Monro Inc (MNRO) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake's earnings conference call for the fourth quarter and fiscal 2016.

(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 from the Company. 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 that 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 risk 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; risk 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 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 fourth-quarter and fiscal 2016 performance.

I'll start today with a review of our results, our growth strategy, and outlook for fiscal 2017; then I'll turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional details on our financial results. Looking back at our performance in fiscal 2016, we were able to grow sales by $49 million, or 5.5%, to a total of $944 million.

Through our increased scale, effective cost control, and the outperformance of acquisitions, we delivered 70 basis points in operating margin expansion and net income growth of 10% versus fiscal 2015, excluding due diligence costs in both periods. We delivered these results despite flat comparable store sales and on top of the 43% increase in net income we delivered in the prior two years.

Fiscal 2016 earnings per share were $2 compared with $1.88 in the prior year, and included $0.04 of higher due diligence costs. That said, I'm disappointed that our overall results were not better.

On the plus side, we were able to drive traffic and expand margins. Early in fiscal 2016 we said that we were going to increase traffic, and we did. Despite ongoing weakness in consumer spending and the lack of winter weather in our markets, traffic increased by 1% for the year.

We also said that we would take advantage of higher average retail prices and lower material costs to improve margins, and we did, with gross margins up 140 basis points for the year on top of a 100 basis point increase in the prior year. Operating margins were up 70 basis points, as I just described, on top of an 80-basis point increase in the prior year.

Fiscal 2016 was a tale of two periods and two geographies, northern and southern. Through October, despite the difficult consumer spending environment, traffic was positive, comparable store sales were positive, as were brake, alignment, exhaust, and tire sales.

Importantly, through October comparable store sales were positive in both our northern and southern geographies. However, the lack of winter weather that followed negatively impacted our northern market, flattening out overall comparable store sales by fiscal year end, while our southern markets delivered positive comparable store sales in the fourth quarter and for the full year.

Our overall sales by category for the year reflected these dynamics, with outperformance from need-based categories including alignments, which were up 7%, with consumers looking to extend the life of their tires; brakes up 2% as customers address safety concerns; and flat comparable store sales in tires with higher average realized tire ticket offsetting a unit decline driven largely by the lack of winter weather.

Turning to our fourth quarter, comparable store sales increased by 50 basis points. While store traffic for the quarter was up 2%, including positive traffic in February and March combined, we saw consumers defer purchases and focus on the safety of their vehicles, with a 5% increase in comparable store sales for both alignment and brakes but declines in more discretionary categories including front-end shocks and exhaust, which were down 4% and 8% respectively.

Despite the disappointing sales in the quarter, our focus on margins, cost control, and acquisition allowed us to increase our gross margin by 190 basis points and operating margin by 90 basis points, enabling us to achieve $0.42 in earnings per share, the midpoint of our guidance.

Our performance through fiscal 2016 underscores the flexibility of our business model, and demonstrates that regardless of the macro environment we continue to successfully manage the business to deliver improved bottom-line results.

As we have discussed on prior calls, consumers continue to be impacted by stagnant wages in the face of increasing healthcare premiums and deductibles, as well as higher rent and other expenses which outstrip the benefit of lower gas prices.

These pressures have caused our customers to continue to defer purchases and focus on their most critical vehicle needs. In addition to a weak consumer spending environment, we believe a mild winter has negatively impacted sales in these early spring months, as the lack of extreme cold has resulted in less wear and tear on vehicles and fewer part failures.

As noted in our press release, April and May have started off very slowly, with comparable store sales decreasing 8% for the reasons just described. However, the relative outperformance of our southern markets has continued, with positive comparable store sales in May in these markets.

Also there are potential signs that overall trends may be starting to turn, as the building block of our business, oil changes, are up 1% so far in May. The slowdown in sales is impacting our northern markets and across all categories, though tires are performing better than repair-based service category.

The weaker quarter-to-date trends we are seeing in our business are the same trends that competitors in northern markets we are looking to acquire are experiencing. If this difficult environment persists this fiscal year, I would expect that our acquisitions will be significantly above our 10% annualized growth target.

Turning now to our growth strategy. Acquisitions completed in fiscal 2016 represent 35 stores, a total of $36 million or about 4% in annualized sales. These acquisitions allowed us to fill in our New York, Pennsylvania, Massachusetts, and Wisconsin markets.

Additionally, the acquisition of Car-X in the first quarter of fiscal 2016 significantly increased our market share in 10 states through the addition of 134 franchise locations. During fiscal 2016 two new franchise Car-X stores were added and seven Car-X stores were converted to Company-operated locations.

Fiscal 2016 acquisition growth would have been stronger had we not shifted our focus for five months to a much larger transaction which we ultimately did not proceed with. I am pleased to report that in early May we completed the acquisition of 29 McGee Auto Service and Tire retail and commercial stores and one retread facility in Florida.

