Monro Inc (MNRO) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded and may not be reproduced in whole or in part without permission from the Company.

I would now like to introduce Ms. Jennifer Milan of FTI Consulting. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. I would just like to remind you that on this morning's call, management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the Company's filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not necessarily limited to, uncertainties affecting retail generally, such as consumer confidence and demand for auto repair; risks relating to leverage and debt service, including sensitivity to fluctuations in interest rates; dependence on and competition within the primary markets in which the Company's stores are located; and the need for and costs associated with store renovations and other capital expenditures.

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

Joining us for this morning's call from management are 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'd 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're with us to discuss our first quarter fiscal 2014 performance. After some brief opening remarks, I will review our quarterly performance and provide you with an update on our key initiatives and outlook for the remainder of the year. I'll 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 by saying that, although our first quarter results are weaker than we had hoped, our strong business model and execution against our long-term growth strategy enabled us to increase our market share and deliver sales and net income growth of 22% and 17%, respectively. This is a testament to our proven strategy and the initiatives that have helped us consistently lead our industry during both strong and weak markets.

We said that 2014 would be marked by increased traffic and sales, reduced tire costs, expense reduction, significant sales and earnings contributions from our recent acquisitions, and opportunities to make further accretive acquisitions at attractive prices. While we still haven't hit the mark on predicting sales, we delivered on all these other important objectives in the first quarter and expect these positive trends to grow as we progress through fiscal 2014.

In fiscal 2013, we achieved record acquisition growth, providing us with greater economies of scale and positioning the Company to deliver strong earnings over the next several years. Importantly, we continue to be very encouraged by our fiscal 2013 acquisition, which generated $44 million of sales and contributed to our earnings for the quarter, outperforming our plan. As a reminder, starting in our first quarter, the Kramer stores are included in our comparable store sales base.

We are not pleased with our first quarter comparable store sales performance, which softened in the final six weeks of the quarter after consistently tracking up 3% in the first seven weeks. We believe this is primarily the result of the macro environment, as reflected by the softer retail sales generally in June.

Consumers increasingly turned to us during the quarter to perform the necessary work to maintain and extend the life of their vehicles, as evidenced by a 2% increase in our comparable store oil change traffic on top of the 2.5% increase last year and a 4% increase in comparable store tire units in the quarter. However, customers continued to defer more costly purchases and trade down, resulting in flat or slightly positive comparable store sales in key categories.

While the 4% comp tire unit increase demonstrates the type of demand for tires, the impact of customers trading down and lower average prices collected translated to a tire category sales increase of approximately 1%. However, our continuing focus on reducing import tire costs allows us to offer great value to customers that are trading down at better margins for us.

That said, we are optimistic for improved performance in the second half of the year, given the 4% comp tire and 2% oil change unit increases in the first quarter and with a return to more normalized weather, particularly as we will be cycling against two consecutive years of unseasonably warm weather and a two-year deferral cycle. At the end of the day, people can only defer purchases of our products and services for so long. We are confident that they will continue to turn to us as their trusted service provider.

Gross margin declined versus the prior year as expected, primarily due to the continued shift in sales mix to the lower-margin tire category, which is a result of the high mix of tire sales of recent acquisitions. We continue to take a number of steps to help improve margins and are seeing continued declines in tire and oil costs, all of which we expect will benefit our margins as we move through fiscal 2014.

Specifically, we continue to leverage the significantly increased purchasing power that has resulted from our recent acquisition and our ability to shift purchases between our broad base of vendors. As discussed on prior calls, and as a result of our recent acquisition, we were able to negotiate lower oil costs that took effect during the second quarter of fiscal 2013 and benefited our first quarter this year by approximately $500,000.

We're also seeing continued improvement in tire costs. As [noted] previously, we received a 10% reduction in import tire costs after the September 2012 expiration of the tariff on Chinese tires and an additional 5% cost reduction in import tires that took effect January 1.

In addition to these savings, we continue to take a proactive approach in negotiating lower tire costs from both import and domestic suppliers. As a reminder, these cost reductions [will lead] to our cost of goods sold as our tire inventory turns. And in the case of import tires, time from order to receipt of good is approximately 90 days. Accordingly, many of these discounts that we've negotiated will flow through our cost of goods sold later this fiscal year.

