Monro Inc (MNRO) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake second quarter 2011 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 call is being recorded and may not be reproduced in whole or in part without permission from the Company. I would now like introduce Miss Jessica Greenberger of FD. Please go ahead, Jessica.

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 on the Company's filings with the Securities and Exchange Commission.

The risks and uncertainties include, but are not necessarily limited to uncertainties reflecting retail generally such as consumer confidence and demand for auto repair, risks relating to leverage to debt service, including sensitivity to fluctuations and interest rates, dependence on and competition within the primary markets in which the Company's stores are located and the need for and costs associated with store renovations and other capital expenditures. The company undertakes no obligations 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 statements in this call does not constitute an admission by Monro or any person that the events or circumstances described in such statement are material. Joining us from morning's call from management are Rob Gross, Chairman and Chief Executive Officer, John Van Heel, President 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 to discuss our record second 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 third quarter and fiscal year. I will then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provided additional details on our financial results.

The positive trends that we have experienced in the business over two to three years continue through the second quarter and as a result, we once again achieved record sales and net income for the second quarter of 2011. Our comparable store sales increase of 6.4% on top of 7.4% increase last year continues to be among the highest, if not the highest in the industry and is at the high end of the recently increased expected range. Customer traffic, which showed a strong 5% increase during the quarter and our excellent in store execution once again drove the strong sales results across our business.

As we passed the mid point of the year, we were on track to deliver our 10th consecutive year of annual comparable store increases which highlights the resilience of our business model throughout the variety of economic conditions. We grew total sales by 18.6% to a record $162.1 million compared with $136.6 million for the prior year second quarter.

Our four recent acquisitions continue to outperform and contributed more quickly to our strong top and bottom line performance than we initially anticipated. Combined, these acquisitions delivered an approximate 7% comparable store sales increase during the quarter following a 6% increase last quarter. Remember, these acquisitions will not be included in our reported comp sales base until next fiscal year.

As we continue to integrate the 79 newly acquired tire stores, our second quarter gross margin results reflected a product mix shift towards sales of lower margin tires as expected. We have also continued to experience increases in our cost to goods resulting particularly from tires and to a lesser degree, oil. To provide a bit more color on what we were seeing in terms of material costs, we have absorbed three cost increases from tire manufacturers in the past 15 months. However, we have been able to partially offset these increases through our increased purchasing power, shifting purchases and our ability to pass price increases along to the consumer.

As we have grown through the tire store acquisitions, our tire purchases increased by 50% to 1.8 million units per year allowing us to improve our negotiating leverage with vendors. Further, we have a broad base of tire manufacturing vendors providing us with the flexibility to shift business between manufacturers, which we believe is another important advantage as we pursue the best product cost.

Finally, we successfully raised prices 2% to 2.5% in September which is similar to what we have done in the past. Remember that this latest increase is in addition to an increase in April of 2% to 2.5%. We also see an opportunity to offset any gross margin pressure and hopefully deliver incremental benefit by increase our direct international sourcing. Over the next couple of years, we expect direct imports, primarily from China, which now comprise approximately 15% of our total product costs, less oil and out buys, to run closer to 30%.

We have been approaching this initiative cautiously over time to gain comfort with the quality of product manufactured at these facilities. At this point, we are comfortable increasing the sourcing from these facilities. At the same time, we are carefully managing our costs and as a result of our acquisitions and sales growth, we are continuing to realize substantial leverage in our SG&A. This has significantly benefited our operating margin and outweighed the impact to gross margin. Operating income for the second quarter increased 29.5% to a record $22.7 million which equates to an operating margin of 14%, up from 12.8% in the second quarter of last year. We also continue to generate record net income as a result of our sales and operating margin improvement. Net income for the second quarter increased 33.2% to $13.3 million from $10 million last year. Our earnings per share, which came in ahead of the high end of the expected range, rose to $0.63 on a base of 21.1 million shares outstanding from $0.49 on a base of 20.5 million shares in the prior quarter.

