Monro Inc (MNRO) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake second-quarter 2013 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions).

As a reminder, ladies and gentlemen, this conference is being recorded and may not be produced in whole or in part without permission from the Company. I would now like to turn the conference over to 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 demands 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 John Van Heel, President and Chief Executive Officer; Cathy D'Amico, Chief Financial Officer, and Rob Gross, Executive Chairman. With these formalities out of the way, I would like to turn the call over to John Van Heel. John, 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 second-quarter fiscal 2013 performance. After some brief opening remarks, I will review our quarterly performance, then provide you with an update on our business, as well as our outlook for the remainder of the fiscal year. I will then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results.

Before I review our second-quarter performance, I would first like to speak briefly about our recent management succession. As many of you know, I assumed the role of Chief Executive Officer October 1, at which time Rob Gross assumed the role of Executive Chairman of the Board. On behalf of the Board and the entire Monro team, I'd like to thank Rob for his leadership, strategic vision, and dedication, which have been instrumental in Monro's success over the past 13 years.

I am very pleased to be in my new role and to continue to work together with Rob, our strong management team and our 5300 professional associates to further strengthen and leverage our position as a low-cost, trusted service provider. We continue to execute on our previous strategy and the initiatives that have delivered 11 straight years of positive comp sales and a 13-year average of 20% EPS growth because favorable industry trends in our competitive advantages haven't changed.

We have accelerated acquisitions as we said we would in times of slow organic growth. We are not pleased with the first half of fiscal 2013 and 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 the second half of fiscal 2013 as weather normalizes in our market and customers turn to us for these deferred purchases while operating margins will benefit from reduced material costs and improving results from recent acquisitions.

Now onto our second-quarter results. As we had anticipated, the second quarter remained challenging in terms of both top line and margins. However, we were able to somewhat navigate the headwinds we are seeing in our business and delivered EPS within our anticipated range. That's being said, we are not happy with our results. Comparable store sales for the second quarter declined 4.6% versus a 0.8% decrease last year, at the midpoint of our expected range, but weaker than we had hoped.

With high gas and food prices compounded by high unemployment, the macro environment continues to weigh on consumer purchasing behavior. Customers are deferring trading down and prioritizing higher-cost maintenance, repair and tire purchases more than in the past and have been able to defer these purchases longer due to the mild winter last year.

Our position as a low-cost trusted service provider remains strong and we are maintaining share as evidenced by the fact that comparable store (technical difficulty) oil changes were up 1% year-over-year and the decrease in our comp tire units sold this year is in line with RNA data for our Northeastern, Great Lakes and Mid-Atlantic geography.

Significantly, customers are coming into our stores, but are just not buying as much when it comes to maintenance, repair and tires. This is further evidenced by a year-to-date decline in our average ticket, which we haven't experienced since 2003.

For the second quarter, total sales increased by 1.9% to $176.5 million compared with $173.3 million in the prior-year second quarter due to contributions from recent acquisitions. Our fiscal 2012 and 2013 acquisitions contributed slightly to our bottom line for the quarter as we expected with contributions from the 2012 acquisitions partially offset by early transition costs from the 2013 acquisition.

Over the last several quarters, we have discussed actions that we are taking to combat the gross margin pressure that we are experiencing as a result of both the expected product mix shift where sales of lower-margin tires, which is associated with our recent tire store acquisition and significant cost increases on tires and oil. We continue to deleverage the increased purchasing power that has resulted from our recent acquisitions and shipping purchases between our broad base of vendors.

Our new oil pricing, which we were able to renegotiate as a result of adding stores through acquisition, took affect during the quarter and helped our gross margin. Further, this cost benefit will continue saving $1 million in oil costs in the second half of our fiscal year.

Although we have raised prices over the past year, our gross margin remained under pressure by rising tire costs in particular, which was exacerbated by the loss of leverage from weak comparable store sales. However, these price increases helped maintain flat average gross profit dollars collected per tire during the second quarter. In total, gross margin decreased 160 basis points during the second quarter to 39.6% versus 41.2% in the prior year.

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 strengths 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.

We achieved our goal for our run rate of approximately 30% of our total product cost less oil and (inaudible) at the end of fiscal 2012. Our run rate at the end of the second quarter was at a similar rate of 30%, which is lower than the 34% run rate at the end of the first quarter due to our decision to bring in fewer direct import tires during the quarter in advance of the September 2012 expiration of the tariff on tires imported from China.

However, we continue to see an opportunity to improve gross margin, particularly on tires, by further increasing our direct international sourcing to a run rate of about 40% over the next 12 months. At the same time, we are carefully managing our costs and our recent acquisitions will continue to benefit our operating margin. In this difficult sales environment, substantially all of the increase in total SG&A costs in the second quarter is attributable to acquired stores and for the year, non-acquisition SG&A costs are actually down.

