Monro Inc (MNRO) 2005 Q3 法說會逐字稿

Welcome to the Monro Muffler's third-quarter conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the program over to Melissa Myron of Financial Dynamics. Go ahead please.

Thank you. Hello, everyone, and thank you for joining us on this morning's call with Monro Muffler.

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 in interest rates; dependence on and competition within the primary market 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 persons that the events or circumstances described in such statements are material.

And now joining us for this morning's call from management are Rob Gross, President and Chief Executive Officer, and Cathy D'Amico, Chief Financial Officer. And now I would like to turn the call over to Rob. Rob, please 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 with a brief overview of our third-quarter results and will then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional detail on the financial results. After Cathy's remarks we will be happy to answer any questions you may have.

We are pleased with our ability to again achieve record performance during the third quarter. Despite continued challenges in the marketplace, which I will expand upon in a moment, we delivered double-digit increases in both our top and bottom lines, and also made further progress on our initiatives to grow and strengthen the business. Continued execution of our strategy to drive traffic and build consumer loyalty has resulted in increased market share, superior margins and profitability, and has further enhanced our position as the industry leader.

During the third quarter we essentially experienced a continuation of second-quarter trends; namely, comparable store traffic was strong at plus 6 percent, and we again saw sizable increases in comparable oil changes, scheduled maintenance and tires. More importantly, we have driven comparable store sales gains for 10 consecutive quarters by not only building loyalty with existing customers, which drives repeat business, but by also successfully attracting new customers through our oil change offering. This made us extremely confident going into '06.

That said, similar to what we experienced in the second quarter, consumers continue to defer purchases of the higher-ticket, higher-margin major maintenance categories such as breaks, shocks, struts and exhaust. While we're disappointed that we did not see an up-tick in these categories in the third quarter as we had hoped, we remain encouraged and very comfortable in our position in the marketplace. In short, these are not services that can be deferred indefinitely, and we are confident that when consumers finally decide it is time to complete these larger repairs, they will come to Monro.

Despite the softness in the major-maintenance categories, our comparable store sales increased 2.4 percent for the quarter, with December up 5 percent, going against a 7.5 percent increase last December. As our top line continues to grow, we were also pleased with our cost control, efficient infrastructure, robust cash flow, and our ability to raise prices, which have created leverage and allowed us to expand our gross margins despite a variety of margin pressures.

For example, the growth of certain lower-margin categories, such as tires, and impact of higher tire, oil and steel costs, negatively impacted our gross margin. In addition, higher-than-anticipated Sarbanes-Oxley costs of 350,000 affected our SG&A costs as a percentage of sales. Nevertheless, despite these pressures, both gross margin and SG&A margin remained relatively stable versus last year's third quarter, and we were able to increase our net income by 21 percent.

It should be noted that in Monro's 530 non-tire stores, gross margin increased a healthy 100 basis points. We are quite proud of this, and were able to accomplish it primarily due to our company-owned business model that allows us to centralize purchasing and distribution operations, as well as implement various performance programs that help us keep our employee productivity growing, up 40 percent the last 6 years.

In addition, we're constantly looking for ways to maintain business discipline and streamline expenses wherever we can. For example, we recently moved Mr. Tire's headquarters into their warehouse building and will shut down the old Kimmel warehouse by the end of February, eliminating approximately 150,000 of cost in '06.

Turning now to our long-term objectives, we believe Monro will continue to grow not only internally by seizing opportunities to drive traffic, diversifying our revenue stream, and improving productivity, but also externally through new store additions, both BJ's, currently totaling 27, and greenfield locations, as well as strategic acquisitions.

