UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                        

O’REILLY AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

Missouri	000-21318	27-4358837
(State or other jurisdiction	Commission file	(I.R.S. Employer
of incorporation or organization)	number	Identification No.)

233 South Patterson Avenue

Springfield, Missouri 65802

(Address of principal executive offices, Zip code)

(417) 862-6708

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol(s)	Name of Each Exchange on which Registered
Common Stock	$0.01 par value	ORLY	The NASDAQ Stock Market LLC
			(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☒  No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐  No  ☒

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☒	Accelerated filer  ☐
Non-accelerated filer  ☐	Smaller reporting company  ☐
Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

At June 30, 2020, the aggregate market value of the voting stock held by non-affiliates of the Company was $25,984,638,678 based on the last price of the common stock reported by The NASDAQ Global Select Market.

At February 22, 2021, an aggregate of 70,206,669 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 2021 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after December 31, 2020, are incorporated by reference into Part III.

O’REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2020

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	20
Item 2.	Properties	20
Item 3.	Legal Proceedings	21
Item 4.	Mine Safety Disclosures	21
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 8.	Financial Statements and Supplementary Data	40
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	72
Item 9A.	Controls and Procedures	72
Item 9B.	Other Information	73
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	74
Item 11.	Executive Compensation	74
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	75
Item 13.	Certain Relationships and Related Transactions, and Director Independence	75
Item 14.	Principal Accounting Fees and Services	75
PART IV
Item 15.	Exhibits and Financial Statement Schedules	76
Item 16	Form 10-K Summary	79

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Forward-Looking Statements

We claim the protection of the safe-harbor for forward-looking statements within the meaning of 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.  In addition, statements contained within this annual report that are not historical facts are forward-looking statements, such as statements discussing, among other things, expected growth, store development, integration and expansion strategy, business strategies, future revenues and future performance.  These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results.  Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, the COVID-19 pandemic or other public health crises, the economy in general, inflation, consumer debt levels, product demand, the market for auto parts, competition, weather, tariffs, terrorist activities, war and the threat of war, risks associated with the performance of acquired businesses, our increased debt levels, credit ratings on public debt, our ability to hire and retain qualified employees, information security and cyber-attacks and governmental regulations.  Actual results may materially differ from anticipated results described or implied in these forward-looking statements.  Please refer to the “Risk Factors” section in this annual report on Form 10-K for the year ended December 31, 2020, and subsequent Securities and Exchange Commission filings, for additional factors that could materially affect our financial performance.  Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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PART I

Item 1.  Business

GENERAL INFORMATION

Unless otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company,” refer to O’Reilly Automotive, Inc. and its Subsidiaries.  O’Reilly is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States (“U.S.”), selling our products to both do-it-yourself (“DIY”) and professional service provider customers, our “dual market strategy.”  The business was founded in 1957 by Charles F. O’Reilly and his son, Charles H. “Chub’’ O’Reilly, Sr., and initially operated from a single store in Springfield, Missouri. Our common stock has traded on The NASDAQ Global Select Market under the symbol “ORLY” since April 22, 1993.

After the close of business on November 29, 2019, we completed the acquisition of Mayoreo de Autopartes y Aceites, S.A. de C.V. (“Mayasa”), a specialty retailer of automotive aftermarket parts headquartered in Guadalajara, Jalisco, Mexico pursuant to a stock purchase agreement.  At the time of the acquisition, Mayasa operated six distribution centers, 21 Orma Autopartes stores and served over 2,000 independent jobber locations in 28 Mexican states.

At December 31, 2020, we operated 5,594 stores in 47 states in the United States and 22 stores in Mexico.  Our stores carry an extensive product line, including

● new and remanufactured automotive hard parts and maintenance items, such as alternators, batteries, brake system components, belts, chassis parts, driveline parts, engine parts, fuel pumps, hoses, starters, temperature control, water pumps, antifreeze, appearance products, engine additives, filters, fluids, lighting, oil and wiper blades; and

● accessories, such as floor mats, seat covers and truck accessories.

Our stores offer many enhanced services and programs to our customers, such as

● battery diagnostic testing;

● battery, wiper and bulb replacement;

● check engine light code extraction, where allowed by law;

● custom hydraulic hoses;

● drum and rotor resurfacing;

● electrical and module testing;

● loaner tool program;

● professional paint shop mixing and related materials; and

● used oil, oil filter and battery recycling.

See the “Risk Factors” section of this annual report on Form 10-K for a description of certain risks relevant to our business.  These risk factors include, among others, risk related to the novel coronavirus (“COVID-19”) pandemic, deteriorating economic conditions, competition in the automotive aftermarket business, our sensitivity to regional economic and weather conditions, our relationships with key suppliers and availability of key products, complications in our distribution centers (“DCs”), failure to protect our brand and reputation, risks associated with international operations, unanticipated fluctuations in our quarterly results, the volatility of the market price of our common stock, our increased debt levels, a downgrade in our credit ratings, future growth assurance, our dependence upon key and other personnel, our acquisition strategies, data security and environmental legislation and other regulations.

OUR BUSINESS

Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our growth strategy.  We remain confident in our ability to continue to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O’Reilly values, including superior customer service and expense control.  Our intent is to be the dominant auto parts provider in all the markets we serve, by providing a higher level of customer service and a better value position than our competitors to both DIY and professional service provider customers.

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Competitive Advantages

We believe our effective dual market strategy, superior customer service, technically proficient store personnel, strategic distribution network and experienced management Team make up our key competitive advantages, which cannot be easily duplicated.

Proven Ability to Execute Our Dual Market Strategy:

For more than 40 years, we have established a track record of effectively serving, at a high level, both DIY and professional service provider customers.  We believe our proven ability to effectively execute a dual market strategy is a unique competitive advantage.  The execution of this strategy enables us to better compete by targeting a larger base of automotive aftermarket parts consumers, capitalizing on our existing store and distribution infrastructure, operating profitably in both large markets and less densely populated geographic areas that typically attract fewer competitors and enhancing service levels offered to DIY customers through the offering of a broad inventory and the extensive product knowledge required by professional service provider customers.

In 2020, we derived approximately 59% of our sales from our DIY customers and approximately 41% of our sales from our professional service provider customers.  Over the long-term, we have increased our sales to professional service provider customers at a faster pace than the increase in our sales to DIY customers due to the more fragmented nature of the professional service provider business, which offers a greater opportunity for consolidation.  We believe we will continue to have a competitive advantage on the professional service provider portion of our business, due to our systems, knowledge, industry-leading parts availability and experience serving the professional service provider side of the automotive aftermarket, supported by our approximately 765 full-time sales staff dedicated solely to calling upon and servicing the professional service provider customer.  We will also continue to expand and enhance the level of offerings focused on growing our DIY business and will continue to execute our proven dual market strategy in both existing and new markets.

Superior Customer Service:

We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient locations with a wide selection of automotive products.  We believe the satisfaction of DIY and professional service provider customers is substantially dependent upon our ability to provide, in a timely fashion, the specific automotive products needed to complete their repairs.  Accordingly, each O’Reilly store carries, or has same or next day availability to, a broad selection of automotive products designed to cover a wide range of vehicle applications.  We continuously refine the inventory levels and assortments carried in each of our stores and within our network, based in large part on the sales movement tracked by our inventory control system, market vehicle registration data, failure rates and management’s assessment of the changes and trends in the marketplace.  We have no material backorders for the products we sell.

We seek to attract new DIY and professional service provider customers and retain existing customers by offering superior customer service, the key elements of which are identified below:

● superior in-store service through highly-motivated, technically-proficient store personnel (“Professional Parts People”);

● an extensive selection and availability of products;

● many enhanced service programs, including battery and electrical testing, battery, wiper and bulb replacement and check engine light code extractions;

● attractive stores in convenient locations;

● competitive pricing, supported by a good, better, best product assortment designed to meet all of our customers’ quality and value preferences; and

● a robust point-of-sale system integrated with our proprietary electronic catalog, which contains a wide variety of product images, schematics and technical specifications and equips our Team Members with highly effective tools to source products in our extensive supply network.

Technically Proficient Professional Parts People:

Our highly-motivated, technically-proficient Professional Parts People provide us with a significant competitive advantage, particularly over less specialized retail operators.  We require our Professional Parts People to undergo extensive and ongoing training and to be knowledgeable, particularly with respect to hard part repairs, in order to better serve the technically-oriented professional service provider customers with whom they interact on a daily basis.  Such technical proficiency also enhances the customer service we provide to our DIY customers who value the expert assistance provided by our Professional Parts People.

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Strategic Regional Tiered Distribution Network:

We believe our commitment to a robust, regional, tiered distribution network provides superior replenishment and access to hard-to-find parts and enables us to optimize product availability and inventory levels throughout our store network.  Our strategic, regional, tiered distribution network includes DCs and Hub stores.  Our inventory management and distribution systems electronically link each of our stores to one or more DCs, which provides for efficient inventory control and management.  We currently operate 28 regional DCs, which provide our stores with same-day or overnight access to an average of 159,000 stock keeping units (“SKUs”), many of which are hard-to-find items not typically stocked by other auto parts retailers.  To augment our robust distribution network, we operate a total of 362 Hub stores that also provide delivery service and same-day access to an average of 70,000 SKUs from a Super Hub or 42,000 SKUs from a Hub to other stores within the surrounding area.  We believe this timely access to a broad range of products is a key competitive advantage in satisfying customer demand and generating repeat business.

Experienced Management Team:

Our Company philosophy is to “promote from within” and the vast majority of our senior management, district managers and store managers have been promoted from within the Company.  We augment this promote from within philosophy by pursuing strategic hires with a strong emphasis on automotive aftermarket experience.  We have a strong management Team comprised of 216 senior managers who average 20 years of service, 269 corporate managers who average 16 years of service and 560 district managers who average 13 years of service.  Our management Team has demonstrated the consistent ability to successfully execute our business plan and growth strategy by generating 28 consecutive years of record revenues and earnings and positive comparable store sales results since becoming a public company in April of 1993.

Growth Strategy

Aggressively Open New Stores:

We intend to continue to consolidate the fragmented automotive aftermarket.  During 2020, we opened 155 net, new domestic stores and one new store in Mexico.  In 2021, we plan to open 165 to 175 net, new stores, which will increase our penetration in existing markets and allow for expansion into new, contiguous markets.  The sites for these new stores have been identified, and to date, we have not experienced significant difficulties in locating suitable sites for construction of new stores or identifying suitable acquisition targets for conversion to O’Reilly stores.  We typically open new stores by

(i) constructing a new facility or renovating an existing one on property we purchase or lease and stocking the new store with fixtures and inventory;

(ii) acquiring an independently owned auto parts store (“jobber store”), typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store; or

(iii) purchasing multi-store chains.

New store sites are strategically located in clusters within geographic areas that complement our distribution network in order to achieve economies of scale in management, advertising and distribution.  Other key factors we consider in the site selection process include population density and growth patterns, demographic lifestyle segmentation, age and per capita income, vehicle traffic counts, vehicles in operation, number and type of existing automotive repair facilities and competing auto parts stores within a predetermined radius.

We target both small and large markets for expansion of our store network.  While we have, and continue to face, aggressive competition in the more densely populated markets, we believe we have competed effectively, and are well positioned to continue to compete effectively, in such markets and to achieve our goal of continued profitable sales growth within these markets.  We also believe that with our dual market strategy, we are better able to operate stores in less densely populated areas, which would not otherwise support a national chain store selling primarily to the retail automotive aftermarket.  Therefore, we continue to pursue opening new stores in less densely populated market areas as part of our growth strategy.

Grow Sales in Existing Stores:

Profitable comparable store sales growth is also an important part of our growth strategy.  To achieve improved sales and profitability at existing O’Reilly stores, we continually strive to improve the service provided to our customers.  We believe that while competitive pricing is an essential component of successful growth in the automotive aftermarket business, it is customer satisfaction, whether of the DIY consumer or professional service provider, resulting from superior customer service, that generates increased sales and profitability.

Selectively Pursue Strategic Acquisitions:

The automotive aftermarket industry is still highly fragmented, and we believe the ability of national auto parts chains, like O’Reilly, to operate more efficiently and effectively than smaller independent operators will result in continued industry consolidation.  Our intention

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is to continue to selectively pursue strategic acquisitions that will strengthen our position as a leading automotive aftermarket parts supplier in existing markets and provide a springboard for expansion into new markets, domestic and cross-border.

Continually Enhance Store Design and Location:

Our current prototype store design features optimized square footage, high ceilings, convenient interior store layouts, in-store signage, bright lighting, convenient ingress, egress and parking and dedicated counters to serve professional service provider customers, each designed to increase sales and operating efficiencies to enhance overall customer service.  We continually update the location and condition of our store network through systematic renovation and relocation of our existing stores to enhance store performance.  During 2020, while experiencing constraints to construction timing due to the COVID-19 pandemic, we relocated 16 stores and performed minor to major updates or renovations to approximately 970 additional stores.  We believe that our ability to consistently achieve growth in comparable store sales is due in part to our commitment to maintaining an attractive store network, which is strategically located to best serve our customers.

