Monro Inc (MNRO) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake third-quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (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 now like to introduce Ms. Leigh Parrish of FD. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. I would 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 in 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 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 this morning's call from management are Rob Gross, Chairman and CEO, and Cathy D'Amico, Chief Financial Officer. With these formalities out of the way, I would like to turn the call over to Rob Gross. Rob?

Thanks very much. Good morning, and thank you for joining us on today's call. We are pleased to be joining you today to discuss our third-quarter performance. I will also provide you with an update on our business as well as our outlook for the fourth quarter on the 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 our financial results.

Net income for the third quarter increased 9% to $5.3 million, and earnings per share was $0.25 compared with $0.21 for the third quarter of last year. Quarterly comparable store sales were 1.9%. Adjusting for one best-selling day in the third quarter of fiscal 2008, comparable store sales increased 3.2%.

We generated a total sales increase of $8.7 million, or approximately 8% to $112.5 million for the third quarter. This growth included an increase from new stores of $6.6 million, $5 million of which were generated from the 19 former Craven and Valley Forge stores we acquired in July. Due in part to some low-cost advertising programs, comparable store sales for our ProCare stores increased 4.9% for the reported period and 6.3% adjusted for days.

Although we still have not realized ProCare's full potential, we are finally seeing consistent progress on the sales line and feel we are warily positioned well-positioned for further improvement in fiscal '09, regardless of the environment, when ProCare sales will then be included in our comp store base.

Weak consumer confidence and difficult economic conditions continue. Our business is consumer-oriented, and influenced to a large extent by trends in the macroeconomy. However, our low-cost operating model and the somewhat nondiscretionary nature of certain products and services provides us with a level of defense against significant economic downturns.

To put it simply, in difficult times, our customers may temporarily delay major repairs and services, until their confidence returns or they can no longer delay. But they may also be more likely to repair their existing vehicles than to purchase new ones.

For the quarter, we had a negative 3% comp in brakes, a relatively high margin category which comprises almost 25% of our overall sales and is a deferrable purchase. Conversely, comparable store sales for our low margin tire category, also 25% of sales, increased approximately 9% for the quarter. And comps for our mid margin Maintenance Services, almost 30% of sales, were up approximately 4%. Alignments, which are a high margin category and closely tied to tire sales, increased by approximately 18% during the quarter as we continued our operational and sales focus in this category.

We have experienced strong, double-digit comparable store sales in alignments for all three quarters of fiscal 2008, and are pleased by the continued strength of this category.

As we have said previously, oil changes are a key traffic driver for our business, and our traffic was down approximately 3.5% for the quarter. While our customers were slightly extending the average time between oil changes, we were able to mitigate these trends by our price increases, and have been able to collect nearly $2.70 more per oil change, representing an increase of about 15%.

I would now like to provide you with an update on our acquisition strategy and then discuss specific initiatives we are implementing to drive growth in our business. First, we continue to benefit from our recent acquisitions and strategic partnerships. We are pleased with the integration of our Craven and Valley Forge tire chains that we acquired early in the second quarter. The total contribution of these two businesses is in line with expectations when we have been able to take costs out and realize synergies. Separately, we have expanded our strategic partnership with Auction Direct USA to include two additional locations, and we have received the expected levels of incremental revenue from the arrangement.

Second, as expected, we have entered into an agreement to purchase the Broad-Elm Group, which we expect to close later this month. This seven-store chain is located in Buffalo, New York and has approximately $4.5 million in sales. This is small acquisition is in line with our stated strategy of growth through value-priced acquisitions. We continue to seek additional acquisition opportunities, hopefully larger, as challenging business conditions lead to particularly difficult times for many of our targets.

I would now like to discuss our organic growth strategy and positioning for the fourth quarter and beginning of our next fiscal year. We continue to succeed in providing our customers with a broad range of products and services in both our tire and service stores.

The success of this two-store format strategy has been enhanced by our Black Gold program, in which we focus on increasing the sales of tires at our service stores through sales training and in-store execution initiatives. As we discussed during our last quarterly conference call, we are on track to double our Black Gold tire program to include 120 service format stores by the end of this fiscal year. The program, which we began in October 2006, was originally focused on locations primarily in the estate and western New York. Since we are encouraged by the program's success, we decided to expand the program to our Philadelphia, Pittsburgh and Baltimore locations. These geographies are particularly attractive, given our high service store density in these markets and the fact that, with the Valley Forge acquisition, we now have tire stores in all these markets, making distribution efficient.

