Monro Inc (MNRO) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Monro Muffler Brake, Inc. earnings conference call for the second quarter of fiscal 2016. At this time all participants are in a listen-only mode. (Operator instructions). I would now like to introduce Ms. Effie Veres of FTI Consulting. Please go ahead.

Thank you. Hello, everyone and thank you for joining us on this morning's call. I would just like to remind you on this morning's call, management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the company's filings with the Securities and Exchange Commission.

These risks and uncertainties include but are not necessarily limited to uncertainties affecting retail generally, such as consumer confidence and demand for auto repair, risks relating to leverage and debt service, including sensitivity to fluctuations in interest rates, dependence on and competition within the primary markets in which the company's stores are located, and the need for and costs associated with store renovations and other capital expenditures.

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

Joining us for this morning's call, from management, are John Van Heel, President and Chief Executive Officer, Cathy D'Amico, Chief Financial Officer, and Rob Gross, Executive Chairman. With these formalities out of the way, I would 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 second quarter fiscal 2016 performance. I'll start today with a review of our results, key initiatives and outlook for fiscal 2016. I'll then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results.

In the second quarter we delivered on our key objectives of increasing traffic, leveraging our scale and supply chain to affect, and effectively managing operating expenses while driving strong contributions from our recent acquisitions and maintaining a robust pipeline of new acquisition opportunities. Our team's strong execution drove positive results on both the top and bottom lines.

Sales in the second quarter increased by over 8%. Comparable store sales were positive 2.1%, led by a 2% increase in traffic. And were consistent throughout the quarter. Earnings per share grew 14% to a record $0.57, the mid-point of our guidance, supported by operating margin expansion of 120 basis points. For the first six months of the fiscal year, sales have increased by 8%. Operating margin expanded 90 basis points and net income increased by 13%. These results clearly demonstrate that our business model is working.

We are also pleased that the sales momentum we experienced in the second quarter has strengthened into October with a 4.2% increase in comparable store sales month to date, and continued positive traffic.

During the second quarter, sales grew across our key categories. Most notably, comparable sales for alignment increased by 11%. Tires and exhaust each increased by 3%. And brakes increased by 2%. Maintenance services and front end shop were both flat.

We are encouraged by the 3% increase in tire sales in the second quarter led by higher retail tire prices and flat tire units, which we believe are indicative of broader trends and reflective of customers continuing to delay purchases, particularly on large ticket items. That said, as our results would suggest, we are seeing improvement.

October will mark our sixth consecutive month of positive comparable store sales. However, I would like to see our 4.2% positive comparable store sales trend month-to-date continue through the third quarter before I consider this an inflexion point for consumers. The recent sales initiatives we have undertaken to improve our marketing, DRM and website capabilities are helping to support our field team's heightened focus on driving higher store traffic and sales.

The continued shift in marketing spends to more efficient digital advertising and improvements to our CRM system are driving customers both to our stores and website. We have upgraded our desktop and mobile website capabilities with significant improvements to our online appointments and tire search functions. In addition to these online enhancements, we are increasing the collection of customer email addresses, allowing us to more effectively communicate and drive higher customer conversion. These initiatives are already having a positive impact on our traffic and sales, which we expect will build as we move further into the back half of the year.

Now let's turn to gross margin. We continue to generate significant gross margin expansion, with an increase of 170 basis points to 42.1% in the quarter driven by lower material costs as a percentage of sales, increased payroll efficiency and leverage of our distribution and occupancy costs. In the second quarter we collected more gross profit dollars for tires than in the same period last year. This is significant to our earnings growth, given that every $1.00 increase in tire gross profit is worth $0.05 of earnings per share in a given year, which is double the contribution versus a 1% increase in units.

Looking ahead, we expect that our cost advantage versus competitors will continue to widen as we capitalize on our increasing scale and flexible supply chain while continuing to effectively manage our retail tire prices.

