Monro Inc (MNRO) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake third quarter 2011 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 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 & 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 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; John Van Heel, President; and Cathy D'Amico, Chief Financial Officer. With these formalities out of the way, I would like to turn the call over to Rob Gross. Rob, you may begin.

Thanks, Jessica. Good morning, and thank you for joining us on today's call to discuss our strong third quarter 2011 performance. After reviewing our quarterly performance, I'll 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. Then John Van Heel, our President, Cathy and I will take your questions.

As most of you probably saw, during the quarter we announced a 33% increase in our quarterly dividend, our fifth increase in five years, along with the three for two stock split, which was affected in the form of a 50% stock dividend on December 23. The stock split was our third in the last seven years, and we anticipate that it will further enhance the attractiveness of our stock to a wider group of investors and increase the liquidity of our shares. As a result, we will be discussing all financial figures and comparisons during today's call on a split-adjusted basis.

We once again achieved record sales and net income for the third quarter of 2011, as the positive trends that we have experienced in our business over the past several years have continued. Our comparable store sales increase of 5.4%, versus a 7.2% increase last year, continues to be among the highest, if not the highest in our industry. Customer traffic, which increased 5.6% as a result of our excellent in-store execution and our ability to capitalize on favorable macroeconomic conditions, once again drove the strong sales results across our business.

We were also successful in leveraging our increased sales to drive profitability. As we approach the end of our fiscal year, we were -- we are on track to deliver our tenth consecutive year of annual comparable source sales increases, which highlights the resilience of our business model throughout a variety of economic conditions.

During the third quarter, we grew sales by 8.4% to a record $165.5 million, compared to $152.7 million for the prior-year third quarter. Our five recent acquisitions continue to perform well and contribute to our strong top and bottom-line performance as we expected.

Last quarter, we spoke about the actions that we were taking to offset the gross margin pressure that we were experiencing as a result of both the expected product-mix shift toward sales of lower tires, which is associated with our recent tire store acquisitions, and cost increases from tires and, to a lesser degree, oil. As part of these actions, we are leveraging the increased purchasing power that has resulted from our recent tire store acquisitions, and shifting purchases between our broad base of vendors. We also successfully passed price increases along to the consumer in September, obtained increased vendor rebates, and achieved significant leverage on our distribution, occupancy, and labor productivity. As a result, we experienced an 80 basis point improvement in our gross margin during Q3 to 39.1% versus 38.3% in the prior year. It was this better-than-expected gross margin that lead to our earnings beat this quarter and our raised guidance for the full year.

We also continue to see an opportunity to help offset any future gross margin pressure and deliver incremental benefit by increasing our direct international sourcing, primarily from China, from approximately 15% of our total product cost, less oil and out-buys, to approximately 30% over the next few years. We have been approaching this initiative cautiously over time to gain comfort with the quality of product manufactured at these facilities, and have already begun to increase our sourcing from these facilities. At the same time, we continue to carefully manage our costs. As you can see from the substantial leverage that we have experienced in SG&A, the integration of our recent acquisitions is complete, and significantly benefited our operating margin.

Operating income for the third quarter increased 31% to $18.7 million, which equates to an operating margin of 11.3%, up from 9.3% in the third quarter of last year. Net income for the third quarter increased 39.9% to a record $11.1 million from $7.9 million last year. Our earnings per share, which came in $0.02 ahead of the high end of our expected range, rose 40% to $0.35 on a base of 31.9 million shares outstanding, from $0.25 on a base of 31.2 million shares in the prior-year quarter.

Our continued strong sales and traffic performance demonstrates that many of the positive industry and macroeconomic trends that we have been experiencing over the past few years are continuing through fiscal 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 its way to 12 years from ten years in 2009. Further as drivers invest in expensive repairs, such as shocks and exhaust, it suggests to us that they are planning to hold onto their vehicles for even longer, and they are looking to Monro to help keep them safely on the road.

