Monro Inc (MNRO) 2008 Q2 法說會逐字稿

(OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the Company. I would like to introduce Ms. Lee Parish of FD.

Thank you. Good morning, everyone, and thank you for joining us on today'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 SEC. These risks and uncertainties include but are not necessarily limited to uncertainties affecting retail generally, such as consumer confidence and demand for auto repair, risks relating to leverage and debt service, including sensitivities and fluctuations in interest rates, dependence on and competition within the primary markets in which the Company's stores are located, and the need for and costs associated with store renovations and other capital expenditures.

The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date here of 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 this morning's call from management are Rob Gross, Chairman and CEO, and Kathy D'Amico, Chief Financial Officer. With these formalities out of the way I'd like to turn the call over to Rob Gross. Rob?

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

Our results for the quarter were lower than we had originally forecast, and we are not satisfied with our performance. However, while we had planned for stronger top and bottom-line growth we are encouraged that our comp store sales were above our revised estimate and our earnings per share was at the high end of our revised range. More specifically, we're pleased to have experienced positive momentum in our business in the latter part of September and are seeing the momentum continue as we enter the third quarter.

Net income for the second quarter increased 16.2% to $6.5 million and split adjusted earnings per share was $0.29 compared with $0.25 for the second quarter of last year. Quarterly comparable store sales grew 2%. We generated total sales increase of almost 5% to $112 million from the second quarter. This growth included an increase for new stores of $4.1 million, $3.5 million of which we generated from the 18 former Craven and Valley Forge stores we acquired in July. Also, while sales in the former Pro Care stores were up only 0.4% for the quarter these stores broke even as a group. This improvement in operating results on planned sales demonstrates the benefit from implementing our low-cost operating model. We continue to focus our efforts on improving sales at this group of stores from this unsatisfactory level.

Like many consumer-oriented businesses we face macro economic challenges during the quarter, particularly during July and in early September. We believe that weaker consumer confidence was the primary cause of softness in our sales of certain big-ticket items and declines in store traffic. We ended the quarter with low to mid single digit comparable store sales increases in three of our major product categories while exhaust continues to be a drag on our business at minus 17% for the quarter, though it is now only 7% of our overall sales mix. We had had a 5% increase in comparable store sales in tires, a 2% increase in brakes, and a 4% increase in maintenance services.

We were very pleased to have grown the high margin alignments category by 20% as a result of our increased operational focus in the category. Specifically, we've increased training and sales focus on this value-added service which improves the ride of our customers' vehicles and contributes to longer tire life and improved fuel efficiency. As such, we have seen almost equal increases in both the number of alignments we are performing as well as our average collection per service. As most of you know, oil changes are a key driver of traffic for us.

As we mentioned last quarter, earlier this year we increased the price of our oil changes by $2 to try and recover some of the past year's 13% increase in the cost of oil. We also shifted the timing of the sales contest that we ran for oil changes from the first quarter to the second quarter, running the contest this year from August to September while we usually run the contest from April to July. While traffic this quarter was down 5%, as compared to the prior year, largely as a result of overall weakness in consumer spending, we continued to collect nearly $2 more per oil change. Because of the importance of driving traffic, we have extended our oil change and traffic incentives into the third quarter.

As I mentioned at the start of the call we began to see some improvement in our sales trends in late September which is continuing as we enter the third quarter. Consumers can only postpone big ticket purchases for so long. We found that once consumers began to regain their confidence towards the end of September, their spending patterns normalized and they became more comfortable making investments in necessary repairs and replacements. In doing so they returned to us as their trusted service provider. We're pleased to see a continuation of this rebound to date in October with overall comparable store sales growing 2% through the end of the third week of the month.

I'd now like to update you on specific initiatives we are implementing to drive growth in our business and then move to a discussion of our stated acquisition strategy. As you may remember, we operate with a two-store format strategy. Tire stores and service stores. That enables us to provide our loyal customers with product and services across a wide breadth of categories. We find that the two-store format strategy has been very successful thus far in enabling us to increase sales of tires and related services in our service stores.

We have been able to better leverage this strategy over the past year through the implementation of our Black Gold tire sales program in which we focus on tire sales training and in-store execution as well as the expansion of tire merchandise assortment in our service stores and related advertising. We view the focus on sales and marketing of tires in our service -- to our service customers as low-hanging fruit, that not only drive sales and traffic but also strengthens our relationships with our service customers and provides them with added convenience.

