Monro Inc (MNRO) 2003 Q2 法說會逐字稿

Welcome to the Monro Muffler second quarter earnings conference. During the presentation, all participants will be in a 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 and one on your touch-tone phone to register for a question. As a reminder, this conference is being recorded on October 16, 2003. I would now like to turn the program over to [Cara O'Brien][ph] of Financial Dynamics.

Go ahead, please.

Thank you, Operator.

Hello, everyone, and thank you for joining us on this morning's call with Monro Muffler. If you have not received a copy of today's press release, please call Financial Dynamics at (212) 850-5600, and we'll get one out to you immediately.

Before we begin, 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 SEC.

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 in interest rate; dependence on competition within the primary market in which the company 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 statements in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material.

Joining us for this morning's call from management are Rob Gross, President and CEO, and Cathy D'Amico, Chief Financial Officer. With these formalities out of the way, I'd now like to turn the call over to Rob Gross.

Rob, please go ahead.

Thanks, Carrie. Good morning. Thank you for joining us on this morning's call and for your continued support of Monro Muffler. I will begin by giving a brief overview of the second quarter, which ended September 27, 2003. And now I will turn the call over to Cathy, who will provide additional detail on the financial results. We'd be happy to answer any questions you may have.

I'd like to start out by saying that once again we have met our goals for the quarter by continued and consistent execution of our business strategy. During the second quarter, we were able to post record sales and earnings, highlighted by a 20-percent net income growth and comparable store sales of 6.6 percent, our fifth consecutive quarter of positive comps. These results were driven by our team, who continues to work hard to build our reputation as the trusted service provider for a wide range of customers' automobile service needs.

This has been accomplished by consistent execution of our strategy to drive traffic via the oil change and then use that oil change as a means to turn a customer that tries us once into a loyal, repeat customer that will purchase all their automotive repair services from Monro.

For example, our 10-percent comparable increase in brakes, on the heels of last quarter's 5-percent increase, provides evidence of the traction we have gained in terms of generating trust and driving repeat customers. To fully leverage our quarter-over-quarter traffic increases and provide more customer convenience, we constantly work to diversify our service offerings, as well as raise our customers' awareness of these offerings.

The success of this strategy can be seen in our 11-percent increase in our miscellaneous service category. This category, which includes our newest service offerings, such as state inspection, scheduled maintenance and flush and fills, has experienced double-digit increases for the past ten quarters.

Our strong comparable store sales result of 6.6 was driven not only by our solid increase in our brakes and miscellaneous services, but also a 16-percent increase in our commercial business.

In addition, we've hosted a very strong 8-percent increase in the exhaust category. Over the past three quarters, our exhaust comps have averaged plus three. After experiencing years of decline in our exhaust business, we are hesitant to call this a trend too soon. However, we are getting more comfortable that exhaust has turned the corner.

As we mentioned in the press release this morning, our strong quarter was hindered by the hurricane that impacted the southern portion of our markets in September. While I've always said that we won't use weather as an excuse, I never said anything about natural disasters. We estimate that the hurricane impacted our comps for the quarter by approximately half of 1 percent and 1 cent on a diluted earnings per share.

Our tire business was down about 5 percent in the quarter, which was primarily due to Tread Quarters and Kimmel Tire stores getting pummeled by the storm. Despite the negative impact of the hurricane, we were able to achieve our goals and deliver a strong quarter.

Before I discuss our outlook for the back half of the year, there are two other positive events that occurred during the quarter, which I'd like to briefly mention. First, we announced a three-for-two stock split that is payable to shareholders of record as of October 21. Our board of directors approved the split due to our continued strong financial performance and confidence in our ability to achieve sustained growth. We hope that increasing the number of shares outstanding will improve our stock's liquidity and encourage additional market interest and broader ownership.

Second, we were proud to be included on the Forbes 200 Best Small Companies List, which came out on October 9. The selection process started with a pool of 3,500 companies and was narrowed down to the top 200 based upon criteria such as growth in sales, earnings, and return on equity. We were among a stellar group of companies, and it's always a pleasure to have our achievements recognized by an independent source, such as Forbes.

Looking ahead, our organic growth is on track. Importantly, we are also actively pursuing opportunities to increase our store base. Currently we have six BJ's locations open, which are exceeding our operating expectations, and two more slated to open in the next 30 days. We hope to open a total of 15 this year in addition to five standalone Monros and will keep you updated on our progress on that front.

