O'Reilly Automotive, Inc. (ORLY) Q3 2026 Earnings Report, Transcript and Summary

Welcome to the O'Reilly Automotive Inc Third Quarter 26 earnings call. My name is Tom, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press 1 on your touch-tone phone. I will now turn the call over to Jeremy Adam Fletcher. Mr. Fletcher, you may begin.

Thank you, Tom. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our third quarter 26 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 certain 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 2000. 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 12/31/2025 and other recent SEC filings. Company assumes no obligation to update any forward looking statements made during this call. At this time, I would like to introduce Brad W. Beckham:

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 G. Kirby, our President and Jeremy Adam Fletcher, our chief financial officer. Gregory L. Henslee, our executive chairman and David E. O'Reilly, our Executive Vice Chairman are also present on the call. I am excited to begin our call by thanking our outstanding team of professional parts people for their hard work and commitment to producing industry leading results. We have over 90-6 thousand team members across North America living our culture of excellent customer service. I am excited by the momentum our team has sustained. Our comparable store sales growth of 7.2% in the third quarter and 7.1% year to date demonstrate our team's ability to generate strong results even against very tough comparisons. Our third quarter 26 results represent comparable store sales growth on a 2 year stack basis of 12.8%. Which is an acceleration to the growth we generated in the first half of the year. Our team's focused on profitable growth translated this strong top line performance into a 14% increase in diluted earnings per share. On top of a 12% we delivered in the third quarter of last year. While we are pleased by these results, we are even more excited about the opportunities we have ahead of us and firmly believe that our focus on consistently strong execution will allow us to continue to compound these results. I would like to start the discussion of our performance in the third quarter by walking through the details of our comparable store sales increase. Our comp growth of 7.2% significantly surpassed our expectations for the quarter, and we were pleased to see contributions to our outperformance from both sides of our business. As we noted on our last call, we were pleased with the strong step up in sales results in July as summer heat began to set in. This benefit was sustained throughout the quarter and we generated consistently strong results against the supportive backdrop with the robust sales growth spread fairly evenly for each month of the quarter. We are also pleased with continued strength across our business thus far in October. Our performance in hot weather related categories was very strong in the third quarter, which we attribute to both a favorable weather dynamic across our markets as well as a strong performance from our team to capture market share in these key categories. However, these categories were not the sole driver of our outperformance. We were able to capitalize on demand strong performance across the breadth of our business. Our professional business was the larger driver of our overall comparable store sales growth with a third quarter professional comp of slightly over 10 percent. However, both our professional and retail businesses contributed fairly evenly to our outperformance against our expectations. Our professional comp growth was split evenly between an increase in ticket and increased transaction counts. Our team's ability to once again generate mid single digit growth in professional customer ticket count is evidence of broad based share gains in our professional business. We will always pursue market share with a disciplined mindset that ensures we appropriately prioritize industry leading service and availability our teams work so hard to provide. Our retail business also had strong quarter with a mid single digit comparable store sales increase. While we did experience a low single digit headwind in DIY transaction counts that we believe is evidence of some pressure on the overall consumer we were pleased to see a continued prioritization of maintenance spend by our customers as well as strong demand in key hot weather categories. The pressure of the DIY transaction counts were more than offset by increases in average ticket. Our average ticket in the third quarter included a benefit from same SKU inflation of slightly over 4 percent in our combined DIY and professional businesses. This tailwind came in above our expectations with the primary driver being petroleum based products such as oil and lubricants. Since these categories are a greater portion of sales on the DIY side of our business, We have a slightly higher inflationary benefit in DIY than we did for our professional business. We also want to highlight that our overall growth in average ticket exceeded the benefit from same SKU inflation we realized in the third quarter, which reflects a continued benefit from parts complexity as well as positive dynamics in the composition of our customer tickets. Now I would like to provide some color on our updated full year comparables for sales guidance. We raised our full year guidance from a range of 4% to 6% to a range of 5.5% to 6.5%. The primary driver for the increase was our outperformance in the third quarter. We expect SKU inflation will continue to benefit our results in the fourth quarter, but still anticipate a moderation in this benefit as we lap our largest same SKU comparison in fourth quarter of 25. We consider pricing to be rational within the industry and could see some continued upside to our same SKU expectations. However, the primary driver of our step up in same-SKU inflation in the third quarter was tied to some of our more commodity based that can have more fluid price changes. So we are cognizant that our pricing benefits could subside as we finish out 2026 and remain cautious that the pressures consumers are facing could intensify. Aside from the short term volatility these dynamics could cause, we still expect resilient demand within the industry and have confidence that the consistent execution of our team will drive share gains on both sides of the business. Stepping back a bit to look at the overall backdrop our fundamental drivers of demand, we have seen stable growth in vehicle miles driven and the car parc within the U.S. continues to grow and age. Keeping vehicles in safe and reliable operating condition is critical to the daily commuting needs of the majority of the population across our markets. Consumers simply do not have a choice when it comes to the repair and maintenance of their vehicles as the sole mode of transportation, whether they depend on our professional parts people help diagnose their problem and get them the right parts for a job, or they rely on their trusted local professional service provider who is supported by our unmatched parts availability, and unwavering customer service. Either way, when it comes to maintenance or repair, our customers, both professional and DIY alike, need access to a broad range of parts, and they need those parts quickly. Our execution in store and across our entire supply chain puts us in the best position to fill these needs quickly reliably, and with the quality products our customers trust. Our ability to close out the year strong and generate industry leading top line results beyond the fourth quarter will be primarily driven by our ability to meet these needs and do so while providing excellent customer service. Before I turn the call over to Brent, I would like to take a moment to highlight our updated diluted earnings per share guidance. As noted in our press release, we have updated our EPS guidance to the range of $3.25 to $3.35 This incorporates our year to date performance and sales outlook along with our gross margin and SG&A expectations for the fourth quarter which Brent will discuss next. Brent will also provide some color on the tariff refunds we have received in the third quarter. At the midpoint, our current EPS guidance is an increase of 2 percent from the midpoint of our previous guidance and a year over year increase of 11 percent. We are pleased our team continues to generate strong returns for our shareholders through executing on our long held operating fundamentals. As I wrap up my prepared comments, I would like to once again thank the entire O'Reilly team across North America, for their continued dedication to our company, our customers, and the strong performance in the third quarter. Now I will turn the call over to Brent.

