Monro Inc (MNRO) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake First Quarter 2009 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). And 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 Miss Caren Barbara of FD. Please go ahead, ma'am.

Thank you. Hello, everyone and thank you for joining us on this morning's call. I would just like to remind you that one this morning's call, management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor provisions at 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 now more fully described in the press release and the Company's filings with the Securities and Exchange Commission.

These risks and uncertainties include, but are not necessarily limited to; uncertainties affecting retail generally, such as consumer confidence and demand for auto repair, risks relating to leverage and debt service, including sensitivity to fluctuations and interest rates, dependence upon competition within the primary markets in which the Company's stores are located, and the need for the cost associated with store renovations and other capital expenditures.

The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the 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 event or circumstances described in such statements are material.

Joining us for this morning's call from management are Rob Gross, Chairman and Chief Executive Officer, 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, you may begin.

Thanks, Caren. Good morning, and thank you for joining us on today's call. We are pleased that you are with us to discuss our first quarter 2009 performance. I'll also provide you with an update on our business as well as our outlook for the second quarter in full year 2009. I'll then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results.

We are pleased with our performance for the first quarter and are encouraged by the positive momentum that our business has sustained over the past five months, despite a very challenging environment. As you know, consumer confidence is at historically low levels, due to many factors including high fuel costs. As a result, consumers continue to defer spending when possible and are driving 700 to 800 fewer miles per year on average. That said, our business has been only minimally impacted, if at all, by the decrease in miles driven, because the decrease is not enough to significantly reduce the need for repairs or oil changes.

You may note that oil changes should occur every 3,500 to 4,000 miles. However, tighter spending by consumers puts pressure on our store traffic, and higher ticket repairs and has also resulted in choppy sales trends in prior periods. At the same time, as sales of new cars decrease, customers must maintain or make larger repairs on their existing vehicles. In addition, our business has been subject to significantly higher material costs with oil and tire costs increasing several times already this calendar year and showing no signs of stopping.

Given these dynamics, we adopted a strategy of driving store traffic through increased advertised spending on proven programs and are continuing to implement price increases more frequently and significantly. These strategies have proven effective in our first quarter due to continued solid execution, our ability to leverage our low-cost business model, and, of course, our strong commitment to quality service and reputation as a trusted service provider.

Now, I'd like to review the highlights from the first quarter. Quarterly comparable store sales grew 5.6%, on top of a 6.2% increase for the first quarter of fiscal 2008, and exceeding our originally estimated range of 3% to 5%. We generated total sales increase of 11.8%, achieving $120.4 million in sales compared to $107.6 million in sales for the prior year first quarter.

Total sales included an increase from new stores of $7.4 million, $6.6 million of which was generated from the 19 former Craven and Valley Forge stores and seven former Broad Elm group stores which were acquired in July of '07 and January of '08 respectively. Comparable store sales for our ProCare stores increased 8.2% for the first quarter. As you may recall, the first quarter marks the first time that ProCare stores were included in the total comparable stores sales space.

Net income for the first quarter was $7.8 million and earnings per share were $0.39 compared to $0.36 for the first quarter of last year. During the quarter, store traffic increased 2.5%. Oil changes remained a key driver for our business. At the same time, we've experienced significant increases in oil costs over the past several quarters.

While we are concerned about the potential impact of our higher oil change prices on our store traffic, we have been aggressive in offsetting these higher costs by raising our price and collecting an additional $2 per oil change. Fortunately, we've been able to make these necessary price adjustments while maintaining strong relationships with our valued customers. In fact, we achieved comparable increases in the number of oil changes in both our tire and service stores, which were up 3.7% and 4.4% respectively compared to the first quarter of 2008.

Contributing to this success was our Oil Change and More program, which includes a free tire rotation and pressure check, as well as a free brake inspection with a purchase of an oil change. This program draws new and existing customers to our locations and encourages them to come back to us when they are in need of bigger ticket repairs.

In addition to raising our prices for oil changes, we're also successful in passing along commodity and manufacturer price increases in our tire category. Comparable store sales for tires increased approximately 9% for the quarter, which was driven partially by a 7% price increase in June on top of a 6% increase implemented earlier this calendar year. While these increases were quite significant, our customers generally understand that higher prices are largely a result of the macro-environment and trust us to service their vehicles as efficiently and economically as possible.

First quarter comparable sales for brakes increased approximately 5%, which also helped drive the increase in our average ticket. Sales for the brake category benefited from our Brakes Forever! sales program in which we guarantee brake pads for the life of the car and replace pads at only the cost of labor.

With regard to other product categories, comparable store sales for alignments, which are closely associated with tire sales, and our high margin, increased 12%. Comparable store sales for our mid-margin maintenance service category, increased approximately 6%, while exhaust was down 4% for the quarter.

