Monro Inc (MNRO) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcometo the Monro Muffler Brake third quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the Company. I would now like to introduce Ms. Megan Crudele of FTI Consulting. Please go ahead, Megan.

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 the statements which are more fully described in the press release in 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, risks relating to leverage and debt service including sensitivity to fluctuations in interest rates, dependence on and competition within the primary markets in which the Company stores are located, and a 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'd like to turn the call over to Rob Gross. Rob, you may begin.

Thank you. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our third quarter 2012 performance. After reviewing our quarterly performance, I will provide you with an update on our business as well as 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 once again had a solid quarter given the lingering tough 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 and generate solid performance across many areas of the business. Importantly, we are confident that this flexibility will continue to be an advantage going forward.

In the third quarter, we increased total sales by 6.8% to a record $176.7 million as compared with $165.5 million in sales for the prior year third quarter. Our comparable store sales were essentially flat versus a strong comparable store sales increases of 5.4% last year. Additionally, our recent acquisitions continue to perform very well and contribute to our 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 towards sales of lower margin tires, which is associated with our recent tire store acquisitions, and significant continued cost increases on tires and oil.

Although we continue to leverage increased purchasing power that has resulted from our recent tire store acquisitions and shifting purchases between your broad base of vendors, over the past several quarters, we have also implemented higher than normal retail price increases to offset the higher tire and oil costs.

However, many of our industry competitors have not followed suit and during this year's third quarter we decided to not pass along certain price increases to consumers and also chose to cut back on planned advertising increases in this area, which impacted our gross margin and tempered our top line results. As a result, gross margin decreased 70 basis points during the third quarter to 38.4% versus 39.1% in the prior year.

In retrospect, this was a mistake, particularly given the weak sales environment during the quarter in part due to warmer weather. In January, we raised tire prices. 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.

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 to a run rate of approximately 36% of our total product costs less oil and out buys by the end of this fiscal year.

During the third quarter, we were at a rate of 26% direct sourcing. Once we obtain our target, we will 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 third quarter increased 21.2% to $22.6 million, which translates to an operating margin of 12.8% compared with 11.3% in the third quarter of last year. As a result of our sales and operating margin improvement, net income for the third quarter increased 22.5% to a record $13.6 million from $11.1 million last year.

Our earnings per share, which came in at the top end of our expected range, rose 20% to $0.42 on a base of 32.1 million shares outstanding from $0.35 on a base of 31.9 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. However, due to the tough economic environment, we continue to see customers prioritizing certain repairs while deferring other needed repairs until a later date.

During the quarter, traffic was down approximately 2%. We believe that this was due to a number of factors including weather, as the mild weather enabled customers to delay purchases needed to prepare their cars for winter, primarily tires.

High unemployment, high gas prices continued depressed consumer confidence and higher retail prices for tires. At 38% of our sales mix, we have significantly higher sales mix in tires than our competition, withthe exception of the independent tire retailers we are looking to acquire. Tires are a big ticket item and with the recent price increases in this environment where gas, food, and other prices are also higher, there is sticker shock.

Being tires are a safety issue and a need, we generally see sales pick up with the winter weather. However, as I mentioned, the mild winter weather during the second half of the quarter negatively impacted sales in the category.

Coming off three straight years averaging 8% to 9% tire comps, tires are weighing us down. That said, we are continuing to promote sales in key categories through specific programs such as Oil Change and More in which our customers receive free tire rotations and brake inspections with the purchase of an oil change 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 the initiatives continue to create value for the customers and build trust.

As I mentioned, we continue to see that consumers are choosing to invest in maintaining older vehicles instead of buying new cars. This was demonstrated by the fact that we saw our largest comparable store sales increase in the exhaust category in 16 years. This is also the first quarter in ten years during which our tire sales mix decreased versus the prior year quarter.

The strength of key service categories such as brakes and exhaust in the face of weakness in the tire category signals to us that our business model is working, allowing us the flexibility to benefit from customers prioritizing certain categories over others. Additionally, we believe that the trusting relationships 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.

For the quarter, overall comparable store sales were flat. On a category basis, comparable store sales increased approximately 14% for exhaust, 6% for brakes, and 2% for front-end shocks. We are approximately flat for maintenance services and decreased approximately 4% for tires and alignments.

