Monro Inc (MNRO) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Monro Muffler Brake Earnings Conference Call for the second quarter of fiscal 2015. 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. 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. Leigh Parrish of FTI consulting. Please, go ahead.

Thank you. Hello and thank you for joining us on this morning's call. I would just like to remind you on this morning's call management may reiterate forward-looking statements made in today's release. According to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 I would like the 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 Security said 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 sensitivities, fluctuations and interest rates, dependence on in competition within the primary markets in which the Co. stores are located and the need for and cost associated with store renovations and other capital expenditures. The Co. 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 Monroe, 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, Kathy. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our second quarter, fiscal 2015 performance. I'll start today with a review of our results for the quarter and an update on our key initiatives and 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.

Similar to our strong performance in the first quarter, our unique business model enabled us to deliver record sales and net income for the second quarter with sales growth of 8% and net income growth of 20% versus the prior year. While we are disappointed in our comparable store sales results, which we believe reflects our continued difficult macro environment, outperformance of our acquisition, improving and margins and cost control helped us to achieve earnings results within our expected range. Our strong business model and execution allowed us to continue to deliver on our key objectives, including driving lower material costs, effectively 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 focus and strong execution enables us to lead our industry in both strong and weak markets. Second quarter comparable store sales were down 2% driven by a weak consumer sales environment. We continue to see an extended deferral cycle, particularly as it relates to higher ticket purchases with consumers allocating spending to their most pressing needs. Coming off a very strong first quarter in our service business, we saw a second quarter increase in comparable store sales of approximately 5% for alignments and 4% for brakes, which are key profitable categories.

More discretionary categories such as front end and shocks and exhaust were flat and declined 6% respectively. We believe that despite the difficult spending environment customers continue to turn to us for repairs that could no longer be delayed, as well as to perform maintenance in order to extend the life of their aging vehicles as evidenced by our positive comparable store oil change units in the quarter. As we previously discussed, the challenging macro environment continues to weigh on consumer purchasing behavior, particularly with respect to large ticket items, which is evidenced by a 4% decline in our comparable store tire sales.

The decline was primarily due to consumers continuing to trade down from higher price tires, further pressured by a decline we experienced in comparable store tire units of 1.5%. The decline in tire units this quarter was the first decline in the last four quarters. We believe there may be additional upside to tire volumes in the second half of the fiscal year as last year's harsh winter may lead more consumers to replace worn tires ahead of this year's winter weather. We continue to meet consumers needs through our expanded tire assortment, which provides additional value-oriented options, including the lower price for more profitable direct import tires. This quarter direct import tires represented over 40% of our mix of tire units sold, consistent with the sales mix in the first quarter, but significantly higher than the 31% in fiscal 2014 and mid 20s in fiscal 2013.

As a result of the investments we continue to make in our direct sourcing, and to expand our tire selection, we will be in an even better position to offer consumers value-oriented options in the event of a tariff on import tires. Given that we anticipate a tariff will be implemented, we are taking steps to further expand our competitive advantage, which I will discuss further in a moment. Consistent with the last several quarters the mixed shift to lower-priced direct import tires in the second quarter accounted for the entire variance between our comparable store tire sales and our comparable store tire units. In fact, the impact of the shift in tire sales and export lower price direct import has reduced overall comparable store sales by approximately 1.5% in the first half of the fiscal year.

Due to our recent tire price increases the combined pricing mix impact on comparable store tire sales was reduced to less than three per percentage points in the second quarter this year, from four percentage points in the first quarter with corresponding benefit to gross profit and margin. Importantly, we anticipate that price mix on tires will turn positive in the fourth quarter. We expect that our pricing actions will have a positive impact on tire sales as we look through the end of the year. Assuming flat tire units, a tire sales mix and average prices consistent with what we [collected] in September of this year, we believe that in the fourth quarter of this year we will see a comparable store tire sales increase of approximately 2%, driven by improved pricing.

To be clear, this does not include what we believe will be the positive impact on tire retail pricing from the implementation of the tariff. As a reminder, when the tariff was implemented in late 2009 through 2012, Monro tire sales increased by 5% in the first two years, much of the increase driven by price (inaudible). Moving on to gross margin, during the second quarter we reported a gross margin increase of 60 basis points to 40.4% of sales. Our ability to expand our Gross margin was largely due to pricing actions and reduced material costs, slightly offset by higher distribution and occupancy costs. As a reminder, in September we began to [map] the significant benefits of the lower product costs we experienced in fiscal 2014, which made for more difficult comparisons for the back half of this fiscal year.