As I've said in the past, we definitely will not do deals just to do deals. Rather, we continue to search for cost-effective acquisitions that will strengthen our geographic presence, increase our market share, and diversify our product line, also being accretive to earnings in a reasonable timeframe. Currently we hope to have additional news in terms of new stores to update you on by our next conference call.

We continue to be very positive about our business model and the traction we have gained and are seeing the trends of the second quarter continuing into the third quarter thus far. Looking ahead to the back half of the year, I believe Monro will continue to grow and gain market share from our competitors. 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, and grow our store base.

We are comfortable with our earnings per share guidance for the full year of $1.74 to $1.80 pre-stock split, which compares to diluted earnings per share of $1.46 last fiscal year.

For the third quarter, we currently anticipate diluted earnings per share to range between 30 and 32 cents per diluted share, pre-split, versus 26 cents last year.

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.

Thanks, Rob. Good morning, everyone.

Sales through the quarter overall increased 9 percent, with comparable store sales up 6.6, as Rob had said. New stores, which we define as stores opened after March 30, 2002, added $2 million to the sales line. As a reminder, the Kimmel stores are included in the comparable store sales numbers because they have been open one full fiscal year, and that compares to a comparable store sales increase for the same quarter of last year of 1.5 percent.

Year-to-date comparable store sales increased 6.3 percent. New stores added 3 point million dollars, and that compares to an increase of seven-tenths for the first six months of last year.

Gross profit at 42.4 percent of sales for the second quarter ended September 2003 increased as a percent of sales when compared to the same quarter last year, which showed a gross profit of 42.1 percent. The increase is due primarily to the buyout of the synthetic leased properties, which occurred on June 27, 2003. As a result of this transaction, approximately $400,000 of expense, which was formerly recorded as rent expense and included in cost of sales, is now recorded as interest expense in the quarter ended September 2003. This reduction was partially offset by approximately $125,000 of additional depreciation expense, recognized in this quarter now that the related properties under the synthetic lease are recorded on the Company's balance sheet.

Partially offsetting this increase in gross profit was an increase in total material cost caused by vendor price increases as well as an increase in outside purchases.

Technician labor as a percent of sales was relatively consistent between the two quarters; however, productivity, as measured by sales per man-hour, improved 3.6 percent over the same quarter of last year. Since the Company formally began tracking this statistic in fiscal 1998, productivity has increased every year, and since the second quarter of fiscal 1998 is up 33 percent.

Operating, selling, general and administrative expenses for the quarter ended September 2003 decreased to 28.5 percent of sales as compared to 29.4 percent in the same quarter of the prior year. The decrease in SG&A as a percent of sales is due primarily to a decrease in advertising expense due to reduced expenditures, as well as a decrease in field expense related primarily to restructuring and streamlining of the Kimmel field organization.

Operating income from the quarter ended September 27, 2003 of approximately 10.4 million, increased 1.8 million, or 20.7 percent, over the same quarter as last year, an increase as a percentage of sales from 12.6 percent to 14 percent for the same period.

Net interest expense for the quarter ended September 2003 increased by approximately $200,000, as compared to the same period in the prior year and increased from .9 percent to 1.2 percent as a percentage of sales for the same period.

The weighted average debt outstanding for the quarter ended September 27, 2003 increased by approximately $14.7m, due to the buyout of the synthetic lease of approximately $26.5m dollars, partially offset by a reduction in revolver debt. Additionally, there was a decrease in the weighted average interest rate for the current year quarter of approximately 40 basis points as compared to the prior year.

Due to the Company's performance for the 12 months ended June 2003, we qualified for a 25-basis-point reduction in our interest rate spread over LIBOR, which should remain in effect for the remainder of fiscal year 2004.

Currently, the Company is borrowing at LIBOR plus 125 basis points, or at approximately 2.4 percent. This equates to an annualized interest rate savings of approximately--or the 25-basis-point reduction equates to an annualized interest rate savings of approximately $115,000.

The effective tax rate for both the current year and prior-year quarters was 38 percent of pre-tax income.

Net income for the quarter ended September 27, 2003 of $5.9m increased 20.2 percent from net income for the quarter ended September 28, 2002. For the six months ended September 2003, net income of 11.8 million increased 33.3 percent over the prior year.

