Monro Inc (MNRO) 2008 Q1 法說會逐字稿

Good morning, ladies and gentleman, and welcome to the Monro Muffler Brake first quarter 2008 earnings conference call. [OPERATOR INSTRUCTIONS]

I would like to now introduce Ms. Caren Barbara of FD. Please go ahead.

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 to 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 the statements, which are more fully described in the press release in the Company's filed 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 related to leverage and debt service including sensitivities to fluctuations and interest rates dependent on, and competition within, the primary markets in which the Company stores are located and the need for cost 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 dates hereof, or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material.

Joining us for today's call from management are Rob Gross, President and Chief Executive Officer; and Cathy D'Amico, Chief Financial Officer. With these formalities out of the way I'd like to call the -- turn the call over to Rob Gross. Rob, you may begin.

Thanks, Caren. Good morning and thank you for joining us on today's call. We are pleased to be joining you today to discuss our record first quarter results and our two months recent acquisitions. We'll also provide you with an overview and update on our business, as well as our outlook for the second quarter and remainder of fiscal 2008. I'll then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on the financial results.

We are pleased that we have carried the momentum from the second half of fiscal 2007 into the first quarter. We have also continued with our stated acquisition strategy completing the two acquisitions that we announced today.

Now, I'd like to review several highlights from our first quarter. In the first quarter we grew sales by 9.3% to a record $107.6 million. Our 6.2% comp increase continue to outpace the industry and exceeded the high end of our expectation. These strong comps follow on the heels of our 7.3% comp sales increase for the fourth quarter of 2007, which was our highest quarterly comp sales increase since 2003. While we did not meet our aggressive plan of 15% sales growth for our ProCare stores, which negatively impacted our bottom line versus our guidance, ProCare did generate a 10% comp sales increase and we improved the performance of these stores to break even for the quarter. This month, we realigned top field management to expedite the improvement in these stores.

That said, we are pleased to have achieved a 15% increase in our pretax earnings and an 8% increase in earnings per diluted share. Our pretax earnings is an apples-to-apples comparison to the first quarter results last year and takes into consideration the income statement classification shifts due to co-op in capital lease accounting, as noted in our release, and excludes a $0.03 per share income-tax benefit recorded in the first quarter of last year. We are pleased with our continued strong sales momentum, particularly as it is tracking ahead of the industry. We are particularly pleased with the growth in our big ticket and high margin major maintenance categories, which we put special emphasis on in the last few quarters.

This quarter we achieved a solid comp sales increase across numerous key categories, namely tires, maintenance services, brakes and alignments. During the quarter we increased the price for our oil changes by $2.00 to try and recoup the past year's 13% price increase on the oil we buy. While we experienced an increase in average ticket for oil changes, and it contributed to our gross margin improvement, we also experienced a decrease in traffic of approximately 3%. As most of you know, oil changes are a significant traffic driver for us. Last year, we had a sales contest which ran from April to July focused on a minimum 5% increase in oil changes. This year, that contest was moved and runs from August to September. We currently believe the first quarter decline in traffic relates to a lack of focus in the stores on oil changes as some of the other initiatives in brakes, tires and alignments were being emphasized. Oil changes are now back on the front burner.

Over the years, Monro has worked hard to build a strong reputation as a trusted service provider. Consistent with the trends, we began to see on the back half of fiscal 2007, we continue to see consumers following more normalized spending patterns in the first quarter, and we continue to experience positive trends in some of the major maintenance services that have been deferred.

We are very pleased at our commitment to our customers and the strong reputation Monro has established as a trusted service provider as translating into our service customers also coming to our locations for their bigger ticket repairs. We are happy to see continued growth in alignments, as this category increased 26% for the quarter on the heels of a 33% increase last quarter. We are further encouraged by the rebound in brake sales which increased to a solid 5% comp.

Growth in tires and sales remains strong as we gain more knowledge and experience in this category. This is particularly encouraging given the fact that tire manufacturer's prices continue to rise, and we have been successful in passing on the increases to our customers. We are pleased to have generated strong sales of tires in both our tire stores and service stores.

In relation to the focus we've placed on tires and the programs we have established around this area, it is important to note the progress we are making across our service stores in tires and alignments. In the first quarter, tire contests for our service stores ran an outstanding 27% increase versus 10% for the Company overall; and our service stores alignment comps ran at an equally outstanding 47% increase versus 26% for the Company as a whole. We are extremely encouraged by these results, which are attributable to the marketing, training and operations programs we began in fiscal 2007.

We've been successful in growing the sales and profitability of our service stores by making changes to our tire inventory, focusing our advertising increasingly on tires and providing tire sales training to all service store managers. Tire sale increases in our 60 Black Gold service stores in Upstate New York, where we expanded our tire merchandise assortment, were up 31% in units and 59% in comparable sales dollars. During fiscal 2008 we will continue our focus on training and in-store execution across our service stores, as well as refining the product assortment and merchandising in the 60 Black Gold stores.

