Monro Inc (MNRO) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake first quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; 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 of the Company. And now I would like to introduce Ms. Caren Villarreal 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 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 Securities and Exchange Commission. These risks and uncertainties include, but are not necessarily limited to, uncertainties affecting retail generally, such as consumer confidence and demand for auto repair; risks related to leverage and debt service, including 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 the costs associated with store renovations and other capital expenditures. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material.

Joining us for this morning's call from management are Rob Gross, Chairman and Chief Executive Officer, and Cathy D'Amico, Chief Financial Officer. With these formalities out of the way, I'd 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 2010 performance. After reviewing our quarterly performance, I'll provide you with an update on our business as well as our outlook for the second quarter and fiscal year. 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 results for the first quarter in that we extended last year's strong performance into our new fiscal year, especially in light of ongoing challenges in the economic environment.

Our comparable store sales increase of 6.2% against the 5.6% increase last year was at the high end of our anticipated range and continued to be among the highest in the industry. We generated a total sales increase of 6.4%, achieving a record $128 million in sales compared to $120.4 million in sales for the prior-year first quarter.

For the first quarter, we achieved increases of more than 20% in both operating income and net income. Operating income increased 21.7% to a record $17 million and net income increased 20.7% to a record $9.4 million. In addition, our earnings per share increased to a record $0.46 from $0.39 in the prior-year quarter as we reached the high end of our expected range.

Our earnings per share for the first quarter included about $0.01 of due diligence costs related to our acquisition of Autotire in mid-June. The strong relationships that we have established with our customers, as well as our unwavering commitment to quality service remain the backbone of our business and the keys to our success. Particularly in trying economies, we have found that our customers do not take chances with service providers other than those that they trust, and that is why they keep returning to Monro.

Additionally, over the past few quarters, we have been attracting many new customers and expanding our market share due to dealership closures. In addition, some customers have opted to switch from dealer service to repair specialists, such as Monro, so that they may save 33% to 50%. These trends accelerated in the first quarter given industry developments, as it is projected that approximately 2,000 dealerships will close during our fiscal 2010 year. We believe that this reduced or weakened competition will add approximately 0.5% to 1.5% annually to our comparable store sales over the next two to five years.

Also driving our strong performance in the first quarter is the continuation of our highly impactful and cost effective advertising and marketing campaigns that we began implementing in the third quarter of last year. We've adjusted the campaigns to reflect current industry conditions and encourage new customers to seek our services. In addition, we've also continued to actively promote sales in certain categories through programs such as Oil Change and More in which our customers receive free tire rotations and brake inspections with the purchase of an oil change. Partially as a result of these successful programs, traffic increased approximately 2% for the quarter. We'll continue to fine tune these campaigns to maximize their impact as we move forward in this changing industry landscape.

Moving to our product categories, comparable store sales increased approximately 6% for brakes; 6% for maintenance services; and 7% for tires. We are delighted by our 6% comparable store sales increase for brakes, especially given that others in the industry continue to be challenged in brakes, which is typically a deferrable big ticket item. Strong sales in the brakes category continue to be driven by our solid trust relationships as well as positive customer response to our Brakes Forever sales program and intensified training at store level in this key high-margin category.

You may recall that Brakes Forever is the program in which we guarantee brake pads and shoes for the life of the car, charging only the cost of labor upon replacement. We find that this program not only assists with the sale of brakes, but also keeps our customers returning to us periodically for other services when they need their pads and shoes replaced.

We are pleased with our continued expansion in gross margin, which grew 180 basis points to 44.1% through a combination of price increases, increased vendor rebates, reduced labor costs, and leveraging of occupancy costs due to the higher sales. Also, as we anticipated, we benefited modestly from a reduction in cost of goods during the quarter and we continue to expect that we will more substantially benefit from further reductions in the second half of the year as already received vendor price reductions flow through cost of goods when our inventory turns. Partially offsetting gross margin expansion was the shift in sales mix towards lower margin tire and maintenance service categories.

