Monro Inc (MNRO) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Monro Muffler Brake Second Quarter 2012 Earnings Conference Call.

As a reminder, this call is being recorded. 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).

And as a reminder, being that the call is recorded, and it may not be reproduced in whole or in part without permission from the Company.

I would now like to introduce Megan Crudele, FTI Consulting. Please go ahead, ma'am.

Thank you. Hello, everyone, and thank you for joining us on this morning's call.

I would just like to remind you that on this morning's call, Management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the Company's filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not necessarily limited to; uncertainties affecting retail, generally, such as consumer confidence and demand for auto repair, risk 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 obligations to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any 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. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our second quarter 2012 performance. After reviewing our quarterly performance, I will provide you with an update on our Business, as well as our outlook for the remainder of the fiscal year. I will then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results.

We had a solid first half of fiscal 2012, given the tough economic environment, which we believe is a testament to Monro's compelling customer value proposition and reputation as a trusted service provider. Our flexible business model has provided us with the opportunity to pull different levers to expand our operating margin. And we believe that these results are a clear indicator of this. Importantly, we are confident that this will continue to be an advantage, going forward.

In the second quarter, we increased total sales by 6.9% to a record $173.3 million, as compared with $162.1 million in sales for the prior year second quarter.

Our comparable store sales were down 0.8% as we cycled against a strong comparable store sales increase of 6.4% last year, which came on top of a 7.4% increase in the fiscal 2010 second quarter. Comp sales are up 0.7% for the first six months.

Additionally, our recent acquisitions continue to perform very well and contribute to our top and bottom line performance, as we expected. We also completed an additional acquisition during the quarter, which I will discuss in more detail shortly.

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 towards 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 second quarter, these retail price increases helped maintain our gross margin but have 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 a 30 basis point improvement in our gross margin during Q2 to 41.2% versus 40.9% in the prior year.

We 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 24% of our total product costs, less oil and [out-buys] for the second quarter, to a run rate of approximately 30% by the end of this fiscal year. Remember that our direct sourcing has increased from approximately 15% just two years ago when we really started to focus on this initiative. We have been approaching this initiative cautiously over time to gain comfort with the quality of the product manufactured at these facilities. Once we obtain our 30% target, we'll evaluate opportunities to move that percentage higher.

At the same time, we are carefully managing our costs. We continue to gain operating expense leverage, as our recent acquisitions benefited our operating margin. Operating income for the second quarter increased 11% to $25.2 million, which translates to an operating margin of 14.5% compared with 14% in the second quarter of last year.

As a result of our sales and margin improvement, net income for the second quarter increased to 13.5% to a record $15.1 million, from $13.3 million last year.

Our earnings per share, which came in within our expected range, rose 11.9% to $0.47 on a base of 32.3 million shares outstanding, from $0.42 on a base of 31.7 million shares in the prior year quarter.

We continue to see that consumers are choosing to invest and maintain older vehicles instead of buying new cars, as proven by increasing ticket average in our exhaust sales. Moreover, we believe that the trusting relationships we have established with our customers and our unwavering commitment to quality service has enabled us to continue gaining new customers as they see convenient, value-priced alternatives to a declining dealership base in a challenging economy. However, we do continue to see customers continuing to prioritize the repairs that they choose to make to their vehicles while deferring other needed repairs until a later date as evidenced by the results in some of our major service categories.

Comparable store sales increased approximately 3% for exhaust and 1% for brakes, were flat for tires and front-end shocks, and were down approximately 3% for maintenance services and 6% for alignments.

During the quarter, traffic was down approximately 3%. We believe that this was due to a number of factors, including weather -- the hurricane cost us $500,000 in sales or 0.3% comps --high gas prices continues to press consumer confidence, and our decision to pass oil and tire cost increases along to consumers. Most importantly, we have a significantly higher sales mix in tires at 35% than our competition, with the exception of the independent tire retailers we are looking to acquire.

Tires are a big-ticket item, and with the rapid cost increases, there's sticker shock. Coming off three years of 6% to 8% tire comps, tires are weighing us down. Being this is a safety issue and a need, we would expect some pickup prior to the hazardous winter driving season.