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 that attract evaluations.

While we expect moderate organic sales growth for the remainder of this year as a result of the previously mentioned continuing economic issues, we are well positioned to take advantage of additional acquisitions at attractive valuations, especially in light of the current weakness in the tire category. Importantly, these acquisitions will further expand our market share and our operating leverage, positioning Monro for continued profitable growth.

With the $9 million in sales from the Terry's Tire Town acquisition in October 2011 plus the $36 million in sales from the Vespia acquisition in June of 2011, Monro has added $45 million in annualized sales or approximately 7% acquisition growth year-to-date. We are very pleased with the results that we have seen thus far from these acquisitions as sales and earnings from these stores have been better than expected.

As mentioned in our press release this morning, we expect to close on the acquisition of additional stores this quarter, which will bring our total acquired sales this year to approximately 10% of our overall sales on a run rate basis. These stores are expected to be accretive in fiscal 2013.

Overall, we continue to pursue value price, opportunistic bolt-on acquisitions to further fill out our footprint. We currently have six nondisclosure agreements signed. As competitors struggle to address the rising cost of goods, some are becoming more willing to be acquired.

Given this environment and what we believe will be growing seller concern over potential future income and capital gains tax increases, we hope to step up our acquisition acquisitions activity even more in the coming year. We have plenty of liquidity and strong cash flow to complete these deals, weremain 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. As we have previously discussed, year-over-year oil costs and gas prices are significantly higher and have pressured our margins and miles driven, althoughmiles driven are now on older vehicles, which offsets this impact.

Higher year-over-year gas prices continue to negatively impact consumer sentiment and purchasing behavior, which affects Monro as a service and retail business. However, the good news is our services and products are in need, not a want purchase, and we have been able to support higher sales prices through convenience, advertising, and store execution.

Significantly, we have had nine consecutive years of averaging approximately 17 million new cars sold through 2007, which are now in our sweet spot. Plus, in our view, the 14 million new car sales projected for calendar 2012 will not significantly change the growing age of the average vehicle in the US fleet, which is driving our business forward.

As we detailed in our press release this morning, we expect fourth quarter comparable store sales growth in the range of 1% to 4%. Adjusted for days, 8% to 11% to include the extra week. Remember, we are up against flat comparable store sales in the prior year fourth quarter and, for that matter, all next year.

For the month of January, which is complete, comps are up approximately 6%,up 9% adjusted for the one less selling day, and tire sales are up 9%, signalingthat the weakness we saw in the latter half of the third quarter was possibly a result of unusually warm weather and customers prioritizing holiday spending and might not be a trend that is carrying forward.

We expect fourth quarter earnings per share to be in the range of $0.34 to $0.38, which compares to $0.26 for the fourth quarter of fiscal 2011, a 46% increase at the high end of our range. We anticipate the 53rd week will benefit our fourth quarter results by approximately $11 million in sales and approximately $0.05 in EPS.

For the full year, we anticipate comparable store sales growth in the range of 2% to 3% or flat to 1% when adjusted for days and expect total sales of approximately $690 million. We are increasing our estimated fiscal 2012 diluted earnings per share to a range of $1.71 to $1.75 from $1.68 to $1.74.

As we mentioned last year, we expect accounts will be 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 that I just discussed. We also expect operating margin for the year to improve at least 125 basis points, all a result of SG&A leverage, driving earnings per share growth of 17% to 21% on top of three years of approximately 30% compounded increases.

Finally, we believe that the environment is great for accelerated growth through acquisitions. We continue to have the positive outlook for the business going forward. Importantly, we remain confident that fiscal 2012 will be a year like we saw back in fiscal 2008 where weak sales trends and rising costs set the stage for higher comp sales and accelerated acquisitions in the next several years, allowing 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.

Looking over the long-term, our five-year plan calls for on average 15% annual top line growth, 10% through acquisitions, 3% to 4% comps, and 1% to 2% Greenfield stores. The acquisition growth will break even year one, be $0.08 accretive year two, and adds an additional $0.08 year three. That should improve operating margins approximately 300 basis points and deliver an average of 20% bottom line growth.

Before turning the call over 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 operational initiatives, protecting our position as a low cost operator, and capitalizing on favorable industry trends despite the challenging macro environment. I believe that 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, everybody.

