Monro Inc (MNRO) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler and Brake earnings conference call for the third quarter of FY15. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in part without permission of the Company.

I would now like to introduce Ms. Effie Veres of FTI Consulting. Please go ahead.

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. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the Company's filings with the Securities and Exchange Commission.

These risks and uncertainties include, but are not necessarily limited to, uncertainties affecting retail generally such as consumer confidence and demand for auto repair, risks relating to leverage and debt service, including sensitivity to fluctuations in interest rates, dependence on and competition within the primary markets in which the Company's stores are located, and the need for and costs associated with the store renovations and other capital expenditures. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material. Joining us for this morning's call from management are John Van Heel, President and Chief Executive Officer, Cathy D'Amico, Chief Financial Officer and Rob Gross, Executive Chairman. With these formalities out of the way, I'd like to turn the call over to John Van Heel.

John, you may begin.

Thanks, Effie. Good morning, and thank you for joining us on today's call.

We are pleased that you are with us to discuss our third quarter FY15 performance. I'll start today with a review of our results for the quarter and first nine months and an update on our key initiatives. Then I will provide our outlook for the remainder of the fiscal year. I will then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results.

In the third quarter we delivered record sales and earnings results despite the milder weather in December and the choppy sales environment. The $0.49 in EPS we reported this quarter represents a 40% increase over the past two years on slightly negative comparable store sales. We believe this is a testament to Monro's flexible business model, which allows us to grow the Company's earnings in both stronger and weaker markets.

The outperformance of our acquisitions and improvement in gross margin enabled us to achieve solid earnings results despite lapping significantly lower product costs and the benefit of favorable lease accounting and tax adjustments in the third quarter last year. Our third quarter comparable store sales decreased 1.8%.

Through November, our comparable store sales were positive, with October down 2% and November up 4% as we benefited from more normalized weather patterns across our markets. However, this was more than offset by negative 9% comparable store sales in December amidst very mild weather and the holiday shopping season. Additionally, we continued to see many of our customers defer purchases, particularly on large ticket items, and trade down from higher cost maintenance and repairs.

Despite this consumer spending environment, we are encouraged by the momentum we have seen in key service categories in FY15. Comparable store sales were positive in the third quarter in profitable key service categories, such as alignments, which are plus 10, and brakes, which are plus 2.

Importantly, on a year-to-date basis, comparable store sales increased approximately 8% for alignments, 5% for brakes, 2% for front end shocks while oil change traffic was also up. We believe that these positive results demonstrate that customers continue to turn to us for repairs that could no longer be delayed, as well as to perform the necessary maintenance in order to extend the life of their aging vehicles.

Turning to our tire business, with the help of colder weather and snow, comparable tire store -- comparable tire sales and units were positive through November. But this was more than offset by weaker sales in December. This resulted in a decline of 3% in both tire sales and units for the third quarter. However, I am pleased that the impact of the mix shift to the more value-oriented direct import tires this quarter was negligible compared to the 350 basis point drag on comparable store tire sales in the first six months of this year.

For the quarter, direct import tires represented 38% of total unit -- of tire unit sales versus 30% last year. We continue to expect that in the fourth quarter price mix will help comparable store tire sales and profitability on each tire sold. We believe this benefit should continue through at least the first half of 2016.

That said, in the third quarter we collected the highest average price and gross profit dollars per tire for the year. This was due to our effective retail pricing management and ability to continue to drive lower product costs through scale.

To put this in perspective, for the first three quarters of this year, comparable store sales were down 1% with positive sales trends in our service business. This was offset by lower tire sales, which has reduced overall comparable store sales by approximately 150 basis points year to date, primarily as a result of deflation.

As discussed, we expect this deflation to reverse and anticipate tire price mix to turn positive in February and March and for FY16. In this choppy environment, we continue to manage the business to maximize profit, not just sales, as evidenced by our 16% net income increase in the first nine months of the year on top of a 24% increase last year.