We began the Black Gold initiative approximately one year ago this month with a limited test run of 30 targeted locations in upstate New York, mainly Rochester and Syracuse. As we were very pleased with the initial results of the Black Gold test program we decided to expand the program to a total of 60 stores throughout Western New York. This initiative has continued to show results over the past year. In the quarter just ended, tire units increased by 7% across our service stores but were double that increase in Black Gold stores. And the Black Gold stores as a group outperformed with comps up 4.5% for the quarter.

Given the success of this initiative in its first year, we now plan to double our Black Gold tire rollout program to include a total of 120 service format stores by the end of this fiscal year. Again, we'll focus on specific geographic areas, this time emphasizing our locations in Philadelphia, Baltimore, and Pittsburgh where we operate both tire and service stores, including the recently acquired Valley Forge tire business in Philadelphia. We expect that the expansion of our Black Gold program has the potential to significantly drive sales over the long term and to further strengthen our already strong market share position. The Pittsburgh and Philadelphia markets are particularly attractive given the high service store density we enjoy there. With 32 service stores in Pittsburgh area and 26 in Philadelphia. Because we already have tires in these markets in existing tire stores, the inventory and logistics investment required to roll out Black Gold in these markets is low, increasing our operating leverage.

Now I'd like to move to a short update on our stated acquisition strategy. During the first month of the second quarter we announced the acquisition of the Craven and Valley Forge tire chains. I'm pleased to say that the integration of these two small tire chains is progressing well and they are performing in line with our overall expectations. The 18 stores have significantly expanded our Mr. Tire footprint, have adapted well to our low-cost business model, and have enabled to us achieve operating synergies. We are encouraged by the success of these recent acquisitions and we'll continue to -- continue our strategy of expansion through reasonably priced acquisitions.

As we said before, challenging business conditions for our competition often creates good growth opportunities for us. We currently see several opportunities in the pipeline and expect to announce at least one more small acquisition by the end of the third quarter.

Separately, John Van Heel our Chief Administrative Officer, has negotiated a five year strategic partnership agreement with Auction Direct U.S.A. which currently operates used vehicle superstores in Rochester, New York, and Atlanta, Georgia, and is opening additional stores in Jacksonville, Florida, and Raleigh, North Carolina, over the next few months as part of its national expansion program. Under terms of this agreement we provide consulting services for Auction Direct as it expands its operation and opens additional locations and service centers as well as supplying parts and equipment to those stores.

Additionally, Monro locations in Rochester, New York also provide pre sale mechanical inspection services for all of the vehicles Auction Direct markets in these two Rochester stores and in November we'll begin similar work in Raleigh. Under this agreement, Monro receives an annual consulting fee of $250,000 and will generate approximately $1.5 million in annual revenue for the service center work in Rochester and Raleigh, making Auction Direct one of the Company's top five commercial accounts. Other strategic -- our strategic partnership with Auction Direct allows us to leverage our industry expertise, vendor relationships, and existing operations to provide critical services to Auction Direct to help them grow while driving incremental recurring revenue at Monro. Further, Auction Direct has issued warrants to Monro providing us with the potential for significant upside if Auction Direct's expansion plan is realized.

Turning to our outlook we anticipate moderate comparable store sales growth of 2 to 4% for the third quarter and earnings per diluted share to be in the range of $0.25 to $0.27. The earnings per share for the third quarter includes a $0.02 noncash charge related to the renewal of my employment agreement. For the full year, we expect total sales to range from 440 million to $445 million and are maintaining our projection of sales comps in the range of 2 to 4%. We expect estimated earnings per diluted share for the full year to range from $1.08 to $1.11, including the $0.03 charge for my options. Our estimates are based on 22.8 million shares outstanding.

Before I turn the call over to Cathy, I would just like to say that I am very pleased to have renewed my employment contract for another five years. I continue to have great confidence in the strength of our low-cost business model and our two-store format and continue to see significant growth potential for Monro Muffler Brake, both from within and through reasonably priced strategic acquisitions. I am very much looking forward to the next five years during which I expect to continue our strategy and to further strengthen the relationships we've established with our loyal customer base, our vendors, and our employees. I also want to take this opportunity to thank my team for their support and dedication. 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. Cat?