Another driver of our success has been our ability to leverage our two store formats by maximizing the sale of tires in our service stores and vice versa. Our Black Gold program is designed to accomplish this objective. And combined with strengthened in-store sales execution and employee training, it has helped us to expand our market share and balance our total sales mix. In fact, our 196 Black Gold service stores continued to outperform non-Black Gold service stores during the first quarter. Our Black Gold stores showed a 23% increase in tire sales for the quarter versus about half that percentage increase for non-Black Gold service stores.

We most recently completed the expansion of the program into Cleveland and have been very satisfied with our success in that market. We anticipate that the next opportunity to expand the program will be when we acquire another tire store chain in one of our service store markets.

And now for an update on our growth strategy. I'll start with an update on our Autotire acquisition. Toward the end of the first quarter, we expanded our footprint into the St. Louis, Missouri area when we acquired 26-store Autotire business from American Tire Distributors. We closed the deal in mid-June, about two weeks earlier than expected, and remain very satisfied with our purchase decision, as Autotire is an excellent fit with Monro due to our shared commitment to quality and customer service. Similar to how we handled prior acquisitions, we converted all 26 Autotire stores to Monro's point-of-sale systems, basic operating procedures, and inventory over the closing weekend of June 13th and 14th.

We supported this rapid conversion by holding human resource meetings with all employees and full-day point-of-sale training sessions for all management staff during the week prior to close, which allowed us to focus on serving customers from our first day of ownership. We also asked 26 of our most accomplished Monro store managers to work in the stores alongside the Autotire staff during the first full week of operation under Monro ownership in order to support the conversion to our POS system and procedures as well as demonstrate our winning approach to customer service and building the business. These best performers from Monro formed lasting relationships with the Autotire management and continue to guide their Autotire colleagues.

In addition, we took some steps to more conveniently serve Autotire customers in line with our other stores. For example, we extended our hours of operation significantly on Saturdays and added an extra hour of operation each day during the week. We have also provided the stores with key initial marketing materials, such as A-frame signs, bay banners, and other point-of-sale materials. These are key to driving traffic through our Oil Change and More offers and communicating our full-service capabilities, both of which support the expanded hours of operation. We are confident in our progress integrating the Autotire stores and plan to begin enhanced advertising and marketing programs soon to promote the business and drive customer traffic to the stores. In fact, the business has already started to improve from their minus 11 comps in June to minus 1 so far in July. Given our progress, we expect that Autotire will break even to slightly positive on an operating basis for the first 12 months of operation.

We expect to continue with our strategy of maximizing shareholder return by acquiring low-cost, high-reward businesses that are reasonably priced and have the capability to add value to our company. We believe that we are positioned to capitalize on additional acquisition opportunities as they arise, even while we finish the Autotire integration. We are constantly assessing potential strategic fits to our business. As we have said previously, economic pressures faced by many smaller and even large chains can lead to excellent growth opportunities for Monro and we look forward to taking advantage of these prospects to further expand our market share.

I'd now like to briefly discuss our outlook for the second quarter and fiscal year 2010. As I mentioned at the start of this call, our business is performing well and we are continuing with a positive momentum that we experienced during our last fiscal year. Moreover, we are encouraged that July comparable store sales are up approximately 7% on top of 7.7% growth for last July. We expect that our business will continue to perform well throughout the remainder of the second quarter and full fiscal year.

As we detailed in our press release this morning, we expect second quarter comparable store sales growth in the range of 5% to 7%. We expect second quarter earnings per share to range between $0.43 and $0.48, which compares to $0.38 from the second quarter of fiscal 2009. For the full year, we continue to expect total sales in the range of $515 million to $530 million and comparable store sales growth in the range of 4% to 7%. We are positively adjusting our estimated range for fiscal year EPS to $1.35 to $1.45 from our previously estimated range of $1.30 to $1.45. Also, as I mentioned a few minutes ago, we expect to benefit from reductions in cost of goods sold during the second half of the year, which we anticipate will help drive continued expansion in gross margin.

In summary, we are continuing to perform well as we benefit from our low cost business model and Company-owned stores, which remain among our key competitive advantages. Additionally, customers regularly return to us for their maintenance needs based on their positive experiences and our solid reputation for excellent service in an industry for which trust is often an issue. While our customers continue to face economic pressures, they are holding onto their older cars longer, which is good for our business. We believe that these positive trends in our business, along with reduced competition and related uncertainty, position us well in a continued difficult economic environment as well as an eventual economic recovery.

