Monro Inc (MNRO) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Monro Muffler Brake fourth quarter and full year earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in part without permission from the Company.

I would now like to introduce Ms. Caren Barber of Financial Dynamics.

Thank you. Hello everyone and thank you for joining us on this morning's call. 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 order repair, risks related to leverage invest service including sensitivities to fluctuations and interest rates, dependence on competition within the primary markets in which the Company's stores are located and the need for 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 reflects events or circumstances under 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 at the event or circumstances described, anticipated are material. Joining us for this morning's call for management are Rob Gross, President and Chief Executive Officer; and Cathy D'Amico, Chief Financial Officer. With these formalities out of the way I would like to turn the call over to Rob Gross, Rob, please go ahead.

Thanks, Caren, good morning and thank you for joining us on today's call. I will begin with a brief overview of the fourth quarter and year, provide an update on our strategic initiatives and acquisition strategy as well as review our outlook for fiscal '08. I will then turn the call o over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on the financial results.

Throughout fiscal 2007, we maintained focus on our key initiatives and continued to execute our strategic plan. As a result we achieved our sixth consecutive year of comp store sales growth. We closed out the year with our best ever fourth quarter sales and earnings and also generated record sales for the year. Importantly we made progress in our stated acquisition strategy with the acquisition of ProCare which we completed one month into the fiscal year and subsequently focused on integrating over the course of the past 12 months. Our operating model is absolutely working and we remain as confident in our business as ever.

Now I'd like to review several highlights from both the quarter and the year. In the fourth quarter we grew sales 22% to a record $107.7 million, and generated comp store sales growth of 7.3% adjusted for the benefit of four extra days. This quarterly comp increase was our strongest since 2003. For the year we achieved record sales of $417.2 million, representing year over year growth of 13.2%. We also generated a 1.9% comp sale increase for the year, which as I mentioned was our sixth consecutive year of comp sales growth. We achieved earnings per diluted share of $0.28 for the fourth quarter, which exceeded our most recent expectations and was an increase of 33% over the prior year's fourth quarter. For the year we generated earnings per diluted share of $1.46 which includes the one time impairment charge of $0.11 related to our equity investment in Strauss Discount Auto which we recorded in the second quarter. Excluding this impairment charge earnings per diluted share for the year would have been $1.57, up $0.06 from the prior fiscal year.

Traffic for the quarter was up approximately 2% over the previous years fourth quarter. The traffic increase is a solid indicator of the overall health of our business. Additionally, when contrasted with the higher increase in comp store sales for the quarter demonstrates that our price increases are sticking and that our source is developing long-term relationships with our customers and that those customers are returning to Monro for their repair and service needs.

As we discussed throughout the year the economic environment including higher gas prices during the first six months of fiscal '07 caused consumers to defer certain higher ticket, automotive maintenance and repair purchases. That said, regardless of the economic environment, people still need to have their state inspections done, get their oil changed and perform regular maintenance to help them avoid major repairs down the road and they continue to come to Monroe for those services. Maintenance services remain our bread and butter and this category comped positively throughout the year including an 11% increase in the fourth quarter.

We believe we have built a reputation as a trusted service provider and the same customers that have come to us for service are also choosing us when it's time for their bigger ticket repairs. Our strategy began to pay off in the third quarter as consumers started to return to more normalized spending patterns and visited our locations for some of the major maintenance services that have been deferred. We are very happy to have seen this trend accelerate in the fourth quarter and some of our major repair categories as we experienced positive comps and shocks and a strong 33% comp increase in alignments. We also continue to do a great job in the tire category which was up 18% on a comparable store basis in the fourth quarter. As we gain more knowledge and experience in this area we believe this category will continue to grow for us.

As many of your aware we began a program in the third quarter at 30 locations in Syracuse and Rochester designed to increase sales of tires at our service stores. We expanded the program to additional stores in Buffalo bringing the total number of converted stores to 60. Overall this program is expected to grow our service store sales and profitability. Our goal is to leverage the success of our tire stores through training and expanded merchandise in our service stores. Essentially we made some changes to our inventory and made room for more name brand tire lines. We also changed the focus of our advertising to feature tires more prominently in these markets. Additionally we have increased the training in tire sales and related services to the managers in all 550 non BJ's service stores, with particular emphasis on the 60 program stores. Our strong alignment sales in the fourth quarter can largely be attributed to this training and operational focus.

