Welcome to the O'Reilly Automotive, Inc. Q2 2022 Earnings Conference Call. My name is Cheryl, 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 would like to ask a question, please press zero one on your touchtone phone. I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin. Thank you, Cheryl. Good morning, everyone, and thank you for joining us. During today's conference call, we will discuss our Q2 2022 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, 2021, 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 Greg Johnson. Thanks, Jeremy. Good morning, everyone, and welcome to the O'Reilly Auto Parts Q2 Conference Call. Participating on the call with me this morning are Brad Beckham, our Chief Operating Officer, and Jeremy Fletcher, our Chief Financial Officer. Brent Kirby, our Chief Supply Chain Officer, Greg Henslee, our Executive Chairman, and David O'Reilly, our Executive Vice Chairman, are also present on the call. I'd also like to welcome Jeremy to his first earnings call. I'd like to begin our call today by thanking Team O'Reilly for their continued dedication to our customers and their hard work that drove another solid quarter of financial performance. Hopefully, everyone had a chance to review the details on our Q2 earnings release. During the call today, I will walk through the performance in the quarter and our adjusted outlook for the remainder of the year. I think it's important to begin by highlighting the strong results our team continues to generate and then put them into proper context against the backdrop of the incredible growth we've delivered the past three years. In Q2, our team was able to generate a 4.3% comparable store sales increase after driving comp increases of 9.9% and 16.2% in the Q2 s of 2021 and 2020 respectively, resulting in an incredible three-year stack of 30.4%. Entering 2022, we knew our team had a daunting task ahead of them with the challenge to deliver continued growth on top of these outstanding results, which were fueled in part by government stimulus payments in 2020 and 2021 that did not repeat in 2022. Our teams have set an incredibly high performance bar, and their ability to comp the comp yet again is a testament to their relentless focus on providing excellent customer service. Team O'Reilly has continued to translate the robust sales growth into outstanding returns for our shareholders, highlighted by Q2 diluted earnings per share of $8.78, which is an increase of 5% over our extremely strong Q2 2021 when we grew EPS by 17%. On a compounded basis, compared to 2019, our Q2 EPS is up an impressive 25% per year, which is just another testament to the unwavering commitment of our team to growing profitable growth through their dedication to the O'Reilly culture of excellent customer service. Next, I'd like to spend time walking through some details of our sales performance for Q2 and the factors that drove our results, as well as provide some color on our revised comparable store sales guidance for the full year. As we discussed on our Q1 earnings call in April, we began Q2 facing headwinds from a delayed start to spring and rising fuel prices. We're also lapping our historically strong comparable store sales performance, driven in part by the tailwinds we saw from government stimulus payments in 2021. However, as we moved through the quarter, the volatility from these factors moderated and our business stabilized. Since the past few years have been significantly impacted by these effects of the pandemic and timing of the stimulus payments, we think it is most useful to evaluate the cadence of our comp results on a three-year stack basis. On this basis, our month-to-month results were fairly steady throughout the quarter. As our business stabilized in Q2, we encountered more pronounced ticket count pressures on the DIY side of our business, resulting in top-line results below our expectations for the quarter. Our plan for Q2 included an expected headwind to DIY ticket counts as we were up against extremely strong growth from the comparison to stimulus-driven demand at the beginning Q2 of 2021. However, we saw more pressure than expected as our DIY customers faced high fuel prices and continued broad-based inflation. I'll spend some time in a few moments discussing our broader outlook for the industry and our business as we move forward, but for now, I'll point out that it's not completely surprising to us to have experienced these types of pressures. Many of our core DIY customers work on their own vehicles out of economic necessity and can be more susceptible to price inflation in short periods of time. We believe what we're seeing now is comparable to other periods in our history when our customers have gone through these types of fuel price spikes. The current environment is different to the degree that the spike in fuel prices is occurring at the same time broad-based inflation is elevated, but we expect consumers will adjust to these pressures as we've seen in the past and continue to prioritize vehicle repair and maintenance. From a total DIY comp perspective, we did see an inflation benefit in average ticket values, but the macroeconomic pressures to ticket counts and difficult compares resulted in total DIY comparable store sales being slightly negative for the quarter. Turning to the professional side of our business, we're very pleased with our team's performance in Q2, where we generated comparable store sales growth in the low double digits as a result of growth of both ticket counts and average ticket size. We continue to be excited about the strength of our professional customer business as we grow our share and consolidate the industry. As we discussed on the last two calls, we anticipated this side of our business will be the larger driver of our growth in 2022, and our results in Q2 were in line with those expectations. We continue to be pleased with the early returns from our professional pricing initiative, and Brad will cover our professional customer momentum and this initiative in more detail in his prepared comments. On a combined basis, including both DIY and professional sales, our comparable store sales growth for the quarter was driven by strength in average ticket, with professional ticket count growth only partially offsetting pressure we saw in DIY traffic. Average ticket size came in around 10% for the quarter on both sides of our business due to our benefit from same SKU inflation at similar levels. We have continued to be highly successful in passing through product acquisition and operating expense inflation and selling price increases as we've moved through 2022, which is a benefit to average ticket values. Beginning in Q3, we began to anniversary the onset of higher inflation in 2021, which will moderate the year-over-year increase in average ticket value and is factored into our full-year sales expectation. Now I'd like to provide some color on how we view the conditions of our industry and our outlook on the remainder of the year. As we move through the back half of 2022, it remains a challenge to predict what we will encounter in a rapidly changing macroeconomic environment. Certainly, if we could look in the