These acquired stores are expected to add approximately $50 million in annualized sales, and represent 5% annualized sales growth, achieving half of our full-year acquisition growth target already this year. This acquisition represents a sales mix of 40% service and 60% tires, and is expected to be breakeven in fiscal 2017.

The acquisition allows us to significantly increase our presence in the greater Tampa Bay and Fort Myers areas while also expanding into Daytona and Tallahassee. In just two years since our entry into the Florida market, we now operate 83 stores extending across both coasts representing approximately $115 million in annualized sales, or about 12% of total Company sales.

Florida and Georgia represent significant opportunities for continued store growth, and further diversification of the Company's footprint into southern markets. It's worth noting that because we don't have Company-operated distribution fully servicing Florida and Georgia, we are not achieving all of the synergies we expect to eventually benefit from.

However, as we approach the 100-store benchmark in Florida, we are refining our modeling for distribution to southern markets and expect to begin laying out plans in the second half of fiscal 2017. Additionally, I want to note that McGee's business is predominately retail, about two-thirds, but it includes a larger commercial component than other businesses that we have previously acquired.

Margins on commercial service work are similar to those in the retail business, and on average commercial tire sales earn gross profit dollars similar to sales of retail tires. As we look ahead, we plan to grow this component of McGee's business in Florida, as we believe it is complementary to our retail business, and when combined with our overall scale will lead to significant savings on material costs in that business.

Based on our results in Florida, we will continue to evaluate the many opportunities to expand our commercial business throughout the remaining 24 states we operate in. Note that most of the leading commercial dealers also operate some number of retail stores, so we view this opportunity as not only important but a natural extension of our proven retail-focused consolidation strategy.

We believe solid execution of our strategy will continue to expand our sales, market share, and overall profitability for many years to come. Our confidence in our fiscal 2017 acquisition opportunities is underscored by the more than 10 NDAs we currently have signed, the same level as last quarter despite having completed yet another transaction with the McGee deal.

Each of these NDAs represents between 5 and 40 locations all within existing markets. Additionally, the new $600 million expanded revolving credit facility we completed in January of 2016 more than doubles our previous borrowing capacity, and allows us to increase the number and size of acquisitions we can pursue going forward.

In some ways the start of fiscal 2017 gives me deja vu, as it's similar to the beginning of fiscal 2013 in which we experienced: one, a slow start to the year with weak consumer spending and unseasonable weather impacting sales across categories in northern markets; two, $50 million in annualized acquisition growth completed early in the fiscal year; and three, a strong acquisition pipeline driven primarily by the fact that owners of independent tire dealers are at or near retirement age without an internal succession option. Both years are also characterized by the potential for tax and capital gains increases in the following calendar year, which may accelerate current year acquisitions.

In fiscal 2013, that was predominately calendar 2012, it was capital gains tax increases, and this year it's a presidential election that most likely results in higher taxes no matter who gets elected. The net result of fiscal 2013 was lower comparable store sales and compressed margins due to higher material costs. But importantly fiscal 2013 delivered 25% in annualized sales growth through acquisitions that have since driven the over 50% increase in earnings over the last three years.

There are also some important differences between fiscal year 2013 and 2017. One, we're a much larger company now, with exposure to southern markets. Two, we believe we are now late in an elevated consumer deferral cycle, and total vehicles in operation are growing. And three, we have a credit facility more than double what it was four years ago. And most importantly material costs are expected to decline this year, which provides some offset against any continuing sales pressure.

As I said earlier, I already expect fiscal 2017 to be a good year for acquisitions versus our annual target of 10% annualized sales growth. However, it may set up to significantly leverage the great hedge in our business, the ability to grow the business at an accelerated pace during difficult markets. In light of what we accomplished in fiscal 2013, I will take a difficult year if it means we have the opportunity to expand our business by anywhere near 25% through attractively priced acquisitions.

Additionally, you can expect to see us increase the number of greenfield stores we open this year. We are targeting 20 to 40 greenfield locations in fiscal 2017, with eight stores expected to open in the first four months of this year.

The majority of these stores will be fill-in purchases of existing one to three store businesses in our existing markets. Overall, we should see lower entry costs and higher returns as we bring significant operating margin improvements to these locations. We expect each of these stores will average $1 million in annualized sales and will not be included in our guidance until they open, so they represent some potential upside to our full-year estimate.

Now I'd like to turn to our outlook. Given the continued choppiness in the market, we are guiding comparable store sales to a decrease of 5% to 8%, and total sales in the range of $230 million to $240 million in the first quarter. We anticipate first-quarter diluted earnings per share to be between $0.47 and $0.51, compared to $0.57 for the first quarter of fiscal 2016.

