Executive Summary / Key Takeaways

• Consistent Market Leadership: O'Reilly Automotive continues to demonstrate robust performance in the fragmented automotive aftermarket, leveraging its dual market strategy and extensive distribution network to consistently gain market share.
• Strong Financial Momentum: The company reported an 8% increase in sales and a 12% rise in diluted EPS for Q3 2025, driven by strong professional segment growth and effective pricing management, despite cautious DIY consumer spending.
• Strategic Infrastructure Investments: O'Reilly is aggressively expanding its store footprint with targets of 200-210 new stores in 2025 and 225-235 in 2026, supported by significant capital expenditures in new and upgraded distribution centers and a growing hub store network.
• Resilient Business Model: Despite macroeconomic uncertainties, including tariff pressures and inflationary costs, O'Reilly's focus on superior customer service, product availability, and a diversified supply chain underpins its ability to maintain profitability and long-term growth.
• Shareholder Value Creation: The company's disciplined capital allocation, including a robust share repurchase program and a recent 15-for-1 stock split, underscores its commitment to returning excess capital to shareholders while funding strategic growth.

The Enduring Engine of the Aftermarket: O'Reilly's Core Strategy

O'Reilly Automotive, Inc. stands as a formidable force in the automotive aftermarket, a sector characterized by its resilience and consistent demand. Founded in 1957, the company has built a nearly seven-decade legacy on a "next level mindset" and a steadfast commitment to its "dual market strategy," serving both do-it-yourself (DIY) customers and professional service providers. This approach, coupled with an unwavering focus on superior customer service and industry-leading product availability, forms the bedrock of O'Reilly's competitive advantage.

The industry backdrop remains fundamentally supportive. The total number of U.S. registered vehicles reached 286 million by the end of 2024, an increase of 13.4% since 2014. Critically, the average age of the U.S. vehicle population has climbed to 12.6 years in 2024, up 10.5% over the past decade. This aging fleet, combined with consistent miles driven—which increased 0.9% year-to-date through July 2025—translates into a sustained need for maintenance and repairs. As vehicles age and become more complex, consumers are increasingly motivated to invest in their existing cars rather than incur the substantial cost of new vehicle purchases. This dynamic fuels robust demand for automotive aftermarket products, particularly for out-of-warranty vehicles that require more frequent servicing and mechanical attention.

O'Reilly's overarching strategy is to capitalize on these favorable industry trends by aggressively expanding its store footprint, enhancing merchandising, and implementing omnichannel initiatives. The company's history, including its public listing in 1993 and 32 consecutive years of growth in comparable store sales and diluted earnings per share, underscores its ability to execute this strategy effectively across various economic cycles.

Technological Edge and Operational Excellence

O'Reilly's competitive differentiation is not rooted in a single proprietary hardware or software product, but rather in its sophisticated operational technology and infrastructure that collectively create a powerful competitive moat. The company's core technological advantage lies in its strategic tiered distribution network and hub store model. This system is designed to provide "same day and over-night inventory access" for a "broad selection of product offerings" to its vast store network. This capability is critical in an industry where immediacy of need often dictates customer choice.

The tangible benefits of this operational technology are clear. By strategically locating regional distribution centers (DCs) and hub stores, O'Reilly ensures rapid replenishment and extensive SKU coverage across its markets. This translates into superior product availability, a key factor in customer satisfaction and market share capture, particularly for professional service providers who rely on quick access to parts to minimize vehicle downtime. For example, the new 690,000-square-foot Atlanta distribution center, now operational, can service 350 stores with direct import processing capabilities. The upcoming Stafford, Virginia DC, expected to begin servicing the Mid-Atlantic region in Q4 2025, and the Fort Worth, Texas DC, slated for 2027, further exemplify this commitment to infrastructure-led technological advantage.