Moving on to operating expense, we are carefully managing our operating costs, while appropriately investing for growth. For the second quarter total operating expenses as a percentage of sales decreased to 27.4% from 28.2% of sales, or 80 basis points versus the prior year, reflecting our cost control efforts and leverage from higher sales. We are pleased to have achieved another quarter of significant operating income growth with second quarter operating profit up 21%, and operating margin expansion of 140 basis points, to 13.1% of sales. Turning now to our growth strategy, we remain focused on increasing our market share through same-store sales growth, opening new stores in existing markets, and acquiring competitors at attractive valuations.

In this challenging macro environment, we believe there are even more opportunities to complete acquisitions at attractive valuations. To that end we are pleased to announce that in fiscal October we completed the acquisition of nine stores in the Atlanta, Georgia area, adding a new state to Monro's footprint and further filling in our presence in key contiguous states. Additionally, in August we completed the previously announced acquisition of the 35 tire choice locations in Florida. Our expansion into these large growing southern markets will balance our northern -- our exposure to northeastern and north central markets, providing many years of profitable expansion. We are confident that acquisitions in fiscal 2015 will exceed our 10% annualized sales growth target as outlined in our five-year plan.

In fact, the acquisitions we have completed to date in fiscal 2015 already represent 9% annualized sales growth this fiscal year, and continue to outperform plan. We do, however, expect slight dilution in the third and fourth quarters from these acquisitions. Also, I'm pleased to report that we recently signed a letter of intent to purchase an additional nine store chain in an existing market with approximately $10 million in annual sales. We expect this transaction to close later this quarter.

Acquisitions increase in (inaudible) total sales and store count and raise our purchasing power with vendors. They also allow us to further to further leverage distribution, advertising, field management and corporate overhead costs, all of which well help drive future operating margin expansion. Our primary focus remains increasing store density in our geographic footprint, while opportunistically entering new contiguous markets as we have with our fiscal 2015 deals. With ongoing softness in consumer spending, higher healthcare costs and the higher likelihood of a tariff on import tires, we continue to see meaningful opportunity for attractive deals in the marketplace. The owners of Target Independent Tire Dealers are generally individuals who are at or nearing retirement age, without an internal succession option. We presently have 10 MBA signs, excluding the transaction we closed in October, and still in line with the high number of MDAs we had signed the end of last quarter.

Based on our recent transactions and existing MDAs we remain very optimistic about our opportunities for additional deals in the near future, and we expect fiscal 2015 to be a significant year for acquisitions. A difficult operating environment will allow us to complete even more deals and further accelerate our top line growth. This represents a key hedge in our business model. I also want to note that we have now decided to exit the 29 remaining Monro Muffler Brake and Service stores located in [BJ] locations. We had 37. We opened our first Monro in (inaudible) to fill in selective market; however, as we do not sell the tires in these locations, our opportunities are limited, and with our continued growth these locations are not strategic for Monro. Due to our high store density in key markets a significant portion of these sales will transfer to other Monro locations where we will be able to leverage existing fixed costs.

The overall earnings impact of exiting these locations will cost us $0.02 this year, and is incorporated in our fiscal 2015 guidance. We expect the ongoing earnings impact to be minimal from exiting these locations. Now to the details of our outlook. We anticipate the sales softness that we experienced through the second quarter will continue into the third quarter, as comparable store sales remain negative, in October with a decline of approximately 1.5%, month to date. Based on these trends we expect third quarter comparable store sales to be in the range of a decline of 2% to flat, and total sales to be in the range of $232 million to $238 million.

We anticipate third quarter diluted earnings per share to be in the range of $0.47 to $0.52, versus $0.47 last year. Our third quarter guidance also assumes incremental warehouse and logistics costs related to our elevated tire purchases in advance of a potential tariff and slight dilution from the completed fiscal year 2015 acquisition. As a reminder last year's third quarter earnings represent a difficult comparison given that in the third quarter of fiscal 2014, Monro achieved earnings growth of 34% versus the prior year, and benefited from favorable lease-purchase accounting and tax adjustments of approximately $0.03 per share.

However, the majority of last year's earnings growth was driven by significant cost reductions on tires, which we are now fully (inaudible). Turning to our outlook for the full year taking into account anticipated sales contribution from our fiscal 2014 and 2015 completed acquisitions, and the recent softness in the comparable store sales, we now expect total sales to be in the range of $900 million to $910 million, narrowing the range of our previous guidance of $900 million to $920 million. This range assumes comparable store sales will be approximately flat, with (inaudible) down from our previous guidance of positive 1%, to 3%. Based on these sales assumptions we are lowering our fiscal year 2015 EPS to the range of $1.85 to $1.95, an increase of 11% to 17% year-over-year versus $1.67 diluted earnings per share in fiscal 2014.