At the midpoint of our guidance, operating margin is expected to decrease by approximately 150 basis points, driven by deleveraging from negative comparable store sales. We expect sales to improve as the year progresses, particularly as we move past spring and into the summer driving season and as we lap easier weather and sales comparisons in the second half of the year.

We also believe there may be some benefit in consumer spending in the second half of the calendar year, as consumers meet healthcare deductibles. For fiscal 2017, taking into account a full year of sales from our 2016 acquisition and 11 months from our most recent 2017 acquisition, we anticipate total sales to be in the range of $980 million to $1.01 billion based on comparable store sales guidance of flat to a 2% decline. This guidance assumes that the second quarter comparable store sales are down about half of the first quarter decline, and that sales in the second half of the year turned positive with more normalized weather in our markets.

We continue to expect that Monro's overall tire costs, including related warehouse and logistics, will be down slightly as a percentage of sales in fiscal 2017. In fact, we believe we will widen our competitive cost advantage even further, as market dynamics have become increasingly difficult for smaller dealers. As we've told you on previous calls, we have shifted the vast majority of our non-branded tire sourcing to suppliers outside of China, minimizing the impact of the Chinese tariff.

Because of lower material costs we anticipate in fiscal 2017, we expect to generate operating leverage on flat comparable -- on comparable store sales above flat this year. I would also like to remind you that every 1% increase in comparable store sales generates an incremental $0.07 in EPS for the year.

Based on these assumptions, we expect fiscal 2017 earnings per share to be in the range of $2.05 to $2.20. This includes $0.14 to $0.16 in contribution from recent acquisitions and is based on 33.4 million diluted weighted average shares outstanding.

The low end of our fiscal 2017 guidance reflects the $2 in EPS in 2016, adding back the nonrecurring $0.04 of higher fiscal 2016 due diligence costs and adding $0.15 from recent acquisitions. This is offset by the $0.14 impact from the 2% decline in comparable store sales. At the midpoint of our guidance, operating margins are expected to increase by approximately 30 basis points, and EBITDA is expected to be $170 million.

Turning now to the long-term drivers of our business. The structural trends in our industry remain positive, and we expect them to strengthen as we move forward. For the first time vehicles 13 years old and older accounted for 26% of our traffic in fiscal 2016.

These vehicles produce average tickets similar to our overall average, which demonstrates that consumers continue to invest in and maintain their vehicles even as they age. Additionally, as we look over the next five years, we will see an increasing number of vehicles entering our sweet spot of six years old and older, driven by the strong recovery in new car sales in 2011 through 2015, representing a significant tailwind for our business.

Overall, while we expect a difficult environment in the first half of fiscal 2017, we remain confident in the long-term outlook for the industry. Some will interpret the recent slowdown in sales in our industry as the start of a secular trend. If you think the world has changed since last October when we were positive in traffic, comp store sales, margins, and earnings let me state very clearly that I don't agree.

As I commented earlier, I'm disappointed that our results for fiscal 2016 were not better. However, we were able to drive traffic and expand margins in a difficult operating environment. Our team continues to demonstrate the importance of our acquisition strategy and our ability to effectively execute as proven by the strong contributions from our recent acquisitions and the completion of our most recent transaction.

I expect a solid year for acquisitions in fiscal 2017, which may turn into a very significant year if market dynamics do not improve or if tax increases become more likely. Before I turn the call over to Cathy for a more detailed review of our financial results, I would like to thank all of our employees for their continued hard work, passion for superior customer service, and consistent execution, all of which are critical to Monro's brand strength and financial success. We greatly appreciate their efforts.

Now I'd like to turn the call over to Cathy. Cathy?

Thanks, John, and good morning, everybody. Sales for the quarter increased 4.5% and $9.9 million. New stores, which we define as stores opened or acquired after March 29, 2014, added $11.1 million, including sales of $9.9 million from fiscal 2015 and 2016 acquired stores.

Comparable store sales increased 0.5%, and there was a decrease in sales from closed stores of approximately $3.1 million, largely related to the BJ store closures in fiscal 2015. There were 91 selling days in both the current and prior-year fourth quarters.

Year-to-date sales increased $49.2 million and 5.5%. New stores contributed $68.7 million of the increase, including $63.6 million from fiscal 2015 and 2016 acquisitions. This was partially offset by a decrease in comparable store sales of 1/10 of 1%, and sales from closed stores of approximately $19.6 million, again largely due to the 2015 BJ store closures. There were 361 selling dates in this and the last fiscal year.

At March 26, 2016, the Company had 1,029 Company-operated stores and 135 franchise locations, as compared with 999 Company-operated stores and one franchise location at March 28, 2015. During the quarter ended March 2016, the Company added six Company-operated stores and closed eight. For the full year 2016, we added 52 Company-operated stores, including 7 acquired from Car-X franchisees, and we closed 22 underperforming locations generally at the end of their lease terms.