We are excited about the expanded rollout of this program, and expect that it will enable us to strengthen our already strong market share position in these areas.

In addition to expanding our Black Gold program, we will support our marketing efforts by an expanded low-cost, high reward advertising program encompassing radio, print and Internet advertising. We tested several initiatives in November, and had success driving sales, especially in areas where we had high store density with these three new programs. We are now in the process of planning and budgeting our advertising program to position our business for a big push for these high-return programs starting in the spring, which is traditionally a high sales season.

Turning to our outlook, we are cautious about the remainder of fiscal 2008, given the challenging economy and weak consumer spending patterns. However, for the first three weeks of January, we had a total comparable store sales increase of approximately 2.5%. Given continued anticipated pressures on consumer spending and confidence, we forecast the comparable store sales increase in the fourth quarter in the range of 1 to 3%. Because of fourth quarter of 2008 has one less selling week, we expect reported comparable store sales to decrease 3 to 5% for the quarter. The loss of this week has an EPS impact of approximately $0.045.

For the full year, we expect total sales to range from $440 million to $442 million. Our expected EPS range is $1.03 to $1.05 as compared to $0.97 in fiscal 2007. The revised range for 2008 includes an approximate $0.03, primarily non-cash charge, related to the renewal of executive employment agreements. Additionally, in response to the difficult market conditions, and continued pressure from commodity costs, our team has conducted a review of our business for cost saving opportunities.

While we already run of lien operations and take advantage of savings opportunities regularly, we challenged owns our team to come up with new opportunities to be more efficient and eliminate costs, focusing on those costs that are [invisible] to our customers. As a result of this process, we have begun to implement initiatives that will result in at least $1 million in fiscal '09 cost savings, including improved controls and auditing of outside purchases and store payouts; in-house coordination of store repairs; merchandising and adjusted changes; reduction of staff through attrition; and elimination of awards banquets and holiday bonuses.

Further, in February 2008, we will increase our retail prices. We have consistently increased prices and in each of the past four years we have implemented across the board price increases in March and August of each year. We will continue that timing so that we benefit from higher sales prices for the full fiscal year 2009, particularly in light of continuing increases in tire, oil and other operating costs.

Before I turn the call over to Cathy D'Amico, I would like to say that we are very pleased that our senior management team will be together for another three years. I would like to extend my thanks to Cathy D'Amico, our EVP and CFO; John Van Heel, our EVP and Chief Administrative Officer; and Joseph Tomarchio, Jr., our Executive Vice President of Store Operations; and the respective teams for their outstanding work and commitment to our success. We look forward to continuing as the industry leader, low-cost operator, and being the trusted service provider to our loyal customer base.

I feel confident our Company is extremely well-positioned to continue to outperform aftermarket service providers in both strong and weak markets.

This completes my overview, and now, I would like to turn the call over to Cathy for a more detailed review of our financial results. Cath?

Thanks, Rob. Good morning, everyone. As Rob said, sales for the quarter increased 8.4%. Comparable store sales increased 1.9%. There were 76 selling days in the current quarter as compared to 77 days in the prior year quarter, so adjusting for days, comparable store sales increased 3.2%. New stores, which we define as stores opened after March 25, 2006, added $6.6 million, including $5 million from the acquired Craven and Valley Forge tire stores. ProCare stores, which are not included in the comp number, and are still considered new stores, increased 4.9% or 6.3% adjusted for days.

Partially offsetting this increase was a decrease in sales related to closed stores amounting to approximately $1 million. And that all compares to a comparable store sales increase of 2.9% in the third quarter of last year.

Bulk sales to a [barter] company of slower moving inventory were approximately $2.5 million as compared to $1.3 million in the prior year quarter. These are important transactions to the Company, as they help us to improved inventory turns and reduce carrying costs. Inventory turns have a more direct impact on costs of goods sold than they had in the past because of the large amount of vendor rebates that we received, which are recognized over turns and now under the new accounting rules.

Year-to-date sales increased 7.3%. Comp store sales increased 3.4% or 3.8% adjusted for days. New stores added $16 million, including $8.2 million from the Craven and Valley Forge tire stores. Partially offsetting this was a decrease in sales from closed stores of $3.7 million. There were 229 selling days for the first nine months of this year as compared to 230 in the prior-year period.

