Monro Inc (MNRO) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Monro Muffler Brake First Quarter 2013 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. Jennifer Milan of FTI Consulting. Please go ahead.

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

The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material.

Joining us for this morning's call from management are Rob Gross, Chairman and Chief Executive Officer; John Van Heel, President; and Cathy D'Amico, Chief Financial Officer. With these formalities out of the way, I'd like to turn the call over to Rob Gross. Rob, you may begin.

Thanks, Jen. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our first quarter fiscal 2013 performance. After reviewing our quarterly performance, I'll provide you with an update on our business as well as our outlook for the remainder of the fiscal year.

I'll also briefly discuss our long-planned management transition, which will take effect October 1. I'll then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results.

As we had anticipated, the first quarter remained challenging in terms of both top line and margins. However, we were able to somewhat navigate the headwinds we have seen in our business and deliver EPS within our anticipated range.

That said, we are not happy with our results. Sales for the first quarter were in line with the low end of our expected range but remained somewhat weaker than we had hoped. While gas prices have moderated somewhat recently, and weather is more favorable than in Q4, the macro environment seems to be weighing more heavily on consumer sentiment. Customers are deferring, trading down, and prioritizing higher-cost maintenance and repair purchases, which they have been able to defer longer due to the mild winter this past year.

Our position as a low-cost trusted service provider remains strong and we are maintaining share, as evidenced by the fact that comparable oil changes were up 2.5% year over year.

Significantly, customers are coming in; they're just not buying as much when it comes to maintenance and repair. This is further supported by our first decline in average ticket since 2003.

While weather was a negative factor for us in Q3 and Q4 last year, with a lingering effect on Q1, the good news is that it should become a positive for us in the back half of fiscal 2013.

Our recent acquisitions continue to out-perform, and the favorable industry trends and our business model advantages haven't changed. Our strategy, which we believe is the right one, also hasn't changed. We continue to execute on the initiatives that delivered 11 straight years of positive comp sales and 20% average EPS growth. We have accelerated acquisitions as we said we would in times of slow organic growth.

We are not happy with the start of fiscal 2013, and we expect near-term results to remain choppy. But people need what we sell and can only defer purchases of our products and services for so long. I believe that sales will improve as we move through fiscal 2013 and customers turn to us for these deferred purchases.

Now, turning to our performance. Let me begin by providing a review of our first quarter results. For the quarter, our comparable store sales declined 7.2%, versus a 2.3% increase last year. Comparable store sales for the quarter came in at the low end of our estimated range. We believe this is a function of the tough economic environment taking a greater toll on consumers and the lingering effect of this year's mild winter weather.

In total, we increased sales by 2.6% to $169.2 million, compared with $164.8 million in the prior-year first quarter due to contribution from our acquisitions. Notably, our fiscal 2012 acquisitions continue to perform very well and contributed to our top and bottom-line performance as we expected.

Over the last several quarters, we have discussed actions that we are taking to combat gross margin pressure 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 cost increases on tires and oil.

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 are closely monitoring pricing to our customer and implementing increases where possible, despite the fact that many of our competitors have not passed along similar increases. Although we raised tire prices in January and March, our gross margin remained under pressure, which was exacerbated by the loss of leverage from weak comparable store sales.

In total, gross margins decreased 270 basis points during the first quarter to 40.3%, versus 43% in the prior year. However, price increases have helped maintain our average gross profit dollars collected per tire.

As we've said in the past, we are focused on leveraging our business model to create sustainable long-term value by capitalizing on our size and the strength of our Company-operated store model.

In this regard, we have been working to increase our direct international sourcing, primarily from China. As we've discussed on our last call, we achieved our goal for a run rate of approximately 30% of our total product cost less oil and out-buys by the end of fiscal 2012.

We continue to see an opportunity to at least partially offset future gross margin pressure, particularly on tires, by further increasing our direct international sourcing to a run rate of about 40% over the next 12 to 18 months. At the end of the first quarter, we were at a run rate of 34% direct sourcing and we continue to evaluate opportunities to move that percentage higher.