With that, I would like to turn the call over to Cathy for a more detailed review of our financial results.

Thanks, Rob. Good morning, everyone. Sales for the quarter increased 6.4%, with comparable store sales increasing 6.2%, and new stores, which we define as stores opened after March 30, 2008, added $2.5 million, which includes $1.3 million from the 26 Autotire Center stores acquired in June of this year.

The Valley Forge, Craven, and Broad Elm stores are now all included in the comparable store sales numbers. Partially offsetting these increases was a decrease in sales from closed stores of approximately $2 million for the quarter. This compares to a comparable store sales increase of 5.6% in the first quarter of last year. There were 77 selling days in both the current and prior-year first quarters.

At June 27, 2009, the Company had 740 Company-operated stores, as compared with 713 stores at June 28, 2008. During the quarter ended June 2009, the Company added 26 stores from the Autotire acquisition and opened four additional stores. There were no store closures.

Gross profit for the quarter ended June 2009 was $56.4 million, or 44.1% of sales, as compared with $50.9 million, or 42.3% of sales, for the prior-year quarter. The increase in gross profit for the quarter ended June 2009, as a percent of sales, is due to several factors. There was a decrease in labor cost as a percent of sales, due primarily to a continued shift in mix to tire sales. Distribution and occupancy costs decreased as a percentage of sales from the prior year as the Company with improved sales was able to better leverage largely fixed costs. In addition, rent expense decreased due to the capitalization of one new and several recently renewed store leases. This was offset by an increase in depreciation and interest expense.

Material costs decreased as a percentage of sales as compared to the prior year due to several factors. Outside purchases declined as compared to the prior-year quarter. There was also an increase in vendor rebates as compared to the prior year. Additionally, price increases helped to offset margin pressure caused by tire price increases as well as a slight shift in mix to the lower margin categories of tires and maintenance services.

Operating expenses for the quarter ended June 2009 were $39.4 million, or 30.8% of sales, as compared with $36.9 million, or 30.7% of sales for the prior-year quarter. Within operating expenses, selling, general, and administrative expenses for the first quarter of this fiscal year 2010 increased by $2.3 million to $39.2 million from the prior-year quarter, and were 30.6% of sales, unchanged from the prior-year quarter.

The Company gained leverage as a percentage of sales in many of the components of SG&A, both in store direct and store support costs because of strong comparable store sales and cost control. Excluding benefits expense, SG&A would have been a full point lower as a percentage of sales as compared to the prior year.

In the first quarter of the prior year, the Company changed its method of reserving for incurred but not reported health claims, reducing expense by $0.6 million. Without this credit, SG&A expense would have been 31.1% of sales last year as compared to 30.6% this year. And operating expense last year would have been 31.2% of sales, as compared to this year's 30.8%. Utilities expense in the first quarter of fiscal 2010 was also lower as a percent of sales as compared to the prior year due to reduced energy costs and lower usage in some areas.

Intangible amortization for the quarter ended June 2009 remains unchanged from $0.1 million for the quarter ended June 2008 and was at 0.1% of sales for both quarters. The gain/loss on disposal of assets for the quarter ended June 2009 decreased about $200,000 from a gain of $30,000 last year to a loss of $140,000 for the quarter ended June 2009, an increase by 0.1% as a percentage of sales. This line item accounts for the overall increase as a percent of sales in total operating expenses as compared to the first quarter of last year.

Operating income for the quarter ended June 2009 of approximately $17 million increased by 21.7% as compared to operating income of approximately $13.9 million for the prior-year quarter, an increase, as a percentage of sales, from 11.6% to 13.3%.

Net interest expense for the quarter ended June 2009 increased by approximately $0.4 million, as compared to the same period in the prior year, and increased from 1.3% to 1.5% as a percentage of sales for the same period. The weighted average debt outstanding for the first quarter of fiscal 2010 decreased by approximately $18.5 million as compared to the first quarter of last year, primarily related to repayments made on the Company's revolving credit facility agreement. However, the weighted average interest rate increased by approximately 250 basis points over the prior year. This increase is due primarily to an entry in the current quarter to capitalize one new and several recently renewed leases. Without this entry, the weighted average interest rate decreased by approximately 30 basis points due to a slight shift to a larger percentage of debt, capital leases versus revolver, outstanding at a higher rate. For the year, interest expense should be approximately $6.3 million. We will have a corresponding decrease in occupancy costs, which are included in cost of sales.