These modern distribution centers incorporate advanced "goods to person automation," which enhances "efficiency, effectiveness, and accuracy" in inventory management and order fulfillment. While specific quantitative metrics for these benefits are not publicly detailed, the strategic intent is to streamline operations, reduce labor costs, and improve the speed and precision of deliveries. Furthermore, O'Reilly leverages data and science in its pricing strategies and continuously invests in information technology systems and tools to support its "professional parts people" and omnichannel initiatives. These technological underpinnings contribute directly to O'Reilly's competitive moat by enabling unparalleled service levels, optimizing operational costs, and strengthening its market positioning for long-term growth.

A History of Growth and Strategic Evolution

From its founding in 1957, O'Reilly Automotive has consistently demonstrated a commitment to expansion and shareholder value. The company's decision to go public in April 1993 marked a significant milestone, providing capital for its aggressive growth strategy. Over the decades, O'Reilly has navigated various economic challenges, including significant tariff periods in 2018 and heightened inflation from 2021 to 2023. These experiences have refined the company's approach to supplier coordination and pricing adjustments, proving the industry's rational response to increased acquisition costs.

A key aspect of O'Reilly's historical evolution is its proactive supply chain diversification, initiated during the COVID-19 pandemic to reduce dependency on specific sourcing regions. This strategic foresight has positioned the company to better manage current and future supply chain disruptions. The company has also consistently returned value to shareholders through a robust share repurchase program, initiated in January 2011, and strategic stock splits, including a 15-for-1 forward stock split in June 2025, aimed at increasing stock accessibility for its team members.

Geographic expansion has been a continuous theme. In 2024, O'Reilly acquired Groupe Del Vasto Vast Auto, adding 23 stores in Canada and signaling a measured entry into this new international market, with further organic growth planned for 2026. Mexico remains a significant long-term opportunity, with 25 new stores opened in 2024, bringing the total to 87, and similar expansion planned for 2025. Domestically, the company has relocated and opened new distribution centers, such as the 690,000-square-foot facility in Atlanta, Georgia, and is nearing completion of a greenfield DC in Stafford, Virginia, expected to service the Mid-Atlantic region by Q4 2025. These investments underscore O'Reilly's commitment to building out the infrastructure necessary to support its expanding store network and maintain its competitive edge in parts availability.

Robust Financial Performance and Operational Discipline

O'Reilly Automotive continues to exhibit strong financial performance, reflecting its effective dual market strategy and operational discipline. For the three months ended September 30, 2025, total sales increased by 8% to $4.71 billion, while for the nine months ended September 30, 2025, sales rose 6% to $13.37 billion. This growth was underpinned by a comparable store sales increase of 5.6% in Q3 2025 and 4.5% for the nine-month period.

The professional business remains a significant growth driver, with comparable store sales increasing "just over 10%" in Q3 2025, primarily due to strong ticket count growth. This segment's robust performance is a testament to O'Reilly's deep relationships with professional service providers and its enhanced service levels. The DIY segment also contributed positively, achieving low single-digit comparable store sales growth in Q3 2025, driven by average ticket benefits. However, the company observed "modest pressure to DIY transaction counts midway through the third quarter," which management attributes to initial short-term consumer reactions to rising price levels and potential deferral of larger ticket jobs. Despite this, strength persists in core DIY maintenance categories such as oil, filters, and fluids.

Average ticket values continue to benefit from the increasing complexity and cost of replacement parts for modern vehicles, with same-SKU inflation contributing "just over 4%" in Q3 2025, felt evenly across both DIY and professional segments. This ability to pass on acquisition cost increases in selling prices has been a key factor in maintaining profitability.

Net income followed suit, increasing 9% to $726 million in Q3 2025 and 5% to $1.93 billion for the nine-month period. Diluted earnings per share saw a 12% increase to $0.85 in Q3 2025 and an 8% increase to $2.25 for the nine months.