With regard to franchise locations, we added one during the fourth quarter of this year and four closed. During the year we added two franchise locations and seven closed, in addition to the locations we acquired from Car-X. Additionally, we purchased seven locations during the year from existing franchisees.

Gross profit for the quarter ended March 2016, was $91.9 million, or 40.1% of sales, as compared with $83.7 million, or 38.2% of sales for the quarter ended March 2015. The increase in gross profit for the quarter ended March 2016 as a percentage of sales is due primarily to a decrease in material costs as compared to the prior year. Total material costs, including outside purchases, decreased as a percentage of sales as compared to the prior year largely due to a decrease in oil and tire costs.

Gross profit for the fiscal year ended March 2016 was $385.7 million, or 40.9% of sales, as compared with $353.3 million, or 39.5% of sales for the fiscal year ended March 2015. The full-year increase in gross profit as a percentage of sales is largely due to decreased material costs as previously described.

Distribution and occupancy as well as labor costs were relatively flat as a percentage of sales as compared to the prior year. Labor productivity, as measured by sales per man hour, improved over the prior year for both the fourth quarter and fiscal year [2015].

Moving on to operating expenses, for the quarter ended March 2016 they increased $5.3 million and were $65.4 million, or 28.6% of sales, as compared with $60.2 million or 27.5% of sales for the quarter ended March 2015. The dollar increase in operating expenses is largely due to new stores and higher net costs related to store closures. As a percentage of sales, about half of the increase is due to the increase in store closing costs, with the remainder related to deleverage resulting from the increase in total operating expenses against softer sales increases.

For the fiscal year ended March 2016, operating expenses increased by $21.6 million to $265.1 million, or 28.1% of sales, as compared with $243.6 million and 27.2% of sales for the prior period. Excluding the increase in due diligence costs in fiscal 2016 and operating expenses associated with fiscal 2015 and 2016 acquired stores, operating expenses increased only $2.7 million, or approximately 1% over the prior year. As a percentage of sales, the increase is largely due to increased expenses against relatively flat comparable store sales.

Operating income for the quarter ended March 2016 of $26.5 million increased 12.6% as compared to operating income of approximately $23.5 million for the quarter ended March 2015. And it increased as a percentage of sales from 10.7% to 11.6%. Operating income for the full fiscal year ended March 2016 of approximately $120.6 million increased by 9.8% as compared to operating income of approximately $109.8 million for the fiscal year ended March 2015, and increased as a percentage of sales from 12.3% to 12.8%.

Net interest expense for the quarter ended March 2016 at 2% of sales increased $1 million as compared to the same period last year, which was at 1.6% of sales. Weighted average debt outstanding for the fourth quarter of fiscal 2016 increased by approximately $13 million as compared to the fourth quarter of last year.

The increase is due to an increase in capital lease debt recorded primarily in connection with the fiscal 2015 and 2016 acquisitions partially offset by lower borrowings on our revolving credit facility. The weighted average interest rate also increased by approximately 120 basis points from the prior year, again largely due to adding capital leases.

For the fiscal year ended March 2016, interest expense increased by $4.2 million, and increased from 1.3% to 1.6% as a percentage of sales for the same period. Weighted average debt increased by approximately $41 million, and the weighted average interest rate increased by approximately 80 basis points again, largely due to an increase in capital lease debt as well as an increase in the LIBOR and prime rate versus last year.

The effective tax rate was 36.5% of pretax income for the quarter ended March 2016, and 37.5% for the quarter ended March 2015. For the year ended March 2016, the effective tax rate was 36.6% of pretax income versus 37.8% for the year ended March 2015. The decrease in the effective income tax rate for the year ended March 2016 is primarily due to a tax benefit that was recorded for the reduction in reserves related to the refinement of transfer pricing estimates as well as normal year-end FIN 48 adjustment.

Net income for the current quarter of $13.9 million increased 10.8% as compared to the quarter ended March 2015. Earnings per share on a diluted basis of $0.42 increased 10.5% as compared to last year's $0.38. Net income for the current quarter -- I'm sorry, for the full fiscal year March 2016 net income of $66.8 million increased 8.1%, and diluted earnings per share increased 6.4% from $1.88 to $2.

Our balance sheet continues to be very strong. Our current ratio at 1 to 1 is comparable to year end fiscal 2015. Inventory at March 2016 was relatively flat with the balance at March 2015, with inventory turns up slightly from fiscal 2015.

During this fiscal year we generated approximately $127 million of cash flow from operating activities and decreased our debt under our revolver by approximately $19 million. We used cash flow from operating activities to finance our fiscal 2016 acquisition which added 40 stores as well as the Car-X franchise business.

Capital lease and financing obligations increased $35 million primarily due to the accounting for our fiscal 2015 and 2016 acquired stores. At the end of the fiscal year, debt consisted of $103 million of outstanding revolver debt and $177 million of capital leases and financing obligations.