In addition, the trusting relationships that we have established with our customers and our unwavering commitment to quality service have enabled us to continue gaining new customers, as they seek convenient, value-priced alternatives to a declining dealership base in a challenging economy. Supporting this is our comparable store scheduled maintenance, which is a subset of maintenance services and typically performed by dealers, is up 9.2% for the last 12 months. Notably, we expect the decline of the dealership base to continue for the next several years.

Moving on to our other major service categories, comparable store sales increased approximately 8% for tires, 7% for shocks, 6% for maintenance services, 2% for breaks, and we're down slightly for alignments. Combined, these factors substantiate our belief that our sweet spot for servicing vehicles has shifted to vehicles that are four to 12 years old from what used to be a range of vehicles that were six to ten years old. Six years has moved to four years as we capture more business from dealers with services such as scheduled maintenance. And ten years has moved to 12 years as consumers keep their cars longer. We believe that this trend should continue to benefit Monro for this foreseeable future.

Our high-impact cost-effective advertising and marking campaigns once again drove traffic throughout the quarter. We are continuing to leverage our increased store density and marketing dollars, spent over larger sales base, to gain as much knowledge about our customers as possible, which is helping us to make intelligent marketing decisions. We are promoting sales in key 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. The success of this and other value-oriented programs, as well as the favorable macro environment, is evidenced in the customer traffic increase of 5.6% for the quarter that 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 store openings to fill in existing markets, and acquiring competitors at attractive valuations. As I mentioned, the successful integration of our 79 tire stores acquired in fiscal 2010 are now behind us. Over the course of the year we have continued to leverage the Tire Warehouse acquisition to support our Black Gold initiative, converting 54 Monro service stores in New England to our Black Gold format. We are pleased to report that tire and alignment sales in these 54 stores increased by 37% and 13% respectively during the quarter. 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, including all markets where we operate both service and tire stores.

Now that we have fully integrated our recent acquisitions and are realizing the significant benefits of our Black Gold program, we're in a strong position to do more value-priced, opportunistic, bolt-on acquisitions to further fill out our footprint. As we look for acquisitions, one consideration is opportunities to acquire tire stores in our service store markets to further expand the very successful Black Gold program.

Also it is important that we continue to build scale in our business as that scale has proven to be a significant advantage for us in widening our competitive advantage versus many of our smaller competitors. As these smaller competitors struggle to address the rising cost of goods and to obtain adequate supply, some are becoming more willing to be acquired, which is leading to additional acquisition opportunities for Monro. With plenty of liquidity and strong cash flow, we remain poised to take advantage of additional prospects, but at the same time we continue 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 our outlook for the fourth quarter and fiscal year 2011. The positive drivers of our results over the past two to three years are continuing and support our outlook. However, January comp-store sales were down 3.8% and were disappointing. I'll give you some color on what we saw during the month.

First, New Year's Day shifted and fell on a Saturday this year, which cost us about a $1 million in sales, or a 3% to 4% comp. Second, severe winter weather caused over a thousand closed-store days, which resulted in approximately $1.5 million in lost sales. Trust me, I don't like weather reports either, but it was a real issue. The good news is, tough winters, bring good spring sales. And third, we were up against a strong January last year at up 9.4% comp, and up 14.6% the year before. However, this all happened in January, which along with December is one of the least important months of the year.

That said, we anticipate fourth quarter comparable store sales growth to be in the range of 2% to 4% on top of an 8% increase last year. Additionally, we expect fourth quarter earnings per share on a split-adjusted basis to be in the range of $0.22 to $0.26, which compares to $0.19 for the fourth quarter of fiscal 2010, a 37% increase at the high end of our range. For the full year 2011, we're increasing our expectation for total sales to a range of $635 million to $645 million, and we now expect comparable store sales growth in the range of 4.5% to 5.5%, narrowed from our previous estimate of 4% to 6%.

