Monro Inc (MNRO) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake's earnings conference call for the third quarter of fiscal 2014. At this time, all participants are in a listen-only mode, and later we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions) And, as a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in any part without permission from the Company.

I would now like to introduce Ms. Leigh Parrish of FTI Consulting. Please go ahead.

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 press 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 SEC. 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 the leverage and debt service, including sensitivity to fluctuations in interest rates; dependence on and competition within the primary market 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 statements 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 CEO; Cathy D'Amico, CFO; and Rob Gross, Executive Chairman.

With these formalities out of the way, I would like to turn the call over to John. John, you may begin. Go ahead.

Thanks, Leigh. 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 2014 performance.

After some brief opening remarks, I will review our results for the quarter and provide you with an update on our key initiatives and outlook for the remainder of the year. I will then turn the call over to Kathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results.

We delivered record sales and net income in the third quarter as we leveraged our strong operating model and benefited from more normalized winter weather with sales and net income growth of 14% and 36%, respectively.

Importantly, during the quarter, we continued to deliver on our key objectives of increasing traffic, benefiting from lower product costs, controlling operating expenses, generating strong sales and earnings contributions from our recent acquisitions, and capitalizing on opportunities to complete additional acquisitions at attractive prices. Our performance is the result of our team's consistent execution of our proven strategy and the initiatives that enable us to lead our industry in both strong and weak markets.

While we benefited from more normalized weather trends in the third quarter, the macro and retail environment remained weak and negatively influenced consumer purchasing behavior, resulting in a comparable-store sales increase of 0.3%. We have seen budget-conscious consumers defer repairs and focus on the most necessary items, which has resulted in choppy sales across key categories throughout this year.

Customers have also continued to trade down, particularly in tires, where direct imports were just over 30% of our tires sold versus mid 20s last year and midteens three years ago. In our third quarter, comparable-store oil change traffic and tire units each increased 3%, and comparable-store sales were up 2% for brakes and 1% for tires, demonstrating that customers continued to turn to us during the quarter to perform the work necessary to keep them safe and maintain and extend the life of their vehicles.

At the same time, comparable-store sales decreased in the exhaust, shock and alignment categories, which are more discretionary. Comparable-store tire units were positive for the quarter and year-to-date periods, despite the weak consumer.

In November and December, comparable store tire units were positive by mid-single digits as a result of the winter weather in our markets. Tire unit sales have also been leading the way month to date in January.

We remain cautiously optimistic for improved sales performance in the fourth quarter with continued normalized weather patterns, particularly as we are cycling against two consecutive warm winters 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, and we have demonstrated that customers continue to turn to us as their trusted service provider.

We are hopeful that sales improvements we are seeing in certain categories, while choppy, are signs that the extended deferral cycle may begin to reverse in the near future. Overall, we are encouraged that the cold winter weather and its effects on part failures and repairs in the spring season should help our sales in the first quarter of fiscal 2015.

As expected, we generated improved gross margin versus the third quarter of the prior fiscal year, despite a shift in sales mix to the lower-margin tire category that primarily reflects the higher tire sales mix of our recent acquisitions. Our ability to increase gross margin was largely due to reduced product costs and payroll control in our comp stores, as well as leverage of fixed costs as we achieve greater economies of scale from our recent acquisitions.

We continue to drive reductions in product costs, primarily tires, which will benefit the fourth quarter of this year and next fiscal year. As we have previously discussed, since the elimination of the tariff on imported tires a year ago, we have received 15% to 20% reductions in import tire costs.

In addition to these savings, we continue to take a proactive approach in pursuing lower tire costs from direct import and branded suppliers and are taking advantage of the increased purchasing power that has resulted from our recent acquisition.

We are also benefiting from increased volume-related incentives and select cost reductions from branded manufacturers. As a reminder, these cost reductions flow into our cost of goods sold as our tire inventory turns. We expect this trend to continue into fiscal 2015 due to lower tire input costs, increasing supply and our increasing volume.

The benefit of declining tire costs was enhanced by the fact that, on average, we collected slightly more per tire in the third quarter versus the second quarter of this year. This is quite an accomplishment considering that the consumer continues to trade down to private label import tires.

