Monro Inc (MNRO) 2015 Q1 法說會逐字稿

Presentation

Good day, everyone. And welcome to the Monro Muffler Brake Inc First Quarter 2015 Earnings Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Leigh Parrish. 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 on 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 on this call does not constitute an admission by Monro or other person that 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. Cath D'Amico, CFO. And Rob Gross, Executive Chairman.

With these formalities out of the way, I'd like to turn the call over to John. John, you may begin.

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 first-quarter fiscal 2015 performance.

I'll start today with a review of results for the quarter, and an update on our key initiatives. Then we'll provide our outlook for the remainder of the fiscal 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.

As we started off our new fiscal year, our flexible business model enabled us to deliver sales growth of 5.5%, and strong net income growth of 25% in the first quarter.

While we are not satisfied with a 1% comparable-store sales increase, we were able to deliver total sales and bottom-line results within our guidance range. Importantly, during the quarter despite a challenging consumer-spending environment, we continued to deliver on our key objectives of increasing traffic -- benefiting from lower material costs -- managing 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.

Our first-quarter comparable-store sales increase of 1% reflects traffic gains of 2%. We generated a comparable-store sales increase of approximately 2% in the first seven weeks of the quarter. However, comparable-store sales softened the last six weeks of the quarter; particularly in the tire category, although units remained positive.

Turning to our performance within specific categories, we were encouraged to see comparable-store sales increases across all of our service and maintenance categories. We believe that last year's harsh winter benefited repairs and maintenance categories such as brakes and alignments, with comparable-store sales for these categories up a combined 9%. And front-end shocks up 6%.

More discretionary categories, such as exhaust, also benefited. Improving from last quarter, to a 1% increase.

Additionally, we were pleased to see comparable-store oil changes continue to drive traffic, with an increase of 2% during the quarter. These results demonstrate that consumers continue to turn to us for repairs that can no longer be delayed -- as well as to perform basic maintenance on their aging vehicles.

We expect that last year's extreme winter weather will benefit the service business, as we move through the fiscal year.

We believe that the challenging consumer-spending environment is weighing on tires, in particular, because of their high cost -- which is evidenced by a 3% decline in comparable-store tire sales, as customers traded down to lower-priced tires, while our comparable-store tire units increased 1%.

This reduced our overall comparable-store sales by approximately 1.5% during the quarter.

The pressure on tire sales was entirely related to the change in tire-sales mix, to the lower-priced but more-profitable direct imports -- which drove improvement in our gross margin and gross profit per-tire.

We are in the process of raising prices on direct imports by 3% to 5% as we speak.

We continue to be effectively positioned to meet the consumer's needs through our expanded tire assortment, which provides additional value-oriented options. And we are pleased that customer-acceptance in the first quarter was very strong.

In fact, we saw direct-tire imports increase to over 40% of tire units sold for the first quarter, compared to 32% in Fiscal 2014, and the mid-20s in Fiscal 2013.

As a result, we saw gross profit dollars-per-tire increase year-over-year, as well as sequentially from the first quarter of Fiscal 2014.

We expect consumers to continue to trade down this year. However, we believe that the tire category will benefit in the second half of Fiscal 2015 from last year's harsh winter, as more consumers replace worn tires ahead of this year's winter weather.

Moving on to gross margin.

We generated significant gross margin expansion in the first quarter, delivering an increase of 310 bps, to 41.4%; our highest gross margin percentage since the first quarter of Fiscal 2012, when our tire-sales mix was only 35%.

Our ability to expand our gross margin was largely due to reduced material costs -- particularly in tires.

It's worth noting that in September, we will begin to [inaudible] the significant benefits of lower product costs we experienced in Fiscal 2014. That being said, we remain very focused on pursuing lower tire costs from direct and branded suppliers, by capitalizing on the significant increase in purchasing power that has resulted from our recent acquisitions.