We also continue to carefully manage operating costs, while keeping mindful that we are a growth company. For the first quarter, total operating expenses as a percent of sales were 27.1% versus 28.6% in the prior year.

For fiscal 2014, we continue to expect these actions, combined with declining material costs, to improve our operating model and allow us to generate EPS growth on our base business at a zero percent comp, whereas in the past, we needed a 2% to 2.5% comp sales increase to overcome normal inflationary cost increases. Our first quarter results demonstrate the benefits of these actions.

Turning now to our growth strategy, we remain focused on increasing our market share through comparable store sales growth, opening new stores in existing markets, and acquiring competitors at attractive valuation. As discussed previously, fiscal 2013 was our strongest year ever for acquisition growth. And while still somewhat early in the operational transition, and the sales environment remains challenging, we are pleased with the results of these stores thus far. In this choppy sales environment, we remain focused on increasing our market share while strengthening our key competitive advantages and our operating leverage through accretive acquisitions.

To that end, we are pleased to announce that we executed a definitive agreement to acquire 10 Curry's Auto Service Stores. This acquisition will increase our number of store in the greater Washington, D.C., market to 37, filling in a key market, and adds approximately $18 million in annual sales. This transaction is expected to close in mid-August.

Importantly, the sales mix of these stores is approximately 80% auto service and 20% tires, which plays very well into one of our key competitive advantages of being able to source high-quality parts very cost effectively. We saw great results with the Vespia stores we acquired in fiscal 2012, another group of stores that has a high mix of service sales.

The high mix of service sales will also help in part to offset the pressure we have been seeing from the sales mix shift to tires. We expect the Curry stores to be slightly dilutive in the second quarter and for the full fiscal year.

Collectively, our acquisitions decrease our purchasing power with vendors, reducing material and other costs and allowing us to further leverage distribution, advertising, field management, and headquarters G&A costs, all of which will drive operating margin improvements going forward.

With ongoing seller concerns over the operating environment as well as higher taxes and healthcare costs, we continue to see meaningful opportunities for attractive deals in the marketplace. Additionally, 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 seven NDAs signed, after taking a six-month break to integrate our fiscal 2013 acquisitions. Five of these NDAs are within our footprint and two are in a continuous market with store chains ranging in size from five to 40 locations.

Based on the Curry transaction, the current macro environment, and our existing NDAs, we think the acquisition environment could heat up further in the second half of the year. We have plenty of liquidity combined with strong cash flow to complete these deals and remain very disciplined on the prices we pay with 7 to 7.5 times EBITDA, or about 80% of sales, being our key metric. (Inaudible) continue to compete only with the sellers' expectations in these deals.

Turning now to our outlook. While we have limited visibility on when the state of the consumer may ultimately improve, and we expect that the environment will remain choppy in the near term, we are optimistic about our ability to deliver comparable store sales increases for the full year fiscal 2014 based on easy comparisons ahead.

To date in the second quarter, oil change traffic remains positive and comparable store sales are trending flat to last year. We expect this trend to continue through our second quarter. That said, we are optimistic that with the increase in comparable store tire and oil change units, and with more normalized weather throughout the high tire selling season, two years of increased customer deferrals will reverse and present a tailwind for sales in the second half of fiscal 2014.

In addition, our fiscal 2013 acquisitions position Monro for profitable growth over the next several years, including fiscal 2014.

For the full fiscal year, taking into account the anticipated sales contribution from the Curry acquisition, we now expect total sales to be in the range of $840 million to $860 million, incorporating a comparable store sales increase in the range of 1% to 3%. Based on these assumptions, we now estimate full fiscal year 2014 EPS of $1.58 to $1.70, which compares to EPS of $1.32 in fiscal 2013 and which, at the high end of our anticipated range, represents a 29% increase in EPS and 100 basis points of operating margin improvement.

Based upon trends to date, and taking into account the Curry acquisition, we expect total sales for the second quarter to be $209 million to $214 million, incorporating comparable store sales growth of 0% to 2%. We expect second quarter earnings per share to be in the range of $0.41 to $0.45, with the fiscal 2013 acquisitions contributing to earnings and the Curry acquisition slightly dilutive. This compares to $0.36 for the second quarter of fiscal 2013.

