Monro Inc (MNRO) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake's earnings conference call for the third quarter of fiscal 2016. (Operator Instructions) And as a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in part without permission from the Company.

And now I would like to introduce Ms. Effie Veres of FTI Consulting. Please go ahead, ma'am.

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

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

The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any statement 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 on 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 fiscal 2016 performance. I'll start today with a review of our results, key initiatives, and outlook for the remainder of the year. I'll then turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional detail on our financial results.

Third-quarter comparable store sales declined by 2.5% and earnings per share were $0.46, in line with the business update we released on January 11, but below our original earnings guidance range of $0.53 to $0.58. The earnings miss was due to lower comparable-store sales, which were negatively impacted by unseasonable weather. Everything else is just noise.

Despite the weaker top-line results this quarter, our team continued to leverage our competitive advantages, including our increasing scale and flexible supply chain, which led to 100 basis points of gross margin expansion and an increase in our operating margin to 12.1%, excluding due diligence costs.

Now let me provide you with more detail around the cadence of sales during the quarter. While comparable-store sales were strong in October, increasing 4%, unseasonably warm weather across our northeastern and north-central markets during the remainder of the quarter led to a 9% decline in comparable-store sales in November followed by an increase of 0.4% in December.

Overall for the quarter, comparable-store tire sales declined by nearly 4.5%, which drove substantially all of the comparable-store sales decrease. While average retail tire prices increased approximately 3% from last year, which is consistent with prior quarters, this was more than offset by a 7.5% decline in tire units.

Despite the adverse weather, the underlying fundamentals within our business remained intact. Positive comparable-store sales in key service categories continued into the third quarter, including a 6% increase in alignments and a 2% increase in brakes. Additionally, non-weather-affected markets experienced solid top-line trends, including mid-single-digit comparable-store sales growth in our southern market.

As winter finally arrived, I'm encouraged to see that comparable-store sales in our January fiscal month rebounded strongly across our market, increasing by 10% on positive traffic and tire sales in spite of the negative impact of Winter Storm Jonas on Friday and Saturday, the last two days of our fiscal January month. On Saturday in particular, 240 of our stores were closed throughout the mid-Atlantic.

Notwithstanding my weather report, we continue to support our field team's heightened focus to drive higher store traffic with recent initiatives we've undertaken to improve our marketing, CRM, and website capability. The continued shift in our marketing spend to more efficient digital advertising and improvements to our CRM system are driving customers to both our stores and website. We also continue to upgrade our desktop and mobile website capabilities with significant improvements to our appointment and tire search function.

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. We believe the positive impact these initiatives have had on our traffic and sales this year will continue to build into fiscal 2017.

Now let's turn to gross margin. As I said, we continued to generate significant gross margin expansion with an increase of 100 basis points in the quarter and 120 basis points fiscal year to date. The increase in the quarter was primarily driven by lower product costs as a percentage of sales and favorable mix due to lower tire sales. The lower product costs reflect both our retail pricing discipline and cost-effective sourcing.

We continue to expect that Munro's overall tire cost, including related warehouse and logistics, will be down slightly in fiscal 2016. As we move through our fourth quarter and into fiscal 2017, we believe gross margins will continue to benefit from favorable commodity prices and greater competition among tire manufacturers. Our increasing scale and robust supply chain will allow Munro to take greater advantage of these trends, further expanding our competitive cost advantage.

Moving to operating expenses. Total operating expenses increased 7.5% to $66.9 million or 28% of sales as a result of due diligence costs and the layering in of operating expenses from new stores. When excluding due diligence costs, operating margins expanded to 12.1% in the quarter, despite lower comparable-store sales.

Additionally, when looking at our fiscal year-to-date performance, net income is up by over 7% on top of the 43% growth achieved in the previous two years, underscoring our ability to drive profitability in any operating environment.

Now I would like to turn to our acquisition strategy. With more than 10 NDAs currently signed, we remain very optimistic about the attractive acquisition opportunities we've seen in the marketplace, particularly as choppy sales trends and higher costs continue to weigh on smaller dealers and owners of independent tire dealers are at or near retirement age without an internal succession option.

These NDAs represent chains of between five and 40 stores located within our 25-state footprint. After putting these opportunities on hold for the last several months, we are now moving forward on them aggressively.