This reflects $0.02 to $0.03 of additional warehouse and logistics cost related to recent elevated tire purchases in advance of a potential tariff, cost to exit BJ stores, costs relayed to Obamacare in the fourth quarter and $0.02 of lower vendor rebate income in the fourth quarter due to slow returns on tire inventory. This vendor rebate income will be recognized in the first half of fiscal 2016 instead of the fourth quarter of fiscal 2015. We believe there is potential upside to our comparable store sales trends in the second half of the year as more consumers look to adjust their tire and service needs following last year's harsh winter, which may be further helped by recent lower gas prices. Also as I described earlier our comparable store tire sales are expected to be positively impacted by pricing in our fourth quarter after several quarters of significant pressure from trade down.

It is worth noting that excluding the fiscal 2015 acquisitions, which are slightly diluted, our fiscal 2015 earnings guidance on flat comparable store sales represents an operating margin increase of 100 to 150 basis points on top of the 140 basis point improvement in fiscal 2014. Even though the customer is weak our business model is working. Now I'd like to provide you with additional color regarding our thoughts around a potential tariff on Chinese import tires. Although our sales could see the need for it, I believe that a tariff is more likely to be implemented than not. In the event a tariff is enacted the tire selling environment will become more favorable to our current operating model, tires sales mix and pricing.

With our company size and increasing scale we will drive lower costs than our smaller competitors, allowing us to accelerate market share gains while continuing to offer the customers great value. As retail prices increase, I expect that this value tire category will become even more important to consumers. It is important to note that there are several significant differences between this potential tariff and the one implemented from October 2009 to September 2012. During that period there were significant commodity-based increases in tire costs, which are not currently a factor. Second, in 2009, we sourced these economy tires from only one tire vendor, where as now we purchase from three vendors, allowing us to negotiate more favorable costs.

We believe these factors will limit the cost pressure for Monro. More specifically, if a 35% tariff is passed, as it was initially in 2009 through 2012, and based on current plans and ongoing vendor negotiations, we estimate that our import tire cost to be sold, including any related warehousing and logistic expenses, will increase in the range of 5% to 10% during fiscal year 2015. Also the majority of any tariffs impact on our cost of goods sold will not occur until the second half of fiscal 2015.

This is a distinct advantage compared to smaller dealers as they lack the scale to buy from multiple vendors and negotiate favorable pricing and financing to build significant stock. We anticipate total costs for smaller dealers will increase several times the impact on Monro if the 35% tariff is implemented. We believe that financial strain felt by smaller dealers will increase our competitive advantage and lead to additional acquisition opportunities at even more attractive valuations, allowing us to further drive earnings growth.

Looking at this longer term and consistent with how we have established our business model, anything that pressures the industry as a whole should increase our competitive advantage. Even in light of these new market dynamics our long-term plans remain unchanged and continues to call for on average 15% annual top line growth, including 10% growth through acquisitions, 3% to 4% comps and 1% to 2% increase from Greenfield stores.

Our acquisitions are generally diluted to earnings in the first six months as we overcome due diligence and deal related cost, while working through initial inventory in the operational transition of these stores. With costs savings and recovery in sales results are generally breaking into (inaudible) accretive year one, and $0.09 to $0.12, a accretive year two and three. Over the five-year period, that should improve operating margins by 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 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 teams during our first six months.

We continue to service more customers, offering them exceptional service. Drive higher gross margins, overall, and Gross profit per tire, control operating costs, do an excellent job of integrating acquisitions and finding and acting on new acquisition opportunities at attractive prices. The hard work, passion for superior customer service, and consistent execution that are in place to deliver every day are reflected in our sales and earnings results and our 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. Cathy?

Thank you, John, and good morning, everybody. Sales for the quarter increased 7.8%, and $16 million. New stores, which we define as stores opened or acquired after March 31, 2013, added $18.9 million, including sales of $16.5 million from our fiscal 2014 and 2015 acquired stores. Comparable store sales decreased 2%, and there is a decrease in sales from closed stores of approximately $1.8 million. Additionally, during the quarter ended September 2014, the Company completed the bulk sale of approximately $2.9 million of slower moving inventory to a barter company.

There were 91 selling days in both the current and prior selling year second quarters. Year to date sales increased $27.3 million and 6.6%. New stores contributed $30.1 million of the increase. Partially offsetting the sales increase was a comparable store sales decline of 0.6% and a decrease in sales from closed stores amounting to $3.3 million. There were 181 selling days for the first six months of this and last fiscal year. At September 27th, 2014, the Company had 1,003 Company-operated stores, as compared with 940 stores in September 28, 2015. During the quarter ended September 2014, the Company added 42 stores and closed five.

