O’Reilly (ORLY): A 6% Comp — And The Operating Margin FELL. Is ORLY a Buy?

O'Reilly Automotive, Inc. (ORLY) Q2 2026 — Reported after the close on July 29 (Q2 2026, the three months ended June 30, 2026). Sales $4,892.0M, up 8.1% from $4,525.1M. Comparable store sales +6.0%, on top of +4.1% a year ago. Diluted EPS $0.86 against $0.78, up 10.3%, and against a Street number near $0.86 — in line. Management RAISED full-year comparable sales guidance to 4.0-6.0% from 3.0-5.0% and EPS guidance to $3.20-$3.30. The stock fell from $90.63 to $87.36 the next session, down 3.6%, and closed at $89.76 on August 3. The number nobody put on air: the incremental operating margin was 19.4%. Sales rose $367.0M, gross profit rose $190.2M, SG&A rose $118.9M — so operating income rose just $71.3M. Every new dollar of sales earned 19.4 cents of operating income against a company average of 20.2. That is why the strongest comparable store sales in years arrived with the operating margin FALLING six basis points, from 20.21% to 20.15%, gross margin flat at 51.4% and SG&A DELEVERAGING nine basis points. Net income grew 7.0%. Diluted EPS grew 10.3%. The entire gap is a 3.4% smaller share count, bought with $1.19B more debt. THE CALL: HOLD (4/5, A SUPERB BUSINESS WHOSE EPS ENGINE IS NOW A THIRD BUYBACK.) — base-case value ~$75.0 vs ~$89.76 today. KEY METRICS: - CALL: HOLD 4/5 — fair value ~$75 vs $89.76 (about 16% BELOW) and 30.4% below the Street's $107.77. OWNER EARNINGS = trailing net income $2,650.4M plus D&A $537.7M less roughly $775M of maintenance capital (capex is guided at $1.30-1.40B, of which about $575M opens the 225-235 new stores) = ~$2,413M, a 3.3% yield on a ~$72.6B market value. STEP 1, a 3x3 DCF grid across owner-earnings bases of $2.25B / $2.41B / $2.65B and bear/base/bull growth: $46-$54, $62-$73, $84-$98. Exactly TWO of the nine cells clear $89.76 and both need the bull row — 8% growth for five years at a 7.75% discount rate. Probability-weighted the grid gives $68. STEP 2, a multiple grid on 2027E EPS of $3.58 at 20x/22x/24x/26x, weighted, gives $82. Blend to ~$75. REVERSE DCF: today's price needs 9.3% compound owner-earnings growth for a decade; the Street's $107.77 needs 11.6%. - THE UNDER-COVERED ANGLE — A 6% COMP WITH NEGATIVE OPERATING LEVERAGE. Sales +$367.0M. Gross profit +$190.2M, a 51.8% flow-through. SG&A +$118.9M — 32.4% of the incremental sales against a 31.3% average. Operating income +$71.3M, an incremental margin of 19.4% against the 20.2% the company already earns. The marginal dollar is LESS profitable than the average dollar. Result: gross margin 51.45% vs 51.41%, SG&A 31.30% vs 31.21%, operating margin 20.15% vs 20.21% — DOWN six basis points on the best comp in years. - PROFESSIONAL PASSED DIY, AND THAT IS WHY THE MARGIN IS FLAT: sales to professional service providers rose 12.5% to $2,469.6M while DIY rose 4.9% to $2,336.9M. Professional is now 50.5% of total revenue against 48.5% a year ago — a year ago DIY was the bigger half. The gap went from DIY ahead by $32.7M to professional ahead by $132.7M. DIFM is the lower-margin half (wholesale pricing, volume, negotiation), so the fastest-growing half is the thinnest one. The lazy 'ageing car parc guarantees DIY comps' thesis is being monetised through the SHOP, not the driveway — and the shop pays less. First-half professional +13.5%, DIY +5.8%. - THE BUYBACK IS DEBT-FUNDED AND THE SUPPLIER FLOAT IS RUNNING DOWN: H1 free cash flow $1,477.8M, H1 repurchases $2,433.0M — 165% of it, funded with $651.9M of net commercial paper and $847.4M of new notes against $500.0M repaid. Long-term debt $5,823.7M to $7,014.5M; interest expense +21.9% to $69.9M. Shareholders' equity went from a $763.4M deficit at December 31 to a $1,835.7M deficit — $1,072.4M more negative in six months. Adjusted debt/EBITDAR 2.06x to 2.17x. And accounts payable to inventory fell from 127.0% to 123.7%: the float SHRANK from $1,459.1M to $1,413.1M while inventory grew $572.3M. - THE RAISE GUIDES TO A SLOWDOWN: comps went to 4.0-6.0% from 3.0-5.0%, revenue to $18.9-19.2B from $18.7-19.0B, EPS to $3.20-3.30 from $3.15-3.25. But H1 revenue was $9,452.6M, so the guide implies H2 of $9,447-9,747M against $9,120M — growth of 3.6% to 6.9% versus 9.1% in H1. H1 comps were 7.0%, so a 4-6% year implies roughly 1-5% to come. H1 EPS $1.58 implies H2 of $1.62-1.72 against $1.56, versus the 12.9% just delivered. And gross margin, operating margin and FREE CASH FLOW guidance were all left UNCHANGED — H1 FCF of $1,477.8M against an unchanged $1.8-2.1B year implies H2 FCF of $322-622M, below the $659.2M of H2 2025. - STREET vs US: 47 analysts, consensus Buy — 28 buy, 18 hold, 1 sell. Consensus target $107.77, median $109, range $98-$115, about 20.1% above the $89.76 close, and the post-print revisions on July 31 went UP: Roth $111, Raymond James $110, D.A. Davidson $106, Baird $100. On the BUSINESS we ALIGN: 6,695 stores, sales per weighted-average store of $733K against $698K, 110 net new stores in six months toward a 225-235 target, and 1.50 billion shares retired since 2011 at an average price of $20.32. On the PRICE we DIFFER and are more CAUTIOUS. $107.77 is about 30x our 2027E $3.58 against a 2021-2025 average of 25.0x. Over five years the stock rose 120.9%, EPS rose 57.0% and the multiple rose 40.7% — roughly 43% of the return was re-rating, and it has already reversed from 32.8x last August to 27.6x. - NOTE ON BASIS: O'Reilly split 15-for-1 effective June 10, 2025. Every per-share figure here is post-split, taken off the Q2 2026 release or off the FY2025 10-K's restated XBRL. Shareholders' equity is NEGATIVE $1,835.7M (retained deficit $3,416.4M), so return on equity, price-to-book and debt-to-equity are arithmetically meaningless for this company and none is quoted. Share count: 816,165,813 at June 30, about 808.9M after the 7.3M shares repurchased at $86.81 between the quarter end and the release — screens still show ~828.9M. What to watch: Bullish: gross margin above 51.5% with professional still growing double digits, which would prove the DIFM mix is not capping the margin and the operating leverage is real after all; SG&A growing slower than sales for two consecutive quarters, turning a 19.4% incremental margin into something above 20; a second-half comp of five or six percent, which would show the raised guide was simply conservative and reset the whole deceleration argument. Bearish: accounts payable to inventory falling through 120% — that supplier float has been a free, self-funding balance sheet for three decades and it has already gone from 127.0% to 123.7%; DIY comping below two percent while professional stays strong, which is the mix getting worse and the retail thesis failing at the same time; and leverage pushed through 2.5x EBITDAR to hold the buyback at this pace. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.