For the first quarter, total operating expenses increased due in large part to layering in the new-stores' operating expenses -- tire year-over-year acquisition-related costs -- and to a lesser extent, a higher investment in advertising.

We remain focused on cost-control and expect to leverage our expense structure on higher sales for the full year.

Despite the difficult environment, we achieved another quarter of significant operating income-growth, with first-quarter operating profit up 27%, year-over-year, and operating margin expansion of 230 bps to 13.5% of sales.

Overall, we remain focused on increasing our market share from same store sales growth, opening additional new stores in existing markets, and extending our footprint into new markets -- and acquiring competitors at attractive valuations.

We continue to see more opportunities for attractive deals in this challenging macro environment. We are confident that acquisitions in Fiscal 2015 will exceed our 10% annualized sales-growth target, as outlined in our long-term plan -- which will continue our profitable growth.

Our ability to complete acquisitions at attractive prices is due to our superior experience in targeting and integrating acquisitions, our two-store-brand strategy and our financial strength. These factors represent a distinct competitive advantage that underpins this key component of our growth strategy.

Along those lines, we are pleased to announce today that we have signed a definitive agreement to acquire 35 Tire Choice stores in Florida; a new state for the Company.

These stores are located in major West Coast and East Coast Florida markets, allowing us to enter the state with a premiere chain, and a solid foundation for continued store growth there.

This transaction is expected to close in mid-August. We believe that a large market like Florida can support similar store counts to what we operate in states like New York, Pennsylvania and Ohio -- all of which have approximately 150 stores.

The acquisitions we have completed and announced to date in Fiscal 2015, at 54 locations, with total annualized sales of approximately $64 million. This represents 8% sales-growth this fiscal year, with an approximate sales mix of 55% service and 45% tires.

We anticipate that these acquisitions will be slightly dilutive in the second quarter of Fiscal 2015, but expect they will be accretive by our fourth quarter.

In Fiscal 2015, we expect earnings accretion of $0.25 to $0.27 from the Fiscal 2013, 2014 and 2015 acquisitions -- including the slight dilution from our Fiscal 2015 acquisitions. This compares to previous guidance of $0.27 to $0.30 provided at the end of last quarter.

Our acquisitions increased total sales in store count, and raised our purchasing power with vendors. They also allow us to further leverage distribution, advertising, field management and corporate overhead costs -- all of which will help drive future operating-margin expansion.

Our primary focus remains increasing store-density in our geographic footprint, while opportunistically entering new and contiguous markets, as we have with our Fiscal 2015 deals.

We still see meaningful opportunity for attractive deals in the marketplace, given the current macro environment. The owners of targeted independent tire dealers are generally individuals who are at or nearing retirement age, without an internal succession option.

We presently have turned NDA time, excluding the acquisition we expect to complete this quarter, and in line with the high number of NDAs we had signed at the end of our fourth quarter. Based upon our recent transactions and our existing NDAs, we remain very optimistic about our opportunities for additional acquisitions in the near future.

Before I turn to the details of our outlook, I want to discuss our overall view on the industry, and key trends, which remain very positive.

There continue to be 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.

In fact, vehicles over 12 years old represented 25% of our traffic during the quarter -- the highest level we've seen. With average ticket on these older vehicles consistent with our overall average.

Although deferrals and trade-downs have increased in this economy, consumers continue to repair and retain these older vehicles -- as evidenced by our positive comparable-store sales this quarter, in categories such as front-end shocks and exhaust.

Additionally, fewer consumers have an interest in and are able to work on their vehicles. The number of overall service bays 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, price-advantage versus car dealers along with our store-density and 2-brand-store strategy.

Now to the details of our outlook.

As we've previously stated, we experienced sales volatility in the latter part of the first quarter. This has carried over into July, with comparable-store sales at minus-2 through the first three weeks.

Sales have remained soft in the tire category, while oil-change traffic, key service-categories and tire units continue to be positive.