Silent mode. it is mode. it is mode. it is mode. it is mode. it is mode. it is mode. Thank you, Tom.

Thanks, Brad. I would also like to join Brad in congratulating team O'Reilly on a strong performance in the third quarter and thank them for their commitment to our culture, and our customers. I would like to begin my comments this morning by discussing our third quarter gross margin results and our outlook for the remainder of 2026. For the third quarter, our gross margin of 52.4% was significantly above our expectations and up 54 basis points from last year. The largest driver of this gross margin expansion, as we noted in our press release yesterday, was a $39 million benefit from tariff refunds. Which equates to 76 basis points of rate benefit to the third quarter. Excluding this discrete tailwind, our third quarter gross margin results came in at the bottom of our expected range. Driven by a few puts and takes that I would like to discuss next. First, we continue to see sustained incremental acquisition cost improvements that have benefited our year over year gross margins, and those results were in line with our expectations for the third quarter and consistent with our experience in the first half of the year. We were also pleased to generate better than expected leverage of our distribution costs on stronger sales volumes. Though this tailwind was partially offset by fuel price pressure, within our supply chain, Offsetting these tailwinds to gross margins were discrete product mix and margin rate pressures related to cost and pricing dynamics for certain categories that drove a portion of our sales outperformance. In particular, much of the incremental same SKU pricing benefit we realized in the quarter came from the acquisition cost increases we passed through for petroleum based commodity categories. With motor oil being the biggest driver. These are high turn and primarily front-room items that are widely available in the marketplace and carry lower gross margins than our company average. So the significant comparable store tailwind in these categories drove a mix headwind. To our total gross margins. We also saw some margin rate pressure specifically in these petroleum based categories. Market pricing levels for these products have adjusted upward to pass through more than the incremental increase in acquisition cost but short of the adjustment necessary to maintain gross margin rate within the quarter. These dynamics of mix and rate did present a pressure to overall gross margins of approximately 40 basis points. However, we are still pleased we were able to generate strong gross profit dollar growth within these categories. Would also note that while these categories that benefited from pricing helped to support our strong comparable store sales results in the quarter, the remainder of our business also performed very well. With top line sales that exceeded our expectations at gross margin rates that were in line with previous guidance forecast. Before moving on to our fourth quarter gross margin outlook, I want to pause and give some additional detail on the tariff refunds. For most of the products that we sell, we are not the importer of record. And, accordingly, our suppliers directly pay the tariffs on impacted goods. As we have previously noted, we took subsequent acquisition cost increases relating to those tariffs and as such, have been in negotiations with our supplier partners surrounding how those tariff refunds are expected to be shared. The $39 million we recognized in the third quarter are tariff refunds our supplier partners received directly and pass through to us. We are in regular and continual conversations with our supplier community, regarding all factors that play into a healthy and stable vendor customer, from acquisition cost to fill rate sourcing and supplier financial health. The ultimate realization of any tariff refund is just 1 component of these broad based discussions. And we will continue to work with our supplier community on all these fronts. Our gross margin expectations for the remainder of the year take into consideration all of these factors. We raised our full year gross margin guidance by 10 basis points to a range of 51.6% to 52.1% Implicit within this guidance is the expectation that our fourth quarter gross margin rate will moderate somewhat relative to our third quarter rate, that includes the tariff refund benefit. Next, I would like to turn to SG&A to provide some details on the quarter. Our SG&A leverage of 16 basis points was significantly better than our expectations for the quarter and we are pleased with our team's ability to drive profitable sales growth while managing our SG&A structure. SG&A dollar growth was higher than expected with our average per store growth of 4.8 percent. Driven primarily by the necessary spend to ensure that we are executing in store service levels to match the strong sales volumes. We are also experiencing the expected modest level of pressure from higher fuel prices within our SG&A structure. As well as some degree of broader secondary cost inflation pressure in our operating model. As we have progressed through 2026, our incremental SG&A dollar spend above our earlier forecast has been primarily driven by variable selling costs namely in store service levels and incentive compensation, to support sales volumes that have been elevated against our original expectations. As we generate top line growth and take market share, it is critical for us to uphold our highest standard for store level execution we will continue to staff our stores to provide the excellent customer service that drives repeat business. Looking to the remainder of the year, we would now expect our full year SG&A per store growth in a range between 4.5% to 5%. With the ultimate spend within that range to be determined by our ability to sustain our top line momentum. In conjunction with our updated sales, gross margin and SG&A forecast, we are raising our operating profit guidance range by 20 basis points to an updated range of 19.5% to 20%. This reflects the strong operating cost leverage, of