Monro Inc (MNRO) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake third-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 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 third 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.

I want to start out by saying that my long-term confidence in our business and the outlook for our industry remains very strong. There are still 240 million cars on the road in the US that are getting older. Consumers still can't work on these vehicles, and the number of overall service bays is declining, 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 and convenience, along with our store density and two-store brand strategy. That said, we continue to hear various concerns or myths in the marketplace in terms of how they affect our sector, and especially Monro, which I would like to offer my opinion on.

Myth number one -- increasing new car sales will crater our business. In our view, the 14.5 million new car sales in calendar 2012, or 15 million to 15.5 million in calendar 2013, will not dent the increasing average age of the average vehicle in the US fleet, now a record 10.8 years, which will continue to drive our business forward. In particular, if many households have the ability to sign up for $4,000 in annual new car payments when they are already paying more for food and gas, and now paying about $1,000 more in Social Security taxes on average, it is hard to see how the other 85% of households won't be doing better, and will likely reduce their deferrals of needed services 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 old to an all-time high. By the way, we ran positive comp-store sales all of those years.

Myth number two -- 10-year old cars were a tailwind; 11-year old cars are a headwind. The thinking is -- old car owners will sign up for the $4,000 in new car payments in this economy, versus the $1,000 to $1,500 it takes to maintain their vehicle. We don't believe that owners that hold cars of this age won't get the needed oil changes, brakes, tires and other services that keep these older cars safe and running, and which represent the vast majority of our sales. In fact, vehicles aged 13 years and older now represent more than 20% of our traffic, and as a group, have a ticket average consistent with younger vehicles.

We also hear concerns about our sales remaining weak while the economy and the consumer are showing some signs of improving. I'm probably more pessimistic about the economy and the consumer than most other retailers, and believe that the consumer is in much worse shape than most. This is evident in the deteriorating consumer sentiment over the past two months, which hit the lowest point in over a year in January, and certainly won't be helped in coming months as people begin to adjust to less disposable income due to higher taxes. This 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 Lakes, and mid-Atlantic regions, which have lagged the rest of the country significantly this year. In fact, national parts retailers have reported that their overall comps and commercial business comps in our regions are underperforming the rest of the country by as much as 500 to 1,500 basis points, respectively.

In part, we believe the underperformance in these regions relative to other areas of the country is due to the extremely mild winter last year, and so far this year. Additionally, some of our key geographies were less impacted by the housing crisis than other regions of the country, and significantly outperformed in the 2009 to 2011 timeframe, but are not benefiting currently from the modest recovery affecting other areas of the country. If the difficult market was the result of basic industry issues with new car sales, increasing age of vehicles, or competition, none of these other regions would be performing better than our geographies.

Importantly, this difficult environment benefits our acquisition strategy. As the primary macro drivers of our business are still in place, we continue to execute on our proven strategy and the initiatives that have helped us deliver 11 straight years of positive comp sales and a 13-year average of 20% EPS growth. We have accelerated acquisitions, as we said we would in times of slow organic growth, positioning the Company for significant earnings growth over the next several years.

We are not pleased with the first nine months 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 when this deferral cycle reverses, and customers turn to us for these needed purchases, while operating margins will also benefit from reduced material costs, implemented expense-reduction initiatives, and improving results from recent acquisitions.

Now, on to our third-quarter results. As we had anticipated, the third quarter remained challenging in terms of both top line and margins. However, we were somewhat able to navigate the headwinds we are seeing in our business, and deliver EPS within our anticipated range. That being said, we are not happy with our results.

For our third quarter, our comparable-store sales adjusted for days declined 4.9% versus a 1.3% comparable-store sales decline last year, weaker than we had anticipated. We believe the softness in sales is due in large part to continued economic pressures, the lack of winter weather, most importantly snow, and also remains a headwind that -- and was not the catalyst we hoped it would be. As a note, hurricanes don't help either.

On a reported basis, comparable-store sales declined 5.9%. However, our position as a low-cost, trusted service provider remains strong, and we are maintaining share, as evidenced by the fact that comparable-store oil changes were flat year over year. Our collective price is slightly positive, and the decrease in our comp tire units sold this year is in line with Rubber Manufacturers Association data for our Northeastern, Great Lakes, and mid-Atlantic geographies.

Customers continue 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. This is further evidenced by a year-to-date decline in average ticket, which we haven't experienced since 2003. Importantly, during the last two weeks of December, snow had a significant impact throughout our markets, and we ran a positive 10% comparable-store sales increase, led by the tire category.

For the third quarter, total sales increased by 7.8% to $190 million compared with $176 million in the prior-year quarter, due to the contribution from our recent acquisitions. Our fiscal-2012 acquisitions contributed slightly to our bottom line for the quarter, as we expected, with contributions from the 2012 acquisitions partially offset by early transition and deal-related costs from the 2013 acquisitions. Gross margin decreased 180 basis points during the quarter to 36.6% versus 38.4% in the prior year, due primarily to a shift in sales mix to the lower-margin tire and service categories, in part due to our recent acquisitions and the loss of leverage due to weak comparable-store sales, while product costs began to moderate.