Other income for the quarter ended June 2009 remained unchanged at approximately $0.1 million, as compared to the same period in the prior year.

The effective tax rate for the quarter ended June 2009 and June 2008 was 37.8% and 37.6%, respectively, of pre-tax income.

Net income for the current quarter of $9.4 million increased almost 21% over net income for the prior-year quarter. Earnings per share on a diluted basis of $0.46 increased 17.9% over last year's $0.39.

Moving on to the balance sheet, we continue to have a very strong balance sheet. Our current ratio at 1.4 to 1 is comparable to last year's first quarter and our year end. We generated $16 million of cash flow from operating activities this quarter and were able to pay down $3 million of debt during the quarter in spite of the Autotire acquisition, which used $7.4 million of cash in the quarter. As a result of the debt pay down, our debt-to-capital ratio dropped to 32% from 34% at year-end. As just a reminder, we have our $163 million revolving credit facility, which is committed through January 2012. The agreement bears interest at LIBOR plus a spread of 50 to 150 basis points. We are currently paying LIBOR plus 100 basis points. That spread will drop to 75 basis points around the end of this month once we file our bank compliance certificate for a net interest savings of about $150,000 on an annual basis.

The very favorable agreement permits us to operate our business, including doing acquisitions, without bank approval as long as we are in compliance with debt covenants. Those terms, as well as our current availability of $88 million, give us a lot of ability and flexibility to get acquisitions done quickly, as we did this quarter. We are fully compliant with all of our debt covenants and have a lot of room under our financial covenants to do additional acquisitions without any problem.

During the quarter, we were also conservative with our CapEx spending at $4 million. Depreciation was approximately $5 million, and we received $700,000 from the exercise of stock options. We paid about $2.6 million in dividends.

Inventory is up $3.5 million from March 2009, due primarily to the addition of the Autotire stores, which accounted for $2.1 million of the increase, as well as 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 continue to try to reduce outside purchases and buy ahead of cost increases.

That concludes my formal remarks on the financial statements, and with that, I will now turn the call over to the operator for questions.

Thank you. (Operator instructions.) The first question this morning will come from Scott Stember with Sidoti & Company.

Hey, Scott.

Could you maybe give a couple of more of the segments' comps -- wheel alignment, exhaust?

Sure. Exhaust was down 1%; shocks were down 6%; brakes up 6%; front-end, up 6.7%; alignments up 2.5%; service up 6.5%; tires up 6.6%.

Okay. And last quarter you had talked about how you were targeting numerous Chrysler dealers that were within five to ten miles of a Monro location that were closing. Could you just talk about any initial success that you can pin exactly on those closures?

Well, we're not obviously going to get into a store-by-store analysis, but obviously our traffic was good, our comps were good. They continue to be good in July, and remember the stores that Chrysler announced closing was June 9th. I mean, so you're not going to see much of it in Q1. We would hope that that contributed to July. And we'll see how it goes. We haven't even really, in earnest, made our efforts to capture some of that business.

But remember, we keep talking about the dealer closures being immediate and big and what we tried to say by putting a number of 0.5% comp to 1.5% over the next five years annual help, is that this is going to be a long process. A lot of these car dealers are going to try and become used car dealers, a lot of these car dealers are going to try and provide service. We don't think they're going to have much success. But it is more long-term gain.

And a lot of what we've gained already was Q3/Q4, just with the uncertainty of GM and Chrysler, the bankruptcies, are they closing. I don't want to spend $1,000 at someone who is closing. But also, in general, the economic environment where people are going to trade down from an $800 brake job at a dealer to a $500 brake job at Monro. And I think we've seen that already, we're seeing it currently, so I think the dealers will be a positive. It's longer term than I think people are assessing. We're certainly getting help and would expect help this quarter and the rest of the year. But I mean it's not going to be this massive comp increase in leverage.