Profitability metrics remain solid. Gross profit for Q3 2025 reached $2.44 billion, representing 51.9% of sales, and for the nine months, it was $6.89 billion, or 51.5% of sales. The increase in gross profit as a percentage of sales was primarily due to improved acquisition costs and distribution operating efficiencies, partially offset by the higher mix of professional sales, which typically carry lower gross margins. Operating income for Q3 2025 increased 9% to $976 million (20.7% of sales), and for the nine months, it rose 5% to $2.63 billion (19.7% of sales). Net income followed suit, increasing 9% to $726 million in Q3 2025 and 5% to $1.93 billion for the nine-month period.

Selling, general, and administrative (SG&A) expenses as a percentage of sales increased in Q3 2025, primarily due to "broad inflationary pressure in costs, primarily relating to medical and casualty insurance programs, and enhancements to store level compensation and benefits." This reflects ongoing investments in its workforce and the broader inflationary environment.

From a liquidity standpoint, O'Reilly's long-term business strategy is supported by strong cash flow generation. Net cash provided by operating activities for the nine months ended September 30, 2025, was $2.13 billion. The company's adjusted debt-to-EBITDA ratio stood at 2.4x as of September 30, 2025, remaining below its target of 2.5x, demonstrating prudent financial management. Inventory per store reached $858,000 at the end of Q3 2025, up 10% year-over-year, reflecting strategic investments to enhance product availability. The company's robust share repurchase program continues to return excess capital to shareholders, with $899 million remaining under authorization as of September 30, 2025.

Strategic Initiatives and Future Outlook

O'Reilly Automotive is poised for continued expansion, with aggressive store growth targets and significant investments in its distribution infrastructure. The company is on track to open 200 to 210 net new stores in 2025 and has announced an even more ambitious target of 225 to 235 net new stores for 2026. This growth will be concentrated in U.S. markets, but also includes measured expansion in international markets like Mexico and Canada, where the company is developing the necessary teams and infrastructure.

Capital expenditures for 2025 are projected to be in the range of $1.1 billion to $1.2 billion, a reduction from earlier guidance due to timing shifts of projects into 2026. These investments are strategically allocated, with a projected 60% owned versus 40% leased mix for new store openings, reflecting enhanced returns on capital from new stores. Significant capital is also being deployed to expand and enhance the hub store network, a critical component of O'Reilly's strategy to provide quick access to broad localized SKU availability.

The distribution network is undergoing substantial upgrades. The new Stafford, Virginia distribution center is expected to begin servicing stores in the Mid-Atlantic region in Q4 2025, unlocking growth opportunities in heavily populated and previously untapped markets along the I-95 corridor. Additionally, the acquisition of a 560,000-square-foot facility in Fort Worth, Texas, slated to become the 33rd distribution center in 2027, will provide crucial capacity in the South Central U.S.

For the full year 2025, O'Reilly has updated its total revenue guidance to a range of $17.6 billion to $17.8 billion and its comparable store sales guidance to 4% to 5%. Diluted earnings per share guidance has been updated to $2.90 to $3.00. The company anticipates a mid-single-digit same-SKU benefit in Q4 2025, reflecting the current pricing environment and the "lion's share of the cost impacts" from existing tariffs. Gross margin guidance is maintained at 51.2% to 51.7%, with operating margin expected to be between 19.2% and 19.7%. The effective tax rate for 2025 is now expected to be 21.6%, benefiting from accelerated payments of transferable renewable energy tax credits. Free cash flow guidance for 2025 has been updated to $1.5 billion to $1.8 billion, reflecting the accelerated tax payments and adjusted capital expenditures.

Competitive Dynamics and Market Leadership

O'Reilly Automotive operates in a highly competitive, yet fragmented, industry alongside major players like AutoZone (AZO), Advance Auto Parts (AAP), and Genuine Parts Company (GPC), as well as numerous independent distributors. O'Reilly's dual market strategy, catering to both DIY and professional customers, provides a distinct advantage. The company's "professional parts people" and industry-leading supply chain enable it to offer a premium service and availability proposition, which is particularly valued by professional service providers. This focus has consistently driven market share gains, with management stating that their "customer transaction count results lead the industry on both sides of our business."