With that said, we lost leverage on these operating costs in the second quarter due to weak comparable store sales. For the second quarter, operating income decreased 21.7% to $19.7 million, which translates to an operating margin of 11.2% compared with 14.5% in the second quarter of last year.

Net income for the second quarter decreased 23.6% to $11.5 million from $15.1 million last year. Our earnings per share declined 23.4% to $0.36 on a base of 32.2 million shares outstanding from $0.47 in the prior-year quarter.

In terms of sales category trends during the quarter, nearly all remained weak with the exception of comp oil changes because consumers still rely on Monro, but are deferring and prioritizing higher-cost tire and automotive maintenance and repair purchases.

For the quarter, comp oil changes were up 1% year-over-year. Comparable brake sales on the other hand, which have held up reasonably well throughout fiscal 2012, but reversed the positive trend in the first quarter of fiscal 2013, were down a similar 11% in the second quarter.

Comparable exhaust sales, which were up an average of 4% over the last two fiscal years, were down nearly 16% in the second quarter compared to a 15% decline in the first quarter. Comp sales for tires improved and were down 3% in the second quarter compared to down 6% in the first quarter. At 39% of our sales mix, we had 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 and we believe the significant price increases over the past two years have resulted in increased deferrals by customers. Given that tires are a safety issue and a need that consumers can only delay for so long, the ultimate reversal of this trend should positively impact sales in the second half of fiscal 2013, particularly as we get into winter.

We continue to promote traffic and sales in key categories through specific programs such as Oil Change & More in which our customers receive free tire rotations and brake inspections with a purchase of an oil change and Brakes Forever in which we guarantee brake pads for the life of the car and replace pads for only the cost of labor. We believe that these initiatives continue to create value for customers and build trust and are particularly important during tough economic times like these.

Further, we also recently improved our financing offers, allowing customers to finance larger purchases for 12 months with no interest. We believe these types of offers support sales in a tough economy, as well as gross margin.

Turning now to our growth strategy. We remain focused on increasing our marketshare through same-store sales growth, opening additional new stores in existing markets and acquiring competitors at attractive valuation. We expect full-year fiscal 2013 organic sales to be weak as a result of continued pressure on consumers and our poor results in the first half of the year.

However, we have been accelerating acquisitions so far in fiscal 2013 as opportunities have significantly increased during this tough operating environment. Importantly, these acquisitions will further expand our marketshare and our operating leverage positioning Monro for continued profitable growth. We have and will continue to pursue these acquisitions in a very disciplined manner.

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. (inaudible) was slightly accretive in fiscal 2012 and Terry's Tire Town stores were slightly accretive in the first 12 months of ownership, ahead of plan.

Fiscal 2013 is our strongest year ever for acquisition growth. We completed the Kramer Tires acquisition in April 2012, which added $25 million in annualized sales and gave us number one marketshare in the Norfolk/Tidewater, Virginia market. We completed the acquisition of 18 retail stores from the Colony Tire business in early June representing an additional $25 million in annualized sales and expanding our presence in North Carolina.

In August, we completed the acquisition of 17 service stores from Tuffy Associates representing an additional $9 million in annualized sales and expanding our footprint into Milwaukee, Wisconsin, a new contiguous market and filling in South Carolina. In October, we also completed the acquisition of five stores located in Rochester, New York from a former Midas franchisee for an additional $3 million in annualized sales. These completed acquisitions represent a combined total of $62 million or 9% in annualized sales growth.

More recently, we executed agreements to acquire multiple stores with annualized sales of at least $60 million. These deals are scheduled to close by December 31, 2012. We will provide additional details regarding these transactions in the near future after public announcements are made.

Combined with our completed deals and before any acquisitions that may close in our fourth quarter, total fiscal 2013 annualized acquisition sales growth will be at least $122 million or 18%. We continue to see more opportunities for attractive deals than we have in the past several years due to near-term seller concerns over the increasingly difficult operating environment, cost pressures and potential future income and capital gains tax increases.

Notwithstanding these near-term drivers, we believe the availability of suitable acquisition candidates at highly attractive valuations will continue into the coming year and beyond given that many of the independent tire dealers we are looking to acquire are getting older and nearing retirement age without an internal succession option.

Further, we expect that significantly rising costs related to Obamacare will act as another stimulus of seller interest during calendar 2013. Also, if the potential tax increases are pushed out another year, that will add to seller interest in calendar 2013. We presently have seven NDAs signed versus the eight that we had at the end of the first quarter even after having completed two of those deals since our last conference call.

