Tariffs Aren't O'Reilly's Biggest Problem, This Is

O'Reilly Automotive (NASDAQ: ORLY) is a fast-growing auto parts retailer. The stock is fast-growing as well, and its price is up over 41% over the past 12 months, trouncing the 13% or so gain of the S&P 500 over that span. With a price-to-earnings ratio of 33x, investors clearly have high expectations for the business.

However, there's a problem that needs monitoring, and it isn't tariffs.

What does O'Reilly Automotive do?

As noted, O'Reilly Automotive is an auto parts retailer. It sells parts to both the professional and the public. The key fact here, however, is that it is a retailer. This has implications for its business in multiple ways.

Image source: Getty Images.

For example, there are two main ways for a retailer to grow. The first is to sell more from the stores it has open, which you can track with the same-store sales metric. The second is to open new locations -- information the company shares on a quarterly basis. In the first quarter, same-store sales were up 3.6%, and O'Reilly opened 38 new locations.

Solid news on both fronts helped to push the company's top line up 4%. But as you move down to the bottom of the income statement, you see that net income actually fell year over year. Earnings per share rose, but that was only brought about by a large stock repurchase program.

What is going wrong at O'Reilly Automotive?

The big problem O'Reilly faces is rising costs. Before jumping to the current Wall Street fear around tariffs, that's not the problem management is pointing out. The company highlighted something even more fundamental to its retail business: employees.

Specifically, O'Reilly highlighted that its selling, general, and administrative (SG&A) costs rose faster than it expected, largely because of employee-related expenses. The company isn't changing its outlook for SG&A expenses for the year, but inflationary cost pressures around employee compensation are something it is watching, and you should watch it, too.

That's because stores don't run themselves; they need employees. And O'Reilly has a lot of employees, with the figure expanding as it opens new locations. To put some numbers on that, the company had roughly 90,600 employees in the first quarter of 2024 and 93,400 in the first quarter of 2025. Not only does each employee increase costs, but it makes the impact of inflationary employee cost increases that much worse.

There's not much O'Reilly can do about this fact, since skimping on employees would likely lead to worse service for customers. And that would hurt same-store sales. Meanwhile, opening new stores inherently requires additional staff. Not opening new stores would stall the company's growth. It simply has to eat the costs it faces on the employee front if it wants to keep growing.

O'Reilly is dealing with the issue as best it can

For now, as costs rise, O'Reilly is managing the issue on the earnings statement by buying back shares. That's a temporary fix, but it papered over the impact that rising costs had in the first quarter pretty well, given the rise in earnings despite the drop in net income. However, that's not a great long-term solution. Investors will want to watch O'Reilly's costs closely in the quarters ahead to see if this problem is one it can truly get control over, or if it becomes a lingering issue.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.