rearview mirror to the beginning of the year and build our expectations based on inflation we haven't seen in decades and a global conflict accelerating growth in fuel prices, we would have landed at a different spot with our initial guidance. Despite these headwinds, we're pleased with our performance against this challenging macro backdrop, and we remain very confident in both the fundamental strength of our industry and the quality of our team, and their proven ability to outperform the market and gain share. While we believe we're seeing some short-term impact to demand as consumers respond to economic challenges, we're also confident our industry benefits from the reality that very little of the demand in the automotive aftermarket is truly discretionary, and the necessary maintenance and repairs can only be deferred for so long. In fact, as economic conditions worsen, our experience has been that the value our industry provides is even more critical to consumers facing economic challenges. This plays out in many different ways. We see it when one of our customers is able to hold off on a new car purchase and avoid a monthly expense because they're able to invest in repairs and maintenance on a higher mileage vehicle. When we help a DIY customer stretch their wallet a little further by providing incredible service from one of our professional parts people who have technical knowledge and customer service skills to support the customer who needs a DIY fix to keep their vehicle on the road. These are just two of the many scenarios which motivate our customers to prioritize taking care of their vehicles when money is tight or consumers have less confidence in the state of the economy. The core underlying factors that support demand in our industry also continue to be very healthy. The average age of vehicles on the road continues to increase, aided not only by headwinds to new vehicle sales and mileage and higher resale values, I'm sorry, of older vehicles, but also the excellent engineering and manufacturing of vehicles on the road today. We are also bullish on the overall health of our customer base. Unemployment has remained at very low levels, and increasing wage rates have been a positive partial offset to inflation, especially for the more economically constrained DIY customer base. We believe consumers are in a much stronger position than in recent periods of economic uncertainty. As we have discussed often in the past, miles driven is a critical metric for our industry, and we are cognizant that the potential for miles driven growth could slow if the broader economy slows. As a buffer against this pressure, we believe industry benefits from dynamics that will support miles driven growth over the long term, as we still see the potential in incremental miles from post-pandemic return to work, coupled with consumers' willingness to move further away from urban centers and utilize their vehicles to satisfy pent-up demand for personal travel. Finally, while miles driven is an important factor for our industry, we have proven that during previous periods when miles driven have flattened, that we have the ability as a company to drive top-line growth as consumers prioritize the care and maintenance of their vehicles. The broader outlook for our industry is important in how we think about the prospects for future growth. Far more important is the opportunity we have to outperform the industry to drive outstanding financial results. We have the best team of professional parts people in the industry, and we are very confident we are well-positioned to deliver excellent customer service and increase our market share in any market condition. While we remain very positive on the prospects of our industry and our business, we are also cautious in our assessment of the pressures from high fuel prices and broad-based inflation that impacted our Q2 performance and the potential for continued pressure as we move through the balance of 2022. As a result, we have incorporated our year-to-date performance and expectations for the remainder of the year in our updated comparable sales guidance range of 3%-5%. Ultimately, we'll have to see how the rest of the year plays out, and we continue to be encouraged by the resilience of our business, but feel the prudent step is to adjust our expectations at this time. At the midpoint, our revised comparable same-store sales guidance range reflects solid growth over 2021 and a three-year stack increase of 28%, and we still view this as a very favorable outlook reflecting our ability to outperform the market and gain share. Before I move on from sales, I will note that we're pleased with our performance thus far in July. We've seen some improvement in July sales volume trends relative to our expectations, partially driven by the extreme heat we're seeing across many of our markets right now. We still have a lot of summer remaining, and ultimately we'll have to see how the weather plays out for the rest of the year. As such, our guidance forecast assumes a normal weather backdrop for the remainder of the year, in line with our customary practice. Moving on to gross margin. For Q2, our gross margin of 51.3% was a 136 basis point decrease from Q2 of 2021 gross margin. This was in line with our expectations with a couple of key points I want to highlight. Our year-over-year gross margin is impacted primarily by the rollout of our professional pricing initiative, as well as pressures from a reduced LIFO benefit and higher mix of professional business. As we discussed on last quarter's call, we rolled out our initiative in February and only saw a partial impact to gross margin right in that quarter. Our Q2 gross margin reflects a full quarter impact from the initiative and is in line with our expectations. We are maintaining our full year gross margin range of 50.8%-51.3% with the expectation that gross margin in the back half of the year as compared to 2021 will be slightly below where we have run year to date based upon mix differences and timing of the reduced LIFO benefit. Before handing the call off to Brad, I want to update our full year diluted earnings per share expectations. Based on the adjustment to our comparable store sales guidance, we are lowering our full year earnings per share guidance to $31.25-31.75. At the midpoint, this range now represents an increase of 1% compared to 2021 and a three-year compounded annual growth rate of 21%. To wrap up my comments, I want to again thank Team O'Reilly for their continued dedication to consistently providing excellent customer service. It's your commitment to our culture, fellow team members, and customers that drives our success. I'll now turn the call over to Brad Beckham. Brad? Thanks, Greg, and good morning, everyone. I would like to begin my comments today by thanking Team O'Reilly for their continued dedication to our company's success and their steadfast commitment to excellent customer service. Since Greg has already discussed our sales results and how we view the current industry environment, I don't want to spend a lot of time repeating what he said. However, I do want to highlight our company's philosophy for how we execute