Monro Inc (MNRO) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake fourth-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 produced in whole or in part without permission from the Company. I would now like to introduce Ms. Leigh Parrish of Financial Dynamics.

Thank you. Hello, everyone. 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'd like to call your attention to the risks and uncertainties related to the statements which are more fully described in the press release and the Company's filings with the SEC.

These risks and uncertainties include but are not necessarily limited to uncertainties affecting retail generally such as consumer confidence and demand for auto repair, risks related to leverage and debt service including sensitivity to fluctuations in interest rates, dependence on and competition within the primary markets in which the Company stores are located and the needs for and cost 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 thereof or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an addition 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'd like to turn the call over to Rob Gross. Rob, you may begin.

Thanks, Leigh. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our fourth-quarter and fiscal 2011 performance and to review our quarterly and full-year performance.

I'll provide you with an update on our business as well as our outlook for the first quarter and new 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. John Van Heel our President is on the line from a remote location in New Jersey working on the acquisition we announced this morning.

We ended the fiscal year solidly, setting new Company records for both our fourth-quarter and full-year results. We believe that these results demonstrate the strength and flexibility of our business model as well as our strong position in the marketplace which have given us the ability to pull different levers to drive improved performance.

As we have closed out our fiscal 2011, I want to acknowledge each of Monro's employees. Our strong performance is a direct result of the ability of each of our employees to execute well and consistently provide excellent service to our loyal customers.

Let me begin by providing a review of our fourth-quarter and fiscal year results. For the quarter, our comparable store sales were flat, negatively impacted by weather and rising gas prices versus an 8% increase last year.

We increased our total sales by 2.1% to a record $150.8 million compared with $147.2 million in sales for the prior year fourth quarter. For the fiscal year, our comparable store sales increased 4.2% on top of a 7.2% increase last year.

This marked our 10th straight year of annual same-store sales increases. Total sales for the fiscal year increased by 12.8% to a record $636.7 million compared with $564.6 million in sales for the prior year. Notably our recent acquisitions continued to perform very well and contributed to our strong top and bottomline performance as we expected.

Over the last several quarters, we have discussed actions that we're taking to offset the gross margin pressure that we are experiencing as a result of both the expected product mix shift towards sales of lower margin tires which is associated with our recent tire store acquisition and cost increases from tires and 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've also passed price increases along to the consumer and obtained increased vendor rebates. As a result, we experienced a 110 basis point improvement in our gross margin during Q4 to 40.1% versus 39% in the prior year while gross margin was down slightly for the year at 40.4% compared to 40.9% for fiscal year 2010 primarily due to our recent tire store acquisitions.

We also continue to see an opportunity to help offset any future gross margin pressure and hopefully deliver incremental benefit by increasing our direct international sourcing primarily from China from approximately 15% of our total product cost less oil and outbuys to approximately 30% over the next few years. We've been approaching this initiative cautiously over time to gain comfort with the quality of product manufactured at these facilities and we currently source approximately 22% of these products internationally.

At the same time, we continue to carefully manage our costs. As you can see from the leverage we experienced in SG&A, the integration of our recent acquisitions is complete and significantly benefited our operating margin.

Operating income for the fourth quarter increased 37.4% to $14.4 million. This translates to an operating margin of 9.5% compared with 7.1% in the fourth quarter of last year.

Operating income for the year increased 32.3% to $78.4 million from $59.2 million in fiscal 2010 which translates into operating margin of 12.3% versus 10.5% in 2010. Net income for the fourth quarter increased 40.5% to a record $8.2 million from $5.9 million last year.

Our earnings per share which came in at the high end of our expected range rose 36.8% to $0.26 on a base of 32 million shares outstanding from $0.19 on a base of 31.4 million shares in the prior year quarter. For the full year, net income increased 38.1% to a record $45.8 million from $33.2 million in 2010. Full-year earnings per share which were also at the high end of our expectations increased 34.6% to $1.44 from $1.07 in 2010.