our year to date results over the gross margin improvements that I previously discussed. At the midpoint, this reflects full year operating profit margin expansion of 20-9 basis points. Moving on to inventory. Our per store inventory finished the quarter at $912 thousand which was up 6.3 percent from this time last year and 4.8% from the end of 25. We continue to expect to finish the year with an average inventory per store growth of 5 percent and our inventory turns of 1.6x or in line with the productivity that we would like to see from our inventory investment. We believe our work to continually enhance store level inventories and flow in inventory throughout our tiered distribution network is a strong factor in our share gains, and we will continue to pursue opportunities to bring inventory closer to our customers. Lastly, I will give some detail on our capital investments and new store growth. Capital expenditures year to date totaled $860 million and we remain on track with the projects driving our full year CapEx guidance range of $1.3 billion to $1.4 billion During the third quarter, we opened 63 new stores across North America, bringing our year to date new store openings to 173 net new stores. We are on pace to achieve our 26 new store opening target of 2 hundred 20-5 to 235 net new store openings. Our annual new store growth has trended upwards since the pandemic and reflects the strong returns we continue to see from our new store investments. We are pleased with the performance we have seen from each of our new store classes, as well as the opportunity we have to both expand into newer markets and to continue to backfill existing markets. These opportunities have us excited to announce today the continued excel acceleration of our new store growth with a 2027 new store target of 2 hundred 60-5 to 275 net new stores. Our new store growth so far in 2026 has been spread across 30-6 states, Canada, and Mexico. And our plan for 2027 will follow a similar approach. This is reflective of both the opportunity we see across The United States for continued store growth as well as our strategy and priorities for opening new stores, both domestic and internationally. We have always viewed the primary driver of new store success to be the high performing group of team members within that store. Additionally, with every new store we open, we have to ensure we have the distribution capacity for our supply chain teams to be able to provide the level of service and availability store team members rely on to serve our customers. As a result, We will continue to prioritize our capital deployment toward new store investments and distribution expansion projects that facilitate and support our core growth engine. We are excited to give our new and existing customers more opportunities to choose O'Reilly. And we believe we have the best team in the automotive aftermarket to continue to fuel this growth. As I close my comments, I want to thank Team O'Reilly once again for their commitment to providing consistent excellent service to all our customers each and every day. Now I will turn the call over to Jeremy.

Thanks, Brad. 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 third quarter results and outlook for the remainder of 2026. For the third quarter, sales increased $416 million driven by a 7.2% increase in comparable store sales and a $94 million non comp contribution from stores opened in 2025 and 2026 have not yet entered the comp base. For 2026, we now expect our total revenues to be between $19 billion and $19.3 billion Our third quarter effective tax rate was in line with expectations at 23.1 percent of pretax income comprised of a base rate of 23.3 percent reduced by a 0.2 percent benefit for share based compensation. This compares to the third quarter of 25 rate of 21.4% of pretax income, which was comprised of a base tax rate of 22.2 percent reduced by a 0.8 percent benefit for share based compensation. For the full year of 2026, we now expect an effective tax rate of 22.7 percent. 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 9 months of 2026 was $1.7 billion versus $1.2 billion in the same period last year. The increase in free cash flow was primarily driven by robust growth in operating income and the timing of payment for renewable energy tax credit with a higher cash outflow for these payments occurring in 2025. For the full year of 2026, we are increasing our expected free cash flow guidance to a range of $1.9 billion to $2.2 billion Moving on to debt, we finished the third quarter with an adjusted debt to EBITDA ratio of 2.26x which was an increase from our ratio at the end of 25 of 2.04 times. We successfully issued $1.6 billion in senior notes during the third quarter, marking our largest ever senior note offering. With proceeds used primarily to term out borrowings under our commercial paper program in anticipation of the October redemption of maturing senior notes. This incremental step up in leverage reflects our additional borrowing 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 third quarter, we repurchased 12 million shares at an average share price of $87.34 for a total investment of $1 billion. Our 26 year to date share repurchases through the date of yesterday's press release totaled 40-1 million shares. For a total investment of $3.7 billion We have consistently viewed our buyback program as an effective means of returning excess capital to our shareholders and a step up in share repurchase volume in 2026 reflects our strong cash flow generation and incremental borrowings as we move towards our leverage target. It is appropriate to return excess capital to shareholders, we are very confident that the average repurchase price is supported the expected discounted future cash flows of our business. As a reminder, our EPS guidance Brad outlined earlier, includes the impact of shares repurchase through this call but does not include any additional share repurchase. 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 Tom, the operator, to return to the line, and we will be happy to answer your questions.