Moving on to gross margin, during the third quarter we reported a gross margin increase of 10 basis points to 38.1% of sales. However, when excluding the favorable lease purchase accounting adjustments included in the quarter last year, gross margin for the third quarter 2015 would have increased by approximately 100 basis points year over year.

This increase was primarily driven by reduced material costs, which is particularly impressive given we lapped a significant benefit of lower product costs we experienced in FY14. For the third quarter, total operating expenses as a percent of sales delevered by 70 basis points versus the prior year, driven by negative comparable store sales, the layering of operating expenses from newly acquired stores and higher year over year acquisition costs.

Before I turn to our growth strategy, I would like to discuss to the recently announced tariff on tires imported from China. There are significant differences between this new tariff and the one that was in effect between October of 2009 and September of 2012.

First, during that period, there were significant commodity-based increases in tire costs as opposed to the rapidly declining commodity price environment we are experiencing today. Second, our purchases of imported tires are now double what they were in 2009, giving Monro the scale to negotiate more favorable costs. Third, in 2009 we sourced these economy tires from only one vendor, whereas now our purchases are made through multiple vendors, providing us more opportunities to optimize costs. And lastly, given the nature of this tariff, manufacturers have been taking significant steps to move production out of China into other nontariff countries.

We believe these factors limit the cost pressure for Monro and position us at a significant advantage versus our competition. We continue to work with existing and new manufacturers to provide the growing supply of tires we need going forward. I want to reiterate that unlike many of our competitors, Monro will not be impacted by the retroactive aspects of these tariffs.

Based on our negotiations with current and new vendors and consistent with the estimate we discussed in our second quarter conference call, we anticipate FY16 cost of goods sold for direct import tires, including warehousing and logistics costs, will increase between 5% to 10% from FY15 at the 35% average total tariff currently imposed. I think it is important to note that the higher tariff costs on Chinese tires should be considered a temporary issue for large dealers like Monro.

I believe that the most underappreciated aspect of the broader tariff discussion is that production of these tires will shift from China. In fact, production has been shifting away from China since last summer. We have already begun receiving tires from manufacturers outside of China, and the vast majority of our purchases going forward will be from non-Chinese plants.

In this context, cost increases on these tires will be defined more by competitive dynamics and less by tariffs. With our large and growing volume, that is a plus for Monro. Also, declining trends in tire raw material costs and increasing tire production for the US, particularly in branded tires, remain in place and apply to both economy and branded tire manufacturers.

As I discussed with you previously, anything that pressures the industry as a whole generally increases our competitive advantage. With our Company's size, increasing scale in low cost, we expect to continue to drive lower product costs than our smaller competitors, allowing us to accelerate market share gains and capitalize on attractive acquisition opportunities while continuing to offer customers great values.

Lastly, I believe the higher tariff costs on entry-level tires will result in higher retail tire prices starting this quarter and continuing in the next fiscal year. As a reminder, when the last tariff was implemented in late 2009 to 2012, Monro comparable tire store sales increased 5% for the first two years with most of the increase driven by pricing.

Now, I would like to discuss our growth strategy. We remain focused on increasing our market share through same-store sales growth, opening new stores in existing markets, extending our footprint into new contiguous markets and acquiring competitors at attractive valuations.

To that end, I am pleased to announce that in December we completed the acquisition of nine stores in the Fort Lauderdale and Palm Beach areas of Florida and in October, the acquisition of nine stores in the Atlanta, Georgia area, both of which were referenced on our second quarter call. Combined, these two acquisitions add approximately $19 million in annualized sales and our expansion into these large growing southern markets will help to balance our exposure to Northeastern and North Central markets, providing many years of profitable growth.

Including these deals, total acquisitions completed year to date added 72 locations, $84 million in annualized sales in three contiguous states to our geographic footprint. This represents 10% annualized sales growth, which is the base case assumed in our five-year plan. In addition, we expect to sign an agreement to purchase another chain in an existing market with approximately $9 million in annualized sales, and we expect this transaction to close this quarter.

Acquisitions increase Monro's total sales in-store account 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 contiguous markets as we have with our FY15 deals.

We continue to see meaningful opportunities 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 NDAs signed, excluding the acquisition we expect to complete this quarter.