Omnichannel Growth Strategy:

Our Omnichannel growth strategies reflect the continued evolution of customer preferences in researching and completing purchases.  More than ever before, our customers’ purchase decisions are informed by a range of interactions, whether in-person, over the phone, or through a variety of digital channels, as they seek to find the professional parts knowledge and the product availability they need to meet their automotive repair and maintenance needs.  Our Omnichannel growth strategies are focused on offering our customers an enhanced and seamless research and buying experience through any of these channels.  We have long been known for excellent customer service and continue to grow the functionality and user-friendliness of our websites, including www.OReillyAuto.com and www.FirstCallOnline.com, to enhance our customer’s shopping experience.  Many of our customers interact over multiple channels to research and complete a purchase, and the functionality and features of our digital sites complements the outstanding customer service provided in our over 5,600 brick and mortar locations.

Team Members and Human Capital Management

Our tradition for 64 years has been to treat all of our Team Members with honesty and respect and to commit significant resources to instill in them our “Live Green” culture, which emphasizes the importance of each Team Member’s contribution to the success of O’Reilly.  This focus on professionalism and respect has created an industry-leading Team, and we consider our relations with our Team Members to be excellent.  

We are also committed to providing a work environment where Team Members feel highly valued and where productivity at work is enhance by maintaining an inclusive environment and healthy work/life balance, which we believe increases employee engagement.  Our ongoing emphasis on diversity and inclusion, including further ensuring our policies, recruitment and selection procedures, onboarding tactics and training efforts, positively builds upon our successful “promote from within” philosophy and growth strategies.  

Management Structure:

Our Company knows the value of a tenured Team, which is why our philosophy is to “promote from within” first.  As management opportunities arise, we look first within the Company and promote those who have performed well, have the right expertise and have shown leadership potential before looking outside the Company; however, we augment this philosophy by pursuing strategic hires with a strong emphasis on automotive aftermarket experience when appropriate.  This comprehensive approach increases Team Member commitment and has resulted in a very experienced leadership Team.  As of December 31, 2020, our strong management Team was comprised of 216 senior managers who average 20 years of service, 269 corporate managers who average 16 years of service and 560 district managers who average 13 years of service.

Each of our stores is staffed with a store manager and one or more assistant managers, in addition to parts specialists, retail and/or installer service specialists and other positions required to meet the specific needs of each store.  Each of our 560 district managers has general supervisory responsibility for an average of 10 stores, which provides our stores with strong operational support.

Store and district managers complete a comprehensive training program to ensure each has a thorough understanding of customer service, leadership, inventory management and store profitability, as well as all other sales and operational aspects of our business model.  Store and district managers are also required to complete a structured training program that is specific to their position, including attending a week-long manager development program at the corporate headquarters in Springfield, Missouri.  Store and district managers also receive continuous training through online training, field workshops, regional meetings and our annual leadership conference.

We provide financial incentives to all store Team Members through incentive compensation programs.  Under our incentive compensation programs, base salary is augmented by incentive compensation based on individual and store sales and profitability.  In

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addition, each of our district managers participates in our stock option and bonus programs, and store managers participate in bonus programs based on their store’s performance.  We believe our incentive compensation programs significantly increase the motivation and overall performance of our store Team Members and enhance our ability to attract and retain qualified management and other personnel.

Professional Parts People:

We believe our highly trained Team of Professional Parts People is essential in providing superior customer service to both DIY and professional service provider customers.  A significant portion of our business is from professional service provider customers; therefore, our Professional Parts People are required to be highly technically proficient in automotive products.  In addition, we have found that the typical DIY customer often seeks assistance from Professional Parts People, particularly when purchasing hard parts.  The ability of our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression and is a significant factor in generating repeat DIY business.

We screen prospective Team Members to identify highly motivated individuals who either have experience with automotive parts or repairs, or automotive aptitude.  New store Team Members go through a comprehensive orientation focused on the culture of our Company, as well as the requirements for their specific position.  Additionally, during their first year of employment, our parts specialists go through extensive automotive systems and product knowledge training to ensure they are able to provide high levels of service to our customers.  Once all of the required training has been satisfied, our parts specialists become eligible to take the O’Reilly Certified Parts Professional test.  Passing the O’Reilly test helps prepare them to become certified by the National Institute for Automotive Service Excellence (“ASE”).

All of our stores have the ability to service professional service provider customers.  For this reason, select Team Members in each store complete extensive sales call training with a regional field sales manager.  These Team Members then spend at least one day per week calling on existing and potential professional service provider customers.  Additionally, each Team Member engaged in such sales activities participates in quarterly advanced training programs for sales and business development.

Team Members and Unions:

As of January 31, 2021, we employed 77,827 Team Members (62,530 full-time Team Members and 15,297 part-time Team Members), of whom 63,212 were employed at our U.S. stores, 9,593 were employed at our U.S. DCs, 3,625 were employed at our U.S. corporate and regional offices and 1,397 were employed in Mexico.  Ours is an increasingly technical business creating the need for knowledgeable Professional Parts People, and our ongoing focus on developing a technically proficient Team has resulted in the growth of our full-time work force, increasing to 80% as of January 31, 2021, up from 65% as of January 31, 2020.  While full-time Professional Parts People play a vital role in our ongoing success, the flexibility of incorporating part-time employment into our work force is also an important component of providing excellent customer service.  Many of our part-time Team Members choose to work at O’Reilly while attending school, or during other transitional periods in their lives, or simply because of their passion for cars and knowledge of auto parts.  Part-time Team Members have the opportunity to become career Professional Parts People because of our promote from within philosophy, and many of our leaders today began their careers as part-time Team Members in our stores or distribution centers.

A union represents Team Members in 53 stores (408 Team Members) in the Greater Bay Area in California and has for many years.  Approximately 63 Team Members that drive over-the-road trucks in two of our domestic DCs are also represented by a labor union.  In addition, the Company has collective bargaining agreements with two unions in Mexico, where the legal environment is very different and evolving compared to the U.S.  Our relationships with unions in Mexico will continue to evolve to ensure compliance with changing requirements.  We consider our current relationship with these unions and union Team Members to be excellent.  With the exception of the previously described Team Members, our Team Members are not represented by labor unions.  

Store Network

New Store Site Selection:

In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in management, advertising and distribution.  Other key factors we consider in the site selection process are

● population density;

● demographics, including age, life style and per capita income;

● market economic strength, retail draw and growth patterns;

● number, age and percent of makes and models of registered vehicles;

● the number, type and sales potential of existing automotive repair facilities;

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● the number of auto parts stores and other competitors within a predetermined radius;

● physical location, traffic count, size, economics and presentation of the site;

● financial review of adjacent existing locations; and

● the type and size of store that should be developed.

When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve economies of scale.  After opening this initial cluster of new stores, we begin penetrating the less densely populated surrounding areas.  As these store clusters mature, we evaluate the need to open additional locations in the more densely populated markets where we believe opportunities exist to expand our market share or to improve the level of service provided in high volume areas.  This strategy enables us to achieve additional distribution and advertising efficiencies in each market.

Store Locations and Size:

As a result of our dual market strategy, we are able to profitably operate in both large, densely populated markets and small, less densely populated areas that would not otherwise support a national chain selling primarily to the retail automotive aftermarket.  Our U.S. stores, on average, carry approximately 22,000 SKUs and average approximately 7,400 total square feet in size.  At December 31, 2020, we had a total of approximately 42 million square feet in our 5,594 domestic stores.  Our domestic stores are served primarily by the nearest DC, which averages 159,000 SKUs, but also have same-day access to the broad selection of inventory available at one of our 362 Hub stores, which are comprised of 88 Super Hubs that average approximately 17,100 square feet and carry an average of 70,000 SKUs and 274 Hubs that average approximately 10,200 square feet and carry an average of 42,000 SKUs.

We believe that our stores are “destination stores” generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity.  Consequently, most of our stores are freestanding buildings or prominent end caps situated on or near major traffic thoroughfares and offer ample parking, easy customer access and are generally located in close proximity to our professional service provider customers.

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The following table sets forth the geographic distribution and activity of our stores as of December 31, 2020 and 2019:

	December 31, 2019			2020 Net, New Stores			December 31, 2020
					% of Total					Cumulative
	Store	% of Total		Store	Store		Store	% of Total		% of Total
State	Count	Store Count		Change	Change		Count	Store Count		Store Count
Texas	735	13.5	%	20	12.9	%	755	13.5	%	13.5	%
California	554	10.2	%	8	5.2	%	562	10.0	%	23.5	%
Florida	239	4.4	%	7	4.5	%	246	4.4	%	27.9	%
Georgia	214	3.9	%	10	6.5	%	224	4.0	%	31.9	%
Illinois	211	3.9	%	2	1.3	%	213	3.8	%	35.7	%
Ohio	203	3.7	%	8	5.2	%	211	3.8	%	39.5	%
Missouri	203	3.7	%	1	0.6	%	204	3.6	%	43.1	%
North Carolina	185	3.4	%	14	9.0	%	199	3.6	%	46.7	%
Tennessee	183	3.4	%	2	1.3	%	185	3.3	%	50.0	%
Michigan	175	3.2	%	6	3.9	%	181	3.2	%	53.2	%
Washington	158	2.9	%	—	—	%	158	2.8	%	56.0	%
Indiana	147	2.7	%	9	5.8	%	156	2.8	%	58.8	%
Alabama	147	2.7	%	5	3.2	%	152	2.7	%	61.5	%
Arizona	140	2.6	%	2	1.3	%	142	2.5	%	64.0	%
Wisconsin	124	2.3	%	4	2.7	%	128	2.3	%	66.3	%
Louisiana	124	2.3	%	3	1.9	%	127	2.3	%	68.6	%
Minnesota	126	2.3	%	(2)	(1.3)	%	124	2.2	%	70.8	%
Oklahoma	122	2.2	%	2	1.3	%	124	2.2	%	73.0	%
Arkansas	114	2.1	%	3	1.9	%	117	2.1	%	75.1	%
South Carolina	110	2.0	%	5	3.2	%	115	2.1	%	77.2	%
Colorado	105	1.9	%	4	2.7	%	109	1.9	%	79.1	%
Kentucky	101	1.9	%	4	2.7	%	105	1.9	%	81.0	%
Virginia	85	1.7	%	5	3.2	%	90	1.6	%	82.6	%
Kansas	85	1.7	%	1	0.6	%	86	1.5	%	84.1	%
Mississippi	80	1.5	%	2	1.3	%	82	1.5	%	85.6	%
Iowa	78	1.4	%	2	1.3	%	80	1.4	%	87.0	%
Oregon	72	1.3	%	(1)	(0.6)	%	71	1.3	%	88.3	%
Utah	65	1.2	%	1	0.6	%	66	1.2	%	89.5	%
New Mexico	60	1.1	%	—	—	%	60	1.1	%	90.6	%
Nevada	56	1.0	%	1	0.6	%	57	1.0	%	91.6	%
Massachusetts	46	0.8	%	5	3.2	%	51	0.9	%	92.5	%
Nebraska	47	0.9	%	2	1.3	%	49	0.9	%	93.4	%
Idaho	45	0.8	%	3	1.9	%	48	0.9	%	94.3	%
Pennsylvania	33	0.6	%	4	2.7	%	37	0.7	%	95.0	%
Maine	34	0.6	%	—	—	%	34	0.6	%	95.6	%
New Hampshire	32	0.6	%	1	0.6	%	33	0.6	%	96.2	%
Montana	28	0.5	%	—	—	%	28	0.5	%	96.7	%
Connecticut	23	0.4	%	3	1.9	%	26	0.5	%	97.2	%
Vermont	24	0.4	%	—	—	%	24	0.4	%	97.6	%
Wyoming	22	0.4	%	1	0.6	%	23	0.4	%	98.0	%
New York	17	0.3	%	3	1.9	%	20	0.4	%	98.4	%
South Dakota	18	0.3	%	1	0.6	%	19	0.3	%	98.7	%
West Virginia	17	0.3	%	1	0.6	%	18	0.3	%	99.0	%
Alaska	15	0.3	%	—	—	%	15	0.3	%	99.3	%
North Dakota	15	0.3	%	—	—	%	15	0.3	%	99.6	%
Hawaii	12	0.2	%	1	0.6	%	13	0.2	%	99.8	%
Rhode Island	10	0.2	%	2	1.3	%	12	0.2	%	100.0	%
Total U.S. stores	5,439	100.0	%	155	100.0	%	5,594	100.0	%
Mexico	21			1			22
Total stores	5,460			156			5,616

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Distribution Systems

We believe that our tiered distribution model provides industry-leading parts availability and store in-stock positions, while lowering our inventory carrying costs by controlling the depth of our store stocked inventory.  Moreover, we believe our ongoing, significant capital investments made in our DC network allow us to efficiently service new stores that are planned to open in contiguous market areas as well as servicing our existing store network.  Our distribution expansion strategy complements our new store opening strategy by supporting newly established clusters of stores, and additional penetration into existing markets, in the regions surrounding each DC.  As of December 31, 2020, we had a total growth capacity of more than 585 stores in our distribution center network, which benefited from relocating our Nashville, Tennessee, DC into a larger facility in Lebanon, Tennessee, providing a larger, more efficient facility in March 2020.  The existing store portion of the Nashville, Tennessee, DC facility remained a large Hub that continues to provide same day parts availability in the attractive Nashville market.  The distribution operations of our Knoxville, Tennessee, DC are in the process of being merged into our Lebanon, Tennessee, DC, which is expected to be completed in 2021, and the existing store portion of our Knoxville, Tennessee, DC facility will remain a large Hub that will continue to provide same day parts availability in the Knoxville market.  Additionally, we plan to merge our North Little Rock, Arkansas, DC into our new Horn Lake, Mississippi, DC, which we expect to open in mid-2021.  At that time, the existing store portion of our North Little Rock, Arkansas, DC facility will remain a large Hub that will continue to provide same day parts availability in the Little Rock market.

