Monro Inc (MNRO) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Monro Muffler Brake. Inc. First Quarter 2011 Earnings Conference Call. As a reminder, today's call is being recorded. Now, at this time, I would like to turn the conference over to Ms. Jessica Greenberger. Please go ahead.

I would now like to introduce Ms. Jessica Greenberger of FD. Please go ahead.

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 sensitivities to fluctuations in interest rates, dependence on and competition within the primary markets in which the Company 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'd like to turn the call over to Rob Gross. Rob, you may begin.

Thanks, Jessica. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our record first quarter 2011 performance. After reviewing our quarterly performance, I will provide you with an update on our business as well as our outlook for the second quarter of fiscal year. 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 are very pleased with our performance in the first quarter as the last two years' momentum continued into our new fiscal year. With many of the consumer dynamics that we've experienced over recent quarters continuing to drive our results, we once again achieved record sales, net income, and earnings per share. Our comparable store sales increase of 5.1% continues to be among the highest, if not the highest, in our industry. In addition, we've increased total sales by 23.6% to a record $158.2 million compared to $128 million for the prior-year first quarter.

Our four recent acquisitions continue to outperform and, combined, they delivered approximately a 5% comparable store sales increase during the quarter, which is newly integrated stores surpassed our expectations and helped drive our strong top and bottom line performance.

We also continue to generate very strong growth in both operating income and net income, achieving record levels in each. Operating income for the first quarter increased 33.2% to $22.6 million. This translates to an operating margin of 14.3%, up from 13.3% in the first quarter of last year. As we continue to integrate our 79 newly acquired tire stores, our first quarter gross margin results reflected an expected product mix shift towards the lower-margin tires.

However, at the same time, we are realizing significant benefits to our operating margin as we scale our business and leverage our cost structure. As a result of our sales and operating margin improvement, net income increased 40.4% to a record $13.2 million. Our earnings per share, which came in ahead of the high end of our previously expected range increased to $0.63 on a base of 21 million shares outstanding from $0.46 in the prior-year quarter.

Customer traffic, which showed a strong 3.2% increase during the quarter and our excellent in-store execution once again drove the strong results across our business.

Moving on to our product categories, we think that the performance of our major service categories demonstrates that many of the positive industry and macroeconomic trends that we have been experiencing over the past two years are continuing into fiscal 2011. All of our major service categories posted positive comparable stores sales versus the prior-year period including an approximately 8% increase in exhaust sales.

This marks the first time in more than a decade that exhaust services have been the leader of our category performance. Combined with a measurable increase in our scheduled maintenance category, this increase in comparable exhaust sales further indicates to us that a very important dynamic is impacting our business. Consumers are choosing to invest in maintaining older vehicles instead of buying new cars.

As we mentioned last quarter, there have been 9 million fewer new vehicles sold over the last two years as compared to the previous two years and, as a result, the number of miles being driven on older vehicles has increased significantly. The average age of a domestic car or light truck is well on its way to 12 years. As drivers continue to delay their purchases of new vehicles, projected 2010 SARs is a weak 11.5 million units and maintain their current vehicles for longer periods, they are increasingly investing in maintaining and repairing these vehicles and looking to Monro to help keep them safely on the road.

We believe that when consumers invest in expensive repairs such as exhaust and shocks, it is a sign that they intend to hold onto their vehicle for many more years, further supporting our view that this trend should continue to benefit Monro for the foreseeable future.

Moving on to our other major service categories, comparable store sales increased approximately 7% for tires, 6% for alignments, 6% for maintenance services, 3% for shocks, and 2% for brakes. In addition, scheduled maintenance, which is a subset of maintenance services, increased approximately 12%. We continue to be pleased with 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 all stores including Black Gold stores.

In addition, as we said in the past, the challenging economy, GM and Chrysler bankruptcies, dealer uncertainty in closures that have taken place over the last two to three years have allowed us to attract many new customers and expand our market share. This is reflected in our significant increase in scheduled maintenance comparable store sales.

The trusting relationships that we have established with our customers and our unwavering commitment to quality service have enabled us to continue getting new customers as they seek convenient, value-price alternatives to a declining dealership base.

Notably, we expect the decline of the dealer base to continue for the next several years. This, coupled with the continuing weak new car sales is why we have seen our sweet spot expand to four- to 12-year-old vehicles from what used to be six to 10.