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 with earnings multiples being the most important factor at 7 to 7.5 times EBITDA, which generally translates to about 80% of sales. Importantly, we have not seen any competition for the deals we are involved in, just the sellers' expectations.

Let me now turn to our outlook for fiscal 2013. While consumer sentiment has improved recently, we believe high gas prices and high gas and food prices, combined with high unemployment and a turbulent macro environment, continues to negatively impact consumer purchasing behavior, which affects Monro as a service and retail business, as well as the whole industry.

Trends in the third quarter of fiscal 2013 have remained more challenging than we had hoped. October comps are down 6% while oil change traffic is up 1%. Our chief sales categories remain down, which indicates that consumers are still visiting us for basic low-cost maintenance, but differing 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 during the quarter. Remember, November is a key month for tire sales.

For the third quarter overall, we expect comparable store sales to be in the range of down 3% to flat adjusted for days versus down 1% last year. We expect third-quarter earnings per share to be in the range of $0.35 to $0.40 versus $0.42 for the third quarter of fiscal 2012, which included a $0.03 gain from the sale of seven stores last year.

For the fiscal year, for the full fiscal year, taking into account sales contributions from our three first-half acquisitions, the acquisition we completed in October and the recently executed agreements to acquire additional stores this quarter, we now expect total sales to be in the range of $720 million to $735 million and comparable store sales to decline in the range of 3.5% to 2% adjusted for days.

Based on these assumptions, we now estimate full fiscal year 2013 EPS of $1.36 to $1.50, which compares to EPS of $1.69 in fiscal 2012 or EPS of $1.65 last year, 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 don't have visibility on when the state of the consumer may ultimately improve, there are several positives that will impact the second half of our fiscal 2013. We are up against flat comp store sales over this period and we expect that customers will turn to us for repair and replacements that can no longer be deferred. We expect operating margins will benefit from improved sales on new oil pricing, lower tire costs and increasing contribution from our fiscal 2012 and 2013 acquisitions.

Importantly, with lower tire industry unit shipments, declining input costs and the expiration of the Chinese tariff, tire tariff, we expect tire costs to decline through the rest of the year. With the expiration of the tariff at the end of September, costs on tires imported from China are already lower by 10% and we are seeing higher rebates and declining costs from other manufacturers. This will benefit our fourth quarter in particular and will be dependent upon what occurs with retail prices.

We are now -- we are and will continue directing our tire purchases where we see the most attractive costs and opportunities for gross profit. We will also continue to carefully manage SG&A costs, but expect that for the full year, weak comparable store sales in the first half of fiscal 2013 and the fact that fiscal 2012 was a 53-week year will offset these cost controls and the SG&A leverage provided by our acquisitions.

While trends remain challenging and we remain more cautious near term as a result of the previously mentioned macroeconomic issue, our long-term confidence in the business and outlook for our 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 are decreasing and the availability of suitable acquisition candidates is accelerating.

Further, our key competitive advantages are still in place, including our low-cost operations, superior customer service, convenience and our store density and [tire] store brand strategy. 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 several 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, improve operating margins and enhance shareholder return.

Before I wrap up, I would like to give my opinion on some of the concerns that we have been hearing in the marketplace recently in terms of how they affect our sector and especially Monro. One, some people are worried that new car sales increasing to 14 million or more could challenge our business. In our view, the 14 million to 14.5 million new car sales projected for calendar 2012 will not dent the growing age of the average vehicle in the US fleet, now a record 10.8 years. And that will drive our business going forward.

In particular, if more households have the ability to sign up to the 3,000 to 4,000 in annual new car payments, it is hard to see how the other 85% of the households won't be doing better and would likely reduce their deferrals on needed service and tires. Also, the US market had nine consecutive years of averaging approximately 17 million new cars sold through 2007, which has driven the number of vehicles in our sweet spot of 4 to 12 years to an all-time high.

Two, some are now concerned that while the average vehicle age -- that while the average vehicle age increasing from 9 to 10 years was a tailwind for the aftermarket and Monroe, a 10.8 or 11-year old vehicle is now too old for owners to repair and they will sign up for new car payments in this economy versus the $1000 it takes to maintain their vehicle.

We don't believe that new car sales are headed significantly higher anytime soon or that owners that hold their cars won't eventually get the needed oil changes, brakes and tires and other services that keep those older cars safe and running. In fact, vehicles age 13 years old and older are growing as a percentage of our traffic and as a group have a higher ticket average than younger vehicles.

Three, increasing competition from dealers and others is thought to be significantly hurting our business. The fewer remaining dealers have become more competitive over the past couple of years and we've probably given back the 1% comp sales gain we experienced during 2008 to 2011. However, we still hold important advantages over dealers, franchise operations and others in convenience, price, selection, customer service, store density and low-cost operations.