We continue to leverage the increased purchasing power that has resulted from our recent acquisitions, and our ability to shift purchases between our broad base of vendors. As discussed on our last call, and as a result of adding stores through acquisitions, we were able to negotiate lower oil costs that took effect during the second quarter, and helped our gross margin again in the third quarter. This cost benefit will continue, saving $500,000 in oil costs in the fourth quarter of our fiscal year, and $1 million in the first half of 2014 -- fiscal 2014 at current trends.

We are also seeing improvement in tire costs. After the September 2012 expiration of the tariff on tires imported from China, we received a 10% reduction in import tire costs, and more recently we received an additional 5% cost reduction on import tires that took effect January 1. We are also benefiting from increased volume-related incentives from branded manufacturers. As a result of these decreases and a generally stable pricing environment, during the third quarter our tire gross margin improved slightly over the prior-year quarter, the first such improvement this year. We expect continued declines in tire and oil costs to benefit margins further, as we move throughout the remainder of fiscal 2013 and into fiscal 2014.

Further, we have increased our direct international sourcing, primarily from China, over the past several years. At the end of fiscal 2012, we achieved a run rate of approximately 30% of our total product costs, less oil and out buys, and have increased that to 32% year to date in 2013. 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 as much as 40% over the next year.

At the same time, we are carefully managing our costs in this difficult environment, and our recent acquisitions will start to benefit our operating margin next year. For the third quarter, all of the increase in total SG&A costs is attributable to acquired stores. Excluding fiscal-2013 acquisitions, and the $1.7 million gain on the sale of seven stores in the third quarter of fiscal 2012, operating expenses were actually down $900,000 as compared to the prior year, due to this focused cost control. That said, we lost leverage in the third quarter due to weak comparable-store sales.

For the third quarter, operating income decreased 16-point -- decreased 16.8% to $18.8 million, which translates to an operating margin of 9.9% compared with 12.8% in the third quarter of last year. Net income for the third quarter decreased 16.9% to $11.3 million from $13.6 million last year. Our earnings per share declined 16.7% to $0.35, including $0.02 dilution from our fiscal-2013 acquisitions, on a base of 32.2 million shares outstanding, from $0.42 in the prior-year quarter, or $0.39 excluding the $1.9 million gain last year. In terms of sales category trends during the quarter, nearly all remained weak, and similar to the first six months of the year, with the exception of comp oil changes, which were flat.

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 full-year 2013 organic sales to be weak, as a result of continued pressure on consumers, and our poor results in the first nine months of the year. However, we have accelerated acquisitions in fiscal 2013, as attractive opportunities have significantly increased during this tough operating environment. Importantly, these acquisitions further expand our market share and our operating leverage, positioning Monro for profitable growth over the next several years. We have and will continue to pursue these transactions 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. Vespia and the Terry's Tire Town stores were accretive in the first 12 months of ownership, ahead of plan, and continued to contribute in fiscal 2013.

Fiscal 2013 is our strongest year ever for acquisition growth. During the first half of the fiscal year, we completed acquisitions from Kramer Tire, Colony Tire, and Tuffy Associates, representing an incremental $59 million in annualized sales in total, or 9% acquisition growth. These acquisitions strengthened our presence by giving us number-one market share in the Norfolk and Tidewater, Virginia market, expanding our presence in North and South Carolina, and expanding our footprint into Milwaukee, Wisconsin, a new contiguous market.

The second half of fiscal 2013 has been even stronger for acquisition growth. In October, we completed the acquisition of five stores located in Rochester, New York from a former Midas franchisee for an additional $3 million in annualized sales. In November, we completed the acquisition of 31 tire stores from Tire Barn, representing an additional $64 million in annualized sales, which added to our presence in Indiana, including a leading position in Indianapolis and Illinois, and expanded our footprint into Tennessee, a new contiguous market.

In December, we completed the acquisition of 27 stores from Towery's Tire and Auto Care, and the Company's wholesale business, which, combined, represent an additional $54 million in annualized sales. This transaction expanded our footprint into Louisville and Lexington, Kentucky, new contiguous markets, where Towery currently holds the number-one position. For the third quarter, this represents a combined total of $121 million in annualized sales, or 18% acquisition growth.

Most recently, at the start of the Company's fourth quarter, we completed acquisitions of Enger Tire and Tire King stores. The Enger Tire acquisition expands our presence in northern Ohio, with the addition of 12 stores and $9 million in annualized sales to our existing 16 Mr. Tire and 15 Monro stores in these markets. The Tire King transaction expands our presence in Raleigh and Durham, North Carolina, with the addition of 9 stores and $11 million in annualized sales to our existing 12 stores in these markets. The Tire Barn stores offer only tires and alignment services, similar to our Tire Warehouse stores in New England. And the other stores acquired this year have a 50% service/50% tire sales mix, with the exception of the Tuffy stores, which are service locations.

We have strengthened and grown our business through this series of acquisitions that expand our footprint, adding 139 locations that will contribute roughly $200 million in incremental annualized sales, a record year, or 29% growth over fiscal 2012. This broadening of our store portfolio helps to reduce our geographic concentration in the Northeast and Great Lakes, and increases our base for continued expansion in the Midwest and South.