Our guidance for the second quarter and fiscal year assumed a muted macro environment, even in light of the relatively easy comparable-store sales' comparisons from last year.

As a reminder, comparable-store sales in August and September of last year were a combined minus-3%. Just turning that around will get us to the higher end of sales guidance for the quarter.

Looking to our results for the remainder of the fiscal year. We continue to believe that last year's winter weather will drive positive traffic, and growth within the service business, and benefit tires in our third and fourth quarters.

We also believe that our expanded tire offering effectively positions us to capture higher tire-unit sales.

For the full fiscal year, taking into account the anticipated sales contribution from our completed and announced acquisitions, we now expect total sales to be in the range of $900 million to $920 million. We are narrowing our comparable-store sales guidance for Fiscal 2015 to an increase of 1% to 3% versus the prior range of an increase of 1% to 4%.

Based on these sales assumptions, we are revising our estimate of Fiscal Year 2015 EPS to a range of $1.95 to $2.08, from a range of $1.95 to $2.15. An increase of 17% to 25% year-over-year, versus $1.67 diluted earnings per share interest in Fiscal 2014.

Operating margins are expected to expand approximately 100 bps for the year, and will lessen the magnitude from the 230-bps expansion achieved in the first quarter, as we begin to anniversary the lower product costs realized this year, and add significant acquisition sales.

Additionally, as we stated on last quarter's call, we expect 4th-quarter Fiscal 2015 operating-margin improvement to be limited by higher healthcare costs, due primarily to the Affordable Care Act. In addition to last year's significant product cost reductions.

It's worth noting that excluding the new Florida acquisition, our full-year operating margin would increase by approximately 150 bps; consistent with our initial guidance for the year, and on top of the 140 bps improvement in Fiscal 2014.

Based upon trends month-to-date, we expect second-quarter comparable-store sales to be flat-to-up 2%, and total sales to be in the range of $222 million to $228 million.

We anticipate second-quarter operating margin to expand approximately 125 bps.

As a result, we expect diluted earnings per share to be in the range of $0.50 to $0.52, including $0.02 of annual non-cash director stock-option expense, and a slight dilution from the previously-announced 2015 acquisition.

This compares to earnings per share of $0.42 for the second quarter of Fiscal 2014, and represents earnings per share growth of 19% to 24%.

Our long-term 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 little over 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 breakeven to slightly accretive Year-1, and $0.09 to $0.12 accretive Year 2 and Year 3.

Over a five-year period, that should improve operating margins by 300 bps, 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'm proud of the performance of our team during our first quarter. We continued to service more customers, drive higher tire-unit sales, while generating more profit-per-tire, despite sales pressure from trade-down. Control operating costs, do an excellent job of integrating acquisitions, and find and act on new acquisition opportunities at attractive prices.

The hard work, passion for superior customer service, and consistent execution that our employees deliver every day are reflected in our sales and earnings results, and are critical to Monro's brand-strength and success. We greatly appreciate the efforts.

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

Thanks, John. And good morning, everybody.

Starting with sales, sales in total increased 5.5%, and $11.3 million. New stores, which we define as stores open or acquired after March 31, 2013, added $11.2 million. Including sales of $9.9 million from the Fiscal 2014 and 2015 acquired stores.

Comparable-store sales increased 9/10 of a percent. And there was a decrease in sales from closed stores of approximately $1.5 million.

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

At June 28th 2014, the Company had 966 Company-operated stores, as compared with 935 stores at June 29, 2013. During the quarter ended June 2014, the Company added 19 stores and closed 6.

Gross profit for the quarter ended June 2014 was $90 million -- or 41.4% of sales -- as compared with $78.9 million or 38.3% of sales for the quarter ended June 2013.

The increase in gross profit for the quarter ended June 28, 2014 -- as a percentage of sales -- is due to a decrease in total material costs as compared to the prior year. This was largely due to a shift in the mix of tires sold thru lower-cost direct import tires, which carry a higher margin.

