on some of how we're viewing where the customer is going to go at these price levels, and we're cautious but still feel good about the overall trends in the business.

Makes a lot of sense. I wanted to ask a longer-term question. Can you -- you are accelerating the unit growth next year. It looks like it will be over 4% in 2016 based on you mentioned earlier. Can you talk about your latest thoughts around the U.S. store potential? And maybe Mexico and Canada as well to the extent that you have some thoughts there? And do you think as we look out over the next few years, could international accelerate enough that you bend that 4-ish type unit growth rate higher?

Yes. Great. Great question, Chris. This is Brad. So first off, we feel extremely good about our new store cohorts. We continue to be extremely pleased with the way that our field teams are opening up new stores, just from the quality of the team, professional parts people putting in place the right store managers, the right district managers that absolutely drives the quality of our new store locations. Obviously, there's a lot more that goes into it than just the teams, but that's primarily how we make those decisions is our ability store count wise to staff them with great teams. We're also extremely pleased with the way our design and development teams have continued to develop here in the corporate office, not just from a U.S. perspective, but how those teams have matured and really understanding what the machine -- how the machine runs, what it really looks like as we ramp up internationally.

To your question about where we can go in the U.S. we haven't put a new fine point on that. But I would just tell you, every year that goes on, we continue to ramp that number up of what we feel like our store count could be in the U.S., not just from a really not just from the way we've always looked at it, but as consolidation continues in the industry, which we believe it will continue to do so. We feel really good about continuing to ramp up and and continue to have a higher number in the U.S. and where we feel like that could be in 5 and 10 years. We're very excited about our international opportunities, continue to look at Mexico as such a huge opportunity for us mid- to long term. We lost a little bit of time during the pandemic in terms of our ability to build the muscle that we wanted to build in-country, in Mexico and the inability to really get down there, build the muscle from a people standpoint, a structural standpoint, supply chain systems, et cetera.

But we've made a lot of progress over this last couple of years. Chris, and really excited about what the future holds in virtually an untapped market for us in Mexico over the next many years. Really, same thing for Canada. We're early stages in Canada, excited to make the announcement that Brent mentioned earlier in his prepared comments that our expansion is officially going to start in the Canadian market in 2026. And while that doesn't hold the total addressable market that in Mexico or obviously the U.S. does. The car park is very similar in Canada. We feel like that is an untapped market from a retail and DIFM standpoint in terms of our scale and size and ability to build the right teams, especially off that BaaS platform that's such an amazing people platform for us in Canada. So excited about all those markets and really excited about our target for 2026.

Your next question is coming from Scott Ciccarelli from Truist Securities.

Hopefully, 2 quickies. Any notable differences in terms of geographic performance given some of the weather patterns that we've seen? And then secondly, you did spend a little bit more time than usual talking about supplier health. So can you directly address any risk or exposure you may have to the first brand situation?

Scott. Yes, I'll take the first portion of that on regional performance and kick it over to Brent brand. So actually, we didn't see a lot of material differences in our geographies and regional performance in Q3. there's always going to be some differences. But directionally, they weren't much different than what we originally had planned with our internal plan month-to-month by region. So no material differences. There was I had bit of difference in our north south and a little bit east and west, but .

[Audio Gap]

In terms of First Brands specifically, they're a little bit more than 3% of our COGS. So it's not a huge material thing when you think about the fact that we've got we're dual and triple and quadruple sourced on most of our lines. We do that by DC. Again, over 50% of our revenue is in our proprietary brands, which gives us a lot of ability to multisource with multi suppliers. So -- and quite frankly, a lot of the brands that First Brands has acquired over the last several years, we had long-standing relationships with those brands even before they were acquired by the parent company of First brands. And we're still working with a lot of those same teams and feel very confident that in our ability to work with them and with our -- the rest of our supplier base to manage through what we don't really see as any disruption from wherever that may land. So we feel good overall again about the overall supplier health in the industry.

Scott, I'll make just follow up really quick for -- Scott, I may just a follow up really quick. We have really good engagement with the new leadership at First Brands and a lot of leaders that have been there for some time. We also have great engagement from their competitors, meaning that to Brent's point, when you think about the majority of the lines that they provide to us, we have our distribution network split up, meaning that whether it be a first brands or one of their competitors in some of these categories, we are dual and triple source, sometimes quadrupled to Brent's point, and so we have our DC split up accordingly. So we're hopeful that first brands really gets where they need to be on fill rates, which we believe they will, but we also have opportunities to fill in with backfill orders, and we also have opportunities with other existing suppliers that compete in those categories to take on another DC or 2 here and there, and we don't feel like we'll have a material impact.