We remain very optimistic about our opportunities for additional deals through the first half of FY16 as higher tire and healthcare costs are now a certainty amidst a choppy sales environment. In fact, we would be disappointed if acquisitions in FY16 didn't exceed our base case of 10% in annualized acquisition sales growth as outlined in our five-year plan.

I also want to remind everyone, as we discussed last quarter, we will be exiting the 26 remaining Monro Muffler Brake and Service stores located in BJ stores by the end of this quarter. We had 37. Because we do not sell the tires in these locations, our opportunities have been limited, and with our continued growth, they are no longer a strategic fit for Monro.

Due to our high store density in these 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 remaining locations is incorporated in our FY15 guidance, and we expect the impact to FY16 earnings to be minimal.

Now to the details of our outlook, consumer spending has remained choppy as evidenced by a 2% decrease in comparable store sales quarter to date despite higher traffic. Lower gas prices, easier comparisons in February and March, last year down nearly 2%, and positive trends in tire prices create opportunities for upside in our comparable store sales for the fourth quarter.

Based on these factors, we expect fourth quarter comparable store sales to be in the range of flat to positive 2, total sales to be in the range of $225 million to $230 million and diluted earnings per share to be in the range of $0.36 to $0.40 versus $0.36 last year. As a reminder, last year's fourth quarter earnings represent a difficult comparison, given that in the fourth quarter of 2014, Monro achieved earnings growth of 44% versus the prior year, primarily driven by significant cost reductions in tires, which we are now fully lapping.

Turning to our outlook for the full year, taking into account anticipated sales contribution from our FY14 and FY15 completed acquisitions, the recent trends in our comparable store sales and the timing of the BJ store closings, we now expect total sales to be in the range of $900 million to $905 million, narrowing the range of our previous guidance of $900 million to $910 million. This range assumes comparable store sales for the year will be flat to a decrease of 50 basis points. Based on these assumptions, we are narrowing our FY15 EPS to the range of $1.86 to $1.90, an increase of 11% to 14% year over year versus $1.67 diluted earnings per share in FY14.

As always, we continue to plan our business conservatively. Our primary concern remains the health of the consumer and that the benefit of lower gas prices may be more than offset by higher healthcare premiums and deductibles, particularly as wages remain stagnant. Nevertheless, our strong operating model allows us the flexibility to drive strong earnings growth in both strong and weak markets.

Additionally, long-term trends remain favorable for our business, with 245 million vehicles on the road with a record high average age of 11.7 years, a declining population of service bays and consumers choosing do it for me service more frequently. Also, our key competitive advantages are still in place including our low-cost operations, superior customer service and convenience, along with our store density and two-brand store strategy. Our five-year plan remains unchanged and calls for on average 15% annual top line growth including 10% growth through acquisitions, 3% comps and 2% increase in 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 one and $0.09 to $0.12 accretive year two and another $0.09 to $0.12 accretive in year three. Over a 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 our shareholders for many years to come.

Before I hand the call over to Cathy, I would like to update the comments we made on our last call regarding FY16. While we expect double-digit earnings growth this fiscal year on top of the 27% achieved last year, we are not content with our results, and I expect you feel the same way.

However, as we look out beyond the third quarter, we can see positive trends that we continue to believe will favorably impact FY16. These include continued positive sales trends in key profitable service categories such as alignments, brakes, front end shocks and oil changes.

A favorable tire pricing environment with benefits, one, from potential tariff related inflation and two, the positive impact of price mix on tire sales. Remember that every $1 increase in gross profit per tire is $0.05 of EPS, and every 1% increase in units equates to 2.5% -- to $0.025 in EPS.

The impact of cost increases from the tariffs on our import tires will be limited to 5% to 10%, expanding our cost advantage over competitors and providing opportunity for increased gross profit per tire. At current barrel prices, a decline in oil cost of about $1 million in FY16 net of lower waste oil credits, significant sales and earnings contributions from our FY14 and FY15 acquisitions and additional acquisitions at attractive valuations, particularly if the consumer and operating environment remain difficult.

