Monro Inc (MNRO) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Monro Muffler Brake first-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later we conduct a question-and-answer session, and instructions will follow at that time. 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. Megan Grabos of Financial Dynamics. Please go ahead.

Thank you. Hello, everyone and thank you for joining us on this morning's call. I would like to remind you that on this morning's call, management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the Company's filings with the Securities and Exchange Commission.

These risks and uncertainties include, but are not necessarily limited to, uncertainties effecting retail generally, such as consumer confidence and demand for auto repair, risks relating to leverage and debt service, including sensitivities to fluctuations in interest rates, dependence on and competition within the primary markets in which the Company'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 of to Rob Gross. Rob, you may begin.

Thanks, Megan. Good morning, and thank you for joining us on today's call. We are pleased that you are with us to discuss our first quarter 2012 performance. After reviewing our quarterly performance, I'll provide you with an update on business as well as our outlook for the second 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.

We started fiscal 2012 off on a strong note, and are pleased with our record sales results, as well as better-than-expected gross margin and earnings in the first quarter. Our flexible business model has provided us with the opportunity to pull different levers to expand our operating margin, and we believe that these strong results are a clear indicator of this. Importantly, we are confident that this will continue to be an advantage going forward. In the first quarter, we increased total sales by 4.2% to a record $164.8 million compared to $158.2 million in sales for the prior-year first quarter. Our comparable store sales were up 2.1%, following a 5.1% increase last year. Notably, our recent acquisitions continued to perform very well, and contributed to our strong top and bottom line performance, as we expected.

Over the last several quarters, we have discussed actions that we are taking to offset the gross margin pressure that we are experiencing as a result of both the expected product mix shift toward sales of lower-margin tires, which is associated with our recent tire store acquisitions, and cost increases on tires and oil. Although we continue to leverage the increased purchasing power that has resulted from our recent tire store acquisitions and shifting purchases between our broad base of vendors, we have also continued to implement retail price increases to offset the higher tire and oil costs. In the first quarter, these retail price increases helped drive gross margin improvement, but may have slightly tempered our top line results.

As we have said in the past, we are focused on leveraging our business model to create sustainable long-term value, and we believe that this continues to be the best strategy for Monro. As a result of this approach, we experienced 130-basis point improvement in our gross margin during Q1 to 43%, versus 41.7% in the prior year. 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 22% of our total product costs, less oil and out buys, to a 30% run rate by the end of this fiscal year. We've been approaching this initiative cautiously over time, to gain comfort with the quality of product manufactured at these facilities. Once we obtain our 30% target, we will evaluate opportunities to move that percentage higher.

At the same time, we are carefully managing our operating costs. We continue to experience SG&A leverage as our cost control efforts and recent acquisitions continue to benefit our operating margin. Operating income for the first quarter increased 15.6% to $26.1 million. This translates to an operating margin of 15.9%, compared with 14.3% in the first quarter of last year. As a result of our sales and margin improvement, net income for the first quarter increased 16.9% to a record $15.4 million from $13.2 million last year. Our earnings per share, which came in above the high end of our expected range rose 14.3% to $0.48, on a base of 32 million shares outstanding, from $0.42 on a base of 31.6 million shares in the prior year quarter.

We continue to see that consumers are choosing to invest in maintaining older vehicles instead of buying new cars. Moreover, we believe that 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 and a challenging economy. We are pleased with the results in most of our major service categories. As comparable store sales increased approximately 5% for exhaust, 5% for shocks, 3% for brakes, and 2% for tires, at the same time, comparable store sales were flat for maintenance services and were down approximately 5% for alignments. During the quarter, traffic was down approximately 0.5%.

Now for an update on our growth strategy. We continue to be focused on increasing our market share through same-store growth, expanding our service offerings, opening additional new stores in existing markets and acquiring competitors at attractive valuations. We are continuing to promote sales in certain categories through specific programs such as oil change and more, in which our customers receive free tire rotations and brake inspections with the purchase of an oil change, and brakes forever, in which we guarantee brake pads for the life of the car, and replace pads for only the cost of labor, and believe that these initiatives continues to drive customers to our stores, and convert new customers into loyal Monro users.