From a financial perspective, these acquisitions provide significant top-line growth that will contribute to leverage for Monro going forward. Also, they collectively increase our annual tire purchases by about 40%, which significantly increases our purchasing power with vendors, and will help us reduce costs and increase tire margins going forward. Importantly, we completed the majority of these deals as tire costs were at their highest, depressing earnings of these sellers, and when the cost reductions were just beginning to occur, giving Monro and our shareholders the full earnings benefit of lower tire costs moving forward.

In a better overall economic environment, we would not have been able to complete these deals for roughly 30% annualized sales growth at these prices, and with this momentum on costs and margins. While we are not happy with the difficult year we are going through, the future benefits and earnings from these acquisitions will far outweigh the temporary earnings decline we are experiencing.

We continue to see more opportunities for attractive deals than we have in the past years, due to near-term seller concerns over the continuing difficult operating environment. And into the future, given that all of the independent tire dealers we are looking to acquire are getting older, and many are at or nearing retirement age without an internal succession option. We presently have eight NDAs signed versus the seven we had at the end of the second quarter, even after having completed four of those deals since our last conference call. Seven of these NDAs are within our footprint, and one is in a new contiguous market. We could close on one or more of these opportunities as early as the first fiscal quarter of 2014.

We have plenty of liquidity, combined with strong cash flow, to complete these deals. We remain very disciplined on the prices we will pay, with 7 to 7.5 times EBITDA, or about 80% of sales being our key metrics. The November and December transactions were completed for a purchase price of $104 million in total, or about 75% of sales, which includes the real estate for 25 of the 79 locations. Importantly, we continue to compete only with the sellers' expectations in these deals.

Let me now turn to our outlook for this quarter. We believe the turbulent macroeconomic environment will continue to negatively impact consumer purchasing behavior, all of which is likely to be exacerbated further by higher taxes. This affects Monro as a service and retail business, as well as the whole industry.

Trends in the fourth quarter of fiscal 2013 have remained more challenging than we had hoped. Weather has remained a headwind to start the quarter, with January snowfall in our key markets at less than 50% of last year's already depressed levels. January comp-store sales are down 10% versus a 6% comp increase last January, while oil change units are holding in. As a note, the two-year sales comp for January is minus 4%, versus a minus 5.6% for the nine months ended December 2012.

Our key sales categories remain down, which indicates that consumers are still visiting us for basic, low-cost maintenance, but still deferring larger purchases, particularly tires. Given this very slow start, we expect comparable-store sales for the quarter to be down 9% to 6% adjusted for days, versus up 0.7% last year.

We expect fourth-quarter earnings per share to be in the range of $0.20 to $0.25, with the fiscal-2013 acquisitions at break-even to slightly dilutive. This compares to $0.33 in the fourth quarter of fiscal 2012, or $0.29 excluding the estimated $0.07 benefit from the 53rd week, and $0.03 in Midas-related due diligence costs. The low end of our EPS range incorporates combined comps for February and March at our year-to-date comp sales run rate, down about 6%, and the high-end incorporates a similar comp decrease as we had in last February and March, which is down about 3%.

For the full fiscal year, taking into account sales contributions from the eight acquisitions completed year to date, we now expect total sales to be in the range of $725 million to $735 million, incorporating a comparable-store sales decline in the range of 6.5% to 5.5% adjusted for days. Based on these new assumptions, we estimate full fiscal-year 2013 EPS of $1.27 to $1.32, 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 Midas-related due diligence costs.

While we don't have visibility on when the state of the consumer may ultimately improve, there are several positives that will impact us in the fourth quarter of fiscal 2013 and heading into fiscal 2014. We are up against negative 3% comp-store sales in February and March, adjusted for days, and a negative 6% comp-store sales for the first nine months of fiscal 2014. We would not expect customer deferrals to continue at this increased rate.

We expect operating margins will benefit from improved sales, lower oil costs, lower tire costs, and increased contribution from our fiscal 2012 and 2013 acquisitions. We will also continue to carefully manage SG&A costs, but expect that for fiscal 2013 weak comparable-store sales in the first nine months, 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.

That being said, we are not content to wait for increased consumer deferrals to turn around. We are aggressively pursuing expense reductions in all areas of the business, while keeping mindful that we are a growth company. Specifically, we are on track to achieve roughly $4 million in annual cost reductions on our base business, excluding fiscal-2013 acquisitions. In short, we are acting quickly and aggressively to better align our operating expenses with current sales trends, while improving productivity. For fiscal 2014, we expect these actions, combined with other declining costs, to improve our business model and allow us to generate EPS growth on our base business at 0% comps, where in the past we have needed a 2% comp or better increase to overcome normal inflationary cost increases.

Our five-year plan continues to call for, on average, 15% annual top-line growth, 10% acquisition growth, 3% to 4% from comps, and 1% to 2% greenfield stores. The acquisitions are generally dilutive in the first six months, as we overcome due diligence and deal-related costs while working through initial inventory and the operational transition.