Fully diluted earnings per share for the quarter was [61][ph] cents, as compared to 52 cents for the same quarter a year ago, a 17-percent increase for the six months ended September 2003. Diluted earnings per share increased 30 percent to $1.22 from 94 cents for the first six months of the prior year.

Just a couple of comments on the balance sheet. Our balance sheet again remains very strong. Our current ratio is comparable to year-end and stronger than last year at 1.5 times versus 1.2. Inventory is up about a million dollars from March 2003, and turns were slightly improved from last year's September and year-end.

Our debt balance increased due to the buyout of the synthetic lease, which moved existing debt for 86 Speedy properties onto our balance sheet. However, overall, we are in a net repayment position with our banks based on our strong results year to date. Additionally, we continue to negotiate terms with our vendors to ship more financing from banks to vendors.

For the first six months of this fiscal year, we generated approximately 19 million of cash from operations and received a million dollars from employees' exercise of stock options. We spent approximately $7.5m dollars on CAPEX and paid down $11.5m in debt. Depreciation and amortization totaled approximately $6.5m.

To reiterate our previous guidance, we expect earnings for the third quarter to be in the range of 30 to 32 cents, as Rob mentioned, as compared to 26 cents last year, and the fourth quarter in a range of 23 to 25 cents, as compared to 26 cents last year. The reason for the shift 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--[inaudible] fourth quarter.

The second reason has to do with recent accounting changes for vendor rebates and cooperative advertising cuts, which is shifting income recognition to our stronger sales quarters, which would be our first and second, based on faster inventory turns and moving it out of the slower sales quarters, such as our third and fourth quarters.

And that concludes my formal remarks on the financials. With that, I'll turn it over to the Operator for questions, Nancy.

At this time if you would like to ask a question, please press star and one on your touch-tone phone. You may withdraw your question from the queue at any time by pressing the pound key. Again, if you would like to ask a question, please press star and one on your touch-tone phone. And we'll take just a moment to register questions.

Our first question comes from Bret Jordan with Advet. Please go ahead.

Hi, good morning.

Hey, Bret.

Couple quick questions here. And one of them on your comment about third quarter comp trends. Are you seeing an improving comp trend on tires in the third quarter from the second quarter?

Sure, you know, but understand that September was a disaster with the Kimmel stores getting clobbered. But, yes, I mean, the trend is back. And as we said, in general the third quarter, the first 15 days, are on par with what we've been doing.

Okay. And then on the BJ's rollout, do you have a feeling for the incremental performance, the return on invested capital or cash on cash, what you're seeing as you get a meaningful handful of those stores rolled out?

On that, Bret, we're only-- we're investing in those stores probably about, oh, a quarter or 20 percent at normal investment, around $150,000. And those stores should-- [inaudible] them. We'd thought they'd be about breakeven or maybe lose a little money in the first year. They're making money already. So, you know, where we're going be--it's only two or three months--it's hard to say. But when you compare that to a $900,000 investment in a Monro store, we're really pleased with the results.

Okay. And then a quick comment on the vendor pricing. You were discussing the fact that you'd given up the margin at the vendor level. Is there a feeling for the full-year impact, or is that--the vendor's price shift, is that pretty much fully reflected in the current quarter? Are any of the other vendors taking price [inaudible] that you see in the future?

No, I think it's reflected in the current quarter, and if anything, you'll see some of that offset down the road because we raised our prices.

Okay. And one last question; I'll pass it along. As far as the acquisition landscape out there, do you see any shift on expectations as far as valuation?

Not on our part; maybe on the seller's part. We'll continue to look, and we certainly are having conversations with folks that, while we're not there yet, we would not be surprised if we got there in the future at the kind of numbers that we have done in the past and will continue to execute on.

All right.

Thanks.

Thank you. Our next question comes from [Scott Zembler] [phonetic] with [Zatella] [phonetic]. Please go ahead.

That's with a Z. Good morning, guys.

Good morning.

Rob or Cathy, you mentioned that there was a reduction in advertising in the SG&A line. Could you maybe comment on that? Was that a one-time issue, or will we see that trend rolling out throughout the future, and what's the [thought process][ph] behind that?

It's not a huge trend downward. It really is just a function of moving away from electronic media. We haven't done television in years. And this year is the first year that we said radio is more productive, those dollars being spent, than direct one-on-one consumer marketing. So as we've continued over the past couple years to test and now expend our one-on-one consumer marketing, it's more efficient and getting obviously good results. If you look at the last three quarters' numbers, the company averaging about 6.5-, 6.6-percent comps, spending less money. So it's really just a function of our marketing becoming more efficient and getting more bang from the buck with a switch from electronic to one-on-one minding our database and dealing with our customers directly.