I would like to thank our team for their great performance throughout the years. Their 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 their 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, everyone.

Sales for the quarter increased 9.2% and $19.9 million. New stores, which we define as stores opened or acquired after March 31, 2013, added $24.1 million, including sales of $21 million from FY14 and FY15 acquired stores.

Comparable store sales decreased 1.8%, and there was a decrease in sales from closed stores of approximately $2.5 million. Additionally, during the quarter ended December 2014, the Company completed the bulk sale of approximately $2.1 million of slower moving and nonstocking inventory to a barter company in exchange for barter credit.

There were 89 selling days in both the current and prior year third quarters. Year to date sales increased $47.2 million and 7.5% to $675.4 million. New stores contributed $54.2 million of the increase. Partially offsetting this sales increase was a comparable store sales decrease of 1% and a decrease in sales from closed stores amounting to $5.8 million.

During the nine months ended December 2014, sales to the barter company of slower moving inventory totaled approximately $5 million. And there were 270 selling days for the first nine months of this and last fiscal year.

At December 27, 2014, the Company had 1,017 Company-operated stores, as compared with 951 stores at December 28, 2013. During the quarter ended December 2014, the Company added 21 stores and closed 7. Year to date we added 82 stores and closed 18.

Gross profit for the quarter ended December 2014 was $90.2 million, or 38.1% of sales as compared with $82.3 million, or 38% of sales for the quarter ended December 2013. The increase in gross profit for the quarter ended December 2014 as a percentage of sales is 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, largely due to a shift in the mix of tires sold to lower cost direct import tires, which carry a higher margin. Labor costs were relatively flat as a percentage of sales as compared to the prior-year quarter through continued focus on payroll control.

Partially offsetting these decreases was an increase in distribution and occupancy costs as compared to the comparable prior period. This is due primarily to opening balance sheet lease accounting adjustments recorded in the quarter ended December 2013 which artificially lowered cost of sales by approximately 100 basis points last year.

In addition, as previously mentioned, we completed the barter sale of $2.1 million during the quarter at lower margins. This transaction decreased gross profit in the third quarter of this year by two-tenths of a percent as a percentage of sales. Additionally, excluding the new stores opened in FY14 and in FY15, gross profit actually improved by approximately 90 basis points as compared to the third quarter of last year.

Gross profit for the nine months ended December 2014 was $269.7 million, or 39.9% of sales as compared with $242.9 million, or 38.7% of sales for the nine months ended December 2013. This year to date increase in gross profit as a percent of sales is largely due to decreased material costs as I described for the quarter.

Moving on to operating expenses, operating expenses for the quarter ended December 2014 increased $6.8 million and were $62.2 million, or 26.3% of sales, as compared with $55.4 million, or 25.6% of sales for the quarter ended December 2013.

The increase as a percentage of sales is due to the decline in comparable store sales in the quarter. For the nine months ended December 2014, operating expenses increased by $14.4 million to $183.4 million, or 27.2% of sales from $169 million, or 26.9% of years for the comparable period of the prior year.

Operating income for the quarter ended December 2014 was $28 million, and it increased by 3.8%, as compared to operating income of approximately $26.9 million for the quarter ended December 2013 and decreased as a percentage of sales from 12.4% to 11.8%. For the nine months ended December 2014, operating income of approximately $86.3 million increased by 16.7% as compared to operating income of $73.9 million for the nine months ended December 2013, an increase as a percentage of sales from 11.8% to 12.8%. Net interest expense for the quarter ended December 2014 at 1.2% of sales decreased $0.3 million as compared to the same period last year, which was at 1.5% of sales.

Weighted average debt outstanding for the third quarter of FY15 increased by approximately $83 million as compared to the third quarter of last year. This increase is related to an increase in debt outstanding under our revolving credit facility for the purchase of our FY14 and FY15 acquisitions, as well as an increase in capital lease debt recorded in connection with these acquisitions.

