Monro Inc (MNRO) 2003 Q1 法說會逐字稿

Welcome to the Monro Muffler First Quarter Earnings Conference. During the presentation, all participants will be in listen-only mode. Afterwards, you will be invited to participate in a question and answer session. At that time, if you have a question, you will press star one on your touchtone phone to register for a question.

As a reminder, this conference is being recorded on July 24, 2003.

I would like to now turn the program over to Ms. Melissa Myron of Morgen-Walke. Go ahead please.

Great, thank you. Hello, everyone, and thank you for joining us on this morning’s call with Monro Muffler. If you have not yet received a copy of today’s press release, please call FD Morgen-Walke at 212/850-5776.

I would just like to remind you that on this morning’s call, management may reiterate forward looking statements made in today’s release. In accordance with the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the company’s filings with the Securities and Exchange Commission.

These risks and uncertainties include, but are not necessarily limited to uncertainties affecting retail generally, such as consumer confidence and demand for auto repair, risks relating to leverage and debt service, including sensitivity to fluctuations and interest rates, dependence on and competition within the primary markets in which the company’s stores are located, the need for and costs associated with store renovations and other capital expenditures.

The company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

The inclusion of any statement in this call does not constitute an admission by Monro or any other person, that the events or circumstances described in such statements or material.

Joining us for this morning’s call from management are Rob Gross, President and Chief Executive Officer, and Cathy D’Amico, Chief Financial Officer.

With these formalities out of the way, I’d like to now turn the call over to Rob Gross. Rob, you may begin.

Thanks, Melissa. Good morning, and thank you for joining us on today’s call, and for your continued support of Monro. I will begin by giving a brief overview of our first quarter, which ended June 28, 2003, and then I will turn the call over the Cathy, who will provide additional detail on the financial results. We’d then be happy to answer any questions you may have.

Well, I’d have to say we got the year started off right, as we again posted a record quarter, including double-digit, bottom-line growth and our fourth consecutive quarter of positive comparable store sales. We experienced strength across all areas of our business, and believe we are well positioned to continue this trend.

Over the years, all the members of our team have worked hard to build our reputation as the trusted service provider for a wide range of our customers’ automobile service needs. This has been accomplished by consistent execution of our strategy to drive traffic via discounted oil change, and then view that oil change as a means to build a relationship with the customer, and to convince that customer to come back to Monro multiple times per year for other auto service needs.

We began by generating consistent year-over-year same-store traffic increases, while working to diversify our product line and service offerings. This has helped minimize the risk of being too dependent on one or a few products, and allows us to continue offering consumers quality service at affordable prices, and one-stop shopping, while growing our top line. I’m pleased to say that we achieved a comparable store sales increase of 5.9% during the first quarter on the heels of a 7.3% increase in the fourth quarter of last year.

These comps, which came in a period of continued cautious consumer spending, were driven by strength in many areas of our business, including a 36% increase in our commercial business, and while we both increased orders from existing customers, as well as new customer wins, and a 21% increase in our miscellaneous services category, which included an 11% gain in scheduled maintenance services.

These increases were driven by increased consumer awareness of our services, as well as continued expansion of our service offering. For example, we now have installed Mitchell On Demand, which is an important database used to diagnose and repair many common automobile failures, in 60 stores. This investment will help us to go after an increased piece of the overall service business.

Also, we generated an 8% comp store increase in our tire business. That was a result of continued learning and leverage from our Kimmel and Frasier acquisition.

In addition, we continue to see a relative flattening out of our exhaust sales. For the first quarter, our exhaust comps were down 3%, on top of a positive 5% in the fourth quarter. Both the flattening out of the exhaust comps and the strong growth of our other revenue strengths, have resulted in exhaust becoming a smaller portion of our total revenues each quarter. We expect that trend to continue for the next two or three years, until we see exhausts that are around 10% to 13% of our total revenue.