Year-to-date, we added 61 stores and closed 11. Gross profit for the quarter ended September, 2014, was $89.5 million or 40.4% of sales as compared with $81.7 million or 39.8% of sales for the quarter ended September, 2013. The increase in gross profit for the quarter ended September 27, 2014, as a percentage of sales is primarily due to a decrease in material costs. Total material costs, including outside purchases, decreased as a percentage of sales as compared to the prior year. This was largely due to a shift in the mix of tires sold to lower cost direct import tires, which carry a higher margin. Partially offsetting this decrease was an increase in distribution and occupancy costs, as a percentage of sales from the prior year related primarily to increased warehousing and distribution costs. These resulted from increased frequency of delivery to our service stores and some additional warehousing for higher inventory levels.

Additionally, excluding the new stores opened in fiscal 2014 and fiscal 2015, gross profit actually improved by130 basis points as compared to the second quarter of last year. Gross profits for the six months ended September, 2014 was $179.5 million, or 40.9% of sales, as compared with $160.6 million, or 39% of sales, for the six months ended September 20, 13. The year-to-date increase in gross profit as a percentage of sales is due to increased -- due to decreased material costs as I previously described for the quarter. Moving onto operating expenses, for the quarter ended December -- September , 2014, they increased $2.7 million and were $60.5 million, or 27.4% of sales as compared with $57.8 million or 28.2% of sales for the quarter ended September, 2013.

Excluding the increase in operating expenses related to new stores opened in fiscal 2014 and 2015, and the increase in due diligence costs, operating costs actually decreased by approximately $2 million as compared to the same quarter of last year. This demonstrates that we experienced leverage in this line to focus cost control on lower comparable sales as well as pay plans that adjust for performance. For the six months ended September, 2014, operating expenses increased by $7.6 million, to $121.2 million, from the comparable period of the prior year, and remain flat at 27.6% of sales.

The increase in expenditures was due primarily to $7.3 million of operating expenses related to new stores opened in fiscal 2014 and 2015, as well as an increase in due diligence costs compared to the first six months of last year. Operating income for the quarter ended September, 2014 of $28.9 million increased by 21% as compared to operating income of approximately $23.9 million for the quarter ended September, 2013, an increase of a percent of sales from 11.6% to 13.1%Operating income for the six months ended September, 2014 of approximately $58.3 million, increased by 24.1%, as compared to operating income of approximately $47 million for the six months ended 2013. It also increased as a percentage of sales from 11.4% to 13.3%.

Net interest expense for the quarter ended September, 2014 at 1.3% of sales increased 3/10 of a percent as compared to the same period last year. Weighted average debt outstanding for the second quarter of fiscal 2015 increased by approximately $39 million, as compared to the second quarter of last year. This increase is primarily related to an increase of debt outstanding under our revolving credit facility for the purchase of our fiscal 2014 and 2015 acquisition, as well as an increase in capital lease debt recorded in connection with these acquisitions. The weighted average interest rate increased by approximately 60 basis points from the prior year, due primarily to purchase accounting adjustments for recent acquisitions in both the current and prior year second quarters, which artificially impacted interest expense for the comparative quarters. Without these adjustments, the weighted average interest rate was relatively flat between the second quarters of both years.

For the six months ended September, 2014, interest expense increased by $1.1 million and increased two times as a percentage of sales as compared to the prior year. Weighted average debt increased by approximately $6 million, and the weighted average interest rate increased by 90 basis points. Without the previously mentioned purchase accounting adjustments the weighted average interest rate increased by approximately 30 basis points as compared to the first six months of last year. The effect tax rate was 38.1% of pre-tax income for both the quarters ended September, 2014 and September, 2013. Net income for the current quarter of $16.3 million increased 19.6%, over net income for the quarter ended September, 2013.

Earnings per share on a diluted basis of $0.50 increased 19% as compared to last year's $0.42. For the six months ended September, 2014 net income of $33.3 million increased 22.2%, and diluted earnings per share increased 20.2%, from $0.84 to $1.01. Moving on to the balance sheet it remains strong. Our current ratio at 1.3 to 1 is comparable to last year's second quarter and the year-end fiscal 2014. In the first six months of this year we generated approximately $55 million of cash flow from operating activities, and increased borrowings under our revolver by approximately $41 million. We used these borrowings and cash flow from operating activities to finance our 2015 acquisitions, which added 61 stores to date.

At the end of the second quarter, debt consisted of $152 million of outstanding revolver debt, and $137 million of capital lease and financing obligations. As a result of the debt borrowings our debt-to-capital ratio, including capital leases, increased to 39% at September, 2014, from 32% at March, 2014. Without the capital and financing leases, our debt-to-capital ratio was 25% at the end of September, 2014, as compared to 20% at the end of March.