Moving on to expenses. Total operating expenses as a percent of sales delivered by 50 basis points in the second quarter, driven primarily by higher due diligence related to potential acquisitions. Despite the choppy environment, we achieved another quarter of strong profit growth, with second quarter operating income up 18% year-over-year and operating margin expansion of 120 basis points to 14.3% of sales.

Net income increased 16% year-over-year to $18.9 million or a record $0.57 in earnings per share, and included $0.02 of expense related to annual direct or stock option grants. Our strong sales results in the quarter, and year-to-date, underscored the flexibility of our business model and demonstrated that regardless of the macro environment, we can successfully manage the business to drive strong bottom line results.

Now I would like to discuss our growth strategy. Continuing our strong acquisition growth, during the second quarter we completed the previously announced acquisition of 31 stores in central New York, Pennsylvania and Massachusetts, 25 of these stores are located in central New York and two are in Pennsylvania. Those stores have been rebranded under the Mr. Tire brand, allowing the company to fill in existing markets where we currently operate Monro Brake and Tire locations.

The remaining four stores are located in Massachusetts and operate under the Monro Brake and Tire brand. These acquisitions increase Monro's presence in these regions and demonstrate the advantages of Monro's two brand strategies. These transaction also expected to add approximately $31 million in annualized sales, representing an estimated sales mix of 60% service and 40% tires. They are expected to be break-even to slightly accretive to earnings per share in fiscal 2016 as we anticipate that cost synergies will be realized at an accelerated pace due primarily to our ability to leverage existing distribution in these markets.

As a reminder, in the first quarter we completed the acquisition of the Car-X brand, a chain of 146 franchise locations operating in 10 states. Car-X is expected to add $2 million in EBITDA annually and will be slightly accretive to earnings per share in fiscal 2016. In total these transactions, completed in the first six months of fiscal 2016, represent approximately $35 million in annualized sales. Acquisitions allow us to increase Monro's total sales and store count and as a result raise 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.

The current operating environment continues to create favorable acquisition opportunities. In the short-term, choppy sales trends and higher costs continue to weigh on smaller dealers, but importantly the longer term opportunity is that owners of independent tire dealers are at or near retirement age without an internal succession option. When excluding the acquisitions completed year-to-date in fiscal 2016, we continue to have more than ten MDAs signed. We remain very optimistic by the opportunities to complete additional acquisitions in the second half of the fiscal year.

Now let's turn to the details of our outlook. Taking into account anticipated sales contribution from our completed 2016 acquisitions, the strong performance of our recent acquisitions and positive comparable store sales trends, we are narrowing our fiscal 2016 sales guidance to a range of $955 million to $970 million. This range now assumes comparable store sales of positive 1.5% to 2.5% compared to our previous guidance 1% to 3%. As a reminder, we closed 34 BJs locations in fiscal 2015 which reduces our sales base versus last year but will have minimal impact on earnings.

Turning to our expectations for cost of goods, we continue to believe that Monro's overall tire cost including related warehousing and logistics, will be down slightly in fiscal 2016. We expect lower raw material costs, increasing competition among manufacturers, and our robust supply chain to continue to benefit gross margin while further widening our competitive cost advantage. Unlike many of our competitors, we have already shifted nearly all of our non-branded tire sourcing to suppliers outside of China, minimizing the impact of the Chinese tariffs.

Furthermore, due to the strong performance of our recent acquisitions we now expect $0.14 to $0.18 in earnings per share contributions from them compared to previous guidance of $0.12 to $0.17. We remain very encouraged by the opportunities we see to complete additional attractive acquisitions this fiscal year. As a result, we expect higher due diligence costs in fiscal 2016 compared to last year, which is reflected in our earnings guidance.

Based on these assumptions we have narrowed our fiscal 2016 diluted earnings per share to a range of $2.07 to $2.17 versus our prior guidance of $2.00 to $2.20. This compares to earnings per share of $1.88 in fiscal 2015, an increase of 10% to 15% year-over-year, on top of a 40% increase in the prior two years.