Moving to our results across the product categories, we think that the performance of the major service categories, exhaust and scheduled maintenance in particular, demonstrates that many of the positive industry and macroeconomic trends that we have been experiencing over the past two years are continuing through fiscal it 2011. The most important factor is that there have been 14 million fewer new vehicles sold over the last three years as compared to the previous three 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 it way to 12 years. As drivers continue to delay their purchases of new vehicles and maintain the current vehicles for longer periods, they are increasingly investing and maintaining and repairing these vehicles and looking to Monro to help keep them safely on the road. Our comparable store exhaust sales increased approximately 6% in the second quarter, marking the fifth straight quarter of increases in exhaust sales. This is the first time in 14 years that we have experienced an extended period of same-store sales increases in exhaust. If you don't need exhaust until the vehicle is 10 to 12 years old and because investing in exhaust is expensive, the strong performance in this category indicates to us that consumers are deciding to hold onto their vehicles for longer periods of time. In addition, comparable store scheduled maintenance, which is a subset of maintenance services is up 12% to the last 12 months and up 8% in the second quarter on top of a 17% increase in this category in the second quarter last year.

Our strong performance in scheduled maintenance, which is typically performed by dealers, highlights our success in attracting new customers and expanding our market share as a result of the challenging economy and dealer uncertainty and closures that have taken place over the last two to three years. The trusting relationships that we have established with the customers and our unwavering commitment to quality service has enabled us to continue gaining new customers as a convenient value priced alternatives to a declining dealership base.

Notably, we expect the decline of the dealer base to continue for the next several years. The increases in both comparable exhaust sales and scheduled maintenance combined substantiates our belief that our sweet spot for servicing vehicles and shifted to vehicles that are four to 12 years old from what used to be a range of vehicles that were six to 10 years old. Six years has moved four years as we capture more business from dealers with services such as scheduled maintenance. And 10 years has moved to 12 years as consumers keep their cars longer. We believe 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 10% for tires with strong unit sales in all stores, including Black Gold stores. Comparable store sales increased 9% for shocks, 8% for maintenance services, 4% for alignments which is a high margin category closely tied to the sale of tires, and we're flat for brakes which was against a 7% increase in that category a year ago.

Our high impact cost effective advertising and marketing campaigns continue to drive traffic throughout the quarter. We are continuing to leverage our increased store density and marketing dollar spend over a larger sales base to gain as much knowledge about our customers as possible, which is helping us to make intelligent marketing decision. 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 free inspections with the purchase of an oil change. The success of this and other value oriented programs, as well as the favorable macro environment is evidenced in the customer traffic increase of 5% for the quarter which I mentioned earlier.

Turning to our growth strategy, we remain focused on increasing our market share through same-store sales growth, expanding our services,continuing new openings and existing markets and acquiring competitors at attractive valuation. The integration of our recent acquisitions is almost complete. While integrating these 79 newly acquired tire stores, we also converted 54 Monro service stores in New England to our Black Gold format earlier this year as part of leveraging the Tire Warehouse acquisition.

We are pleased to report that tire and alignment sales in these 54 stores increased by 41% and 19% respectively during the quarter, consistent with Q1 increases over the prior year. You may recall that our Black Gold program is designed to maximize the sale of tires and related services in our service 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 opportunities to acquire tire stores in our service store markets to further expand this very successful program. With that, we continue to be on the lookout for value priced opportunistic bolt on acquisitions to further fill out our footprint.

To that end, as we announced this morning, we have signed a definitive asset purchase agreement to acquire three stores in the Fredericksburg, Virginia area operating under the names of Courthouse Tire and Service Center, Stafford Tire and Auto and Chancellor Tire and Auto for approximately $3 million, which we plan to fund through our existing credit line. The three locations which generate annualized sales of approximately $5 million should help us fill in the North Virginia market where we currently operate 11 stores. In addition, we hope to close a second acquisition that would represent approximately $10 million to $15 million in sales by the end of the calendar year.

As I have previously noted, economic pressures put on our competition, both large and small and uncertainty regarding potential tax increases on sellers can eventually lead to it excellent acquisition opportunities for Monro, and we believe that these two acquisitions are example of those types of opportunities. With plenty of liquidity and strong cash flow generation, we remain poised to take advantage of additional prospects, but at the same time, we continued to be very disciplined on the prices we will pay and believe that time is on our side. I would now like to briefly discuss for the third quarter and fiscal year 2011. As I have discussed, our business continues to perform well with comp store sales thus far up approximately 2.5%. This compares to an unusually strong 11.9% comp sales increase last year when early October cold weather and snow caused a significant portion of sales to be pulled forward into October from November which only increased 1.3%.