Also, I don't view buying parts or tires for significantly more than we do even if you get them later that day or the next day and selling them for less as a viable strategy. I believe that the existing trend of decreasing service days in operation and industry consolidation as demonstrated by our acquisition of five smaller players just this year will continue, both benefitting Monro moving forward.

Four, we hear concerns about decreasing average miles driven negatively impacting our business. This concern is often linked to the economy in general and gas prices in particular. These macro factors do negatively impact miles driven. However, the decrease in average miles driven estimated for 2012 is about 100 miles less than 2011, which is only a fraction of an oil change and in my view, a minor impact on our business. What is more important is that, one, those miles are being driven on older vehicles, which leads to more required repairs and two, the negative impact of higher gas prices on consumers.

Five, we hear concerns about our sales remaining weak while the economy and the consumer are showing some signs of improving. I am probably more pessimistic about the economy and the consumer than most other retailers and believe that the consumer is in worse shape than most. That is a real risk to our business and all retail companies for that matter. Some of this concern may be attributable to our concentration in the Northeast, Great Atlantic and Mid-Atlantic states, which have lagged the rest of the country this year in part due to the extremely mild winter last year. However, the weather the remainder of this year should be of benefit and further, the good news is that our services and products are a need, not a want purchase.

Importantly, this tough economic environment benefits our acquisition strategy. In short, we believe the long-term trends for our business are still in place and remain very favorable notwithstanding short-term choppiness like we are currently experiencing. Our five-year plan continues to call for, on average, 15% top-line annual growth, 10% from acquisition, 3% to 4% from comps and 1% to 2% from greenfield stores. The acquisition growth will be breakeven to slightly accretive year one, be $0.08 to $0.10 accretive year two and an additional $0.08 to $0.10 accretive year three. For 20% acquisition growth, just double those EPS benefits. Over the period, that should improve operating margins approximately 300 basis points and deliver an average of 20% bottom-line growth.

Before I turn the call over to Cathy, I would also like to thank each of our employees. Monro's brand strength is a direct result of their hard work and consistent execution. Providing superior customer service that is an integral part of Monro's compelling customer value proposition. With that, I would like to turn the call over to Cathy for a more detailed review of our financial results. Cathy.

Thanks, John. Good morning, everybody. As John said, sales for the quarter increased 1.9%. New stores, which we define as stores opened or acquired after March 26, 2011, added $15.4 million. Comparable store sales decreased 4.6% and there was a decrease in sales from closed stores of approximately $1.9 million.

Additionally, during the quarter ended September 2011, the Company completed the bulk sale of approximately $2.9 million of slower-moving inventory to a private company. There was no [barter] transaction in the quarter ended September 2012. And these numbers compare to a comparable store sales decrease of 0.8% in the second quarter of last year. There were 91 selling days in both the current and prior year's second quarters.

Year-to-date, sales increased $7.6 million and 2.2%. New stores contributed $33.1 million of the increase. Partially offsetting the sales increase was a comparable store sales decline of 5.9% and a decrease in sales from closed doors amounting to $3.6 million.

At September 29, 2012, the Company had 853 Company-operated stores as compared with 802 stores at September 24, 2011. During the quarter ended September 2012, the Company opened 18 stores, including 17 from the Tuffy acquisition and closed one store. Year-to-date, we have added 56 stores and closed six.

Gross profit for the quarter ended September 2012 was $69.9 million or 39.6% of sales as compared with $71.3 million or 41.2% of sales for the quarter ended September 2011. The decrease in gross profit for the quarter ended September 2012 as a percent of new sales is due to several factors. First, distribution and occupancy costs accounted for the majority of the increase as a percentage of sales over the prior year as the Company's lower overall comparable store sales lost leverage on these largely fixed costs.

Additionally, labor costs increases slightly as a percentage of sales as compared to the prior year. With lower sales, there was a small increase in subsidized wages because technicians are somewhat less productive. However, another measure of productivity which we've quoted in the past is sales per man hour and that was flat as compared with the same quarter of last year.

Total material costs, including outside purchases, were virtually flat as a percentage of sales as compared to the prior year. The Company experienced increases in tire costs as compared to the same quarter of last year and for competitive reasons did not increase selling prices to the degree that would have preserved gross margin percentages at both prior-year levels.

Additionally, there was a shift in mix to the lower margin service and tire category, the ladder due primarily to the acquisition of more tire stores. These increases were largely offset by a decrease in oil costs as compared to the prior year helped in part by the Company's newly negotiated oil pricing.