As Rob said, sales for the quarter increased 6.8%. New stores, which we define as stores opened after March 27, 2010, added $12.3 million. Partially offsetting this increase was a slight decrease in comparable store sales of two-tenths of a percent and there was a decrease in sales from closed stores of approximately $1.1 million, and that compares to a comparable store sales increase of 5.4% in the third quarter of last year.

There were 90 selling days in the current third quarter and 89 in the prior year quarter. Adjusting for days, comparable store sales declined 1.3% as compared to the prior year quarter. Year-to-date, comparable store sales increased four-tenths of a percent. Additionally, there was a sales increases $26.9 million related to new stores. Partially offsetting the sales increase was a decrease in sales from closed stores amounting to $3 million.

There were 271 selling days in fiscal 2012 through December 2011 as compared to 270 days in the prior year. Adjusting for days, comparable store sales were flat for the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011, andthat compares to a comparable store sales increases 5.7% in the first nine months of last year.

At December 24, 2011, the Company had 803 company-operated stores as compared with 783 stores a year ago. During the quarter ended December 2011, the Company closed seven stores.

Gross profit for the quarter ended December 2011 was $67.8 million, or 38.4% of sales, as compared with $64.7 million, or 39.1% of sales for the quarter ended December 2010. The decrease in gross profit for the quarter ended December 2011 as a percentage of sales is due to several factors.

Total material costs, including outside purchases, increased as a percentage of sales as compared to the prior year. The Company experienced significant increases in oil and tire costs as compared to the same quarter of the prior year, and for competitive reasons elected not to pass-through certain of these increases, cost increases, which resulted in gross margin percentages below prior year levels.

The shift in mix to higher margin categories, as Rob mentioned, such as brakes and exhaust, which had comparable store sales increases in the quarter, helped to slightly offset the effect of the tire and oil cost increases. Distribution and occupancy costs decreased as a percentage of sales from the prior year as the Company, with higher overall sales, was better able to 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.

Gross profit for the nine months ended December 2011 was $209.9 million, or 40.8% of sales, as compared with $197.1 million, or 40.6% of sales for the nine months ended December 2010. The year-to-date improvement in gross profit is largely due to the leveraging of fixed distribution occupancy costs against higher sales this year, as well as decreased labor costs partially offset by increased material costs.

Operating expenses for the quarter ended December 2011 decreased $1 million and was $45.1 million,or 25.5% of sales, as compared with $46.1 million,or 27.8% of sales for the prior year quarter.

Direct store expenses related to the fiscal year 2011 and 2012 acquired stores increased operating expenses by $2.5 million for the quarter, demonstrating that, on a comparable store basis, the Company experienced leverage in this line through focused cost control on lower comp sales. Additionally, approximately 100 basis points of the decline relates to the sale of the seven stores on Long Island during this year's quarter.

For the nine months ended December 2011, operating expenses increased by $2.8 million to $135.9 million from the comparable period of the prior year and were 26.4% of sales as compared to 27.4%.

Operating income for the quarter ended December 2011 of $22.6 million increased by 21.2% as compared to operating income of approximately $18.7 million for the quarter ended December 2010. An increase as a percentage of sales from 11.3% to 12.8%.

Operating income for the nine months ended December 2011 of approximately $74 million increased by 15.6% as compared to operating income of approximately $64 million for the nine months ended December 2010, an increase as a percentage of sales by 120 basis points from 13.2% to 14.4%.

Net interest expense for the quarter ended December 2011 remained flat as compared to net interest expense of $1.2 million and 0.7% as a percentage of sales for the same period in the prior year.

The weighted average debt outstanding in the third quarter of fiscal 2012 decreased by approximately $9 million as compared to the third 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 160 basis points from the prior year due to a shift to a larger percentage of debt, that being capital leases versus revolver at a higher rate.

For the nine months ended December 2011, weighted average debt decreased by approximately $13 million and the weighted average interest rate increased by approximately 120 basis points.

The effective tax rate for the quarter ended December 2011 and December 2010 was 36.9% and 38.3%, respectively, of pre-tax income. The difference in rate relates to the accounting for uncertain tax positions, which may vary from quarter-to-quarter and year-to-year. The effective tax rate for the nine months ended December 24, 2011 and December 25, 2010 was 37.5% and 38.1%, respectively, of pre-tax income.

