Monro Inc (MNRO) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake second 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) 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 Caren Barbara of FD. Please go ahead.

Hello, everyone, and thank you for joining us on this mornings call. I would just like to remind you that on this morning's call management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements which are more fully described in the press release and the Company's filings with the SEC. These risks and uncertainties include but are not necessarily limited to uncertainties affecting retail generally, such as consumer confidence and demand for order repair, risks related to leverage and debt service including sensitivity to fluctuations in interest rates, dependence on and competition within the primary markets in which the Company's stores are located and the need for costs -- and the need for costs -- sorry, and the need for and 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 not be relevant events or circumstances after the dates hereof or to reflect these occurrence as unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material. Joining us for today's call from management are Rob Gross, Chairman and Chief Executive Officer; and Cathy D'Amico, Chief Financial Officer. With these formalities out of the way, I would like to turn the call over to Rob Gross. Rob, 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 second quarter 2009 performance. After reviewing our quarterly performance, I will provide you with an update on our business as well as our outlook for the third quarter and full-year 2009. I will then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results.

We're pleased that our results for the quarter were at the high end of our anticipated ranges for both comparable-store sales growth and EPS. We are encouraged by the positive momentum that our business has sustained over the past seven months and are especially satisfied with our performance in light of the challenging economic environment. We're also pleased to have been included in Forbes magazine's Americas 200 best small companies again in 2008, as we have for four out of the past five years. Now I would like to review the highlights from the second quarter.

Quarterly comparable store sales grew 4.5% at the high end of our estimated range of 3% to 5%. We generated a total sales increase of 7%, achieving $119.9 million in sales compared to $112 million in sales for the prior year's second quarter. Comparable-store sales for our Pro Care stores increased 6.6% for the second quarter. Net income for the second quarter was $7.7 million, and earnings per share were $0.38 compared with $0.29 for the second quarter of last year, a 31% increase.

Our performance continues to be driven in large part by our solid reputation as a quality service provider and our strong relationships with our customer base who return to us regularly for value-added services. As we said before, these relationships are one of our major assets. Our customers are clearly confident that we can meet their needs and that they can depend on us to keep their vehicles running. We have found the letter to be especially important when times are tough for consumers. Sales for the quarter were driven by our effective in-store execution which resulted in part from our ongoing efforts to train our staff to perform complete inspections of customer vehicles and to effectively sell needed services. We also continue to work with our customers to schedule vehicle maintenance and our marketing programs to remind them of maintenance schedules as appropriate.

Sales also continue to be positively influenced by highly effective low-cost advertising program. You may recall that we expanded our advertising campaign during our first fiscal quarter with programs that we tested last fall. These additional programs mainly entailed Internet and direct mail advertising as well as select radio advertising. We found that the programs were very successful in driving sales and traffic in the first quarter and we are pleased that the positive momentum continued in the second quarter. We continue to carefully measure the effectiveness of our advertising programs and we regularly refresh and/or tests new additions to our advertising programs.

We are also pleased with our expansion and gross margin and the increased leverage on occupancy costs. The gross margin improvement was driven by price increases that we implemented in April and September 2008 in response to higher parts costs. We now have the pricing in place to run similar gross margin improvement quarterly for the rest of the year. Additionally, if oil and steel commodity costs stay at current levels we would expect to see our cost of goods improve going into next year. On top of price increases gross margin was positively influenced by improved in stock position which enabled us to reduce outbuys this quarter. Also, we are pleased that our labor activity increased about 7% over the last six months, adding to the 46% improvement over the last nine years. This increased productivity is largely the result of better management of our labor schedules.

As I just mentioned, price increases were the most significant driver of our gross margin expansion. Store traffic was down 2.5% for the quarter as customers continue to defer purchases and delay oil changes for as long as possible in this tough economy. However, we are satisfied with the tradeoff as our average collective price on an oil change rose from $21 to $25. We are continuing to run our oil change and program which includes several free value added maintenance services with a purchase of an oil change. As the economy improves, we believe that this program will help to drive customers back to our locations when they need their oil change, as well as when they are in need of bigger ticket repairs.

Regarding our product categories, comparable store sales increased approximately 6% for brakes 6% for maintenance services, 7% for alignments, 4% for tires and 3% for exhaust. We're especially pleased with our results for the high margin brakes category where we continue to outperform the competition and have achieved three consecutive quarters of mid single digit comparable store sales growth. We believe that much of this achievement has to do with the continued success of our brakes forever sales program. In which we guarantee brake pads for the life of the car and replace pads for only the cost of labor. We are also happy to achieve significant comparable store sales growth for alignments in three of the last four quarters. As you may recall, alignments are a high margin category and tied closely to the sale of tires. Growth in the sale of alignments along with other high ticket items such as brakes has helped to drag growth in average ticket which has increased over the past few quarters.