We continue to believe that the trusting relationships that we've established with our customers and our unwavering commitment to quality service has enabled us to continue gaining new customers as they seek convenient value priced alternatives to a declining dealership base and a challenging economy. Supporting this, our comparable store scheduled maintenance which is a subset of maintenance services and typically performed by dealers is up 6.5% for the last 12 months.

Moving on to our other major service categories, comparable store sales increased approximately 6% for service and tires, 5% for exhaust and 4% for shocks and were flat for brakes for the year. 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 10 years old.

We believe that this trend should continue to benefit Monro in the future although the benefits of this trend could slightly be offset by the continued pressure on consumers from high gas prices and prolonged high unemployment. Our high-impact cost-effective advertising and marketing campaigns also continue to drive traffic throughout fiscal 2011.

For the year, traffic increased 3.5% and for the fourth quarter, traffic was flat. We are continuing to promote sales of certain categories for 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 pads for only the cost of labor. And now for an update on our growth strategy.

We continue to be focused on increasing our market share through same-store sales growth, expanding our service offerings, opening additional new stores in existing markets and acquiring competitors at attractive valuations. As you may have seen, we announced today we signed a definitive asset purchase agreement to acquire Vespia Tire Centers which consists of 24 locations in New Jersey and Eastern Pennsylvania.

Notably, the purchase of Vespia which generated annual net sales of approximately $36 million in 2010 will help us to quickly expand Munro's footprint in this densely populated market. We are excited about Vespia for five reasons.

One, the great employees and customer service they have delivered for 35 years. Two, the store sales average $1.5 million annually, leading to solid operating leverage.

Three, unlike other stores acquired, Vespia is approximately 70% service, giving us additional gross margin and operating margin opportunities. Four, it increases our tire units purchased by 100,000 or 5%. And five, it supports our Black Gold program in 10 Monro stores. We expect that the transaction will close by June 5, 2011 and will be slightly accretive in fiscal 2012.

In addition to this most recent acquisition, we continue to pursue value priced opportunistic bolt-on acquisitions to further fill out our footprint. As I have previously noted, we believe that economic pressures put on our competition both large and small can lead to excellent acquisition opportunities for Monro.

As these 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. Given the current environment, we expect to step up our acquisition activity even more in the coming year.

We have no bank debt, 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 the trends we are seeing in our industry as well as the economy overall are on our side. I would now like to briefly discuss our outlook for the first quarter and fiscal 2012.

As we discussed on last quarter's call, there have been some concerns we've been hearing in the marketplace. One of the key macro and industry concerns is the higher cost of oil and its impact on prices at the pump.

Despite the recent slump, oil costs have been moving towards $120 and have pressured our margins and miles driven, although I'm less concerned myself about miles driven since they are now on older vehicles which helps our business. Of more concern to me are the rising gas prices that are impacting consumer sentiment and purchasing behavior which affects Munro as a service and retail business.

However, the good news is our services and products are a need, not a want purchase. Many of you are worried that new car sales increasing off historic low could challenge our business.

I believe the more important trends for our business is after nine consecutive years of averaging approximately 17 million new cars sold through 2007 are now in our sweet spot. I'm also confident there will be more closures and market share loss for dealers which will continue to benefit us, slightly offset by the dealers that do remain becoming more aggressive in promoting service and tires.

All that being said, while we continue to have a positive outlook for the business over the long term, we expect more moderate organic earnings growth during fiscal 2012 as rising gas prices and the macroeconomic environment will weigh on consumer sentiment and purchasing behavior. Hopefully, we're being conservative in our view.

Additionally, as I just noted, we expect to continue to execute on our disciplined acquisition strategy and therefore anticipate the growth from acquisitions will be accelerated during the year offsetting any sluggishness we see from organic growth.