While we expect the challenging macroeconomic environment to continue this year, with high gas prices and depressed consumer confidence, this environment leaves us well-positioned to take advantage of additional acquisitions at attractive valuations. Importantly, these acquisitions will further expand our market share and our operating leverage, more strongly positioning Monro for continued profitable growth.

We're very pleased with the early results that we've seen from our June, 2011 acquisition of Vespia Tire Centers, which as you may recall, consists of 24 locations in New Jersey and eastern Pennsylvania. Sales and earnings from these stores have been better than expected, and we are encouraged by these early results. We also continued to pursue value-priced opportunistic bolt-on acquisitions to further fill out our foot print. We are very encouraged by prospective targets that we have been talking to. We currently have six non-disclosure agreements signed, up from five, which we reported at the end of May.

As I had 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 disease the rising cost of goods, some are become more willing to be acquired. Given the current environment, we expect to close more deals in the coming year. We have plenty of liquidity and strong cash flow to complete these deals. 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 second and fiscal 2012. We continue to have a positive outlook for the business for 2012, and for the long term. Importantly, we remain confident that fiscal 2012 be a year that, much like we saw back in fiscal 2008, will allow us to leverage our strong business model and our 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 we've previously discussed, despite the recent tick-down, oil costs have been significantly higher than last year, and have pressured our margins and miles driven, although miles driven are now on older vehicles, which offsets this impact. High gas prices are negatively impacting consumer sentiment and purchasing behavior, which affects Monro as a service and retail business. However, the good news is our services and products are a need, not a want purchase, and we've been able to support higher sales prices through convenience, advertising and store execution.

Importantly, remember, there were 9 consecutive years of averaging 17 million new car sales sold through 2007, which are now in our sweet spot. I continue to believe that there will be more closures and market share loss for dealers, which will continue to benefit us, slightly offset by dealers that do remain becoming more aggressive in promoting service and tires. As we detailed in our press release this morning, we expect second-quarter comparable store sales growth in the range of 1% to 3%, on top of 6.4% in the prior year, our strongest quarterly comp store performance in 2011. To date in July, comps are down 1%, following an 8.2% increase last year. However taking into account July 4 falling on a Monday this year, versus Sunday last year, comps are slightly positive.

We expect second quarter earnings per share to be in the range of $0.46 to $0.50, which compares to $0.42 for the second quarter in fiscal 2011, a 19% 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 continue to anticipate comparable store sales growth in range of 4% to 6%, or 2% to 4% when adjusted for days, and sales in the range of $690 million to $705 million. We are increasing our estimated fiscal 2012 diluted earnings per share to a range of $1.65 to $1.77, from $1.61 to $1.75. We would anticipate that oil prices at approximately $100 a barrel would allow us to reach the high end of the range. Also, we anticipate the fifty-third week will benefit our fourth-quarter results by approximately $12.5 million in sales and approximately $0.06 in EPS.

As we look at how results are expected to flow through the remainder of the year, there are a few additional points I want to make. First, after three strong comparable store sales years, averaging 6% a year, we expect that comps will moderate in Q2 and Q3, and then will be significantly higher on a year-over-year basis in Q4. Which is due to weak Q4 comps last year and the extra selling week. This lines up with the guidance of the second quarter that I just discussed. The extra selling week should be kept in mind as you look at expectations for our fourth quarter.

Second, we expect operating margins for the year to improve by 125 to 150 basis points, driving earnings-per-share growth of 15% to 23%, on top of three years of approximately 30% increases. And third, we feel the environment is great for accelerated growth through acquisitions. More long-term, our five-year plan calls for, on average, 15% annual top-line growth, 10% through acquisitions, 4% comps, 1% green field stores. The acquisition growth will break down, breakeven year one, be $0.08 accretive year two, and an additional $0.08 accretive year three. That should improve operating margins by approximately 300 basis points, and deliver on average 20% bottom line growth. Additionally, as we noted in today's press release, for the sixth time in as many years, our Board has approved an increase in our dividend, this time 12.5%. It is a testament to the strength of our business that we've been able to raise our dividend each year, while increasing our operating leverage and using capital to pursue opportunistic acquisitions.