Before I update you on our growth strategy, I would like to first comment on our strong liquidity and financial flexibility which we think is important to mention in light of the current environment. We are pleased that our business continues to generate ample cash flow and are comfortable that we ended the quarter with a solid balance sheet and sufficient working capital position. We take added comfort in our $163 million revolving line of credit which had $85 million in availability at the end of the second quarter, the current facility is available to us until 2012.

Now for an update on our growth strategy, starting first with an update on acquisitions. As we said previously, difficult conditions for our competitors often provide us with opportunities to make value added acquisitions at reasonable costs. As such, we have been actively engaged in discussions with several potential targets and are encouraged by a pipeline of opportunities. We would expect to announce one of these midsize deals by the end of the current quarter. The acquisition will fit our stated strategy of acquiring businesses that will strengthen our geographic footprint, increase our market share and bolster our two formatted store strategy.

I will now move to an update of some of our more recently acquired chains. I'll start with an update on our Pro Care stores which continue to exhibit positive trends and operate profitably. Pro Care's second quarter sales were $10.5 million, its comparable store sales growth was 6.6% and its operating income was $900,000.

Our other recently acquired businesses continue to perform in line with expectations. These chains include the Craven and Valley Forge tire stores that we acquired in July of 2007 and were profitable in the first 12 months. As far as the Broad Elm tire chain that we acquired in January 2008. In addition to the successful integration of our acquired businesses we are encouraged by the strength of our organic growth strategies. To that end we remain focused on our Black Gold program in which we aim to expand our market share and increase sales of tires and services in our service stores. In aggregate, our 166 Black Gold Service stores, continue to outperform non-Black Gold Service stores in tire unit sales, as well as in comparable-store sales. An end of the second quarter, we added 21 stores to our Back/Gold program primarily in the Columbus, Ohio, area, and we remain on track with our stated goal of adding 25 to 50 stores to our Black Gold program during fiscal year 2009. Our intended area of focus for the fourth quarter will be Cleveland, Ohio, where we have existing tire stores.

I would now like to briefly discuss our outlook for the third quarter and fiscal year 2009. As I mentioned at the start of this call, we are encouraged by our continued solid performance and the strong momentum that we have experienced over the past seven months. These positive trends are continuing into the third quarter as we have achieved comparable store sales growth for October of approximately 4% as of last weekend with Pro Care stores up approximately 9%. We are certainly are cognizant of the macro environment, we are cautiously optimistic about our outlook for the third quarter and the remainder of the year as we expect to continue producing solid results despite broader market trends.

As detailed in our press release this morning, we expect third quarter comparable store sales growth in the range of 2% to 4%. We expect third quarter EPS to range between $0.27, and $0.29, which compares to $0.25 for the third quarter of 2008. For the full year, we now anticipate sales in the range of $460 million to $465 million and comparable store sales growth in the range of 3% to 4%. We have increased our expected fiscal year EPS range to $1.14 to $1.19 versus our previous estimate of $1.10 to $1.18.

As we mentioned at the beginning of our fiscal year, although we are already a low-cost operator our goal is to reduce expenses by approximately $1 million in fiscal year 2009, and we are going to further increase operating efficiency. As anticipated, we saved approximately $250,000 in the second quarter from these initiatives and continue to expect the cost reduction to be realized in roughly equal installments over the remainder of the year. While we have always prided ourselves on our low-cost model we have been especially vigilant in streamlining our operations in light of the difficult costs and economic environment.

Before I turn the call over to Cathy I want to reiterate that our results for the quarter and our positive momentum over the past seven months have provided us with confidence in our ability to continue to perform well as we move forward this year. While consumer confidence remains weak, we are encouraged by several current trends that are working in our favor such as the decrease in sales of new cars, the tightening credit market for auto loans and the overall increased price consciousness of consumers which lead them in choosing our service centers over the more expensive auto dealerships. The fact that gas prices have come down doesn't hurt either. Additionally, the long-term macro trends of more cars, older cars, more complex cars, demographics, and less competition, remain intact.

Overall, while our economic environment continues to be challenging, we are pleased that our strong commitment to providing customers with value rated services as well as our reputation as a trusted service provider has enabled us to drive growth in both the top and bottom lines as well as capture additional market share from our competition. By staying in tune to trends, carefully managing our business, and reacting appropriately through this time of uncertainty, we have been able to sustain our strong position in the industry and increase our market share during the time it has been difficult for many of our competitors. This completes my overview, now, I would like to turn the call over to Cathy for a more detailed review of our financial results. Cathy?