Net income for the current quarter of $13.6 million increased 22.5% over net income for the quarter ended December 2010. Earnings per share on a diluted basis of $0.42 increased 20% over last year's $0.35 per share.

For the nine months ended December 2011, net income of $44.1 million increased 17.3% and diluted earnings per share increased 16.1% from $1.18 to $1.37.

Moving on to the balance sheet. Our balance sheet remains very strong. Our current ratio at 1.2 to 1 is comparable to year end and last year's third quarter. In the first nine months of this year, we generated $71 million of cash flow from operating activities and decreased our debt from year end by about $12 million.

In addition, we financed the purchase of Vespia Tire in June of 2011, which added 24 stores and $36 million of annualized sales, as well as the purchase of Terry's Tire Town in October of 2011, which added seven stores and $9 million of annualized sales. As a result of the debt pay down, our debt to capital ratio, including capital leases, decreased to 13% from 16% at year end.

At the end of the quarter, long-term debt consisted of $0.8 million of outstanding revolver debt and $42 million of capital leases. As a reminder, we have a $175 million revolving credit facility with a group of lenders that is committed through June 2016.

Additionally, we have a $75 million accordion feature included in the agreement. The agreement bears interest at LIBOR plus a spread of 100 to 200 basis points, and we're currently at the low end paying LIBOR plus 100 basis points. This very favorable agreement permits to us operate our business, including doing acquisitions without bank approval as we said in the past, as long as we are in compliance with debt covenants.

Those terms, as well as our current availability of about $156 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 to do acquisitions without any problems.

During the first nine months of this year, we were also conservative with CapEx spending at approximately $19 million, including $16 million of maintenance CapEx. The Vespia and Terry's Tire Town acquisitions earlier in year used another $38 million of cash.

Depreciation and amortizations were approximately $18 million and wereceived $3 million from the exercise of stock options. We paid about $8 million in dividends.

Inventory is up about $2 million from March 2011 due primarily to vendor price increases and the addition of the fiscal year 2012 acquired stores. Additionally, we added parts inventory in an effort to improve stocking levels and the mix of inventory to reduce outside purchases, buy ahead of cost increases, and ensure adequate supply for longer lead time for foreign purchases. This was partially offset by reduced tire purchases in an effort to right size stocking levels in the stores, as well as improve inventory turns.

That concludes my formal remarks on the financial statements. So with that, I will turn the call over to the operator for questions. Operator?

Thank you. (Operator Instructions). Our first question today comes from Tony Cristello, BB&T Capital Markets.

Good morning.

Good morning.

Good morning.

First question, SG&A and operating expenses, flat comp, significant leverage, what are you doing in the business and is it simply a function that you have gotten the acquisitions you have made over the recent years fully integrated and you are getting a lot of cost savings operationally? And what is the sustainability of this now on a go-forward basis? You have obviously talked a little bit about that, but could you give us some more color on what is going on there?

Sure, this is Rob. Remember when we talk about the acquisitions, not only -- we're saying they break even year one but they are accretive $0.08 in year two, and I think sometimes we forget about the leverage that moves into year three of that additional $0.08. So with the acquisition growth we have had recently , we are still getting the incremental operating leverage from deals done two years ago.

In addition to that, with the deals we have done this year, that we plan on them breaking even the first 12 months. They have come out of the box in the first quarter being accretive, averaging to that leverage and moving the SG&A improvement up significantly. Over the five years in addition to the last three years where we have grown our EBIT margin 300 basis points, we've said we would be able to add another 300 basis points to that.

So the game plan is either get it through comps. If comps are weak, the business model works by doing more acquisitions. One way or the other, we will grow the sales off a stagnant fixed cost base, get operating leverage, or obviously organic growth tied into our 12-year average of 3% to 4% comps gets us enough juice in the business model to give us some comfort over the long-term with the year-to-year getting to that 20% average bottom line growth.

When you look at the gross margin line then, which you gave a little bit back on that, and you have certainly been more aggressive in terms of holding price and implementing price increases in the past, what's going on with the supplier of tires today? I mean, do you -- in your opinion, do you think there is still too much inventory, do you expect to see price increases try to be pushed down to you again, or have we reached a point now that demand has been a bit softer on the part of the consumer such that you should start to see maybe a little bit of easing your way?