That said, we are continuing to promote sales on certain categories through specific programs such as Oil Change and More, in which our customers receive free tire rotations and brake inspections with a 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 we believe that these initiatives continue to create value for customers and build trust.

Turning now to 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. While we expect continued, moderate, organic sales growth this year, as a result of the macro-economic environment, high gas prices and depressed consumer confidence, this environment leaves us well-positioned to take advantage of additional acquisitions at attractive prices. Importantly, these acquisitions will further expand our market share and our operating leverage, positioning Monro for continued profitable growth.

As we announced in our press release this morning, we recently closed the acquisition of Terry's Tire Town retail locations, a seven store chain in Ohio and Pittsburgh, with approximately $9 million in annual sales. Importantly, this acquisition will allow us to convert 13 of our stores into our Black Gold format, enabling us to further expand our market share and increase the sale of tires and related services in our Monro stores in these markets.

With the $9 million in sales from the Terry stores, plus the $36 million in sales from the Vespia acquisition in June 2011, Monro has added $45 million in annualized sales, or 6% acquisition growth year-to-date, and we are only halfway through fiscal 2012. Additionally, we are very pleased with the early results that we have seen from the Vespia acquisition, in particular, as sales and earnings from these stores have been better than expected.

Overall, we continue to pursue value-priced, opportunistic bolt-on acquisitions to further fill out our footprint. We are very encouraged by the perspective targets that we have been talking to and believe that the macro-economic environment and tire issue leaves us well-positioned to take advantage of additional acquisition opportunities this year. We currently have six non-disclosure agreements signed, we have closed one deal, and entered into an additional NDA since we last spoke to you in July.

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 addressing the rising cost of goods, some are becoming more willing to be acquired. Given the current environment, we hope to step up our acquisition activity even more in the coming year. We have plenty of liquidity and strong cashflow to complete these deals. 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 remainder of fiscal 2012. We continue to have a positive outlook for the Business for 2012 and the long-term. Importantly, we remain 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 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. I believe that we have already begun to see this proving true through the first half of the year and expect for this trend to continue through the remainder of the year.

As we have previously discussed, despite the recent downtick, oil costs have been moving significantly higher and pressured our margins in miles driven. Although miles driven are now on older vehicles, which offsets this impact. Higher year-over-year gas prices are negatively impacting consumer sentiment and purchasing behavior, with affects Monro as a service and retail business. However, the good news is that our services and products are a need, not a want purchase, and we have been able to support higher sales prices through convenience, advertising and store execution.

Additionally, we have had nine 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 in marketshare loss for dealers, which will continue to benefit us, slightly offset by the dealers that do remain becoming more aggressive and better at promoting service and tires.

As we detailed in our press release this morning, we expect third quarter comparable store sales growth in the range of 1% to 3%, on top of 5.4% in the prior year. To date, in October, comps are up 1.2%.

We expect third quarter earnings per share to be in the range of $0.38 to $0.42, which compares to $0.35 for the third quarter of fiscal 2011, a 20% increase at the high end of our range.

Given the Company's expectations for the fiscal year, we expect fourth quarter earnings per share in the range of $0.35 to $0.37, as compared to $0.26 in the fourth quarter of fiscal 2011,a 42% increase at the high end of our range. We anticipate the 53rd week will benefit our fourth quarter results by approximately $12.5 million in sales and approximately $0.06 in EPS.

As we move through fiscal 2012, we will be looking at our performance during November as a key indicator for results for the remainder of the year. Note that November is typically the month that consumers, who have deferred tires and maintenance during the summer months and back-to-school shopping, turn to us to prepare for the upcoming winter, and falls right between the holiday season, when customers typically tend to defer non-essential purchases.

For the full year, we now anticipate comparable store sales growth in the range of 3% to 4%, or 1% to 2% when adjusted for days, and continue to expect sales in the range of $690 million to $705 million. We are narrowing our estimated fiscal 2012 diluted earnings per share to a range of $1.68 to $1.74 from $1.65 to $1.77, up from $1.44 last year.