Thanks, Rob. Good morning, everybody. Sales for the quarter increased 7%, or $7.9 million. As Rob stated, comparable store sales increased 4.5%. As a reminder Pro Care sales are now included in the comparable store sales numbers. New stores which we define as stores after open March 2007 added $4 million. 19 former Craven, Valley Forge, and Broad Elm stores acquired last fiscal year contributed $3.3 million of the increase. The total sale of these acquired stores were $6.8 million in the second quarter of fiscal 2009 as compared to $3.5 million in the prior year quarter. Partially offsetting this was a decrease in sales from closed stores, of $0.9 million. This compares to a comparable store sales increase of 2% in the second quarter of fiscal 2008.

There were 76 selling days in both the quarter ended September 2008 and September 2007. Year to date, comp store sales have increased 5%. New stores added $11.4 million including approximately $9.9 million from the acquired Broad-Elm, Valley Forge and Craven tire stores. Total sales for the acquired stores were $13.4 million in the first six months of fiscal 2009 as compared to $3.5 million in the first six months of the last year. Partially offsetting these increases was an decrease in sales from closed stores of approximately $1.8 million. And a comp store increase of 5% for the first six months compared to a comparable store sales increase of 4.1% for the first six months of last year.

September 27, 2008, the Company has 709 Company operated stores as compared to 714, at September 29, 2007. During the quarter the Company closed four stores. Sales for the Pro Care stores acquired in April 2006 continued to improve, as Rob stated since the acquisition and efforts continue which focus on increasing sales volumes, reducing costs and improving margins. These stores made approximately $0.01 per share in the second quarter of September of fiscal 2009 as compared to breaking even in the quarter ended September 2007.

As Rob mentioned, comparable store sales for the Pro Care stores for the quarter ended September 2008 increased 6.6%. Gross profit in the same quarter improved by 180 basis points, and operating income improved by $300,000 to $900,000 as compared to the same period in the prior year. Additionally, pretax income increased by $0.5 million to a pretax profit of $0.4 million as compared to a pretax loss last year of $100,000 in the second quarter of September 2007. Year to date on a pretax basis, Pro Care has improved $1.1 million over last year with pretax income of $0.9 million. We are encouraged by the continuing improvement in these stores.

Gross profits for the quarter ended September 2008 for the chain was $50.4 million or 42% of sales as compared with $45.5 million or 40.6% of sales for the quarter ending September 2007. The increase in gross profit for the quarter ending September 2008 as a percentage of sales is due to several factors. Total material costs decreased slightly primarily due to decrease outlook. In addition, costs increased in various items such as oil and tires, were largely offset by selling price increases in all categories. Additionally, there was a decrease in labor costs as a percent of sales as Rob mentioned due to improvement in technician productivity chain wide and especially at the Pro Care stores. Our keys to improved sales and right sizing improves.

When sales improve and with good control over technician hours. They were less subsidize or guaranteed wages because technicians are more productive, thereby decreasing labor as a percentage of sales. Traditionally sales per man hour increase in the second quarter for the fourth consecutive year. Occupancy costs decrease four-tenths of a percent as a percent of sales from the prior year as the Company gained leverage with positive comparable store sales. Gross profit for the six months ended September 2008 was $101.3 million or 42.2% of sales compared with $92.2 million, or 42% of sales for the six months ended September 2007.

Operating expenses were virtually flat at 30.5% as a percentage of sales for the second quarter ended September 2008 as compared to the prior year quarter, when operating expenses were 30.4% of sales. Within operating expenses, selling, general and administrative expenses for the quarter ended September 2008 increased by $3 million to $36.8 million from the prior year quarter, and were 30.7% of sales as compared to 30.1% in the prior-year quarter.

The increase in SG&A expense as a percentage of sales is partially due to an increase in manager pay related to increased incentives in the second quarter of fiscal 2009, due to improved store performance as compared to the prior year. Additionally, management compensation expense increased as a percentage of sales as compared to the prior year, due mainly because of two factors. There is additional stock option in other compensation expense in the second quarter of fiscal 2009 associated with Rob's October 2007 contract renewal. Additionally, increased management bonus was provided in the second quarter of fiscal 2009 as compared to the prior year, due to the expectation that the Company will attain the required profit goals for fiscal 2009 which it did not attain in 2008. In addition, advertising expense increased as a percentage of sales related to the Company's efforts to improve sales and gain market share. Partially offsetting these increases were decreases in utilities expense and benefits expense as a percent of sales.