Our fiscal 2016 guidance is based on 33.1 million weighted average diluted shares outstanding. In short, we raised the lower end of our guidance from $2.00 to $2.07 per share in step with our higher sales expectations, and adjusted the high end from $2.20 to $2.17 per share as a result of higher expected due diligence costs.

The mid-point of our earnings guidance represents operating margin expansion of 80 basis points for the fiscal year on top of the 80 basis point improvement we realized in fiscal 2015. Given the lower material costs we anticipate this fiscal year, we now expect the comparable store sales increase of approximately 50 basis points will overcome inflation versus the 2% to 2.5% increase we have historically required. With that said, let me remind you that every 1% increase in comparable store sales, above that inflation hurdle, generates an incremental $0.07 in EPS.

Turning to the quarter, as I previously stated, October comparable store sales are up approximately 4.2% month-to-date. Based on these trends, we expect total third quarter comparable store sales to increase 2% to 4% versus the prior year period. We anticipate total sales for the quarter to be in the range of $247 to $254 million. Diluted earnings per share are expected to be in the range of $0.53 to $0.58 versus $0.49 in the prior year period, and includes higher due diligence costs.

Long-term trends remain favorable for our business, with nearly 250 million vehicles on the road, with a record average age of 11.8 years old, a slowly declining population of service days, and consumers choosing do it for me service more frequently. Importantly, during the first six months of the fiscal year, vehicles 13 years old and older accounted for 28% of our traffic. These vehicles produce average tickets similar to our overall average, demonstrating that consumers continue to invest in and maintain their vehicles even as they advance in age.

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 5-year plan remains unchanged and continues to call for, on average, 15% annual top line growth including 10% growth through acquisitions, 3% cost, and a 2% increase from Greenfield stores. Our acquisitions are generally dilutive to earnings in the first six months as we overcome due diligence and deal-related costs while working through initial inventory and the operational transition of these stores.

With cost savings and recovery in sales, results are generally break-even to slightly accretive year one and $0.09 to $0.12 accretive in year two and an additional $0.9 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. As our results have shown, our disciplined acquisition strategy is further strengthening our position in the market place. We expect it to continue to provide meaningful value to our shareholders for many years to come.

Before I hand the call over to Cathy, I want to reiterate that I am pleased by our overall execution as we look to deliver our sixth consecutive month of positive comparable store sales with 90 basis points of operating margin expansion year-to-date and record profits. As we move into the second half of the year, I would like to share with you positive trends that we believe will continue to favorably impact our bottom line in fiscal 2016.

These include the positive impacts to traffic and sales from our heightened operational focus, and our current digital CRM and marketing initiatives, tire inflation of 2% to 3%, which represents a 1% increase in overall comparable store sales on flat unit volume, tire (inaudible) of goods that are down slightly versus fiscal 2015. At current prices, a year-over-year benefit from the decline in oil costs, net of reduced waste oil credit, of approximately $1 million and significant sales and earnings contributions from our fiscal 2014, 2015 and recent 2016 acquisitions. And additional acquisitions at attractive valuations.

Before I turn the call over to Cathy, I would like to thank each of our employees for their continued hard work. The consistent execution and superior customer service they deliver on a daily basis is reflected in Monro's brand strength and financial success. They are the reason for Monro's compelling customer value proposition and I'm greatly appreciative of their efforts.

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

Thanks, John. Good morning, everyone. Sales increased 8.1% and $17.9 million for the quarter. New stores, which we define as stores opened or acquired after March 29, 2014, added $18.5 million including sales of $17.5 million from fiscal 2015 and 2016 acquired stores. Comparable store sales increased 2.1%. Partially offsetting these increases was a decrease in sales from closed stores of approximately $5.2 million, largely related to the BJ store closures in fiscal 2015.

