# TO OUR FELLOW SHAREHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/NASDAQ_ORLY_2018/NASDAQ_ORLY_2018.mmd` · pages 2-8_

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TO OUR FELLOW SHAREHOLDERS:

"Our over 78,000 dedicated Team Members in our stores, distribution centers and offices across the country relentlessly focus on taking market share, as we strive to be the dominant auto parts supplier in all of our market areas."

We are once again pleased to report to you another year of record-breaking revenues, comparable store sales growth, which came in at the top end of our guidance range, and record operating income. Our more than 78,000 dedicated Team Members in our stores, distribution centers and offices across the country relentlessly focus on taking market share, as we strive to be the dominant auto parts supplier in all of our market areas. Our knowledgeable and hard working men and women remain our single greatest asset, and their ongoing focus on perpetuating and growing our Company Culture continues to drive O'Reilly to a record performance year after year. Thank you, Team O'Reilly, for your ceaseless commitment to our success!

Our 3.8% comparable store sales growth in 2018 marks our 26th consecutive year of positive comparable store sales growth since we became a public company in April of 1993; however, we absolutely understand that strong top-line performance must be coupled with a relentless focus on sustainable profitable growth. During 2018, we capitalized on the significant tax savings benefit we received from the Tax Cuts and Jobs Act of 2017 by allocating approximately 30% of these savings back into the business, with a focus on strengthening our team and improving our in-store and omnichannel customer experience. Even with the increased operating costs from these initiatives, our Team's dedication to sustainable, profitable growth drove a 5.2% increase in operating income. This improvement, combined with the tax savings benefits and the continued prudent execution of our share repurchase program, drove a 27% increase in diluted earnings per share, representing our 10th consecutive year of an annual diluted earnings per share increase in excess of 15%.

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GREG JOHNSON
Chief Executive Officer
and Co-President

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JEFF SHAW
Chief Operating Officer
and Co-President

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BRAD BECKHAM
Executive Vice President of
Store Operations and Sales

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THOMAS MCFALL
Executive Vice President
and Chief Financial Officer

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Jean Alsaindor, Store Manager, at O'Reilly 5312-Lehigh Acres, FL.

From the first day we opened our doors in 1957 at 403 Sherman Avenue in Springfield, Missouri, our Team Members and our Culture have been our greatest competitive advantage, and our Team Members' ongoing commitment to providing consistently excellent service will continue to be the critical factor to our future success. In all conditions, rain or shine, fire or flood, our customers have come to expect our doors to stand open, with our Team ready and waiting to provide them with the best technical knowledge and the greatest parts selection available to complete their automotive repairs. In 2019, we plan to open 200 to 210 new stores, and the key ingredient to the success of these stores will be our ability to open the stores with a team of Professional Parts People who are friendly, knowledgeable and dedicated to our Culture of teamwork, honesty, respect, enthusiasm and hard work. For this reason, our top priority continues to be to identify, hire, train, develop and retain outstanding Team Members who will benefit from our "promote from within" philosophy and perpetuate our Culture throughout the Company.

Our commitment to profitably growing our market share is enhanced by the continued strength in the long-term drivers of demand in our industry. Annual miles driven remains the most significant driver of demand in our industry, and in 2018, U.S. consumers once again drove their vehicles more than they did the prior year, accumulating over three trillion miles. A growing and aging vehicle fleet continues to be another long-term demand driver for our industry. Approximately 17.5 million new vehicles were sold in 2018, and coupled with steady scrappage rates, the size of the vehicle fleet increased to approximately 270 million vehicles. As the engineering and manufacturing of these new vehicles continues to improve, so does their ability to remain on the road longer and be reliably driven at higher mileages, resulting in the growth of the average age of the fleet, which is now up to 11.7 years old. We believe this growing and aging vehicle fleet will result in more routine maintenance cycles and ongoing repairs, which are positive for industry demand. The better engineered and manufactured parts in these vehicles