As I have said before, we continue to believe that the best strategy for Monro is to focus on our leveraging our business model to drive sustainable long-term value, and we are encouraged by the continued progress that we have been making on this goal. I want to acknowledge each of Monro's 5,300 employees, our continued strong performance is a direct result of their ability to execute well and consistently provide excellent service to our loyal customers. With our keen 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, despite the challenging macro environment, we are well-positioned, and I am confident that fiscal 2012 will continue to move us forward.

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

Thanks, Rob, good morning, everyone. As Rob said, sales for the quarter increased 4.2%, with comparable store sales increasing 2.1%, and new stores, which we defined as stores opened or acquired after March 28, 2010, adding $4.2 million. Partially offsetting these increases was a decrease in sales from closed stores of approximately $0.9 million. Are we still on the call?

I'm the operator, Ma'am, you're still connected.

Okay. I apologize. There were 90 selling days in both the current and prior year first quarters. At June 25th, 2011, the Company had 802 Company-operated stores as compared with 785 stores in the previous, June 26, 2010. During the quarter ended June 2011, the company added 24 stores and closed 3 stores. Gross profit for the quarter ended June 2011 was $70.8 million or 43% of sales, as compared with $66 million or 41.7% of sales for the quarter ended June 25, 2010.

The increase in gross profit for the quarter ended June, 2011, as a percentage of sales, was due to several factors. First, total material costs, including outside purchases, decreased as a percentage of sales, as compared to the prior year, largely due to selling price increases across the chain and the recognition of increased vendor rebates as compared to the prior-year quarter. These decreases were partially offset by a shift in mix to increased tire sales, as well as cost increases in various items such as oil and tires.

Labor costs also decreased as a percentage of sales, as compared to the prior year, largely due to better control of payroll as well as improved labor efficiency, as measured by sales per man-hour. Distribution and occupancy costs increased slightly as a percentage of sales from the prior year, mainly due to increased costs from the fiscal 2011 and 2012 acquired stores. Operating expenses for the quarter ended June 2011 were $44.7 million, or 27.1% of sales, as compared to $43.4 million or 27.4% of sales for the quarter ended June 2010.

Within operating expenses, selling, general, and administrative expenses for the quarter ended June 2011 increased by $1.4 million to $44.5 million from the previous year quarter, and were 27% of sales as compared with 27.2% of sales in the prior year quarter. The Company experienced leverage in this line through focused cost control on increased sales. About $900,000 of the increase in SG&A expense is directly attributable to increased direct store expenses, such as manager pay, advertising and utilities related to the fiscal 2011 and 2012 acquired stores. Operating income for the quarter ended June 2011 of $26.1 million increased by 15.6%, as compared to operating income of approximately $22.6 million for the prior-year quarter, and increased as a percentage of sales from 14.3% to 15.9%.

Moving on to interest expense, net interest expense for the quarter ended June 2011, increased by approximately $0.3 million-- decreased, excuse me, by approximately $0.3 million as compared to the same period in the prior year, and decreased from 0.9% to 0.7% as a percentage of sales for the same period. The weighted average debt outstanding for the quarter ended June 2011 decreased by approximately $39 million, as compared to the prior-year quarter, primarily related to payments made on the Company's revolving credit facility. In addition, the weighted average interest rate increased by approximately 230 basis points from the prior year, due to a shift to a larger percentage of debt, debt being capital leases versus revolver, which carry a higher interest rate, as well as additional financing fees associated with the new revolving credit agreements.

The effective tax rate for the quarter ended June 2011 and June 2010 were 38.5% and 37.7% respectively of pre-tax income. Net income for the quarter ended June 2011 of $15.4 million increased 16.9% over the prior-year quarter and earnings per share on a diluted basis for the quarter of $0.48 increased 14.3%.

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 first quarter and year end. For the quarter ended June 2011, we generated approximately $29 million of cash flow from operating activities. We spent approximately $4 million on CapEx and increased debt by $11 million, due to the acquisition which used approximately $33 million of cash in the quarter. As a result of the increase in debt, our debt to capital ratio, which includes capital leases, increased to 18% from 16% at year-end. During the quarter ended June 2011, we paid approximately $3 million of dividends and received about $1 million from the exercise of stock options. Depreciation and amortization totaled $6 million for the quarter.