Additionally during the quarter ended September 2015, the company completed the bulk sales of approximately $2 million of inventory to a barter company as compared to a $2.9 million transaction in the second quarter of last year. There were 91 selling days in both the current and prior year second quarters. Year-to-date, sales increased $36.9 million and 8.4%. New stores contributed $43.8 million of the increase including $40.7 million dollars from fiscal 2015 and 2016 acquisitions.

Additionally, there was a comparable store sales increase of 0.8%. These were partially offset by a decrease in sales from closed doors of approximately $11.3 million, again, largely related to the BJ store closures. And there were 181 selling days for the first six months of this and last fiscal year. At September 26, 2015 the company had 1,029 company operated stores and 143 franchise locations. As compared with 1,003 company-operated stores and one franchise location at September 27, 2014.

During the quarter ended September 2015, the company added 35 company-operated stores and closed five. Year-to-date we added 39 stores and closed nine. Gross profit for the quarter ended September 2015 was $100.7 million or 42.1% of sales as compared with $89.5 million or 44.4% of sales for the quarter ended September 2014.

The increase in gross profit for the quarter ended September 26, 2015, as a percentage of sales, is due to several factors. First, there was a decrease in total material costs including outside purchases primarily related to reduced oil and tire costs. Distribution and occupancy costs decreased as a percentage of sales as compared to a prior year quarter as we gain leverage on these largely fixed costs with higher sales.

Additionally the recording of some new releases under GAAP as operating versus capital reduced occupancy costs and increased interest expense. Labor costs decreased as a percent of sales as compared to the prior year quarter due to continued focus cost control. Gross profits for the six months ended September 2015 was $200.4 million or 42.1% of sales as compared to $179.5 million or 40.9% of sales for the six months ended September 2014.

The year-to-date increase in gross profit as a percent of sales is due to similar factors as I described for the quarter. Material costs declined meaningfully, related to decreases in oil and tire costs. Additionally, labor costs as a percentage of sales decreased as compared to the prior year.

Operating expenses for the quarter ended September 2015 increased $6.1 million and were $66.6 million or 27.9% of sales as compared with $60.5 million or 27.4% of sales for the quarter ended September 2014. The increase as a percent of sales is primarily due to increased due diligence costs and increased management bonus related to improved performance as compared to the prior year quarter.

For the six months ended September 2015, operating expenses increased by $11.6 million to $132.7 million or 27.9% of sales as compared with $121.2 million and 27.6% of sales for the prior period six months. The increase is primarily due to increased due diligence many management bonus expense as well as a small increase in benefit costs as a percent of sales. Again, it's compared to the prior six months.

Operating income for the quarter ended September 2015 of $34.1 million increased by 17.9% as compared to operating income of approximately $28.9 million for the quarter ended September 2014 and increased as a percentage of sales from 13.1% to 14.3%. Operating income for the six months ended September 2015 of approximately $67.7 million increased by 16.1% as compared to operating income of approximately $58.3 million for the six months ended September 2014. And also increased as a percentage of sales from 13.3% to 14.2%.

Interest expense for the quarter ended September 2015 at 1.6% of sales increased $1 million as compared to the same period last year, which was at 1.3% of sales. Weighted average debt outstanding for the second quarter of fiscal 2016 increased by approximately $43 million as compared to the second quarter of last year. The increase is primarily related to an increase in capital debt recorded in connection to the fiscal 2015 and 2016 acquisitions. The weighted average interest rate also increased by approximately 70 basis points from the prior year, largely due to adding capital leases.

For the six months ended September 2015, interest expense increased by $2.2 million and increased from 1.1% to 1.5% as a percentage of sales for the same periods. Weighted average debt increased by approximately $43 million and the weighted average interest rate increased by approximately 100 basis points, again due to an increase in capital lease debts. Our effective tax rate was 38% of pre-tax income for the quarter ended September 2015, and 38.1% for the quarter ended September 2014.

Net income for the current quarter of $18.9 million increased 15.6% over the net income for the quarter ended September 2014. Earnings per share on a diluted basis of $0.57 increased 14% as compared to last year's $0.50. For the six months ended September 2015, net income of $37.7 million increased 13.3% and diluted earnings per share increased 12.9% from $1.01 to $1.14 per share.