With respect to the acquisitions, as we have said before with our operating and net income margins two times greater than most of our service competitors, we are uniquely positioned to accelerate growth with attractively-priced deals during any temporary industry or consumer weakness. We continue to make significant progress in this area, and along these lines we announced last week that we signed a definitive agreement to purchase 10 retail tire stores located in the southern Maryland market from Henderson Holdings Inc. These new stores will fit very nicely with our existing tire stores in this region and increase our market penetration. The 10 stores, branded Mr. Tire, generated annualized revenues of approximately 12.5 million, and we expect the stores will be accretive to earnings in the first year of ownership. The purchase price totaled 7.5 million, of which approximately 6.5 million is to be paid in Monro common stock.

For the remainder of this fiscal year and beyond, we continue to pursue our steady acquisition strategy. We believe pricing remains attractive as many of our smaller and bigger competitors have been impacted to a much greater degree than we have by the recent industry environment.

Additionally, we believe we are in a position of strength in terms of our financial flexibility to fund deals. The deal announced last week demonstrated that our stock is viewed as attractive currency, and we do not necessarily have to increase our leverage in order to grow. Also, we have approximately 60 million available under our credit facility, meaning we believe we have room to do bigger deals should one arise that needs meets our criteria.

Turning finally to our outlook for the balance of the current fiscal year, we are optimistic that given the positive comp growth we generated in December, appears to be continuing into January as we're attracting up over 5.5 percent in comp sales thus far. Taking into account our year-to-date trends and what we have seen thus far in January, we are currently anticipating comparable store sales in the 3 to 5 percent range for the fourth quarter against the 2 percent increase last year.

Based upon our year-to-date results, the current industry environment and our expectations for comparable store sales in Q4, we anticipate earnings per diluted share to fall within the low to midpoint of our previously announced range of $1.36 to $1.40. This compares to earnings per diluted share of $1.18 in the year-ago period. Our earnings per share range for the full year continues to be in line with our consistent year-over-year earnings per share growth of 15 to 20 percent, and we remain confident in our ability to further drive sales, profitability, and enhance shareholder value for the short and long term.

This completes my overview, and I would 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 for the quarter increased 24.7 percent with comparable store sales increasing 2.4 percent. New stores, which we define as stores opened after March 2003, added 14.8 million, including $12.3 million from the acquired Mr. Tire stores. That compares to a comparable store sales increase of 4 percent in the third quarter of fiscal 2004.

Year-to-date sales increased 21 percent. Comp store sales were up 1.2 percent. New stores added 42.4 million, including 37.7 million from the acquired Mr. Tire stores. That compares to a comparable store sales increase of 5.6 percent increase for the first 9 months of last year.

Gross profit at 39.6 percent of sales for the third quarter ended December 25, 2004 increased as a percent of sales when compared to the same quarter last year, which showed a gross profit of 39.1 percent. The increase is due primarily to the leveraging of occupancy costs, which are largely fixed expenses and are included in our cost of sales.

Total material costs increase due to a shift in mix to the lower-margin categories of tires and maintenance services. Included in the maintenance category are sales of oil changes, which increased approximately 15 percent on a comparable-store basis over the prior-year quarter. Beginning in the Company's second quarter of fiscal 2005, we promoted oil changes to drive traffic by slightly lowering the selling price, while experiencing an increase in the cost of oil during the quarter. This had the effect of lower margin in the maintenance category as compared to the prior-year quarter, although served to drive traffic. However, price increases in the quarter, as well as the recognition of vendor rebates against cost of goods in concert with inventory turns in accordance with the new accounting rules, helped to partially offset aforementioned margin pressures. Technician labor as a percent of sales decreased between the two quarters, also due to increase in tire sales as a percent of total sales.

Without Mr. Tire, gross profit for the quarter increased from 39.1 percent last year to 39.9 percent this year, partially due to a reduction in total material costs, as well as through increased leveraging of distribution and occupancy costs. The improvement in materials cost apart from the Mr. Tire stores was due to a reduction in outside purchases. The Company has added approximately $5.8 million of inventory in fiscal 2005 in a concerted effort to reduce out-buys.