Our high-impact, cost-effective advertising and marketing campaigns also continue to drive traffic throughout fiscal 2010 and into 2011. We are leveraging our increased store density and marketing dollars spent over a larger sales base and continuing to gain as much knowledge about our customers as possible to make intelligent marketing decisions. We are promoting sales in certain categories through specific 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. And Brakes Forever, in which we guarantee brake pads for the life of the car and replace the pads for only the cost of labor. The success of these value-oriented programs, as well as the favorable macro environment, is evidenced in the same-store traffic increase of more than 3% for the quarter supported by a 3% increase in the number of oil changes and a 2% increase in brake sales.

Turning to 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.

The integration of our recent acquisitions is almost complete. While four acquisitions and the total 79 newly acquired tire stores in 12 months, has certainly kept us busy. It is gratifying to see the great results of the hard work done by our store and field managers. In addition, as part of integrating the tire warehouse acquisition, we've been converting Monro service stores in New England to our Black Gold format. And as I mentioned earlier, as of the first quarter, Black Gold has now been fully implemented in New England, which provided some nice momentum in those markets.

You may recall the Black Gold program is designed to maximize the sale of tires and related services in our service stores. Well, tire sales are up over 40%, and alignments are up 19% in these 54 newly converted Black Gold stores. Now in its fifth year, the Black Gold program has been implemented in 248 service stores. As we look for acquisitions, one consideration is the opportunities to acquire tire stores in our service store markets to further expand this very successful program.

With that, we will continue to be on the lookout for value priced, opportunistic bolt-on acquisitions to further fill out our footprint. As I have previously noted, we continue to believe that economic pressures put on our competition, both large and small, and uncertainty regarding potential tax increases on sellers, can eventually lead to excellent acquisition opportunities for Monro.

We remain poised to take advantage of such prospects and discipline on the prices we will pay.

I would now like to briefly discuss our outlook for the second quarter and fiscal year 2011. As I've discussed, our business continues to perform well with comp store sales thus far in the quarter up approximately 8%. And we expect that the positive momentum we have been experiencing will continue through the second quarter.

In addition, we expect that the favorable macro conditions that we have been experiencing will continue for at least the next couple of years. We also anticipate continuing to achieve operating margin expansion of 100 to 125 basis points through the integration of our recent acquisitions and our ability to leverage SG&A.

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

As we detailed in our press release this morning, we expect second quarter comparable store sales growth in the range of 4.5% to 6.5% versus 7.4% in the prior year. We expect second quarter earnings per share to be in the range of $0.58 to $0.62, which compares to $0.49 for the second quarter of fiscal 2010, a 27% increase at the high end of our range.

Additionally, as we move throughout the year, we expect to see the gross margin decline from the prior year to moderate, due to the fact that the bulk of the tires stores acquired in 2010 were part of our business for the third and fourth quarter of fiscal 2010.

For the full year, we continue to expect total sales in the range of $625 million to $640 million and comparable store sales growth in the range of 4% to 6%. Again, operating margin should improve 100 to 125 basis points for the year due to the sales growth and resulting leverage gained on our operating model. We are also slightly increasing our diluted earnings per share range to $1.94 to $2.01 from $1.92 to $2.00 due to our first quarter performance.

We remain focused on taking advantage of current favorable trends within our business as well as our industry to capitalize on opportunities to grow the business both organically and through acquisitions. We continue to challenge, improve upon, and execute against our operational initiatives, protect our position as a low-cost operator, and consistently provide excellent service to our loyal customers.

I want to thank our 5,100 employees again for demonstrating their hardworking commitment as they are the key to our continued success. We are excited about the opportunities for further market share expansion in fiscal 2011 and remain confident that customers will continue to turn to Monroe as their trusted service provider.

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

Thanks, Rob. Good morning, everyone. As Rob said, sales through the quarter increased 23.6%, comparable store sales increased 5.1%, and new stores, which we define as stores opened after March 29, 2009, added $24.6 million, which includes $22.2 million from the fiscal year '10 and fiscal year '11 acquired stores. Partially offsetting these increases was a decrease in sales from closed stores of approximately $1.2 million.

There were 90 selling days in both the current and prior-year first quarters. At June 26, 2010, the Company had 785 Company-operated stores as compared with 740 stores at June 27, 2009. During the first quarter of fiscal 2011, the Company added eight stores.