Thanks, Rob. Good morning, everyone. As Rob stated sales for the quarter increased 4.4%. Comparable store sales increased 2% and new stores which are stores which opened after March 25, 2006 added $4.1 million including $3.5 million from the acquired Craven and Valley Forge tire stores. There was a decrease in sales from closed stores partially offsetting this of $1.4 million. That compares to a comparable store sales increase of 1.1% in the second quarter of fiscal 2006. There were 76 selling days in both the September quarter of this year and last year.

Year to date comp store sales increased 4.1%. New stores added $9.4 million, including approximately 44.1 million from the acquired Pro Care stores, and $3.5 million from the acquired Valley Forge and Craven tire stores. There was a decrease in sales from closed stores of approximately $2.7 million. And the year to date six month comparable store sales increase of 4.1% compares to a decrease of 0.9% for the first six months of last year. At September 29, 2007, the company had 714 Company-operated stores as compared to 701 at September 2006.

During the quarter the Company added 20 locations including the acquired Craven and Valley Forge stores and closed two stores. Gross profit for the quarter ended September 2007 was $45.5 million, or 40.6% of sales as compared to $44.1 million or 41.1% of sales for the same quarter of last year. The decrease in gross profit for the quarter ended September 2007 as a percentage of sales is due to several factors. The Valley Forge and Craven stores acquired in July 2007 increased consolidated cost of sales and decreased gross profit by 0.2% of sales. In addition there was a shift in mix to the lower margin tire and maintenance service category away from higher margin categories as well as increased -- increases in oil costs.

Gross profit for the six months ended September 2007 was $92.2 million or 42% of sales compared to 41.4% of sales for the six months of last year. The increase in gross profits for the six months ended September 2007 as a percentage of sales is due to several factors. First, there were more vendor rebates received as a percentage of sales lowering material costs. In addition, distribution and occupancy costs decreased slightly as a percentage of sales in the six months ended September 2007 as -- compared to the prior year as the Company with improved sales was able to better leverage these largely fixed costs. Additionally, as we have increased sales in the former Pro Care stores and continue to right-size the staff, we have seen a decrease in labor costs in those stores as a percentage of sales as compared to the prior year.

Operating, selling, general, and administrative expenses for the quarter ended September 2007 increased by $1.6 million to $33.8 million for the -- from the same quarter of last year, and were 30.1% of sales as compared to 29.9% in the prior year quarter. The increase in SG&A expense as a percentage of sales is due primarily to decreased operating leverage. More specifically, there was an increase in stock option compensation expense as a percentage of sales related to the adoption of FAS 123R as well as an increase in health insurance expense as compared to the prior year.

These increases were partially offset by decreases in amortizing expense where we made a conscious decision during the quarter to reduce spending in light of soft sales and consumer belt tightening and shift the dollars to November this year, which is typically a strong month for us, especially in the tire category. For the six months ended September 2007 SG&A expenses increased by $4.7 million to $66.4 million as compared to the prior year, and we're 30.2% of sales compared to 30% for similar reasons.

Operating income for the quarter ended September 2007 of approximately $11.8 million decreased 1.8% as compared to operating income for the same quarter of last year and decreased as a percentage of sales from 11.2% to 10.5% for the same period. Net interest expense for the quarter ended September 2007 increased by approximately 0.4 million as compared to the same period in the prior year and increased from 0.8% to 1.1% as a percent of sales for the same period.

The weighted average debt outstanding for the quarter ended September 2000 increased by approximately $13.5 million from the prior year quarter primarily related to increased debt associated with the stock buyback as well as the purchase of Craven and Valley Forge tire stores offset by payments in the Company's revolving credit facility. In addition, the increase is due to the recording of capital leases assumed in connection with the Pro Care acquisition. These leases were recorded in the third quarter of last year in connection with our true-up of the purchase accounting for Pro Care. There was also a decrease of interest income of approximately $100,000 for the prior year. Ignoring this item, the weighted average interest rate decreased by approximately 0.2 from the prior year. While interest rates associated with capital leases on generally much higher than the Company's incremental borrowing rate under its revolving credit facility LIBOR rates also decreased as compared to the prior year. So it helped to offset -- or completely offset the rate increases from the capital leases.