Gross profit for the 9 months ended December 2004 was 41.5 percent of sales as compared to 41.9 percent of sales for the same period last year. Without Mr. Tire gross profit for the 9 months increased from 41.9 percent last year to 42.4 percent this year, due to improved leveraging of D&O costs.

Operating, selling and general administrative expenses for the quarter ended December 2004 increased to 31.5 percent of sales as compared to 31 percent in the same quarter of the prior year. The increase in SG&A expense as a percentage of sales is due primarily to an increase in benefit expense, Sarbanes-Oxley costs, as Rob mentioned, and Mr. Tire integration costs. Within benefits expense, health insurance costs increased as a percent of sales as compared to the prior-year quarter. Sarbanes-Oxley costs, excluding internal labor and headcount increases, amounted to 0.5 percent of sales in the third quarter of fiscal 2005.

Regarding Mr. Tire, the Company successfully installed its point-of-sale system in the Mr. Tire retail stores and its merchandising system in Mr. Tire's warehouse and wholesale center during the second quarter of this year. Some of the costs associated with both the system and other integration-related activities which continued into this third quarter of fiscal 2005 are not capitalizable, thereby increasing SG&A costs as a percent of sales.

For the 9 months ended December 2004, SG&A costs were 29.7 percent of sales and were flat when compared to the first 9 months of last year.

Operating income for the quarter ended December 2004 of $6.5 million increased 23 percent as compared to operating income for the same quarter of last year, and decreased slightly as a percentage of sales from 8.2 percent to 8.1 percent for the same period.

Net interest expense for the quarter ended December 2004 decreased by approximately $100,000 as compared to the same period in the prior year and remained flat as a percentage of sales for the same period.

The weighted average debt outstanding for the quarter ended December 2004 increased by approximately $2.5 million. Additionally, there was an increase in the weighted average interest rate for the current-year quarter of approximately 70 basis points as compared to the prior year.

Net interest expense for the 9 months ended December 2004 decreased as a percentage of sales by 2/10 percent 2.7 percent.

The effective tax rate for the quarter December 2004 and 2003 was 38 percent of pre-tax income.

Net income for the quarter ended December 2004 of 3.7 million increased 20.5 percent as compared to net income from the same quarter of last year. For the 9 months ended December 2004, net income of 17.3 million increased 16.5 percent.

Fully diluted earnings per share for the quarter were 25 cents as compared to 21 cents for the same quarter a year ago, a 19 percent increase. For the 9 months ended December 2004, diluted earnings per share were increased 17 percent to $1.19 from $1.02 for the first 9 months of the prior year.

Moving on to our balance sheet, again our balance sheet remains very strong. Our current ratio of 1.5-to-1 is comparable to year end and a year ago December. Inventory is up 6.2 million from March 2004 as we endeavor to improve stocking levels and mix of inventory to reduce outside purchases. However, turns were slightly improved from last year December and year end. Our debt balance decreased and payables increased as we continue to try to shift more our cash flow needs to vendor financing.

For the first 9 months of this fiscal year, we generated approximately 32 million of cash from operations and received $1 million from the employees' exercise of stock options. We spent approximately $15 million on CapEx and paid down $17 million of debt. Depreciation and amortization totaled approximately $11 million.

As a reminder, our debt-to-capital ratio is 24 percent, about the lowest in our history. We have $64 million of availability under our credit line, as Rob mentioned, and plenty of room under our debt covenants, making it very easy for us to do the acquisitions if the right ones present themselves.

That concludes my formal remarks on the financial statements. With that, I will now turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS) Jack Belos, Midwest Research.

I was wondering in terms of expansion in a new fiscal year, what are your plans there and what are the prospects for greenfield development?

We believe in expansion for the new year greenfield will combined with BJ's probably be somewhere around 20, 25 locations; maybe a few more greenfield than BJ's in the upcoming year. But primarily I think you'll see the vast majority of our growth coming from the acquisition front.

I was just wondering, in terms of the 6.5 million of stock and 1 million of cash that you paid for the 10 Mr. Tire stores, was that something that the sellers wanted as opposed to cash?