Our debt-to-capital ratio, including capital leases, is 34% at March 2016 as compared to 36% at March 2015. Without capital and financing leases our debt-to-capital ratio was 16% at the end of March 2016 and 21% at the end of March 2015.

Under our new revolving credit facility that we signed in January 2016, we have $600 million that is committed through January 2021. Additionally, we have a $100 million accordion feature included in the revolving credit agreement.

We are currently borrowing at LIBOR plus 100 basis points and have approximately $430 million of availability not counting the accordion. We are fully compliant with all of our debt covenants, and we have plenty of room under our financial covenants to add additional debt for new acquisitions without any problem.

All of this as well as the flexibility built into our debt agreement allows us to take advantage of more and larger acquisitions and makes it easy for us to get acquisitions done quickly. During this fiscal year, we spent approximately $37 million on CapEx, which included 12 single store purchases in greenfield locations and $49 million on acquisitions.

Depreciation and amortization totaled approximately $40 million, and we received $9 million from the exercise of stock options. We paid about $20 million in dividends.

So reiterating the guidance for fiscal 2017 and expanding on it a little bit, as John stated, we expect sales in the range of $980 million and $1.01 billion. This reflects a decline in comparable store sales of 2% to flat comparable store sales as compared to fiscal 2016.

Operating margin is expected to increase by approximately 30 basis points at the midpoint of our range. Interest expense should be about $15 million before any adjustments to true up acquisition accounting for potential capital leases, however any such adjustment would result in a reduction to occupancy costs and cost of sales.

EBITDA should be approximately $170 million at the midpoint of our range. Depreciation and amortization should be about $40 million. CapEx could be as high as $46 million, with maintenance CapEx at about $26 million and the remainder for new stores. The tax rate should be about 37.4% for the year with some fluctuation between quarters.

I also wanted to take just a minute at this point to mention the FLSA change, which most of you are familiar with, which is raising the minimum weekly wage for salaried individuals from $455 per week to $913 per week beginning on December 1 of this year. We are looking at our pay plans and we'll make the necessary changes to comply with the law with minimal impact on the overall payroll expense for the year. This has been incorporated in our numbers for fiscal 2017.

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

Thank you. (Operator Instructions) Tony Cristello, BB&T Capital Markets.

Thank you. Good morning, everybody.

Good morning.

First question I had with respect to the distribution center and potential addition for Florida and what type of leverage that ultimately can bring as you grow that business. It's obviously not giving the benefits that you can fully realize in a self-distributed marketplace.

Yes. I think what my expectation is it's going to be somewhere in the neighborhood of 200 basis points.

And what's the timeline, then, if you start implementing something -- I think you talked about perhaps a second half of next year? What's the timeline of then getting something fully up and running? Is that a 12-month sort of project to get something going?

Yes. We'd expect something to be occurring within some time mid fiscal 2018.

Okay. I wanted to ask a little bit. I missed the final CapEx number, Cathy, that you gave, so I wanted to -- I think I got $26 million of maintenance CapEx, and I missed the other component there. But I also wanted to understand, if I look at what you've done relative to a store investment standpoint, you've got over 1,000 locations now.

As you start to add more and if you accelerate, are your stores where they need to be, whether it's systems or equipment or tooling or Wi-Fi or whatever else it might be? Should we have to expect any change in how you view maintenance CapEx in a more normalized environment?

Yes. Tony, what I said for 2017 was that we thought CapEx could be upwards of $46 million. Maintenance CapEx would be about $26 million and the other $20 million would be for opportunities that we see with single-store acquisitions that John has talked about in the past.

As far as our stores are concerned, we don't expect any -- we've been performing routine CapEx and investing in our stores in equipment that's needed. We're up with latest technology. This year we're going to have internet in all of our stores. That's all included in our numbers, and I don't see any year coming that will have a spike in that in terms of maintenance CapEx. And, John, I don't know if you want to comment?

I would agree.

Okay. And then, one last question just on your purchasing cost. Is there any reason to believe -- how should we think about it from a commodity standpoint? Is there any read-through if oil prices stay here or go up a little bit, do you still think the capacity that you see coming into the marketplace is still going to give you some benefit in terms of your purchasing as we move forward?

Yes. Our guidance is contemplating commodity prices around where we are right now. That's all incorporated in what we've put out for this year. So, yes, we are still expecting these benefits with commodities where they're at.

Great. Thank you for your time.

Sure. Thank you.

Thank you.

Bret Jordan, Jefferies.

Good morning.

Good morning.

When you look at the comp guide, could you give us some granularity between what you're expecting in price and traffic, both in the quarter that we're looking at now and then for the year?

Sure. For the quarter, traffic is down right now. I'm expecting that traffic in either scenario is down. The minus 5% contemplates us running basically flat in June. And then, as we said, for the remainder of the fiscal year, Q2 is about half of the decrease that we've put out for Q1. So, think down 2% to 4%, and then the back half of the year is up 1% to 4%.