Another boost from our top line results continued ability to drive price increases on our oil changes. While our oil change offering is still at or below our competitors’ prices, and remains a vehicle to drive store traffic, we have also successfully instituted price increases. And at 1.3 million oil changes per year, this has and will contribute nicely to our top and bottom line growth. I can say with comfort that these price increases have been accepted by our customers, as evidenced by the consistent growth in the number of same-store oil changes performed each year. Even with the $2.00 price increase during this fiscal year, our average number of oil changes per store increased 6%.

As I have discussed before, we are also driving traffic in sales through continued improvements of in-store execution and productivity. We are particularly pleased with the benefits from our powerful POS Direct Marketing database, which provides consumers customized printouts of maintenance services their cars will require over the next several months, as well as generates customized reminders and coupons that are mailed to the customer just prior to their need for a specific service. This system has proven to be a cost-effective way to improve customer awareness of our broad range of products and services, build stronger relationships with our customers, and drive additional store visits per customer per year.

All of the factors that I just reviewed with you combined to create a very strong quarter for our company, and importantly, we have seen these positive trends continue into the second quarter.

Looking ahead, I believe Monro will continue to grow and gain market share from our competitors, some of which are suffering from the increased competition in the industry, combined with a prolonged, difficult economic environment. While we have not been completely immune to the economic slowdown, we have been able to make great progress in building our base of repeat customers and diversifying our revenue stream. We think that the economic environment will in some ways benefit us, by providing solid opportunities to execute our acquisition strategy.

With the integration of the Frasier stores purchased in February 2003 under our belt and performing well, we are continually reviewing prospects that fit our criteria. As I’ve said in the past, we definitely will not do deals just to do deals. However, we are intent on finding cost-effective acquisitions that will strengthen our geographic presence, increase our market share, and diversify our product line, while also being accretive to earnings in a reasonable timeframe.

As we mentioned in our release this morning, our two new BJ’s Wholesale Club locations are performing significantly ahead of our expectations, and we expect to open more locations in the near future. Further, we continue to be very positive about our business model and the traction that we have gained thus far. However, we are not content and will continue to seize opportunities to drive traffic, diversify our revenue stream, improve productivity, manage costs, and gain market share.

Based on what we have seen so far this year, we are comfortable increasing the lower end our guidance from $1.70 to $1.74, making our full-year guidance $1.74 to $1.80, which compares to diluted earnings per share of $1.46 last fiscal year. I’d like to point out, and Cathy will go into more detail about it, that beginning in our second quarter, this year’s guidance includes additional depreciation expense of $0.03 per share, $0.01 per quarter, due to a consolidation of the properties under our synthetic lease. For the second quarter, we currently anticipate diluted earnings per share to range between $0.59 and $0.61.

This completes my overview, and I’d now like to turn the call over to Cathy D’Amico, our Chief Financial Officer, for a more detailed review of our financial results. Cathy.

Thanks, Rob. Good morning, everybody. As we stated, sales for the quarter increased 8.4%, comparable store sales increased 5.9%, and new stores, which are stores that opened after March 31, 2002, added $1.9m, which includes $1.5m from the acquired Frasier stores. Just as a reminder, Kimmel stores are included in the comparable store sales numbers, because they have been opened one full fiscal year, and that compares to a comparable store sales decrease of 0.1% in the first quarter of last year.

With regard to gross profit at 43.8% for the first quarter ended June 28, 2003, it declined slightly as a percent of sales when compared to the same quarter of last year, which showed a gross profit of 44%. The decrease in gross profit as a percent of sales is primarily due to an increase in material cost caused by a shift in mix to the scheduled maintenance and tire categories, which are higher material costs in brakes and exhaust.

Technician labor as a percent of sales was relatively consistent between the two quarters. However, productivity as measured by sales per man hour, improved 2.4% over the same quarter of last year. Since the company began formally tracking the statistics, productivity has increased every year over the last seven years, and since the first quarter of fiscal 1998 is up 38%.