our business model in more challenging macroeconomic conditions. Simply put, we never accept external market pressures as an excuse for falling short of our goals. A guiding philosophy in our company, especially in our store operations group, from our store manager up through the chain to senior vice presidents, states that as long as there are customer vehicles in the parking lot of our competitors or there are competitors delivering to our professional customers in our markets, we haven't captured all the business we are entitled to, and we are missing out on an opportunity to grow sales. We believe our commitment to never settling for subpar performance is a key to our success and also served us well in Q2. While pressures to our DIY customers from spikes in fuel prices and persistent high inflation weighed down the top-line sales growth we were expecting to see, we are still pleased with our team's ability to drive solid positive sales increases on top of two consecutive years of record growth for our company. More importantly, we remain excited about the opportunities we see to grow our business as we move forward. I'm not sure an expert in predicting what the rest of the year will hold for the U.S. economy, but I am highly confident that even challenging market conditions can present an opportunity for us to capitalize on our competitive advantages. Our focus on maintaining an extremely high standard of customer service in any market environment allows us to build long-term relationships, ultimately reinforcing our industry-leading position. Now, I would like to provide some color on our professional sales performance in the quarter, as well as review what we're seeing from our professional pricing initiative. As Greg mentioned in his prepared remarks, our professional business was the driver of our comparable store sales growth with the double-digit increase in line with our expectations for the quarter. Before I provide an update on our progress with our professional pricing initiative, I think it's important to first focus on the key factors that drive our professional sales growth. Our company's foundation was largely built on the professional customer, and we have proven decade after decade that the most important drivers of our success on the professional side of the business are also our competitive advantages in strong customer relationships, excellent customer service, and superior inventory availability. For our professional customer base, the efficient and reliable service they receive from their parts supplier is the most important factor in driving the economic success of their business. We strongly believe that professional business can only be won by consistently delivering a high level of customer service, and this was the primary reason we were able to deliver robust comps in Q2. We also believe what we're seeing in professional comps is consistent with the long-term demographic industry trend of faster professional growth, as well as the stronger economic resilience of the end user do it for me customer on this side of our business. However, our professional customers aren't completely insulated from the economic pressures of high fuel prices and inflation that are impacting our DIY business. We believe our ability to post significant professional sales growth in this environment against extremely difficult comparisons reflects the momentum we are generating through our professional pricing initiative, though it's only one piece of our value proposition. We are very pleased with the response we've seen from our store teams and our sales force, as well as our existing and new prospective customers. Our store and sales teams have been energized as they've leveraged this initiative as another tool in their toolbox to win professional business. It truly is a combination of strong customer relationships, excellent customer service, and industry-leading inventory availability, coupled with our more competitive pricing, which drives the superior value proposition we provide to our professional customers. Simply put, the best overall value in the aftermarket has gotten even better. Since the professional business is driven primarily by strong customer relationships, exceptional customer service, and inventory availability, it is difficult for us to parse the direct impact of our pricing initiative now that it has been rolled out across our company for several months. However, we believe the results we are seeing line up favorably with the expectations we developed in our thorough testing process leading up to launching this initiative. We are excited about the immediate positive results we've seen, but I want to caution everyone that we are still in the early innings of this initiative. Our pricing actions are clearly removing some barriers which had previously existed. However, business is ultimately won with consistent execution after being given a chance to earn new business. These new opportunities don't necessarily open up instantly, and we expect that we will have to grind out gains over time, which is no different than how we've executed our playbook for 65 years, and in turn, established our company as the premier supplier to the professional market. Finally, before I move on, I want to reiterate that the execution of our professional pricing initiative hasn't changed the broader pricing dynamic in our industry. We have not seen significant competitive pricing actions in response to our initiative, and as Greg mentioned, we continue as a company and industry to rationally pass along inflation in pricing. Now I'd like to discuss our SG&A and operating profit results for Q2 and our updated expectations for the full year. SG&A as a percentage of sales was 29.6%, a leverage of 15 basis points from Q2 of 2021. At this level, SG&A is down over 400 basis points from pre-pandemic levels in Q2 of 2019. This incredible step change in our profitability is a testament to our team's commitment to grow sales, exercise diligent expense control, improve productivity, and drive long-term value. On an average per store basis, our SG&A grew 2.5%, which was largely in line with our expectations for the quarter. On a full year basis, we're revising our guidance for SG&A per store to grow 3%, up from our previous guidance of 2.5%. Our teams have been diligent in managing costs to mitigate the impact of inflation thus far this year with our overall spend largely in line with our expectations, but the prolonged and heightened inflation we're experiencing, especially in fuel and energy costs, has driven up our forecast for the remainder of the year. Wage rates have also been in line with our expectations year to date, but we could also see pressure in the back half of the year if we see further sustained inflation. We are also updating our operating profit guidance and now expect the full year to be in the range of 20%-20.3%, which reflects the adjustment to SG&A per store in our revised comparable store sales range. As we look to the back half of the year and plan SG&A, we will be appropriately responsive to the changing business trends and sales opportunities, and we'll make prudent adjustments to staffing