At the same time, we're carefully managing our costs, and our recent acquisitions will continue to benefit our operating margin. That said, our ability to leverage operating costs was hampered in the first quarter by the loss of leverage due to weak comparable-store sales. For the first quarter, operating income decreased 24.7% to $19.7 million, which translates to an operating margin of 11.6%, compared with 15.9% in the first quarter of last year.

Net income for the first quarter decreased 24.6% to $11.6 million, from $15.4 million last year. Our earnings per share declined 25% to $0.36 on a base of 32.2 million shares outstanding, from $0.48 in the prior-year quarter.

In terms of sales category trends during the quarter, nearly all were weak, with the exception of comp oil changes, which is reflective of consumers that deferring and prioritizing higher-cost automotive maintenance and repair purchases.

For the quarter, comp oil changes were up 2.5% year over year.

Comparable brake sales, on the other hand, which had held up reasonably well throughout fiscal 2012, reversed a positive trend and were down 11% in the first quarter.

Comparable exhaust sales, which were down 8% in the fourth quarter after being up 12% in the third quarter of fiscal 2012 and up an average of 4% over the past two years, also weakened further and were down 15% in the first quarter.

Comp sales for tires were down 6% in the first quarter. At 39% of our sales mix, we have a significantly higher mix of tires than our competitors, with the exception of the independent tire retailers we are looking to acquire. Tires are a big-ticket item that we believe the last 18 months of price increases has resulted in increased deferrals.

Given that tires are a safety issue and it means that consumers can only defer for so long, the ultimate reversal of this trend should positively impact sales in the second half of fiscal 2013.

We continue 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. We believe that these initiatives continue to create value for customers and build trust and are particularly important during tough economic times like these.

Turning now to our growth strategy, we remain focused on increasing our market share through same-store sales growth; opening additional new stores in existing markets; and acquiring competitors at attractive valuations. We expect organic sales to be weak for fiscal 2013 as a result of continued pressure on consumers and our poor start to the year.

However, we believe that we are well positioned to take advantage of additional acquisitions at attractive valuations and have been accelerating these acquisitions so far in fiscal 2013, as has been our strategy during periods of slow organic growth. Importantly, these acquisitions will further expand our market share and our operating leverage, positioning Monro for continued profitable growth. We have and will continue to pursue these transactions in a very disciplined manner.

Now, turning to our more successful recent pursuits -- as discussed on our last call, we have been very pleased with the results that we have seen thus far from the acquisitions we completed in fiscal 2012, which added $45 million in annualized sales. Both sales and earnings from these stores continue to be better than expected. Vespia was slightly accretive in fiscal 2012, and the Terry's Tire Town stores remain on track to be slightly accretive in the first 12 months of ownership, ahead of plan.

Fiscal 2013 has also started off as a strong year for acquisition growth. As discussed on our last call, we completed the Kramer Tire acquisition in April 2012, which added $25 million in annualized sales. We also completed the acquisition of 18 retail stores from the Colony Tire Business on June 4, representing an additional $25 million in annualized sales and expanding our presence in North Carolina.

This represents a combined total of $50 million in incremental annualized sales so far in fiscal 2013, or 7% acquisition growth.

With respect to the signed letter of intent that we mentioned on our last call for a similarly sized transaction that we'd hoped to closed in the second quarter, their results had subsequently deteriorated and we decided not to go forward with the deal, maintaining our discipline.

However, we executed a definitive agreement to acquire 17 service stores from Tuffy Associates in Milwaukee, Wisconsin, and South Carolina that generate approximately $9 million in annualized sales. This new deal is scheduled to close in August.