With that, I'll now move to a discussion of our growth strategy. I'll start with an update on our ProCare stores, which as I mentioned, were added to our total comparable store sales base this quarter. ProCare's first quarter sales were $10.5 million and comparable store sales were up 8.2%. We are encouraged by ProCare's performance for the quarter and the positive trends experienced in the business. ProCare is operating profitably with operating income of $1 million and pre-tax income up $600,000. Additionally, with three days left in July, comp sales in the ProCare stores are up approximately 11%.

We are pleased with the contributions of Craven and Valley Forge Tire Stores that we acquired in July of 2007. These stores were slightly profitable in the first 12 months of ownership, versus a forecast of break-even. Further, we made progress in integrating our Broad Elm tire chain acquisition and held it's grand reopening as part of the Mr. Tire chain in June. We're pleased with our gain in market share in the Buffalo area as a result of this acquisition and are satisfied with the progress of its integration.

As we've stated before, we are constantly assessing potential acquisitions and look forward to capitalizing on additional, fairly priced opportunities that may come about in this difficult environment. We are fortunate to have the financial flexibility and liquidity to take advantage of these growth opportunities as they arise.

Regarding these opportunities, all I can say is we are getting closer. We not only seek to expand through reasonably priced acquisitions, but to grow organically as well. To that end, we continue to be pleased with the results of our Black Gold program in which we aim to expand our market share and increase the sales of tires and services in our service stores.

During the first quarter, our 145 Black Gold stores continue to out-perform non-Black Gold service stores in tire unit sales, plus 20 versus plus 5 as well as in comparable store sales, plus 7 versus plus 5. We are on track with our stated goal of adding 25 to 50 stores to our Black Gold program by the end of the fiscal year 2009, and we'll focus our expansion in the Cleveland and Columbus areas where we have existing tire stores.

Another important driver of our organic growth during the first quarter was the expansion of our highly effective, low-cost advertising campaign, designed to bolster awareness of our locations and to drive new and repeat customer traffic. The additions to our advertising program, which we tested in fall, are geared largely towards internet, direct-mail advertising campaigns, as well as select radio advertising. We find that radio ads are especially effective as many people listen over the radio while they are driving their cars when our advertisements are most likely to resonate with them.

Our incremental ad spend for the quarter for these programs was $500,000, which we more than recouped as a result of increased traffic and sales. We are thrilled with the results of these programs and the continued momentum they are generating. We will continue to run these programs in Q2 while carefully measuring their effectiveness in returns.

I'd now like to briefly discuss our outlook for the second quarter and fiscal year 2009. As I mentioned at the start of the call, we are encouraged by our continued solid performance and positive trends over the past five months, no longer an aberration in my view. Interestingly, I went back to the '90 to 1992 period and for those three years, Monro's comp store increases were better than any three-year period since.

We have a very good start to fiscal 2009 and have achieved comparable store sales growth for July of 8% as of this weekend. While we are certainly cognizant of the macro-environment, we are cautiously optimistic about our outlook for the second quarter and the remainder of the year as we expect to continue to produce strong results. As detailed in our press release this morning, we expect second quarter comparable store sales growth in the range of 3% to 5%. We expect second quarter EPS to range between $0.36 and $0.38, which compares to $0.29 to the second quarter of 2008. Additionally, every 1% comp above 5% is worth another $0.015 in EPS for the quarter.

For the full year, we now expect comparable store sales growth in the range of 3% to 4%. This compares with our originally anticipated range of 2% to 4%. We expect total fiscal 2009 sales in the range of $455 million to $465 million and now expect fiscal year EPS in the range of $1.10 to $1.18 versus our previous estimate of $1.08 to $1.18. As we mentioned during our fourth quarter call, although we are already low-cost operators, our goal is to reduce expenses by approximately $1 million in fiscal year 2009 in order to further increase our operating efficiency.

As anticipated, we cut costs by approximately $250,000 in the first quarter, which we achieved largely through reductions in back-office expenses. We expect the remainder of the $1 million in cost reduction to be realized in roughly equal installments over the remainder of the year.

Before I turn the call over to Cathy, I want to reiterate that we are encouraged by our results for the quarter, and for the past several months. While this time has been difficult for some of the players in our industry, we are satisfied that our dedication to quality service and our trusted reputation enabled us to capture market share and grow despite the economic environment. We will continue our focus on industry-leading execution in this dynamic environment and will continue to actively manage our business in order to take advantage of opportunities and react to increasing costs in order to keep up this positive momentum.

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

Thanks, Rob. Good morning, everyone. Sales for the quarter increased 11.8%, comparable store sales increased 5.6%, and new stores, which we define as stores that opened after March 31, 2007, added $7.4 million, including $6.6 million from the former Craven, Valley Forge and Broad Elm stores. As Rob stated, the ProCare stores are now included in the comparable store sales numbers. And that compares to a comparable store sales increase of 6.2% in the first quarter of last year.

There were 77 selling days in the first quarter of fiscal 2008 and in fiscal 2009. At June 28, 2008, the Company had 713 company-operated stores as compared with 696 stores at June 30, 2007. During the quarter end of June 2008, the Company closed 7 stores.