With cost savings and recovery in sales, results are generally break-even to slightly accretive year one, $0.08 to $0.10 accretive year two, and an additional $0.08 to $0.10 in year three. For 30% acquisition growth, just triple those EPS benefits. Over the five-year period, that should improve operating margins approximately 300 basis points, and deliver an average of 20% bottom-line growth.

Given the timing of our fiscal-2013 acquisitions, we would expect to see positive contribution from these deals in the first quarter of fiscal 2014 and beyond. We are confident that our disciplined acquisition strategy is strengthening our position in the marketplace, and will provide meaningful value to shareholders for many years to come.

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, consistent execution in 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. Sales for the quarter increased 7.8%. New stores, which we define as stores opened or acquired after March 26, 2011, added $23 million. Reported comparable-store sales decreased 5.9%, and there was a decrease in sales from closed stores of approximately $1.6 million. There were 89 selling days in the current third quarter and 90 in the prior-year quarter. Adjusting for days, comparable-store sales declined 4.9% as compared to the prior-year quarter.

Year to date, sales increased $21.3 million and 4.1%. New stores contributed $56.1 million of the increase. Partially offsetting this sales increase was a comparable-store sales decrease of 5.9%, and a decrease in sales from closed stores amounting to $5.3 million.

There were 270 selling days in the first nine months of fiscal-year '13, and 271 in the prior year. Adjusting for days, comparable-store sales declined 5.6% as compared to the prior year.

At December 29, 2012, the Company had 918 Company-operated stores, as compared with 803 stores at December 24, 2011. During the quarter ended December 2012, the Company opened or added 65 stores, including 63 from recent acquisitions, and closed none. Year to date, we have added 121 stores and closed 6.

Gross profit for the quarter ended December 2012 was $69.6 million or 36.6% of sales, as compared with $67.8 million or 38.4% of sales for the quarter ended December 2011. The decrease in gross profit for the quarter ended December 2012 as of percentage of sales is due to several factors. First, distribution and occupancy costs, which are included in cost of sales, increased as a percentage of sales from the prior year, as we lost leverage on these larger fixed costs with lower overall comparable-store sales.

Total material costs, including outside purchases, increased as a percentage of sales as compared to the prior year. This was primarily due to a shift in mix to the lower-margin service and tire categories, the latter due in large part to the acquisition of more tire stores. These increases were partially offset by a decrease in oil costs as compared to the prior year, helped in part by our newly negotiated oil pricing. Labor costs were relatively flat as a percentage of sales as compared to the prior year.

Gross profit for the nine months ended December 2012 was $207.6 million or 38.7% of sales, as compared with $209.9 million or 40.8% of sales for the nine months ended December 2011. The year-to-date decrease in gross profit as a percent of sales is due to increased material costs, related primarily to the increased tire mix related to the acquired stores, along with increased distribution and occupancy costs, and labor costs, due to loss of leverage on lower comparable-store sales.

Operating expenses for the quarter ended December 2012 increased $5.7 million, and were $50.8 million or 26.7% of sales, as compared with $45.1 million or 25.5% of sales for the quarter ended December 2011. If you exclude the $1.7 million gain from the sale of the Long Island stores last year, which reduced operating expense, and operating expenses related to the FY '13 acquired stores, operating expenses, as John mentioned, actually decreased by approximately $0.9 million.

Additionally, if you exclude the due diligence costs we incurred this year in Q3, operating expenses are actually down a total of $1.7 million on the base business. This demonstrates that the Company experienced leverage in this line on a comparable-store basis through focused cost control and pay plans which appropriately adjust for performance. For the nine months ended December 2012, operating expenses increased by $13.4 million to $149.3 million from the comparable period of the prior year, and were 27.9% of sales as compared to 26.4%.

Operating income for the quarter ended December 2012 of $18.8 million decreased by 16.8% as compared to operating income of approximately $22.6 million for the quarter ended December 2011. And decreased as a percentage of sales from 12.8% to 9.9%. Operating income for the nine months ended December 2012 of approximately $58.2 million decreased by 21.3% as compared to operating income of approximately $74 million for the nine months ended December 2011. And as a percentage of sales it decreased from 14.4% to 10.9%.

With regard to interest expense for the quarter ended December 2012, it was $1.5 million, which is an increase of $300,000 as compared to interest expense of $1.2 million for the quarter ended December 2011. It increased as a percentage of sales from 0.7% to 0.8%, relatively flat.

The weighted average debt outstanding for the third quarter of fiscal 2013 increased by approximately $58 million as compared to the third quarter of last year, primarily related to borrowings made on the Company's revolving credit facility for the purchase of our recent acquisitions. This was offset by a decrease in the weighted average interest rate of approximately 370 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 nine months ended December 2012, results were similar. Interest expense increased by $0.5 million, and was virtually flat as a percentage of sales as compared to the prior year. Weighted average debt increased by approximately $39 million, and the weighted average interest rate decreased by approximately 270 basis points.