Gross profit for the quarter ended June 2010 with $66 million, or 41.7% of sales as compared to $56.4 million, or 44.1% of sales for the first quarter of last year. The decrease in gross profit for the quarter ended June 26, 2010, as a percentage of sales, is due to several factors.

Total material costs, including outside purchases, increased as a percentage of sales as compared to the prior year. The fiscal year 2010 and 2011 acquisitions have resulted in a more pronounced shift in mix to the lower-margin tire category causing a fair amount of tire pressure. Approximately two-thirds of the gross margin deterioration was attributable to these acquired tire stores.

Tire and oil increases also contributed to the decline in margin. Partially offsetting these factors were selling price increases across the chain. There was also a decrease in labor costs as a percent of sales due primarily to a continued shift in mix to tire sales and improved labor productivity, which helped to partially offset the gross margin pressures. Additionally, 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.

As Rob discussed, we would expect the decline in gross margin versus the prior-year quarters to be most pronounced in our first and second quarters, since we did not own the 44 tire warehouse stores whose sales mix is almost 100% tighter, until our third quarter last year. We would expect gross margin for the third and fourth quarters to begin to flatten out as compared to the same quarters of fiscal 2010 and operating profit to be approximately 100 basis points better.

Operating expenses for the quarter ended June 2010 were $43.4 million, or 27.4% of sales as compared with $39.4 million, or 30.8% of sales for the quarter ended June 2009. Within operating expenses, selling, general, and administrative expenses for the first quarter of this fiscal year increased by $3.9 million to $43.1 million from the prior-year quarter, and were 27.2% of sales compared with 30.6% of sales the prior quarter.

The increase in dollars is directly attributable to the acquired stores' operating expenses. The decrease in percentage of sales is due to improved sales, which have allowed the Company to leverage largely fixed costs as well as our continued focus on cost control. As a result of the intangibles recorded from recent acquisitions, intangible amortization for the quarter ended June 2010 increased to $0.3 million and was 0.2% of sales as compared to $0.1 million and one-tenth percent of sales for the prior-year quarter.

Operating income for the quarter ended June 2010 of $22.6 million, increased by 33.2% as compared to operating income of approximately $17 million for the prior-year quarter and increased as a percentage of sales from 13.3% to 14.3%.

Net interest expense for the quarter ended June 2010 decreased by approximately $0.4 million as compared to the same period in the prior year and also decreased from 1.5% to 0.9% as percentage of sales for the same period. The weighted average debt outstanding for the first quarter of fiscal 2011, decreased by approximately $10.6 million as compared to the first quarter of last year, primarily related to repayments made on the Company's revolving credit facility.

In addition, the weighted average interest rate decreased by approximately 100 basis points from the prior year.

The effect of tax rate for the quarter ended June 2010 and June 2009 was 37.7% and 37.8%, respectively, of pretax income.

Net income for the current quarter of $13.2 million increased 40.4% from net income for the quarter ended June 2009 and earnings per share on a fully diluted basis of $0.63 increased 37% over last year's $0.46.

1, which is comparable to last year's first quarter and year-end. We generated $12 million of cash flow from operating activities this quarter and were able to pay down about $11 million of debt during this quarter in spite of acquisitions, which used $7 million of cash during the quarter. As a result of the debt paydown, our debt-to-capital ratio dropped to 26% from 30% 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, and we currently are paying LIBOR plus 50 basis points. This very favorable agreement permits us to operate our business, including doing acquisitions without bank approval as long as we are in compliance with our debt covenant. Those terms, as well as our current availability of $104 million give us a lot of ability and flexibility to get acquisitions done quickly.

We are fully compliant with all of our debt covenants and have plenty of room under those covenants to do acquisitions without any problem.

During the quarter, we were also conservative with CapEx spending at $3 million. Depreciation and amortization was approximately $6 million, and we received $1 million from the exercise of stock options. We paid about $2 million in dividends.

Inventory is up $2.7 million from March 2010 due primarily to the addition of fiscal year '11 acquired stores, which accounted for $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 of lower-cost import tires and to improve the mix of inventory, in general, 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. Operator?

Thank you very much. (Operator Instructions) Bret Jordan, Avondale Partners.

A couple of quick questions, and one on the exhaust business. What is the average transaction value of an exhaust purchase just comparing that to the rest of your business mix?