Operating expenses for the quarter ended June 2014 increased $4.8 million and were $60.6 million, or 27.9% of sales -- as compared with $55.8 million or 27.1% of sales for the quarter ended June 2013. The majority of the increase in operating expense dollars was attributable to costs such as manager pay, advertising and supplies related to full quarter of expenses for the Fiscal 2014 new stores -- and a partial quarter of expenses for the Fiscal 2015 acquisition stores. As well as due-diligence costs associated with the Fiscal 2015 acquisitions.

Operating income for the quarter ended June 2014 of $29.4 million, increased by 27.3% as compared to operating income of approximately $23.1 million for the quarter ended June 2013. An increase as a percentage of sales, from 11.2% to 13.5%.

Net-interest expense for the quarter ended June 2014 at 1% of sales was relatively flat as a percentage of sales, as compared to the same period last year.

Weighted average-debt outstanding for the first quarter of Fiscal 2015 decreased by approximately $27 million, as compared to the first quarter of last year. The decrease is primarily related to a decrease in debt-outstanding under our revolving credit facility, as well as a decrease in capital-lease debt.

This was offset by an increase in the weighted-average interest rate of approximately 130 bps from the prior year, primarily due to the impact of purchase accounting for the Fiscal Year 2013 acquired stores, which lowered interest expense in Q1 of last year.

The effective tax rate for the quarters ended June 2014 and June 2013 were 38.1% and 36.5% respectively of pre-tax income. The difference in the tax rate lowered earnings per share for the Fiscal 2015 first quarter by approximately a penny per share versus last year.

We should expect a tax rate of approximately 38% for the next three quarters of this year.

Net income for the current quarter of $16.9 million increased 24.8% over last year's quarter ended June 2013. Earnings per share on a diluted basis of $0.52 increased 23.8%, as compared to last year's $0.42 per share.

Moving on to the balance sheet. Our balance sheet continues to be strong. Our current rates are at 1.2 to 1 -- comparable to last year's first quarter and year-end fiscal 2014.

For the quarter ended June 28, 2014 -- we generated approximately $34 million of cash flow from operating activities, and paid off $3 million of debt. In addition, we used some of the cash flow from operating activities to finance the Fiscal 2015 acquisitions, which added 19 stores to date.

At the end of the first quarter, debt consisted of $106 million of outstanding revolver debt, and $86 million of capital-leases and financing obligations. As a result of the debt pay-down, our debt-to-capital ratio -- including capital-leases -- decreased 100 bps, to 31% at June 2014, from 32% at March 2014.

Without capital-financing leases, our debt-to-capital ratio was 20% at both June 2014 and March 2014.

Under our revolving credit facility, we have $250 million that is committed to December 2017, and additionally, we have a $75 million accordion feature included in the revolving credit agreement.

We currently are paying LIBOR plus 125 bps, but expect that spread to drop to 100 bps in our second quarter. 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 $120 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 the financial covenants to add additional debt for acquisitions, without any problem.

During Fiscal 2015, we spent approximately $9 million on CapEx in the first quarter. Store acquisitions during the first quarter of Fiscal 2015 used another $18 million of cash. Depreciation and amortization totaled approximately $8 million. And we received $1 million from the exercise of stock options.

We paid about $4 million in dividends.

For the full year, we expect EBITDA to be in the range of between $145 million and $150 million.

Inventory is up approximately $2 million from March 2014, largely due to the acquired stores. As well as the purchase of tires to expand product assortment and take advantage of some promotional pricing provided by vendors.

Slow inventory turns for the rolling 12 months ended June 2014 were relatively flat with last year.

That concludes my formal remarks on the financial statements. With that, I will now turn the call back over to John for some additional remarks. John?

Thanks, Cathy.

Before we answer your questions, I want to comment on the potential for additional tariffs on tires imported from China. Very recent reports indicate that the USW petition requesting additional tariffs is moving forward. And it looks as if any additional tariff or duty would not apply until later this calendar year, or early next year.