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 years averaging 6% per year, we continue to expect that comps will moderate in 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 for the third and fourth quarters 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 margin for the year to improve by 125 basis points, driving earnings per share growth of 17% to 21% on top of three years of approximately 30% compounded increases. And third, we feel the environment is great for accelerated growth through acquisitions.

More long-term; our five-year plan remains unchanged and calls for, on average, 15% annual top line growth, 10% acquisitions, 4% comps and 1% greenfield stores. The acquisition growth will break-even year one, be $0.08 accretive, year two, and add an additional $0.08, year three. That should improve operating margins approximately 300 basis points and deliver an average 20% bottom line growth.

Before turning the call to Cathy, 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. We remain steadfastly focused on setting new goals, growing the Business organically and through acquisitions, executing on our operational initiatives, protecting our position as a low-cost operator and capitalizing on favorable industry trends, despite the changing macro environment. I believe that we are well-positioned and I am counting on the 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, everybody.

Starting with sales; sales increased 6.9%, comparable store sales decreased 0.8%. And new stores, which we define as stores opened after March 27, 2010, added $10.7 million. Additionally, there were sales of $2.9 million of slower moving inventory to a barter company during this quarter. Partially offsetting these increases was a decrease in sales from closed stores of approximately $1.1 million. And there were 91 selling days in both the current and prior year second quarters.

Year-to-date, comparable store sales increased 0.7%. Additionally, there was an increase of $14.7 million related to new stores. And partially offsetting the sales increase was a decrease in sales from closed stores, amounting to $2.1 million. On September 24th, 2011, the Company had 802 Company-operated stores, as compared with 783 stores at September 2010. During the quarter ended September 2011, the Company closed two stores and opened two stores.

Gross profit for the quarter ended September 2011 was $71.3 million or 41.2% of sales, as compared with $66.4 million or 40.9% of sales for the previous year quarter.

The increase in gross profit for the current quarter, as a percentage of sales, is due to several factors. Distribution and occupancy costs decreased as a percentage of sales from the prior year, as the Company, with higher overall sales, was able to better leverage these largely fixed costs. Labor costs also decreased as a percentage of sales, as compared to the prior year, largely due to better control of payroll and improved labor efficiency, as measured by sales per man hour. Total material costs including outside purchases, increased as a percentage of sales, as compared to the prior year, due to cost increases primarily in oil and tires. Selling price increases during this and -- the first quarter of this year helped to partially offset the margin pressure.

Gross profit for the six months ended September 2011 was $142.1 million or 42% of sales, as compared with $132.4 million or 41.3% of sales for the six months ended September 2010.

The year-to-date improvement in gross margin is largely due to leveraging of six distribution and occupancy costs against improved sales this year,as well as decreased labor costs. For the six month period, selling price increases largely offset material cost increases.

Operating expenses for the quarter ended September 2011 decreased 2.5 -- I'm sorry -- increased $2.5 million and were $46.1 million or 26.6% of sales, as compared with $43.7 million or 26.9% of sales for the quarter ended September 2010.

Direct store expenses related to the fiscal year 2011 and 2012 acquired stores increased by $2.6 million,demonstrating that on a comparable store basis, the Company experienced leverage in this line through focused cost control on lower sales.

For the six months ended September 2011, operating expenses increased by $3.8 million to $90.8 million from the comparable period of the prior year, and were 26.9% of sales as compared to 27.2%.

Operating income for the quarter ended September 2011 of $25.2 million increased by 11%, as compared to operating income of approximately $22.7 million for the prior year quarter, and increased as a percentage of sales from 14% to 14.5%.

Operating income for the six months ended September 2011 of approximately $51.3 million increased by 13.3%, as compared to operating income of approximately $45.3 million for the prior year six months. An increase as a percentage of sales by 110 basis points from 14.1% to 15.2%.

Net interest expense for the quarter ended September 2011 increased by approximately $100,000, as compared to the same period in the prior year,and increased 0.1% to 0.8% for the same period.