Importantly, we are confident that fiscal 2012 will be a year that much like we saw back in fiscal 2008 will allow us to leverage our strong business model and position as a low cost and trusted service provider to continue to grow the business and enhance shareholder returns despite the economic or operating environment. As many of you may recall, 2008 was a year in which we saw softer organic growth but in which we were able to take advantage of acquisition opportunities that helped us expand and strengthen our business overall leading us to the last three years of accelerated earnings growth.

As I mentioned, we believe the trends we are currently seeing will again allow us to take advantage of additional acquisition opportunities, achieving further economies of scale, enhancing convenience for customers and more strongly positioning the Company for continued profitable growth in the future. As we detailed in our press release this morning, we expect first-quarter comparables store sales growth in the range of 1 to 3% versus 5.1% in the prior year.

April comps were flat versus an 8.1% increase last year. The first three weeks of May have progressively improved and we reached a 6.4% comp increase last week.

We expect first-quarter earnings per share to be in the range of $0.44 to $0.47 which compares to $0.42 for the first quarter of fiscal 2010, a 12% increase at the high end of our range. For the full year, taking into account the Vespia acquisition as well as fiscal 2012 being a 53 week year, we expect total sales in the range of $690 million to $705 million and comparable store sales growth in the range of 4 to 6%.

Or 2 to 4% when adjusted for days. Additionally, we estimate fiscal year EPS of $1.61 to 1.75. We would anticipate $100 oil gets us the high end of the range where $120 gets us the low end. Also, we anticipate the 53rd week will benefit our fourth-quarter results by approximately $12.5 million in sales and approximately $0.06 in earnings per share.

In summary, 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 challenging macro environment, we are well-positioned and I'm confident that fiscal 2012 will continue to move us forward.

We're excited about the opportunities for further market share expansion in fiscal 2012 and remain confident that customers will continue to turn to Munro 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. Cathy?

Good morning, everyone. As Rob said, sales for the quarter increased 2.4% with comparable store sales decreasing slightly by 0.3%. There was an increase of $4.6 million related to new stores of which $4.2 million came from the 2010 and 2011 acquired stores.

Partially offsetting this increase was a decrease in sales from closed stores close amounting to $700,000 and this compared to a comparable store sales increase of 8% in the fourth quarter of fiscal 2010. Year-to-date sales increased 12.8%, comparable store sales increased 4.2% with new stores adding $54.6 million.

The 2010 and 2011 acquired stores accounted for $51.5 million of the new store increase. Partially offsetting this was a decrease in sales from closed stores of $3.5 million.

This compares to a comparable store sales increase of 7.2% for the 12 months ended March 27, 2010. At March 26, 2011, the Company had 781 Company-operated stores as compared with 777 stores at March 2010.

During the quarter ended March 2011, the Company closed two locations and for the year, the Company has added 12 locations and closed eight underperforming locations. Gross profit for the fourth quarter ended March 26, 2011 was $60.4 million or 40.1% of sales as compared with $57.4 million or 39% of sales for the quarter ended March 2010.

The increase in gross profit for the quarter ended March 2011 as a percentage of sales is due to several factors. Total material cost including outside purchases decreased as a percentage of sales as compared to the prior year quarter primarily due to selling price increases as well as increased vendor rebates recognized during the period as compared to the prior year.

Labor costs as well as distribution and occupancy costs which are included in Munro's cost of sales were relatively flat as a percentage of sales as compared to the prior year. Gross profit for the 12 months ended March 2011 was $257.5 million or 40.4% of sales as compared with $231.2 million or 40.9% of sales for the 12 months ended March 2010.

The year-to-date decline in gross profit as a percent of sales is largely due to an increase in material costs related to the shift in mix to the lower margins tire sales category resulting primarily from a full year of sales from the fiscal year 10 acquired stores which have a heavy tire mix. These increases were partially offset by a decrease in labor costs due to increased tire sales and improved labor productivity for the year as well as leveraging of largely fixed occupancy costs against strong sales for the year.

