O’Reilly Earnings: Top-Line Growth Slows but Professional Market Share Gains Look Persistent

Wide-moat O'Reilly's second-quarter results lagged our estimates, as comparable store sales growth of 2.3% landed below our forecast for a 4% gain, and operating margin of 20.2% represented an 80-basis-point decline. In light of a softer demand environment, management trimmed its top-line guidance for the full year to 2%-4% comp growth (from 3%-5% previously), but its operating margin target of about 20% remained largely intact. Despite underperforming expectations, the stock popped by a mid-single-digit percentage. We share in the market's positive sentiment because weak demand for aftermarket auto parts appears pervasive across the fragmented industry, and we think O'Reilly continues to gain market share, which should prove favorable longer term. For instance, O'Reilly's low-single-digit comp growth again outpaced its close competitor, narrow-moat Genuine Parts (owner of the NAPA brand), which reported a 1.5% decline in domestic automotive comp sales. We plan to raise our $810 fair value estimate by a low- to mid-single-digit percentage due to the time value of money and a slight upward adjustment to our long-term comp growth forecast.