First, it's hard to understand the need for additional tariffs, as major tire manufacturers have reported significantly improved margins and operating results. If additional tariffs are implemented, US customers will end up paying more for every tire purchased. Period.

That said, in the short-term, we will leverage our own distribution centers, logistics networks and low borrowing costs as Cathy said -- LIBOR-plus-1 -- to increase our orders of direct-import tiers.

This will allow us to increase our competitive advantage on costs, and allow us to continue to offer customers great value.

We would also expect that retail prices will begin to increase -- which should cover our additional warehousing costs over the year, and then some. It will likely resolve our deflation impact from trade-down, and help our comp tire sales -- if units don't suffer significantly.

As a reminder, last time we dealt with additional tariffs, which was October of 2009 to September of 2012, tire sales increased more than 5% in the first two years -- helped by pricing. Looking at this longer-term, and consistent with how we have established our business model, anything that affects the industry as a whole should increase our competitive advantage.

If additional tariffs are implemented, we believe that our comps get better, our earnings get better, and smaller tire dealers would find themselves under additional pressure. Which will create more opportunities for us to make accretive acquisitions.

In short, bring it on!

With that, I'll turn it over to the operator for questions.

Thank you. If you would like to ask a question, please press *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Again, that is *1 for questions.

We'll go first to Bret Jordan at BB&T Capital Markets.

Hi! Good morning, guys!

Quick question on logistics, as Florida is looking to enter the mix here. Is that a market that you'll need incremental distribution for? Or is there distribution that comes with that package?

There's no distribution that comes with the chain. We see significant opportunities to continue to expand there. And with additional expansion, we will likely open distribution down in Florida.

Okay. And as your NDAs have grown to 10, has that increased because you're now looking at stores in these new Western and Southern markets? Or are those 10 NDAs in existing legacy markets?

Those are chains within our legacy -- our existing -- footprint. And in these two new markets.

As we've expanded into these markets, our phone has continued to ring. We expected that we would see additional opportunity in those markets, and we absolutely are.

By the way -- just back to your question on distribution -- the fact that we won't be opening distribution right now in Florida is absolutely incorporated into the guidance that we've given for this year.

Okay.

One question as it relates to the tariff in your comment -- on probably stockpiling in advance, if it looks likely. Would you lease excess storage space? And is it the kind of thing where you could stockpile, given the incremental points of sale you have now down in the Southeast that you could expand distribution on a shorter-term basis?

Yes. That's absolutely part of that thought process. Again, I was just going to mention we've incorporated it in our guidance for the year.

Okay. And then one last housekeeping. Could you give us the monthly progression? You mentioned the first several weeks was plus-2. And the last week was soft. But could you give us the three months?

Sure.

April was up 2.2. May was up 1. And June was down 0.8.

Okay. Great. Thank you.

Thank you. Operator?

We'll move next to Rick Nelson at Stevens Inc Investment Bank.

Hi. This is Nick Zenglar in for Rick.

The comps that you just gave. Were those sales comps or were those traffic comps?

Those were sales comps.

Can you provide traffic just in those three months, and how that trended?

Traffic was up for the quarter. We don't break that out. It was up 2 for the quarter, and we don't break that out by-month.

Okay. No, that's fine.

Then with your guidance on comps and then comments on the consumer -- is the current environment still pressuring independence? Or do you find that they're finding relief at this period? Exclusive of the potential Chinese tire tariff.

Yes. In the 10 NDAs that we've signed, obviously we're getting financial statements from those individuals. We continue to see pressure on those businesses.

They certainly don't have the levers that we do to drive additional profitability. We're seeing that in their numbers. And I think that's at the rate of the additional acquisition opportunities we see this year.