The weighted average interest rate decreased by approximately 220 basis points from the prior year, due primarily to the purchase accounting adjustments for acquisitions recorded in the prior-year third quarter, which artificially increased interest expense for the prior-year quarter. Excluding those adjustments, the weighted average interest rates decreased by approximately 30 basis points as compared to the third quarter of last year.

For the nine months ended December 2014, interest expense increased $5.8 million and increased by a one-tenth of a percent as a percentage of sales as compared to the prior year. Weighted average debt increased by approximately $31 million and the weighted average interest rate decreased by 20 basis points. The effective tax rate was 37.4% of pretax income for the quarter ended December 2014 and 36.3% for the quarter ended December 2013.

Net income for the current quarter of $16 million increased 4.3% over net income for the quarter ended December 2013. Earnings per share on a diluted basis of $0.49 increased 4.3% as compared to last year's $0.47. For the nine months ended December 2014, net income of $49.2 million increased 15.7%, and diluted earnings per share increased 14.5% from $1.31 to $1.50.

Moving on to the balance sheet, our balance sheet continues to be strong. Our currently ratio at 1.2 to 1 is comparable to last year's third quarter and fiscal -- and year end FY14. In the first nine months of this year we generated approximately $89 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 FY15 acquisitions and new stores, which added 82 stores year to date.

At the end of the third quarter, debt consisted of $147 million of outstanding revolver debt and $136 million of capital leases and financing obligations. As a result of the debt borrowings, our debt-to-capital ratio, including capital leases, increased to 38% at December 2014 from 32% at March 2014. Without capital and financing leases, our debt-to-capital ratio was 24% at the end of December 2014 and 20% at the end of March 2014.

Under our revolving credit facility we have $250 million that is committed through 2017, and we also have a $75 million accordion feature included in the agreement. Our interest rates during the second -- our interest rate is currently at LIBOR plus 25 basis points -- I'm sorry. Our interest rate is currently at LIBOR plus 100 basis points, and we have a lot of flexibility under our debt agreement to operate our business without bank approval, including doing acquisitions, as long as we are compliant with debt covenants.

Those terms (technical difficulties) are our current availability of approximately $88 million, which does not include the accordion, gives us a lot of ability to get acquisitions done quickly. We are fully compliant with our debt covenants and have plenty of room under the financial covenants to add additional debt for acquisitions without any problems.

During the first nine months of this year, we spent approximately $26 million on CapEx, including approximately $7 million in this third quarter. Store acquisitions used another $83 million of cash. Depreciation and amortization totaled approximately $26 million, divided roughly evenly between all three quarters, and we received $2 million from the exercise of stock options. We paid about $13 million in dividends.

Inventory is up approximately $12 million from March 2014, largely due to inventory for acquired stores and the purchase of import tires to get ahead of the tariff. However, we made a conscious effort to reduce some branded tire inventory through the barter transaction and lowered replenishment, which helped to offset the increases from the import tires. Inventory turns for the rolling 12 months ended December 2014 were down slightly from last year, largely as a result of these advance purchases of import tires. That concludes my formal remarks on the financial statements.

With that, I will now turn the call over to the operator for questions.

(Operator Instructions)

We will pause for a moment to assemble the queue. Bret Jordan, BB&T Capital Markets

Good morning, guys. A quick question as we look at the new stores that have been added further south markets, could you give us any feeling about what the impact on operating efficiency has been with some of those longer supply chains and maybe what it did for basis points in the third quarter?

Yes, generally you are looking at a couple of hundred basis points difference in the overall material and distribution costs.

What do you think about the distribution down in that market since you are buying a few more stores in South Florida right now?

It's -- the ones we added in December, and I think we need to be closer to triple digits to be really thinking about putting a significant facility down there.

Okay, and then as we look at the current quarter -- go ahead.

Go ahead, Bret.

As we look at the current quarter you talked about expectations of some retail price inflation in the near term. In your comp forecast, what is your assumption on import tire pricing in the current quarter?

On import tire pricing, I'm assuming we get some help in February and March. I am not going to give a specific number related to that.