Gross profit for the six months ended September 2012 was $138 million or 39.9% of sales as compared with $142.1 million, or 42% of sales for the six months ended September, 2011. The year-to-date decrease in gross profit as a percent of sales is largely due to increased distribution and occupancy costs and labor costs due to a loss of leverage on lower comparable store sales.

Operating expenses for the quarter ended September 2012 increased $4 million and were $50.1 million in total, or 28.4% of sales as compared to $46.1 million, or 26.6% of sales for the quarter ended September 2011. Increased operating expenses related to the fiscal year '12 and '13 acquired stores accounted for $3.9 million of the overall increase.

For the six months ended September 2012, operating expenses increased by $7.8 million to $98.5 million from the comparable period of the prior year and were 28.5% of sales as compared to 26.9% of sales last year. Increased operating expenses related again to the fiscal 2012 and 2013 acquired stores totaled $8.6 million. This demonstrates that the Company experienced leverage in this line on a comparable store basis through focused cost control and [paid] plans, which appropriately adjust for performance.

Operating income for the quarter ended September 2012 of $19.7 million decreased by 21.7% as compared to operating income of approximately $25.2 million for the prior-year quarter and decreased as a percentage of sales from 14.5% to 11.2%. Operating income for the six months ended September 2012 of approximately $39.4 million decreased by 23.2% as compared to the same period of last year and were $51.3 million last year. This decrease as a percentage of sales went from 15.2% last year to 11.4% this year.

Interest expense for the quarter ended September 2012 remained flat as compared to the same period in the prior year and was 0.8% as a percentage of sales for both periods. The weighted average debt outstanding for the second quarter of fiscal 2013 increased by approximately $31 million as compared to the second quarter of last year, primarily related to borrowings made on the Company's revolving credit facility for the purchase of our recent acquisition. This was offset by a decrease in the weighted average interest rate of approximately 260 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.

For the six months ended September, 2012, results were similar. Interest expense increased by $0.2 million and was virtually flat as a percentage of sales as compared to the prior year. Weighted average debt increased by approximately $30 million and the weighted average interest rate decreased by approximately 230 basis points. The effective tax rate for the quarter ended September 2012 and September 2011 was 37.6% and 37% respectively of pretax income.

Net income for the current quarter of $11.5 million decreased 23.6% from net income for the quarter ended September 2011. Earnings per share on a diluted basis of $0.36 decreased 23.4% as compared to last year's $0.47 EPS. For the six months ended September, 2012, net income of $23.1 million decreased 24.1% and diluted earnings per share decreased 24.2% from $0.95 to $0.72 per share.

Moving onto the balance sheet, our balance sheet continues to be strong. Our current ratio at 1.3 to 1.0 is comparable to last year's second quarter. In the first six months of this year, we generated $30 million of cash flow from operating activities and incurred about $40 million of debt.

In addition, we financed the purchase of Kramer Tire in April 2012, which added 20 stores and $25 million of annualized sales; purchased Colony Tire in June, 2012, which added 18 stores and $25 million of annualized sales; and purchased Tuffy/Car-X in August 2012, which added 17 stores and $9 million of annualized sales. As a result of the debt borrowing, our debt-to-capital ratio, including capital leases, increased to 22% from 14% at March 2012.

As John reminded everyone, 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 pay LIBOR plus 100 basis points. This agreement gives us a lot of flexibility and permits us to operate our business, including doing acquisitions as we've been without bank approval as long as we are compliant with our debt covenants.

Those terms, as well as the current availability of approximately $110 million, which doesn't include the accordion, gives 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 headroom to do these and other acquisitions without any problem. At the end of the second quarter, long-term debt consisted of $48 million of outstanding revolver debt and $48 million of capital lease debt.

During the first six months of this year, we were also conservative with CapEx spending at approximately $12 million, which includes $5 million in the second quarter. The store acquisitions during the first six months of this year used $57 million of cash. Depreciation and amortization was approximately $13 million divided pretty evenly between Q1 and Q2 and we received $2 million from the exercise of stock options, as well as $3 million from the disposal of assets, primarily related to the sale of the Kramer wholesale business. We paid about $6 million in dividends.

Inventory is up about $12 million from March 2012 with approximately $7.5 million of the increase in store inventory due primarily to the addition of the FY '13 acquired stores. Additionally, we increased inventory related to import products such as tires and sellthroughs to enhance product assortment, ensure adequate adequacy of supply in light of leadtimes for foreign purchases, and helped to offset margin pressures. Inventory is also up due to the purchase of winter tires in anticipation of the demand in the third quarter.

Last, inventory levels have increased due to cost increases and the initiative to expand and enhance product assortment in order to reduce outside purchases. As an aside, prior inventory in total is up about 2% from last September with a 9% increase in new stores over that period.