We continue to believe that we can significantly increase the percentage of tire sales from current levels which are about 10% of total sales up from 8% in our service stores without losing other business. We have been pleased with our unit gains to date in the service stores, up approximately 20% in the fourth quarter with the 60 program stores up 48%.

During fiscal 2008 we are continuing our focus on training and instore execution across the service stores, as well as refining the product assortment and merchandising in the 60 upstate New York stores. Based on our success to date we expect the tire category to continue to contribute to overall sales increases going forward.

With regard to our acquisition of ProCare which was completed on April 28, 2007, we focused during the year on the integration of these locations and operations into our business. Our initial focus with ProCare was to get their expense structure and overall business model aligned with Monro's. We also conducted grand reopening events in November. As we reported in March we made slower than expected progress in balancing the expense structure with the consistently improving comparable store sales at these shops. However, it is worth noting that the business at ProCare has improved significantly from when we first acquired it. When we took over these stores their sales were running down approximately 30% in bankruptcy. For the fourth quarter the ProCare stores had positive comps of plus 2. In April, comps were plus 4% and so far in May, plus 19%. Remember, ProCare stores will not be included in our comp base until fiscal '09. At the present sales levels the expense structure is appropriate and with continued sales momentum we expect the ProCare stores to contribute $0.10 in earnings in fiscal 2008.

We are continuing with our strategy of seeking attractively priced acquisitions in fiscal 2008. To that end we expect to announce one or two small transactions, 10 to 15 stores each, in the first quarter, as we reported in March. Our focus remains in acquiring locations and businesses that are within or contiguous to our existing markets and that will be accretive to earnings in a reasonable period of time.

Turning to our outlook for the year, we continue to expect that earnings per diluted share for the full year will be in the range of $1.85 to $1.95 based on 15.4 million shares outstanding and not including the impact of any potential acquisitions. We expect total sales of 435 million to $445 million and comps for the year in the range 3 to 5%. For the first quarter we anticipate diluted earnings per share to be in the range of $0.54 to $0.57. This compares favorably to $0.50 for the first quarter of last year, which included a $0.03 per share one time tax benefit. We expect to achieve comp store sales for the first quarter in the range of 4 to 6%.

We are encouraged by the positive business trends that we are currently experiencing. We generated a comp store sales increase of 3.2% in April, despite a poor retail environment and business to date in May has been good with comps up 8.5% for the first three weeks. As announced in a press release we issued today separately from our earnings release, we have increased our quarterly dividend by 29% from $0.07 cents to $0.09. Our discussion to increase our dividends for a second consecutive year not only reflects our commitment to enhancing shareholder value and encouraging long term investment in Monro but also underscores our confidence in the future prospects of the Company. Given our strong financial position and cash generation, we have the flexibility to both pay dividends and continue to invest in growing our business.

In addition to our dividend increase, our Board of Directors intends to declare a 3 for 2 stock split when we expect -- which we expect to complete once we have attained approval from shareholders in August, 2007, for an increase in the Company's authorized shares. Finally, I'd like to mention that we have maintained our stock buyback program. As you know, we established the buyback program in January to give us the flexibility to be strategic with our capital and opportunistically purchase Monro stock. We evaluate repurchasing our stock in the same way that we assess acquisitions. We are pleased to have returned value to shareholders through the purchase of 118,400 shares of Monro stock for $4.1 million from March 5, through Friday at an average price of $34.78 per share.

In closing, we have continued to outperform the industry and have further increased our market share. We remain confident in the position we have established for Monro Muffler Brake in the marketplace and in the effectiveness of our operating model and future growth prospects. As we look ahead, we expect that in fiscal 2008 we will continue our long-term growth trend and profitability expansion and are optimistic about our businesses prospects for the future. This concludes my overview and now I would like to turn the call over to Cathy for a more detailed review of our financial results.

Thanks, Rob, good morning everyone. As Rob mentioned, sales for the quarter increased 22%. New stores which we define as stores that opened after March, 2005, added 11.7 million in sales which includes 9.9 million from the acquired ProCare stores. Adjusted for days, comparable store sales increased 7.3% over last year. Partially offsetting this increase was a decrease in sales related to closed stores of $1.2 million. And those increases compare to a four-tenths decrease in comparable store sales in the fourth quarter of last year.