Year-to-date, ProCare stores increased 4.7% or 5.1% adjusted for days. And last year's comp store sales increase was 0.3 for the first nine months of the year.

In December 29, 2007, the Company had 713 Company-operated stores compared with 699 stores at December 23, 2006. During the current year quarter, the Company opened one store and closed two stores.

Gross profit for the quarter ended December 2007 was $42.4 million or 37.7% of sales as compared with 38.9% of sales for the prior year quarter. The decrease in gross profit for the quarter ended December 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. The acquired ProCare stores lowered gross profit by 0.7% as a percentage of sales in the current year quarter as opposed to 0.4% in the prior year quarter. This occurred primarily due to promotions, especially in tires, which were intended to drive sales and regain consumer confidence in those stores.

In addition, team wide, there was a shift in mix to the lower margin tire and maintenance service categories away from higher-margin categories, as Rob mentioned. There were cost increases as well in oil and tire. For tires we were able to effectively offset these increases with increases in selling prices, preserving our margin.

In addition, the buyer transaction in the current year quarter, which carries a lower profit margin and then typical service sales, had the effect of lowering gross profit by about 0.4% of sales this quarter.

Lastly, occupancy costs were up as compared to the prior year. You may recall that in the prior year quarter, the Company recorded a cumulative entry to true-up the accounting for the ProCare stores with regard to 45 capital leases. This had the effect of artificially lowering occupancy costs, which is a component of cost of sales on our P&L, by 0.8% of sales. On an apples-to-apples basis, occupancy costs decreased slightly this year as we gained leverage with positive comparable store sales.

Partially offsetting these increases in cost of sales was the decrease in labor costs as a percent of sales, primarily due to the significant improvement in productivity of the technicians at the ProCare stores. And that was achieved through improved sales and rightsizing of the crew sizes.

Gross profit for the nine months ended December 2007 was 40.5% of sales, flat with last year.

Moving to operating expenses, you may have noticed that we have changed the presentation of this section of our P&L in order to better conform with GAAP. We moved both amortization and gains and losses on property disposals from other income and expense up to income from operations. In the past, this section of the P&L only consisted of selling, general and administrative expenses. That line still exists, but we have added the other two lines to arrive at total operating expenses.

So beginning with SG&A, for the current-year quarter, it increased by $4 million to $34.3 million over the prior year and were 30.5% of sales as compared to 29.2% in the prior year quarter.

The largest drivers of the dollar increases this quarter were as follows. There was an approximate $900,000 pretax charge related to the award of vested options to Rob Gross in connection with the renewal of his contract. There was an increase in benefits expense of $1.2 million primarily related to increased health insurance expense and FICA, and a planned increase in advertising expense of about $500,000 to help drive sales, especially in the ProCare stores.

We believe that the increase in health insurance is somewhat of an aberration, due to an unusually low expense in the prior year quarter combined with a handful of very large claims in the current year.

With regard to the increase in SG&A expense as a percentage of sales as compared to last year, 0.8% of 1% relates to the stock option expense, and 0.8% relates to the increase in benefits expense.

For the nine months ended December 2007, SG&A expenses increased $8.7 million from the comparable period of the prior year, and were 30.3% of sales compared to 29.7%.

The other significant component of operating expenses is the gain on disposal of assets. For the quarter ended December 2007, this line increased $1.1 million from the prior year quarter and represented a gain of 0.9% of sales as compared to all loss of 0.1% of sales in the prior year quarter. This increase was due to the sale of certain properties in the current year quarter that have larger gains and property sold in the prior-year quarter.

Effectively, as we stated last quarter, there will be timing differences in property sales year to year.

The gain on disposal of assets for the nine months ended December 2007 decreased $700,000 to $900,000 from the nine months ended December 2006, and was 0.3% of sales as compared to 0.5% of sales in the prior year. This decrease was largely due to the relocation of a Mr. Tire store in the prior year. The owners of the property paid the Company $900,000 to relinquish a lease. The Company did not have a similar transaction in the current year.

In addition, in the prior year, there was a reduction in the closed [door] reserves of $400,000, which was partially offset by the sale this year of certain properties that have larger gains in properties sold last year. Just a lot of activity in outline that will vary from quarter to quarter.