During June 2011, we signed a new five-year revolving credit facility agreement with a group of lenders that increased our total availability from $163 million under the old agreement to $175 million. This agreement also provides an accordion feature permitting us to request an increase in availability of up to an additional $75 million. The agreement bears interest at LIBOR plus the spread of a 100 to 200 basis points, depending on our performance. We currently are paying LIBOR plus 100 basis points. This very favorable agreement eliminated some covenants and increased or liberalized various thresholds, allowing us more flexibility to run our business, including doing acquisitions without bank approval, as long as we're in compliance with our covenant. Those terms, as well as the fact that the amount outstanding under our revolver is only $27 million today, give us a lot of ability to get acquisitions done quickly.

Inventory was up approximately $4 million from March 2011, due primarily to the addition of the fiscal year 2012 acquired stores, which accounted for $3 million of the increase, as well as the continued expansion of inventory to reduce outside purchases. Additionally, inventory levels have increased due to cost increases, as well as well as purchases of tires from several major vendors, as part of a transition to a new product line. However, inventory turns were flat with the first quarter of last year, and up slightly from last year-end.

Regarding our guidance for our fiscal year 2012, which includes the expected results from the Vespia acquisition and our increased earnings per share range for the year of $1.65 to $1.77. The assumptions there are that we expect sales in the range of $690 million to $705 million, which reflects 4% to 6% comparable store sales including the fifty-third week. Operating margin as updated, is expected to improve 125 to 150 basis points, with gross profit increasing about 50 basis points, and SG&A improving by about a 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 for the full year should be about $23 million, and CapEx should be approximately $32 million.

I also wanted to mention that we were just approved for a very generous financial package which included grants and property tax abatements from New York State, our local County of Monro and the city of Rochester to incentivize us to expand our office and warehouse facility here in Rochester New York by another 15,000 square feet of office and 55,000 square feet of warehouse space. Our current space consists of 20,000 square feet of office and 85,000 square feet of warehouse space. This addition will give us some breathing room for personnel and inventory, and over the last few years to support completed acquisitions, as well as position us to handle our anticipated growth over the next number of years.

That concludes my formal remarks and the financial statement. With that I'll turn the continual over to the operator for questions. Operator?

Thank you, ma'am. (Operator Instructions). We'll pause just a moment. We'll take our first question from Rick Nelson from Stephens.

Thank you. It's Stephens, Rick Nelson. A question about the same store growth in the tire category, 2%. How much of that was driven by price increases, and do you have the same store unit sales for tires?

Yes. We don't break out the units, but obviously with the pricing we took, certainly all of comp increases guide to price.

And both tires and alignments, now we've seen a couple of quarters tracking below the Company average. Rob, what do you think is driving that, and how long can the consumer postpone these tire purchases?

Well that's a good question. Obviously we're encouraged that as they're prioritizing their purchases with older vehicles and the overall recommended ticket average to them going up, they've been taking care of shocks and exhaust where before the priority would have been tires and brakes. Certainly we're coming off three really strong years in tire sales.

So it's not that surprising, with the rapid increase in tire prices that there's some sticker shock involved, and they're trying to hold off as much as possible on that. What is surprising is with alignments down 5%, we're seeing them still buy tires and then holding off on the alignment for 2 or 3 months until either paychecks or they get enough money to continue that work, figuring if they shorten the value -- the length of the tires lasting, which might normally be 3 years, they'll deal with that 3 years down the road and not so much worry about the align. Certainly that has surprised us, but it has consistently come in that way, and we'll deal with it.

And the maintenance services, which were flat this quarter, what do you think is happening in terms of market share there for Monro?

I think a piece of it is similar to tires with the price increases we took, some on oil changes, and some markets were $24.99, and other markets were $21.99. We've tried to hold off on raising those prices above our normal price point of $19.99. But again, like we said in tires, our objective is the operating margin line, and maybe this quarter and next quarter, I think our gross margin may outperform our operating leverage if the rest of the market plays, and some of the competitors don't get more rational, and want to raise their prices along with us, we will look at maybe going back to being more aggressive, being we are the low-cost operator, and you might see a flip, and less improvement in gross margin or more improvement in SG&A leverage. I would guess for this coming quarter, it would be more similar to what we reported in Q1.

