Springfield-based O’Reilly Automotive Inc. is working to build a 390,000-square-foot distribution center in Lakeland, Fla., its first since 2010 when it opened four centers.
Lakeland Community Development Department Senior Planner Lorenzo Thomas confirmed O’Reilly Automotive (Nasdaq: ORLY) has submitted preliminary site plans for the distribution center and a 7,200-square-foot retail store.
The move appears to target a distribution gap in the Southeast, though O’Reilly Investor Relations Director Mark Merz declined to comment, noting the publicly traded company has not announced plans for a distribution center in Florida.
O’Reilly Automotive currently operates 23 distribution centers, most recently opening in Stockton, Calif., in September 2010, according to Merz.
John Neff, an O’Reilly stock analyst for Middleburg, Va.-based Akre Capital Management, said the auto-parts supplier has a robust distribution network with a goal of placing centers within 250 miles of its retail stores. Currently, distribution centers in Mobile, Ala., and Atlanta each about 500 miles from Lakeland in central Florida—are the nearest to O’Reilly’s roughly 50 stores throughout the Sunshine State.
O’Reilly Automotive rose to national powerhouse status in the aftermarket auto-parts industry when it acquired Phoenix-based CSK Auto Corp. in a $1 billion cash-and-stock deal in July 2008, increasing its reach by roughly 1,300 stores and providing penetration in to the Western United States. With 3,859 O’Reilly Auto Parts stores, the company is now ahead of Advance Auto Parts for the No. 2 spot in the U.S., behind market leader AutoZone’s 4,685 stores.
Neff said O’Reilly Automotive’s approach toward distribution is one of the key reasons Akre Capital doubled down on its O’Reilly stock when share prices recently fell to around $80 per share from above $95 per share when second-quarter projections were downgraded in June.
“There are some interesting differences between O’Reilly and AutoZone or Advance,” Neff said. “First, it has taken a much more distribution-center or DC-centric approach.”
Neff said O’Reilly manages 8.5 million square feet of distribution-center space, compared to 4 million for AutoZone and 3.9 million for Advance Auto Parts.
He said Advance and AutoZone rely on a business model that depends heavily on hub stores that serve as minidistribution sites for other retail locations in a given region; an approach Neff feels has drawbacks.
“Hub stores are much less expensive to build than distribution centers, so you save money on capital expenditures, but they are actually more expensive from a working capital perspective,” Neff said, explaining that hubs require more duplicative inventory, and more middlemen to feed the needs of nearby locations. “In a hub store, you may carry two of a certain part and have to restock that frequently, but in a distribution center, you may have 100 of those parts and just need to drop a pallet a week and you are good to go in terms of service.”
O’Reilly last opened a distribution center in September 2010.
In addition, Neff said hubs don’t typically carry as broad of a range of parts.
“The reason why it matters to O’Reilly to invest in these distribution centers is because they are more efficient, they carry more parts and that increases the inventory depth that it can get into their stores very quickly,” Neff said. “What O’Reilly is doing is a strategy to be in more places, more of the time, the first call.”
According to Chicago-based equity research group Zacks Investment Research, O’Reilly opened 50 stores nationwide in the second quarter and is on pace to add 180 stores in 2012. Merz said recent growth has not been concentrated in any particular area of the country.
O’Reilly posted 2011 sales of $5.8 billion, and as of June 30, the publicly traded company employed 52,254 in 39 states, according to
OreillyAuto.com.
Lakeland’s Thomas said the process to build a distribution center in Florida is still in the early stages.
“The first process is concept review,” Thomas said, noting O’Reilly representatives met with a Lakeland planning committee Sept. 5 to discuss how the company can correctly submit plans for review on details such as where a structure would connect to utilities, what kind of landscaping would be included and issues related to road infrastructure. “The next step is to submit an engineer’s site plan or civil-work site plan. … They haven’t started that step, yet.”
Thomas said he is not aware of any project cost estimates being provided to the city. He said estimated impact fees to support road development, fire protection and law enforcement protection would be around $630,000 based on the size of the building being proposed. According to a Sept. 21 report in the Lakeland Ledger, Lakeland city commissioners approved $438,000 in impact fee mitigation to help bring the auto parts company to town.
Neff said Florida appears to be an area where O’Reilly has room to grow. At the end of last year, Neff said O’Reilly operated 46 stores in Florida, which compares to 509 for Advance.
Down the road, Neff said he wouldn’t be surprised to see O’Reilly make a focused effort to break into markets in the Northeast.
“The Northeast is uncharted territory for O’Reilly,” Neff said, noting the auto-parts retailer has no stores in New Jersey, New York, Massachusetts, Connecticut, Rhode Island, Vermont or Maine.
O’Reilly was founded in Springfield by Charles H. “Chub” O’Reilly in 1957. In 1975, it built its first distribution center, a 52,000-square-foot facility located at 233 S. Patterson Ave., after annual sales hit $7 million, according to its website.
