Monro Inc (MNRO) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake third-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, and instructions will follow at that time. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the Company.

I would now like to introduce Ms. Jessica Greenberger 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 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 relating 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 in stores are located; and the need for and costs associated with store renovations and other capital expenditures.

The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material.

Joining us for this morning's call from management are Rob Gross, Chairman and 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.

Thank you. Good morning, and thank you for joining us on today's call. We are pleased that you are with us to discuss our third-quarter 2010 performance. After reviewing our quarterly performance, I will provide you with an update on our business, as well as our outlook for the fourth 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.

The positive momentum that we have experienced the last two years continued throughout the quarter, and we turned in record third-quarter results. Our comparable store sales increase of 7.2% on top of a 5.9% increase last year continues to be among the highest, if not the highest, in our industry. Notably, we are on track to deliver our ninth consecutive year of annual comparable store sales increases in fiscal 2010, which further underscores that our business model is effective in both good and difficult times.

In addition, we are very pleased to have increased total sales by 28.7% to a record $152.7 million compared with $118.7 million in sales for the prior-year third quarter.

We continue to generate very stronger growth in both operating income and net income. Operating income for the third quarter increased 43.7% to a record $14.3 million. This translates to an operating margin of 9.3% compared with 8.4% in the third quarter of last year.

I want to note our significant improvement in this metric, given our recent acquisitions, which have been tire stores. As anticipated, while our third-quarter gross margin results reflect a product mix shift towards lower-margin tires, we are also realizing benefits to our operating margin as we scale up and increase our ability to leverage our cost structure.

As a result [of] our sales and operating margin improvement, net income increased 41.8% to a record $7.9 million. Our earnings per share, which came in $0.03 higher than our previously expected range, increased to $0.38 on a base of 20.8 million shares outstanding from $0.28 on a base of 20.1 million shares in the prior-year quarter.

Additionally, our earnings per share for the third quarter included expense of about $0.01 for due diligence costs related to our acquisitions. Q4 will have a similar $0.01 charge for acquisitions we are currently working to complete, as well as integration costs.

Customer traffic, which remained strong through the quarter, and our superior in-store execution drove the strong results across our business. We are extremely pleased that many of the positive industry and macroeconomic trends that we have been experiencing over the past two years have continued into the back half of this year.

Specifically, dealer uncertainty and closures that have taken place over the last two years have allowed us to attract many new customers and expand our market share. The trusting relationships that we have established with our customers and our unwavering commitment to quality service remain the driving factors behind our success. These key tenets of our business have enabled us to continue gaining new customers as they seek convenient, value-priced alternatives to a declining dealership base.

Most importantly, with 9 million fewer new vehicles being sold over the last two years and the large increase in aged vehicles on the road as a result, we are seeing significant benefits to our business. As drivers continue to delay their purchases of new vehicles, they are maintaining their current vehicles for longer period, and look to Monro to help them keep these older vehicles on the road and operating safely.

We have also noticed that we are seeing more vehicles earlier, when they are only two to three years old, when historically, we would see more vehicles after about five to six years of ownership. We are hopeful that by beginning to build a relationship with the customer earlier in the vehicle's life, we will establish longer customer relationships, and that with new vehicles sales down and not expected to recover for years, this momentum could become a longer-term trend.

As you may recall, during the third quarter of last year, we began implementing highly impactful and cost-effective advertising and marketing campaigns. I am happy to say that these campaigns continue to drive traffic almost a year later.

In addition, we are continuing to promote sales in certain categories through specific programs, such as Oil Change & More, in which our customers receive free tire rotations and brake inspections with the purchase of an oil change, and Brakes Forever, in which we guarantee brake pads for the life of the car and replace pads for only the cost of labor.

The return on our investment in these programs, as well as the favorable macro environment, is evidenced in a same-store traffic increase of 4% for the quarter, supported by a 7% increase in the number of oil changes and a 6% increase in brake sales.