We continue to see more opportunities for attractive deals than we have in the past several years due to the increasingly difficult operating environment, cost pressures, and growing seller concern over potential future income and capital gains tax increases. In fact, we presently have eight non-disclosure agreements signed, which is one more than we had in the pipeline last quarter, even after having completed one of the acquisitions.

We have a strong pipeline of attractive deals lined up and plenty of liquidity, combined with strong cash flow, to complete these deals. We remain very disciplined on the prices we will pay, and believe that this extremely favorable acquisition environment will continue throughout fiscal 2014.

I'd now like to briefly discuss our outlook on the environment and industry prospects. While gas prices have moderated recently and the weather has been more favorable, high unemployment and the turbulent macro environment continue to negatively impact consumer sentiment and purchasing behavior, which affects Monro as a service and retail business as well as the whole industry.

However, as we have always said, the good new is that our services and products are a need, not a want, purchase. Significantly, the US market had nine consecutive years of averaging approximately 17 million new car sales through 2007, which have grown the number of vehicles in our sweet spot of four to 12 years old to an all-time high. Plus, in our view the 14.5 million in new car sales projected for calendar 2012 will not dent the growing age of the average vehicle in the US fleet, now at a record 10.8 years, which will drive our business forward.

In short, we believe the long-term trends for our business are still in place and remain very favorable, notwithstanding occasional short-term choppiness like what we are experiencing.

Let me now turn to our outlook for fiscal 2013. As we've discussed, trends in the second quarter of fiscal '13 have remained lousy. July comp sales are down 6, while oil change traffic is flat. Our key sales categories remain down, which indicates that consumers are still visiting us for basic low-cost maintenance but deferring larger purchases. Again, because consumers eventually have to get these needs addressed, and with more normalized winter weather this year, we would expect our traffic and sales trends to improve significantly in the back half of the year.

For the second quarter over all, we expect comparable-store sales to decline in the range of 3% to 6%. We expect second quarter earnings per share to be in the range of $0.35 to $0.40, which compares to $0.47 for the second quarter of fiscal 2012.

For the full fiscal year, taking into account sales contributions from our two first quarter and one pending acquisition, we now expect total sales to be in the range of $715 million to $735 million and comparable-store sales to be in the range of flat to negative 2%, adjusted for days. This sales range does not include any potential acquisitions in the second half.

Based on these assumptions, we now estimate fiscal 2013 EPS of $1.50 to $1.65, which compares to the EPS of $1.69 in fiscal 2012, or EPS of $1.65 excluding the estimated $0.07 benefit from the 53rd week and the $0.03 in due diligence charges related to the Midas deal.

While we do not have visibility on when the state of the consumer might ultimately improve, there are several positives that will impact the second half of fiscal 2013, including moderating gas prices and much more favorable weather comparisons. Additionally, we will be up against flat comp-store sales over this period and we expect that customers will turn to us for repairs or replacements that can no longer be deferred.

Given these factors, we expect that comps will improve meaningfully in the second half of fiscal 2013. We expect operating expense margins will flatten due to improved sales and increased direct imports of parts and tires throughout the year. Importantly, our last tire cost increases were April 1. And with tire import costs declining, we are seeing higher rebates and declining costs from some manufactures -- about time.

Additionally, as the Chinese tariff comes off in October, we and the consumer should be the beneficiaries.

We continue to carefully manage costs but expect that weak comparable-store sales in the first half of fiscal 2013, and the fact that fiscal 2012 was a 53-week year, will offset SG&A leverage provided by our acquisitions and tight cost controls.

With that said, we believe that we have not seen a better environment for accelerated growth through accretive acquisitions than we currently see. While trends remain challenging and we are somewhat more cautious near term as a result of the previously mentioned macro economic issues, our long-term confidence in our business and outlook for the industry remains very positive. There are still 240 million cars on the road in the US that are getting older. Consumers still can't work on these vehicles. The number of overall service bays is decreasing. And independent tire dealers that we are looking to acquire are finding it increasingly difficult to compete and worrying more about taxes.