As I discussed earlier, the shift in sales mix to the tire category, primarily related to acquisitions, will continue to pressure gross margin, particularly in the second quarter. This impact is more pronounced in the first half of the year as we incorporate the acquired stores' higher tire sales mix for the first time and continue the first year operational transition of these stores.

We expect that operating margin for the second quarter will be flat to 50 basis points better than last year's second quarter. Operating margin should improve throughout the year from higher sales, expense reductions, lower material costs, and increasing leverage and contributions from our fiscal 2012 and 2013 acquisitions.

Our five-year plan continues to call for, on average, 15% annual top-line growth, including 10% growth through acquisitions, 3% to 4% comps, and a 1% to 2% increase from greenfield stores.

Our acquisitions are generally dilutive to earnings in the first six months as we overcome due diligence and deal-related costs while working through initial inventory and the operational transition of these stores. With cost savings and recovery in sales, results are generally break-even to slightly accretive year 1, $0.08 to $0.10 accretive year 2, and another $0.08 to $0.10 accretive in year 3. 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 expect to see increasing contributions from these deals throughout fiscal 2014 and even greater contribution in fiscal 2015. We are confident that our disciplined acquisition strategy is strengthening our position in the marketplace and will continue to provide meaningful value to shareholders for many years to come.

Before I turn the call over to Cathy, I would like to reiterate that my confidence in our business and outlook for our industry remain very positive. There are still 245 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-brand core strategy.

In closing, I would like to thank all of our employees for their continued hard work, passion for superior customer service, and consistent execution, all of which are critical to Monro's brand strength and success. With that, I'd like to turn the call over to Cathy for a more detailed review of our financial results.

Thank you, John. Good morning, everybody. Sales for the quarter increased 21.9%, and new stores, which we define as stores opened or acquired after March 31, 2012, added $36 million, of which $34.4 million came from the fiscal 2013 acquisition stores, excluding Kramer, since Kramer stores are comparable stores effective March 31, 2013.

Reported comparable store sales, including the Kramer stores, increased 1.2%, and there was a decrease in sales from closed stores of approximately $1 million.

There were 90 selling days in both the current and prior-year first quarters.

At June 29, 2013, the Company had 935 Company-operated stores, as compared with 836 stores at June 30, 2012. During the quarter ended June 2013, the Company opened one store and closed three.

Gross profit for the quarter ended June 2013 was $78.9 million, or 38.3% of sales, as compared with $68.1 million, or 40.3% of sales, for the quarter ended June 2012. The decrease in gross profit for the quarter ended June 2013 as a percentage of sales was primarily due to material costs.

Total material costs, including outside purchases, increased as a percentage of sales as compared to the prior year. As John mentioned, the increase in material costs as a percent of sales is largely due to a shift in mix to the lower-margin tire category, attributable in large part to the FY '13 tire store acquisitions. In fact, including the results of these fiscal year '13 acquisition stores, gross profit as a percent of sales in total was essentially flat with the prior-year quarter.

The increase in total material costs was offset in part by decreases in labor and distribution and occupancy costs as a percentage of sales.

Labor productivity, as measured by sales per man hour, improved over the prior-year quarter. Additionally, the Company achieved some leverage in distribution and occupancy costs as a result of the positive comparable store sales in the quarter as well as the increased sales from last year's acquisitions.

Operating expenses for the quarter ended June 2013 increased $7.3 million, and were $55.8 million, or 27.1% of sales, as compared with $48.4 million, or 28.6% of sales, for the quarter ended June 2012. This demonstrates that the Company experienced leverage in this line with the increase in comparable store sales and through focused cost control.

Operating income for the quarter ended June 2013 of $23.1 million increased by 17.4%, as compared to operating income of approximately $19.7 million for the quarter ended June 2012, and decreased as a percentage of sales from 11.6% to 11.2%.

While net interest expense for the quarter ended June 2013 was relatively flat as a percentage of sales as compared to the same period last year, the weighted average debt outstanding for the first quarter of fiscal 2014 increased by approximately $97 million as compared to the first quarter of last year. This increase is primarily related to an increase in debt outstanding under the Company's revolving credit facility for the purchase of our recent acquisitions as well as an increase in capital leases recorded in connection with the debt position.