Moving to our product categories, comparable store sales increased approximately 13% for alignments, 10% for tires, 8% for exhaust and 3% for maintenance services. In addition, brakes continued to be solid, with comparable store sales up approximately 6%, and shocks, which are generally one of the most deferrable purchases, were very strong, with comparable store sales up 11%, attesting to the fact that you can only defer car maintenance for so long.

Importantly, scheduled maintenance increased 11% during the quarter and 17% last quarter, which in many cases stems from business that we gain from dealerships. This increase indicates to us that customers are increasingly coming to appreciate Monro's value proposition, convenience and 33% to 50% less expensive. And more are turning to Monro as their trusted service provider for all their service needs.

We are also especially pleased with the comparable store sales increases in the alignment category, which is a high-margin category closely tied to the sale of tires. Tires also increased significantly this quarter, with strong unit sales in both our core tire and Black Gold stores. You may recall that our Black Gold program is designed to maximize the sale of tires and related services in our service stores.

Another driver of our success has been our ability to leverage our two store formats, both tires and service stores. Notably, our 194 Black Gold service stores continued to outperform non-Black Gold service stores year-to-date. Our Black Gold stores showed a 19% comp increase in tire sales for the year versus a 13% increase for non-Black Gold service stores.

Additionally, as a result of our recent acquisitions, we are poised to convert an additional 53 service stores to our Black Gold format in the fourth quarter, which should increase the overall sales and profitability of these service stores.

And now, for an update on our growth strategy. We are focused on increasing our market share through same-store sales growth, expanding our product offerings, continuing new store openings in existing markets and acquiring competitors at attractive valuations.

As you know, toward the end of the second quarter, we acquired 45 Tire Warehouse Central and Midwest Tire & Auto Repair stores. In addition, we acquired 26 Autotire stores in the first quarter of the year.

We have added approximately $90 million in annualized sales, which translates to approximately 20% top-line growth from these recent tire store acquisitions. These acquisitions are running considerably ahead of plan, with Tire Warehouse up 11% comp sales during their busiest time of the year, and were the primary reason for our earnings beat and raised full-year guidance.

As I noted earlier on the call, these acquisitions have had some effect on our sales mix, shifting it towards the lower-margin tire category, and therefore impacting our gross margin expansion. However, I am very pleased to point out that our operating margin is up 90 basis points, as we have been able to prudently control expenses and leverage our SG&A spend over a significantly higher sales base.

We continue to be on the lookout for value-priced, opportunistic bolt-on acquisitions to further fill out our footprint. As part of this strategy, in January, we announced the acquisition of the assets of Cheshire Tire Center, Inc. in Keene, New Hampshire, which generates net sales of approximately $3 million annually.

Importantly, we remain very well-positioned to capitalize on additional acquisition opportunities as they arise. As I have previously noted, we continue to believe that economic pressures put on our competition, particularly smaller chains and mom-and-pop shops and their tax concerns, can lead to excellent growth opportunities for Monro. We remain poised to take advantage of such prospects and hope to add approximately $20 million in sales through new, unannounced acquisitions by the end of this quarter.

I would now like to briefly discuss our outlook for the fourth quarter and fiscal year 2010. As I've discussed, our business continues to perform well, and we expect that the positive momentum that we have been experiencing will continue in the fourth quarter.

We are also very encouraged by our January comp store sales, which were up approximately 9%, and that is on top of an extremely strong 14.6% last January. In addition, we expect that the favorable macro conditions that we have been experiencing will continue throughout the remainder of the year and beyond.

While we remain optimistic about our prospects going forward, we realize that we are operating in a difficult environment and very uncertain times, and will remain vigilant going forward.

As we detailed in our press release this morning, we expect fourth-quarter comparable store sales growth in the range of 5% to 7% versus 11.2% in the prior year. We expect fourth-quarter earnings per share to be in the range of $0.20 to $0.23, which compares to $0.15 for the fourth quarter of fiscal 2009.

For the full year, we now expect total sales in the range of $555 million to $561 million and comparable store sales growth in the range of 6% to 7%, on top of 6.7% last year. Additionally, we now expect fiscal-year EPS of $1.53 to $1.56, up from our previously expected range of $1.44 to $1.48.