There were 82 selling days in the fourth quarter of fiscal 2007 as compared to 78 selling days in the fourth quarter of fiscal 2006. Year to date sales increased 13.2%, new stores added 43.1 million, including 35.3 million from the acquired ProCare stores. Adjusted for days comparable store sales increased 1.9%. Partially offsetting these sales increases was a decrease in sales related to closed stores of 5.7 million. And that all compares to a comparable store sales increase of 1.7% for the prior fiscal year. So there were 312 selling days in fiscal year '07 as compared to 308 selling days in fiscal year '06.

Gross profit at 38% for the fourth quarter ended March, 2007, increased as a percent of sales when compared to the same quarter of last year which showed a gross profit of 36.8%. Without the ProCare stores gross profit would have been 38.7% as compared to 36.8 last year. The improvement in gross profit as a percentage of sales was due to a couple of factors. The primary reason is the shift in vendor rebates or cooperative advertising credits from SG&A to cost of sales. Additionally the Company earned more vendor rebates in the fiscal year '07 as compared to fiscal year '06. These rebates offset the negative impact of the shift in mix to the lower margin tire and maintenance services category in the quarter as compared to the same quarter of last year.

The increase in comparable store sales also helped to provide leverage on fixed occupancy costs which as you know are included in cost of sales and thereby improved gross margin. Gross profit for the 12 months ended March, 2007, declined slightly as a percent of sales from 40.1% to 39.9% of sales, primarily due to the shift in mix previously discussed. The favorable impact of the increased vendor rebate was offset by the negative impact of the ProCare stores. With negative comparable store sales for the entire year ProCare's fixed occupancy cost created margin pressure. Additionally these stores experienced higher labor cost as a percent of sales in the earlier months of the year due to lower productivity as compared to the rest of the chain. Without the ProCare stores gross margin for the year was 40.6% of sales as compared to 40.1% last year.

Moving on to operating, selling, general, and administrative expenses for the quarter ended March, 2007, they increased from 30.5% of sales to 32% of sales. The increase is primarily attributable to the unplanned insurance charge of $1.2 million incurred in the quarter as well as a shift of vendor rebates from SG&A to cost of sales. These increases were partially offset by reduced expense for management bonuses which were not earned in fiscal 2007. SG&A expense for the year ended March, 2007, was 30.3% of sales as compared to 29.3% for the prior year, primarily due to the shift in vendor rebates from SG&A to cost of sales as previously discussed.

Interest, net interest expense for the quarter and year ended March, 2007, was relatively flat as a percent of sales as compared to the same period of the prior year. For the year, interest expense increased by two-tenths of a percent from the prior year to 1.1% as a percent of sales. While the Company continues to pay down its revolver debt it's weighted-average debt and interest rate are up compared to last year due to the addition of 44 capital releases related to the ProCare stores.

The weighted-average interest rate for the current year quarter was approximately 100 basis points higher than the rate for the same quarter of last year. Weighted-average debt outstanding for the quarter ended March, 2007, increased by approximately 8.8 million over the prior year quarter. For the year, the weighted-average interest rate increased by approximately 60 basis points from the prior year and the weighted-average debt increased $11 million. As far as additional borrowings for acquisitions, the Company would be borrowing obviously at the stated bank debt rate which is LIBOR, currently LIBOR plus 75 basis points, so the capital lease rate is insulated for the accounting, it's not our actual incremental borrowing rate.

As far as income tax expense is concerned the effective tax rate for the fourth quarter of fiscal 2007 and 2006 were 35% and 40.8% of pretax income respectively. As you may recall in the fourth quarter of fiscal 2006, the Company recorded stock option expense just prior to adopting FAS 123R. And most of that was not tax deductible which inflated the rate in last year's quarter. Other income for the fourth quarters of both years was flat as a percent of sales and primarily relates to the net gain on property sales.

Diluted earnings per share for the quarter ended March, 2007 were $0.28 as compared to $0.21 for the fourth quarter of fiscal 2006, an increase of 33%. For the year, diluted earnings per share decreased 3% and were $1.46 as compared to $1.51 for the year ended March, 2006. Without the Strauss loss, earnings per share for fiscal '07 were $1.57 as compared to $1.51.

Moving on to our balance sheet, it remains very strong. Our current ratio is 1.5 to 1 and is comparable to last year end. Inventory is up $2 million from March, 2006, due primarily to the addition of the ProCare stores and other new store openings as well as our continued operations to improve stocking levels and the mix of inventory to reduce outside purchases. Nonetheless inventory turns were slightly improved from the prior year.