Your next question is coming from Simeon Gutman from Morgan Stanley.

First, a follow-up, Brad, you mentioned some of the deferral that's happening in DIY. To what extent is that just price elasticity? And is there any sense that it could be the timing of when prices are moving around in the marketplace. It sounds like you've narrowed it down, but curious if that that's 1 of the potential maybe a head fake that's happened I mean, with some of the demand.

Yes. Great question. Well, the reason we want to be balanced on that, and we just -- we wanted to characterize as some categories and the potential for some deferral is because it's to Jeremy's point earlier to another question, it's still so early, and there's enough factors with weather, seasonality, the way the weeks played out in Q3.

And as we get into Q4, again, just really the first time we've seen some pressure to some of those larger ticket jobs, but it wasn't across the board, Simeon. And it's not always directly tied to the exact categories lines or sublines that we're seeing the tariffs. And so that line is not direct. And where we saw some pressure to some categories, we didn't see it in others. And so really, on the professional side, we continue to have a lot of conviction, even though the DIFM consumer can be a little bit cautious that we're not seeing any pressure there. And when we look at the DIY side, the thing that gives us balance on the other side of it is just the fact that we are seeing it in some categories, not seeing it in others.

And again, it's not directly tied to to tariff-driven cost pressures always by line, by category, but also we continue to see strength in a lot of our DIY categories. Like we mentioned, oil changes, oil filters, chemicals, fluids, et cetera. And so we just want to sit back a little longer and really see how the fourth quarter plays out. Our teams are always just focused, as you know, just continue to take share. and just watching that closely. The other thing we didn't say in our prepared comments, Simeon, is we're really not seeing any trade down. We're seeing some pressure to those bigger ticket categories potentially those bigger ticket jobs. But the way we look at good, better, best, we're really not seeing any material shifts.

If anything, we continue to see -- while some people may be moving down, so to speak, on the price side, we continue to seek even the lower to middle income consumers on the DIY side, trading up because they're looking for value, not just the cheapest price. They're trading up in areas like batteries and things like that to get a better warranty. And so long answer, I said a lot of things there. But I think the key is we just want to continue to take a balanced look and see how the rest of the year plays out.

Okay. And my follow-up is on your investment posture. We've had SG&A per store elevated for the better part of the last, call it, 2 years, and now you're stepping up your store growth. So is there maybe a shift from per store to new stores. And then within that, any different way you're approaching the operating margin of the business, either holding it or even letting it go down to take advantage of disruption or opportunities in the market.

Yes, Simeon, good questions, and maybe take the second 1 first. There's not been, I think, any fundamental shift as we think about our operating margin, our profile for how we go to market. Having said that, I think it's less of a question or consideration for where we see the potential kind of competitive balance or market opportunities so much as it does how do we run and operate our business, what do we think allows us and puts us in a position to be competitive.

And I think much of what you've seen over the course of the last couple of years when we think about the investment profile of how we thought about our business has been really geared around where we see opportunities to continue to strengthen our operating posture to help put our teams in the best position to also support the teams that we've got taking care of our customers within our stores. some of what we've seen candidly in the current year are just more inflation-driven cost pressures in some of the areas of our business that I think have put pressure on us that we were not maybe as anticipated as as being as significant as it was when we came into the year, ultimately, those things from time to time are going to -- are going to move in flex. We will obviously have to take a hard look at that and think about where that sits for the for the next year. But that hasn't really changed our outlook on how we think about the right way to manage the business to take care of our customers and grow our share.

Simeon, the one thing I'd add to that is really just -- when I think about the controllables within our 4 walls, we're very pleased. Jeremy, Brent and I are very pleased with the way that our internal teams are managing SG&A to sales, walking the fine line between acceptable SG&A profitability and taking our service levels to the next level. .

Some of the things we saw throughout the year and for sure in Q3 was just some of that inflation in some of the medical and some of the self-insurance stuff that's somewhat out of our control. There's always things we can do better and different from a safety and health and well-being of our team members, but some of that's out of the control of the team, and we feel really good about the way the teams are managing SG&A.

Your next question is coming from Michael Lasser from UBS.

You talked about a mid-single-digit inflation benefit in 4Q, which it sounds like that will be the peak of the inflation contribution So, a, is that right? Is that the way we should think about it? And b, overall, is this as good as it gets that O'Reilly can do a mid-single-digit comp under the right conditions. It's just a -- it's a different model than it's been in the past.