Okay. And on the commercial side, it looks like you're having continued traction in that segment. Were there any big wins in that area, or is it just beginning new business with existing customers?

No, it's small stuff and just being out there a little bit more. Obviously that business was impacted in September because a lot of our commercial is down south, so we got hurt a little bit with the weather there. But strong growth, and we continue to add resources. We would think it's still small in relation to what other companies have been able to achieve, and we would see that business continuing to grow.

Okay, and when you commented that you see similar trends, sales trends, going into this quarter, is it fair to assume that it's pretty much on a segment-by-segment basis, for instance, that brakes continue to do well and continue to grow, being that's a high-margin area?

I think brakes continue to do well. I would focus that-- as we've said, we expect comps to be somewhere between 4 and 6. We've done better the last two quarters, the first two quarters of the year, and, you know, I would use that as the primary parameter.

Okay. That's all I have. Thanks a lot.

Thanks, Scott.

Thank you. Our next question comes from Jack [Valos] [phonetic] with Midwood Research.

Cathy, I was wondering, what portion of your currently liabilities is accounts payable? And is that ratio going up as a percent of inventory?

Yes, it is going up. We continually are raising the number of days of accounts payable outstanding. We went up another three days since the year-end and continue to try to negotiate better terms with our vendors and shift away from debt. That's how we got our 25-basis-point deduction.

At the end of September, payables represented about $19m of the current liabilities.

Oh, really? So what's the remaining 22, 24 million?

Well, you've got income taxes payable, you've payroll, accrued payroll. You've got accrued insurance. You've got--you know, it's just a deluge of things.

I see.

And that compares to 17 million at March. So it's up about $2m, with a $1m increase in inventory, less than that.

When you were saying that current sales are similar to the second quarter, the third quarter comps were up 3.8 percent a year ago compared to 1.5 for the second quarter. So you're actually doing pretty well comparing with a stronger base. What kind of sales gains are you currently getting -- what kind of sales gains did you get in tires prior to the store?

Tires were down five -- if you remember, all last year we were reporting tires at double-digit increases.

Right. In other words, prior to the hurricane, were comps in tires running down?

Tires in the first quarter of '04 were up 8 percent comp, and were running fairly flat prior to September being down pretty close to double digits.

What will be the comparison going into the third quarter?

I don't have that.

Okay. One other question is you said that technician labor was consistent with a year ago. Does that mean that the--that their percentage to sales was about unchanged?

That's correct.

So does that mean that the average technician's compensation went up in line with comp store sales of 6.6 percent?

Yes, I think that's fair. And mix impacts that somewhat as well, but, yeah, on an average, that's probably correct.

We would hope so.

I mean is there a formula that that would take place that way, or do you get any positive leverage after you go up a certain amount in comp sales?

You can get leverage because you reduce something. You can call it subsidy, which is where you guarantee a guy, you know, a minimum wage for being in the store if the store isn't productive. That's why our productivity is increasing to some extent as we've been reducing--our field guys have done a good job in reducing things like subsidy. When you're productive, that's easier to do, making sure you're staffed right. And, also, things like what we call run shop time, having your assistant manager on the floor rather than behind the counter and having your store manager working more hours. Keep your best guy on the floor--it's more productive--and, you know, your best salesman behind the counter.

Okay. Thank you.

Thank you. Our next question comes from [Larry Raider] [phonetic] with [Larr Management] [phonetic].

Good morning.

Hey, Larry.

How you doing?

Good. How are you?

Good, good. Question--let's talk for a moment if we can about BJ's. Where are you or what sort of contractual, if any, arrangement do you have currently? And I know you're profitable, but are the sales trends significantly stronger, modestly stronger, and no different than before you guys came in? And where do you think this can go, in what format?

BJ's is very happy with the arrangement, both from a customer service standpoint, and tire sales in their locations where we're operating are up double digits. So from their perspective, they're very happy. We are running anywhere from 10 to 30 percent better than we expected to be running right out of the chute. The profitability--with the fact that we've had two of these open for a while, we're operating them better. As Cathy said, they're becoming profitable quicker than we would've expected.