Historically, as many of you are aware, the first signs of winter prompts people to buy tires. So, the timing of the cold weather can shift the buying period between months, similar to the timing of back to school shifts for other retailers. In addition, we expect that the favorable macro conditions that we have been experiencing will continue for at least the next couple of years. While we remain optimistic about our prospects going forward, we realize that we are operating in a difficult consumer environment and uncertain times and will remain prudent in the management of our operations.

As we detailed in our press release this morning, we expect third quarter comparative store sales growth in the range of 4% to 6%. We expect third quarter earnings per share to be in the range of $0.44 to $0.50 which compares to $0.38 for the third quarter of fiscal 2010, a 32% increase at the high end of our range. For the full year, we continue to expect total sales in the rage of $625 million to $640 million in comparable store sales growth in the range of 4% to 6%. Again, operating margin shouldn't prove 100 to 125 basis points for the year due to the sales growth and resulting leverage gained on the operating model. We are also increasing our diluted earnings per share range to $2 to $2.06 from $1.94 to $2.01 due to our strong first half performance.

Additionally, as we move through the remainder of the fiscal year we expect the declines that we have been experiencing in gross margin to the prior year periods to moderate from the 240 basis point decline we experienced in the first quarter of this year to a decline of approximately 100 basis points by the fourth quarter as reflected in our current outlook. This is due in part to the bulk of the tire stores acquired in 2010 being a part of our business for the first and fourth quarters of the last year. We expect that SG&A leverage that we generate as a result of the tire store acquisitions will continue to outweigh any decline in gross margin by approximately 100 basis points.

At the midpoint of the year, we are on track to deliver our third straight full year of strong comparable store sales and earnings growth against solid prior year results, and we are also on track to deliver our 10th straight year of comparable store sales increases. It is important to note that these data points marking our success have occurred over various points in economic cycles with the momentum continuing over the last four years as consumers remain value conscious, holding onto vehicles longer in the midst of the soft economy.

I want to thank our 5,100 employees again this quarter for demonstrating their hard work and commitment as they are the key to our continued success. As we have discussed, we believe that looking ahead the macro trends continue to be in our favor. We remain focused on taking advantage of these trends, further expanding our market share and capitalizing on opportunities to grow the business, both organically and through acquisitions. We continue to challenge, improve upon and execute against the operational initiatives, protect our position as the low cost operator and consistently provide excellent service to our loyal customers. We are excited about the opportunities ahead and remain confident that customers will continue to turn to Monro as their trusted service provider. 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. Sales for the quarter increased 18.6% with comparable store sales increasing 6.4% and new stores, which we define as stores opened after March 2009 added $18 million, including $16.9 million from the fiscal year 2010 and 2011 acquired stores. Partially offsetting these increases was a decrease in sales from closed stores of approximately $1 million. There were 91 selling days in both the current and prior year second quarters. Year to date, comp store sales increased 5.8%. Additionally, there was an increase of 42.5% -- $42.5 million, excuse me, related to new stores, of which $40.6 million came from fiscal 2010 and 2011 acquired stores. Partially offsetting, this sales increase was a decrease in sales from closed stores amounting to $2.1 million.

At September 25, 2010, the Company had 783 Company operated stores as compared with 739 stores at December 26, 2010 -- 2009. During the quarter ended September 2010, the Company closed two stores. Gross profit for the quarter ended September 10 was $66.4 million, or 40.9% of sales as compared with $58.9 million or 43.1% of sales for the prior year quarter. The decrease in gross profit for the quarter ended September 25, 2010 as a percentage of sales is due to several factors. As Rob mentioned, 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, all but one of which was tire stores, has resulted in a more pronounced index to lower margin tire category, causing a fair amount of margin pressure. Over 80% of the gross margin deterioration related to material costs was attributable to these acquired tire stores. Tire and oil cost 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 cost as a percent of sales, due primarily to the continued shift in mix of tire sales and improved labor productivity helping to improve gross profit. Additionally, distribution and occupancy cost decreased as the percentage of sales from the prior year as the Company, with the improved sales, was able to better leverage these largely fixed costs. Gross profits for the six months it ended September 2010 was $132.4 million, or 41.3% of sales as compared with $115.3 million, or 43.5% of sales for the six months ended September 2009.