For the year we generated approximately $37 million of cash from operations and received $3.6 million from the exercise of stock options and warrants. We collected our $5 million loan back from Strauss and realized approximately $5 million from the sale of fixed assets. Depreciation and amortization totaled approximately $20 million. Total CapEx this year was approximately $22 million excluding capital leases. We paid down $15 million of debt and paid $3.8 million in dividends. We spent approximately 13 million to acquire primarily the ProCare stores and a couple of other stores. As a reminder our debt to capital ratio is 20% and before the $75 million accordion feature which increases our availability we have $105 million today currently available under our credit line and plenty of room under a debt covenants for acquisition.

I also wanted to give you some guidance for fiscal year 2008. Our earnings range of $1.85 to $1.95 per share as Rob stated. CapEx is expected to be approximately $24 million, including $4 million for an expansion of our headquarters and warehouse that we postponed this year to accommodate our growth and $7 million for new stores. Approximately $13 million will be for maintenance CapEx. We expect depreciation to be approximately $20 million, free cash flow to be approximately 22 to $24 million, and operating cash flow to be between 46 and $48 million. EBITDA should be in the range of 70 to $72 million, as compared to $60 million in the fiscal year '07. We expect operating income as a percent of sales to improve 150 to 200 basis points as compared to FY '07 which was 9.6%. However, due to the change in accounting rules for vendor rebate which records these credits now as a reduction of cost of sales, we expect to see an additional flip of about 100 to 150 basis points between cost of sales and SG&A with cost of sales declining and SG&A increasing. Interest expense at approximately 1% of sales should be about $1 million less than the current years expense of $4.6 million. This concludes my formal remarks on the financial statement and with that I will turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS) First question, Tony Cristello with BB&T Capital Markets.

I want to just congratulate you and your team because you certainly are the outlaw right now in the environment and you are putting up some fantastic numbers and your execution really shows. I just wanted to congratulate you guys on that. One question, you talk about some acquisitions that may occur. Can you just talk about the pipeline, how that looks for this quarter, are those pretty close to being completed and then is that just the beginning, will we see more as the year progresses? What's the environment look like right now?

Certainly again as you look out on the environment and see some of the difficulties, smaller guys and some of our competitors are happening, it creates opportunities in this environment for us to do more on the acquisition front. As we said in the release, we would expect to announce over the next four, five weeks one to two deals each in the 10 to 15 store range. So certainly for us to be saying that we've overcome the price obstacle which had slowed down some of these deals and are doing due diligence and are fairly confident that one or both of those deals would occur. We had another deal where we were picking up 11 franchisee stores in a market but as you know whenever we go after a franchisee there's right of first refusal and the franchisor matched our offer so that deal went away. But the one or two that are currently on the docket do not involve a franchise operation so we would expect to move forward with either one or both of them. And beyond that we would expect with $3 gas or $3.20 gas that those opportunities would continue to come our way and we would hope to do more than just what we announced more immediately but certainly we are not going to get involved with three or four of them at the same time. We will do a couple small ones at the same time or one big one at once and we will continue to progress that way.

Can we assume that the, any acquisitions you make or, I guess we shouldn't assume, but are they more likely to be accretive or nondilutive relative to what we experienced with ProCare out of the box?

Yes, again, ProCare being out of bankruptcy and running comps down 30 to 35% we just felt that that deal was too strategic, too many stores and too fixable, albeit not as quick as I had anticipated, to pass up and I think it was reflected in the price of $200,000 per location. Other deals and certainly the two, three, four we are currently trying to bring along the finish line are all companies that will not be dilutive in year one.

When you look at the comps, you gave guidance of 4 to 6%, $0.54 to $0.57, well, you are running 8.5, I think you said through three weeks of May or so. What happens if you run a 7% comp for the quarter? I mean, what does that do to this estimate range here, are you being conservative just not knowing how the next six weeks might play out?

Certainly, if we run a plus 7, remember the 8.5 is only three weeks into May but certainly yesterday was good, also. So that's weak four. We ran a 3.2 in April. So if we continue 8.5% for the rest of the quarter, probably averages out to 7% like you said, and that would add probably $0.02 to the quarter.