And I guess the last part of your question is, again, we said we'd expect to have 15 of them open by the end of our fiscal year. I don't think either of the two parties are getting into the arrangement we have to end up with us operating 15 BJ's stores. They're happy with the customer service improvement. They're happy with-- they're increasing tire sales within the BJ's. So I would certainly--

What is your formal arrangement? What do you pay them or they-- you know?

We pay them 2.5 to 4 percent of our sales, not counting what we do for them and get paid for on putting the tires on.

You're generating a very high return on investment, you just pointed out by Cathy.

Absolutely.

Yeah. How many units do they have in the chain?

They have between 130 and 140. I don't have the exact number. About 100 of those are currently in our markets. The other 30 or 40 are in Atlanta, in Georgia and Florida, certainly markets there are contiguous, being we're in South Carolina.

Is there some sort of trigger point, i.e., when you're running 36 of them and you're attaining certain levels of performance, they give you another 30? They give you everything?

No. I would think that you would see the relationship expand down the road if the results that we've seen preliminarily continue. And when that occurs, you know, we have our growth plans for 2005, or the number shifts significantly off the 15 we've been talking about, we would be sure to let you know.

Okay. And right now, this is contributing a nominal amount to Monro's earnings?

Yeah, I guess only because it's only six stores.

No, I know.

We're way ahead of what we thought where we would be.

Okay. Thanks.

Thanks, Larry.

Thanks, Larry.

Thank you. Our next question comes Bruce [Bennett] [phonetic] with [EVS ] [phonetic] Financial Services.

Good morning, Rob and Cathy.

Hey, Bruce.

Quick question for you. What looks like the customer count on the Monro stores and on the-- in the-- compared to the past and also your average ticket size? There may be a little color in that regard. And the last one was just a depreciation -- kind of going forward, what kind of level are you-- think you'll be running at?

Average ticket is up. I just need a second to find the traffic. Traffic was up as well. Average ticket was a little bit better this quarter than last [inaudible].

That would be due to, obviously, some of our higher-ticket items, exhaust and brakes both being up.

Yeah. The average ticket was up about 5 percent over the same quarter of last year. And traffic was up overall about 2 percent, with Kimmel traffic being up about a percent and Monro and Speedy stores being up closer to 3 combined. But Kimmel had a lot to do with the storm.

Good. Now, the depreciation going forward?

Depreciation going forward should be about the same as you'd see in the first two quarters. It's our-- our CAPEX is relatively consistent. We were at $6.5m for the first half. You know, we should be about that level for the second half as well.

Okay. And then just the last question. With the muffler, which has been kind of stretched out so many years, once it's gets going, I think some of us have had the hope that that would be a real windfall going forward. The question is, do you think you're taking share, or do you think that's industry trend?

Well, I think absolutely we're taking share. If you look at our comparable store sales now for the last year, they're significantly higher than any of our competitors'. So we're taking share in exhaust as well as brakes as well as miscellaneous services as well as tires. That being said, certainly on exhaust, I don't think you're going to hear too many plus eights in exhaust or plus threes for the last nine months. In fact, I think the inventory is still running down ten. So we are grabbing market share. We expect to continue to outperform our competitors and continue to have market share gains.

That being said, if exhaust is coming on so strong for us, primarily driven by just the constant increasing traffic over the years, I would also expect it to start improving industrywide as well.

Thanks. You guys did a great job.

Thanks. Appreciate it.

Thanks, Bruce.

Thank you. Our next question comes from [Jim Larkins] [phonetic] with Wafash [phonetic].

Couple quick questions. On your debt, is there a portion that's in your current liabilities that I should account for?

It's about a couple hundred thousand bucks.

Oh, okay. So it's--

Very little. It just relates to a couple of notes that we have. Our bank financing is all revolver and not--there's no payments due on any of it. Not amortizing.

All right. Perfect. You mentioned that you hoped to talk about some new stores. Should we assume that's going to be a combination of acquired stores, BJ's stores, new stores? What would that look like?

Yes.

All of the above. All right.

Yeah, when we have something definitive, Jim, we will be anxious to let you know.

Okay, but those are sort of -- those are the options. I guess you're not really interested, though, in building new, freestanding stores? That's kind of low on the list; is that correct?

That's correct. Especially, you know, a lot of the competitors are now selling two or five locations. That will probably be what we would use for the growth of-- when I say we're opening five standalone Monros, most likely, most of those will be acquired from competitors or other closed locations. The number might be slightly higher than that, but the economics, you know, with what we can go out and buy, whether it's 6, 10, 20, 50 store chains for [ours], significantly more attractive than today what we would build locations for.