In fact, our third-quarter tire gross margin improved over the prior year, and we expect to see that continue in our fourth quarter, assuming a relatively stable retail pricing environment.

We also continue to carefully manage operating costs while appropriately investing for growth. For the third quarter, total operating expenses as a percent of sales decreased to 25.6% from 26.7% in the prior year, reflecting leverage from our higher overall sales, combined with our cost control initiatives. Our third-quarter results demonstrate the benefits of our active management of operating expenses.

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 valuations. As you know, we significantly accelerated acquisitions and achieved record acquisition growth in fiscal 2013.

Through our successful acquisitions, we are operating with greater economies of scale that are benefiting us today, as well as positioning the Company to deliver strong earnings over the next several years. In this uneven sales environment, we remain focused on increasing our market share while strengthening our key competitive advantages and our operating leverage through accretive acquisition.

We continue to be very encouraged by our fiscal 2012 and 2013 acquisitions, which contributed to earnings for the quarter again outperforming our plan.

As a reminder, based on the timing of our fiscal 2013 acquisitions, we estimate an EPS accretion of $0.15 to $0.20 coming into fiscal 2014 and raised that estimate after our second quarter to $0.20 to $0.22.

During our third quarter, we closed on the previously announced acquisitions of 10 stores and $15 million in annualized sales in Delaware, Maryland and Kentucky. These deals increase our store density and leverage our existing brands of Mr. Tire in Delaware and Maryland and Towery's Tire in Kentucky. On a combined basis, the acquisitions we have completed in fiscal 2014 represent nearly 5% of total sales.

Collectively, our acquisitions increase our store density within our geographic footprint and our purchasing power with vendors and allow us to further leverage distribution, advertising, field management and headquarters G&A costs, all of which will help us drive future operating margin expansion.

We still see meaningful opportunity for attractive deals in the marketplace, given the current macro environment. Owners of target independent tire deals are individuals who are at or nearing retirement age without an internal succession option. We presently have seven NDA signed compared to six at the end of the second quarter. Five of these NDAs are within our footprint and two are in a contiguous market with store chains ranging in size from five to 40 locations. Based upon our recent transactions and our existing NDAs, we remain opportunistic about opportunities for additional acquisitions in the near future.

While we remain disciplined in the prices we will pay for acquisitions, as we reach acceptable terms, we are ready to act on any opportunities, smaller or larger.

Turning to our outlook, I want to first discuss our overall view on the industry and key trends, which remains very positive. There are still 245 million cars on the road in the US that are getting older, and consumers are keeping and maintaining their vehicles longer. We know this because the average age of vehicles on the road has increased to 11.7 years. Vehicles over 12-years-old now represent over 20% of our traffic, up from the midteens three years ago, and average ticket on these older vehicles is consistent with our overall average.

Although deferrals have increased in this economy, consumers continue to perform necessary repairs on these older vehicles, as evidenced by our year-to-date increases in comparable store oil change traffic, tire units and brake, exhaust and shock category sales.

Newer customers have an interest in and are able to work on their vehicles. The number of overall service base is declining, and there remain numerous acquisition candidates that meet our criteria.

As we look at the position of our business within the industry, 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 store strategy.

Looking to our results for the remainder of the year, we are encouraged by this year's weather trends and expect that normalized weather patterns will continue to have a positive impact on our business.

January comparable-store sales month to date are slightly positive after running up approximately 2% prior to last week's storms that impacted many of our stores. By the way, that is not a complaint about the weather. As a result, we have conservatively incorporated our year-to-date run rate of flat sales into our guidance for the fourth quarter.

For the full fiscal year, taking into account anticipated sales contribution from our fiscal 2013 and 2014 acquisitions, we now expect total sales to be in the range of $830 million to $835 million. This range incorporates flat comparable-store sales versus the prior range of down 1% to flat.