Just a brief overview of the ProCare stores, as you know, we acquired them in April 2006 out of bankruptcy. These stores have suffered significant declines in recent years and have underperformed. However, sales have improved and continue to improve since the acquisition and efforts continue which focus on increasing sales volumes, reducing costs and improving margins. Comparable store sales of the ProCare stores increased 8.2% in the first quarter of 2009.

In the first quarter of 2009, also gross profit improved by 100 basis points and operating income improved by $400,000 to $1 million, as compared to the same period in the prior year. Additionally, pre-tax income increased by $600,000 to a pre-tax profit of $0.5 million as compared to a pre-tax loss last year of $100,000. We believe we are finally turning the corner on the ProCare stores.

Gross profit for the quarter ended June 2008 with $50.9 million, or 42.3% of sales as compared to $46.7 million or 43.4% of sales for the prior year quarter. The decrease in gross profit for the quarter ended June 2008, as a percentage of sales is due to several factors; the Valley Forge, Craven and Broad Elm stores acquired in fiscal 2008 increased consolidated material costs and decreased gross profit by 0.03% of sales due to their heavier tire mix. In addition, chain-wide there was a shift in mix to the lower-margin tire and maintenance service category away from higher-margin categories.

There were cost increases as well in oil and tires. For oil, the Company was able to effectively offset these increases with increases in selling prices, thereby preserving margins. Additionally, selling price increases across the board helped to partially offset the margin depression caused by mixed changes in cost increases. Overall, about one-third of the increase in material costs was due to mixed changes and two-thirds were due to cost increases.

Partially offsetting these increases was a decrease in labor costs as a percent of sales, primarily due to the continued significant improvement and productivity of the technicians at the ProCare stores, achieved through improved sales and right-sizing of crews. Occupancy costs decreased 0.04% as a percent of sales from the prior year as the Company gained leverage with positive comparable store sales.

SG&A expenses for the quarter ended June 2008 increased by $4.2 million to $36.9 million from the quarter ended June 2007, and were 30.6% of sales as compared to 30.4% in the prior year quarter. The increase in SG&A expense as a percentage of sales is largely due to an increase in manager pay related to several factors; there was a 21 store increase in the weighted average number of stores and there were increased incentives in the first quarter of fiscal 2009 due to improved store performances as compared to the prior year.

Additionally, management expense increased as a percent of sales as compared to the prior year due to two factors; there is additional stock option and other compensation expense in the first quarter of fiscal 2009, primarily associated with the CEO's October 2007 contract renewal. Additionally, increased management bonus was provided in the first quarter of fiscal 2009 as compared to the prior year due to the expectation that the Company will attain required profit goals for fiscal 2009, which it did not attain in 2008.

With regard to the $4.2 million increase in SG&A expense between fiscal 2008 and 2009, $2.2 million is attributable to an increase in compensation for store managers, and -- as well as additional store -- new store managers with the increase in stores, and field managers, as well as executive management. Overall, management incentives are higher than the previous year due to the current and expected improvements in performance at both the store and the corporate level. Of this amount, $500,000 relates specifically to field and corporate management incentives.

Additionally, advertising expense increased overall by $600,000 and benefits expense increased by $700,000. Operating income for the quarter ended June 2008 of approximately $13.9 million, increased by 0.09% of sales as compared to operating income of $13.8 million for the quarter ended June 2007. Operating income decreased as a percentage of sales from 12.9% for the quarter ended June 2007 to 11.6% for the quarter ended June 2008.

Net interest expense for the quarter ended June 2008 increased by approximately $300,000 as compared to the same period in the prior year, an increase from 1.1% to 1.3% as a percentage of sales for the same period. The weighted average debt outstanding for the quarter ended June 2008 increased by approximately $66 million over the prior year quarter, primarily related to the funding of the Valley Forge, Craven and Broad Elm acquisitions and the funding of the stock repurchase program.

However, the weighted average interest rate decreased by approximately 400 basis points from the prior year. This decrease is due to a shift in a larger percentage of debt, bank revolver debt versus capital lease debt outstanding at a lower rate. The decrease in other income of $300,000 is primarily related to the fact that we received a one-time payment in the lawsuit settlement with Strauss last year of $325,000.

The effective cash rate for the quarter ended June 2008 and June 2007 was 37.6% and 37.3% respectively of pre-tax income. Net income for the quarter ended June 2008 of $7.8 million decreased 4.7% from net income for the quarter ended June 2007. Earnings per share on a fully diluted basis of $0.39 for the quarter ended June 2008 increased 8.3% over the prior year EPS of $0.36.

While pre-tax and net income decreased as compared to the prior year, it is important to note a few things. First, interest expense is up $0.5 million directly related to the stock buy-back and increased debt of $60 million. Second, as I mentioned earlier, there are $0.5 million of management incentives included in this year that were not in last year's numbers, primarily related to the improved operating performance of the Company and the retention of our CEO, Rob Gross.