Based on our success to date, expect the entire category to continue to contribute to overall sales increases going forward and the Black Gold program to be expanded to 30 to 60 additional stores this fiscal year.

And now, I'd like to turn to some exciting news about our strategic growth initiatives. In line with our previously stated expectations, we announced two small acquisitions for a total of 19 stores within or contiguous to our existing markets. We expect that these stores will break even in the first 12 months of operation under Monro and will be accretive to earnings in the second 12 months. Valley Forge and Craven chains compliment our existing operations. The new stores will expand our presence in the Philadelphia market and grow our tire store footprint in northern Virginia.

In particularl, we are pleased to implement our two-store format strategy in the Philadelphia market where we already operate 26 service stores, making this market a candidate for expansion of our Black Gold program. These acquisitions are very much in line with our ongoing strategy of buying value-priced businesses that strengthen our existing operation. Craven and Valley Forge together generate annual sales equal to approximately 5% of our total sales last year. Along with operational synergies, we believe that there are significant opportunity in these stores to increase sales in the tire and maintenance service categories, which are mainstays of our business and significant drivers of store traffic.

As we have stated in the past, we have found that acquisition opportunities are plentiful in challenging times like these, when our competitors are struggling a bit and our business is able to remain strong and flexible. In fact, we see several opportunities in our pipeline and expect to announce at least one additional acquisition by the end of the third quarter.

Turning to our outlook, we anticipate continued solid growth. Based on performance to date, we are moderating our plan for the ProCare stores for the near term. Our expectations for the second quarter and full fiscal year include these moderated expectations, as well as the effects of the transactions we announce today. For the second quarter we expect earnings per diluted share in the range of $0.53 to $0.56 with comps in the range of 3 to 5%.

As a reminder, every year we target to sell two or three properties of our 190 owned properties to offset the cost associated with closing stores in a given year. In fiscal year 2007 and 2006, those property sale profits were $2.1 million and $1.6 million, respectively. This year we are scheduled to sell two stores in the second half of the year with gains between $1.3 and $1.5 million. No properties will be sold in the first half of fiscal 2008 versus $1.1 million in gains recorded in the first half of fiscal 2007.

For the full year we have increased our sales expectations to a range of $445 million to $455 million to account for the acquisitions and are maintaining our projection of comps in the range of 3 to 5%. We have tightened our estimated earnings per diluted share rate for the full year to $1.85 to $1.90. Our estimates are based on 15.3 million shares outstanding.

Before I turn the call over to Cathy I would just like to reiterate that we are pleased with our overall results for the quarter. We continue to outperform the service industry and successfully expand our market share. The fact that our results are tracking ahead of the industry is evidence that our model is working, our business is sustainable in good times and bad, and there is a bright future of growth and profitability ahead for Monro Muffler and its shareholders. I would also like to thank our 4,000 employees for their contributions to this success.

This completes my overview. And now I'd like to turn the call over to Cathy for a more detailed review of our financial results. Cathy?

Thanks, Rob. Good morning, everyone. As Rob stated, sales for the quarter increased 9.3%, profitable store sales increased 6.2%, and new stores, which we define as stores opened after March 25, 2006, added $5.4 million, including $4.2 million from the ProCare stores acquired April 29, 2006. And that compares to a comparable store sales decrease of 2.9% in the first quarter of last year.

There were 77 selling days in the quarter ended June 2007 and the quarter ended June 2006. At June 30, 2007, the Company had 696 Company-operated stores, as compared with 701 at June 25 -- as compared with 701 in the prior quarter -- prior year quarter. During the quarter ended June 2007, the Company added one new tire store and closed three underperforming or redundant ProCare stores.

As you know, the new ProCare stores acquired last year were purchased out of bankruptcy and these stores suffered significant declines in the months prior to Monro ownership, and they did not perform at a profitable level at fiscal year '07. However, sales have improved and continue to improve since the acquisition, and we are continuing our efforts to reduce cost and improve margins in those stores.

The ProCare stores lost approximately $0.09 per share in fiscal 2007, including $0.02 in the fourth quarter of fiscal 2007. In the current quarter, the ProCare stores broke even with an approximate 10% comparable store sales increase. In spite of these improvements, the ProCare stores negatively impacted gross margin by six tenths of a percent, and store direct costs, which are included in SG&A expenses, by a half a percent in the current quarter.

Gross profit for the quarter ended June 2007 was $46.7 million or 43.4% of sales, as compared to 41.7% of sales for the quarter ended June 2006. The increase in gross profit in the current quarter, as a percentage of sales, is due to several factors. First, there were more vendor rebates received, as well as a shift in vendor rebates in accordance with EITF 0216 from SG&A to cost of sales in the current year quarter as compared to the prior year.