1% gets us back what we lost last year. I would expect, from traffic standpoint, we're going to be positive in traffic as we -- later in the year, as the business responds to the soft winter compares that we have.

In pricing right now we're seeing a little bit of price pressure, which says to me that others are feeling very much the same trends that we are. So that's baked into a little bit of prices -- pressure is baked into the first quarter estimate, with that easing up as we go through the year.

Okay. And then on McGee, with the commercial mix, is that something that you're going to begin to look at commercial acquisitions in the rest of your geography as well? Your toe is in the water in Florida, are you looking -- are you going to shop around in the northern markets as well?

What I said in my comments was that we're going to focus on Florida first, we're going to prove the value that we bring to that business down there. There is a significant opportunity down there, and then we'll look outside of that.

I think we're open to anything that obviously that makes sense, and we think that adding commercial and going after it in Florida first is the smart way to do that. And then, absolutely, it could represent a significant opportunity outside of Florida because it's complementary to the business overall.

Okay. And then on (inaudible) question, on store closures, is there any common theme? Are you either in a region, or are some of the store closures that we saw at the end of the year from a particular acquisition?

No. Those are throughout our markets. There's no real concentration there, it just happened that a number of leases came up this year that we decided that were underperforming stores and were at the end of their lease so we took advantage to clean those up.

Okay. Great. Thanks.

Yes. Thank you.

Rick Nelson, Stephens.

Thanks. Good morning. John, you mentioned a 25% acquisition pace in 2013. If we added together the 10 NDAs, what would that represent in terms of growth for you, if you got them all?

Like I said in the past that, that represents at least two years of acquisition growth. It's in the neighborhood of 20% plus.

What are you seeing in terms of acquisition multiples? I guess McGee would be the most recent example. Any changes there?

No changes in what we've seen on deals in that size. Our metrics are holding.

Got you. And --

Of course, if it's a tough year this year, and earnings go down for the guys that we're looking to buy, at that point we adjust our purchase price expectations based on those multiples. I think that, for us, with the operating leverage that we bring, absolutely is a much higher value for us.

Are you starting to see more willing -- more negotiations I guess and more willing sellers?

Yes. A tough market helps those conversations, as does a fear of tax increases. These guys are going to sell their business only once in their life, and the last thing they want to do is write a bigger check for the pleasure of having sold it -- to the government.

Got you. If I could ask you also about the competitive landscape. The franchise dealers seem to be making a big push into the tire business. The internet companies like Tire Rack, are you seeing any meaningful changes that way that could be affecting comps?

Nothing year over year, no. The installations that we do for internet-based companies are a couple percent of our tire units, have been, so I don't see that as the issue. With regard to franchise companies that right now don't have a large presence in the tire category, I'm not overly concerned about those guys.

Our -- the folks that we have in our stores are well trained and we have great programs that I think is very hard to replicate, including availability of tires which, of course, is helped by the fact that we focus on store density. And you'll find that a lot of these smaller -- a lot of these franchise guys don't have the capacity to carry tires to make it convenient for consumers.

The tire unit decline you refer to in the fourth quarter, what percentage I guess was that? And if you could comment on market share, what you think happened there, as well as what you're seeing in the April/May timeframe from a unit perspective and a market share perspective?

Sure. Units were down 3% in the quarter and tire ticket was up 5%. In April and May, units are down. And, as I said, from a market share perspective, we're absolutely not losing share. From everything that I've gathered through looking at financials for companies that we're looking to buy, we are absolutely performing with the market and better than them.

Great. Thanks for the color. Good luck.

Thank you.

Michael Montani, Evercore ISI.

Thanks for taking the question. Just wanted to ask if I could, first off, what the split was by mix of business? What percentage of revenues you had for brakes versus maintenance, et cetera?

Sure. For the quarter it was 13% brake, 3% exhaust, 10% steering, 45% tires, and maintenance was 29%.

Okay. Within that, I guess, just diving into the tire ASP a little bit more, can you provide any update -- what percentage was the imported tires of your total tire units?

And then, also, are you still feeling any trade-down pressures there? What about pricing? What kind of price increases are you getting on net?

Yes. We -- so, the imports are just under 40% of our overall mix. So that's down a little bit. And, from an average selling price perspective, we picked up price as we had consistently throughout the year.

Okay. I guess the follow up I had was just on the labor side. Can you share any updates in terms of what you're seeing for wage increases for your technicians, either on an hourly rate or otherwise?

And what is your ability to pass it through? Because there's some nice gross margin gains, but it sounds like it's really mostly occupancy as well as some of the acquisition cost improvement, given the commodity costs.

Yes. It's pricing discipline combined with material cost reduction in terms of a gross margin improvement. From a labor perspective, we managed labor well this year I think. Our labor as a percentage of sales was flat. We've been competitive in terms of wages, and anything we've had to do has certainly been made up for in productivity. But our wage base is generally pretty flat.