Just as information, or as a reminder, our spread over LIBOR that we pay on a revolving credit facility is 50 basis points. It decreased from 75 basis points during this quarter based on our performance. Other expense for the quarter ended September 2007 decreased $2.1 million as compared to the prior year primarily related to the write-off of the Company's investment of Strauss last year of $2.7 million and also in that quarter we had had an offset of about $0.4 million from a reduction in closed store reserves. Other expense for the six months ended decreased $1.7 million as compared to the prior year for similar reasons.

The effective tax rate for the quarter ended September 2007 and 2006 was 37.7% and 37.5% respectively of pretax income. For the six months ended September 2007 and September 2006, the effective tax rates were 37.6% and 35.4% respectively, of pretax income. As you may recall, in last year's first six months, we recognized about $0.4 million of an income tax benefit relating to the favorable resolution of state income tax issues which lowered the rate, our effective tax rate last year. Net income for the quarter ended September 2007 of $6.5 million increased [16.2%] over net income from the prior year quarter and increased 11.6% for the six months ended September 2007.

Earnings per share at $0.29 on a diluted basis for the quarter ended September 2007 increased 16% as compared to the prior year earnings of $0.25 per share. For the six months ended September 2007 earnings per share of $0.64 increased 10.3% as compared to the prior year period.

Moving on to the balance sheet, our balance sheet remains very strong. The current ratio is 1.4 to 1. It's comparable to our year end and a year ago September. Inventory is up $4.2 million from March 2007, primarily due to the addition of the Valley Forge and Craven stores as well as a deliberate increase in tires in all of our stores. Inventory turns were flat as compared to year end and slightly improved from last year's September.

For the first six months of this fiscal year we generated approximately $28.5 million of cash from operations and received $1.4 million from the exercise of stock options. We spent $16.8 million to purchase Valley Forge and Craven this year, and $10.6 million to buy back our stock. Additionally, total CapEx so far this year is approximately $7.6 million. We borrowed approximately $7.5 million of debt and paid $2.3 million of dividends. Depreciation and amortization totaled approximately $9.8 million.

As a reminder our debt-to-capital ratio is 22%. We have $131 million of availability under our credit line and plenty of room under our debt covenants to make it easy for us to do the right acquisitions. This concludes my formal remarks on the financial statements, and with that I will turn the call over to the operator for questions. Operator.

(OPERATOR INSTRUCTIONS) Our first question is coming from Tony Cristello from BB&T Capital Markets.

Thanks. Good morning, Rob, good morning, Cath. A couple questions. Rob, maybe first, if you could comment, you talked about exhaust continuing to decline as a percent of mix. Can you talk a little bit about where you're seeing tires go as well as the brake categories as that mix evolves?

Well, certainly tires are up to approximately 25% of our sales mix. I would expect that and the maintenance service categories during good times to grow at high single digits. During tougher quarters, like this past one, to be low to mid single digits as it was with tires up 5% comp this quarter and maintenance services up 4% this quarter. Brakes, I think is going to flow with whatever we do on comps. When we had the seven-month period from December through June where the Company was running up 6 comps, brakes were up 5. In July, when we ran flat comps, brakes were flat. In August, when we ran plus 4 comps, brakes were up 5. In September when we ran a plus 1.5 comp with some pick-up at the end of the month, brakes were flat. So brakes, exhaust, some of the bigger categories are going to continue to flow with consumer confidence and how our overall comp number is running. Maintenance services and tires will continue to outperform and will become a bigger piece of our sales mix.

You noted that the alignment business, very strong. What percentage of your tire sales actually now result in an alignment sale, and is that an opportunity to continue to drive these type of growth numbers in that category?

It's about 25%. And obviously, as tires grow, we should expect to see alignments grow. That being said, remember, alignments I believe the last three-quarters including this one were up 33% up 26% up 20%, eventually we are going to be anniversarying against, all of our -- those kind of numbers and all the sales training and operational focus. So I would expect that that category, while it should have an opportunity to continue to grow as tire sales grow, will not be running, plus 20s forever.

Is it a situation where you could see customers get an alignment one out of every two times instead of one out every four times, or what do you think the opportunity is there? And is that simply educating your techs to up-sell?