Based upon these sales assumptions, improving margins and outperformance by our recent acquisitions, we are increasing our estimate of fiscal year 2014 EPS to a range of $1.63 to $1.66 from a range of $1.58 to $1.65, which compares to EPS of $1.32 in fiscal 2013 and which represents a 23% to 26% increase in EPS versus fiscal year 2013.

In addition, margins will continue to improve significantly in the fourth quarter as compared to the prior year, and we expect 100 to 125 basis points of operating margin improvement for the full fiscal year 2014. Based upon trends to date in the fourth quarter, we expect fourth-quarter comparable-store sales to be flat to an increase of 1% and earnings per share to be in the range of $0.32 to $0.35 with fiscal 2013 acquisitions contributing to earnings and the fiscal 2014 acquisitions being slightly dilutive. This compares to $0.25 for the fourth quarter of fiscal 2013 and represents earnings-per-share growth of 28% to 40%.

Looking forward to next year, I am encouraged by the cold and wintry weather this season because its effects on part failures and repairs should accelerate our comparable-store sales in the spring.

I am also encouraged by the results of our continued actions to reduce both product and operating costs, which should allow us to produce operating leverage at a comparable-store sales increase of approximately 1% versus the 2% to 2.5% we have needed in past years.

Coupling this with continued strong performance of our recent acquisitions, we should deliver a solid fiscal 2015. Our five-year plan remains unchanged and continues to call for, on average, 15% annual topline 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 to these stores.

With cost savings and recovery in sales, results are generally breakeven to slightly accretive year one, $0.08 to $0.10 accretive year two and another $0.08 to $0.10 accretive in year three. For our recent 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.

Our disciplined acquisition strategy is further strengthening our position in the marketplace and will continue to provide meaningful value to our shareholders for many years to come.

Before I turn the call over to Cathy, I would like to say that I am very proud of the performance of our team during the third quarter. We serviced more customers, performed more oil changes starting out future business, sold more tires and made more money on each unit, controlled operating costs and did a great job integrating our acquisitions from last year and our three new deals completed this year. These efforts allowed us to report record sales and earnings for the quarter. The hard work, passion for superior customer service and consistent execution that our employees deliver every day are reflected in these results and are critical to Monro's brand strength and success. We greatly appreciate their efforts.

With that, I would like to turn the call over to Cathy for a more detailed review of our financial results.

Good morning, everyone.

Sales for the quarter increased 13.8% and $26.3 million. New stores, which we define as stores opened or acquired after April 1, 2012, added $29.6 million. As a reminder, the former Kramer Tire stores acquired on April 1, 2012 are considered comparable stores in fiscal 2014 because they were open one full fiscal year at the end of fiscal 2013.

Comparable-store sales, including the Kramer stores, increased 0.3%, and there was a decrease in sales from closed stores of approximately $1.5 million.

Additionally, in the third quarter of last year, the Company sold $2.4 million of slower moving inventory to a buyer company. There was no similar transaction in this quarter. There were 89 selling days in both the current and prior-year third quarters.

Year-to-date sales increased $92.1 million and 17.2%. New stores contributed $99.5 million of the increase. Partially offsetting this sales increase was a comparable-store sales decrease of 0.2% and a decrease in sales from closed stores amounting to $3.9 million.

At December 28, 2013, the Company had 951 company-operated stores as compared with 918 stores at December 29, 2012. During the quarter ended December 2013, the Company added 13 stores and closed two. Year-to-date we added 26 stores and closed 12. Gross profit for the quarter ended December 2013 was $82.3 million or 38% of sales as compared with $59.6 million or 36.6% of sales for the quarter ended December 2012.

The increase in gross profit for the quarter ended December 20, 2013 as a percentage of sales was due to several factors. Distribution and occupancy costs decreased as a percentage of sales from the prior year as we gained leverage on these largely fixed costs with higher overall sales. Labor costs decreased as a percentage of sales as compared to the prior-year through focused payroll control. Labor productivity as measured by sales per man hour improved over the prior-year quarter.

Additionally, tire costs decreased meaningfully in the third quarter of this year as compared to the same quarter of last year.

Total material costs, including outside purchases, were relatively flat with the prior year. We saw a meaningful decline in product costs, which were offset by a shift in sales mix to the lower margin tire category, due primarily to the fiscal year 2013 and 2014 acquisitions of tire stores with high tire sales mix.