Moving on to our balance sheet, it continues to be strong. Our current ratio of 1.2 to 1 is comparable to fiscal 2015. In the first six months of this year we generated approximately $45 million of cash flow from operating activities and increased our debt under our revolver by approximately $22 million. We used these borrowings to cash flow from operating activities to finance our fiscal 2016 acquisitions we added 34 stores to date, as well as the Car-X franchise business.

Capital lease and financing obligations increased $29 million due primarily to our fiscal 2015 and 2016 acquisitions. At the end of the second quarter, debt consisted of $145 million of outstanding revolver debt and $171 million of capital leases and financing obligations. As a result of the fiscal 2016 borrowings, our debt to capital ratio including capital leases increased 38% at September 2015 from 36% at March 2015. I'm sorry, to, yes.

Without capital and operating leases our debt to capital ratio was 22% at the end of September 2015 and 21% at the end of March 2015. 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.

We are currently borrowing at LIBOR plus 125 basis points and we have approximately $90 million of availability not including the accordion. We are fully compliant with all of our debt covenants and have plenty of room under these covenants to add additional debt for acquisitions without any problem. All of this as well as the flexibility built into our debt agreements continues to make it easy for us to get acquisitions done quickly.

Additionally, we are in the process of negotiating a larger facility to ensure that we can fund more and larger acquisitions going forward. During the first six months of this year, we spent approximately $20 million on CapEx which included approximately $10 million in the second quarter and $47 million on acquisitions. Depreciation and amortization totaled approximately $20 million, divided roughly evenly between Q1 and Q2 and we received $5 million from the exercise of the stock options.

We paid about $10 million in dividends. Inventory is up approximately $5 million from march 2015, largely due to acquired stores 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 2015 were relatively flat from last year's second quarter and year-end.

That concludes my formal remarks on the financial statements. With that, I will turn the call over to the operator for questions.

(Operator instructions). We'll take our first question from Brett Jordan with Jefferies.

Good morning, guys.

Good morning.

On the gross margin, some pretty good performance in the quarter. Was there any contribution from leftover Chinese tire inventory that was still turning in the period?

No. Well, obviously we're turning the tires as we go. But what we've said is we expect tire costs, overall, to be slightly down this year. So we've really been able to hold those costs in check. So (inaudible) from that. No.

Okay. And in the supply chain, what markets are you sourcing out of now, given the fact that the Chinese product is less attractive, and maybe could you tell us what the mix of import versus branded tire is in the quarter.

There are other Pacific Rim countries. And they are, as we've said before, some new manufacturer relationships as well as some continuing that just shifted their production outside of China. And then the mix is roughly the same this year and last year. It's right around 40%.

Okay, great. And then just on segments, 11% comp and alignment, and outperforming tires so much in sort of a non-alignment season, what do you make of that? Is that something that was promoted in the quarter?

Yes, I think it's, you know, again it relates back to what we said about tire units being flat. I think consumers are still deferring larger ticket purchases, and in those cases they're making sure and accepting our alignment recommendations more often, to keep the tires that they have on their cars going longer. And we have absolutely put an operational focus on that as well, because we think that is the case and we're doing a much better job of it than we were doing prior to this.

Okay. And then the quarter, October to date comp, is segment trends in that 4.2% roughly the same or is anything sort of outlying in that current performance?

So traffic is up, as I said. Tires are about plus 3%, like they were. And service is getting better.

Okay. Great. Thank you.

Thank you.

Moving on we'll go to Rick Nelson of Stephens.

Hey, guys, this is [Nick Zengler] in for Rick. Just hitting on that 4.2% October comp, that's really strong. Looks like, to me, the strongest number since January of 2012. It looks like November could be a little bit of a harder month to lap, but December looks like on a comparative basis like October.