Yeah, Tony, hi, this is John. We see more softness in the demand side helping to temper cost increases going forward. Also, the raw material indexes for these -- for the tire manufacturers have come down, so we would expect that to be an additional factor that helps control the costs going forward.

From our standpoint, we are independent and we continue to buy from the guys that give us the best overall service and cost. We have plenty of warehousing and we borrow very inexpensively so we can do what we need to on the inventory side to help to control the increases.

And is the traffic numbers that were down, I guess a couple percent, in the quarter, is what you're seeing in traffic primarily a function related to the tire side of the business? And maybe if you could just sort of -- just the last part sort of update us on what your core customer and sort of the database or data on that customer has shown you over the last six to 12 months, if you can.

I think the traffic number relates to customers deferring purchases. So we are still seeing new customers come in. What we are seeing is the regular 3,000 mile oil change expanding to 4,000 miles,and you can see that in our maintenance category, which had been growing really for the past five years, flattening out.

So I think less visits, more work being needed when they come in, and then choosing what work needs to be -- they choose to get done because they can't afford the whole repair package, which is why I think you see a lot of flip flopping, with the exceptions of brakes remaining fairly strong each quarter, it seems like a different category takes the lead and that is the cars are older, people are coming in less often, when they come in they need bigger repairs, and then they are prioritizing and choosing what gets done during that period.

Okay. Very helpful. Thank you.

Thanks, Tony.

Thank you.

Next up is Rick Nelson, Stephens.

Good morning. How much was the gain on seven stores in Long Island?

Approximately $1.7 million and it improved our operating leverage of the -- I think it was 230 basis points, 100 of the 230 was due to that gain.

Got you. And what was behind the sale, Rob? That was an under-performer and what sort of loss, if it was, what sort of losses are attached to that?

That was -- this is John. That market was an under-performer. The contribution that it had was minimal. But more importantly there, we looked to be number one or number two in all of our markets and on Long Island where we had seven stores, we just didn't see that we could get there. So we would rather take that capital out, you know, make a gain.

At the same time, over the years, we have closed under-performing stores; that's been a cost that we have overcome over the last several years. So we decided to exit that market to be able to put that capital to work in markets where we are increasing density and have a more dominant position.

Yeah, and, you know, getting back to -- Rick, this is Rob. It is also part of our operating leverage story. If we have 800 stores and over the years, while we have taken hits through the P&L to close upwards of 40 of those stores, remember those are typically close to the 40 worst performing stores we have. So if you are eliminating the bottom of your chain from a performance and profitability standpoint, that is a piece of the operating leverage story that goes forward.

That makes sense. Can you talk about the acquisition pipeline?It sounds like there is a deal about to close here in the March quarter, if we are doing our you math correctly, $18 million or $19 million in revenue. Is that in the ballpark?

That is in the ballpark and it is one or more deals is that will get done during the quarter, but you are exactly right on the dollars in sales that it takes to get to at least that 10%. As Rob mentioned, we have six MBAs currently. One of those is Midas and the others are between five and 40 stores. Four of those are within our footprint and one is adjacent.

And what we -- Rob obviously explained that we still believe that the market is good for acquisitions and improving. Again, these tire guys that we are buying are typically 50% to 60% tires, so the pressures that you see in our results on the tire side are weighing even more on these guys.

And we are seeing it in the P&Ls that we get from them, so that obviously enters into the valuation discussion and we will -- we remain committed to our discipline on the price side, but we absolutely expect to get more deals done as the market -- as this tough market continues and these guys get concerned about any future tax changes that are likely obviously we are in an election year and beyond that.

Okay. Thank you for that. Also, I would like to ask about comp strength, in January, you're up 6%. It sounds like you are now passing on these commodity cost increases to the consumer. Is that the case? And also the guide of 1% to 4%, you're up 6%, what do you see over the remainder of the quarter?

This is Rob. Obviously, with the 6% and the 1% to 4%, frankly, I hate to say it, but our visibility is limited. We're thrilled with the plus 6%. And, remember, effectively, it is a plus 9% with the one less day.