To further capitalize on our growth strategy, we've announced a new five-year credit agreement expanding our revolving credit facility to $600 million, which is more than double our previous borrowing capacity. Cathy D'Amico and Brian D'Ambrosia, who is our Chief Accounting Officer and Controller, did a great job of negotiating a favorable agreement for Munro, which will allow us to increase the number and size of acquisitions we can pursue going forward.

As we have stated in the past, we believe our focus on filling in our existing 25-state footprint is a high-value and low-risk growth strategy. The fragmented nature of our industry provides us with significant opportunities to drive strong market share gain and earnings growth. We will, however, also continue to look at larger transactions with our disciplined approach, moving forward only at valuation that create meaningful value for our shareholders.

Now I would like to turn to our outlook. We are maintaining the fourth-quarter guidance we originally provided on our second-quarter call in late October. This guidance includes sales in the range of $232 million to $240 million based upon comparable-store sales growth of 2% to 4% and diluted earnings per share in the range of $0.40 to $0.45 compared to $0.38 in the prior-year period, which represents 12% earnings-per-share growth at the midpoint of the guidance range.

Despite the choppy sales environment, January's 10% increase marks eight of 10 months we have driven positive comparable-store sales this fiscal year. We are hopeful that the sales momentum continues through the fourth quarter; however, at this point, we left our guidance unchanged, which we think is conservative. As a reminder, comparable-store sales declined 2.7% last year in February and March combined, so we're up against soft comps.

Based upon fiscal year-to-date results and our fourth-quarter guidance, we expect fiscal 2016 sales in the range of $947 million to $955 million compared to our previous guidance range of $955 million to $970 million. This guidance range assumes comparable-store sales of flat to positive 1%.

Our fiscal 2016 diluted earnings per share guidance is now $2.00 to $2.05 compared to our previous guidance range of $2.07 to $2.17. This earnings guidance is based upon 33.3 million weighted average diluted shares outstanding.

Given the lower material costs, we continue to anticipate we will need a comparable-store sales increase of approximately 0.5% to overcome inflation. This is lower than the 1% increase we required last year and significantly lower than the 2% to 2.5% increase we have required historically. With that said, let me remind you that every 1% in comparable-store sales above that inflation hurdle generates an incremental $0.07 in EPS for the year or an incremental $0.016 for the fourth quarter.

As we look ahead, we feel confident in our strategy and our business. While we remain concerned about the health of the consumer, more so than many of our peers, as the benefit of lower gas prices continues to be offset by higher healthcare and other costs, such as rent, longer-term trends remain very favorable for our business. There are nearly 250 million vehicles on the road with a record average age of 11.9 years old, a slowly declining number of service bays, and consumers choosing to do-it-for-me service more frequently.

Importantly, this fiscal year, vehicles 13 years old and older accounted for 27% of our traffic, a significant increase compared to the midteens we saw in 2012. 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. Additionally, our key competitive advantages are still in place, including our low-cost operation, superior customer service and convenience, along with our store density and two-brand store strategy.

Our five-year plan remains unchanged and continues to call for, on average, 15% annual top-line growth, including 10% growth through acquisitions, 3% comps, and a 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 costs while working through the initial inventory and 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 in year two. And an additional $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.

As our results have shown, our disciplined acquisition strategy is further strengthening our position in the marketplace. 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 would like to provide an update on the positive trends we believe will continue to favorably impact our bottom line in the fourth quarter and into fiscal 2017. These include the positive impact to traffic and sales from our heightened operational focus and our current digital CRM and marketing initiatives; a favorable tire pricing environment, with tire inflation of 2% to 3%; tire cost of goods that are down slightly in fiscal 2016 with continued benefit into 2017; at current prices, a year-over-year benefit from the decline in oil cost, net of reduced waste oil credit, of approximately $1 million in fiscal 2015 and continued benefit into 2017; significant sales and earnings contribution from our fiscal 2014, 2015, and 2016 acquisitions; and additional acquisitions at attractive valuation.

To conclude, I'd like to thank each of our employees for their continued hard work. Their passion for superior customer service and consistent execution they deliver every day is critical to Monro's brand strength and financial success. And we greatly appreciate their efforts.

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

Thanks, John. Good morning, everybody. Sales for the quarter increased 1% and $2.4 million. New stores, which we define as stores open or acquired after March 29, 2014, added $13.9 million, including sales of $13 million from fiscal 2015 and 2016 acquired stores. Comparable store sales decreased 2.5% and there was a decrease in sales from closed stores of approximately $5.2 million, largely related to the BJ store closures in fiscal 2015.