levels to provide excellent customer service and grow our business while at the same time controlling our expenses. As we've discussed on multiple occasions over the years, we are very deliberate in how we manage our SG&A spend and leverage a variety of tools to manage store payroll on a store-by-store, day-by-day basis. We believe sudden dramatic changes in store staffing levels have a noticeable negative impact on customer service, and as a result, we manage adjustments gradually over time to match the sales environment in conjunction with the normal seasonality of our business. As always, our top priority in managing expenses is to ensure consistent, excellent customer service that is critical to building long-lasting relationships with both our DIY and professional customers. We strongly believe this long-term view of never sacrificing excellent customer service has been a key factor in our success and was the foundation that drove the incredible gains in profitability that our team has generated over the last several years. Next, turning to inventory. We finished Q2 with an average inventory per store of $679,000, which was up 7% from both the beginning of 2022 and this time last year. Parts availability is a key driver of our success in our business, and we continue to execute our plan to aggressively add incremental dollars to our store-level inventories as we move throughout 2022. While we still face constraints in certain areas of our supply chain, we are very optimistic we will see continued improvement as we move through the back half of the year and still expect our per store inventory to be up over 8% by year-end. Our investments in inventory and daily execution both continue to be focused first and foremost on our replenishment and fill rates, then on having the right combination of common as well as hard-to-find parts in every one of our stores that is tailored to that specific market, then backed up by our dynamic multi-tier hub and distribution center network. Our extensive industry-leading network powers our best-in-class parts availability and equips us to be the dominant auto parts supplier in all our market areas. We feel strongly that these investments in inventory, as well as enhanced supply chain capabilities, will continue to be a critical part of our success on both sides of the business and in turn, provide long-term share gains as well as returns. Before turning the call over to Jeremy, I'll provide an update on our store growth during the Q2. We opened 62 new stores across 28 states in the U.S., bringing our year-to-date total to 116 net new store openings. We are on pace to hit our plan of 175-185 net new store openings for the year. We continue to be pleased with our performance of our new stores, and I am very proud of the outstanding teams of professional parts people we have in each of our new stores. To close my comments, I want to once again thank Team O'Reilly for their continued dedication to our customers. Our teams are committed to winning our customers' business each day by out-hustling and out-servicing our competition, and I am confident in their ability to deliver a strong finish to 2022. Now, I will turn the call over to Jeremy. Thanks, Brad. I would also like to add my thanks to all of Team O'Reilly for their continued dedication to our company's long-term success. Now, we will cover some additional details on our quarterly results and updated guidance for the remainder of 2022. For the quarter, sales increased $205 million, comprised of a $145 million increase in comp store sales, a $56 million increase in non-comp store sales, a $5 million increase in non-comp non-store sales, and a 1 million decrease from closed stores. For 2022, we now expect our total revenues to be $14.0- 14.3 billion, which is a reduction from our previous range of $14.2- 14.5 billion as a result of our revised comparable store sales guidance range. Greg covered our gross profit margin performance for Q2 and reiterated our full year guidance, but I want to briefly recap that we are not expecting a significant LIFO benefit to our gross margin results in 2022 as a result of more typical LIFO accounting after our reserve returned to a credit balance in 2021. Our year-to-date results were in line with those expectations, and our outlook on this item for the year is unchanged. Our Q2 effective tax rate was 23.8% of pre-tax income, comprised of a base rate of 24.3%, reduced by a 0.5% benefit for share-based compensation. This compares to Q2 of 2021 rate of 23.1% of pre-tax income, which was comprised of a base tax rate of 24.5%, reduced by a 1.4% benefit for share-based compensation. Q2 of 2022 base rate was in line with our expectations. For the full year of 2022, we now expect an effective tax rate of 23.0%, comprised of a base rate of 23.5, reduced by a benefit of 0.5% for share-based compensation. Our expected tax rate is down slightly from our previous guidance of 23.2% due to anticipated benefits from renewable energy tax credits. We continue to expect Q4 rate to be lower than the other three quarters as a result of the timing of these benefits and totaling of certain tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. Now, we will move on to free cash flow and the components that drove our results. Free cash flow for the first six months of 2022 was $1.2 versus 1.5 billion for the first six months of 2021, with the decrease driven by a smaller benefit from reduction of net inventory investment in 2022 versus 2021 and differences in accrued compensation. Capital expenditures for the first six months of 2022 were $229 million, which was in line with the same period of 2021. We continue to expect CapEx to come in between $650- 730 million for the full year, with the balance of the spend for the remainder of the year supporting new store and DC development, initiatives to enhance the image, appearance and convenience of our stores, DC and store fleet upgrades, and strategic investments in information technology projects. Our AP to inventory ratio at the end of Q2 was 131%, which once again has set an all-time high for our company and was heavily influenced by the extremely strong sales volumes and inventory turns over the last 12 months. We anticipate our AP to inventory ratio to moderate off of this historic high as we complete our additional inventory investments. Based on the anticipated moderation in this ratio and a heavier spend on CapEx for the second half of the year, we are keeping our expected full-year free cash flow guidance unchanged at a rate of $1.3- 1.6 billion after generating $1.2 billion in the first half of 2022. Moving on to debt. In June, we were pleased to execute a very successful debt transaction with the issuance of $850 million of 10-year senior notes at a rate of 4.7%. As a result of the bond issuance, we finished Q2 with an adjusted debt to EBITDAR ratio of 1.95x as compared to our end of 2021 ratio of 1.69x. We continue to be below our leverage target at 2.5x, and we will approach that number when appropriate. We continue to execute our share repurchase program, and during Q2, we repurchased 2.2 million shares at an average share price of $620.27 for a total