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. Our interest rate during the second quarter was lowered 25 basis points to LIBOR plus 100 basis points. The flexibility built into this agreement permits us to operate our business without bank approval as long as we are compliant with that covenant. Those terms as well as our current availability of approximately $67 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 the first six months of this year, we spent approximately $19 million on CapEx, including approximately $10 million in the second quarter.

Store acquisitions used another $64 million of cash. Depreciation and amortization totaled approximately $17 million, divided roughly between Q1 and Q2, and we received $2 million from the exercising stock options. We paid about $8 million in dividends. Inventory is up approximately $18 million from March, 2014, largely due to acquired stores, the purchase of import tires to get ahead of the tariff and the purchase of winter tires in anticipation of the demand in the third quarter. Total inventory turns for the rolling 12 months ended September, 2014, were down slightly from last year. That concludes my formal remarks on the financial statement. And with that I will now turn the call back over to John for some additional remarks.

Thanks, Cathy. Before we answer your questions, I thought it would be helpful to give you some color on fiscal 2016. While we expect double-digit earnings growth this fiscal year, on top of the 27% achieved last year, we are disappointed in our sales guidance, sales and guidance, as we expect you are.

However, as you look out into the next six months, we can see some positive trends that we believe will positively impact fiscal 2016. These include a favorable tire pricing environment with benefits from potential tariff related inflation, and price mix on tires turning positive. Remember that every $1 increase in gross profit per tire is $0.05 of EPS, and every 1% increase in units equates to about $0.025 in EPS. Second, limited impact of cost increases from the tariff on our import tires in the range of 5% to 10% expanding our cost advantages over competitors and providing opportunity for increased gross profit per tire. Recognition of vendor rebates in fiscal 2016 that are not being recognized in the fourth quarter of this year due to our investments in inventory. This recent trend holds a decline in oil costs of about $1 million in fiscal 2016. Sales and earnings contributions from our fiscal 2014 and 2015 acquisitions, and additional acquisitions, particularly if the consumer and operating environment remains difficult. With that I would like to open the call to Q&A. Operator?

Thank you, sir, and each of our audience today. (Operator Instructions). We'll go first to Bret Jordan at BB&T Capital Markets.

Good morning, guys.

Good morning.

Good morning.

Now that you got a pretty big regional footprint, I can start asking a question about regional performance. Could you give us any color as far as areas of particular strength or weakness from the Midwestern markets to Northeast and that added to the South?

Yeah, there is nothing that I would call out, you know, as that significant of a difference between the different areas. I mean, we're relatively new down in the very south, so, you know, maybe in the future we'll have more to comment there.

Okay. And what's been the decision as far as distribution to the Florida stores? Are you doing more out buys or are you going to try to run weekly truck delivery down to that market?

No, right now we're -- and this is for parts, we're being supplied locally down there. You know, for -- on the parts side, that will continue until we probably double or more the size, you know, the number of stores down there. And on tires, of course, we get the majority of our tires delivered direct to the stores. So we've enabled those relationships down there.

Okay. And as it relates to the BJ's announcement are they going to try to keep a service offering there, or will they just cut back to mounting and balancing their own tires and give up the services that you were providing?

Yeah, what I understand is they're going to just run their tire base.

Okay. Then one last question on the Chinese tire inventory, the talk about building some inventory levels prior to perspective tariff, what levels would you consider taking them up to? I guess how big an investment and low cost inventory can you make or would you think about making?

Well, I don't want to talk about the details of what we're doing for competitive purposes. That's why, you know, I thought it was more helpful to everyone that we would talk about what the overall impact would be looking forward. Certainly, we've got coverage for several months right now, and that is a piece of it, as is working with our existing new vendors.

Okay. Great. Thank you.

Thank you.

We'll go next to James Albertine at Stifel.

Great. Good morning and thanks for taking the question.

Sure.

I wanted to ask very quickly if I could, just a monthly comp trend during the (inaudible). Apologies, if you said it in the prepared remarks. I got hung up in the queue a little bit.

No, we didn't. We didn't. July was down three, August was down two, September was down one.

And you said you were running negative, on 1.5% October to date?

Yes. That's correct.

Okay. Great thank you. And also, you know, given cadence of M&A and sort of gives you an opportunity to see more directly, via the diligence of those deals, how your competitors are performing and/or reacting to the current environment. So I to get a sense for what you're seeing from a competitive standpoint, you know, extend that to what you're seeing on a promotional environment and so on and so forth, and then add one quick follow up question after that.

Sure. You know, the smaller operators and the guys that we're looking at, you know, are having some trouble in this market. It's choppy. They're seeing very much of, you know, the sales side that we are; although, they are not making the money that we are. Overall, acquisitions are getting cheaper as a result of that.