The weighted average debt outstanding for the same quarter of fiscal 2012 decreased by approximately $8 million as compared to the second quarter of last year, primarily related to repayments made on the Company's revolving credit facility. This was offset by an increase in the weighted average interest rate of approximately 140 basis points in the prior year, due to a shift to a larger percentage of debt that being capital leases versus our revolver at a higher rate.

For the six months ended September 2011, weighted average debt decreased by approximately $23 million. And a weighted average interest rate increased by approximately 160 basis points.

The effective tax rate for the quarter ended September 2011 and September 2010 was 37% and 38.2%, respectively, of pre-tax income.

Net income for the current quarter of $15.1 million increased 13.5% from net income for the quarter ended September 2010.

Earnings per share on a diluted basis of $0.47, increased 11.9% over last year's $0.42.

For the six months ended September 2011, net income of $30.6 million increased 15.2%. And diluted earnings per share increased 13.1% from $0.84 to $0.95.

In regards to our balance sheet; it remains very strong. Our current ratio is 1.3 to one and it's comparable to last year's second quarter.

In the first six months of this year, we generated $38 million of cash flow from operating activities. And increased our outstanding bank debt from year-end by about $9 million. Related to the purchase of Vespia Tires in June 2011, we've added 25 stores and $36 million of annualized sales.

As a result of the debt borrowing, our debt-to-capital ratio increased to 18% from 16% at year end. At the end of the quarter, long-term debt consisted of $21 million of outstanding revolver debt and $41 million of capital leases.

As a reminder, we have $175 million revolving credit facility with a group of lenders that is committed through June 2016. The agreement bears interest at LIBOR plus a spread of 100 to 200 basis points. We currently are paying LIBOR plus 100 basis points.

This very favorable agreement permits us to operate our business, including doing acquisitions without bank approval, as long as we are in compliance with our debt covenant. Those terms, as well as our current availability of approximately $136 million, give us a lot of ability and flexibility to get acquisitions done quickly. We are fully compliant with all of our debt covenants and have plenty of room under our financial covenants to do acquisitions without any problems.

During the first six months of this year, we were also conservative with our CapEx spending at approximately $11 million, including $7 million in the second quarter. The Vespia acquisition earlier this year used another $33 million of cash. Depreciation and amortization was approximately $12 million. And we received $2 million from the exercise of stock options. We paid about $5 million in dividends.

Inventory is up about $7 million from March 2011,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 2012 acquired stores, as well as the continued expansion of tire inventory in the Black Gold and other stores. Additionally, we added [cars and] tire inventory in an effort to improve stocking levels, including amounts of lower cost import tires and the mix of inventory to reduce outside purchases and buy ahead of cost increases.

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

Thank you. (Operator Instructions). And we'll take our first question from Bret Jordan with Avondale Partners.

For one -- just trying to get a feeling for tire unit trends in the quarter. That comp was about flat but prices have been pretty well up year-over-year. Would they be more or less in line with the comp trend on alignments? Would it be down through single-digits if alignments are typically sold in conjunction with a tire purchase?

Yes. I think -- this is Rob. I think you should look at our alignment comp and that's going to mirror fairly closely what the units are doing. So we are down 6% in alignments, you can assume our unit tire is down five, down six.

And trend in the quarter experienced -- it sounds like back-to-school in a lot of categories has been kind of soft. Would you say that that is the case? Or do you see improvement as we've got especially closer to the fall?

Yes. There's been some improvement -- This is John, Brett. How you doing?

There was some improvement on the quarter. July and August were worse than September.

Okay. Great.

So there is some improvement there.

And on the acquisition pipeline, if you've got a six non-disclosure that's maybe Midas. Is there -- do you have to keep powder dry? If you look at the non-disclosures you have and you look at one potentially larger acquisition out there, do you have to hold off on some of the deals you might have in the pipeline as you evaluate the large one? Or is there capital available to -- essentially do most of the deals in the pipeline?

There's certainly capital available for us to do whatever we need to do with our balance sheet. And certainly, we would not hold off on anything that was attractive on the hopes of something that has a limited chance of occurring.

Okay. And then on the tire price macros, looks like we might be looking at another price increase? Or are you seeing some moderation from the manufacturers?