I wanted to talk to you about some activity you may see in the stock prior to calendar year-end. Some directors and officers may be selling in connection with the exercise of expiring options and to shore up their tax liabilities in connection with these exercises and other transactions earlier in the year. However, for most officers, their holdings should increase net net for the year after the exercise is instilled. That concludes my formal remarks on the financial statement. With that, I will now turn the call over to the operator for questions. Operator?

(Operator Instructions). Bret Jordan, BB&T Capital Markets.

Good morning. A couple quick questions here. One, I guess if we look at tires and they are down 3% comp in the quarter, what were tire units down in the quarter?

They were down 7%.

Okay. And I guess as you look at tire pricing strategy and you've gotten some price reduction from the supply side, is that something that you would use to try to capture the margin or do you think you're going to be lowering price to the retail to try to drive velocity there?

Yes, I think we are going to try to maintain the margin and make sure that we stay competitive. In September, we put through a price increase on services of about 2% and we held tire pricing basically flat with no increase there just due to where the market is. So we will look to maintain the margin as we go forward, but remain competitive.

Okay, and I guess on the pricing strategy, it seems that oil has been a category that a number of folks have been using to promote recently to try to get the traffic back in the bay. Are you expecting that you are going to give most of the oil savings or some of the oil savings back on the new oil contract in the form of lower price on oil changes or is that a category that is staying roughly flat on margin?

No, first of all, we are maintaining marketshare with positive oil change comp units for the year. And our strategy has always been to use that low-cost, everyday low-cost oil change to bring customers on a low-cost, low-risk service to begin to establish a relationship with them and trust and then to plug them into our marketing and advise them about their car and earn that repeat business. So we are already there on the oil change pricing and I don't think that needs to change going forward. That is a benefit for our gross margin.

Okay, and then one last question. On acquisitions, what are you seeing on pricing, I guess sort of the parameters you generally try to value these within? Have we seen any given sustained tough environment of change in pricing either getting cheaper as motivated sellers in the market or just stability?

Definitely there is more flexibility on the sellers' side, but there is disappointment just like we are fighting through a tough environment here. These guys are making less money and there's a little bit of disappointment to get through in trying to pay them on what their results are now versus what they were. But obviously we have been able to be disciplined and get deals done.

Okay. Then one last question and I'll get back in line. On the seven non-disclosures you have signed, could you give us a feeling, sort of size range of those seven, small to large, number of units or revenues?

They are 5 to 40 stores in [New York] contiguous to our markets and I remarked last quarter that they would take care of the better part of two years of acquisition growth. So there are some sizable deals there.

All right, great. I'll get back in line. Thanks.

Joe Edelstein, Stephens, Inc.

Good morning. John, you have already done a great job bringing in the new acquisitions here today that you announced, but I'm also just curious what goals that you've set out for yourself and for the Company really within the first 90 days of your new role.

Well, I guess I'm glad to say that the very first day of my new role I spent talking to the employees of the Midas stores up here in Rochester that we were acquiring. So I have been here for 10 years and my objective was to continue to capitalize on the significant opportunities that we see in the current market, especially with many sellers concerned about tax rates going up this year.

So it's really to take advantage of this near-term opportunity that we have and continue the long-term trend of running good stores, continuing to be a low-cost operator trusted by our customers that drives profitable growth going forward.

And just on the topic of --.

It's more of the same.

I'm sorry, go ahead.

I said I guess it's just more of the same what we've been doing.

Great. And I guess on the topic of acquisitions, and correct me if I misheard you, but I think you said that you're not necessarily seeing a lot of competition for the deals that you are looking at. Does that surprise you given the environment?

No, I think we are the best guy out there acquiring companies. We continue to cultivate relationships and seek these acquisitions. We've been aggressive about that for the past 10 years and we will continue to be aggressive there. And I think there is a lot of credibility that we've established in doing these deals quickly and confidentially that -- and these sellers are very comfortable in working with us.

And do you think, just in terms of timing then, do you think that, with the pipeline that you currently have, that we could potentially see some more deals getting completed by the end of the year to push you above that roughly 18% rate that you are already at?

Yes, we could see that within the [fits] of the year.

Okay. And then just one other question then; I'll get back in queue. I'm curious about the financing offering that you mentioned. Is that a new program and really how much uptake have you seen from customers?

Yes, what that is, in a tough environment, that's a 12 months no interest offer on our -- on the customer credit card that we have and use in the stores. So we thought that coming into a key selling season for high-ticket items like tires, we wanted to make it more convenient and less costly for our customers to make those larger purchases. And we view that as a real customer benefit. We think that customers right now are deferring because they can't afford this stuff and we think that this helps get more sales done through the rest of the year and also supports our gross margin. It's a pretty low interest rate environment, so the cost of this versus straight discounting everything is we thought the right kind of trade-off (inaudible).