Perfect. That's what I was hoping to get some color on. And then lastly, just if you could remind us, understanding there are, you know, various key differences in terms of where Monro is today versus where it was in October of 2009, and where the market is today versus back then, but as that 35% initial tariff came on, which as I understand it was above and beyond the 4% that always sort of seems to exist, if I b if I understand [correctly].

Right. Right.

So when that happened, how quickly does the market react,, in your experience to take pricing higher, and so I'm just trying to get a sense of the cadence here in looking ahead into third quarter and fourth quarter, you know, should this tariff, which sounds like you're pretty confident the tariff be implemented.

Yes. I guess you could say confident, but I also think it's prudent for us to act like it will, you know, given the landscape. Tire prices went unfairly early, you know, fairly quickly, after the tariff came on last time, and that is a lot of operators look at when I have to replace this inventory at a higher cost I now need to start charging more.

Yes. Janie, this is Rob. I think it's reflected in our numbers, and really the biggest upside, I think what John was trying to allude to is competitively the control we have in having a lower cost base and continued lower cost base if not expanding lower cost base than our competition, but really that, you know, it bodes well for next fiscal year, while what you're asking is incorporated in the guidance this year.

Right. Understood. Thanks again, gentlemen, and Cathy for all your help, and we'll talk soon. Good luck in the next quarter.

Thank you.

Thank you.

Thank you.

Moving on we'll go next to Rick Nelson at Stephens.

Thanks. Good morning.

Good morning.

Good morning.

If you can provide some color around the acquisition multiple. I understand, you know, the earnings are becoming more depressed with some of these candidates, but the multiples you're paying, or they consistent with what you've done in the past?

Yeah, the multiple is consistent, you know, we talked about 7 to 7 1/2 times EBITDA. You know, the prices are going down because of some of the -- because of the pressure on earnings. What I will say in terms of the overall value out of acquisitions is more recently you'll see at our metrics we're getting more real estates in these deal. So longer term, as you know, owning is -- we want to have the right mix of owning versus leasing, but we're doing better on that front, which I, you know, lowers the long-term cost of the business.

Yes. Well I think the other thing, Rick, that might show up is it would be more in where we consistently talked about the 800 to 1500 basis points on every deal. The fact that the cost advantage is expanding might push that, you know, more towards the higher end as opposed to the 800 number.

Okay, John. Thanks for that color. Also, I'm curious why the tire price increases that you've taken, why that isn't working into the tire counts, and if you could also comment on market share where you think tire market share is for you guys..

Sure. The tire price increases is working, you know, into the comp respect of -- in respect of the delta between the units and the overall comp. That's come down, and will turn positive, you know, going forward. Units were weak in the second quarter, but I don't believe that that was a significant, you know, result of our taking the pricing up, you know. So units have -- unit trends have improved from Q2 into the early part of October. I think it's much more of a consumer issue. We've been talking about the consumer for well over a year now, and you know, I do expect that there's some opportunity with Winter that the consumer will react better and even better than -- even better and earlier than they did last year. You know, we haven't worked that into our guidance.

Okay. (Inaudible). Thanks a lot and good luck.

Sure. Thank you.

(Operator Instructions). And moving next to Anthony Dean at KeyBanc. Please go ahead, sir.

Hi. Good morning.

Good morning.

A few questions here. First on the second half EPS outlook, looks like the guidance effectively was reduced $0.10 to $0.13. Just want to make sure I have the dimensioning right. Sounds like $0.02 to $0.03 from the warehousing, $0.02 from the exit at BJ's business, and so I'm wondering of the remaining $0.06 to $0.08, how much of the same store growth, and how much might that vendor rebate being pushed out in fiscal 2015 be? And also did I hear if there's additional Obamacare costs?

Those have been in our guidance.

Okay.

We just continue to point it out as an issue for the fourth quarter. The vendor rebates is $0.02, you know, in the last half, particularly in Q4, as I said that will reverse next year. So that's an additional $0.02, but the rest of it is basically the impact on sales. We effectively, you know, in sort of projecting forward the run rate guide, the run rate sales that we have, reduced the sales guidance by 2% over the last six months. When you look at that, you know, every 1% we talked about is $0.07. That's effectively $0.07, 2% on the last half of the year. So the sales, and you can call it the net of sales, another margin is, you know, is the plug there.

Okay. And then so with the (inaudible) b

Which is less than $0.07. So there is -- you know, we are continuing to get some margin out.

Okay. And then just wondering of the outlook on the second half same store performance, can you give me a reason? Is it -- it sounds like the outlook was lowered somewhat. Is that isolated to maybe service or the outlook for tires? Is it simply because October is starting out a little bit weak here? And just wondering if you can provide a little additional color.