We said in the second quarter that based on what we were collecting at the end of September, if we compared that to the fourth quarter we would have been at plus 2 vers -- in average selling prices quarter versus quarter and followed that up in Q3 with the highest average selling price for the year. I think that supports that. In the latter half of this quarter, we should see some of that benefit.

One last question. On the inventory Cathy was talking about of $12 million between new stores and tires, could you break out what was tires versus new stores? And would we expect to see that tire inventory build convert back to cash as things normalize around the tariff front loading?

I think you will see that convert back to cash in FY16. That should occur. And no, we do not break it out tires versus other.

All right, thanks.

Thank you.

Rick Nelson, Stephens.

Thanks. Good morning. (Multiple speakers) account [surveilling] tariff come late November, the bigger anti-dumping tariff came in January. How much did you raise tire prices in the third quarter, and what have we seen quarter to-date?

We raised tire prices in the third quarter 2%. The anti-dumping -- the November tariff was the smaller of the two. And again, for the fourth quarter I would expect to see more of the benefit to the later half of the quarter now that competitors have had the actual amounts that the costs are going to go up.

Just to put that in context. We have maintained our $2 more than the market tire pricing stance, so throughout the third quarter we continued to maintain that. I would expect us to be following the market up as it goes. And I would think that would occur now that the news is out in the later part of this quarter.

(Inaudible) tariff, we saw a big increase in Chinese tire prices and the domestic manufacturers followed. Are you seeing that scenario bear out this time, or does lower oil prices impact things differently?

Your question was the last tariff we saw the branded go up along with the Chinese and what our expectation is this time?

Yes, exactly.

Given the nature of this tariff as I laid out in our comments, for the branded manufacturers who are not manufacturing in China, I would expect to see less increased activity this time because of the raw material environment, because of growing production for the US, aimed at the US, and also because of the fact that they are potentially losing market share to these economy tires. I think what we will see out of these manufacturers potentially is realignment of some of their lines to close the gaps between where their tires are positioned and these economy tires.

Can you remind us what oil represents out of the cost of goods sold for a tire? I know it's being meaningful.

I don't have that offhand. I would not want to. I know it is meaningful, I don't want to give you a number here. I can definitely follow back up with you, Rick.

Okay, thanks.

I just don't have that right here.

Okay, thanks. If I could finally --sure, understood. If I could ask you also about the pipeline on the acquisition front and the number of NDAs. Did I miss that, or did you cover that in the prepared remarks?

Yes, I said we have 10 NDAs, excluding the acquisition we expect to close this quarter. And that acquisition will add about $9 million in sales. It is within our existing markets. The NDAs that we have are generally between 5 and 40 stores within our markets.

Thanks a lot, and good luck.

Thank you.

Anthony Deem, KeyBanc

Good morning.

Good morning.

A couple of questions here. First, as you wind down your Chinese imports, as raw material environment is increasingly favorable for tire manufacturers, that's something you could presumably benefit from. How should we be thinking about one offsetting the other? In other words, could higher COGS from the tariff be offset by more favorable pricing from tire manufacturers? Or net/net, do you see tire costs in general going up next year?

We will update next year's overall numbers when we give our guidance. But directionally, I think that is one of the significant differences between this tariff and last tariff.

That raw material -- that declining raw material environment is significant. I expect there to be a much harder case for branded manufacturers to make in raising their tire costs than previously.

The -- with the comment on price mix on your tires turning positive in the fourth quarter here we are obviously seeing a decline in raws, I was wondering if at all you're seeing a lower cost of goods on your tires if at all that can effect the anticipated reversal of the pricing deflation that you anticipate in your same-store guidance?

No. We are seeing lower tire costs this year, but the pricing -- the retail pricing increases in terms of price mix are about what the replacement cost is of current inventory. That is the way most dealers approach it. When they know their costs are going up, which the tariff does put some pressure on those costs, they begin to raise price at retail.

Did I hear correctly that there is a 2% decline quarter to date in your same-store sales?

Yes. On positive traffic. So that --

Okay, and -- so just a follow-up there. Your guidance reflects up 2%; is really the price inflation, or lack of deflation, giving you some confidence on the outlook for obviously February and March here? Is that the primary driver to getting it flat to up 2%?