Just on recent calls, actually, it sounds like there's a strong demand for mechanics and technicians in various service shops. Are you guys seeing it? Finding it to be a little bit more difficult to find qualified personnel and keep them? Or do you see labor costs increasing? Or is everything going as-planned in that category?

No, I don't find that we're having particular difficulty getting qualified guys to staff our stores. That hasn't been a problem.

We continue to control labor off of the gains that we made last year.

Great. All right. Thanks a lot, guys. Good luck!

We'll move next to Brett Hoselton at KeyBanc.

Good morning, gentlemen.

First, I was hoping you could talk a little bit more about tire volumes. A little bit surprising.

It seems like you underperformed the industry a little bit. I guess I'm wondering what are your thoughts there?

I mean same store unit sales up about 1% on a year-over-year basis. We kind of saw the industry being up maybe 100 bps or 200 bps better than that.

So it seems you might have underperformed the industry. Can you talk a little bit about that? Do you feel you underperformed the industry? Or is your region -- do you think you're pretty much in line with your region? What are your thoughts there?

Yes. I think we're in line with our region. Again, from what we see in our markets and in the NDAs.

I would, I guess, offer consistent with our approach -- we are designed to make as much profit as we can. We maintain our pricing discipline to achieve that.

What I can say is that if anyone out there is selling more units, they're certainly not making as much money as we are.

And then can you talk a little bit about your adjustment in terms of your earnings guidance? Particularly trimming the upper end. What are the primary drivers there?

And how did the acquisitions factor into the adjustment in earnings guidance?

Yes. For the year, the primary adjustment is the fact that after running plus-1 in the first quarter, we took down the high end of the sales guidance. And we've always said that 1% comp-stores sales is about $0.07. That's really where that lines up.

Perfect.

And then can you talk a little bit about -- kind of frame out your acquisition pipeline? You typically talk maybe in terms of numbers of non-disclosure agreements. So can you kind of frame out the magnitude of that? Maybe provide potential additional revenue opportunity?

Then you've also just recently entered into two brand-new markets. How do we think about entering into brand-new markets versus building out your current footprint?

Sure. The NDAs that we have are all within our existing markets. They range from 5 stores to 40 stores.

Again, we don't accumulate that up. But I could tell you that it's well more than 1-year's acquisition-growth in our 10% annual goal that we have in our operating plan.

In terms of entering new markets, we look for the right opportunities within those markets. When we entered Michigan, we did that with nearly 20 stores. We entered Florida with 35 stores.

We're not going to go to a new state like Florida for five stores. But with the tremendous opportunity that exists down there, entering with 35 stores that cover major markets on both coasts is a perfect way for us to get into a large market, there. And it affords us the opportunity to bolt on additional stores, which will help drive the operating synergies we get by increasing the store-density in our markets.

So that's how we look at it. We look at Florida like it's a 150-store state for us.

But specifically, Brett, it's a 50-bps hit to the Company's operating margin for the full year, going into these new markets. Because it'll start off a little bit slower than obviously just filling in to our overall business model.

And it's a lot warmer in the wintertime. So thank you very much gentlemen.

That's why everyone's happy that we're sending them down there in August.

We'll go next to James Albertine at Stifel.

Thanks and good morning, everyone. Very, very nice way to end the call, by the way. Very refreshing to hear.

To the points that you were making on the Chinese tire tariff, to the best of our knowledge, it doesn't look like the arguments have really changed since I think the last time we were having or hearing this debate.

Number 1 -- what's your view on the USW's arguments in a little bit more detail? Why do they think they have a better case, this time around? And quite frankly, why do you think this is not or this hasn't been shut down in-process?

We're sort of surprised that they've received the traction they have, in terms of the ongoing investigation, it sounds like. Then as it relates to all that, we haven't seen it, but is there an effort or are you part of an effort on the other side of the debate to argue against the USW's case in this instance?

Jim, this is Rob. In total, we think it's asinine. We now have perfect information on what it did to the consumer three years ago. It didn't cost the USW jobs. All these guys are opening plants. We think it's unbelievably stupid, but look around the country and there are plenty of unbelievably stupid things going on.