Additionally, excluding the fiscal year 2013 and 2014 acquisition stores, total material costs declined almost a full percentage point as compared to the third quarter of last year. Gross profit for the nine months ended December 2013 was $242.9 million as compared with $207.6 million for the nine months ended December 2012 and remained flat at 38.7% of sales.

Operating expenses for the quarter ended December 2013 increased $4.6 million and were $55.4 million or 25.6% of sales as compared with $50.8 million or 26.7% of sales for the quarter ended December 2012. Due to increased comparable-store sales and sales from the fiscal 2013 and 2014 acquisitions, as well as continued cost control, we gained leverage on these largely fixed costs.

For the nine months ended December 2013, operating expenses increased by $19.7 million to $169 million from the comparable period in the prior year and were 26.9% of sales as compared to 27.9%.

Within operating expenses approximately $5 million in expenses were directly attributable to increased expenses such as manager pay, advertising and supplies related to the fiscal 2013 and fiscal 2014 acquisitions. On a comparable-store basis, operating expense dollars actually decreased, demonstrating some leverage in the supplies through focused cost controls.

Operating income for the quarter ended December 2013 of $26.9 million increased by 43% as compared to operating income of approximately $18.8 million for the quarter ended December 2012 and increased as a percentage of sales from 9.9% to 12.4%.

Operating income for the nine months ended December 2013 of approximately $73.9 million increased by 27% as compared to operating income of approximately $58.2 million for the nine months ended December 2012 and increased as a percentage of sales from 10.9% to 11.8%.

Net interest expense for the quarter ended December 2013 increased 0.7% as a percentage of sales as compared to the same period last year, related primarily to the trueup of opening balance sheet lease accounting related to the recent acquisition. There was a corresponding decrease in occupancy costs, primarily rent, included in cost of sales during the quarter. There was an increase in the weighted average interest rate of approximately 180 basis points related entirely to this opening balance sheet trueup.

Weighted average debt outstanding for the third quarter of fiscal 2014 increased by approximately $72 million as compared to the third quarter of last year. This increase is 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 these acquisitions.

Total interest expense for the fourth quarter of this fiscal year should be about $2.3 million.

For the nine months ended December 2013, interest expense increased by $2.9 million or 0.3% as a percent of sales as compared to the prior year. Weighted average debt increased by approximately $92 million, and the weighted average interest rate decreased by approximately 35 basis points. The effective tax rate for the quarter ended December 2013 and December 2012 was 36.3% and 35.4%, respectively, of pretax income.

Net income for the quarter ended -- for the current quarter of $15.3 million increased 36.2% from net income for the quarter ended December 2012. Earnings per share on a diluted basis of $0.47 increased 34.3% as compared to last year's $0.35.

For the nine months ended December 2013, net income of $42.6 million increased 23.5%, and diluted earnings per share increased 22.4% from $1.07 to $1.31.

Our balance sheet continues to be strong. Our current ratio is 1.2 to 1 as comparable to last year end and last year's third quarter. In the first nine months of this year, we generated approximately $75 million of cash flow from operating activities and paid off $20 million of debt.

In addition, we used some of the cash flow from operating activities to finance the fiscal 2014 acquisition. At the end of the third quarter, long-term debt consisted of $112 million of outstanding revolver debt and $88 million of capital leases and financing obligations.

As a result of the debt paydown, our debt to capital ratio, including capital leases, decreased 500 basis points to 33% at December 2013 from 38% at March 2013. Without capital and financing leases, our debt to capital ratio was 22% at the end of December 2013, a decrease from 26% at March 2013.

Under our revolving credit facility, we have $250 million that is committed through December 2017. Additionally, we have a $75 million accordion feature included in the revolving credit agreement. The agreement bears interest at LIBOR plus a spread of 100 to 200 basis points, and we currently are paying LIBOR plus 125 basis points. The flexibility built into the agreement permits us to operate our business, including doing acquisitions, without bank approval as long as we are compliant with debt covenants. Those terms, as well as our current availability of approximately $117 million, which does not include the accordion, gives 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 acquisitions without any problems.