Distribution Centers:

As of December 31, 2020, we operated 28 domestic DCs comprised of approximately 11.6 million operating square feet (see the “Properties” table in Item 2 of this annual report on Form 10-K for more information about DC operating square footages).  Our DCs stock an average of 159,000 SKUs and most DCs are linked to and have access to multiple other regional DCs’ inventory.  Our DCs provide five-night-a-week delivery, primarily via a Company-owned fleet, to substantially all of our stores in the continental United States.  In addition, stores within an individual DC’s metropolitan area receive multiple daily deliveries from the DC’s “city counter,” many of which receive this service seven days per week.  Our DCs provide weekend service to not only the stores they service via their city counters but also to strategic Hub locations, which redistribute products to surrounding stores.  Our national Hub store network provides additional service throughout the week, and on weekends, to surrounding stores.

As part of our continuing efforts to enhance our distribution network in 2021, we plan to

● continue to enhance our distribution network through the engineering, design, expansion or relocation of new or current DCs;

● continue to utilize routing software to continue to enhance logistics efficiencies;

● continue to implement labor management software to improve DC productivity and overall operating efficiency;

● continue to define and implement best practices in all DCs;

● make proven, return-on-investment based capital enhancements to material handling equipment in DCs, including conveyor systems, picking modules, lift equipment and computer hardware; and

● continue to augment our robust distribution network, when and where appropriate, through the use of strategically located Hubs and Super Hubs.  

Hub Stores:

We currently operate a total of 362 strategically located Hub stores.  In addition to serving DIY and professional service provider customers in their markets, Hub stores also provide delivery service to our other stores within the surrounding area and access to an expanded selection of SKUs on a same-day basis.  Our Hub store network consists of 88 Super Hubs that average approximately 17,100 square feet and carry an average of 70,000 SKUs and 274 Hubs that average approximately 10,200 square feet and carry an average of 42,000 SKUs.

Products and Purchasing

Our stores offer DIY and professional service provider customers a wide selection of products for domestic and imported automobiles, vans and trucks.  Our merchandise generally consists of nationally recognized, well-advertised, premium name brand products, such as AC Delco, Armor All, Bosch, Castrol, Dorman, Fel-Pro, Gates Rubber, Lucas Oil, Mobil1, Monroe, Moog, Pennzoil, Prestone, Standard, STP, Turtle Wax, Valvoline, Wagner, and Wix, and a wide selection of quality proprietary private label products, which span the entire good, better and best value spectrum, under our BesTest®, BrakeBest®, Cartek®, Import Direct®, MasterPro®, MicroGard®, Murray®, Omnispark®, O’Reilly Auto Parts®, Precision®, Power Torque®, Super Start®, and Ultima® brands.  Our proprietary private label products are produced by respected automotive manufacturers, meet or exceed original equipment manufacturer specifications and consist of house brands and nationally recognized proprietary bands, which we have acquired or developed over time.  Our “good” proprietary brands provide a great combination of quality and value, a characteristic important to our DIY customers, while

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our “better” and “best” proprietary brands offer options for our more heavy-duty DIY customers, as well as our professional service provider customers, who often prefer higher quality products that can be relied upon to support and grow their businesses.

We have no long-term contracts with material purchase commitments with any of our suppliers, nor have we experienced difficulty in obtaining satisfactory alternative supply sources for automotive parts.  We believe that alternative supply sources exist at competitive costs for substantially all of the automotive products that we sell.  It is our policy to take advantage of payment and seasonal purchasing discounts offered by our suppliers and to utilize extended dating terms available from suppliers.  We have entered into various programs and arrangements with certain suppliers that provided for extended dating and payment terms for inventory purchases.  As a whole, we consider our relationships with our suppliers to be very good.

We purchase automotive products in substantial quantities from over 730 suppliers, the five largest of which accounted for approximately 25% of our total purchases in 2020.  Our largest supplier in 2020 accounted for approximately 7% of our total purchases and the next four largest suppliers each accounted for approximately 3% to 6% of our total purchases.

Marketing

Retail and Online Marketing:

Our integrated marketing strategy and Omnichannel efforts include national media channels, in-store, digital and social media activation, as well as marketing the O’Reilly brand through automotive event sponsorships and on-site appearances throughout the country.  Our O’Rewards loyalty program encourages repeat customers, as they accumulate points from their O’Reilly purchases that are redeemable for rewards at various purchase levels.  Our marketing efforts also target the Spanish-speaking market through broadcast media, print and sports marketing, as well as sponsorships of local and regional events.

Professional Marketing:

To develop our continued relationships with professional service providers and installers, we employ Territory Sales Managers in nearly every market to ensure complete sales territory coverage and personalized service for these customers.  Flyers, quick reference guides and catalogs are distributed on a regular basis to all professional service providers, including paint and body shops and fleet maintenance customers to encourage brand and program awareness.  In addition, our professional customer program, First Call, also offers an ordering website, www.FirstCallOnline.com, dedicated to Professional Service Specialists in stores, multiple daily deliveries and access to training opportunities, shop management, maintenance supplies and the Certified Auto Repair program, which offers professional service providers with the business tools they need to profitably grow and market their business.

INDUSTRY ENVIRONMENT

The automotive aftermarket industry includes all products and services purchased for light and heavy-duty vehicles after the original sale.  The total size of the automotive aftermarket is estimated to be approximately $281 billion, according to The Auto Care Association.  This market is made up of four segments:  labor share of professional service provider sales, auto parts share of professional service provider sales, DIY sales and tire sales.  We estimate that O’Reilly’s addressable market within this industry is approximately $90 billion to $100 billion, which includes the auto parts share of professional service provider sales at wholesale and DIY sales at retail.  We do not sell tires or perform for-fee automotive repairs or installations.

Competition

The sale of automotive aftermarket items is highly competitive in many areas, including customer service, product availability, store location, brand recognition and price.  We compete in both the DIY and professional service provider portions of the automotive aftermarket and are one of the largest specialty retailers within that market.  We compete primarily with

● national retail and wholesale automotive parts chains (such as AutoZone, Inc., Advance Auto Parts, CARQUEST, NAPA and the Pep Boys - Manny, Moe and Jack, Inc.);

● regional retail and wholesale automotive parts chains;

● wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as NAPA, CARQUEST, Bumper to Bumper and Auto Value);

● automobile dealers; and

● mass merchandisers and online retailers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc. and Amazon.com, Inc.).

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We compete on the basis of customer service, which includes merchandise selection and availability, technical proficiency and helpfulness of store personnel, price, store layout, continually enhancing the Omnichannel experience and convenient and accessible store locations.  Our dual market strategy requires significant capital, such as the capital expenditures required for our distribution and store networks and working capital needed to maintain inventory levels necessary for providing products to both the DIY and professional service provider portions of the automotive aftermarket.

Inflation and Seasonality

We have been successful, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of supplier incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying.  To the extent our acquisition costs increase due to price increases industry wide, we have typically been able to pass along these increased costs through higher retail prices for the affected products.  As a result, we do not believe our operations have been materially, adversely affected by inflation.

To some extent our business is seasonal, primarily as a result of the impact of weather conditions on customer buying patterns.  Store sales, profits and inventory levels have historically been higher in the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.

Regulations

We are subject to federal, state and local laws and governmental regulations relating to our business, as well as the health and safety of our Team Members and customers, including, but not limited to, those related to the handling, storage and disposal of hazardous substances, the recycling of batteries and used lubricants and the ownership and operation of real property.

As part of our operations, we handle hazardous materials in the ordinary course of business and our customers may bring hazardous materials onto our property in connection with, for example, our used oil, oil filter and battery recycling programs.  We currently provide a recycling program for batteries and the collection of used lubricants at certain stores as a service to our customers pursuant to agreements with third-party suppliers.  The batteries and used lubricants are collected by our Team Members, deposited into supplier-provided containers and pallets and then recycled by the third-party suppliers.  In general, our agreements with such suppliers contain provisions that are designed to limit our potential liability under applicable environmental regulations for any damage or contamination, which may be caused by the batteries and lubricants to off-site properties (including as a result of waste disposal) and to our properties, when caused by the supplier.

Compliance with any such laws and regulations has not had a material adverse effect on our operations to date.  However, we cannot give any assurance that we will not incur significant expenses in the future in order to comply with any such laws or regulations.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Gregory D. Johnson, age 55, Chief Executive Officer and Co-President, has been an O’Reilly Team Member for 38 years, which includes continuous years of service with a company acquired by O’Reilly.  Mr. Johnson’s O’Reilly career began as a part-time Distribution Center Team Member and progressed through the roles of Retail Systems Manager, Warehouse Management Systems (WMS) Development Manager, Director of Distribution, Vice President of Distribution Operations, Senior Vice President of Distribution Operations, and Executive Vice President of Supply Chain.  Mr. Johnson has held the position of Co-President since 2017.  Mr. Johnson was promoted to Chief Executive Officer and Co-President in 2018.

Jeff M. Shaw, age 58, Chief Operating Officer and Co-President, has been an O’Reilly Team Member for 32 years.  Mr. Shaw’s primary areas of responsibility are Store Operations, Sales, Distribution Operations and International Operations.  Mr. Shaw’s O’Reilly career began as a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Manager, Vice President of the Southern Division, Vice President of Sales and Operations, Senior Vice President of Sales and Operations, and Executive Vice President of Store Operations and Sales.  Mr. Shaw has held the position of Co-President since 2017.  Mr. Shaw was promoted to Chief Operating Officer and Co-President in 2018.

Brad Beckham, age 42, Executive Vice President of Store Operations and Sales, has been an O’Reilly Team Member for 24 years.  Mr. Beckham’s primary areas of responsibility are Store Operations and Sales for O’Reilly’s Store Operations.  Mr. Beckham’s O’Reilly career began as a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Manager, Divisional Vice President, Vice President of Eastern Store Operations and Sales, Senior Vice President of Eastern Store Operations and Sales, and Senior Vice President of Central Store Operations.  Mr. Beckham has held the position of Executive Vice President of Store Operations and Sales since 2018.

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Brent G. Kirby, age 52, Executive Vice President of Supply Chain, has been an O’Reilly Team Member since 2018.  Mr. Kirby’s primary areas of responsibility are Inventory Management, Purchasing, Merchandise, Pricing, Store Design, Marketing, Advertising, Electronic Catalog, Customer Satisfaction and Digital business areas while working cross functionally to deliver our Omnichannel strategy.  Mr. Kirby has over 30 years of experience in the retail industry.  Prior to joining O’Reilly, Mr. Kirby held the position of Chief Supply Chain Officer for Lowe’s Companies, Inc. (“Lowe’s”), with direct responsibility for leading the global supply chain supporting Lowe’s U.S.-based home improvement business.  In this role, Mr. Kirby was responsible for team members across a diverse network of distribution centers, manufacturing facilities, direct-to-consumer parcel operations and last mile delivery operations.  Mr. Kirby began his retail career as a hardware associate with Lowe’s and progressed through various positions at the store, district and regional levels before being promoted to Senior Vice President of Store Operations and later Chief Omnichannel Officer.  In 2018, Mr. Kirby joined O’Reilly as Senior Vice President of Omnichannel.  Mr. Kirby has held the position of Executive Vice President of Supply Chain since January of 2021.