That's part of it. Plus we're up against down two comps in February and March. If we run up one for the last two months of the quarter, we are at the low end of our guidance. I felt like with the tire pricing opportunity that there is and with those softer comps, that was reasonable.

A couple more if I may. With the anticipated $0.02 to $0.03 EPS headwind from the higher inventory in tires in the back half discussed last quarter, just looking at inventory as a percentage of your cost of goods, seems like it's the lowest it's been in the past four quarters. Is that a seasonal issue, was that the barter issue that you all discussed, or should we expect higher inventory to hit in the fourth quarter?

No, I do not think you can expect much higher inventory to hit in the fourth quarter. And certainly, we just came through the largest tire selling season of the year. Our December inventory obviously reflects that. As Cathy mentioned, we have been trimming other inventory in order to keep an overall handle on working capital.

Okay, and then just last question for me. Of the 10 NDAs that you signed, can you share the range of revenues? How small to how large might these acquisitions be?

Yes, again, generally they are 5 to 40 stores, and they are primarily tire stores. Those would be in that 1.3 million range per store.

Thank you very much.

Sure. Thank you.

James Albertine, Stifel.

Good morning. Thank you for taking my question.

Good morning.

I apologize, just for a quick housekeeping item, I apologize if I missed it, but the monthly comps during the quarter, did you say those in the prepared remarks?

Yes, October was down 2, November was up 4, December was down 9.

Got it, apologize for missing that. And then separately, we've talked historically about in a more Northeast-centric Monro portfolio, something along the lines of 3X in terms of potential store count. And this was back when you were running something like 700 or 800 stores.

Now that you have grown into the mid-Atlantic, the upper Midwest and certainly the Southeast, how should we think about your aggregate target for portfolio size? Should we take that 3X and extrapolate from there? Or do you have any updates you are willing to share at this point?

No, I do not think we are updating that. We continue to see something like 1,300 tire stores and 1,300 service stores throughout our 25 states. There's that kind of opportunity for density.

Okay, and then historically as well, you've talked $0.08 to $0.10 as it relates to years two and three accretion from new stores. More recently, last three quarters you have been saying $0.09 to $0.12.

Understanding the lack of succession plans and quite frankly, the bigger, broader pressures on your competitive set -- competitor's set, is that really, that additional accretion, a function of lower valuations of deals? Or is there something that you are deriving from a logistics perspective that is helping you to find more accretion than you did historically?

The metrics that we are using are remaining the same. 7 to 7.5 times EBITDA, and that -- and picking up 800 to 1,500 basis points of operating margin improvement. As there's more pressure on these smaller guys, we are tending to get more of that 800 -- that 800 to 1,500 is coming through a little bit at the higher end generally.

But also, the $0.08 to $0.10 going to $0.09 to $0.12 reflects a larger Company. You are buying more stores, and that is generating more incremental income. The acquisition volume goes up, and so does the EPS.

Very good. Thank you for clarifying, and good luck in the fourth quarter.

Thank you.

Michael Montani, Evercore ISI

Thanks for taking my question. I wanted to ask about, first off, comp ticket versus traffic in the third quarter. With the 1.8% decline, can you tell us what was traffic and what was ticket?

Traffic was the majority of that. About 1.5, which you would expect, since the tire price mix flattened out in the quarter.

And year to date, is traffic actually still up now, or is it flat or down?

Year to date traffic is slightly positive for the year, yes.

Okay, in the third quarter you mentioned that price and mix was roughly a neutral factor in terms of your tire comp dollars being down 3. Can you give us the split of actually what the price did versus what mix was?

It's -- so you had a mix shift. We gave you the percentage of direct import tires. You saw that went from 30 to 38. And that shift was offset by price increases.

Okay. Because I was thinking sequentially in the second quarter, ASPs I had up 0.5. Is it fair to think maybe they can be up 1 or 1.5 this quarter? Or how should we think year-over-year?

I think we commented that we thought units would be flat in February and March and comps would be up 2, which would be generated by a flip in price and inflationary raising prices in general on tires in light of what is going on.