We did look back at the numbers and the impact on our business when this occurred. We ran two straight years of the best numbers we've seen, even with a lower percentage of tire sales than we have now.

So we're encouraged about our total volume pickup over the last number of years, which can benefit us. We're encouraged about our advantage with our direct supply from China and our low borrowing costs for ability to make this more profitable for us today than it was back then.

As far as what's going to occur -- our bet would be that it's likely going to go on, because it shouldn't have gotten to this point. It'll take a while for these guys to end up voting on it. But be careful what you ask for if you're the unions.

The bottom-line is that the domestic manufacturers don't even compete with what's going on with the imports. They've given up that segment of the market. And we know the only thing that's going to occur from this is that the average retail price to the consumer on every tire -- high-end or low-end -- is going up. For us, that will alleviate the deflation we've been struggling with.

Our plan is to maintain units, make more money, and we can't control what goes on in areas other than inside our stores.

Sure. I understand and appreciate that additional color.

Just a quick housekeeping item. I appreciate, as you always provide a monthly comp cadence. Was there a quarter-to-date number, just for the month of July that you'd be willing to provide at this point as well? Or did I just miss it?

Yes. We've said that comps through 3 weeks in July were down 2.

Down 2, you said? Okay. Sorry. I apologize for that. Thanks for clarifying.

Sure.

All right. Take care.

Thank you.

And just a reminder, if you would like to ask a question, please press *1. We'll go next to Scott Stember at Sidoti & Company.

Good morning.

You mentioned that on tires, at least, you were going to see a 3% to 5% price increase that you're putting through. Could you talk about what your plans are for price increases on the rest of your products?

Sure. We said that in the spring, we'd have about a 1% increase on the service business. We will look to do that again in the fall, as we have traditionally.

And with regard to the price-increase that we're putting through on the direct import tires right now, we've had such strong acceptance of that. And it is a real value.

We continue, as we work that program, to look for ways to make more money. Here, we think there's an opportunity to -- given the fact that we've had positive units -- to capture some price here.

Okay. And just last question on the tire-store acquisition down in Florida. Can you maybe talk about their standing within the local markets? Maybe how their sales have been performing? Notably in tires, in recent quarters?

Yes. They are an absolute market-leader down there. Great locations. Again, like we said, in key markets on east and west coasts. Their comps have been positive this year.

Slightly positive? Okay. That's all I have. Thank you.

All right. Thanks, Scott.

We'll go next to Michael Montani at ISI Group.

Hey, guys! Good morning!

Just wanted to first ask a housekeeping question, if you could. Just to provide a percentage of sales by-category that you have in the past, historically?

Sure.

Sales by-category. Brakes was 17. Exhaust was 4. Steering front-end was 10. Tires 41. Maintenance was 28.

Okay. Thanks.

Then a question on the quarter. Can you just provide a little clarity in terms of how the traffic had trended throughout the quarter? Like it was obviously a "2" for the whole thing.

But when things moderated a bit and turned negative, was that more due to pricing pressure or mix changing on ticket? Or was it traffic?

Traffic was positive in all of the months for the quarter, including June. So it was more on the overall average-ticket size.

Okay. That's helpful.

And if you could also just elaborate a bit, when the ticket was down 4 in tires, was that basically all mix? Or was there a point of deflation? Or how should we think about what you're coming off of?

That was all due to the change in the mix to the direct-import tires.

When was the 3% to 5% increase going on? I apologize if I missed that.

That's okay. It's going in as we speak, here. So late this month. That's part of the reason that I see opportunity against some weak comps from last year, for us to recover some of that on the comp side for the rest of the quarter.

And just in terms of the benefits that you all did receive from the sourcing and the Chinese tires. My understanding is that the benefits basically have increased over the past years.