So given your guide of 2% to 4%, what needs to happen in this quarter to get to the high end of that range? I'm kind of hearing tidbits on a milder winter on this quarter, into next year. How does that factor in? Is that good for you guys? Bad for you guys? Just some reflections on that.

Look, I think we've seen a quarter of plus 2%, that we think is the floor. We're running plus 4% right now on higher traffic. We've gotten good contribution from our initiatives there. And as I look at it, November and December really offset themselves.

So we're really, we're running up against a slightly negative comp over the next couple of months. And I think there's significant opportunity to continue at this plus 4%. I would like to see that for the remainder of the quarter.

Great. And then I just wanted to jump back over to the Car-X acquisition. Obviously I would imagine franchise owners are able to purchase product from Monro, which has the potential to provide benefits to both Monro and the franchise owners, given your scale.

Can you talk about any progress that you have made with those owners, you know, since the acquisition? Have you been able to improve those franchise operations? Have they benefited you? Just what your interaction has been with those owners since the acquisition. there.

Sure. Things are going well at Car-X. We are looking to use all of the advantages that we have that you just talked about, to help improve the businesses of the franchise owners. We are bringing opportunities to them as we get those sorted out. So, they have been running well but overall that's a $2 million EBITDA opportunity on $160 plus million EBITDA company. So it's going well. We're very pleased with it. And we continue to work hard to help these guys improve their business and grow the chain.

Great. And then finally, as that serves as a potential acquisition pool, how are the dynamics? What do those look like? Do you have a right of first refusal? I would imagine the owners would go to you guys first. But is there anything contractually that's baked in there?

No. No, there isn't. Again, our objective is to help these guys improve their businesses and grow the chain. We think that where they would come to us, if they want to sell their business, they would have more of an opportunity than perhaps they have had in the past. But we're very happy with the franchise model there, and we're trying to grow that with them.

Great. Congratulations on the results, positive comp and the good start to 3Q. Good luck.

Thank you.

Thanks.

Next we'll hear from Tony Cristello with BB&T Capital Markets.

Thank you. Good morning.

Hey, Tony.

Good morning.

One question I wanted to talk a little bit about, and obviously you've got to be careful in terms of comp trend and where you're forecasting. And I know you're running a 4% in October. Can you give me the sort of cadence of how the quarter shaped up, and then on the sustainability of a positive October, what do you typically see heading into November on that?

So the second quarter was plus 2.3% in July, plus 2.1% in August, and plus 1.9% in September. And, again, in this quarter is a key quarter for tire sales. November is a very important month there. As we just talked about, we were up something like 3.9% last September but then had a negative month in December. So I think it's the consumer, hopefully our traffic initiatives, which have brought in a bunch of new customers in the second quarter, are going to help us sustain that plus 4% throughout the third quarter here.

Yes, I think we were up 3.9% in November, is what we were going to say. And we would hope the 4% is the new norm. But one month does not make a trend.

Right. Patience. But you hope that the pent-up demand flows through.

No, we have no patience!

Maybe shifting gears a little bit too, you have expanded into some newer markets in Florida and Georgia, which are very good markets. But atypical to Monro, you don't have a big infrastructure built. You don't get the benefits of distribution.

And I'm just trying to understand, then, one, I'm assuming you're getting good sales results but you may not get the full leverage that you would get in those markets. How should we think about contribution on a go-forward basis as you're backfilling and building out those markets?

Sure. In particular, Florida and Georgia, you're right, we don't have the distribution down there. The sales results are good. We're happy with that. We typically talk about 100 to 150 basis points of operating margin improvement that we get from distribution synergies.

Right now we are delivering product down to those markets. So our distribution costs are higher. So basically right now we're not get that 100 to 150 basis points on distribution. And that represents an opportunity.

We have said in the past that we would look at opening a DC when we're more like triple digit stores down in those markets. And at that point we would spend some money on the DC, on a larger store base to get after that distribution synergy.

Okay. And I'm assuming that your targeted growth of acquisitions is inclusive of those newer markets, or are those markets that you feel comfortable enough to continue to maybe add stores via Greenfield?