The effective tax rate for the quarter ended December 2012 and December 2011 was 35.4% and 36.9%, respectively, of pre-tax income. Net income for the current quarter of $11.3 million decreased 16.9% from net income for the quarter ended December 2011. Earnings per share on a diluted basis of $0.35 decreased 16.7% as compared to last year's $0.42. For the nine months ended December 2012, net income of $34.4 million decreased 21.9%, and diluted earnings per share decreased 21.9% as well, from $1.37 to $1.07 EPS.

Moving on to the balance sheet, our balance sheet continues to be strong. Our current ratio of 1.3 to 1 is slightly higher than last year's third quarter. In the first nine months of this year, we generated $63 million of cash flow from operating activities. Depreciation and amortization was approximately $19 million, which is divided evenly between Q1, Q2 and Q3, and we received about $2 million from the exercise of stock options.

We incurred net borrowings of $116 million of debt. We used those borrowings and cash flow from operations to finance acquisitions of 118 stores through the end of Q3 for $143 million, net of the proceeds from the disposal of assets related primarily to the Kramer acquisition. At the end of the third quarter, long-term debt consisted of $124 million of outstanding revolver debt, and $49 million of capital leases. As a result of the debt borrowings, our debt-to-capital ratio including capital leases increased to 33% from 14% at March 2012.

As we stated in our press release, we amended our revolving credit facility during the third quarter of fiscal '13 to increase the committed sum from $175 million to $250 million, and extended the maturity date through December 2017. Additionally, we continue to have a $75 million accordion feature included in the agreement. No other terms of the agreement were changed. The agreement continues to bear interest at LIBOR plus a spread of 100 to 200 basis points, and we currently are paying LIBOR plus 100 basis points.

Even before the amendment, this facility provided us with significant flexibility during these past nine months to get the acquisitions done quickly. The amended agreement, with the increased committed sum and extended term at continued favorable rates, gives us even more flexibility to continue to operate our business opportunistically without bank approval, as long as we are compliant with our debt covenants. We currently have $95 million available under the facility, after completing the Enger and Tire King acquisitions at the beginning of Q4.

During the first nine months of this year, we spent approximately $21 million on CapEx, including approximately $3 million spent on acquired stores since we bought them. We paid about $13 million in dividends, including the planned fourth-quarter dividend, which we accelerated into Q3 to try to benefit investors for tax purposes.

Inventory is up about $18 million from March 2012, with approximately $13 million of the increase in store inventory, due primarily to the addition of the fiscal-year '13 acquired stores and timing related to increased stocking of snow tires. Additionally, we increased inventory related to import products, which is tires and filters, to enhance product assortment, ensure adequacy of supply in light of lead times for foreign purchases, and help to offset margin pressures. 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, tire inventory in total is up about 19% from last December, including inventory added for acquisitions, but is down 9% for non-acquisition locations. That concludes my formal remarks on the financial statements. So with that, I'll now turn the call over to the operator for questions.

Operator?

(Operator Instructions)

Bret Jordan, BB&T Capital Markets.

Couple of quick questions, and one just, John, to start out on the tire pricing, you talked about seeing some price decreases on the import side as well as some of the domestic sourcing. If you gave us sort of a blended tire price decrease, accounting for what has been imported versus what is sourced domestically on the quarter, what would the year-over-year deflation be?

Sure, well, we've got -- oh, for the quarter?

Yes.

Yes, for the quarter it's down slightly. We are about 2% -- we got a 2% retail price increase working in there, so the margin itself was up slightly. The cost was down just a touch.

Okay, and I guess going forward, do you see continued price decreases coming to you from the manufacturers as cost of goods have come in?

Yes, absolutely. As I said, we've got about 15% decrease since the tariff came off on the low-cost radial -- low-cost tires, which are about 25% of units, and the discounts, volume discounts, other discounts that we are getting from the branded manufacturers are running at somewhere around 5%, and we see that continuing into next year.

All right, and I guess looking at tire pick-up, you got a positive comp in December when the weather got bad. Was that driven primarily by tires moving, and I guess to some extent, as you have seen a little bit in the last week or so of weather deterioration or snow and ice in your markets, have you seen the same trend on tires?

Yes, absolutely, tires was a driver in late December, and I can tell you that the last week was our best week in January as well. It improved sequentially during the month.

Then one final question on --

Brett, slow up. This is Rob.

In that case, and I guess it seems like you have got some correlation to weather and improving sales, does your comp guide for the current quarter, because the quarter gets easier as you get through it, January being the toughest month every year, assume that the weather remains warmer and dryer year-over-year? I'm just trying to get a handle on the guide down -- at the rate that you guided down, given what is an easing comparison as the quarter progresses, and if you're seeing some signs of improvement in tires?

Yes, I guess in -- first of all, our comp in January being down what it is, all the categories sucked, tires leading the way. But our comp guidance for the quarter, with the limited visibility that we have from the January number, it basically says that on the low end we are going to run what we've run all year, and on the high end we're going to run a similar comp in February and March to what we did last year. We thought that was the most conservative way to go, after being wrong for the first nine months of the year.

Okay, great. I will get back in the queue, I have got a couple more but I will let somebody ask some questions.