Occupancy costs are also included in the company’s cost of sales line, and as a percent of sales, they declined compared to the same quarter of last year. With strong causes of comparable store sales, the company was able to leverage these costs.

Operating, selling, and general administrative expenses for the first quarter ended June 28, 2003 decreased to 29.9% of sales, as compared to 33.7% in the same quarter of the prior year. The decrease in expense is primarily due to the fact that last year, the company recognized approximately $1.6m of expense related to the performance based stock options granted to Rob Gross in December of 1998, increasing SG&A by 240 basis points. The expense did not recur in the quarter ended June 2003.

Insurance expense declined in the current year quarter as compared to the prior year primarily due to a difference in the timing of the recognition of expense.

Additionally, there was a decrease in advertising expense, due to reduced expenditures, as well as an increase in cooperative advertising credits from Dunders [ph]. These larger decreases were partially offset by increases in benefits expense, as well as increased manager pay, due to raises and higher commissions and bonuses on improved store performance.

Operating income for the quarter ended June 28, 2003 of approximately $10.2m, increased 45.6%, as compared to operating income for the prior year’s quarter, and increased as a percent of sales from 10.3% to 13.8% for the same period.

Net interest expense for the quarter ended June 28, 2003, decreased by approximately $200,000 as compared to the comparable period in the prior year, and declined as a percent of sales from 1.1% to 0.8%.

Weighted average debt outstanding decreased by approximately $13m, resulting in a decrease in expense between the two quarters. This decrease was slightly offset by an increase in the weighted average interest rate for the current year quarter of approximately 50 basis points as compared to the prior year. This situation occurred due to the company’s continuing pay-down of lower rate revolver debt, while higher rate capitalized leases remain, because they are amortized over a longer term.

Other expense increased by approximately $200,000 for the quarter ended June 28, 2003, as compared to the prior year. The reason for the increase is primarily due to the fact that last year, the Kimmel Truck Tire Division earned approximately $140,000 on a pre-tax basis, and under FAS 144, its results were reported on the other income line in the income statement at that time. That division was sold at the end of the first quarter of last year. The effective cash rate for each of the quarters, June 2003 and June 2002, was 38% of pre-tax income.

Fully diluted earnings per share for the quarter were $0.62 compared to $0.42 for the same quarter a year ago, up 47.5% over the prior year.

Moving on to the balance sheet, our balance sheet remains very strong. Our current ratio is comparable to the end of last year, as well as a year ago. Inventory turns are flat with year-end, and slightly better than a year ago. Current liabilities are up due to increased vendor payables and income taxes payables. We continue to try to shift more of our cash flow needs to accounts payable and vendor financing, versus bank financing.

As some of you may know, the new accounting for special purpose entities required us to take an action by the end of our first quarter with regard to our synthetic lease. This lease financed a bulk of the Speedy Real Estate in connection with that acquisition in our fiscal year 1999. We decided to buy the limited and general partners’ interests in the entity, which held the real estate and corresponding debt on June 27, 2003. This entity was consolidated into Monro’s financial statements at June 28, 2003, and as a result, the properties and related debt of approximately $27.4m are recorded on our balance sheet at the end of the quarter.

Going forward, we will record an annual depreciation charge of approximately $500,000 related to these properties. As Rob mentioned, for the remainder of this fiscal year, the pre-tax charge will be approximately $375,000, or $0.01 per share per quarter after tax. With this debt on our balance sheet, our debt to capital ratio is approximately 30%.

Monro generated approximately $11.2m of cash from operations during the quarter. We received approximately 900,000 of cash from option exercises. We spent approximately $900,000 to acquire Brazos Automotive Properties, which held the assets in the synthetic lease. We spent $2.9m on Cap-X, and paid down $8.1m of debt. Depreciation and amortization totaled approximately $3.2m.