So like maybe initially you got 15% reduction, and now I think you're more like 20% or 25% on import tires. Is that right?

Was there actually incremental benefit as we progressed through that? And how do you think about cycling that on the ticket side, as well? Because perhaps that could also help your ticket.

Yes. That to me is less about tickets. Certainly it's more about the average cost-side and the gross-profit. So yes, we have, as you look back. We initially talked about 10% to 15%. Then you're right. 15%, 20% and over 20%.

So there is a progression of costs there that has come in, even through the early parts of this year. So we will get some benefit from that.

In terms of the ticket, or the sales price, again -- our approach is to not be the lowest in the market. We've talked of tariffs and higher tire costs. We'll maintain our discipline there.

I would expect, as we move forward, for retail prices to recover some. That certainly will help our comps and that deflation impact.

Thanks.

Maybe just lastly, to quantify the overall opportunity here.

Can you just provide a sense of how large you guys are now, after all these deals? In terms of annualized tire-buy in units? And how did that change -- now versus the last time the tire tariffs were in place?

We are upwards of 3 million tires, right now. Somewhere in that range.

Last time that the tariffs were in place, we would've been half of that -- or less.

Okay. That's helpful. Thank you.

Thank you.

And just a final reminder -- if you'd like to ask a question, please press *1.

All right. We're going to go to Brett Hoselton at Keybanc.

Gentlemen!

I was hoping you could kind of just talk a little bit through -- but it sounds like you're feeling very good about --

It sounds like you don't feel that the tariff is going to negatively impact your earnings. It sounds like you're actually suggesting it might actually positively impact your earnings.

I guess I'm struggling a little bit with that, in that if your cost of goods sold go up, your margins are going to get squeezed. Obviously.

Then there is potentially some price inelasticity or demand from a consumer's standpoint, which might cause some sort of a negative impact in terms of unit volumes and so forth.

Can you kind of walk through how you think about tariff driving higher earnings?

Yes. I think that relates more to next year, certainly. Certainly, the early stages of that.

What I do expect is that like last time, pricing to the consumer will go up. We will have bought a bunch of tires in advance at the existing cost, and we will benefit from that.

Last time, that benefit was well more than a year. Like I said, we ran positive 5% tires in the first two years of the tariff, last time it was implemented.

So I think that is at the heart of where we see that. We talked about that, in terms of when you look at that on a little bit of a longer-term basis.

Outside of that, smaller players in the industry that don't have the ability to source like we do will get squeezed by the tariff much sooner than that. That will open up additional acquisition opportunities, which -- again -- drive our profitability, long-term.

We're building a long-term business here. And these types of dynamics in the market will help our strategy, long-term. It will drive the acquisition growth, and we will be able to take advantage of our size and our buying power, and our logistics network in the shorter term.

If you were to pre-buy, prior to the tariff, a large amount of tires, and then warehouse them, and so forth -- would you consider -- ?

It sounds like in the past, you've done more than a year. Is there a possibility that you could do two-years' worth or three-years' worth? How do you think about the order of magnitude of being able to do something along those lines?

I wanted to comment on the tariff; not to break down to absolute specifics of what we're going to do. These rulings aren't even final, yet.

I wanted to make sure that everyone was aware that we were going to use the advantages that we have in this environment to continue to create value, and to continue to grow our business and profitability.

We will fill everyone in on what we're doing as more details of what specifically will happen when the tariffs come out.

That makes sense, John. Thank you very much. It's just very compelling. So, thank you.

True. I agree!

And that does conclude the question-and-answer session.

At this time, I'd like to turn the conference back over to management for any closing remarks.

Great.

Thank you all for your time this morning. Our business is healthy. We are serving more customers, selling more tires and service, continuing to grow through profitable acquisitions, and driving higher earnings. We appreciate your continued support and the efforts of our employees that work hard every day to take care of our customers.

Thanks again, and have a great day.

And that does conclude today's conference. Again, thank you for your participation.