Thank you. Will now begin the question-and-answer session. If you have a question, please press 1 on your phone. If you wish to be removed from the queue, please press 2. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please limit yourself to 1 question and 1 follow-up question. Once again, if you have a question, please press 1 on your phone. The first question is from Scot Ciccarelli from Truist Securities. Scot, your line is live. Please go ahead.

Good morning, guys. Thanks for the time. Can you help us understand the gross margin dynamics a bit better? I know you noted some gross margin pressures where you did not raise prices as quickly as needed to maintain, gross margins. But you also knew you had tariff refunds coming in. So it is as simple as taking out the $39 million benefit from tariff refunds to get to an adjusted gross margin number. Or were those, refund dollars considered when you are making some of your pricing decisions? Thanks.

Yeah. Good morning, Scott. Thanks for the question. This is Jeremy. I will kind of and others can join in. I think the most appropriate thing is, The reason why we called it out in the press release yesterday is we do view the tariff refunds as a unique item, as a 1-off item. And I think it is more than appropriate to think about gross margin results excluding what we saw there. I think in a similar vein, we would tell you that we really did not factor the benefit of those into how we thought about managing gross margins in the quarter. You know, we would have been, I think, happy to have had that just layer in on top of what our previous expectations for gross margin would have been. I think more of how we thought about gross margin in the quarter were the things that Brent talked about. And I know it was of his prepared comments, but I will I will just maybe walk through it again here. In part, some of the strength we saw was generated by some pricing benefits that were new to us in the quarter and a little bit unexpected. In particular, at least a portion of those were in these petroleum based commodity categories, motor oil being the largest 1. And we would tell you that lift to our overall concept of the 7.2%, it was probably about a 1 percent portion of that comp was driven by those categories. That happens to be just a lower margin category for us in general. And so had we not even had the rate pressures you know, probably about half of that 40 basis points that Brent talked about earlier, would have just been. a mixed pressure to us in the quarter as that category itself comp pretty significantly better than even the rest of the company. But then we did also see some timing pressures in how we think about the market passing that through. Ultimately, you know, we. We have kind of seen a little bit of that in the past or in the course of the pandemic. There were there were some impacts in oil, particularly as some prices were challenged, a similar scenario here where it took a little bit longer. The market to adjust to that. Ultimately, we will see where that happens. But I still feel good that the cost impact that we have seen in those categories has been adequately passed through. You know, we are generating better gross profit dollars. But just not at quite the same rate of what we would have seen before. We have been you know, we have been active as a catalyst to continue to move that where it is appropriate. And so it is not a it is not a call that we made, but the tariff refund that it moved through. it is really just kind of where the market is set on those on those items.

Yeah. Understood. Scott, I would just say, this is Brad, that Jeremy said it very well. But we do wanna be clear that those are 2 discrete things. You are appropriate to ask what you did and but we, you know, we manage price in a rational industry the way we always have. You know, whether it be oil, whether it be any petroleum based products, or be any other hard part or out front merchandise categories, nothing's changed in our philosophy in terms of pricing. Okay. Thanks, guys.

Thank you. Thank you. Your next question your next question is coming from David Bellinger from Mizuho. David, your line is live. Please go ahead.

Hey, good morning. Thanks, guys. 2 questions. First, wanted to ask about the SG&A growth per store, you are now guiding that to 4.5 percent to 5 percent for the full year. How much of that is internal versus external? Or said better, how much of that is in your control in terms of being tied to better than expected sales growth And how much is based on some of these outside factors out of your control? And more industry based, like wages, health care, and just other costs out there?