As we have previously discussed, we would expect the decline in gross margins versus the prior year quarters to be most pronounced in our first and second quarters since we do not own the 44 Tire Warehouse stores, whose sales mix is almost 100% tires, until our third fiscal quarter last year. We would expect gross margin for the third and fourth quarter 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 September 2010 were $43.7 million, or 26.9% of sales as compared to $41.3 million, or 30.2% of sales for the quarter ended September 2009.

Within operating expenses, selling, general and administrative expenses, SG&A for the quarter -- for the second quarter of this fiscal year, increased by $2 million to $43.1 million from the quarter ended September 2009 and were 26.6% of sales as compared with 30.1% of sales in the prior year quarter. The increase in dollars is directly attributable to the acquired stores operating expenses. The decrease in percentage of sales is due to improve sales which had allowed the Company to leverage largely fixed costs, as well as our continued focus on cost control.

For the six months ended September 2010, operating expenses increased by $6.3 million to $87 million from the comparable period of the prior year and were 27.2% of sales as compared to 30.5% of sales. SG&A expenses for the six months ended September 2010 increased $5.9 million to $86.2 million from the comparable period of the prior year and were 26.9% of sales as compared to 30.3% of sales last year. As a result of the intangibles recorded from recent acquisitions, the intangible amortization for the quarter ended September 2010 increased to $300,000 and 0.2% of sales as compared to $200,000 and 0.1% of sales for the prior year quarter.

Operating income for the quarter ended September 2010 of $22.7 million increased by 29.5% as compared to operating income of approximately $17.5 million for the prior year quarter and increased as a percentage of sales from 12.8% to 14%. Operating income for the six months ended December 2010 of approximately $45.3 million increased by 31.4% as compared to operating income of approximately $34.5 million for the prior six month -- prior year six month period and increased as a percentage of sales from 13% to 14.1%. Net interest expense for the quarter ended September 2010 decreased by approximately $200,000 as compared to the same period in the prior year and decreased from 1.1% to 0.7% for the same period. The weighted average debt outstanding for the second quarter of fiscal 2011 decreased by approximately seven -- $14 million as compared to the second quarter of last year, primarily related to repayments made on the Company's revolving credit facility. The weighted average interest rate was relatively flat as compared to the prior year.

For the six months that ended September 2010, weighted average debt decreased by approximately $7 million and the weighted average interest rate declined by approximately 90 basis points. The effective tax rate for the quarter ended September 2010 and September 2009 was 38.2% and 38.1% respectively of pretax income. Net income for the current quarter of $13.3 million increased 33.2% from net income for the quarter ended September 2009. Earnings per share on a diluted basis of $0.63 increased 28.6% over last year's $0.49. For the six months ended September 2010, net income of $26.5 million increased 36.7% and diluted earnings per share increased 32.6% from $0.95 to $1.26.

Moving on to the balance sheet. Our balance sheet remains very strong. Our current ratio at 1.3 to 1 is comparable to last year's second quarter and year end. In the first six months of this year, we generated $29 million of cash flow from operating activities and were able to pay down about $23 million of debt. As a result of the debt pay down, our debt to capital ratio dropped to 22% from 30% at year end.

As a reminder, we have a $153 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 are currently paying LIBOR plus 50 basis points. The very favorable agreement permits us to operate our business, including doing acquisitions without bank approval and as long as we are in compliance with covenant. These terms, as well as our current availability of approximately $125 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 room of room under our financial covenants to continue to do acquisition without any problems.

During the first six months of this year we were also conservative with CapEx spending at approximately $7 million. The four store acquisition earlier this year used another $7 million of cash. Depreciation and amortization was approximately $11 million and we received $2.5 million from the exercise of stock option. We paid about $4 million in dividends.

Inventory is up about $10 million from March 2010, due primarily to the purchase of winter tires in anticipation of the demand in the third quarter, vendor price increases, the addition of the FY 2011 acquired stores as well as continued expansion of tire inventory the Black Gold and other stores. Additionally, we had (inaudible) tire inventory in an effort to improve stocking levels, including some amounts of lower cost import tires and also improved the mix of inventory we could reduce outside purchases and buy ahead of cost increases.