We now think operating margins should improve 100 basis points for the year, above our prior estimate of 100 to 125 basis points, due to the sales growth and resulting leverage gained on our operating model. We are also increasing our diluted earnings per share range on a split-adjusted basis to $1.41 to $1.45, compared to $1.07 in the full year fiscal 2010. This puts us on track to deliver our tenth consecutive year of comparable store sales increases and to generate compound annual earnings growth of approximately 30% over the last three years.

Before I wrap up, I would like to give my opinion on some of the concerns that I have been hearing in the marketplace in terms of how they affect our sector, and especially Monro. One, some people are worried that new car sales increasing off historic lows could challenge our business. I would like to remind you that there were 11.6 million units sold last year, and the projection for this year is 13 million units. This year's projection mirrors the 13.2 million units sold in calendar 2008, and in that environment our fiscal 2009 comps were up 6.7%. Even more important to us is that nine years of 16 million or more new car sales that are now in our sweet spot.

Two, I have also heard that some people think that the benefits from recent dealer closures and consolidation are over. I am confident that there will be more closures and market share losses for dealers. It's not over.

Three, the bad economy is another concern, and that raises a few misconceptions. Some people wonder whether customers will defer maintenance. But it has been bad for three years, so under this line of reasoning people have been deferring for three years and will eventually need maintenance. Others worry that customers will trade down, but again, this has been happening for the past three years. I have also heard concerns that customers will prioritize repair, and this to some extent is true. It is why we see various sales mix category shifts from quarter-to-quarter.

Four, rising prices at the pump is another concern in the market, but with oil at $90, up significantly this year, we have done all right. If prices move towards $120, that will pressure our margins and miles driven, which is a concern. However, miles driven are now on older vehicles, which should somewhat offset that impact. Also, we expect airline baggage fees, rising fares, and limited capacity to cause a shift to more driving vacations, and in turn the need for more vehicle service.

Number five. Of the concerns that I hear, the only one that I agree with is that of the economy, as we are a service and retail business. I worry about the economy getting worse and the consumer sentiment, confidence and purchasing pulling back. That is a real risk to our business and all retail companies for that matter. However, the good news is our services and products are a need, not a want purchase. Importantly, this environment benefits our acquisition strategy.

In summary, we expect the favorable macro conditions that we have been experiencing to 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. With our team's focus on 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 through the recent macro environment, we are ahead of plan, and I'm confident that fiscal 2012 will continue to move us forward. As usual, we will try to give more color as fiscal 2012 approaches. Suffice it to say, we expect that 20% earnings per share increase will be somewhere in our initial guidance range.

I want to thank our 5,100 employees again this quarter for demonstrating our their work and commitment to ensuring that customers continue to turn to Monro as their trusted service provider. I am also thrilled that the top management team has signed four-year contract extensions and will be together to continue winning. With that, I would like to turn the call over to Cathy for a more detailed review of our financial results.

Thanks, Rob. Good morning, everyone.

As Rob stated, sales for the quarter increased to 8.4%, comparable store sales increased 5.4%, and new stores, which we define as stores that opened after March 28, 2009, added $6.9 million, which includes $6 million from the fiscal year 2010 and 2011 acquired stores. Partially offsetting these increases was a decrease in sales from closed stores of approximately $0.8 million. That compares to a comparable store sales increase of 7.2% in the third quarter of last year. There were 89 selling days in both the current and prior-year third quarters.

Year to date, sales increased 16.4%, comparable store sales increased 5.7%, and new stores added $50 million, including $47.3 million from the fiscal year 2010 and 2011 acquired stores. Partially offsetting this was a decrease in sales from closed stores of $2.9 million. The year to date comps, compared to last year, a comparable store sales increase of 6.9% for the first nine months.

At December 25, 2010, the Company had 783 Company-operated stores, as compared with 780 at December 2009. During the quarter, December 2010, the Company added four stores and closed four stores. Year to date the Company has added 12 locations and closed six underperforming locations.