If you have the comps by month during the quarter --

We do. April was down 0.2%, May was up 1.8% and June was up 4.8%.

And I think you mentioned July was down 1%?

Yes, down 1%.

A tough compare there against 8.2%?

Yes. Absolutely a tough compare there, but I'm not going to blame it on July weather. There were no weather problems in July. We just got some of the reward in June.

And the compares get easier now as we move into August and September if my numbers are correct, at 6.5% in August and 4.5% in September?

Yes. Then the good news is October drops to 2.4%.

And the fourth quarter gets easier yet.

Yes. The fourth quarter was flat. So that's why, in looking out as far as at least our numbers show, I think, on average, we show a little bit better performance than most show in Q4 and we're a little bit under where some folks were in Q2.

And to get to your guide for the current quarter, it seems to pick up in sales and that's easier compares in a return to more normal weather?

No, I think, again, weather wasn't an issue in July; but if you look at the progression of our Q1, April was flat, similar to July, and then again, we have easier compares in August and September, and certainly, we think one to three is, at this juncture, what we would expect to see.

And the Vespia acquisition, $33 million was the purchase price?

Correct.

And I think you earlier had mentioned 6 to 6.5 times EBITDA, so I'm calculating EBITDA for Vespia in the low 5s, 5.1 to 5.5?

I don't know, we didn't say that, but certainly, that's usually what we pay.

OKay, and then the China direct sourcing initiative, you mentioned 22%. I think that was the number, I think, last quarter. Were there no gains made then quarter to quarter? How do you see the 30% evolving?

This is John Van Heel. The numbers were pretty flat quarter over quarter. We continue to focus on the brake line and filter line, and we're adding -- we be adding a couple of additional important, but smaller parts, lines, through the rest of 2000 -- calendar 2011, and so through the rest of our fiscal 2012 and into fiscal 2013. So we will be adding those lines, and we will be taking a look at additional opportunities in tires, as well throughout the year, because that obviously becomes one of our -- becomes our most significant category, and we think there's some is some opportunity there as well.

Okay. I've got other questions, but I'll let others hop on. Thanks a lot, and good luck.

Thank you.

Moving on, we'll take our next question from Tony Cristello from BB&T Capital Markets.

Thank you. Good morning, everyone.

Hi, Tony.

Rob, maybe you can talk a little bit about the competitive landscape. I mean, your -- it seems like you're continuing to out perform -- you're putting a price increase in. Do you think that's something that others will follow you on? Is it a situation where traffic is down? Is it down because of the price increase and people are phone shopping and realizing Monro my be higher so they're going elsewhere, and from a strategy standpoint, is that something you may readdress throughout the year?

Certainly we may address it. We'll probably let Q2 run, because we're not that embarrassed about picking up 160 basis points in operating margin. We think, and we've seen others report numbers, but also remember, we now have six smaller competitors. What's happening to their earnings when they're not as aggressive in raising prices, when they're seeing costs come across, and the relationship between, as an example tires and units is just unsustainable, if you don't raise the price. You're not going to get enough units to make up for not raising your tire prices, to keep your earnings momentum going.

So I would like to see comps better. Certainly after three strong years in tires, a 2% tire increase is not the worst thing in the world, but we're going to stick with this. But absolutely if, an additional month or two goes by where we see the competitive of landscape is just eating all these increases, we might look to get more aggressive. For us it's about operating margin as far as gross margin and SG&A leverage, and as our sales go up, obviously SG&A leverage improves, but we're pretty happy picking up the gross margin percentage we did, and let's see how some of the other numbers look out there.

As far as traffic goes, do you think that's more a function of gas prices and disposable income than anything else?