Okay, I will move on. The last two I had was, is there any way to think about this quarter's increase in price in terms of branded tires versus the Chinese tires? Were both of those up a few points, or can you just help us with that? And the last one I had was the mix of sales by category.

Sure. The answer on branded versus import. Yes, they were both up. And second -- and your second question, mix by category, brakes was 13%, exhaust was 3%, steering was 9%, tires was 49% and maintenance was 26%.

Great, thanks a lot, guys.

Robert Higginbotham with SunTrust

Good morning, everyone. Thanks for the question. My question relates mainly to inventory. To the extent that your inventory grew pretty close to overall revenue growth, as you stockpile import products, you said that you were funding some of those import purchases by lower branded purchases. Would you characterize your current branded tire inventory as significantly short such that you are starting to have to ramp up those purchases now?

No, we get very ready supply from branded manufacturers, so we are able to manage that inventory pretty closely. We've made sure that all of our stores have plenty of tires to sell, and that has allowed us to just manage the overall increase in inventory while investing in the pre-buys for the import tires.

Okay. And then so what you have in terms of imports, how many months of supply do you have of that product now?

We -- the -- we have not broken out how many months of supply we have at any point during this, and I don't think it helps for us to do that. I am 100% comfortable with the 5% to 10% increase year-over-year FY16 cost of sales versus FY15 that we've guided to. And the pre-buy, in orders that we have made and agreements we have with manufacturers all play into that.

Robert, we borrow at 1%. If the domestic guys decide they want to sell stuff, we are in a position to buy it and put whatever on the shelves we want to, just like with the shifting production out of China. We will do the same on imported tires. It is not a function when you carry 5 million extra of inventory and it costs you $50,000 to carry it for a year, it's not something we worry about to the same extent you do.

To be clear, I am less worried about what your cost to store the product might be. I am wondering how long and how many quarters you can sell Chinese imports at a higher retail market price, having funded it at a pre-tariff cost.

We've said coming the first six months of 2016 to work through it. But that question is assuming that domestic guys are not going to make any adjustments, import guys are not going to make any adjustments. Some of this is driven by what our competition does also. So, it's a pretty long tail.

Sure, fair enough. To make sure I understand the 5% to 10% cost increase that you have talked about for a while, which is really helpful, that sounds like that is a FY16 number. What would the annualized number be based on the current post-tariff cost structure be?

That is our estimate for the annual number for FY16 with post-tariff -- all post-tariff impacts incorporated over FY15.

I mean more on a rolling 12 months, what is the full annual impact?

You mean beyond FY16?

Yes, beyond 2016 and really importantly, beyond whatever -- beyond you working down your stockpile levels.

There is absolutely assumptions we've made of costs beyond working down our existing inventory. That is all incorporated in the 5% to 10%.

But as I have said, the most important -- we are focused on FY16 not only because it is the next fiscal year, but in this trans -- in the year coming up, you are going to have significant amount of sourcing shifting out of China into other non-tariff countries. And that's really where we are focused. Our whole focus was to put ourselves in a position where we could contain the cost in the first year and then maximize the opportunities that we have to source outside of China.

What you should hear out of that is, I don't expect costs beyond that to be ramping up significantly from what we have talked about for FY16. That is a long way off. That is my projecting it forward.

Understood, that's helpful.

We're trying to get (inaudible) right.

Sure, understood. And then so one quick last one. The 2%-ish price increase you said you took in third quarter, which sounds like it was spread across both Chinese imports and the branded product. Was that driven by the manufacturers and you passing that through, or was any of that you taking price action just at retail? With the (multiple speakers) cost?

That was us taking action at retail.

Okay, thank you.

Sure.

Thank you.

That does conclude our Q&A session, I will turn it back to our speakers for any closing remarks.

Thank you. Thank you all for your time on this snowy morning. While I am not content with our results, we are actively managing our business to drive topline growth and earnings in this operating environment and to expand our competitive advantages to strengthen Monro for the long term. 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.

That does conclude today's conference call, we appreciate your participation.