For the six months ended September 2008, SG&A expenses increase by $7.1 million to $73.6 million from the comparable period in the prior year, and was 30.6% of sales compared to 30.2% of sales for similar reasons as noted for the recent quarter. Intangible amortization for the quarter and six months ended September 2008 remains unchanged from $0.1 million, and $0.3 million respectively and was one-tenth of a percent of sales for the quarter, and six months ended September 2008 and September 2007. The gain on disposal of assets for the quarter ending September 2008 increase $0.4 million from a loss of $100,000 for the prior year quarter to a gain of $300,000 for the current year quarter.

Operating income for the quarter ended September 2008 of approximately $13.8 million increased 19.8% as compared to operating income of approximately $11.5 million for the quarter ended September 2007. An increase as a percentage of sales, to 10.3% to 11.5% for the current year quarter. Operating income for the six months ended September 2008 of approximately $27.7 million increased by 9.5% as compared to operating income of $25.3 million for the six months ended September 2007 and remained unchanged at 11.5% of sales for both periods. Our interest expense for the quarter ended September 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 September 2008 increased by approximately $53 million over the quarter ended September 2007 primarily related to the funding of the Valley Forge, Craven, and Broad Elm acquisition and the funding of the stock repurchase program last year.

However, the weighted average interest rate decrease by approximately 300 basis points in the prior year. The decrease is due to a couple factors including a shift in the larger percentage of debt revolver versus capital leases outstanding at a lower rate as well as a decline in bank borrowing rates. As a reminder, we entered into interest rate swap agreements for $30 million, or a little less than half of our current revolver debt, which swapped our flowing 30 day LIBOR rate which is now 3.75% to rate of approximately 3.28%. Net interest expense for the six months ended September 2008 increased by approximately $0.7 million as compared to the same period in the prior-year, and increased from 1.1% to 1.3% as a percentage of sales for the same period. Other income for the quarter ended September 2008 was flat as compared to the same period in the prior year for the six months ended September 2008, other income decreased by $0.3 million. If you recall, the Company received a one time payment last fiscal year of $325,000 in lawsuit settlements.

The effective tax rate for the quarter ended September 2008 and 2007 were 38%, and 37.4% respectively, of pretax income, and for the six months ended, the effective tax rate, 37.8% for September 2008, and 37.3% for six months September 2007 respectively in pretax income.

Net income for the quarter ended September 2008 of some $7.7 million increased 18% over the prior year quarter and EPS for the same period increased 31%. The six months ending September 2008, net income of $15.5 million increased 5.3%, and diluted earnings per share increased 20.3%.

Some comments on our balance sheet, as Rob mentioned, we have a very strong balance sheet. Current ratio is 1.4 to 1 and comparable to last year at second quarter, slightly lower than year end. The decrease from year end is due in large part to our very deliberate working capital management, whereby we were able to shift -- were able to increase better payables and reduce bank debt. In the first six months of the year we generated $31 million of cash flow from operating activities as compared to $29 million for the same period last year and we were able to pay down $24 million of debt during this first six months as compared to borrowing about $8 million in the same six months of last year.

Last year's first half did include $11 million of stock buyback of which none occurred in this year's fiscal year. As a result of the debt pay down, our debt to capital ratio dropped to 35% from 42% at year end. As we mentioned last quarter in June of this year we finalized an increase in our committed zone under a 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. We still have $37 million more remaining in the accordion feature. At this time we have approximately $87 million as of today available under the facility for borrowings, for acquisitions or other needs.

During the first six months of this year we have also been conservative with CapEx spending at $7.3 million, depreciation was approximately $10 million in the first six months, and we received $1 million from the exercise of stock options. We paid about $2.4 million in dividends. Inventory is up $3.8 million from March 2008 due primarily to the continued expansion of tighter inventory in the Glack Gold and other stores. Additionally, we added inventory in an effort to improve stocking levels and make some inventory to reduce outside purchases and buy ahead of cost increases in oil and tires.

I wanted to talk to you about some activity you may see in the stocks over the next couple of months. Many of you know that Rob Gross was granted performance based stock options when he joined Monro in December 1998. These options have a 10-year life and will expire at calendar year at the end of November 2008. Rob exercised some of these options in a prior fiscal year, but had 656,000 options remaining to be exercised at the beginning of fiscal 2009. In May 2008 he held approximately 188,000 shares of Monro stock before going out of pocket to exercise 100,000 options in June 2008 and to pay the related taxes. Rob will be exercising the remaining 556,000 nonqualified stock options and paying the related taxes at an approximate 44% rate over the next three months. He will do a cashless exchange with the Company as allowed by the option plan as well as sell out to 250,000 shares on the open market for any remaining tax liabilities as well as to cover his out of pocket exercise in June of this year. Net-net when he has finished with all of these transactions his holdings at Monro will increase from 188,000 shares at the beginning of this fiscal year to approximately 330,000 shares by the end of this fiscal year. Additionally he will still hold options to purchase an additional 675,000 shares. That concludes my formal remarks on the financial statement. With that, I will now turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Tony Cristello of BB&T Capital Markets. Please go ahead.