Third, last year's numbers include the one-time gain of $325,000 from the Strauss settlement. Normalizing for these items, pre-tax income is up about 6.5% over the prior year, in spite of tough gross margin pressures, specifically in the form of rapidly spiking oil and tire costs.

Moving on to the balance sheet, our balance sheet remains very strong. Our current ratio at 1.4 to 1 is comparable to last year's first quarter and only slightly lower than year-end. The decrease from year-end is due in large part to our very deliberate and close working capital management, whereby we were able to increase vendor payables and reduce bank debt this quarter.

We generated $19 million of cash flow from operating activities this quarter as compared to $15 million last year and were able to pay down $15 million of debt during this quarter as compared to about $7 million last year in the same quarter. Last year's first quarter did include $4 million of the stock buy-back of which none occurred in this year's quarter.

As a result of the debt pay down, our debt-to-capital ratio dropped to 37% from 42% at year-end. Last quarter, we mentioned that we were finalizing an increase in our committed sum under our revolving credit facility. We were able to secure an additional $38 million with no change in terms or cost of borrowing, bringing our total committed sum to $163 million. $37 million more remains in the accordion feature. At the end of June, we had approximately $77 million available under the facility for borrowings for acquisitions or other needs.

During the quarter, we were also conservative with CapEx spending at $3.7 million. Depreciation was approximately $5 million and we received $700,000 from the [exercise] of stock options. We paid about $1.2 million in dividends. Inventory is up $3.1 million from March 2008 due primarily to the continued expansion of tire inventory in the Black Gold and other stores. Additionally, we added inventory in an effort to improve stocking levels and mix of inventory to reduce outside purchases and also to buy ahead of cost increases from our vendors.

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

Thank you. (OPERATOR INSTRUCTIONS).

Our first question comes from the line of Scott Stember from Sidoti & Company. Please go ahead.

Good morning.

Hey, Scott.

Hi, Scott.

Hi. Could you talk about price increases again? Just give us a little bit of a timeline? I think you guys are scheduled for another price increase with oil changes in September, if I'm not mistaken.

We are constantly evaluating everything. The September flyers went out with moving -- I believe it was about 100 stores up in oil to $24.99 from $19.99. Everything else stayed the same with a number of stores staying at $19.99. Now, again, 100 more stores at the $24.99 level and additional stores at a $24.99 level with a $5 mail-in rebate, which we continue to test to make sure, again, very cognizant of not wanting to do anything to negatively impact the store traffic that we think the advertising programs are generating. So, that would be what is coming down the pike and what's occurred this year.

All right, and just moving over to ProCare, it's nice to see that you guys are making some good traction there --

You're telling me.

-- on the operating line. Could you maybe talk about some of the areas where you're noticing success and maybe talk about future opportunities to expand margins there?

ProCare you're talking about?

Yes.

Yes, I think that the starting point is the guys have done a real good job, finally, getting the right people working in the stores. And while we've been dissatisfied and feel it's underperforming, remember, it was out of bankruptcy running minus 30 comps and we've only owned it for two years, so the people are in place now. If you remember, we advertised in November for the first time when we thought we had the right people in place, and we did.

Those advertising programs worked, but with the new name on the outside of the location, it takes some advertising to get the name recognition out there and to get customers back into those locations and we really started that process in earnest in April through June, continuing now into the second quarter where we're comfortable driving the traffic into the store, the label productivity is better, the sales volumes are now starting to go up, so it reduces our occupancy cost and I think as Cathy said, that's where we picked up the 100 basis points in margin improvement.

All right. And, Black Gold, you gave some statistics, I missed a few of them. You were talking about, I guess tire sales?

Tire units in the Black Gold stores are up 20% and they're up 5% in the non-Black Gold service stores. For the quarter, the Company's overall tire unit improvement was 7%, which is very favorable compared to most of what we're hearing out there. You might know better than I do. And on the comp basis, the Black Gold comps were up approximately 7%, with the non-Black Gold comps were up approximately 5% for the quarter.

That was for the whole store?

Correct.

Okay. And last question on the acquisition environment, I know you mentioned that you're close. Are we looking at tire stores, or is anything fair game right now?

I think, you know what I said specifically, all I can say is we're closer.

Fair enough, and just what was the CapEx figure for the quarter again, Cathy? And then, I'll leave it to someone else.

$3.7 million, Scott.

All right, thanks a lot, guys.

Thanks, Scott.

Thank you.

Thank you. Our next question comes from the line of Tony Cristello from BB&T Capital Markets. Please go ahead.

Thanks, good morning, Rob. Good morning, Cathy.

Hey, Tony.

Hi, Tony.

Now, I guess all things being equal, Rob, would you prefer to have traffic counts up or better comps?

Why do I have to choose?

Yes. I'm just -- it sounds -- to me in this environment having traffic up is a bigger signal than just being driven by pricing. And it's pretty impressive that your traffic up 2.5%, traffic on tires, which is a big deferral category, units being up 4.4%, I think is what you said. And so, what I'm wondering here is how much is coming from direct marketing or ad versus how much is pent up demand that you're just simply reached a point where you cycle through and now, you're seeing those sales come through, if you can comment?