Tom McFall, age 50, Executive Vice President and Chief Financial Officer, has been an O’Reilly Team Member for 14 years.  Mr. McFall’s primary areas of responsibility are Finance, Accounting, Information Technology, Legal, Real Estate and Risk Management.  Mr. McFall’s career began with Ernst & Young LLP in Detroit, Michigan, where he achieved the position of Audit Manager, before accepting a position with Murray’s Discount Auto Stores (“Murray’s”).  Mr. McFall served Murray’s for eight years through the roles of Controller, Vice President of Finance, and Chief Financial Officer, with direct responsibility for finance, accounting and distribution and logistics operations.  After Murray’s was acquired by CSK Auto Corporation (“CSK”) in 2005, Mr. McFall held the position of Chief Financial Officer of Midwest Operation for CSK.  In 2006, Mr. McFall joined O’Reilly as Senior Vice President of Finance and Chief Financial Officer.  Mr. McFall has held the position of Executive Vice President and Chief Financial Officer since 2007.

Jonathan Andrews, age 53, Senior Vice President of Human Resources and Training, has been an O’Reilly Team Member for eight years.  Mr. Andrews’s primary areas of responsibility are Human Resources and Training.  Mr. Andrews has over 25 years of human resources experience.  Mr. Andrews’s career includes human resource positions with Cargill, Inc., Tyson Foods, Inc. and AutoNation, Inc.  Mr. Andrews served AutoNation for 10 years as Director of Human Resources and Senior Director of Human Resources.  In 2012, Mr. Andrews joined O’Reilly as Vice President of Human Resources and progressed through the role of Vice President of Human Resources and Training.  Mr. Andrews has held the position of Senior Vice President of Human Resources and Training since 2019.

Doug Bragg, age 51, Senior Vice President of Central Store Operations and Sales, has been an O’Reilly Team Member for 30 years.  Mr. Bragg’s primary areas of responsibility are Store Operations and Sales for O’Reilly Central Store Operations.  Mr. Bragg’s O’Reilly career began as a Distribution Center Team Member and progressed through the roles of Assistant Store Manager, Store Manager, District Manager, Regional Manager, and Divisional Vice President.  Mr. Bragg has held the position of Senior Vice President of Central Store Operations since 2018.

Robert Dumas, age 47, Senior Vice President of Eastern Store Operations and Sales, has been an O’Reilly Team Member for 29 years, which includes continuous years of service with a company acquired by O’Reilly.  Mr. Dumas’s primary areas of responsibility are Store Operations and Sales for O’Reilly’s Eastern Store Operations.  Mr. Dumas’s O’Reilly career began as a Parts Specialist and progressed through the roles of Installer Service Specialist, Night Manager, Associate Manager, Store Manager, District Manager, Regional Manager, and Divisional Vice President.  Mr. Dumas has held the position of Senior Vice President of Eastern Store Operations and Sales since 2016.

Larry L. Ellis, age 65, Senior Vice President of Distribution Operations, has been an O’Reilly Team Member for 45 years, which includes continuous years of service with a company acquired by O’Reilly.  Mr. Ellis’s primary areas of responsibility are Distribution Operations and Logistics.  Mr. Ellis’s O’Reilly career began as a Distribution Center Team Member and progressed through the roles of Distribution Center Supervisor, Distribution Center Manager, Director of Distribution Operations, Vice President of Logistics, Vice President of Western Division Distribution Operations, and Vice President of Distribution Operations.  Mr. Ellis has held the position of Senior Vice President of Distribution Operations since 2014.

Jeremy Fletcher, age 43, Senior Vice President of Finance and Controller, has been an O’Reilly Team Member for 15 years.  Mr. Fletcher’s primary area of responsibility is Finance.  Mr. Fletcher’s O’Reilly career began as the Financial Reporting and Budgeting Manager and progressed through the roles of Director of Finance, and Vice President of Finance and Controller.  Prior to joining O’Reilly, Mr. Fletcher worked as a Certified Public Accountant with a public accounting firm and in a financial reporting and planning role for a Fortune 1000 corporation.  Mr. Fletcher has held the position of Senior Vice President of Finance and Controller since 2017.

Jeffrey L. Groves, age 55, Senior Vice President of Legal and General Counsel, has been an O’Reilly Team Member for 16 years.  Mr. Groves’s primary areas of responsibility are Corporate Governance, Regulatory Matters, and Internal Audit.  Mr. Groves’s O’Reilly

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career began as Director of Legal and Claim Services and progressed through the roles of Director of Legal and Claim Services and General Counsel and Vice President of Legal and Claim Services and General Counsel.  Prior to joining O’Reilly, Mr. Groves worked in a private civil defense trial practice.  Mr. Groves has held the position of Senior Vice President of Legal and General Counsel since 2016.

Scott Kraus, age 44, Senior Vice President of Real Estate and Expansion, has been an O’Reilly Team Member for 22 years.  Mr. Kraus’s primary areas of responsibility are Real Estate Expansion and Acquisitions.  Mr. Kraus’s O’Reilly career began as a Parts Specialist and progressed through the roles of Store Manager, District Manager, Regional Field Sales Manager, Regional Manager, Divisional Vice President, and Vice President of Real Estate.  Mr. Kraus has held the position of Senior Vice President of Real Estate and Expansion since 2016.

Jeffrey A. Lauro, age 54, Senior Vice President of Information Technology, has been an O’Reilly Team Member for five years.  Mr. Lauro’s primary area of responsibility is Information Technology.  Mr. Lauro has over 30 years of information technology experience primarily in the retail industry.  Prior to joining O’Reilly, Mr. Lauro held the position of Chief Information Officer for Payless ShoeSource (“Payless”), with direct responsibility for solution delivery, infrastructure and operations and enterprise architecture.  Prior to joining Payless, Mr. Lauro was the Vice President, Global Information Technology Service Delivery Director for The TJX Companies, Inc., with direct responsibility for global information technology service management, operations, implementation and disaster recovery.  In 2015, Mr. Lauro joined O’Reilly as Senior Vice President of Information Technology and has held this position since that time.

Jason Tarrant, age 40, Senior Vice President of Western Store Operations and Sales, has been an O’Reilly Team Member for 19 years, which includes continuous years of service with a company acquired by O’Reilly.  Mr. Tarrant’s primary areas of responsibility are Store Operations and Sales for O’Reilly Western Store Operations.  Mr. Tarrant’s O’Reilly career began as a Parts Specialist and progressed through the roles of Assistant Store Manager, Store Manager, District Manager, Regional Field Sales Manager, Regional Manager, and Divisional Vice President.  Mr. Tarrant has held the position of Senior Vice President of Western Store Operations and Sales since 2018.

Darin Venosdel, age 50, Senior Vice President of Inventory Management, has been an O’Reilly Team Member for 23 years.  Mr. Venosdel’s primary areas of responsibility are Inventory Management, Purchasing and Store Design.  Mr. Venosdel’s O’Reilly career began as a Programmer/Analyst and progressed through the roles of Application Development Manager, Director of Application Development, Director of Inventory Management, and Vice President of Inventory Management.  Mr. Venosdel has held the position of Senior Vice President of Inventory Management since 2018.

David Wilbanks, age 49, Senior Vice President of Merchandise, has been an O’Reilly Team Member for eight years.  Mr. Wilbanks’s primary areas of responsibility are Merchandise and Pricing.  Mr. Wilbanks has over 30 years of experience in the automotive aftermarket industry.  Mr. Wilbanks’s career began as a counter technician for an independent jobber and progressed to becoming an ASE Certified Master Technician for an automotive dealership, before accepting a position with AutoZone, Inc. (“AutoZone”).  Mr. Wilbanks served AutoZone for twelve years as a financial analyst, Category Manager, and Director of Merchandise.  In 2012, Mr. Wilbanks joined O’Reilly as Vice President of Merchandise and has held the position of Senior Vice President of Merchandise since 2016.

SERVICE MARKS AND TRADEMARKS

We have registered, acquired and/or been assigned the following service marks and trademarks in the United States:  BENNETT AUTO SUPPLY®; BESTEST®; BETTER PARTS. BETTER PRICES.®; BETTER PARTS, BETTER PRICES....EVERYDAY!®; BOND AUTO PARTS®; BRAKEBEST®; BRAKEBEST HD®; BRAKEBEST SELECT®; CARTEK®; CARTEK PRO®; CERTIFIED AUTO REPAIR®; CHECKER AUTO PARTS®; CSK PROSHOP®; CUSTOMIZE YOUR RIDE®; DO IT RIGHT DEALS®; DO IT RIGHT REBATE®; DRIVE WITH THE LEADER!®; EARN POINTS EVERY WAY YOU SHOP®; FIRST CALL®; FLEET & HEAVY DUTY PROFESSIONAL PARTS PEOPLE®; FRIENDLIEST PARTS STORE IN TOWN®; FROM OUR STORE TO YOUR DOOR®; IMPORT DIRECT®; KRAGEN AUTO PARTS®; MASTER PRO®; MASTER PRO REFINISHING®; MASTERPRO SELECT®; MASTERPRO UNDERCAR®; MICROGARD®; MICROGARD HEPA®; MURRAY®; MURRAY CLIMATE CONTROL®; MURRAY TEMPERATURE CONTROL®; MURRAY’S MASCOT® (Design only); MURRAY PLUS®; MURRAY ULTRA®; MURRAY’S AUTO PARTS®; O LOW PRICE GUARANTEE! ®;  O® (Shamrock inside of “O”); OMNISPARK®; O’REILLY®; O’REILLY AUTO COLOR PROFESSIONAL PAINT PEOPLE®; O’REILLY AUTO PARTS®; O’REILLY AUTO PARTS PROFESSIONAL PARTS PEOPLE®; O’REILLY AUTOMOTIVE®; O’REILLY O’REWARDS®; O’REILLY SELECT®; O’REWARDS®; PARTNERSHIP NETWORK®; PARTS CITY®; PARTS CITY AUTO COLOR PROFESSIONAL PAINT PEOPLE®; PARTS CITY AUTO PARTS®; PARTS FOR YOUR CAR WHEREVER YOU ARE®; PARTS PAYOFF®; POWER TORQUE®; PRECISION®; PRECISION HUB ASSEMBLIES®; PRIORITY PARTS®; QUIETECH®; REAL

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WORLD TRAINING®; ¡SIGUE ADELANTE CON O’REILLY!®; SCHUCK’S AUTO SUPPLY®; SUPER START®; TOOLBOX®; ULTIMA®; ULTIMA SELECT®; and WORK AT THE O®.  Some of the service marks and trademarks listed above may also have a design associated therewith.  Each of the service marks and trademarks are in duration for as long as we continue to use and seek renewal of such marks.  The above list includes only the trademarks and service marks that are currently and validly registered with the United States Patent and Trademark Office.  It does not include trademarks or service marks which may also be in use, but are not yet registered.  We believe that our business is not otherwise dependent upon any patent, trademark, service mark or copyright.

Solely for convenience, our service marks and trademarks may appear in this report without the ® or ™ symbol, which is not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights or the right to these service marks and trademarks.

AVAILABLE INFORMATION

Our Internet address is www.OReillyAuto.com.  Interested readers can access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Securities and Exchange Commission website at www.sec.gov and searching with our ticker symbol “ORLY.”  Such reports are generally available the day they are filed.  Upon request, we will furnish interested readers a paper copy of such reports free of charge by contacting Mark Merz, Vice President of Investor Relations, Financial Reporting and Planning, at 233 South Patterson Avenue, Springfield, Missouri, 65802.

Item 1A.  Risk Factors

Our future performance is subject to a variety of risks and uncertainties.  Although the risks described below are the risks that we believe are material, there may also be risks of which we are currently unaware, or that we currently regard as immaterial based upon the information available to us that later may prove to be material.  Interested parties should be aware that the occurrence of the events described in these risk factors, elsewhere in this Form 10-K and in our other filings with the Securities and Exchange Commission could have a material adverse effect on our business, operating results and financial condition.  Actual results, therefore, may materially differ from anticipated results described in our forward-looking statements.

RISKS RELATED TO THE COVID-19 PANDEMIC

The ongoing occurrence of COVID-19, or any other such widespread public health crisis, could have a material adverse effect on our business, results of operations, financial condition and cash flows.