Yeah. I can I can I can start there, David, and then and then others can chime in. You know, relative to, I think, the change that we have seen in the back half of the year versus where we would have previously expected. The majority of what we see is really tied to the actions that we are taking internally to make sure that we are matching our service levels and how we operate our business to align with the with the strong sales volume that our teams are being able to generate. For sure, some component of that is just incentive comp. We you know, as you know, within our stores, operate with, you know, a heavy mix of full time team members. They are all compensated really down to the entry level in our stores with commissions. And so there is there is a direct tie to the success of our stores with all of our teams. But then we have also seen strong volumes and good activity, side of the business with solid traffic. And so we have worked hard to match to that. There is a component piece. You know, we hit, I think, considered a lot of what we have seen from pressures like fuel, for instance. But that has also caused a little bit of pressure to where we would have sat last quarter. As we have seen those price. Those costs remain high and that is been coupled with a lot of the activity that we have had to generate as we are supporting more deliveries to our professional customers. And we are starting to see that, I think, bleed into other areas of our of our cost structure. Anytime you have to roll a truck to fix the AC, to 1 of your stores or those types of items, you are starting to see some of that cost pressure bleed in. And so we are cognizant of that being potential pressure. As we think about the how we finish out the year in the fourth quarter, the variance for where we land with that largely, we would expect would be driven by our ability to sustain the strong sales results that we have seen that we have been very happy with. But, certainly, you know, we are we are paying attention to how some of broader inflation filters into the cost we have to manage. Yeah.

Got it. If you could go back to the petroleum based categories again, just the full percentage point comp lift that you got there, understanding prices have gone up, but not to the extent to maintain gross margin rate, Should that change at all going forward? Are there more price increases that will be enough to recapture some of that 40 basis points of gross margin that just was not made up this quarter? Thank you.

Yes. David, this is Brent. I can start and you guys can chime in. it is a fair question and Jeremy mentioned this. You know, we cannot. Obviously, do not have a crystal ball. We cannot tell the future. But the closest thing we have in recent times compare this to really is some of the challenges we face in. During some of the COVID quarters when petroleum products were moving up. At a very rapid rate. Again, these are high turn products. Broadly available in the market. We are obviously gonna be competitive We are gonna maintain a competitive posture on these products, so we monitor that daily, weekly. Our teams do a great job of that. And we are gonna always adjust to the market to be competitive. But we also are in a very rational industry that continues to be able to pass those, pass those increases along over time. So what we will tell you is based on historical, I cannot tell you exactly what is gonna happen in Q4. I mean, there is some belief that oil could even go farther north in Q4 with some continuation in the Iran conflict. Who knows? Nobody has a crystal ball. But what I would tell you, if I look historically, what we saw during the COVID time period was very similar dynamic. Yes. We were able to adjust the rate over time. it is really just about time and the turn on that product category specifically.

Maybe the only other thing that I would add there is that when we look past that kind of discrete item for us, for the results in the quarter, Still feel very good about the comp results. You know, the oil was left. We will take it. Know, every quarter we can, but we also comp, I think, very strongly in that kind of 6% ballpark anyway at gross margins. That in other areas of our business were in line with our expectation. And that did include some degree of pressures that were either, you know, primarily or secondary related to some of the fuel cost pressures freight that priced through. And in the industry on really the rest of kind of the basket has been rational and pass through rate in ways that are consistent with what we would have seen historically. So we view that kind of dynamic as still being consistent with what we would expect in a positive as we move forward. Thank you both.

Thank you. Your next question is coming from is from Simeon Gutman from Morgan Stanley. Simeon, your line is live. Please go ahead.

Hey, good morning, everyone. Nice quarter. So back to this SG&A and incremental margin question, So you are clearly gaining share, and SG&A per store is still growing at a relatively elevated rate. So is it. You know, how should we think about incremental profitability of that growth? Are investments either investments or just cost of operating the business getting higher such that it is just a little more expensive to maintain or to grow the share at the rate you are doing? And I think it is fine if it is, and that is okay. But should we take the expectation down that SG&A just somehow moderates and then incremental margins could get wider?

Yeah. No. it is a great question, Simeon. I can start there, and others can chime in. I think for us, you know, couple factors that they contribute to what you are, rightly, characterized as a little bit higher than historical average estimate rate. I think there is some component of just more significant cost inflation within that number than what we would have seen if, you know, maybe in years past, say, 10, 12 years ago. And we see that dynamic in the in the top line. I do think that has, at the level of sales results that we have been able to generate, including you know, real share gains that drive incremental activity within our stores. We think that also has an incremental pressure to us. And to whatever extent, we are able to sustain that, we continue to believe philosophically that is an important use of how we manage our operating structure. And we think over the course of time, that drives operating profit dollar growth and allows us to capture more of the addressable market in our industry, and we feel good about that. there is also a component of where our spend has been that sets the floor a little bit higher than would have been in previous years, and it is the types of investments that we have talked about. Over the course of several quarters now as we as we wanna make sure that we are being prudent from a long term perspective in how we invest in things like technology and ensuring that our store network is well maintained, that we are that we positioned ourselves well from an inventory deployment perspective and manage that well. So, you know, some of what we have seen is, I think, a little bit unique to this environment. But we also. We have been pretty elective in being aggressive in how we pursue what we think are exciting opportunities to grab share in our industry. Yeah.