Largely offsetting this increase was a decrease in the weighted average interest rate of approximately 250 basis points from the prior year, due to a shift to a larger percentage of debt -- that being revolver versus capital leases -- at a lower rate.

The effective tax rate for the quarters ended June 2013 and June 2012 was 36.4% and 36.9%, respectively, of pretax income.

Net income for the current quarter of $13.6 million increased 16.6% from net income for the quarter ended June 2012. Earnings per share on a diluted basis of $0.42 increased 16.7% as compared to last year's $0.36 per share.

Our balance sheet continues to be strong. Our current ratio of 1.2 to 1 is comparable to last year's first quarter and to our recent year end. For the quarter ended June 29, 2013, we generated approximately $34 million of cash flow from operating activities and received about $2 million from the exercise of stock options.

We used the cash flow from operations to pay off $25 million of debt, finance approximately $7 million of CapEx, and pay about $4 million in dividends to shareholders.

At the end of the first quarter, long-term debt consisted of $104 million of outstanding revolver debt and $62 million of capital leases and financing obligations. As a result of the debt pay-down, our debt-to-capital ratio, including cap leases, decreased 400 basis points to 30% at June 2013 from 34% at March 2013. Without capital and financing leases, our debt-to-capital ratio was 22% at the end of June 2013, a decrease from 26% at March 2013.

As a reminder, we have a $250 million revolving credit facility that is committed through December 2017. 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 are currently paying LIBOR plus 125 basis points.

Our flexible agreement permits us to operate our business, including doing acquisitions, without bank approval, as long as we are compliant with debt covenants. Thos terms, as well as our current availability of about $120 million, which doesn't include the accordion, give us a lot of ability to get acquisitions done quickly. We are fully compliant with all of our debt covenants and have plenty of room under our financial covenants to do this Curry transaction and other acquisitions that may come about without any problem.

Inventory is down about $2 million from March 2013. This is due in part to lower tire costs. Total inventory turns for the rolling 12 months ended June 2013 have improved slightly from year end. Additionally, at June 29, 2013, for the non-fiscal year '13 acquisition stores, our total tire inventory was actually down about 11% when compared with the same time last year.

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

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

Good morning. A couple of quick questions here. One of them -- I guess if you look in your markets, your tire units were up 4%. Do you have a feeling for how that compared to general tire traffic in the markets that you serve?

And then, as a bigger sort of geographic outlook, if you're now in 22 states, did you see any regional dispersion in performance over some of the markets that had historically wet Junes, like Philadelphia under-performing some of the western markets, or was there any noticeable difference regionally?

Yes. On the tire units, I think we are at or better than what we see within our markets and in the guides that we're looking to to buy. So that's favorable.

With regard to regional differences, we didn't see significant regional differences. June retail sales were weak generally. Weather certainly didn't help that situation but I frankly wouldn't have expected, after running positive three comps for seven weeks, to run six weeks of flat. So I think that had an impact.

Okay. And if you look at oil as a category, tires are deflating with the import mix. Is your oil change pricing year over year meaningfully down? I think you've been promoting a $21.99. What was the year-ago quarter for oil pricing?

Over all, it's not down meaningfully. I think it might have ticked down slightly, but not meaningfully at all.

Okay. And then I guess one just housekeeping -- could you give us the monthly comps and maybe some cadence as we come into July?

Yes, the monthly comp was up 3% in April, up 1% in May, and flat in June.

Okay. And I guess as we look at July, I think the week around July 4 might have been soft industry-wide. But what have we seen since then?

Actually, we didn't have a bad week there. I mean, things have been uneven. Again, we've not proven to be able to predict things on the sales side so we've had some uneven weeks there. This week is up mid-single digits. You tell me what sales are going to be; I'll tell you want the results are going to be. We're delivering on everything else and we're working hard to bring customers in, which we did in the first quarter with increased oil changes, where I think the tire units being up shows that folks are getting to a point that they need to replace some tires -- and we're working hard in a choppy environment.

All right; thank you.

Thank you.

James Albertine, Stifel Nicolaus.

Great; thanks for taking my question. Good morning. Just wanted to focus on the M&A side. Just given the soft comp environment, certainly in the last six weeks of the quarter and then, as you noted, the choppy July results, what are you seeing from -- I guess on the first high end of the pipeline perspective -- the number of deals? And then the valuation, secondly, that you're seeing relative to the deals that you're working on.