The outbreak of the COVID-19 pandemic and its global spread, including in the U.S., has had a significant impact on the U.S. and world economies.  The public health concerns resulting from the pandemic have created significant uncertainty, economic disruption and volatility, all of which have impacted and may continue to impact our business.  We may be required to take significant actions to mitigate any adverse impact of the COVID-19 pandemic, including, but not limited to, reduced staffing and increased expenses.  We are unable to predict the ongoing short-term and long-term impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows due to several factors beyond our control, including, but not limited to:

● the severity and duration of the pandemic, including additional outbreaks, new strands of the virus and availability of effective medical treatments and vaccines for COVID-19;

● the continued response of both governmental and nongovernmental authorities, including, but not limited to, stay at home orders or quarantine, restrictions on our operations, such as requiring a reduction in store operating hours or the temporary closure of stores, distributions centers and other facilities, complex and changing regulations and guidance regarding the safety of employees and customers, inconsistent application of COVID-19 orders and regulations, unemployment compensation and economic stimulus;

● the impact of the pandemic on consumer confidence and macroeconomic factors such as unemployment and work force availability, as well as industry specific demand drivers such as the number of U.S. miles driven, which could impact demand for our product;

● temporary or long-term disruption in our supply network from local and international suppliers and/or delays in the delivery of our inventory;

● volatility in the U.S. and global financial markets, including global debt and equity markets;

● the impact of regulatory and legislative changes in liability for workers’ compensation; and

● the impact of litigation, investigations or claims from customers, Team Members, suppliers, regulators or other third parties relating to the COVID-19 pandemic or our actions in response thereto, including any reputational harm.

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The above factors and uncertainties, in addition to others we are not currently aware of, may result in adverse impacts to our business, results of operations, financial condition and cash flows.

RISKS SPECIFIC TO OUR BUSINESS AND INDUSTRY

Deteriorating economic conditions may adversely impact demand for our products, reduce access to credit and cause our customers and others, with which we do business, to suffer financial hardship, all of which could adversely impact our business, results of operations, financial condition and cash flows.

Although demand for many of our products is primarily non-discretionary in nature and tend to be purchased by consumers out of necessity, rather than on an impulse basis, our sales are impacted by constraints on the economic health of our customers.  The economic health of our customers is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, fuel prices, unemployment levels and other matters that influence consumer confidence and spending, such as a prolonged public health crisis or pandemic, such as the COVID-19 pandemic.  Many of these factors are outside of our control.  Our customers’ purchases, including purchases of our products, could decline during periods when income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions or political uncertainty.  If any of these events occur, or if unfavorable economic conditions challenge the consumer environment, our business, results of operations, financial condition and cash flows could be adversely affected.

Overall demand for products sold in the automotive aftermarket is dependent upon many factors including the total number of vehicle miles driven in the U.S., the total number of registered vehicles in the U.S., the age and quality of these registered vehicles and the level of unemployment in the U.S.  Changes in vehicle technology used by the original equipment manufacturers (“OEM”) on future vehicles, including but not limited to electric, hybrid and internal combustion engines, may result in less frequent repairs, parts lasting longer or elimination of certain repairs.  In addition, restrictions on access to telematics, diagnostic tools and repair information imposed by the OEMs or by governmental regulations may force vehicle owners to rely on dealers to perform maintenance and repairs.  Adverse changes in these factors could lead to a decreased level of demand for our products, which could negatively impact our business, results of operations, financial condition and cash flows.

In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers, logistics and other service providers and financial institutions that are counterparties to our credit facilities.  Furthermore, the ability of these third parties to overcome these difficulties may increase.  If third parties, on whom we rely for merchandise, are unable to overcome difficulties resulting from the deterioration in economic conditions, the cause of which could include a prolonged public health crisis or pandemic, such as the COVID-19 pandemic, and provide us with the merchandise we need, or if counterparties to our credit facilities do not perform their obligations, our business, results of operations, financial condition and cash flows could be adversely affected.

The automotive aftermarket business is highly competitive, and we may have to risk our capital to remain competitive, all of which could adversely impact our business, results of operations, financial condition and cash flows.

Both the DIY and professional service provider portions of our business are highly competitive, particularly in the more densely populated areas that we serve.  Some of our competitors are larger than we are and have greater financial resources.  In addition, some of our competitors are smaller than we are, but have a greater presence than we do in a particular market.  Online and mobile platforms may allow customers to quickly compare prices and product assortments between us and a range of competitors, which could result in pricing pressure.  Some online competitors may have a lower cost structure than we do, as a result of our strategy of providing an exceptional in-store experience and superior parts availability supported by our extensive store network and robust, regional distribution footprint, which could also create pricing pressure.  We may have to expend more resources and risk additional capital to remain competitive and our results of operations, financial condition and cash flows could be adversely affected.  For a list of our principal competitors, see the “Competition” section of Item 1 of this annual report on Form 10-K.

We are sensitive to regional economic and weather conditions that could impact our costs and sales.

Our business is sensitive to national and regional economic and weather conditions and natural disasters.  Unusually inclement weather, such as significant rain, snow, sleet, freezing rain, flooding, seismic activity and hurricanes, has historically discouraged our customers from visiting our stores during the affected period and reduced our sales, particularly to DIY customers.  Extreme weather conditions, such as extreme heat and extreme cold temperatures, may enhance demand for our products due to increased failure rates of our customers’ automotive parts, while temperate weather conditions may have a lesser impact on failure rates of automotive parts.  In addition, our stores and DCs located in coastal regions may be subject to increased insurance claims resulting from regional weather conditions and our results of operations, financial condition and cash flows could be adversely affected.

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A change in the relationship with any of our key suppliers, the unavailability of our key products at competitive prices or changes in trade policies could affect our financial health.

Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability or willingness to sell quality products to us at favorable prices and terms.  Many factors outside of our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms.  For example, financial or operational difficulties that our suppliers may face could increase the cost of the products we purchase from them or our ability to source products from them.  In addition, the trend toward consolidation among automotive parts suppliers, as well as the off-shoring of manufacturing capacity to foreign countries, may disrupt or end our relationship with some suppliers and could lead to less competition and result in higher prices.  We could also be negatively impacted by suppliers who might experience work stoppages, labor strikes, a prolonged public health crisis or pandemic, such as the COVID-19 pandemic, or other interruptions to, or difficulties in the, manufacture or supply of the products we purchase from them.  Changes in U.S. trade policies, practices, tariffs or taxes could affect our ability and our suppliers’ ability to source product at current volumes and/or prices.

Business interruptions in our distribution centers or other facilities may affect our store hours, stability of our computer systems, and/or availability and distribution of merchandise, which may affect our business.

Weather, terrorist activities, war or other disasters, or the threat of them, may result in the closure of one or more of our DCs or other facilities, or may adversely affect our ability to deliver inventory to our stores on a nightly basis.  This may affect our ability to timely provide products to our customers, resulting in lost sales or a potential loss of customer loyalty.  Some of our merchandise is imported from other countries and these goods could become difficult or impossible to bring into the United States, and we may not be able to obtain such merchandise from other sources at similar prices.  Such a disruption in revenue could potentially have a negative impact on our results of operations, financial condition and cash flows.

We rely extensively on our computer systems to manage inventory, process transactions and timely provide products to our customers.  Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses, security breaches or other catastrophic events.  If our systems are damaged or fail to function properly, we may experience loss of critical data and interruptions or delays in our ability to manage inventories or process customer transactions.  Such a disruption of our systems could negatively impact revenue and potentially have a negative impact on our results of operations, financial condition and cash flows.

Failure to protect our brand and reputation could have a material adverse effect on our brand name, business, results of operations, financial condition and cash flows.

We believe our Company has built an excellent reputation as a leading retailer in the automotive aftermarket industry.  We believe our continued success depends, in part, on our ability to preserve, grow and leverage the value of our brand.  Our reputation is based, in part, on perceptions of subjective qualities; negative publicity involving the Company, our merchandise or our industry in general that erode customer trust or confidence could adversely affect our reputation and business.  Failure to comply with ethical, social, product, labor, health and safety, accounting or environmental standards, or existing or future laws or regulations could also jeopardize our reputation and potentially lead to various adverse actions from consumer or environmental groups, employees or regulatory bodies, which could require us to incur substantial legal fees and costs.  In addition, negative claims or publicity, including the availability of information and opinions on social media, as its impact is immediate, could adversely affect our reputation.  The opportunity for the rapid dissemination of information, including inaccurate and inflammatory information and opinions, is virtually limitless and easily accessible.  Damage to our reputation or loss of consumer confidence for any of these or other reasons could have an adverse effect on our business, results of operations, financial condition or cash flows, as well as require additional resources to rebuild our reputation.

Risks associated with international operations could result in additional costs and inefficiencies.

In addition to many of the risks we face in our U.S. operations, international operations present a unique set of risks and challenges, including local laws and customs, U.S. laws applicable to foreign operations and political and socio-economic conditions.  Our ability to operate effectively and grow in international markets could be impacted by these risks resulting in legal liabilities, additional costs and the distraction of management’s attention.  Compliance with the Foreign Corrupt Practices Act and protection of intellectual property rights surrounding items such as tradenames and trademarks in foreign jurisdictions can pose significant challenges.

In addition, our operations in international markets are conducted primarily in the local currency of those countries.  Given that our Consolidated Financial Statements are denominated in U.S. dollars, amounts of assets, liabilities, net sales and other revenues and expenses denominated in local currencies must be translated into U.S. dollars using exchange rates for the current period.  As a result, foreign currency exchange rates and fluctuations in those rates may adversely impact our financial performance.

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RISKS RELATED TO OUR COMMON STOCK

Risks related to us and unanticipated fluctuations in our quarterly operating results could affect our stock price.

We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful indicators of our future operating results and should not be relied on as an indication of future performance.  If our quarterly operating results fail to meet the expectations of analysts, the trading price of our common stock could be negatively affected.  We cannot be certain that our growth plans and business strategies will be successful or that they will successfully meet the expectations of these analysts.  If we fail to adequately address any of these risks or difficulties, our stock price would likely suffer.

The market price of our common stock may be volatile and could expose us to securities class action litigation.

The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions and potentially being targeted through the selling and buying of our common stock by a group of individuals, whose interests and reasoning behind such actions may not align with an average market participant.  The market price of our common stock may also be affected by our ability to meet analysts’ expectations and failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock.

In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies.  Downturns in the stock market may cause the price of our common stock to decline.  In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against such companies.  If similar litigation were initiated against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.

RISKS RELATED TO OUR INDEBTEDNESS AND FINANCING

Our debt levels could adversely affect our cash flow and prevent us from fulfilling our obligations.

We have an unsecured revolving credit facility and unsecured senior notes, which could have important consequences to our financial health.  For example, our level of indebtedness could, among other things,

● make it more difficult to satisfy our financial obligations, including those relating to the senior unsecured notes and our credit facility;

● increase our vulnerability to adverse economic and industry conditions;

● limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive disadvantage;

● require us to dedicate a substantial portion of our cash flows to service the principal and interest on the debt, reducing the funds available for other business purposes, such as working capital, capital expenditures or other cash requirements;

● limit our ability to incur additional debt with acceptable terms, if at all; and

● expose us to fluctuations in interest rates, including changes that may result from the implementation of new benchmark rates that replace LIBOR.

In addition, the terms of our financing obligations include restrictions, such as affirmative, negative and financial covenants, conditions on borrowing and subsidiary guarantees.  A failure to comply with these restrictions could result in a default under our financing obligations or could require us to obtain waivers from our lenders for failure to comply with these restrictions.  The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver could have a material adverse effect on our business, financial condition, results of operations and cash flows.

A downgrade in our credit rating would impact our cost of capital and could impact the market value of our unsecured senior notes, as well as limit our access to attractive supplier financing programs.

Credit ratings are an important component of our cost of capital.  These ratings are based upon, among other factors, our financial strength.  Our current credit ratings provide us with the ability to borrow funds at favorable rates.  A downgrade in our current credit rating from either rating agency could adversely affect our cost of capital by causing us to pay a higher interest rate on borrowed funds under our unsecured revolving credit facility and a higher facility fee on commitments under our unsecured revolving credit facility.  A downgrade in our current credit rating could also adversely affect the market price and/or liquidity of our unsecured senior notes, preventing a holder from selling the unsecured senior notes at a favorable price, as well as adversely affect our ability to issue new notes in the future.  In addition, a downgrade in our current credit rating could limit the financial institutions willing to commit funds to our supplier financing programs at attractive rates.  Decreased participation in our supplier financing programs would lead to an increase in working capital needed to operate the business, adversely affecting our cash flows.

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GENERAL RISKS

We cannot assure future growth will be achieved.

We believe that our ability to open additional, profitable stores at a high growth rate will be a significant factor in achieving our growth objectives for the future.  Our ability to accomplish our growth objectives is dependent, in part, on matters beyond our control, such as weather conditions, zoning and other issues related to new store site development, the availability of qualified management personnel and general business and economic conditions.  We cannot be sure that our growth plans for 2021 and beyond will be achieved.  Failure to achieve our growth objectives may negatively impact the trading price of our common stock.  For a discussion of our growth strategies, see the “Growth Strategy” section of Item 1 of this annual report on Form 10-K.

In order to be successful, we will need to retain and motivate key employees.