Operating income for the quarter ended December 2007 increased 7.1% as compared to operating income from the prior-year quarter, and decreased as a percentage of sales from 9.3% to 8% for the same period, in large part due to the non-cash expense due to the CEO stock options as previously mentioned.

Operating income for the nine months ended December 2007 of approximately $34.4 million increased 0.7% as compared to operating income for the previous nine months, and decreased as a percentage of sales from 11% to 10.4% for the same period.

Net interest expense for the quarter ended December 2007 decreased by approximately $300,000 as compared to the same period in the prior year, and decreased from 1.8% to 1.3% as a percentage of sales for the same period. The weighted average debt outstanding for the current year quarter increased by approximately $22 million from the prior-year quarter, primarily related to the funding of the Valley Forge and Craven acquisitions, and the funding of the stock repurchase program.

Additionally, capital leases assumed in the ProCare acquisitions involving the 45 locations I previously mentioned were recorded in the third quarter of last year, in connection with our true-up of the purchase accounting for ProCare. So this resulted in an increase in the weighted average interest rate in the prior-year quarter, and artificially increased interest expense by $0.5 million that really belonged to previous quarters.

So the impact of this adjustment increased interest expense in the prior year quarter by 0.5% as a percent of sales. Ignoring this item, interest expense was flat as a percent of sales between the two periods. Also, ignoring this item, the weighted average interest rate decreased by approximately 130 basis points from the prior year. The decrease was due to a shift to a larger percentage of debt outstanding, so more revolver debt, less capital leases, at which the revolver debt is at a lower rate.

Other income for the quarter increased about $200,000 as compared to the same period in the prior year. For the nine months, other income increased $3.3 million as compared to the same period in the prior year, primarily related to the write-off of the Company's investment last year in Strauss of $2.8 million.

Also contributing to the increase was the Company's recognition this year of $300,000 of income in connection with our settlement of outstanding legal claims with Strauss.

The effective tax rate for this current year quarter was 30.1%, and for the prior year, 37.5%, of pretax income. For the nine months ended December 2007 and 2006, the effective tax rate with 35.8% and 36%, respectively, of pretax income. In the current year quarter, income taxed expense was reduced by $300,000 related to the resolution of state tax accounting matters, including state apportionment factors, and $200,000 related to various state on certain tax positions in accordance with same FIN 48.

Offsetting the prior year nine months tax provision of 36% was the recognition of a $400,000 tax benefit related to the -- primarily to the favorable resolution last year of some state income tax issues.

Our tax rate for the Q4 of last year aside from any FIN 48 adjustments should be approximately 37.6%.

Net income for the full year ended December 2007 of $5.3 million increased 9% over the prior-year quarter, and EPS increased 19% on a diluted basis. For the nine months ended, net income of $20 million increased 10.9%, and diluted earnings per share increased 12.7%.

Moving on to the balance sheet, our balance sheet still remains very strong. Our current rates show at 1.4 to 1 is comparable to year end, and slightly lower than a year ago December. Inventory is up $4.8 million from March 2007 and $328 million from December 2006, due primarily to the addition of the Valley Forge and Craven stores, the addition of product to the ProCare stores as we attempt to give them the right inventory based on their sales mix, and the expansion of the prior assortment offered in all service stores.

In addition, we continue efforts to improve stocking levels and mix of inventories to reduce outside purchases chainwide. However, [turns] were slightly improved from year end in spite of these inventory editions, and from last year December due to our focus on reducing store moving inventory such as exhaust, and our interest in improving inventory turns in order to be able to more quickly recognize the vendor rebates that we recorded under the new accounting rules.

For the first nine months of this fiscal year, we generated approximately $37 million of cash from operations. We received $1.5 million from the exercise of stock options and warrants. We spent about $16.8 million to acquire the Valley Forge and Craven stores this year, and we paid $3.7 million in dividends. We realized approximately $1 million from the sale of fixed assets, and we spent approximately $13 million for CapEx. Depreciation and amortization totaled $14.9 million.

Through December, we also spent $52 million to buy back our stock. Our net borrowings on our revolver were approximately $45 million for the first nine months of this fiscal year, with $58 million available before the $75 million accordion feature. Our debt to capital ratio was 35% at December 29, 2007, and we still have plenty of room under our covenant for further borrowings. We currently borrow at 50 basis points above LIBOR. This, combined with our strong balance sheet, well positions us to continue to either buy effectively priced acquisitions or our own stock, depending on market conditions.