During the first nine months of this year, we spent approximately $22 million on CapEx, including approximately $8 million in the third quarter. Store acquisitions during the first nine months of this year used another $26 million of cash. Depreciation and amortization was approximately $24 million, and we received $3 million from the exercise of stock options. We paid about $11 million in dividends.

Inventory is up about $5.9 million from March 2013, largely due to new stores and the purchase of tires to expand product assortment and decrease outsize. Total inventory turns for the rolling 12 months ended December 2013 have improved slightly from last year's third quarter and the March year end.

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

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

A quick question on the tire costs, I guess the trajectory. Do you have a feeling for is the cost savings moderating or maybe what any more in on the savings side on the input?

Certainly, as we indicated, within our inventory, we've got cost savings that will leak into the fourth quarter and into fiscal 2015 based on inventory turns, and we continue to see decreases going forward. As we said, input costs are down, supply is there, and we expect our volume to continue to grow. So we absolutely see more room there to decrease costs.

Okay. And a question on the current quarter comp guidance. If the majority of January was up to until the storm, but you are guiding to something slightly better than flat for the quarter, is there some expectation that the trends continue to moderate, or is that just not reflecting the first half of January in your guidance?

No. We just thought that it was better to be conservative in the comp, notwithstanding the recent change that we had here. We just thought it was conservative, which is consistent with how we have approached the remainder of this year.

And then one last question and I will get off. On big picture, as you look at the acquisitions out there and talk about Sears, if you physically look at that chain, how many of those Sears units are within your distribution network?

On the larger deals, we have been very successful doing what we are doing. We view that as low risk. And, frankly, we have also said we would be willing to look at other things larger than that. But those would come with the higher risks, so we would need to see the right price there for anything bigger. Certainly, a big chunk of those are within our current geography.

Rick Nelson, Stephens.

I'd like to ask you about the downward revision to the revenue guidance. We saw an upward revision in the comp. If you could talk about what drove that and the acquired stores, how they are performing?

The acquired stores, again, are outperforming, ahead of our plan. With regard to the sales revision, we took the high-end down, based upon what we saw in the third quarter and the start to the fourth quarter to reflect that conservatism.

Also, I'm curious about the traffic in January with the improvement in the weather to the easy compares, why you don't think that comp isn't stronger at present, and is the weather potentially, in fact, a negative keeping people out of the stores?

Certainly, we believe the weather hasn't helped us. I am not here to make excuses about weather. We've talked about it for too long, and the winter weather is good for our business, and it has helped our business. In shorter timeframes, it can certainly disrupt store operations and keep people at home when temperatures are very low and wind chills are below freezing and all that. So we saw a little bit of that recently. Outside of that, the weather has gotten us back flat, and it's the consumer that we are looking to make the next move.

And January is headed up or down or is sideways?

Traffic is slightly up in January. Led by tires.

I would also like to ask you about the acquisition pipeline. You mentioned the NDAs. I know in a typical year you target 10% acquisition growth. I think you are at 5% at this point, how you feel about that and looking out to next year, excluding any transformational deals. I'm curious on your current thoughts there.

The pipeline is strong. We've got one more NDA than we had at the end of the second quarter, and it's a matter of trying to get a meeting of the minds on price really. These guys are interested in selling. They are at the right time. Some of them are not showing the earnings increases that they would like to, to reconcile what we think is a fair price within the range that we pay. So we need to resolve those. And as we do, we are completely ready to add on several of those acquisitions.

We are at 5% this year, but we had a self-imposed six-month hiatus to make sure that we did a good job integrating the prior year's acquisitions. And I certainly think that was time and effort well spent.

That's a good point, Rob. And then on the transformational opportunities, has that got a price differential, or is there more to it than that?

Like I said, we have been very successful in doing what we have been doing. We view it as low risk to continue to grow in our markets and contiguous areas to our markets. So anything that's broader would come with more risk and more award. We need to balance that, and it would have to be the right price.