Yes, we absolutely are adding both Greenfield stores and looking at those for acquisitions. We have a number of acquisition opportunities in those markets, which I view as very positive. They're large, dense markets and they balance our exposure to more northeast and north central markets. I think it's a great opportunity for us.

And how long would it take you to sort of get DC up and running? Is that a couple of year venture and therefore maybe you don't get the full efficiencies in those markets for another two or three years now?

No, that would be more like somewhere plus or minus, well, probably a little bit 12 months once we got that up, once we made that decision.

Okay. Great. Thank you for your time.

Sure. Thank you.

And next we'll hear from Michael Montani with Evercore ISI.

Hey, guys. Good morning. I wanted to ask about the NDA pipeline, if I could, for a moment. There's a comment that you all had made about increasing the credit line, and potentially being related to larger sized deals. So could there be any in the pipeline now that are larger size? How should we sort of think about that?

The more than ten NDAs that we talked about, five to 40 stores within our market. So we're a bigger company with more opportunity, and with respect to larger deals, we've always said that anything that makes sense for our company and the shareholders is something that we would look at.

But right now, I want to make sure that we have the opportunity to take advantage of all the acquisition opportunities that we seek. We said it was going to be a good year for acquisitions. We want to have the flexibility to take advantage.

Great. And just to follow up, the digital initiatives that you have embarked on sound to be paying off a little bit. Can you quantify at all, if you look at the traffic, up 2%. And it sounds like it hasn't gotten any worse than that in October. How much of that might be related to those initiatives, and also what are oil changes looking like?

The oil changes are up, and when you look at the traffic, we're bringing in a lot of new customers here. That's our focus in the field. And I view the digital initiative as supporting that. So the big push is all of our guys in the field doing a great job for customers, bringing in new customers, doing more, you know, getting them out, happy with our service.

On a first visit that might be something more like an oil change or a lower cost service, and giving them a reason to come back to us. So that plus 2% traffic in the quarter should help pay off in the second quarter, should help pay off in the third quarter, with consumers coming back and needing more costly repairs that they can't delay anymore.

Got it. Just one last housekeeping thing, which was if you could share what the mix was this quarter in terms of revenue by category?

Sure. So for the quarter, tires was $43 million. Steering was $10 million. Exhaust was $4 million. Brakes was $16 million. And maintenance was $28 million. And as always, don't hold me to the rounding.

Sounds good. Thanks a lot.

Okay. Thank you.

(Operator Instructions). Next we'll hear from James Albertine with Stifel.

Good morning and thanks for taking my questions.

Sure. Thank you.

First of all, congratulations. You had a solid quarter, the gross margin DEET that was already asked about was exceptional. It looks like what you're doing to drive the comp leverage point lower is benefiting yourselves. Now as comp appears to be, it sounds, accelerating.

But really, if I may, I know it's asked a bunch of different ways, I want to drill on the comp a little bit. Is it too early, given where we are in October, I know I saw of bill of highlight last weekend, there was some snow falling. I don't know if upstate New York's different but is it too early to make a call on whether folks are getting into snow tires and replacing, what you have told us in the past, are heavily used, bald, deferred tire purchases?

James, this is Rob. It's too early. We said tires in October are doing the same thing they did in Q2 and I don't think people are thinking about buying snow tires in July, August or September. So we continue to run flat units, which would say they're not unbelievably nervous about winter weather.

I mean, the few snowflakes we saw last weekend, you know, is not a driver and I think, as we said, flat units with inflation are going to be the driver of the tire comp and the improvement, at least we've seen in October, John said, relates to a service business. We really need to see November and December to make a call on whether the consumer's going to stop deferring tires.

We certainly know they need them. We've certainly seen a lot of ugly ones. When we do change them, they're bald. But too early to call and we hope that pushes towards a plus 4% as opposed to what John said was the floor of plus 2%.