Sure. I -- the outlook is where it's at, because of the run rate, you know, that we've had. And we've, again, we've been talking about the consumer, and you know, over the last -- over the last year, and I think it's just the consumer that is allocating their dollars. I would expect, you know, that the service business will continue, you know, in the brakes and alignment category to, you know, run, you know positively. And I think that is a number that we felt was at least a continuation of what we have seen. And we pointed out what we think are the upsides there. We're in an extended deferral cycle, I still believe the next move is for the consumer to shorten that, which will help our comps. We haven't seen it yet. And we may see that in November, with tire sales, particularly if we get some early weather. So --

Great. And then on the inventory pre-buy ahead of the tariff? Just wondering if you could share any preliminary thoughts on what is the earnings opportunity and the timing of any benefit from buying low and selling high. It sounds like it's going to be a 2016 event, despite the -- sounds like the tariff implementation might come under fiscal 2015, so I'm just kind of wondering if you can ballpark how much you expect to benefit in fiscal 2016 versus the $0.02 to $0.03 cost headwind you're incurring this year.

Yeah, I -- you know, we're taking some costs in the second half of this year to put ourselves in a strong position with respect to the tariff. So let's say in November there's an announcement in November and one in January. There may be some impact, some positive impact on the fourth quarter. We pointed out that we really haven't pulled that into any estimates. What we've talked about as a favorable pricing environment in the fourth quarter is based off of where we were at, you know, towards the end of Q2 after we implemented some of those pricing increases. So you know, the primary impact and upside we're really remaining in fiscal 2016, and I guess to help you with working with some of those numbers, since there's no announcement yet I'm not going to guesstimate what a tariff will be, but when you look at a dollar help on -- a dollar increase in gross profit per tire, which if we have pretty flat costs and prices go up a dollar, that's $0.05 EPS. And you know, I think that's pretty compelling if we think that we're going to have a pretty flat cost structure, and you know, pricing inflation from a tariff.

Just one follow up question. Are you resourcing out of China into other non-tariff countries such as Vietnam? Are you positioning for that with your three suppliers, or do you anticipate sourcing out of -- and importing out of China, primarily?

Yeah, I'm not going to go into the details of that. It doesn't do anyone good on this phone for me to talk about the details of what we're doing there.

Great.

That's why I wanted to give you the guidance of what we expect based on the plans and discussions that we're having. And that's, you know, a 5% to 10% increase in cost of sales on import tires in fiscal [2015].

Thank you.

Thank you.

Thank you very much.

And moving next to Scott Stember at Sidoti & Company.

Good morning, guys.

Good morning.

Can any of you talk about the tire deferral process? I know that we've been talking about over the last couple years of eventually seeing a nice big rebound across the board, and it seems like every time we have a couple steps forward you have a step back. Can you just maybe talk about, you know, where we think that is? Is this going to be a situation where as long as the economy is weak in your markets you're always going to see some kind of net pressure? And adjust give us some general thoughts about those headwinds that you'll be facing for the next couple years possibly.

Sure. You know, right now the deferral cycle is longer than it's been in years. So again, I think, you know, I think that the next step is, you know, for the consumer to shorten that deferral cycle. You bring up geography, and I think that's a fair point. And that's really, you know, one of the benefits of us now making some solid acquisitions in large growing southern markets, which will help us offset our exposure to some of the more northern, northeastern rust belt type markets. But I do think that there will be some pressure as long as the economy is, you know, is not doing great. And that ties into the natural hedging our business of our ability to grow the topline and grow the number of stores, grow the Company in of there environments. The longer it stays tough, the more acquisitions and the faster growth we're going to have. We will have, you know, some comp challenges there, but you know, at some point the consumer has to turn around. It's going to flip back.

Got you. And referring to the price increases on tires that you alluded to the last couple, could you tell us what the combined value of that will be? As we start turning positive in the fourth quarter?

Yeah, I think I said that we would, on the same mix and the same volume of tires, we would expect the tire comp in Q4 to be plus two when you compare what we did last year with where we were in September.

Yes. That's right. I'm sorry about that.

No problem.

Yes. And could I just -- yes. Last question on tariffs. I know this is look into your crystal ball, but is -- and with the actual amount of the tariff not, you know, far from decided yet, is there any care about their, supposing itb s greater than 35%, where there actually could be a negative impact that you would foresee on the overall tire market, meaning the price is too prohibitive for people to, you know, to be -- that has a negative impact on units. Is there anything out there that you are saying, or is it safe to assume, probably, in this 35% range once again?