Operating expenses for the quarter ended March 2011 were $46 million or 30.5% of sales as compared with $46.9 million or 31.8% of sales for the quarter ended March 2010. Within operating expenses, selling, general and administrative expenses for the quarter ended March 2011 decreased by $0.7 million to $45.4 million from the quarter ended March 2010 and were 30.1% of sales as compared with 31.3% for the prior year quarter.

The decrease in operating expenses as a percentage of sales is largely due to the Company gaining operating leverage against strong sales as well as reduced benefit costs. This was partially offset by increased legal and management bonus expense in the fourth quarter of fiscal 2011 as compared to the prior year.

For the 12 months ended March 2011, operating expenses increased by $7.2 million to $179.1 million from the comparable period of the prior year and were 28.1% of sales as compared to 30.5% of sales for fiscal 2010. The reduction in operating expenses as a percentage of sales for fiscal year 2011 as compared to the prior year was due to similar factors as described for the Company's fourth quarter.

Intangible amortization for the quarter ended March 2011 increased by $0.1 million to $0.3 million from the comparable period of the prior year and were 0.2% of sales as compared to 0.1%. For the 12 months ended March 2011, amortization expense increased by $0.5 million to $1.4 million from the comparable period in the prior year.

The dollar increase is due to the amortization of acquired intangibles associated with the fiscal year 2010 and 2011 acquisitions. Loss on disposal of assets for the quarter ended March 2011 decreased $0.3 million from $0.6 million for the prior year quarter and similarly decreased by $0.4 million from $1.1 million for the 12 months ended March 2010. The decrease is strictly due to the timing of proceeds from sales of property in one period versus another as well as the closure of underperforming stores.

Operating income for the quarter ended March 2011 of approximately $14.4 million increased by 37.4% as compared to operating income of approximately $10.5 million for the prior year quarter [had it] increased by 240 basis points as a percentage of sales from 7.1% for the quarter ended March 2010 to 9.5% for the quarter ended March 2011. Operating income for the 12 months ended March 2011 of approximately $78.4 million increased by 32.3% as compared to operating income of $59.2 million for the 12 months ended March 2010, an increase as a percentage of sales from 10.5% for the 12 months ended March 2010 to 12.3% for the 12 months ended March 2011.

Net interest expense for the quarter ended March 2011 decreased by approximately $0.5 million as compared to the same period in the prior year. And it also decreased as a percentage of sales from 1.2% to 0.8% for the quarter.

The weighted average debt outstanding for the quarter ended March 2011 decreased by approximately $50 million from the prior year quarter largely due to the repayment of a significant amount of the Company revolving credit facility. Net interest expense for the 12 months ended March 2011 of approximately $5.1 million decreased by approximately $1 million as compared to the same period in the prior year and also decreased as a percentage of sales from 1.1% to 0.8% for the 12 months ended March 2011.

The effective tax rate for the quarter ended March 26, 2011 and March 27, 2010 was 37.7% and 33.4% respectively of pretax income. The difference in rate relates to the accounting for certain tax positions under FIN 48 which may vary from quarter to quarter and year to year.

The effective tax rate for the 12 months ended March 2011 and March 2010 was 38% and 37.9% respectively of pretax income. At this point, we would expect fiscal year 2012 tax rate to be approximately 38%.

Pretax income for the quarter of $13.2 million and year to date of $73.9 million for the period ended March 2011 increased by 50.2% and 38.4% respectively over the prior year period. Net income for the quarter ended March 2011 of $8.2 million increased 40.5% as compared to the prior year earnings per share on a diluted basis for the quarter ended March 2011 increased 36.8%.

For the 12 months ended March 2011 net income of $45.8 million increased 38.1% and diluted earnings per share increased 34.6%. Moving on to the balance sheet, our balance sheet remains very strong.

The current ratio at 1.3 to 1 is comparable to though slightly higher than last March. The increase is due in large part to an increase in tire inventory due to the expansion of the Gold program, a shift in product mix toward higher-end tires which carry a higher cost, vendor cost increases, advance purchase of tires in anticipation of cost increases and the addition of 12 stores in fiscal 2011.