Yes. I think last time we spoke, we had eight NDAs. We have seven now because we signed one of those. So the price line at that level is very strong. And in terms of -- I think a choppy environment plays into that. So I expect to see more acquisition opportunities as we move forward.

And in terms of valuation, we're being very careful with the valuation. We are within the parameters that we've been paying -- 7 to 7.5 times EBITDA, 80% of sales. I would note in the last several transactions we've been purchasing within those parameters more of the real estate, which is a benefit on the valuation side. We're getting more assets.

That's very helpful. And then, if I may ask a second question. On the implication that the conversion remains stubborn in the last quarter, I just wanted to get a sense for as consumers continue to defer items, can you just get into a little more granularity, maybe by segment, where you're seeing that?

And then, as sort of a related question, I wouldn't imagine it's typical of sort of your core consumer, but are you seeing folks that at this point, with significantly older vehicles, perhaps opting to replace rather than repair when they get into the big-ticket maintenances and repair categories? Thanks.

Yes. On a category basis, really that choppiness, or that deferral there, is kind of across the board.

On the replacement of vehicle, that's always been a consideration. And I think if you take a look at our consumer, what the data is showing is that they are hanging on to their cars and they're investing in those cars. I think those consumers are having a tougher time right now and that is showing up in the choppiness in our sales. But I don't think that those folks are going to buying new cars in droves. Just as a note, we continue to see the number -- or, the percentage -- of vehicles that are 12 years old and older grow within our customer base, and our traffic is up there.

Right; it doesn't sound like there's any systematic change, then.

No, I don't see anything there.

Great; okay. Well, I appreciate that and good luck in the coming quarters.

Thank you.

Rick Nelson, Stephens.

Thanks; good morning.

Good morning.

The acquisition looks like it had more of a service component to it -- 80% service. Does that signal any change or desire to look at more service stores as opposed to tire stores?

No. We've said in the past, we're indifferent there. Our multi-branding strategy allows us to have that kind of flexibility as we approach acquisition candidates, and it allows us to get more deals done to create that store density that drives operating margins up. But it's in no way a shift to buying service stores as opposed to tire stores.

What we have said is because of the significant number of independent tire dealers that are out there, we will have more of our acquisitions, probably four out of five, being on the tire store side versus a service store side.

Okay, got you. So that would be true of the seven NDAs -- that are still more tire oriented?

That's right.

And just to follow up on the margin pressure you felt in the quarter, I understand acquisitions, lower-margin tires, weigh on that. If you could discuss the competitive environment in the tire business, what's happening to pricing and margins and maybe looking at some of your legacy stores as opposed to the newer ones.

Yes. With tire costs coming down there's a bit of a downward bias in tire retail pricing. But as Cathy said, excluding the acquisitions, our gross margin was flat for the quarter. And as I said, I thought we discounted more in the quarter, in particular on tires, than we should have. And we're addressing that.

One of the things to remember as well on the acquisition side is those stores that we bought have a high concentration of tire sales, but they are also still coming up the spectrum on the integration. So we always have a lower margin earlier in that integration. So I expect that to be a help later in the year. We certainly see margin opportunity as we move through the year as we address our discounting and as those integrations occur and the tire costs continue to come down.

Okay. Thanks a lot and good luck.

Sure.

Thank you.

Scott Stember, Sidoti and Company.

Morning.

Morning.

Hi, Scott.

Can you maybe talk about the tire performance between the two different types of formats that you have? And I'm talking more along the lines of the volume tire stores like Tire Warehouse versus, let's say, Mr. Tire.

There wasn't a significant difference between those formats, if you're talking about where the unit increase came from.

Right; that's what I was referring to.

No, there was nothing meaningful there.

The big adjustment, Scott, just in general, is we're getting more units now but people continue to look for value and trade down to the private label category as we're offering that value. We're encouraged with the units. We think at some point it levels off and the units will start approaching a comp number -- instead of a plus 4, getting us a plus 1.

Got you. And last quarter you talked about the condition of the tires that are actually coming into your bay. We haven't seen any change there; obviously, they must still be in pretty wretched condition, I imagine.