Importantly, we remain confident that fiscal 2013 will be a year like we saw back in fiscal 2008, where weaker sales trends, economic issues, and higher costs set the stage for accelerated acquisitions in the next few years. This will allow us to leverage our business model and further improve our position as a low-cost and trusted service provider to continue to grow the business and enhance shareholder returns.

Our five-year plan continues to call for, on average, 15% annual top-line growth, 10% acquisition growth, 3% to 4% comps, and 1% to 2% greenfield stores. The acquisition growth will be slightly accretive Year One, be $0.08 to $0.10 accretive Year Two, and add an additional $0.08 to $0.10 Year Three. Over the period, that should improve our operating margins approximately 300 basis points and deliver an average of 20% bottom-line growth.

Now I'd like to speak briefly about the change in leadership with the upcoming promotion of John Van Heel to the position of Chief Executive Officer. Our Monro leadership team, the Board, John and I, and the other top executives all take a long-term view of our business. We're committed to excellence in management and we are also committed to a seamless leadership transition at the top and throughout the organization.

As most of you probably know, I became CEO in 1999 and have served as Chairman since 2007. A little over four years ago, we promoted John to President in an effort to strengthen our team. And he certainly has done that and exceeded our expectations. And you can see that in our results.

We also promoted John with plans for my potential successor in mind. We've been planning and preparing for this change for a long time. We have total confidence in John's ability to run the business. This transition represents a transfer of titles and a shift in ultimate accountability, but John and I both share the same set of values. We are passionate about our business, we are passionate about our mission, and we see eye to eye on all of our basic business strategies. You will see continued execution on the strategies that have built the Monro business so successfully over the years.

As for what I will be doing, I'm going to stick around. I will continue to serve the Company though I will be spending much less time in the day-to-day operations of the business. I'm going to work with John on high-level strategy issues and will continue to focus a large amount of my time on acquisitions and investor relations. I will continue to be John's No. One supporter and No. One cheerleader.

We look forward to the future and continuing our work to further strengthen and leverage Monro's position as a low-cost trusted service provider to capitalize the opportunities we see in the marketplace. I am proud to be a part of this terrific organization for 13 years and counting, and believe Monro has never been better positioned for long-term profitable growth.

Before I turn the call over to Cathy, I would also like to thank each of our employees, who continue to work hard to provide consistently superior service to our loyal customers. Monro's brand strength is a direct result of this consistent execution, which is an integral part of Monro's compelling customer value proposition.

With that, I'd 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 stated, for the quarter sales increased 2.6%.

New stores, which we define as stores that opened after March 26, 2011, added $17.7 million. Partially offsetting these increases was a decrease in sales from closed stores of approximately $1.8 million, and comparable-store sales decreased 7.2%.

There were 90 selling days in both the current and prior-year first quarters, At June 30, 2012, the Company had 836 Company-operated stores, as compared with 802 stores on June 25, 2011. During the quarter ended June 2012, the Company added 38 locations, including 20 Kramer and 18 Colony stores, and closed five stores.

Gross profit for the quarter ended June 30, 2012, was $68.1 million, or 40.3% of sales, as compared with $70.8 million, or 43% of sales, for the quarter ended June 2011. The decrease in gross profit for the quarter ended June 2012 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 quarter. The Company experienced significant increases in oil and tire costs as compared to the same quarter of the prior year, and for competitive reasons we did not increase selling prices to the degree that would have preserved gross margin percentages at prior-year levels.

Additionally, there was a shift in mix to the lower-margin service and tires categories, the latter due in part to the acquisition of more tire stores.

Distribution and occupancy costs, which are part of costs of sales, increased as a percentage of sales from the prior year as the Company, with lower comparable-store sales, lost leverage on these largely fixed costs.

Labor costs also increased slightly as a percentage of sales as compared to the prior-year quarter.