So, I mean, I think Jeremy said it pretty well. I think, just to pull it up for a second and just. You know, everything our team focuses on from a strategic standpoint is always focused on this 1.1 thousand%, share that we have and our opportunity that continues, we feel like, to consolidate the industry through organic growth, through aggressive strategies, both in The US, Mexico, and Canada. So we always start there. We continue to start there until we have some short term and mid and long term opportunities for sure. And then when you get into you know, your direct question about margins and SG&A and just leverage over time, you know, I think the reason we wanna have a little bit of caution is we wanna continue to obviously reserve the right to make sure we are keeping up with our volumes from a service level standpoint, everything Jeremy talked about. But, also, it is just a point in time where there is some things that are frankly, out of direct control of our operating teams, whether it be in the stores whether it be in our distribution centers, etcetera, with what we have seen with medical, what we have seen with self insurance, what we are seeing with fuel and some of those things. So we just wanna be a little bit careful knowing that we are not gonna. While we may continue to have some of those pressures, here in the short term, we are not gonna sacrifice those service levels, and we are committed to appropriate leverage over the mid to long term. Okay.

The follow-up is a year ago you saw some elasticity with lower income consumers around now, and you mentioned you were seeing that when we saw you at the Investor Day. And can you update us on that And then related to the near term, you were appropriately, I think, prudent about inflation or pricing, moderating. Could this oil driven inflation, and then it may trickle to other categories, actually end up either keeping pricing where it is into the early part of next year or actually increasing it.

I mean, start with the consumer and then maybe kick it over to Jeremy and Brent on the second part of your question, both good ones.

We continue to be where we have been on the consumer. You know, overall, we feel really good about our performance. We continue to have conviction that our consumer, DIY and DIFM, are relatively healthy, though we recognize and believe that the middle to upper income consumer kinda on that higher end of DIY and then into the DIFM consumer is a little healthier than the low end, DIY consumer. That said, we still are really where we were at the Analyst Day that you know, when we look at our category performance, when we look at geographies, when we look at different cohorts, or consumers, they are still prioritizing the maintenance and repair of their vehicles. There could be a few areas of discretionary and maybe some larger ticket jobs here and there we may see a little bit of pressure. But overall, per our results, on both sides of the business, we still feel like, consumers continue to spend on maintenance and repair. Yeah.

Then, Sidney, you know, the second part of your question around inflation, you know, maybe the first place I would start, we do still expect moderation moving from third quarter to fourth quarter really just even at existing price levels with that comparison, just being a little bit more of a step up.

So where we would have been last quarter, maybe thinking we would be around 1% for fourth quarter, we would expect to be you know, around 2.5. We will see, you know, maybe 2.5, 3% for the fourth quarter. That does assume, you know, some x expectation around particularly, some of the petroleum based commodity pricing continuing to still be a little bit elevated. We think that even if we get relief in the short term, there is some supply chain issues to work out there. And so we think that there is still potential for some volatility there. We will we will have see, you know, what can happen in a couple of months. As to how that looks as we flow into next year. And so we will have, I think, a better read on how to set expectations for what we would see next year. But there is some amount of what we see, I think, specific to that issue that will probably take a little bit of unwinding. And so we would. We feel somewhat comfortable that we are gonna be in a little bit more elevated price environment there. Through the through the balance of 2026. Thank you. Good luck. Thanks, Simeon.

Thank you. Your next question is from Kate McShane from Goldman Sachs. Kate, your line is live. Please go ahead.

In prior El Nino cycles in 2015, 2016 and 2023 and 2024 you did note slower DIY sales in cold weather categories. Just with the Super El Nino cycle expected to come up here, how should we think about the impact to comp? And just maybe how you would manage through at this time and if there are any differences from last time? Thank you.

Yeah. Hey. Good morning, Kate. You know, great question. You know, we historically have not been very good at predicting wet weather patterns, weather cycles. So we wanna be careful just assuming that all the predictions are accurate You know, I think, you know, just frankly, we spend all our time focusing on, you know, just we can control our service levels, our ability to gain share. You know, I think it is just yet to be seen what happens this winter. We obviously, in our industry, you know, demand signals continue to be, very healthy. Talked about that a little bit prepared comments, miles driven, you know, age and size of car park. You know, we still feel really good about that. And to your question, we do like if extremes. You know? We like hot summers, and we like cold winters. And a lot of those type drivers, when we talk about weather, just short term. They are the, you know, really the wear and tear that happens over a longer period of time. So, again, you know, yet to be seen. We love a good winter. Sounds like, it could be a little bit mild, but who knows? I think, you know, 1 of the keys is that you know, when we think about the hot summer, that just took place, you know, feel good about how we performed in hot weather categories. You know? You know, Even if we had a little bit of a mild winter, you know, heat is actually what is really hard on batteries, other electrical components, rotating electrical starters, alternators, things like that. And so even though even if it was a little bit of a mild winter, when it gets cold, those things can still fail even if it is not extreme. And so, I just would not, overemphasize or really underemphasize that we just have to see how it plays out. I think our conviction just continues to be that no matter what the winter plays out like, that we continue to have our ability to take share on both sides of the business. Thank you. Okay. Thank you. Stay safe.