We are up against soft numbers. It snowed in January. It is gulf weather up here this week. Some of it is going to be snow related and I have been wrong all year on what is going to go on, so we thought we were being conservative, we wanted to protect our estimate,

I mean, it is six to one, half dozen of the other. I think the consumer remains weak. I continue to be concerned about them. That being said, I don't know anything in February and March that is going crater the business versus the plus 6% we did in January. That being said, we had one good month in January after six months of crap running a zero.

So your guess on the number unfortunately or fortunately is as good as mine. We thought having the 6% under our belt and 1% to 4% for the rest of the quarter, saying that's where we come out, really gave conservative guidance, protected us in a period where hopefully we do better, but I don't know.

Got you. You mentioned your advertising at 4Q, has that picked back up now in relation to that?

Yeah, we're back on our regular plan. We just -- again, it's difficult without the weather to spend extra money when it was our belief, and if you remember on the last conference call, we indicated we don't think the consumer is going be very focused around the holiday season in buying our stuff and with the weather not cooperating, they didn't have to buy our stuff. In January, they did.

Got you. And, Rob, if we could get the comps by month for the quarter, that would be helpful.

Sure. October was up 1.2, November was up 3.9, and and December was down 6.8.

Got you. Thanks so much. And good luck.

All right.

Thank you.

Thank you.

Thank you.

Up next from Avondale Partners is Bret Jordan.

Good morning.

Good morning.

A couple of questions. And I guess around the pricing, you talked about taking pricing in tires around January and I guess I used to think about April and September being price months. Could you give us some feeling for what magnitude the price increase was and then what the strategy is as we face the coming April? What the average price increase was last year and sort of how you going to bring price through this year?

Sure. In January, we put through about 2% to 3% on tires. And we would expect to put our normal increases through in the March and September timeframe going forward. And we may be adjusting tire prices up outside of that within the quarter as we move forward. We still have some more run on the cost file to deal with and so we would expect to continue to increase the prices going forward.

Okay. What are you up against? I guess refresh me on what your last spring price increase was.

The last spring price increases was about -- was 2% and it was higher in the tire category.

Okay. And then I guess if we look at January and the price -- the comp increase of plus 6%, how much -- was traffic up in January or was that still ticket then over traffic?

Yeah, traffic in January was up 1%.

Okay.

We obviously got some ticket there, certainlywith the return of the positive comp in the tire category.

Okay. And the Q3 traffic comp was down 2%. How did that -- what was the sequential comp? Q1 was -- or Q2 was down what?

Traffic?

Yeah.

Q2 was down 3%. I don't remember Q1 off-hand, but Cathy who has everything forever.

Q1 was down 0.7%.

Okay. And then I guess one last question around Long Island. Is there anything else, any other markets you are looking at sort of exiting that could swing SG&A the way that one did or is that pretty much a cleanup?

No, that was just managing the business with that market in particular. And, again, any of those stores or markets that we would ever consider are marginal contributors anyway from an earnings perspective.

Okay. And I'm sure the answer is no but now updates on what is going on with Midas?

No.

All right, thanks.

Next up, we will take a question from John Lawrence, Morgan Keegan.

Just quickly, Rob, would you talk a little bit about the purchases of product? You said you'll be at 36% by the end of the year. How much of that is volume versus moving to new categories to purchase?

Yeah, John, this is John. So I will take that. We said we would be at a run rate of 30% at year end on the direct sourcing. And that is -- we have got a couple of smaller categories that we are looking at going forward. But the -- and we were at 26% in the third quarter. We still have a little bit of additional fill-in from the lines that we've already moved, brakes and filters on the parts side, but we are looking at moving some on the tire side, as well, and that is where you will see the next larger move.

Okay. And you mentioned also doing some things to buy ahead to help your outside purchases. What would outside purchases be now? Well, under 20% or what would those is be?

I'm not --

I had talked about the fact that during the quarter, we bought inventory in certain categories to get ahead of cost in increases. So we don't typically disclose outside purchases but, yes, it is well under 20%.

All right. And then, John, is there anything looking forward as you look at the services offered within the bays of where you can change -- you can add anything to the presentation mix or to the offerings going forward?

No, I think we have talked in the past about air conditioning and TPMS as a service is something that is going to be needed more and more going forward. But we have been focused on continuing to drive traffic and doing a good job of inspecting customers' cars. There is plenty of needed work in these repair categories like brakes that are -- brakes and tires that are wear categories for us.