Additionally, due to the recording of certain ProCare leases as capital leases, which occurred in the third quarter of last year, there was a shift in expense from rent to interest expense, and as you know, occupancy costs are included in our cost of sales. Further, distribution and occupancy costs decreased as a percent of sales in the first quarter of fiscal 2008 as compared to the prior year as the Company with improved sales was able to better leverage these largely fixed costs.

SG&A expenses for the quarter ended June 2007 increased to $32.6 million and with 30.3% of sales as compared to 31 -- 30.1% of sales in the prior year quarter. The increase in SG&A expense, as a percent of sales, is due primarily to the aforementioned shift in vendor rebates from SG&A to cost of sales and partially offset by decreases in various store direct and store support costs.

Operating income for the quarter ended June 2007 increased approximately 23% as compared to operating income for the prior year quarter, an increase of the percentage of sales from 11.6% to 13.1% for the same period.

Net interest expense for the quarter ended June 2007 increased by approximately $0.6 million, as compared to the same period in the prior year, an increase from six tenths of a percent of sales to 1.1% for the same period.

The weighed average debt outstanding for the quarter ended June 2007 increased by approximately $10.1 million from the prior year quarter, primarily related to the $20 million of capital leases we assumed in connection with the ProCare acquisition and partially offset by net payments on the Company's revolving credit facility.

Additionally, there was an increase in the weighted average interest rate for the current year quarter of approximately 110 basis points from the prior year quarter resulting in an increase in excess between the two periods. The increase was largely due to the interest rates associated with the capital leases which are generally much higher than the Company's incremental borrowing rate under its revolving credit facility, which is currently at LIBOR plus 75 basis points, or about 6%. There was also a decrease in interest income of $0.2 million between the two quarters.

Other income decreased by approximately $0.4 million, as compared to the prior year, primarily related to the relocation of a Mr. Tire store in the quarter ended June 2006. The owners of the property paid the Company $0.9 million to relinquish the lease. We did not have a similar transaction in the current quarter; however, the Company recorded $325,000 of income in the current quarter in connection with our settlement of all outstanding legal claims with Strauss. Additionally, amortization expense was $0.1 million in the current quarter, as compared to $0.3 million in the prior year quarters.

Pretax income, at $13.1 million, increased 14.7% over the prior year. The effective tax rate for the quarter end of June 2007 and June 2006 was 37.5% and 33.8%, respectively, of pretaxed income. Outstanding the prior year tax provision of 37.5% was the recognition of a $0.4 million income tax benefit primarily related to the favorable resolution of state income tax issues. Additionally, the Company adopted the provisions of 1048, which is the accounting for uncertainty in income taxes standards and we adopted that as of April 1, 2007. The adoption resulted in a one-time charge to retain earnings of $1.6 million in the current year quarter.

Net income for the quarter ended June 30, 2007 of $8.2 million increased 8.5% over the prior year quarter. Fully diluted earnings per share at $0.54, as compared to $0.50 for the prior year quarter, increased 0.8%.

Moving on to the balance sheet, our balance sheet remains strong. Our current ratio, at 1.5 to 1, is comparable to last year. Inventory is up $1.4 million from March 2007, due primarily to the continued expansion of inventory in the ProCare stores, as well as the addition of more tires used in all our stores. Additionally, we added inventory in an effort to improve stocking levels and mix with inventory throughout the chain to continue to reduce outside purchases.

For the quarter, we generated approximately $15 million of cash from operations and received about $400,000 from the exercise of stock options. Depreciation and amortization total approximately $5 million. Total CapEx this quarter -- excuse me -- was approximately $3.5 million. We paid down $7 million in debt and paid $1 million in dividends. We spent approximately $4 million to buy back our stock.

As a reminder, our debt-to-capital ratio is 19%, and before the $75 million accordion feature, we have $111 million of availability under our credit line and plenty of room under our debt covenants for acquisition. Additionally, based on our performance, we have qualified for a 25 basis point reduction in the spread on our borrowing. Beginning in August our borrowing rate will be lowered to LIBOR plus 60 basis points.

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

Thank you. [OPERATOR INSTRUCTIONS]

Your first question's coming from Scott Stember from Sidoti & Company. Sir, please go ahead.

Okay. Good morning.

Hello, Scott.

Rob, you mentioned that you've seen some of your key categories continue to do relatively well in July. Could you maybe comment on that and maybe talk to the levels of what you're seeing sales at right now?

Well, we're typically not talking about July. July, overall, is a little bit weaker than the first quarter was. We expect July to come in flat and really don't have the breakdown until the month's completed, but traffic continues to run similar to where we ran last quarter. Remember, we need to anniversary the sales contest, and our sales contest for oil changes starts in the August/September period.