Yes, maybe I can address the question there, Michael. At this point in time, when we think about the current tariff and pricing environment, we would think that most of the benefit that we might expect to see moving forward would be in the fourth quarter numbers. And I think both with Brad and Brent spoke to that. it's always a little bit of a crystal ball exercise to say exactly what happens from this point forward. And we're obviously going to be very sensitive and responsive to making sure that from a market perspective, we're priced right in where we need to be. Ultimately, that -- while it's an important consideration, it's a factor that, obviously, we're all paying pretty close attention to that historically has not been what's driven our business and the ability to grow share. And we feel -- we still feel very bullish about our opportunity over the course of time. to be able to be a consolidator of the industry to pro forma model that's the best within our industry and to be able to gain share over the course of time. .

And we feel good about our performance, particularly when you look at it on a 2-, 3-year stack perspective. And so ultimately, it is -- as we've talked many times, a very grinded-out business and and the long-term trajectory of what we can deliver as we consolidate the industry and gain share is dependent upon executing day in and day out and growing faster than the marketplace. We'll see ultimately where those numbers push out. But there have been -- there have been plenty of years within our history where the results that we're producing. This year have been in line with that long-term growth rate, we feel good about it.

Yes. No, Michael, Well, Jeremy, I think the key is the reason we don't want to talk in absolute if we've seen everything. It's because we don't know what's going to be in the headline next week or next month. It is still fluid. We feel good about what we said about the majority being already in but we don't know what's next. What I do know and this Parley is in the kind of your second part of your question, what I do know is when I look at Brent and our merchandise teams and our pricing teams they are operating at a very high level.

I feel very good about the way that they are navigating not only from a negotiation with our suppliers the way we're thinking about pricing. But the overall way that we look at the fine line between walking all those things. And just the way we can continue to compete the value proposition we provide. And we never think internally here teams, the way our supply chain runs, new DCs, hub stores, all the things we do from a culture standpoint, promote from within and supply chain, we really feel good about what we can do over the next many years.

Got you. My follow-up question, what conditions would be necessary in order for O'Reilly to restore its SG&A per store growth back to the 2% range, that was consistent for a long period of time prior to the last couple of years. And as a management team, how focused are you on deploying technology or making proactive investments today in order to ease some of the pressures from health care costs and other factors in order to restore that level so you can generate the margin expansion that the market has known to from [indiscernible].

Yes, Michael. I appreciate that question. It's a little bit of, I think, a challenge for us to to really address a hypothetical around kind of a lot of the other broader conditions that contribute to how we might think about SG&A moving forward. For sure, when we look at where we sit today versus other periods of time, where wage rate inflation was much more muted where we weren't seeing some of the other inflation pressures where we weren't seeing kind of rising price levels, I think more broadly around the economy. Those were some of the, I think, broader macro conditions that we would have seen during the course of time there that I think play into the consideration. I think from our perspective, we've always had, I think, a pretty intense expense control focus as a company. And ultimately, those are all things that we manage for the long-term growth rate and the success and health of our business. While we're always, I think, pushing to be more efficient and more effective, and there are always ways in which you can do that within our business. .

It's also important to note that I think one of the core strengths of our business is the ability to provide a high service level in an industry where that's still, I think, a critical factor in how consumers perceive value, how they make buying decisions. And so for us, there's always going to be some level of understanding that the strength of our business is built around running the best model that ultimately our ability to grow operating profit dollars from a long-term perspective means that we're going to want to to manage our business in the right way, and we're not going to view it necessarily as just an offset [indiscernible]. Let's go find cuts and reductions that don't otherwise make sense because some other components of the business have seen inflation. So that's really from a philosophy perspective where we see it. Some of the -- where we've seen lower nominal numbers in different environments still reflected that same philosophy. And ultimately, I think that's the right way to manage the business for the long term.

Yes. And Michael, I may just real quick add, Jeremy said it very well. We we have a lot of pride in our ability to lever when we have a comparable store sales level that we've had. We have a lot of pride in the operating profit rate that we've delivered over a long period of time, and that's going to continue to be our focus. That said, for the mid and long term back to the 10% share across North America, we are going to continue to invest in our business in a very disciplined way when it comes to technology, when it comes to our teams. When it comes to our supply chain, we are going to continue to play from a position of strength we continue to feel like we have a unique opportunity over the next many years to do all that within the discipline we have with our capital allocation, the discipline we have with our OpEx and we're going to continue to balance the 2 sides of what I just said as good as we possibly can over the next year.

Your next question is coming from Bret Jordan from Jefferies. .