That 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)

Tony Cristello. BB&T Capital Markets.

The sales trends, Rob -- I have got to say, it is not nearly as bad as what -- you know, you look in the papers, you look on the news, you look where oil prices are, it sounds like (technical difficulty)

Certainly I would agree with that. We continue to see deferrals of high margin, high-priced products every day where people are waiting the length of an oil change. I think what effectively is happening is it has now been occurring for so long that the deferrals that walk in the door and want to wait that could have been a sale today, but wait five months out are similar to the deferrals we had five months ago where they wanted to wait.

So effectively, there is more of a smoothing and a run rate that probably runs between 2, 2.5% comps as the people that deferred five months ago are coming in today to get the work done, and new people are still defined with the weak economic conditions in some of the consumer confidence issues today, making it more of a smoothing effect than a real bad quarter and a down quarter where then, we recapture a lot of that five or six months down the road.

Okay, I guess from that standpoint -- assuming gas prices stay where they are, there is no reason to believe that this type of operating environment is going to change at least for the foreseeable future?

Currently, we don't see it changing in Q4 of '08.

Okay. So given this environment, can you discuss then the deployment of capital in terms of acquisitions to drive growth or share repurchases to add immediate value, and how you think about each, given your own stock's current valuation?

Sure. Obviously, we think our own stock is cheap. Otherwise, we would not be spending $60 million to buy it back. The -- probably the one thing working significantly in our favor with some of the headwinds we have talked about is interest rates. And certainly, the last Fed cut and whatever comes in the future at borrowing at 50 basis points above LIBOR -- that makes both acquisitions cheaper, as well as certainly the accretive mix of stock repurchases.

At a $17 stock price, with current interest rates, we pick up about $0.055 for every $30 million purchased. And we are certainly buying what we view is an undervalued asset similar to an acquisition, but in buying ourselves, we know with the risks are, and we don't think there are very many of them with the business model and our performance in good or bad models -- good or bad markets.

That being said, our preference would be during these weak economic times where, certainly, a lot of the targets that we have, financial information, and get financial information every three months about their progress or lack of it, as they continue to run a wider spread between our performance being apples-to-apples plus three comp last quarter, and others of our competitors, as well as many of the folks we are looking at running minus 4 or minus 6 or minus 7 comps, I would much prefer to deploy the capital to grow the business where we can get a lot of operating leverage and continue to improve our business models, store density, and grow the business in a way that, frankly, I am surprised -- the going has been as low as it has been based on what I am looking at from the competition.

And so does this change any targets you may have had for sort of debt to cap ratios of what you have in the past to where you are comfortable with today?

Well, certainly, 35% is as high as we have been since I joined the Company, when it was 50 to 55%, right after the [Speedy] acquisitions. That being said, it is ironic for the last three years I have heard from a lot of folks how we are not deploying our assets, and 20% debt to cap is too low with our borrowing rate. Now our borrowing rate has gotten a lot cheaper, and I think we feel pretty fortunate to, in tough economic times, number one, to have a very strong balance sheet; number two, to have a lot of availability to go out and grow the business at a time when the others might not have the access to capital we have. And I don't think anyone in our Company, including the Board, thinks that 35% debt to capital was our free cash flow, is aggressive and would not be willing to go higher with the strength of our free cash flow and to grow the business.

Okay. And just maybe a couple of questions for Cathy. On the tax rate, it looked like you had some accruals. And I am just wondering, on a normalized tax rate going forward, does that adjust? It was obviously lower in this quarter.

And then, can you comment then -- are there -- days by quarter, there are obviously here in the fourth quarter here. In 2009 just from a modeling standpoint, are the quarters evenly spread, or should we be thinking about any quarters next year that might have some fluctuations with respective days?

The tax rate -- let me take that one first -- should be right around 37.6 before any adjustment -- FIN 48 year end adjustment. But that should be the normalized rate that you should use for Q4.

For '09, it should be a fairly comparable number of days each quarter. I am just trying to think how Christmas falls this coming year. But other than that, we shouldn't have any unusual [things and dates].

It should be the same.

Yes, normal for us is 306 selling days. And last year, due to the extra week, we had 312 selling days. So we lose six this year, which you have seen reflected in one day loss in December this year, and five days lost in the fourth quarter. I think next year, our normal man-made runs about 306 days; maybe it is 307.