No. The reason that I donb t -- please donb t read anything into me using 35%. That was the only reason I thought that was a helpful percentage to use as thatb s what happened last time, so Ib m not trying to predict that in any way. What I do know is so whether it goes higher I know we are going to be doing better and we are better placed to deal with anything that hurts everybody sort of in the same direction. We are going to do better. We are even doing better than we did last time data tariff came on. Last time a tariff came on we didnb t tell you, and werenb t in a position to tell you that our cost would only be upsized to 10%. It went up much more than that, and so in our own company we brought it forward. We are in a stronger position and I know that we are in a much stronger position than most of the guys out there. Sorry for general answer, but there's a lot of strength in being able to answer generally there, because I don't know what the tariff is going to be. I know we are going to continue to stand our competitor advantages, and continue to deliver growth through acquisitions and improve profitability no matter what the operating environment is.

Got you. Thanks so much. That's all I have.

Sure. Thanks.

And we'll go next to Michael Montani at ISI Group.

Hey, guys. Thanks for taking the question.

Sure.

First I just wanted to ask housekeeping question. Can you just share the mix that you have this quarter by lot of category?

Yes. Breaks buys 17%, tires was 42%, (inaudible) was 28%, exhaust was 4% and steering was 10%, front ends (inaudible) b

And then from a ticket standpoint and tires, and you mentioned, I think, a 1 1/2% decline in units, and then about 4% down and comp, so at 2 1/2%, can you just break out what was mixed there versus pricing? The pricing (inaudible).

It was all related to the import tires, so it's all encompassed in that (inaudible).

Okay. And when you think I had, I mean it still unknown, obviously, for sure, if there will be a tariff and then how much it would be, but as you sit here today is there any price increases planned in the next, say, 3 to 6 months that you can share. I mean the July 1, I think, was 3% to 5%, at least on the private label side. So anything there either in tires or service that you can do proactively to get ahead of it?

Yes. We already implemented a service category. A price increase of a little over 1% later in the second quarter, so that will impact. You know, we continue to monitor pricing on the tire side. We are not backing off of the pricing that we have that at the end of the second quarter, and so that will continue to help the sales and gross profit dollars per tire. What I can say is that we will maintain our [standing] in the market. We do not need to be the lowest guy out there, but we need to be within a reasonable range of competitors. And that's something that we monitor constantly.

Can you just remind us, last time in 2009 when we had the tariff what did you see from the branded guys. I mean is it fair to assume that they want just sit by and that they'd also like to get low single-digit plus type pricing, or what did you see the past and how are you thinking about that?

Yes. I think they welcome the opportunity to grab some margin there. Again, you know, from my perspective I can understand why there is a tariff needed, and there's an awful lot of silence from those guys in my view. And I guess I -- from a certain point I can understand that when someone hands you a margin gain you are tempted to take it. What I know is that we have a significantly growing volume, and we're going to continue to seek the right cost for the volume that we have.

Great. Thank you. And the last one b b

Yes. And, you know, maybe you see somebody out there that's looking there as we gain some market share at this point, but what one of the comments that I've made about the tariff is as (inaudible) pricing goes up, and consumer income are relatively flat, the consumer is not going to step up. They still need tires. They are going to keep their tires. They are going to continue to drive their cars. We know that's going to happen. What they're going to look for is more value, and I think the higher that branded pricing goes up the more attractive to consumer the value priced tires are, and, you know, I'm very happy with the gains we've made in [outsourcing] and the quality of the tires in our assortment. I think that will help us.

Yes. Just to finish up that line of thought. I mean in terms of unit elasticity, I mean can you just give us any feel, historically? It seems like 3% to 5% price increase has relatively low impact on units, you know, this quarter aside for a minute. But, you know, if you think back in the past where is the point where you start to see some kind of a situation where the consumer may need the tire but they just have to defer a little extra. Is it 10%? Or 20% or can you just help us think through it?

Yes. I think - this is Rob. If you go back to the last pair up we ran +5 tire comps for the first two years. Units were negatively impacted in the third year of the tariff. I would caution you, though, that the big difference is the deferral cycle at this juncture has never been longer, so you can only put off your tires going into winter on the heels of finally, a harsh winter, so long.

Okay. Thanks, guys. Good luck.

Thank you.

And that is all the time we have for questions today. Mr. Van Heel, I'd like to turn the call back over to you for any additional remarks, sir.

Thank you. Thank you all for your time this morning. You all were disappointed with our recent sales trends. We are actively managing our business to drive topline growth and earnings, and look forward to having better numbers to discuss with you in January. In this operating environment we are taking advantage of the natural hedges and our business model and competitive advantages to this strengthen the growth of the long-term. We appreciate your continued support, and the efforts of our employees that worked hard to take care of our customers every day. Thanks again and have a great day.

Ladies and gentlemen, once again that does conclude today's conference, and I'd like to again thank everyone for joining us.