If you look at the expectations for 4% same-SKU inflation, are supply chains in the industry sort of creating a delta between your expectations maybe versus a peer, I think that NAPA guys were saying maybe 2.5 million, is that because they're sourcing out of different regions and markets and have less tariff exposure? Or is it really sort of a relatively even playing field on a same SKU basis?

Yes. Brett, this is Brent. I'll start and the other guys can chime in. I think we talked about supplier diversification for years now. And again, the team. Our merchandise team has done a fantastic job continuing to diversify that supplier base. And we've talked a little bit about China, what that looks like specifically for us. We're in the mid-20s. Some others may report somewhere in that range or a little bit less. But generally speaking, we feel like we're very diversified globally and the teams continue to get more diversified. That number is down hundreds of basis points from where it was a few years ago and continues to fall. What's interesting, though, when you look at some of the other countries right now in the tariff environment that we've been operating in, especially in 2025, some of the -- when you think about 25%, you look at some of those other countries, Vietnam, Thailand, India, some of the other countries that a lot of sourcing has moved to -- supply has moved to Mexico as well and some South American countries, that 25% or more is the same rate. So what I would tell you is it's less about what's that China number look like, and it's more about the blend and the ability to multisource from multiple countries of origin and to manage that dynamically and to work with suppliers that are managing that dynamically. And I feel like our team has done a great job with that. .

It continues to be a challenge. And Brad mentioned earlier, and we've talked about on the call in the prepared comments about what we feel like the lion's share passed through in Q3 from tariffs, but I think we all know, we all listen to the news. I mean there's still some uncertainty about where that may go in the future with some of these countries until it's all said and done. So we feel like we're very well positioned to respond and react to whatever comes our way. The teams have done a great job with sourcing across the globe, and we're going to continue to do that and work with suppliers that are doing a great job of that.

Yes, Brett, I may just jump in real quick. In terms of us directly to other competitors, we don't know. I mean we don't we don't spend near as much time frankly, looking at trying to parse the details of anybody else. That would be up to them to explain what we know is our merchandise teams and our pricing teams. Like I mentioned earlier, just doing a masterful job managing through this. We feel good about our scale, our negotiating power, our pricing power feel really good about the way that we have worked with our suppliers to mitigate all of this, I feel really good about where we're at from a pricing perspective versus our versus all our competitors, both small and big. WD independent all the way up to the other big 3, I feel really good about all that. So hard to say in differences of COGS and all those things. But -- we feel really good about where we're at, the way we've negotiated and just so proud of the teams managing through this. .

Okay. And then as sort of a follow through on that. And that 10% inventory per store growth is something maybe 4 of that is on a same SKU basis. The other 6, are you buying ahead of expected further price increases sort of getting a lower cost inventory into the DC ahead of additional expansion? Or are you adding units just from a strategic standpoint of a better fill rate and take more share? I guess, what's the growth in inventory ex the price factor?

Yes, Brett. It's really more just us executing on our inventory strategies and how we think about deploying incremental inventory enhancements. Price has a little bit less of an impact on on the inventory balances just from the standpoint of being a LIFO reporter of this.

You really only see inflation have an impact to the extent that you're kind of adding layers on top and there's been some of that, but not the same magnitude of what runs to the income statement. And I think conversely, no real change changes in that strategy as it relates to the broader cost environment, which we think is pretty stable.

But obviously, those are decisions that we make based upon upon the objective of being the best in the industry from an availability perspective. Obviously, the cadence and timing of that can change period to period. It's not always does always roll out in the same kind of schedule as you were because we're pretty active about how we think about the right time and where we see opportunities to be able to execute that strategy.

Brad, yes, just to add on to what Jeremy said too, Brett, specifically speaking we're going to continue to optimize our network. We talk all the time about our -- the strength of our tier distribution network, our regional DCs our hub stores and how we continue to optimize that network of SKU count and depth and breadth by secondary tertiary market, even the ones outside of the reach of our regional DCs. The other thing though is consider and think about for Q3 is we were stocking up our new DC in Stafford, Virginia as well, that's another component that brings more dollars into a system in a given quarter that may prove to be a little bit lumpy quarter-to-quarter with the investments in a new DC. .

We've reached our allotted time for questions. I will now turn the call back over to Mr. Brad Beckham for closing remarks. .

Thank you, Matthew. We would like to conclude our call today by thanking the entire O'Reilly team for your continued dedication to our customers. I would like to thank everyone for joining our call today, and we look forward to reporting our fourth quarter and full year results in February. Thank you. .

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.