I had also wanted to talk briefly about the rest of the year in terms of guidance, and how some other accounting changes will affect the quarters. As Rob stated, we expect our earnings for the full year to be in the range of $1.74 to $1.80, as compared to $1.46 last year. For the second quarter of the year, we expect earnings to be in the range of $0.59 to $0.61 this year, as compared to $0.52 last year. The third quarter should be in the range of $0.30 to $0.32 as compared to $0.26 last year. And our fourth quarter should be in the range of $0.23 to $0.25, as compared to $0.26 last year.

The reason for the shift in income away from the fourth quarter is due to a couple of things. First, the tire business is typically the weakest in the first calendar quarter of the year, or Monroe’s fourth quarter. With our increased tire business, we will continue to see a shift in business from the fourth quarter to the first three quarters.

The second reason has to do with some recent accounting changes for vendor rebates and cooperative advertising credit. Some of you may have heard about the EITF 2-16, which impacts accounting for vendor rebates. Monro has very good relationships with its vendors, and has and continues to receive significant amounts of cooperative advertising credits. In the past, we recognized these credits on a fairly straight-line basis over the first three quarters, with a larger amount in the fourth quarter as we finalized new deals and had a firm hand on exactly how much our purchases were for the year, and how much we had earned from vendors. Now, most of those credits, under the new accounting rules must be recognized in line with inventory turns, which for us is faster in the first haft of the year and slower, due to seasonality, in the second half of the year.

We are still in the process of understanding the rules as they apply to each of our existing vendor contracts, and we will also be analyzing the impact of the rules on new agreements. We will continue to fine-tune our estimate as the year progresses for this new accounting rule, as well as for the change in the timing of the recognition of buyer credits in connection with the re-statement during our recent year-end audit of the original buyer transactions that occurred in fiscal 1998 through 2000. As you may recall, this re-statement reduced prior year after-tax earnings by $2.5m, with the result that earnings over the next several years will improve by a corresponding amount.

That concludes my formal remarks on the financial statement, and with that, I will now turn the call over to the Operator for questions.

At this time, if you would like to register your site for a question, please press the star then the one on your touchtone phone. To withdraw from the queue, press the pound key. Once again, if you would like to register your site for a question, please press the star then the one on your touchtone phone.

Our first question comes from the site of Scott [Stenver], from Sidoti.

Hey, Scott.

Good morning. You talk about maybe -- this is the question I usually ask you. You talked about how the comps were looking good in the second quarter. Maybe just quantify what we’re looking at so far in July.

As of today, we’re plus five.

Okay. And now that Kimmel is totally in the mix, and you’ve already talked about how Kimmel has helped your same-store sales in the tire business for the core business, could you just maybe give some metrics and some general framework of how you’ve been able to cross-leverage the Monro and Speedy, you know, service part of it, and how that’s being applied to the Kimmel and Frasier, please?

Sure. Well, their merchandise mix, obviously, they’re doing more service. Their oil changes per store have gone from four per day to six per day. We are obviously getting the benefits of significantly more tire purchases, which are, you know, helping us, and obviously have gained some selling techniques, because both Kimmel and Frasier do a great job in selling tires.

Okay, and on the miscellaneous category of same store, I guess scheduled maintenance was up 11. What was the difference that drove the miscellaneous category up?

A bunch of other categories. Obviously, you know, we’re, as we get more customers in the door, there are more opportunities, and outside of breaking-out exhaust, brakes, front end, and tires, everything else we do flows into the miscellaneous service category, and it’s just consistently -- you know, we started with the oil changes to drive traffic. Now there’s a slew of other services that those oil change customers come in to us for on a regular basis.

And you can see with our star traffic being up four or five percent a year, year over year, and these customers now coming back four or five times a year, the opportunities in that category, as we’ve said, it will consistently be the high-growth category of the company. Even with scheduled maintenance up 11, that up 11 is on the heels of a plus 30 last year same quarter, so continuing the double-digit growth in all these, you know, categories will continue. And as we’ve said before, probably tires and miscellaneous services three years down the road will be 55% to 60% of our business.