I wanted to talk to you also today about some activity you may see in the stock prior to the calendar year end. Some directors and members of the management team may be selling up to a total of 150,000 shares to shore up their tax liabilities in connection with option exercises and sales transactions that occurred earlier in this calendar year. With that, I am concluding my formal remarks on the financial statement, and I will now turn the call over to the operator for questions.

Thank you. (Operator Instructions) We will take the first question from BB&T Capital Market, Tony Cristello.

Good morning. This is actually Allen Hatzimanolis in for Tony. First question, operating expenses on a per store basis were down year-over-year for the first time in over two years. How should we think about the trajectory of SG&A spending over the balance of this year? And does part of the decline simply speak to the level of integration that has been accomplished with your recent acquisitions?

Sure, part of the decline is certainly based on the operating level through the acquisitions for the rest of the year, which is what we have commented on. We are going to fall out on an EBIT margin perspective, 100 to 125 basis points improvement. We said that gross margin by Q4 it should be 100 basis point decline from prior year Q4, so that would say SG&A leverage and the operating benefit of both the acquisitions and our productivity within the stores should be it something like a 200 basis point improvement in operating expenses, which will deliver the 100 basis point improvement for Q4.

Okay, and then with respect to the targeted increase in your direct import, what has changed that has now made you more comfortable in doubling your sourcing? And how should we think about the magnitude of potential savings and the realization of these benefits from a timely perspective?

Yes, this is John Van Heel. What's causing us to increase that right now is that over the past couple of years we have been looking at companies producing parts and sourcing them out of China, and -- including the major retailers here in the US. And we have also looked at the performance of those parts over here. And wanted to be very careful about quality, so those parts are now on their second -- into their second replacement cycle. So, we have identified that the quality is there and we have identified the right manufacturers for us. So, based upon some work we have done over the past 18 months, we began this year to bring some of those parts into our stores through our warehousing. And there is a save on those parts and we are -- we will incorporate that into our guidance on margin as we go forward and as those costs start to work through the cost of sales.

In general, you are looking at a 20% to 30% plus saved on the parts that we buy. But as Rob talked about, oil and tire costs are going up as well.

So, we are viewing this as a way to offset some of that pressure. When we have the specifics on where all those costs are going, we will incorporate that into the guidance.

Okay, that's very helpful. And one last question if I could. With respect to acquisitions, what do you currently see as the largest governor on your ability to complete additional deals? Have the expectations of sellers with respect to valuation multiples changed much in the recent months?

Yes, I think the -- this is John. I think the primary limitation there is the ability to agree on a price list with the sellers. We are willing to pay a fair price and we have talked about there being a generally a 20% spread there that we are not willing to split. We've have had five NDAs out there, we're getting one of those done by the end of October. We talked about today getting another one of those it done by year-end. In the meantime, we have added one from our last public comment, so we are working off of five.

That's great, thank you very much.

And Rick Nelson from Stephens will have our next question.

Thank you, good morning, congratulations on a nice quarter.

Hello Rick, thank you.

You are getting a nice sales left on the recent group of acquisitions. I know you've talked about getting 800 basis points of operating margin expansion on acquisitions. How is that tracking relative to that 800 basis points, and how much opportunity is there?

Yes, obviously very well. I think we count on and bake into our numbers that we will get 800 minimum basis points in year two after we've sold through the higher priced inventory. Got people accustomed to our systems, labor productivity gets better, advertising gets more efficient. The reason for the significant out performance of this group of acquisitions in year one versus others is usually we conservatively budget and plan for us to hurt the comp store sales the first year of operation as they're adapting to us and some of the culture changes. As we've said, this group of transactions are running a 7% comp this past quarter and 6% last quarter, significantly above what we planned. So that the real leverage is coming from the sales line, certainly helped by some of the leverage that we normally see and account for in year two of an acquisition.

Thanks for that, Rob. Also, I would like to follow up on the 2.5% comp for October. I know you have got some very tough two year comparison. It looks tough, like it gets a lot easier in November and December. Seems we could see comps north of that 4% to 6% guidance given these comparison, what you've put up historically in this October/November timeframe.