So, July expectations will be flattish. We expect August and September to rebound significantly and, as far as the categories, certainly with the flat comp store sales number instead of a plus 6 for the quarter, the categories, I would guess, will look weaker than they did last quarter.

You were referring to a sales contest. Could you just talk about that a little bit more? I think I might have missed that earlier.

Sure. I mean, typically we run sales contests every quarter. Last quarter it was focused on brakes. We saw the results with a plus 5 comp on brakes. The problem is we put the brake contest in the first quarter, moved the oil change contest to the second quarter. That being said, oil changes drive our traffic. We feel that negatively impacted our traffic last quarter, and we are adjusting the sales contest to run this August and September.

While we're very satisfied, even with some of the weakness in traffic we experienced last quarter and into July, the comps remain very strong due to some of the other initiatives we focused on. We need to get back to driving the oil change business to grow traffic in the second quarter, and we feel that was related to the sales contest.

All right, so the bottom line is July flat sales and think you should bounce back into August and September with this traffic-thriving oil change, which should drive everything else.

Absolutely and at this point with seven months straight averaging 6.5% comps, we're viewing July as an aberration. Maybe a piece of it is back to school moving up a couple weeks, so the discretionary income is going elsewhere. Right now we view it an aberration. The end of August I hope we'll be talking about it as an aberration, as opposed to a trend, but that's why you saw the guidance of comps be 3 to 5% instead of the 4 to 6% we were in last quarter on the heels of six straight months of above 6%.

Right and back to the Black Gold program. You were talking about how you -- two upstate markets, 60 stores. You plan on being in 30 to 60 additional stores this year, and could you maybe talk about which markets they would be?

Certainly, as we said on the call, Philadelphia would be a prime market for us to do Black Gold now with the addition of the Valley Forge stores, so we have both a tire presence and a service presence. Doing the Black Gold project where you have tire stores in the markets makes a lot of sense.

So, that being said, if you're looking from 30 to 60 stores, I would look at potentially Pittsburg. I would look at Philadelphia. We have tire stores now in Columbus and Cleveland. So, some grouping of those four markets will make up the 30 to 60 stores, doubling the current store count by the end of the year. As we continue to fine-tune it, and if the results stay where they are you could expect a quicker roll out all of next year.

Okay. And the two stores that you acquired, will they -- well, the two chains -- will they eventually assume the Mr. Tire moniker?

Yes. Very quickly they will assume the Mr. Tire moniker.

Okay. And lastly if you could just talk about what's going on in the exhaust segment. Are there any different trends there, or are we still seeing fluctuating up and down? What's going on with the market?

Exhaust last quarter was down 4.7% versus down 13.4% in '07, down 11% in '06. So, it's moderating, if you want to look at it that way, or you could look at it that we lost all there is to lose, and it's going to flatten out now.

All right. That's all I have. Thanks.

All right. Thanks, Scott. Stacey, is there another question?

Yes. Your next question's coming from Tony Cristello from BB&T Capital Markets. Please go ahead, sir.

Hey, good morning.

Hey, Tony.

Hi.

I guess I -- one of the things I wanted to ask about was when you look at the consumer coming into your shops right now, do you offer them sort of an up sell type of package, and are they still wanting to defer that type and still saying, "Hey, fix it, but fix it as at a low cost as you can"?

We have not seen that. Our premium oil changes continue to perform -- perform well. We frankly just saw less traffic, but if you look at the quarter, again, we ran one of the best comp increases last quarter than we ever have. So, the deferred maintenance that we saw negatively impact our business. Last year the first two quarters came back to us and we have not seen, to this point, people declining brake jobs or looking to not get their tires put on the vehicle.

What occurs down the road, I don't know, but certainly gas prices have not been an issue beyond anything that we've seen over the last six or seven months. May was our strongest month of the quarter at up over 8%, and gas prices peaked in May and have now kicked back a little bit.

So, whether at some point the consumer gets tapped out and some of the weakness we've seen in July continues, we don't see that being the case. We think some of it was -- as I've said often from an operating standpoint, a good store manager can focus on five to seven things at a time. We threw tires at them, alignments at them, brakes and really changed our focus in those categories where our guys did a great job of delivering, bringing in the higher ticket items and the high margin items. And maybe we need to get back to basics and remind them that, while we need to do all these other things to make sure we take care of the customer that driving that oil change traffic is key to our strategy and key to our business going forward.

When you -- and I guess you're putting up really solid comp growth relative to your peers in the industry, so you certainly are the outlier, and your execution is certainly working. And when you look at the ProCare as -- I'm not going to say disappointment, but as a situation. You're throwing a lot of things at your core business. Are you throwing the same amount at ProCare and, at the same time, that maybe they're still -- you're still trying to get that business on the right track, and is that causing some of the sort of softness or, I guess, below expectation sales at this point?