But frankly, we have not done our budgeting for '09. I know you guys have this figured out till 2012. But I am just trying to figure out this quarter.

Scott Stember. Sidoti Company.

Rob, you talked about some of those things that you have done at ProCare to streamline them and to bring some synergies in-house. Will ProCare break even in the quarter, or did they actually contribute to the bottom line?

They lost a little money in the quarter due to the increased advertising expenditure in November which, as you know, when you spend it, you expense it. But a lot of the spend, they are forgetting about testing the new programs you will see come out in a larger number of stores in April that we are doing. Those expenditures go for more than just driving current sales in those locations.

And while we are pleased with the 6% comp this quarter, and January is running up 5, that spend was really geared towards re-establishing our relationship with the customers now that we are right sized from a staffing perspective, have good performers in there. And, as you know, as you are transitioning people out and trying to create an experience the customers, you don't want to spend money driving customers when you are not putting your best foot forward.

So we started that process in November. As November is really the last good month for us to get efficient advertising out there. We don't advertise anywhere near those levels in December, January, February or March, based on the seasonality of our business, but wanted to use that month, because we are confident in our execution of the ProCare stores as well as learning what we could do to start off the new year when our sales are a lot higher. And know that we have programs in the bag that can work to help drive sales in Q1 and Q2 of '09.

Okay, and just circling back to the price increase you talked about for February. Could you give the amount? And would that be across all -- across the board with ProCare and all the other acquired stores as well?

It would be across the board in all the acquired stores. We have already raised our oil change price, which was reflected in the $2.70 increase for oil change gotten. We will not be raising that again. As far as given the specifics parameters out of any price increases, I would much rather do it and then tell all my competitors, rather than tell them what I am doing with specific advertising programs or specific price increases.

Suffice to say what we have done over the last four years has been a 3% price increase for the most part that nets out to 2%, because we don't raise all categories. Twice a year, you can expect that at a minimum to occur in February of this year; so it's fully implemented for the '09 selling season.

Okay. And Cathy, I don't know if you gave this already, but the actual number of shares that were repurchased in 3Q?

We purchased 109 million shares at about $41 million for Q3. (multiple speakers) I'm sorry -- $41 million, yes. Rob was correcting me, but I had my numbers correct.

That's all I have for now.

(OPERATOR INSTRUCTIONS) Graham Tanaka. Tanaka Capital Management.

I just wanted to give a little more color on the traffic trends. What were the traffic in terms of people in the stores? And then how much was the average price per ticket (inaudible) per customer?

Yes, the traffic was down 3.5% in the quarter, and ticket average was up 10%.

And how much of that was price increases?

Probably about 4 to 5%, and then the rest, tying to tires being -- while lower margin, higher ticket. So gross margin dollars are a help, but our gross margin percentage is hurt.

Do you think that this is different from what the competitors are facing in terms of mix shift?

I think we certainly are doing a better job on tires, alignments, and Maintenance Services. I think our brakes running down 3 -- obviously, that is a high margin category -- that hurts us. But the only public information I have got on competitors is a minus 4, so if they are minus 4 and we are plus 3, apples-to-apples for the quarter, I would certainly bet that their traffic isn't up.

Part of it is explained by mix, and part of it is explained by price. I am just wondering if competition had as much pricing in there.

I would guess not. We usually try to be on the forefront of recouping cost increases and commodities prices and feel from an executional standpoint, our customers do come back to us. They trust us. Our repeat business is very high, and they get their oil changed with us anywhere from two to four times a year, and they are not worried about the last $20. Again, as we have always said, 45% of the customers in this space just don't want to get ripped off. 40% just want a quality job done right, and 15% are price shoppers, but if you can handle the 85% that are not concerned and just want you to take care of them well, and we spent years building up trust on the benefits that they are looking for, we feel that obviously contributes to us (inaudible) higher price.

And our whole marketing strategy is outside of oil changes, everything we sell is hat or above the competition. And we think that is a good position for us.

The other is looking out ahead for the next 12 months -- either this calendar year or March '09 year -- what do you think the cost trends are looking like? Are you getting some [analysis]. for example, tires and that kind of thing? Or is that going to have to develop over the year?