Moving on to gross profit for the quarter ended December 2010, it was $64.7 million or 39.1% of sales, as compared with $58.6 million or 38.3% of sales, for the prior-year quarter. The increase in gross profit for the quarter ended December 2010 as a percentage of sales is due to several factors. First, total material costs, including outside purchases, increased slightly as a percentage of sales as compared to the prior year, causing margin pressure. The shift in mix during the quarter to increased tire sales, as well as cost increases in various items such as oil and tires, were largely offset by selling price increases across the chain and increased vendor rebates recognized during the period as compared to the prior year.

Offsetting this increase in material costs was -- were labor costs, which decreased slightly as compared to the prior year, due primarily to the continued shift -- mix shift to tire sales and improved labor productivity which we measure as sales per man hour. 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 these largely fixed costs.

In our fourth quarter, we would expect gross margin improvement to be similar to the improvement we saw in the third quarter of this year, and operating profit to be approximately 150 basis points better. Gross profit for the nine months ended December 2010 was $197.1 million, or 40.6% of sales, compared with $173.8 million, or 41.6% of sales for the nine months ended December 2009. The year to date decline in gross profit as a percentage of sales is largely due again to the shift in mix to the lower margin tire sales category, resulting primarily from a full year of sales from the fiscal 2010 acquired stores, including Tire Warehouse, whose sales mix is almost 100% tires.

Operating expenses for the quarter ended December 2010 were $46.1 million, or 27.8% of sales, as compared to $44.3 million, or 29% of sales, for the prior-year quarter. Within operating expenses, selling, general, and administrative expenses for the third quarter of the current year increased by $1.8 million to $45.4 million from the prior-year quarter and were down to 27.4% of sales as compared to 28.5% of sales in the previous year. The decrease in percentage of sales is due to improved sales, which have allowed the Company to leverage, again, fixed -- largely fixed costs, as well as our continued focus on cost control. For the nine months ended December 2010, operating expenses increased by $8 million to $133.1 million from the previous -- from the comparable period of the prior year, and were 27.4% of sales as compared to 30% of sales.

Operating income for the quarter ended December 2010 of $18.7 million increased by 31% as compared to operating income of approximately $14.3 million for the quarter ended December 2009, an increase as a percentage of sales from 9.3% to 11.3%. Operating income for the nine months ended December 2010 of approximately $64 million increased by 31.2% as compared to operating income of $48.8 million for the nine months ended December 2009. It also increased as a percentage of sales from 11.7% for the prior-year period to 13.2% for the nine months ended December 2010.

Net interest expense for the quarter increased by approximately $0.2 million as compared to the same period in the prior year, and remained relatively flat at 0.7% of sales for the same period. The weighted average debt outstanding for the third quarter of fiscal 2011 decreased by approximately $29 million, as compared to the third quarter of last year, primarily related to repayments made -- that we made on our revolving credit facility. Net interest expense for the nine months ended December 2010, increased by approximately $0.5 million as compared to the same period in the prior year, and decreased as a percentage of sales from 1% for the nine months ended December 2009, to 0.8% for the nine months ended December 2010.

The effective tax rate for the quarter ended December 2010 and December 2009 was 38.3% and 40.7% respectively of pre-tax income. 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 2010 and December 2009 was 38.1% and 38.8% respectively of pre-tax income. Pre-tax income for the quarter of $17.9 million and year to date of $60.7 million for the period ended December 2010 increased by 34% and 36% respectively over the prior-year periods.

Net income for the quarter of $11.1 million increased 39.9% from net income for the quarter ended December 2009. Earnings per share on a diluted basis of $0.35 increased 40% over last year's $0.25 per share. For the nine months December 25, 2010, net income of $37.6 million increased 38%, and diluted earnings per share increased 33%.