Operating expenses for the quarter ended June 2012 increased $3.8 million and were $48.4 million, or 28.6% of sales, as compared with $44.7 million, or 27.1% of sales, for the prior-year quarter.

Over $4.1 million of the increase in operating expenses is directly attributable to increased expenses such as manager pay, advertising, and supplies related to the fiscal 2013 acquisition stores, and a full quarter of expenses for the fiscal 2012 acquisition stores.

Other drivers of the dollar increase in operating expenses were approximately $0.6 million in due diligence costs related to the Colony, Kramer, and Tuffy acquisitions.

Before these expenses, on a comparable-store basis, direct store expenses decreased $1 million, as compared to the prior year, and store support costs decreased by approximately $0.2 million, demonstrating that the Company experienced some leverage in this line to focus cost control.

Operating income for the quarter ended June 2012 of $19.7 million decreased by 24.7% as compared to operating income of approximately $26.1 million for the quarter ended June 2011. It decreased also as a percentage of sales, from 15.9% to 11.6%.

While net interest expense for the quarter ended June 2012 was relatively flat as a percentage of sales as compared to the same period last year, the weighted average debt outstanding for the first quarter of fiscal 2012 (sic) increased by approximately $31 million as compared to the first quarter of last year, primarily related to an increase in debt outstanding under the Company's revolving credit facility agreement related to the Kramer and Colony acquisitions.

Largely offsetting this increase was a decrease in the weighted average interest rate of approximately 230 basis points from the prior year due to a shift to a larger percentage of debt, that being revolver versus capital leases, at a lower rate.

The effective tax rate for the quarter ended June 2012 and June 2011 was 36.9% and 38.5%, respectively, of pre-tax income.

Net income for the current quarter of $11.6 million decreased 24.6% from net income for the quarter ended June 2011.

Earnings per share on a diluted basis of $0.36 decreased 25% as compared to last year's $0.48.

Moving on to the balance sheet, our balance sheet remains strong. Our current ratio at 1.2 to 1 is comparable to last year's first quarter and year end. For the quarter ended June 2012, we generated approximately $19 million of cash flow from operating activities and borrowed about $30 million of debt, including the financing of the purchase of Kramer Tire in April 2012, which added 20 stores and $25 million of sales, as well as the purchase of Colony Tire in June 2012, which added 18 stores and $25 million of annualized sales.

As a result of the debt borrowings, our debt-to-capital ratio, including capital leases, increased to 21% from 14% at March 2012.

As part of the Kramer acquisition, two heavy truck-trailer repair stores, two wholesale operations, and a retread facility were acquired and subsequently sold during the quarter, for total proceeds of approximately $3 million, effectively lowering our investment in the Kramer acquisition.

At the end of the first quarter, long-term debt consisted of $43 million of outstanding revolver debt and $49 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 currently are borrowing at LIBOR plus 100 basis points. This agreement permits to us operate our business, including doing additional acquisitions this year, without bank approval as long as we are compliant with debt covenants.

Those terms, as well as our current availability of $110 million, which doesn't include the accordion, give us a lot of ability and flexibility to get acquisitions like Kramer, Colony, and Tuffy, done quickly. We are fully compliant with all of our debt covenants and have plenty of room under our financial covenants to do these and other acquisitions without any problems.

Inventory is up about $8 million from March 2012, due primarily to the addition of the FY '13 acquired stores, which accounted for approximately $4 million of the increase, as well as the continued expansion of inventory to reduce outside purchases.

Inventory related to import products, such as tires and filters, added approximately $3 million as the Company added inventory to enhance product assortment, ensure adequate (inaudible) supply, in light of longer lead times for foreign purchases, and to help reduce margin pressures. Additionally, inventory levels have increased due to cost increases.

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

Thank you very much. (Operator Instructions) Brett Jordan, BB&T Capital Markets.

Good morning. A couple of quick questions here. And one of them -- starting out with tires -- comp was down 6. Could you give us a feeling for what the unit comp was down for tires?