As we have said before, I wouldn't own us in hopes of a transformational deal.

Thanks very much and good luck.

Anthony Dean, KeyBanc Capital Markets.

You mentioned you see decreases going forward on the tire side and as input costs are down, the supply is there, and certainly as your volume grows. So you think you can decrease costs. I was just curious. Are you able to quantify the benefit you might expect for fiscal 2015 overall? It seems as though that the most recent slate of tire cost reductions might anniversary by fiscal 2Q. So any thoughts there?

Yes. I think we gave you some general guidance on how we see tire costs moving down and saying that we think that we think the point at which we get EPS contribution will be somewhere in the neighborhood of a 1% comp versus the 2% to 2.5% that we have needed.

Now, this year we are operating even lower than that. That is -- I still think there's a lot of opportunity out there, but we wanted to at least indicate that we see some continued help there.

I was hoping you could comment on margins and specifically operating margins. We are obviously hitting this period of lower tire cost, contributions from acquisition and good cost controls. What I'm wondering is, as you think about fiscal 2015, can you identify what the major tailwinds are versus the major headwinds?

Yes. I think the major tailwinds are tire costs, we will continue to help. And for us, the major headwinds are things like Obamacare and the consumer. But in terms of another significant tailwind obviously will be another year of contribution from our fiscal 2013 and fiscal 2014 acquisitions.

So, on the headwind side, Obamacare and the consumer. On the tailwind side, you have tire costs coming down. You have acquisitions. And, frankly, the winter weather should help us in terms of sales in the spring. And when you come around to next year in the fall, certainly the winter we've had this year will be on the minds of consumers even earlier, I think, than it was this year. So, again, that weather helps our business.

Scott Stember, Sidoti & Company.

I jumped on the call late, so I apologize if you have answered these already. But can you just remind us what the tire comps that you are going up against in the fourth quarter and throughout maybe the next couple of quarters?

The tire comp is down 3% in the fourth quarter of -- was down 3% in the fourth quarter of last year. It was up 1% in the first quarter of this year and down 6% in the second quarter.

Got you. And, again, if you mentioned this, I apologize. But can you talk about percentage of your tires that are private label now versus a year ago, and could you possibly comment on what that percentage could be by the end of the year?

Sure. We said that the percentage of import tires in terms of sales was just over 30%. That is up from the mid-20%s last year. And with regard to where that can go, we manage the business to make money. And we believe that after several years of significant inflation on tire prices that we believe we are delivering a value to the consumer with these new Ford tires. They are great tires that we can offer to consumers at an attractive price. Again, if you think about this consumer that's under a lot of pressure, we think that makes a lot of sense, and consumers are voting with their wallets. They are obviously buying these and seeing value there.

So we are not going to place necessarily a limit there. We will continue to push them, and I think, as you look at the broader picture, certainly that comes at the expense of other tires we could be selling. So you take a look at branded manufacturers and what they are looking to do and how long they allow us to -- and others like us to drive these import tires at the expense of tires they could be selling.

Okay. So it's fair to assume that we will probably see a continuation of the trend of the sales growth lagging the unit growth of tires at least for the foreseeable future?

Well, in the first quarter of our current fiscal year, we were up in the higher 20%s. In Q2 we were just short of 30%, right around 30%. So we're going to be anniversarying some higher rates there, which I think will mute the impact on the sales side of things, as well as anniversarying some of the pressure that was more prevalent earlier in the year on tire prices. That will start to anniversary in our first quarter, so with some stability there, you'll see that effect potentially deleting.

Peter Keith, Piper Jaffray.

Congratulations on a nice quarter, guys. This is John Berg on for Peter. I know you haven't specifically guided fiscal year 2015 yet. You have provided some commentary on how you are thinking about some things moving into fiscal 2015. But if you weigh out and balance the impact of this winter weather versus the condition of your core consumer right now, how do you expect that to play out over the next six months, and which categories do you expect to see the biggest benefit?