It was a combination. I think a lot of these little guys believe in the industry. But certainly as we've been saying, they understand running 10, 20 stores as a franchise or as an independent operator, it's very difficult to compete against the bigger guys. And I think this particular owner felt the prospects of holding Monro stock for the next 2 or 3 years would be a higher likelihood of appreciation than what he would get out of running the business independently.

So I guess when they get stock as opposed to cash you don't have to pay a capital gains tax right away.

That's true.

Thank you very much.

Jim Larkins, Wasatch.

I just wanted to try to get the number of stores that were operated during the quarter. I know you have 618 in the press release --

Right.

-- in the press release. Does that include the announced acquisition or not?

No, it doesn't.

We added 14 stores during the quarter; 5 were from the Rice Tire acquisition -- maybe that's what you're thinking of -- and 7 BJ's and then 2 others.

Okay, that's helpful. Can you break out the total number of tire stores out of that number?

Yes, hold on one second. In the quarter you mean or what we have now total?

Out of the 612, how many of those are tire stores?

There's 26 Mr. Tire, 33 of the Kimmel. So that's 59. And then Frasier is another 10, which is 69. Plus Rice -- I'm sorry. Plus Rice would be 74.

Okay. Also, on the systems end you talked a little bit about the Mr. Tire systems. Are those completely rolled out now?

Yes, they're out in all the stores, and obviously we continue to upgrade them. But they are operating on a version of the Monro VAS (ph) system adjusted for the differences between the business, predominantly tires.

And are you seeing improvements in the out-buys due to that? Or where do you expect to see the most immediate improvements?

Certainly the out-buys are a big thing, and they continue to get better. Again, with all of our acquisitions, I think the primary focus and what we've been able to prove in every one of them is typically these companies that we buy are running net margins anywhere from minus 2 to plus 2, and in 2 years in almost every case we've been able to take them to our 6 percent net margin. So certainly we're getting big cost advantages with being able to buy parts for about half the price that they were.

Certainly now with the size and growth in the Tire Division, we're doing much better on our tire purchases throughout the chain, which is helping us. And I would expect that to continue with every future deal, as well as the systems making it easier for the tire folks to do business and do more service work.

Can you give us an idea of what the CapEx number is on kind of an annualized basis right now? I guess that's a little bit tough given greenfield stores. But can you give me a number like with new stores or without stores or maintenance CapEx kind of number?

Yes. I think typically our maintenance CapEx this year we have said would be about 14.5 million; 5.5 million additional for new stores. I would think as we shift to more greenfield stores this year, the 25 new locations are going to break down about 20 BJ's stores and 5 greenfield. That is '05, our current year. I think next year you'll probably see more like 10 to 15 BJ's, and then the resulting number to get us to the 25 in greenfield locations. So you will probably see a higher expenditure of CapEx for new stores than you did this year. But the maintenance CapEx piece will probably hold pretty steady at the 14.5.

Any color on the marketing side? Are you still doing promotional mailers on the oil changes, and is that a primary driver of your traffic?

That is a primary driver of our traffic, as well as obviously even cheaper means such as reader boards and A-frame signs. We will continue to focus the lion's share of our advertising dollars on one-on-one direct-mail correspondence. We think with our systems we have a competitive advantage that way. And we will continue to put resources in that venue, being our response rates are anywhere from a low of 8 percent to a high of 20 percent on the one-on-one correspondence front versus mass mailers running the normal 1 to 3 percent and spending on radio and television more expensive than that. That's pretty much why we shy away from electronic media.

Great. Thanks a lot.

Sid Wilson, Monarch Research.

My first question is could you talk a little bit more about your inventory position as it relates to your out-buys, because I heard you mention that you were trying to reduce your out-buys, but I was wondering how that's been trending in terms of the percentage of your sales that are being -- percent of your inventory that you still have to get from the Auto Zones and the Advances of the world for commercial business?