No. Most of the manufacturers announced increases in October or -- to take effect October or November. Despite the fact that the input cost matrices for those guys are down off their high. So we're seeing that pressure -- continued pressure from the tire manufacturers. Importantly for us is, we're independent, we're going to move the business to where guys want to get units as opposed to price.

Great. And then two housekeeping questions for Cathy. Of the tax rate we should work off of? And then the $2.9 million in inventory -- slow-moving inventory sales. What kind of product was that was sold? And was it sold with any margin attached to it?

It was some tires and some brake parts. It was a fairly wide assortment, Bret, of what we sold the $2.9 million. And there was some profit attached to that. A lower profit than we would have sold it (inaudible) through the normal chain -- it would have been faster moving inventory. And then what was the first part of your question?

Tax rate.

Oh, the tax rate -- use about 38% going forward.

Okay. Great. Thank you.

Thank you.

And we'll hear next from Rick Nelson with Stephens Inc.

Good morning. This is Joe Edelstein for Rick.

Hey, Joe.

I just want to ask if you plan to provide an update following the November results, since that seems to be a pretty key month for this quarter?

We would typically not give updates unless we're going to miss our earnings number. So if we're doing better, we would typically remain silent. But as we have always said in -- even on this quarter where it wasn't a miss, but certainly over the last three weeks anyone who has heard me talking -- heard that it's a tough environment and we should look towards the low end of the range. Remember, our guidance of $1.68 to $1.74, we are assuming no improvement in our Business to get to the low end of our range.

So should there ever be a situation -- we haven't had to deal with it in the last five years -- where at some point prior to our earnings release, we think we might miss the low end of our range, we would certainly make everyone well aware of that prior to the end of the period. If you don't here from us at the end of November, you should assume there are no problems. If you do hear from us, you will hear it loud and clear.

Okay. That sounds great. Thank you.

Second question -- just coming back to the acquisitions and the NDAs that you currently have in the pipeline; can you describe at all the size of those companies?Would you consider them to be large, with 20 plus stores? Or small operations of less than ten stores? Can you even comment on that at all?

We said the core NDAs we have -- five of them -- five to 40 stores and obviously one big one. Yes. Four of those are within our current footprint and one of them is adjacent to our footprint.

Okay. That's helpful. Thank you. And maybe just last question. I know that you just said that September was better than the months of July and August, but can you provide the comps? Can you give us a cadence by month through the quarter?

Sure. July was down 1.3, August was down 1.1, September was flat. And obviously, October is up 1.2.

Okay. Thanks for the color, guys.

No problem.

You're welcome.

And we'll hear next from John Lawrence with Morgan Keegan.

Morning, guys.

Hi, John.

Hello.

Rob, would you just comment a little bit of -- when you look at a comparison to 2008 when you made the acquisitions of $100 million, what's different today if that were to replay? Obviously your direct sourcing is higher, you started off that acquisition with not as good a terms on -- we had pressure on gross margins on tires on mix. Just talk about if 2008 were to replay itself, what's different today than then?

Well, certainly with my comments I think that period is replaying itself. And remember, you had banking issues, housing issues, really high oil prices. And we had for the year, 1% comps and flat earnings. What has occurred since then is we entered $100 million of acquisition growth and coming off that period with deferrals and lagging new car sales, we had three straight years averaging 6% comps. So flash forward to our current environment, which I believe is very similar to what we saw then; we have $100 million more of acquisitions, we have three straight years growing our base, which is creating, in another crummy environment, 17% to 21% earnings growth versus a business model four years ago that delivered zero in the same environment. So I think it speaks to, number one, how small we still are and the benefits we get from growing the business, as long as we stick to our pricing disciplines.

Great. Thanks.

Thanks, John.

Thank you.

(Operator Instructions). And we will hear next from Tony Cristello with BB&T Capital Markets.

Thank you. Good morning, everyone.

Hey, Tony.

Good morning.