All right. Talk about this new diagnostic tool that you talked about. I think you just called it the Mitchell Diagnostic System, and what exactly it does, just a little more in depth, and just talk about how maybe it will keep the scheduled maintenance moving forward.

Yeah, what we did, Scott, was we put an electronic version of a repair manual online in 60 of our stores as a test. And what it does is it gives detailed repair instructions based on the make, model and vehicle of car for, you know, different services that need to be done, which helps us, you know, as we expand into new areas to be sure that, you know, we’re doing things the right way based on, you know, each manufacturer’s guidelines.

We’ve always had, and continue to have a hotline right to our training center, where our technicians and our managers can call in for guidance. But this makes it more immediate, and they can see it right on a screen, and we’re looking at -- we’re going to follow up and see how sales fare in the stores that have it versus the other stores and see if it’s an investment we want to make chain-wide. It’s not an inexpensive one, but something that can only help as we expand.

And, you know, as we said, Scott, we have a huge advantage versus the dealerships, and add technology that others might not be able to afford to allow us to do more sophisticated repairs without giving up our labor rate advantage, we’re going to seriously look at those opportunities, because it gives us a real competitive advantage, both against the dealers, but also against the smaller guys that can’t afford to make some of the investments we can.

Okay, and a last question here. Cathy, could you just go over again the fourth quarter guidance. I think you said a 23 to 25, and maybe just explain, you know, what the timing issue of these vendor credits is, so I can get a better framework.

Sure. And you probably -- you might be seeing this with other retailers as well. We’ve seen some things where if people adopt it, they’re restating, or at least pro forma, restating their prior quarters. But basically, what happens, Scott, is the new accounting rules say, hey, we don’t care why you’re getting the money, whether you’re getting it because you get so much a unit to apply for very specific advertising, so much a unit to apply for general advertising, coupon books, TV, radio. The accountants are saying, ah, and in most every case, what we want you to do with is record that as a reduction of cost of sales.

And unless you can show specifically dollar for dollar that it matches up with an ad that you ran, and most of these vendors give it to us just to support our advertising. So whatever we do in their product category, you know, so ours is more general as with many, many other companies that receive this money. Basically, the new accounting was just saying, it’s a reduction of cost of sales. Tie it to term. So, this starts with agreements that are in effect in the December/January timeframe. Many of ours were signed before then, but they’re coming up for renewal, and it will start impacting us going forward.

So instead of recognizing the income as we purchased the product and get our advertising, which, you know, was pretty much straight line over the year, now we’re saying, you’ve got to match it to the terms based on each individual agreement and each individual product.

So because our softest quarter is our fourth, which is the quarter that used to be heaviest with these credits, again, just because we’re truing up the year, the agreements are signed for the year, we know exactly how much we were going to get in the olden days. Now we have to estimate at the beginning of the year what our return’s going to be, what do we think we’re going to get for the year, and up-front, more of that, that those credits versus a year ago, you know, more straight line with a heavier fourth quarter. So the fourth quarter will be our lightest quarter in terms of recognition, because it doesn’t change what we get or how much we end up with for a year. It’s just timing between quarters.

Okay, so basically, the fourth quarter of this year will be a true up, and it should be more, I guess, you’ll have a better picture of where it should go once we -- when you start giving out guidance for ’05 at this point.

Yeah, and I would expect that you would see that going forward, our fourth quarter would be our weakest of the four quarters, because of the accounting changes, which are going to be around now forever. Go ahead.

I mean, what you also will see, Scott, our best guess right now is, you know, probably Q3 and Q4, gross margin will be 50 basis points better or higher, and SG&A will be 50 basis points worse or lower, netting out to the same amount. But again, it used to be accounted for in SG&A as an offset to our advertising expense. Now it goes up to cost of goods. Net net, it’s all timing.

Okay, that’s all I have. Thanks a lot.

Yep.