Thank you, good morning, Rob, good morning, Cathy. One question, Rob, your same-store sales are up 5% year to date, October, same-store sales running plus 4, but your guidance is only 3 to 4 for the year. You're expecting to sell trends even with easy year over year comparisons or are you just trying to be conservative, trying to gauge you hear a little bit?

Well, I guess the answer, Tony would be I hope we are being conservative. But with what is going on in the marketplace and the consumer of leading into Christmas, some other things going on, we have a good seven months under our belt. If things continue as they currently are, great for us and our shareholders, but we don't want to do anything to get too far ahead of ourselves, and thought being conservative in this environment would be prudent.

When you look at what you have done on the GM side and still been able to keep the cost side in check, is that something going forward in the next few quarters or even into next year, that we should think there is no reason to believe GM improvement isn't sustainable?

Certainly for the upcoming two quarters, the gross margin improvement is sustainable. What we would hope will occur for 2010 then, starting in April, with some of the commodity costs coming down, the cost to us for oil, tires, and steel, come down, and that might be the next tranche of margin improvement going into next year. Certainly we would expect to see 100 basis points, GM improvement, year over year for the next two quarters, that is incorporated in our numbers.

One of the things Pro Care, the first quarter, same-store sales up over 8, this quarter, nicely solid, 6.6, just wondering, when you look at the sustainability in Pro Care, you talk about increasing sales volumes, reducing costs, and improving margins, can you talk about each of those three aspects, tell us where you think you are in this stage of the game with respect to where is the most opportunity yet to come on the Pro Care side of things?

Sure. The most opportunity going forward is getting the sales volumes up to pre bankruptcy levels. We just started that process. A piece of that is continuing to invest in advertising in those markets, which we couldn't until we replaced a lot of the people and got the stores operating effectively. The last thing you want to do is drive more traffic if your stores are not delivering the right experience to the customers. I think we have the right people in the stores, they are executing well. I think we have the staffing correct which Cathy mentioned, 180 basis points improvement in the gross margin. A lot of that being from staffing. Now, it is just a matter of ramping it up. The expectation, as we have said all along, once we fix it, is that these stores should operate like greenfield stores with higher comp store sales going forward over the next three years and then the chain, as a whole, we saw that in Q1 with Pro Care up 8% comp versus the company up 5.6%, I think you saw it in Q2 with Pro Care up 6.6 comps versus the Company up 4.5 and even in October, Pro Care, being up 9 versus the Company being up 4, that that spread is continuing, in light of the fact that half of the of the Pro Care stores are in Ohio which is not the most buoyant geographic area we have.

When you look at where Pro Care -- I know you talked about them being below where they were when you acquired them, how far below are they from a core Monro store at this point?

The Pro Care stores when we acquired them were running between $625,000, and $650,000 in sales. The average Monro store runs 525,000 to 550,000. Pro Care is on the way to getting to a sales level of the average Monro store, still with the opportunity, we believe, because of the good real estate, now, that the operations are fixed, now, that we can start advertising and bringing back customers, on a chain that was running minus 30 comps, to get to that 600 to 650 level again, and then obviously we get a lot of occupancy level, continued labor productivity level, and you should see the margins start approaching Monro's margin long-term.

So it sounds like there is a multi year tailwind here with what is going on at Pro Care?

We screwed it up for two years so hopefully there will be a multi-year tailwind. Thank you.

One other question here with respect to the Black Gold and the out performance, how much out performance is there with the Black Gold store versus a non-Black Gold store?

Especially on the tire units, the Black Gold stores are running up 5% in tire units versus a service. Non-Black Gold stores running up 0.3. These sales are about a 7 point differential with comp tire sales being up 10% in Black Gold versus 3% comp for the non-Black Gold tire stores. Overall comps are up slightly more than 1%.

That is impressive. Okay, I will let someone ask some questions.

Thank you.

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

Good morning. Can you maybe touch on the advertising, obviously you have seen some success in the last couple quarters. What was advertised in expensed as a percentage of sales this quarter versus last quarter, and are we expecting to see any increase in advertising levels going forward?

3.8 this quarter percent of sales. Remember we said what we expect for the full year is last year our advertising rate at 3.3% of sales. This year we expected it to come in at 3.7% of sales. You should see the same level of advertising expenditure in our Q3, that will be October, November and December. Then we will assess the consumer and the marketplace for January, February and March. Obviously January and February are two of our weakest months of the year and we just want to make sure while we continue to strive to grab market share, which we successfully have, we want to make sure the return on investment in Q4 is there. You certainly won't see an increase in advertising in Q4 above the run rate that we will have for the first nine months of this fiscal year. You might see a decrease if we decide to hold back on some of the additional programs we have put into place the first nine months of the year depending on whether we think there is value in what the marketplace is doing.