Our success has been largely dependent on the efforts of certain key personnel.  In order to be successful, we will need to retain and motivate executives and other key employees.  Experienced management and technical personnel are in high demand and competition for their talents is intense.  We must also continue to motivate employees and keep them focused on our strategies and goals.  Our business, results of operations and cash flows could be materially adversely affected by the unexpected loss of the services of one or more of our key employees.  We cannot be sure that we will be able to continue to attract qualified personnel, which could cause us to be less efficient and, as a result, may adversely impact our sales and profitability.  For a discussion of our management, see the “Business” section of Item 1 of this annual report on Form 10-K.

Risks associated with future acquisitions may not lead to expected growth and could result in increased costs and inefficiencies.

We expect to continue to make acquisitions as an element of our growth strategy.  Acquisitions involve certain risks that could cause our actual growth and profitability to differ from our expectations.  Examples of such risks include the following:

● We may not be able to continue to identify suitable acquisition targets or to acquire additional companies at favorable prices or on other favorable terms.

● Our management’s attention may be distracted.

● We may fail to retain key personnel from acquired businesses.

● We may assume unanticipated legal liabilities and other problems.

● We may not be able to successfully integrate the operations (accounting and billing functions, for example) of businesses we acquire to realize economic, operational and other benefits.

We may fail, or be unable to, discover liabilities of businesses that we acquire for which we or the subsequent owner or operator may be liable.

A breach of customer, supplier, Team Member or Company information could damage our reputation or result in substantial additional costs or possible litigation.

Our business involves the storage of information about our customers, suppliers, Team Members and the Company, some of which is entrusted to third-party service providers and vendors.  We and our third-party service providers and vendors have taken reasonable and appropriate steps to protect this information; however, these security measures may be breached due to cyber-attacks, Team Member error, system compromises, fraud, hacking or other intentional or unintentional acts, which could result in unauthorized parties gaining access to such information.  The methods used to obtain unauthorized access are constantly evolving and may be difficult to anticipate or detect for long periods of time.  If we experience a significant data security breach, we could be exposed to damage to our reputation, additional costs, lost sales, litigation or possible regulatory action.  In addition, the regulatory environment related to information security and privacy is constantly evolving, and compliance with those requirements could result in additional costs.  There is no guarantee that the procedures that we and our third-party service providers and vendors have implemented to protect against unauthorized access to secured data are adequate to safeguard against all data security breaches, and such a breach could potentially have a negative impact on our results of operations, financial condition and cash flows.

Litigation, governmental proceedings, environmental legislation and regulations and employment legislation and regulations may affect our business, financial condition, results of operations and cash flows.

We are, and in the future may become, involved in lawsuits, regulatory inquiries and governmental and other legal proceedings, arising out of the ordinary course of our business.  The damages sought against us in some of these litigation proceedings may be material and may adversely affect our business, results of operations, financial condition and cash flows.

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Environmental legislation and regulations, like the initiatives to limit greenhouse gas emissions and bills related to climate change, could adversely impact all industries.  While it is uncertain whether these initiatives will become law, additional climate change related mandates could potentially be forthcoming and these matters, if enacted, could adversely impact our costs, by, among other things, increasing fuel prices.

Our business is subject to employment legislation and regulations, including requirements related to minimum wage.  Our success depends, in part, on our ability to manage operating costs and identify opportunities to reduce costs.  Our ability to meet labor needs, while controlling costs is subject to external factors, such as minimum wage legislation.  A violation of, or change in, employment legislation and/or regulations could hinder our ability to control costs, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.  

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Stores, distribution centers and other properties:

Of the 5,616 stores we operated at December 31, 2020, 2,325 stores were owned, 3,220 stores were leased from unaffiliated parties, 22 of which were located in Mexico, and 71 stores were leased from entities that include one or more of our affiliated directors or members of their immediate family.  Leases with unaffiliated parties generally provide for payment of a fixed base rent, payment of certain tax, insurance and maintenance expenses and an original term of, at a minimum, 10 years, subject to one or more renewals at our option.  We have entered into separate master lease agreements with each of the affiliated entities for the occupancy of the stores covered thereby.  Such master lease agreements with two of the five affiliated entities have been modified to extend the term of the lease agreement for specific stores.  The master lease agreements or modifications thereto expire on dates ranging from June 30, 2021, to November 1, 2035.  We believe that the lease agreements with the affiliated entities are on terms comparable to those obtainable from third parties.

The following table provides information regarding our U.S. domestic regional DCs in operation as of December 31, 2020:

			Operating Square Footage (1)
Principal Use	Nature of Occupancy	Number of Locations	(in thousands)
Distribution center	Owned	21	9,161
Distribution center	Leased (2)	7	2,483
Total		28	11,644

(1) DC operating square footage includes floor and mezzanine operating square footage and excludes subleased square footage.  

(2) Terms expiring on dates ranging from March 31, 2022, to June 30, 2035.

In addition, we operate six small distribution centers in Mexico; these distribution centers do not serve U.S. stores and are immaterial in the aggregate.  In 2020, we relocated our Nashville, Tennessee, DC into a larger facility in Lebanon, Tennessee, providing a larger, more efficient facility that serves both markets in March 2020.  The existing store portion of the Nashville, Tennessee, DC facility remained a large Hub that continues to provide same day parts availability in the attractive Nashville market.  The distribution operations of our Knoxville, Tennessee, DC are in the process of being merged into our Lebanon, Tennessee, DC, which is expected to be completed in 2021, and the existing store portion of our Knoxville, Tennessee, DC facility will remain a large Hub that will continue to provide same day parts availability in the Knoxville market.  Additionally, we plan to merge our North Little Rock, Arkansas, DC into our new Horn Lake, Mississippi, DC, which we expect to open in mid-2021.  At that time, the existing store portion of our North Little Rock, Arkansas, DC facility will remain a large Hub that will continue to provide same day parts availability in the Little Rock market.

We believe that our present facilities are in good condition, are sufficiently insured and are adequate for the conduct of our current operations.  The store servicing capability of our 28 existing U.S. DCs is approximately 6,180 stores, providing a growth capacity of more than 585 U.S. stores, which will increase by approximately 150 net, stores with the completion of our Horn Lake, Mississippi, DC and the conversion of our North Little Rock, Arkansas, DC into a Hub facility in 2021.  We believe the growth capacity in our DCs, along with the additional capacity of our new Horn Lake, Mississippi, DC, will provide us with the DC infrastructure needed for near-term expansion.  However, as we expand our geographic footprint, we will continue to evaluate our existing distribution system infrastructure and will adjust our distribution system capacity as needed to support our future growth.

Our corporate office operations occur primarily in Springfield, Missouri, and as of December 31, 2020, the total square footage was 0.6 million square feet, substantially all of which was owned.  

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Item 3.  Legal Proceedings

The Company is currently involved in litigation incidental to the ordinary conduct of the Company’s business.  The Company accrues for litigation losses in instances where a material adverse outcome is probable and the Company is able to reasonably estimate the probable loss.  The Company accrues for an estimate of material legal costs to be incurred in pending litigation matters.  Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, these matters, taking into account applicable insurance and accruals, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter or annual period.

Item 4.  Mine Safety Disclosures

Not applicable.

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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common stock:

Shares of the Company’s common stock are traded on The NASDAQ Global Select Market (“Nasdaq”) under the symbol “ORLY.”  The Company’s common stock began trading on April 22, 1993; no cash dividends have been declared since that time, and the Company does not anticipate paying any cash dividends in the foreseeable future.

As of February 18, 2021, the Company had approximately 420,000 shareholders of common stock based on the number of holders of record and an estimate of individual participants represented by security position listings.

Sales of unregistered securities:

There were no sales of unregistered securities during the year ended December 31, 2020.

Issuer purchases of equity securities:

The following table identifies all repurchases during the fourth quarter ended December 31, 2020, of any of the Company’s securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, by or on behalf of the Company or any affiliated purchaser (in thousands, except per share data):

				Total Number of	Maximum Dollar Value
	Total	Average		Shares Purchased as	of Shares that May Yet
	Number of	Price Paid		Part of Publicly	Be Purchased Under the
Period	Shares Purchased	per Share		Announced Programs	Programs (1)
October 1, 2020, to October 31, 2020	779	$	457.71	779	$	1,118,244
November 1, 2020, to November 30, 2020	714		449.32	714		797,226
December 1, 2020, to December 31, 2020	705		448.08	705	$	481,538
Total as of December 31, 2020	2,198	$	451.90	2,198

(1) Under the Company’s share repurchase program, as approved by its Board of Directors on January 11, 2011, the Company may, from time to time, repurchase shares of its common stock, solely through open market purchases effected through a broker dealer at prevailing market prices, based on a variety of factors such as price, corporate trading policy requirements and overall market conditions not to exceed a dollar limit authorized by the Board of Directors.  The Company’s Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program at any time, without prior notice.  As announced on February 5, 2020, October 28, 2020, and February 10, 2021, the Company’s Board of Directors each time approved a resolution to increase the authorization amount under the share repurchase program by an additional $1.0 billion, resulting in a cumulative authorization amount of $15.8 billion.  Each additional authorization is effective for a three–year period, beginning on its respective announcement date.  The authorizations under the share repurchase program that currently have capacity are scheduled to expire on October 28, 2023 and February 10, 2024.  No other share repurchase programs existed during the twelve months ended December 31, 2020.

The Company repurchased a total of 4.8 million shares of its common stock under its publicly announced share repurchase program during the year ended December 31, 2020, at an average price per share of $431.93, for a total investment of $2.1 billion.  Subsequent to the end of the year and through February 26, 2021, the Company repurchased an additional 1.1 million shares of its common stock, at an average price per share of $447.49, for a total investment of $478.4 million.  The Company has repurchased a total of 82.1 million shares of its common stock under its share repurchase program since the inception of the program in January of 2011 and through February 26, 2021, at an average price of $179.65, for a total aggregate investment of $14.7 billion.

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Stock performance graph:

The graph below shows the cumulative total shareholder return assuming the investment of $100, on December 31, 2015, and the reinvestment of dividends thereafter, if any, in the Company’s common stock versus the Standard and Poor’s S&P 500 Retail Index (“S&P 500 Retail Index”) and the Standard and Poor’s S&P 500 Index (“S&P 500”).

	December 31,
Company/Index	2015		2016		2017		2018		2019		2020
O’Reilly Automotive, Inc.	$	100	$	110	$	95	$	136	$	173	$	179
S&P 500 Retail Index		100		105		135		152		191		278
S&P 500	$	100	$	110	$	131	$	123	$	158	$	184

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Item 6.  Selected Financial Data

The table below compares the “Company’s selected financial data over a ten-year period:

Years ended December 31,	2020		2019		2018		2017		2016		2015		2014		2013		2012		2011
(In thousands, except per share, Team Members, stores and ratio data)
INCOME STATEMENT DATA:
Sales ($)	11,604,493		10,149,985		9,536,428		8,977,726		8,593,096		7,966,674		7,216,081		6,649,237		6,182,184		5,788,816
Cost of goods sold, including warehouse and distribution expenses	5,518,801		4,755,294		4,496,462		4,257,043		4,084,085		3,804,031		3,507,180		3,280,236		3,084,766		2,951,467
Gross profit	6,085,692		5,394,691		5,039,966		4,720,683		4,509,011		4,162,643		3,708,901		3,369,001		3,097,418		2,837,349
Selling, general and administrative expenses	3,666,356		3,473,965		3,224,782		2,995,283		2,809,805		2,648,622		2,438,527		2,265,516		2,120,025		1,973,381
Former CSK officer clawback	—		—		—		—		—		—		—		—		—		(2,798)
Operating income	2,419,336		1,920,726		1,815,184		1,725,400		1,699,206		1,514,021		1,270,374		1,103,485		977,393		866,766
Write-off of asset-based revolving credit agreement debt issuance costs	—		—		—		—		—		—		—		—		—		(21,626)
Termination of interest rate swap agreements	—		—		—		—		—		—		—		—		—		(4,237)
Other income (expense), net	(152,931)		(130,397)		(121,097)		(87,596)		(62,015)		(53,655)		(48,192)		(44,543)		(35,872)		(25,130)
Total other income (expense)	(152,931)		(130,397)		(121,097)		(87,596)		(62,015)		(53,655)		(48,192)		(44,543)		(35,872)		(50,993)
Income before income taxes	2,266,405		1,790,329		1,694,087		1,637,804		1,637,191		1,460,366		1,222,182		1,058,942		941,521		815,773
Provision for income taxes (a)(b)	514,103		399,287		369,600		504,000		599,500		529,150		444,000		388,650		355,775		308,100
Net income ($) (a)(b)	1,752,302		1,391,042		1,324,487		1,133,804		1,037,691		931,216		778,182		670,292		585,746		507,673
Basic earnings per common share:
Earnings per share – basic ($)	23.74		18.07		16.27		12.82		10.87		9.32		7.46		6.14		4.83		3.77
Weighted-average common shares outstanding – basic	73,817		76,985		81,406		88,426		95,447		99,965		104,262		109,244		121,182		134,667
Earnings per common share -assuming dilution: (a)(b)
Earnings per share – assuming dilution ($)	23.53		17.88		16.10		12.67		10.73		9.17		7.34		6.03		4.75		3.71
Weighted-average common shares outstanding – assuming dilution	74,462		77,788		82,280		89,502		96,720		101,514		106,041		111,101		123,314		136,983
SELECTED OPERATING DATA:
Number of Team Members at year end (c)	76,257		81,223		78,882		75,552		74,580		71,621		67,569		61,909		53,063		49,324
Total number of stores at year end (d)(e)	5,616		5,460		5,219		5,019		4,829		4,571		4,366		4,166		3,976		3,740
Number of U.S. stores at year end (d)	5,594		5,439		5,219		5,019		4,829		4,571		4,366		4,166		3,976		3,740
Number of Mexico stores at year end (e)	22		21		—		—		—		—		—		—		—		—
Store square footage at year end (c)(f)	41,668		40,227		38,455		36,685		35,123		33,148		31,591		30,077		28,628		26,530
Sales per weighted-average store ($) (c)(g)	2,057		1,881		1,842		1,807		1,826		1,769		1,678		1,614		1,590		1,566
Sales per weighted-average square foot ($) (c)(f)(h)	277		255		251		248		251		244		232		224		224		221
Percentage increase in comparable store sales (c)(i)	10.9	%	4.0	%	3.8	%	1.4	%	4.8	%	7.5	%	6.0	%	4.6	%	3.5	%	4.6	%