There were 89 selling days in both the current and the prior-year third quarters. Year to date, sales increased $39.3 million and 5.8%. New stores contributed $57.6 million of the increase, including $53.7 million from the fiscal 2015 and 2016 acquisition. This was partially offset by a decrease in capital store sales of 3/10 of a percent and sales from closed stores of approximately $16.5 million, largely again related to the BJ store closures last year.

At December 26, 2015, the Company had 1,031 Company-operated stores and 138 franchise locations as compared with 1,017 Company-operated stores and one franchise location at December 27, 2014. During the quarter ended December 2015, the Company added seven Company-operated stores and closed five.

Year to date, we've added 46 Company-operated stores and closed 14. With regard to franchise locations, we opened one during the third quarter of this year, closed two, and purchased four. Year to date, we opened one franchise location, closed three, and purchased seven.

Gross profit for the quarter ended December 2015 was $93.4 million or 39.1% of sales as compared with $90.2 million or 38.1% of sales for the quarter ended December 2014. The increase in gross profit for the quarter ended December 2015 as a percentage of sales was due to a decrease in material costs.

Total material costs, including outside purchases, decreased as a percentage of sales compared to the prior year. This was largely due to a decrease in oil and tire costs as well as the shift in mix from the lower margin tire category to a higher margin service category.

Offsetting the decrease in total material costs as a percentage of sales was a slight increase in distribution occupancy costs, which are largely fixed, and a slight increase in labor costs as compared to the comparable period last year. However, productivity as measured by sales per man hour was up as compared to the same quarter of last year.

Gross profit for the nine months ended December 2015 was $293.8 million or 41.1% of sales as compared to $269.7 million or 39.9% of sales for the nine months ended December 2014. The year-to-date increase in gross profit as a percent of sales is largely due to decreased material costs as previously described, but all related to costs and not mix. Additionally, labor cost as a percentage of sales improved slightly as compared to the prior year.

Operating expenses for the quarter ended December 2015 increased $4.7 million and were $66.9 million or 28% of sales as compared with $62.2 million or 26.3% of sales for the quarter ended December 2014. The increase is primarily due to $3.7 million of operating expenses related to new stores opened in fiscal 2015 and fiscal 2016 as well as an increase of $2.1 million of due diligence costs as compared to the same period in the prior year.

For the nine months ended December 2015, operating expenses increased by $16.3 million to $199.7 million or 27.9% of sales as compared with $183.4 million or 27.2% of sales for the prior nine-month period. Accounting for the increase were $14.9 million of operating expenses, again related to new stores opened in fiscal 2015 and 2016, as well as an increase of $2.5 million of due diligence costs as compared to the first nine months of the prior year.

Operating income for the quarter ended December 2015 of $26.4 million decreased by 5.5% as compared to operating income of approximately $28 million for the quarter ended December 2014 and decreased as a percentage of sales from 11.8% to 11.1%. Operating income for the nine months ended December 2015 of approximately $94.1 million increased by 9.1% as compared to operating income of approximately $86.3 million for the nine months ended December 2014. That increase as a percentage of sales from 12.8% to 13.2%.

Net interest expense for the quarter ended December 2015 at 1.6% of sales increased $0.9 million as compared to the same period last year, which was at 1.2% of sales. Weighted average debt outstanding for the third quarter of fiscal 2016 increased by approximately $15 million as compared to the third quarter of last year.

The increases all related to an increase in capital lease debt recorded in connection with the fiscal 2015 and 2016 acquisition. The weighted average interest rate also increased by approximately 100 basis points for the prior year, largely due to adding capital leases as well as an increase in the LIBOR and prime rate versus the same time last year.

For the nine months ended December 2015, interest expense increased by $3.2 million and increased from 1.2% to 1.5% as a percentage of sales for the same period. Weighted average debt outstanding increased by approximately $48 million and the weighted average interest rate increased by approximately 75 basis points. Again, primarily due to an increase in capital lease debt.

The effective tax rate was 33.1% of pre-tax income for the quarter ended December 2015 and 37.4% for the quarter ended December 2014. The decrease in the effective income tax rate for the quarter ended December 2015 related primarily to a non-cash benefit related to normal FIN 48 third-quarter provision through return adjustment.