investment of $1.4 billion. Year to date through our press release yesterday, we repurchased 3.8 million shares at an average share price of $637.47 for a total investment of $2.4 billion. We remain very confident that the average repurchase price is supported by the expected future discounted 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. Finally, before I open up our call to your questions, I would like to thank the entire O'Reilly team for their continued dedication to the company's long-term success. This concludes our prepared comments. At this time, I would like to ask Cheryl, the operator, to return to the line, and we will be happy to answer your questions. Thank you. We will now begin the question and answer session. If you have a question, please press zero one on your touch-tone phone. Please limit your questions to one question and one follow-up question. Once again, if you have a question, please press zero one on your touch-tone phone. Our first question goes to Michael Lasser with UBS. Your line is now open. Good morning. Thanks a lot for taking my question. The auto parts industry has experienced a significant benefit from same-SKU inflation over the last several quarters. Now that's starting to moderate. Is it your expectation that as the contribution from same-SKU inflation moderates, that there'll be a corresponding increase in the number of transactions to drive steady growth for the overall sector? Jeremy, you wanna take that? Yeah. I can maybe answer that first, Michael. I think when we think about the same SKU dynamics as we move into the back half of the year, you know, we're not gonna necessarily see a reversal of some of that inflation. I think the year-over-year benefit as we see that in the balance of the year will moderate, as you've mentioned, and we've built that into our plan expectations. I think from a traffic perspective, since we won't see the actual rate of pricing reverse necessarily, and certainly we wouldn't want to give back anything on pricing, I don't know that that's gonna be a dynamic that changes the ticket dynamics within our industry. I think for us specifically, as we've thought about how the back half of the year lays out, we understand on a one-year basis that we'll see some pressure as average ticket moderates, but still continue to be very optimistic about continued traction we'll see on our professional pricing initiative. Also just more broadly feel like our industry performs very well in environments where consumers are pressured and that we'll see support to overall demand, but not necessarily an offsetting pickup to the point that you've mentioned. I think. You know, on top of that, we're cautious as to how the rest of the year will play out from a macroeconomic perspective, and I think that comes into play here as well. My follow-up question is, at the midpoint of your guidance for the back half of the year, have you assumed that the DIY business is gonna turn positive? Have you already started to see that in response to the recent decline in gasoline prices? Thank you. Yeah, Michael, I mean, our assumption all along has been that, you know, that our DIFM business would perform stronger than our DIY business. You know, we don't see that changing in the back half of the year. Our expectations remain that DIFM will outperform DIY. Will DIY improve in the back half of the year? It's really yet to be seen. It really depends on what happens in the macro, how quickly that turns around. Fuel price is a contributor, but it's one of many contributors. You know, we've historically talked a lot about fuel prices and the impact. This year we've got, you know, a more significant inflationary impact, you know, across all of retail on top of fuel prices. Again, as Jeremy said, we remain pretty cautious on our outlook, but remain very optimistic on the industry as a whole. Thank you very much. Good luck. Thanks. Our next question comes from Michael Baker from D.A. Davidson. Your line is now open. Hi. Thanks. One question and one follow-up. You said July is better versus expectations. Can you tell us if it's better, and really I'm talking about on a one-year comp basis, is it better than Q2? Or if you don't wanna answer it that way, maybe tell us what your expectation was for July. Did you expect July to be better or worse than Q2? Thanks. Yeah. I guess maybe just want to clarify. I think our improvement really reflects how we were trending as we finished Q2, and we do think we've seen business pick up a little bit there. You know, it's a short period of time, and we tend not to be over-influenced by what we see, particularly as we've seen a lot of hot weather, and we think that that's a positive benefit to us. You know, beyond that, we feel good about the overall level of what our business is seeing, and we really saw that stabilize as we moved through Q2 and got past some of the stimulus challenges early in the quarter that we saw. What we've seen is it settled a little bit lower than where we had expected, but that has kinda continued. We think that's you know that's an appropriate way of thinking about as we move into the back half of the year, encouraged by July certainly, but also you know cognizant that as we move through the rest of the year, weather can normalize a little bit and we're not gonna overreact a few weeks. Fair enough. The follow-up is a follow-up to your answer to Mike Lasser's question. You said you certainly expect to hold on to price. Does that imply that if inflation does start to moderate, you should see a little bit of a gross margin benefit in the back half? Yeah, certainly within our industry, and within our history, we wanna hang on to price increases that we've passed through. We think that to the extent that we see moderation in price levels or we start to see some reversals and the question around tariffs has come up some, you know, we would expect to maintain pricing at our current levels and would hope to benefit from the reduction in acquisition costs. I think that's largely in line with how our business operates with price being a secondary or a third factor for the value that we provide to our customers and being able to drive continued strong performance off of excellent customer service and making sure that we've got the part that our customers need when they need it. I think that allows us, puts us in a position where we wouldn't have to see a reduction. Ultimately, we'll see how that plays out within the industry as we move through the balance of the year. It would certainly be our intent to maintain pricing levels and see a benefit from that. That potential gross margin benefit doesn't seem to be in your back half guidance. Correct me if I'm wrong on that. Yeah. We haven't forecasted a deflation in pricing in how we've thought about where we'll go for the rest of the year. Fair enough. Thank you. Thank you. Thank you. Our next question comes from Simeon Gutman from Morgan Stanley. Your line is now open. Hey, good morning, everyone. I wanted to ask around, I guess you wrote, you talk about tickets being down. I guess I don't know if they are in DIFM, but it sounds like in DIY. This is, I guess, hard to parse, but can you