As I said, we have described pressure on the consumer as a key driver in our business and what has happened in our business over the last two years, really. And the weather was a piece of it. The weather certainly has helped us, and we are hopeful that some of the strength we've seen at different times during the year in categories is an indication that the consumer is going to be coming back. And I think our next natural inflection point in timing would be the spring season coming off a pretty harsh winter when consumers will have a lot of heart failures that we typically have off of a tough winter. So I think that's how we would see it, in April and May.

Okay. And I know you are certainly not using weather as an excuse here and it has certainly benefitted your business here in Q3 and seems to be in Q4 as well, too. But would it be fair to say in Q3 you had more store closures year over year due to the weather?

Yes. I mean we didn't highlight -- again, we don't highlight those types of things, typically, within the quarter unless they are very significant. So that's probably -- it's fair to say, because we certainly had worse weather this year than last, but we didn't think it was significant enough to highlight.

Okay. Great. And then just one last quick one. If I didn't catch it, did you give the comps by month?

No. The comps by month were October was down 2.6%, November was up 2.6%, and December was up 10%.

Great. Thanks a lot, guys, and good luck in Q4.

Michael Montani, ISI Group.

I wanted to ask about first housekeeping question. Can you provide the sales mix by category for the quarter?

Sure. Sales mix by category for the quarter -- brakes was 13%, exhaust was 3%, steering was 9% front end, tires was 49% and maintenance was 26%. And don't hold me to the rounding.

And then just in total, on traffic and ticket for the quarter, I understand traffic was up. Was it basically up 3% like the oil change/tire units, or was it a little lighter than that?

Traffic was up less than that, and ticket was down slightly.

And then within the tire category, in particular, can you just talk about how much ASP was versus mix in terms of the ticket pressure that you saw?

Sure. In this quarter, it was more mix and trade down than it was average selling price.

And my follow-up question was just to understand basically the competitive dynamics that you might be seeing out there. As you head into the fourth quarter, the guidance seems to imply gross margin is better, but maybe similar to this one, although the compares are a lot easier. Do you see maybe some incremental competition, or is there an incremental step up in tires and mix that would impact that? How should we think about -- you guys typically want to increase prices, so how should we think about that?

I mean I think the guidance for Q4 is we ran nine months of zero comps. So why go out there? Why not have the opportunity to do better? Certainly, the weather has been cooperating. We think the big upside of the weather is going to be April and May. But how much to stretch when you got nine months under your belt of zero?

Just from a competitive standpoint strictly, though, it sounds like it's pretty rational out there. Is that a fair way to think about it, or how would you guys categorize it?

Yes, I would say it's more rational than it was last year. I think people are hoping to make more money. We think we are holding our share based on looking at seven NDAs and how those guys are doing. And, again, I think our margin -- we are about the business model and improving our operating margin. And, as John said, we took some reductions in operating costs that would show up as a percentage of sales and reduced advertising. We're not going to advertise. We are not going to get significantly promotional at a time where, in our view, the consumer is not shopping, and it's the softest volume months of the year. We will save our powder, and we will see what the consumer has to say based on our traffic come April and May.

Brian Sponheimer, Gabelli & Co.

I just want to go back to the acquisition pipeline. Presumably, as you guys get bigger, you are going to need bigger targets in order to maintain that growth rate. Rob, you were very clear in saying that we should have known you or recommend you in the hopes of a transformational deal. But in the event something were to come around, that would be the right price and the right size, would you all ever consider using your stock as a currency if the transaction was that significant?

Yes, yes, sure. Again, our risk profile is to be conservative. And anything big, I don't think we would be looking to leverage up to the point where we would do in all-cash deal.

Okay. But presumably if there was a distressed seller, the stock might be an appropriate currency for you to look down?

If we think the stock is reasonably priced.

And that does conclude our question and answer session. Gentlemen, I will turn it back for any additional or closing remarks.

Thank you all for your time this morning. We continue to make a lot of progress on margins and acquisitions in a weak consumer sales environment. We are committed to profitable growth and expect positive fourth-quarter results and a strong next year. We appreciate your continued support and the efforts of all of our employees that work hard every day to take care of our customers.

Thanks and have a great day.

Thank you very much, and I would like to thank everyone for your participation today. That does conclude our conference.