Over the past five years, the Company has recorded an average tax benefit of approximately $0.02 in the third quarter of each fiscal year. This year was slightly higher due to the reduction of tax reserves related to our refinement of transfer pricing estimates.

Net income for the quarter ended -- excuse me, net income for the current quarter of $15.2 million decreased 4.7% as compared to the quarter ended December 2014. Earnings per share on a diluted basis of $0.46 decreased 6.1% as compared to last year's $0.49. For the nine months ended December 2015, net income of $52.9 million increased 7.4% and diluted earnings per share increased 6% from $1.50 to $1.59 per share.

Moving on to our balance sheet, our balance sheet continued to be strong. Our current ratio at 1.2 to 1 is comparable to last year's third quarter and year-end fiscal 2015. Inventory is up approximately $1.6 million from March 2015, largely due to acquired stores and the purchase of winter tires in anticipation of the demand in the third and fourth quarters. Total inventory turns for the rolling 12 months ended December 2015 were up slightly from last year's third quarter and year end.

In the first nine months of this year, we generated approximately $82 million of cash flow from operating activities and increased our debt under our revolver by approximately $5 million. We used these borrowings and cash flow from operating activities to finance our fiscal 2016 acquisition, which added 39 stores to date as well as the current franchise business. Capital lease and financing obligations increased $31 million due primarily to our fiscal 2015 and 2016 acquisition.

At the end of the third quarter, debt consisted of $127 million of outstanding revolver debt and $173 million of capital leases and financing obligation. Our debt to capital ratio, including capital leases, remains flat at 36% compared with March 2015. Without capital and financing leases, our debt to capital ratio is 20% at the end of December 2015 and 21% at the end of March 2015.

During the first nine months of this year, we spent approximately $29 million on CapEx, which was approximately $10 million in each quarter, and $48 million on acquisitions. Depreciation and amortization totaled approximately $30 million, again divided roughly evenly between Q1, Q2, and Q3. And we received $7 million from the exercise of stock options. We paid about $15 million in dividends.

As you are all aware, yesterday we entered into a new five-year $600 million senior secured revolving credit facility agreement with nine banks. Interest only is payable monthly throughout the credit facility's term. The credit facility increases our current borrowing capacity by $350 million to $600 million and also includes an accordion feature, permitting us to request an increase in availability of up to an additional $100 million. As of today, we have approximately $[460] million available to borrow under this facility.

Our interest rate spread ranges from 75 basis points to 175 basis points over LIBOR, a 25 basis point reduction at each level from the pricing grid under our old facility. Effective today, our interest rate spread is 100 basis points over LIBOR, down from 125 basis points.

The unused fee also decreased by 5 basis points at every level on our pricing grid. With these reductions in the interest rate spread and in the unused fee, the annual all-in cost under the new facility is only about $0.005 more in earnings per share, even with the larger committed amount.

Financial and other covenants are generally consistent with our prior financing agreement, with increases in specific provisions to reflect our increased size and borrowing capacity. Additionally, the security under the new credit facility is the same as the old one. Long story short, we have more money and fewer restrictions, allowing us to take advantage of more and larger acquisition opportunities that present themselves and meet our criteria.

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

(Operator Instructions) Bret Jordan, Jefferies.

Good morning, guys. You commented on the outlook for tire pricing a combination of increased competition from manufacturers as well as lower raw materials. Which do you see as being the bigger impact as you look out into fiscal 2017?

Right now, I think the raw materials is a slight win there; has slightly more weight there.

Okay. So you haven't seen a lot of price competition amongst the manufacturers yet?

We have, yes, certainly. But the raw material -- I don't know how to parse it for you, Bret, within the cost reductions that we're talking about. But I can tell you that we have entertained new quotes that are more attractive from several new tire brands that we are not currently carrying. So that applies to what we import from the Pacific Rim as well as what we talk about as branded tires.

Okay. And then on tire inventory, given soft unit sales in the December quarter, how is tires growth year over year in inventory?

Well, we have -- as of the end of the quarter, we had more snow tires than we wanted on hand. We certainly sold through a lot of those in January, but overall, our tire inventory isn't way out of whack certainly at the end of January and the turns reflect that they are pretty flat.

Okay. And one last question. On the January comp, I guess regionally, you called out the South as outperforming the December quarter. Is there anything that is particularly meaningful on what we've seen in January as far as regional performance goes?