try to talk to how much units or tickets are down because prices are higher versus how much might be reversion or digestion from the last couple of years? Yeah. Simeon, good question. It's really hard to break that out. You know, that almost becomes an opinion. What I would tell you is I think it's more an impact of the inflationary environment. You know, the negative ticket count was on the DIY side of our business. As we've said, that consumer is a little more pressured right now with higher fuel prices and the overall inflationary environment. We think it's more of just a cash flow issue for that lower income consumer than maybe margins or any of that. Okay. That's fair. Maybe the follow-up is connected. Does it feel like, because you have visibility into units or tickets, does it feel like if there is any digestion from, you know, post-stimulus and post what consumers were spending on during the COVID period, that this represents the rebasing? This is the renew baseline, and then we move into 2023, and we could see the business look or act a little bit more normal. I get there's a lot of, you know, moving pieces with price, but at least from a unit perspective or ticket, this puts in the floor. Yes, I mean, I think you're right in saying that there are a lot of moving pieces and it can be a little bit challenging to get it read through, particularly as we've seen stimulus in some of the comparative periods that have, you know, kind of pushed demand around. We know as we entered this year, we faced some volatility just as weather and timing has impacted us. I think where we sit today, you know, we probably characterize this as a more normalized, broader period around what we would expect for current economic conditions. I don't know what time will tell moving forward, but as we think about just the overall makeup of our business, we certainly don't view it as having still significant drivers that are things that are out of what we would have expected as we've moved through the pandemic and we sit where we are today. Okay. Thanks, guys. Good luck rest of the year. Thank you. Thank you. Our next question comes from Scot Ciccarelli from Truist Securities. Your line is now open. Thank you. Good morning, everyone. Can you speak to what you guys are seeing on a geographic basis? I think your market has been pretty uniformly geographically for most of the last two years, but I think we're starting to hear about widening performance differences market to market over the last two quarters. If you can help clarify that'd be helpful. Yeah, Scot, you were breaking up a little bit, but we kinda gathered the geographic performance component of the question. Brad, do you wanna take a shot at that? Yeah, sure. Hey, good morning, Scot. Really, similar to last quarter, we were very pleased at the consistency of our business on both sides of the business as we looked across our regions and divisions. A lot of consistency, not a lot of differences from a geography standpoint. The one that we would call out, Scot, that is a little bit of a tough line to draw, but we did see a little bit of softness on the West Coast, specifically Northern California, even you know, Pacific Northwest, Washington State, that we would probably draw a line to some of the fuel prices out there. But that was a very minor difference in the way the rest of the company performed. A little bit there, but other than that, very consistent. Got it. Thank you. Just a quick one. You know, have you guys seen much of a shift towards private label, you know, just in terms of the whole trade down potential concept? You know, Scot, we've seen over the past several years, we've seen more and more volume shift to private label. I think there's a little less brand loyalty than there once was. You know, throughout the pandemic and supply chain issues, frankly, there's definitely not as much brand loyalty. I think consumers are buying products you have, not necessarily getting the products they want every time. But our private label program is about 50% of our volume today overall. In the hard parts category, it's between 60% and 65%. It continues to grow as a percentage of our overall sales. Great. Thanks a lot. Hey, Scot, this is Brad. I would just- Yeah. I would just add on that, Scot, that when you think about private label, we don't necessarily think of that as being a trade down. We want you to keep in mind that our exclusive national brands, while we have entry points, we have an equal amount of better investment when it comes to our private label. Good examples would be our Import Direct program, Precision Chassis, things like that. Just want you to keep in mind that when we talk about private label, we're also talking about exclusive national brands that is a premium product. Good. Thanks a lot, guys. Thank you. Thank you. Our next question comes from Zachary Fadem from Wells Fargo. Your line is now open. Hey, good morning. So following up on the average ticket question, I believe you said it was up 10%. The question is whether this implies units were down 6% or if there are other factors at play like mix. Yeah, we saw pressure on units primarily on the DIY side of our business. You know, there are mix dynamics that play into what we've seen. When we think about our professional business specifically, you'll continue to be encouraged by the progress we've made there, where our comp was driven by both the average ticket growth, but also growth in tickets. Really, I think on that side of the business, you know, the split between that average ticket count can depend on being able to add more things to the shop order when you send it out the door. We feel positive there. We think that we've had the ability to continue to drive incremental business and incremental share relative to where the market's at. We are pressured on the DIY side business. We expected that we would be as we came into the quarter with some of the stimulus comps, ended up a little bit softer there than we anticipated because of some of the macroeconomic pressures we've spoken to. Got it. On your gross margin outlook, it looks like on an ex-LIFO basis, gross margin has been tracking at about 51.5% in the first half of the year, assuming my math is right. It looks like you're guiding the second half about 100 basis points lower. I'm just trying to understand the moving parts, how much of this is incremental pricing versus Q2, and any other factors that we should consider on the input cost side. Yeah, I can take that one, Zach. The sequential first half to back half can be a little bit challenging because we do have different seasonality dynamics that come into play. Maybe to directly answer a few points of the questions. You know, we're not anticipating incremental price investments on the professional side of our business. We expect that what we've done there is, you know, the full amount of what our plan was, and that we would continue to maintain those levels, and that in and of itself doesn't create incremental pressure other than you'll have two full quarters of the impact versus Q1 being a bit light. You know, beyond that, when we think about the back half of the year, we do have different