Okay. One last question maybe for Cathy. When you look at the interest expense line, last quarter you had some capital leases that were reallocated and that bumped up your interest expense. Now you came back down this quarter. Going forward, what should I be looking at in terms of just sort of a stable number here or will this continue to fluctuate by quarter depending on the variables?

No, it will be fairly consistent, Tony, throughout the year, declining a little bit as the year goes on because we are getting close to, if things kep progressing the way they are we will end up paying off our revolver debt sometime before the middle of the year, so we'll have the the consistency of the cap rate. So you are looking at probably maybe about $1 million for the first couple of quarters and declining to probably 8, 900,000 for the last two quarters.

Okay. And that's, on the interest expense side. The other income you had something else go on this quarter that was a little, I assume you had some type of asset sales sale in those numbers?

That is correct, in both fourth quarters we had a fairly profitable two store sales, one in each quarter. That's not something that's necessarily predictable. We expect we will have a sale, we are always trying to rationalize our assets. If we have a property that's worth more dead than alive we always look at those and may end up selling one or two properties this year as well.

I think the other income line, Tony, you should probably, the big variable will be the sales of properties for profit versus the store closures and in any given year we would target to pay for our store closures, obviously it goes straight through our operating numbers and that line for a year should be anywhere between a $500,000 profit to a $500,000 loss depending on what it fluctuates.

Okay. That's perfect. Thanks everyone.

Thanks, Tony.

Your next question is coming from Scott Stember with Sidoti & Company.

Could you maybe give a little more detail on some of the other categories from a sales perspective in the quarter like exhaust, brakes and a few other items?

Sure, shocks were up 3, brakes were down 2, front end was up 5, alignments, 33 up, service 11, and tires up 18 and exhaust was down 12.

With the numbers that you gave for the first two months of this quarter, are you seeing similar segment trends?

Certainly I would say the three categories that we specifically commented on, alignments, tires and maintenance services continue to perform very well and without getting too granular, if we are running an 8.5% comp like we are in May, typically most things are positive.

As far as the integration of ProCare, now that we are finished with that or just about, could you talk about some of the synergies just right out of the gate that you are noticing and that you expect to really drive that 10% or $0.10 accretion for the year?

Well, sure, I mean frankly, we probably couldn't screw it up any more than we did but I think obviously gross margin will continue to get better as we get the right inventory in their locations. I think the 30 stores that we converted to tire stores, getting their merchandise mix correctly and getting them trained to sell tires for the first time is coming along well. That will continue to generate comparable store sales for them. And after suffering through maybe our slower period with too much labor I think where we are currently is probably what's contributing to the plus 19 comps in May where we have staffing levels that can support the increased business and those customers starting to return, where we overspent for six months, we are now getting the benefit of having those people in the locations and obviously the sales volume absorbs a lot of payroll when you're running a lot better numbers.

My last question is revolving around the acquisitions. Are we to assume that we are looking at tire type stores or maybe something along the lines of ProCare that can be transformed into having a tire format?

Of the deals that we are specifically speaking, those would be all tire stores.

Okay. That's all I have. Thank you.

Great, thanks, Scott.

Thank you. Your next question is coming from Jamie Wilen with Wilen Management.

Hi, fellows, great quarter. Thanks for the stock dividend and cash dividend increase. First, a question about ProCare. Obviously the same store sales are moving on a nice track. When you estimate that you'll add a dime could you tell us what you think same store sales for ProCare would be to get to you achieve that dime?

Give or take 15% up.

Okay. That would be nice numbers. And then secondly, you talked tire sales are up 18% yet alignments are up 30%. Alignments obviously a much higher margin item. What percentage of tire sales get in alignment and how do you, obviously you're increasing that number. How are you doing that and what is the potential, is there much greater potential to increase alignments because it hasn't been focused on?

Yes, and I think that's what Joe Tomarchio, and Chris Hoornbeck, and Craig Hoyle really executed very well. Joe is now in charge of all of our locations. He came from the tire side and one of his first initiatives started with Black Gold that said, there's a lot of easy money on alignments with these cars on our list on the service stores so the opportunity is to get to somewhere around 20 to 25% of tire sales units. And we are just scratching the surface but certainly that alignment increase was not generated by all the tire stores which have been doing it well for a long time. It was just beginning to get started in the service stores, really focusing on training, making that a key operational initiative to see if we could move the dial and if you remember as we spoke of the Black Gold or the program, sales where we adjusted merchandising or put more focus on tires in the upstate New York tires we were kind of complaining that we were getting the units but not the margin, this was Joe and his teams effort to ramp the margin up and obviously alignments are including labor about 90% margin business.