It's difficult because again, you're saying, Tony, both things re going on at the same time. A piece of it is certainly what we've just talked about, that we're trying to make money, but high gas price -- I think gas is up. Everyone talks about there's no longer $4 gas, but you don't hear as much that gas prices are up 40%. That's a big number. Unemployment isn't getting any better. Consumer confidence is bad, so certainly the macro environment, I think, in total, has a piece of it. It's difficult for us to parse out what piece is the economy and what piece is some of our pricing action. All we try to do is make money every year and continue to move the company forward and again, we probably have better macro information than most based on all the information we have from some of these additional guys we're trying to buy.

And very last question. When you look at what you've been able to learn about your customers today -- and I don't know if you can share sort of what your retention rate is, what your repeat customer -- how often your customers are coming back into the stores, but has anything stood out in terms of, looking any different than it has over the recent quarters or even recent years?

I mean, if you're talking recent quarters and recent years, I think we commented last year that we were running about an 85% customer retention. That number has moved more to 75% to 80%, but remember we said that was a function of the dealer closures and us seeing a lot more vehicles early on. So the new customer based on some of the Internet advertising we are doing and grabbing some share from the dealers over the last couple of years have moved that, with the traffic increases we've seen over the last couple of years of 3 to 4% more than anything as a function of less loyalty from our current customer base.

Okay. Very helpful. Thank you.

You're welcome.

Moving on take our next question from John Lawrence from Morgan Keegan.

John?

And, actually, John, if you could please reprompt, we'll move on while we're waiting for Bret Jordan with Avondale Partners.

Good morning. A couple quick questions. One on Tony's last question, on price increases, if traffic was down 0.5% and you are typically taking price in September, it would be the next scheduled price increases, is that something you're likely to take, or was that something you said you were evaluating?

We'll obviously evaluate it. We're not necessarily happy with 2% comps or, a negative 0.5% traffic, but again, our normal price increases are typically 2% to 2.5%. We have been consistently taking that on some of our categories, brakes, shocks. I don't necessarily -- based on the performance of those categories, seen any reason, again, most of those things are not shoppable.

We don't expect additional price increases in tires, but we probably have had a couple of price increases in tires that we didn't expect already. So, but I think a lot of what's driving the pricing has been really the meteoric rise in tire cost increases, and I don't think that will continue. So, we'll evaluate our traffic, but that's nothing I'm seeing now that, after 11 years of price increases and offering a value to our customers that we would see not doing that again in September, but we'll keep an eye on what the competition is doing.

And then you mentioned vendor rebate trends as a margin driver in the quarter. Has the competitive landscape changed there? Are you getting better terms than you have been previously? Is there any particular category that you are seeing better rebate trends on?

Certainly the power that we now have in tires, and the competitiveness of the tire manufacturers as we are now over 2 million units a year, a lot of vendors really want our business. We're one of the few guys that carries all major brands. So it's very easy for our store folks to move market share from one vendor to the other based on who wants it the most. And, our guys, John and Joe and Dave and the whole team are very focused on whoever in a given year is focused on market share and units gets our business, and whoever throughout the year is focused on their gross margin percentage will typically lose share.

Okay. One last question, I guess, on the supply chain, and maybe for John. Now that you've gotten a little more experience on the direct sourcing, some of the filter and friction parts, what sort of margin differential are you expecting on the incremental, 8 points of direct source business you expect to pick up by year end?

We said that we've picked up at least 20 points in cost improvement on moving additional product sourcing over to China. So we would expect that to continue.

Okay, great. All right. Thank you.

Thanks, Bret.

Moving on we'll take our next question from John Lawrence from Morgan Keegan.

Bob, you mentioned Vespia a little bit, exceeded expectations in the first month that you had it. What do you think that is? Is it top line, or is it just conservatism when you bought it?

John, this is John. We typically build in a small sales hit, in the initial months just due to the normal disruption of getting these guys through the purchase process and the integration, and we haven't seen that; but -- so the top line has certainly out performed that expectation. But again it is early. What we're focused on right now is follow-up sales training. We converted all the stores that weekend of June 4th to our new computer system and our inventory, we're back in there doing follow-up sales training, and in these first 90 to 120 days we're focused on increasing the parts inventory through additional racking to take advantage of our purchasing power on this high service business, and that high service mix, 65%, 70% has hung right in there.