Yes, they are. They have less tread on them than they have in recent years. Same trend that we've been seeing there. And I think, again, with our driving positive units in the quarter that's a good thing, and it certainly give me confidence as we look at the opportunity versus the second half of the year, which has been weak for two years now. I can't imagine -- it's going to be three years, particularly if we get any kind of normalized weather.

Okay. And just last, on some of the higher-margin components of your business like brakes. A little bit softer in the quarter than we expected here. Is there anything going on there, or is it just a function of the entire portfolio of products being affected by the lower June sales to the consumer?

On those categories, again, we continue to drive those folks in with oil changes. Those categories have been weak in the quarter. I think that, again, comes back to the consumer and the consumer being in a tough environment.

What I will say is we've had negative trends in exhaust and in ride control and things like that. So more stable trends there to me support the fact that we have a bunch of folks that are investing in older cars and keeping them. Certainly exhaust and ride are both categories that you only spend those hundreds of dollars on when you're going to be keeping your vehicle. So not great results, but at least stable as opposed to any kind of a decline.

That's great; thanks a lot.

Thank you.

Thank you.

(Operator Instructions) Michael Montani, the ISI Group.

Hey guys, good morning. Just wanted to ask about, on the tire side, the 4% comp -- I'm sorry, the 1% comp and the 4% unit increase. Is the difference there basically all ASP compression or deflation or is it sort of 50/50 mix? Can you just help us understand that?

Yes, it's a good chunk of trading down and some average selling price compression. So it's a chunk of both.

Okay. And can you update, John, now in terms of what your total tire purchase volume is versus what it might have been a year ago? And then, what percentage is looking like branded versus sort of private label?

Yes, we were about 2 million; now we're nearly 2.8 million. And the branded -- the import tires have grown to the high 20s in terms of a percentage from the mid-20s last year.

And then, just to update in terms of the savings that you're realizing -- I think it's now 15% run rate on the imported tires. Can you provide an update on where branded is, and are we mixing out in total then at sort of a high single-digit-type improvement in purchase costs?

Yes, we've said in the past that branded was up to 8%. We're still in that general range. Again, we're not going to talk too much about this; it's pretty competitive information. I expect margin to -- while in the second quarter will still be impacted by bringing in the acquired stores' higher tire mix, so gross margin to be impacted there and somewhat in the third quarter.

But margin is an absolute opportunity as we move through the year because we will have more of the discounts actually coming through our cost of sales.

Okay, great. And just the last question I had was in terms of the competitive environment -- you touched on it a bit before. When you think about getting into the September time frame where you've historically done price increases, with traffic now positive, do you actually feel like there's a decent chance you can get a price increase through again? And what are you sort of seeing out there in terms of the outlook?

I think you can take from our comments about managing our discounting and that to be -- through our consistent approach of trying to collect everything we can. So we will absolutely look to put a price increase through in September. But we'll wait until we get there to evaluate what to do there. We'll see how the next month and a half lays out.

Okay, great. Thanks; good luck.

Thank you.

Thank you.

Peter Keith, Piper Jaffray.

Hey; good morning, everyone. Just wanted to understand the revision to the full-year earnings guidance. Clearly there's a little bit of a reduced comp outlook. However, with the margin characteristics -- if you strip out what Curry's for that acquisition -- did your margin outlook at all change for the year?

No, it hasn't changed other than to account for some potential up side there that we've been describing.

Peter, we did -- we're calling for 1% to 3% instead of 2.5% to 4%. If you just do the math, if every 1% comp is $0.07 and you're lowering everything by 1.5% on your estimate, the margin doesn't change, just sales are a little bit lighter than we might have anticipated after the start to the year being 3%.

Yes. And we're very pleased with where the acquisitions are and they came in in first quarter ahead of our plan, so that also helped.

Okay, that's helpful clarification.

If you look at the second quarter, we're at 41 and 45, off 36, and that's 0% to 2% comp. So with zero, we said we start leveraging the business on the low end, it kind of gives you an indication of what we think the acquisitions are going to do to get us from 36 to 41. And then, you just do the math -- $0.07 for a year on 1% comp. You move it up to 2%, and that's where 45 comes from. So fairly consistent on everything, with obviously proving our lack of ability to predict sales.

Okay. Kind of as a follow-up to that last comment, if we look at the revised comp guidance, you've guided the quarter 0% to 2%, you're currently at 0%. So there's clearly potential for some acceleration that you're factoring in.