Well, obviously, November comps of 1.3% last year were the weakest comps we've seen in three years. So, we think that that was artificially low because business moved into October, especially being the third quarter now is dominated by tire sales, and we had early snow last year. So we certainly would think November would be approaching high single digits and are planning for that to occur just based on historically, if you go back to our 2009 fiscal year as an example, October was up 4.4% comp. That was followed last year with an 11.9%. If you go back to November of '09, we ran a 9.2% comp that was followed by a 1.3%.

Then if you look at adding October and November in a given year together, the 4.4% and 9.2% two years ago came out to a 13.6% total for the winter tire season. And last year, the 11.9% and the 1.3% came in at 13.2%. Obviously with a 2.5% being in the books, or not quite in the books, we still have a week left in October and we're still supposed to get our first snow potentially in the next couple of days, at least up here in beautiful Rochester. We think November is a huge opportunity and it's reflected in our guidance of 4% to 6% comp for the quarter.

Thanks for that color. Can you also comment, the comp was up 6.4% in the September quarter. You mentioned traffic is up 5%. Can you talk about your ability to hold price increases, and does the customer trading down still have a negative impact on your business?

Sure, the customer trading down absolutely has a negative impact on our business. Plus, with that 5% store traffic increase, we've seen a lot of those customers be first time customers coming to us from dealers, for scheduled maintenance and some services, oil changes, where they don't have the level of confidence in us that someone who's been around for two or three visits to do the more expensive repairs. So, it is SKUing both lower price services like scheduled maintenance and oil changes. But also, in this economy, there continues to be a trade down factor. There was last year also. People are very tight with their money, they're looking for good value and anything that they can defer they will defer, and nothing has changed in that regard.

And the gross margin pressures that we saw in the quarter, how much of that is due to mix and how much is marginal compression within each of the matrix categories?

Probably 70% to 75% is mix, and the rest would be cost increases.

Thank you, Cathy.

You're welcome.

Thanks a lot. Good luck.

Thank you.

Next we will move on to John Lawrence with Morgan Keegan.

Good morning.

Hello, John.

Just real quick. Rob, on the marketing front, you have talked a lot of times about being able to leverage that a little bit. What's going on in that category? Traffic is good, but you were using some other methods. Internet, et cetera.

Sure, this is John. We generally target our marketing spend at about 3.8% of our sales. So, every year we've added more money to the pot there. And in terms of what we are doing, we have added funds to the internet channel of marketing more than other areas in the last couple of years. We are spending that money on paid advertisements including paid words, and we're also making some improvements to our site. Obviously, with the traffic increases that we have had, we are pretty pleased with what we have been doing.

Even though on the internet side we certainly, as we get more and more into it, have some room to continue to increase the effectiveness. And with regard to the level of spend, our sales out performance displayed our target has brought that overall spend back to about 3.5% of sales. And we would continue to see that kind of an approach going forwards, with more money being directed at the internet than other channels.

Second question on Black Gold. Can you talk a little bit about what you have seen as far as the -- how many throughput tires can you get in one of those stores, just sort of the range? I think you started at one or two a day. But what is the capacity you've seen in some of those markets?

Sure, we've -- our stores that we convert to Black Gold typically start around two tires a day. We are between three and four tires a day on the Black Gold stores. And frankly, we see that we can do a lot better than that. And those guys are -- those stores are continuing to perform well. As we pointed out, the stores that we converted earlier this year are up 40% in tires, 20% in alignments which is obviously a tire related category. So, we see that we can bring them pretty quickly from two to three stores as day. And we believe we've got room above that three to four tires a day.

Thanks for that, and just last question. As the traffic continues to build and the fleet some of this scheduled come in, you maybe get some newer cars from the dealer. Has that affected at all your ability of how often you have to go outside of your network for part sourcing?

Slightly, not significantly, John. As you know, we continue to buy less parts outside than anyone else. But a lot of what we are talking about, and Cathy mentioned, we continue to expand our inventory because when you're borrowing money at 1% with the return privileges we have, as you know, it cost us twice as much to go to an Auto Zone or to an Advance. As good a job as those guys do, we want to keep as much in house as possible, and it's very cost effective for us to continue to focus that way. But certainly, as the scheduled maintenance business grows, we will have to go outside of our network a little bit more, but that won't be the major driver of gross margin. Direct imports will more than offset that and eventually, the pressures we see on the tire side will subside and more of that will make its way to the bottom line.