Heading into the back end of the year I know there has been a lot of concern across the board about the holiday shopping season coming up and the deferred purchase can hit again. What was the experience again last year at this time heading into the holiday season for you guys?

Last year, November, we were up 3.3%. December, we were up 0.9. January we were off 2.2%. Not difficult comps. If you recall, last year was not the most robust holiday season. That being said, you tell me what December and January are going to bring. The good news for us is we are starting off a low base and those are the two least important months for us. Certainly our guidance incorporates a certain amount of caution and hopefully things will work out better but at this juncture, I don't know what tomorrow is going to bring. I am so far happy with the year and certainly happy that October has held up and I would hope November is a good month for us just based on it being a very big tire month and we, from a sales mix perspective have more more stores selling tires and doing a better job of selling them.

Okay. Maybe just touch on the store closures this quarter. Do you have a full year guidance that you have given before? What stores and what markets have been closed?

Usually the way we close stores are one of two factors. It is poor performing store that the lease is running out so we use that as an opportunity with very low writeoffs to to get out of it, or it is a store that a Walgreen's or a CVS is attracted to because, as you know, we own 190 of our real estate locations and while the store might be doing okay, say making $50,000 a year, operating profit, one of those guys will come in and offer us an 800,000 or $1 million gain, and a ROA is too good to pass up. You will see some of those sales going on. You will see closures, when we have an opportunity to get out of an underperforming stores. We have closed 11 stores so far this year. That is a little bit more than normal. As we mentioned, with everything we were doing with the Company, whether it is capital expenditures, the outlay for them, or an opportunity to cut costs, and our team pulling $1 million out of SG&A, we would certainly looking into a continued weak market, to get rid of any potential losers we have to shore up our business to move forward.

Last question is on capital expenditures. I know a couple years ago we were talking about a distribution upgrade or warehouse upgrade that was pushed off. Is that something that is going to happen this year? Or are you basically trying to monitor it?

It will not happen this year. We will certainly monitor it going into next year. When we report on our 2010 capital budget, depending on market conditions and the number of stores we add through acquisition, we will either do it or not do it. I would say if we are going to add 30 to 50 stores, you are probably not going to see it in the 2010 capital budget. If that number starts approaching 100 stores, we are going to need to do it.

Thanks a lot.

Next question comes from the line of Cid Wilson with Kevin Dann & Partners LLC. Please go ahead.

Good morning. Can you repeat one time? I didn't write down fast enough what the cash flow numbers were, cash flow from operations and CapEx.

Sure. Cash flow from operations was about $31 million for the first half and in Q2 it was about $11 million. Then CapEx was $7.3 million for the first six months. Q2 was $3.7 million.

Do you have to depreciate an acquisition for the quarter?

Yes. The year was -- six months was $10 million, and the quarter was $4.9 million.

One question regarding -- just some of the efficiencies that you -- particularly with the Pro Care stores. Can you tell me more about exactly what -- a little more color in terms of the shifts in labor (inaudible) and the capture of those efficiencies there compared to the rest of the chain?

The technician labor -- the biggest gain in gross margin of the 180 basis points by far was the improvement in technician labor. Basically as the op guys are improving sales, they are also rightsizing the fruit. So in other words, if you have five guys in the shop, and they're producing $1,000 a day in sales. That was last year, say, and now this year we're producing $1,006 in sales, and we've only got four guys in the shop, we are just more productive, when there's a certain minimum guarantee you have to pay the technicians, as far as the minimum wage, which you have if someone is clocked in. Our guys have done a good job of keeping the best guys, and it's a natural turnover as well plus they are improving sales. You can see where the productivity in current man hour is improving that has been the biggest gain in the Pro Care stores. As well as reduction in out sizes, the next item where we have seen some significant improvement. Stocking levels are better at those stores, we know better what they're selling, and the guys are doing a better job of transferring costs with neighboring Monro and Mr. Tire stores to reduce their out buys so, it is an evolution, understanding how Monro operates and our field management has done a good job making those improvements in the stores. The other piece would be some leverage on occupancy which is cost of sales also. You have sales improved, rent is the same, you are going to see an improvement in margins.

Thank you very much.

Next question comes from John Lawrence of Morgan Keegan. Please go ahead.

Good morning. Rob would you, just to clarify Cathy's last comments on the out buys was most of that performance on Pro Care or was there some of that across the chain?