Okay. Talking about the gross margin, what you've done this quarter and the comments you made about the back half of the year with reduced costs, let's say for oil, is it fair to assume that we should see similar types of increases then accelerating throughout the back half of the year?

Yes. Just remember that distribution and occupancy are included in our gross margin, which are fairly fixed components. So our largest sales volume months are Q1 and Q2. You'll see similar numbers in Q1 and Q2. And then what we said, when we start in Q3 and Q4, the cost declines will have already been fully through inventory turns and you should see more pronounced improvement, albeit remember we're up against a Q3 gross margin last year and a historically low Q4 gross margin the year before. But, yes, you should be seeing improvement sequentially quarter by quarter.

Okay. And, lastly, advertising, could you just talk about where the levels were this quarter versus the previous quarters (inaudible)?

Sure. We're continuing to spend at a similar dollar level as we did last year. But that should get us more efficiency based on the fact that both Internet purchases of advertising as well as electronic media, radio, the cost to purchase them has gone down. So by us keeping our dollars the same, with comps running where they are and advertising rates being reduced by anywhere from 10% to 15%, that should benefit us with more effective advertising, cost effective, throughout the year.

Great. That's all I have. Thank you.

Thanks, Scott.

Thank you. Our next question will come from Tony Cristello with BB&T Capital Markets.

Hey, Tony.

Hey, good morning, Rob. I'm going to Cathy.

Okay, thanks.

A couple of questions. One, there's been a lot of discussion recently on proposed tariffs on Chinese tire imports, and, obviously, it's going to come down to the current administration's decision on what to do. Can you talk a little bit about your mix of business? I'm assuming there's been a lot of trade down to those lower price point tires. What impact, if any, would that type of tariff have on, one, your business, and, two, do you think on the consumer?

Sure. As far as our business, I guess two things. We have a tendency to sell less private label than a lot of our competitors. So that should benefit us if things get uglier with tariffs and cost of goods on low-end tires go up. And then just in general with our business, us being the low cost operator and as big as we are, what we've said with any kind of tariffs, legislation, things that potentially hurt the industry, anything that hurts the industry hurts us less based on our position within the market. So new things coming in that you've got to react to, we feel any change benefits our company going forward and we're prepared to deal with that.

As far as the consumer, I think if things go through as they're talking about, and there's certainly no guaranteeing that, I think they're going to be paying more for their tires.

And I guess, yes, then it would probably force more, perhaps, business to the private label or at least a trade down from a higher-end brand, if you will, if that opportunity exists. Is that kind of the way to think about it?

Yes. I think people are already trading down. They've been trading down for the past year. We obviously have numerous suppliers and access and we'll see if we, as a country, want to start this battle and think that it's going to benefit us long term.

It may help the tire industry, but it may hurt others. All right, when you look at, then, gross margin, you're showing nice improvement. You talked about vendor rebates and pricing and those types of things that have sort of created a tailwind here for a few quarters on the gross margin side. When you look at over the past couple of years in the accounting change and moving vendor rebates and co-op out of SG&A up into the gross margin side, that has certainly acted as an offset to more or greater tire mix, which generally carry lower gross margins. Beyond this year, I mean how should we be thinking about the benefits of co-op or vendor rebates in that gross margin line, along with, then, the offset for what I'm assuming is going to be a greater representation from the tire category given Black Gold and expansion into the tire sales and into new markets?

Sure. Obviously, tires are the lowest margin category we sell and it's one of the fastest growing categories. That being said, I think it's a key driver of gross margin dollars and comp store sales and absorbing SG&A, which are all the benefits. But you're right. Prior to last year us running a 20% earnings increase we had two fairly flat years. And I think what has gotten lost with the vendor co-op and the accounting change for that is about a 200-basis point detriment to our gross margin, while it makes our SG&A look like we're getting no leverage because millions of dollars of vendor rebates and co-op advertising, which used to be a direct offset to advertising expense in SG&A, now flows through cost of goods and inventory turns.

So over the same period where gross margin was being artificially helped, if you will, with vendor co-op moving up to reduce cost of goods, our cost of goods on tires and oil was doubling. So net/net it really doesn't matter, except for a couple of months of timing. But the gross margin improvement we're experiencing the last couple of quarters, and the expected improvement going forward, is a lot more pronounced because we're starting at an artificially low level due to the cost of goods going up so significantly over the past three years that we're just starting to get it back now. And then likewise it looks like we're not maybe getting as much SG&A leverage as we should be with the growth we've experienced.