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Years ended December 31,	2020		2019		2018		2017		2016		2015		2014		2013		2012		2011
(In thousands, except per share, Team Members, stores and ratio data)
SELECT BALANCE SHEET AND CASH FLOW DATA:
Working capital ($) (j)	(762,630)		(635,765)		(350,918)		(249,694)		(142,674)		(36,372)		252,082		430,832		478,093		1,028,330
Total assets ($) (j)	11,596,642		10,717,160		7,980,789		7,571,885		7,204,189		6,676,684		6,532,083		6,057,895		5,741,241		5,494,174
Inventory turnover (k)	1.5		1.4		1.4		1.4		1.5		1.5		1.4		1.4		1.4		1.5
Accounts payable to inventory (l)	114.5	%	104.4	%	105.7	%	106.0	%	105.7	%	99.1	%	94.6	%	86.6	%	84.7	%	64.4	%
Current portion of long-term debt and short-term debt ($)	—		—		—		—		—		—		25		67		222		662
Long-term debt, less current portion ($) (j)	4,123,217		3,890,527		3,417,122		2,978,390		1,887,019		1,390,018		1,388,397		1,386,828		1,087,789		790,585
Shareholders’ equity ($) (a)	140,258		397,340		353,667		653,046		1,627,136		1,961,314		2,018,418		1,966,321		2,108,307		2,844,851
Cash provided by operating activities ($) (m)	2,836,603		1,708,479		1,727,555		1,403,687		1,510,713		1,345,488		1,190,430		908,026		1,251,555		1,118,991
Capital expenditures ($)	465,579		628,057		504,268		465,940		476,344		414,020		429,987		395,881		300,719		328,319
Free cash flow ($) (m)(n)	2,189,995		1,020,649		1,188,584		889,059		978,375		868,390		760,443		512,145		950,836		790,672

(a) During the year ended December 31, 2017, the Company adopted a new accounting standard that requires excess tax benefits related to share-based compensation payments to be recorded through the income statement.  In compliance with the standard, the Company did not restate prior period amounts to conform to current period presentation.  The Company recorded a cumulative effect adjustment to opening retained earnings, due to the adoption of the new accounting standard.  See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2017, for more information.

(b) Following the enactment of the U.S. Tax Cuts and Jobs Act in December of 2017, the Company revalued its deferred income tax liabilities, which resulted in a one-time benefit to the Company’s Consolidated Statement of Income for the years ended December 31, 2018 and 2017.  See Note 13 “Income Taxes” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2018, for more information.

(c) Represents O’Reilly’s U.S. operations only.

(d) In 2012, 2016 and 2018, the Company acquired materially all assets of VIP Parts, Tires & Service (“VIP”), Bond Auto Parts (“Bond”) and Bennett Auto Supply, Inc. (“Bennett”), respectively.  The 2012 VIP acquisition added 56 stores, and the 2016 Bond acquisition added 48 stores to the O’Reilly store count.  After the close of business on December 31, 2018, the Company acquired substantially all of the non-real estate assets of Bennett, including 33 stores that were not included in the 2018 store count and were not operated by the Company in 2018, but beginning January 1, 2019, the operations of the acquired Bennett locations were included in the Company’s store count, and during the year ended December 31, 2019, the Company merged 13 of these acquired Bennett stores into existing O’Reilly locations and rebranded the remaining 20 Bennett stores as O’Reilly stores.  Financial results for these acquired companies have been included in the Company’s consolidated financial statements from the dates of the acquisitions forward.

(e) In 2019, the Company acquired Mayoreo de Autopartes y Aceites, S.A. de C.V.  (“Mayasa”), which added 21 stores to the O’Reilly store count.  Financial results for this acquired company have been included in the Company’s consolidated financial statements beginning from the date of the acquisition.

(f) Square footage includes normal selling, office, stockroom and receiving space.

(g) Sales per weighted-average store are weighted to consider the approximate dates of store openings, acquisitions or closures.

(h) Sales per weighted-average square foot are weighted to consider the approximate dates of domestic store openings, acquisitions, expansions or closures.

(i) Comparable store sales are calculated based on the change in sales of U.S. stores open at least one year and excludes sales of specialty machinery, sales to independent parts stores, sales to Team Members, sales from Leap Day during the years ended December 31, 2020, 2016 and 2012.  Online sales, resulting from ship-to-home orders and pick-up-in-store orders, for U.S. stores open at least one year, are included in the comparable store sales calculation.

(j) Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of new accounting standards during the fourth quarter ended December 31, 2015.  See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2015, for more information.

(k) Inventory turnover is calculated as cost of goods sold for the last 12 months divided by average inventory.  Average inventory is calculated as the average of inventory for the trailing four quarters used in determining the denominator.

(l) Accounts payable to inventory is calculated as accounts payable divided by inventory.

(m) Certain prior period amounts have been reclassified to conform to current period presentation, due to the Company’s adoption of a new accounting standard during the first quarter ended March 31, 2017.  See Note 1 “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of the annual report on Form 10-K for the year ended December 31, 2017, for more information.

(n) Free cash flow is calculated as net cash provided by operating activities less capital expenditures, excess tax benefit from share-based compensation payments and investment in tax credit equity investments for the period.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

In Management’s Discussion and Analysis, we provide a historical and prospective narrative of our general financial condition, results of operations, liquidity and certain other factors that may affect our future results, including

● an overview of the key drivers of the automotive aftermarket industry;

● key events and recent developments within our Company;

● our results of operations for the years ended December 31, 2020 and 2019;

● our liquidity and capital resources;

● any contractual obligations, to which we are committed;

● any off-balance sheet arrangements we utilize;

● our critical accounting estimates;

● the inflation and seasonality of our business; and

● recent accounting pronouncements that may affect our Company.

The review of Management’s Discussion and Analysis should be made in conjunction with our consolidated financial statements, related notes and other financial information, forward-looking statements and other risk factors included elsewhere in this annual report.

OVERVIEW

We are a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States and Mexico.  We are one of the largest U.S. automotive aftermarket specialty retailers, selling our products to both DIY customers and professional service providers – our “dual market strategy.”  Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items, accessories, a complete line of auto body paint and related materials, automotive tools and professional service provider service equipment.  

Our extensive product line includes an assortment of products that are differentiated by quality and price for most of the product lines we offer.  For many of our product offerings, this quality differentiation reflects “good,” “better,” and “best” alternatives.  Our sales and total gross profit dollars are highest for the “best” quality category of products.  Consumers’ willingness to select products at a higher point on the value spectrum is a driver of sales and profitability in our industry.  We have ongoing initiatives focused on marketing and training to educate customers on the advantages of ongoing vehicle maintenance, as well as “purchasing up” on the value spectrum.

Our stores also offer enhanced services and programs to our customers, including used oil, oil filter and battery recycling; battery, wiper and bulb replacement; battery diagnostic testing; electrical and module testing; check engine light code extraction; loaner tool program; drum and rotor resurfacing; custom hydraulic hoses; and professional paint shop mixing and related materials.  As of December 31, 2020, we operated 5,594 stores in 47 U.S. states and 22 stores in Mexico.

We are influenced by a number of general macroeconomic factors that impact both our industry and our consumers, including, but not limited to, fuel costs, unemployment trends, interest rates and other economic factors.  Due to the nature of these macroeconomic factors, we are unable to determine how long current conditions will persist and the degree of impact future changes may have on our business.  Macroeconomic factors, such as increases in the U.S. unemployment rate, and demand drivers specific to the automotive aftermarket, such as U.S. miles driven, have been pressured as a result of responses to the COVID-19 pandemic, such as stay at home orders, work from home arrangements and reduced travel.  Gradual reopening processes across many markets positively impacted our performance beginning in the second quarter and continuing into our third and fourth quarters; however, we are unable to predict the ongoing and future impact of the pandemic on broader economic conditions or our industry.

We believe the key drivers of current and future long-term demand for the products sold within the automotive aftermarket include the number of U.S. miles driven, number of U.S. registered vehicles, new light vehicle registrations and average vehicle age.

Number of Miles Driven 

The number of total miles driven in the U.S. influences the demand for repair and maintenance products sold within the automotive aftermarket.  In total, vehicles in the U.S. are driven approximately three trillion miles per year, resulting in ongoing wear and tear and a corresponding continued demand for the repair and maintenance products necessary to keep these vehicles in operation.  According to the Department of Transportation, the number of total miles driven in the U.S. increased 0.9% and 0.4% in 2019 and 2018, respectively, and through February of 2020, year-to-date miles driven increased 2.1%.  Miles driven dramatically declined beginning in March of 2020, and through December 2020, year-to-date miles driven decreased 13.2%, as a result of the measures taken by state and local

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governments in response to COVID-19 and the impact to economic activity as consumers responded to COVID-19.  Further government measures or consumer and business behavior could continue to have a negative impact on miles driven, but we are unable to predict the duration and severity of the impact to our business.

Size and Age of the Vehicle Fleet

The total number of vehicles on the road and the average age of the vehicle population heavily influence the demand for products sold within the automotive aftermarket industry.  As reported by The Auto Care Association, the total number of registered vehicles increased 10.4% from 2009 to 2019, bringing the number of light vehicles on the road to 278 million by the end of 2019.  For the year ended December 31, 2020, the seasonally adjusted annual rate of light vehicle sales in the U.S. (“SAAR”) was approximately 16.3 million.  In the past decade, vehicle scrappage rates have remained relatively stable, ranging from 4.1% to 5.7% annually.  As a result, over the past decade, the average age of the U.S. vehicle population has increased, growing 18.0%, from 10.0 years in 2009 to 11.8 years in 2019.

We believe this increase in average age can be attributed to better engineered and manufactured vehicles, which can be reliably driven at higher mileages due to better quality power trains, interiors and exteriors and the consumer’s willingness to invest in maintaining these higher-mileage, better built vehicles.  As the average age of vehicles on the road increases, a larger percentage of miles are being driven by vehicles that are outside of a manufacturer warranty.  These out-of-warranty, older vehicles generate strong demand for automotive aftermarket products as they go through more routine maintenance cycles, have more frequent mechanical failures and generally require more maintenance than newer vehicles.  We believe consumers will continue to invest in these reliable, higher-quality, higher-mileage vehicles and these investments, along with an increasing total light vehicle fleet, will support continued demand for automotive aftermarket products.

We remain confident in our ability to gain market share in our existing markets and grow our business in new markets by focusing on our dual market strategy and the core O’Reilly values of hard work and excellent customer service.

KEY EVENTS AND RECENT DEVELOPMENTS

Several key events have had or may have a significant impact on our operations and are identified below:

After the close of business on November 29, 2019, we completed the acquisition of Mayasa, a specialty retailer of automotive aftermarket parts headquartered in Guadalajara, Jalisco, Mexico pursuant to a stock purchase agreement.  At the time of the acquisition, Mayasa operated six distribution centers, 21 Orma Autopartes stores and served over 2,000 independent jobber locations in 28 Mexican states.  The results of Mayasa’s operations have been included in the Company’s consolidated financial statements and results of operations beginning from the date of acquisition.  