If you've heard me speak at conferences recently, you might recall me talking about our five-year operating plan. Before I turn the call over to Cathy, I would like to take a minute to talk about where we are with regard to the plan as we approach the end of the year one.

When we first developed our plan, we set out to grow the top line by 15% annually, which would be 10% through acquisitions, 4% through comps and 1% through greenfield stores, as well as a goal of 12% to 13% operating margins or 200 to 300 basis points of operating margin improvement. I am pleased to report that even with the changing environment, we are ahead of the curve and see no reason currently that 2011 won't continue to move us forward.

I want to assure you that we are as focused now as when I joined the Company 10 years ago. I am setting new goals, growing the business organically and through acquisitions, executing on operational initiatives, protecting our position as a low-cost operator and capitalizing on favorable industry trends.

As we continue to see even more reductions in competition as a result of the difficult economic environment, we remain confident that customers will continue to choose Monro for service that they trust.

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

Thanks, Rob. Good morning, everyone. As Rob stated, sales for the quarter were up 28.7%. Comparable store sales increased 7.2%. The Craven and Valley Forge stores acquired in July 2007 and the former Broad Elm stores acquired in January 2008 are now included in comparable store sales. Additionally, there was an increase of $28.8 million related to new stores, of which $27.3 million came from the Autotire, Midwest and Tire Warehouse stores acquired this fiscal year.

Partially offsetting this was a decrease in sales from closed stores amounting to $1.8 million. This all compares to a comparable store sales increase of 5.9% in the third quarter of last year.

Year-to-date, total sales increased 16.3%. Comp store sales increased 6.9% versus 5.3% for the first nine months of last year. New stores this year to date added $41.3 million, including $37 million from the Autotire, Midwest and Tire Warehouse stores. Partially offsetting this increase was a decrease in sales from closed stores of $5.7 million.

At December 26, 2009, the Company had 780 Company-operated stores as compared with 711 stores at December 2008. During the quarter ended December 2009, the Company added 42 locations and closed one. Year-to-date, the Company has added 76 locations and closed six underperforming locations.

Gross profit for the quarter ended December 2009 was $58.6 million, or 38.3% of sales, as compared with $42.2 million, or 38.1% of sales, for the same quarter of last year. The increase in gross profit for the quarter ended December 2009 as a percentage of sales is due to several factors.

First, there was a decrease in labor cost as a percent of sales due partially to a continued shift in mix to tire sales, as well as improved labor productivity. 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.

Total material costs, including outside purchases, increased as a percentage of sales as compared to the prior-year quarter. This was due to margin pressure caused by a shift in mix to the lower-margin categories of tires and maintenance services from the higher-margin categories of brakes and exhaust.

As Rob mentioned, the fiscal year 2010 acquisitions, which were all tire stores, have resulted in a more pronounced shift in mix this quarter. Partially offsetting this was a decrease in material costs, primarily in oil and tires.

Gross profit for the nine months ended December 2009 was $173.8 million, or 41.6% of sales, as compared with $146.5 million, or 40.8% of sales, for the nine months ended December 2008.

Operating expenses for the quarter ended December 2009 were $44.3 million, or 29% of sales, compared with $35.3 million, or 29.7% of sales, for the same quarter last year.

Within operating expenses, selling, general and administrative expenses for the quarter ended December 2009 increased by $7.8 million to $43.5 million from the quarter ended December 2008, and were 28.5% of sales compared with 30.1% for the prior-year quarter. Over $5 million of the increase in operating expenses is directly attributable to the acquired stores' operating expense.

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 and acquisition store sales, as well as cost controls.

For the nine months ended December 2009, operating expenses increased by $16.2 million to $125.1 million from the comparable period of the prior year, and were 30% of sales compared to 30.3% in the prior year.

SG&A expenses for the nine months ended December 2009 increased $14.5 million to $123.8 million from the comparable period of the prior year, and were 29.7% of sales compared to 30.5%.