And last question. As you look at the favorable results from Vespia, how much is just increased parts penetration or more expanded tires? What would you point to that has led to that better than expected performance?

Yeah. Certainly, we have taken advantage of different aspects on the sales side. We increased their hours a little bit, weimplemented our advertising program which we think helped out in driving some more traffic there, and we absolutely have expanded their parts inventory at our low costs to take advantage of our cost advantage there and their high mix of service sales.

Great. Congratulations. Thanks.

Thank you.

Thanks.

(Operator Instructions). Next up is Scott Stember, Sidoti & Company.

Good morning.

Good morning.

Hey, Scott.

Could you talk about what the comps were for tires a year ago in the third quarter and maybe what we are going up against in the fourth quarter?

We can do that.

Sure. Last year tire comps were up 5% in the quarter, in the third quarter. And in the fourth quarter, they were down 2%.

Okay. Maybe, Rob, if you could touch base again on your comments about what the competition is doing from a pricing standpoint and now that you implemented some price increases in January, what has the competition done?

I don't know necessarily how they responded to our $2 or $3 a tire move. I know last quarter, the reason we decided not to pass along the price increases was we typically effectively looked to target ourselves to be about 5% above the competition with us continuing to raise prices and then not going quite as far as we did, that percentage on a commodity item was starting to approach more like 7%, 8%, 9% difference. We wanted to bring that back in.

As we said, we felt we had up to that point been maintaining our margin pretty well. We thought consumers were deferring anyways and that it wasn't all about the last $3 or $4 per tire. We reacted to us getting a little bit higher than we would like to be versus the competition.

We think it was the wrong thing to do and we have corrected to where we will be able to make money and continue to move forward. And at this juncture, what they do, we'll monitor, but it is more about what we do as opposed to what they are going to do. We will see how their decisions are reflected in their numbers.

Got you. And from a competitive standpoint , many of the new car dealers have been making a push into the tire segment. Just talk about whether that has had any impact on your business or if it's, given your store density, it's just not an issue whatsoever?

I mean the dealer network continues to be inconvenient. They are selling less cars so they are doing the right thing and they're getting more aggressive on service and certainly more aggressive on selling tires.

It is a convenience thing in general with the exception of tires, though, we still hold our 30% advantage to what the consumer pays for everything else and I don't think most folks look at the dealer as a competitive alternative on a price standpoint or a convenience standpoint to what competitors like Monro can do for them.

Okay. And John just a follow-up question on the additional services. You mentioned climate control. Could you just -- how many stores or what percentage of your stores are currently doing climate control and what is the opportunity at least with that to expand it?

I think we are at about 35% or 40% on air conditioning, and we continue to roll that out on a measured basis each year where guys in markets are showing that they can actually grow that service.

Okay. And just one last question. A lot of mention is going on about the Right to Repair Act and could you talk about how your ability to possibly buy some of the diagnostic equipment that your competitors couldn't, down the road how that could possibly benefit you?

Well, certainly there is a lot more diagnostics, there is a lot more scanning tools. The higher the cost of entry or the higher the cost of maintaining our stores, we have the capital resources, we obviously buy in bulkin light parts, and that creates a competitive opportunity for us to expand services as they come up and running and do more complicated diagnostic work than others can do to stay competitive.

So anything that raises the cost of entry or makes it more expensive typically will play into our hand at our size with our cash flow and our buying power. As far as the Right to Repair Act, I think the last one was in New Jersey and it was a 10-to-1 vote. So if part of the question was are we concerned about the government stepping in and making all consumers go back to dealers to pay a lot more for their repairs, I don't think anyone involved with consumer advocacy is going to allow that to occur.

I was taking the stand if the Bill does go through and independent repair shops have the ability to do more diagnostic work, how it would actually benefit you given your ability to purchase the more expensive equipment?

Yeah, I think, Scott, right now we don't see any limitation. There is nothing proprietary that we want to do that we can't do. So the computer chips are there for all makes and models, we can do the diagnostics, and that is not an issue and we don't see it becoming an issue.

Got it. That's all I have. Thank you.

Great, thanks, Scott. Go Giants!

Oh, yeah.

Next up we will hear from Peter Keith, Piper Jaffray.