Your next question is coming from Michael Lasser from UBS. Michael, your line is live. Please go ahead.

Good morning. Thank you so much for taking my question. The current consensus for O'Reilly for 27 calls for a 4% same store sales increase. This is coming off of much of what has been talked about over the last 40 minutes. A fading benefit from like for like inflation, uncertainty with the weather. And a year of outsized share gains for O'Reilly in particular And in the past, that has ushered in maybe a more moderate pace of share gains in the year ahead. So the next time we have the opportunity to talk to you, we are all gonna be speculating whether you guide the outset of the year, a 2 to 4 comp, a 3 to 5 comp, this is a wonderful opportunity for you to help manage our expectations. Would you think that next year is gonna be a below average year in light of everything you are gonna have to lap from this year? Thank you so much.

Yeah. Thanks for the question, Michael. Obviously, not going to be able to put too fine a point on it that for next year, it is not what we really ever do. I think that some components of the items that you talked about you know, involve some things that are gonna occur over the next few months that are very relevant to how we form our expectations there. So inflation has been a big part of the story for the last couple of years, and we want a clean read into that as we think about next year. And then, obviously, the weather dynamics are unique to each period, and Brad talked about that just quite a bit. Already. We have had a very strong year in driving better traffic to our stores in the broader competitive space, and those are always tough bars to meet year over year. But we also continue to have a lot of, excitement and optimism around the execution in the core components of our business model that are delivering that strength. So I would tell you internally, nobody within our management team or in our entire field organization feels like that we ought to have any expectation the next year to step back. And in that ability to grow and to gain share. You know, we will we will have a better read into that as we as we turn the calendar year and look for some of those other specific factors. But independent of any individual quarter or how we think about the dynamics, what comparisons look like, we are operating a model and with a team that absolutely has the expectation that we will gain share over the course of time. And that there will be some. Always some puts and takes. There are unique things that happen in individual quarters, but our team is primed that we ought to be able to add growth on top of growth and compound the strength that we have seen, really, this year and last year as well.

Understood. My follow-up is there is been an interesting dynamic at O'Reilly over the last couple of years where the pace of operating expense has been elevated. At the same time, O'Reilly has been increasing its leverage ratio to buy back more stock. Should we, as outsiders, interpret that as a signal to suggest that the composition of your earnings algorithm is just perpetually going to change where more of your earning drop is gonna come from buybacks because the cost of doing business has remained elevated. If that is maybe too much of a stretch to assume, what will it take for O'Reilly to get back to the days when it only saw around 2.5 percent SG&A per store growth. Thank you so much.

Yeah. Probably address the question around how we think about leverage in buybacks on that, Michael. You know, I that there is anything, I think, unique from a strategy shift or change in how we view that. You know, we have long said that we have a leverage target that is that is higher than where we had been at. We are we are optimistic about most things that we do, and we felt like that this was an appropriate window to be able to ratchet that up. Ultimately, that. that is an item that you know, that will determine a little bit how we rebalance the debt and capital funding our business, and that flows through to the buybacks being a little bit more aggressive. But that is not a long term shift. We will, you know, we will settle in from a leverage perspective in land, I think, in an appropriate place, and you will see us continue to generate strong cash flows, invest them back into the business, and deliver excess capital back to shareholders through the buy buyback, which we continue to feel is a is a good is a good methodology for doing that. You know, none of that is informed by a change in expectation around our ability to generate returns off of what we invest in the business. And those are quantified for us internally in operating profit dollar growth. And we continue to be excited about what that looks like for our business. And have felt good about how we have managed our overall cost structure to aggressively pursue that and so that. that is really the answer to the question around you know, what does that look like over the course of time? We are continuing to have a lot of stores. We are we are supporting our stores with distribution centers. We are leaning into the places where we think we help to make our business better than grow. And we will we will we will manage our cost structure and be effective in doing all those things. Thank you very much. Thanks, Michael.

Your next question is coming from Steven Forbes from Guggenheim. Steven, your line is live. Please go ahead.

Good morning, everyone. Maybe for, Brent or Brad, appreciate the store growth guidance for 2027. And I guess given the DC capacity needs to support this growth, can you talk through sort of regional expectations around that footprint expansion? Then maybe sort of just frame up for us, how you guys think about store growth potential on a percentage basis, right, or an absolute basis, even further out. Right? In 2028, 2029, Are we sort of reaching a level of comfort or does the business have the capacity to continue to accelerate the absolute level?