Rob, one question pertaining to tires. If we look at the acquisitions you have made over the last couple years and look at the -- and there's been alot of tire acquisitions in that mix, can you talk a little bit about how the tire performance is dealing at those locations versus the stores that perhaps are Black Gold or some of the older tires stores? I'm just trying to understand if you're still benefiting at the recent acquisitions? And/or are your other -- or is tire comp, in general, would it be lower had you not had sort of a newer mix of stores?

Well, the only tire stores we have that are not included in the comp base are obviously Terry's and Vespia. So we commented that Vespia is ahead of plan and we said it would be slightly accretive this year. In fact, it was $0.01 accretive this quarter, so they are performing very well on a sales and bottom line standpoint -- above our expectations. Certainly, the other stores are already in the comp base. Our tire stores, in general, as you would expect with the mix continuing to go up for a company as a whole during this period have been underperforming the service stores. The service stores, in general, are a positive comp as a unit and the tire stores are running negative comps as a unit.

Okay. And if you look at the competitive landscape, I'm assuming, at least from what we're heard, the tire category in general has been weak. And I'm assuming you continue to pass price increases through and probably put your traditional fall price increase through as well. At some point, based upon how the consumer reacts, do you foresee lowering prices and/or would you expect the industry to become perhaps a bit more price competitive?

Frankly, I'd expect the industry --- and we will see what others have to say. Certainly, we probably have as good information as anyone with all the non-disclosure agreements we sign. We absolutely see what happens to the companies we're looking to buy. And we'll wait to see what some of the competitors have to say, even though they have a lower compliment of tires than we do.

The negative impact on gross margin and earnings, when you absorb 20% price increases and you don't get it back from the consumer. Don't know which is right or which is wrong. I'm certainly happy that I can talk about 20% earnings growth and flat comps. I'm certainly not happy with our unit decline, but I certainly don't want to bet on if we lower our prices and start cratering our gross margin and our profitability that -- in a time where the consumer is strapped focusing on either back-to-school, soon to be focusing on Christmas, that we are going to generate enough incremental units to compensate for what we have we would be giving up on price.

That doesn't mean there's a crystal ball that says we're right. That's -- we feel we're a good value to the consumer. I wish we weren't priced above some of our competitors the way we are. My guess is that -- if I was them, I would raise my price, but I'm not them.

If things continue irrational from a competitive standpoint, certainly we have room to move on getting more competitive, whether it's a market-by-market basis, if someone is doing something that we think is stupid and hurting us for the long-term. But we're in business for the long-term. We're in business to make money. And this is a tough environment for everybody and we're looking for the longer-term. That being said, as someone mentioned, we did raise our prices, on average, 2% in September. We did not raise our tire prices at all.

So we're cognizant that maybe we're a little above in a perfect world where we would want to be. I don't think the problem in the industry is our pricing strategy. I think the problem is others in the industry and maybe the tire manufacturers getting a little full of themselves, which everything is cyclical and the [worm] will turn, whether it's next quarter or next year. And we have long memories and a lot of flexibility to move business.

And on an inventory basis, with respect to tires, it sounds as if you're better positioned now going into your seasonal peak, so that even with these rounds of price increases, November, December, that the tire manufactures have implemented, you may not have to purchase as much or you may be better positioned from a sell-through standpoint today and be able to wait it out a bit more. Is that a fair assessment?

Yes Tony, this is John. That's absolutely right. We borrow very cheaply, we have got a lot of warehouse space, we've been buying ahead of price increases. But as Rob just said, units throughout the industry are weak and we think that with these next rounds of price increases from the tire manufacturers, we're a little less willing to get in front of that, because we think there's going to be more flexibility coming forward on units and we'll be in a better position to negotiate and to get good pricing. But we have absolutely bought ahead, as a lot of other guys have been doing and we're just not quite as interested, at the moment, to do that.

I would just add, as Rob was talking about, the results from the guys that we're talking to about potential acquisitions are down flat at best on an earnings basis, they're not passing through these cost increases on the tires and oil. And that's absolutely hurting their results. In a piece of the outperformance of Vespia and the gains that we're getting there is us adjusting pricing down in those stores. So we think we're -- sorry --adjusting pricing up in those stores. So we think that our strategy, like Rob said, for making money, is the right thing to do right now.

Okay. That's very helpful. Thank you.