Okay. And so as you focus on this, your percentage increase in alignments should exceed your percentage increase in tires moving forward as well?

Yes, as a percentage obviously it will as the tire units go up, again, the expectation would be every tire you get 25% in alignments, so a full set would you hope to get one alignment per four tires.

And lastly in the stores you have tire stores in Ohio, are they all -- you say that you switch to premium brands I guess from other ones or private brands, do you have the same election of tires throughout the entire chain?

No. The tire stores would basic very well everything we choose to sell. Michelin, Yokohama, Pirelli, Goodyear, Bridgestone, these service stores typically have Bridgestone and Goodyear, the ProCare stores that we made tires more expensive line but still not as complete as a tire store just based on storage capacity.

Great quarter. Great job, fellows. Thanks.

Our next question is coming from Cid Wilson with Kevin Dann & Partners.

I should also congratulate you on bucking the trend of what we are seeing from the industry so congratulations on that order. My question is, is that, has there been any change in terms of the mix of inventory that you get directly from your vendors versus that that you get from the auto parts retailers?

No. Again we are very focused and a key component of our business model is if we are buying something from an Auto Zone, an Advanced or a Napa, while they all do a great job we are paying twice as much and we view that as something that we should have had and a mistake. So we have a significant focus because we think we do have a cost of goods advantage with our distribution network and the way we buy our product having it coming into one warehouse and distributing it from there, that anything we buy from someone else we better stop buying from someone else and our customers walk into our service stores and 90% of the time we service them out of our own inventory. And remember on our system every single one of our locations has a seven closest stores inventory on its system. So we have eight chances to buy a part internally at a very attractive price before we then have to go and do business with some of the retailers.

Okay. And then my, I guess my next question is that given that you are going to be expanding your brand of tires, can you give any color in terms of your relationship with the tire companies? Will this have an impact with your existing relationships in terms of negotiations, in terms of pricing?

We love all our vendors and the one that give are gives us the best deal we love more.

Okay. And then with, I think you mentioned that your guidance for free cash flow was 22 to 24 million. I didn't hear the operating cash flow guidance for 2008.

For 2008 it was 40 million.

40 million. And did you also mention how your free cash flow and operating cash flow finished for this year?

Yes, our operating cash flow was 37 million and our free cash flow was about 15 million.

Thank you much. Congratulations.

(OPERATOR INSTRUCTIONS) Next question, John Lawrence, Morgan Keegan.

Good morning. Just following up on that last question, did you give us the amount, the percentage of the time you went outside your warehouse system?

About 10%.

10%?

We pay a premium of 15% on that.

And then is that 10% down just a little bit?

No, it's running pretty consistent.

And then secondly, you expanded the Black Gold project up a little bit to another 30 stores. Where could we see that go? I mean, if it all worked right in the next say year to 18 months?

Certainly you could see it go to 550 locations.

So you could roll it out chain wide at that point.

We could but I wouldn't look at seeing this in 500 locations in the next 12 to 18 months. I mean, we have 60 up and running. We want to finalize those 60 and we will move it forward on a steady pace where we can guarantee our performance.

Last question. As you look through the summer months, anything promotion wise, summer going into the fall that changes from last year, the approach to that at all?

Obviously we are constantly testing things. We will spend a few more add dollars on some of the things we are trying to accomplish on the web but again I think a key component of our business model, what differentiates us and what has helped us is really the systems, obtaining the data from the customers and our whole direct mail program has proven to be a very efficient business model and continuing to mine that data and improve our rate of return on what we currently do is the best way for us to go forward.

But no real major product roll-outs or anything new, right?

Well, we will continue to obviously make the improvements in ProCare. We will continue to look to generate the opportunities in alignments and obviously there are big categories that we haven't talked about that should be next up.

Congratulations. Thanks.

Your next question is coming from [Jack Ballew] with Focus Research.

First I have a couple questions for Cathy. First of all, Cathy, what do you expect your tax rate to be for this new fiscal year?

37.5%, Jack.

And what quarter would you expect the vendor rebate transition to be comparable to last year?

It won't be. The vendor rebate will continue to shift the cost of sales as our agreement, as we sign new agreements. Because there's several agreements, larger ones that we are operating under still that were more like evergreen agreements that have not transitioned to the new rules. So looking at all of fiscal '08 versus '07 will you see that shift of 100 to 150 basis points from SG&A to cost of sales reduction.