The COVID-19 pandemic has caused significant disruption to the economy, placing pressure on our business beginning in mid-March 2020, as stay at home orders and/or business restrictions were put in place in most cities, counties and states.  This pressure continued until mid-April when our customers began to receive Economic Impact Payments under the CARES Act.  We believe these government stimulus payments and enhanced unemployment benefits, along with the easing of stay at home orders and the associated market reopenings beginning in May and June and favorable industry dynamics, such as consumers investing in existing vehicles, led to strong demand for our products beginning in April and continuing through the remainder of 2020.  

We have been deemed an essential service provider in the communities we serve, and have taken many steps to promote the health and safety of our customers and Team Members, while keeping our stores open and operating to meet our customers’ critical needs during the COVID-19 crisis.  In addition, when our business was pressured at the end of the first quarter, we took steps to strengthen our liquidity and mitigate the expected ongoing impact on our operations and financial performance.

These actions include, but are not limited to:

● Implementing social distancing standards throughout the Company, providing our Team Members with personal protective equipment and modifying store procedures, including the implementation of curbside pickup for Buy Online, Pick Up In-Store orders, enhanced cleaning protocols, health screening, contact tracing and mandatory masking for all Team Members;

● Putting in place programs to relax attendance policies, as well as advance sick time to assist Team Members who are place in quarantine or need time away to support family members effective by COVID-19;

● Temporarily deferring certain capital investments, many of which have now resumed, and prudently managing our cost structure in response to sales volatility;

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● Successfully issuing $500 million aggregate principal amount unsecured 4.20% Senior Notes due 2030, and drawing a precautionary $250 million on our existing revolving credit facility, however during the second quarter of 2020, this additional draw was repaid;

● Temporarily suspending our share repurchase program on March 16, 2020, however, the program resumed on May 29, 2020, based on the improved business environment and outlook; and

● Utilizing relief efforts as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020, which included bonus depreciation on eligible property, deferral of employer portion of social security taxes and deferral of certain tax payments.

While we continue to make adjustments as we navigate the current environment, we are unable to predict how long the current crisis will last or the extent of the impact on our customers and our business. 

RESULTS OF OPERATIONS

The following table includes income statement data as a percentage of sales, which is computed independently and may not compute to presented totals due to rounding differences, for the years ended December 31, 2020 and 2019:

	For the Year Ended
	December 31,
	2020		2019
Sales	100.0	%	100.0	%
Cost of goods sold, including warehouse and distribution expenses	47.6		46.9
Gross profit	52.4		53.1
Selling, general and administrative expenses	31.6		34.2
Operating income	20.8		18.9
Interest expense	(1.4)		(1.4)
Interest income	0.1		0.1
Income before income taxes	19.5		17.6
Provision for income taxes	4.4		3.9
Net income	15.1	%	13.7	%

2020 Compared to 2019

Sales:

Sales for the year ended December 31, 2020, increased $1.45 billion, or 14%, to $11.60 billion from $10.15 billion for the same period in 2019.  Comparable store sales for stores open at least one year increased 10.9% and 4.0% for the years ended December 31, 2020 and 2019, respectively.  Comparable store sales are calculated based on changes in sales for U.S. domestic stores open at least one year and exclude sales of specialty machinery, sales to independent parts stores and sales to Team Members, as well as sales from Leap Day in the year ended December 31, 2020.  Online sales, resulting from ship-to-home orders and pickup in-store orders, for stores open at least one year, are included in the comparable store sales calculation.

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The following table presents the components of the increase in sales for the year ended December 31, 2020 (in millions):

	Increase in Sales for the Year Ended
	December 31, 2020,
	Compared to the Same Period in 2019
Store sales:
Comparable store sales	$	1,082
Non-comparable store sales:
Sales for stores opened throughout 2019, excluding stores open at least one year that are included in comparable store sales, and sales from the acquired Mayasa stores		120
Sales for stores opened throughout 2020		123
Sales from Leap Day		34
Decline in sales for stores that have closed		(9)
Non-store sales:
Includes sales of machinery and sales to independent parts stores and Team Members		105
Total increase in sales	$	1,455

We believe the increased sales are the result of store growth, the acquisition of Mayasa, sales from one additional day due to Leap Day for the year ended December 31, 2020, the high levels of customer service provided by our well-trained and technically proficient Team Members, superior inventory availability, including same day and over-night access to inventory in our regional distribution centers, enhanced services and programs offered in our stores, a broader selection of product offerings in most stores with a dynamic catalog system to identify and source parts, a targeted promotional and advertising effort through a variety of media and localized promotional events, continued improvement in the merchandising and store layouts of our stores, compensation programs for all store Team Members that provide incentives for performance and our continued focus on serving both DIY and professional service provider customers.  The Company incurred significant sales headwinds beginning in the middle of March and through the middle of April, as a result of COVID-19; however, the government stimulus payments, enhanced unemployment benefits, easing of stay at home orders and the associated market reopenings beginning in May and June, when combined with favorable industry dynamics, such as consumers investing in existing vehicles, led to strong demand for our products over the remainder of the second quarter and continuing through the remainder of 2020.

Our comparable store sales increase for the year ended December 31, 2020, was driven by increases in average ticket and transaction counts for both DIY and professional service provider customers.  Beginning in April of 2020, average ticket values, primarily for DIY customers, benefited from consumers spending additional time and money repairing and maintaining their vehicles in response to the COVID-19 and economic environment.  In addition, the improvement in average ticket values was the result of the increasing complexity and cost of replacement parts necessary to maintain the current population of better-engineered and more technically advanced vehicles.  These better-engineered, more technically advanced vehicles require less frequent repairs, as the component parts are more durable and last for longer periods of time.  This decrease in repair frequency creates pressure on customer transaction counts; however, when repairs are needed, the cost of replacement parts is, on average, greater, which is a benefit to average ticket values.  Average ticket values also benefited from increased selling prices on a SKU-by-SKU basis, as compared to the same period in 2019, driven by increases in acquisition cost of inventory, which were passed on in market prices.  

As the COVID-19 stay at home orders and business restrictions took effect in our markets in the middle of March 2020, transaction counts for both DIY and professional service provider customers turned sharply negative, with a larger impact realized on the professional side of the business, as we believe a larger segment of the demographic served by our professional service provider customers is more likely to accommodate working from home than a typical DIY customer.  However, in the middle of April 2020, as the government stimulus and enhanced unemployment benefits reached consumers, we saw a reversal in transaction counts, with a more immediate impact realized on the DIY side of the business.  Improved transaction counts continued through December 2020, as states implemented reopening plans and many individuals returned to work.  We cannot predict what continued impact the COVID-19 pandemic will have to our business in the future given the high degree of uncertainty as to the duration and severity of the pandemic, the potential future changes to economic reopening plans and the mitigating impact of government stimulus for consumers.

We opened 155 net, new U.S. stores and one new store in Mexico during the year ended December 31, 2020, compared to opening 200 net, new U.S. stores during the year ended December 31, 2019.  In addition, on January 1, 2019, we began operating 33 acquired Bennett stores, and during the year ended December 31, 2019, we merged 13 of these acquired Bennett stores into existing O’Reilly locations and rebranded the remaining 20 Bennett stores as O’Reilly stores.  After the close of business on November 29, 2019, we acquired 21 stores from Mayasa.  As of December 31, 2020, we operated 5,594 stores in 47 U.S. states and 22 stores in Mexico compared to 5,439 U.S. stores in 47 states and 21 stores in Mexico at December 31, 2019.  We anticipate new store growth will be 165 to 175 net, new store openings in 2021.

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Gross profit:

Gross profit for the year ended December 31, 2020, increased 13% to $6.09 billion (or 52.4% of sales) from $5.39 billion (or 53.1% of sales) for the same period in 2019.  The increase in gross profit dollars for the year ended December 31, 2020, was primarily the result of sales from new stores, the increase in comparable store sales at existing stores, sales from the acquired Mayasa stores and one additional day due to Leap Day.  The decrease in gross profit as a percentage of sales for the year ended December 31, 2020, was due to the comparable period in the prior year receiving a benefit from selling through inventory purchased prior to tariff related, industry-wide acquisition cost increases, and corresponding selling price increases, and the lower gross margin sales from the acquired Mayasa stores, due to their large independent jobber customer base, partially offset by a greater percentage of total sales generated from DIY customers, which carry a higher gross margin than professional service provider sales and acquisition cost reductions.  We determine inventory cost using the last-in, first-out (“LIFO”) method, but have, over time, seen our LIFO reserve balance exhausted as a result of cumulative historical acquisition cost decreases.  Our policy is to not write up inventory in excess of replacement cost, and accordingly, we are effectively valuing our inventory at replacement cost.

Selling, general and administrative expenses:

Selling, general and administrative expenses (“SG&A”) for the year ended December 31, 2020, increased 6% to $3.67 billion (or 31.6% of sales) from $3.47 billion (or 34.2% of sales) for the same period in 2019.  The increase in total SG&A dollars for the year ended December 31, 2020, was the result of facilities and vehicles to support our increased sales and store count, expense from the acquired Mayasa stores and one additional day due to Leap Day.  The decrease in SG&A as a percentage of sales for the year ended December 31, 2020, was principally due to leverage of store operating costs on strong comparable store sales growth combined with our cautionary approach and strict expense control measures in response to the onset of the COVID-19 environment.

Operating income:

As a result of the impacts discussed above, operating income for the year ended December 31, 2020, increased 26% to $2.42 billion (or 20.8% of sales) from $1.92 billion (or 18.9% of sales) for the same period in 2019.

Other income and expense:

Total other expense for the year ended December 31, 2020, increased 17% to $153 million (or 1.3% of sales), from $130 million (or 1.3% of sales) for the same period in 2019.  The increase in total other expense for the year ended December 31, 2020, was the result of increased interest expense on higher average outstanding borrowings.

Income taxes:

Our provision for income taxes for the year ended December 31, 2020, increased 29% to $514 million (22.7% effective tax rate) from $399 million (22.3% effective tax rate) for the same period in 2019.  The increase in our provision for income taxes for the year ended December 31, 2020, was the result of higher taxable income and lower excess tax benefits from share-based compensation, partially offset by a greater benefit from tax credit equity investments in 2020, as compared to the same period in 2019.  The increase in our effective tax rate for the year ended December 31, 2020, was the result of the lower excess tax benefits from share-based compensation, partially offset by a greater benefit from tax credit equity investments in 2020, as compared to the same period in 2019.  

Net income:

As a result of the impacts discussed above, net income for the year ended December 31, 2020, increased 26% to $1.75 billion (or 15.1% of sales), from $1.39 billion (or 13.7% of sales) for the same period in 2019.

Earnings per share:

Our diluted earnings per common share for the year ended December 31, 2020, increased 32% to $23.53 on 74 million shares from $17.88 on 78 million shares for the same period in 2019.  

2019 Compared to 2018

A discussion of the changes in our results of operations for the year ended December 31, 2019, as compared to the year ended December 31, 2018, has been omitted from this Form 10-K but may be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the annual report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020, which is available free of charge on the SEC’s website at www.sec.gov by searching with our ticker symbol “ORLY” or at our internet address, www.OReillyAuto.com, by clicking “Investor Relations” located at the bottom of the page.    

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LIQUIDITY AND CAPITAL RESOURCES

Our long-term business strategy requires capital to open new stores, fund strategic acquisitions, expand distribution infrastructure, operate and maintain our existing stores and may include the opportunistic repurchase of shares of our common stock through our Board-approved share repurchase program.  The primary sources of our liquidity are funds generated from operations and borrowed under our unsecured revolving credit facility.  Decreased demand for our products or changes in customer buying patterns could negatively impact our ability to generate funds from operations.  Additionally, decreased demand or changes in buying patterns could impact our ability to meet the debt covenants of our credit agreement and, therefore, negatively impact the funds available under our unsecured revolving credit facility.  

As we operated amid uncertainty and disruption caused by the COVID-19 pandemic, we have demonstrated our ability to take prudent steps to support the future stability and financial flexibility of our Company.  At the onset of disruption caused by the COVID-19 pandemic, our Teams took decisive action to reduce costs and conserve cash, which included delaying capital investments, reducing operating costs and temporarily suspending our share repurchase program from March 16, 2020, through May 28, 2020.  As we are unable to determine the duration or potential increase in severity of this crisis, we cannot predict its future impacts on our ability to generate funds from operations or maintain liquidity, and accordingly, we will continue to make adjustments as we navigate the current and expected environment.

Liquidity and related ratios:

The following table highlights our liquidity and related ratios as of December 31, 2020 and 2019 (dollars in millions):

	December 31,				Percentage
Liquidity and Related Ratios	2020		2019		Change
Current assets	$	4,500	$	3,834	17.4	%
Current liabilities		5,262		4,469	17.7	%
Working capital (1)		(763)		(636)	(20.0)	%
Total debt		4,123		3,891	6.0	%
Total equity	$	140	$	397	(64.7)