And we'll go next to Jon Evans with Edmunds White Partners.

Hey Rob, can you just give us a little -- and maybe you don't want to do this -- but could you give us any bridge how we should think about your next fiscal year, just because you have that 53rd week? And you think you will still be able to get your 20% earnings growth?

Certainly a big piece of that -- I will tell you what we're going to do, tell me what comps are going to be. I'll tell you what we're going to do, tell me what acquisition growth is going to be. We have a longer term view of the Business and certainly I understand the realities of next year. I think we are very well-positioned to take advantage of any environment being we have a lot of room to grow and we are a low-cost operator in a time where a lot of these people are looking to buy -- are getting squeezed.

But if you're asking me to project next year, I got comps wrong this quarter. It's pretty tough to anticipate what I would expect next year. I might say this; our core business has been solid, continues to perform. I think the issue is tires.

Tires are related to rubber and oil costs which have come down yet the cost being charged us continue to go up. I think I think we have a lot of flexibility to move business. I think the Chinese import business next year will improve and there's pressure with tariffs being -- getting more favorable. On the tire manufacturers to react to that, whether they do or not, I'm surprised with the announced round of increases they're talking about.

But in general, our business model is created to work. When things are really good, we'll get the operating leverage off our comp number. When things are really bad, they're a lot worse from some of these guys we're trying too buy and we will accelerate our growth and the acquisitions will generate the bottom line improvement. And if this year ends up moving towards the low end of the range, which effectively, based on what I said on the call, means November sucks, we would expect there's a lot of opportunity and a lot of deferrals going into next year that we might not normally have because there's only so long you can run your car on no tread. And if people have proven this year that they're willing to buy exhaust on an older vehicle, that's a choice, but they're going to need tires.

Got it. May I ask you two other questions?

You may.

You talked a little bit about -- to someone else's question, that you didn't think, potentially, Midas would get done. If you X out Midas and you look at your NDAs that you have out there, can you give us a rough estimate of the total amount of stores, potentially. If you were successful and bought them all, which we know won't happen, how much you could increase the store base by?

Well, certainly, we alluded to five to 40 stores. We did more than allude to it --we said. Five to 40 stores and we also said we would be disappointed if this year's annual acquisition run rate was not above what we think is our long-term sustainable run rate. So I can do the math -- do the math.

We said that all of these -- or John said all of these deals -- the five NDAs are all tire stores. You can assume, at a minimum, they average $1 million in sales each. And nothing was in our capital structure or nothing within the Company's ability to get these done are an impediment to doing any or all of them. The impediment is price, and we will not overpay, for anything, large or small.

Okay. And then the last question is just relative to pricing; so you're obviously -- the tire guys are trying to push price again. So will you implement another price increase? And if you do, can you tell us when that potentially would be and how much it would be?

Obviously, we'll monitor the situation and see what the competition does. We'll see how well this latest round of price increases holds. If I, as some people have said -- if at least one tire manufacturer had an inventory problem that I thought hurt my performance and other manufacturers saw that and maybe didn't want to have to report excess inventory, the quickest way to move more units forward and not have to talk about high inventory levels would be to announce a price increase in the future to get everybody to buy tires before that price increase.

Don't know if that's what's going on or don't know if they really think, in light of the unit declines that all of us have been experiencing, they can really pass it along successfully. We'll have to see what folks in our industry respond with. But we are not going to continue to lose market share. We are not going to be happy with a 3% traffic decline.

That being said, I'm going to be a lot less happy talking to you with rising costs. Remember, tire and oil costs have gone up every quarter and we will be anniversarying higher costs going forward. You are not going to hear us talk about 100 basis point decline in gross margin either.

Got it. Great. Thanks for your time. Have a greatday.

Thank you.

Thank you.

And we will hear next from Scott Stember with Sidoti & Company.

Good morning.

Hey Scott.

Yes. Most of my questions have been answered already. But could you talk about brakes? They seem to have out performed virtually everything else -- all the other categories. Could you make talk about what happened there? And the disconnect between that and what's going on in maintenance services down 3%?