Well, we certainly will know if it develops. But I would not be betting that costs are going to go down and any of the headwinds that we are currently facing, I would expect to continue to face. The good news is certainly interest costs are dropping dramatically. That is helpful, but currently, about 40% of our costs of goods over the last four years are up close to 50%. I don't think we are going to get any of that back.

So if anything, if I were budgeting next year, I would probably look for 5% price increases in both oil and tires above the current exorbitant levels.

We may get some benefit on that. The other thing is acquisition accretions in the March '09 year from these two acquisitions of ProCare -- ProCare sounds like it's going to be kicking in really effectively in the next fiscal year. And I am wondering about these two acquisitions -- what does it add up to in then maybe cents per share?

Well, the two small acquisitions -- not counting the 1 we just completed, the Craven and Valley Forge deals, we said would be breakeven the first 12 months. We are certainly on track to do that, maybe a touch better, so that [weaves in] for next year, and certainly, if we can get to breakeven this year, we would hope to get $0.02 to $0.03 out of those next year. And ProCare since I've been so right for so long on that one, it will be accretive. Let me tell you a little bit more, and I will certainly give you a number to include in your own estimates. But I am really looking forward to getting that one right.

And the current one -- is that still on (inaudible) in total higher revenues, I guess?

Well, the current one -- the seven-store deal is $4.5 million of sales. It is right in our market. Certainly, it is not going to be meaningful the first 12 months, and we obviously would like to build on that success. And again, with a lot of these deals, whether it is Valley Forge or Broad-Elm, what doesn't get laid out in the specific accretiveness of these deals is it allows us to be more efficient and open more Black Gold markets, converting a lot of our service stores to more tires, which we have proven the Black Gold program drives incremental sales. While a lot of the increases obviously are in tires, we are not giving up areas of sale in other areas. It is plus comps.

So the fact we have a Valley Forge now that allows us to open Philadelphia; the fact that we'd bought ProCare, which gave us tire stores in Pittsburgh; Mr. Tire in Baltimore; and now the Broad-Elm group in Buffalo allows the Black Gold program to be much more efficient, generate earnings would show up on the core Monro stores, but also an added economic benefit that we get from the two-brand strategy and the Black Gold program, which are specifically derived from these tuck-in tire store acquisitions.

And my last question is on the tax rate. Cathy was talking about it being over 38%. Is it less for this fiscal year ending March, which implied that the fourth quarter would be a bit higher than the -- ?

No, the fourth quarter will be about 37.6%.

37.6. And so the tax rate for the year would be about what?

Probably -- because we ran the first nine months, we were at 35%. So (multiple speakers) 36 something? For the year?

I thought I heard 38%. Maybe that was -- .

No, I think maybe -- did you hear me say FIN 48 adjustments, maybe? That is what I -- I said the run rate for Q4 should be 37.6 outside of the normal, now new accounting FIN 48 adjustments where you have to -- used to be the concept of cash cushion. That doesn't exist anymore, and that you have to consistently adjust for any fluctuations in state rates and things like that, whereas in the past, if they went up a little or down a little, we just left it alone. (multiple speakers)

That's great. Okay.

John Lawrence, Morgan Keegan.

Rob, since you brought it up on the success of Black Gold, he give us any more details there? You went through it pretty quickly. But if you segment out those stores that are doing Black Gold can you give us topline, bottom line -- what does it do for the profitability, even though the mix of tires, at the end of the day -- what of those stores get a better return?

On average, store contribution is about 100 basis points better; margin is certainly lower because you are putting in a mix of tire units. On the comp stores sales basis, again, while we talk about the margin being lower comp store sales in the Black Gold stores were running up 8.6% versus the total service stores running at 1.6%.

Tire units in the Black Gold stores are up 35%; total service is 9%. Tire dollars are up 56% versus 13% in the service stores. How is that?

So once again, you're going to roll it out, and the key continues to be as the deferrals come back on the other part of the business, you are ramping up the leverage in keeping comps, and go from there?

We will hopefully improve the comps -- certainly keep the comps on the tire stores that are growing, and continue to focus on the oil changes, and also brakes. I mean, while [+3 comps] comparatively looks pretty good if we could adjust that to breakeven and get back to some of the numbers we ran earlier in the year before some of these deferrals, we would be having a much happier conference call.

I understand. Your commitment to the sort of cost savings -- you outlined the items; that is $0.03 to $0.05 at the end of the day?