Okay. Regarding ProCare, this year for the June quarter you'll have ProCare in your financials for three months compared to two months last year.

Right.

Excuse me?

Correct.

Yes. So my question is, what difference is that going to make? I assume last year ProCare had a small loss in earnings per share. What would be the contribution this year compared to last year from ProCare?

We would expect there to be a small gain.

A small gain.

Correct. Again, if you were $0.10 for the year the expectation should be the first three quarters should be profitable, quarter two should be the most profitable, quarter four should probably be flat.

You mean flat in terms of no--?

Profitability.

I see. Okay.

The $0.10 will come from the first three quarters.

Right. Okay. Regarding the new distribution, the expansion of the DC, when do you expect that to be completed and what advantages should you get from that? For example, would that help with less outside purchasing?

Probably not. It will allow us to better service the stores and you will not see us, again, it was in the capital budget approved by the Board last year. When the Strauss deal didn't go through we nixed it, depending on how many stores we buy this year, if all we got done all year which is not our expectation is two small deals of 20 to 30 stores in total you would probably not see us make that expenditure. We anticipate certainly in this environment doing more than that and it's in our capital budget and we would expect to make that expenditure and it should allow us to be more efficient and service more stores. But I wouldn't think that that would attribute to outside purchases going down.

Okay. So being more efficient does that mean that the distribution expense as a percent of sales would be lower this fiscal year compared to last fiscal year?

No, because, we will obviously have all the fixed overhead we are putting into expand. It will position us with this expenditure. And, again, if we make it, because maybe we buy someone that has something but should we go ahead with that expenditure, it will allow us to do a much better job in the Northeast on tires which are now, all of our tires are being serviced out of the Baltimore warehouse in the tires further south with a limited supply up here to service the Black Gold location. So it would be in conjunction with allowing us to go further with the Black Gold process and give us more selection located in the Northeast and Rochester, New York.

Okay. My last question concerns the rising price of oil and how you're handling that in terms of passing along those increases in terms of your prices.

Well, we try where we can. Obviously some of the margin pressure we saw last year and we would expect to have this year are on tire prices and oil prices to us. As we've said before we raise our prices twice a year. We've done that now three years straight. The most recent price increase occurred in March of this year and those price increases that we've been passing along have stuck without negatively impacting traffic. So there's margin pressure with those costs going on.

If you're talking about rising gasoline prices and what it does to our business, certainly it had a negative impact on our business when we first hit $3 a gallon over last year's summer, we are now there and slightly above currently and it's our feeling that the second time usually hit a big number like that it's less painful than the first time. Certainly our comp store sales currently, are supporting that. That being said some of our hesitancy throughout the year is going to be based on what happens at $3.50, what happens at $4. I think we are comfortable with everything we are talking about at 3 to $3.25 gas but you don't know how the consumer is going to react to the 3.50 to $4 gas and certainly when we hit $3 for the first time last year it was painful and we felt it.

I understand. When it comes to tires, do you have more flexibility there in terms of passing along the cost increases because everyone else in the industry I assume is doing that?

Sure. We pass along those costs increases but we would like to make more margin dollars and a higher percentage on that which is why it was felt in this time where tire prices are going significantly higher Joe and his team wanted to focus on the alignments the rotations those additional services that would improve the overall margins and not lose business, or customers because we are not price competitive.

I see. Okay. Thank you very much.

Thanks.

Thank you. Your next question is coming from Robert Straus with Merriman Curhan Ford.

I just want to ask probably a couple questions on the tire business. Rob, earlier in the call, I think you had discussed a number for tire unit sales and the attachments of alignment service in the range of 20 to 25%. Is that a goal that you're seeking to achieve?

Yes.

What is the current level that the operation runs at right now?

We are getting pretty close after this last quarter.

So you are at 20% or so or 15 to 20%?

Probably 20%.

Do you think that 20 to 25% is conservative? I mean, do you push the envelope.

Obviously Robert, we are going to raise the target once we hit the old one. We were starting from hardly anything but certainly without getting too specific on the initiatives we felt the guys had done a fabulous job, they are ahead of our expectations in this category. Obviously it helped significantly in all aspects of the business including margin and we will be happy to keep you posted as we pass and move forward from there.