We're doing a much better job on that. We decided that we needed to expand our inventory in the stores, number one, for better customer service and creating competitive advantage against some of the smaller guys that can't afford to have 80 or 90,000 of parts in their stores. Primarily that gives us a huge advantage in customer service, because the customer doesn't have to wait as long, and we have the parts on our shelf or with our computer system having the eight closest stores to any individual store also available on their computer system, it helps keep those numbers down.

From an economic standpoint, if you look at us increasing 6 million in inventory, at a borrowing cost, let's just say, throughout the year of what was 3.5 percent, that comes to 210,000. And if you figure we can reduce outside purchases by 0.2 percent on $350 million of sales, that number comes to 700,000. So it doesn't take much to see economically it's certainly worth the investment. We don't have an obsolescence problem. We have return privileges. And we made a conscious effort to see if we could improve our margins and improve our customer service with an investment in inventory.

My second question is can you talk a little or give us some idea -- I know you didn't give any guidance for your fiscal 2006, but I know that you said your target is 15 to 20 percent. Is that something that -- is that somewhat of like a soft guidance that we can assume?

Yes, I think that's always our target, both to grow the top line by 20 percent, as well as the bottom line by 15 to 20 percent.

Okay. And with regards to any pricing opportunities, are you seeing any opportunities in your markets to possibly raise prices again in this calendar year?

Yes. We certainly intend on raising them again. Typically ever year for the past 6 years we've raised our prices approximately 3 percent across the board in March. This year we raises them a total of 6 percent; two 3 percent price increases, one in March, one in July. You can certainly expect something in the vicinity of a minimum 3 percent price increase in March again coming up. We have obviously with our traffic up 6 percent have not seen any negative ramifications from those increases.

My last question is with regards to your guidance of 3 to 5 percent, given the fact that you are off to a very strong start, is -- what was the thinking behind the 3 to 5? Is it that you are just being a little more conservative or are we up against some -- are there some issues taken with in (ph) February and March that make it tougher to keep that trend going?

No. We're up against the softest quarter we've been up to. Again, the plus 5 in December was against an up 7.5 percent last year. And in fact, in March we're up against a minus 1.5. I think the reason for the conservativism is certainly the last 8 weeks have been strong, running plus 5 or above. But it doesn't take a long-term memory to see what we did the first two quarters, which was up less than 1. And I would rather be getting back on the horn talking about the great sales in the fourth quarter above 5, but we only have two months of superior comps, and just in light of 8 prior months that weren't as stellar probably a bit of conservatism hopefully.

Thank you very much.

Patrick Stowe (ph), Priority Capital.

A couple of things, if I may. Just touched on the comps a little bit. And in the ramp up there in December and January, was there any change in kind of the mix driving that? Or was it more of the oil change and items you mentioned for the quarter?

Certainly oil changes were very strong throughout that period, as well as the maintenance category. And tires were ticking up. But certainly we didn't have the kind of conversion into the major categories that we would have hoped. Certainly with plus 5 numbers for two months, the major categories were better, but not what we would normally like to see. That being said, we will see what February and March brings.

Probably the most important thing for us is that plus 15 percent units in oil changes on top of a double-digit increase in oil change units last year, because that is really the lifeblood of our strategy, which is to drive traffic, build the customer, get the names in our database where we think we can market better than a lot of our competitors, and convert them into three, four, five times a year customers who will trust us to do the more major repairs when they decide to get them done.

And that's been fairly successful to date, so good luck on that.

In terms of the tire sales, obviously with the growing number of tire stores and your growing scale you said you're enjoying some buying advantages there on the tires. Is that driving the mix of tires up in the service stores?