Sure, thanks.

(Operator Instructions)

Joseph Edelstein, Stephens.

Can you, first, just provide the comp numbers by month, and remind us what you are going to be up against then? I guess the February/March number, I think you may have said that but I just want to double-check.

Right. So the comps for the month during Q3 were down 5% in October, adjusted for days, down 7% in November, and down 1% in December. For the fourth quarter, well for February and March, February was down 3.5% and March was down 2.5%.

And January was up 6%, as we said.

Was up 6%, right.

Okay, that is helpful. And I certainly appreciate the breakdown by category that you put in the press release and, John, I think you also talked about the oil changes being flat, and how that indicates to you that it is really a deferral process, but I've also noticed that the trends in the year-over-year performance in oil changes has also been coming down. So I'm just trying to get a sense for what other indications is it, that it is just a deferral and not necessarily losing share to other participants in the marketplace?

I mean in -- for us, importantly, we want to be at least flat. We want to be positive. We were up 2.5% in oil change units in the first quarter, and we have been flat for the past six months. So, we believe -- that to me says we are not losing market share, because customers aren't going to come to our shop to get an oil change and go somewhere else to get their brakes done or get their tires. We are going -- they are coming back to us, because they trust us to do all of their work. They are deferring the more significant purchases.

Well, Joe, this is Rob, we bought Eight Guys during the year in our markets, so we know what their numbers are. We have eight NDAs currently signed that we are working on, so we know what all their numbers are. We know the Rubber Manufacturers Association is running minus eight units in our geographic area, and we have the breakdown between the national parts guys showing what is going on within our specific regions. I think the one other public guy that reports is certainly doing better on pushing the oil changes at the lower price, and taking margin hits commensurate, which we're not willing to do. We have always been running plus 2% traffic and oil changes, flat oil change traffic, and that generates our business.

So when you hear us start to talk about oil changes running down 3% or down 5%, I think that would be a point where we would be very concerned in losing market share. But running a flat oil change number for us, in a very difficult environment, I think speaks very well that we are holding on to what we have. Certainly, not happy with the sell-through and selling the additional needed work that these customers need to protect their vehicles, but we are two years into the deferral cycle and that will come around. But, certainly, we have quite a grouping, whether we've bought them or are looking to buy them, of knowing exactly what is going on within our marketplace.

Right, I appreciate the extra details there, that is very helpful. And then if I can maybe just ask one other clean-up question related to the tax rate, that number has bounced around a bit for the first couple of quarters here. Just, generally, where do you think that will come in for the fourth quarter, and just as you look out even into next year?

Q4 should be around 36%. It bounces in part because we -- there's state tax credits that come and go, and next year, conservatively I would say somewhere about 38%, because we are in new states, but we will provide more clarity when we talk about FY14, as we normally do in the spring, but 38%, that's used right now.

Great, that is helpful. Thank you.

James Albertine, Stifel Nicolaus.

Great, thanks for taking my question, and good morning to everybody. Very quickly, as always, thank you so much for all the detail that you go into in your prepared remarks. I wanted to focus on one of the points, make sure I heard it correctly, first. It sounded like you made a comment, John, that your comp leverage point, if you think about this deferral cycle and hopefully the turning of this deferral cycle back to the positive category, it sounds like your comp leverage point's fallen to flat, from an ebb in 2% or better before. I just want to make sure I understood that correctly, and if you could, by order of magnitude, lay out the drivers, it sounds like mostly in gross profit, that get us there?

Yes, absolutely, you're exactly right in what we said. For fiscal '14 that rate, through the lower oil cost and the lower tire costs, and us taking initiative in this year and getting it -- and adjusting the business in terms of the expense structure to what our sales run rate is, going after that $4 million of expense reductions on the base business, that brings it -- that will bring it to flat, that inflection point, from what has traditionally been 2% or a little bit better. Certainly, we have never had an increase of 40% in tire units to work with before. So for us that is extremely important, and is going to be very powerful to driving those costs down, which will be a big piece of the gross margin element of driving that inflection point down.

That is great, I appreciate the additional detail. And I guess as it relates to that, maybe asking the same question a slightly different way. If you look at where gross profit is as a percentage of sales, I think it was 36.6% this quarter, and I think a very helpful point that you mentioned, as you roll on the tire stores, the non-Warehouse, non-Tire Barn stores, it's a 50/50 split service and tire, so just trying to gauge where you think gross profits can go, and if they are in fact troughing in your opinion?

Yes, they are going to go up.

Back to where we've seen before, I guess is my question?

Yes, I think back to where -- back to where they were last year, two years ago. That -- you know, that is where I see them going. Obviously, it depends somewhat on the retail pricing environment, but again we've never -- we haven't had cost decreases year-over-year like we're having right now, 15 points on the low-cost radials, 5% on the branded tires going into next year, and that is only going to get better.