Sure. On the brakes front, I appreciate the way you postured the question. I would say they sucked less than our other categories. But certainly, they performed better. It's a required purchase. What we are seeing is two years ago people walked in needing $400 worth of work, tried to delay it, then got it. Now people, because of the older vehicles, are walking in with $1,200 worth of work, maybe it's exhausts, brakes and tires. And it really just depends on where they are on the cycle as to what they're going to choose to do.

And to your point, brakes and exhaust have held up better. Tires have not held up at all. At some point, we think things shift. But I'm certainly not going to be happy with a 1% brake comp. In maintenance services, we did increase the price of our oil change slightly. Maybe that had some impact but not really meaningful.

People -- real people have no money. Real people have relatives that have moved in with them because they're trying to cut expenses. Real people are cutting their cable service. And until things improve, or at least there's a perception in their minds that they're going to improve, I think we have been in a tough environment this year and it will continue that way.

Okay. And on the advertising front, could you talk about what you did, as far as dollars this quarter? And what you would plan on doing going forward?

Besides what we did -- oh, the advertising dollars? We're advertising at about 3.5% of sales, that's been pretty consistent. We have absolutely moved more of the advertising spend over to the web and we're having great success there. We're into purchasing keywords there, we're optimizing our local search, continuing to enhance our website. Last month we launched a mobile site for each one of our brands. About 10% of our traffic to our sites is from mobile devices. So we're giving those folks an easy way to do the things they want, which is find stores, access coupons, make appointments, research tires. So we're having very good success off of the web. We're getting a lot of coupon prints, a lot of people printing quotes, making appointments. And we're getting a lot of calls offer of the web. So we will continue to allocate advertising money to the web, coming mostly from some of our direct mail -- the print piece for that -- and that's what you will see going forward. But we would expect to continue to be able to operate efficiently at this 3.5% of sales, which is somewhat less than what we see most of our competitors and the guys that we're buying operate at.

All right. And last question, Cathy, I missed the free cash number. Did you give that out -- or the operating cash flow number?

Yes. Free cash is $27 million for the first six months, Scott.

Great. That's all I have. Thank you.

Thank you.

Thank you.

And we'll hear next from a follow-up question with Bret Jordan with Avondale Partners.

Yes. Quick question. Just on September, given that zero is fairly strong given the back-to-school spend drawing from aftermarket; what was prior year September? And what was prior year December, as we go into the holiday season?

Prior year September was 4.5%. Prior year December was 8.6%. Prior year January was negative 3.8%.

Okay. Great. Thank you.

Thanks.

Thanks.

And we do have a follow-up question from John Lawrence of Morgan Keegan.

Yes. Thanks. John, could you remind us on Vespia -- how did Vespia perform as you put in the broader mix of tires -- I assume you got that done for most the quarter? And how would that compare to traffic compared to the basis stores?

Well, the stores are up 2% for the quarter, tires played a part of that and traffic was pretty -- was flat in the Vespia stores. Again, we got a little bit of price. What we did during the quarter -- we didn't broaden their tire mix as much as we added service parts and hard parts to the business to take advantage of our significant -- significantly lower costs on those parts. Because their business again, if you recall, is 70% service and 30% tires. So we really focused on getting our advertising programs implemented down there, which are much more robust than theirs, adjusting their pricing, adjusting their hours, both to the benefit of comps and getting the parts down there to make sure we take advantage of the cost side of things.

All right. Thanks. Good luck.

We haven't done anything to hurt the tire business at all. What we're looking to do down there is keep the service business and expand the tires.

Good luck. Thanks.

Thank you.

And with no further questions in the queue, I would like to torn the conference back over to Management for any additional or closing remarks.

Thanks, Operator. Really appreciate your support. Again, decent quarter, certainly didn't knock the cover off the ball. Think it's a tough environment. Think we performed well and we'll continue to perform well the rest the year and use this as a springboard into more normalized and happier times next fiscal year.

So any other questions, I'm around, John's around, Cathy's around for the rest of the week. And really appreciate your support and listening to the call. Thanks very much. Bye.

And again, that does concludes today's conference. We thank you for your participation.