About $300.

Okay. And then on tires, if you look at that +7 comp, what's the check average looking like? How much of the increased traffic versus trade-down in price?

The trade-down in price continues. As we've said, we see a lot of people switching from a high-end Goodyear to a low-end Goodyear, from low-end Goodyear to a Chinese import. So traffic is obviously up. We've increased our selling prices, but people continue to trade down. It's very similar to what we see in every aspect of our business, Bret.

Okay. And then as far as acquisition pipeline goes -- do you have any clarity on that?

We're for acquisitions.

Okay, and I guess then one last question -- acquisitions -- the spend in the quarter of acquisitions and how did that work out at a revenue-acquired ratio?

I don't understand.

What did you spend in the last quarter? I missed it. I think -- I thought you said $7 million.

$7 million yes.

And how did that work on a per-day or a per-dollar of business acquired?

Well, I mean, $7 million was for the last deal we did. The four deals we've done in the last year deliver $100 million annualized revenue. So I think we've given the detailed numbers relating to what each specific acquisition cost. And I think that number is something like $45 million to $50 million for $100 million of revenue.

Okay, so we're still okay, great. Thank you.

Scott Stember, Sidoti.

Could you guys talk about the sales by month in the quarter?

Comps?

Yes, comps, please.

April was 8.1, May and June were 3.8 and 3.9 -- or it might be 3.9 and 3.8. Just shy of 4.0 both months.

And just talk about July. Obviously, things have bounced back nicely in July. Just talk about maybe the composition of that number, you know, breaks or just anecdotally talk about some of this stuff.

Yes, I think obviously the nice bounce back in July, all categories continue to contribute. So, in total, just a real solid month that we would hope to continue through the quarter. But if we ran a 5.1 for the first quarter, July should look relatively similar to the first quarter but obviously better.

Got it. And Black Gold, could you give the usual update about how those stores are performing versus the non-Black Gold stores?

Yes, as we have said on the group of stores, their store contribution continues to run about 250 basis points ahead of non-Black Gold stores. And, again, remember, we're five years into it, so obviously we're going to get huge leverage off the 54 new ones in New England, and we're seeing that, whereas, the rest of the base are fairly mature and keep maturing into the total. But as a group, those stores run about 250 basis points store contribution better than the non-Black Gold stores.

And what's the next group of stores that will be put in, going forward, (inaudible).

I'll be able to tell you when the next tire acquisition gets announced.

Fair enough.

And we are (inaudible) -- the 248 that we currently have take into account everything we can currently do with our store base and then the next ones that will be converted to Black Gold will be generated specifically off the next acquisition.

Okay. And as far as the advertising, could you just give percentage of sales versus a year ago?

Yes, I think we're pretty much running similar to the 3.5% that we continue to run. We keep putting more dollars in and get more efficiency because those dollars are being spread over more stores due to our store density. But the percentage usually falls 3.4, 3.5, right in that range.

Got you. And last question about the acquisitions -- how much did they contribute on the bottom line in the quarter?

Somewhere, for the quarter, around $0.07 or $0.08.

Tony Cristello, BB&T Capital Markets.

A question for you on the scheduled maintenance side of things. The numbers seem to be increasing and, obviously, you would tie that to what's going on with the macro. Has the increase in scheduled maintenance growth simply been the function of more aggressive advertising to promote that for the education of the consumer? Or are customers just coming in saying, "Hey, can you do this for me because I don't want to spend that money at the dealer. It's more expensive."

Yes and yes. I mean, the scheduled maintenance, we started promoting it more when the economy got bad, offering the value that we offer about to 50% less than the dealer, more convenience to keep your warranty in place. And it continues to grow based on those original efforts, which were really three years ago, but certainly has accelerated due to some of the dealer displacement.

I'm assuming the level of advertising you're putting into place now -- is that going to be something that, at least for the foreseeable future, sustainable? And given that it's relatively new in terms of promotional activity over the last few quarters, can we expect that that organic growth, or that comp growth in that category, to continue to be high?

Yes. We are now -- if you look at scheduled maintenance, I think last quarter we said it was +11. In Q3 of last year it was +11. Now it's +12. So it seems to be a steady diet of improvement. If anything, obviously, we have an opportunity with these new customers that might come in at the 15,000 or 30,000 mile scheduled maintenance interval. If we do the job right, those should continue to come back to us as well as then new customers that we continued to build upon. So, hopefully, we can gain some momentum.