mix dynamics from a seasonality perspective that we think will impact the gross margin rate some. As we think about it on a more normalized basis, year-over-year, the pressures that we'll see are because of some of the LIFO compares, because of some of mix. The rest of what we would anticipate is would have been incorporated into how we thought about our plan for the year, given those mix differences. The prior comparables can be a little bit tough because we have had some, you know, some LIFO impacts that have caused some of that normal cadence of the year to change for us. Really that's in line with what we would have thought when we came into the year. Got it. Thanks for the time. Thanks, Zach. Thank you. Our next question comes from Christopher Horvers from J.P. Morgan. Your line is now open. Thanks. Good morning. My first question is a follow-up on the top line outlook in the back half of the year. On the pro pricing initiative, you had baked in some share gains in the back half in the original guidance, causing some trend acceleration in the overall comp in the back half despite lapping inflation. In the updated guide, did you take that out, given your heightened caution in the macro and that was, you know, part of the back half revision? Yeah. Chris, I would tell you, as we thought about how our expectations would have changed in the back half, it was really geared around what we said in the script and in the press release around the pressures we're seeing on the DIY side of our business from a ticket perspective. Even as we've, you know, we've talked about our full year expectations this year, we've been cognizant of continued pressure that we could see there, and that's really the change that we see. You know, as Brad mentioned in his prepared comments, we're still early stages on our professional pricing initiative. We still have gains that we think that we can make there, and we have built in incremental improvements as we move through the year. There's nothing in our initial indications that have changed our outlook and perspective on that for the balance of the year. There's a lot of excitement, I think, on not just how our professional play out for the balance of the year, but as we move past this year, what that'll look like. Thank you. That's very helpful. And two follow-ups. First, can you lay out what the LIFO headwind was and if anything changed in the back half of the year in Q2? Secondly, you know, you bought back a lot of stock in Q2. You know, the cash balance has come down quite a bit, but you're also sitting below your long-term leverage target. How do you think about deployment of capital and use of the balance sheet in the back half of the year to help, you know, sort of the earnings and capital return to shareholders? Yeah, absolutely. I can take those, Chris. From a LIFO perspective, our LIFO was neutral in the Q2, and that's where we expect we'll be for the full year. Really our headwind is what we would have talked about as a positive last year as we moved through the year. From a repurchase perspective, you know, we continue to feel like we utilize our repurchase program as an effective means of returning capital to our shareholders. I think for us, over the course of time, it has been successful really because it's been driven by our ability to be both consistent and drive our repurchases really month in, month out because of the consistent nature of our cash flows, but then also when we have opportunities to be opportunistic at times. I think you probably saw some of that in the first half of the year. That philosophy hasn't changed. We'll prioritize our capital for reinvestment in our business because we like those returns the best. When we have an opportunity, we'll execute our buyback program with that same philosophy. Thanks very much. Best of luck. Thanks, Chris. Thank you. Our next question comes from Brian Nagel from Oppenheimer. Your line is now open. Hi. Good morning. Morning. The first question I wanna ask, you know, just with regard to, you know, the commentary around inflation. You know, you and other retailers now are saying, you know, this same thing, where, you know, there's this view that, you know, broad-based inflationary pressures are weighing upon your sales. I guess the question I have is, you know, as you think about that and, you know, and this dynamic taking hold, you know, at the same time, you know, O'Reilly has been very good at sort of, say, strategically passing along higher costs. As you look at that DIY, I guess the question working towards, as you look at that DIY category, recognizing this, you know, this broad-based inflation is now impacting your business, is there a thought to maybe adjusting pricing or even rethinking the inflation within O'Reilly stores to help stimulate that business? No, Brian, we haven't considered that. Obviously, that would just create a race to the bottom in retail, which is not something we want. You know, we feel like we're competitively priced for our DIY and our DIFM customers. You know, we commented on the DIFM price adjustments. While we're constantly monitoring and adjusting prices on both sides of our business, that one, you know, really philosophy change that we made earlier in the year was a one-time event on the DIFM side, and we have not, you know, had any consideration of making any type of mass change to the DIY side or retail side of our pricing. Maybe the only thing I would add to that, Brian, is as we think about how we'll be impacted by or are being impacted by what consumers are seeing, you know, even though we think we're seeing some pressure, it's not as significant as where other areas of retail will see it. I think our customer responds differently to it over the course of time. You know, we view a lot of these shocks as transitory because ultimately, consumers need their vehicles. They need to stay on the road. There is a real value proposition in being able to maintain an older vehicle and invest in it. I think some of what we see on our business is less impacted and it's probably shorter term in nature. As a result of that, there's that nature of the demand doesn't really make it something that we can move around by moving prices, and that's why our industry has been as rational as we've seen it. Yeah. Brian, keep in mind that, you know, we operate in an industry that's mostly non-discretionary. It's not a situation where if you lower the price on a category, the consumer is gonna buy more of it. That's typically not the way it works. It's the customer buys products from us because they have a problem, and that purchase solves the problem in most cases in our environment. Got it. No, that's very helpful. A follow-up to that. What's happening right now to some extent is unprecedented out there. We've talked in the past about higher fuel prices and the impacts upon O'Reilly. For many reasons, the DIFM or the commercial business should be more insulated. Have you historically, if you look back over time, has there been any indication that there's a lead lag relationship where maybe you see the impacts first in DIY and that ultimately spills into commercial, or are they two really distinct