How much is retention for the technicians themselves? Because there's been a fair amount of interest from the dealers to poach these guys, not just from you all but broadly. Are you seeing any of that, or are you feeling like there's good recruitment and retention?

Sure, we've been seeing that for -- I've been in this business for more than 13 years. We've seen it for that entire time. I don't -- if you are asking whether anything has changed fundamentally there, I would say, no.

Okay. Thank you.

Thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot. A couple questions if I could. First of all, at a couple of conference presentations you all had over the course of the quarter, you indicated that the pace at which you finished the quarter and started fiscal Q1 you thought was likely to be the pace at which you would run for a few months going forward. You saw it as indicative of what the run rate would look like.

It seems like, despite the tough start to Q1, you seem to think perhaps because of what's happened in recent days or perhaps because of some obvious weather factors that some improvement is likely reasonably soon. If you could help us contextualize how you're thinking about the forecast with that in mind?

I think you summarized what we're considering. First of all, the trend significantly changed almost immediately in April. If you want to say that we underestimated what that would look like, I think that's a fair statement.

I just don't -- we're a needs-based business. What I really see here is a pullback by the consumer off of a very light winter. I think what gives me confidence about that is the fact that our southern markets are better and the fact that, later in the year, we really have easier comps. And that's really what -- there's something going on with the consumer that wasn't present at the time we were having those discussions at conferences. And I think that, for those reasons, it's going to improve as we work through the year.

Got it. If I -- and this might be an old-hat issue, and I'm new to covering the stock as you know. But if I look now -- there's obviously been some quarterly volatility on weather and other things. If I look now at really the past four or five fiscal years, we've been running comps flat to down somewhat. That's in contrast to where we stood with some consistency over the prior number of years, where flat had been, in essence, the low end of the range, and that was through a variety of macroeconomic backdrops.

If you could think about something structural that you think would get you back to the prior comp range, or maybe it has to do with acquisition volume and integration, what do you think it would take to get the comps out of the rut that we've seen? What would have to happen in the industry for that to transpire?

I think what you're -- first of all, I think if you look back at that period you will see over the last several years that our comps have been down 50 basis points I think from 2014. If you go back a few years earlier than that, just to give some perspective, we ran three years of plus seven prior to this tougher period.

What I referred to in the comments are that I know that there are more vehicles that are entering the six-plus age range over the next five years, and we really haven't had that. It's been more flat. Overall vehicles in operation have been flat and now that's coming back and growing.

The other important trend, older cars, is a trend that's going to continue for the next several years. I think that helps. And you're seeing that there are more vehicles per base. The service stations and garages are exiting the marketplace.

So, when you look at overall vehicles in operation increasing 8% over the next five years, you look at the number of vehicles coming into the six plus going to be increasing for the next five years, and you look at the number of vehicles per day continuing to go up because small guys are exiting the market, I think that underpins what we've described as our comp opportunity on the traffic side. And then, we've proven that we've been able to get something in price. If you look at something like flat to plus two in traffic and flat to plus two in price, you get that 3% comp that we talk about.

Thanks so much, John, appreciate it.

Sure. Thank you.

Scott Stember, CL King.

Good morning.

Good morning.

Could you maybe talk about the cadence of sales by month in the quarter, please?

Sure. January was up 10%, February was down 4%, and March was down 3%.

Okay. Maybe just bigger picture. Not having a crystal ball and knowing what sales will be, obviously, it's a very volatile market and you said yourself this is a needs-based business. In the event that sales were to be worse than expected than the guidance that you gave, and we were to see some of these pretty sharp negative trends continue for the foreseeable future, does this at any way impact your acquisition strategy whatsoever?

And, maybe also just throwing the balance sheet in there as well, given the fact that you have been using debt to some extent to fund these acquisitions. Thanks.

Sure. Thanks. As I said in my comments, if this year stays very difficult, we will get significantly more than our average annual 10% target of acquisitions done. That's my expectation. And, the fact that we have $400 million plus of availability means that we can get pretty much any of the acquisitions that we have as NDAs, some as a part of that. It's the thing that I have -- that's attracted me, or been one of the most attractive things about me to Monro over the years and that continues to be. It's a great hedge in our business.

Even in a softer year, we're generating $80 million to $90 million of free cash flow. It won't all be debt.

Fair point, absolutely.

Got you. Just last question, just trying to flesh out the 8% decline that we've seen so far. Without getting too specific by category, could you just talk about maybe how tires are performing versus some of the other categories? Just better/worse than kind of thing?

Sure. As I said, tires are actually performing better than our other repair-based service categories.

Okay. Got you. That's all I have right now. Thanks for taking my questions.

Sure.

Thank you.

Anthony Deem, KeyBanc.