No. We were up across our markets because we got some weather throughout our markets. So if your question did the Southern markets trail off? They didn't. (multiple speakers)

Okay. Great. All right, thank you.

Rick Nelson, Stephens.

This is Nick Zangler in for Rick. Just looking for more detail on that January comp. What would you attribute the 10% to, and specifically maybe the acceleration throughout the month? I know you started off about 9% two weeks in. That seemed to obviously improve through the month.

Are we talking pent-up demand? Is it the digital initiative? And maybe tire unit comps in the month? Any further detail would be great.

Sure. I mean, it's pent-up demand primarily from Q3. And I don't think we got everything in January that was pent-up from Q3. So it was basically the turn with winter finally coming to our market. We got some pent-up demand from the weak sales we had -- we reported in Q3, but certainly one strong month doesn't make up for a three-year deferral cycle.

So I still see some period that there will be an inflection point with the consumer. And I'm certainly not calling that with January, but I'm hopeful looking throughout the rest of the quarter and into April that if we continue to see some strong sales momentum throughout that period that that might be an inflection point for the consumer.

And in terms of color on tires, just like tires was the weakest category in the third quarter, tires was absolutely the strongest category in January. It overindexed the plus-10%.

Okay. Great. And then just on the NDAs and acquisitions going forward, it sounds like you guys have a more aggressive stance against going forward than maybe you have in the past. Do you think the due diligence costs start to roll off? I mean, the $0.05 in the last quarter.

Just wondering how to think about that going forward? I know you guys have a few in the pipeline, but do you think we will stay at this kind of level going forward as you guys get more aggressive? Or was that more like a one-time thing this quarter?

No, that was -- the due diligence costs in the quarter at $0.05 was a one-time thing. That was one large transaction that we were looking at. So no, we're not going to be at that level going forward and we've always had due diligence costs. We've rarely pointed them out because they are a part of our expansion strategy and we've overcome those costs consistently in driving the EPS growth that we have over the years.

Great. Thank you very much. Great start to the quarter. Good luck.

Tony Cristello, BB&T Capital Markets.

Thank you, good morning. The question I wanted to talk about a little bit is on your regional performance. When you look at the service category in and of itself, is the South performing better in that segment of the business? The tire side seems to influence the Northern trends, but are you seeing differences in service patterns?

Sure. I think you've picked up on what difference there is. When the North is impacted by tires, it has some knockdown impact on the other categories. Generally, though, those categories were positive throughout the Company, but just stronger in the Southern markets.

Okay. So you're not seeing any less demand in service. It's more of an influence that the tire purchasing is having and thus looks at alignments or brakes or any of those other categories.

Right.

Okay. And when you look at some of the more markets that you're expanding into, (technical difficulty) the density that you do in some of the Northeast markets, can you talk a little bit about how you are seeing those stores perform in general? And are you performing better than you would have expected to see?

You were breaking up a little bit. I understood that you were asking where -- in some of the newer markets, where we are less dense, is that impacting the sales performance?

Correct.

Yes, I think we're performing well. So I think you are asking about Florida. You are asking about Georgia. We are performing well down there. The acquisitions are ahead of plan and there's nothing to point out in a negative sense from the sales side because we haven't filled in the markets there.

We are certainly not getting all of the cost efficiencies that we will get once we fill those in and in strengthening the distribution network down to those markets. But from a sales side, we're doing well and overall they are performing better than our expectation.

Okay. And then on a little bit different topic, when you look at your cost side, I think you were able to control that a little bit better, even though sales turned against you in the quarter. Do you think your business is in a place where you have the ability to throttle back or more control to prevent the leverage, even though sales may be running negative on a comp basis? And what do you think your -- is that a situation where once you get the first couple weeks in, you can really control that so that earnings aren't materially impacted?

As we've pointed out in the past, we tend not to chase sales where customers are not buying. Like, this is a good quarter. We didn't go out and -- not that we've predicted the weather, but we didn't have -- we didn't run additional promotions or additional advertising as we were seeing the weather not materialize.

But generally, the big piece of our cost benefit for the year has been product costs. We continue to drive product costs down by remaining independent and seeking out the best deal possible with a growing volume. And when we approach vendors, we are the company out there with consistently meaningful growth in volume and that means a lot to the vendors that we deal with.

And that's -- we've tied that into our inflation breakeven point at being 50 basis points this year off of 100 basis points last year and that's really the benefit. And as we continue to execute the acquisition strategy, it will continue, but it will become even more important.