Scott, thank you.

Our next question comes from the site of Brett Jordan, from Advest.

Good morning.

Hi, Brett.

A couple of quick questions. One on Mitchell, I guess, going with Mitchell, does that link you more closely with NAPA and as the hard parts business grows, do you potentially get better pricing and better margins by using Mitchell?

Yes.

Okay, all right. I guess, on the tire side of the business at 8% comp, and with Kimmel now in the comp, I guess trying to get a feeling for what the macro tire growth and demand looks like, do you have feeling for what the general replacement environment’s looking like these days in, you know, the tire business in core stores, versus tire business in your tire stores?

Sure, and again, the best comparison would be Kimmel, and their comps or money, you know, on a month by month basis, anywhere from plus five to plus seven, that is a true tire store. And we’ve been, obviously, very happy with their four years straight of comp store sales growth. Our first year in operating their stores of a plus four to plus five last year. This first quarter, they were plus five to plus seven, and it continues to run very similar.

So, our tire business in our tire stores is strong. It’s a little bit higher comp number because, obviously, in the Monro stores, we’re up against -- we’re relatively new to the tires, so for example, in the same quarter last year, tire sales comp were up 19%. This year, they’re up a plus eight on top of a plus 19. So I would expect our tire sales overall, from a comp basis, to look better than a lot of our competitors. But the truest comparison of our performance versus some of the other, you know, mainly tire guys, would probably be Kimmel, and they’re running plus five to plus seven.

Okay, great. And then on the exhaust, do you have a current quarter trend in exhaust? I guess you saw a negative three, versus a positive fourth quarter. Is there any shift on exhaust throughout the quarter that was dramatic, or is it just, you know, within a few points of zeroes where you always expected it to be?

Yes, that’s where we expected it be. As we’ve said, it appears, we’re now seven months into, with a plus five in Q4 and a minus three this last quarter, it looks like we’re coming pretty close to flattening out. That doesn’t mean one quarter we might not be plus three, another quarter we might be minus three. But certainly as it approaches -- it’s 18% of our business as it approaches 15, whether it’s minus three or plus three, we can certainly overcome that with some of the explosive growth in some of the other categories. I think one of the big helps we had, you know, this quarter and continues, is brakes were up 5% comp, and obviously, while service will eventually be our biggest category, brakes is still one of our biggest categories currently.

Okay, thank you.

Thanks, Brett.

Once again, if you would like to register your site for a question, please press the star then one on your touchtone phone. Our next question comes from the site of Jack Velots [ph], from Midwood Research.

Hi. I was wondering, regarding Kimmel and now Frasier, to what degree has the overhead savings been complete, or to what degree is there further room to grow?

That is complete. Frasier is fully integrated. There’s no corporate overhead outside of what we have in Rochester still with their locations, and I think the biggest way to look at Kimmel is, we said it did about $2m EBITDA last year and $0.06, and this year we projected Kimmel to provide $0.13 of, you know, earnings power tuned to our numbers. So the spread between six and 13 includes about six months of corporate overhead that we had last year, but no longer exists in Kimmel either.

Okay. Does Kimmel and Frasier have a lower SG&A ratio than a Monro store?

Catherine D’ Amico: On a store level, no. SG&A, though, is overhead and we don’t really allocate overhead to those, you know -- we don’t have a separate balance sheet for those stores. So, only because of corporate overhead being, you know, on a top level. Otherwise, on a store basis, they’re very comparable.

Oh similar, I see.

Yeah. Well because we -- Jack, if you remember, we buy everything here. We negotiate all the contracts here across the chain, so.

I was talking more in terms of payroll ratio at the store level.

Well, payroll…

They are very similar. I think the best way to look at the addition of tire stores is, they’re going to do more volume, but a tire store is going to make very similar bottom line to a Monro store. It’s just going to have higher sales volume, say 650 to 700 per location, versus Monro with 500 per location, with a lower margin, netting us out to the same store-by-store profitability.