Okay, great. Thanks for taking my questions today.

Sure, thank you.

Scott Stember, Sidoti & Company.

Good morning. You talked about how sales so far in the quarter are trending down about 6%, yet your guidance is looking for flat to down 3%. When would we get a good sign of how things are materializing? Obviously, it sounds like you are relying on tire sales coming back for the more normalized winter. Could you just maybe talk about that a little bit?

Yes, I think that is the key, Scott. November is a key month for tire sales in particular. Customers right now or consumers I should -- consumers are riding around on tires with less tread depth than ever or certainly in an awful long time and tires are a safety issue. So we are looking at November being a key month there. And if you look at November and December last year, we were down a little over 2% and our guidance assumes that in what should be a better environment in terms of weather that we do comps similar to that -- similar to that down 2%.

Got you. Could you just go over the comment again about the percentage of parts bought from China? I missed the exact details.

Sure. Our run rate for Q2 was 30%. That was similar to the run rate we had achieved at the end of last year and down slightly from our first quarter. In the first quarter, we had -- and that is really because we stopped bringing tires in later in the second quarter so that we could take advantage of post-tariff costs on those tires once the tariff expired at the end of September.

Great. And just to clarify one more time, the amount of incremental acquisition revenue that you announced today, that was not in your guidance before, was the $60 million that you announced on today's press release and also is that included in your guidance going forward?

It is included in the sales range, but, in the first 12 months, acquisitions are breakeven to slightly accretive, so there's really not much built into the range certainly on the low end for the acquisition -- that acquisition -- those acquisitions being profitable in this fiscal year.

And the $60 million that you announced, that's the only incremental revenues that were announced today?

That is correct. This is Rob. That doesn't include anything that might get accomplished in our Q4. We talked about -- we got $62 million under our belt. John just said he expects to get $60 million done in the fourth quarter. That is included in our range and then whatever occurs obviously -- in the third quarter -- yes, whatever gets accomplished in the fourth quarter would be in addition to that.

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

(Operator Instructions). Peter Keith, Piper Jaffray.

Hi, good morning, everyone. The large acquisition that you are kind of in the process of closing, I guess the wording on that is a little funny because I think you are using acquisitions in a plural form. Is it multiple deals or I guess better said, is it kind of an all or none type of structure or is it kind of a series of acquisitions?

It is multiple deals.

But just coincidentally all closing around the same time?

Yes, closing within the third quarter is obviously significant for seller tax purposes.

Yes, that's right, okay, but those are not linked together in any way where --

No.

-- some could fall out?

No.

Okay, I understand. Thank you, okay. On a separate topic, you have done a nice job explaining your oil change costs the last few quarters and (inaudible) that's probably a good proxy for traffic. Is that actual oil change units or has that been impacted at all by oil price inflation?

Yes, that is units.

Right.

I was just going to add that the pricing on the oil changes, retail pricing, is fairly stable. We are out there at an everyday low price, so that is units and they will drive the related sales.

Okay. On a unit basis, if you're trending at 1% right now, how would you observe your oil change unit growth historically? Is that kind of in line with maybe what you were at a couple years ago or is it still a little bit below just to reflect the tough economy?

In general, we have run the traffic between down 2% and plus 2% during our 11 years of comp store sales increases. So I view the 1% -- we are actually at about 1.5% or maybe a little bit better than that for the year, but I view that kind of within the range of what we've seen in the past.

Okay, great. Last question from then is it's nice to see I guess with the gross margin that you didn't have any material cost impact. There is some positives and negatives kind of neutralizing one another. On a go-forward basis, to your best visibility that you have right now, are material costs are going to be neutral and maybe even slightly positive to gross margin?

Yes, we think that Q3 is more like neutral and Q4 getting better as we sell through the inventory and as everyone sells through the inventory of tires that they currently have.

Okay, to think about gross margin then through the end of the year, even into next year, I guess it's more going to be driven by the leverage or de-leverage effect of the comp store sales?

Yes, absolutely. We certainly have not indicated we have a lot of visibility on sales with a 4-point range for the third quarter, so that is a key to what the gross margin is going to be. As you know, rent and occupancy costs and distributions costs are included in our gross -- our cost of sales. So we do lose leverage if we have a negative comp.

Okay, thanks very much and good luck with the coming months.

Thank you.

[Michael Montony], ISI Group.

Hey, guys, good morning. Thanks for taking my question. I was just going to ask about on the traffic side, you had mentioned oil changes were up 1%. Is it fair to assume that the overall traffic count was also up about 1%?