Hi, good morning. This is actually John on for Peter. Just had a couple of quick questions for you here. When you look at Q3, why do you think it was your exhaust and brake comps accelerated so much? I mean, were you a little more potentially promotional on those categories or was it something else in the quarter?

No, it is just the age of cars and consumers prioritizing those repairs. You don't get your exhaust fixed unless you are going to hang on to your car and you don't need that exhaust repaired until your car is at least ten to 12 years old, so we think that is continuing that trend. And on the brakes front, brakes, obviously the safety-related category, and if the snow is not flying and you need brakes and tires, you're going to get the brakes fixed before you get the tires fixed.

And what do you think right now you is your most neglected repair category you are seeing coming in to your shops?

I think it is tires. With folks that haven't seen a lot of snow this it winter yet, they are putting off whatever they can and weather had a lot to do with the fact that we didn't -- that tire sales were weak during the quarter.

Okay. And then I know you said tires have been strong in January so far. Are you seeing the strength in exhaust and brakes continue, as well?

Yes. Brakes, exhaust, shocks as a group are up consistent with that comp number that we gave you.

Okay. And then just I guess one last one here. Did you accelerate advertising at all in January?

No.

Great. Thanks a lot and good luck on Q4. John Van Heel: Thank you.

Thank you.

We will go next to John Evans, Edmunds White Partners.

Can you talk just a little bit about your thoughts relative to next year and maybe how we should be thinking about kind of the growth rates? I know what you have given in the past but we do have the extra week this year, so how does that ding you from a comparison standpoint?

For next year, obviously, we haven't given any guidance yet being I just stated I didn't know what tomorrow's sales were going to be. However, we are up against soft numbers for the first time after three years of advertising 6% comps. That works to our advantage. I continue to be worried about the consumer. I don't know what that is going bring.

I was surprised December was so bad. I was thrilled January was so good. We said certainly the 53rd week should be backed out so you got to account for $0.05 of additional earnings. And then beyond that, I would like to see a little bit more before I put my toe in the water. What I am very confident about is that over a five-year period, we will average top line growth of 15% and bottom line growth of 20%.

How that shakes out in any given year, it's tough enough for me talking about Q4 much less getting into next year. We're encouraged about January just like we were not thrilled with the six months prior to January.

Got it. And then just from a comparison standpoint, though, you mentioned the $0.05 that you should back that out. Should we back out the leases, too, which was about $0.03? So it's at an $0.08, kind of, to give our base number to think about the growth? Is that the way we should think about it?

Certainly, I wouldn't plan on Long Island occurring again. That being said, remember, the acquisitions we have done are accretive already. They will only get more accretive and you've got to go back a couple of years because those are going to continue to be layered into the model.

Okay. And then the last question I have for you is just relative to the SG&A. So if you put the lease back in and just add that back in, you did a great job on SG&A. It would have been up only about 1.6% year-over-year. I guess how much leverage is there in the SG&A then if you are able to start growing comp? I mean, can you keepSG&A dollars basically flat next year or will you have to grow SG&A dollars from this year?

SG&A dollars will grow every year whether it's inflation-based or -- remember, a lot of our growth is tied to acquisitions, so we're layering in a lot more employees. We certainly would expect to leverage the SG&A percentage, and at some point, we should be able to get gross margin moving in the right direction again whether it is direct imports or some less pressure on some of the cost side. But in general, over the last five years, we've gotten benefits on gross margin and SG&A. There is nothing that we would see SG&A as a percentage of sales going up.

And this is John. When we talked about adding more employees on the SG&A line because of acquisitions, we're talking primarily about the store level guys. We get a lot of leverage here off of all of our HQ operations.

Right, because those guys are basically in your COGS, is that right or no?

The mechanics are in the cost of sales and the store management and sales staff is in SG&A.

Okay, great. Thanks for your time.

Thank you.

Thank you.

And that does conclude our question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks.

Great. Thank you. Well, in general, challenging year but, once again, proving out the resiliency of our business model, including growing through acquisitions. We have great industry trends. Most importantly, the continued rise in the average age of vehicles, counterbalanced by an uncertain economic environment, and an unpredictable consumer.

We are looking forward to gaining greater visibility in the coming months and rooting for more snow. So we are and will continue to work hard to reward our shareholders and want to thank you for joining us on today's call. Thanks.

Once again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.