Nonetheless, inventory turns were flat as compared to last year. For the 12 months ended March 2011 we generated [$52 million] of cash flow from operating activities.

We spent approximately $18 million on CapEx and $10 million on acquisitions. Nonetheless we were still able to pay down approximately $45 million of debt during this fiscal year.

As a result of the debt paydown, our debt to capital ratio dropped to 16% from 30% a year ago even after accounting for the new capital leases in fiscal year 2011. During the year, we paid approximately $9 million of dividends and received about $5 million from the exercise of stock options.

Depreciation and amortization totaled $23 million for the year and $6 million this quarter. Expanding on the guidance for our fiscal year 2012 which includes the expected results from the Vespia acquisition, we expect sales in the range of $690 million and $705 million. This reflects 4 to 6% comparable store sales including the 53rd week.

Operating margin is expected to improve 100 to 150 basis points with gross profit increasing about 50 basis points and SG&A improving by about 100 basis points. This factors in the integration costs and our slightly accretive expectations of the Vespia acquisition.

Interest expense should be between $5 million and $6 million. EBITDA should be in the range of $116 million to $123 million, depreciation and amortization should be about $23 million, CapEx should be in the range of $32 million. And that concludes my formal remarks on the financial statement. With that, I'll now turn the call over to the operator for questions.

(Operator Instructions) Rick Nelson, Stephens.

Rob, can you talk about the tire business? It looks like it has been softer due to sticker shock you think going on? And maybe (inaudible) calendar shift might have affected that business in the quarter?

Sure, obviously we've had a number of price increases. Total announced price increases last 15 months approached 25%.

We have seen our cost of goods on the tires go up about 18%. The calendar shift to Easter obviously negatively impacts our May comps because Easter falls in May.

So for the month of May so far, we are up a little bit more than 3% comp. That does not take into account the approximately $700,000 we lost because we're closed on Easter versus last year.

So comps are coming back nicely, but I think -- I always used to say we're not like buying milk or eggs. You go to the grocery store and you see the price increases every week.

Certainly what we are seeing now on tire cost is there is sticker shock. A guy who bought tires for one vehicle last year, it might've been $400, those same tires are $500 to $550 now. So they absolutely are feeling it.

You couple it with the higher gas prices and the pain that that brings along with higher food prices and people continue to try and defer and people are even buying new tires in February and March and deferring the alignment because they didn't want to knock their car out of alignment again with the potholes until spring came. So we're hopeful spring comes and people have a lot of work that needs to be done because certainly what we have always seen is really bad winters like we just experienced usually brings better sales in April and May. We obviously didn't get it in April. Hopefully when spring comes, we will see sales improve.

And tires are the type of purchase I would guess you can't postpone very long.

No, true -- I mean tires obviously stop your car and people don't want to defer those purchases, but we certainly are seeing them running the treads down a little bit further than they were even a year or two ago.

And I think what we've said on past calls is we are seeing more of a prioritization come into play due to the average age of vehicles continuing to go up. Where someone might've come in initially and needed $400 worth of work, it might be painful but they are getting it, we're seeing a lot more vehicles come in needing $1000 or $1200 worth of work, older cars planning on holding them longer, and they're deciding whether they get exhaust done, whether they get their tires done or defer tires until the next paycheck or the next couple of months. And that is more prevalent than we have seen even over the years with a lot of deferrals.

And with the comp a bit more challenging, do you accelerate the direct outsourcing? (inaudible) on the margin line and did we see that this quarter?

Sure, you absolutely saw it this quarter. Again when we were at 15%, we started talking about this. I believe it was nine months ago that we were going to work our way towards 30.

Obviously, we got halfway between 15 and 30 already. That is working its way through the pipeline. It absolutely helped us on filter costs and brake costs and to some extent tire costs.

And as we said, we have a lot of levers, a lot of flexibility. It has moved our margin up in a period that it was very challenging to move gross margin up especially in light of weaker than anticipated comps.