Intangible amortization for the quarter ended December 26, 2009 increased by $0.3 million to $0.4 million from the comparable period in the prior year, and was 2/10 as a percent of sales compared to 1/10 of a percent. The increased is due to the acquisitions that occurred in fiscal 2010. Intangible amortization for the nine months ended December 2009 increased by $300,000 to $700,000 from the comparable period of the prior year.

Gain on disposal of assets for the quarter ended December 2009 decreased $0.9 million from a gain of $0.5 million for the prior-year quarter to a loss of $0.4 million for the current quarter. The decrease is due to the closure of underperforming stores this quarter, as well as the timing of proceeds from a number of sales of property in one quarter versus another.

Year-to-date, gain on the disposal of assets decreased $1.3 million from a gain of $0.8 million for the nine months ended December 2008 to a loss of $0.5 million for the nine months ended December 2009.

Operating income for the quarter ended December 2009 of approximately $14.3 million increased by 43.7% as compared to operating income of approximately $9.9 million for the quarter ended December 2008, and also increased as a percentage of sales from 8.4% for the quarter ended December 2008 to 9.3% for the quarter ended December 2009.

Operating income for the nine months ended December 2009 of approximately $48.8 million increased by 29.6% as compared to operating income of approximately $37.6 million for the nine months ended December 2008. It also increased as a percentage of sales, from 10.5% for the nine months ended December 2008 to 11.7% for the nine months ended December 2009.

Interest expense for the quarter ended December 2009 decreased by approximately $0.5 million as compared to the same period in the prior year, and decreased from 1.3% to 0.7 [of a per] -- as a percentage of sales for the same period.

The weighted average debt outstanding for the quarter ended December 2009 decreased by approximately $4 million from the prior-year quarter, primarily related to repayment of the Company's revolving credit facility agreement. In addition, the weighted average interest rate decreased by approximately 200 basis points from the prior year.

Net interest expense for the nine months ended December 2009 decreased by approximately $300,000 as compared to the same period in the prior year and decreased as a percentage of sales from 1.3% for the nine months ended December 2008 to 1% for the nine months ended December 2009.

Our effective tax rate for the current-year quarter was 40.7% as compared to 34.2% of pretax income for the prior-year quarter. The difference in rate relates to the accounting for uncertain tax positions, which may vary from quarter to quarter and year to year.

The effective tax rate for the nine months ended December 2009 and December 2008 was 38.8% and 36.9%, respectively, of pretax income. At this point, we would expect our fourth-quarter and fiscal-year 2011 tax rate to be approximately 38% of pretax income.

Pretax income for the quarter of $13.3 million and year to date of $44.6 million for the period ended December 2009 increased by 57% and 34%, respectively, over the prior-year period.

Net income for the quarter ended December 2009 of $7.9 million increased 42% over net income for the quarter ended December 2008.

Earnings per share on a diluted basis for the quarter ended December 2009 increased 36%, even with share count increasing by 700,000 shares, with more stock options being in the money.

For the nine months ended December 2009, net income of $27.3 million increased 30%, and diluted earnings per share increased 27% over the prior year year-to-date figures.

Moving on to the balance sheet, our balance sheet remains strong. Our current ratio at 1.3-to-1 is comparable to, though slightly lower, than last December and year-end. The decrease 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.

In the first nine months of this year, we generated $41 million of cash flow from operating activities as compared to $24 million for the same period last year. We spent approximately $11 million on CapEx and $44 million on acquisitions. Nonetheless, we were still able to pay down a net $12 million of debt during this fiscal year. As a result of the debt paydown, our debt-to-capital ratio dropped to 28% from 34% at year-end.

As a reminder, we have a $163 million revolving credit facility with a group of lenders that is committed through January 2012. The agreement bears interest at LIBOR plus a spread of 50 to 150 basis points. We currently are paying LIBOR plus 75 basis points.