Okay, and maybe just last, a little bit bigger-picture question for you -- a 14%-plus operating margin is really solid for this quarter, it's really solid for your company. How much of that is how you continue to make these acquisitions, you continue to layer in big volume, so you're getting a lot of operating leverage. At what point do you must max out and say, as a service, as an installer, I can't have 25% operating margins? Where do you see the opportunity to continue to expand margins? And are you just -- because of the services in the categories and the things that you're offering, is that where you thought it is today? You didn't think you were going to be here and maybe things can get better from this point, going forward?

I don't think we ever get up to 25% operating margins, which I don't think you were really asking. I think last year we improved our operating margin by 100 to 125 basis points. We said we would be able to do the same thing this year. And, if you remember, a little over two years ago when we talked about our five-year operating plan, we talked about an ability to improve our operating margin by 300 basis points. We're obviously well on the way to that. Certainly didn't plan on the level of comps from '09 being 6.7 to last year being 7.2 to starting off this year solidly and continuing with July at +8.

So I think we will recalibrate our operating margin opportunities once we have been at 300 basis-point level, which we are approaching 200 to 250 after only two years, certainly, we'll take a look at it. I don't think 300 basis points on the 9% operating margin we commented on, is the end of it. And we certainly can approach something above the level we might have talked about a couple of years ago.

(Operator Instructions) John Lawrence, Morgan Keegan.

Rob, you mentioned in your prepared remarks about new product offerings being part of the strategy as you're seeing these cars younger in scheduled maintenance. What are some of the things you could do to expand services?

Well, obviously, the scheduled maintenance growth is a huge opportunity for us on a number of levels. Air conditioning services are only in 40% of our stores currently. That's an opportunity to grow. We have just started scratching the surface with servicing hybrids. I think last year we serviced about 35,000 of those vehicles. As that grows that becomes an opportunity down the road. Not in the short-term future you have an opportunity with whatever is going on with electric vehicles. At our size, we are best positioned to invest, train, and move forward in whatever product categories might be expensive to service but others won't have the financial wherewithal or capabilities to grow upon.

Thanks. Secondly, the St. Louis acquisition -- can you give us an idea, with the leverage that you've seen from some of the acquisitions, how does St. Louis fit as far as distribution coming from outside of the model? Just talk about that a little bit. And, going forward, would you do that again?

Sure, I think we just opened a satellite warehouse in St. Louis to help us with the distribution and reduce the outside purchases. What we said, in general, though, regarding those specific 26 stores is based on their store density and a reputation in the market, while the gross margin and outside purchases will be about 200 basis points higher. We get a lot of benefit from the attractive rents that have been established and the high level of store volume sales that we get out of those locations.

So nothing significant on the gross margin or the operating margin line. We're certainly pleased with the comp performance for a relatively new chain. As we said, we are -- with all of the acquisitions taken as a whole.

And the last question -- would you help me a little bit with, sort of, back on the margin question that somebody else asked. When do you, at $650 million, as you move to $1 billion in sales, where does the infrastructure, whether G&A, capacity, how far can that take us before we have a major increase in G&A, I guess, is another way to look at that?

Well, you will never have a major increase in G&A. So the more we do the better the margin gets, and that should continue -- maybe not as dramatic as 340 basis points this quarter but there's huge margin opportunities as long as we stick to our knitting. Remember, we can get three times bigger, not leave our current footprint, and I think this past year adding $100 million or approximately -- you know, of sales at approximately 20% to the top line just shows the power of the operating model that we've created. So as we continue to layer in 50 and 100 more stores within this business model, you will see significant improvements in our operating margin, assuming we don't screw them up.

I understand. Thanks a lot, good luck, and congratulations.

Thanks, John.

And, at this time, there are no further questions. I'd like to turn the call back over to Mr. Gross.

Great. I just want to thank everyone for taking their time to listen to the call. Certainly, we are available if anyone has any follow-up questions, and we're pleased with the momentum we've been driving over the past three years; are confident in our position in the marketplace both ourselves as well as the industry's performance and look forward to continue to delivering improved results over the course of the year and into the future. And just want to thank everybody. Bye now.

And we'd like to thank everyone for their participation. That does conclude today's conference.