And the second question is the 6 companies in the pipeline, how would you compare the pipeline to where it was in 2008 before you started generating the 30% growth?

Very similar. But those were done, John. We haven't gotten these done yet.

I understand. The last question, if you looked at the comps for the quarter, would the tire comps mirror those numbers?

Yes, they improved throughout the quarter.

I mean, not that we're going to make a habit of it. April tire comps were 1%. May tire comps were 0.4%. June tire comps were up 6.5%.

Thanks a lot. Good luck.

All right. Thank you.

(Operator Instructions). We'll take our next question from Scott Stember from Sidoti & Company.

Good morning. Most of my questions have been answered already, but can you talk about the average age of cars, what you're seeing, I know we've seen a big jump over the last couple of years, but is that trend still, actually dropping on the low end?

Well, remember already, the new revision, at least I'm seeing, is that many folks had this year's SAAR number being 13.5 million units. Now, we're already seeing people revise down as low as 12.5 million. That's on the heels of 11.6 million the year before. Obviously numbers like that mean the fleet is getting older. We continue to believe, by the 2012, 2013 calendar year, the number is going to move on to average 12 years. What's important is our sweet spot, being four to 12 years old, all of the 17 million unit sales years are now right in our sweet spot.

And I think most importantly, these numbers are borne out by, as we said the past two years, after 14 straight years of exhaust declines -- exhaust last quarter was up 5, and it's been up the last two years, you don't even need an exhaust job until it's an 11 to 12-year-old vehicle and then you wouldn't even get an exhaust job if you weren't planning on holding the vehicle for another three or four years. So hard data points we have, all support that, not to mention the empirical data that's out there from AAIA or anywhere you went to pull it. It's certainly an encouraging trend.

Last question, just more of a bigger picture item, are there any new areas that you can look into? I know that over the last 5 or 6 years, the climate control is an area that you moved into, with your resources, and you've got some of your competitors that don't have the resources, is there anything else that's out there that we can look for, a new area that you guys can move into?

I think the most exciting thing for us is anything that costs money to get into, or makes things complicated, or requires investment at our size with our cash flow, it creates a huge competitive advantage, whether it's TPMS training, whether it's expanding our air-conditioning services, whether it's if hybrids ever become important. Those are all things that we can do that others might not be able to do. So again, bring it on.

All right. That's all I have.

Great. Thanks, Scott.

Moving on we'll take our next question from Cid Wilson from Cabrera Capital Markets.

Hi, Rob, how are you?

Hey Cid.

Most of my questions have also been answered. Just some other questions. Regarding your tire sales are you seeing from the consumers, any shift in terms of the quality of tires? Are they trying to look for value, or are they still leaning toward certain brand categories? What are you seeing there from a tire standpoint?

Hey, Cid, this is John. Customers continue to trade down as they have been, to either a lesser brand tire, or into a private label or non-branded tire, all looking to, contain the overall cost of replacing those tires. So, that certainly decreases some of the gross profit dollars per tire, it improves the margin somewhat. The gross profit per tire is getting huge hit per unit, but that does go down slightly, and the margin ticks up, but the most important thing for that customer trading from a branded tire to a private label is that they've reduced the cost of getting those tires. They don't necessarily look at what our price increase have been on those non-branded tires. They're more interested in the fact that hey last time, I spent $400, and this time I want to stay a little bit above that or around that, and they're trading down, and that gives us a little bit of an opportunity to collect more dollars on the tires we actually sell them.

Thanks. And with regards to the actual traffic, I think you mentioned that traffic was down 0.5%, are you still seeing the traffic trends going into this quarter, and how is that compared to the traffic increase in the same period in the fiscal before last year?

I don't have -- I think traffic quarter to quarter was up 2.5% last year and down 0.5% this year, and we're seeing a continuation of that trend.

Okay. Thank you very much.

And at this time there are no further questions. I'd like to turn it over to our host for any additional or closing remarks.

Great. Want to thank everybody for their support of our business. Everybody here is working real hard to build this Company and to both deliver short-term and long-term results, and we look forward to talking to you on our next call. Thanks again, bye.

Thank you, that will conclude today's conference, and thank you for your participation.