Against AutoZone, O'Reilly's comprehensive suite of professional services and localized inventory density often provides an edge in regional coverage and fostering customer loyalty for complex repairs. Compared to Advance Auto Parts, O'Reilly's robust execution in integrated in-store services, such as custom hydraulic hoses and professional paint shop support, differentiates its offerings and enhances customer satisfaction. While Genuine Parts Company (NAPA) maintains a strong B2B orientation, O'Reilly's balanced approach, including a strong DIY presence, allows it to capture market share in consumer-facing segments where NAPA may be less focused.

O'Reilly's diversified supplier base and significant private label portfolio (representing over 50% of sales) further strengthen its competitive position. This allows for multi-sourcing from various countries of origin, mitigating risks associated with single-source dependencies and tariff volatility. For instance, in response to concerns about First Brands, a supplier representing "a little bit more than 3% of our COGS," O'Reilly highlighted its dual, triple, and even quadruple sourcing across its distribution network, ensuring minimal material impact from potential disruptions. This strategic flexibility, combined with its scale and negotiating power, allows O'Reilly to effectively manage acquisition costs and maintain competitive pricing across its product lines.

The company actively capitalizes on industry disruption, particularly from "weaker smaller players" and struggling independents. While the industry is resilient, periods of complexity create opportunities for O'Reilly to convert market share to its "sustainable profitable business." Management emphasizes that the industry has historically behaved rationally in response to cost increases, including tariffs, and expects this dynamic to continue, allowing for appropriate pass-through of increased costs.

Key Risks and Mitigations

Despite its strong position, O'Reilly Automotive faces several risks. Macroeconomic factors such as "continued broad-based inflation and rapid fuel cost increases that exceed wage growth" could negatively impact consumer disposable income. This has already led to "modest pressure to DIY transaction counts" and potential deferral of larger-ticket jobs, particularly among lower-income DIY consumers. Softness in discretionary categories also persists, indicating cautious consumer spending.

Tariff uncertainty remains a fluid challenge. While O'Reilly believes it has seen the "lion's share of the cost impacts" from current tariffs, the potential for future revisions or new tariffs could lead to further acquisition cost pressures and "short-term timing headwinds to gross margin rate." The company mitigates this through close coordination with suppliers, supply chain diversification, and its strong private label portfolio.

Operational costs, particularly "medical and casualty insurance programs," have experienced inflationary pressure, impacting SG&A. A $35 million charge in Q4 2024 related to self-insurance liabilities for historic auto claims highlighted the "significant inflation in the cost to resolve these claims." O'Reilly is addressing this through safety improvements and efforts to reduce accident rates. While the company acknowledges potential "digital transformation gaps" compared to some rivals, its continuous investment in IT systems and omnichannel initiatives aims to address this vulnerability.

Conclusion

O'Reilly Automotive continues to exemplify a compelling investment thesis, rooted in its deep understanding of the automotive aftermarket and its disciplined execution of a proven strategy. The company's consistent market share gains, driven by its dual market approach, superior customer service, and technologically advanced distribution network, position it for sustained profitable growth. Despite macroeconomic headwinds and inflationary pressures, O'Reilly's robust financial performance, strategic capital allocation, and aggressive expansion plans underscore its resilience.

The company's commitment to operational excellence, from its automated distribution centers to its "professional parts people," provides a formidable competitive advantage against both direct and indirect rivals. As the vehicle fleet ages and becomes more complex, O'Reilly's ability to provide immediate access to a broad range of parts and specialized services will remain paramount. Investors should recognize O'Reilly's strategic investments in infrastructure and technology as foundational to its long-term success, enabling it to capitalize on industry consolidation and reinforce its leadership in a dynamic and essential sector.