It is $1 million, so that I guess calculates to $0.03 to $0.05 for the new share count.

And when does that start? Is that for '09 or immediately?

That's for '09. Certainly, you do things over this last quarter, this year's banquet is canceled; next year's Christmas bonuses -- which was a grandfather program anyway -- has been canceled. I mean, good companies move before they have to. And certainly, there are not a ton of excesses in our Company.

But culturally, I think everyone pulls together, and no one is confident of what the consumer is going to be doing over the next year, and the best news for us would be, we put these things in place. And business comes back quicker than any of us thought, and that's a good thing, and we revisit them a year out.

And last question -- and not to belabor that point, but to get into the detail of, one, on the outside purchases, what percent --? I mean, is it 2 to 3% that you think you can save by not having to go outside if you buckle down on that? Is that what it is?

No, it wouldn't be that high. If it was 2 or 3%, that is incorporated in the $1 million number. We think we are leaving a lot on the table. And I would much rather, outside of trying to put a number on it before we have gotten 0 out of it, certainly as we report the numbers next year, we can certainly break that out. And we will know exactly where that improvement falls; how it has impacted gross margin, and where we go from there, John.

Good luck.

Cid Wilson. Kevin Dann and Partners.

Most of my questions have been answered, but just one question for you, Cathy. Did you give depreciation and amortization number for the third quarter?

Yes, it was $14.9 million for -- oh, for the nine months. For the quarter, I didn't give it, but I can call you that number. It is about one-third of that. About $5 million.

(OPERATOR INSTRUCTIONS) George [Hansberger] with [Quintium] Capital.

Rob, you have said in previous calls and presentations that as the environment gets more difficult with regard to comps in the economy, that the thought process was it would be easier to make acquisitions. Could you give us a little compare and contrast of the pipeline now versus maybe six or nine months ago, just in terms of either numbers, of companies that you're engaged with or maybe negotiating actively with?

Well, one of them, obviously is we are engaged to be closed in a week or so. The other ones are, there are probably two additional ones that have come up over the last three months that we started talks with -- not close to anything. And again, our normal way that we convey that to shareholders is right now, the pipelines fall -- call it anywhere from six to eight people that we know are willing to sell; however, we have not gotten to a price agreement.

Typically, when we get to a price agreement, we would talk on the various conference calls -- and I am not talking about any additional ones on this conference call, that we have agreed to price -- we have got to do due diligence and see what occurs at that juncture. So the fact that we might have six or eight people that we know are selling that are willing sellers, doesn't mean that they are willing sellers at a price that we are willing to pay. And while our costs of capital continues to get cheaper, their operating results continue to get worse. So whether we ever get to an agreement on price with them, I don't know.

What I can tell you is based on the numbers that I see, if I were them, I would have already come to an agreement on price. Unfortunately, I am not dealing with myself. Because I am very reasonable.

Well, fair enough. What I am just trying to get at maybe is the premise that when things get more difficult, that either more acquisitions or the likelihood that acquisitions will closed getting greater -- ?

Yes.

Do you think that is shaping up the way that you have described it?

It has. But you know, frankly, I am disappointed. I would have bet that last year, we would have done more than we did. I mean, we did get three deals done. There were on the smaller side. Great deals make a lot of sense for us, but there are other, larger players that make little or no money that the numbers continue to get worse. That would be fabulous acquisitions for us that they have not come to the table yet, where I would have come to the table a year ago. So it is hard to predict their rationale.

But the premise which should have occurred this past year still holds through for this next year, which is -- if it is a difficult environment for us, and we are the low cost operator and buying better than them and have more store density and more economies of scale, the longer this lasts, and the uglier it gets, the uglier it is for them. They will continue to deteriorate, and the only thing I can say is they have a willingness to absorb more pain that I would if I were the owner of the businesses, as I am looking at the numbers.

Thank you. You have no further questions. I would like to turn it back over to management for closing remarks.

Great. Thanks, Nicole. I just want to thank everyone for their time and their continued support of Monro and the management team; and we are working very diligently to improve our operating performance and certainly improve our shareholders' return on investment, which our whole management team is very interested in that on a personal level. So we are all working in this together and appreciate your support going forward. Thank you.

Thank you, ladies and gentlemen. That does conclude our conference call for today. Thank you for using AT&T, and you may now disconnect.