Moving on to the balance sheet, again, our balance sheet remains strong. The current ratio at 1.2 to 1.0 is comparable to last year's third quarter and year end. We generated $51 million of cash flow from operating activities this quarter, and we're able to pay down approximately $43 million of debt this -- so far this year. As a result of the debt pay down, our debt to capital ratio dropped to 17% from 30% at year end.

During the first nine months of this year, we were conservative with CapEx spending at $10.2 million, depreciation and amortization was approximately $17 million, and we received $4 million from the exercise of stock options. We paid about $6 million in dividends. Inventory is up $9.8 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, which accounted for $1.4 million of the increase; as well as the continued expansion of tire inventory in Black Gold and other stores. Additionally, we continue to add inventory in an effort to improve starting levels of lower-cost import tires and the mix of inventory to reduce outside purchases and buy ahead of cost increases. However, inventory turns are up slightly from year end and last year.

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

Thank you. (Operator instructions). And we'll go first to Bret Jordan with Avondale Partners.

Couple of quick questions, and really around gross margin. The expansion of gross margin, given the increased tire mix, is this reflecting different sourcing model on the tire side, or is there a benefit from tires that were owned prior to your September price increase or the manufacturer's price increases in the fall? That you are selling lower-cost inventory that might tail off as we started restocking with higher-cost inventory?

Hi, Brett, this is John. No, there was no -- we didn't make any one-time kind of significant buys. Certainly what we did in -- of tires to try to sell at older cost tires at newer prices, but we increased our prices in September to try to deal with the two cost increases that we had earlier in the year, January and June. So as we continue on into the fourth quarter, we have got an additional cost increase that came through in the November/December time frame, and we're making adjustments right now to try to deal with that and pass that along as much as we can. So we're trying to stay ahead of it, and certainly you get a little bit of a benefit by raising your prices earlier, but we're -- we don't see anything different going in to the fourth quarter than what happened in the third quarter.

Yes, I think that's why Cathy mentioned we would expect a similar gross margin improvement in Q4 versus Q3.

Right. So we have essentially -- have we seen a bottom in margin contraction? I mean, barring the acquisition of a large tire retailer, have we found a steady state in gross margins where we can work around going forward?

Yes.

Okay. And I guess also on that potential acquisition of large tire retailers, how does the pipeline look? I guess as far as in the past you talked about signed nondisclosures or number of deals that at some level are being discussed. Do you have any color on that and maybe what we can expect in calendar 2011?

Sure. Last -- on last call we talked about having five NDAs signed. Since then we signed another one. Those are all within the five to 30 store range. On the last call we also talked about hoping to have closed one of those deals in the December time frame. That deal didn't close because during due diligence we saw that the run rate for the year for that chain went to down nine, and strangely enough the seller's price didn't adjust, so that fell out of our valuation, and that seller needs -- we would need to agree to a lower price there, or certainly we'll -- we would entertain it when they fix the business.

So we're still dealing with our valuation versus the seller's expectation, and we have been talking to most of these guys for several years right now. One thing that I can say is that in the updated financials that we have gotten from them, none of these guys operating results have improved, and as Rob said, we feel like we have been able to make fair deals with sellers over the 15 deals that we have done, and we're maintaining our discipline.

What we see coming into calendar 2011 is guys that are running at the same level that they were in operating earnings in a rising cost environment on tires and oil and a tight tire supply. None of these guys are getting any younger. Several of them have succession issues. And we expect that -- that's a favorable environment for us to be able to achieve the 10% annual sales growth that is a part of our operating plan, at least on a run rate basis. So we think that the pressures that we're all dealing with this year, and in to 2011 might make these guys a little bit more flexible. We'll get some deals done.

Great. And one last question. On direct sourcing at 15% of mix right now, what inning are you at getting that to ramp? Is there a feeling to what we might see that grow to this year? As you begin to do more work on the last couple of quarters, at what point do you see beginning to meaningfully change that?