You're talking about at ProCare?

Yeah, at ProCare. Why I -- are those stores -- I mean, I would assume that you would admit that those stores right now may not be operating from a sales standpoint where you would think they were or would like them to be, is that correct?

No. I think that's a fair comment. I have a tendency to be impatient. We made some realignments in those stores this month because of that impatience. That being said, while I've said before, and I absolutely think a piece of it is operations not executing there as well as we would have expected.

I also take the lion's share of the blame because if we would have bought 72 stores which we bought out of bankruptcy that were running minus 30 and I would have come out and said, "Look, they're broke. They're going to be $0.10 dilute of year one. They're going to be break even year two, and, by the way, if we open 72 Greenfield stores to get the same growth, and they were going to lose $0.10 in year one and break even in year two" everyone would think that's unbelievably profitable growth from an organic standpoint. And, unfortunately, most of it comes down on me for raising the bar too high initially and expectations of how long it takes to fix a minus 30 out of bankruptcy, and that's on me.

Well -- yeah, no, and that's fair. I mean, is there anything different that you're trying to do in those stores now than what you're doing in your core business, not on the operational side, but sales programs or contests or anything to try and -- are you managing the two businesses the same now, or you still kind of have one isolated from the other?

Well, obviously, I'm tired of talking about ProCare, so we are putting emphasis on fixing it. That being said, we still have to run our core business, which is operating well, so it's not like we've taken all these resources away from the core business to work on ProCare and the core business is poor.

ProCare is a small piece of our business that's under performing. Just like at any point in time with 60 markets, we focus on markets that have opportunities for improvement. Just like with two new acquisitions and bringing 200 new employees on, we need to focus on those things. But we certainly have the bench and Joe Tomarchio and Chris and Craig with their teams. There are plenty of resources to do what we're doing and get better results out of ProCare without negatively impacting the rest of the business.

And when you're replacing 80% of your employees in the ProCare operation throughout the year it takes a little time, as did Speedy ten years ago when we brought -- when we bought that broke company.

I guess, shifting gears on you. I think ProCare is certainly coming along, and it's break even, and you're going to be turning a profit and so it's -- this is a tough environment as it is, but I think, importantly, it seems like you're still putting up good revenue, good comps, and, at the same time, you're getting good looks at opportunity and opportunities for making acquisitions.

And I'm assuming the prices you're paying are still pretty reasonable and you wouldn't be making them if you thought you weren't getting a fair price. Is that -- the environment going to continue like that do you think, and does that give you even an added benefit when your business is performing well and you're still able to make solid acquisitions to layer in?

Yes, I think -- usually we talk about our business model as being set up as a hedge, and when the industry is doing good we'll outperform, and our outperformance will be able to make bottom line numbers as we leverage our business, while usually we say in that environment it's more difficult to make acquisitions.

Over the last couple quarters, as the spread between us and the good guys has increased on a sales line and on a performance line, we will continue to get leverage off our business model, which I'm having trouble apologizing for a 15% pretax improvement this quarter in this environment.

That being said, when we get that leverage and our good competitors are flat and the weaker, smaller guys are running minus 3 to minus 5 you could argue we're going to get the best of both worlds by being able to continue to grow and leverage our business operations off our own fundamentals of running a plus 6 comp and then being able to buy these guys at very reasonable multiples, bring them into the fold and 12 months later, additionally, see them continue to grow our bottom line as well as our top line.

So, the two we got on currently are now in the fold and we'll continue to make improvements, sell through their higher priced inventory, get them the equipment they need to expand their services. But there's another two or three that are in the pipeline that we continue to work on, which is why we're fairly confident that, at least for this year, we will deliver the 15% to 20% bottom line that we've been talking about over -- again, we're at $1.85 to $1.90 this year versus $1.57 last year. Which I think the low end is 18%. And, in addition to that, accelerate the growth beyond where we would have expected it to be with our performance being where it is with additional acquisitions to plug in that will contribute to fiscal year '09's accelerated bottom line growth.

Great. Hey, thanks, Rob. Appreciate it.

Thanks, Tony.

Thank you. Your next question's coming from John Curty from Principal Investors. Please go ahead, sir.

Good morning. A point of clarification on your comparable store sales of 6.2, does that include the ProCare stores?

No. ProCare stores will not become comp included until fiscal year '09.

Okay. And then with your estimate of contribution from the ProCare stores of $0.05 for the remainder of the year, what kind of comps are you assuming on that?

We're assuming we will be able to achieve a 15% comp increase. So, last quarter we were up 10%. In Q4 of last year we were up 2%, and the starting point was minus 30, so we're -- we continue to move forward towards those numbers, and we would expect continued improvement in Q2 and further on down the year.

And were there any extraordinary or one-time lingering integration expenses that contributed to the break-even contribution for the quarter from ProCare?