But we will continue to expand that. Again, we set targets out there. For example, our five-year plan to get operating margins to 12.5%, well we got that in three years.

We will recalibrate that number for everybody. But next year certainly we would expect operating margins to be up between 100 and 150 basis points and we are not saying the high watermark on direct importing is 30%. When we get there, we will see what the opportunities for us might be to expand that further.

Thanks for that. Also would like to ask about Japan. Are you seeing any parts supply disruption?

No, no parts supply disruption from Japan.

Thanks a lot. Good luck.

This is John. We haven't seen anything on the tire side to this point in terms of disruption of our supply. We are getting the tires we need.

Bret Jordan, Avondale Partners.

This is Anand in for Bret. What was the price paid for Vespia?

We didn't disclose that. What we said is relating to our metrics, you can assume it was somewhere around 6, 6.5 times EBITDA pre synergies.

The seller would like a certain amount of confidentiality. Certainly down the road you'll probably see it in a Q.

But for the time being especially related to the fact that we haven't even closed on it yet until June 4, June 5, we figured we gave appropriate information and I think the most important thing is this I now think is our 16th or 17th deal.

It is the first time we have ever said a deal will be accretive in the first year of operation. So that should give you an indication that it's a pretty good deal for the seller and a pretty good deal for the buyer.

Got it. And then just within consumers and specifically within tires, are you seeing consumers starting to trade down in brands, going from name brand to off-brand in order to save?

We have seen that and we continue to see that. That is fairly constant.

And again as you know, cost of goods to us and retail prices to the consumer continue to shoot up significantly. Everybody is trying to save money wherever they can and that is one spot.

Similar to people trading down from high-end brakes to more standard brakes. And we have seen that though over the last year or two and we continue to see it today.

Okay, and then lastly just looking at the acquisition pipeline and what that looks like, if you could give any comments on whether you are seeing valuation starting to become a bit more rational as the oil prices have been higher and (inaudible) have been impacted?

This is John Van Heel. Yes, we said we had six MDAs signed. Now we have five obviously. We just got the Vespia deal completed and I think that is the best evidence that sellers are getting more flexible as the environment gets tougher and the fact that we got that deal done within all of our metrics. So as the year rolls on, we expect that we'll have even more opportunity to complete further acquisitions.

What's the size of the deals that are still in the pipeline roughly?

We've talked about those being from five to 30 stores with at least four of those within our immediate footprint.

Okay, and then just one quick last question, just housekeeping. Did you give the monthly comps for the fourth quarter?

We did.

January down 3.8 which you know, February up 3.4, March down 1.5, total for the quarter down 0.3. Getting more granular just to give you an indication on the negative impact of tires, service stores were down 3.4 in January.

[February December] stores were up 6.9, March they were up 0.5, tire stores were down 4.4 in January, down 2.1 in February, down 5.1 in March. Total comp of 4.2 year to date versus 7.2 last year and the quarter was basically flat versus up 8 last year.

Perfect. Thank you very much.

John Lawrence, Morgan Keegan.

Rob, would you touch on a little bit -- on Vespia a little bit? Obviously a little higher volume per unit, more service. Is that because better marketshare position, better operator or range of services on the service side are a little broader?

This is John. I can take that.

It's -- the range of services is the same that we offer. I think they just had a very high focus on service which we intend to continue while we also grow the tire business.

And as you see and you know the forecasts that we put out for it, the fact that it's a high percentage of service and our significant advantage on buying parts contributes to the fact that we're talking about this being slightly accretive.

Second part of that, John, if you would, for several quarters you've talked about that being able to track that car -- that traffic or that car in that used to go to a dealer for the oil change, etc. Are you seeing that car come back regularly or is the frequency of that visit on that high-end maybe vehicle that's less than four years old continuing?

Yes, we haven't seen any change there. Our retention has been solid and we have continued to drive traffic through the year. So we are continuing to see those customers.

Thank you.

Tony Cristello, BB&T Capital Markets.