Yes, it has not been a significant help in fiscal 2011. We expect that we will get some help on that in fiscal 2012, and again, we're viewing that as a way to offset some of the cost pressures that we're getting on tires and oil, as opposed to a straight margin expansion itself.

Okay. Great. Thank you.

Next we'll hear from Rick Nelson with Stephens.

Thank you, and good morning, and congratulations on a great quarter.

Thanks, Rick.

I would like to follow up on gross margin improvement, how you would rank the drivers there, and it sounds like you think that improvement is sustainable, at least through the March quarter. Looking beyond that, do you think that improvement is in fact sustainable?

Yes. We haven't spent a ton of time on 2012 beyond knowing that what we have said publicly and what we feel will be the case next year is -- what I said that you should count on, we would expect somewhere in the range of 20% increase in bottom line, specifically on the gross margin, ranking the item. Certainly the price increases at retail level help. The vendor rebates help.

And then the other items we talked about, the leverage we're gaining in distribution, occupancy, and labor productivity have continued. So probably I would go in that order as far as where the improvement from the first two quarters, where there were big hits, to what we are now saying Q3 and Q4, you should look for something in the range of 80 basis point gross margin improvement. And remember also, Q3 and Q4 we have anniversaried those big tire acquisitions, which obviously takes some pressure off sales mix.

And to the vender rebates, Rob, are those more one time in nature, volume driven and then they dissipate or --

No, we would expect them to be continuing as every year -- I think last year alone we went from something like 1.2 million tire units purchased to 2 million. And you would expect the bigger you get, the more important you become to various vendors.

Got you. And you gave us the one- and the two-year comp for January, which was helpful. Wondering if you could do the same for February and March, and what sort of a -- January, I believe is seasonally small and things really ramp up in February. If you could provide some color as to how much January contributes to the quarter?

Sure. First off, for this past quarter the progression was in October we were up 2.4%, November we were up 5.5%, and December we were up 8.6%. As far as compared to last year, last February was our weakest month of the quarter at 4.1%, and again, not getting in to weather, which we didn't talk about last February, that was when there were a number of storms in a number of our markets -- Philadelphia, Baltimore, Washington -- that hurt our business in February last year, which we would expect would lend itself to better comps this year, just like next January we would expect better comps. So last year it was 9.4% in January, 4.1% in February, 11.5% in March, and 8% for the quarter.

Thank you for that. Also I think you had indicated that the shift in calendar at New Year's Day impacted the comp by 3% to 4%. Is that for the day, for the month, for the quarter that you are referring to?

That's for the month of January.

For the month.

Yes, I don't feel the need to apologize for the 5.4% comp on the 7.2% this past quarter. I do feel the need to be apologetic for a minus 3.8% out of nowhere.

Great. And then the traffic rise we saw in the quarter, 5.6%, you put through some price increases on top of that. What accounts for the differential between those two factors and the comp that you reported, 5.4%?

Sure, we --

Was that by trading down or --

Exactly right. Sales mix shift and trading down accounts for all of it. So very good traffic, the price increases were implemented, which helped our gross margin. The other leg of the stool, if you will, are -- people are trading down. They continue to trade down, and in my opinion will continue to trade down.

And is that issue actually accelerating or is it stabilizing or --

No, it's pretty stable, and it's really just a function of what categories perform at what levels. When brakes are running plus six comp, as they were for two years, instead of plus two, things look a little bit better as the ticket average goes up. So we would expect continuing to trading down next year, as we would expect deferred maintenance to occur, and people to continue to prioritize in a tough economy where they are deciding what they can afford to do.

Got it. Thanks a lot. And good luck.

Thanks a lot, Rick.

Thank you.

Next from Morgan Keegan we'll hear from John Lawrence.

Good morning.

Hey, John.

Good morning.