Obviously it is across the chain. Certainly Pro Care has the most upside so it skews there, but remember, as we are talking about these improvements, especially 140 basis point margin improvement, Pro Care again is less than 10% sales. Even if the margin has improved dramatically it is less than 10% of the overall Company sales total. We are not talking leaps and bounds. It is nice improvement, it is nice that it is accretive this year and the delta between what we did last year, and this year is a positive. But it is not that big number.

Just to follow that one step, the increase in the inventory to reduce the out buys just comes from the information and the data from the customer base?

Sure. Obviously we talk a lot about our system, helping our advertising and our logistics, certainly the fact that every one of our stores, has the seven closest stores inventory, and has the shop trucks, it can go back and forth to pick up parts. All of those things benefit us. From a merchandising perspective we are constantly striving to get smarter and do a better job making sure we are in the stock and I think we see some of the benefits of our efforts chain wide, certainly not just in the Pro Care stores.

Secondly, on the growth plan, you have talked over the last several quarters about the strategy of talking to the competitors that are struggling in this environment. Has anything changed in the last 60 days in this environment with credit, et cetera, as you talk acquisitions?

As Cathy mentioned, nothing on our front. We got currently $87 million up from $85 million of availability three weeks ago. We continue to generate cash flow, that money is available to us, locked and loaded, and we intend on using it over the next two to three months. As far as, if you are asking, do some of the sellers -- are they getting more concerned that their credit is drying up, not so much. They are highly worried about what is going to happen with corporate tax rates or capital gains tax rates, and I think that is really what is putting people over the edge to allow us to get to the point where we are comfortable, that we can announce one of these things and close it this quarter or the beginning of January, depending on sellers's tax preferences.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Gerry Heffernan with Lord Abbett. Please go ahead.

Good morning, everybody, thanks so much for real good results year.

Thanks for your support.

To go off of the last question in regards to my positions, given your response that the owners of these of the businesses are more concerned about cap gains situations, tax situations, is that to say that most of these businesses are not in a working capital need position, that short-term financing is not a real big part of the business and would not be a pressure point for them to get out?

Some of them are. I was probably more referring to the ones we are currently working on and close to. The issue -- what you're saying is true for a number of them and those obviously would be ones that are performing worse. What we are seeing across the board, and these guys we're looking at is that comps are weaker, earnings are weaker, they are getting more realistic on the price, but from a cash flow perspective, they own, if you are looking at a 20, or 40, or 60 store chain, on average, these guys would own anywhere from 25 to 50% of the real-estate, so they are not burdening the Company with a full mortgage or a full rent load. From a cash flow perspective, not breaking out the real estate separately, their business is still generating cash flow. If a financial advisor would break down the real-estate piece and say look, you could be earning this on your real estate and your business is not making a lot of money at all, why don't you sell the business and just collect the check on your real estate and your return on investment would be significantly higher, I think a lot of these guys would be better served. And I think as changes in taxes are coming, them and their advisors are more focused on that their real estate ownership is supporting the deterioration of their business.

Okay, thanks. In regards to acquisitions, the last couple weeks has shaken up a lot of people, a lot of management and Boards have gone into a bunker mentality. Can you give us a feeling to what the mindset of your Board is in regards to making acquisitions at this time, are they not feeling the same pressure to sit tight?

No. I can certainly speak for myself and I believe the Board, in that we believe this is a unique opportunity to grow the business at an accelerated pace. Our cash flow is great and getting better. We do not have a lot of debt, we do not have any credit risk with our banks, our borrowing rates are cheap, and over the next year or two or however long, some of the difficulties continue. Let's not forget the 18 months before today, we are not that robust future, the Board feels that $460 million in sales, being a low-cost operator, with the ability to get three times bigger and not leave our current footprint which is a very low risk growth strategy, that it would be imprudent not to grow the business during what is a obviously very attractive time for this Company to grow.

Okay, thank you. The next question I have is in regards to store manager turnover. We haven't talked about this in a while, it was always a strong point of your operation. Can you tell us what the situation is with your store managers? What are turnover levels? I imagine, given the ability to win market share, that the capabilities of these guys are even more important today.

Sure. Certainly one of the things that benefits us, is a bad economy and difficulty means people are less likely to switch jobs and there is less opportunities. The fact that we are outperforming a lot of the marketplace makes us a stable place to work where we focus on 401K plans and health care benefits that a lot of others cannot offer quite as well, that helps us. Certainly offering stock options to the top 25% of our store managers keeps the turnover of our best performing store managers at about the 15% level, which is significantly better than both our average and the industry's average and that continues to help us move forward. In a tough environment, it is obvious in the markets we serve, we are the number one or number two market share. We are the only guy that is growing, we are a good place to work. If you are married and you want to take care of your family, and those are the exact kind of guys we're looking for to build our Company, and certainly that same group has been instrumental in our out performance over the years.