Also for just the rest of the year, it also looks like you're baking in the potential for acceleration. Can you give us some comfort on how that outlook comes together? Is it the tire pricing that you're going to annualize something, or is it just, you think, more normalized weather? Help us understand where that comp acceleration might come from.

It's primarily the opportunity in the back half of the year that we see coming off of two very weak years. Again, we're driving positive oil change units right now, we've got positive tire units. We get a handle on our pricing here, I see a real opportunity for unit increases to drive that positive comp in the second half of the year after two years of declines.

And the industry hasn't seen that in decades and I can't imagine it's going to be three. It's important to us that we saw the tire units respond in the first quarter and that, again, gives me a lot of confidence looking at the back half of the year if we get some weather.

Okay. Just changing gears real quick, on the acquisition front. You talked recently, maybe it was just last quarter, that you thought this current fiscal year would be an above-average acquisition year because of some of the changes to the healthcare laws. The Affordable Healthcare Act employer mandate, though, was pushed out a full year to 2015. Would that change the acquisition dynamic? And maybe do you find some sellers less eager to sell this year as a result?

Well, no one called me after they heard the Treasury Department announcement to tell me that they weren't interested anymore. So no, I think the weak environment, the choppy environment, that we're currently facing has been the primary issue. And the long-term trend is of these guys getting older and looking for other things to do. Given that environment is where we'll find most of the opportunities. I haven't seen any impact from the healthcare mandate being pushed off for employers.

And frankly, if the opportunities were there we could certainly hit the -- if the right deal, we're able to strike -- we could get to that 10% growth this year and handle that from a management perspective.

Okay, great. Thanks a lot for that, John, and good luck to everyone for this coming quarter.

Thank you.

Thank you.

(Operator Instructions) Gary Balter, Credit Suisse.

Thank you. One question, which is to follow up. And I joined the call a bit late so you may have discussed this, but could you talk about regionality? Were there some areas that were just significantly weaker and was some of that weather-related?

Yes, we saw the weakness in the back half of our quarter more generally, and weather certainly didn't help in that situation.

But given that it's getting warmer, shouldn't that be helping at this stage?

Yes. Like we said, we've proven our inability to predict the sales side. I certainly didn't see six weeks of flat coming after three weeks of positive comps. Mentioned a little bit earlier, this week's up mid-single digits. I mean, we haven't been able to predict it. What we're focused on is continuing to bring customers in and that's why for us the oil changes is so important, and the fact that we drove some higher tire units is very favorable for us.

Just to follow up -- historically, Monro would be able to put though price increases on a relatively consistent basis. Is there a worry -- and I don't know the competitive market very well, so this may be a naive question -- but is there a worry that you're pricing yourself a little too high relative to either other franchise operations or other people trying to be in the business in some of these categories?

Yes, certainly we've never been the low-price guy out there. We've got attractive everyday prices on oil changes and entry-level tires. We look to be competitive and slightly above a lot of our competitors there.

And what we look at is traffic. I mean, typically we'll run plus-2 to minus-2 traffic. And that's what we really gauge to determine whether we're pushing too hard on the pricing side. So with the traffic that we've seen, what it tells me -- and of course, the weakness in sales -- it's a consumer issue. Retail sales were weak in June; weather played a small part in that. And we have an opportunity in the back half of the year if we get some weather. But really, if we're driving the traffic -- and I'm comfortable that we are here because we continue to drive folks in for oil -- that's how we monitor the pricing.

And we will continue to operate that way. Our margins are pretty good and that's the way that we support --

We also have the benefit, Gary, of seeing the seven guys we're trying to buy, plus the one guy we just bought, what they're doing in units and what they're doing in sales, which gives us some comfort that after 12 years, we just didn't all of a sudden get stupid.

Yes, which I wasn't implying by any means. But just maybe if some of the outside players like a Wal-Mart or Sears is trying to drive some business and getting more aggressive; it doesn't seem like that's going on.

No. We don't think that's the case.

Thank you very much.

Thank you.

Thank you.

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

I'd just like to thank everyone for their time this morning. We continue to work hard to take advantage of the great opportunities that we have here and I look forward to talking with everyone about better numbers in October. Thanks; have a great day.

And that does conclude our conference. Thank you for your participation.