I think James, to John's point, third quarter, 47% of our business is tires. It is the highest we've ever been. We run about 40%. I think John was trying to give you a view that way down the road, it never gets above 50%. So if you are looking at third-quarter gross margin, couple that with the negative comps, it doesn't get worse than that. And remember, again, we have a fixed component of distribution and occupancy in there. So while we haven't given anything relating to 2014, certainly the fourth quarter should be better, but there is huge opportunity to move that number up. Just remember that there will still be a continuing quarter, one year over another year, sales mix shift towards tires, which even as tire margins will get significantly better based on the things John mentioned, there will still be some negative pressure with the shift to more tire sales.

That is all very helpful. Thanks again, guys, and congratulations on closing as many deals as you did in that short period of time.

Thank you.

Jon Berg, Piper Jaffray.

Good morning, guys, this is actually Jon Berg on for Peter this morning. Just a couple of questions for you here. Do you believe you're seeing any incremental impact from the expiration of the payroll tax cut in month-to-date results? I know you commented that your core consumer continues to be challenged, and it doesn't seem like there's any differences this quarter in what you are seeing, but have you been seeing anything above and beyond that, you think, in January?

All we can say about January is minus 10 is worse than minus 6.

Okay. Got you.

I don't know what piece is weather, what piece --

Yes, weather certainly did not help us. The payroll tax can't help. So breaking it out is not something that I think we can -- we're going to be offering too much on.

Okay, all right. And I guess looking at your acquisition outlook as you go forward, I know you said your number of NDAs are up, and with the people I think trying to rush and sell ahead of the end of the year last year, I mean even though your NDAs are up, are you seeing any less as far as people inquiring about selling the business, or is everything just kind of where it has been running?

No, we haven't seen a slowdown in those discussions at all. As a note, the NDAs are between 5 and 40 stores, and 7 are within our territories and 1 is in a contiguous market. So very consistent to what we've looked at over the last several years.

Okay, excellent. And just one last quick one, and I apologize if I missed this, but did you quantify at all the comp headwind from Sandy at all in the quarter?

When I said hurricanes don't help either, that was all of our comment, it was about a 1% comp drain on November.

Okay, thank a lot guys. Appreciate you taking the questions, and good luck in Q4.

(Operator Instructions)

Michael Montani, ISI Group.

Hello guys, good morning, thanks for taking the question. First was just on traffic and ticket, I know you mentioned oil change traffic was flattish. Should we assume that the overall traffic and transaction counts were about flat or slightly down, or how would you break that down?

No, they are slightly down, as Rob was alluding to. We've traditionally run traffic between plus 2%, minus 2%, so -- but overall, traffic was down.

Okay, and then just in terms of the SG&A leverage, I know you mentioned the $4 million of expense reductions. Is there any way you can help just break that down a little bit further, because the other piece that we were concerned about is Affordable Care Act, which I think would impact you guys in fiscal 4Q of next year, but it sounds like you are still seeing net reductions despite that, so is that correct? And then is there some specific initiatives you can point to there?

Yes, I guess with regard to the initiatives, we have traditionally been very good at managing costs, and in this environment we are absolutely taking another look at every aspect of the business. That incorporates payroll in the field, it incorporates payroll back here, again understanding that we are in a high period of growth, but there is significant leverage in that. Warehousing, it's -- that is across-the-board in terms of where we are looking for the cost savings. And with regard to Affordable Care Act, part of what we're doing right now is -- we will definitely help when we get around to the Affordable Care Act, and that is absolutely in our minds as we approach how to manage payroll and other costs everywhere within the Company. That will -- it will start to have an impact next year in Q4, but the real impact will come through in fiscal year 2015, and we think with the initiatives we are taking right now, we will only be in a better place to address what is going to be a higher cost. We, like all other companies, are looking hard at the Affordable Care Act and what impact it will have.

Okay.

I know it's not going to reduced our cost, it is going to increase it.

Sure, but when you mentioned that you might be able, or you would be able, to improve the expense rate on a flattish comp, was that speaking specifically to the SG&A leverage or was that including the tire and the oil cost benefits, too?

No, it's SG&A, and non-tire and oil costs.

Great, thank you guys.

Yes.

Matthew Dodson, Edmunds White Partners.

Thanks for taking some time. Real quick, when we look out to 2014, should we bake in $200 million of acquisition revenue? Is that a fair kind of run rate?

Yes, we will -- yes, we'll have all of the acquisitions in for a full 12 months. It is going to be something slightly less than that, because several of these will still be coming up the sales curve from the initial hit that we take in the first six months of transition.

Yes, I think from a sales standpoint, we try and -- our new presentation, which we will have on the website today, breaks out the exact dates that we bought these stores, what the annualized sales is, just to help you guys starting with the 2012 acquisitions, so you can run the 12 months. Obviously, a lot of the deals we did in November and December, we already have sales that will be included in our Q4, so you can't double count that increase each year. I think we've given you perfect information to understand the accretiveness, when the deals turn over 12 months, so we can start getting that $0.08 to $0.10 accretive on the 10% acquisition growth. And your specific question on what to add to the sales base, which we said for this year would be $725 million to $735 million, I think you take those run rates with the dates we gave you, with the annual sales, and you can get a pretty good estimate of our sales numbers for next year, which we will come out with in the April/May time period anyways and give you that, but you should be able to work through it with the information we've given you.

