ORLY is staying on our Best Ideas long list, but I have this name on a ridiculously short leash. The quarter was obviously a champ, and the market knows it. I’m pleased with how our call has worked out thus far. No material changes to our model for the year, but the consensus is catching up to our above-consensus numbers.
ORLY sticking with the 2-4% comp guide, which I think is perfectly doable (in fact I’m taking it to the bank), but the 1Q print implicitly set expectations at the higher end of the range. Given the fact – and it is a fact – that DIY is underperforming, the online threat will keep the multiple capped (likely in the mid-teens) even for one of the highest return concepts in retail. I think we need to see a good 3 quarters of above trend comps (imo) to minimize the online threat's impact on multiples in this space.
Also, March slowed. Nice. So…we’re at 2.5% comp for the year after a 3.4% in 1Q – that means a deceleration. Deceleration makes a multiple call tough. This needs to be an earnings upside story. We’re more bullish on the DIFM component, and even though it is lower GM we’re looking for an aggregate GM boost of 10bps this year due to private label and power over vendors driving higher merchandise margins.
As such, our EPS estimates are ahead of the Street by $0.06 for the next quarter and ahead of the upper end of guidance by $0.26 for the year. If my team gains confidence over the quarter that a comp above 3% is likely, THEN our earnings upside becomes more material and the name is likely teeing up for a re-rating on higher numbers. That's the reason I'm hanging in there today.
To be clear, I think that the potential for a miss for the quarter or the year is extremely unlikely, and I think there’s a strong margin of safety here. But I only get to meaningful enough EPS upside if I can justify another 3-4% comp. If our research call doesn’t evolve to a point where my team can model that – then I’m pulling the plug on this call. Limited downside is no reason to have this as a Best Idea Long unless you’re bearish on the market and need exposure to something in retail that’s got some cap with strong margin of safety. That’s not me. So again, I’m still bullish, but this is one where my analyst team will need to prove to me over the course of this quarter that business is trending up without margin degradation for me to pound the table on this call – or even stick with it.
#shortleash