Yeah. Hey, good morning, Steven. great question. This is Brad. I will start out and see if the other guys wanna chime in. But appreciate you asking about store growth. Feel really good about where we are gonna end the year here. With our target growth for 2026. We continue to feel really great about how all our new store cohorts are performing. And so really excited to announce our new store growth opening for 2027 that you are asking about. You know, I think to the first part of your question, we wanna emphasize very similar to what our growth looked like in 2026, Brent cited that growth in 2026 was spread out over 36 states. You know, as well as incremental in Mexico and Canada. And that is gonna look very similar. A lot's made about, our new DC and in Northern Virginia and kind of that Upper Mid-Atlantic. But I wanna remind you and everybody that our growth is gonna continue to be spread out over the majority of the states that we operate in today. that is existing markets. that is West Coast, East Coast, North And South. And, obviously, incremental as we get more mature in the international markets. But we feel really good about the way we have been able to add to our distribution capabilities. So we talked a lot about for a long time, and that allows us to really spread that growth out, across The US. And what that really does is enables all our operational teams to open less stores per region, so to speak, and that allows them to really focus on the quality of the store manager, the quality of the parts people, rolling out the right district managers, the right regional directors and so it. It will be a combination of everything we talked about and we said earlier. And so I feel really good about that. We are excited. Not gonna guide to, you know, store growth or percentage overall for Beyond 27 today, but just would just tell you that we are gonna continue to pour into our expansion plans. New stores continue to be our strongest return. On our next dollar spent. You know, that is obviously gonna be backed up distribution capabilities, distribution expansion, technology, both in stores, our distribution centers or our entire supply chain. And so, you know, we will we will leave that for this time next year, but we will we will tell you that store growth specifically is going to continue to be a big part of our strategy.

And then maybe a brief follow-up. As you mentioned technology within the regional DCs and supply chain broadly, the auto store efforts many of us got to see it right down at the Analyst Day. Curious if there is a way to sort of think through or frame up for us what the variable cost savings are or can be what the time to serve benefits you are seeing today, what they can be, Any way to think about, how you guys will leverage those efforts in lean into them over time here to continue to drive, you know, sort of separation? Yes.

Thanks for the question. This is Brent. I can start on that 1, and the other guys can jump in. You know, obviously, yeah, we were we were pleased to host you all at our analyst day recently at our Atlanta, DC, and see some of that technology. But I guess the thing I would just kind of lean into, philosophically for us, we are always. Every DC project, we are always about how do we make it most efficient for our store base that we are trying to serve, give us the most capacity. And the most productivity in terms of, you know, the return on that investment. And so, really, as we think nothing really has changed with our strategy. Obviously, we have got. You know, we have a generation of DCs out there where we had you know, a compelling business case to move to that level of automation. So far, we are pleased. With what we are seeing in terms of the return on those investments and the results we are getting. That allows us to get additional capacity in some of those buildings for additional store counts, which we need as we continue to grow. You know, just to some of Brad's comments. We continue to back those existing markets in many of these geographies across The US. What I would tell you, though, is we are always gonna be looking for that. I mean, that is not. We are always looking for. And even if you go back generations beyond, you know, AutoStore, we have been in. We have got carousels in some of our buildings. I mean, we are just. When we make that investment, we are always looking at the best way to get the best ROI, and that DC is best positioned. And we are gonna continue to do that with new projects. We are excited about the project in South Central US outside the Dallas Metroplex that we have we have announced where the teams are working on that. We are excited, to see what we bring there. We will bring some levels of automation there. In that building. Not ready to talk about anything in detail yet, but, again, we are always looking at those kind of things, to make sure we get the most productivity capacity and the best return on those investments. We are also continuing to look at the infrastructure we need in some other geographies. As well to continue to support that store growth that Brad talked about. And the only other thing I will say is, you know, about this distribution is not only just domestically. Obviously, that you know, but you think about our footprint, in terms of our distribution footprint, 32 regional DCs, 400 hub stores, how we continue to move product up and down the tier distribution capacity that we have to serve all of our stores, And we. We are gonna follow. We are following that same plan and blueprint in Mexico and Canada as well. So we are excited about all of those growth opportunities for our distribution. Network.

Yeah. Steven, I think the key Brent said it very well. I think the. 1 of the key points is we have always been so rifled in on DC productivity and ROI on our existing our existing boxes that we would just caution anybody from extrapolating anything specific to the goods-to-person solutions that are newer to us. Because that is gonna be slow and incremental. it is yet to be seen what you know, what those investments will look like in some of the brownfield opportunities we have with existing DCs. And, also, it is not just, you know, productivity and you know, cost mechanism. Some of the automation that you have seen as well as how we are looking at the rest of our DCs is equally focused on getting those parts out the door that much quicker with our industry leading advantage on how we run city counter, how we do those overnight special orders. So the average 170 thousand SKUs in those buildings. So just wanna make sure we balance how you all are thinking about that. Thank you. And thank you, Steven. Thanks. You.

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

Thank you, Tom. I 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 full 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.