Yes, the overall traffic is less than that. Again, consumers are coming in for that low-cost maintenance and deferring those larger purchases.

But is it still positive though, John?

It's slightly negative.

Just to actually clarify with respect to the tire purchase savings that you all have been able to realize, it sounds like it's about 10% on Chinese tires. We were thinking it could actually be closer to 20% there. When you said 10%, was that across the board? Was it just for Chinese tires and do you think there's more opportunity to go there in terms of further cost savings?

Yes, that is on the Chinese imported tires and there absolutely is more room to go there. I think with the number of tires that we buy from over there, we are already at a very favorable low cost. We picked up that 10% and we expect there to be more, like I expect there to be more with all the manufacturers.

And when you mentioned a goal of maintaining margin on tires, was that -- just to be clear, was that profit dollars or was it margin rate? How would you prioritize or think about it?

Yes, our first priority is to maintain gross profit dollars per tire, which we did in the second quarter and we did have a slightly lower gross margin percentage on tires.

And one housekeeping thing and apologies if I missed this, but did you give out the monthly comp trends intraquarter?

Sure. In the quarter, the comp trend was down 5% in July, down 4% in August and down 4.9% in September.

And just the last question that I had was on the fleet side. Can you guys speak at all to the opportunity that you see there for growth in terms of fleet? Maybe some of the actions that you've taken to build out your organization and how we should be thinking about that as a potential driver for traffic in the future. Thank you.

Sure. Yes, we have -- we've typically been focused, highly focused on the retail customer and have not been nearly as focused on the fleet customer and we are getting more organized on the fleet side of things. So we view that as a positive to sales going forward and as we develop that program, we will talk about it more.

All right, thanks. Good luck.

Thank you, Michael.

Bret Jordan, BB&T Capital Markets.

A couple follow-ups here and one of them goes to mix of the non-disclosures you are looking at. What is the tire mix in that portfolio? Are you still looking at tire-heavy acquisitions?

It is 6 to 1.

Okay. And I guess just trying to get a feeling for consumer sentiment. Do you have the attachment rate of alignments to tire transactions or are people still opting out of the alignment given the sticker shock attached to the tire or is that improving or deteriorating or stable?

Well, we have said tires were down 3 and alignments I believe were down (inaudible).

You said -- well, units -- I guess we need to be looking at tire units maybe as opposed to dollars there to get that math?

Yes, people are getting two tires instead of four; they are getting one instead of two and if they're getting two tires instead of four, usually there is a lesser chance of an alignment fee being associated with it. So alignments are still -- I mean the business is weak period.

It's hard to talk about categories with such a weak consumer.

Right. And I guess from a sequential standpoint, I guess slightly negative traffic, I was under the impression that traffic had been more than slightly negative in some preceding quarters. So is that -- what's the trend on traffic in Q2?

It's pretty consistent. Maybe it slightly improved in Q2, but it's been -- oil changes are up and if every one of your categories are down, your traffic is going to be challenged. I mean it's well within the range that we have run even in good years and bad years, just a function that now people are buying nothing generating, as John said, the first ticket average declined the first six months of this year than we've seen since 2003.

So they're coming in for oil changes, they are getting some of their scheduled maintenance done, they are buying nothing. We are seeing them as often as we did and they're just not complying with recommendations saying I'll wait until my next oil change or in our view potentially they'll wait till it snows.

All right, great. Thank you.

Michael Montony, ISI Group.

Thanks, guys. Just a housekeeping question, but can you share the breakdown of sales by category like brakes versus exhaust for the quarter, major category items?

Yes, I think we gave you the comps. The brake comps were down 10% and the exhaust comps were down 15%.

Yes, I was actually thinking of like the percentage of sales that brakes make up, (inaudible).

Okay, sure. For the quarter, you have got brakes at 17%, exhaust at 5%, front-end and steering at 10%, tires at 39% and maintenance is the rest.

Thank you.

Otherwise, you're going to tell me that I didn't round right.

There are no additional questions at this time.

All right, I would like to thank everyone for their time this morning and unfortunately your patience. We are doing everything we can in this tough environment. We are committed to maintaining our marketshare and we are working hard to get back to the kinds of returns and earnings that you are accustomed to and certainly we are accustomed to over the last number of years.

We are taking advantage of this tough period and will come out of it with a lot higher store count, a lot better store density, a lot better operating margins and a lot bigger and more profitable company. We appreciate your continued support and certainly we appreciate all of the efforts from all of our employees that are working hard every day. Thank you and have a great day. Goodbye.

Ladies and gentlemen, that will conclude today's presentation. We appreciate your attendance. You may now disconnect.