businesses in this regard? No, DIFM is not immune to impacts, you know, in the economy like the fuel prices. To your point, you're spot on. It typically hits our more, you know, cash constrained DIY customer before it would impact the typical DIFM customer who, you know, typically has, you know, is in a better cash flow position. But they're definitely not immune to it. We haven't seen significant evidence of that thus far. Got it. Well, again, thank you. Appreciate it. Thanks, Brian. Thank you. Our next question comes from Bret Jordan from Jefferies. Your line is now open. Hey, good morning, guys. Morning, Bret. Morning, Bret. Good morning. Now that the price initiative is I guess largely rolled out and complete, could you talk to us maybe about sort of how broadly staked it was? Like maybe what percentage of your DIFM sales were touched by that pricing initiative? It seemed like maybe it was product or customer, you know, sort of narrowly focused, but could you give us some color? Yeah, maybe I'll step into that first and then Brad can add comments. You know, we very intentionally haven't been too detailed on how we thought about that, and talked to folks about the specifics on that. I can tell you that, you know, obviously it was significant across lots of different customer segments. It wasn't, you know, it wasn't every item, it wasn't every line. It was very specifically focused on areas where we thought we would have opportunity and it was something, as Brad mentioned in his prepared comments, was thoroughly tested. Brad, do you wanna add anything to that? Yeah, Bret, just maybe keep in mind that you know where the majority of the share on the DIFM side lies in the U.S. with the you know the amount of incredible independents out there you know solid competition. With two-step models that you know our goal like you know wasn't to you know be as cheap or cheaper than those, but that's where the majority of the opportunity for share gains was for our professional pricing initiative. In turn, it was in those key categories where we felt like we may have been too far out of line, you know, with those traditional players that had a lot of volume and were gaining some, either half a basket or half a delivery that we wanted to turn into a, you know, an entire delivery and jobs and change those buying habits over time. You know, we're really pleased with where we're at with it. The team's excited, but like we mentioned earlier, it's just gonna continue to take time. You know, the point that we lower price, it could take, you know, six, seven, eight sales calls on an individual garage if they were, you know, previously buying from a local independent that they trusted for decades or more. You know, just because we're that much more competitive the first time we call on them doesn't mean they're gonna call the next day. It can take months to really get that opportunity, and it may just be for second or third call. We're very pleased with what we're seeing on that front. Great. Thank you. A quick question on inflation for the second half. I think one of your peers yesterday was talking about second half inflation expectations in line with what they saw in Q2. I think you're talking about maybe a little bit lower price impact in the second half. How should we think about that? I mean, I think you were close to 10% in Q2. You know, just as we model it, what should we think about top line from price? Yeah, I think for us, the way we think about that question is from an overall price level perspective, we would expect the balance of the year to be relatively in line with where we are today. I think when we talked about that from a year-over-year perspective, we are up against bigger comparisons. So where we would have seen the same SKU number in Q2 at price levels that are, you know, consistent with where we sit today, there was a bigger year-over-year change because some of that increase happened in Q3 and Q4 of last year, beginning part of this year. That's really how we think about the impact of that as we move through the rest of the year. Okay, great. Thank you. Thanks, Bret. Thanks, Bret. Thank you. Our next question comes from Elizabeth Suzuki from Bank of America. Your line is now open. Great. Thank you for taking my question. I'm just curious what the M&A environment looks like. Are any small chains feeling a little bit more pressure in these challenging times and maybe the valuation multiples they were expecting have come down a little bit? You know, Liz, like I said before, we're always looking for potential acquisition targets, both inside and outside of the U.S., and really nothing's changed. You know, over the years, the players that are out there that remain, especially the smaller chains, they're just solid performers. A lot of these regional players that have survived what's happened the past several years are solid performers. You know, we're constantly looking at smaller one, two store chains, and we buy some of those throughout the year-over-year, and we'll continue to do that. Those are the things that don't make the headlines. We don't talk a lot about. But we've not seen any real uptick in opportunities from an M&A standpoint as far as, you know, seeing companies that are reaching out, you know, looking for an exit strategy. Great. Thank you. Just a quick one on inventory. I mean, it sounds like overall inventory per store grew at a similar rate to your plan. But you know, with the slowdown in DIY demand, are you finding that you have pockets of excess inventory in products like fluids that have more limited shelf life and you have to discount them? Or are you able to just keep the product on the shelf and then pace your orders from your suppliers accordingly? Brent, do you wanna take that one? Yeah. Hey, hey, Liz. This is Brent. I'll take that one. Yeah, you know, a lot of the inventory growth is really, you know, Brad talked about it in his prepared comments. A lot of it was really built into our plan this year. You know, we typically are always looking to try to get inventory closest to customers and get it in the markets where we think it's gonna serve service best. We had to slow down some of that expansion at the local level last year with some of the supply chain constraints that were out there. This year, we set a plan to kind of make up some of that ground as we went into 2022, and we're continuing to do that. That's really what's driving it. There's not really anything there that is hangover or non-productive inventory. Great. Thank you. Thank you. Thank you. We have reached our allotted time for questions. I will now turn the call back over to Mr. Greg Johnson for closing remarks. Thank you, Cheryl. We'd like to conclude our call today by thanking the entire O'Reilly team for your continued hard work in Q2. I'd like to also remind everyone that we will be webcasting our Analyst Day on Tuesday, August 23, beginning at 8:30 A.M. Central Time. Details are available on our website, and we hope you'll be able to join us. I'd like to thank everyone for joining our call today, and we look forward to reporting our Q3 results in October. Thank you. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.