Okay. Very helpful. Thanks for the time.

James Albertine, Stifel.

Thanks for taking the question. Congratulations as well on the January comp and on the new revolving facility. It sounds like it's a huge opportunity for you guys from a future pipeline perspective.

Just a housekeeping item. I don't think you mentioned it -- apologies if I missed it. The percentage of tires on the private-label side, did you guys break that out in your prepared remarks?

No, we didn't. It was consistent with the 40% that it's been running.

Okay, great. And maybe a bigger picture question. We saw sort of an epic acquisition sort of takeout of one of your biggest peers and fighting between an OEM and another sort of independent ownership. How do we think about or how do you think about what that does to the competitive landscape?

And maybe as an aside, without knowing the plan for the business over time, considering what appears to be new ownership -- I don't think it's closed, but we all expect it will -- will there be future M&A opportunities in terms of carving up that portfolio? Or is it pretty well settled at this point?

Well, to deal with the first part first, we've been competing with those stores -- there's a chunk of those stores, I think maybe 400 or so, within our markets. And our strength of density in the markets is something that that brand lacked in our market.

So we've been competing well against them in the past; it hasn't impacted our operation or growth. So I don't see anything particularly significant out of this change just from that change.

And I don't know what the plan is there, but in terms of future opportunities, we've said all along that we're interested in anything larger that makes sense for our shareholders. We view that something like that, certainly the entire business, as having more risk versus our low risk strategy that we've been executing on. So the price has to be right for us to do something like that, whether it's that company or any other.

Okay, great. John, thank you very much and best of luck in the next quarter.

Michael Montani, Evercore ISI.

Just wanted to ask first off, on the digital initiative, it sounds like there's some momentum going there, although given the volatility, it's obviously hard to parse it out. But can you just help us think about maybe anything to quantify the impact it could have had so far to traffic or appointments? And then how should we think about the gating of that moving forward as you get the CRM for the develop and some of the website enhancements, etc?

Sure. Yes, I think you're right that with the choppiness of sales, it's been a little bit hard to see. But as an example, I think you can look at the fact that despite traffic being pressured and being pressured by tire units being down so much, we still ran positive oil changes for the quarter.

And a lot of that is due to driving new customers in from these initiatives. Our website visits, our appointments continue to outpace any other traffic measures that we have. I'm very pleased with what's happening there. We're still very early indicator in the game, so there is lot more to develop as we go into next year.

And I talked about that as being supportive of our overall focus within our field operation of driving traffic and then sales off of that traffic. And that's really how I view it. So it's positive and as we take more steps, we will outline more in that regard.

Okay, great. And if I could just follow-up a little bit on the January result being as strong as it is, is there any way to quantify the lost sales days you may have had in January last year versus this year, just to kind of parse that out?

The loss in -- between Friday and Saturday, we lost somewhere about $1 million worth of sales in January. So I don't believe -- the primary days that we lost last year were in February versus January. So I think that $1 million -- I couldn't tell you, Mike, but I think it stacks up pretty well against anything that we would have lost right at the end of January.

Okay, great. And the last one I had if you can, just housekeeping. But the mix of sales, John, by line of business?

Sure. So brakes was 13%. Exhaust was 3%. Steering was 9%, tires was 48%, and maintenance was 26%.

All right. Thank you.

Matthew Fassler, Goldman Sachs.

My first question relates to gross margin and just understanding the impact that the favorable mix dynamics had, as tire sales were a bit softer this quarter versus the pure product cost decline in this one, which was in tires.

Sure. The cost piece of it was 60 basis points or 70 basis points. The mix was 30 basis points or 40 basis points.

And would that mix most likely -- to the extent that tires are outpacing the house this quarter, probably go to some degree the other way, though I know the underlying cost dynamics will improve?

Yes. Tire costs certainly have a higher material content to them, sure.

Okay. And then secondly, just to understand the way things work with these storms. I know that you printed the very strong January comp, despite some lost sales on the last day of the quarter. And presumably the preparation for that storm also helped.

How to things tend to play out in the aftermath? Do you tend to see kind of one seasonal surge in front of need? And clearly there was enough media going into the storm to create that path, or is there less lumpiness to the business than that over the course of the winter?

Certainly there are some sales that take place just before an event like that. And also you have some customers that were planning on coming in that couldn't come in that are going to come in after that. So again, I think more broadly, we're still catching up with some near-term pent-up demand and we're really working off of a three-year deferral cycle that at some point is going to reverse. And that will help our comp.