So, outside of, say, the next 12 months, when you look at gross margin, I'm assuming you'll continue to have some benefit that then is offset directly with greater mix of tires that may then neutralize any big gross margin improvements and maybe, sort of maybe, modest 20, 30 basis point type of improvements rather than the larger 100-basis point type chunks?

Well, specifically what we've said, we kind of view things over a longer period maybe than some folks. And our five-year plan involves EBIT margin going up 200 to 300 basis points from the 9.5% level over the next five years. And we drive that through 15% top-line growth; 10% acquisition growth; 4% comps; 1% greenfield stores. Now, obviously, the acquisition piece is choppy, but last year and this year it looks like the 4% comp level is going to be lower than what we're anticipating over the long term. That should then generate the 200 to 300 basis points of EBIT margin improvement, which nullifies some of this movement between vendor co-op and gets us a pure operating number, which should then deliver, if we do it right, a consistent 20% bottom line as a target.

Within that, then, what we've said on acquisitions, barring -- now that we have to expense due diligence costs of $0.01 to $0.02 each one of these deals, but in general on an operating basis, the first year of an acquisition at that 10% top line growth number should deliver breakeven bottom line. It should then be $0.05 accretive year two and an additional $0.03 to $0.04 accretive year three. So you can model and layer in the acquisition growth into that five-year model and then move your gross margin any way you want to. But our target obviously is let's grow our EBIT margin by 300 basis points.

Okay. And just one other follow-up. And, Cathy, I think you alluded to the SG&A actually would have been 100 basis points lower if it wasn't for the accounting of health care and how you sort of adjusted for sort of how that works prior to last year. Going forward, is that sort of structure to where you make a new adjustment every year, or then as we get 12 months out from now, will you still be basically using the same metric you did this quarter so you won't have as much of a negative impact?

The latter, Tony. That was a change. Basically, the reserve, we found that the insurance companies are reporting claims more timely. So, instead of having, say, a three-month reserve, we went to a two-month reserve. And that will hold now going forward unless something significantly changes with how the insurance company operates.

Okay. So a year from now, though, you shouldn't have as dramatic of an impact then? It wouldn't be 100 basis points drag?

That's correct. And actually only a little more than half of that was due to the health insurance. There were some other factors there as well. But the biggest chunk of it was the health insurance change and not needing as much of a reserve.

Okay.

Tony, are you going to tell us what's going to happen with the health insurance plans?

We're all going to have health insurance, Rob. I'll leave it at that. Thanks.

Yes.

Thanks, Tony.

We will take our next question from John Lawrence with Morgan Keegan.

Good morning.

Hi, John.

Cathy, I mean not to beat the gross margin to death, but can you sort of walk us through just a little bit some of those components and maybe put them in buckets as major or minor factors in the increase?

Sure. If you take combined material costs compared to last year, that was probably about -- that's between material usage and outside purchases, that was probably close to half of the improvement.

Okay.

Including vendor rebates. And tech pay was very -- fairly small. And the other half would have been, or say 45%, would have been the occupancy cost leverage in that accounting entry for the cap leases.

And once again, the tech pay, Rob, that labor coming down, was a result of just higher tickets with, say, for tire purchases?

Yes. I mean incentive pay on tires is lower than incentive pay on other items. Again, remember we've also said that our turnover is down 15% year over year, which obviously helps if you have less turnover within your ranks. So I think those two factors helped.

And just on that note, on techs with the dealerships, are you still seeing tech applications on the rise?

Sure. Tech applications are on the rise. We, obviously, based on our standing within the industry and the fact that we're winning and growing and provide career opportunities, we're a popular place. But relating to hiring technicians out of dealers, remember part of our competitive advantage is the fact that a technician for a dealer might make $70,000, for us, they'll make $40,000. If there's a quality dealership technician that can either run a store or be a service manager in a tire store for us, so we can hold their pay somewhat comparable, that would be attractive for us. We get concerned when we are the guy hiring someone that lost his $70,000 a year job and we're going to offer him all of $40,000 a year. That has a tendency to be a very unhappy employee until they get used to their new reality, and we'd rather that new reality be established by one of our competitors.