Well, I think certainly a piece of it is pent-up demand. I think certainly though, the increase in advertising, while not a ton of money at $500,000 for the quarter, being very targeted, only being programs that have worked in the past has been beneficial to drive new traffic because whether it's the internet marketing and the buying of key words we're doing in numerous markets or increasing some of the direct mail being sent out to households that we don't normally cover or the radio; those are new customers.

I think that shows up in the store traffic, and it specifically shows up at a higher level with the numbers you quoted, the 3.7% increase in tire store traffic on oil changes and 4.4% on the service store unit increases on oil changes, while the prices are higher and new customers. So, we like seeing specifically oil changes go up, because to us that means we are maintaining our current stronghold on our customer base and with the value equation, we're driving new customers into the door, which should feed into profitable and bigger jobs later on if we do a good job in servicing them. But, I certainly don't want to have to choose.

When you -- and again, I'm not in the Monro market, so when you look at these advertisements or these direct market mailers, are they -- one goes out for oil? Will the same customer receive a second for tires? Or are you looking at when the last time they were in, what they came in for and then basing that ad on that data-point?

Sure. Obviously with current customers, one of the value added things we provide to the customer, is again, we've got their odometer reading, the month of their state inspection and we track when it's time for their next oil change, so we will certainly hone in and target them for specific services that we think they need. And again, customers that we see three or four times a year know when it's time for their brakes or when it's time for their tires. We certainly have seen customers trade down on tires, getting less expensive tires, but that advertising program would be geared towards our current customer base.

The key words that we're purchasing, i.e. Syracuse tires and things like that and fine tuning some of the internet advertising most likely is hitting an all-new customer base as would any radio advertising we're doing because those are not vehicles we have historically done, they're fairly new, it broadens our appeal and then, once those drive the new customers in the door, again, the process will start over again with us on those new customers grabbing their odometer reading, the month of their state inspection and start tracking their mileage, so we can add value and let them know when it's time for their service.

What is your, and I don't know maybe Cathy if you have this number or not, what is your ad spend as a percent of revenue or is that something that you can share with us?

Sure, I think what we said in total for the year that the incremental advertising we're planning on doing, if it continues to work is about $500,000 a quarter, that's $2 million for the year, that would bring our overall Company ad spend from what, historically has been about 3.3%, 3.4% of sales up to 3.7% of sales.

Okay, okay. And one of the other pieces of this, and I think when you look at the cost of goods, I guess fuel costs are going up and from a distribution standpoint, that has to be impacting you some as well, that number is included in your cost of sales, I'm assuming? And how has that changed on a year-over-year basis?

I don't -- I can't give you a specific number, I think that John Van Heel and his team have done a good job of, as we said in picking up the $250,000 a quarter in cost savings, cutting back roots, consolidating things, making ourselves more efficient in the warehouse. Again, things that won't negatively impact our customer, but certainly our cost of gas, our cost of diesel, our cost of utilities, our cost of oil are all up.

I think also those guys have done a good job in hedging a lot of utility costs, so any year-to-year, we only have 50% of those costs for utilities, natural fuel gas, negatively impacting us and a lot of that will come during the winter and we'll see what kind of winter we have up in the northeast.

But, we're focused on every piece and as we said at the end of the fourth quarter, we really are running our business and have made adjustments in our business model, not necessarily in anticipation of what the last five months have delivered and we would hope that the second quarter and on if we can continue this momentum, all the better with some of the adjustments we've made in the cost structure going forward to try and combat what is a high commodity-cost environment across the board.

And one last question, you did a five, six comp and now July's 8% comp, and it seems like your guidance is 3 to 5 on compare of 2. We being conservative, Rob?

How about I tell you in September?

Okay. Fair enough. I'll let someone else ask some questions, I appreciate the time.

Great. Thanks, Tony.

Thanks, Tony.

Thank you. Our next question comes from the line of Cid Wilson from Kevin Dann & Partners. Please go ahead.

Congratulations on a very good quarter.

Thanks.

Thanks.

Just a [quick clean-up] question. Cathy, what was the depreciation amortization for the quarter? Did you give that?

Yes, $5 million.

Okay, thank you.

You're welcome.

And also, can you give us some sense of what you're long-term debt-to-cap may look like by the end of this year, what your guidance is in terms of your target?

Probably, I mean, we -- I wouldn't expect we would pay down $15 million a quarter going forward, Cid. Some of that was timing, but I think we could probably be in the mid-30% debt-to-cap mid-to-low 30's by the end of this fiscal year.

Okay. And then, my last question is that, were there any geographical variances in your sales?

No. I mean, business was fairly solid. The advertising programs were there, certainly ProCare is in Ohio and Pennsylvania, they're running a little bit better, but they're starting off with the worst base. I mean, the tire stores, the service stores, in general, any weakness in our business is probably personnel-related as opposed to geographically-related.