Understood. Thanks, John. Thank you so much.

Anthony Deem, KeyBanc.

So your formal comments, it sounds like you are getting aggressive with these 10 NDAs. And I'm wondering can you share how advanced you are into these negotiations currently? And should we have reason to believe fiscal 2017 will be an above-average year for M&A as a result?

Well, look, I don't think that -- we took several months off to take a look at another opportunity. And we are back looking and working through these opportunities as aggressively as we had previous to that. I would just tell you that all along, I believe that fiscal 2016 was going to be a very strong year for acquisitions.

We then took some time off to look at another opportunity and I think that what I'm trying to convey is that nothing has changed there in either the number of opportunities that we seek or our interest in proceeding on them very aggressively. So yes, I think that the next 12 months should be a very good time for acquisitions for us. And importantly, we put our new credit facility in place so we have much more flexibility in acting on the number of deals or the size of deals that we feel fit our criteria.

And then how is valuation being viewed currently in the M&A market? Are retailers looking for higher valuations lately? Have there been changes in expectations? I think you have all have done a great job being disciplined at around 7 times trailing 12 months, but do you see the need to raise your max valuation maybe to stay competitive? Or has there been really no change there as well?

Our need -- we've talked about this in the past -- is very consistent with that. And that is that the smaller deals are on the valuation criteria that we've laid out and we've executed against. And the larger deals are certainly attracting higher multiples.

Okay. Just a couple more, if I may. Would you say about $0.01 per share is a normal run rate for due diligence costs? And I'm curious what was originally built into the third-quarter EPS guidance and what is currently built into the fourth quarter?

Sure. Somewhere around $0.01 or up to $0.01 is not bad for a quarter. And in the initial guidance, it was $0.01 to $0.02 that was built in for the third quarter. And then in the fourth quarter, you have that sort of same up to $0.01 of costs built in.

Great. And then last one from me. I appreciate all the comments on gross margins and your comment on manufacturers maybe getting more aggressive. Really just two questions. Do you see that greater competition in tires happening with branded or import manufacturers? Because it sounds like maybe new vendors might be driving that.

And then secondly, are there any other major puts and takes we should take into consideration from a cost of sale standpoint or operating costs looking into fiscal 2017 that might offset the benefits of lower tire costs? Thank you.

So the first question is it's both Pacific Rim as well as branded manufacturers. And again, it's hard to separate between just increasing supply and the benign or lower material costs. But the good news is is that we've got opportunities on both sides that we're acting on.

And then in terms of fiscal 2017, I wouldn't point out anything in particular. Right now, we covered what we thought the main points were in terms of commodity costs remaining low and getting some help on tire costs for next year. We will fill out the rest of that once we get through this quarter.

Thank you.

Bret Jordan, Jefferies.

Just on the number and the size of the potential deals out there, has anything changed on the size, I guess, as maybe Sumitomo has been frustrated with Midas or the Sears tire and service. Is there anything that would give us an outlook for potentially larger transactions down the road? Or is everything pretty much the same?

Consistent with the past, the more than 10 NDAs, are the five to 40 stores that I described. There are certainly other potential opportunities out there, but we've stuck with talking about those smaller chains that we have.

Okay. And then you mentioned a couple of other prospective tire suppliers and I think you were just talking about that. Could you tell us what the mix is of private label versus branded? Are you looking at some new brands in the portfolio or is this mostly house-brand stuff?

No. The import stuff or the branded/nonbranded is about 40% right now. A lot of that is coming out of the Pacific Rim, so it's really being driven by that opportunity for supply. And by the way, on the five to 40 stores, those are five to 40 stores each of one of those NDAs. So I think I've commented in the past that that type line accounts for greater than two years of our 10% acquisition growth, just to sort of throw up a high-level estimate on it.

Okay. Thanks.

And ladies and gentlemen, that does conclude the Q&A portion of today's call. At this time, I'd like to turn it back over to John Van Heel for any comments or closing remarks.

Thank you. Thank you all for your time this morning. I'm pleased that we have January sales momentum to take into the last two months of our fiscal year. We remain focused on driving profitable growth through our core stores and acquisition.

Despite this year's choppy market, our business model should produce another year of 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 this does conclude today's conference call. We thank you for your participation. You may now disconnect.