Okay. Perfect. Are there any other kind of big [option funds][ph] just coming up in the next year or so, or should we see the share count be pretty stable going forward?

The share count--

[Inaudible].

-- should be pretty stable. You know --

Once that new option grant, but most of the grant--most of the options today are in the money.

Okay. So it should be nominal from here?

Right.

Okay. All right. Thank you.

Thanks, Jim.

Thank you. Our next question comes from [Bobby Nalnack] [phonetic] with [Carrier Partners] [phonetic].

Hi. Good morning. Rob, you touched on this on the penultimate question, or the question about the exhaust business. I don't know whether you have an answer. But I guess I would have just asked, when you look across your product categories, what would you estimate industry numbers would be? I know that you said in the past that getting these figures with precision is difficult. But clearly you all have better industry insights than currently I do, and when you look at the cost and services, etcetera, what would you think the number was for, let's say, the first half of the year or last quarter, or whatever number you're comfortable discussing?

You mean our competitors' numbers?

I'm sorry, yeah, the industry, let's say, rather than Monro. I mean you've talked consistently and you've demonstrated consistently that you take share. In order for you to do that, obviously, the 8 percent that we're doing has to be higher than the industry. So I guess--

Right.

-- I would love to know if you have the number, which I don't think you have with exact verification. What do you think that number is?

Well, I think if you go back to what's been publicly disclosed, our first quarter comparable store sales were up 5.9, and I think most of the competition was flat to down 3.

Okay.

So if I had to guess on this quarter, I would hope we are keeping a spread of anywhere from 5 to 8 percent versus the competition.

Okay.

And, hopefully, we would keep that in the future in all categories but--

Would it be fair to say that you think, therefore, that the exhaust business industrywide is around flat, up a little now, given that we were up 8? Or do you think that--for instance, that business is thinning, so, you know, in decline? I mean, obviously, there are-- there's one publicly traded peer of yours, and then there are other companies in the business that have components that do some of what we do. I don't know whether there is a central data-gathering source that says what the--or whether you can track from manufacturers, I mean, but if you had to guess, what do you think the exhaust business is in the first semester of your year?

I would say what you hear competitors in the industry come out with is flat to down two. If it was plus one, would I be totally shocked? No.

Okay. Okay. Thank you.

All right. Thanks, Bobby.

Again if you would like to register your site for a question, please press star and one on your touch-tone phone. We'll take our next question from [Jack Valos] [phonetic] with [Midwood Research] [phonetic].

I just have a couple of follow-up questions. First, regarding tires, what percent of your total sales right now are tires?

Ten to eleven percent.

Okay. And did you say that going forward you would expect flat comps in tires because you're comparing with strong results of a year ago?

No.

No. Are you expecting an increase in comp sales in tires going--

We would expect all of our business segments to grow.

Okay. And in terms of the vendor increases to you, do you have an idea as to what the percentage increase was in their prices to you and to what degree are you increasing your prices to offset that cost?

I mean, obviously, we're not going to share some of the competitor data. I think it's safe to say that any price increases we received will be passed along, at a minimum, to our customers.

Okay.

And Cathy, regarding that synthetic lease, there was an actual lease payment that was made, right, when you had that synthetic lease?

It was interest only on the debt that was categorized under those accounting rules as rent. And today, we continue to pay interest actually at a lower spread since it's no longer under the synthetic lease, with the middleman or landlord being out of the picture.

So, technically, what you were calling rent was -- when your income statement came out as interest expense?

Before the change in accounting, what we paid on the synthetic lease was interest expense classified as rent. Today, under the new accounting rules with the buyout of the synthetic lease, what we pay is interest only classified as interest.

Okay. When it was classified as rent, was that part of your SG&A expense?

It was part of our cost of sales.

Oh, really?

Our occupancy costs are in cost of sales.

Oh, okay.

Okay?

Thank you.

Um-hmm.

Thank you. And at this time, we have no further questions, so I'd like to turn the call back over to management for closing comments.

Thank you very much for your time this morning, for your continued support of Monro, and we will continue to work hard to deliver the type of results you've grown to expect from us. So thank you very much, and have a great day. Bye.

Again, this concludes today's teleconference. Thank you all for attending. You may disconnect at any time, and everyone have a wonderful day.