The very favorable agreement permits us to operate our business, including doing acquisitions without bank approval, for as long as we are in compliance with debt covenants. Those terms, as well as our current availability of $96 million, give us a lot of ability and flexibility to get additional acquisitions done quickly. We are fully compliant with all of our debt covenants and have plenty of room under our financial covenants to do more acquisitions without any problem.

During the first nine months of this year, we paid approximately $5.4 million of dividends and received about $4 million from the exercise of stock options. Depreciation and amortization totaled $16 million year to date and $6 million this quarter.

Inventory is up $14.5 million from March 2009, due in large part to the $12.6 million of inventory added related to our FY '10 acquisitions. The balance of the increase relates in part to the expansion of the Black Gold store program, as well as adding inventory in our continuing efforts to improve stocking levels and mix of inventory to reduce outside purchases, and also buy ahead of cost increases. We purchased a large supply of import tires in anticipation of the tariff that was imposed at the end of September. Turns were relatively flat as compared to year end and last year December.

That concludes my formal remarks on the financial statements, but I wanted to share with you some information about (technical difficulty) selling activity that we expect from directors and management. As we mentioned in the conference call at the end of the second quarter, you may see some activity in the stock over the next month. Some of the directors may be selling stock in connection with our annual estate planning goals, approximately a total of 125,000 to 150,000 shares.

In addition, some members of the management team have options that expire in May 2010, and February is the last month to trade prior to the options expiration. They plan to sell stock to be able to exercise these options and pay any related income taxes. However, in the case of the management trades, you should see a net increase in their holdings over the last six months.

With that, I will now turn the call over to the operator for questions.

(Operator Instructions) Scott Stember, Sidoti & Company.

I'm trying to just quantify the benefit from dealership tradedown, how much of it is coming from closed dealerships versus, let's say, a Toyota or a Honda dealer, where a customer just doesn't want to pay 30% to 40% more for an oil change.

I think in general, Scott, without getting too granular, what we've said is we would expect last year, this year and going forward about 0.5% comp to 1.5% comp benefit due to the whole dealership situation. This past year, obviously, a lot of dealerships actually closed. But if you remember the year before, we had GM and Chrysler bankruptcies and a lot of uncertainty, which certainly helped our business.

So rather than get into details of store by store and what's going on, I think we in general feel that that over the last two years has contributed to our comps 0.5. to 1.5, and we would expect that to be a long-term trend that would continue going forward.

All right. Just one follow-up question. These people that are actually bringing their cars in for basic maintenance, do you notice them getting any higher-content things done on their vehicles beyond just oil changes?

Oh, sure. That is the whole point of starting the relationship. Remember, our traffic driver and starting to build the trust, especially with customers that might have preconceived notions that dealers have higher quality, forgetting about the significantly higher price, we want to get them in the door, show them a good experience and start building the relationship over the long term.

And certainly. by moving them up from just an oil change to the whole 15,000, 30,000, 60,000 mile scheduled maintenance packages, that gets us involved with a lot more of the service work going forward.

Okay. On the acquisition side, it seems like we've had a flurry of activity over the last [two] quarters, and you're talking about some more activity in the fourth quarter. Is it safe to deduce that pricing has become more attractive?

It is safe to deduce that the pricing that you saw last year with the three deals we've done has continued, which we are very happy with, and why we are able to get more deals done quicker.

And in general, could you just talk about the pipeline?

Well, obviously, if we are talking about on the heels of getting $90 million in additional sales annually, and three deals over five months, and now saying, now that we have them in the fold, we have another $20 million coming up, which should close somewhere March, April timeframe, the pipeline is good and continues forward.

And with the environment we are in and people worried about taxes potentially going up in calendar year 2011, we would hope that similar type growth and acquisitions will occur all throughout the year.

Last question, Cathy. I missed the operating cash flow number for the first nine months.

The operating -- well, free cash flow is $56.9 million, but cash from operating activities was $68.2 million.

Great. Thank you so much.

Tony Cristello, BB&T Capital Markets.