Well, certainly that is where we have a tendency to run on the tire store side of the business. On on the service side of the business, remember, while we are improving our tires and we've seen great success with the Black Gold program, a lot of people come in to our service stores and are only buying one and two tires as opposed to really those transactions with people coming in to buy a set of four. So the upside certainly on the service side is not going to be 50% alignments to tire sales just by the nature of it being add-on and us incrementally trying to improve our tire business in the service stores, thinking that's the opportunity.

Okay. And when you look at the more tire sales logically you should see sort of a little bit of a downward pressure on the gross margin, and I guess we're a bit surprised that gross margin is hanging in there a little bit better than we would have thought, just with the emphasis tires. Are there some other things, I guess alignments that are driving this higher, as well as are you seeing better buying the more stores you open up, are you getting a little bit better purchasing power?

Well, we're getting some of that. Obviously brakes helps, when -- our plus in brakes, obviously that's a high-margin category. Alignments certainly help, being a very very high margin category, but you're also looking at, while it's only 7% of our overall business now, exhaust running down 17%, that's a very high margin category, and effectively, if you look at the weighted average, it's about a 1.2% comp drag on the quarter and high-margin business that's negatively impacting us with consumers absolutely delaying and deferring that category.

So we obviously are trying to run our business and distribution and occupancy are fixed components in our gross margins, and we're getting more leverage off our distribution network. That being said, with tires and maintenance services, including oil changes, continuing to grow and those costs going up every year, we do have headwinds in that category that we'll see what next year brings, but certainly I don't think it's going to go the other way.

Okay. One last question. With you bumping up against -- you've been buying a lot of stock back in. As you get to that 30 million level is there opportunity or should we be thinking, hey, if the stock price stays where it is the Board may say go ahead and let's up that amount?

We have a Board meeting at the end of November. I don't think we're up against it yet. I think we're about two-thirds through it. But, from a standpoint of -- we're buying stock at $23.25 or less, our debt to cap is 22%, we have tons of availability, we're on an acquisition strategy. Obviously at that level or below, the Board has decided that's a compelling value for the Company and its shareholders as compelling as anything we could buy on the outside, knowing our Company full well and knowing the growth prospects we have, I would expect that in November we would certainly have that discussion if the stock price continues to be where we think it's a compelling value.

Okay, thanks, guys.

Thank you.

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

Good morning.

Hey, Scott.

Could you talk about Pro Care a little? I think with the last conference call you gave pretty much a plan of action to try to stimulate the sales levels over there. Could you talk about any progress you've had or what you plan to do differently this quarter going forward?

Sure. I think the plan of action on the expense side worked unbelievably well being we had no sales momentum, cut back our expenses, and if you remember in the first quarter we ran a 10% comp and broke even. This quarter we had no sales momentum and broke even. So the expense side of the ledger, the inventory being in place, all of the components of our low-cost operating model are there. That being said, obviously, sales have been disappointing, and Cathy mentioned us saving advertising dollars this quarter to view November as an opportunity, being we're only up against a 0.8 comp last year, with November being a very good tire month, now for us, we save that money to really go after business throughout the Company but specifically in the Pro Care markets, to see what we can do to get sales up from what are obviously unsatisfactory levels in total but from the business model standpoint, I think the new folks have done a great job in that area, and now we've got to give them some help in driving the customers back into those stores.

In your forecast for the rest of the year, and maybe typically for the third quarter, are you assuming flat comps at Pro Care?

Similar comps at Pro Care to the rest of the chain. 2 to 4%. Obviously we ran flat comps in Q2. There's no reason to think outside of potentially what we're going do in November that we should see some -- any marked improvement, that quickly, especially with the consumer environment.

Okay. And could you talk a little bit more granularly about this arrangement with Auction Direct? Talk about what kind of -- are they a wholesale auction? Maybe just get into a little bit more of the nitty-gritty of how the revenue will be and the income will be derived.

Sure. They're a similar operation to CarMax with maybe a little bit more focus on the Internet and the ability to -- you can go in and tell them what vehicle you want and they will go out and buy it for you with the markup over their cost. They're high-volume, they're a start-up private company that continues to bring in capital and expand. Our income stream from them is a $250,000 annual consulting fee. I think it's paid quarterly or monthly. That is after all of our expenses, and then we do all the service work to get the cars ready for sale in their two Rochester locations, and we'll have a similar revenue stream coming from them out of the Raleigh, North Carolina location.