Okay, thank you very much.

Thank you.

Thank you. Our next question comes from the line of Jack Balos from Midwood Research. Please go ahead.

Hi, I was just wondering, given your recent increases in the prices of tires, how the gross margins in tires now look versus a year ago. Are they still declining or are they stabilized?

Well, I think they're stabilizing. It's hurting our overall gross margin because it's becoming a bigger percent of the business. As Cathy mentioned, the mix issue. But, we've increased the price of tires relatively significantly with a 6% increase and a 7% already this calendar year. It's being reflected in the comp store sales, the margin is holding up and what we see happening is we raised those prices across the board on all tires, but people in the tire category are trading down.

So, when is that, how does that all end up in terms of the -- you're saying the gross margin itself in tires versus a year ago is therefore lower?

Those margins are a little bit lower than it was a year ago on tires.

[Oh], okay. So that --

But in general, Jack, don't forget our alignments are up 12% and that's probably about 90% margin business.

Right.

And that's not included in what you're asking, which is the strength gross margin on the rubber sale.

Okay, okay. Regarding the management incentive pay [and need] and the stock options and all that that occurred in this quarter, is this all just up front first quarter spending that will not be repeatable going forward?

No, I think 'til all -- at least as far as my $22.80 in options that I got in '07, obviously, the Company takes that charge every year until they fully vest, I think there's another year beyond this year that that charge exists, but it's a non-cash charge. As far as bonuses for the management team and vice presidents, that is an incremental dollar amount that won't be paid until year-end and we've hit the target, so from a cash flow perspective, it's not in there. From an expense perspective, we are hoping to continue our performance and get paid a bonus this year versus not getting paid one the last couple years.

Okay, so this bonus should continue on a quarterly basis?

Yes, correct.

Okay, okay. Thank you very much.

Yes.

Thank you.

Thank you. Our next question comes from the line of John Lawrence from Morgan Keegan. Please go ahead. One moment please.

John?

Hello?

Hey, John.

Yes, good morning. Rob, would you talk a little bit about the distribution center and just in theory, the last couple years, a lot of the retail guys have expanded inventory, et cetera. How much of your sales is coming from third-party versus your distribution network?

About 85% of everything we deliver is in-house, 15% would be NAPA, Advance, Auto-Zone.

And as you continue to move that, obviously that's been one of the success factors, as you continue to grow and look at that network and now with the tire business so much strength, what -- how should we look at that going forward? I mean, I guess two-fold, number one is is what's the next cost element to increase that distribution capacity?

Again, if you remember over the last couple years, we had budgeted approximately $4 million, $4.5 million for expansion of our warehouse in Rochester, New York. And right now, we're delivering to all of the stores throughout. The last couple years we decided based on the environment and the fact that we haven't successfully grown to the same level we had hoped to that that facility, while being a nicety, hasn't gotten to the point where we have to do it.

When we grow the business further, you will see that capital expenditure come out and it won't significantly increase our costs. Some of the things you're asking about relating to the distribution is why our inventory was up $3 million going into the busy season for parts proliferation, for more tire buys, before price increases from the manufacturer went into place to position ourselves to take advantage to be in stock, so we buy less outside.

Got it, and as far as those commodity cost pressures, what's the next level of -- I understand you're fighting through this every day, but what's the next level of discounts based on your size in some of these categories or is there another level of discount?

Well, the more you spend there's always level of discounts. Unfortunately, as a percentage of sales, we don't get it based on the exorbitant costs we're now paying, it's based on units in tires or gallons in oil, but certainly as our traffic increases and as our oil change numbers increase, and as we sell more tires and last year, we were over 1 million units in tires sold and our units -- first quarter we said were up 7. That will trigger additional co-op, which would then be plugged into a reduction in cost of goods, and show up in our gross margin. But the same thing occurred last year.

Got it. Thanks, good luck.

Thanks.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS).

Our next question comes from the line of Gerry Heffernan from Lord Abbett & Company. Please go ahead.

Good morning, Rob. Good morning, Cathy. How are you?

Good.

Good morning, Gerry.

Hey, Rob, I'm not sure if it's the fact that you just speak so softly and slowly, or if I'm getting a little bit older. Did you say ProCare on a fully-loaded expense basis was profitable?

Yes.

Okay. And you made mention that you, in April through June began a -- was it a direct mail advertising program in the, I guess we'll just refer to it as the ProCare market?

It was direct mail and some internet advertising.

Okay. Was it a [cart blanc], was it a direct mail that was pretty much evenly distributed over where that entire store base would be, or did you target a micro-geography of the full ProCare area?

Well, we have the customer lists, the old customer lists from ProCare when we purchased it, and obviously that's a starting point, and then, our normal direct mail would look at zip codes around stores and other opportunities and internet usage and markets like Columbus, or Boston or Washington D.C. where there's a high level of usage to identify opportunities to advertise, which we did not significantly do, as I said in the past, just based on not being comfortable in driving traffic and underperforming to the customer.