The service stores, as we said, our comp store tire sales were up 5 percent. That would include what they're doing in the service stores, because remember Mr. Tire does not comp yet. The big tire acquisition we did in March '04. Certainly we're learning a lot about the way to go to market with the help of the Mr. Tire folks, who are as good as it comes on the tire side of the business. As I think we're contributing to their margin enhancement, both with the cost of parts and some of the things we do both on the service side with flush and fills in the maintenance category that we've done a very good job, and has grown to the third quarter where its now 28 percent of our business, while exhaust is down to the lowest level its ever been at 12 percent of our business. So I think what's happening is we're getting best practices out of both organizations and working them into the two. But tire sales in the whole chain, to answer your question, are better certainly in the Monro side as well.

I guess the kind of bigger picture question I have, and you kind of touched on it in breaking out the gross margin with and without the Mr. Tire stores, it seems like the gross margin improvements that you've made through occupancy, leverage, etc. are offset by an increase in mix of tires, which would seem like it might continue if you continue to acquire tire stores. Is that something that's fair to assume going forward or do you feel like profitability can still improve for the overall Company?

I think that's fair to assume with a combination certainly of sales mix moving to tires and will continue to move to tires over the years. Probably of the next five acquisitions we do, you can expect four of them to be tire stores. So that is true. Plus, with tire prices going up and oil prices going up, we do get an offset on tire prices because our volume rebates and cooperative advertising is offsetting a large share of any tire increases that we have.

So I think what we've said is you can expect margins to remain fairly constant. I think we've gotten some leverage in that category, in the outside purchase category. But that will remain fairly constant. The price increases will help, but there are also negative pressures on other categories.

I think the biggest opportunity for margin expansion going into '06, not so much in the fourth quarter of this year, will be some of the onetime costs associated with Sarbanes-Oxley. And we should, as we continue to grow the top line by our expected 20 percent, continue to get operating leverage in the SG&A line not being offset by a lot of onetime expenses.

And then just one more, if I may. On the M&A environment, can you just talk about the landscape there maybe in terms of competition and making some of these acquisitions?

Sure. On the M&A front there are a number of both small and larger companies that are having a difficult go of it that we're looking at. I think on the small front, the 5, 10, 20 stores there's basically no one we've run up against. So we're bidding against the owners' assessment of value. And that continues. On the bigger front, we will certainly run up against TBC and the other players that are interested in those locations. And if they have the means and the desire, they will absolutely be involved in the bidding process.

But you see no shortage of opportunities out there at this point?

No. We do not see anything that would keep us from growing the top line next year by 20 percent.

Great. Thanks. Good luck.

David Siino, Gabelli & Company.

Just to be clear on the inventory, I guess others in the past, as you know, have gotten in trouble maybe carrying too much inventory to try and have more parts on hand to be able to satisfy the customer. What sort of level of inventory are you comfortable with maybe in terms of days or turns, however you want to put it? Because the math make sense, but I assume it doesn't have a -- it is not open ended; there is some level where you're just going to -- that you'll feel comfortable at.

We're constrained just because our stores can't hold much inventory. They are pretty small from a square footage standpoint. So from that standpoint, we're probably bumping up against that now, which is on average 70 to $80,000 worth of inventory on the service stores. The tire stores -- actually, tire stores, because tires take up a lot of room, don't have a ton more capacity either. So that will just constrain us.

But part of the formula that Rob was talking about too that you have to keep in mind is we pay double to buy something from NAPA as compared to buying it through the manufacturer. So with no risk of obsolescence and having such great return privileges, it's pretty hard to get to a point where you say beyond the space capacity that it's too much. There would be, obviously. But if we can get the returns -- turning -- if we turn 3 times instead of 4, 2 times instead of 3.5, it's not as big a deal to us as having that margin differential.

Okay, that was helpful. And on price increases, we're talking across the board, not just commodity driven products like oil and tires and --?

I think if we're saying a 3 percent price increase or a 5 percent price increase in March, that to us effectively is across the board. That being said, we're not going to risk our oil change business. So certain things might be 0, but others would be, say, 6 percent. So if we're talking about a 3 percent price increase, it's not 3 percent on half of our business and 0 on the other half; that would be a 1.5 percent price increase.