So the consulting fee is basically setting up the service operation which they will run. They will handle. Our expertise in what they need in inventory, what they need in equipment goes into that consulting fee, and on the service side, where they don't have service bays to perform the work, being the high-volume operation they are, we take on that work in markets like Raleigh, where we have numerous Monro stores already, as well as obviously Rochester where we have a strong presence and can do it more cost effectively than they could do it themselves.

Is there the opportunity at some point for you to handle all their service needs?

Well, not in like Jacksonville, Florida until we have a presence there, but they're looking at Jacksonville, Florida where they're opening locations. And Atlanta, Georgia, obviously we don't have any service operations, and we are not going to decide what markets we go into based on where they are best suited to open their superstores based on the demographics they're looking at.

Fair enough. And I know could I back into some of these numbers for the share repurchases, but how many shares did you buy back, Cathy, in the quarter, and how much do you have left on the plan dollar-wise?

We have about 8 million under plan. Dollar-wise, I don't have the number handy for the quarter. But I can get back to you.

I think in the press release overall we're at split adjusted 899 we said, 889. We can buy under the plan the volume limitations on a daily basis allows us to buy 32,000 shares a day.

We bought, pre split, 189,000 shares in the quarter. So that adds another 90. So 270 to that. About $6.5 million in Q2.

Okay. And last question, on CapEx, I know that this year you had planned on doing a major distribution facility expansion, and with the way the market is, are those plans still intact, or are you decided to hold off on that?

They will be in the budget for next year. We will not do that this year.

2009. Okay. So what is CapEx for this year expected to be for '08?

I think last we said, somewhere around 20 million. It might be slightly less. Remember, of that 20 million, 13 is maintenance CapEx, 7 million is greenfield stores, and potentially we might do a few less greenfield stores and allocate that money towards continuing acquisitions, which looks good for now.

All right, that's all I have. Thank you.

Thanks, Scott.

Our next question is coming from [DeForest Hennin] from [Web Holder and Company].

I have a couple questions about the Pro Care business. I think in the press release you commented that it was break even. How do we define break even?

That it didn't make money or it didn't lose money.

I mean, is it on a net income basis or is it on a cash flow basis?

No, it's fully loaded, including some supervision, field supervision. It's four-wall profit, allocated interest in there, advertising, everything, amortization of intangibles, the whole works.

We wouldn't play games with you.

I mean, I just wanted to know how you guys are looking at it.

On a cosh flow basis it actually did a lot better when you add some of the depreciation and amortization back.

Okay. And I was looking at your filings and just fundamentally looking at the acquired Pro Care locations. These guys have a smaller footprint than the Monro locations, and we talk about our low-cost model with kind of the larger Monro store holds inventory that feeds into some of the smaller stores. Is there an issue with the Pro Care footprint that is just fundamentally going to have that business run at a lower margin than what we can achieve at a Monro location?

Yes. It will always run at a slightly lower margin based on exactly the issue you're talking about. I think the offset to that, however, is the average Monro store, not counting the Pro Care stores, does about $525,000 a year in sales. The Pro Care stores before the bankruptcy, before the letter to all their customers, before the minus 35% comps were running at 600,000 to $625,000 in sales. The difference in the higher volume that these stores have proven they could do being poorly run is the opportunity for us to get them back to those levels which will make the 100 basis points difference in gross margin opportunity based on having to transfer more parts and carry less parts in the Pro Care stores moot.

All right. And can you help me understand the percentage of parts that are bought outside of the store for a typical Monro and then just compare that to a Pro Care?

Yes. The difference is we probably buy twice as many parts out at Pro Care than we do at Monro, based on the size. We don't break out the outside purchase percentage versus the regular, because obviously with our systems and the fact that we buy less parts out than anyone else, we just don't feel competitively there's any reason to give those numbers out.

What we do say is about 15% of the parts that we sell to the consumer comes from a Napa or a AutoZone or -- that's the percentage that we buy out of the total parts we sell.

Okay. I guess my last question is, have we ever made clear kind of a long-term margin goal for the Pro Care business, or do we have one in mind that we can talk about?

I think long term operating margin at Pro Care will run 150 to 200 basis points behind the average Monro store.

And have we said kind of where those are stacking up right now?