Okay, and that's kind of the key I want to latch on there. In this April to June period, did you go all out on what you would consider a 100% marketing effort using that direct mail and internet list or are you in a you know what, let's start doing it, but we'll turn the dial up when and if we see success with handling the increased traffic?

Sure. The overall for all stores, was $500,000 and we felt that we wanted to increase our advertising for new customers to get across effectively what is higher retail prices to them, didn't want to raise our prices without trying to promote it and a lot of retailers in this environment cut back advertising and cut their prices.

We felt that with some of the programs we've implemented, both in ProCare and company-wide, like the Brakes Forever!, which we feel is a value-added program to guaranteeing their brake pads, like the Oil Change and More, where we will give you a free tire rotation and a pressure check, adds value to what the customer is getting, makes our price-point not totally be tied to price and generates a traffic increase and more names going in our database.

So specifically, we didn't do anything significantly more in ProCare, and it was burdened with these costs, that we did in the quarter company-wide. I think the performance in ProCare just had further to go, and I think that's why you see it leading on a comp basis, and you would expect that based on what it was before we got the stores, and the two years it took to fix them.

You know what, that's great, I appreciate all that information. I guess where I was going at this from having worked with you guys several years here, I know that you are; one, that you have stated in the past with ProCare, hey look, I'm not going to drive people in there only for them to have a lousy experience and then not show up again. Two, when you go to do things, you -- hey, let's start out, see if it works, and then we can keep on adding on.

So, I'm just wondering if in ProCare, was this a first step as far as driving traffic, and you say you know what, there's now a couple more levers that I can pull now that I am happy with the way we are able to handle this first step in traffic increase, or did you just say we're ready now, all levers on?

I think certainly the $500,000 per quarter, we are repeating that in Q2 and that would be the expectation for the additional spend, both in ProCare and company-wide in Q2. The question for us more is, can you afford to continue that level into Q3 and Q4 where the volumes are slightly lower and certainly happy with the success in Q1.

If the answer is do we have more bullets and if things continue the way they are, might you see us spend $750,000 a quarter or additional in ProCare to continue to drive traffic? I think the short answer is in Q3 for the ProCare stores, for sure we will continue at the level we currently are that has been working, there might be some reduction in Q3 in some advertising if it loses steam. Now, obviously --

Right. Okay, I was trying to concentrate my efforts just on the ProCare market. My thoughts being, my hypothesis being, and Cathy, you can certainly jump in here too, is that to the extent that you can start ratcheting up the traffic count in that area.

We had a set of stores that was a drag on profitability for a while, and they have the most, the greatest marginal benefit from a step-up in each percentage of traffic count given to the point that we've just gotten back to a full absorption level, and everything from here would be gravy as compared to the other stores where we're trying to three yards and a cloud of dust, just get that little extra more because they are already in a nicely profitable position.

I don't disagree with the promise that there's more upside on ProCare and there should be. That being said, I'd like to see, we're talking about everything we're doing has been working the last five months and is going to continue and certainly, I don't think we're going to go into Q3 or Q4 on ProCare and try and ratchet it down. That being said, 8% company-wide with ProCare at 11%, we are not talking about monumental, incremental spend and I think, I'm saying that, which probably supports your point and what you're trying to say is it's 10% of your business, it's running up well, how much better would it do with another whatever it is, $50,000?

Right, right.

I don't disagree, I'm just trying to get through August.

Okay, okay. Please don't report in September, because that would be a pre-release. How about if we wait for the news in October?

Well, maybe it's going to be a good pre-release.

Okay, very good. Thank you for all your work, Rob and Cathy.

Thank you.

Thank you.

Thank you. Our next question comes from Graham Tanaka from Tanaka Capital. Please go ahead.

Yes. Hi, Rob and Cathy. Nice quarter and great job, a lot of work in ProCare. Related to the ProCare, maybe we can get at in terms of the sales per foot and the margins there now versus where you would like to get them to be?

The sales per square foot I don't have off the top of my head, we usually as our metrics of utilization look at sales per day. And if you assume a run-rate of 40 million out of 72 stores averaging 6 days, you probably have that number. And what was the second part?

On the margins. I think on the margins, Graham, we're doing probably a little better than we thought we would be on labor at this point because there's such a significant improvement from last year and getting some good leverage on the occupancy. On material costs, we'd like to see chain-wide us do better there, some of that is a little bit outside of our control as we said with the material costs, but we can certainly emphasize mixed changes with more brakes in the ProCare stores as we're doing throughout the chain as well.

So, that would be an area where we, and maybe a little bit less in outside purchases there is where there might be a little bit more opportunity. But I --

[Yes] --

Go ahead.

The biggest opportunity which I think Gerry on the previous question was getting to, is we need to grow the sales of ProCare. The rents are stable and as those sales go, the biggest improvement we've made there, the labor and that stuff is great, but as sales go up 10% or 15%, our occupancy costs start dropping and net-net, our goal with ProCare would be the whole chain would run 150 basis points, 200 basis points behind the Monro Service stores in general.