Okay. In terms of acquisitions, you mentioned the criteria that you’re going to follow. I was wondering, where’s your outlook on a near-term basis in terms of deals that might be available?

We’re constantly looking, and as soon as we have something done to report, we’ll be happy to let everybody know.

Okay. One last thing, Cathy. What was the level of your inventories in your June quarter of 2003?

Hold on a second. I’ve got it right here. It was $48m versus $53m, so we’re up $5m.

Okay, thank you.

You’re welcome.

We’ll go next to the site of Les Bryant, from UBS Financial Services.

Hi, guys.

Hi.

Great job.

Thank you.

I just have maybe an insignificant question, but it’s regarding the BJ’s Wholesale Club.

Uh huh.

Who are your customers? Is that a new type of retailing, or is it a wholesale business?

BJ’s Wholesale Clubs are very similar -- you guys, I think out on the West Coast have Cosco.

Oh.

So it’s the same format as a Sam’s Club or a Cosco. And all those guys have tire centers and service bays within their locations, as does BJ’s Tire Centers, which only provided the tire service to the BJ’s customers, and transferring them into full service Monro Muffler Brake locations.

Interesting. Thank you.

Yep.

Our next question comes from the site of Bobby Melnick [ph], from Carrier Parts.

Partners. Hi, good morning.

Hi there.

It’s reporting season, so I’ve been jumping around. I apologize if you did address this, and maybe we can elaborate offline if that’s a better use of time. My question has to do with the, how successful you guys have made Monro a pretty high cash-generating company, which is wonderful for all of us, and thanks. Obviously, your choices as to how to deploy that capital are sort of laid-out there along with a lot of other people.

But I think this is probably the first conference call in which a dividend has been much more attractive to the owners than it was in times gone by. And, you know, Rob, you’ve obviously made a couple of acquisitions, and you’ve still managed to in general, you know, pay down a good chunk of the company’s debt, and you still have a very attractive and liquid balance sheet. And we still have an ownership group that obviously, they’ve filed, but some of the big owners have sold a little bit of stock, and certainly, there’s not criticism implied in stock and that’s gone from, you know, 10 to 30 over the last couple of years.

I guess the question, then, is where does a dividend or return of capital to shareholders come into play? One presumes that the company’s share re-purchase at $30.00 is not a terribly efficient use of capital, although you guys were smart in buying back stock in the single digits. So, talk a little about the dividend and whether that’s starting to be a topic at board meetings, if you can.

The dividend is starting to be a topic at board meetings. However, we just need to assess the opportunity of putting the capital to work for acquisitions while keeping the leverage of the company low versus what might make sense in sharing some of the significant free cash flow we have and giving that back to our owners.

Given that the acquisitions that we have made have been (a) accretive, (b) nominally small, i.e. in terms of cash outlay, and (c) pretty much very quickly paid-down the acquisition costs, could a shareholder then interpret what you said as to think that maybe there’s some larger and possibly significantly larger acquisition candidates out there?

Potentially, but certainly, you know, when we know more and we have something done, we would certainly share it with you. If there were not opportunities out there, we might be further along on the dividend front.

Okay, okay. Thanks.

Thanks, Bobby.

Once again, if you would like to register your site for a question, please press the star then one on your touchtone phone at this time. We have a question from the site of Jerry Heffernan [ph], from Lord Abbott.

Good morning. How are you guys doing today.

Hi, Jerry.

Yeah, I’d like to reiterate previous comments of appreciation for a job well done here.

Thank you.

Could you give a little bit more insight to the BJ's stores? You indicated that the two that are running are ahead of plan, if I can put those words into your mouth, and that you are looking forward to expanding the program. Can you give us a little bit more detail as to how well they’re doing in regards to ahead of plan and how you see the rollout of future stores going?