One of the questions I wanted to ask was when you look at your business today, it is readily apparent that the leverage or the ability to drive earnings on a lower same-store sales basis continues to increase. Can you maybe talk about a little bit more your thoughts on historically what has been a three to five comp that gives you sort of the same-store sales in terms of SG&A leverage? To what maybe on a go forward basis that comp might need to be?

Sure, I think probably 2% comps covers all inflation which is probably down from to your point somewhere closer to a 3. I think one of the biggest benefits is there's not a lot of wage inflation in our system and outside of what we have experienced really the last year, year and a half on cost of goods, I mean there hasn't been a lot of factors on steel.

But oil and tires obviously are the biggest negative impact that puts pressure on where we have to go with some other facets of our business. We continue to run a lean shop but I think you're seeing the remnants at least of this past year that shows up in Q3 and Q4.

And what we expect to continue to show up next year is the leverage comes from $100 of the acquisition growth on a base of what was at the time $500 million or $525 million. You get that kind of topline growth in a company that is still relatively small, it just creates huge operating leverage.

The fact that we have a two-brand format, the fact that we're all Company-operated stores really allows us to gain leverage on all facets and move the operating margin forward to the point where again we pick up in three years close to 300 basis points of operating margin. The biggest piece of it is our increased buying power, the great job the stores have done with labor productivity and the acquisition sales just absorbing what is a very tightly controlled Company letting a lot of the incremental sales flow through the bottomline once we put in our business model to the extent where again on the heels of that 300 basis points we've already picked up, we're talking about 100 to 150 additional in operating margin this year.

And I guess in addition to sort of some of the service synergies that you get with scale advertising, distribution, I guess with every acquisition that you will make -- I mean you acquired another tire center today and Vespia and I guess I sort of look at the volume that you're doing and the mix of your business being as it may be 40% higher business today, I'm not sure what the latest number will be if you include that, but I guess your buying power on a go forward basis is continuing to increase as well.

Can you talk a little bit then on the supply chain management, the capacity, the utilization, the facility infrastructure you have today and where you are in terms of being able to support your future growth with a number of acquisitions that you would like to make or have targeted to make over the next 12 to 18 months?

Sure, I can take that. This is John.

We have the capacity in the stores to continue to drive the organic comp growth. And with regard to the acquisitions, we moved our warehouse earlier in fiscal year 2011 in Baltimore and we established a warehouse in Swansea.

We kept the warehouse in Swansea when we acquired Tire Warehouse. So we have plenty of capacity to distribute to newly acquired stores.

As I said, four of the five MDAs that we're currently working on are within our existing footprint. So those would be serviced by our existing warehouse and logistics infrastructure. So like the stores in New Jersey that we just acquired will be serviced out of our Baltimore warehouse, so we have plenty of capacity to service additional acquisition growth.

Tony, additionally, over the last month or so, Cathy and her team got the city which we've been talking about for a long time to give us the kind of deal to allow us to expand our warehouse in Rochester. That'll be anywhere between $4 million and $5 million of capital.

That is included in all the numbers and all the estimates for this year which will give us significantly further reach and handle the growth that you are asking about. But that's already baked into all the numbers.

That's helpful. And then maybe one last question then as it seems like your CapEx is more maintenance and/or cash flow than used towards acquisitions.

How should we think about your free cash in lieu of acquisitions? Obviously I'm assuming you'll get some done.

But does just sweep into paying down the debt from this standpoint? Because you're very self-funding and it seems like the rates remain very favorable for you from a utilization standpoint.

Yes, borrowing at 1% is a pretty good deal. As far as paying down debt, until we pay for this most recent acquisition, there's nothing to pay down. But we will add a little bit which will obviously be paid down quickly and short of that, we hope to spend every dollar we bring in and more in acquisitions.

Perfect, thank you.

(Operator Instructions) Scott Stember, Sidoti & Co.

Could you guys just remind us with oil finally coming down and assuming that it stays at these levels for a while, how long do you guys -- usually does it take to start seeing some relief from your vendors with regards to oil and tires and so forth?