Okay. And back on the outside purchases for a second, obviously those deals that come along, I assume they're one time in nature from time to time from different manufacturers?

Yes. I think we're seeing a lot more one-time deals from the tire manufacturers offering us OEM units or a lot of units that they ran up production, that with our warehousing, with some of the skilled buying staff, and the fact that we are now a customer of choice based on our growth. And as fast as it's growing, there's, as Cathy mentioned, vendor co-op available. There are significant decreases for cost of goods by having the ability to pay quickly, and also the ability to pick up 20,000, 50,000 units in one shot and solve a problem for a vendor. All of that works to our advantage.

Last question, I promise. The 11% down, the minus 1 at Autotire, what would you give me, the two major factors for that?

Well, John Van Heel and Joe Tomarchio would tell me that it was their brilliance.

I understand. As they should probably.

I think, we've been doing this a long time, I think the team spent a lot of time prepping for this transition. I think the biggest plus is getting a deal that has that number of stores and the real estate in such good shape surrounding the market so we can continue to move forward with our advertising as we go forward. But the one thing we get out of this deal that we really don't have the opportunity in a lot of other deals is to be able to drive sales just by opening when our customers want to shop. That creates huge customer convenience. We're now not turning business away. And I think that's why you can see, as a first step, such a pronounced improvement from June to July and turning the tide a lot quicker than any deal we've ever done and moving forward to grow the business in that market once we start advertising over the next little bit.

But the hours changed, what, mid-month?

The 6th of July.

The 6th of July. Thanks. Good luck.

Thank you. (Operator instructions.) And we do move now to Bret Jordan with Avondale Partners.

Good morning, Rob.

Hey, Bret.

Quick question. We've flogged the gross margin question, but on the comp store sales in July, now that we're doing monthly comps, how much of that is traffic versus ticket? And from a June standpoint, given the historically wet weather in the northeastern market, do you think you did have some deferred sales into July or is the trend really that strong in this quarter? I guess what was the June comp?

June comp was up 5.

Okay.

And I think we gave the others. April was 5.5. I think May was plus 8. So, effectively, you're looking for us to have excuses for why our performance is so poor? I think, boy, May, June, and July weather in the Northeast was terrible and we didn't have any stimulus checks like we did last year and business was just so weak. I think the July comps were benefited. While again we're not going to get specific, in general, it's up quarterly. Traffic was up a little bit better than the 2%. Maybe you can focus on 4% to 5% traffic, price going through.

And as far as the rest of Q2, obviously there's two periods from our perspective that we keep an eye on. One is Christmas as a month that people can defer. If you remember, even during our run last year of really strong numbers, December was only up plus 3, our worst monthly comp. But then January came back at plus 15, our best monthly comp. That is a deferral of one month due to Christmas.

We also, because we have nothing better to do, worry about back to school. And even though it's earlier this year, where we should have seen some pressure at the back half of July and should be over after the first couple of weeks of August, we worry potentially that might be another period in a tough economy where people defer their purchases, even though I don't have one day of sales in August. That's kind of how we think about it, is that, if there is a deferral in August, we should get it back in September. Like in December, we got it back in January. So it should all be within the quarter.

Okay, great. And just confirming, to think about the gross margin, as Cathy was saying, about 50% of that benefit was on the material side, right?

Well, effectively, yes.

Including outside purchases.

Yes.

Right.

Right, exactly. Okay, thank you.

And at this time we have no other questions standing by. I'd like to turn the program back to our speakers for any additional or closing comments.

Great. Thanks, Operator. Again, everybody, our whole team, has done a great job. It's a team effort and what they accomplished in very short order at Autotire speaks to everyone at headquarters as well as the field team that's been getting the job done, as well as our comp store numbers, including the strong performance in brakes. We're pleased with our market position. We're pleased where the Company is positioned overall. And we look forward to talking to you in a couple of months and talk about another great quarter. So thanks very much for your support. We're working hard for your benefit as well as our customers and employees. Thanks and have a great day. Bye.

Thank you, everyone, for your participation in today's conference call, and you may disconnect at this time.