John, would you speak to just a little bit of the fact that -- I know when we started seeing these cars because of the dealerships, and started seeing these cars earlier in their cycle, can you talk a little bit now -- we have had a year or so of that. Can you give a little more color to how often we're seeing this car in the bay predicated by the oil change, and what has that done to that life cycle of that relationship? If you could talk to that a little bit?

Sure. We're -- we see our customers on an average of about 2.5 times a year. That hasn't changed significantly. Obviously, over the last several years we've run good traffic numbers, but we're seeing more customers, and that's supporting -- that along with the price is supporting the sales increases, offset by what Rob was just talking about, some of that trading down.

And secondly, what would you -- how would you -- if you looked at the Black Gold stores, those earliest -- the first group of stores that you looked at and the second group, how would the comps in those stores hold up over time?

Yes, the -- in the initial rollout, you get a bump in the comps, because those tire units go up and the related services around that. After that they comp more like the rest of the chain, but off of that higher base. Those initial Black Gold stores -- well, all of the Black Gold stores as a group are about -- have about a 10% higher sales base than the non-Black Gold stores, and the increased tire units is a big piece of that. Of course, allowing them more options on the tire side lets those stores be more things to more customers to meet more customer needs, so they have, we think, an increased ability to respond to customers and to grow their sales. And that's why as we continue to buy stores -- buy tire stores in markets where we only have service stores right now, we're looking to continue to roll out that program.

Right. Thanks. That's all I have. Congratulations.

Sure. Thank you.

Thank you.

Next we'll here from Tony Cristello with BB&T Capital Markets.

Thanks. Good morning, everyone.

Hey, Tony.

Couple of questions. First question, when you look at the environment, and I believe John mentioned the underperformance relative to your numbers, which continues with some of the smaller independents out there, have you seen anything develop from a more rational approach on a competitive standpoint, whether pricing, whether direct marketing mailing, anything that you might have to fight off a little bit as those independents continue to struggle?

Well, certainly they have been struggling this year as well as maybe not have the kind of performance we've had over the last three years, so anything they have or haven't been doing is really reflected in the last nine month's performance of ours. And as we said, our key driver is store traffic. We're going to continue to take care of the customer, offer value programs, be the most convenient because of our store density, and continue to look to drive that traffic number up and keep it positive. The one thing that would give us pause, and we have not seen, is if our traffic numbers fell off significantly, which might send a message that we have gone too far in the pricing, and the consumer doesn't view us a value anymore.

So certainly, some of the pressure in the earnings from some of these guys we're looking at comes from their opinion and others being it's a tough market. You can't raise prices. Our opinion is we can't afford not to raise prices, and so far what we have been doing with the customers -- remember, simplistically, customers aren't coming in buying eggs and milk, which they buy every week, so price increases they are highly attuned to. Our services -- the bigger ones are purchased every three or four years, and if we're convenient and you trust us, and you have been with us a while, you're really not worried about the last $20 or $30. You are worried about someone selling you something you didn't need.

Okay. Helpful. And when you look then -- maybe shifting gears a little bit -- at the success you have had at leveraging your SG&A expenses in an environment where you have made a lot of acquisitions, and you benefited from various robust sales, are there investments that you need to -- or will require at some point, whether it's infrastructure, distribution systems? Anything we should be thinking about as you go from the 700 to 800 level of store base to the 1,100 to 1,200 store base in the next several years that we should start to think about?

I think the only thing to think about is what we have talked about, really, for the past four years, is that eventually we're going to do a $4 million or $5 million expansion to the Rochester warehouse facility, which as we have said, we continue to hold off until the state and the city give us what we feel is an appropriate tax abatement to keep our business here. That being said, as Cathy said, I think our current borrowing rate is 50 basis points above LIBOR. It is not a big number, especially in light of our cash flow, but that's the only thing we would need to do in the next two or three years to increase our capacity to service that 1,100 or 1,200 locations.

Okay. Okay. And one last question. You -- in your closing remarks, you commented about everyone on board for another four years. I'm assuming you mean Cathy and John and Joe, and I'm just curious as far as are you participating for the next four years as well?