I think we said -- Cathy mentioned what the negative drag on margin was due to the Pro Care stores this quarter. And overall, I think it brought it down maybe 30 basis points on one side and another 20 on the other. About 50 basis points weighted average into the whole company.

All right. And kind of -- have we put a time line out there for when we think we can kind of hit that longer term run rate?

Yes, three months ago.

All right. Thank you. That was it.

Yes.

Our next question is coming from John Lawrence from Morgan Keegan. Please go ahead.

Hi, actually this is Rachel Charles speaking for John Lawrence. All my questions have been answered. Thank you.

Thanks, Rachel.

Thank you.

Our next question is coming from Graham Tanaka from Tanaka Corp.

Rob, if you could comment on the pricing on the acquisition marketplace, just wondering, sounds like the pipeline has opened up a bit. I'm just wondering if the pricing has improved?

The pricing really doesn't need to improve. It's a function of the seller's price becoming realistic that is really the parameter that drives these things. With us buying assets for $0.60 on the $1, replacement cost, $0.70 on the $1 sales, or 6 to 6.5 times EBITDA, those numbers pretty much in every case get us o a quick break even year one and create a lot of operating leverage once we put our low-cost model, our systems, our inventory in place, and that is a model that works pretty well. The Craven and Valley Forge deal that we got done in July, those were deals we've been working on for, six months on one, three years on the other, and it was a function of the seller finally saying "uncle" and agreeing with our valuation, and I think the future deals we do, we can get the deal done very attractively and it's proven as they've contributed to our numbers over the last six years of doing the deals with those parameters, especially with what appears to be maybe at least for the next year a slightly more favorable interest rate environment, so it's really more a function of the seller not having anywhere to go, seeing that they're getting a fair price, seeing what the real price is, and then agreeing to a price that we might have been willing to pay a year ago but they were unwilling to sell at that number.

So really, the slowing down economy and perhaps weaker -- or down pressure on pricing has resulted in more deals rather than lower priced deals.

Exactly correct. And hopefully we will see that play out over the next six months.

The other is gasoline prices have maybe gone moving higher on a near term based on oil prices. Just wondering what your studies have shown in terms of effect on comps from gas price?

Sure. I think the only significant move where gas had a negative impact on us was our Q1 of last year, and that hit $3 for the first time. It was all over the news. You couldn't turn on the TV and see a $3 gas pump, and I think consumer confidence waned and they started to defer and we had a bad quarter off of that. It wasn't so much the 50 or $100 more a month out of their wallet to buy gas. It was how the consumer was feeling. Why do I say that? In May of this year gas peaked at $3.20, and we had a plus 6 comp. So I think it was that hurdle rate and overcoming $3. The first time, it had a negative impact.

That being said, I think we can see a similar phenomena of consumer confidence waning with what's going on with the subprime mortgages, not so much that all our customers are losing their house, but again, any of us walks home now, whether you're on CNN or the local news or CNBC, and you walk in and you see either a foreclosure sign or a for sale sign, and people get -- consumer gets a little sketchy and might decide to wait on buying things, and I think that is the issue now that has the consumer flip-flopping, at least in our business, from a plus 6 comp in June to flat in July to plus 4 in August, to plus 1 in September. It's a lot more difficult to forecast what they are going to do in this environment, but gas going up or down $0.20 I think at this junction isn't an issue, if we hit something like $3.50 or $4, obviously, I think all bets are off.

I just was wondering then how you would reconcile the improvement in late September, early October, relative to all the negative consumer confidence type news in the marketplace.

It sounds ridiculous and I'm not hanging my hat on this but the day after the fed cut rates 50 basis points, our business got better. Continuing for the last four weeks. Now, obviously that isn't someone saying, oh, my credit card payment is less, oh, they're not going to foreclose on me less. Certainly the stock market did better, and a a lot of customers have 401(k)s, and maybe they felt better about that. Maybe they felt better directionally. It certainly wasn't a link to their wallet.

But that's, all I can tell you is what occurred based on that, and it's weather, it's not our brilliance or stupidity. We're just as dumb or as smart as we've always been. It's certainly -- let's call it at least a coincidence, and maybe something stronger that something like that that you would think is so innocuous might have driven our business, but we're not complaining right now. We're certainly not dancing in the streets at a plus 2 either, Graham.