No. Just underperforming.

So, just the lack of sales against your fixed-cost base?

Yes, we anticipated a 15% comp increase. We got a 10, so there was a fail shortfall and then, obviously, the relative expenses if you're planning your labor to take care of a higher level of sales.

All right. And then the two acquisitions that you announced today, that will be funded from borrowings on your credit agreement?

Correct.

Okay. All right. Thank you very much.

Thanks.

Thank you. Your next question's coming from Nancy Hatch from JP Morgan. Please go ahead.

Great. Thank you. Good morning.

Hi, Nancy.

Hi, how are you?

Ron, just a question on the full-year guidance. The range seems to imply a pretty big pipe up in the EPS growth rate in the back half. Is that all -- although you're facing tougher comparisons, is that all ProCare, or are there other drivers that we should be thinking about?

Well, there's ProCare help, and I wouldn't say our third quarter numbers were that stellar, but remember a piece of the back end will be helped by the property sales we talked about that hurt us in the first two quarters because we didn't have that million 3 to million 5 profits coming in the first two quarters. It's back loaded this year where we had 1.1 million of those kind of sales, which we used to offset our store closures, in the first half of last year.

Okay. That's helpful. And then on the -- specifically, on the gross margin you mentioned increase in bender rebates this quarter. Was that a timing shift or are you just, I think, getting more support now that your volume quantities are higher?

As we continue to do acquisitions, as we a have 6 months strength of plus 6% comps or better growing our store base, ProCare starting to pick up their numbers, we certainly feel we have great relationships with our vendors, and they're looking forward to our growth pattern. It has been very supportive in everything we want to try and do to drive sales.

Great. So, then say that that's an ongoing tail end for you?

We would hope so, but let's not forget the headwinds of these same guys who are very helpful to us also keep increasing their prices to us.

Got it. And then just in terms of thinking about the two new acquisitions, is there a short-term diluted impact that then is recaptured toward later in the year, or is the break even fairly steady across the 12 months?

We will have some pressure that will be included in Q2 for the integration costs of those two deals, incorporated, though, overcoming that is included in our break even in the first 12 months, which has typically been our target and a target we hit every time except for the ProCare deals. So these are, I believe, ninth and tenth acquisitions in the last five years. With the exception of ProCare, every one we've been able to get to break even in year one, and you can bet in setting that as our range on these two deals we were hoping to be conservative so we can get away from this continued discussion of the one deal that's taking a little bit longer.

Sure. And then any quantification of what those integration costs are in Q2?

No. But certainly we're happy to report on that at the next conference call, and they're incorporated in our range.

Okay, great. Thank you.

Thanks, Nancy.

Thank you. Your next question is coming from Mark Cooper from Wells Capital. Sir, please go ahead.

Thank you. I got cut off the call earlier. Did you mention what cash flow from operations in CapEx were this quarter?

Yes. Cash flow from operations was $15 million, and CapEx was approximately $3.5 million dollars, Mark.

Thank you.

You're welcome.

Thank you. Your next question is coming from John Lawrence from Keegan. Please go ahead, sir.

Good morning, Rob.

Good morning.

Hey, John.

Can you just comment a little bit, Rob, on obviously Black Gold's experience doing very well. Is there anything different from the structure, labor content, et cetera that you see with the success of that? Any changes you have to make in those stores other than just minor modifications for the volumes?

There are minor modifications and, again, the attractiveness of having the two-store format and the tire stores in those markets allow us -- remember, every one of our stores has a shop truck. Every one of our stores has the seven closest stores, whether a tire store or a service store, on their inventory screen to draw from. So, from an inventory's perspective we do increase inventory a little.

That being said, the space is made by pulling exhaust out of these locations, and the main emphasis is on ongoing training in those markets to make sure the service store managers can handle the influx of tire business and have a better understanding of what tires best suits the customers that now potentially come into Monro more as a destination for tires, as opposed to our normal mode of operation in the service stores which is just help the customer by having the tires to solve their problem when they're coming in for something else.

And just to follow. As far as the mix of tire sales how would you categorize that as far as mix of private -- I mean, primarily your brands, but what's going on on the private label side?

In the service stores and the Black Gold stores, for the most part, it's 100% branded. In the Mr. Tire stores we carry all brands from Goodyear to Michelin to Yokohama to Pirelli, and the private label piece of that business is not growing. Our focus is to work on selling the customer what they need and what they want and be able in the tire stores to solve all their needs. The private label piece on the service stores is a much smaller component of the overall mix.

Okay. Longer term, obviously, you want to establish the network, but longer term that gives you another lever to pull at some point?

Absolutely, as does looking for cost advantages in the parts we buy by doing more overseas, but we are not looking at those areas now. We think we want to command a premium for our service and the parts we sell, and that will be the next trench of what we try and do in improving gross margin.