Last question, can you just repeat the incremental Sarbanes-Oxley number again? I missed that.

It was 0.5 percent of sales this quarter, this year. Obviously nothing last year -- or little or nothing last year. It was $350,000 in this quarter.

Thank you very much.

Jacob Grossman (ph), Goldman Sachs.

Just wondering if you could speak quickly about the competitive environment. I know some of your competitors are tweaking their service offerings, sort of moving to some higher-turn oil changes, most notably Pep Boys. Just wondering if you could sort of add some color on what you're seeing our there competitively.

Competitively, I think there's room for all of us to grow. Obviously I'm a firm believer certainly in our Company, but also the industry. I think the industry continues to move to do-it-for-me versus do-it-yourself. And do-it-for-me is currently 75 percent. I certainly think our competitors getting into the oil change business, number one, it's easier said than done to actually get it done, especially with franchise operations. But beyond that, it's the right thing for them to do, and I think there's plenty out there for all of us.

As far as in our markets and competing, we certainly have a head start with our systems and the fact that we've been on this path for six years. We continue to grow at double-digit increases in oil year after year after year. But probably the best statement as to the competitive environment is we continue to be able to raise prices every year without seeing a drop off in our store traffic, and continuing to maintain both operating margins and net margins twice our competition. So I think they are certainly going to get better and they will continue to get better, and it's our job to maintain the advantage.

Thank you very much.

(OPERATOR INSTRUCTIONS) Robert Strauss, IRG Research.

Just if you could touch on your BJ's relationship? I think that you're going to get to about 20 locations at the end of this fiscal year, and I think take you may have mentioned about 10 to 15 next year. How are those going? What is the total number of locations you think you can be in related to the BJ's partnership?

We have 26 locations right now open with BJ's. And so far, we are going in line with what we thought we would. The stores are various sizes. They're not all large volume tire stores; some are smaller volume. But I think they're pacing in line with what we expected in their first year of operations, and we're encouraged by the relationship. It's going well.

I think take we would probably end up down the road, three or four years, with 80 BJ's locations, probably doing anywhere from 35 to 40 million in sales and somewhat profitable, $1 million. But as we've said, as we build and the reason we're doing it in stages is these things, the first two or three years are going to cost us 250,000 bottom line; maybe we make 250,000 bottom line. It's really a fill-in market strategy. Everything we're about is operating margins, net margins, and market share. And I think it helps fill out our markets again with the lowest cost of entry in very expensive markets like Massachusetts than anything we do, again going back to the fact that it's about 200,000 all-in including equipment and inventory to open a five bay BJ's store, where it's anywhere from 900,000 to $1 million to open a Monro Muffler Break and Service. So anytime we can get in, fill in a market for very low cost of capital, have a very quick cash-on-cash payback, it's going to help our market penetration, as well as continue to grow the business.

The 20 to 25 stores that you plan to expand your store base in fiscal '06, that is not including acquisitions, correct?

That is not including acquisitions.

And you said that you're expecting from BJ's probably another 10 to 15 locations, correct?

That is correct.

Thank you.

Jim Larkins, Wasatch.

Will we be fully comping Mr. Tire this coming quarter?

March of --

April.

April of '06, so the first month of --

This coming April.

Right.

So we aren't comping it yet then?

(multiple speakers) Q4 will not include comps from Mr. Tire; first quarter of '06 will in full.

Great. Thank you.

It appears we have no further questions at this time, so I would like to hand it back over to our presenters.

Thank you, operator. Our business fundamentals remain strong. We firmly believe we have a better mousetrap with a simple business model, company-owned stores, operating margins double most service competitors, superior systems and marketing capabilities with our direct-mail program, and the best employees in the business. We will continue to work and expand upon our lead, grow the business, and enhance shareholder value. And thank you for your time today.

Thank you very much for joining us today, ladies and gentlemen. This concludes today's conference, and you may now disconnect.