Sure. On brand new locations, you know, we anticipated again, because we don’t get the tire sales and there’s no consumer recognition of all the services now Monro provides, we typically expect a new BJ’s location to do about $200,000 a year in sales. The one in Coventry, Rhode Island is running over $400,000 in sales. The one that we just opened in Victor, New York is running somewhere on an annualized basis, between and 250,000 and 300,000 for sales. We’re certainly happy with those results.

Obviously, with the low rents and less than $100,000 to open these things, not counting the inventory, their very high rate of returns, we’re happy. We think BJ’s is happy with the relationship, and the additional service that their members are gaining. So certainly, in the future, already started but we will open between 10 and 12 of those this year. We would hope if things continue to operate the way they are, that potentially that number would increase. But they have a total of 100 stores today that overlap in our markets, that potentially we could do something with over the next three years.

Okay, and not to be nit-picky, but I don’t know how BJ’s works. Is that 10 to 12 in this calendar year, or 10 to 12 in your fiscal year?

We were looking at 10 to 12 in our fiscal year the last time we quoted a number.

Okay, great. And the synthetic leases were brought on the balance sheet?

Yes.

Yeah, Catherine, if you could just review that, why the decision was made. Obviously, I see the long-term debt balance going up. Is that entire difference due to the synthetic leases, or is there a gross amount of leases brought on and a net number that I’m seeing due to debt repayment?

We did pay down about $8m in debt, Jerry, but…

That is not me!

Yeah, Operator, can you, you know, take care of the music?

I hope you’re not trying to send me a signal, Cathy.

No, I think that’s coming from the operator’s side. Anyway, with the new rules, our structure didn’t qualify for off-balance sheet treatment under the new accounting rules. And we had a choice of either restructuring it under a different sort of arrangement, which would have been fairly expensive to do, or consolidating it. And you can consolidate it in a lot of different fashions, but we chose to do is we chose to basically buy the entity that held the debt and owned the properties under the synthetic lease.

So that’s what we did. It gave us complete control over those properties, then that way also reduced by about 32-1/2 basis points the spread on the debt that we’re paying for those to finance those properties. So net net, we basically just consolidated $27.5m worth of real estate, and put that on our balance sheet, along with a similar amount of debt. And going forward, we’ll just have interest expense on the debt, and we’ll have depreciation expense on the building.

In this environment, Jerry, we just felt it was a lot cleaner.

I’m inclined to agree with you, without a doubt. And Catherine, I’m sorry, you started out with indicating that you had paid down some debt. How much was that again?

We paid down about $8m of debt in the quarter.

Okay, great.

Okay?

Again, thank you very much for a job well done.

Once again, if you would like to register your site for a question, please press the star then the one on your touchtone phone. Our next question comes from the site of Jack Velots [ph], from Midwood Research.

I just had a follow up on the tire stores versus the Monro stores, and that is do the tire stores have a higher inventory turn, or is there a similar return on investment?

They have a higher inventory turn, Jack.

And so, that means that they might have comparable return investment, or is it lower than a Monro store?

Don’t know.

We can certainly get back to you on that.

Okay. And, Cathy, you had said that inventory returns per store I think were slightly higher than last year, but on a year-over-year, inventory is up 10% compared to about eight and a half for sales.

Well, what you can’t see in cost of sales, is how much of the expense is material usage, versus we have technician labor and occupancy cost.

No, I’m talking about the increase year-over-year in inventory, compared to increase year-over-year in sales.

I understand, but it’s, I, you know, without sitting down and showing you the calculations, it’s just up a hair from where it has been running, mainly because of more tire sales.

Okay, thank you.

It appears we don’t have any further questions. I would like to turn it back over to Mr. Gross.

Thanks, Operator. I just want to thank everyone for their continued support, and that the team here is working real hard. We’re excited about the progress we’ve made, and certainly see continued opportunities for us to grow the business profitably, and continue to give you guys good returns on your investments.

So with that, I just want to thank you, and have a great day.

That concludes today’s conference call. You may disconnect at any time.