Way too long. Let's see what happens. I think with oil having taken the turn back towards 100 or slightly below, we might see some relief on gas prices.

But again that usually happens slower than the move. Certainly tire prices take longer to come down.

Our main concern is again if cost of goods go up, with our operating model being the low-cost operator, it affects everybody else more than us. It helps us with the acquisition strategy. What we did say is $100 oil gets us closer to the high end of the range. $120 barrel oil gets us towards the low end.

Right now we are at $100. If we stay there, you can draw -- you don't even have to draw a conclusion. I think basically I'm telling you what I think we're going to do. But I mean -- if I could figure that out with certainty, I wouldn't need this job.

Fair enough. Could you just maybe go back and talk about Vespia a little bit? And with 70% of business being services, can you talk about how their tire sales are performing right now and just the overall potential similar to what you saw with Black Gold as you increase the tire sales here?

Sure. They're 30% tires. Obviously the Mr. Tire chain and the rest of our operations run significantly more tire sales.

We think the breadth and the stocking of inventory that we can offer should be able to give us better than average tire opportunity growth while doing everything we can to learn from them how you run on average over $1 million in service out of a tire store. They do a great job there.

So like we always talk about, we think we have opportunities to get leverage and improve the operations of the companies we buy. In this case I think there's a lot we can learn from the great job that Vespia has done over the years building the service business in this high-density marketplace that will continue to service us.

And as far as current operations, they are running very similar to the numbers -- we are overall from a month-to-month basis flat to up 2 comps. So they're holding up fairly well in this marketplace which is very encouraging to step right in to the new year with.

Just lastly following up on that Black Gold comment, have we seen everything that we're going to see from Black Gold and would that rely on acquisitions to gain further synergies from that?

Yes, the overall plan is to add Black Gold stores as we acquire tire stores in markets where we don't have them currently. With regard to the Vespia acquisition, Rob said that that helps support about 10 of our Monro stores and Black Gold.

About half of those are new Black Gold stores. And I would add that we have 12 tire stores currently in Philadelphia, so doing more tire distribution up in this general area will also -- and having more stores up in that area will also help those 12 stores out in terms of tire distribution.

Gotcha, that's all I have. Thank you.

Sid Wilson, Cabrera Capital Markets.

My question is actually relating to that. I think, Cathy, I think I heard you mention these comments that with your tire inventory that you were taking on more higher-end tires as part of your tire inventory in the Black Gold program. My question is is that can you talk about a little bit of the margin dynamics there?

Because you had mentioned that there was a higher cost but are you able to get some -- are you able to capture higher margin rates with the higher-end tires? And is that also a function of a strategy to try to lure in more higher-end vehicles that would have those tires and is that what you are seeing in this market environment?

Well, we are certainly carrying the higher-end tires to help us do a better job servicing the dealer customers. As far as margin impact of the higher-end tires, no, those would have a tendency to be lower gross margin percentage but at higher gross margin dollars.

So it's just us in anticipation of the continuing shifting mix, the advent of more new cars coming on the road being foreign vehicles that we just are uniquely positioned being able to carry all the major brands and distribute them to our tire stores, we want to be able to be in a position to create a competitive advantage versus some of our competitors that skew highly towards one brand because that's the nameplate on their stores.

Okay, thanks for the clarification.

That concludes today's question-and-answer session. At this time I'd like to turn the conference back over to management for any additional or closing remarks.

Great. Thanks, Nancy.

Just want to thank everybody for their participation today and their continuing support for Monro. We are very confident about our business model.

We are very confident about the future and less confident about what the consumer is going to be doing. But within that realm, I think all good retailers manage their business to take advantage of whatever is out there and at least the consumer piece is out of our control, but we would expect to grow the business significantly and continue to deliver superior earnings growth in good times or bad times and we will see you on the next call if not before. So thank you very much.

That concludes today's presentation. Thank you for your participation.