In regards to the car dealerships really starting to struggle right now, at least per the results of the public car dealership companies, is this putting you guys in a position to obtain talent from their service base?

We go back and forth with them. If someone wants more of a family atmosphere with some flexibility in hours, they will come from a car dealership to us. We will also have a tendency to lose that 25, 26-year-old single guy that is a very good mechanic that he can go to a car dealership and make more money working there. On the labor front it goes back and forth. We haven't seen any major shift in that.

Okay. In regards to the advertising. I know that a previous questioner hit this topic, but just, you have always been very pragmatic about advertising, it is not just something you do, you throw money at it, you've always talked us too, how you know what, it is not just advertising, it is the type of advertising, it's where you do it, and how you go about it. What are you learning in that regard? What is working, what is not working, anything new that you have hit upon that you believe is going to help you for targeting your advertising in different or newer markets going forward?

Well, certainly, obviously we took the best of the best. When we started testing last fall, and put the programs together for this year. The difficult thing that anyone in advertising will tell you is, I am spending the money, 50% of it is working, I need to find which 50%. We continue to fine tune, we are much further, ahead of the game, with our years of experience in direct mail, we know that radio and markets where we can buy it inexpensively, works very well. We are sure the Internet has helped us build a base but it is difficult to break down. As to sales, we will do anything as we assess the fourth quarter and leading into our programs of next year, we are certainly happy with the market share gains, we are certainly happy with maintaining traffic, at basically break even for the first six months of this year, when we know units and traffic and all of our competitors, is down. We will spend time really digging in and fine-tuning what we are doing. I certainly think the easy efficiency is the guys are doing a much better job getting e-mail addresses. With that being said, every time we then send a coupon, or a flier or a promotion to a customer, via email it's $0.01 versus $0.40, and that becomes very efficient for us going forward. We would expect to make continued efforts on that front.

Thank you very much.

We have time for one more question from a line of Jamie Wilen with Wilen Management.

Hi fellows. Rob, I hope you give Cathy a day off one of these days so she can get healthy.

How do you know that was her coughing and not me?

There we go, you're too happy to cough. Just one question. Obviously store operations are great but driving same-store traffic is the greatest opportunity moving forward. How much of that do you expect to come from new customer growth? And do you expect to get it from the dealers that are having trouble or from other aftermarket service places? Where is the opportunity going to be the greatest for you?

Yes and yes. We would expect to gain traffic from the dealer strictly because there is a lot of consolidation going on, they're significantly higher priced than we are today, and with the consolidation, they are going to be significantly less convenient than they have been. That said, they are not selling new cars, so we expect them to be, as they have been, more aggressive on the service front. It is much more likely that a dealer customer is going to trade down from their $500 Lexus brake job to of $350 Monro Lexus brake job than it is a Monro customer is going to trade down from a full, do it for me, $25 oil change which includes free tire rotation and checking out your vehicle fully to a $17 do it yourself oil change with private label oil. Us being in the middle, we are not losing much to the do it yourselfers in this environment, and we're picking up from the dealer network.

As far as from a competitive standpoint, obviously we're gaining share. Traffic gains will not be great for us. Our market share gains will be, versus the competition, if you look at, in general, us running flat or plus two or minus two traffic, is probably anywhere from 2 to 5 points better than anyone else we are competing with. We can see it in the comps, we can see it in the price increases that our customers are agreeing to pay to us because with the additional prices they are paying us, they view that they are getting more value, whether it is the free tire rotation, whether it is the Brakes Forever program, customers are coming back to us and we would expect those market share gains, as well as the price increases implemented, to stick with the hope that as cost of goods go down, that becomes margin expansion for us, but we are never going to be a plus five traffic company. The opportunities for us are to stay diligent, run the advertising programs to maintain or slightly improve our traffic where other people are giving it up, and then generate whether through price increases or next year, costs of goods improvement, the gross margin improvement, the growth in the business then gets us leverage in the SG&A, and you put those things together and over the next three to five years we start making our movement from a 9.5 to 10% EBIT margin Company to 12% to 13% EBIT margin Company.

Nice job.

Thanks, Jamie.

I will now turn the call back over to Rob Gross for any closing remarks.

We continue to work hard in a tough environment to improve our business, certainly we like what we have seen in the last seven months, we are not taking anything for granted. It is still a tough environment out there and we will continue to challenge ourselves and our stores to do better for the customer and continue to move the Company forward over the near-term and set ourselves up for what we hope to be a nice 2010. Thank you for your support and we will talk to you soon, bye.

Thank you, ladies and gentlemen, that does conclude our conference for today, thank you for your participation. You may now disconnect.