Good morning. I guess a few questions. On sort of what was a pretty good fourth quarter -- or third quarter and good start to the fourth quarter, when you look at sort of the 11% same-store sales number that you had, that you will be anniversarying from last year, and January obviously had a 14-plus comp for the month that you put up a very strong 9%, were the February/March months of last year -- just helping me recall -- were they pretty equivalent from a same-store sales basis, or was one noticeably different than the other?

In the quarter, January was up 14.6% last year. February was up 12.9% last year. March was up 6.1% last year, for an 11.2% for the quarter.

And anything from a seasonal standpoint we should just keep in mind as we are looking at sales trends?

Certainly January was strong. December was up 10.5%. And it is the winter and it was cold in those months, which certainly helped those sales. Whether we stole from -- some business from February potentially, it's tough to say. All I know is January was up 9%, and we are pleased with that. And we think 5% to 7% guidance is prudent to see what else is coming. But I don't know what February and March is quite yet.

Okay. I can tell you what they will be, Rob.

When you look at -- shifting gears a little bit -- customer traffic continues to sort of perform well. Have you noticed a change in the amount of advertising spend on a customer basis? Are you spending less because you are getting more repeat customer business, in a sense?

Well, on average, with 7% comps, our advertising spend as a percentage of sales continues to go down. In addition to that, while we haven't seen it yet, remember, all the New England acquisitions and all those stores we purchased are in markets that we already exist. So hopefully, we will get some leverage there and some trade-off, especially with the Black Gold stores in the New England area, to allow us to further leverage the advertising expense.

But in general, electronic media, advertising rates are down. We are getting some help from that. We continue to spend at levels above last year, but as a percentage of sales, it is down. Next year, we will continue to spend at levels above this year, but hopefully as comps continue to run where they are as a percentage of sales, that will be down. And I think that talks to the SG&A number improving 120 basis points.

Obviously, we are leveraging advertising as well as a bunch of other items, with both the comp store sale increases, as well as layering in an effective run rate of $90 million in acquisition increases.

Have you noticed or can you quantify the difference in mix in terms of percentage of customers that are repeat customers to your business versus the percentage of customers that are new?

Again, we've said our repeat business runs about 85%. It continues to run right about that level. Albeit, remember, the last two years, obviously overall comps are up significantly.

Okay. And then one last question. How can you categorize sort of the pricing environment? And are your competitors or yourself changing any of the price points across various categories to drive sales, or are you actually having more flexibility, given the demand or increased traffic coming to you?

Sure. Well, as we've said, we've raised prices every year for the past 11 years. The year we are currently in, we raised them 2% to 2.5% in April, 2% to 2.5% in September. Obviously, comps are up 7%. Traffic was up 4%. So ticket is the difference, so the price increases have been sticking.

It is our intention that we would look to our normal time periods of this coming April, before the summer driving months, where people come back to get their cars repaired, so look for a similar type increase of 2% to 2.5%. And 2% to 2.5% in September, while keeping a watchful eye on store traffic.

But again, we have not seen any negative impact of the price increases on our store traffic. And we think the value equation that we are offering, whether it is the Oil Change & More, with the free tire rotation and brake inspection, or some of the warranties, or, in this environment, the fact that we are fairly big, we've been around for over 50 years, gives the customer some comfort to come back.

And as we've always spoke, one of the biggest concerns of customers is just not getting ripped off. And I think that is a primary factor, where if we are a little bit more expensive while still significantly less than the dealers, but more expensive against some of the other folks, the value and their confidence in us obviously hasn't sent them elsewhere.

Okay. That's great. Again, good job. Thank you. Appreciate it.

John Lawrence, Morgan Keegan.

Rob, would you -- not to belabor the point, but when you talk about traffic and you look at your comments of getting this customer earlier, is there any way to quantify the difference of maybe the lifetime value of a customer, say, two years ago versus now, when you get that customer earlier?

Obviously, we have much better information in what we used to call our sweet spot, which would be five to 10 years. I think we need a little bit more data over the next year or two to see these customers that are trading down or coming from dealership, what the spending pattern is, how long they are going to stay with us, and what the tail is. So it is a little early to make those kind of projections, but at some point, we will be able to help you with that.