Great, congratulations. Thanks for your help.

Thank you, John.

Next we will hear from Bret Jordan with Avondale Partners.

Good morning. A couple of questions, and going back to the direct import program. If you are seeing a 20% to 30% on the savings on the 15% of the mix you're doing now, is that the low hanging fruit or is it reasonable to think that getting up to 30% would carry the same sort of rate of savings?

Yes, I think getting up to 30% would carry the same rate of savings.

Okay. And I guess as you looked at a 13% target EBIT margin on a longer term basis, was that assuming a ramp up in direct sourcing, or is it incremental to that?

No, certainly it is tied to doing these programs, Bret. That being said, if you remember, we put 13% EBIT margin as a target out two years ago. And certainly weren't counting on 20% acquisition growth in a year as well as an extended period of year-over-year comps above 6%, so we're running slightly ahead of what was our initial five year plan. And what we said regarding that is let us get to the 13% EBIT margin for a full year. We'll recalibrate everything with better information. And we're not saying that's the high water mark or the ceiling permanently. When you lay out long-term goals, you put something out there and then when you hit them you reevaluate and well obviously be seeing where we fall out this year and update when we put everything going on in our numbers for next year.

Okay, and then on tires, comp is up 10% on the quarter. How does that compare to unit costs? I guess there's probably been some trade down with all the price increases. Give a feeling for what your comparable unit sales look like year-over-year.

As we mentioned, total units we're purchasing are up to 50% to $1.8 million. The unit sales on average are up 4%. The rest of it, you can obviously tie in when we talk about the two price increases we've had. But in general, even in tires, people are not trading up, they're trading down. So price increases help, units are up. But in general, the average consumer that wants a Goodyear tire is willing to trade down from a high end Goodyear tire to a low end Good year tire. So, it could go the other way.

Right, okay. And then one question, I think. What is the average ticket on the exhaust transaction?

$300 to $500.

Okay, great. So, pretty significant percentage of a 10-plus year old car's value. And then one last question. Were the acquired Courthouse Tire stores in aggregate profitable?

Yes, but they're going to be more profitable.

Okay, thanks.

Thanks, Bret.

(Operator Instructions) Scott Stember with Sidoti & Company has the next question.

Good morning.

Hello, Scott.

Did you guys talk about comps by quarter? I don't know if you guys give that out yet.

Sure. By quarter or by month in that quarter, Scott?

I'm sorry, I meant by month within the quarter.

July was 8.2%, August was 6.5%, September was 4.5%. The 4.5% in September was up against the 10.2% the year before, the 6.5% August was up against a 5.9% the year before. The 8.2% in July was up against the 6.6% the year before.

Got you. And just circling back to brakes, obviously you're going up against a very difficult comparison a year ago. But some of you other higher margin, higher ticket categories did very well in the quarter. Was there any change in the advertising there, or anything else other than just a difficult comparison with a year ago?

I think it was a difficult comparison for starters. And I think frankly, we didn't do as good a job as we usually do in store execution. As you put operational initiatives out there, sometimes you are not as solid as you might have been. And I think a piece of it was that. I also think a piece of it was as people are now buying significant number of shocks, with that being up 9% and tires at 10%, there's only so much money to go around. And they are prioritizing what they need to get done, trying to stretch out maybe a $1,500 bill to three $500 payments and shocks, tires and exhaust might have won out. And then possibly the last piece is, as I mentioned earlier, with all these new customers coming in, we need to build a track record of trust with them on the oil changes and the scheduled maintenance to layer in them -- for their more trusted services to buy them down the road.

Got you, and last question. Can you just tell us what December comps were last year so we know what we are going up against?

Sure, December comps were 10.5%.

Got you. That's all I have.

And for the -- alright, for the quarter, we ran a 7.2%, and that was up against a 5.9% the year it before.

Great, thank you so much.

Thanks, cap.

(Operator Instructions) And there are no further questions at this time. We will turn the conference pack over to management for closing comments.

Great. Everyone, thank you for joining us. We are pleased to be able to deliver record results for our second quarter and keep the momentum going. Again, I want to reiterate the thanks to our 5,100 employees who do a great job and represent us to the customer every day and look forward to the continued of momentum and talking to you next quarter. Appreciate your support. Have a great day.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.