Once we firmly establish our tire brand and our service brand as a place to go and Monro is the name to trust, we will look at other opportunities to prove -- improve margins through the distribution network. But we want to make sure that we'll let others make the mistake of importing now and making sure our quality stays where, we and our customers, want it to be.

Thanks for that, and just last question. Can you give us just one level of more detail on the two acquisitions history, how long you've been involved, and what sort of led to the final decision, and does it fit the norm of how these transactions usually take place over time? Thanks.

Yeah. I think, frankly, the Craven deal we've probably been in discussions on and off for three years. That's a deal in northern Virginia. The Valley Forge was a little bit quicker, probably more a year from soup to nuts.

The biggest issue with all of these folks are as things become more difficult, whether it's healthcare costs, whether it's worker's comp, whether it's a requirement of emissions equipment to do state inspections or some of the sensor reading computer equipment we need to do some of the diagnostic work that we can do that others can, their business has a tendency to trail off because they can't make the capital investment at their size that we can afford to make at a bigger size to move forward.

So, as those environments, including labor and cost of goods, get more challenging for them, at some point these guys continue to get older. They're 60, they're 65. They might not have kids involved in the business to hand the business over to, and they look for an exit strategy to get out, and that seems to be over our five years, the timing usually comes about at some point where they just say -- give up. And what typically takes so long is it's a lot like the real estate market where now you have tons of people wanting to sell, but they don't think the price of their house went down if they don't sell it for the lower price.

So, there's a lot of properties on the market. We seem to be the only guys acquiring them, and the competition for us is with the seller's price, and sometimes it is a painful, more drawn out, from a timeframe standpoint, than we would like for the seller to come to the realization that if he wants to sell it, he's selling it to us and our price is fair. But it takes him to get over the hurdle of the price he's established in his mind.

All right. Thanks.

Thanks.

Thank you. Your next question is coming from Cid Wilson from Kevin Dann & Partners. Please go ahead.

Hi Rob, how are you?

Good, Cid.

Good. Let's see. Some of my questions have been answered, but can you elaborate a little more. Earlier on the conference call you mentioned that I think you made some changes in the management with regards to ProCare, and I'm not sure if it's ProCare specifically or if it's just regional changes. If you can elaborate more on that and what led to that besides the obvious of the challenge of the ProCare.

Yeah. Well, what led to it is the obvious, and we made changes at the zone manager level and got more direct involvement of one of our divisional vice presidents and moved some of the ProCare markets to our best performing zone managers, giving them the challenge of working through some of the difficulties that we had and my lack of satisfaction with the progress, and really the whole team's lack of satisfaction with the progress that we've made to date.

Okay. And I know that when you -- when you acquired the ProCare stores you mentioned that you thought it was the equivalent of opening like a Greenville store because of the potential for the increase in comp, and maybe the conflict of the Valley Forge and Craven acquisitions, while it sounds like there's obviously creative opportunities, the potential comp growth is probably a little more consistent with a mature store. Is that reasonable to assume?

Yes. I think what we usually say on acquisitions after a year, we've blown through the inventory and put a lot of our programs in place, is that you should expect these acquisitions of long-standing companies that are running 3 to 5% comps in the future, but will pick up 600 to 800 basis points of operating margin with our economy's scale and some of the programs once we get our POS system established and fully integrate those locations, and that's where the earnings momentum comes from.

Okay. And then my last question is that based on your guidance for next quarter it's -- and I think you may have mentioned this a little bit about already that you expect a better increase on the back half. Is it reasonable to assume that that's going to come more in your fiscal fourth quarter versus the third quarter? Or how would you -- how would you -- what were your thinking processes in terms of the second half?

If you tell me when these two properties are going to close, if they're going to close in Q3 or Q4 I can answer that question, but that's a million 3 to a million 5 of profits. That's -- so, obviously, if they all occur in Q3, Q3 is going to be very strong. If they both occur in Q4, Q4 is going to be very strong.

I think the key is we think the core operations are going to consistently run, and our comp estimate for the full year is 3 to 5%, and at those numbers we see us hitting the $1.85 to $1.90 tightened reins that we gave today.

Okay. Thank you very much.

Thanks.

Thank you.

Thank you. Your next question's coming from Jack Ballew from Focus Research. Please go ahead.

Hi. Regarding the shift in your oil promotion, I guess it was done in June/July last year, and it's going to be August/September this year, is that right?

Really May, June and July last year, and it will be August and September this year. We ran it three months last year. We're running it two months this year. Now, obviously, if we have success with it you can always continue things like that.

What is the reason that you wanted to shift the dates?

Well, the reason at the time is that we wanted to make sure our emphasis and operations was the tire category, the alignment category and the brake category, which all performed very well with emphasis and the shift. And we think, potentially, we took too much focus off the oil changes, so it's getting back to basics now.