Hello, John, Cathy, Rob, Effie, good morning. Thanks for taking my question.

Good morning.

Sure.

I have a three-part question here on the comp outlook, going off one of the last questions. And, John, I can appreciate the vehicle part and age comment. For 2017, (inaudible) mark the fifth year of flat-to-negative same-store sales, while the vehicle age has gone up.

Would your Company ever rule out reevaluating the positive longer-term same-store revenue growth outlook? And then, as it relates to the 2017 comp outlook, and it sounds like, in the first quarter, you're not losing share but taking a step back, taking more longer term. Do you think it's just a regional issue in terms of weak consumer, Monro losing share over the long term?

And then, just one more on there. Lastly, how should we think about the margin given the weak comps? Do you think there's a need to be more competitive, maybe sacrifice some profitability? Because, frankly, it sounds like that's exactly what's going on in the first quarter. Thank you.

Sure. I described what my view is of our comp outlook going forward, and I wouldn't change that. I would only change that if I saw one of those fundamental pieces of it change itself.

From the second piece I think was, in the first quarter, are we -- is it regional? I think we expressed very clearly that our southern markets have been and are performing better, and we've actually seen that, as well, in the financials of the acquisitions that we've been looking at. So, yes, I do think it's regional. And I think that's an important element to it.

And then, lastly, in terms of pricing and -- pricing versus volume and traffic, we're a retailer, we're always focused on traffic. But, as we've said in the past, we are focused on bottom-line profitability. And we try to manage the business in that way. We need to stay competitive, generally, but we are not the lowest-priced guy out there. And I don't see that changing right now.

That doesn't mean we don't have to modify our pricing and react. Like I did talk about, we've seen some pressure in these first several weeks of the quarter on pricing. But, again, we manage the business for the bottom line and trying to balance that with driving traffic and sales.

Okay. Then can I ask, in your flat-to-down 2% comp estimate for the year, can you break down the full-year assumption on tire revenue and units, specifically, and then the expectation for services? I may have missed that, if not shared already, but I'd appreciate that.

And then, on the price pressure in the first quarter, is that more on the tire side or the service side? Because it sounds like the fourth-quarter tire ASP was up 5%, which is pretty impressive. Thanks.

Sure. I would expect -- tire units right now are under pressure, as you would imagine with us being down 8%. And I would expect tire units to be positive in the back half of the year. Like I said, tire units were down 4% for the year, so I think you can expect us to look to get a big chunk of that back during the year.

And then, the second part of your question was what?

Just on the tire pricing question in the first quarter, is that -- are you seeing that in service or tires, is it across the board? That fourth-quarter tire ASP was strong, but my point is it seems like tire (multiple speakers).

That is not all ASP. There are some other related services like TPMS that we're doing a good job in there. But, we did collect more on tires during the quarter.

Can I fit one more in, please? John, can you repeat your comment on leverage? Did you say now is a flat comp where the leverage isn't [as] dilutive, or I guess is it at 0.5% to overcome inflation still?

We said that we will start to achieve operating leverage on any positive comp. So, if you want to call it an inflation hurdle, inflation hurdle zero.

Got it. Thank you very much.

Sure.

Carolina Jolly, Gabelli.

Good morning, everyone, it's Brian Sponheimer on for Carolina. Thank you for fitting me in. I guess just one question because I know you're bumping up against time here. The transaction that you weren't able to complete last year, has there been any noticeable difference in how they go to market in your comparable markets? And has that changed the environment at all from a pricing perspective?

I assume you're talking about Pep Boys?

Yes.

No. I don't think they're driving the market.

All right. One just real quick. John, when you speak about the consumer environment, you probably use that same term, it's difficult, for the last several years, you and Rob. Is this environment any different, really, than that which you really didn't experience for the past 7, 8, 9, 10 years? What, other than wage inflation, would lead you to change your view on that?

I think it's a difficult -- it is a difficult environment, has been a difficult environment for some time. I think some wage inflation would certainly help that, but the consumer overall is dealing with the higher cost that I talked about, and I do think that healthcare, rent, those kind of things are outstripping the benefit of gas.

We look at our own employees and we look at our customers, and we see a lot of similarities there. And I think that's -- we've seen it over this couple of years in trade down and in increasing intervals in deferral. That's the environment that we're describing and that we've been operating through.

And, again, the tougher the environment the more we'll grow the top line. And that to me is the big hedge being the business model that we have that we continue to act on.

All right. I greatly appreciate it. Thank you very much.

Sure.

And, at this time, I'd like to turn things back to Mr. John Van Heel for any closing or additional remarks.

Thank you. Thank you all for your time this morning. We remain focused on managing the business through this difficult environment and taking advantage of the significant growth opportunities it presents.

I look forward to reporting our progress in July. And, as always, 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 does conclude our conference. Thank you for your participation. You may now disconnect.