Well, I will -- despite what I keep hearing, I was always planning on participating in the next four years. So, again, at some point with a good management team, you have got to let them move up. The only change I have been talking about is maybe giving up day-to-day responsibilities in October of 2012 to a guy who is pretty much doing all of the work now anyways, and I will continue to help on strategy acquisitions and see all of my favorite analysts and investors occasionally. But what you're seeing in the performance the past couple of years is generated by the same team that will be around for the next four.

Okay. Great. Thank you.

Thanks, Tony.

Scott Stember from Sidoti & Company has the next question.

Good morning.

Hey, Scott.

Can you tell us what the price increase that you put through was in September, and what you would be planning to do pretty shortly?

Sure. On -- we put an across-the-board increase through at about 2.5%. We put some additional price increases through on tires above that level, and you see that in the margin that resulted for the quarter.

Okay, and -- I'm sorry, go ahead.

We would plan on putting through a similar increase, maybe slightly less in the February/March time frame in terms of an across the board, as we have done for the past nine, ten years.

Okay. And with regards to tire sales now that you are shifting to some of these Chinese tires, have you seen any reluctance from customers as far as them buying that, or is that actually working in your favor with people trading down to lower price points?

No, we have been selling those private-label Chinese tires for the past six years, so that's a continuing part of our program. And in -- with regard to trading down and to price increases, the most important thing for a customer that's trading down from a branded tire to a -- maybe a private-label tire is that gross savings. They don't know that we just raised the price on that private-label tire by 5% or something like that. What is important to them is the total dollars spent out of their pocket, and that they are getting a tire that will be safe for their car.

Okay, and --

So (inaudible -- multiple speakers) -- that aspect of trading down might help us a little bit in terms of the margin.

Got you. And, Rob, you gave us some statistics about the weather, how much that played. I think you said 1,000 store days. Can you just give those one more time for January?

If I must. It was 1,000 closed-store days and about $1.5 million in sales.

Okay.

And about $1 million due to the shift on New Year's Day.

Got you. And the last question, Rob, you said you could expect to grow initially, I guess, 20% in fiscal 2012. That excludes acquisitions beyond what [you're doing already]?

Correct. Correct.

Got you. That's all I have. Thanks.

Great. Thanks, Scott.

Thank you.

(Operator Instructions). And from UBS we'll go to Les Bryant.

Hi, guys.

Hey, Les.

I'm still around. I'm 80 years now, but I'm still around, and I'm still a shareholder. And I just have a question for Cathy first. Is she still around?

I'm here, Les.

Hi, how are you doing? Cathy, how many years have you been making sweet music here at Monro?

Oh God, you're going to make me seem very old. 17 years.

Rob, how long have you been fine-tuning the orchestra here?

I have been making sweet music with Cathy for 11 years. Business-related music.

I have been enjoying Monro for about 25, 30 years.

You win.

Yes, well, no. I just had a comment -- a little comment here. Maybe everybody will enjoy it. I feel certain that Monro shareholders join me in thanking you and your orchestrating the Monro team during the super years of growth that have been accomplished during your tenure. Now I hope it goes on a long time.

We are all comforted that your winning team will continue to lead us for another four years. You are super guys, and the price-earnings multiple of Monro reflects everyone's admiration and confidence in your talents and professional commitment to Monro. We all thank you for your efforts. End quote.

Thank you, Les.

Thank you.

Yes, thanks. That's the nicest thing I have heard in a while. We certainly appreciate it, and we're not done yet.

Everybody appreciates you guys too.

Well, thank you, Les. Be well.

And there are no further questions at this time. I'll turn the conference back over to management for any additional or closing comments.

Well, again, another solid quarter. We certainly appreciate all of your support, and we look forward to continuing to perform in the fourth quarter and fiscal 2012. And we're available if you have got any questions beyond what we have covered today, so have a great day.

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