Yes, the unit was down low double digits.

Okay. And I guess, just in alignments, whether or not -- are you seeing a softening in alignment correlation to tires as consumers are pulling back on spending?

Yes, there's absolutely a correlation between the lower tire units and the consumer pulling back. So you have alignment units down similarly.

Okay. And I guess on tires you talk about lower-margin tires impacted, I guess, from trade-down as well as what might be an ability to pass through price. Could you give us a feeling for sort of what we look at year over year on the quarter for margin, tire margin, deterioration as well as what might have been from a trade-down to lower price point as well as what might be inability to pass through?

Yes, I think the -- it's down a little bit more than our consolidated gross margin was down. So when you look at -- we were down 270 basis points -- a little bit higher than that. And that really is due to the cost pressure when -- we typically have better margins on the lower-end tires, better gross margin percentages on those. So it's basically due to the cost pressure.

Okay. And I guess as you look at that, and it looks like Tuffy, just from an average unit volume, is more weighted to service than it is to tires. Is that something that your pipeline is focusing more towards service than tires right now?

No, it's not. The Tuffy stores, in our view, has value similar to the Monro stores. On our side they have a split of sales that's also similar to our Monro stores, although our mix of sales for tires in our Monro stores is a bit higher there. But it's not a shift in what we're looking at in terms of where the opportunities are. This was just an opportunity to get in a contiguous market and to fill in one of our other markets, and we would expect that, with our ability to put inventory into those services stores, those service-based stores, that we'll be able to get a great return out of them.

Okay. And then, I guess on that pipeline on acquisitions, it was seven NDAs in hand. Is that primarily weighted to tire operations in that pipeline?

It is eight; and it is -- yes, it is weighted heavily to tires, as it has been.

Okay, great. I'll get back in line with another question.

Rick Nelson, Stephens.

Thank you. Can I -- what gives you confidence the deferral and the trading-down is sort of going to run its course by the back half of this year? I understand the weather impacts so that's going to drive more store traffic. But is it anything beyond that that gives you the comfort?

Well, certainly we talked that the margins are going to get better. Certainly there is a good chance, or 50-50 chance, that the tariff's going to come off, which will make the price increase on tires much more manageable and there won't be sticker shock for the consumers.

But we are up against flat comps last year with no winter, and tires are a safety issue. If you ask me when exhaust is going to rebound, I'm going to have a much harder problem because that's a quality of ride issue. But with tires and brakes, they wear out. And the rubber that are currently on people's vehicles have never been as worse shape coming off last winter, and one would think we were going to have to get it fixed irrespective of what's going on with the consumer.

That all being said, I don't have a crystal ball. But certainly I find it hard to believe that after what we went through last year, with some of the price and sticker shock going away due to tire manufacturers starting to reduce their prices as well as some of the other things going on, how it can't be better than last year.

Got you. And (inaudible) on the eight and the As (ph), can you give us some feel for the number of stores or revenues that we're talking about?

Yes, the number of stores is between five and 40 stores. The best way I can describe the volume there is it would take care of a couple years of our 10% annual growth, at least. So it's a healthy pipeline. Like we said, I've never seen a pipeline better than this right now and there's a lot of flexibility on the seller's side because they're having the same tough time that we are with return market.

Got you. And the low double-digit unit decline for tires in the quarter -- how do you think that compared to the industry over that same period?

I think we're slightly worse than the industry because we've maintained the margin. And we think that in our market, where customers are pulling back anyway, we're not going to try to force volume because we just don't think it's there. We're going to maintain some discipline on the price side and keep people coming through the door with driving traffic on oil changes, like we are.

Okay. And the margin pressures that we did see in the quarter -- I understand the mix toward the lower-margin products. But if you look at gross profits in your major segment, the margins there, aside from tires, which was discussed, how are they holding up year over year?