Okay, I didn't know if seasonally speaking, August or September might be a better timeframe than the other months. Is this a pattern that you probably will repeat in the future, in terms of this timeframe?

Rob Gross; Well, certainly I'm not pleased with the traffic, so maybe we need to adjust it again. The key is getting the stores -- the stores operate great as long as you don't overburden them with initiatives.

During the June category we rolled out a Brakes Forever program which warranties the brakes forever. We wanted to put a big push on that. Obviously with a plus 5 comp for the quarter that was very well received, it was very well emphasized, as were tires, as were alignments, maybe at the expense of what would be our normal emphasis on oil changes and traffic.

So, I would say we will be hard-pressed not to do something on the oil change front in the first quarter of next year. Not saying it was a mistake to abandon oil changes, but, in hindsight, I'm unbelievably thrilled with the job the guys did, and those major categories which drove our comps up 6%, by the way, but probably will sprinkle in something relating to driving oil change traffic because I think we probably deemphasized it too much.

Okay. Regarding the acquisitions, you said that they represented the 5% of last year's sales. So does that mean you did around $21 million in 19 stores?

I think we said in the press release on the acquisitions that they did $22 million last year.

Oh, $22, okay. So you're doing better than a $1 million a store.

Yes.

About $1.1 million or so.

Absolutely.

Okay. Okay. In terms of ProCare, in terms of the service ProCare stores are they something like $450,000 average a unit now?

Rob Gross; I think our projection for -- last year in -- what -- three -- in 11 months we did $35 million, something like that, Jack. So, that would make it $38 million, so that's $3 --

Let me ask the question differently. What is the annualized, seasonally adjusted average per store for a ProCare store that does not have tires?

We don't break down the difference between tire stores and service stores. I think we bought 72 service stores.

Okay.

So, the 72 ProCare stores did $35 million in 11 months last year. So, expect them to do close to -- what -- $43, $45 million this year. 72 stores, that's an average of -- what -- in total $600,000 per store. The tire stores will, obviously, be higher volume. The service stores will, obviously, be lower volume.

Right, right, right, right. I was just trying to get to what the service stores would be and how that would compare to a Monro store at the same level, in terms of profitability.

And we don't break out the breakup of 72 stores on a base of 700 stores between service and tire stores. We do say that we currently operate 43 service stores and 29 tire stores of the ProCare mix.

Okay. One last question regarding gross margins, and that is to what degree, Cathy, did the shift in leases and the vendor rebates help the gross margin?

Well, they were the primary drivers, as I said, of the gross margin increases.

You mean of the 1.7%, it was all of it? I mean, what percentage of the 1.7% was it?

We haven't broken that out, Jack, in the MB&A that we made, but at this point I'm not prepared to do that. But the significant reasons about -- the majority of it was between the two of them, and they were probably about equal, that shift in vendor rebates and the shift on the interest.

I mean, you can see interest is up about six tenths of a percent. Okay?

Right.

And vendor rebate's probably counted for about the same. So it's the bulk of the increase, as well as some leverage. As we said, when comps are high you've got the fixed component of occupancy cost in general in cost of sales, so you get some leverage from that. We held our own on labor rates. We held our own on material costs, without vendor rebates, because we had good, solid performance and high margin categories offsetting some of the price increases from our vendors.

ProCare negatively impacted gross margin by 0.6%. It negatively impacted SG&A by 0.5%. I think the important number that with all the shifts you just asked about, and including ProCare, pretax income, including all of that stuff was up 15%, apples to apples, to last year.

Right. Very good. Thank you.

Thanks.

Thank you. Your last question is a follow-up question coming from John Curty from Principal Investors. Sir, please go ahead.

Yes. I was wondering on your prior guidance of $1.85 to $1.95, did that include some contribution from these two acquisitions that you announced today closing a little bit sooner?

No. The $1.85 to $1.95 included a $0.10 contribution from ProCare this year, which we took down to a $0.05 contribution from ProCare this year having more visibility, obviously, being at the low end of our guidance for Q1. So, that movement was strictly due to a $0.05 underperformance from what we thought we would get on ProCare.

And, now, the way the volumes shake out in ProCare you anticipate that the $0.05 is going to be made in the next two quarters and then break even in the last quarter?

I think that's a fair way of looking at it, yeah.

Okay. Thank you very much.

Thanks.

Thank you. There appears to be no more further questions. At this time I will turn the floor over to Rob Gross for any closing remarks.

I just want to thank everybody for joining us on today's call. Appreciate the support, and both Cathy and I will be available for any questions you might have following the call. Talk to you soon. Bye.

Thank you. This concludes today's Monro Muffler Brake first quarter 2008 earnings conference call. You may now disconnect your lines and have a wonderful day.