Perfect, that helps. And my next question is you guys talked about snow tires, adding inventory, if we don't get more snow in the quarter, can you talk about the headwind that would be with clearing that inventory out?

Well, it's all good inventory, and one of these years, soon, we are going to have a normal amount of snow, and we left last year's winter with some tires, and we are leaving this year with some additional tires, but that product is no problem at all. It is maybe a couple million dollars' worth of inventory, and as we said, we borrow at LIBOR plus 100, so the ordering and holding of snow tires is somewhat of a crap shoot each year, and it is not a significant cost for us to carry them. They are all good. I'm hoping to sell all of them next year.

Perfect, thank you.

Brian Sponheimer, Gabelli & Company.

Thanks for extending the call past the hour here. Just a couple of real quick ones, with this series of acquisitions you've made, what is the appetite for a larger splash, and are there targets that actually exist that are bigger than some of the targets you have gotten in-house over the course of the last six months? I guess I'll start there.

Rob wants to know if you have something you want us to buy?

I don't. You guys are the pros.

No, we can absolutely do additional -- complete additional acquisitions into next year. Certainly, this level of growth is something that we haven't done in the past. But our team, over the past 10 years, we have absolutely changed our Company such that we could take in this amount of growth, and we could absolutely do a couple more deals next year, including a larger deal if that came about. I said our current NDAs are 5 to 40 stores, and we can absolutely get several of those done, and a bigger deal if it came along.

Going back to I guess about 18 months ago now, did the Midas acquisition -- or a year ago, anyway, did the Midas acquisition disrupt the valuation multiples of your targets?

No. I think you can see that from the purchase price information that we gave you. We bought these stores within our metrics, and the deals that we -- that closed in November and December, we bought one-third of the stores within -- the real estate for one-third of the stores within those metrics. So, like I said, I don't think in a different year we would've been able to complete this many at these prices, when tire costs already we know are going down. So there is no question there, and we are going to get the entire benefit of that.

All right, that is actually good segue for my last question here. With the added real estate from the acquisitions, what are your plans regarding the parcels of land that you now hold under -- in-house? Any sale/lease-back opportunities, any conversion to a REIT, MLP, something along those lines?

No, not at all. We think owning good real estate at a level where we have it, somewhere around 30%, maybe just short of that, of our entire store base is a good thing long-term. And again, we borrow at LIBOR plus 100 basis points, with plenty of liquidity to get other deals done.

We are not looking to be trading at liquidation value any time soon.

I have to ask. All right, guys, thank you very much. I hope it dumps snow in all of your regions, except for the Fairfield County area.

Fair enough.

And at this time, we have one more question left in the queue. Bret Jordan, BB&T Capital Markets.

Great, at least I finally made the follow-up. One question, John, this is sort of the class of 2012 acquisitions, because a lot of those came late in the year. I think I heard you say that you thought they might be contributing to earnings in the first fiscal quarter of 2014, so that would be less than the couple of quarters of integration period that you traditionally talk about. Are they on balance better stores that you picked up or more functional, or you have just become more effective?

No, are you talking about our -- you're talking about the deals we've done in fiscal 2013?

Right, I thought you were -- I thought your fiscal '13 transactions you were talking about possibly being additive to earnings in the beginning of fiscal 2014, right?

Yes.

Yes, okay. Is was my understanding you usually took a few quarters, or a couple of quarters, to get them to the point where they were not a drag on earnings, yet a lot of these acquired sales came in the December quarter. So would they -- are they better, in that it will only take a quarter to integrate?

Yes, I think the --

It seems if they were going to be additive in the June quarter, that is only the March quarter that they are going to be sucking from earnings.

We've got several of those acquisitions that we did earlier in the year that will be contributing, and we'll have gone through the most difficult piece on these bigger deals, which will be in the fourth quarter, and beside that -- you know, they might be slightly dilutive as a group there. But we would expect net/net to see that contribute in the first quarter, and we will -- we ourselves will take a better look at that, as we look to issue guidance for next year. Certainly, the cost of sales reductions in tire costs are absolutely a big piece of that, with regard to how we've talked about acquisitions over the last couple of years in that rising cost environment. So, again, getting these deals done when costs for the seller, tire costs for the seller, were at their highest, and were positioned to come down, from a timing perspective is a big benefit to us. The thing we haven't been able to predict is when the consumer turns around, but at least having that tailwind is very significant.

Okay, great. Thanks a lot.

Sure, thank you.

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

Thank you. I would like to thank everyone for the time this morning. We are doing everything we can in this environment. We are committed to maintaining our market share, and working hard to get back to the kinds of returns and earnings that you and we are accustomed to over the past -- last number of years. We have taken advantage of this tough environment to significantly grow our store base, at a time when we will be benefiting significantly from declining tire costs and other cost savings, and we will come out of this period with a lot better operating margins and a lot bigger, more profitable company. We appreciate your continued support, and certainly appreciate the efforts from all of our employees that are working hard every day. Thank you, and have a good day.

This does conclude today's conference. Thank you for your participation.