Everything's holding up fine outside of tires. And remember, when we report a 270 basis point decline in gross margin, that also incorporates a minus 7 comp, and we have distribution and occupancy as a part of our gross margin. And mechanics' labor as a part of our gross margin.

So it is not all cost of goods; a lot of the leverage we lost is not just straight cost of goods, which -- specifically to answer your question, things like exhaust, things like brakes, we did not see margin deterioration. Oil changes have been our traffic driver for a while; slight margin hit there. But in general, the lion's share, as John said, of the margin deterioration is sitting in tire costs, which will hopefully reverse in the second half.

Yes. And the China sourcing is going to help there? What sort of margin advantage are you getting with the direct sourcing?

On the parts side it's greater than 20% -- 20% to as much as 40%. And on the tire side, it's about 10% to 15% of an advantage there. And again, during the first quarter we rolled out low-cost radials, the entry-level radials, to all of our service stores; they were only in half of our service stores. That's about 250 stores. Again, those stores are selling about two tires a day.

And in the second quarter, we are bringing in that second line of import tires that we've referred to that's part of the increase in the direct sourcing that is meant to be the step-up from that low-cost, that turn entry-level tire. And we expect that to be a solid help to our margin.

Okay. Can I just sneak one more in. Comps by month -- April, May, and June -- if you have those.

Adjusted for days, down four in April, down 10 in May, down 6.8 in June.

Thanks a lot, and good luck.

Thank you.

Scott Stember, Sidoti and Company.

Good morning.

Hey, Scott.

Could you maybe talk about the raw material pricing, Rob? You alluded to the fact that you expect your in-book (ph) costs to start going down in the back half of the year. Could you just maybe dig into that a little bit more? When we could start seeing that a little bit closer?

Tire costs are going to go down the second half of the year. Oil costs are going to go down the second half of the year. We said the second half and we said it for six months. Q1 and Q2, gross margin is going to be under a lot of pressure. Q3 and Q4, we start anniversarying the higher prices, which are now starting to recede. So in Q3 and Q4, they will make their way through the system.

As far as any other categories, we're not seeing any cost pressure, so that should remain the same.

And you said that you're starting to see a little bit of an abatement right now. Should you see a little bit of benefit in the second quarter, then, on your margin?

No. By the time -- we'll sell through the higher-price inventory. Again, our estimate for Q2 incorporates no benefit till Q3 on the cost side.

Okay. And moving over to Tuffy, now that you've moved far over into the Midwest, how is Tuffy getting their product right now, and will you be supplying product there through Rochester?

Yes, we will be supplying product there through Rochester. And right now they primarily source it from the Napa's Auto Zones and (inaudible) of the world.

Got you. That's all I have for right now; thank you.

Thank you.

(Operator Instructions) Peter Keith, Piper Jaffray.

Hey, good morning, everyone.

Hey, Pete.

Question on -- the various players in the industry, some seem to be still getting impacted by the warm weather that we had this past year, and I imagine that plays to you guys as well. I'm curious, though, if there's been any noticeable regional disparity. I know you're mostly in the Northeast but you do dip out to Missouri and the Mid-Atlantic and these states that don't have as severe winter. Is there any change, or differences, in performance between some of those different geographic places?

No real differences at all. The only slight impact was when we had the hurricanes roll through the Mid-Atlantic, those numbers dipped; we lost about $500,000 in sales with closed stores and power outages. But we've been consistently crappy throughout all our areas.

Okay. What about with the product mix? With the number of things that you guys would either sell or work on, it seems like everything across the board is pretty weak. Are there certain categories that should be more impacted by weather, wear and tear on a cold or snowy winter that should be weak and maybe others that are sort of surprisingly weak from the economy?

You mentioned cold or snowy winters. Obviously, tires is the key for the winter season. When it gets hot, you're talking about batteries, electrical, AC -- air conditioning -- those kind of things.

Okay. And even though we've had a little bit of heat here, you're still not seeing much improvement?