And secondly, can you talk about your vendors? Obviously, you've had a great run here for a couple years. You've made acquisitions and growing. Those conversations with the oil and the tire guys, is that getting -- continues to get more aggressive as other people wanting that business?

Well, certainly, the bigger we get, obviously, our balance sheet is very strong, and they want to do business with us. We are certainly challenging our vendors based on, especially on the tire side recently, with the number of units we will be selling a year between the comp increases, as well as adding 400,000 units through acquisitions, looking for the best deal for our customers and our shareholders. And those conversations are ongoing.

Could you comment a little bit or speak to the fact that if you look at some of your best stores that are doing good numbers in comps, give us a little sense of how much productivity is really there. I guess at peak times, when traffic is up and you are at capacity, where do you think you are capacity-wise in some of your best operations?

Sure. As a chain, we probably run somewhere between 50% and 60% of capacity. That being said, obviously we have stores that are running close to 100% of capacity. But what you do there is you extend the store hours. You are open on Sunday. You are open until 8 p.m. or 9 p.m. instead of 7:30, or you open earlier. Short of that, you add service bays to those stores that need it, and in some markets, we've added another store.

So nowhere near a capacity problem. There will be a handful of stores every year that will buck up against it. That should be the biggest problem we have to endure.

Yes, and just a couple more. You mentioned product expansions, expanding product offerings. What would some of those be, say, for this year?

Well, obviously, we are constantly evaluating air-conditioning services, which are currently in 40% of our stores. Cars are now -- the newer cars that we're starting to see more of come with tire pressure monitoring systems. So we have training programs and other things to make sure we can take care of those.

As hybrids on the road become more prevalent, we need our people to be able to service those. Those kind of things, which we are constantly evaluating for return on investment and profitability would be areas I would see over the next three years that you would see us doing more business with.

Great. Thanks. Last question. St. Louis with Autotire, you entered that market as a third player. How would you say you've been received in the market? Obviously, it is a new entry. How was the competitors reacted to your entry there and you're offering?

In St. Louis, no different than anywhere else. There is a lot of good competitors in St. Louis, as there are good competitors in all of our markets. So all of us want to make money. We have not changed anything beyond some of the distribution issues out in St. Louis that we do anywhere from a pricing perspective or a customer satisfaction perspective.

And certainly are to the point where satisfied enough with the St. Louis that it would not inhibit us from going to other similar markets like St. Louis in the future, that might not be directly in our current footprint.

Great. Congratulations. Thanks for the help.

Bret Jordan, Avondale Partners.

On the shocks and exhaust, extraordinary comps there. Given that those are more age wear than usage wear, is that saying something about the vehicle demographic that you're seeing coming through the door, or did you run some particular promotions around those categories in the quarter?

No, no particular promotions. I think what it speaks to if people aren't buying new cars, they are making a decision, whether the car is 10 years old, 12 years old, especially with something like exhaust, that they are going to make the investment and plan on keeping the car another two, three or four years. Whereas five years ago, they were probably trading it in.

So things like shocks that are 50,000 to 60,000 miles, or exhaust, which we've said, now has a replacement cycle closer to 12 years from what used to be four years, with stainless steel exhaust, they are making those investments in the later years of the vehicles. They are not making those investments to turn around and buy a new car.

I think in the current environment, they are saying, let's hold on to what I have for longer, and I think that is borne out by what was pretty much a six- to seven-year period of 16 million to 17 million new car sales a year, dropping to 13 and change two years ago and 10.4 million last year.

And then on the import tire inventories, you guys have stockpiled pre-tariff. Where does your pre-tariff inventory stand right now? Did you use the fact that you had some lower-cost inventory to drive market share by keeping prices lower, or did you take the margin and price competitively to the others?

I think we took the margin, which will pretty typically be the way we go about things, have gone about things. And unless we see something happen to our traffic different than we've seen over the last two years, we will continue to be of a mind to provide superior value and service to our customers and try and make more money for our shareholders.