And the reason for that difference is not the occupancy costs then, once we get their sales volume back to where it should be, but the fact that they have smaller storage spaces and we will always have slightly more outside purchases in those locations than we will in the rest of the distribution network and the chain. But the biggest opportunity for us is they were down 30% comp when we took them over, if we can get back to only down 10%, these things are very profitable and at least for the last five months, we've made some progress there and potentially, maybe we can ramp that up and make more.

Okay. If that map is relatively correct, you have the potential then of having maybe a 20% improvement in sales and therefore, what kind of an improvement in margins as you go from what it was to what you could get to say in a year or two?

Well, I think as a Company as a whole, we say is running whatever approximately 40%, ProCare should be able to run at 38%.

Really? And it's right now, it's at roughly what level?

We don't --

33%, 34%, something like that.

Okay, so another 5% improvement?

Yes, I mean --

You feel some progress already in other words, even though --

Yes, sure, but again, as you do the map on this and while it certainly will be profitable and certainly will be meaningful, remember, we're talking about 8% of our sales.

Yes, all right, okay. The other is I just was wondering about this whole with time lag of cost increases and passes in terms of price. I remember back, believe it or not I go back that far, to the late '70s, early '80s when you had all these huge price increases, the first round of OPEC price increases and hyperinflation and the companies that did well with those, that were able to get price increases through and not have this big lag relative to their cost increases. How are you -- what kind of a time lag are you facing, are you pretty much doing it contemporaneously?

Again, the best and closest example is we had a 7% price increase from the tire manufacturers that went into affect July 1st, and across the board, we raised all the prices on tires June 1st. So, that helped margins in June, which we should continue to see some benefit in July and by September, we're probably going to be in the same boat again. But we certainly are given notice and pretty much across the board, whether it's oil or tires, which are the big items that are going up, we will try and beat any manufacturers pass-through to us by 30 days and get ahead of the curve. It's a little bit more difficult sometimes with the flyers and the advertising to catch up because those are two months out.

No, that's fabulous. Now, the other thing is on the down side, were we to have a continued drop in oil prices and petroleum-related products, tires, et cetera, oil, would you be sticky on the down side? Or would you be lowering prices at the same time as costs go down?

Lowering prices to retail?

Yes.

Oh no, I think we've found our new level, and if the prices go down on the cost to us, ideally we would return that to you guys.

Okay, and that being said --

Not in a special dividend, Graham --

No, no, no, I --

-- we'd make more money.

All right, thanks.

Yes.

Okay.

Thank you. We have time for one further question, it comes from DeForest Hinman from Walthausen & Company. Please go ahead.

Hi, kind of two miscellaneous questions; do we have a material snow tire business at all?

Not really, I mean, are markets are obviously the northeast and lower. I mean, radial tires and some of the products, whether it's Goodyear or Bridgestone, Blizzak, things like that. We certainly sell those. We do have a material November tire business, where in our markets, people upgrade and get new tires before the winter, and that's why our third quarter is stronger, where margin gets a little bit weaker because the percentage of our business that is tire-related, specifically related to November is people buying tires, changing tires, whatever it is, but upgrading their vehicles before the winter and the lion's share of those expenditures end up being on tires.

All right, and then on the utility side. What do we heat the locations with? Do we have any ability to use waste oil burning systems, so it's like we do the oil change, but we get oil back we can use it to heat the building?

I have John Van Heel here, President of the Company, and John?

Yes, we do have waste oil systems and in a number of our stores, it's less than 200 of the stores, and there, we look for stores that have a high natural gas usage and enough through-put on the oil changes to warrant putting a waste oil heater in. Most of our stores are heated with natural gas though, and as Rob said, we normally hedge about 40% to 50% and fix those costs year to year to try to maintain some consistency there in volatile markets.

And has the waste oil program, in terms of the burning units, is that something we've been expanding or is that just a steady state?

It's more been at steady state, after Katrina, certainly there was some benefit as who knew where the natural fuel gas was going to go? There is absolutely a payback and some kind of a finer print maintenance cost as you go forward, so at very high levels of natural gas makes more sense than where we were for at least part of the last 24 months. We're a little bit at steady state, the main thing is we do try to keep that -- those natural gas contracts fixed there so that we're not really exposed significantly in a high-cost market.

All right, thanks.

Thanks.

Thank you. And at this time, there are no further questions in the cue. I'd like to turn it back to Mr. Gross for any closing remarks.

Great. Thank you, operator. Certainly, we're happy with the quarter, but we're hoping to continue the momentum and one quarter does not make a year, but it's encouraging. Certainly, the traffic improvements and that price increases are sticking and customers are coming back and they see value in our offering and we look to hopefully have some good news for you when we report on our next quarter and thank you very much for your participation and interest. Talk to you soon, bye.

Ladies and gentlemen, this concludes the Monro Muffler Brake First Quarter 2009 Earnings Conference Call. Thank you for your participation, you may now disconnect.