Well, air conditioners and batteries are obviously holding up better than anything else. But the bottom line is, we're 20% brakes, we're 40% tires. Those two areas are safety issues. Brakes held up last year so we're encouraged that, on the safety front, people are going to have to get this stuff done. Some of the other repairs, like shocks and exhaust, are more deferrable.

Okay. On the second quarter comp guidance, I get the kind of sweeps (ph) that are similar to Q1. So you're running at the low end of the range here for the first month. Is there something with compares for the upcoming two months that are a lot easier that give you some confidence that you can accelerate here in the coming weeks?

The whole quarter last year was weak. Frankly, I just can't believe we're going to continue to run record crummy numbers. So I might be wrong; I was obviously wrong in Q1, thinking that things would improve and they didn't; they stayed where they were. And certainly can't see it getting worse than what we did in July, but I was wrong before. My best estimate is that it's going to get slightly better in August and September, still not great, and significantly better in the second half of the year.

All right; well, I'm there with you. Last question, maybe for Cathy specifically -- could you just let us know what you're factoring in for interest expense with the guidance?

Yes. For the year, we should be somewhere in the $4 million to $5 million range for interest expense. Now, if we do a lot more acquisitions that could go up, but barring (inaudible). A lot of that is also can't believe (ph) business as well.

Yes, okay. Very good. Thanks a lot and good luck with the coming quarter.

Thank you.

Bret Jordan, BB&T Capital Markets.

Hey, just on sort of the visibility on lower-input costs into the second half. You did renegotiate your oil contract with Ashland. On the tire side, are you seeing manufacturers beginning to offer you lower price-point product or lower prices if you commit to some volume on the second half that gives you, I guess, the confidence in lower input?

With regard to the oil contract, we are in the process of negotiating not only with Valvoline but with other key players. We're bidding that contract. I would expect us to, at a minimum, be buying oil for a dollar less year over year in the second half of the year. And we're looking to do better than that through that process.

On the tire side, we are absolutely seeing greater rebates on specific lines are not quite as much tied to annual volumes. So it takes different forms with different vendors, but through those kind of programs we're absolutely seeing softening in the tire cost side of things.

Okay. And I guess if you look at that -- and you've taken a lot of price last year to help maintain the margin that seems to have cost a little market share here -- do you have a feeling for what your delta is versus competition on sort of comparable products? Regionally, if you were to look at comparable gears (ph) on the comparable products, where you're off on price?

Yes, we typically would be about 5% higher, somewhere in that range. If we get closer to double digits, we get really sensitive to that and make adjustments back down. We continuously make adjustments back and forth on that. We talk about the increases we put through periodically throughout the year, but we're always adjusting back and forth. Globally, we haven't taken that down significantly in the last seven months. (inaudible) adjusted within the lines.

All right. And did you say, on the quarter, what your traffic comp was? And I know on July you said your oil traffic was flat. Did you give a number for what July traffic comp is?

No. The traffic comp is going to run -- oil changes are a traffic driver.

Okay. What was traffic comp in the quarter, I guess, if total comp was down 7 and a fraction

2.5 is the oil change.

Okay. How about over all?

I don't have that.

Okay, thanks.

Thanks.

And Mr. Gross, we have no other questions in the queue at the moment. I'd like to turn the call back over to you for any additional or closing remarks.

Just want to thank everybody for their time and, unfortunately, their patience. We are doing everything we can. We have done nothing different than we have in the past and we're going to work hard to get back to the kind of returns and earnings that you're accustomed to, and certainly we're accustomed to, over the last number of years.

We will go through this choppy period and come out on the other side with a lot more store count, a lot better store density, a lot better operating margins, and a lot bigger, more profitable company. Appreciate you guys being along for the ride and we'll be working hard and certainly appreciate all the efforts from all of our employees that are working hard every day.

So thanks a lot, and have a great day. Bye.

Ladies and gentlemen, that does conclude today's conference. Thank you, everyone, for joining us.