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last longer, resulting in an increase in the interval between repairs and pressuring industry traffic; however, the repair cost of these more advanced components is on average higher, offsetting the pressure on transaction counts and benefitting our industry. Total employment levels in the U.S. is another driver for industry demand. The decrease in unemployment levels over the last several years has benefited industry demand and continued to benefit in 2018, with unemployment levels reaching a 49 year low of 3.9%. This sustained level of total employment supports growth in annual miles driven and the health of the consumer,
resulting in continued stable long-term demand in our industry.
With a growing, aging and diverse vehicle population comes the challenge of providing our customers with quick access to an expanding
We have developed and continue to enhance our robust, tiered, regional distribution network comprised of 27 strategically located distribution centers with the capacity to deliver hard-to-find parts into the hands of customers faster than our competitors. \( ^{II} \) 
to each local market based on vehicle registration data, market demographic information and customer purchasing patterns. This store inventory assortment is augmented by same-day access to hard-to-find parts either directly from one of our DCs or through our network of 342 Hub stores. Our Hub store network is comprised of 84 Super Hubs, which stock on average 66,000 SKUs, and 258 Hub stores, which stock on average 42,000 SKUs. In order to maintain our parts availability advantage, we continually evaluate our distribution capacity, and we are excited about the two new distribution projects we currently have
underway in Twinsburg, Ohio, and Lebanon, Tennessee. These expansion projects will improve our capacity in both of these markets and bolster our position as the industry leader in parts availability. Our "Never Say No" commitment is an essential piece of the excellent
universe of parts. Our ability to meet this inherent challenge by leading the industry in parts availability is a key competitive advantage for our Company. We have developed and continue to enhance our robust, tiered, regional distribution network comprised of 27 strategically located distribution centers with the capacity to deliver hard-to-find parts into the hands of customers faster than our competitors. Each store in the continental United States is replenished five nights a week directly from one of our distribution centers, which carry on average 156,000 SKUs, allowing our stores to stock a broader and more diverse inventory assortment. Each of our stores carry an average of 23,000 SKUs, which are tailored

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Naperville, IL, Distribution Center.

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Suriel Sosa, Parts Specialist, at O'Reilly 2902-Escondido, CA.

opened 200 new stores throughout the U.S. and remain very pleased with the performance of our new stores. We continue to see exciting growth opportunities in newer regions in the Northeast, Middle Atlantic and Southern Florida, as well as strategic backfill opportunities in our established markets. We are also happy to report that at the end of 2018, we closed on the purchase of Bennett Auto Supply in southern Florida and look forward to converting those stores to the O'Reilly brand in 2019.

Our Team's dedication to excellent customer service and profitable growth generated free cash flow of \(1.2 billion, after investing \)504 million in capital projects at our stores, DCs and offices. In 2018, we were able to return excess capital of \(1.7 billion to you, our shareholders, through our share repurchase program. Since we began this program in 2011, we have returned \)11 billion by repurchasing 73 million shares, at an average price of \(150.73 per share. We continue to view the disciplined execution of our share repurchase program as an effective means of returning capital after we have exhausted all opportunities to profitably grow the business and drive a high rate of return for our shareholders. As a Company, we are deeply committed to maintaining an appropriate capital structure, which supports our investment-grade credit ratings and provides the flexibility to take advantage of future growth opportunities.

We would like to conclude our letter by expressing our deep gratitude to our Team Members, who strive every day to make our Company successful and cement the foundation for our continued success for years to come. It is their hard work and dedication to our Culture that continues to build O'Reilly's strong brand reputation. We would also like to thank you, our shareholders, for the trust and confidence you place in our Team, and we look forward to extending our record of profitable growth in 2019.

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## CUSTOMER SERVICE Coast To Coast

Alabama ..... 139
Alaska ..... 15
Arizona ..... 139
Arkansas ..... 112
California ..... 553
Colorado ..... 102
Connecticut ..... 20
Florida ..... 200
Georgia ..... 205
Hawaii ..... 12
Idaho ..... 44
Illinois ..... 203
Indiana ..... 137
Iowa ..... 77
Kansas ..... 85
Kentucky ..... 95

Louisiana.....121
Maine.....35
Massachusetts.....39
Michigan.....168
Minnesota.....125
Mississippi.....78
Missouri.....201
Montana.....28
Nebraska.....45
Nevada.....56
New Hampshire.....32
New Mexico.....56
New York.....3
North Carolina.....173
North Dakota.....15
Ohio.....196

THE O'REILLY FOOTPRINT
Store Count 200-700+ 100-199 1-99
Distribution Center
Future Distribution Center

Oklahoma.....121
Oregon.....70
Pennsylvania.....24
Rhode Island.....8
South Carolina.....108
South Dakota.....18
Tennessee.....176
Texas.....706
Utah.....64
Vermont.....24
Virginia.....78
Washington.....156
West Virginia.....15
Wisconsin.....121
Wyoming.....21