The success that you're having with increasing the alignment service attachment rate with tires, how much does that have to do with the leverage that you have on your computer systems in the store?

It really has to do with the concerted training effort out in the stores and great execution by our store managers. A lot of our investment and what we constantly talk about, it wasn't very apparent in last year's performance, is sticking to our knitting, building up trust with the customer and alignments are something they might not necessarily feel but if they believe they need it and they are buying more tires from you, they don't want to ruin their 300 or $400 investment and they are going to spend the money on the alignment to protect that investment and they are going to believe our store managers credibility that we are not trying to sell them something they don't need.

Keep up the good work.

Thanks, Robert.

Your final question, [George Hashbarter] with Kingston Capital.

Point of clarification on the guidance for ProCare contributing $0.10 next year. Do you guys describe that in terms of operating profit or is that a fully allocated net income number that has some piece of interest and taxes associated with it?

Bottom line fully loaded.

Fully loaded. Okay. Did you describe what the fully loaded contribution for this Q4 was for ProCare?

No, we said comps were up 2%. We gave an indication in our March release where we thought ProCare would be and that was was part of the March release we had which was about $0.03.

So approximately $0.03 for the fourth quarter.

Loss, loss.

Loss. Okay.

Yes.

If I go back and do the implied math of the relative growth profit margins of ProCare versus all other operations, if I go back to Q1, there was a 1260 basis point GAAP, in Q2, it was 1190 basis points, Q3, 420, so each quarter had been a progressive improvement. It looks like this quarter it's increased back to 740 basis points. Is there something that's going on on a relative basis that would cause that, the gap to increase as opposed to continue to decrease.

It's really a largely a function of sales volume. The fourth quarter is typically one of our two lowest sales volume quarters and, because in our cost of sales is, we include occupancy costs which are fixed. That can have a big swing or big impact on margin, if sales are soft. We continue to make improvements in the ProCare stores, in labor, and in the parts that we are stocking. But if sales volume isn't there it will have a negative impact on margin. But if those stores will continue to get progressively more like the margins in a typical Monro or Mr. Tire store with the caveat that they will probably have a little bit higher cost of goods because their store rooms aren't as big. But from a labor standpoint and eventually from an occupancy standpoint although they have the capital leases which puts a little bit more pressure on margins they will continue to get closer to a typical Monro or Mr. Tire store.

What do you think the kind of final resting place would be in a differential margin once you get the stores to where you want them to be?

Pretty close to zero. I mean, you might have, you might have 50 to 100 basis points maybe difference. It would be mostly in the occupancy because of the capital leases but I mean labor should get very close. There is no reason labor shouldn't be very similar to typical Monro service or tire store and as I said little bit different in cost of goods. but not very much.

I think, George, the opportunities if you remember when we bought these ProCare stores prior to them sending that letter to all the customers, these stores got as high as an average run rate of 625 to $650,000 each where the average Monro store which are generating the kind of margins you are talking about did that off of a 525 to $550,000 sales base. So the margins will get there because we would expect being these stores being poorly running got off an extra 100,000 in sales that that will close the gap between maybe some inherent difficulties on the size of their store rooms and things like that. But net/net our intent is to get back everything these stores used to do through higher sales at an average Monro store, the margins netting out.

Okay. Then a final question back on the allocation of the fully loaded ProCare contribution, how do you guys think about allocating interest and taxes to the ProCare operation? Is that based on operating profit contribution or revenue contribution? What's a reasonable way to think about allocating that.

Basically we do is separate cash flow statement for ProCare. We look at what we spent to acquire it, what we spent on CapEx, what it's generating on its own cash flow wise and see what the net debt is responsible for, take our overall interest rate and say, this is your share, guys. That's pretty straight forward. Then we just take -- the only thing that's not allocated is a share of, for instance, accounting or data processing help with all the field people are allocated there that are directly attributable to ProCare. So then we just take the pre tax income, use our overall effective rate and say that's what they made.

Great. Thanks very much. Nice quarter, guys.

Thank you.

Thank you. At this time there appear to be no further questions.

Great. In closing I just want to thank everybody for their support. We feel good about the quarter we delivered and certainly the quarter we are halfway through and we hope to have another positive report back to you in the middle of July. Thanks again and appreciate your time today. Bye.

Thank you. This concludes today's Monro Muffler Brake conference call. You may now disconnect and have a wonderful day.