Well, it it could have been worse, so I think it's at least directionally better. Thank you very much for your answer.

(OPERATOR INSTRUCTIONS) Our next question is coming from [Jack Bolo] from Focus Research.

I was wondering, your outlook for accelerated gains in the December quarter, th 2 to 4%, which compares against 2.9 of a year ago, while you're doing around 2% in October, is that primarily due to the November promotion or anything else?

No, that's due to November and the fact that, again, as our margins are hurt all year with our tire business and the lower margin business, November is a huge opportunity that we should be getting some benefit in comps from the price increases. We've taken to the consumer from the additional advertising spend that we've saved throughout the year to put into November. Both of those things should benefit us. Remember, we're up against a 0.8% comp increase, the lowest number we've seen in the quarter. Currently we're running a plus 2 against a 2.4 in October of last year, and our sales mix is all moving towards the tire category, alignments are going strong, so we would expect to see an opportunity in November to do a decent sales run rate where as December will obviously be a little bit tougher, but obviously not a very significant month for us, either, and including all the back and forth of our numbers, remember, for the first six months of the year, we're up plus 4. So we ran 2% last quarter. We're up 4% for the year. 2 to 4% with an opportunity in November. That's where it came from.

Okay. Finally, in terms of the negative impact for the macro factors affecting business, is that also affecting your new store performance? Are they opening up at lower volumes and growing slower, year number two?

No. Again, Jack, we always open, somewhere between 10 and 15 new stores a year.

Right.

Obviously with that low a store count against our base of 714 locations, we can be very particular in the sites we select, how we negotiate the leases, and if anything, the last two or three years, our new performance on stores just opened has improved because of the selectivity, regardless it's still obviously a minute piece of our business.

Okay. Regarding Pro Care, is Pro Care, in terms of expenses, and average sales per store similar or still higher than another Monro store? With the same level of volume.

As far as the store direct cost, they're comparable to a Monro store. Those would be things like utilities and waste management and those kinds of things because we control those here. Where there's some pressure is occupancy, because capital leases typically, especially in the earlier years, they refinanced all their properties through capital leases, so there's a little bit of pressure on occupancy costs as a percent of sales, and then also their margins. Although they've made significant improvement in reducing their labor costs as a percent of sales, that's improved just in the quarter alone about 2.5 percentage points. And as Rob said, there's a little bit of pressure on -- compared to a typical Monroe store, material costs, because they buy a little bit more out than a Monro store does until their sales get up where we think they will be and should be.

Okay. Just one last thing, Cathy. When you say comps are up 2% was that 2.0?

2.0, yes.

I was interesting to know if you were eliminating the 10ths.

No, believe me, I include those. Thank you very much.

Our final question is coming from [George Hashbarner] from Kensington. Please go ahead.

Hi, Rob. Has your -- have you changed your kind of overall long-term philosophy about the Company's ability to recapture market share in the Pro Care markets? It seems before that you had guided to plus 5 to plus 10 comps. What I thought I just heard you say is the comps for those stores are going to be the same as the rest of the store base.

I think temporarily, coming off a 0, I think it would be disingenuous to start projecting 10 or 15% comp up, but obviously that reduction in this quarter's expectations is reflected in our third quarter numbers and our full year numbers, and, I'm encouraged on the expense side, and we've got some work to do on the sales side, but inherently we know it's not a real-estate problem, and we just need to win back the customers and it's taking longer than we thought coming out of the bankruptcy and the letters that were sent out, and continues to underperform.

So would you then say that the average sales potential is still the same you just think it will take you longer to get there?

Yes.

With regard to the Auction Direct relationship, what is the duration of the consulting arrangement?

Five years.

So that's five-year deal.

Yes.

Okay.

Just like my contract.

And I thought I heard you say that there was going to be about $1.5 million of revenue associated with that. Is that--?

We did.

Will that ramp up in the first year, or does that kind of hit run rate immediately?

We, right now, we're saying it will be 1.5 years, 1.5 million this year. Hopefully it ramps up as they continue to grow, but I think 1.5 million is a good number.

When you say this year, do you just mean for the rest of your fiscal year?

For a 12-month period use that number.

For a 12-month period. Great. Thank you.

You're welcome.

This does conclude today's Monro Muffler Brake second quarter 2008 earnings conference call. You may now disconnect.

Bye, everybody.