Let me ask then, as well, because it sounds like you're doing a great job to bring in new customers. I guess, first, is there any data to suggest where you're pulling those customers from? And what can you tell us about those new customers? Are they more inclined to spend? Are they of a higher income level versus maybe your core base?

How should we think about the impact, however small, because I'm really trying to get a sense here of when can we expect the deferred maintenance cycle to end, right? And I'm looking for any evidence that we can find to that extent. So is there anything on the new customer side that can help us?

Well, you know, look, we have the plus 2% in traffic for the quarter is a high number for us. It's a good number for us. And it is a lot of new customers. With regard to where they're coming from, I guess I could say to you that I think our sales trends in general are ahead of the other companies that I'm seeing in those MDAs.

So I think we're doing well there. But those customers are coming in for oil changes. And again, we're looking to bring them back for additional service on their, you know, on a return visit. And I think with regard to whether this is a real shift in the customer, I would say that it's not, given, right now, given the flat tire units. But we'll let you know after the end of the quarter.

Okay. And I'm still beating the comp horse here. But last question on comp. From a regional perspective, as you've grown into newer markets, and I know they're not flowing through your comp base in many cases yet. But is there a clear or definitive performance difference in the newer markets versus the northeast? And so to that end could you make the argument that perhaps your comp will be a little bit more predictable or be more stable over the next few years as they roll into your base?

Yes, Florida and Georgia are doing well for us. And I think the more exposure we get to those markets, that will certainly help reduce some of the volatilities that we've seen from winter weather and this discussion we're having about November and December.

Understood.

And I view that as a positive. The most important thing for us is to grow and increase our store density in our existing markets and as we're talking about in Florida and Georgia here, in these contiguous markets.

Okay, great. Well, John and everyone, thanks again. I appreciate it. Good luck in the current quarter.

Sure. Thank you.

Moving on we'll go to Scott Stember with CL King.

Good morning, guys.

Morning.

Most of my questions have been asked already, but just going back to the comp range that you gave for the full year of 1.5% to 2.5%, it looks like you pared down the high end by just a smidge. And in October we saw probably stronger than anybody expected comps, up north of 4%.

I know you guys like to be conservative and you know justly so, but is there anything else that we're missing that we should be looking at? Any concerns that you have that has given you any pause to be maybe a little bit more aggressive on the comp ends?

No. October was consistent with the overall comp last year, was down 2%. In the fourth quarter we were down 1.8% in the third quarter and the fourth quarter was down 2.5%. So I think there's nothing there that you're not seeing. It's just a bit of conservative I feel. I would like to make sure -- conservatism. I would like to make sure that we hit a number.

Got it. That's fair enough. Last question. You guys have, obviously, done a very good job of attracting new customers into your stores for the services that you sell. But is there anything else out there, anything new that you guys are working on, any new services that is part of your broad initiative to increase your sales, whether it be more temperature control items or what not? Is there anything that's in the works that possibly could be an additional driver going forward?

Look, where our focus is operationally is driving new customers in. They need the basic work that we provide, and our doing a better job with those customers, you know, you can see that as an example in the alignment category. There's a need out there. We've got an operational focus on it.

It's a very high-profit category for us, and high customer satisfaction category because it helps them preserve the investment that they have made in their tires. That's where our focus is. And that's where we think the biggest gains are for us. We're looking at -- we're trying to do the best job we can adjusting all the needs that our customers have.

Got it. That's all I have. Thanks so much for taking my questions.

Sure. Thank you.

That will conclude our question answer and session. I would like to turn it back to John Van Heel for any additional or closing comments.

Thank you all for your time this morning. I'm looking forward to reporting on the continued positive impacts of our focus on sales and traffic and contributions from the acquisition opportunities we're acting on. Our business model should produce another year of double digit EPS growth on top of the 40% increase over the past two years.

We appreciate your continued support and the efforts of our employees that work hard to take care of our customers every day. Thanks again and have a great day.

And that will conclude today's conference. We would like to thank everyone for their participation.