Where do you stand on the inventory? Are you primarily buying import now, paying the tariff, or are you still selling pre-tariff product?

Well, there is some pre-tariff, but a lot of it has been sold through, and we are going to continue to buy post-tariffs product. And all I can tell you, without getting too specific, is that we are not spending 35% more on Chinese tires.

Great. All right. Thanks.

Cid Wilson, Kern Suslow Securities.

Most of my questions have been answered, but can you give us maybe a little bit more of a breakdown maybe of how your comps -- which of your regions were the strongest between the Northeast, mid-Atlantic and Midwest?

Pretty much straight across the board, what you see is what you get. We commented that Black Gold stores are performing a little bit better, driven by tire sales, but -- I mean, business is good.

Okay, all right. That's good (multiple speakers).

And we are not going to break out our top third stores, our medium third stores and our bottom third stores.

Okay. Fair enough. And this is for Cathy. I'm not sure if you've mentioned this, but can you -- do you know what depreciation and amortization was for the quarter?

Yes. For the quarter, it was $6 million, Cid.

Right. And -- okay, no. Great. That's it. Thank you.

(Operator Instructions) Eric Swanson, KeyBanc.

Great. Thanks for taking my call. I just have a quick question for you guys here.

Can you give a little more clarity? I know you mentioned the January comp store sales were up 9% and you're looking for your fourth quarter of 5% to 7%. Is that just to kind of remain conservative because you have easier comps in February and March, or are there any product categories that you expect to contract?

Well, again, February comps are 12.9%. We are not in February. Yes, certainly -- I don't know what we have to gain by saying January was plus 9%. The quarter is going to be plus 9% against a plus 11%. For the first nine months of this year, we ran a 6.9% comp. For all of last year, we ran a 6.7%.

It seemed prudent to say 5% to 7%, and hopefully it is better and the numbers will be better. But it's not like I know February is going to run minus 5% because we are not going to sell anything.

Great. And then just a final question here. I know you had strong comps in your tire, 10% I think. And you said you have seen a trend towards lower-margin products. Are there any other trends that you think are worth pointing out, and how was January for the tire sales?

I don't know if we have January tire sales, but if you look across the board, if January was up 9%, most likely tire sales are right around there. To run a plus 9% comp, pretty much every category is doing well. And if you look at the breakdown we gave you for Q3, you are probably looking at a similar type breakdown, where Q3, remember, was up 7.2%, January was up 9%. So --.

Got you. Great. Thanks for your answers, and great quarter.

Brian Sponheimer, Gabelli & Company.

Just a question on acquisition strategy going forward on owned versus franchise stores. Are you focusing only on non-franchise operations? And if you were to buy a franchise operation, what obstacles would you exist in gaining control over the operations of a franchise business?

I don't know. We haven't bought any real franchise operations. We had a few franchises as part of the Tire Warehouse operation. I would -- if we were to go about buying a franchise operation, probably the biggest thing we'd bring to the table is our operating model, our buying power, and hopefully make the franchises more profitable and increase our royalty fees.

The only way you would be able to take control there would to be actually buy out the owners of the franchise.

That is how -- we would certainly convert the franchise to Company-operated stores. But certainly part of it would be to try and make them partners, improve their operation, so the cash flow got better.

Okay, I was just curious about the mechanics there. Good quarter.

We likely certainly like our business model of Company-operated stores in a high-service, low-trust business. You never know what those franchises are going to do.

Certainly not.

There are no further questions in the queue at this time. I would like to turn the call back to Mr. Rob Gross for any additional or closing comments.

Great. Thanks, Paula. Really appreciate everyone for supporting us from the investment standpoint, and certainly, it can't go without saying that this last quarter we are very pleased with, and that does not happen without a full team of people working their butts off, converting stores, buying stores, working in the back office.

We've got a great team, both delivering service to our customers, as well as internally delivering service to our stores. And couldn't be prouder and appreciate the support and look forward to talking to you about fourth-quarter results and what 2011 will bring. Thank you very much.

And that does conclude today's conference. We would like to thank you all for your participation.